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SECURITES 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 1, 2000
OR
X TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
---
COMMISSION FILE NUMBER 0-9478
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SPECTRUM LABORATORIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 95-4718363
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
18617 BROADWICK STREET, RANCHO DOMINGUEZ, CALIFORNIA 90220
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (310) 885-4600
Indicate by check mark 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, 2000: 5,311,968
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Spectrum Laboratories, Inc.
Page
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of July 1, 2000 3
Consolidated Statements of Income for the Three and Six
Months Ended July 1, 2000 and July 3, 1999 4
Consolidated Statements of Cash Flows for the Six Months
Ended July 1, 2000 and July 3, 1999 5
Notes to Consolidated Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 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
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
SPECTRUM LABORATORIES, INC.
CONSOLIDATED BALANCE SHEET
AS OF JULY 1, 2000
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 697
Accounts receivable 1,789
Inventories 2,332
Prepaid expenses 256
Deferred taxes 340
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Total current assets 5,414
Equipment and leasehold improvements 2,257
Goodwill 1,246
Deferred taxes 1,585
Other assets 61
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TOTAL ASSETS $ 10,563
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 823
Accounts payable 487
Accrued expenses and other current liabilities 1,017
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Total current liabilities 2,327
LONG-TERM DEBT, less current portion 619
MINORITY INTEREST 1,755
STOCKHOLDERS' EQUITY
Common stock, par value $.01: 25,000,000 shares
authorized; 5,311,968 issued and outstanding 53
Preferred stock, par value $.01: 10,000,000
shares authorized; None issued or outstanding
Additional paid in capital 8,390
Accumulated deficit (2,581)
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TOTAL STOCKHOLDERS' EQUITY 5,862
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,563
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SPECTRUM LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ----------------------------
July 1 July 3 July 1 July 3
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $ 3,447 $ 3,415 $ 6,818 $ 6,712
COSTS AND EXPENSES
Cost of sales 1,742 1,724 3,459 3,395
Selling 315 450 634 790
General and administrative 689 727 1,455 1,458
Research and development 141 180 302 343
Other expense, primarily interest 27 40 57 88
------------- ------------- ------------- -------------
Total costs and expenses 2,914 3,121 5,907 6,074
Income before provision for income taxes 533 294 911 638
Provision for income taxes 213 114 364 255
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Net income $ 320 $ 180 $ 547 $ 383
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Earnings per share
Basic $ .06 $ .03 $ .10 $ .07
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Diluted $ .06 $ .03 $ .10 $ .07
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Weighted average shares outstanding
Basic 5,312 5,312 5,312 5,312
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Diluted 5,461 5,458 5,454 5,458
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</TABLE>
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SPECTRUM LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JULY 1, 2000 AND JULY 3, 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 547 $ 383
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 273 345
Noncash compensation 43 20
Change in assets and liabilities:
Increase in accounts receivables (281) (134)
Decrease (increase) in inventories 57 (18)
Decrease (increase) in prepaid expenses 31 (149)
Decrease (increase) in other assets 6 (31)
(Decrease) increase in accounts payable (324) 381
Increase in accrued expenses and other current liabilities 281 235
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Net cash provided by operating activities 633 1,032
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of equipment and leasehold improvements (175) (195)
Advances to principal shareholder (80)
Proceeds from the sale of equipment 29
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Net cash used in investing activities (175) (246)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt (411) (472)
Decrease in restricted cash 100
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Net cash used in financing activities (311) (472)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 147 314
CASH AND CASH EQUIVALENTS, beginning of period 550 855
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CASH AND CASH EQUIVALENTS, end of period $ 697 $ 1,169
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</TABLE>
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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. and its subsidiaries, SLI Acquisition Corp.,
Spectrum Europe B.V. and Spectrum Chromatography (collectively, 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 1, 2000 and the results of its operations and its cash flows
for the three and six months ended July 1, 2000 and July 3, 1999. 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 (in
thousands):
Raw materials $ 1,251
Work in progress 298
Finished goods 783
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$ 2,332
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Note 3 - Earnings per Share
Basic earnings per share is computed by dividing the net income attributable to
the common stockholders by the weighted average number of common shares
outstanding during the period. There is no adjustment in the net income
attributable to common stockholders. Diluted earnings per share reflects the
potential dilution that could occur from common shares issuable through stock
options (148,929 and 141,876 shares in the year 2000 three and six-month
periods, respectively, and 145,642 and 146,117 in the year 1999 three and
six-month periods, respectively).
Note 4 - Income Taxes
In assessing the realizability of deferred tax assets, management has estimated
that it is more likely than not that approximately $2,200,000 will not be
realized. Approximately $1,500,000 of the valuation allowance represents a
portion of net operating loss carryforwards attained through a prior business
acquisition. As further discussed below, tax law limits the use of an acquired
entity's net operating loss carryforwards to subsequent taxable income of the
consolidated entity.
At January 1, 2000, the Company had approximately $8.3 million in net operating
loss carryforwards for federal income tax purposes available to offset future
taxable income. Certain of these loss carryforwards are limited to approximately
$298,000 annually. Any unused net operating loss is carried forward. As a result
of the limitation, it is possible that more than $4,500,000 of the entity's net
operating loss may expire without utilization. Loss carryforwards for tax
purposes expire in amounts and by fiscal year as follows: 2003 $909,000; 2004
$2,279,000; 2005 $1,319,000; 2011 $20,000; 2012 $347,000; 2013 $776,000; 2014 to
2021 $299,000 per year; 2022 $275,000.
Note 5 - Stock Option Plan
During the quarter ended July 1, 2000, the Company adopted a new 2000 Stock
Option Plan reserving 300,000 shares of common stock for option grants to its
key employees, directors and consultants. Exercise prices for the stock options
will not be less than 100% of the fair market value of the stock on the date of
grant. During the quarter ended July 1, 2000, the Company granted 284,200
options under this Plan. The Company's fair value of $1.29 per option granted
was estimated using the Black-Scholes option-pricing model with the following
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assumptions: expected lives of ten years, no dividends, expected amounts to be
exercised of 100%, risk-free interest rate of 6.51% and expected volatility of
35%.
Note 6 - Product Group Information
The Company's product groups are based on specific product characteristics and
are grouped into laboratory products and operating room disposable products.
Laboratory products consist primarily of: (1) membranes used to concentrate,
separate and purify dissolved or suspended molecules that are sold primarily to
laboratories and (2) hollow fiber membrane devices that allow components
retained by a membrane to be concentrated including filters utilized for micro
and ultrafiltration separations that are sold to biotech and pharmaceutical
companies. Operating room disposable products consist of sterile plastic
surgical drapes and cloth bandages that are sold primarily to hospitals.
Revenue by product group is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ----------------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Laboratory products $ 2,991 $ 2,940 $ 5,901 $ 5,814
Operating room disposable products 456 475 917 898
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$ 3,447 $ 3,415 $ 6,818 $ 6,712
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</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 1, 2000, as filed with the Securities and Exchange Commission and, from
time to time, in the Company's other reports on file with the Commission.
Results of Operations
Net sales - There have been no significant changes in net sales, including
quantities and prices, for the three and six-month periods ending July 1, 2000,
as compared to the respective three and six-month periods of the prior year.
Selling expenses - Selling expenses decreased for the current year three and
six-month periods as compared to the respective periods of the prior year
primarily as a result of decreased product catalog costs.
Income taxes - The Company has applied a valuation allowance on its net deferred
tax assets which exceed the recoverability of those assets from estimated future
taxable income for the next three years. This valuation allowance could change
substantially in future years due to changes in estimates of future taxable
income and changes in the components of the deferred tax assets. Accordingly,
income taxes as a percentage of income before income taxes could vary
significantly in future years.
Liquidity and Capital Resources
During the first six months of fiscal 2000, the Company generated approximately
$633,000 of cash from operating activities. Net income before non-cash expenses
of depreciation and amortization was the primary source of these cash flows,
which was offset by a $230,000 net increase in operating assets.
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The Company has two loans with a bank under a loan agreement. One of the loans,
with a balance of approximately $182,000 at July 1, 2000, matured on July 1,
2000 and was replaced by a loan that matures on April 1, 2002.
The Company believes that cash on hand and cash expected to be generated from
operations will be sufficient to meet operating cash requirements for the next
twelve months, subject to the following.
In October 1996, a subsidiary of the Company, SLI Acquisition Corp. (SLIAC),
acquired certain assets and liabilities of Cellco, Inc., a Delaware corporation,
in exchange for 10,000 shares of SLIAC's preferred stock valued at $2,000,000.
At July 1, 2000, there is $1,755,000 of the preferred stock still outstanding.
Beginning October 1, 2000, and continuing until September 30, 2001, the holders
of the preferred stock have the right to put their stock to SLIAC for an
aggregate price of $1,755,000. In the event SLIAC is combined with the Company
and the combined company completes an underwritten offering, the preferred
stockholders have the right to exchange such stock for 7% of the newly combined
company. If the preferred stockholders convert their stock wholly, or in a
substantial portion, to a cash payment, the Company would most probably be
required to obtain additional funds from outside sources and there is no
assurance that such financing, if necessary, could be obtained.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to various claims and litigation that arise in the
normal course of business. While any litigation contains an element of
uncertainty, management believes that the ultimate outcome of these
claims and litigation will not have a material adverse effect on the
Company's results of operations or financial condition.
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) Exhibits
Exhibit 10.22 - Second amendment, dated July 1, 2000, to the
credit agreement, dated December 22, 1998, between the Company and
City National Bank
Exhibit 10.23 - The Company's 2000 Stock Option Plan
(b) The Company filed no reports on Form 8-K filed during the quarter
ended July 1, 2000.
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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
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Signature
F. Jesus Martinez
President
Date: August 10, 2000
/s/ Larry D. Womack
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Signature
Larry D. Womack
Vice President Finance
Date: August 10, 2000
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