<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Period Ended February 28, 1998 Commission File Number 0-8796
Spectrum Control, Inc.
Exact name of registrant as specified in its charter
Pennsylvania 25-1196447
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number)
6000 West Ridge Road; Erie, Pennsylvania 16506
(Address) (Zip Code)
Registrant's telephone number, including area code: (814) 835-4000
Not Applicable
Former name, former address and former fiscal year, if changed since last
report
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to the filing requirements for at least the past 90 days.
Yes X No __
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Number of Shares Outstanding
Class as of March 15, 1998
Common, no par value 10,872,343
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets --
February 28, 1998 and November 30, 1997 3-4
Consolidated Condensed Statements of Income --
Three Months Ended February 28, 1998 and 1997 5
Consolidated Condensed Statements of Cash Flows --
Three Months Ended February 28, 1998 and 1997 6
Notes to Consolidated Condensed Financial Statements 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-13
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
<PAGE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
DOLLAR AMOUNTS IN THOUSANDS
(UNAUDITED)
<CAPTION>
February 28 November 30
1998 1997
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,511 $ 196
Accounts receivable, net of
allowances 9,495 9,997
Inventories
Finished goods 2,465 2,159
Work-in-process 5,026 5,364
Raw materials 4,729 4,587
Total inventories 12,220 12,110
Prepaid expenses and other
current assets 587 534
Total current assets 23,813 22,837
PROPERTY, PLANT AND EQUIPMENT,
at cost less accumulated
depreciation of $18,308
in 1998 and $17,357 in 1997 15,529 15,979
OTHER ASSETS
Intangible assets 325 334
Debt issuance costs 162 165
Deferred income taxes 566 566
Deferred charges 203 175
Total other assets 1,256 1,240
TOTAL ASSETS $40,598 $40,056
<FN>
The accompanying notes are an integral part of the financial
statements.
</TABLE>
<PAGE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
DOLLAR AMOUNTS IN THOUSANDS
(UNAUDITED)
<CAPTION>
February 28 November 30
1998 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Short-term debt $ -- $ 40
Accounts payable 2,862 3,302
Accrued salaries and wages 1,034 1,311
Accrued interest 24 45
Accrued federal and state
income taxes 369 289
Accrued other expenses 374 226
Current portion of long-term debt 743 743
Total current liabilities 5,406 5,956
LONG-TERM DEBT 3,295 3,330
DEFERRED INCOME TAXES 1,458 1,225
STOCKHOLDERS' EQUITY
Common stock, no par value,
authorized 25,000,000 shares,
issued and outstanding 10,872,343
shares in 1998 and 10,838,345
shares in 1997 14,091 13,977
Retained earnings 16,820 15,864
Foreign currency translation
adjustment (472) (296)
Total stockholders' equity 30,439 29,545
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $40,598 $40,056
<FN>
The accompanying notes are an integral part of the financial
statements.
</TABLE>
<PAGE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
(Dollars in Thousands Except Per Share Data)
Three Months Ended
February 28
1998 1997
<S> <C> <C>
Net sales $14,641 $12,712
Cost of products sold 10,222 8,998
Gross margin 4,419 3,714
Selling, general and
administrative expense 2,905 2,676
Income from operations 1,514 1,038
Other income (expense)
Interest expense (53) (130)
Other income and expense, 10 --
net (43) (130)
Income before provision
for income taxes 1,471 908
Provision for
income taxes 515 254
Net income $ 956 $ 654
Earnings per
common share $ 0.09 $ 0.06
Earnings per common share-
assuming dilution $ 0.09 $ 0.06
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
DOLLAR AMOUNTS IN THOUSANDS
(UNAUDITED)
<CAPTION>
Three Months Ended
February 28
1998 1997
<S> <C> <C>
NET CASH PROVIDED BY
OPERATING ACTIVITIES $1,818 $1,873
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of property, plant
and equipment (522) (587)
Net cash used in investing
activities (522) (587)
CASH FLOWS FROM FINANCING
ACTIVITIES
Net repayment of short-term
debt (40) (1,203)
Repayment of long-term debt (35) (104)
Net proceeds from issuance
of common stock 114 --
Net cash provided by
(used in) financing
activities 39 (1,307)
Effect of Exchange Rate
Changes on Cash (20) 16
Net Increase (Decrease)
in Cash and Cash Equivalents 1,315 (5)
Cash and Cash Equivalents,
Beginning of Period 196 413
Cash and Cash Equivalanets,
End of Period $1,511 $ 408
Cash Paid During the Period For:
Interest $ 74 $ 141
Income taxes 137 18
<FN>
The accompanying notes are an integral part of the financial
statements.
</TABLE>
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FEBRUARY 28, 1998
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and notes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying financial statements
include all adjustments which are normal, recurring and necessary to
present fairly the results for the interim periods. Operating results
for interim periods are not necessarily indicative of the results that
may be expected for the year. For further information, refer to the
consolidated financial statements and notes thereto included in the
Spectrum Control, Inc. and Subsidiaries annual report on Form 10-K for
the fiscal year ended November 30, 1997.
Note 1 - Principles of Consolidation
The consolidated condensed financial statements include the accounts of
Spectrum Control, Inc. and its subsidiaries (the Company). To facilitate
timely reporting, the fiscal quarters of a foreign subsidiary are based
upon a fiscal year which ends October 31. All significant intercompany
accounts are eliminated upon consolidation.
Note 2 - Foreign Currency Translation
The assets and liabilities of the foreign subsidiary are translated into
U.S. dollars at current exchange rates. Revenue and expense accounts of
these operations are translated at average exchange rates prevailing
during the period. These translation adjustments are accumulated in a
separate component of stockholders' equity. Foreign currency transaction
gains and losses are included in determining net income for the period in
which the exchange rate changes.
Note 3 - Earnings Per Common Share
In the quarter ended February 28, 1998, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128"). SFAS No. 128 requires, among other things, dual
presentation of basic and diluted earnings per share on the face of the
income statement. Under the new standard, basic earnings per share is
computed using only the weighted average number of common shares
outstanding during the period, while diluted earnings per share is
computed assuming the conversion of all dilutive common stock equivalents,
such as stock options.
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
In accordance with SFAS No. 128, prior period per share amounts have been
revised to reflect the new computation and presentation. The Company's
basic and diluted earnings per share amounts are the same for the prior
period presented in the accompanying financial statements. Accordingly,
there has been no change or restatement in any historical earnings per
share amounts presented herein.
<TABLE>
The following table sets forth the computation of basic and diluted
earnings per common share:
<CAPTION>
Three Months Ended
February 28
1998 1997
<S> <C> <C>
Numerator for basic and
diluted earnings per
common share:
Net income $ 956,000 $ 654,000
Denominator for basic
earnings per common
share:
Weighted average
shares outstanding 10,846,265 10,774,233
Denominator for diluted
earnings per common
share:
Weighted average
shares outstanding 10,846,265 10,774,233
Effect of dilutive
stock options 140,582 56,235
10,986,847 10,830,468
Earnings per common share $ 0.09 $ 0 .06
Earnings per common share -
assuming dilution $ 0.09 $ 0 .06
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis may be understood more fully
by reference to the consolidated financial statements, notes to
the consolidated financial statements, and management's discussion
and analysis contained in the Spectrum Control, Inc. and Subsidiaries
annual report on Form 10-K for the fiscal year ended November 30, 1997.
General
Spectrum Control, Inc. and its Subsidiaries (the "Company") design,
manufacture and market a broad line of control products and systems.
The Company was founded in 1968 as a solutions-oriented company,
designing and manufacturing products to suppress or eliminate
electromagnetic interference ("EMI"). The Company has adapted its core
EMI filter technology into a complete line of capacitors, filters,
filtered arrays, and filtered connectors. In recent years, the Company
has expanded its focus by developing new lines of power products
(commercial custom assemblies, military/aerospace multisection
assemblies, power entry modules, and power line filters), microwave
products (coaxial ceramic bandpass filters, duplexers, and dielectric
resonators), and specialty ceramic products. The Company's products
are used in virtually all industries worldwide, including
telecommunications, aerospace, military, medical, computer, and
industrial controls.
Results of Operations
<TABLE>
The following table sets forth certain financial data, as a percentage
of net sales, for the three months ended February 28, 1998 and 1997:
<CAPTION>
1998 1997
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of products sold 69.8 70.8
Gross margin 30.2 29.2
Selling, general and
administrative expenses 19.9 21.1
Income from operations 10.3 8.1
Other income (expense)
Interest expense (0.4) (1.0)
Other income and expense, net 0.1 --
Income before provision
for income taxes 10.0 7.1
Provision for income taxes 3.5 2.0
Net income 6.5% 5.1%
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Net Sales
Net sales increased 15% during the period, with consolidated net
sales of $14.6 million in the first quarter of 1998 and $12.7
million in the comparable quarter of 1997. The increase in sales
reflects additional shipment volume for substantially all of the
Company's product offerings. Customer orders received during 1998
amounted to $15.1 million, an increase of 7% from the same period
last year.
Gross Margin
Gross margin was $4.4 million or 30.2% of sales in the first
quarter of 1998, compared to $3.7 million or 29.2% of sales in the
first quarter of 1997. The increase in gross margin primarily
reflects economies of scale realized with additional shipment
volume.
Selling, General and Administrative Expense
As a percentage of sales, selling expense remained constant during
the period at approximately 11.0%, with total selling expense of
$1.6 million in 1998 and $1.5 million in 1997. General and
administrative expense amounted to $1.3 million or approximately
9.0% of sales in 1998, compared to $1.2 million or 10.0% of sales
in 1997. The increase in general and administrative expense
principally reflects additional personnel costs in 1998.
Other Income and Expense
Interest expense deceased by $77,000 during the period, from
$130,000 in 1997 to $53,000 in 1998. The decrease in interest
expense primarily reflects reduced bank indebtedness. Average
interest rates remained stable throughout the period.
During the first three months of fiscal 1998, the Company
recognized $10,000 of other income from certain short-term
investments.
Income Taxes
The Company's effective income tax rate was 35.0% in 1998 and
28.0% in 1997, compared to an applicable statutory income tax rate
of approximately 40.0%. Differences in the effective tax rate and
statutory tax rate primarily reflect decreases in the deferred tax
asset valuation allowance relating to certain net operating loss
carryforwards.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Risk Factors That May Affect Future Results
The Company's results of operations may be affected in the future
by a variety of factors including: competitive pricing pressures,
new product offerings by the Company and it's competitors, new
technologies, product cost changes, and product mix. In 1998,
management expects approximately 50.0% of the Company's sales will
be to customers in the telecommunication industry. Accordingly,
any significant change in the telecommunication industry's
activity level would have a direct impact on the Company's
performance.
Liquidity, Capital Resources and Financial Condition
The Company has a $6.0 million line of credit with PNC Bank of
Erie, Pennsylvania (the "Bank"). The revolving credit line is
collateralized by substantially all of the Company's tangible and
intangible property, with interest rates on borrowings at or below
the Bank's prevailing prime rate. At February 28, 1998, there
were no borrowings outstanding under this financing arrangement.
The current line of credit agreement expires April 30, 1999.
The Company's wholly-owned foreign subsidiary maintains unsecured
Deutsche Mark lines of credit with several German financial
institutions aggregating $1.6 million (3.0 million DM). At
February 28, 1998, there were no outstanding borrowings under
these lines of credit. Future borrowings, if any, under the lines
of credit will bear interest at rates below the prevailing prime
rate and will be payable upon demand.
The Company's liquidity continued to improve during the period.
At February 28, 1998, the Company had net working capital of $18.4
million, compared to $16.9 million at November 30, 1997. The
Company's current ratio also improved during the first quarter of
fiscal 1998, with current assets at 4.40 times current liabilities
at February 28, 1998, compared to 3.83 at November 30, 1997.
During the first quarter of 1998, the Company's cash expenditures
for property, plant and equipment amounted to $522,000. These
capital expenditures primarily related to manufacturing equipment
for the Company's new dielectric resonators and bandpass filters
product offerings. During the first three months of 1998, the
Company also repaid $75,000 of bank indebtedness. Current
financial resources, including working capital and existing lines
of credit, and anticipated funds from operations are expected to
be sufficient to meet cash requirements throughout 1998, including
scheduled long-term debt repayment and planned capital
expenditures.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company's operating cash flow was relatively stable during the
period, with net cash provided by operations of $1.8 million in
1998 and $1.9 million in 1997. In 1997, the Company substantially
completed its planned reduction of short-term and long-term bank
indebtedness. As a result, the Company's cash position improved
significantly during the first three months of 1998. At February
28, 1998, the Company held $1.5 million of cash and cash
equivalents, compared to $196,000 at November 30, 1997.
Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting
and Disclosures about Comprehensive Income" and No. 131,
"Disclosures about Segments of an Enterprise", which are effective
for fiscal years beginning after December 15, 1997. The Company
is currently evaluating the effects of these new standards.
Impact of Year 2000 Issue
The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the applicable
year. As a result, any of the Company's computer programs that
have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of
operations, including among other things, a temporary inability to
process transactions, prepare invoices, or engage in similar
normal business activities.
The Company has completed an assessment and determined that it
will have to modify or replace portions of its software so that
its computer systems will function properly with respect to dates
in the year 2000 and thereafter. In addition, the Company has
initiated formal communications with 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 Issues. Based upon this
communication and assessment, management anticipates that its
total Year 2000 project costs will not be material.
The total project is expected to be completed on or before
December 31, 1998. The Company believes that with modifications
to existing software and conversions to new software, the Year
2000 Issues will not pose significant operational problems for its
computer systems. However, if such modifications and conversions
are not made, or are not completed timely, the Year 2000 Issue
could have a material impact on the operations of the Company.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The costs of the project and the date on which the Company
believes it will complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability
of certain resources and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results
could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this
area, the ability to locate and correct all relevant computer
codes, and similar uncertainties.
Forward-Looking Information
Management's Discussion and Analysis of Financial Condition and
Results of Operations includes forward-looking statements which
reflect management's current views with respect to future
operating performance and ongoing cash requirements. These
forward-looking statements are subject to certain risks and
uncertainties, including those identified below, which could cause
actual results to differ materially from historical results or
those anticipated. The words "believe", "expect", "anticipate"
and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these
forward-looking statements. The following factors could cause
actual results to differ materially from historical results or
those anticipated: (1) increased competition in the Company's
marketplace; (2) technology advances affecting the demand for the
Company's products; (3) other changes in market demand,
particularly among communications customers; (4) market acceptance
and penetration for the Company's new product offerings; (5)
changes in the overall economic climate; (6) operating cost
fluctuations and availability of raw materials; and (7) unplanned
capital replacement or expansion.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) None
(b) No reports on Form 8-K were filed during the quarter for
which this report is filed.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SPECTRUM CONTROL, INC.
(Registrant)
Date: March 27, 1998 By: /s/ John P. Freeman
John P. Freeman, Vice President
and Chief Financial Officer
(Principal Accounting and
Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SPECTRUM CONROL, INC. CONSOLIDATED BALANCE SHEET AT FEBRUARY 28, 1998
AND CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED
FEBRUARY 28, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO ITS
FORM 10-Q FOR THE QUARTER ENDED FEBRUARY 28, 1998.
</LEGEND>
<CIK> 0000092769
<NAME> SPECTRUM CONTROL, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> FEB-28-1998
<CASH> 1,511
<SECURITIES> 0
<RECEIVABLES> 9,912
<ALLOWANCES> 417
<INVENTORY> 12,220
<CURRENT-ASSETS> 23,813
<PP&E> 33,837
<DEPRECIATION> 18,308
<TOTAL-ASSETS> 40,598
<CURRENT-LIABILITIES> 5,406
<BONDS> 3,295
0
0
<COMMON> 14,091
<OTHER-SE> 16,348
<TOTAL-LIABILITY-AND-EQUITY> 40,598
<SALES> 14,641
<TOTAL-REVENUES> 14,641
<CGS> 10,222
<TOTAL-COSTS> 10,222
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53
<INCOME-PRETAX> 1,471
<INCOME-TAX> 515
<INCOME-CONTINUING> 956
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 956
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
