Full Press Release Details
| Page(s) | ||||
| Report of Independent Auditors | 2 | |||
| Combined Balance Sheets as of April 1, 2017 (unaudited), December 31, 2016 and January 2, 2016 (restated) | 3 | |||
| Combined Statements of Comprehensive Income for the Quarters Ended April 1, 2017 and April 2, 2016 (unaudited), the Year Ended December 31, 2016 and for the Year Ended January 2, 2016 (restated) | 4 | |||
| Combined Statements of Stockholders Equity for the Quarter Ended April 1, 2017 (unaudited), the Year Ended December 31, 2016 and for the Year Ended January 2, 2016 (restated) | 5 | |||
| Combined Statements of Cash Flows for the Quarters Ended April 1, 2017 and April 2, 2016 (unaudited), the Year Ended December 31, 2016 and for the Year Ended January 2, 2016 (restated) | 6 | |||
| Notes to Combined Financial Statements | 7 - 19 |
INDEPENDENT AUDITOR S REPORT
To the Board of Directors and Stockholders of
and its subsidiaries:
We have audited the accompanying combined financial statements of Spectrum, Inc. and subsidiaries and combined entities
(collectively, the Company), which comprise the combined balance sheets as of December 31, 2016 and January 2, 2016, and the related combined statements of comprehensive income, stockholders equity, and cash flows for the years then
ended, and the related notes to the combined financial statements.
Management s Responsibility for the Combined Financial Statements
Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with accounting
principles generally accepted in the United States of America. This includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the combined financial statements that are free from
material misstatement, whether due to fraud or error.
Auditor s Responsibility
Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing
standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures
selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal
control relevant to the entity s preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by
management, as well as evaluating the overall presentation of the combined financial statements.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our audit opinion.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Company as of
December 31, 2016 and January 2, 2016, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
As discussed in Note 3 to the
financial statements, the Company has restated its financial statements as of and for the year ended January 2, 2016, related to the reassessment of two leases as capital leases that had previously been reported as operating leases. Our opinion is
not modified with respect to this matter.
/s/ WRIGHT FORD YOUNG & CO.
Combined Balance Sheets
| April 1, 2017 | December 31, 2016 | January 2, 2016 | ||||||||||
| (Unaudited) | Restated | |||||||||||
| ASSETS | ||||||||||||
| CURRENT ASSETS: | ||||||||||||
| Cash and cash equivalents | $ | 7,071,000 | $ | 6,941,000 | $ | 5,544,000 | ||||||
| Accounts receivable, less allowances for bad debts & sales returns of $199,000, $197,000 and $226,000, respectively | 6,245,000 | 6,415,000 | 5,437,000 | |||||||||
| Investment in marketable securities | 990,000 | 996,000 | 356,000 | |||||||||
| Inventories, net of reserves | 8,847,000 | 8,189,000 | 7,973,000 | |||||||||
| Prepaid expenses | 649,000 | 648,000 | 277,000 | |||||||||
| Income taxes receivable | 242,000 | 172,000 | ||||||||||
| Total current assets | 24,044,000 | 23,361,000 | 19,587,000 | |||||||||
| Due from related party | 3,029,000 | 3,025,000 | 3,010,000 | |||||||||
| Property and equipment, net | 16,736,000 | 16,815,000 | 16,640,000 | |||||||||
| Deferred income taxes | 1,056,000 | 1,165,000 | 982,000 | |||||||||
| Goodwill, net | 1,122,000 | 1,122,000 | 1,122,000 | |||||||||
| Other assets - including artwork of $911,000 in all periods | 988,000 | 1,021,000 | 989,000 | |||||||||
| Total assets | $ | 46,975,000 | $ | 46,509,000 | $ | 42,330,000 | ||||||
| LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||||||
| CURRENT LIABILITIES: | ||||||||||||
| Line of credit | $ | 1,400,000 | $ | 1,400,000 | $ | |||||||
| Current maturities of long-term debt | 509,000 | 506,000 | 491,000 | |||||||||
| Current maturities of capital leases | 5,941,000 | 25,000 | 3,000 | |||||||||
| Current portion of accrued interest on capital leases | 89,000 | 88,000 | 105,000 | |||||||||
| Accounts payable | 1,287,000 | 1,266,000 | 563,000 | |||||||||
| Accrued expenses: | ||||||||||||
| Compensation | 1,640,000 | 1,839,000 | 1,806,000 | |||||||||
| Other | 608,000 | 1,110,000 | 159,000 | |||||||||
| Accrued Dividends | 471,000 | 242,000 | ||||||||||
| Income taxes payable | 76,000 | |||||||||||
| Total current liabilities | 11,945,000 | 6,476,000 | 3,203,000 | |||||||||
| LONG-TERM LIABILITIES: | ||||||||||||
| Line of credit | 1,400,000 | |||||||||||
| Deferred rent | 44,000 | 3,000 | 24,000 | |||||||||
| Long-term debt, net of current maturities | 1,490,000 | 1,584,000 | 2,059,000 | |||||||||
| Capital leases, net of current maturities | 5,914,000 | 11,836,000 | 11,861,000 | |||||||||
| Accrued interest on capital leases, net of current portion | 47,000 | 69,000 | 157,000 | |||||||||
| Unrecognized tax benefit | 576,000 | 534,000 | 355,000 | |||||||||
| Total long-term liabilities | 8,071,000 | 14,026,000 | 15,856,000 | |||||||||
| Total liabilities | 20,016,000 | 20,502,000 | 19,059,000 | |||||||||
| STOCKHOLDERS EQUITY | ||||||||||||
| Spectrum, Inc. stockholders equity: | ||||||||||||
| Common stock | ||||||||||||
| Class A - no par stock, 2,000,000 shares authorized | ||||||||||||
| Class B - no par stock, 18,000,000 shares authorized | ||||||||||||
| Additional paid-in capital | 9,785,000 | 9,785,000 | 9,785,000 | |||||||||
| Accumulated other comprehensive income | 23,000 | 26,000 | 3,000 | |||||||||
| Retained earnings | 17,151,000 | 16,196,000 | 13,483,000 | |||||||||
| Total equity | 26,959,000 | 26,007,000 | 23,271,000 | |||||||||
| Total liabilities and stockholders equity | $ | 46,975,000 | $ | 46,509,000 | $ | 42,330,000 |
See independent auditor s report and notes to these combined financial statements.
Combined Statements of Comprehensive Income
| Quarter ended April 1, 2017 | Quarter ended April 2, 2016 | Fiscal Year 2016 | Fiscal Year 2015 | |||||||||||||
| (Unaudited) | (Unaudited) | Restated | ||||||||||||||
| NET SALES | $ | 9,735,000 | $ | 9,092,000 | $ | 40,200,000 | $ | 34,482,000 | ||||||||
| COSTS AND EXPENSES: | ||||||||||||||||
| Cost of sales | 4,179,000 | 4,440,000 | 18,902,000 | 15,125,000 | ||||||||||||
| Selling, general and administrative | 3,258,000 | 2,490,000 | 11,835,000 | 10,384,000 | ||||||||||||
| Research and development | 567,000 | 476,000 | 1,995,000 | 1,769,000 | ||||||||||||
| Building expenses | 16,000 | 15,000 | 57,000 | 72,000 | ||||||||||||
| (Gain) loss on remeasurement of foreign currencies | (90,000 | ) | (201,000 | ) | 264,000 | 323,000 | ||||||||||
| Interest (income) expense, net | 162,000 | 157,000 | 654,000 | 627,000 | ||||||||||||
| Total costs and expenses | 8,092,000 | 7,377,000 | 33,707,000 | 28,300,000 | ||||||||||||
| Income before provision for income taxes | 1,643,000 | 1,715,000 | 6,493,000 | 6,182,000 | ||||||||||||
| Provision for income taxes | 606,000 | 627,000 | 2,131,000 | 1,800,000 | ||||||||||||
| Net income | 1,037,000 | 1,088,000 | 4,362,000 | 4,382,000 | ||||||||||||
| Other comprehensive income (loss), net of income tax: | ||||||||||||||||
| Unrealized gain (loss) on marketable securities, see Note 2. | (3,000 | ) | 12,000 | 23,000 | (34,000 | ) | ||||||||||
| Comprehensive income | $ | 1,034,000 | $ | 1,100,000 | $ | 4,385,000 | $ | 4,348,000 |
See independent auditor s report and notes to these combined financial statements.
Combined Statements of Stockholders Equity
| Accumulated | ||||||||||||||||||||||||
| Common Stock | Additional | Other | ||||||||||||||||||||||
| Class A Shares | Class B Shares | Paid-in Capital | Comprehensive Income (Loss) | Retained Earnings | Total Equity | |||||||||||||||||||
| Balance, December 27, 2014 (as previously reported) | 1,440,684 | 8,849,916 | $ | 9,785,000 | $ | 37,000 | $ | 9,512,000 | $ | 19,334,000 | ||||||||||||||
| Restatement (Note 3) | 37,000 | 37,000 | ||||||||||||||||||||||
| Balance, December 27, 2014 (restated) | 1,440,684 | 8,849,916 | $ | 9,785,000 | $ | 37,000 | $ | 9,549,000 | $ | 19,371,000 | ||||||||||||||
| Net income (restated) | 4,382,000 | 4,382,000 | ||||||||||||||||||||||
| Dividends accrued | (448,000 | ) | (448,000 | ) | ||||||||||||||||||||
| Other comprehensive loss net of income tax | (34,000 | ) | (34,000 | ) | ||||||||||||||||||||
| Balance, January 2, 2016 (restated) | 1,440,684 | 8,849,916 | $ | 9,785,000 | $ | 3,000 | $ | 13,483,000 | $ | 23,271,000 | ||||||||||||||
| Net income | 4,362,000 | 4,362,000 | ||||||||||||||||||||||
| Dividends accrued | (1,649,000 | ) | (1,649,000 | ) | ||||||||||||||||||||
| Other comprehensive income net of income tax | 23,000 | 23,000 | ||||||||||||||||||||||
| Balance, December 31, 2016 | 1,440,684 | 8,849,916 | $ | 9,785,000 | $ | 26,000 | $ | 16,196,000 | $ | 26,007,000 | ||||||||||||||
| Net income | 1,037,000 | 1,037,000 | ||||||||||||||||||||||
| Dividends accrued | (82,000 | ) | (82,000 | ) | ||||||||||||||||||||
| Other comprehensive loss net of income tax | (3,000 | ) | (3,000 | ) | ||||||||||||||||||||
| Balance, April 1, 2017 | 1,440,684 | 8,849,916 | $ | 9,785,000 | $ | 23,000 | $ | 17,151,000 | $ | 26,959,000 |
See independent auditor s report and notes to these combined financial statements.
Combined Statements of Cash Flows
| Quarter ended April 1, 2017 | Quarter ended April 2, 2016 | Fiscal Year 2016 | Fiscal Year 2015 | |||||||||||||
| (Unaudited) | (Unaudited) | Restated | ||||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
| Comprehensive income | $ | 1,034,000 | $ | 1,100,000 | $ | 4,385,000 | $ | 4,348,000 | ||||||||
| Adjustments to reconcile comprehensive income to net cash provided by operating activities: | ||||||||||||||||
| Depreciation and amortization | 267,000 | 241,000 | 1,033,000 | 937,000 | ||||||||||||
| Deferred income taxes | 112,000 | 35,000 | (200,000 | ) | (115,000 | ) | ||||||||||
| Unrealized (gain) loss on marketable securities, net | 3,000 | (13,000 | ) | (23,000 | ) | 34,000 | ||||||||||
| Change in working capital components: | ||||||||||||||||
| Decrease (increase) in accounts receivable | 170,000 | (491,000 | ) | (978,000 | ) | (1,220,000 | ) | |||||||||
| Increase in inventories | (658,000 | ) | (239,000 | ) | (216,000 | ) | (1,381,000 | ) | ||||||||
| Decrease (increase) in prepaid expenses and other assets | 33,000 | (159,000 | ) | (403,000 | ) | (75,000 | ) | |||||||||
| (Increase) decrease in income taxes receivable/payable | (70,000 | ) | (219,000 | ) | (248,000 | ) | 416,000 | |||||||||
| Increase in accounts payable | 21,000 | 259,000 | 703,000 | 62,000 | ||||||||||||
| Increase (decrease) in accrued expenses | 26,000 | (369,000 | ) | 257,000 | 216,000 | |||||||||||
| Increase (decrease) in deferred rent | 41,000 | (7,000 | ) | (21,000 | ) | (11,000 | ) | |||||||||
| Increase (decrease) in accrued interest on capital leases | (21,000 | ) | (27,000 | ) | (105,000 | ) | 19,000 | |||||||||
| Increase in unrecognized tax benefit | 42,000 | 51,000 | 179,000 | 104,000 | ||||||||||||
| Net cash provided by operating activities | 1,000,000 | 162,000 | 4,363,000 | 3,334,000 | ||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
| Investment in marketable securities | (600,000 | ) | ||||||||||||||
| Increase in due from related party | (4,000 | ) | (4,000 | ) | (15,000 | ) | (140,000 | ) | ||||||||
| Acquisition of property and equipment | (188,000 | ) | (266,000 | ) | (1,208,000 | ) | (543,000 | ) | ||||||||
| Net cash used in investing activities | (192,000 | ) | (270,000 | ) | (1,823,000 | ) | (683,000 | ) | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
| Loan proceeds | 42,000 | |||||||||||||||
| Payments on long-term debt | (91,000 | ) | (97,000 | ) | (502,000 | ) | (384,000 | ) | ||||||||
| Payments on capital leases | (6,000 | ) | (3,000 | ) | ||||||||||||
| Dividends paid | (581,000 | ) | (446,000 | ) | (680,000 | ) | (448,000 | ) | ||||||||
| Net cash used in financing activities | (678,000 | ) | (543,000 | ) | (1,143,000 | ) | (832,000 | ) | ||||||||
| Net change in cash and cash equivalents | 130,000 | (651,000 | ) | 1,397,000 | 1,819,000 | |||||||||||
| Cash and cash equivalents | ||||||||||||||||
| Beginning of year | 6,941,000 | 5,544,000 | 5,544,000 | 3,725,000 | ||||||||||||
| End of year | $ | 7,071,000 | $ | 4,893,000 | $ | 6,941,000 | $ | 5,544,000 |
See independent auditor s report and notes to these combined financial statements.
Spectrum Technology Corporation
Notes to Financial Statements
1 NATURE OF BUSINESS
The accompanying combined financial statements include the accounts of Spectrum, Inc. formerly known as Spectrum
Laboratories, Inc. (Spectrum) and its subsidiaries, Laboratory Safety Inc. (Laboratory Safety) and Spectrum Chromatography (Chromatography); and Spectrum Europe B.V. (Spectrum B.V.) and its subsidiary Spectrum Labs India Pvt. Ltd (Spectrum India),
Spectrum Labs Shanghai Co., Ltd (Spectrum China), and Spectrum Overseas, Inc. (Overseas), which are under common control (collectively, the Company).
Company develops and sells proprietary tubular membranes and membrane devices for existing and emerging life science applications used primarily by research laboratories. The Company is also engaged in the manufacture and sale of medical laboratory
equipment and supplies and disposable products. Certain products are regulated by the United States Food and Drug Administration, California Department of Toxic Substances Control and the California Food and Drug Branch. All products are for sale
primarily to the pharmaceutical, biotechnology and medical industries throughout the world.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Fiscal Year The quarters ended on April 1, 2017 (Q1 2017) and April 2, 2016 (Q1 2016), which consist of 13 weeks. The Company s fiscal year ends on the Saturday closest to December 31st. The years ended on
December 31, 2016 (fiscal year 2016) and January 2, 2016 (fiscal year 2015) consisted of 52 weeks and 53 weeks, respectively.
Combination The accompanying combined financial statements include the accounts of Spectrum, and its two wholly owned subsidiaries, Laboratory Safety and Chromatography; and four entities under common control consisting of Spectrum B.V.
and its wholly owned subsidiary Spectrum India, Spectrum China, and Overseas. All intercompany balances and transactions have been eliminated in combination.
The preparation of the combined
financial statements require management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the combined financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
The Company s operations are affected
by numerous factors including market acceptance, changes in technologies and new laws and government regulations and policies. The Company cannot predict what impact, if any, the occurrence of these or other events might have on the Company s
Significant estimates and assumptions made by management are used for, but not limited to, the allowance for doubtful accounts and sales
returns, the reserve for slow moving or obsolete inventories, the fair value of long-lived and intangible assets, and the realizability of deferred tax assets and unrecognized tax benefits. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company classifies
all highly liquid investments with original maturities of 90 days or less at the time of purchase as cash and cash equivalents. The Company, periodically throughout the year, has amounts on deposit that exceed insured limits.
The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Accounts receivable are carried at original invoice
amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience
applied to an aging of accounts. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received. No interest is charged on past due accounts.
Inventories are stated at the lower of
cost (using the first-in first-out method) or net realizable value and are net of slow moving and obsolescence reserves.
Investment in Marketable Securities Classified as Available-For-Sale
Management determines the appropriate classification of the securities at the time they are acquired and evaluates the appropriateness
of such classifications at each balance sheet date. Available-for-sale securities are stated at fair value and unrealized holding gains and losses, net of the related
deferred tax effect, are reported as other comprehensive income or loss. Realized gains and losses, including losses from declines in value of specific securities determined by management to be other than temporary, are included in earnings.
Realized gains and losses are determined on the basis of the specific identification of the securities sold.
As of April 1, 2017, December 31,
2016 and January 2, 2016, $390,000, $396,000 and $356,000, respectively, in available-for-sale securities included equity securities of two unrelated companies
within the same industry that the Company operates. The cost of these investments approximates $352,000, with no purchases in the quarter ended April 1, 2017 or in fiscal years 2016 or 2015. The following table sets forth a summary of other
comprehensive gain (loss) recognized on these investments during the quarters ended April 1, 2017 and April 2, 2016 and fiscal years 2016 and 2015.
| Quarter ended April 1, 2017 | Quarter ended April 2, 2016 | Fiscal Year 2016 | Fiscal Year 2015 | |||||||||||||
| Unrecognized gain (loss) | $ | (6,000 | ) | $ | 20,000 | $ | 39,000 | $ | (57,000 | ) | ||||||
| Tax benefit (expense) | 3,000 | (8,000 | ) | (16,000 | ) | 23,000 | ||||||||||
| Other comprehensive gain (loss) | $ | (3,000 | ) | $ | 12,000 | $ | 23,000 | $ | (34,000 | ) |
In 2016, the Company made an investment in a venture capital limited partnership. The cost of this investment is $600,000,
with additional committed capital of $400,000 due in 2017. There was no gain or loss associated with this investment in the quarter ended April 1, 2017 or fiscal year 2016.
Property and equipment are
recorded at cost, net of accumulated depreciation and amortization. Depreciation of property and equipment is provided using the straight-line method over the estimated useful lives (ranging from 3 to 30 years) of the respective assets. Leasehold
improvements are amortized on a straight-line basis over the lesser of the lease term or the estimated useful life of the asset. Amortization of leasehold improvements is included with depreciation expense. No depreciation is being provided for the
Company owned artwork, which is carried at its historical cost.
The Company periodically reviews its long-lived assets to determine potential impairment
by comparing the carrying value of the long-lived assets with the estimated future net undiscounted cash flows expected to result from the use of the assets, including cash flows from disposition. Long-lived assets evaluated for impairment are
grouped with other assets to the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Should the sum of the expected future net cash flows be less than the carrying
value, the Company would recognize an impairment loss at that date. An impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value (estimated discounted future cash flows) of the long-lived assets.
Changes in circumstances, such as the passage of new laws or changes in regulations, technological advances or changes to the Company s business
strategy, could result in the actual useful lives of long-lived assets differing from initial estimates. Factors such as changes in the planned use of equipment, customer attrition, contractual amendments or mandated regulatory requirements could
result in shortened useful lives. In those cases where the Company determines that the useful life of a long-lived asset should be revised, the Company will amortize or depreciate the net book value in excess of the estimated residual value over its
revised remaining useful life.
Company accounts for goodwill in accordance with guidance issued by the Financial Accounting Standards Board (the FASB). Based upon the provisions of this guidance, the Company first assesses certain qualitative factors to determine whether it is
likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the
two-step goodwill impairment test. If, after assessing the qualitative events and circumstances, the Company determines that it is not more likely than not that the fair value of the reporting unit is less
than its carrying amount, then performing the two-step impairment test is unnecessary and no impairment of goodwill exists. However, if the Company concludes otherwise, then it is required to perform the first
step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the reporting unit s estimated fair
value exceeds the reporting unit s carrying value, no impairment of goodwill exists. If the fair value of the reporting unit does not exceed the unit s carrying value, then the Company is required to perform the second step of the goodwill
impairment test to measure the amount of the impairment loss, if any.