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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 July 4, 1998
[ ] 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 (949) 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 July 31, 1998: 12,834,394
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Spectrum Laboratories, Inc.
Page
Part I - FINANCIAL INFORMATION ----
Item 1. Financial Statements 3
Consolidated Balance Sheet as of July 4, 1998 3
Consolidated Statements of Operations for the Three and
Six Months Ended July 4, 1998 and June 30, 1997 4
Consolidated Statements of Cash Flows for the Six
Months ended July 4, 1998 and June 30, 1997 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 8
Item 2. Changes in Securities 8
Item 3. Defaults Upon Senior Securities 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Item 5. Other Information 8
Item 6. Exhibits and Reports on Form 8-K 8
Signature 9
2
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<TABLE>
SPECTRUM LABORATORIES, INC.
CONSOLIDATED BALANCE SHEET
AS OF JULY 4, 1998
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
(UNAUDITED)
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 661
Accounts receivable 688
Due from affiliates 526
Inventories 1,063
Prepaid expenses and other current assets 86
--------------
Total current assets 3,024
Property and equipment, net 831
Deferred income taxes 377
Goodwill 2,808
Other assets 146
--------------
TOTAL ASSETS $ 7,186
==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 791
Accrued expenses 539
Current portion of long-term debt 1,893
Income taxes payable 11
--------------
Total current 3,234
liabilities
LONG-TERM DEBT, less current portion 1,854
MINORITY INTEREST 2,040
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 (5,265)
Unrealized loss on foreign currency translation (43)
--------------
TOTAL SHAREHOLDERS' EQUITY 58
--------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,186
==============
</TABLE>
3
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<TABLE>
SPECTRUM LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
<CAPTION>
Three Months Ended Six Months Ended
------------------------- ------------------------
Jul. 4 Jun. 30 Jul. 4 Jun. 30
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 1,572 $ 2,306 $ 3,346 $ 4,356
COSTS AND EXPENSES
Cost of sales 1,041 1,330 2,228 2,487
Selling 366 364 708 728
General and administrative 349 231 685 744
Research and development 143 195 238 326
Other expense, primarily interest 60 92 151 193
------------ ------------ ------------ ------------
TOTAL COSTS AND EXPENSES 1,959 2,212 4,010 4,478
(LOSS) GAIN ON SALE OF PRODUCT LINE (39) 768
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE MINORITY INTEREST IN INCOME
OF SUBSIDIARY AND PROVISION FOR INCOME TAXES (387) 55 (664) 646
MINORITY INTEREST IN INCOME OF SUBSIDIARY 2 10 2 10
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES (389) 45 (666) 636
PROVISION FOR INCOME TAXES 2 12 7 27
------------ ------------ ------------ ------------
NET (LOSS) INCOME $ (391) $ 33 $ (673) $ 609
============ ============ ============ ============
BASIC AND DILUTED NET (LOSS) INCOME PER COMMON SHARE $ (.03) $ - $ (.05) $ .05
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 12,834 12,834 12,834 12,834
</TABLE>
4
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<TABLE>
SPECTRUM LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<CAPTION>
Six Months Ended
----------------------------
Jul. 4 Jun. 30
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (673) $ 609
Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:
Depreciation and amortization 213 261
Minority interest in income of subsidiary 2 10
Gain on sale of product line (768)
Change in assets and liabilities:
Decrease (increase) in trade receivables 337 (355)
Decrease (increase) in due from affiliates 27 (907)
(Increase) decrease in inventories (181) 52
(Increase) decrease in prepaid expenses and other current assets (3) 25
Decrease in other assets 10
Increase (decrease) in accounts payable and accrued and other liabilities 152 (177)
Other (4) (8)
------------ ------------
Net cash used in operating activities (130) (1,248)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of product line 969
Acquisitions of property and equipment (181) (18)
------------ ------------
Net cash (used in) provided by investing activities (181) 951
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt (326) (3,105)
Proceeds from issuance of debt 275 3,600
------------ ------------
Net cash (used in) provided by financing activities (51) 495
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (362) 198
CASH AND CASH EQUIVALENTS, beginning of period 1,023 592
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 661 $ 790
============ ============
</TABLE>
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"), its wholly-owned subsidiaries, SLI
Acquisition Corp. and Hydro-Med Products, Inc. and its partially-owned
subsidiary, Spectrum Europe 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 July 4, 1998 and the results of their operations and their
cash flows for the three and six months ended July 4, 1998 and June 30, 1997.
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 $ 760,271
Work in progress 34,608
Finished goods 467,078
-------------
1,261,957
Reserve for obsolescence (199,030)
-------------
$ 1,062,927
=============
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 was 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 either period.
Note 4 - Income Taxes
In the first six months of 1998, the Company provided $7,000 for income taxes.
This tax provision primarily relates to state taxes. As of January 3, 1998, the
Company had net operating loss carryforwards for federal income tax purposes of
$9,733,699 ($8,100,000 available to offset income of Microgon, a company
purchased in 1995 and merged into Spectrum, 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 $298,000 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 Corp. ("SLIAC") and Hydro-Med Products, Inc. ("Hydro-Med") and
its partially owned subsidiary, Spectrum Europe B.V. ("Spectrum B.V."). 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
January 3, 1998.
Results of Operations
Net sales for the three months ended July 4, 1998 of $1,572,000 were 32% lower
than sales of $2,306,000 for the three months ended June 30, 1997. Net sales for
the first six months of 1998 of $3,346,000 were 23% lower than sales of
$4,356,000 for the first six months of 1997. The decreases were primarily due to
a decline in demand, especially in the Company's Asian markets.
Cost of sales as a percentage of sales was 66% for the three months ended July
4, 1998 compared to 58% for the three months ended June 30, 1997 and 67% for the
first six months of 1998 compared to 57% for the first six months of 1997. The
increased amounts in 1998 were primarily due to change in product mix.
General and administrative expenses increased 51% for the three months ended
July 4, 1998 over the three-month period ended June 30, 1997 but were 8% lower
for the first six months of 1998 compared to the first six months of 1997. The
lower amount for the three months of 1997 was primarily the result of
implementation of cost reductions, in large part due to the reduction of costs
associated with the acquisition of the Cellco, Inc. operation in late 1996.
Research and development expenses were 27% lower for the three and six-month
periods ended July 4, 1998 as compared to the three and six-month periods ended
June 30, 1997 primarily due to the cost reductions, during the last half of
1997, related to the Cellco acquisition.
The gain on sale of product line was the result of the sale of the Company's
microbiological sampling and transport product line.
Liquidity and Capital Resources
During the first six months of the current fiscal year, cash generated from
operations was more than offset by the net loss, investing activities and debt
reduction.
Provisions of the Company's loan agreement with the bank required the Company to
make principal and interest payments of approximately $1,200,000 on July 1,
1998. The bank has granted an extension to October 1, 1998. The Company intends
to refinance this debt prior to its maturity and with this refinancing and the
implementation of certain cost reductions, the Company believes that funds will
be sufficient for operating requirements for the remainder of fiscal 1998.
7
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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) Exhibit - July 17, 1998 Third Amendment to Credit Agreement between
Spectrum Medical Industries, Inc., and Spectrum Laboratories, Inc.
(collectively "Borrower") and City National Bank
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter
ended July 4, 1998
8
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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/ F. Jesus Martinez
- -----------------------------------
Signature
F. Jesus Martinez
President
9
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-02-1998
<PERIOD-END> JUL-04-1998
<CASH> 661
<SECURITIES> 0
<RECEIVABLES> 783
<ALLOWANCES> 95
<INVENTORY> 1063
<CURRENT-ASSETS> 3024
<PP&E> 4824
<DEPRECIATION> 3993
<TOTAL-ASSETS> 7186
<CURRENT-LIABILITIES> 3234
<BONDS> 1854
0
0
<COMMON> 128
<OTHER-SE> (70)
<TOTAL-LIABILITY-AND-EQUITY> 7186
<SALES> 3346
<TOTAL-REVENUES> 3346
<CGS> 2228
<TOTAL-COSTS> 4010
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 151
<INCOME-PRETAX> (666)
<INCOME-TAX> 7
<INCOME-CONTINUING> (673)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (282)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
Exhibit
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CITY NATIONAL BANK
THIRD AMENDMENT TO CREDIT AGREEMENT
This Third Amendment to Credit Agreement is entered into as of July 17,
1998, by and between Spectrum Medical Industries, Inc., a California corporation
and Spectrum Laboratories, Inc., a California corporation ("Borrower") and City
National Bank, a national banking association ("CNB").
RECITALS
A. Borrower and CNB are parties to that certain Credit Agreement, dated
as of February 28, 1997, as amended by that certain First Amendment to Credit
Agreement dated as of October 10, 1997, and that certain Second Amendment to
Credit Agreement dated as of May 7, 1998, (the Credit Agreement, as herein
amended, hereinafter the "Credit Agreement").
B. Borrower and CNB desire to supplement and amend the Credit Agreement
as hereinafter set forth.
NOW, THEREFORE, the parties agree as follows:
1. Definitions. Capitalized terms used in this Amendment without definition
shall have the meanings set forth in the Credit Agreement.
2. Amendments. The Credit Agreement is amended as follows:
2.1 Delete the definition of Date" in its entirety and replace it with:
"Termination Date" means October 1, 1998. Notwithstanding the
foregoing, CNB may, as its option, terminate this Agreement
pursuant to Section 7.3; the date of any such termination will
become the Termination Date as that term is used in this Agreement"
2.2 "Section 2.1.3 "Additional Term Loan Payment" is amended by
deleting the date "July 1, 1998" from both the first sentence and
the last sentence and replacing it with a new date "October 1,
1998" in both the first sentence and the last sentence".
2.3 Section 2 Loans. is amended as follows:
Delete the following sections 2.1A, 2.1A.1, 2.1A.2, 2.1A.3
3. Existing Agreement. Except as expressly amended herein, the Credit
Agreement shall remain in full force and effect, and in all other respects is
affirmed.
<PAGE>
4. Conditions Precedent. This Amendment shall become effective upon the
fulfillment of all of the following conditions to CNB's satisfaction:
4.1 CNB shall have received this Amendment duly executed by Borrower
and acknowledged by the Guarantors.
5. Counterparts. This Amendment may be executed in any number of
counterparts, and all such counterparts taken together shall be deemed to
constitute one and the same instrument.
6. Governing Law. This Amendment and the rights and obligations of the
parties hereto shall be construed in accordance with, and governed by the laws
of the State of California.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
day and year first above written.
"Borrower" Spectrum Medical Industries, Inc., a
California corporation
By: /s/ Roy T. Eddleman
------------------------------------
Roy T. Eddleman, Chairman/CEO
Spectrum Laboratories, Inc., a
California corporation
By: /s/ Roy T. Eddleman
------------------------------------
Roy T. Eddleman, Chairman/CEO
"CNB" City National Bank, a national
banking association
By: /s/ Richard Fein
------------------------------------
Richard Fein, Vice President
2
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CONSENT OF GUARANTORS:
The undersigned have previously guaranteed the indebtedness of Spectrum
Medical Industries, Inc., a California corporation and Spectrum Laboratories,
Inc., a California corporation owed to CNB. The undersigned confirm that their
respective guaranties and the security given in connection therewith, if any,
shall continue in full force and effect and that each guaranty shall be a
separate and distinct obligation and apply to the indebtedness arising from the
Credit Agreement as amended herein, subject to the overall limitation as to the
amount guaranteed.
/s/ Roy T. Eddleman
----------------------------------
Roy T. Eddleman
Spectrum Molecular Separarions, Inc., a
Delaware corporation
By: /s/ Roy T. Eddleman
-------------------------------
Roy T. Eddleman, Chairman/CEO.
Hydro-Med Products, Inc., a
Texas Corporation
By: /s/ Roy T. Eddleman
-------------------------------
Roy T. Eddleman, Chairman/CEO.
SLI Acquisition Corp., a
Delaware corporation
By: /s/ Roy T. Eddleman
-------------------------------
Roy T. Eddleman, Chairman/CEO.
Spectrum Europe B.V., a
Netherlands corporation
By: /s/ Roy T. Eddleman
-------------------------------
Roy T. Eddleman, Chairman/CEO.
3
