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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 MARCH 30, 2002
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
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(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 April 30, 2002: 5,312,468
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
YES [ ] NO [X]
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of March 30, 2002 3
Consolidated Statements of Income for the Three Months Ended
March 30, 2002 and March 31, 2001 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 30, 2002 and March 31, 2001 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 10
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
SPECTRUM LABORATORIES, INC.
Consolidated Balance Sheet
AS OF MARCH 30, 2002
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,866
Accounts receivable 1,913
Inventories 1,631
Prepaid expenses 236
Deferred taxes 293
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Total current assets 6,939
EQUIPMENT AND LEASEHOLD IMPROVEMENTS 2,749
GOODWILL, not subject to amortization 1,122
DEFERRED TAXES 1,662
PATENTS, subject to amortization, net of accumulated amortization of $76,000 674
OTHER ASSETS 34
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Total assets $ 13,180
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 761
Accounts payable 547
Accrued expenses and other current liabilities 681
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Total current liabilities 1,989
LONG-TERM DEBT, net of current maturities 1,492
MINORITY INTEREST 1,755
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 25,000,000 shares authorized;
5,312,468 shares issued and outstanding 53
Preferred stock, par value $.01; 10,000,000 shares authorized;
none issued and outstanding -
Additional paid-in capital 8,465
Accumulated deficit (574)
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Total stockholders' equity 7,944
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Total liabilities and stockholders' equity $ 13,180
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3
SPECTRUM LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 30, 2002 AND MARCH 31, 2001
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
2002 2001
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NET SALES $3,254 $3,301
COSTS AND EXPENSES
Cost of sales 1,797 1,710
Selling, general and administrative 962 1,082
Research and development 163 189
Other expense, primarily interest 27 10
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Total costs and expenses 2,949 2,991
Income before provision for income taxes 305 310
Provision for income taxes 121 123
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Net income $ 184 $ 187
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Earnings per share
Basic $ .03 $ .04
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Diluted $ .03 $ .03
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Weighted average shares outstanding
Basic 5,312 5,312
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Diluted 5,442 5,394
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4
SPECTRUM LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 30, 2002 AND MARCH 31, 2001
(IN THOUSANDS)
(UNAUDITED)
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 184 $ 187
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 161 168
Noncash compensation 7 7
Change in assets and liabilities:
Increase in accounts receivables (224) (62)
(Increase) decrease in inventories 16 (43)
(Increase) decrease in prepaid expenses (101) 91
(Increase) in other assets (1)
Increase in accounts payable 117 193
Increase in accrued expenses and other current liabilities 182 83
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Net cash provided by operating activities 341 624
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of equipment and leasehold improvements (46) (252)
Acquisition of patents (250) (500)
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Net cash used in investing activities (296) (752)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt (206) (205)
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Net cash used in financing activities (206) (205)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (161) (333)
CASH AND CASH EQUIVALENTS, beginning of period 3,027 1,121
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CASH AND CASH EQUIVALENTS, end of period $ 2,866 $ 788
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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 adjustments) necessary to present fairly
the financial position of the Company as of March 30, 2002 and the results of
its operations and its cash flows for the three months ended March 30, 2002 and
March 31 2001. 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.
New Accounting Standards - In June 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS (SFAS No. 142). 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. The
Company has adopted SFAS 142 during the quarter ended March 30, 2002.
Accordingly, under SFAS 142, management has determined there is one reporting
unit and tested the carrying value of goodwill for any impairment losses and has
determined that no impairment exists. Also in accordance with SFAS 142, the
Company has not recorded amortization expense with respect to goodwill during
the three months ended March 30, 2002, while approximately $21,000 amortization
expense was recorded during the three months ended March 31, 2001. Reported net
income for the three months ended March 31, 2001 would be increased by $13,000,
net of related tax effect to $200,000 had goodwill been accounted for in
accordance with SFAS 142. Accordingly, there would have been no affect on basic
earnings per share, and diluted earnings per share would have increased to $.04
In August 2001 the FASB issued Statement of Financial Accounting Standards No.
144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSESTS (SFAS No.
144). SFAS No. 144 addresses the financial accounting and reporting for the
impairment or disposal of long-lived assets. The Company has adopted SFAS 144
during the quarter ended March 30, 2002 with no material impact on the
consolidated financial statements.
Patents - The Company has acquired patents, which are amortized over their
respective lives. Management evaluates the usefulness of these patents annually
in determining any potential impairment. Current period amortization with
respect to these patents is approximately $15,000. Estimated amortization
expense for the next five years is approximately $60,000 annually, all of which
relates to these patents.
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 $ 990
Work in progress 68
Finished goods 573
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$ 1,631
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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 (129,811 and 82,238 shares in the 2002 and 2001 fiscal periods,
respectively).
6
Note 4 - Income Taxes
In assessing the realizability of deferred tax assets, management has estimated
that it is likely 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 29, 2001, the Company had approximately $5.8 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 $1,600,000; 2005 $1,319,000; 2011 $20,000; 2012 $347,000; 2013
$776,000; 2022 to 2026 $299,000 per year; 2027 $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.
Revenue by product group is as follows (in thousands):
2002 2001
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Laboratory products $2,914 $2,868
Operating room disposable products 340 433
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$3,254 $3,301
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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 29, 2001 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 for the first 3 months of 2002 of $3,254,000 were slightly short of prior
years by $47,000 (1.4%). Laboratory product sales totaled $2,914,000, a slight
increase of $46,000 (1.6%) versus prior year while revenues from operating room
disposables were $340,000, a decrease from prior year of $93,000 (21.5%). The
decrease in operating room disposables revenues is due primarily to lower sales
volume with a number of larger customers.
7
Gross Margin for the first quarter of 2002 was $1,457,000 (44.8%) versus the
first quarter of 2001 of $1,591,000 (48.2%). The decrease in gross margin was
due to product sales mix. The decrease in gross margin was more than offset by
reduced SG&A and research & development expenditures of $146,000 (11.5%) in the
first 3 months of 2002 versus the comparable 2001 period.
The net impact of the above resulted in income before taxes of $305,000 in the
first quarter of 2002 versus $310,000 in the first quarter of 2001, a slight
decrease of $5,000 (1.6%).
Liquidity and Capital Resources
During the first three months of fiscal 2002, the Company generated
approximately $341,000 of cash from operating activities. This was offset by
$206,000 in bank loan payments, $250,000 relating to the acquisition of patents
and $46,000 for purchases of equipment and costs for leasehold improvements.
This resulted in a net decrease in cash for the period of approximately
$161,000.
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.
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
Exhibit No. Description
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3.1 Articles of Incorporation of Registrant (incorporated by
reference to Exhibit 4.1 filed with Registrant's Registration
Statement on Form S-2, Registration No. 2-68999)
3.2 Amendment to Article I of the Articles of Incorporation of
Registrant (incorporated by reference to Exhibit 3.2 filed
with Registrant's Report on Form 10-K for the fiscal year
ended December 31, 1982, Commission File No. 0-9478)
3.3 Bylaws of Registrant (incorporated by reference to Exhibit 4.2
filed with Registrant's Registration Statement on Form S-2,
Registration No. 2-68999)
8
3.4 Amendment to Article III, section 2 of Registrant's Bylaws
(incorporated by reference to Exhibit 3.3 filed with
Registrant's Report on Form 10-K for the fiscal year ended May
31, 1982, Commission File No. 0-9478)
3.5 Amendment to Article IV, Section 6 and Section 7 of the
Registrant's Bylaws (incorporated by reference to Exhibit 3.4
filed with Registrant's Report on Form 10-K for the fiscal
year ended May 31, 1982, Commission File No. 0-9478)
3.6 Articles of Amendment to Registrant's Articles of
Incorporation increasing authorized stock to 25,000,000 shares
(incorporated by reference to Registrant's Schedule 14C-2
Information Statement, Exhibit A, filed with the Commission on
October 19, 1996, Commission File No. 0-9478)
3.7 Certificate of Ownership of Microgon into Spectrum
Laboratories (incorporated by reference to Exhibit 2B to the
Registrant's Form 8-K/A on October 15, 1996, Commission File
No. 0-9478)
3.8 Reorganization Agreement, dated September 30, 1998, between
Spectrum Laboratories, Inc., and Spectrum Medical Industries,
Inc. (incorporated by reference to Exhibit 2 to the
Registrant's Form 8-K/A filed November 18, 1998, Commission
File No. 0-9478)
10.1 Amendment to Investment and Loan Agreement dated August 1,
1995 among the Company, Microgon and certain preferred
shareholders of Microgon (incorporated by reference to Exhibit
2A to the Registrant's Form 8K/A filed on October 15, 1995,
Commission File No. 0-9478)
10.2 Stock Option Plan adopted October 11, 1996 (incorporated by
reference to Exhibit B to Registrant's filing of Schedule
14-2, filed with the Commission on October 9, 1996)
10.3 Registrant's purchase agreement of Cellco, Inc. (incorporated
by reference to Exhibit 10.14 with Registrant's Form 8-K dated
November 1, 1996, Commission File No. 0-9478)
10.4 Credit agreement, dated as of December 22, 1998, between
Registrant and City National Bank (incorporated by reference
to Exhibit 10.18 filed with Registrant's report on Form 10-KSB
for fiscal year ended January 2, 1999, Commission File No.
0-9478)
10.5 Incentive Agreement dated August 10, 1998, between Spectrum
Medical Industries, Inc., the Registrant and F. Jesus Martinez
and Roy T. Eddleman (incorporated by reference to Exhibit
10.19 filed with Registrant's report on Form 10-KSB for fiscal
year ended January 2, 1999, Commission File No. 0-9478)
10.6 Sublease agreement dated January 19, 1999 between Millipore
Corporation and Spectrum Laboratories, Inc. (incorporated by
reference to Exhibit 10.20 filed with Registrant's report on
Form 10-KSB for fiscal year ended January 1, 2000, Commission
File No. 0-9478)
10.7 First amendment, dated July 14, 1999, to the credit agreement,
dated December 22, 1998, between the Company and City National
Bank (incorporated by reference to Exhibit 10.21 filed with
Registrant's report on Form 10-KSB for fiscal year ended
January 1, 2000, Commission File No. 0-9478)
10.8 Second amendment, dated July 1, 2000, to the credit agreement,
dated December 22, 1998, between the Company and City National
Bank
10.9 The Registrant's Year 2000 Stock Option Plan
10.10 Third amendment, dated January 8, 2001, to the credit
agreement, dated December 22, 1998, between the Company and
City National Bank
9
10.11 Royalty Agreement, dated June 1, 1976, between Roy T. Eddleman
and Spectrum Medical Industries
10.12 Fourth amendment, dated December 14, 2001, to the credit
agreement, dated December 22, 1998, between the Company and
City National Bank
16 Letter on change in certifying accountant (incorporated by
reference to Exhibit 16 filed with Registrant's report on Form
10-KSB for fiscal year ended January 2, 1999, Commission File
No. 0-9478)
(b) The Company filed no reports on Form 8-K during the quarter ended
March 30, 2002.
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 May 9, 2002.
SPECTRUM LABORATORIES, INC.
(Registrant)
/s/ F. Jesus Martinez
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Signature
F. Jesus Martinez
President
/s/ Brian A. Watts
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Signature
Brian A. Watts
CFO/VP Finance
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