SCHEDULE 14C INFORMATION STATEMENT
INFORMATION STATEMENT PURSUANT TO SECTION 14(C)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Information Statement [ ] Confidential, for use of the
Commission Only (as
[ ] Definitive Information Statement permitted by rule 14c-5(d)
(2))
Spectrum Laboratories, Inc.
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) filing Information Statement, if other than Registrant)
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pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
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(ii)
SPECTRUM LABORATORIES, INC.
23022 LA CADENA DRIVE
LAGUNA HILLS, CA 92653
CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY - PRELIMINARY COPY
SPECTRUM LABORATORIES, INC.
INFORMATION STATEMENT
This information Statement, which is being mailed to shareholders on or
about August 12, 1998, is furnished in accordance with the requirements of
Regulation 14C promulgated under the Securities Exchange Act of 1934, as
amended, by the management of Spectrum Laboratories, Inc., a California
corporation (the "Company" or "Spectrum").
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
On July 10, 1998, the Company took the following actions:
1. Agreed to a 1 for 10 reverse stock split;
2. Agreed to amend its certificate of incorporation so as to have
25,000,000 authorized shares;
3. Agreed to authorize a class of 2,000,000 shares of "Blank Check"
preferred stock; and
4. Agreed to reincorporate in Delaware.
EACH OF THE FOUR ACTIONS WERE CONSENTED TO ON JULY 10, 1998 BY
SHAREHOLDERS WHO OWN 11,939,245 SHARES CONSTITUTING 92.9% OF THE ISSUED AND
OUTSTANDING SHARES OF COMMON STOCK OF THE COMPANY. ACCORDINGLY, PURSUANT TO
SECTION 601 OF THE CALIFORNIA CORPORATE CODE, THE PROPOSALS WERE DULY ADOPTED.
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ACTION NO. 1 APPROVAL OF A ONE-FOR-TEN REVERSE SPLIT OF
THE OUTSTANDING SHARES OF COMMON STOCK
On July 10, 1998, the Board of Directors unanimously adopted a
resolution to authorize a one-for-ten reverse stock split of the Company's
outstanding shares of Common Stock (the "Reverse Stock Split").
The Reverse Stock Split shall be effected by an amendment of the
Company's Articles of Incorporation.
PURPOSES OF THE PROPOSED REVERSE STOCK SPLIT
The Company believes that the proposed Reverse Stock Split may have
several positive effects on the Company and on the market for its Common Stock
and other securities.
REDUCTION IN THE NUMBER OF OUTSTANDING SHARES. The principal purpose of
the Reverse Stock Split is to reduce the number of shares of the Company's
Common Stock outstanding. The Company believes that the total number of shares
currently outstanding is disproportionately large relative to the Company's
present market capitalization. The Company believes that a decrease in the
number of authorized and outstanding shares of the Company's Common Stock,
without any material alteration of the proportionate economic interest in the
Company held by individual shareholders, may increase the trading price of the
outstanding shares to a price more appropriate for a NASDAQ quoted security,
although no assurance can be given that the market price of the Company's Common
Stock will rise in proportion to the reduction in the number of outstanding
shares resulting from the Reverse Stock Split.
POTENTIAL EFFECT ON THE PRICE OF THE COMPANY'S COMMON STOCK. The Company
believes that the current per share price of the Company's Common Stock may
limit the effective marketability of the Company's Common Stock because of the
reluctance of many brokerage firms and institutional investors to recommend
lower-priced stocks to their clients or to hold them in their own portfolios.
Certain policies and practices of the securities industry may tend to discourage
individual brokers within those firms from time-consuming procedures that make
the handling of lower-priced stocks economically unattractive. The brokerage
commission on a sale of lower-priced stock may also represent a higher
percentage of the sale price than the brokerage commission on a higher-priced
issue. Any reduction in brokerage commissions resulting from the Reverse Stock
Split may be offset, however, in whole or in part, by increased brokerage
commissions required to be paid by shareholders selling "odd lots" created by
the Reverse Stock Split.
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The Company believes that the decrease in the number of shares of Common
Stock outstanding as a consequence of the proposed Reverse Stock Split and the
resulting anticipated increased price level may encourage greater interest in
the Company's Common Stock by the financial community and the investing public,
and that such increased interest could promote greater liquidity for the holders
of the Company's Common Stock. It is possible, however, that liquidity could be
affected adversely by the reduced number of shares outstanding after the Reverse
Stock Split. Although any increase in the market price of the Company's Common
Stock resulting from the Reverse Stock Split may be proportionately less than
the decrease in the number of shares outstanding, the proposed Reverse Stock
Split could result in a market price for the share that would be high enough to
overcome the reluctance, policies and practices of brokerage houses and
investors referred to above and to diminish the adverse impact of
correspondingly high trading commissions on the market for the shares.
There can be no assurances, however, that the foregoing effects will
occur or that the market price of the Company's Common Stock immediately after
implementation of the proposed Reverse Stock Split will be maintained for any
period of time, or that such market price will approximate ten times the market
price before the proposed Reverse Stock Split.
EFFECT OF THE REVERSE STOCK SPLIT
An amendment to the Company's Articles of Incorporation shall be filed
with the Secretary of State of the State of California on a date (the "reverse
Split Date") selected by the Board. The Reverse Stock Split would become
effective on the date of such filing. Without any further action on the part of
the Company or the holders of the Company's Common Stock, the shares of
Company's Common Stock held by shareholders of record as of the Reverse Split
Date will be converted into the right to receive an amount of whole shares of
new (post-Reverse Split) Common Stock equal to the number of their shares
divided by ten, and the number of currently authorized shares of Common Stock
would be reduced from 12,834,394 to 1,283,440. No fractional shares would be
issued. After giving effect to the split, all shares shall be rounded up to the
next whole number.
The Reverse Stock Split will not affect any continuing shareholder's
percentage ownership interest in the Company or proportional voting power,
except for minor differences resulting from rounding. The shares of Company's
Common Stock which would be issued upon approval of the Reverse Stock Split
would be fully paid and nonassessable. The voting rights and other privileges of
the continuing holders of Company's Common Stock would not be affected
substantially by adoption of the Reverse Stock Split or subsequent
implementation thereof.
The Company's Common Stock is quoted on the NASDAQ Bulletin Board. The
number of holders of the Company's Common Stock on the Record Date was
approximately 900.
As of the Record Date, the number of issued and outstanding shares of
Company's Common Stock was 12,834,394. As a result of the Reverse Stock Split,
the aggregate number of shares of Company Common Stock that would be issued and
outstanding would be 1,283,440 and 1,196,560 shares would be authorized and
unissued (after the reservation of an additional 20,000 shares of Company's
Common Stock for issuance upon exercise of certain outstanding stock purchase
warrants).
-3-
Number of Shares of Company Immediately Prior to After Reverse Stock
Common Stock Reverse Stock Split Split
- --------------------------------------- ------------------------- -------------------------
Authorized 25,000,000 2,500,000
Outstanding 12,834,394 1,283,440
Reserved for issuance upon exercise
of currently outstanding Options 200,000 20,000
Available for future issuance by 11,965,606 1,966,560
action of the Board after giving effect
to the reservations above
EXCHANGE OF STOCK CERTIFICATES
When the Reverse Stock Split is consummated, as soon as practicable
after the Reverse Split Date and after giving effect to the Reincorporation, the
Company will send a letter of transmittal to each shareholder of record on the
Reverse Split Date for use in transmitting certificates representing shares of
Company's Common Stock ("Old Certificates") to the Exchange Agent. The letter of
transmittal will contain instructions for the surrender of Old Certificates to
the Exchange Agent in exchange for certificates representing the appropriate
number of whole shares of the Company's Common Stock. No new certificates will
be issued to a shareholder until such shareholder has surrendered all Old
Certificates together with a properly completed and executed letter of
transmittal to the Exchange Agent.
Upon proper completion and execution of the letter of transmittal and
return thereof to the Exchange Agent, together with all Old Certificates,
shareholders will receive a new certificate or certificates representing the
number of whole shares of new Company's Common Stock into which their shares of
Company's Common Stock represented by the Old Certificates have been converted
as a result of the Reverse Stock Split. Until surrendered, outstanding Old
Certificates held by share holders will be deemed for all purposes to represent
the number of whole shares of Company's Common Stock to which such shareholders
are entitled as a result of the Reverse Stock Split. Shareholders should not
send their Old Certificates to the Exchange Agent until they have received the
letter of transmittal. Shares not presented for surrender as soon as practicable
after the letter of transmittal is sent shall be exchanged at the first time
they are presented for transfer.
Shareholders will receive shares of Common Stock in the Delaware
corporation having the exact same capitalization as the California corporation
(see Reincorporation in Delaware Supra).
No service charges will be payable by holders of shares of Company's
Common Stock in connection with the exchange of certificates, all expenses of
which will be borne by the Company.
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FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material anticipated Federal income
tax consequences of the Reverse Stock Split to shareholders of the Company. This
summary is based on the Federal income tax laws now in effect and as currently
interpreted. It does not take into account possible changes in such laws or
interpretations, including amendments to applicable statutes, regulations and
proposed regulations or changed in judicial or administrative rulings, some of
which may have retroactive effect. This summary is provided for general
information only and does not purport to address all aspects of the possible
Federal income tax consequences of the Reverse Stock Split and is not intended
as tax advice to any person. In particular, and without limiting the foregoing,
this summary does not consider the Federal income tax consequences to
shareholders of the Company in light of their individual investment
circumstances or to holders subject to special treatment under the Federal
income tax laws (for example, life insurance companies, regulated investment
companies and foreign taxpayers). The summary does not discuss any consequence
of the Reverse Stock Split under any state, local or foreign tax laws.
No ruling from the Internal Revenue Service or opinion of counsel will
be obtained regarding the Federal income tax consequences to the shareholders of
the Company as a result of the Reverse Stock Split. ACCORDINGLY, EACH
SHAREHOLDER IS ENCOURAGED TO CONSULT HIS OR HER TAX ADVISER REGARDING THE
SPECIFIC TAX CONSEQUENCES OF THE PROPOSED REVERSE STOCK SPLIT TO SUCH
SHAREHOLDER, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN
INCOME AND OTHER TAX LAWS.
The Company believes that the Reverse Stock Split would be a tax-free
recapitalization to the Company and its shareholders. If the Reverse Stock Split
qualifies as a recapitalization described in Section 368(a)(1)(E) of the
Internal Revenue Code of 1986, as amended (the "Code"), then: (i) no gain or
loss will be recognized by holders of the Company's Common Stock who exchange
their shares of Common Stock for new, post-Reverse Split share, except that
holders of pre-Reverse Split Common stock who receive cash proceeds from the
sale of fractional shares of Common Stock will recognize gain or loss equal to
the difference, if any, between such proceeds and the basis of their Common
Stock allocated to their fractional share interests, and such gain or loss, if
any, will constitute capital gain or loss if their fractional share interests
are held as capital assets at the time of their sale, (ii) the tax basis of the
new, post-Reverse Split Common Stock received by holders of old, pre-Reverse
Split, Common Stock will be the same as the tax basis of the old, pre-Reverse
Split Common Stock exchanged therefor, and (iii) the holding period of the new
post-Reverse Split Common Stock in the hands of the holders of such shares will
include the holding period of their old, pre-Reverse Split Common Stock
exchanged therefor, provided that such shares were held as a capital asset
immediately prior to the exchange.
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ACTION NO. 2: AMENDMENT OF THE ARTICLES OF
INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED COMMON SHARES FROM 2,500,000
TO 25,000,000 SHARES
Article Six of the Company's Articles of Incorporation currently
authorizes the Company to issue up to 25,000,000 shares of Common Stock. Such
number will automatically be reduced as a result of the Reverse Stock Split to
2,500,000 shares. The Board of Directors has adopted, subject to shareholder
approval, a resolution to amend Article to increase the number of authorized
shares of Common Stock to 25,000,000 shares.
The additional Common Stock to be authorized by adoption of the proposed
amendment would have rights identical to those associated with the Company's
currently authorized and outstanding Common Stock.
PURPOSE OF THE PROPOSED AMENDMENT
As of July 10, 1998, the Company had a total of 12,834,394 issued and
outstanding shares of Common Stock, out of the 25,000,000 shares currently
authorized for issuance. In addition to the shares of Common Stock then actually
outstanding, the Board has reserved 200,000 shares of Common Stock which may be
issued upon exercise of options currently held by employees. As a result, the
Company has at the present time 11,965,606 authorized but unissued and
uncommitted shares of Common Stock available for issuance. (Under the Company's
1995 Stock Option Plan, up to 200,000 shares could potentially be issued upon
the grant and exercise of options.) Such shares will be reduced to 1,196,560
shares after giving effect to the reverse stock split.
Although at present the Board of Directors has no plans to approve
future issuances of additional shares of Common Stock, it desires to have such
shares available to provide additional flexibility to use its capital stock for
business and financial purposes in the future. The additional shares may be
used, without further shareholder approval, for various purposes including,
without limitation, issuing additional dividends in the form of stock splits,
raising capital, providing equity incentives to employees, officers or
directors, establishing strategic relationships with other companies, and
expanding the Company's business or product lines through the acquisition of
other businesses.
The additional shares of Common Stock that would become available for
issuance could also be used by the Company to oppose a hostile takeover attempt
or delay or prevent changes in control or management of the Company. For
example, without further shareholder approval, the Board could strategically
sell shares of Common Stock in a private transaction to purchasers who would
oppose a takeover or favor the current Board. Although this proposal to increase
the authorized Common Stock has been prompted by business and financial
considerations and not by the threat of any hostile takeover attempt (nor is the
Board currently aware of any such attempts directed at the Company),
shareholders should be aware that approval of this proposal could facilitate
future efforts by the Company to deter or prevent changes in control of the
Company, including transactions in which the shareholders might otherwise
receive a premium for their shares over then current market prices.
-6-
EFFECTS OF THE PROPOSED AMENDMENT
Adoption of the proposed amendment and issuance of the Common Stock
would not affect the rights of the holders of currently outstanding Common Stock
of the Company, except for the dilutive effects resulting from increasing the
number of shares of the Company's Common Stock outstanding (when and if such
additional shares are actually issued), including the shares which may be issued
upon exercise of the warrants which will be issued pursuant to the Company's
recent private offering, as described above (see "Recent and Proposed Equity
Offerings"). If the amendment is adopted, it will become effective upon the
filing of a Certificate of Amendment of the Company's Articles of Incorporation
with the Secretary of State of the State of California.
ACTION NO. 3: AMENDMENT OF THE ARTICLES OF INCORPORATION TO
AUTHORIZE THE ISSUANCE 2,000,000 SHARES OF UNDESIGNED
PREFERRED STOCK
Article 6 of the Company's Articles of Incorporation currently
authorizes the Company to issue up to 25,000,000 shares of Common Stock and no
shares of Preferred Stock.
The Board of Directors unanimously adopted a resolution to amend Article
6 of the Company's Articles of Incorporation to authorize the Company to issue
up to 2,000,000 shares of Preferred Stock in addition to the 25,000,000 shares
of Common Stock. As so amended, Article 6 would authorize the Board to cause
shares of Preferred Stock to be issued in one or more series and with such
preferences, limitations, and relative rights, at such times and for such
consideration, as the Board may determine, without shareholder approval.
PURPOSES OF THE PROPOSED AMENDMENT
Many corporations, including many publicly traded corporation, have
provisions in their Articles of Incorporation which are similar to those which
have been proposed by the Board as described herein. The Company believes that
the Company may in the future need to raise capital through the issuance of
Preferred Stock. If that need should arise, potential investors may desire to
purchase stock on terms and conditions different than the Company's common
stock. Accordingly, the Company believes that the proposed amendment, which
would authorize the Company to create and issue on or more series of Preferred
Stock on terms and containing conditions to be set by the Board at its
discretion will provide the Company with the greatest flexibility in
negotiating, structuring and securing additional investment.
-7-
In addition to allowing the Company to pursue financing alternatives
that might exist if the Company did not have such restricted authority to issue
Preferred Stock, the Board could use the Preferred Stock for other purposes,
including public and private offerings of preferred shares for cash, payment of
stock dividends to the Company's shareholders, and the acquisition of the stock
or assets of another company. The Board has no present intention of taking any
of these actions, but the ability to do so could be of significant value to the
Company in the future.
Although it has no present intention of doing so, the Board of Directors
could issue a series of shares of Preferred Stock that could, depending on the
terms of such series, discourage an acquisition or make it more difficult for an
acquirer to obtain control of the Company by means of merger, tender offer,
proxy contest or other means. For example, Preferred Stock could be used to
create voting or other rights which would be impediments to those persons
seeking to gain control of the Company. Such shares could be privately placed
with purchasers favorable to the Board of Directors opposing such action. In
addition, the Board of Directors could authorize holders of a series of
Preferred Stock to vote either separately as a class or with holders of the
Common Stock on any merger, sale, or exchange of assets by the Company or any
other extraordinary corporate transaction. Finally, the existence of the
additional authorized shares of Preferred Stock could have the effect of
discouraging unsolicited takeover attempts.
TERMS OF THE PREFERRED STOCK
In designating the preferences, limitations, and relative rights of any
series of Preferred Stock, the Board of Directors will, if this Proposal is
approved by the shareholders, have the authority to provide that the shares of
any such series may:
(1) have special, confidential, or limited voting rights or no
voting rights;
(2) be redeemable or convertible: (a) at the option of the
Company, by the shareholder or another person on the occurrence of a
designated event; (b) for cash, indebtedness, securities, or other
property; or (c) in a designated amount or in an amount determined in
accordance with a designated formula or by reference to extrinsic data
events;
(3) entitle the holders to distributions calculated in any
manner, including dividends that may be cumulative, noncumulative, or
partially cumulative; and
(4) have a preference over any other classes or series of shares
with respect to distributions, including dividends and distribution upon
the dissolution of the Company, all as the Board of Directors may deem
advisable and as are not inconsistent with the California General
Corporation Law or the Company's Articles of Incorporation.
For example, in the event that Company secures an institutional
investment, an institutional investor could require (a) a liquidation preference
ensuring the return of the preferred investment ahead of any payments to the
holders of the Common Stock in the event of the liquidation, merger or sale of
substantially all of the assets of the Company and (b) the right to convert each
share of Preferred Stock into on or more shares of Common Stock based upon an
agreed conversion ratio. The exact terms of the Preferred Stock into one or more
shares of Common Stock based upon an agreed conversion ratio. The exact terms of
the Preferred Stock will be negotiated with the investor and will vary depending
on the particular needs and concerns for that investor.
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ACTION NO. 4 APPROVAL OF A CHANGE IN THE COMPANY'S STATE OF
INCORPORATION FROM CALIFORNIA TO DELAWARE
The Company was originally incorporated in the State of California, and
it is still a California corporation. In July, 1998, however, the Board of
Directors unanimously adopted a resolution to change the Company's state of
incorporation from California to Delaware. Such a change would involve the
merger of the Company into a wholly-owned Delaware subsidiary corporation, to be
created for that purpose, and it commonly known as "Reincorporation." If the
proposed Reincorporation takes place as planned, the Delaware Company will have
the name Spectrum Laboratories, Inc.
REASONS FOR THE PROPOSED REINCORPORATION
The Company believes that a change in the Company's state of
incorporation would be in the best interests of the Company and its shareholders
for several reasons. In recent years, a number of major public companies have
obtained the approval of their shareholders to reincorporate in Delaware. For
the reasons explained below, the Company believes it is beneficial and important
that the Company likewise avail itself of Delaware law.
ATTRACTING AND RETAINING QUALIFIED DIRECTORS
The Company believes that Reincorporation will enhance the Company's
ability to attract and retain qualified members of the Company's Board of
Directors as well as encourage directors to continue to make independent
decisions in good faith on behalf of the Company. To date, the Company has not
experienced difficulty in retaining directors. The Company believes that the
more favorable corporate environment afforded by Delaware will enable it to
compete more effectively with other public companies, many of which are
incorporated in Delaware, to attract new directors and to retain its current
directors. Reincorporation in Delaware will allow the Company the increased
flexibility and predictability afforded by Delaware law. Concurrent with the
Reincorporation, the Company proposes to adopt or maintain certain measures
designed to make hostile takeovers of the Company more difficult. The Company
believes that adoption of these measures will enable the Company to consider
fully any proposed takeover attempt and to negotiate terms that maximize the
benefit to the Company and its shareholders.
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SUPERIOR RULES OF CORPORATE GOVERNANCE
For many years, Delaware has followed a policy of encouraging
incorporation in that state. In furtherance of that policy, Delaware has adopted
comprehensive corporate laws which are revised regularly to meet changing
business circumstances. The Delaware legislature is particularly sensitive to
issues regarding corporate law and is especially responsive to developments in
modern corporate law. The Delaware courts have developed considerable expertise
in dealing with corporate issues as well as a substantial body of case law
construing Delaware's corporate law. As a result of these factors, it is
anticipated that Delaware law will provide greater predictability in the
Company's legal affairs than is presently available under California law.
In 1996, Delaware amended its corporate law to allow corporations to
limit the personal monetary liability of directors for their conduct as
directors under certain circumstances. The directors have elected to adopt such
a provision in the Delaware certificate and bylaws. It should be noted that
Delaware law does not permit a Delaware corporation to limit or eliminate the
liability of its directors for intentional misconduct, bad faith conduct or any
transaction from which the director derives an improper personal benefit or for
violations of federal laws such as the federal securities laws. The Board
believes that Delaware incorporation will enhance the Company's ability to
recruit and retain directors in the future; however the shareholders should be
aware that such a provision inures to the benefit of the directors, and the
interest of the Board in recommending the Reincorporation may therefore be in
conflict with the interests of the shareholders. See "Indemnification and
Limitation of Liability" for a more complete discussion of these issues.
In 1987, California amended its corporate law in a manner similar to
Delaware to permit a California corporation to limit the personal monetary
liability of its directors for their conduct as directors under certain
circumstances. The Company has in the past adopted articles and bylaws, and
entered into indemnification agreements with its officers and directors, to take
advantage of these changes in California law. Nonetheless, the Board of
Directors believes that the protection from liability for directors is somewhat
greater under the Delaware law than under the California law and therefore that
the Company's objective in adopting this type of provision can be better
achieved by Reincorporation in Delaware. The Board of Directors has included
such a provision in the proposed Delaware articles and bylaws. Shareholders
should be aware that, because such provision inures to the benefit of the
directors, there is a potential conflict in the Board's support of such a
provision. See "Indemnification and Limitation of Liability" for a more complete
discussion of these issues.
The interest of the Board of Directors of the Company, management, and
affiliated shareholders in voting on the Reincorporation proposal may not be the
same as those of unaffiliated shareholders. Delaware law does not afford
minority shareholders some of the rights and protections available under
California law. Reincorporation of the Company and Delaware may make it more
difficult for minority shareholders to elect directors and influence Company
policies. A discussion of the principal differences between California and
Delaware law as they affect shareholders is set forth below, under the heading
"Significant Changes Caused by Reincorporation."
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SIGNIFICANT CHANGES CAUSED BY THE REINCORPORATION
In general, the Company's corporate affairs are governed at present by
the corporate law of California, the Company's state of incorporation, and by
the Company's Articles of Incorporation (the "California Articles"), and Bylaws
(the "California Bylaws"), which have been adopted pursuant to California law.
The California Articles and the California Bylaws are available for inspection
during business hours at the principal executive offices of the Company.
The Company will merge into, and its business will be continued by, the
Delaware Company. Following the merger, issues of corporate governance and
control would be controlled by Delaware, rather than California law (however,
see "Application of California Law After Reincorporation", below). The
California Articles and California Bylaws, will, in effect, be replaced by the
Certificate of Incorporation of the Delaware Company (the "Delaware
Certificate") and the bylaws of the Delaware Company (the "Delaware Bylaws"),
copies of which are attached as Exhibits C and D to this Proxy Statement.
Accordingly, the differences among these documents and between Delaware and
California law are relevant to each shareholder's decision whether to approve
the Reincorporation proposal.
INDEMNIFICATION AND LIMITATION OF LIABILITY
LIMITATIONS ON DIRECTOR LIABILITY. Both California and Delaware permit a
corporation to limit the personal liability of a director to the corporation or
its shareholders for monetary damages for breach of certain duties as of
director. The California and Delaware laws adopt a self-governance approach by
enabling a corporation to take advantage of these provisions only if an
amendment to the charter limiting such liability is approved by a majority of
the outstanding shares or such language is included in the original charter.
The California Articles eliminate the liability of directors to the
corporation to the fullest extent permissible under California law. California
law does not permit the elimination of monetary liability where such liability
is based on: (a) intentional misconduct or knowing and culpable violation of
law; (b) acts or omissions that a director believes to be contrary to the best
interests of the corporation or its shareholders, or that involve the absence of
good faith on the part of the director; (c) receipt of an improper personal
benefit; (d) acts or omissions that show reckless disregard for the director's
duty to the corporation or its shareholders, where the director in the ordinary
course of performing a director's duties should be aware of a risk of serious
injury to the corporation or its shareholders; (e) act or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the director's duty to the corporation and its shareholders; (f) interested
transactions between the corporation and a director in which a director has a
material financial interest; and (g) liability for improper distributions, loans
or guarantees.
The Delaware Certificate also eliminates the liability of directors to
the fullest extent permissible under Delaware law, as such law exists currently
or as it may be amended in the future. Under Delaware law, such provision may
not eliminate or limit director monetary liability for (a) breaches of
director's duty of loyalty to the corporation or its shareholders; (b) acts or
omissions not in good faith or involving intentional misconduct or knowing
violations of law; (c) the payment of unlawful dividends or unlawful stock
repurchases or redemptions; or (d) transactions in which the director received
an improper personal benefit. Such limitation of liability provision also may
not limit director's liability for violation of, or otherwise relieve the
Delaware Company or its directors from the necessity of complying with, federal
or state securities laws or affect the availability of non-monetary remedies
such as injunctive relief or rescission.
-11-
Shareholders should recognize that the proposed Reincorporation and
associated measures are designed to shield a director from suits by the Delaware
Company or its stockholders for monetary damages for negligence or gross
negligence by the director in failing to satisfy the director's duty of care. As
a result, an action for monetary damages against a director predicated on a
breach of the duty of care would be available only if the Delaware Company or
its shareholders were able to establish that the director knowingly violated the
law, derived an improper personal benefit, or approved an illegal dividend or
stock repurchase. Consequently, the effect of such measures may be to limit or
eliminate an effective remedy which might otherwise be available to a
shareholder who is dissatisfied with the Board's decisions. Although an
aggrieved shareholder could sue to enjoin or rescinded an action taken or
proposed by the Board of Directors, such remedies may not be timely or adequate
to prevent or redress injury in all cases.
The Company believes that directors are motivated to exercise due care
in managing the Company's affairs primarily by concern for the best interests of
the Company and its shareholders, rather than by the fear of potential monetary
damage awards. As a result, the Company believes that the Reincorporation
proposal should sustain the Board's continued high standard of corporate
governance without any decrease in accountability by directors to the Company
and its shareholders.
INDEMNIFICATION OF OFFICERS AND DIRECTOR. The California and Delaware
Bylaws relating to indemnification similarly require that the California Company
and the Delaware Company, respectively, each indemnify its directors and its
executive officers and officers to the fullest extent permitted by the
respective state laws, provided that the Company may modify the extent of such
indemnification by individual contracts with its directors and executive
officers, and, provided, further, that the Company will not be required to
indemnify any director or executive officer in connection with a proceeding
initiated by such person, with certain exceptions. Such Bylaws permit the
California Company and the Delaware Company, respectively, to provide
indemnification to its other officers, employees and agents as set forth in the
respective state laws. Such indemnification is intended to provide the full
flexibility available under such laws. The Delaware Bylaws contain provisions
similar to the California Bylaws with respect to advances in that the Company is
required to advance expenses related to any proceeding contingent on such
persons' commitment to repay any advances unless it is ultimately determined
that such persons are entitles to be indemnified.
California and Delaware have similar laws respecting indemnification by
a corporation of its officers, directors, employees and other agents. There are
nonetheless certain differences between the laws of the two states.
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California law permits indemnification of expenses incurred in
derivative or third-party actions, except that with respect to derivative
actions (a) no indemnification may be made without court approval when a person
is adjudged liable to the corporation in the performance of that person's duty
to the corporation and its shareholders, unless a court determines such person
is entitled to indemnity for expenses, and then such indemnification may be made
only to the extent that such court shall determine and (b) no indemnification
may be made under California law, without court approval in respect of amounts
paid or expenses incurred in settling or otherwise disposing of a threatened or
pending action or amount incurred in defending a pending action which is settled
or otherwise disposed of without court approval. Delaware allows indemnification
of such expenses without court approval.
Indemnification is permitted by both California and Delaware law
providing the requisite standard of conduct is met, as determined by a majority
vote of a disinterested quorum of the directors, independent legal counsel (if a
quorum of independent directors is not obtainable), a majority vote of a quorum
of the shareholders (excluding shares owned by the indemnified party) or the
court handling the action.
California law requires indemnification when the individual has
successfully defended the action on the merits (as opposed to Delaware law,
which requires indemnification relating to a successful defense on the merits or
otherwise).
Delaware law generally permits indemnification of expenses incurred in
the defense or settlement of a derivative or third-party action, provided there
is a determination by a disinterested quorum of the directors, by independent
legal counsel or by a majority vote of a quorum of the shareholders, that the
person seeking indemnification acted in good faith and in a manner reasonably
believed to be in or (in contrast to California law) not opposed to the best
interests of the corporation. Without court approval, however, no
indemnification may be made in respect of any derivative action in which such
person is adjudged liable for negligence or misconduct in the performance of his
or her duty to the corporation. Delaware law requires indemnification of
expenses when the individual being indemnified has successfully defended the
action on the merits or otherwise.
California corporations may include in their articles of incorporation a
provision which extends the scope of indemnification through agreements, bylaws
or other corporate action beyond that specifically authorized by statute. The
California Articles include such a provision.
A provision of Delaware law states that the indemnification provided by
statute shall not be deemed exclusive of any other rights under any bylaw,
agreement, vote of shareholders or disinterested directors or otherwise. Under
Delaware law, rights to indemnification and expenses are non-exclusive, in that
they need not be limited to those expressly provided by statute. California law
is similar in that it permits non-exclusive indemnification if authorized in the
Company's charter. The California Articles contain such an enabling provision.
Under Delaware law and the Delaware Bylaws, the Delaware Company is permitted to
indemnify its directors, officers, employees and other agents, within the limits
established by law and public policy, pursuant to an express contract, bylaw
provision, shareholder vote or otherwise, any or all of which could provide
indemnification rights broader than those currently available under the
California Bylaws or the California indemnification statutes. If the
Reincorporation is approved, the Company intends to enter into indemnification
agreements with its officers and directors.
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The indemnification and limitation of liability provisions of California
law, and not Delaware law, will apply to actions of the directors and officers
of the California Company made prior to the proposed Reincorporation.
Nevertheless, in considering this Reincorporation proposal the Board has
recognized that the individual directors have a personal interest in obtaining
the application of Delaware law to such indemnity and limitation of liability
issues affecting them and the Company in the event they arise from a potential
future case, and that the application of Delaware law, to the extent that any
director or officer is actually indemnified in circumstances where
indemnification would not be available under California law, would result in
expense to the Company which the Company would not incur if it were not
reincorporated. The Board believes, however, that the overall effect of
Reincorporation will be to provide a corporate legal environment that enhances
the Company's ability to attract and retain high quality outside directors and
thus benefits the interests of the Company and its shareholders.
There is no pending or, to the Company's knowledge, threatened
litigation to which any of its directors is a party in which the rights of the
Company or its shareholders would be affected if the Company currently were
subject to the provisions of Delaware law rather than California law.
California and Delaware corporate law, the bylaws of both the Company
and of the Delaware Company, as well as any indemnity agreements, may permit
indemnification for liabilities arising under the Securities Act of 1933, as
amended (the "Securities Act") or the Exchange Act. The Board of Directors has
been advised that, in the opinion of the Securities and Exchange Commission (the
"Commission"), indemnification for liabilities arising under the Securities Act
is contrary to public policy and is therefore unenforceable, absent a decision
to the contrary by a court of appropriate jurisdiction.
CUMULATIVE VOTING FOR DIRECTORS
Cumulative voting permits the holder of each share of stock entitled to
vote in the election of directors to cast that number of votes which equal the
number of directors to be elected. The holder may allocate all votes represented
by a share to a single candidate or may allocate those votes among as many
candidates as he chooses. Thus, a shareholder with a significant minority
percentage of the outstanding shares may be able to elect one or more directors
if voting is cumulative. Under California law, cumulative voting in the election
of directors is mandatory upon notice given by a shareholder at a shareholders'
meeting at which directors are to be elected. In order to cumulate votes a
shareholder must give notice cumulatively. If any one shareholder gives such
notice, all shareholders may cumulate their votes.
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Cumulative voting is not available under Delaware law unless so provided
in the corporation's Certificate of Incorporation. Since the Delaware
Certificate does not provide for cumulative voting, the holder or holders of a
majority of the shares entitled to vote in an election of directors will be able
to elect all the directors of the Delaware Company.
The elimination of cumulative voting could deter investors from
acquiring a minority block in the Company with a view toward obtaining a board
seat and influencing Company policy. It is also conceivable that the absence of
cumulative voting might deter efforts to seek control of the Company on a basis
which some shareholders might deem favorable.
OTHER MATTERS RELATING TO DIRECTORS
NUMBER OF DIRECTORS. California law allows the number of persons
constituting the board of directors of a corporation to be fixed by the bylaws
or the articles of incorporation, or permits the bylaws to provide that the
number of directors may vary within a specified range, the exact number to be
determined by the Board of Directors. California law further provides that, in
the case of a variable board, the maximum number of directors may not exceed two
times the minimum number minus one. The California Articles and Bylaws provide
for a board of directors that may vary between four and seven members,
inclusive, and the Board of Directors has fixed the exact number of directors at
four.
California law also requires that any change in a fixed number of
directors and any change in the range of a variable Board of Directors specified
in the articles and bylaws must be approved by a majority in interest of the
outstanding shares entitled to vote (or such greater proportion of the
outstanding shares as may be required by the articles of incorporation),
provided that a change reducing the minimum number of directors to less than
three cannot be adopted if votes cast against its adoption are equal to more
than 16 1/3% of the outstanding shares entitled to vote.
Delaware law permits a board of directors to change the authorized
number of directors by amendment to the bylaws unless the number of directors is
fixed in the certificate of incorporation or the manner of fixing the number of
directors is set forth in the certificate of incorporation, in which case the
number of directors may be changed only by amendment of the certificate of
incorporation or consistent with the manner specified in the certificate of
incorporation, as the case may be.
The Board has no current plans to change the number of directors the
Company will have from the current number, which is two, so if the
Reincorporation is approved the Delaware Company will, at least initially, have
two directors just as the California Company does now.
REMOVAL OF DIRECTORS. Under California law, a director may be removed
with or without cause by the affirmative vote of a majority of the outstanding
shares, provided that the shares voted against removal would not be sufficient
to elect the director by cumulative voting. Under Delaware law, unless the board
is classified or cumulative voting is permitted, a director can be removed from
office during his term by shareholders with or without cause by the holders of a
majority of the shares then entitled to vote at an election of directors. The
Delaware Certificate provides that the Company's directors may be removed from
office at any time with or without cause by the affirmative vote of the holders
of a majority of the voting power of the then-outstanding shares of voting stock
of the Company entitled to vote in the election of directors (the "Voting
Stock"). The term "cause" with respect to the removal of directors is not
defined in the Delaware General Corporation Law and its meaning has not been
precisely delineated by the Delaware courts.
-15-
FILLING BOARD VACANCIES. Under California law, if, after the filling of
any vacancy by the directors of a corporation, the directors then in office who
have been elected by the corporation's shareholders constitute less than a
majority of the directors then in office then: (i) any holder of more than 5% of
the corporation's Voting Stock may call a special meeting of shareholders, or
(ii) the superior court of the appropriate county may order a special meeting of
the shareholders to elect the entire board of directors of the corporation.
Delaware law provides that if, at the time of filling any vacancy or newly
created directorship, the directors then in office constitute less than a
majority of the entire board of directors as constituted immediately prior to
any increase, the Delaware Court of Chancery may, upon application of any
shareholder or shareholders holding at least 10% of the total number of shares
at the time outstanding having the right to vote for such directors, summarily
order an election to be held to fill any such vacancies or newly created
directorships or to replace the directors chosen by the directors then in
office.
The proposed Delaware Certificate and Bylaws provide that vacancies
shall, unless the Board of Directors determines by resolution that any such
vacancies be filled by the shareholders or as otherwise provided by law, be
filled only by the affirmative vote of a majority of directors then in office,
even if such directors comprise less than a quorum of the Board of Directors.
SHAREHOLDER POWER TO CALL SPECIAL SHAREHOLDERS' MEETING
Under California law, a special meeting of shareholders may be called by
the Board of Directors, the Chairman of the Board of Directors, the President or
the holders of shares entitled to cast not less than 10% of the votes at such
meeting and such persons as are authorized by the articles of incorporation or
bylaws. Under Delaware law, a special meeting of shareholders may be called by
the Board of Directors or by any other person authorized to do so in the
certificate of incorporation or the bylaws. The Delaware Certificate and
Delaware Bylaws provide that such a meeting may be called by the Board of
Directors, the Chairman of the Board of Directors or the Chief Executive
Officer. Pursuant to the Delaware Certificate and Delaware Bylaws, if the
meeting is called by a person or persons other than the Board of Directors
(i.e., by the Chairman or the Board of the Chief Executive Officer) the Board of
Directors shall determine the time and the place of such meeting which shall be
from 35 to 120 days after the receipt of the request of the meeting.
-16-
ADVANCE NOTICE REQUIREMENT FOR SHAREHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
There is no specific statutory requirement under either California or
Delaware law with regard to advance notice of director nominations and
shareholder proposals. Absent a bylaw restriction, director nominations and
shareholder proposals may be made without advance notice at the annual meeting.
However, federal securities laws generally provide that shareholder proposals
that the proponent wishes to include in the Company's proxy materials must be
received not less than 120 days in advance of the date of the proxy statement
released in connection with the previous year's annual meeting.
Both the current California Bylaws and the Delaware Bylaws provide that
in order for director nominations to be property brought before the meeting, the
shareholder must have delivered timely notice to the Secretary of the Company.
ANTI-TAKEOVER MATTERS
Delaware law has been widely viewed to permit a corporation greater
flexibility in governing its internal affairs and its relationships with
shareholders and other parties than do the laws of many other states, including
California. In particular, Delaware law permits a corporation to adopt a number
of measures designed to reduce a corporation's vulnerability to hostile takeover
attempts. Such measures are either not currently permitted or are more narrowly
drawn under California law. Among these measures are the establishment of a
classified board of directors and the elimination of the right of shareholders
to call special shareholders' meetings, each of which is described above. In
addition, certain types of meetings, each of which is described above. In
addition, certain types of "poison pill" defenses (such as shareholder rights
plans) have been upheld by Delaware courts, while California courts have yet to
decide ton the validity of such defenses, thus rendering their effectiveness in
California less certain.
One such difference is the existence of a Delaware statute regulating
tender offers, which statute is intended to limit coercive takeovers of
companies incorporated in that state. California has no comparable statute. The
Delaware law provides that a corporation may not engage in any business
combination with any interested shareholder for a period of three years
following the date that such shareholder became an interested shareholder,
unless (i) prior to the date the shareholder became an interested shareholder
the Board of Directors approved the business combination or the transaction
which resulted in the shareholder becoming an interested shareholder, or (ii)
which resulted in the shareholder becoming an interested shareholder, or (ii)
upon consummation of the transaction which resulted in the shareholder becoming
an interested shareholder, the interested shareholder owned at least 85% of the
Voting Stock, or (iii) the business combination is approved by the Board of
Directors and authorized by 66 2/3% of the outstanding Voting Stock which is not
owned by the interested shareholder.
There can be no assurance that the Board of Directors would not adopt
any anti-takeover measures available under Delaware law (some of which may not
require shareholder approval). Moreover, the availability of such measures under
Delaware law, whether or not implemented, may have the effect of discouraging a
future takeover attempt which a majority of the Delaware Company's shareholders
may deem to be in their best interests or in which shareholders may receive a
premium for their shares over then current market prices. As a result,
shareholders who might desire to participate in such transactions may not have
the opportunity to do so.
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Shareholders should recognize that, if adopted, the effect of such
measures, along with the possibility of discouraging takeover attempts, may be
to limit in certain respects the rights of shareholders of the Company. The
Board of Directors recognizes that hostile takeover attempts do not always have
the unfavorable consequences or effects described above and may frequently be
beneficial to the shareholders, providing all of the shareholders with
considerable value for their shares. However, the Board of Directors believes
that the potential disadvantages of unapproved takeover attempts (such as
disruption of the Company's business and the possibility of terms which may be
less than favorable to all of the shareholders than would be available in a
board-approved transaction) are sufficiently great such that prudent steps to
reduce the likelihood of such takeover attempts and to enable the Board to fully
consider the proposed takeover attempt and actively negotiate its terms are in
the best interests of the Company and its shareholders.
In addition to the various anti-takeover measures that would be
available to the Delaware Company after the Reincorporation due to the
application of Delaware law, the Delaware Company would retain the rights
currently available to the Company under California law to issue shares of its
authorized but unissued capital stock. Following the effectiveness of the
proposed Reincorporation, shares of authorized and unissued Common Stock and
Preferred Stock of the Delaware Company could (within the limits imposed by
applicable law) be issued in one or more transactions, or Preferred Stock could
be issued with terms, provisions and rights with would make more difficult and,
therefore, less likely, a takeover of the Delaware Company. Any such issuance of
additional stock could have the effect of diluting the earnings per share and
book value per share of existing shares of Common Stock and Preferred Stock, and
such additional shares could be used to dilute the stock ownership of persons
seeking to obtain control of the Delaware Company.
AMENDMENT OF CERTIFICATE OR ARTICLES OF INCORPORATION
The California Articles may be amended by the approval of a majority of
the members of the Board of Directors and by a majority of the outstanding
shares. The Delaware Certificate provides that the provisions relating to (i)
indemnification of directors, (ii) management of the Delaware Company, and (iii)
the number, term, election and removal of directors can only be amended by the
affirmative vote of the holders of at least 66 2/3% of the voting power of the
outstanding voting stock of the Delaware Company.
AMENDMENT OF BYLAWS
The California Bylaws may be amended or repealed either by the Board of
Directors or by the holders of a majority in interest of the outstanding stock
of the Company. Upon the effectiveness of the proposed Reincorporation, the
Delaware Bylaws may be adopted, amended or repealed by the Delaware Board or by
the holders of at least 66 2/3% of the voting power of the outstanding capital
stock of the Delaware Company.
-18-
LOANS TO OFFICERS, DIRECTORS AND EMPLOYEES
Under California law, any loan or guaranty (other than loans to permit
the purchase of shares under certain stock purchase plans) for the benefit of
any officer or director, or any employee benefit plan authorizing such loan or
guaranty (except certain employee stock purchase plans), must be approved by the
shareholders of the corporation unless the corporation has (a) more than 100
shareholders of record and (b) a bylaw provision in effect which authorizes the
Board alone to approve such a loan or guaranty.
Under Delaware law, a corporation may make loans to, or guarantee the
obligations of, officers or other employees when, in the judgment of the board
of directors, the loan or guaranty may reasonably be expected to benefit the
corporation. Both California law and Delaware law permit such loans or
guaranties to be unsecured and without interest.
CLASS VOTE FOR CERTAIN REORGANIZATIONS
With certain exceptions, California law requires that mergers,
reorganizations, certain sales of assets, and similar transactions be approved
by a majority vote of each class of shares outstanding. Delaware law generally
does not require class voting for such transactions, except in certain
situations involving an amendment to the certificate of incorporation which
adversely affects a specific class of shares.
California law also requires that holders of a California corporation's
Common Stock receive nonredeemable Common Stock in a merger of the corporation
with the holder (or an affiliate of the holder) of more than 50% but less than
90% of its Common Stock, unless all of the holders of its Common Stock consent
to the merger or the merger has been approved by the California Commissioner of
Corporations at a "fairness" hearing. This provision of California law may have
the effect of making a cash "freeze out" merger by a majority shareholder more
difficult to accomplish. A cash freeze out merger is a transaction whereby a
minority shareholder is forced to relinquish his share ownership in a
corporation in exchange for cash, subject in certain instances to dissenters
rights. Delaware law has no comparable provision.
INSPECTION OF SHAREHOLDER LISTS
California law provides for an absolute right of inspection of the
shareholder list for shareholders holding 5% or more of a corporation's
outstanding voting shares or shareholders holding 1% or more or such shares who
filed a Schedule 14A with the SEC. Delaware law provides no such absolute right
of shareholder inspection. However, both California and Delaware law permit any
shareholder of record to inspect the shareholder list for any purpose reasonably
related to that person's interest as a shareholder.
-19-
APPRAISAL RIGHTS
Under both California law and Delaware law, a shareholder of a
corporation participating in certain mergers and reorganizations may be entitled
to receive cash in the amount of the "fair value" (Delaware) or "fair market
value" (California) of its shares, as determined by a court, in lieu of the
consideration it would otherwise receive in the transaction. The limitations on
such dissenters' appraisal rights under California law. For this reason,
appraisal rights will not be available to shareholders in connection with the
Reincorporation proposal.
Under Delaware law appraisal rights are not available to shareholders
with respect to a merger or consolidation by a corporation, the shares of which
are either listed on a national securities exchange or designated as a national
market system security or an interdealer quotation system security by the NASD,
or are held of record by more than 2,000 holders, if the shareholders receive
shares of the surviving corporation of shares of any other corporation which are
similarly listed or dispersed, and the shareholders do not receive any other
property in exchange for their shares except cash for fractional shares.
Appraisal rights are also unavailable under Delaware law to shareholders of a
corporation surviving a merger if no vote of those shareholders is required to
approve the merger because, among other things, the number of shares to be
issued in the merger does not exceed 20% of the shares of the surviving
corporation outstanding immediately before the merger and certain other
conditions are met.
VOTING AND APPRAISAL RIGHTS IN CERTAIN TRANSACTIONS
Delaware law does not provide shareholders with voting or appraisal
rights when a corporation acquires another business through the issuance of its
stock, whether in exchange for assets or stock or in a merger with a subsidiary.
California law treats these kinds of acquisitions in the same manner as a merger
of the corporation directly with the business to be acquired and provides
appraisal rights in the circumstances described in the preceding section.
DIVIDENDS
Under California law, any dividends or other distributions to
shareholders, such as redemptions, are limited to the greater of (i) retained
earnings or (ii) an amount which would leave the corporation with assets
(excluding certain intangible assets) equal to at least 125% of its liabilities
(excluding certain deferred items) and current assets equal to at least 100%
(or, in certain circumstances, 125%) of its current liabilities. Delaware law
allows the payment of dividends and redemption of stock out of surplus
(including paid-in and earned surplus) or out of net profits for the current and
immediately preceding fiscal years. The Company has never paid cash dividends
and has no present plans to do so.
-20-
APPLICATION OF CALIFORNIA LAW AFTER REINCORPORATION
California law provides that if (i) the average of certain property,
payroll and sales factors results in a finding that more than 50% of the
Delaware Company's business is conducted in California in a particular fiscal
year and (ii) more than 50% of the Delaware Company's outstanding voting
securities are held of record by persons having an addresses in California, then
the Delaware Company would become subject to certain provisions of California
law regardless of its state of incorporation. As of the Record Date, greater
than 50% of the Company's outstanding voting securities were held of record by
persons having addresses in California, and consequently California law will
initially apply to the Delaware Company if the Reincorporation is approved. the
Delaware Company will still be subject to California law with respect to
corporate governance matters as long as it continues to meet both of these
tests. If the Delaware Company were to become subject to the provisions of
California law referred to above, and such provisions were enforced by
California courts in a particular case, many of the Delaware laws described in
this Proxy Statement would not apply to the Delaware Company. Instead, the
Delaware Company could be governed by certain California laws, including those
regarding liability of directors for breaches of the duty of care,
indemnification of directors, dissenters' rights of appraisal, and removal of
directors, as well as certain other provisions discussed above, to the exclusion
of Delaware law. The effects of applying both Delaware and California laws to a
Delaware corporation whose principal operations are based in California have not
yet been determined.
The foregoing discussion has been an attempt to summarize the more
important differences in the corporation laws of Delaware and California and
does not purport to be an exhaustive discussion of all of the differences. Such
differences can be determined in fully be reference to the California
Corporations Code and to the Delaware General Corporation Law. In addition, both
California and Delaware law provide that some of the statutory provisions as
they affect various rights of holders of shares may be modified by provisions in
the charter or bylaws of the corporation.
HOW THE REINCORPORATION WOULD BE CARRIED OUT
The proposed Reincorporation shall be accomplished by merging the
Company into a to-be-formed Delaware corporation which will be a wholly-owned
subsidiary of the Company (the "Delaware Company"), pursuant to an Agreement and
Plan of Merger (the "Merger Agreement") which will be entered into as soon as
practicable after the Annual Meeting and the formation of the Delaware Company.
A copy of the proposed Merger Agreement is attached as Exhibit A to this Proxy
Statement. Upon the effective date of the merger, the Delaware Company's name,
will be Spectrum Laboratories, Inc. The Reincorporation will not result in any
change in the Company's business, assets or liabilities, will not cause its
corporate headquarters to be moved, and will not result in any relocation of
management or other employees. The Delaware Corporation will have the same
capitalizations as the California Corporation.
On the effective date of the proposed Reincorporation, each outstanding
share of Common Stock of the Company will automatically convert into one share
of the Common Stock of the Delaware Company, and shareholders of the company
will automatically become shareholders of the Delaware Company. On the effective
date of the Reincorporation, the number of outstanding shares of Common Stock of
the Delaware Company will be equal to the number of shares of Common Stock of
the Company outstanding immediately prior to the effective date of the
Reincorporation. In addition, each then-outstanding warrant or other right to
acquire shares of stock of the Company will be converted into a warrant or other
right to acquire an equal number of shares of the stock of the Delaware Company,
under the same terms and conditions as the original warrants or rights. The
Company's Stock Option Plan will be adopted and continued by the Delaware
Company following the Reincorporation. Shareholders should recognize that
approval of the proposed Reincorporation will constitute approval of the
adoption and assumption of those plans by the Delaware Company.
-21-
Upon consummation of the reincorporation, or as soon as practicable
thereafter, the Company will send a letter of transmittal to each shareholder
then of record for use in transmitting certificates representing shares to the
California Company's Common Stock ("Old Certificates") to the Exchange Agent.
The letter of transmittal will contain instructions for the surrender of Old
Certificates to the Exchange Agent in exchange for certificates representing the
appropriate number of whole shares of the Delaware Company's Common Stock "New
Certificates"). No New Certificates will be issued to a shareholder until such
shareholder has surrendered all Old Certificates together with a properly
completed and executed letter of transmittal to the Exchange Agent. Upon proper
completion and execution of the letter of transmittal and return thereof to the
Exchange Agent, together with all Old Certificates, shareholders will receive
one or more New Certificates representing the number of whole shares of the
Delaware Company's Common Stock into which their shares of the California
Company's Common Stock (represented by the Old Certificates) have been converted
as a result of the Reincorporation. Until surrendered, outstanding Old
Certificates held by shareholders will be deemed for all purposes to represent
the number of shares of the Delaware Company's Common Stock to which such
shareholders are entitled as a result of the reincorporate. Shareholders should
not send their Old Certificates to the Exchange Agent until they have received
the letter of transmittal. Shares not presented for surrender as soon as
practicable after the letter of transmittal is sent shall be exchanged at the
first time they are presented.
No service charges will be payable by holders of shares of the
California Company Common Stock in connection with the exchange of certificates,
all expenses of which will be borne by the Company.
FEDERAL INCOME TAX CONSEQUENCES OF THE REINCORPORATION
The following is a summary of the material anticipated Federal income
tax consequences of the Reincorporation to shareholders of the Company. This
summary is based on the Federal income tax laws now in effect and as currently
interpreted. It doe not take into account possible changes in such laws or
interpretations, including amendments to applicable statutes, regulations, and
proposed regulations or changes in judicial or administrative rulings, some of
which may have retroactive effect. This summary is provided for general
information only and does not purport to address all aspects of the possible
Federal income tax consequences of the Reincorporation, and it is not intended
as tax advice to any person. In particular, and without limiting the foregoing,
this summary does not consider the Federal income tax consequences to
shareholders of the Company in light of their individual investment
circumstances or to holders subject to special treatment under the Federal
income tax laws (for example, life insurance companies, regulated investment
companies and foreign taxpayers). The summary does not discuss any consequence
of the Reincorporation under any state, local or foreign tax laws.
-22-
No ruling from the Internal Revenue Service or opinion of counsel will
be obtained regarding the Federal income tax consequences to the shareholders of
the Company as a result of the Reincorporation. ACCORDINGLY, EACH SHAREHOLDER IS
ENCOURAGED TO CONSULT A TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO
HIM OR HER OF THE REINCORPORATION, INCLUDING THE APPLICATION AND EFFECT OF
STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
The Reincorporation provided for in the Merger Agreement is intended to
be a tax free reorganization under the Code. Assuming the Reincorporation
qualifies as a reorganization, no gain or loss will be recognized to the holders
of capital stock of the Company as a result of consummation of the
Reincorporation, and no gain or loss will be recognized by the Company or the
Delaware Company. Each former holder of capital stock of the Company will have
the same basis in the capital stock of the Delaware Company received by such
holder pursuant to the Reincorporation as such holder has in the capital stock
of the Company held by such holder at the time of consummation of the
Reincorporation. Each shareholder's holding period with respect to the Delaware
Company's capital stock will include the period during which such holder held
the corresponding Company capital stock, provided the latter was held by such
holder as a capital asset at thee time of consummation of the Reincorporation.
The Company has not obtained a ruling from the Internal Revenue Service or an
opinion of legal or tax counsel with respect to the consequences of the
Reincorporation.
The foregoing is only a summary of certain federal income tax
consequences. SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISERS REGARDING THE
SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABILITY OF
THE LAWS OF ANY STATE OR OTHER JURISDICTION.
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