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SECURITIES 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 OCTOBER 2, 1999
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)
23022 LA CADENA DRIVE, LAGUNA HILLS, CALIFORNIA 92653
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (949) 581-3500
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 October 31, 1999: 5,311,968
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Spectrum Laboratories, Inc.
Page
Part I - FINANCIAL INFORMATION ----
Item 1. Financial Statements
Consolidated Balance Sheet as of October 2, 1999 3
Consolidated Statements of Operations for the Three and Nine
Months Ended October 2, 1999 and October 3, 1998 4
Consolidated Statements of Cash Flows for the Nine Months
Ended October 2, 1999 and October 3, 1998 5
Notes to Consolidated Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 7
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Changes in Securities 9
Item 3. Defaults Upon Senior Securities 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
Signature 10
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
SPECTRUM LABORATORIES, INC.
CONSOLIDATED BALANCE SHEET
AS OF OCTOBER 2, 1999
(Dollars in thousands, except par value)
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 584
Accounts receivable 1,609
Inventories 2,049
Prepaid expenses 285
Deferred taxes 377
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Total current assets 4,904
Equipment and leasehold improvements 2,277
Goodwill 2,575
Other assets 524
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TOTAL ASSETS $ 10,280
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 970
Accounts payable 914
Accrued expenses and other current liabilities 1,064
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Total current liabilities 2,948
LONG-TERM DEBT, less current portion 1,020
MINORITY INTEREST 2,000
SHAREHOLDERS' 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 8,046
Accumulated deficit (3,787)
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TOTAL SHAREHOLDERS' EQUITY 4,312
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,280
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3
SPECTRUM LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
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Oct. 2 Oct. 3 Oct. 2 Oct. 3
1999 1998 1999 1998
------------ ------------ ------------ ------------
NET SALES $ 3,315 $ 3,143 $ 10,027 $ 9,144
COSTS AND EXPENSES
Cost of sales 1,632 1,540 5,027 4,697
Selling 360 428 1,150 1,378
General and administrative 785 768 2,243 2,415
Research and development 166 227 509 601
Other expense, primarily interest 31 76 119 201
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Total costs and expenses 2,974 3,039 9,048 9,292
Income (loss) before provision for income taxes 341 104 979 (148)
Provision for income taxes 136 11 391 27
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Net income (loss) $ 205 $ 93 $ 588 $ (175)
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Earnings (loss) per share
Basic $ .04 $ .02 $ .11 $ (.04)
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Diluted $ .04 $ .02 $ .11 $ (.04)
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Weighted average shares outstanding
Basic 5,312 4,824 5,312 4,818
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Diluted 5,457 4,898 5,458 4,818
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4
SPECTRUM LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 2, 1999 AND OCTOBER 3, 1998
(In thousands)
(Unaudited)
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 588 $ (175)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 522 495
Minority interest in loss of subsidiary (17)
Change in assets and liabilities:
(Increase) decrease in accounts receivables (90) 222
Increase in inventories (353) (161)
(Increase) decrease in prepaid expenses (162) 62
Increase in other assets (30)
Increase (decrease) in accounts payable 147 (100)
Increase in accrued expenses and other current liabilities 283 97
Other 30 27
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Net cash provided by operating activities 935 450
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of equipment and leasehold improvements (443) (344)
Advances to principal shareholder (115) 325
Proceeds from the sale of equipment 29
Increase in other assets (106)
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Net cash used in investing activities (529) (125)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt (677) (733)
Proceeds from issuance of debt 275
Proceeds from issuance of stock 500
Distributions to principal shareholder (891)
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Net cash used in financing activities (677) (849)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (271) (524)
CASH AND CASH EQUIVALENTS, beginning of period 855 1,135
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CASH AND CASH EQUIVALENTS, end of period $ 584 $ 611
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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 accruals) necessary to present fairly the financial position of the
Company as of October 2, 1999, the results of its operations for the three and
nine months ended October 2, 1999 and October 3, 1998 and its cash flows for the
nine months ended October 2, 1999 and October 3, 1998. 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 - Reorganization
On September 30, 1998, Spectrum Medical Industries, Inc. (SMI), which formerly
owned 79.9% of Spectrum Laboratories, Inc. merged with Spectrum Laboratories,
Inc. (SLI). The merger was a combination of two companies under common control
and has been accounted for in a manner similar to a pooling of interests. The
consolidated financial statements of Spectrum Laboratories, Inc. for the periods
ended October 3, 1998 are those of Spectrum Medical Industries, Inc. and
subsidiaries and have been restated to reflect the effects of the merger with
Spectrum Laboratories, Inc. In connection with this reorganization, SMI
distributed its 79.9% ownership in SLI, 1,013,543 shares, to the stockholders of
SMI and the Company effected a one-for-ten reverse stock split and
reincorporated in Delaware. This reverse stock split has been accounted for as
if it occurred as of the beginning of the earliest period presented in these
consolidated financial statements. Accordingly, stock options and corresponding
exercise prices have been adjusted to reflect the reverse split.
Note 3 - 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 $ 1,238
Work in progress 72
Finished goods 739
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$ 2,049
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Note 4 - Earnings per Share
Basic earnings or loss per share is computed by dividing the net income or 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
or loss attributable to common stockholders. Diluted earnings per share in 1999
and for the three month period or 1998 reflect the potential dilution that could
occur from common shares issuable through stock options (145,189 and 145,808
shares for the 1999 three and six month periods, respectively, and 73,925 for
the three month period in 1998). Diluted loss per share in the 1998 nine month
period does not give effect to issuance of shares through stock options as the
effect would be anti-dilutive.
Note 5 - Income Taxes
At January 2, 1999, the Company had net operating loss carryforwards for federal
income tax purposes available to offset future taxable income. Certain of these
loss carryforwards are available to offset separate taxable income of one of the
companies and are limited to approximately $298,000 of that entity's income
annually. Any unused net operating loss is carried forward. As a result of the
limitation, it is possible that more than $5,000,000 of the entity's net
operating loss may expire without utilization.
The income tax provisions for the 1998 periods, as a percentage of income before
the tax provision, are lower than expected primarily because SMI, prior to its
merger into the Company, was an S corporation and, hence, paid no federal income
taxes and had a low state income tax rate.
6
Note 6 - 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 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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Oct. 2, Oct. 3, Oct. 2, Oct. 3,
1999 1998 1999 1998
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Laboratory products $ 2,888 $ 2,744 $ 8,702 $ 7,928
Operating room disposable products 427 399 1,325 1,216
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$ 3,315 $ 3,143 $ 10,027 $ 9,144
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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 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 2, 1999, as filed with the Securities and Exchange Commission and, from
time to time, in the Company's other reports on file with the Commission.
In September 1998, Spectrum Medical Industries, Inc. (SMI), which formerly owned
approximately 79.9% of the Company, was merged into the Company. As a result,
the operating results of all periods presented include the operations of SMI and
those of Chromatography, which was formerly a subsidiary of SMI and is now a
subsidiary of the Company.
Results of Operations
Sales for the three months ended October 2, 1999 increased 5.5% to $3.3 million
compared to $3.1 million for the same period in 1998. For the nine months ended
October 2, 1999, sales increased 9.7% to $10.0 million compared to $9.1 million
for the same period in 1998. Although selling prices were increased between 3%
and 5% on certain product groups at the beginning of fiscal 1999, the most
significant reason for product sales growth is attributable to increased demand
for Process Separation, OEM and Operating Room Disposable products.
Cost of sales as a percentage of sales was 50.1% for the nine months of 1999 and
51.4% for the corresponding period of 1998. The improvement was primarily
attributable to cost reductions made in the third quarter of 1998, improvements
in production efficiency and increased selling prices.
The decreases in selling, general and administrative, and research and
development expenses for the quarter and nine months as compared to the prior
year were primarily due to cost reduction measures implemented during the third
quarter of 1998. General and administrative costs were higher for the quarter,
as compared to the same quarter of last year, primarily due to relocation
expenses. The income tax provision for 1999 does not include any tax benefits
for possible utilization of net operating loss carryforwards. Such utilization,
if later determined to be obtainable in sufficient amount, may result in a lower
effective tax rate.
7
Liquidity and Capital Resources
In the first nine months of 1999, $935,000 of cash was generated from operating
activities. Net income before the non-cash expenses of depreciation and
amortization and an increase in accounts payable and accrued expenses were the
primary sources of the positive cash flow. The positive cash flow was offset
primarily by the purchase of equipment, expenditures for leasehold improvements,
payments on debt, and an increase in inventory, resulting in a net decrease in
cash of $271,000.
Although the cash balance may further decrease over the next few months,
primarily due to costs associated with the relocation of the three California
locations into one facility, management of the Company 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.
Year 2000 Matters
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
hardware or computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the Year 2000. The Company has
converted from existing hardware and accounting software to hardware and
software programs that are Year 2000 compliant except for a subsidiary whose
conversion is expected to be completed no later than early December of this
year. The total cost of the Year 2000 project is estimated at $75,000, is being
funded through operating cash flows, and the costs, except for equipment costs,
are being expensed as incurred. Approximately $70,000 had been expended as of
October 2, 1999.
The Company has had formal communications with substantially all of its
significant suppliers and customers to determine the extent to which the
Company's interface systems are vulnerable to those third parties' failure to
remediate their own Year 2000 issue. Although the results of these
communications did not indicate that any problems were expected, there can be no
guarantee that the systems of other companies on which the Company's operations
rely will be timely converted and would not have an adverse effect on the
Company's ability to obtain products and services from vendors or collect
receivables from customers.
Management is of the opinion that the year 2000 issue will not pose significant
operational problems for the Company. However, should future problems arise
related to the company's conversions or those by its significant suppliers and
customers, a potential worst-case effect on the Company could be a significant
disruption of operations, including, among other things, an inability to obtain
materials from vendors, make timely shipments to customers, a temporary
inability to process transactions, send invoices to its customers, or engage in
similar normal business activities. No contingency back-up plan has been
developed to date, as no current material exposure has been identified. If it is
believed, at any time in the future, that there is a probability that any
compliance issue has not been satisfactorily resolved, we will seek to develop
appropriate plans to mitigate any potential negative impact on the Company.
8
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Change in Securities
None
Item 3. Defaults upon Senior Securities
Not Applicable
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
October 2, 1999
9
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: November 5, 1999
/s/ Larry D. Womack
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Signature
Larry D. Womack
Vice President Finance
Date: November 5, 1999
10