<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
Commission File Number 0-9478
SPECTRUM LABORATORIES, INC.
Incorporated pursuant to the laws of the State of California
Internal Revenue Service - Employer Identification Number 95-3557539
23022 La Cadena Drive, Laguna Hills, California 92653
Address of principal executive offices
Issuer's Telephone Number (714) 581-3500
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Number of shares of Common Stock outstanding as of August 15,1997:
12,834,394
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Spectrum Laboratories, Inc.
Page
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Balance Sheet as of June 30, 1997 3
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 1997 and June 30, 1996 4
Consolidated Statements of Cash Flows for the Six Months
ended June 30, 1997 and June 30, 1996 5
Notes to Consolidated Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 7
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Changes in Securities 9
Item 3. Defaults Upon Senior Securities 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
Signature 10
2
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Spectrum Laboratories, Inc.
Consolidated Balance Sheet
As of June 30, 1997
(Dollars in thousands, except par value)
(Unaudited)
30-Jun-97
-----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 790
Accounts receivable 1,538
Due from affiliates 1,180
Inventories 1,234
Prepaid expenses and other current assets 80
-----------
Total currents assets 4,822
Property and equipment, net 943
Deferred income taxes 377
Goodwill 2,982
Other assets 155
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TOTAL ASSETS $ 9,279
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 565
Accrued liabilities 803
Current portion of long-term debt 842
Due to affiliates 206
Income taxes payable 94
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Total current liabilities 2,510
LONG-TERM LIABILITIES
Long-term debt 2,748
Long-term debt, affiliates 553
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Total liabilities 5,811
MINORITY INTEREST 2,057
SHAREHOLDERS' EQUITY
Common stock, par value $.01: 25,000,000 shares
authorized, 12,834,394 issued and outstanding 128
Additional paid in capital 5,238
Retained earnings, accumulated deficit (3,910)
Unrealized loss on foreign currency translation (45)
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TOTAL SHAREHOLDERS' EQUITY 1,411
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,279
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3
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<TABLE>
Spectrum Laboratories, Inc.
Consolidated Statements of Income
(In thousands, except for per share amounts)
(Unaudited)
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES $ 2,306 $ 2,279 $ 4,356 $ 4,461
COSTS AND EXPENSES
Cost of sales 1,330 1,380 2,487 2,633
Selling 364 340 728 697
General and administrative 231 259 744 560
Research and development 195 88 326 180
Other expense, primarily interest 92 81 193 159
---------- ---------- ---------- ----------
TOTAL COSTS AND EXPENSES 2,212 2,148 4,478 4,229
---------- ---------- ---------- ----------
GAIN (LOSS) ON SALE OF PRODUCT LINE (39) 768
---------- ---------- ---------- ----------
INCOME BEFORE MINORITY INTEREST IN INCOME
OF SUBSIDIARY AND PROVISION FOR INCOME TAXES 55 131 646 232
MINORITY INTEREST IN INCOME OF SUBSIDIARY 10 9 10 20
---------- ---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 45 122 636 212
PROVISION FOR INCOME TAXES 12 53 27 100
---------- ---------- ---------- ----------
NET INCOME $ 33 $ 69 $ 609 $ 112
========== ========== ========== ==========
BASIC NET INCOME PER COMMON SHARE $ - $ .01 $ .05 $ .01
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 12,834 12,834 12,834 12,834
4
</TABLE>
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Spectrum Laboratories, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended June 30,
-------------------------------
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 609 $ 112
Adjustments to reconcile net income to net
cash used for operating activities:
Depreciation and amortization 261 196
Minority interest in income of subsidiary 10
Deferred income taxes (2)
Gain on sale of product line (768)
Change in assets and liabilities:
Increase in trade receivables, net (355) (234)
Increase in due from affiliates (848)
Decrease in inventories, net 52 151
(Increase) decrease in prepaid expenses and other
current assets 25 (1)
(Increase) decrease in other assets 10 (9)
Increase (decrease) in accounts payable and accrued
and other liabilities (200) 117
Increase in income taxes payable 23 39
Decrease in due to affiliates (59) (559)
Other (8)
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Net cash used for operating activities (1,248) (190)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of product line 969
Acquisitions of property and equipment (18) (88)
Decrease in investments 44
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Net cash provided by (used for)
investing activities 951 (44)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (3,105)
Proceeds relating to advances from affiliates
and issuances of long-term debt 3,600 1,046
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Net cash provided by financing activities 495 1,046
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- -
NET INCREASE IN CASH AND CASH EQUIVALENTS 198 812
CASH AND CASH EQUIVALENTS, beginning of year 592 83
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CASH AND CASH EQUIVALENTS, end of year $ 790 $ 895
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5
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NOTES TO CONSOLIDATED STATEMENTS
Note 1 - Basis of Presentation
The accompanying unaudited financial statements consolidate the accounts of
Spectrum Laboratories, Inc. ("Spectrum") and its partially owned subsidiary,
Spectrum Europe B.V. ("Spectrum B.V."), which are collectively referred to
as the "Company". All significant intercompany transactions have been
eliminated in consolidation. In the opinion of management, the accompanying
unaudited interim consolidated financial statements contain all adjustments
(consisting only of normal recurring accruals) necessary to present fairly
the financial position of the Company as of June 30, 1997 and the results of
their operations and their cash flows for the three and six months ended
June 30, 1997 and 1996. Certain information and footnote disclosures
normally included in the financial statements have been condensed or omitted
pursuant to rules and regulations of the Securities and Exchange Commission,
although the Company believes that the disclosures in the unaudited interim
financial statements are adequate to make the information presented not
misleading.
Note 2 - Inventories
Inventories are stated at the lower of cost, determined using the first-in,
first-out method, or net realizable value and are composed of the following:
Raw materials $ 665,126
Work in progress 46,901
Finished goods 711,963
-------------
$ 1,423,990
Reserve for obsolescence (190,087)
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$ 1,233,903
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Note 3 - Earnings per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128).
The Company is required to adopt SFAS 128 in the second quarter of 1997 and
accordingly, the Company has applied this standard when computing earnings
per share. SFAS 128 replaces current EPS reporting requirements and
requires a dual presentation of basic and diluted EPS. Basic EPS excludes
dilution and is computed by dividing net income, available to common
shareholders, by the weighted average of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised and
converted into common stock. The increase in weighted average shares
outstanding that would result from the assumed exercise of stock options,
using the treasury stock method, would not change the earnings per share
amounts presented for any period.
Note 4 - Income Taxes
In the first six months of 1997, the Company provided $27,000 for income
taxes. This tax provision primarily relates to federal alternative minimum
tax and state taxes. As of December 31, 1996, the Company had net operating
loss carryforwards for federal income tax purposes of $9,693,261
($8,100,000 available to offset income of Microgon only), which expire at
various dates from 1998 through 2009. The utilization of Microgon's
$8,100,000 federal net operating loss is limited to approximately $230,000
of Microgon income annually. Any unused net operating loss is carried
forward. As a result of the limitation, it is possible that more than
$5,000,000 of the Microgon loss may expire without utilization. The Company
has an approximate $3,500,000 state net operating loss carryforward, which
expires at various dates beginning in 1998.
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion relates to the Company, its wholly owned
subsidiaries, SLI Acquisition Corporation ("SLI AC"), Hydro-Med Products
("Hydro-Med") and Microgon, Inc. ("Microgon") and its partially owned
subsidiary, Spectrum Europe B.V. During 1995, the Company acquired Microgon,
Inc. under a transaction accounted for as a step acquisition. During 1996,
SLI AC acquired the assets and liabilities of Cellco Inc. under a
transaction accounted for as a purchase. The Company has consolidated the
financial position and operations of Spectrum B.V. for all periods
presented.
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto contained elsewhere within this
Report on Form 10-QSB. Except for the historical information contained
herein, the following discussion may contain forward-looking statements that
involve risks and uncertainties. The actual future results of the Company
could differ materially from those discussed here. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed in this report and those factors discussed in the Company's Form
10-KSB for the year ended December 31, 1996.
Results of Operations
Net sales for the three months ended June 30, 1997 of $2,306,000 were
relatively flat compared to net sales of $2,279,000 for the three months
ended June 30, 1996. The Company incurred decreases in net sales from
Spectrum B.V. and its medical disposable product line due to the sale of its
microbiological sampling and transport products business on March 31, 1997,
offset by net sales from its cell culture product line.
Net sales for the six months ended June 30, 1997 of $4,356,000, a decrease
of 2%, compared to net sales of $4,461,000 reported for the six months ended
June 30, 1996. The decrease in net sales can be attributed to decreases in
net sales from Spectrum B.V. and the Company's medical disposable product
line due to the sale of its microbiological sampling and transport products
business. The decrease in net sales is offset by net sales from its cell
culture product line. Management expects net sales to decrease slightly
over the next six months due to the divestiture of its microbiological
sampling and transport products business. Management does not expect net
sales from its cell culture product line to offset the loss of net sales
from its microbiological sampling and transport products business.
Gross margin as a percentage of net sales for the three months ended June
30, 1997 was 42.3% compared to 39.4% for the three months ended June 30,
1996. Gross margin as a percentage of net sales for the six months ended
June 30, 1997 was 42.9% compared to 41% for the six months ended June 30,
1996. The increase in gross margin can be attributable to an improved
product mix mainly due to net sales related to the cell culture product line
that has higher gross margins than the medical disposable product line.
Selling and marketing expenses were 15.8% of net sales for the three months
ended June 30, 1997 compared to 14.9% of net sales for the three months
ended June 30, 1996. For the six months ended June 30, 1997, selling and
marketing expenses were 16.7% of net sales compared to 15.6% of net sales
for the six months ended June 30, 1996. The increase in selling and
marketing expenses can be attributable to the acquisition of Cellco.
General and administrative was 10% of net sales for the three months ended
June 30, 1997 compared to 11.4% of net sales for the three months ended June
30, 1996. The decrease was due to better expense controls by the Company.
General and administrative was 17.1% of net sales for the six months ended
June 30, 1997, compared to 12.6% of net sales for the six months ended June
30, 1996. The increase can be attributable to the acquisition of Cellco and
the retaining of certain essential personnel from that acquisition.
7
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Research and development expenses increased 122% to 8.5% of net sales for
the three months ended June 30, 1997 from 3.9% for the three months ended
June 30, 1996. For the six months ended June 30, 1997, research and
development expenses increased 81% to 7.5% of net sales compared to 4%
reported for the six months ended June 30, 1996. The increase in research
and development expenses for the three and six months, can be attributable
to product development costs related to the Company's cell culture product
line and the retention of certain essential research personnel from the
Cellco acquisition.
Other expense, mainly interest, increased 14% to 4.0% of net sales for the
three months ended June 30, 1997 compared to 3.6% of net sales for the three
months ended June 30, 1996. For the six months ended June 30, 1997, other
expense, mainly interest, increased 22% to 4.4% on net sales compared to
3.6% of net sales for the six months ended June 30, 1996. The increase for
the three and six months in other expense can be attributable to interest
expense related to a higher bank loan, mainly, the $3,600,000 term loan with
City National Bank.
On March 31, 1997, the Company sold its microbiological sampling and
transport business for approximately $969,000 resulting in a gain of
$768,000. Proceeds from the sale were received on April 11, 1997.
Factors That May Affect Future Results
The Company's future operating results may be adversely affected by a number
of factors, including general economic conditions, dependence on constant
development of new products and technologies, the rapid technological change
in the biomedical field, dependence on major customers, dependence on
relationships with third parties concerning research activities, the ability
to protect its patents and proprietary information, and regulation by United
States governmental authorities.
The laboratory life science markets in which the Company competes are highly
competitive. The Company has a significant number of competitors, some of
which are larger and have greater financial and other resources than the
Company. The Company competes with many domestic and international
companies in its global markets. There can be no assurance that the
Company's products will continue to compete successfully with the products
of its competitors. The principal methods of competition in the markets in
which the Company competes are product specifications, performance, quality,
knowledge, reputation, technology, distribution capabilities, service and
price.
Liquidity and Capital Resources
During the first six months of 1997, cash was generated by a net increase in
borrowings of $495,000 and $969,000 from the sale of a product line. These
increases in cash were essentially offset by cash used for operating
activities of $1,248,000 which was primarily attributable to increases in
trade receivables and receivables from an affiliate, Spectrum Medical
Industries, Inc.
On June 30, 1997, the Company had cash and cash equivalents of $790,000 and
a current ratio of 1.9. The Company has no material capital commitment
except for monthly term loan payments of $87,000 including approximately
$27,000 of interest to City National Bank and approximately $100,000
committed to the production and mailing of product line catalogs. Total
amount owed to City National Bank at June 30, 1997 is $3,420,000. The
Company has no other sources of financing.
Management expects that cash generated from operations will be sufficient to
fund operations for the next six months provided there is no material change
to revenues or expenses.
8
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Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Change in Securities
None
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and reports on Form 8-K
(a) The Company filed no exhibits during the quarter ended June
30, 1997
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter
ended June 30, 1997
9
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SPECTRUM LABORATORIES, INC.
(Registrant)
/s/ Michael S. Shimada
- -------------------------
Signature
Michael S. Shimada
Chief Financial Officer
/s/ F. Jesus Martinez
- -----------------------
Signature
F. Jesus Martinez
President
10
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 790
<SECURITIES> 0
<RECEIVABLES> 1631
<ALLOWANCES> 93
<INVENTORY> 1234
<CURRENT-ASSETS> 4822
<PP&E> 4311
<DEPRECIATION> 3368
<TOTAL-ASSETS> 9279
<CURRENT-LIABILITIES> 2510
<BONDS> 0
0
0
<COMMON> 128
<OTHER-SE> 1283
<TOTAL-LIABILITY-AND-EQUITY> 9279
<SALES> 4356
<TOTAL-REVENUES> 4356
<CGS> 2487
<TOTAL-COSTS> 4478
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 207
<INCOME-PRETAX> 636
<INCOME-TAX> 27
<INCOME-CONTINUING> 609
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 609
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
