-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LgriUltmlkInvXS5nyVG8HFyUmFhGDvTmXOnpR2pqEkivT90R90dD/B3BTHGvmBp FJRZo6DVcrjldsbIVHVIag== 0000092769-00-000006.txt : 20000414 0000092769-00-000006.hdr.sgml : 20000414 ACCESSION NUMBER: 0000092769-00-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000229 FILED AS OF DATE: 20000413 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPECTRUM CONTROL INC CENTRAL INDEX KEY: 0000092769 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 251196447 STATE OF INCORPORATION: PA FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-08796 FILM NUMBER: 600346 BUSINESS ADDRESS: STREET 1: 8031 AVONIA ROAD CITY: FAIRVIEW STATE: PA ZIP: 16415 BUSINESS PHONE: 8148351650 MAIL ADDRESS: STREET 1: 8031 AVONIA ROAD CITY: FAIRVIEW STATE: PA ZIP: 16415 10-Q 1 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 29, 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 March 15, 2000 Common, no par value 11,004,371 SPECTRUM CONTROL, INC. AND SUBSIDIARIES INDEX PAGE NO. PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets -- February 29, 2000 and November 30, 1999 3-4 Condensed Consolidated Statements of Income -- Three Months Ended February 29, 2000 and 5 February 28, 1999 Condensed Consolidated Statements of Cash Flows -- Three Months Ended February 29, 2000 and 6 February 28, 1999 Notes to Condensed Consolidated Financial Statements 7-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-19 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 20 Signature 21 SPECTRUM CONTROL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS DOLLAR AMOUNTS IN THOUSANDS (UNAUDITED)
February 29, November 30, 2000 1999 ASSETS CURRENT ASSETS Cash and cash equivalents $ 147 $ 538 Accounts receivable, net of allowances 19,589 19,330 Inventories Finished goods 5,528 4,132 Work-in-process 9,171 9,626 Raw materials 11,754 10,859 Total inventories 26,453 24,617 Prepaid expenses and other current assets 1,309 1,278 Total current assets 47,498 45,763 PROPERTY, PLANT AND EQUIPMENT, at cost less accumulated depreciation of $18,993 in 2000 and $17,836 in 1999 21,177 21,366 OTHER ASSETS Goodwill 14,688 14,225 Patents and patent rights 310 321 Debt issuance costs 375 394 Deferred income taxes 108 108 Deferred charges 320 377 Total other assets 15,801 15,425 TOTAL ASSETS $84,476 $82,554 The accompanying notes are an integral part of the financial statements.
SPECTRUM CONTROL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS DOLLAR AMOUNTS IN THOUSANDS (UNAUDITED)
February 29, November 30, 2000 1999 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Short-term debt $ 6,030 $ 5,089 Accounts payable 11,343 8,801 Accrued salaries and wages 1,542 2,553 Accrued interest 64 103 Accrued other expenses 534 952 Current portion of long-term debt 4,276 4,276 Total current liabilities 23,789 21,774 LONG-TERM DEBT 17,891 19,011 DEFERRED INCOME TAXES 2,753 2,634 STOCKHOLDERS' EQUITY Common stock, no par value, authorized 25,000,000 shares, issued 11,074,371 shares in 2000 and 11,018,703 in 1999 14,802 14,633 Retained earnings 26,327 25,268 Treasury stock, 70,000 shares in 2000 and 1999, at cost (294) (294) 40,835 39,607 Accumulated other comprehensive income Foreign currency translation adjustment (792) (472) Total stockholders' equity 40,043 39,135 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $84,476 $82,554 The accompanying notes are an integral part of the financial statements.
SPECTRUM CONTROL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in Thousands Except Per Share Data) Three Months Ended February 29, February 28, 2000 1999 Net sales $28,524 $15,325 Cost of products sold 22,018 10 913 Gross margin 6,506 4,412 Selling, general and administrative expense 4,613 2,980 Income from operations 1,893 1,432 Other income (expense) Interest expense (593) (53) Other income and expense, net 407 11 (186) (42) Income before provision for income taxes 1,707 1,390 Provision for income taxes 648 527 Net income $ 1,059 $ 863 Earnings per common share: Basic $ 0.10 $ 0.08 Diluted $ 0.09 $ 0.08 Dividends declared per common share $ - $ - The accompanying notes are an integral part of the financial statements.
SPECTRUM CONTROL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS DOLLAR AMOUNTS IN THOUSANDS (UNAUDITED)
Three Months Ended February 29, February 28, 2000 1999 NET CASH PROVIDED BY OPERATING ACTIVITIES $1,208 $ 128 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment (987) (867) Payment for acquired businesses (651) - Net cash used in investing activities (1,638) (867) CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings of short-term debt 1,001 64 Repayment of long-term debt (1,120) (37) Net proceeds from issuance of common stock 169 - Net cash provided by financing activities 50 27 Effect of Exchange Rate Changes on Cash (11) 16 Net Decrease in Cash and Cash Equivalents (391) (696) Cash and Cash Equivalents, Beginning of Period 538 739 Cash and Cash Equivalents, End of Period $ 147 $ 43 Cash Paid During the Period For: Interest $ 632 $ 73 Income taxes 3 23 The accompanying notes are an integral part of the financial statements.
SPECTRUM CONTROL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS February 29, 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. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 4 - Earnings Per Common Share The following table sets forth the computation of basic and diluted earnings per common share for the periods indicated:
Three Months Ended February 29, February 28, 2000 1999 Numerator for basic and diluted earnings per common share (in thousands): Net income $ 1,059 $ 863 Denominator for basic earnings per common share (in thousands): Weighted average shares outstanding 10,972 10,887 Denominator for diluted earnings per common share (in thousands): Weighted average shares outstanding 10,972 10,887 Effect of dilutive securities: Stock options 259 70 Stock warrants 53 - 11,284 10,957 Earnings per common share: Basic $ 0.10 $ 0.08 Diluted $ 0.09 $ 0.08
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 5 - Comprehensive Income The following table sets forth the computation of comprehensive income for the periods indicated (in thousands): Three Months Ended February 29, February 28, 2000 1999 Net income $ 1,059 $ 863 Foreign currency translation adjustment (320) (105) Comprehensive income $ 739 $ 758 Note 6- 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 December 1, 1999, the Company realigned its business segments to better reflect its current strategic focus. The Company's operating results are now 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, bandpass filters and duplexers), and specialty ceramic capacitors. 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. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Prior period amounts in the following tables have been restated to correspond with the new business segment presentation. For each period presented, the accounting polices and procedures used to determine segment income have been consistently applied. Reportable segment information for the periods ended February 29, 2000 and February 28, 1999 is as follows (in thousands): Signal Power Products Products Total Three Months Ended February 29, 2000: Revenue from unaffiliated customers $19,852 $ 8,672 $ 28,524 Segment income 3,604 2,212 5,816 Segment assets 37,166 8,744 45,910 Three Months Ended February 28, 1999: Revenue from unaffiliated customers 10,248 5,077 15,325 Segment income 2,659 1,236 3,895 Segment assets 24,302 4,912 29,214 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) A reconciliation of total reportable segment income to consolidated income before provision for income taxes is as follows (in thousands):
Three Months Ended February 29, February 28, 2000 1999 Total income for reportable segments $5,816 $3,895 Unallocated amounts: Selling, general and administrative expense (3,923) (2,463) Interest expense (593) (53) Other income 407 11 Consolidated income before provision for income taxes $1,707 $1,390
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 (the "Company") annual report on Form 10-K for the fiscal year ended November 30, 1999. General Spectrum Control, Inc. was founded as a solutions - oriented company, designing and manufacturing products to suppress or eliminate electromagnetic interference ("EMI"). 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. The Company's operations are conducted in two business segments: signal products and power products. The Company's Signal Products Group manufactures a broad line of discrete EMI filters, filtered arrays, filtered connectors, wireless products (coaxial ceramic resonators, 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. Although these signal and power products are used in virtually all industries worldwide, the Company's largest market segment is communications equipment. Approximately 60% of the Company's sales are to customers in the telecommunication industry. On March 26, 1999, the Company 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. 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. 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 the Year 2000 Issue. 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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations The following table sets forth certain financial data, as a percentage of net sales, for the three months ended February 29, 2000 and February 28, 1999:
2000 1999 Net sales 100.0% 100.0% Cost of products sold 77.2 71.2 Gross margin 22.8 28.8 Selling, general and administrative expense 16.2 19.4 Income from operations 6.6 9.4 Other income (expense) Interest expense (2.1) (0.3) Other income and expense, net 1.4 - Income before provision for income taxes 5.9 9.1 Provision for income taxes 2.2 3.5 Net income 3.7% 5.6%
First Quarter 2000 Versus First Quarter 1999 Net Sales Net sales increased $13.2 million or 86% during the period, with consolidated net sales of $28.5 million in the first quarter of fiscal 2000 and $15.3 million in the comparable quarter of 1999. Of this increase, $9.6 million was generated from the sale of signal products, with sales of discrete EMI low pass filters increasing $2.1 million and filtered arrays/connectors increasing $7.5 million during the period. The increased shipment of filtered arrays and connectors was primarily generated from the sale of SCPD products. Sales of the Company's power product offerings increased $3.6 million during the first quarter, primarily reflecting additional shipments of power distribution systems and single line filters. These power products are principally used in communications equipment including high-end internet servers and networks. Selling prices declined slightly during the period as a result of competitive market pressures. Overall demand for the Company's products was very strong during the period with total customer orders of $37.7 million received in the first quarter of fiscal 2000, an increase of $14.6 million or 63% from the first quarter of last year. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) International sales, through the Company's German subsidiary, amounted to $3.7 million or 13% of total consolidated sales in the first quarter of fiscal 2000, compared to $2.2 million or 14% of consolidated sales in the comparable quarter of 1999. The increase in international sales principally reflects additional shipments to European customers. Management expects international markets to continue to represent a significant portion of its sales base. Gross Margin With additional sales volume, gross margin increased to $6.5 million in the first quarter of fiscal 2000, compared to $4.4 million in the comparable quarter of 1999. As a percentage of sales, gross margin declined during the period, amounting to approximately 23% in 2000 and 29% in 1999. The decrease in gross margin percentage primarily reflects manufacturing yield losses and resultant higher labor costs incurred during the integration of SCPD into the Company's Signal Products Group. As part of this integration, the Company is redesigning certain SCPD products and production processes which is expected to ultimately reduce manufacturing costs and improve operating efficiencies. The Company currently anticipates the integration process to be substantially completed by May 31, 2000. Accordingly, management believes gross margin percentages will improve during the second half of fiscal 2000 and approximate 29% to 30% of sales. Selling, General and Administrative Expense As a result of greater sales volume, selling expense increased during the period. In the first quarter of fiscal 2000, selling expense amounted to $2.8 million or 10% of sales, compared to $1.8 million or 11% of sales in the same quarter of 1999. The decrease in selling expense, as a percentage of sales, principally reflects economies of scale realized with the additional sales volume. General and administrative expense was approximately $1.8 million in the first quarter of 2000, compared to $1.2 million in the comparable quarter of 1999. Of this increase, approximately $150,000 arises from the amortization of goodwill recognized in connection with the Company's acquisition of SCPD in March 1999. The remaining increase in general and administrative expense primarily reflects additional personnel costs, professional fees and other operating expenses associated with the Company's increased business activity. Other Income and Expense Interest expense increased by $540,000 during the period, with interest expense amounting to $593,000 in the first three months of fiscal 2000 and $53,000 in the first three months of 1999. To finance the acquisition of SCPD, the Company secured an aggregate $20.0 million term loan from its principal lending institutions. The six year term loan bears interest at variable rates at or below the prevailing prime rate. The increase in interest expense primarily reflects this term loan indebtedness. In addition, weighted average short-term bank borrowings and interest rates increased during the period. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Company holds numerous United States and foreign patents relating to polymer multilayer ("PML") technology. During the first quarter of fiscal 2000, the Company 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 previously granted by the Company, requires certain royalties to be paid to the Company 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. Income Taxes The Company's effective income tax rate was 38% in 2000 and 1999, compared to an applicable statutory income tax rate of approximately 40%. 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 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, changes in the overall economic climate, availability of raw materials, and changes in product mix. In fiscal year 2000, management expects approximately 60% 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 maintains a line of credit with its principal lending institutions (PNC Bank of Erie, Pennsylvania and M & T Bank of Buffalo, New York). Effective March 21, 2000, the aggregate line of credit was increased from $6.0 million to $10.0 million. This 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 prevailing prime rate. At February 29, 2000, the Company had borrowed $4.9 million under this financing arrangement. The current line of credit agreement expires March 26, 2002. The Company's wholly-owned foreign subsidiary maintains unsecured Deutsche Mark lines of credit with several German financial institutions aggregating $1.8 million (3.5 million DM). At February 29, 2000, outstanding borrowings under these lines of credit amounted to $1.1 million (2.2 million DM). Borrowings under the lines of credit bear interest at rates below the prevailing prime rate and are payable upon demand. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) As previously indicated, the Company acquired substantially all of the assets of the Signal Conditioning Products Division of AMP Incorporated on March 26, 1999. The aggregate cash purchase price of the acquired assets was approximately $20.7 million. To finance the acquisition, the Company secured an aggregate $20.0 million term loan from its principal lending institutions. The term loan bears interest at variable rates at or below the prevailing prime rate and requires quarterly principal payments of $909,000 from December 26, 1999 through March 26, 2005. On March 26, 1999, the Company entered into a credit agreement with its principal lending institutions covering the $20.0 million term loan and the Company's revolving credit facility (the "Agreement"). The Agreement requires the Company to comply with certain covenants. These covenants generally restrict the Company from granting additional liens on its 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 Agreement also imposes certain restrictions on future acquisitions by the Company. In addition, the Agreement requires the Company to meet the following quarterly financial covenants: maintain a minimum net worth of $28.0 million plus 50% of the Company's net income for each fiscal 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 February 29, 2000, the Company was in compliance with all covenants contained in the Agreement. The Company's working capital and current ratio were relatively constant throughout the period. At February 29, 2000, the Company had net working capital of $23.7 million, compared to $24.0 million at November 30, 1999. At the end of the first quarter of fiscal 2000, current assets were 2.00 times current liabilities, compared to 2.10 at the end of fiscal 1999. During the first three months of fiscal 2000, the Company's cash expenditures for property, plant and equipment amounted to $987,000. These capital expenditures primarily related to manufacturing equipment for capacity expansion within the Company's Signal Products Group. At February 29, 2000, the Company had not entered into any material commitments for capital expenditures. However, the Company expects to lease an additional 45,000 square feet of manufacturing space during fiscal 2000 in order to meet growing customer demand and production requirements. 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 fiscal year 2000, including scheduled long-term debt repayment and planned capital expenditures. There can be no assurance, however, that unplanned capital replacement or other future events will not require the Company to seek additional debt or equity financing and, if so required, that it will be available on terms acceptable to the Company. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Despite additional inventory requirements, the Company's operating cash flow increased during the period. During the first three months of fiscal 2000, net cash generated from operations amounted to $1.2 million, an increase of $1.1 million from the comparable period of 1999. During the first quarter of fiscal 2000, inventories grew by $1.9 million. The increase in inventories primarily reflects additional customer consigned inventory requirements, as well as additional raw materials to support future shipment requirements. At February 29, 2000, goodwill represented 17% of total assets and 37% of stockholders' equity. A majority of this goodwill was recognized in 1999 in connection with the Company's acquisition of SCPD. The Company amortizes goodwill on a straight-line basis over a period of 20 years and periodically reviews its carrying value for possible impairment. Based upon a review of expected future operating cash flows derived from the acquisition of SCPD, 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 the Company's 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 the Company's 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% adverse change in all foreign currencies in which the Company currently transacts business would not have a material impact on the Company's operating results, financial position, or cash flows. Euro In 1999, certain member countries of the European Union established fixed conversion rates between their existing currencies and the European Union's common currency, the Euro. The Company has completed all the necessary enhancements to its sales order, banking arrangements and operational procedures to ensure Euro compliance. The Company is 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 the Company. The Company continues to monitor the risk of price erosion which could result from increased price transparency among countries using the Euro. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Interest Rate Exposure The Company has market risk exposure relating to possible fluctuations in interest rates. The Company's policy is to manage interest rate risk by utilizing interest rate swap agreements to convert a portion of the floating interest rate debt to fixed interest rates. The Company does not enter into derivative financial instruments for trading or speculative purposes. The interest rate swap agreements are entered into with major financial institutions thereby minimizing the risk of credit loss. The following table presents information about the Company's market sensitive financial instruments. The table sets forth the principal and notional amounts, as well as the year of maturity and applicable interest rates for all significant financial and derivative financial instruments in effect as of February 29, 2000:
Year of Maturity Description 2000 2001 2002 2003 Thereafter Revolving credit facility: Principal amount $4,900,000 Actual floating rate Euro-rate portion 5.88% Term loan: Principal amount $2,727,000 $3,636,000 $3,636,000 $3,636,000 $5,456,000 Actual floating rate Euro-rate portion 5.88% 5.88% 5.88% 5.88% 5.88% Interest rate swap agreement: PNC Bank, N.A. Notional amount $2,727,000 $3,636,000 $2,728,000 Actual fixed interest pay rate 5.89% 5.89% 5.89%
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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, computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. The Company's time - - sensitive software includes most of its business information systems, computer systems embedded in production equipment, test equipment, and personal computers. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. With the changeover to the year 2000, the Company did not experience any disruption to its operations. There can be no assurance, however, that there will not be future complications arising from the Year 2000 Issue. The Company's program for addressing the Year 2000 Issue included an assessment and evaluation of internal systems, which resulted in testing and remediation efforts for year 2000 compliance. In addition, the Company queried its important customers, vendors, and service providers to determine the extent to which the Company was vulnerable to any failure by these third-party providers and ascertain their readiness for the year 2000. The Company used both internal and external resources to reprogram or replace, test, and implement the software and production equipment for year 2000 modifications. Total year 2000 project costs were not material. Although the Company believes that it has successfully addressed any significant disruption from the Year 2000 Issue, management will continue to monitor all critical systems for the appearance of delayed complications or disruptions, as well as continue to monitor its suppliers and customers. 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. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. For a derivative not designated as a hedging instrument, changes in the fair value of the derivative are recognized in earnings in the period of change. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000, with earlier application permitted. The Company expects to adopt the new Statement effective December 1, 2000. The Company does not expect the adoption of SFAS No. 133 to have a material impact on the Company's financial position or results of operations. 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. 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: April 13, 2000 By: /s/ John P. Freeman John P. Freeman, Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) EX-27 2 ART. 5 FDS FOR FIRST QUARTER 2000 FORM 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFOMATION EXTRACTED FROM THE SPECTRUM CONTROL, INC. CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) AT FEBRUARY 29, 2000 AND CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED FEBRUARY 29, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO ITS FORM 10-Q FOR THE PERIOD ENDED FEBRUARY 29, 2000 0000092769 SPECTRUM CONTROL, INC. 1,000 3-MOS NOV-30-2000 FEB-29-2000 147 0 20259 670 26453 47498 40170 18993 84476 23789 17891 0 0 14802 25241 84476 28524 28524 22018 22018 0 0 593 1707 648 1059 0 0 0 1059 .010 .090
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