'
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 August 31, 2000 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)
8031 Avonia Road; Fairview, Pennsylvania 16415
(Address) (Zip Code)
Registrant's telephone number, including area code: (814) 835-1650
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 September 15, 2000
Common, no par value 13,373,052
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets --
August 31, 2000 and November 30, 1999
Condensed Consolidated Statements of Income --
Three Months Ended and Nine Months Ended
August 31, 2000 and 1999
Condensed Consolidated Statements of Cash Flows --
Three Months Ended and Nine Months Ended
August 31, 2000 and 1999
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signature
<PAGE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DOLLAR AMOUNTS IN THOUSANDS
(UNAUDITED)
<CAPTION>
August 31, 2000 Nov. 30, 1999
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,667 $ 538
Accounts receivable, net of
allowances 23,130 19,330
Inventories
Finished goods 4,834 4,132
Work-in-process 10,725 9,626
Raw materials 11,317 10,859
Total inventories 26,876 24,617
Prepaid expenses and other
current assets 914 1,278
Total current assets 57,587 45,763
PROPERTY, PLANT AND EQUIPMENT,
at cost less accumulated
depreciation of $21,316
in 2000 and $17,836 in 1999 22,589 21,366
OTHER ASSETS
Goodwill 14,850 14,225
Patents and patent rights 292 321
Debt issuance costs 96 394
Deferred income taxes 108 108
Deferred charges 450 377
Total other assets 15,796 15,425
TOTAL ASSETS $95,972 $82,554
<FN>
The accompanying notes are an integral part of the financial
statements.
</TABLE>
<PAGE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DOLLAR AMOUNTS IN THOUSANDS
(UNAUDITED)
<CAPTION>
August 31, 2000 Nov.30, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Short-term debt $ 189 $ 5,089
Accounts payable 10,855 8,801
Accrued salaries and wages 2,587 2,553
Accrued interest 230 103
Accrued other expenses 2,424 952
Current portion of long-term debt 640 4,276
Total current liabilities 16,925 21,774
LONG-TERM DEBT 2,417 19,011
DEFERRED INCOME TAXES 3,321 2,634
STOCKHOLDERS' EQUITY
Common stock, no par value,
authorized 25,000,000 shares,
issued 13,443,052 shares in 2000
and 11,018,703 shares in 1999 43,045 14,633
Retained earnings 31,356 25,268
Treasury stock, 70,000 shares in
2000 and 1999, at cost (294) (294)
74,107 39,607
Accumulated other comprehensive income
Foreign currency translation
adjustment (798) (472)
Total stockholders' equity 73,309 39,135
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $95,972 $82,554
<FN>
The accompanying notes are an integral part of the financial
statements.
</TABLE>
<PAGE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
(Dollars in Thousands Except Per Share Data)
Three Months Ended Nine Months Ended
August 31 August 31
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net sales $35,649 $28,891 $96,260 $68,758
Cost of products sold 24,214 20,817 69,202 49,261
Gross margin 11,435 8,074 27,058 19,497
Selling, general and
administrative expense 6,220 5,005 15,962 12,251
Income from operations 5,215 3,069 11,096 7,246
Other income (expense)
Interest expense (564) (512) (1,743) (900)
Other income and expense,
net 29 23 464 58
(535) (489) (1,279) (842)
Income before provision
for income taxes 4,680 2,580 9,817 6,404
Provision for
income taxes 1,778 983 3,730 2,434
Net income $ 2,902 $ 1,597 $ 6,087 $3,970
Earnings per common share:
Basic $ 0.25 $ 0.15 $ 0.54 $ 0.36
Diluted $ 0.25 $ 0.14 $ 0.53 $ 0.36
Dividends declared per
common share $ - $ - $ - $ -
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
DOLLAR AMOUNTS IN THOUSANDS
(UNAUDITED)
<CAPTION>
Nine Months Ended
August 31
2000 1999
<S> <C> <C>
NET CASH PROVIDED BY
OPERATING ACTIVITIES $8,801 $1,827
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of property, plant and
equipment (4,752) (3,575)
Payment for acquired businesses (1,190) (20,958)
Net cash used in investing
activities (5,942) (24,533)
CASH FLOWS FROM FINANCING
ACTIVITIES
Net borrowings (repayment) of
short-term debt (4,876) 1,613
Borrowings of long-term debt - 20,800
Repayment of long-term debt (20,230) (430)
Net proceeds from issuance
of common stock
Exercise of employee stock options 179 78
Exercise of stock warrants 379 -
Public stock offering 27,854 -
Net cash provided by
financing activities 3,306 22,061
Effect Of Exchange Rate
Changes On Cash (36) (12)
Net Increase (Decrease)In Cash
And Cash Equivalents 6,129 (657)
Cash And Cash Equivalents,
Beginning Of Period 538 739
Cash And Cash Equivalents,
End Of Period $6,667 $ 82
Cash Paid During The Period For:
Interest $1,616 $ 867
Income taxes 1,695 2,168
<FN>
The accompanying notes are an integral part of the financial
statements.
</TABLE>
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2000
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated 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.
The balance sheet at November 30, 1999 has been derived from the audited
financial statements at that date but does not include all of the
information and notes required by generally accepted accounting principles
for complete financial statements.
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, 1999.
Note 2 - Principles of Consolidation
The condensed consolidated 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 3 - Foreign Currency Translation
The assets and liabilities of the Company's foreign operations 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.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 4 - New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and for Hedging Activities" ("SFAS No. 133"). SFAS No. 133
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. SFAS No. 133 is
effective for years beginning after June 15, 2000. In December 1999, the
Securities and Exchange Commission issued Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" ("SAB No. 101"),
which clarifies the accounting rules for revenue recognition in financial
statements. The Company must implement SAB No. 101 by the fourth quarter
of fiscal year ending November 30, 2001.
Management does not expect the adoption of SFAS No. 133 or SAB No. 101 to
have a material impact on the Company's financial position or results of
operations.
Note 5 - Common Stock Offering
On August 16, 2000, the Company sold 2,300,000 shares of its Common Stock
in a public offering which resulted in net proceeds of approximately
$27,854,000, after deducting issuance costs. The net proceeds of the
offering were used to repay $7,400,000 of revolving line of credit
indebtedness and $17,273,000 of term loan debt, with the remaining proceeds
added to cash and cash equivalents available for general corporate
purposes.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 6 - Earnings Per Common Share
<TABLE>
The following table sets forth the computation of basic and diluted
earnings per common share for the periods indicated:
<CAPTION>
Three Months Ended Nine Months Ended
August 31 August 31
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Numerator for basic and
diluted earnings per
common share
(in thousands):
Net income $ 2,902 $ 1,597 $ 6,087 $ 3,970
Denominator for basic
earnings per common
share (in thousands):
Weighted average
shares outstanding 11,423 10,908 11,136 10,895
Denominator for diluted
earnings per common
share (in thousands):
Weighted average
shares outstanding 11,423 10,908 11,136 10,895
Effect of dilutive
securities:
Stock options 287 178 249 118
Stock warrants 23 - 39 -
11,733 11,086 11,424 11,013
Earnings per common share:
Basic $ 0.25 $ 0.15 $ 0 .54 $ 0 .36
Diluted $ 0.25 $ 0.14 $ 0 .53 $ 0 .36
</TABLE>
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 7- Comprehensive Income
The following table sets forth the computation of comprehensive income for
the periods indicated (in thousands):
Three Months Ended Nine Months Ended
August 31 August 31
2000 1999 2000 1999
Net income $ 2,902 $ 1,597 $ 6,087 $ 3,970
Foreign currency
translation adjustment (83) 24 (326) (30)
Comprehensive income $ 2,819 $ 1,621 $ 5,761 $ 3,940
Note 8- Operating Segments
The Company was founded as a solutions - oriented company, designing and
manufacturing products to suppress or eliminate electromagnetic
interference. In recent years, the Company has broadened its focus and
product lines to become a control products and systems company, providing a
wide range of components and systems used to condition, regulate, transmit,
receive, or govern electronic performance. Effective February 1, 2000, the
Company realigned its business segments to better reflect its current
strategic focus.
The Company's operating results are currently reported in two segments:
signal products and power products. The Company's Signal Products Group
manufactures a broad range of low pass filters, filtered arrays, filtered
connectors, wireless products (coaxial ceramic resonators, patch antennas,
bandpass filters and duplexers), and specialty ceramic capacitors (single
layer, temperature compensating, high voltage, and switch mode). The Power
Products Group manufactures various power management and conditioning
products including power distribution systems, power line filters, and
power entry modules. The reportable segments are each managed separately
because they manufacture and sell distinct products with different
production processes.
The Company evaluates performance and allocates resources to its operating
segments based upon numerous factors, including segment income or loss
before income taxes. The accounting policies of the reportable segments
are the same as those utilized in the
preparation of the Company's consolidated financial statements. However,
substantially all of the Company's selling expenses, general and
administrative expenses, and non-operating expenses are not allocated to
the Company's reportable operating segments and, accordingly, these
expenses are not deducted in arriving at segment income or loss. In
addition, reportable assets are comprised solely of property, plant,
equipment, and inventories.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
<TABLE>
Prior period amounts in the following tables have been restated to
correspond with the new business segment presentation. For each period
presented, the accounting policies and procedures used to determine segment
income have been consistently applied.
Reportable segment information for the periods ended August 31, 2000 and
1999 is as follows (in thousands):
<CAPTION>
Three Months Ended August 31: Signal Power
Products Products Total
<S> <C> <C> <C>
2000
Revenue from unaffiliated
customers $27,137 $ 8,512 $ 35,649
Segment income 9,060 2,147 11,207
Segment assets 39,093 8,564 47,657
1999
Revenue from unaffiliated
customers 20,726 8,165 28,891
Segment income 5,043 2,174 7,217
Segment assets 34,593 8,084 42,677
Nine Months Ended August 31:
2000
Revenue from unaffiliated
customers 70,635 25,625 96,260
Segment income 18,994 6,485 25,479
Segment assets 39,093 8,564 47,657
1999
Revenue from unaffiliated
customers 47,839 20,919 68,758
Segment income 12,125 5,307 17,432
Segment assets 34,593 8,084 42,677
</TABLE>
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
<TABLE>
A reconciliation of total reportable segment income to consolidated
income before provision for income taxes for the periods ended August 31,
2000 and 1999 is as follows (in thousands):
<CAPTION>
Three Months Ended Nine Months Ended
August 31 August 31
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Total income for
reportable segments $ 11,207 $ 7,217 $ 25,479 $ 17,432
Unallocated amounts:
Selling, general and
administrative expense (5,992) (4,148) (14,383) (10,186)
Interest expense (564) (512) (1,743) (900)
Other income 29 23 464 58
Consolidated income
before provision
for income taxes $ 4,680 $ 2,580 $ 9,817 $ 6,404
</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, 1999.
All references to "we", "us", "our", "the Company", or "Spectrum" in
the following discussion and analysis mean Spectrum Control, Inc. and its
subsidiaries.
General
We were founded as a solutions - oriented company, designing and
manufacturing products to suppress or eliminate electromagnetic
interference ("EMI"). In recent years, we broadened our focus and product
lines to become a control products and systems company, providing a wide
range of components and systems used to condition, regulate, transmit,
receive, or govern electronic performance. Although our components and
systems are used in many industries worldwide, our largest market is the
telecommunications industry. Approximately 60% of our sales are to
customers in the telecommunications industry. Our products are used in
numerous telecommunications systems including wireless base stations, fiber
optic networks and switching equipment, wireless modems and LANs, Internet
servers, and global positioning systems.
Our operations are primarily conducted in two business segments: signal
products and power products. Our Signal Products Group manufactures a
broad line of discrete EMI filters, filtered arrays, filtered connectors,
wireless products (coaxial ceramic resonators, patch antennas, bandpass
filters, and duplexers), and specialty ceramic capacitors (single layer,
temperature compensating, high voltage, and switch mode). Our Power
Products Group manufactures various power management and conditioning
products including power distribution systems, power line filters, and
power entry modules. Recently, we formed our Advanced Systems Group to
become a provider of more complex power management systems, and have
introduced a line of digital radio-frequency control equipment for remote
and automatic electronic systems management.
On March 26, 1999, we acquired substantially all of the assets of the
Signal Conditioning Products Division ("SCPD") of AMP Incorporated
("AMP"). AMP is a world leader in the manufacture of electrical,
electronic, fiber-optic and wireless interconnection devices and systems.
Through SCPD, AMP manufactured and sold a broad line of EMI filter products
with annual sales of approximately $30.0 million. The acquisition was
accounted for as a purchase and, accordingly, the results of operations of
the acquired business have been included in the Company's financial
statements since the date of acquisition.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Forward-Looking Information
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes certain forward-looking statements which reflect
management's current views with respect to future operating performance,
ongoing cash requirements, and production capacity expansion. The words
"believe", "expect", "anticipate" and similar expressions identify
forward-looking statements. These forward-looking statements are subject
to certain risks and uncertainties which could cause actual results to
differ materially from historical results or those anticipated. Factors
that could cause or contribute to such differences include those discussed
in "Risk Factors That May Affect Future Results", as well as those
discussed elsewhere herein. Readers are cautioned not to place undue
reliance on these forward-looking statements.
<TABLE>
Results of Operations
The following table sets forth certain financial data, as a percentage of
net sales, for the three months and nine months ended August 31, 2000 and
1999:
<CAPTION>
Three Months Ended Nine Months Ended
August 31 August 31
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 67.9 72.1 71.9 71.7
Gross margin 32.1 27.9 28.1 28.3
Selling, general and
administrative expense 17.5 17.3 16.6 17.8
Income from operations 14.6 10.6 11.5 10.5
Other income (expense)
Interest expense (1.6) (1.8) (1.8) (1.3)
Other income and
expense, net 0.1 0.1 0.5 0.1
Income before provision
for income taxes 13.1 8.9 10.2 9.3
Provision for income taxes 5.0 3.4 3.9 3.5
Net income 8.1% 5.5% 6.3% 5.8%
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Third Quarter 2000 Versus Third Quarter 1999
Net Sales
Net sales increased by $6.7 million or 23.4% during the period, with
consolidated net sales of $35.6 million in the third quarter of fiscal 2000
and $28.9 million in the comparable quarter of 1999. Of this increase,
$6.4 million was generated from the sale of signal products, with sales of
discrete EMI low pass filters increasing by $5.5 million, filtered arrays
and connectors increasing by $800,000, and microwave/wireless products
increasing by approximately $100,000. The increase in signal product sales
primarily reflects additional shipment volume of components used in various
telecommunication equipment including fiber optic networks, wireless base
stations, power amplifiers and transceivers. Power product sales were $8.5
million in the third quarter of fiscal 2000, an increase of approximately
$300,000 from the same quarter last year. Overall demand for the Company's
products was strong during the period with total customer orders of $37.6
million received in the current quarter, an increase of $6.0 million or
19.1% from the third quarter of last year.
Gross Margin
During the third quarter of fiscal 2000, gross margin was $11.4 million or
32.1% of sales, compared to $8.1 million or 27.9% in the comparable quarter
of 1999. The increase in gross margin, as a percentage of sales,
principally reflects the completed integration of SCPD into our Signal
Products Group and the commencement of manufacturing operations in our new
facility in Juarez, Mexico. In April 1999, we commenced a program to
integrate SCPD into our Signal Products Group. This integration, which
included relocating SCPD manufacturing operations and redesigning certain
SCPD products and production processes, was completed in May 2000. With
the completion of this integration, gross margin increased as a result of
improved operating efficiencies and manufacturing yields. During the third
quarter of fiscal 2000, we also commenced manufacturing operations in our
new 46,000 square foot facility in Juarez, Mexico. In addition to
increasing our manufacturing capacity, this facility improves our operating
efficiencies and lowers our overall production costs. To a lessor extent,
gross margin during the current quarter was also positively impacted by
sales mix. Accordingly, we expect gross margin percentages for the
remainder of fiscal year 2000 to approximate 30% to 31% of sales.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Selling, General and Administrative Expense
Selling expense was $3.3 million or 9.3% of sales in the third quarter of
fiscal 2000, compared to $2.5 million or 8.5% of sales in the same quarter
of 1999. In addition to greater sales volume, the increase in selling
expense primarily reflects changes in sales mix and related commission
expenses. General and administrative expense was approximately $2.9
million in the third quarter of fiscal 2000, compared to $2.5 million in
the comparable quarter of 1999. General and administrative expense in the
current quarter includes a charge of $241,000 for debt issuance costs
written-off upon the early retirement of certain indebtedness. The
increase in general and administrative expense also reflects additional
personnel costs and operating expenses associated with our increased
business activity.
Other Income and Expense
Interest expense increased by $52,000 during the period, with interest
expense of $564,000 in the third quarter of fiscal 2000 and $512,000 in the
comparable quarter of 1999. The increase in interest expense primarily
reflects higher average interest rates.
Nine Months 2000 Versus Nine Months 1999
Net Sales
For the first three quarters of fiscal 2000, consolidated net sales
increased by $27.5 million or 40.0%. Sales of signal products amounted to
$70.6 million during the first nine months of fiscal 2000, an increase of
$22.8 million compared to the same period of 1999. Of this increase,
approximately $9.0 million was generated from the sale of SCPD products.
The remaining $13.8 million increase in signal product sales principally
reflects higher shipment levels to original equipment manufacturers of
telecommunications equipment. Sales of power products increased by $4.7
million during the first nine months of fiscal 2000, primarily reflecting
additional shipments of power distribution systems and single line filters.
These power products are principally used in telecommunications equipment,
including high-end Internet servers and networks. Selling prices declined
slightly during the first nine months of fiscal 2000 as a result of
competitive pressures. Overall demand for our products was strong
throughout the period with total customer orders of $113.7 million received
in the first three quarters of fiscal 2000, an increase of $28.3 million or
33.1% from the same period last year.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Gross Margin
For the first nine months of fiscal 2000, gross margin was $27.1 million or
28.1% of sales, compared to $19.5 million or 28.3% of sales for the same
period last year. The decrease in gross margin percentage primarily
reflects manufacturing yield losses and higher labor costs incurred during
the first three months of fiscal 2000 related to the integration of SCPD
into our Signal Products Group. To increase manufacturing capacity, we are
expanding our production and assembly operations. As previously discussed,
we recently established and commenced manufacturing operations in a new
facility in Juarez, Mexico. Production in this leased facility is expected
to be phased in throughout the remainder of fiscal 2000 and the first half
of fiscal 2001. We have also started construction of a 26,000 square foot
addition to our Wesson, Mississippi facility. This addition, which we
anticipate will be completed by the end of fiscal 2000, will be utilized in
the manufacturing of our power product offerings. We believe that these
expansions will improve operating efficiencies, lower production costs, and
improve gross margins.
Selling, General and Administrative Expense
With additional sales volume, selling expense increased during the first
nine months of fiscal 2000 to $9.1 million or 9.5% of sales, compared to
$6.6 million or 9.6% of sales for the same period in 1999. General and
administrative expense was $6.8 million in the first three quarters of
fiscal 2000, compared to $5.6 million in the comparable period of 1999. Of
this $1.2 million increase, approximately $200,000 arises from the
amortization of goodwill recognized in connection with our acquisition of
SCPD and $241,000 arises from the write-off of debt issuance costs upon the
early payoff of certain indebtedness. The remaining increase in general
and administrative expense reflects additional personnel costs,
professional fees and other operating expenses associated with our
increased business activity.
Other Income and Expense
In March 1999, we secured a $20.0 million term loan to substantially
finance the acquisition of SCPD. Principally as a result of incurring this
debt, interest expense increased by $843,000 during the period, from
$900,000 in 1999 to $1.7 million in 2000. In addition, weighted average
short-term bank borrowings and interest rates increased during 2000. As
more fully discussed below, all borrowings under the term loan and our
domestic line of credit were repaid in August 2000.
We hold numerous United States and foreign patents relating to polymer
multilayer ("PML") technology. During the first nine months of fiscal
2000, we realized $375,000 of license fee income upon the granting of a PML
capacitor license. Although the license, as well as other PML technology
licenses that we have previously granted, requires certain royalties to be
paid to us upon the sale of products utilizing PML technology, it is not
known what future commercial value, if any, these patents and related
licenses may have.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Income Taxes
Our effective income tax rate was 38.0% in the first nine months of fiscal
2000 and 1999, compared to an applicable statutory income tax rate of
approximately 40.0%. Differences in the effective tax rate and statutory
income tax rate principally arise from state tax provisions and foreign
income tax rates.
Risk Factors That May Affect Future Results
Our results of operations may be affected in the future by a variety of
factors including: competitive pricing pressures, new product offerings by
us and our competitors, new technologies, product cost changes, changes in
the overall economic climate, availability of raw materials, and changes in
product mix. In fiscal year 2000, we expect approximately 60.0% of our
sales will be to customers in the telecommunication industry. Our two
largest customers, original equipment manufacturers of telecommunication
equipment, are expected to represent approximately 25.0% of our total
consolidated net sales in fiscal 2000. Any significant change in the
activity level of these major customers or the overall telecommunication
industry, would have a direct impact on our financial performance.
Liquidity, Capital Resources and Financial Condition
On August 16, 2000, we sold 2.3 million shares of our Common Stock in a
public offering which resulted in net proceeds of approximately $27.9
million, after deducting issuance costs. The net proceeds of the offering
were used to repay $7.4 million of revolving line of credit indebtedness
and $17.3 million of term loan debt, with the remaining proceeds added to
cash and cash equivalents available for general corporate purposes.
We maintain an aggregate $10.0 million line of credit with our principal
lending institutions, PNC Bank, N.A. of Erie, Pennsylvania and M & T Bank
of Buffalo, New York. At August 31, 2000, no borrowings were outstanding
under this financing arrangement. Future borrowings, if any, will bear
interest at rates below the prevailing prime rate.
Our wholly-owned German subsidiary maintains unsecured Deutsche Mark lines
of credit with several German financial institutions aggregating $1.6
million (DM 3.5 million). At August 31, 2000, outstanding borrowings under
these lines of credit amounted to $189,000 (DM 400,000). Borrowings under
the lines of credit bear interest at rates below the prevailing prime rate
and are payable upon demand.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
We have entered into a credit agreement with our principal lending
institutions which requires us to comply with certain covenants. These
covenants generally restrict us from granting additional liens on our
assets, disposing of assets other than in the ordinary course of business,
and incurring additional indebtedness other than purchase money
indebtedness and debt not exceeding $5.0 million in the aggregate. The
credit agreement also imposes certain restrictions on our future
acquisitions. In addition, the credit agreement requires that we meet the
following quarterly financial covenants: maintain a minimum net worth of
$28.0 million plus 50% of our net income and 100% of the net proceeds from
issuance of Common Stock for each year ending after November 30, 1998;
maintain a minimum ratio of EBITDA (earnings before interest, taxes,
depreciation, and amortization) to fixed charges of 1.2 to 1.0; and
maintain a maximum ratio of total indebtedness to EBITDA of 3.5 to 1.0. As
of August 31, 2000, we were in compliance with all covenants contained in
the credit agreement.
With the proceeds from our public stock offering and the related retirement
of debt, our working capital and current ratio improved significantly
during the period. At August 31, 2000, we had net working capital of $40.7
million, compared to $24.0 million at November 30, 1999. At the end of the
first nine months of fiscal 2000, current assets were 3.40 times current
liabilities, compared to 2.10 at the end of fiscal 1999.
During the first nine months of fiscal 2000, our cash expenditures for
property, plant and equipment amounted to $4.8 million. These capital
expenditures primarily related to manufacturing equipment for our new
Mexican facility and other capacity expansion within our Signal Products
Group. In order to meet growing customer demand and production
requirements for our power product offerings, we are expanding our Wesson,
Mississippi facility. Financing alternatives for this $1.0 million project
are currently being evaluated. With the exception of this project, we had
not entered into any material commitments for capital expenditures at
August 31, 2000.
Current financial resources, including working capital and existing lines
of credit, and anticipated funds from operations are expected to be
sufficient to meet operating cash requirements throughout the remainder of
fiscal 2000, including scheduled long-term debt repayment and planned
capital equipment expenditures. There can be no assurance, however, that
unplanned capital replacement or other future events will not require us to
seek additional debt or equity financing and, if so required, that it will
be available on terms acceptable to us.
With additional profitability and reduced working capital requirements, our
operating cash flow increased significantly during the period. During the
first nine months of fiscal 2000, net cash generated from operations
amounted to $8.8 million, an increase of $7.0 million from the comparable
period of 1999.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
At August 31, 2000, goodwill represented 15.5% of total assets and 20.3% of
stockholders' equity. A majority of this goodwill was recognized in 1999
in connection with our acquisition of SCPD. We amortize goodwill on a
straight-line basis over a period of 20 years and periodically review its
carrying value for possible impairment. Based upon a review of expected
future operating cash flows derived from the acquisition of SCPD, our
management has determined that no impairment losses need be recognized in
the current period.
Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency
Certain of our European sales and related selling expenses are denominated
in German Deutsche Marks, British Pounds, and other local currencies. As a
result, fluctuations in currency exchange rates may affect our operating
results and cash flow. For each of the periods presented herein, however,
currency exchange rate gains and losses were not material. In addition, an
assumed 10.0% adverse change in all foreign currencies in which we
currently transact business would not have a material impact on our
operating results, financial position, or cash flows.
Euro
Certain member countries of the European Union have established fixed
conversion rates between their existing currencies and the European Union's
common currency, the Euro. We have implemented all the necessary
enhancements to our sales order, banking arrangements and operational
procedures to ensure Euro compliance. We are able to process orders,
invoice customers and accept payment in Euros throughout Europe. The
introduction of the Euro has not had any material adverse impact upon us.
We continue to monitor the risk of price erosion which could result from
increased price transparency among countries using the Euro.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and for Hedging Activities" ("SFAS No. 133"). SFAS No. 133
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. SFAS No. 133 is
effective for years beginning after June 15, 2000. In December 1999, the
Securities and Exchange Commission issued Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" ("SAB No. 101"),
which clarifies the accounting rules for revenue recognition in financial
statements. We must implement SAB No. 101 by the fourth quarter of fiscal
year ending November 30, 2001.
We do not expect the adoption of SFAS No. 133 or SAB No. 101 to have a
material impact on our financial position or results of operations.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibit filed as part of this report is listed below:
Exhibit No. Description
27 Financial data schedule
(b) Reports on Form 8-K
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: September 21, 2000 By: /s/ John P. Freeman
John P. Freeman, Vice President
and Chief Financial Officer
(Principal Accounting and
Financial Officer)
