INFORMATION STATEMENT PURSUANT TO SECTION 14(C) OF THE SECURITIES
EXCHANGE ACT OF 1934
Check the appropriate box:
[X] Preliminary Information Statement
[ ] Confidential, for use of the Commission only (as permitted by Rule
14c-5(d)(2)
[ ] Definitive Information
SPECTRUM LABORATORIES, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
1) Title of each class of series to which transaction applies:
COMMON STOCK
2) Aggregate number of securities to which transaction applies: 112,468
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated And state how it
was determined): $2.56
4) Proposed maximum aggregate value of transaction: $ 287,918
5) Total fee paid:
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount previously paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
[PRELIMINARY COPY
DATED MARCH , 2005]
SPECTRUM LABORATORIES, INC.
18617 BROADWICK
RANCHO DOMINGUEZ, CALIFORNIA 90220
INFORMATION STATEMENT
To the Stockholders of Spectrum Laboratories, Inc.
This Information Statement is being mailed to our stockholders on March
___, 2005 to advise them that Spectrum Laboratories, Inc. ("Spectrum") has
decided to amend its Certificate of Incorporation to effectuate a 1 to 25,000
reverse stock split. As a result of the reverse stock split, Spectrum will have
only three stockholders. The common stock of Spectrum will cease to be listed on
the OTC Bulletin Board after the reverse split, and Spectrum will cease to file
periodic reports with the Securities and Exchange Commission. The reverse stock
split has been approved unanimously by the Board of Directors at a meeting on
October 6, 2004 and by holders of 98.4% of the outstanding shares of Common
Stock by written consent pursuant to the Delaware General Business Law. Spectrum
plans to amend its certificate of incorporation on or about the date of the
mailing of this Information Statement.
WE ARE NOT ASKING YOU FOR A PROXY, AND YOU ARE REQUESTED NOT TO SEND US
A PROXY.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE FAIRNESS OR MERITS OF THE TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY
OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
Sincerely,
Roy T. Eddleman
Chief Executive Officer
March ____, 2005
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NOTICE OF THE REVERSE STOCK SPLIT
AGREEMENT BY THE WRITTEN CONSENT OF THE MAJORITY STOCKHOLDERS
Approval of the 1 TO 25,000 reverse stock split required the vote or
written consent of the holders of a majority of the outstanding shares of
Spectrum common stock entitled to vote at an annual or special meeting of
stockholders.
On October 6, 2004, holders of 5,230,548 shares representing 98.4 % of
the outstanding shares entitled to vote approved the reverse stock split and
executed a written consent pursuant to which they adopted the common stock. On
that date, 5,312,468 shares of Spectrum common stock were outstanding and the
shareholders executing the consent, Roy T. Eddleman, Thomas Girardi and Walter
Lack, also constitute a majority of the Board of Directors of the Corporation.
This Information Statement notifies Spectrum's stockholders that
stockholder adoption of the reverse stock split has been obtained in accordance
with Section 228 of the Delaware General Corporation Law. As permitted by the
Delaware General Corporation Law, no meeting of Spectrum's stockholders is being
held to vote on the reverse stock split.
Stockholders owning less than 25,000 shares prior to the reverse stock
split will receive a cash payment of $2.56 for each share of stock. Stockholders
owning more than 25,000 shares shall receive a cash payment of $2.56 per share
for each share representing a fractional interest.
YOU ARE ADVISED TO REVIEW CAREFULLY THE ENTIRE INFORMATION STATEMENT,
INCLUDING ALL APPENDICES TO THE INFORMATION STATEMENT. NO PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS TO YOU
REGARDING THE MERGER AGREEMENT OR THE MERGER EXCEPT FOR THE STATEMENTS THAT ARE
CONTAINED IN THIS INFORMATION STATEMENT, AND YOU SHOULD NOT RELY UPON SUCH OTHER
INFORMATION OR STATEMENTS.
3
TABLE OF CONTENTS
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PAGE
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SUMMARY TERM SHEET............................................................5
SPECIAL FACTORS...............................................................7
FAIRNESS OF THE REVERSE STOCK SPLIT..........................................11
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF..............................20
EXCHANGE OF CERTIFICATES AND PAYMENT.........................................22
FEDERAL INCOME TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT...................22
COST OF THE REVERSE STOCK SPLIT..............................................23
FINANCIAL STATEMENTS AND FINANCIAL INFORMATION 2004..........................24
APPENDIX A FAIRNESS OPINION..................................................26
4
SUMMARY TERM SHEET
PURPOSE OF THE REVERSE STOCK SPLIT
The primary reason for the Reverse Stock Split is to bring the number
of holders of the Company's common stock below 300 so that the Company will no
longer have the expense of filing ongoing reports with the Securities and
Exchange Commission ("SEC"). The Company has decided to do a reverse stock split
as the method to reduce the number of shareholders, since this method provides
shareholders owning less than 25,000 shares of the Company's currently
outstanding common stock the opportunity to dispose of their shares in a simple
manner, at a favorable price and without having to pay brokerage commissions.
Aside from the three shareholders who have approved the transaction and own
98.4% of the issued and outstanding account, the only other holder of any
significance was a depository account holding in excess of 20,000 shares for
what the Company believes to be additional small shareholders. The ratio of
1-for-25,000 was selected in order to maximize the number of shareholders
(record and beneficial owners) who could be cashed out. See SPECIAL FACTORS --
Purpose of the Reverse Stock Split.
TERMS OF THE REVERSE STOCK SPLIT
As used throughout this Information Statement, the term "Reverse Stock
Split" refers to a transaction consisting of the following steps:
o Effective upon the filing of an amendment to Spectrum's Certificate of
Incorporation, we will undertake a l-for-25,000 reverse stock split of
our common stock, pursuant to which a holder of 25,000 shares of our
common stock immediately before the reverse stock split will hold one
share of our common stock immediately after the Reverse Stock Split.
o Any shareholder owning less than 25,000 shares of our common stock in
any discrete account immediately before the reverse stock split will
receive cash in exchange for the resulting fractional share of that
common stock and will no longer be a shareholder of Spectrum. We will
pay each of these shareholders an amount equal to $2.56 per share of
our common stock held by them immediately before the reverse stock
split.
o Shareholders owning more than 25,000 shares will receive a payment of
$2.56 per share for shares held prior to the Reverse Stock Split not
evenly divisible by 25,000.
o The board of directors made this determination in good faith, based
upon a fairness opinion received by Seidman & Co., an independent
financial valuation company, as described in greater detail in the
section of this Information Statement titled, "SPECIAL FACTORS" and
"FAIRNESS OF THE REVERSE STOCK SPLIT."
EFFECT OF GOING PRIVATE TRANSACTION
Following the reverse stock split, we will have only 3 record
shareholders and, as a result, we intend to terminate our status as a reporting
company under the provisions of the 1934 Act. This will mean that we will no
longer be required to file reports with the SEC or be classified as a public
company. Shares will no longer be quoted on the OTC Bulletin Board as a result
of going private, there will be less information publicly available about the
Company. However, the shareholders are all directors and have access to
information. See SPECIAL FACTORS -- Effects of the Reverse Stock Split.
5
REMAINING SHAREHOLDERS
As a result of the transaction the Company will have three (3)
shareholders, Roy T. Eddleman, Thomas Girardi and Walter Lack, each of whom is
also currently a director. Mr. Eddleman is also the CEO. Together they will own
100% of the outstanding shares.
WHY THE COMPANY IS GOING PRIVATE
Over the past five (5) years, trading in the Company's common stock has
been extremely light averaging four or five trades per quarter and only 1.6% of
the Company's shares are in the hands of the public. As a result, Company shares
are quoted in the "OTC Bulletin Board" with no expectation of the shares ever
trading on larger, more active exchanges such as the NASDAQ. Furthermore, the
Company has not in the past and does not anticipate in the future using shares
of its common stock for acquisition purposes, stock dividends or other uses for
which a public traded stock would be advantageous. Due to the foregoing, the
Company no longer felt that the substantial cost both in time and money required
to maintain the Company's reporting obligations under the 1934 Act were
justified given the minimal benefits accruing to the Company. Furthermore, in
light of certain recent legislative initiatives including the Sarbanes-Oxley Act
of 2002, the Company anticipates that its compliance costs and professional fees
related to remaining a reporting company will be increase substantially. As a
result, the Company's board of directors determined that it was in the Company's
best interest to implement the Reverse Stock Split at this time and, thereafter,
terminate its reporting obligations under the 1934 Act. See SPECIAL FACTORS -
"Reasons for the Reverse Stock Split."
WHY A REVERSE STOCK SPLIT WAS DETERMINED APPROPRIATE
The Board of Directors considered various alternative methods of going
private but decided that the Reverse Stock Split format provided the best
alternative. The Reverse Stock Split format would (i) insure that the number of
remaining shareholders would enable the Company to delist; (ii) accomplish the
transaction with related expenses that were deemed reasonable relative to the
size of the transaction and the anticipated savings; and (iii) provide
shareholders owning less than 25,000 shares of common stock with a convenient
and fair cash-out of their interest in the Company. At the present time, the
Company has sufficient cash resources to pay out its minority shareholders
without borrowing or financing the pay out. See SPECIAL FACTORS and EXCHANGE OF
STOCK CERTIFICATES and PAYMENT.
FAIRNESS OF THE TRANSACTION
The board of directors believes that the Reverse Stock Split is fair to
the Company's unaffiliated shareholders. The board of directors retained the
services of an independent evaluation consultant to determine fairness of the
price to be paid to shareholders in lieu of their fractional shares. The
cash-out price recommended by the board of directors and adopted by the board of
directors, $2.56 per share, represents a 22% premium over the last reported sale
prior to announcement of the Reverse Stock Split. See "SPECIAL FACTORS" and
"FAIRNESS OF THE REVERSE STOCK SPLIT".
6
SHAREHOLDER VOTE REQUIRED
Under Delaware law, the amendment to the Certificate of Incorporation
to accomplish the Reverse Stock Split requires the affirmative vote of a
majority of the shares of common stock outstanding and entitled to vote at the
meeting. Three shareholders owning 98.4% of the issued and outstanding shares
have approved the transaction by written consent. Under Delaware law, and
pursuant to the Company's charter documents, it is not necessary for the
remaining shareholders to consent or vote their shares to amendment to the
Certificate of Incorporation.
DISSENTER'S RIGHTS
Delaware law and the Company's charter and by-laws do not provide for
dissenter's rights in conjunction with the proposed Reverse Stock Split.
EFFECTIVE DATE
The Reverse Stock Split would be effective upon the filing of an
amendment to our Certificate of Incorporation with the Secretary of State of
Delaware. It is anticipated that this filing will be made as soon as possible
after the expiration of a twenty (20) day period from the date of mailing of
this Information Statement.
TAX CONSEQUENCES
The anticipated federal and state income tax consequences to both
continuing shareholders and those shareholders being cashed-out in the Reverse
Stock Split transaction is set forth under the section "FEDERAL INCOME TAX
CONSEQUENCES OF REVERSE STOCK SPLIT."
SPECIAL FACTORS
PURPOSE OF REVERSE STOCK SPLIT
The purpose of the Reverse Stock Split is to acquire for cash the
equity interests in Spectrum of each of the approximately 450 record holders of
common stock [excluding the three holders of 98.4% ("Majority Share Holders")],
as well as an indeterminate number of beneficial holders of common stock held in
the names of nominees, that, as of the effective date of the Reverse Stock Split
(as described below), own fewer than 25,000 shares of common stock. The purchase
price is $2.56 per share of common stock owned immediately before the Reverse
Stock Split.
By purchasing the shares of the holders of fewer than 25,000 shares, we
will:
o Eliminate the cost of maintaining small shareholder accounts;
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o Permit these small shareholders to receive cash for all of their shares
without having to pay brokerage commissions, as we will pay all
transaction costs in connection with the Reverse Stock Split; and
o Reduce the number of Spectrum's shareholders of record to 3 persons,
which will allow us to terminate our reporting obligations under the
1934 Act.
REASONS FOR REVERSE STOCK SPLIT
We incur direct and indirect costs associated with compliance with the
Securities and Exchange Commission's filing and reporting requirements imposed
on public companies. The cost of this compliance is expected to increase further
with the implementation of the provisions of the Sarbanes-Oxley Act of 2002 by
the Company. We also incur substantial indirect costs as a result of, among
other things, the executive time expended to prepare and review our public
filings. Since we have relatively few executive personnel, these indirect costs
can be substantial. We estimate that it costs the Company $300,000 per year to
be a public Company and that we would save $170,000 per year if we were private.
In addition, the public disclosure we are required to make under the 1934 Act
places us at a competitive disadvantage by providing our non-public competitors
with detailed information about our operations and financial results while we do
not have access to similar information about these competitors.
We have not derived significant benefits from maintaining a public
trading market. Our weekly trading volume during 2004 has averaged less than 360
shares, with no buying or selling occurring on most days. Our board of directors
does not presently intend to raise capital through sales of securities in a
public offering or to acquire other business entities using stock as
consideration. Accordingly, we are not likely to make use of any advantage for
raising capital, effecting acquisitions or other purposes that our status as a
reporting company may offer.
The Company believes that there is no liquidity for the holders of
shares. With a public float of 1.6% and a low, average trading volume, the
Company does not believe that a substantive number of its public shareholders
would ever be able to liquidate their holdings at any time.
In light of these circumstances, our board of directors believes that
it is in our best interests to undertake the Reverse Stock Split at this time to
enable us to deregister our common stock under the 1934 Act, which will relieve
us of the administrative burden, cost and competitive disadvantages associated
with filing reports and otherwise complying with the requirements imposed under
the 1934 Act.
EFFECTS OF REVERSE STOCK SPLIT ON SHAREHOLDERS WITH FEWER THAN 25,000 SHARES OF
COMMON STOCK IN A DISCRETE ACCOUNT
Shareholders holding fewer than 25,000 shares of our common stock
immediately before the Reverse Stock Split (referred to as "Cashed Out
Shareholders"):
o Will not receive a fractional share of Spectrum common stock as a
result of the Reverse Stock Split;
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o Will instead receive cash equal to $2.56 per share for each share of
our common stock held immediately before the Reverse Stock Split;
o Will have no further ownership interest in Spectrum with respect to
cashed out shares, and will no longer be entitled to vote as
shareholders or share in our assets, earnings or profits;
o Will not have to pay any service charges or brokerage commissions in
connection with the Reverse Stock Split;
o Will receive cash for Spectrum common stock held immediately before the
Reverse Stock Split in accordance with the procedures described in this
Information Statement; and
o Will not receive any interest on cash payments owed as a result of the
Reverse Stock Split.
All amounts owed to Cashed Out Shareholders as a result of the Reverse
Stock Split will be subject to applicable federal and state income taxes and
state abandoned property laws.
EFFECT OF REVERSE STOCK SPLIT ON MAJORITY SHAREHOLDERS
If the Reverse Stock Split is implemented, the Majority Shareholders:
o Will receive one new share of Spectrum common stock for every 25,000
shares of common stock held immediately before the Reverse Stock Split.
Any resulting fractional shares of common stock shall entitled to
receive payment of $2.56 per share;
o Mr. Eddleman's shares will be reduced from 4,320,128 to 173. Mr.
Girardi's shares will be reduced from 800,002 to 32. Mr. Lack's shares
will be reduced from 109,918 to 4. Eddleman, Girardi and Lack will
receive respectively cash payments of $51,527.68, $5.12 and $25,390.08
for fractional shares at the rate of $2.56 per share
o Will be the only persons entitled to vote as shareholders or share in
our assets, earnings, or profits. Majority Shareholders will not be
entitled to receive cash for any portion of their shares.
It is expected that upon the completion of the Reverse Stock Split, our
directors and executive officers will own approximately 209 shares or 100% of
our common stock of the then issued and outstanding shares of our common stock,
as compared to 5,230,048 shares and approximately 98.4% prior to the Reverse
Stock Split. Our common stock will have an approximate book value of $2.08 per
share prior to and $52,833 per share after the Reverse Stock Split.
EFFECT OF REVERSE STOCK SPLIT ON MARKET FOR SHARES
Our common stock is currently quoted on the OTC Bulletin Board, a
centralized quotation service that collects and publishes market maker quotes
for OTC securities. In the event that we terminate the registration of our
common stock under the 1934 Act, our common stock will cease to be eligible for
trading on any securities market.
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Shares no longer outstanding as a result of the Reverse Stock Split
will revert back to authorized but unissued shares of the Company. The Company
does not anticipate issuing shares in the foreseeable future except with regard
to the exercise of outstanding options or other compensatory purposes.
EFFECT OF THE REVERSE STOCK SPLIT ON SPECTRUM
If approved by our shareholders, the Reverse Stock Split will affect
the public registration of our common stock with the Securities and Exchange
Commission under the 1934 Act, as we intend to apply for termination of such
registration as soon as practicable after the Reverse Stock Split.
The Reverse Stock Split will reduce significantly the number of
Spectrum shareholders to three (3) and the number of outstanding shares of our
common stock to 209. The completion of the Reverse Stock Split and the
deregistration of our common stock under the 1934 Act will render our common
stock ineligible for listing on any stock exchange including the OTC Bulletin
Board.
We have no current plans to issue common stock other than pursuant to
our existing stock option plans, but we reserve the right to do so at any time
and from time to time at such prices and on such terms as our board of directors
determines to be in the best interests of Spectrum and its remaining
shareholders. Continuing Shareholders will not have any preemptive or other
preferential rights to purchase any of our stock that we may issue in the
future, unless such rights are specifically granted to the shareholders.
ALTERNATIVES TO REVERSE STOCK SPLIT
Our Board of Directors considered other alternative methods for
reverting to the status of a private company including a merger into a privately
held company or an issuer tender offer in addition to a reverse stock split
transaction. The Board felt that the cost of setting up a private company was
expensive in view of the size of the transaction. In addition, real property
leases of the Company require landlord approval for mergers and the Board did
not want to deal with a landlord given the size of the transaction. Accordingly,
the Board rejected the alternative of a merger. A tender offer was also rejected
since the Company has a number of small shareholders with 82,000 shares held by
approximately 450 people and the Board felt that a number would not even
respond, making a reverse stock split still necessary. After an initial
evaluation of these alternative methods, the board of directors determined that
the Reverse Stock Split transaction was the least costly and most expeditious
means to take Spectrum private. Other than its initial evaluation, the Board did
not spend any additional time on investigating alternatives to a reverse stock
split for taking the Company private. The Board of Directors did not consider
selling the company to a third party since the Majority Shareholders have no
interest in doing so.
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FAIRNESS OF THE TRANSACTION
In order to provide a fair and unbiased consideration of this going
private transaction, our board of directors relied upon a fairness opinion
prepared by Seidman & Co., Inc. See "Fairness of Reverse Stock Split" and
Appendix A, Seidman Opinion.
Throughout the discussions on this issue, Mr. Eddleman took the lead
and was the chief proponent for going public. All Board decisions on the subject
were, however, unanimous.
BENEFIT TO PARTIES
Spectrum will save approximately $170,000 per year and will no longer
incur the expense of compliance. Employees who spend time on compliance will be
able to work on other activities. The Cashed-Out Shareholders will receive $2.56
per share and will not have to pay brokerage commissions. The Majority
Shareholders will own 100% of the Company rather than 98.4%. The net book value
of their shares will increase from $2.08 per share prior to the reverse stock
split to $52,833 after. They will be entitled to 100% of the net earnings.
DETRIMENTS TO THE PARTIES
Spectrum will no longer have access to public markets and may find it
difficult to raise capital if it needs to do so. The Majority Shareholders will
lose the ability to sell shares in the open market. The Cashed-Out Shareholders
will not be able to participate in the future growth of the Company and any
increase in market value of their shares.
FAIRNESS OF THE REVERSE STOCK SPLIT
In July, 2004, the Board began exploring the concept of taking the
Company private. Telephone discussions were had between Roy T. Eddleman, Chief
Executive Officer, Board member and majority shareholder, and Cowan, Liebowitz
and Latman, PC ("CLL"), the Company's outside legal counsel, to ascertain, among
other things, what would be the best strategy for the Company going forward;
being a publicly traded entity or a private entity. In deciding to go private,
the Board considered the following matters: (1) the breakdown of the beneficial
ownership of the Company's outstanding Common Stock before and after
implementation of the proposed reverse stock split, (2) the stockholder
concentration that would result from the proposed reverse stock split, (3) the
projected costs to the Company of maintaining its status as a public company and
the assumptions underlying those projections, (4) the projected costs to the
Company of implementing the proposed reverse stock split and the assumptions
underlying those projections, (5) the advantages and disadvantages of the
alternative methods of taking the Company private, (6) the ability of
stockholders to purchase additional shares prior to the implementation of the
proposed reverse stock split in light of the limited liquidity of the trading
market for the Company's Common Stock, (7) the impact that the implementation of
the proposed reverse stock split would have on the Company's business
arrangements, and (8) the steps to be taken by the Company to minimize the
adverse impact of predatory derivative actions that may arise from the
announcement of a decision to implement the proposed reverse stock split.
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Various methods to accomplish a going private transaction were reviewed
including an examination of a cash-out merger, a self tender offer followed by a
cash-out merger, a reverse stock split, and a sale of the Company's assets
followed by dissolution of the Company. These matters were discussed by the
Board at its meeting on July 19, 2004 at which meeting all members of the Board
were present. At that meeting, the Board determined that if the Company were to
go private, a reverse stock split was the preferable method since it was the
least costly method and would result in the shareholders were paid a fair amount
without paying brokerage commissions. Mr. Eddleman, the Company's largest
shareholder, was the chief proponent of the Company going private and took the
lead in discussing the issues at Board meetings. All decisions of the Board
concerning the decision to become a private company were unanimous and at this
meeting, the Board concluded that there were no compelling reasons for the
Company to remain a public company.
The Board also considered the issue of Board member independence at its
July 19, 2004 Board meeting at which all Board members were present. Out of a
five member Board, only two members were not stockholders. Such members,
however, did possess small numbers of unexercised stock options. The Board
determined that in order to avoid any appearance of impropriety, it was in the
best interests of the unaffiliated holders of the Company's Common Stock, to
determine that no Board member was independent. Accordingly, the Board concluded
that a special committee of directors could not be formed. This position was
supported by advice to the Board from the Company's legal counsel.
The Board also considered whether it was necessary to seek the vote of
unaffiliated shareholders for the transaction or to cause a special
representative to be appointed to represent the interests of the public
shareholders. The Board concluded this since only 1.6% of the outstanding shares
were held by the public, that the unaffiliated shareholders votes could not
change the outcome of the going private process and, therefore, there was no
need to seek a vote or to appoint a representative.
The Board determined at the meeting that if the Company were to engage
in a going private transaction, it would be necessary and appropriate to hire an
independent investment banker to render a fairness opinion to the Board with
respect to the values to be paid for any fractional shares of Common Stock that
may exist after a reverse stock split. The Board authorized Mr. Eddleman to
contact an investment banker.
The Board also determined that a one to 25,000 reverse stock split was
appropriate. In making this conclusion the Board relied on the fact that the
only other substantial record holder (in excess of 20,000 shares but less than
25,000) was a depository account and the reverse stock split would enable the
beneficial holders of shared held in such account to also receive cash
consideration.
Subsequent to that meeting, the Chief Executive Officer directed
company counsel to contact Seidman and Company, an investment banking firm
familiar to him about the possibility of taking the Company private, and the
aspects of rendering a fairness opinion on such a transaction. Seidman had
previously advised the Company in a merger transaction eight years prior so that
the Board was aware of Seidman's competence and experience. Mr. Eddleman
determined that he was satisfied with Seidman's competence and experience, and
did not want to interview other candidates or to contact any other company about
a fairness opinion. There was no other business relationship among the Company,
12
Seidman, and their respective officers and directors other than the prior
engagement. This telephone conversation was an informal fact finding session
used to gather information from Seidman and Company about the processes with
which it had been involved in taking a publicly held corporation private, the
experience Seidman and Company had with taking a publicly held corporation
private, the time frames associated with the various methods of taking a
publicly held corporation private, the type information about the Company that
would be required by Seidman and Company to render a fairness opinion, public
information about other corporations that were in the process of going private,
general information about premiums paid to cashed out shareholders, Seidman's
availability to render services to the Company if it were to proceed with a
going private transaction, to ascertain whether Seidman and Company had any
conflict of interest representing the Company, and the anticipated costs to be
charged by Seidman and Company to the Company if it were to proceed with a going
private transaction. No written material was provided by Seidman and Company to
the Company in connection with this telephone conversation. Company counsel
reported to Mr. Eddleman concerning the foregoing matter. At its August 20, 2004
Meeting, at which all members were present, Mr. Eddleman reviewed the
information provided by Seidman and requested that the Board approve the
appointment of Seidman. The Board then determined that Seidman and Company had
the appropriate expertise and experience to advise on the fairness of the
transaction and determined it was not necessary to interview any other
candidates. On August 20, 2004, the Company engaged Seidman.
At the same meeting, the Board continued its going private discussions.
In deciding to go private, the Board considered the following matters: (1) the
breakdown of the beneficial ownership of the Company's outstanding Common Stock
before and after implementation of the proposed reverse stock split, (2) the
stockholder concentration that would result from the proposed reverse stock
split, (3) the projected costs to the Company of maintaining its status as a
public company and the assumptions underlying those projections, (4) the
projected costs to the Company of implementing the proposed reverse stock split
and the assumptions underlying those projections, (5) the advantages and
disadvantages of the alternative methods of taking the Company private, (6) the
ability of stockholders to purchase additional shares prior to the
implementation of the proposed reverse stock split in light of the limited
liquidity of the trading market for the Company's Common Stock, (7) the impact
that the implementation of the proposed reverse stock split would have on the
Company's business arrangements, and (8) the steps to be taken by the Company to
minimize the adverse impact of predatory derivative actions that may arise from
the announcement of a decision to implement the proposed reverse stock split.
The Board also discussed a price to be paid for shares. The Board knew that
minority shareholders were typically paid a premium over market price in buy-out
transactions. Mr. Eddleman noted that buy-out premiums tended to be around 20%
of the sales price. After discussion, the Board decided that a price of $2.56
representing a premium of 22% over the most recent transaction price of 22% was
fair. At this meeting and throughout the process of making final decisions, Mr.
Eddleman the largest shareholder of the Company and its CEO took the lead in
proposing and promoting the going private concept. All Board decisions on the
issue, however, were unanimous.
At a meeting on October 6, 2004, the Board, with all members present,
reviewed the fairness opinion of Seidman which concluded that a price of $2.56
was fair to minority shareholders. The Board unanimously voted in favor of a
proposal that it would be in the best interests of the Company's stockholders
13
from a procedural and substantive point of view to take the Company private
utilizing a reverse stock split at the ratio of one (1) share of common stock to
25,000 shares of existing Common Stock, that fractional stockholders receive a
payment of $2.56 per share of pre-split Common Stock, and adopted the opinion
issued by Seidman. The Board also authorized management of the Company to take
all such actions necessary that it deems appropriate to accomplish this
decision. Messrs. Eddleman, Girardi and Lack, in their capacity as shareholders,
also approved the transaction.
In coming to its conclusion that the $2.56 price was fair, the Board
analyzed the following additional factors at its October meeting at which all
members were present:.
Net Book Value: The net book value for the period ending September 25,
2004 was approximately $2.08 per share. Since that amount was less than the
amount of $2.56 which the Board felt was fair, the net book value was not an
important factor in determining fairness.
Lack of approval by unaffiliated shareholders and failure to retain a
representative. The Board felt that the small percentage of shares held by
unaffiliated (1.6%) was so small that lack of approval and/or a representative
had no effect on its fairness determination.
Liquidation Value: The Board did not consider liquidation value to be
relevant since the Company's assets were fully deployed in the business.
Going Concern Value: The Board concluded that the Seidman opinion
adequately dealt with valuing the business as a going concern and that there was
no additional discussion necessary.
On October 12, 2004, the Company issued a press release indicating that
the Board had approved a reverse stock split using a ratio of one (1) share of
common stock for 25,000 shares of existing Common Stock as part of a going
private transaction and that fractional shares remaining after the reverse stock
split would be purchased by the Company at $2.56 per share of pre-split Common
Stock.
Other than the discussion had by the members of the Board and
management described herein and occasional informal telephone conversations
between directors, or directors and management, there has been no other
discussion or contacts made by any of the Company's officers or directors
relating to the reverse stock split, or any similar type transactions during the
last two (2) years.
FAIRNESS OPINION
Seidman prepared a draft fairness opinion to the Board which was
reviewed at the October 6th meeting. In connection with rendering its opinion as
presented to the Spectrum Board of Directors, Seidman reviewed and analyzed,
among other things, the following:
1. The terms of the proposed cash distribution to minority
shareholders and reverse split;
14
2. Discussions with certain members of the Company's senior
management (CEO and CFO) concerning the Company's business,
operations, historical financial results, and future
prospects;
3. The reported historical prices, trading multiples, and trading
volumes of the common stock of the Company;
4. Publicly available financial data, stock market performance
data, and trading multiples of companies which it deemed
generally comparable to the Company;
5. Conditions in, and the outlook for, the laboratory equipment
and supplies market of which Spectrum is a part;
6. Conditions in, and the outlook for the United States economy,
interest rates and financial markets;
7. Other studies, analyses, and investigations as Seidman deemed
appropriate.
In preparing the Seidman Opinion, Seidman assumed and relied upon the
accuracy and completeness of the financial and other information used by it and
it did not attempt independently to verify such information, nor did Seidman
assume any responsibility to do so. Seidman also assumed that there was no
material changes in the Company's assets, financial condition, results of
operations, business or prospects since the date of the last financial
statements made available to Seidman. Seidman did not visit or conduct a
physical inspection of the properties and facilities of the Company, nor did it
make or obtain any independent evaluation or appraisal of such properties and
facilities. Seidman has also taken into account its assessment of general
economic, market and financial conditions and its experience in similar
transactions, as well as its experience in securities valuation in general.
Seidman assumed the correctness of all legal advice rendered as to all legal
matters related to the Company, the proposed transaction and related documents.
Seidman has assumed that the proposed transaction will be completed in a manner
that complies in all respects with the applicable provisions of the Securities
Exchange Act of 1934 and all other applicable federal and state statutes, rules
and regulations.
The Seidman Opinion was based upon economic, market, financial and
other conditions as they exist and can be evaluated on the date of the opinion
and does not address the fairness as a result of the proposed transaction on any
other date.
In connection with rendering its opinion, Seidman performed a variety
of financial analyses, including those summarized below. These analyses were
presented to the Directors on September 23, 2004. The summary set forth below
does not purport to be a complete description of the analyses performed by
Seidman in this regard. Seidman also noted that the preparation of a fairness
opinion involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of these methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to a partial analysis or summary description. Accordingly, Seidman
15
advised the Board that notwithstanding the separate analyses summarized below,
Seidman believes that its analyses must be considered as a whole and that
selecting portions of its analyses and factors considered by it, without
considering all of its analyses and factors, or attempting to ascribe relative
weights to some or all of its analyses and factors, could create an incomplete
view of the evaluation process underlying its opinion.
Seidman reviewed the historical stock market performance of Spectrum
Laboratories, Inc. on the Over-The-Counter Bulletin Board. This analysis
indicated that the current pre-reverse split trading price for a share of
Spectrum Laboratories, Inc. common stock was $2.10 as of the September 22, 2004,
Valuation Date, and that the prices paid for a share of Spectrum Laboratories,
Inc. common stock during approximately the last 52 weeks ranged from a high of
$4.00 and a low of $1.60 per share. It is noted that the price was at a
pre-reverse split level of $4.00 per share for only three days, February 13, 17
and 18, 2004, and fell back to a level of $2.70 on 1,348 shares traded. During
virtually all the time between February 18 and September, 2004, the price
hovered at $2.70 and generally drifted down to a level of $2.05 on only periodic
and small trades, where for most of the interim days during this period there
were no trades in the stock at all.
The price of $2.56 per share represented a premium of approximately 22%
over the latest transaction price of $2.10. In analyzing the appropriateness of
the 22% premium, Seidman examined transaction control premium data obtained from
the authoritative Mergerstat Control Premium Study for the year July 2, 2003
through June 30, 2004, which is the latest public data available from this
source. Mergerstat includes all transactions where more than 50% of a company
changes hands. During this subject time period, only one company sharing the
same Standard Industrial Code as Spectrum was found to have completed a
transaction, and the control premium for this company was 17.5%. Altogether,
there were five companies generically related to Spectrum which had transactions
during this period, and these companies had a 19.1% median control premium. In
turn, there were six companies in various industries which went private during
this subject time period, but these companies were found to be larger in size
and more visible in the marketplace. These six companies had a 26.5% median
control premium. Further, the Mergerstat Control Premium Study for the Second
Quarter of 2004 reports 70 domestic transactions with a median control premium
of 24.2%. In this connection, the financial literature shows that premiums
received by shareholders in firms "going private" are lower than those received
by shareholders in other types of transactions.
Another test of fairness employed by Seidman is based on the comparison
of the multiples at which the subject Spectrum minority shareholders would be
selling shares relative to the multiples of selective publicly-traded market
comparable companies. Using publicly available information, Seidman reviewed the
stock price ratios as of September 22, 2004, of the following companies: Bio-Rad
Laboratories, Inc., Millipore Corporation, New Brunswick Scientific Co., Inc.,
O.I. Corporation, Pall Corporation, Perkin Elmer, Inc., and Waters Corp., which
are collectively referred to in this section as the "Comparable Companies."
Seidman believes these companies are engaged in lines of business that are
generally comparable to that of Spectrum. Five of the market comparable
companies, however, are much larger than Spectrum, with annual revenues of
approximately $1 billion or more annually. In contrast, Spectrum has annual
16
revenues approximating $12.4 million. Two of the market comparable companies,
New Brunswick Scientific and O.I. Corporation, are closer in size to Spectrum.
New Brunswick has $56.6 million of annual revenues; O.I. Corp. has approximately
$26.7 million of annual revenues.
Using these two most market comparable companies as the reference for
determining the fairness of the price to be paid Spectrum minority shareholders,
Seidman reviewed, among other things, price/latest book, price/3 year average
revenues, price/3 year average operating cash flow, price/three year average
operating income, price/average three year's pre-tax income, and, likewise,
price/latest year's revenues, price/latest year's operating cash flow,
price/latest year's operating income, and price/latest year's pre-tax income.
Seidman compared the various capitalizing factors of the two most comparable
companies from the publicly-traded universe with those of Spectrum. As is
evident in the tables below, there is only one capitalizing measure for which
that of Spectrum is lower, that of price/3 year average operating cash flow. In
the instance of all other capitalizing measures, both those relating to average
three year operating data and that of latest year's, the multiples to be paid
the shareholders of Spectrum were at approximately the same level or higher,
notwithstanding lower Spectrum revenues and a smaller relative tangible net
worth.
17
TABLE I
SPECTRUM LB
DERIVATION OF CAPITALIZED VALUE USING SELECTED COMPARABLE COMPANIES
MEDIAN PRICE MULTIPLES BASED ON 3-YEAR AVERAGE DATA
---------------------------------------------------
($000)
Price/ Price/
3-Year 3-Year Price/
Price/ Average Average 3-Year
Price/ 3-Year Operating Operating Average
SPECTRUM LB Latest Average Cash Flow Income Pre-Tax
Market Comparable Companies: Book Revenues (EBITDA) (EBIT) Income
---------------------------- ------ -------- --------- --------- -------
N B SCIENT 1.80 x .84 x 13.53 x 21.28 x 30.46 x
O I CORP 1.28 x .97 x 10.29 x 12.93 x 11.08 x
Median Capitalizing Factors for Selected
Market Comparable Companies 1.54 x .90 x 11.91 x 17.10 x 20.77 x
Capitalizing Multiples for Spectrum
@ 22% premium ($2.56 per share) 1.53x 1.07 x 9.37 x 19.74 x 22.69 x
18
TABLE II
SPECTRUM LB
DERIVATION OF CAPITALIZED VALUE USING SELECTED COMPARABLE COMPANIES
MEDIAN PRICE MULTIPLES BASED ON LATEST YEAR DATA
------------------------------------------------
($000)
Price/ Price/
Latest Latest Price/
Price/ Year Year Latest
Price/ Latest Operating Operating Year
SPECTRUM LB Latest Year Cash Flow Income Pre-Tax
Market Comparable Companies: Book Revenues (EBITDA) (EBIT) Income
---------------------------- ------ -------- --------- --------- -------
N B SCIENT 1.80 x .80 x 11.45 x 17.22 x 24.12 x
O I CORP 1.28 x .91 x 7.96 x 9.52 x 8.70 x
Median Capitalizing Factors for Selected
Market Comparable Companies 1.54 x .86 x 9.70 x 13.37 x 16.41 x
Capitalizing Multiples for Spectrum
@ 22% premium ($2.56 per share) 1.53 x 1.1 x 11.31 x 35.51 x 46.73 x
19
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock at February 24, 2005 by (i)
all persons (ii) all directors and nominees and (iii) all directors and nominees
and officers of the Company as a group. On such date there were 5,312,468 shares
outstanding:
Pre-Split Post-Split
------------------------------------ ----------------------------------
Name and Address Amount and Percent Amount and Percent
Nature Of of Class Nature of of Class
Beneficial Beneficial
Ownership (1) Ownership (1)
-------------------------------------------------------------------------------------------------------------------
Roy T. Eddleman 4,320,128 81.3 175 82.8
18617 Broadwick Street
Rancho Dominguez, CA 90220
Thomas V. Girardi, J.D. 800,002 15.1 32 15.3
1126 Wilshire Blvd.
Los Angeles, CA 90017
Jay Henis, Ph.D. 17,000 (A) 0.3
501 Marford Drive
St. Louis, MO 63141
Walter J. Lack, J.D. 109,918 2.1 4 1.9
10100 Santa Monica Blvd.
Los Angeles, CA 90067
Jack Whitescarver, Ph.D. 17,000 (A) 0.3
4301 Massachusetts Ave. NW #6002
Washington, D.C. 20016
F. Jesus Martinez 265,624 (A) 4.8 10.62 4.8
18617 Broadwick Street
Rancho Dominquez, CA 90220
Brian A. Watts 80,000 (A) 1.5 3.2 1.5
18617 Broadwick Street
Rancho Dominquez, CA 90200
All directors and officers 5,609,672 (B) 98.6 100%
as a Group (7 in number)
20
(1) All amounts are amounts of ownership of common stock of the Company unless
otherwise indicated.
(A) Entire amount is amount of exercisable stock options
(B) Includes 379,624 exercisable stock options
OUTSTANDING STOCK OPTIONS
Stock options are held by four individuals who are either directors or
officers. The following table shows the effect of the Reverse Stock Split on
Spectrum's outstanding stock options:
Pre-Split Post-Split
---------- ----------
Jay Henis, Director 17,000 0.68
Jack Whitescarver, Director 17,000 0.68
Jesus Martinez, Vice President 265,624 10.62
Brian Watts, CFO 80,000 3.20
---------- ----------
379,624 15.18
The Company will equitably adjust the exercise price. Each of the shareholders
has agreed not to exercise options in connection with the Reverse Stock Split
21
EXCHANGE OF CERTIFICATES AND PAYMENT
The Company will pay the Cashed Out Shareholders out of its own cash
assets. The Company has sufficient cash assets to pay the amount in full. As
soon as practicable after the effective date, the holders of the Common Stock
will be notified that the reverse stock split has been effected and they should
surrender to the Company any certificate(s) representing outstanding shares of
existing Spectrum common Stock in exchange for (i) cash for any fractional
shares or (ii) new certificate(s) representing the number of new Spectrum common
stock that will result from the reverse stock split. On the effective date, each
certificate representing shares of existing Spectrum Common Stock will be deemed
for all purposes to represent either (i) a claim for cash payment for a
fractional share, or (ii) the number of shares of new Spectrum common stock that
will result from the reverse stock split, whether or not the certificates
representing existing Spectrum Common Stock are surrendered for exchange. It is
anticipated that the payment in cash for any fractional shares will be paid by
the Company within thirty (30) days after such shares are surrendered to the
company for payment. No interest will be paid to any fractional stockholders on
the cash payments to be made from the effective date of the reverse stock split.
Registered stockholders who hold physical stock certificates will be instructed
to submit their certificates to the Company in order to receive their fractional
share payment. Stockholders who hold their shares in book entry form will
automatically receive payment by check. Stockholders who hold their shares in a
brokerage account will have the relevant account automatically credited by the
broker. In the even that any certificate representing shares of Common Stock is
not presented for cash upon request by the Company, the cash payment will be
administered in accordance with the relevant state abandoned property laws.
Until the cash payments have been delivered to the public official holder
thereof or his or her designee at such time as the payment has been properly
presented for exchange.
FEDERAL INCOME TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT
A summary of the federal income tax consequences of the reverse stock split is
set forth below. The discussion is based on present federal income tax law. The
discussion is not, and should not be relied on as, a comprehensive analysis of
the tax issues arising from or relating to the reverse stock split. This summary
does not purport to deal with all aspects of federal income taxation that may be
relevant to a particular stockholder in light of such stockholder's personal
investment circumstances or to certain types of stockholders subject to special
treatment under the Internal Revenue Code of 1986, as amended (including,
without limitation, financial institutions, broker-dealers, regulated investment
companies, life insurance companies, tax-exempt organizations, foreign
corporations and non-resident aliens). Accordingly, stockholders are urged to
consult their personal tax advisors for an analysis of the effect of the reverse
stock split based on their own tax situations, including consequences under
applicable state, local or foreign tax laws.
The Company believes that the receipt of cash for fractional shares will be
deemed a sale of the fractional share for income tax purposes and the difference
between the amount of cash received for the fractional share and the
22
stockholder's tax basis in such share will be the gain or loss to be recognized.
The gain or loss will generally be a capital gain or loss, with the nature being
short term if owned less than one (1) year and long term if owned for a year or
more.
Spectrum believes the exchange of existing Spectrum Common Stock for new
Spectrum common stock under the reverse stock split will qualify as a
recapitalization under Section 368 of the Internal Revenue Code, to the extent
that outstanding shares of existing Spectrum Common Stock are exchanged for a
reduced number of shares of new Spectrum common stock. Therefore, the exchange
of existing Spectrum Common Stock for new Spectrum common stock will result in
neither Spectrum nor its stockholders recognizing any gain or loss for federal
income tax purposes.
The shares of common stock to be issued to each stockholder to effect the
reverse stock split will have an aggregate basis, for computing gain or loss,
equal to the aggregate basis of the shares of existing Spectrum Common Stock
held by such stockholder immediately prior to the reverse stock split less the
basis of any fractional shares for which you receive cash. A stockholder's
holding period for the shares of new Spectrum common stock to be issued will
include the holding period for shares of existing Spectrum Common Stock
exchanged therefore, provided that such outstanding shares of existing Spectrum
Common Stock were held by the stock holder as capital assets on the effective
date of the reverse stock split.
The repurchase of the fractional shares by Spectrum will be considered a
purchase and retirement of its own stock. The purchase will be treated as a
reduction of stockholders' equity. Spectrum has no present plans to re-sell or
dispose of the fractional shares acquired in this transaction.
COST OF THE REVERSE STOCK SPLIT
The Company estimates of the costs incurred or expected to be incurred in
connection with the reverse stock split to be approximately $112,000 in addition
to the $287,918 necessary to pay Cashed Out Shareholders. Actual costs of the
transaction may be more or less than this estimate. The Company will be
responsible for paying these costs. Please note that this estimate of costs does
not include the cost of redeeming shares of those stockholders holding a number
of shares not evenly divisible by 1,500 pursuant to the reverse stock split, the
cost of purchasing the shares from the Company's 401(k) Plan, or the cost of
purchasing the fractional Option plan shares.
Legal fees $ 35,000
Transfer agent fees 0
Fees for fairness opinion 35,000
Printing and mailing costs 5,000
SEC filing fees 2,000
Accounting fees 25,000
Miscellaneous 10,000
---------
Total $112,000
The Company expects its business and operations to continue as they are
currently being conducted and, except as disclosed in this Information
Statement, the reverse stock split is not anticipated to have any effect upon
23
the conduct of the business. The Company expects to realize time and cost
savings as a result of terminating its public company status. If the reverse
stock split is consummated, all persons beneficially owning fewer than 25,000
shares of Common stock at the effective time of the reverse stock split will no
longer have any equity interest in, and will not be stockholders of, the Company
and therefore will not participate in its future potential earnings and growth.
If the reverse stock split is effected, the Company will be 100% owned by these
stockholders who are currently directors.
The Company plans, as a result of the reverse stock split, to become a privately
held company. The registration of Common Stock under the Exchange Act will be
terminated and the Common Stock will cease to be quoted on the OTCBB.
As stated throughout this Information Statement, the Company believes that there
are significant advantages in effecting the reverse stock split and going
private and the Company plans to avail itself of any opportunities it has as a
private company, including, but not limited to, improving its ability to compete
in the marketplace, making itself a more viable candidate with respect to a
merger or acquisition transaction with any one of its competitors or entering
into some type of joint venture or other arrangement.
Other than as described in this Information Statement, neither the Company nor
its management has any current plans or proposals to effect any extraordinary
corporate transaction; such as a merger, reorganization or liquidation; to sell
or transfer any material amount of its assets; to change its Board or
management; to change materially its indebtedness or capitalization; or
otherwise to effect any material change in its corporate structure or business.
There are no plans to change any material term of any severance agreement or
retention bonus plan agreement with any of the Company's executive officers.
FINANCIAL STATEMENTS AND FINANCIAL INFORMATION 2004
The Company's Annual Report on Form 10-K SB for the year ended December 27,
2003, which contains audited consolidated financial statements of the Company
for the fiscal year ended December 27, 2003, and certain additional financial
information, and the Company's Quarterly Report on Form 10-QSB for the quarter
ended September, 2004 which contains unaudited condensed consolidated financial
statements of the Company, are being mailed to stockholders of record with this
Information Statement and are incorporated herein by reference.. The ratio of
earnings to fixed charges (i) for the year ended December 2002 was 1.4, (ii) for
the year ended December 2003 was 1.5, (iii) for the nine months ended September
27, 2003 was 2.5 and (iv) for the nine months ended September 25, 2004, 3.0. .
The ratio of earnings to fixed charges (i) for the year ended December, 2002,
was 2.2, (ii) for the year ended December, 2003, was 1.5, (iii) for the nine
months ended September 27, 2003, was 1.4, and (iv) for the nine months ended
September 25, 2004, was 3.0. The book value per share of Spectrum's common stock
was $1.87 at September 27, 2003, and $2.08 at September 25, 2004.
24
Upon written request of any person who is a record holder of Common Stock or
Preferred Stock as of the close of business on March ___, 2005 the Company will
also provide without charge to such person a copy of the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 27, 2003 as filed with the
SEC, excluding exhibits. Any written request must be directed as follows:
Corporate Secretary,
Spectrum Laboratories, Inc,
18617 Rancho Dominguez, California 90220
. tel. (310) 855 4600
fax. (310) 885 4666
25
Appendix A Fairness Opinion
SEIDMAN & CO., INC.
110 East 59th Street, 25th Floor Tel: (212) 843-1480
New York, NY 10022 Fax: (212) 843-1484
32400 Telegraph Road, Suite 205 Tel: (248) 645-9700
Bingham Farms, MI 48025 Fax: (248) 645-9701
Email: info@seidman-co.com
Website: www.seidman-co.com
September 30, 2004
The Board of Directors
SPECTRUM LABORATORIES, INC.
18617 Broadwick Street
Rancho Dominguez, California 90220-6435
Gentlemen:
You have requested the opinion of Seidman & Co., Inc. ("Seidman") as to
the fairness, from a financial point-of-view, to the minority common stock
shareholders of Spectrum Laboratories, Inc. ("Spectrum," "SLI," or "the
Company"), a Delaware corporation, of the proposed cash distribution of $2.56
per pre-split share of the Company, prior to a proposed reverse split of 1 (one)
for 25,000 (twenty-five thousand) shares. Seidman & Co., Inc. is regularly
engaged in the valuation of businesses and securities in connection with
purchases and sales of businesses, mergers and acquisitions, going private,
leveraged buyouts, and other related securities transactions.
In reaching our fairness opinion, we examined and considered all
available information and data which we deemed relevant to determining the
fairness of the subject distribution to the shareholders of SLI, from a
financial point of view, including:
1. Terms of the proposed cash distribution and reverse split;
2. Certain publicly available financial statements and other
business and financial information of Spectrum Laboratories,
Inc.;
3. Discussions with certain members of the Company's senior
management concerning the Company's business, operations,
historical financial results, and future prospects;
4. The reported historical prices, trading multiples, and trading
volumes of the common stock of the Company;
5. Publicly available financial data, stock market performance
data, and trading multiples of companies which we deemed
generally comparable to the Company;
6. Conditions in, and the outlook for, the laboratory equipment
and supplies market;
INVESTMENT BANKING
ESTABLISHED 1970
SEIDMAN & CO., INC.
The Board of Directors
Spectrum Laboratories, Inc.
September 30, 2004
Page 2
7. Conditions in, and the outlook for the United States economy,
interest rates and financial markets;
8. Other studies, analyses, and investigations as we deemed
appropriate.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth herein without considering
the analysis as a whole could create an incomplete view of the processes
underlying Seidman & Co. Inc.'s fairness opinion. This letter is prepared solely
for the purpose of Seidman & Co., Inc. providing an outline of the opinion as to
the fairness of the subject cash distribution, and does not purport to be an
appraisal or necessarily reflect the prices at which businesses or securities
actually may be sold. This letter only has application as it is employed with
reference to the full written analysis and supporting research and tables.
During the course of our investigation, we conducted interviews with
persons who, in our judgment, were capable of providing us with information
necessary to complete the assignment, including members of management. We have
assumed that the information and accounting supplied by management and others
are accurate, and reflect good faith efforts to describe the current and
prospective status of Spectrum Laboratories, Inc. from an operational and
financial point-of-view. We have relied, without independent verification, upon
the accuracy of the information provided by these sources.
In arriving at our opinion, we have not performed or obtained any
independent appraisal of the assets or liabilities (contingent or otherwise) of
Spectrum, nor have we been furnished with any such appraisals. We have assumed
that the final terms of the cash distribution and reverse split will not
materially differ from the preliminary terms reviewed by us. In addition, we
have assumed that the subject cash distribution and reverse split will be
consummated in a timely manner and in accordance with the terms without any
limitations, restrictions, conditions, amendments or modifications, regulatory
or otherwise, that collectively would have a material effect on Spectrum.
It is understood that this letter is intended for the benefit and use
of the Board of Directors of Spectrum, and it is not intended to confer rights
or remedies upon any other entity or person. It is also understood that this
letter does not constitute a recommendation to the Board of Directors of
Spectrum as to whether or not to pursue the subject cash distribution and
reverse split. This opinion does not address Spectrum's underlying business
decision to pursue the proposed cash distribution and reverse split, the
INVESTMENT BANKING
ESTABLISHED 1970
SEIDMAN & CO., INC.
The Board of Directors
Spectrum Laboratories, Inc.
September 30, 2004
Page 3
relative merits of the cash distribution and reverse split as compared to any
alternative business strategies that might exist for Spectrum, or the effects of
any other transaction in which Spectrum might engage. This letter is not to be
used for any other purpose, or be reproduced, disseminated, quoted from or
referred to at any time, in whole or in part, without our prior written consent;
provided, however, that this letter may be included in its entirety in any
information statement to be distributed to the holders of Common Stock in
connection with the proposed cash distribution and reverse split. Our opinion is
subject to the assumptions and conditions contained herein and is necessarily
based on economic, market and other conditions, and the information made
available to us as of the valuation date of September 22, 2004 ("Valuation
Date"). Subsequent developments may affect this opinion, and we assume no
responsibility for updating or revising our opinion based on circumstances or
events occurring after the Valuation Date.
Based, therefore, on our analysis and consideration of the foregoing
respective information and data, it is our considered professional judgment that
as of September 22, 2004, the cash price of $2.56 per pre-split share of common
stock to be paid to the public minority shareholders of Spectrum precedent to
the proposed reverse split is fair to the existing shareholders of Spectrum
Laboratories, Inc. from a financial point of view.
Yours truly,
Seidman & Co., Inc.
INVESTMENT BANKING
ESTABLISHED 1970