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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 September 30, 2000
OR
[ ] 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 October 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 September 30, 2000 3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 2000 and October 2, 1999 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and October 2, 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 SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,244
Accounts receivable 1,539
Inventories 2,285
Prepaid expenses 188
Deferred taxes 340
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Total current assets 5,596
Equipment and leasehold improvements 2,250
Goodwill 1,225
Deferred taxes 1,755
Other assets 56
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TOTAL ASSETS $ 10,882
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 822
Accounts payable 490
Accrued expenses and other current liabilities 705
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Total current liabilities 2,017
LONG-TERM DEBT, less current portion 414
MINORITY INTEREST 1,755
SHAREHOLDERS' 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 8,414
Accumulated deficit (1,771)
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TOTAL SHAREHOLDERS' EQUITY 6,696
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,882
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<TABLE>
SPECTRUM LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ -------------------------
Sep. 30 Oct. 2 Sep. 30 Oct. 2
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES $ 3,198 $ 3,315 $ 10,016 $ 10,027
COSTS AND EXPENSES
Cost of sales 1,673 1,632 5,132 5,027
Selling 277 360 911 1,150
General and administrative 702 785 2,157 2,243
Research and development 167 166 469 509
Other expense, primarily interest 28 31 85 119
--------- --------- --------- ---------
Total costs and expenses 2,847 2,974 8,754 9,048
Income before provision for income taxes 351 341 1,262 979
Provision (credit) for income taxes (459) 136 (95) 391
--------- --------- --------- ---------
Net income $ 810 $ 205 $ 1,357 $ 588
========= ========= ========= =========
Earnings per share
Basic $ .15 $ .04 $ .26 $ .11
========= ========= ========= =========
Diluted $ .15 $ .04 $ .25 $ .11
========= ========= ========= =========
Weighted average shares outstanding
Basic 5,312 5,312 5,312 5,312
========= ========= ========= =========
Diluted 5,420 5,457 5,443 5,458
========= ========= ========= =========
</TABLE>
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<TABLE>
SPECTRUM LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND OCTOBER 2, 1999
(IN THOUSANDS)
(UNAUDITED)
<CAPTION>
2000 1999
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,357 $ 588
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 457 522
Noncash compensation 67 30
Deferred taxes (170)
Change in assets and liabilities:
Increase in accounts receivable (31) (90)
Decrease (increase) in inventories 104 (353)
Decrease (increase) in prepaid expenses 99 (162)
Decrease (increase) in other assets 11 (30)
(Decrease) increase in accounts payable (321) 147
(Decrease) increase in accrued expenses and other current liabilities (32) 283
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Net cash provided by operating activities 1,541 935
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of equipment and leasehold improvements (330) (443)
Proceeds from the sale of equipment 29
Advances to principal shareholder (115)
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Net cash used in investing activities (330) (529)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt (617) (677)
Decrease in restricted cash 100
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Net cash used in financing activities (517) (677)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 694 (271)
CASH AND CASH EQUIVALENTS, beginning of period 550 855
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CASH AND CASH EQUIVALENTS, end of period $ 1,244 $ 584
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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 September 30, 2000, the results of its operations for the three
and nine months ended September 30, 2000 and October 2, 1999 and its cash flows
for the nine months ended September 30, 2000 and October 2, 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 $ 1,228
Work in progress 216
Finished goods 841
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$ 2,285
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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 (108,506 and 130,752 shares in the year 2000 three and nine-month
periods, respectively, and 145,189 and 145,808 in the year 1999 three and
nine-month periods, respectively).
Note 4 - Income Taxes
In assessing the realizability of deferred tax assets, management previously
estimated that it was more likely than not that approximately $2,200,000 would
not be realized. At September 30, 2000, management reassessed the realizability
of its deferred tax assets in consideration of historical and current estimated
federal taxable income. Management also considered current operations and
profitability and the related effect on future federal taxable income. As a
result of these considerations, management has estimated increased realizability
of the Company's deferred tax assets. During the quarter ended September 30,
2000, the Company reversed $600,000 of the deferred tax valuation allowance by
recording a credit to the income tax provision. The remaining $1,500,000
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.
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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 anticipated that more than $4,500,000 of the entity's
net operating loss carryforwards will 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 - 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 Nine Months Ended
---------------------- ----------------------
Sep. 30, Oct. 2, Sep. 30, Oct. 2,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Laboratory products $ 2,777 $ 2,888 $ 8,678 $ 8,702
Operating room disposable products 421 427 1,338 1,325
-------- -------- -------- --------
$ 3,198 $ 3,315 $10,016 $10,027
======== ======== ======== ========
</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 nine-month periods ending September 30,
2000, as compared to the respective three and nine-month periods of the prior
year.
Selling expenses - Selling expenses decreased for the current year three and
nine-month periods as compared to the respective periods of the prior year
primarily as a result of decreased product catalog costs.
General and administrative expenses - General and administrative expenses
decreased for the current year three and nine-month periods as compared to the
respective periods of the prior year primarily as a result of relocation costs
incurred in the third quarter of last year.
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Income taxes - The income tax provision for the current year three and
nine-month periods, as a percentage to income before income taxes, is a credit
as a result of management's reassessment of the realizability of its deferred
tax assets. During the quarter ended September 30, 2000, the Company reversed
$600,000 of the deferred tax valuation allowance by recording a credit to the
income tax provision. The nine-month income tax provision (credit) represents
the Company's state tax provision of 6% of pretax income, net of the $600,000
decrease in the deferred tax asset valuation allowance. It is expected that the
tax rate as a percentage of pretax income will be approximately 40% for future
years.
Liquidity and Capital Resources
During the first nine months of fiscal 2000, the Company generated approximately
$1,541,000 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 $170,000 increase in net operating assets.
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 September 30, 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
On July 17, 2000, the Company held an annual shareholders' meeting.
Three matters were approved at the meeting with, in each case,
4,320,218 votes being in favor. There were no votes against nor any
abstentions. The items approved at the meeting were the Company's Year
2000 Stock Option Plan, McGladrey & Pullen, LLP as the Company's
independent auditors and the election of the Company's Directors. The
Directors elected were:
Roy T. Eddleman
Thomas V. Girardi, J.D.
Jay Henis, Ph.D.
Walter J. Lack, J.D.
Jack Whitescarver, Ph.D.
Item 5. Other Information
None
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits - None
(b) The Company filed no reports on Form 8-K during the quarter
ended September 30, 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
----------------------
Signature
F. Jesus Martinez
President
Date: November 10, 2000
/s/ Larry D. Womack
--------------------
Signature
Larry D. Womack
Vice President Finance
Date: November 10, 2000
9
