-----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, TNF9sZ10braqjlt9ZM6oZRXyZMhiuT3eGFJLSMKtC9BMxgxKoWzB8ej89WBYZ9Ze rOtFfTG/bc9ga/33d0BXjQ== /in/edgar/work/20000630/0000092769-00-000008/0000092769-00-000008.txt : 20000920 0000092769-00-000008.hdr.sgml : 20000920 ACCESSION NUMBER: 0000092769-00-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000531 FILED AS OF DATE: 20000630 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPECTRUM CONTROL INC CENTRAL INDEX KEY: 0000092769 STANDARD INDUSTRIAL CLASSIFICATION: [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: 666300 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 0001.txt 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 May 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 June 15, 2000 Common, no par value 11,012,468 SPECTRUM CONTROL, INC. AND SUBSIDIARIES INDEX PAGE NO. PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets -- May 31, 2000 and November 30, 1999 Condensed Consolidated Statements of Income -- Three Months Ended and Six Months Ended May 31, 2000 and 1999 Condensed Consolidated Statements of Cash Flows -- Three Months Ended and Six Months Ended May 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 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K Signature SPECTRUM CONTROL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS DOLLAR AMOUNTS IN THOUSANDS (UNAUDITED)
May 31, 2000 Nov. 30, 1999 ASSETS CURRENT ASSETS Cash and cash equivalents $ 641 $ 538 Accounts receivable, net of allowances 21,473 19,330 Inventories Finished goods 4,911 4,132 Work-in-process 10,693 9,626 Raw materials 11,555 10,859 Total inventories 27,159 24,617 Prepaid expenses and other current assets 1,044 1,278 Total current assets 50,317 45,763 PROPERTY, PLANT AND EQUIPMENT, at cost less accumulated depreciation of $20,136 in 2000 and $17,836 in 1999 21,536 21,366 OTHER ASSETS Goodwill 14,785 14,225 Patents and patent rights 301 321 Debt issuance costs 356 394 Deferred income taxes 108 108 Deferred charges 355 377 Total other assets 15,905 15,425 TOTAL ASSETS $87,758 $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)
May 31, 2000 Nov.30, 1999 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Short-term debt $ 7,132 $ 5,089 Accounts payable 10,694 8,801 Accrued salaries and wages 1,995 2,553 Accrued interest 118 103 Accrued other expenses 1,323 952 Current portion of long-term debt 4,276 4,276 Total current liabilities 25,538 21,774 LONG-TERM DEBT 16,973 19,011 DEFERRED INCOME TAXES 2,993 2,634 STOCKHOLDERS' EQUITY Common stock, no par value, authorized 25,000,000 shares, issued 11,081,801 shares in 2000 and 11,018,703 shares in 1999 14,810 14,633 Retained earnings 28,453 25,268 Treasury stock, 70,000 shares in 2000 and 1999, at cost (294) (294) 42,969 39,607 Accumulated other comprehensive income Foreign currency translation adjustment (715) (472) Total stockholders' equity 42,254 39,135 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $87,758 $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 Six Months Ended May 31 May 31 2000 1999 2000 1999 Net sales $32,087 $24,542 $60,611 $39,867 Cost of products sold 22,970 17,531 44,988 28,444 Gross margin 9,117 7,011 15,623 11,423 Selling, general and administrative expense 5,129 4,266 9,742 7,246 Income from operations 3,988 2,745 5,881 4,177 Other income (expense) Interest expense (586) (335) (1,179) (388) Other income and expense, net 28 24 435 35 (558) (311) (744) (353) Income before provision for income taxes 3,430 2,434 5,137 3,824 Provision for income taxes 1,304 924 1,952 1,451 Net income $ 2,126 $ 1,510 $ 3,185 $2,373 Earnings per common share: Basic $ 0.19 $ 0.14 $ 0.29 $ 0.22 Diluted $ 0.19 $ 0.14 $ 0.28 $ 0.22 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)
Six Months Ended May 31 2000 1999 NET CASH PROVIDED BY OPERATING ACTIVITIES $3,274 $ 897 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment (2,523) (2,426) Payment for acquired businesses (935) (20,745) Net cash used in investing activities (3,458) (23,171) CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings of short-term debt 2,152 1,495 Borrowings of long-term debt - 20,550 Repayment of long-term debt (2,038) (428) Net proceeds from issuance of common stock 177 20 Net cash provided by financing activities 291 21,637 Effect Of Exchange Rate Changes On Cash (4) (29) Net Increase (Decrease)In Cash And Cash Equivalents 103 (666) Cash And Cash Equivalents, Beginning Of Period 538 739 Cash And Cash Equivalents, End Of Period $ 641 $ 73 Cash Paid During The Period For: Interest $1,164 $ 359 Income taxes 993 1,271 The accompanying notes are an integral part of the financial statements.
SPECTRUM CONTROL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS May 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. 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 Six Months Ended May 31 May 31 2000 1999 2000 1999 Numerator for basic and diluted earnings per common share (in thousands): Net income $ 2,126 $ 1,510 $ 3,185 $ 2,373 Denominator for basic earnings per common share (in thousands): Weighted average shares outstanding 11,011 10,890 10,992 10,888 Denominator for diluted earnings per common share (in thousands): Weighted average shares outstanding 11,011 10,890 10,992 10,888 Effect of dilutive securities: Stock options 200 105 230 87 Stock warrants 40 - 46 - 11,251 10,995 11,268 10,975 Earnings per common share: Basic $ 0.19 $ 0.14 $ 0 .29 $ 0 .22 $ 0.19 $ 0.14 $ 0 .28 $ 0 .22 Diluted
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 Six Months Ended May 31 May 31 2000 1999 2000 1999 Net income $ 2,126 $ 1,510 $ 3,185 $ 2,373 Foreign currency translation adjustment 77 51 (243) (54) Comprehensive income $ 2,203 $ 1,561 $ 2,942 $ 2,319 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 February 1, 2000, 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 policies and procedures used to determine segment income have been consistently applied. Reportable segment information for the periods ended May 31, 2000 and 1999 is as follows (in thousands):
Three Months Ended May 31: Signal Power Products Products Total 2000 Revenue from unaffiliated customers $23,646 $ 8,441 $ 32,087 Segment income 6,667 2,125 8,792 Segment assets 38,463 8,466 46,929 1999 Revenue from unaffiliated customers 16,865 7,677 24,542 Segment income 4,423 1,898 6,321 Segment assets 33,497 7,229 40,726 Six Months Ended May 31: 2000 Revenue from unaffiliated customers 43,498 17,113 60,611 Segment income 10,271 4,337 14,608 Segment assets 38,463 8,466 46,929 1999 Revenue from unaffiliated customers 27,113 12,754 39,867 Segment income 7,082 3,134 10,216 Segment assets 33,497 7,229 40,726
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) A reconciliation of total reportable segment income to consolidated income before provision for income taxes for the periods ended May 31, 2000 and 1999 is as follows (in thousands):
Three Months Ended Six Months Ended May 31 May 31 2000 1999 2000 1999 Total income for reportable segments $ 8,792 $ 6,321 $ 14,608 $ 10,216 Unallocated amounts: Selling, general and administrative expense (4,804) (3,576) (8,727) (6,039) Interest expense (586) (335) (1,179) (388) Other income 28 24 435 35 Consolidated income before provision for income taxes $ 3,430 $ 2,434 $ 5,137 $ 3,824
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 primarily 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 telecommunications 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 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. 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 and six months ended May 31, 2000 and 1999:
Three Months Ended Six Months Ended May 31 May 31 2000 1999 2000 1999 Net sales 100.0% 100.0% 100.0% 100.0% Cost of product sold 71.6 71.4 74.2 71.3 Gross margin 28.4 28.6 25.8 28.7 Selling, general and administrative expense 16.0 17.4 16.1 18.2 Income from operations 12.4 11.2 9.7 10.5 Other income (expense) Interest expense (1.8) (1.4) (1.9) (1.0) Other income and expense, net 0.1 0.1 0.7 0.1 Income before provision for income taxes 10.7 9.9 8.5 9.6 Provision for income taxes 4.1 3.7 3.2 3.6 Net income 6.6% 6.2% 5.3% 6.0%
Second Quarter 2000 Versus Second Quarter 1999 Net Sales Net sales increased $7.6 million or 30.7% during the period, with consolidated net sales of $32.1 million in the second quarter of fiscal 2000 and $24.5 million in the comparable quarter of 1999. Of this increase, $6.8 million was generated from the sale of signal products, with sales of discrete EMI low pass filters increasing $2.2 million, filtered arrays and connectors increasing $4.4 million, and microwave/ wireless products increasing approximately $200,000. The increase in signal product sales primarily reflects additional shipment volume of components used in various telecommunication equipment including cellular base stations, power amplifiers and transceivers. Overall demand for the Company's products was strong during the period with total customer orders of $38.3 million received in the second quarter of fiscal 2000, an increase of $7.6 million or 24.8% from the second quarter of last year. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Gross Margin With additional sales generated, gross margin increased to $9.1 million in the second quarter of fiscal 2000, compared to $7.0 million in the comparable quarter of 1999. As a percentage of sales, gross margin was relatively stable throughout the period, amounting to 28.4% in 2000 and 28.6% in 1999. Economies of scale realized with additional shipment volume were substantially offset by changes in sales mix within the Company's signal and power product offerings. Selling, General and Administrative Expense Selling expense increased during the period as a result of greater sales volume,. In the second quarter of fiscal 2000, selling expense amounted to $3.0 million or 9.3% of sales, compared to $2.4 million or 9.8% of sales in the same quarter of 1999. General and administrative expense was approximately $2.1 million in the second quarter of 2000, compared to $1.9 million in the comparable quarter of 1999. The increase in general and administrative expense reflects additional personnel costs and operating expenses associated with the Company's increased business activity. Other Income and Expense Interest expense increased by $251,000 during the period, with interest expense amounting to $586,000 in the second quarter of fiscal 2000 and $335,000 in the comparable quarter 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 and additional short-term bank borrowings used to finance growing working capital requirements. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Six Months 2000 Versus Six Months 1999 Net Sales For the first half of fiscal 2000, net sales increased $20.7 million or 52.0%, with consolidated sales of $60.6 million in 2000 and $39.9 million in 1999. Sales of the Company's signal products amounted to $43.4 million during the first six months of fiscal 2000, an increase of $16.4 million from same period of 1999. Of this increase, approximately $9.0 million was generated from the sale of SCPD products. The remaining $7.4 million increase in signal product sales principally reflects higher shipment levels to original equipment manufacturers of telecommunication equipment. Sales of the Company's power product offerings increased $4.3 million during the first half of fiscal 2000, 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 first half of fiscal 2000 as a result of competitive pressures. Overall demand for the Company's products was strong throughout the period with total customer orders of $76.1 million received in the first six months of fiscal 2000, an increase of $22.3 million or 41.3% from the same period last year. Gross Margin For the first six months of fiscal 2000, gross margin was $15.6 million or 25.8% of sales, compared to $11.4 million or 28.7% of sales for the first half of 1999. 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 the Company's Signal Products Group. This integration, which included the redesign of certain SCPD products and production processes, was completed during the second quarter of fiscal 2000. To increase manufacturing capacity, the Company is expanding its production and assembly operations. In June 2000, the Company established manufacturing operations in a new 46,000 square foot facility in Juarez, Mexico. Production in this leased facility is expected to be phased-in throughout fiscal 2000. Later this year, the Company anticipates constructing a 26,000 square foot addition to its Wesson, Mississippi facility. Management believes that these capacity expansions will improve operating efficiencies and lower production costs. Accordingly, management believes gross margin percentages will improve during the second half of fiscal 2000 and approximate 29.0% to 30.0% of sales. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Selling, General and Administrative Expense With additional sales volume, selling expense increased during the period. During the first half of fiscal 2000, selling expense amounted to $5.8 million or 9.6% of sales, compared to $4.1 million or 10.4% of sales for the same period last year. The decrease in selling expense, as a percentage of sales, principally reflects economies of scale realized with additional sales volume. General and administrative expense amounted to $3.9 million in the first six months of 2000, compared to $3.1 million in the comparable period of 1999. Of this $800,000 increase, approximately $200,000 consisted of 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 reflects additional personnel costs, professional fees and other operating expenses associated with the Company's increased business activity. Other Income and Expense The Company 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 $791,000 during the period, from $388,000 in 1999 to $1.2 million in fiscal 2000. In addition, weighted average short-term bank borrowings and interest rates increased during the period. The Company holds numerous United States and foreign patents relating to polymer multilayer ("PML") technology. During the first half 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 38.0% in 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. 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, changes in the overall economic climate, availability of raw materials, and changes in product mix. In fiscal year 2000, management expects approximately 60.0% of the Company's sales will be to customers in the telecommunication industry. The Company's largest single customer, an original equipment manufacturer of telecommunication equipment, is expected to represent approximately 18.0% of the Company's total consolidated net sales in 2000. Any significant change in the activity level of this major customer, or the overall telecommunication industry, 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 May 31, 2000, the Company had borrowed $6.4 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 $1.6 million (3.5 million DM). At May 31, 2000, outstanding borrowings under these lines of credit amounted to $732,000 (1.6 million DM). Borrowings under the lines of credit bear interest at rates below the prevailing prime rate and are payable upon demand. 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 May 31, 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 May 31, 2000, the Company had net working capital of $24.8 million, compared to $24.0 million at November 30, 1999. At the end of the first six months of fiscal 2000, current assets were 1.97 times current liabilities, compared to 2.10 at the end of fiscal 1999. During the first six months of fiscal 2000, the Company's cash expenditures for property, plant and equipment amounted to $2.5 million. These capital expenditures primarily related to manufacturing equipment for capacity expansion within the Company's Signal Products Group. At May 31, 2000, the Company had not entered into any material commitments for capital expenditures. However, in order to meet growing customer demand and production requirements for our power product offerings, the Company expects to construct a 26,000 square foot addition to its Wesson, Mississippi facility later this year. The Company is currently evaluating financing alternatives for this $1.0 million project. 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 equipment 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. Despite additional inventory requirements, the Company's operating cash flow increased during the period. During the first six months of fiscal 2000, net cash generated from operations amounted to $3.3 million, an increase of $2.4 million from the comparable period of 1999. During the first half of fiscal 2000, inventories grew by $2.7 million. The increase in inventories primarily reflects additional customer consigned inventory requirements, as well as additional raw materials and work-in- process to support future shipment requirements. At May 31, 2000, goodwill represented 16.8% of total assets and 35.0% 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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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 10.0% 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 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. The Company has implemented 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. Interest Rate Exposure The Company has market risk exposure relating to possible fluctuations in interest rates. The Company's policy is to mange 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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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 May 31, 2000:
Year of Maturity Description 2000 2001 2002 2003 Thereafter Revolving credit facility: Principal amount $6,400,000 Actual floating rate Euro-rate portion 6.38% Term loan: Principal amount $1,818,000 $3,636,000 $3,636,000 $3,636,000 $5,456,000 Actual floating rate Euro-rate portion 6.62% 6.62% 6.62% 6.62% 6.62% Interest rate swap agreement: PNC Bank, N.A. Notional amount $1,818,000 $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) New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") 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 fiscal 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 expects to adopt SAB No. 101 in its third quarter of fiscal year 2000. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation ("Interpretation No. 44"), which provides guidance on several implementation issues related to the accounting for employee stock options. Interpretation No. 44 clarifies the definition of employee and the accounting for stock options that have been repriced. The Company does not expect the adoption of SFAS No. 133, SAB No. 101, or Interpretation No. 44 to have a material impact on the Company's financial position or results of operations. PART II - OTHER INFORMATION Item 4. Submission of Matters to Vote of Security Holders The Annual Meeting of Shareholders of the Company was held on April 3, 2000, at the Bel-Aire Hotel, 2800 West Eighth Street, Erie, Pennsylvania at 9:00 a.m. All proposals as described in the Company's Proxy Statement dated March 1, 2000 were approved. Below are details of the matters voted upon at the meeting: Proposal 1 - Election of Directors Elections were held for three (3) directors to serve until the 2003 Annual Meeting of Shareholders. The results of the votes are as follows: Votes Votes Broker Name For Against Abstentions Non-Votes J. Thomas Gruenwald 9,769,746 56,857 - - Melvin Kutchin 9,651,271 175,332 - - Gerald A. Ryan 9,786,201 40,402 - - The terms of the following directors extend beyond the Annual Meeting date: Edwin R. Bindseil, John P. Freeman, John M. Petersen, Richard A. Southworth, and James F. Toohey. Proposal 2 - Appointment of Auditors Upon recommendation of the Audit Committee, the Board of Directors resolved to appoint Ernst & Young LLP as the Company's auditors for the fiscal year ending November 30, 2000, subject only to ratification by the shareholders. The results of the votes are as follows: Votes Votes Broker For Against Abstentions Non-Votes 9,791,258 25,614 9,731 - PART II - OTHER INFORMATION (Continued) 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: June 30, 2000 By: /s/ John P. Freeman John P. Freeman, Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) EX-27 2 0002.txt ART. 5 FDS FOR SECOND QUARTER 2000 FORM 10-Q
5 This schedule contains summary financial information extracted from the Spectrum Control, Inc. Condensed Consolidated Balance Sheet (Unaudited) at May 31, 2000 and Condensed Consolidated Statement of Income (Unaudited) for the six months ended May 31, 2000 and is qualified in its entirety by reference to its Form 10-Q for the period ended May 31, 2000. 0000092769 SPECTRUM CONTROL, INC. 1,000 6-MOS NOV-30-2000 MAY-31-2000 641 0 22187 714 27159 50317 41672 20136 87758 25538 16973 0 0 14810 27444 87758 60611 60611 44988 44988 0 0 1179 5137 1952 3185 0 0 0 3185 .29 .28
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