Settlement of lawsuit and termination of agreement

RNS Number : 1024K

Spectra Systems Corporation

20 June 2014

 

June 20, 2014

Spectra Systems Corporation

("The Company" or "Spectra")

Spectra Systems Settles Lawsuit and Terminates Business Agreement

Spectra has agreed to settle a lawsuit filed by one of its shareholders and business partners and terminate the related royalty agreement for sales of certain banknote authentication materials.

The suit was filed on 13 February 2013 for damages totalling $2,136,091 to cover the period from 2004 to 2010. This amount was subsequently reduced to $1,272,397 due to enforcement of the statute of limitations, which bars claims that accrued more than six years prior to the filing of the lawsuit.

The Board is pleased to have reached a settlement which terminates the agreement and liabilities that would otherwise have continued through the remaining multi-year agreement, and settles the pending litigation and avoids further significant legal costs.  The settlement was reached at a cost to Spectra of approximately $2.1MM.

The settlement will result in a one-time, exceptional charge to the Company's profits in 2013 of $1.8MM after offsetting accruals already made in respect of the period from 2006 - 2012.  This appears as an exceptional item expense in its statement of income and as an increase to the accrual on its balance sheet and statement of cash flow, net of an estimated tax benefit of $700,000.  This exceptional charge will be accounted for in Spectra's accounts for the year ended 31 December 2013, the preliminary statement of which was released on 30 April 2014. 

It is anticipated that the Annual Report and Accounts will be circulated to shareholders of Spectra Systems Corporation on 24 June.

The Board's decision to accept this settlement was based on the legal advice that Spectra had a very high probability of success for the period from 2004 to 2013 and a likely, but less certain, probability of success for the remainder of the contract.

The amount which would have been owed, based on the highly probable outcome that we would prevail for the 2004 to 2013 period, would have been approximately $800,000.  This, along with the estimated legal fees through trial of $500,000 would have resulted in a cost to Spectra of approximately $1.3MM.

The analysis for the less certain outcome relating to the future contract years based on the historical levels of authentication materials shipment before 2012 could have resulted in approximately $1.6MM of estimated contract payments for the future years remaining on the agreement and could have been much higher if the order volumes in the future years are in excess of these levels.  The estimated potential cost of the base case for the future contract years, along with the successful outcome for the previous years, plus legal fees, could have resulted in $2.9MM of costs to the Company. 

Based on the analysis described, the Board concluded that the settlement of approximately $2.1MM, with a termination of the agreement, is the correct business decision and will result in significant savings for Spectra.

Enquiries:

Spectra Systems Corporation
Dr. Nabil Lawandy, Chief Executive Officer                                          Tel: [phone]

WH Ireland Limited
Chris Fielding (Head of Corporate Finance)                                          Tel: [phone]

 

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