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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 29, 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 October 31, 2001: 5,312,468
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Page
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet as of September 29, 2001 3
Consolidated Statements of Income for the Three and Nine Months
Ended September 29, 2001 and September 30, 2000 4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 29, 2001 and September 30, 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 SEPTEMBER 29, 2001
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 893
Accounts receivable 1,607
Inventories 1,928
Prepaid expenses 112
Deferred taxes 386
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Total current assets 4,926
Equipment and leasehold improvements 2,941
Goodwill 1,142
Deferred taxes 1,758
Other assets 738
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TOTAL ASSETS $ 11,505
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 442
Accounts payable 822
Accrued expenses and other current liabilities 803
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Total current 2,067
liabilities
LONG-TERM DEBT, less current portion 197
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 8,451
Accumulated deficit (1,018)
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TOTAL STOCKHOLDERS' EQUITY 7,486
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,505
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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 Nine Months Ended
-------------------- --------------------
Sep 29 Sep 30 Sep 29 Sep 30
2001 2000 2001 2000
--------- --------- --------- ---------
NET SALES $ 3,112 $ 3,198 $ 9,595 $ 10,016
COSTS AND EXPENSES
Cost of sales 1,758 1,673 5,311 5,132
Selling, general and administrative 1,008 979 3,176 3,068
Research and development 190 167 521 469
Other expense, primarily interest 2 28 22 85
--------- --------- --------- ---------
Total costs and expenses 2,958 2,847 9,030 8,754
Income before provision for income taxes 154 351 565 1,262
Provision for income taxes 62 (459) 226 (95)
--------- --------- --------- ---------
Net income $ 92 $ 810 $ 339 $ 1,357
========= ========= ========= =========
Earnings per share
Basic $ .02 $ .15 $ .06 $ .26
========= ========= ========= =========
Diluted $ .02 $ .15 $ .06 $ .25
========= ========= ========= =========
Weighted average shares outstanding
Basic 5,312 5,312 5,312 5,312
========= ========= ========= =========
Diluted 5,484 5,420 5,455 5,443
========= ========= ========= =========
See notes to consolidated financial statements.
4
SPECTRUM LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000
(IN THOUSANDS)
(UNAUDITED)
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 339 $ 1,357
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 544 457
Noncash compensation 22 67
Deferred taxes - (170)
Change in assets and liabilities:
(Increase) in accounts receivables (8) (31)
Decrease in inventories 95 104
Decrease in prepaid expenses 46 99
Decrease in other assets - 11
Increase (decrease) in accounts payable 40 (321)
Increase (decrease) in accrued expenses and other current liabilities 189 (32)
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Net cash provided by operating activities 1,267 1,541
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of equipment and leasehold improvements (604) (330)
Acquisition of patents (500) -
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Net cash used in investing activities (1,104) (330)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt (616) (617)
Proceeds from issuance of debt 225 -
Decrease in restricted cash - 100
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Net cash used in financing activities (391) (517)
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (228) 694
CASH AND CASH EQUIVALENTS, beginning of period 1,121 550
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CASH AND CASH EQUIVALENTS, end of period $ 893 $ 1,244
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See notes to consolidated financial statements.
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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 September 29, 2001 and the results of its operations for the three
and nine months ended September 29, 2001 and September 30, 2000 and its cash
flows for the nine months ended September 29, 2001 and September 30, 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 $ 1,093
Work in progress 202
Finished goods 633
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$ 1,928
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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 (171,136 and 142,710 shares in the year 2001 three and nine-month
periods, respectively, and 108,506 and 130,752 in the year 2000 three and
nine-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.
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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.
Revenue by product group is as follows (in thousands):
Three Months Ended Nine Months Ended
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Sep 29, Sep 30, Sep 29, Sep 30,
2001 2000 2001 2000
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Laboratory products $ 2,655 $ 2,777 $ 8,252 $ 8,678
Operating room disposable products 457 421 1,343 1,338
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$ 3,112 $ 3,198 $ 9,595 $10,016
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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 4.2% for the nine-month period of the current fiscal year, as
compared to the same period of the prior fiscal year. The decrease was primarily
due to a decrease in customer demand during the previous three-month period of
the current fiscal year.
Cost of sales, as a percentage of sales, were 56.5% and 55.4% for the three and
nine-month periods of the current fiscal year, respectively, compared to 52.3%
and 51.2% for the same periods of the prior fiscal year. The increase in
percentages were primarily due to lower sales of higher margin products and
increased manufacturing costs.
Income taxes - The income tax provision for the prior 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. The Company has applied a valuation
allowance on its net deferred tax assets which exceeds 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 nine months of fiscal 2001, the Company generated approximately
$1,267,000 of cash from operating activities. This was offset by $616,000 in
bank loan payments, $500,000 for an acquisition of patents (which are being
amortized over approximately twelve years) and $604,000 for purchases of
equipment and costs for leasehold improvements. This resulted in a net decrease
in cash for the period of approximately $453,000 before debt proceeds of
$225,000.
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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. During the first nine months of the current fiscal year,
$225,000 has been 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.
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 September 29, 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.
Accounting Standards: In June 2001, the FASB issued Statement of Financial
Accounting Standards No. 141, "Business Combinations" (SFAS No. 141) and
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" (SFAS No. 142). SFAS No. 141 addresses financial accounting
and reporting for business combinations and is effective for all business
combinations after June 30, 2001. SFAS No. 142 addresses financial accounting
and reporting for acquired goodwill and other intangible assets and is effective
for fiscal years beginning after December 15, 2001. It also requires that
goodwill and indefinite lived intangible assets be tested for impairment at
least annually. The Company is in the process of determining the expected impact
on earnings and existing goodwill and other intangibles upon adoption which will
include the elimination of goodwill amortization and may include goodwill
impairment. As of September 29, 2001, goodwill totaled $1.1 million and is being
amortized over not more than 15 years.
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
September 29, 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 November 9, 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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