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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 27, 2003
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
COMMISSION FILE NUMBER 0-9478
__________________________
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, 2003: 5,312,468
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
YES [_] NO [X]
Page
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of September 27, 2003 3
Consolidated Statements of Income for the Three and Nine months
Ended September 27, 2003 and September 28, 2002 4
Consolidated Statements of Cash Flows for the Nine months Ended
September 27, 2003 5
Notes to Consolidated Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Controls and Procedures 10
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 11
Signature 11
Exhibits Certifications - Chief Executive Officer and Chief Financial
Officer 12
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
SPECTRUM LABORATORIES, INC.
Consolidated Balance Sheet
AS OF SEPTEMBER 27, 2003
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,466
Accounts receivable 1,623
Inventories 2,345
Prepaid expenses 275
Deferred taxes 528
Tax refund receivable 62
--------
Total current assets 9,299
EQUIPMENT AND LEASEHOLD IMPROVEMENTS 2,844
GOODWILL 1,122
DEFERRED TAXES 1,424
PATENTS, subject to amortization, net of accumulated amortization of $167 583
OTHER ASSETS 33
--------
Total assets $15,305
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 960
Accounts payable 868
Accrued expenses and other current liabilities 608
--------
Total current liabilities 2,436
LONG-TERM DEBT, net of current maturities 2,025
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 8,488
Retained earnings 548
--------
Total stockholders' equity 9,089
--------
Total liabilities and stockholders' equity $15,305
========
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
------------------- ------------------
Sept 27, Sept 28, Sept 27, Sept 28,
2003 2002 2003 2002
-------- -------- -------- --------
NET SALES $ 2,653 $ 3,176 $ 9,438 $ 9,768
COSTS AND EXPENSES
Cost of sales 1,697 1,605 5,263 5,220
Selling, general and administrative 1,096 1,054 3,234 3,081
Research and development 215 178 633 539
Other expense, primarily interest 22 13 94 43
-------- -------- -------- --------
Total costs and expenses 3,030 2,850 9,224 8,883
-------- -------- -------- --------
Income (loss) before provision for
income taxes (377) 326 214 885
Provision (benefit) for income taxes (108) 131 64 354
-------- -------- -------- --------
Net income (loss) $ (269) $ 195 $ 150 $ 531
======== ======== ======== ========
Earnings (loss) per share:
Basic ($ 0.05) $ 0.04 $ 0.03 $ 0.10
======== ======== ======== ========
Diluted ($ 0.05) $ 0.04 $ 0.03 $ 0.10
======== ======== ======== ========
Weighted average shares outstanding:
Basic 5,312 5,312 5,312 5,312
======== ======== ======== ========
Diluted 5,312 5,357 5,360 5,368
======== ======== ======== ========
See Notes to Consolidated Financial Statements.
4
SPECTRUM LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 27, 2003 AND SEPTEMBER 28, 2002
(IN THOUSANDS)
(UNAUDITED)
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 150 $ 531
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 566 502
Noncash compensation 9 18
Change in working capital components:
Decrease in accounts receivable 183 50
(Increase) in inventories (579) (201)
(Increase) in prepaid expenses (42) (227)
Increase in accounts payable 304 177
(Decrease) Increase in accrued expenses (88) 296
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NET CASH PROVIDED BY OPERATING ACTIVITIES 503 1,146
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment and leasehold improvements (443) (459)
Acquisition of patents -- (250)
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NET CASH (USED IN) INVESTING ACTIVITIES (443) (709)
-------- --------
CASH FLOWS (USED IN) FINANCING ACTIVITIES:
Principal payments of long-term debt (703) (583)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (643) (146)
CASH AND CASH EQUIVALENTS, beginning of period 5,109 3,027
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 4,466 $ 2,881
======== ========
See Notes to Consolidated Financial Statements.
5
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 September 27, 2003 and the results
of its operations and its cash flows for the nine months ended September 27,
2003 and September 28, 2002. 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.
ACCOUNTING FOR STOCK-BASED COMPENSATION - In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure.
This Statement amends SFAS No 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value-based method of accounting for stock-based employee
compensation. This Statement also amends the disclosure requirement of SFAS No.
123 to require prominent disclosure in both annual and interim financial
statements about the effect on reported net income (loss) of an entity's
accounting policy decisions with respect to stock-based employee compensation.
The Company adopted this Statement in fiscal year 2002.
The Company accounts for stock-based employee compensation under the
requirements of Accounting Principles Board (APB) Opinion No. 25, which does not
require compensation to be recorded if the consideration to be received is at
least equal to fair value at the measurement date. Nonemployee stock-based
transactions are accounted for under the requirements of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which requires compensation to be
recorded based on the fair value of the securities issued or the services
received, whichever is more reliably measurable.
SFAS No. 123 requires the disclosure of pro forma net income and earnings per
share had the Company adopted the fair value method. Under SFAS No. 123, the
fair value of stock-based awards to employees is calculated through the use of
option-pricing models, even though such models were developed to estimate the
fair value of freely tradable, fully transferable options with vesting
restrictions which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
value. The Company's calculations for the options granted were made using the
Black-Scholes option-pricing model.
The calculations are based on a single-option valuation approach and forfeitures
are recognized as they occur. The following table illustrates the effect on net
income (loss) and earnings (loss) per share had compensation cost for
stock-based compensation been determined based on the grant date fair values of
awards for the three and nine months ended September 27, 2003 and September 28,
2002, respectively as detailed on the following page:
6
Note 1 Accounting for Stock-based Compensation (Continued):
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
Sept 27, 2003 Sept 28, 2002 Sept 27, 2003 Sept 28, 2002
------------ ------------ ------------ ------------
Net income (loss):
As reportedd $ (269,000) $ 195,000 $ 150,000 $ 531,000
Add total stock-based employee
compensation expense determined
under APB opinion 25,
net of related tax effects 3,000 4,000 9,000 18,000
(Deduct) total stock-based employee
compensation expense determined
under fair value based for all
awards, net of related tax benefits (16,000) (23,000) (49,000) (61,000)
------------ ------------ ------------ ------------
Pro forma $ (282,000) $ 176,000 $ 110,000 $ 488,000
============ ============ ============ ============
Basic earnings (loss) per share:
As reported $ (0.05) $ 0.04 $ 0.03 $ 0.10
Pro forma $ (0.05) $ 0.03 $ 0.02 $ 0.09
Diluted earnings (loss) per share:
As reported $ (0.05) $ 0.04 $ 0.03 $ 0.10
Pro forma $ (0.05) $ 0.03 $ 0.02 $ 0.09
Weighted average shares outstanding:
Basic 5,312,000 5,312,000 5,312,000 5,312,000
============ ============ ============ ============
Diluted 5,312,000 5,357,000 5,360,000 5,368,000
============ ============ ============ ============
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 $ 1,185
Work in process 290
Finished goods 870
-----------
$ 2,345
===========
Note 3 - Earnings (Loss) per Share
Basic earnings (loss) per share is computed by dividing the net income (loss)
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
(loss) attributable to common stockholders. Diluted earnings per share reflect
the potential dilution that could occur from common shares issuable through
stock options (0 and 143,743 shares in the fiscal year 2003 three and nine month
periods respectively and 44,493 and 55,557 shares in the fiscal 2002 three and
nine month periods, respectively). The dilutive effect of 177,922 equivalent
shares of stock options was not included for the three months ended September
27, 2003 as the effect was anti dilutive.
7
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 28, 2002, the Company had approximately $6.2 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
approximately $4.5 million of the Company's net operating loss will expire
without utilization.
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
------------------ ------------------
Sept 27, Sept 28, Sept 27, Sept 28,
2003 2002 2003 2002
-------- -------- -------- --------
Laboratory products 2,282 2,733 8,224 8,534
Operating room disposable products 371 443 1,214 1,234
-------- -------- -------- --------
$ 2,653 $ 3,176 $ 9,438 $ 9,768
======== ======== ======== ========
Note 5 - Option Plan
The Company had two options plans referred to as the 1995 Option Plan and the
2000 Option Plan with 200,000 and 300,000 shares of common stock, respectively
reserved for option grants to key employees, directors and consultants. In July
2002, the shareholders approved merging the 1995 Option Plan and the 2000 Option
Plan into one plan to be referred to as the 2000 Option Plan (the "2000 Option
Plan"). In addition, shareholders approved the number of shares available to
grant under the 2000 Option Plan by 100,000 to a total of 600,000. As of
September 27, 2003, there were 436,300 options outstanding under the 2000 Option
Plan. There were no grants or cancellations of options during the nine months
ended September 27, 2003.
8
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 28, 2002 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
- -----
Sales for the third quarter ended September 27, 2003 (3rd quarter) were lower by
$523,000 (16.5%) when compared to the third quarter of 2002. The decline in
sales during the 3rd quarter was principally related to Spectrum's distribution
to its Original Equipment Market ("OEM"). During the first six months aggregate
sales to OEM were above prior year by approximately $100,000. This was the
result of sales to one OEM customer ("Customer A") being ahead of prior year by
approximately $400,000 while another significant OEM customer ("Customer B")
sales declined by approximately $275,000. Unfortunately, due to timing during
the 3rd quarter, Customer A sales were minimal, principally due to a delay in
the introduction of their enhanced model. Customer A's enhanced model is in the
final stages of validation while Customer B subsequent to quarter end placed an
order in excess of $100,000 Spectrum realizes the Original Equipment Market can
be cyclical but has and still view's the market as an opportunity for growth.
Gross Margin
- ------------
Gross margin for the 3 month period ended September 27, 2003 was $956,000
(36.0%) versus the similar period in 2002 of $1,571,000 (49.5%). The decline in
gross margin percentage was primarily due to the Company's fixed overhead costs
that aggregate to approximately a million dollars per quarter for Spectrum to
operate its Rancho Dominguez plant. Considering the sales shortfall noted above,
absorption of overhead was at a much lower level creating significant negative
cost variances and thereby reducing margin accordingly. Margin was also impacted
by a higher than normal scrap rate during the quarter.
Considering the negative impacts on gross margin for the quarter, gross margin
year to date was $4,175,000 (44.2%) versus prior year of $4,548,000 (46.6%).
Selling, General & Administrative ("SG&A") and Research & Developmental Expenses
("Expenses") Expenses for the 3rd quarter of 2003 were $1,311,000, an increase
of $79,000 (6.4%) from the 3rd quarter of 2002. The increase in Expenses of
$79,000 during the 3rd quarter was comprised of an increase in SG&A of $42,000,
a 4% increase, and an increase of $37,000 or a 20.8% increase in Research &
Development.
Expenses for the 9 month period ended September 27, 2003 were $3,867,000, an
increase of $247,000 (6.8%) over the same period in 2002 with $153,000 of the
increase related to SG&A and $94,000 attributable to Research & Development. The
increase in SG&A expenditures was principally attributable to an $80,000
charitable contribution the Company made in the first quarter as well as a
$60,000 increase in depreciation expense reflecting of the additional equipment
the Company has acquired. In addition, the Company continues to issue its
BioProcessor newsletter to its customers having issued three BioProcessor
newsletters in the first nine months of 2003. The related expenditures plus the
cost of sales of catalogs and The ABCs of Filtration book distributed during the
nine month period resulted in advertising expenses increasing by $50,000 versus
2002.
The increase in Research & Development ("R&D") of $94,000 was principally
related to personnel, outside consulting and materials. The increase in R&D is
reflective of the Company's current initiatives to expand its breath and depth
of product offerings within the bioprocessing industry to be utilized within its
recently available PharmFlo System.
Net Income (Loss)
- -----------------
Considering the above discussed shortfall in sales and the negative impact on
gross margin, the Company incurred a net loss for the 3rd quarter of 2003 of
$269,000. On a year to date basis net income was $150,000 versus prior year of
$531,000.
9
Liquidity and Capital Resources
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During the first nine months of 2003, the Company generated approximately
$503,000 of cash from operating activities. Cash utilized for working capital
requirements totaled $222,000 principally related to the increase in inventory
of $579,000. The increase in inventory was partially offset by decreases in
accounts receivable of $183,000 and an increase in Accounts Payable of $304,000.
The above discussed cash from operating activities was then offset by $703,000
in bank loan payments and $443,000 for the acquisition of equipment. This
resulted in a net decrease in cash for the period of approximately $643,000 to a
cash balance at September 27, 2003 of $4,466,000.
The Company is obligated under the terms of various operating lease agreements
for manufacturing, warehouse and office facilities. Certain of these leases
provide for rent escalation adjustments. Minimum future rental payments under
these operating lease agreements for the fourth quarters ending December 28,
2003 and the subsequent years ending December 31 are as follows: fourth quarter
2003 $116,000; years ending 2004 $341,000; and 2005 $184,000 (total $641,000).
The Company's management believes that cash on hand and cash expected to be
generated from operations will be sufficient to meet cash requirements for the
next twelve months.
Item 3. Controls and Procedures
As of the end of the period covered by this report, the Company conducted an
evaluation, under the supervision and with the participation of the principal
executive officer and principal financial officer, of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation,
the principal executive officer and principal financial officer concluded that
the Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms. There was no change in the Company's internal control over financial
reporting during the Company's most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Change in Securities and Use of Proceeds
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
10
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31 (a) Certification of Chief Executive Officer of Spectrum Laboratories, Inc.
31 (b) Certification of Chief Financial Officer of Spectrum Laboratories, Inc.
32 Certification of Chief Executive Officer and Chief Financial Officer of
Spectrum Laboratories, Inc.
(b) The Company filed no reports on Form 8-K during the quarter ended
September 27, 2003.
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 11, 2003.
SPECTRUM LABORATORIES, INC.
(Registrant)
/s/ F. Jesus Martinez
- ----------------------------
Signature
F. Jesus Martinez
President
/s/ Brian A. Watts
- ----------------------------
Signature
Brian A. Watts
Chief Financial Officer/Vice President of Finance
11