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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
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FOR THE QUARTERLY PERIOD ENDED APRIL 1, 2000
OR
TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
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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
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Number of shares of Common Stock outstanding as of April 30, 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 April 1, 2000 3
Consolidated Statements of Income for the Three Months Ended
April 1, 2000 and April 3, 1999 4
Consolidated Statements of Cash Flows for the Three Months
Ended April 1, 2000 and April 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
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
SPECTRUM LABORATORIES, INC.
CONSOLIDATED BALANCE SHEET
AS OF APRIL 1, 2000
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 409
Accounts receivable 1,795
Inventories 2,311
Prepaid expenses 260
Deferred taxes 340
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Total current assets 5,115
Equipment and leasehold improvements 2,272
Goodwill 1,266
Deferred taxes 1,585
Other assets 156
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TOTAL ASSETS $ 10,394
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 927
Accounts payable 524
Accrued expenses and other current liabilities 948
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Total current liabilities 2,399
LONG-TERM DEBT, less current portion 720
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 8,368
Accumulated deficit (2,901)
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TOTAL STOCKHOLDERS' EQUITY 5,520
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,394
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3
SPECTRUM LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED APRIL 1, 2000 AND APRIL 3, 1999
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
2000 1999
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NET SALES $ 3,371 $ 3,297
COSTS AND EXPENSES
Cost of sales 1,717 1,671
Selling 319 340
General and administrative 766 731
Research and development 161 163
Other expense, primarily interest 30 48
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Total costs and expenses 2,993 2,953
Income before provision for income taxes 378 344
Provision for income taxes 151 141
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Net income $ 227 $ 203
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Earnings per share
Basic $ .04 $ .04
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Diluted $ .04 $ .04
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Weighted average shares outstanding
Basic 5,312 5,312
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Diluted 5,447 5,459
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SPECTRUM LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED APRIL 1, 2000 AND APRIL 3, 1999
(IN THOUSANDS)
(UNAUDITED)
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 227 $ 203
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 135 175
Noncash compensation 21 10
Change in assets and liabilities:
Increase in accounts receivables (287) (35)
Decrease in inventories 78 119
Decrease (increase) in prepaid expenses 27 (80)
Decrease (increase) in other assets 11 (28)
Decrease in accounts payable (287) (45)
Increase in accrued expenses and other current
liabilities 211 220
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Net cash provided by operating activities 136 539
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of equipment and leasehold
improvements (71) (75)
Advances to principal shareholder (39)
Proceeds from the sale of equipment 29
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Net cash used in investing activities (71) (85)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt (206) (266)
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Net cash used in financing activities (206) (266)
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NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (141) 188
CASH AND CASH EQUIVALENTS, beginning of period 550 855
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CASH AND CASH EQUIVALENTS, end of period $ 409 $ 1,043
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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 April 1, 2000 and the results of its operations and its cash flows
for the three months ended April 1, 2000 and April 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 $ 1,312
Work in progress 191
Finished goods 808
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$ 2,311
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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 (134,822 and 146,592 shares in the 2000 and 1999, fiscal 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 - 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
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companies. Operating room disposable products consist primarily of sterile
plastic surgical drapes and cloth bandages that are sold primarily to hospitals.
Revenue by product group is as follows (in thousands):
2000 1999
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Laboratory products $ 2,910 $ 2,874
Operating room disposable products 461 423
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$ 3,371 $ 3,297
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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 of Spectrum Laboratories, Inc. 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 and costs and expenses - There have been no significant changes in net
sales, including quantities and prices, or in costs and expenses for the three
months ended April 1, 2000 as compared to the three months ended April 3, 1999.
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 quarter of fiscal 2000, the Company generated approximately
$136,000 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 $247,000 net increase in operating assets.
The Company has two loans with a bank under a loan agreement. One of the loans,
with a balance of approximately $207,000 at April 1, 2000, matures on July 1,
2000. The Company expects to request an extension of the maturity date but,
while such requests have been granted in the past, there is no assurance that
such request, if made, will be granted.
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 January 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
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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
None
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 - None
(b) The Company filed no reports on Form 8-K filed during the quarter
ended April 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: May 10, 2000
/s/ Larry D. Womack
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Signature
Larry D. Womack
Vice President Finance
Date: May 10, 2000