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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 JUNE 30, 2001
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 July 31, 2001: 5,312,468
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Spectrum Laboratories, Inc.
Page
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet as of June 30, 2001 3
Consolidated Statements of Income for the Three and Six Months
Ended June 30, 2001 and July 1, 2000 4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2001 and July 1, 2000 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 JUNE 30, 2001
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 922
Accounts receivable 1,524
Inventories 1,903
Prepaid expenses 52
Deferred taxes 386
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Total current assets 4,787
Equipment and leasehold improvements 2,865
Goodwill 1,163
Deferred taxes 1,758
Other assets 753
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TOTAL ASSETS $ 11,326
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 629
Accounts payable 807
Accrued expenses and other current liabilities 606
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Total current 2,042
liabilities
LONG-TERM DEBT, less current portion 141
MINORITY INTEREST 1,755
STOCKHOLDERS' EQUITY
Common stock, par value $.01: 25,000,000 shares authorized;
5,312,468 issued and outstanding 53
Preferred stock, par value $.01: 10,000,000 shares authorized;
None issued or outstanding
Additional paid-in capital 8,444
Accumulated deficit (1,109)
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TOTAL STOCKHOLDERS' EQUITY 7,388
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,326
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See notes to consolidated financial statements.
3
SPECTRUM LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Six Months Ended
---------------- ----------------
June 30 July 1 June 30 July 1
2001 2000 2001 2000
------- ------- ------- -------
NET SALES $3,182 $3,447 $6,483 $6,818
COSTS AND EXPENSES
Cost of sales 1,843 1,742 3,553 3,459
Selling, general and administrative 1,086 1,004 2,168 2,089
Research and development 142 141 331 302
Other expense, primarily interest 10 27 20 57
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Total costs and expenses 3,081 2,914 6,072 5,907
Income before provision for income taxes 101 533 411 911
Provision for income taxes 41 213 164 364
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Net income $ 60 $ 320 $ 247 $ 547
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Earnings per share
Basic $ .01 $ .06 $ .05 $ .10
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Diluted $ .01 $ .06 $ .05 $ .10
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Weighted average shares outstanding
Basic 5,312 5,312 5,312 5,312
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Diluted 5,485 5,461 5,440 5,454
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See notes to consolidated financial statements.
4
SPECTRUM LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2001 AND JULY 1, 2000
(IN THOUSANDS)
(UNAUDITED)
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 247 $ 547
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 361 273
Noncash compensation 16 43
Change in assets and liabilities:
Decrease (increase) in accounts receivables 75 (281)
Decrease in inventories 120 57
Decrease in prepaid expenses 106 31
Decrease in other assets 6
Increase (decrease) in accounts payable 25 (324)
(Decrease) increase in accrued expenses and other current liabilities (8) 281
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Net cash provided by operating activities 942 633
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of equipment and leasehold improvements (381) (175)
Acquisition of patents (500)
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Net cash used in investing activities (881) (175)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt (410) (411)
Proceeds from issuance of debt 150
Decrease in restricted cash 100
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Net cash used in financing activities (260) (311)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (199) (147)
CASH AND CASH EQUIVALENTS, beginning of period 1,121 550
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CASH AND CASH EQUIVALENTS, end of period $ 922 $ 697
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See notes to consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL 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 adjustments) necessary to present fairly the financial position of the
Company as of June 30, 2001 and the results of its operations for the three and
six months ended June 30, 2001 and July 1, 2000 and its cash flows for the six
months ended June 30, 2001 and July 1, 2000. 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 $ 1,169
Work in progress 53
Finished goods 681
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$ 1,903
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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 (172,933 and 127,586 shares in the year 2001 three and six-month
periods, respectively, and 148,929 and 141,876 in the year 2000 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 $1,500,000 will not be
realized. This 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.
Management will continue to evaluate the realizability of the deferred tax
assets by assessing the need for and amount of a valuation allowance.
At December 30, 2000, the Company had approximately $6.1 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 discussed above, it is probable that
$4,500,000 of the Company's net operating loss will expire without utilization.
Loss carryforwards for tax purposes expire in amounts and by fiscal year as
follows: 2004 $988,000; 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 primarily of sterile
plastic surgical drapes and cloth bandages that are sold primarily to hospitals.
6
Revenue by product group is as follows (in thousands):
Three Months Ended Six Months Ended
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June 30, July 1, June 30, July 1,
2001 2000 2001 2000
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Laboratory products $2,729 $2,991 $5,597 $5,901
Operating room disposable products 453 456 886 917
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$3,182 $3,447 $6,483 $6,818
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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 December 30, 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
Sales decreased by 7.7% and 4.9% for the three and six-month periods of the
current fiscal year, respectively, as compared to the same periods of the prior
fiscal year. The decreases were due to a decrease in customer demand during the
three-month period of the current fiscal year.
Cost of sales, as a percentage of sales, were 57.9% and 54.8% for the three and
six-month periods of the current fiscal year, respectively, compared to 50.5%
and 50.7% for the same periods of the prior fiscal year. The increase in
percentages was primarily due to, in the second quarter of the current year,
increased sales with a lower profit margin as compared to the prior year.
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 2001, the Company generated approximately
$942,000 of cash from operating activities. This was offset by $410,000 in bank
loan payments, $500,000 for an acquisition of patents (which are being amortized
over approximately twelve years) and $381,000 for purchases of equipment and
costs for leasehold improvements. This resulted in a net decrease in cash for
the period of approximately $349,000 before debt proceeds of $150,000.
The Company has a credit agreement with a bank that prohibits payment of cash
dividends without prior bank approval. The Company does not intend to pay cash
dividends in fiscal 2001. In January, 2001, the credit agreement was amended to
provide up to $900,000 of additional borrowings for certain purposes as defined
in the amendment. In April, 2001, $150,000 was borrowed against this credit
line.
The Company's management believes that cash on hand, cash expected to be
generated from operations and, to any extent necessary, usage of the
availability of additional borrowings will be sufficient to meet cash
requirements for the next twelve months.
7
In October 1996, a subsidiary of the Company, SLI Acquisition Corp. (SLIAC),
acquired certain assets and liabilities of Cellco, Inc. in exchange for 10,000
shares of SLIAC's preferred stock valued at $2,000,000 for redemption purposes.
At March 31, 2001, 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. The put obligation is that of the subsidiary and not the Company.
Management anticipates that this subsidiary will be liquidated prior to December
31, 2001.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None
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 during the quarter
ended June 30, 2001.
8
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, on August 10, 2001.
SPECTRUM LABORATORIES, INC.
(Registrant)
/s/ F. Jesus Martinez
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Signature
F. Jesus Martinez
President
/s/ Larry D. Womack
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Signature
Larry D. Womack
Vice President Finance
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