-----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, Rfr9i9F/RG7o1qkjUOjKnfyvb0aufeYFf6RKIJHypsOuSREXJuETWGY1e7220TQr 7AG5rkie2izikD2J7ZRzjw== 0000092769-99-000015.txt : 19990716 0000092769-99-000015.hdr.sgml : 19990716 ACCESSION NUMBER: 0000092769-99-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990531 FILED AS OF DATE: 19990715 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: 99665138 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 May 31, 1999 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) 835-4000 6000 West Ridge Road; Erie, Pennsylvania 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, 1999 Common, no par value 10,899,008 SPECTRUM CONTROL, INC. AND SUBSIDIARIES INDEX PAGE NO. PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets -- May 31, 1999 and November 30, 1998 3-4 Condensed Consolidated Statements of Income -- Three Months Ended and Six Months Ended May 31, 1999 and 1998 5 Condensed Consolidated Statements of Cash Flows -- Three Months Ended and Six Months Ended May 31, 1999 and 1998 6 Notes to Condensed Consolidated Financial Statements 7-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-20 PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 21 Item 6. Exhibits and Reports on Form 8-K 22 Signature 23 SPECTRUM CONTROL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS DOLLAR AMOUNTS IN THOUSANDS (UNAUDITED)
May 31, 1999 Nov. 30, 1998 ASSETS CURRENT ASSETS Cash and cash equivalents $ 73 $ 739 Accounts receivable, net of allowances 16,603 10,162 Inventories Finished goods 4,432 2,581 Work-in-process 5,949 5,070 Raw materials 11,083 5,234 Total inventories 21,464 12,885 Prepaid expenses and other current assets 876 593 Total current assets 39,016 24,379 PROPERTY, PLANT AND EQUIPMENT, at cost less accumulated depreciation of $18,473 in 1999 and $16,631 in 1998 20,860 16,289 OTHER ASSETS Goodwill 14,167 2,547 Deferred income taxes 383 383 Patents and patent rights 338 255 Debt issuance costs 434 139 Deferred charges 118 147 Total other assets 15,440 3,471 TOTAL ASSETS $75,316 $44,139 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, 1999 Nov. 30, 1998 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Short-term debt $ 2,148 $ 336 Accounts payable 8,257 2,719 Accrued salaries and wages 1,789 1,438 Accrued interest 92 63 Accrued federal and state income taxes 30 93 Accrued other expenses 1,132 281 Current portion of long-term debt 2,630 830 Total current liabilities 16,078 5,760 LONG-TERM DEBT 20,822 2,500 DEFERRED INCOME TAXES 2,303 2,105 STOCKHOLDERS' EQUITY Common stock, no par value, authorized 25,000,000 shares, issued 10,965,008 shares in 1999 and 10,957,008 shares in 1998 14,490 14,470 Retained earnings 22,171 19,798 Treasury stock, 70,000 shares in 1999 and 1998, at cost (294) (294) 36,367 33,974 Accumulated other comprehensive income Foreign currency translation adjustment (254) (200) Total stockholders' equity 36,113 33,774 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $75,316 $44,139 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 1999 1998 1999 1998 Net sales $24,542 $15,190 $39,867 $29,831 Cost of products sold 17,531 10,449 28,444 20,671 Gross margin 7,011 4,741 11,423 9,160 Selling, general and administrative expense 4,266 2,979 7,246 5,884 Income from operations 2,745 1,762 4,177 3,276 Other income (expense) Interest expense (335) (58) (388) (111) Other income and expense, net 24 24 35 34 (311) (34) (353) (77) Income before provision for income taxes 2,434 1,728 3,824 3,199 Provision for income taxes 924 669 1,451 1,184 Net income $ 1,510 $ 1,059 $ 2,373 $2,015 Earnings per common share: Basic $ 0.14 $ 0.10 $ 0.22 $ 0.19 Diluted $ 0.14 $ 0.10 $ 0.22 $ 0.18 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 1999 1998 NET CASH PROVIDED BY OPERATING ACTIVITIES $ 897 $3,942 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment (2,426) (1,164) Payment for acquired businesses (20,745) (1,150) Net cash used in investing activities (23,171) (2,314) CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings (repayment) of short-term debt 1,495 (40) Borrowings of long-term debt 20,550 - Repayment of long-term debt (428) (270) Net proceeds from issuance of common stock 20 384 Net cash provided by financing activities 21,637 74 Effect Of Exchange Rate Changes On Cash (29) 29 Net Increase (Decrease)In Cash And Cash Equivalents (666) 1,731 Cash And Cash Equivalents, Beginning Of Period 739 196 Cash And Cash Equivalents, End Of Period $ 73 $1,927 Cash Paid During The Period For: Interest $ 359 $ 126 Income taxes 1,271 715 The accompanying notes are an integral part of the financial statements.
SPECTRUM CONTROL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS May 31, 1999 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, 1998 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, 1998. 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 - Acquisition 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 electromagnetic interference ("EMI") filters, filtered arrays, filtered connectors, and related products. The aggregate cash purchase price of the acquired assets, including related acquisition costs, was approximately $20.7 million. To finance the acquisition, the Company secured a $20.0 million term loan from its principal lending institution. 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. The aggregate purchase price of the acquisition has been allocated to the acquired assets based upon their respective fair market values. The excess of the aggregate purchase price over the fair value of the net assets acquired (goodwill) amounted to approximately $12.0 million and is being amortized ratably over a period of 20 years. The acquisition has been accounted for as a purchase and, accordingly, the results of operations of the acquired business have been included in the accompanying financial statements since the date of acquisition. The following unaudited pro forma consolidated results of operations have been prepared as if the acquisition had occurred as of the beginning of fiscal 1999 and 1998, respectively (in thousands, except per share data): Six Months Ended May 31 1999 1998 Net sales $ 44,934 $ 41,626 Net income 2,138 1,727 Earnings per common share: Basic 0.20 0.16 Diluted 0.19 0.16 The above amounts are based upon certain assumptions and estimates, and do not reflect any benefits from economies which might be achieved from combined operations. The pro forma results do not necessarily represent results which would have occurred if the acquisition had taken place on the basis assumed above, nor are they necessarily indicative of the results of future combined operations. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 5 - 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 1999 1998 1999 1998 Numerator for basic and diluted earnings per common share: Net income $ 1,510,000 $ 1,059,000 $ 2,373,000 $ 2,015,000 Denominator for basic earnings per common share: Weighted average shares outstanding 10,890,000 10,908,000 10,888,000 10,877,000 Denominator for diluted earnings per common share: Weighted average shares outstanding 10,890,000 10,908,000 10,888,000 10,877,000 Effect of dilutive stock options 105,000 153,000 87,000 147,000 10,995,000 11,061,000 10,975,000 11,024,000 Earnings per common share: Basic $ 0.14 $ 0.10 $ 0.22 $ 0.19 Diluted $ 0.14 $ 0.10 $ 0.22 $ 0.18
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 6- 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 1999 1998 1999 1998 Net income $ 1,510 $ 1,059 $ 2,373 $ 2,015 Foreign currency translation adjustment 51 82 (54) (94) Comprehensive income $ 1,561 $ 1,141 $ 2,319 $ 1,921 Note 7- Operating Segments The following table sets forth reportable segment information for the periods indicated (in thousands): Three Months Ended May 31: Interconnect Control Products Products Total 1999 Revenue from unaffiliated customers $16,150 $ 8,033 $ 24,183 Segment income 5,603 1,827 7,430 1998 Revenue from unaffiliated customers 11,008 3,828 14,836 Segment income 4,385 870 5,255 Six Months Ended May 31: 1999 Revenue from unaffiliated customers 25,810 13,232 39,042 Segment income 9,381 2,848 12,229 1998 Revenue from unaffiliated customers 22,383 6,896 29,279 Segment income 8,883 1,281 10,164 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table sets forth the reconciliation of total reportable segment income to consolidated income before provision for income taxes for the periods indicated (in thousands):
Three Months Ended Six Months Ended May 31 May 31 1999 1998 1999 1998 Total income for reportable segments $ 7,430 $ 5,255 $ 12,229 $ 10,164 Unallocated amounts: Manufacturing expense related to the Company's ceramic capacitor operations (1,108) (901) (1,961) (1,766) Selling, general and administrative expense (3,577) (2,592) (6,091) (5,122) Interest expense (335) (58) (388) (111) Other income 24 24 35 34 Consolidated income before provision for income taxes $ 2,434 $ 1,728 $ 3,824 $ 3,199 For the periods indicated above, there were no material changes to the accounting policies and procedures used to determine segment income. Substantially all of the tangible assets and related operations of the Signal Conditioning Products Division of AMP Incorporated, acquired by the Company on March 26,1999, have been included above in the Interconnect Products business segment.
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, 1998. General Spectrum Control, Inc. and its Subsidiaries (the "Company") design, manufacture and market a broad line of control products and systems. The Company was founded as a solutions-oriented company, designing and manufacturing products to suppress or eliminate electromagnetic interference ("EMI"). The Company has expanded its core EMI filter technology into a complete line of interconnect filter products (discrete filters, filtered arrays, and filtered connectors). In recent years, the Company broadened its focus by developing new lines of power products (commercial custom assemblies, military/aerospace multisection assemblies, power entry modules, power distribution units, and power line filters), microwave products (coaxial ceramic bandpass filters, duplexers, and dielectric resonators), and specialty ceramic capacitors (single layer, temperature compensating, high voltage, and switch mode). The Company's products are used in virtually all industries worldwide, including telecommunications, aerospace, military, medical, computer, and industrial controls. 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 interconnect 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 and six months ended May 31, 1999 and 1998:
Three Months Ended Six Months Ended May 31 May 31 1999 1998 1999 1998 Net sales 100.0% 100.0% 100.0% 100.0% Cost of product sold 71.4 68.8 71.3 69.3 Gross margin 28.6 31.2 28.7 30.7 Selling, general and administrative expense 17.4 19.6 18.2 19.7 Income from operations 11.2 11.6 10.5 11.0 Other income (expense) Interest expense (1.4) (0.4) (1.0) (0.4) Other income and expense, net 0.1 0.2 0.1 0.1 Income before provision for income taxes 9.9 11.4 9.6 10.7 Provision for income taxes 3.7 4.4 3.6 4.0 Net income 6.2% 7.0% 6.0% 6.7%
Second Quarter 1999 Versus Second Quarter 1998 Net Sales Net sales increased $9.3 million or 61.6% during the period, with consolidated net sales of $24.5 million in the second quarter of 1999 and $15.2 million in the comparable quarter of 1998. Of this increase, $5.4 million was generated from the sale of SCPD products, with the remaining $3.9 million primarily generated from the sale of power products. These power products are principally used in communications equipment, including telecommunication racks and power supplies. Overall demand for the Company's products was very strong during the period with total customer orders of $30.7 million received in the second quarter of 1999, a $14.6 million or 90.7% increase from the second quarter of last year. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Gross Margin Gross margin was $7.0 million or 28.6% of sales in the second quarter of 1999, compared to $4.7 million or 31.2% of sales in the second quarter of 1998. During the second quarter of 1999, the Company commenced the integration of SCPD into its Interconnect Products Division. As a result of this integration, the Company incurred certain production inefficiencies and yield losses which negatively impacted gross margin as a percentage of sales. The integration of SCPD is expected to continue throughout most of fiscal 1999. Accordingly, management anticipates gross margin percentages for the remainder of 1999 to approximate 29.0% to 30.0% of sales. Selling, General and Administrative Expense As a result of greater sales volume, selling expense increased during the period. In the second quarter of 1999, selling expense amounted to $2.4 million or 9.8% of sales, compared to $1.7 million or 11.1% of sales in the same quarter of 1998. 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 $1.9 million in the second quarter of 1999, compared to $1.3 million in the comparable quarter of 1998. Of this $600,000 increase, approximately $200,000 arises from the amortization of goodwill recognized in connection with the Company's acquisition of SCPD in March 1999 and Potter Production Corporation in September 1998. 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 To finance the acquisition of SCPD, the Company secured a $20.0 million term loan from its principal lending institution. The six year term loan bears interest at variable rates at or below the prevailing prime rate. As a result of this indebtedness, interest expense increased $277,000 during the period, from $58,000 in 1998 to $335,000 in 1999. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Six Months 1999 Versus Six Months 1998 Net Sales For the first half of 1999 net sales increased $10.0 million or 33.6%, with net sales of $39.8 million in 1999 and $29.8 million in 1998. Of this increase, $5.4 million was generated from the sale of SCPD products, with the remaining $4.6 million associated with the Company's power product offerings (power distribution units, intelligent power management and conditioning products, commercial custom assemblies, and other value-added assemblies). These power products are primary sold to original equipment manufacturers of telecommunications equipment. In 1999, customer order rates increased for virtually all of the Company's major product lines. For the first six months of fiscal 1999, the Company received customer orders of $53.8 million, an increase of $23.0 million or 75.0% from the comparable period of 1998. Of this increase, approximately $10.8 million was generated by the Company's interconnect filter products and the remaining $12.2 million from the Company's power and microwave product offerings. In addition, during the first half of 1999, the Company assumed approximately $5.2 million of customer order backlog in connection with the acquisition of SCPD. Gross Margin For the first six months of 1999, gross margin was $11.4 million or 28.7% of sales, compared to $9.2 million or 30.7% for the first half of 1998. The decrease in gross margin percentage reflects several factors, of relative equal significance, including: additional production costs incurred during the integration of SCPD into the Company's Interconnect Products Division; changes in sales mix from the Company's interconnect filter products to its power product offerings; and yield losses and resultant higher labor costs incurred at the Company's Ceramic Components Division in New Orleans, Louisiana. Selling, General and Administrative Expense With additional sales volume, selling expense increased during the period. During the first half of 1999, selling expense amounted to $4.1 million or 10.4% of sales, compared to $3.3 million or 11.0% of sales for the same period last year. General and administrative expense amounted to $3.1 million in the first six months of fiscal 1999, compared to $2.6 million in the comparable period of 1998. Of this $500,000 increase, approximately $200,000 arises from the amortization of goodwill in connection with the Company's recent acquisitions. The remaining increase in general and administrative expense primarily reflects professional fees and other operating expenses associated with the Company's increased business activity. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Other Income and Expense As previously indicated, the Company secured a $20.0 million term loan to substantially finance the acquisition of SCPD. As a result of incurring this debt, interest expense increased $277,000 during the period, from $111,000 in 1998 to $388,000 in 1999. Average short-term borrowings and interest rates remained relatively stable throughout the period. Income Taxes The Company's effective income tax rate was 37.9% in 1999 and 37.0% in 1998, compared to an applicable statutory income tax rate of approximately 40.0%. Differences in the effective tax rates 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 1999, management expects approximately 60.0% of the Company's sales will be to customers in the telecommunication industry. Accordingly, any significant change in the telecommunication industry's activity level would have a direct impact on the Company's performance. Liquidity, Capital Resources and Financial Condition The Company has a $6.0 million line of credit with PNC Bank N.A. of Erie, Pennsylvania (the "Bank"). The revolving credit line is collateralized by substantially all of the Company's tangible and intangible property, with interest rates on borrowings at or below the Bank's prevailing prime rate. At May 31, 1999, the Company had borrowed $1.9 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 $1.6 million (3.0 million DM). At May 31, 1999, there were no outstanding borrowings under these lines of credit. Future borrowings, if any, under the lines of credit will bear interest at rates below the prevailing prime rate and will be payable upon demand. The Company's working capital continued to increase during the period. At May 31, 1999, the Company had net working capital of $22.9 million, compared to $18.6 million at November 30, 1998. The Company's current ratio remained strong during the first six months of fiscal 1999, with current assets at 2.43 times current liabilities at May 31, 1999, compared to 4.23 at November 30, 1998. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) As a result of increased working capital requirements, the Company's operating cash flow decreased during the period. During the first half of 1999, net cash generated from operations amounted to $897,000 compared to $3.9 million for the comparable period of 1998. During the first six months of 1999, inventories increased by approximately $3.2 million from operations. The increase in inventories primarily reflects additional customer consigned inventory requirements, as well as additional raw material and finished goods inventories to support anticipated future shipment requirements. During the first six months of fiscal 1999, the Company's cash expenditures for property, plant and equipment amounted to $2.4 million. These capital expenditures primarily related to metal fabrication machinery and other manufacturing equipment for capacity expansion at the Company's Control Products Division, as well as construction of the Company's new corporate headquarters facility in Fairview, Pennsylvania. 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 a $20.0 million term loan from its principal lending institution (PNC Bank N.A. of Erie, Pennsylvania), of which $10.0 million was later syndicated to M&T Bank of Buffalo, New York. 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 PNC Bank, N.A. covering the $20.0 million term loan and the Company's $6.0 million 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, 1999, the Company was in compliance with all covenants contained in the Agreement. 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 1999, 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) Quantitative and Qualitative Disclosures About Market Risk The Company's major market risk exposure is primarily due 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 May 31, 1999:
Year of Maturity Description 2000 2001 2002 2003 Thereafter Revolving credit facility: Principal amount $1,900,000 Actual floating rate Euro-rate portion 4.93% Term loan: Principal amount $3,636,000 $3,636,000 $3,636,000 $3,636,000 $5,456,000 Actual floating rate Euro-rate portion 4.93% 4.93% 4.93% 4.93% 4.93% Interest rate swap agreement: PNC Bank, N.A. Notional amount $3,636,000 $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) Impact of Year 2000 Issue The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. As a result, any of the Company's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including among other things, a temporary inability to process transactions, prepare invoices, or engage in similar normal business activities. The Company has completed an assessment and determined that it will have to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The Company presently believes that with modifications and replacement of existing software, the Year 2000 Issue can be mitigated. However, if such modifications and replacements are not made, or are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Company. The Company's plan to resolve the Year 2000 Issue involves four phases: assessment, remediation, testing, and implementation. To date, the Company has fully completed its assessment of all material systems that could be affected by the Year 2000 Issue. The completed assessment indicated that most of the Company's significant information technology systems could be affected. The assessment also indicated that software used in certain manufacturing equipment (hereafter also referred to as operating equipment) is also at risk. If not resolved on a timely basis, these systems could hamper the Company's ability to manufacture and ship product from which the Company derives a significant portion of its revenues. For its information technology exposures, the Company has completed the remediation phase for all material systems including required software reprogramming and replacement. After completing the reprogramming and replacement of software, the Company commenced the testing and implementation of its information technology systems. To date, the Company has completed 90% of its testing and has implemented 90% of its remediated systems. Completion of the testing phase is expected by July 31, 1999, with all remediated systems fully implemented by August 31, 1999. With respect to operating equipment, the Company has completed the remediation phase of the resolution process. Testing of this equipment is currently 90% complete. Once testing is complete, the operating equipment will be ready for immediate use. Testing and implementation of affected equipment is expected to be completed by July 31, 1999. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Company has queried its important suppliers and vendors to assess their Year 2000 readiness. To date, the Company is not aware of any problems that would materially impact results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that these suppliers and vendors will be Year 2000 ready. The inability of those parties to complete their Year 2000 resolution process could materially impact the Company. The Company is utilizing both internal and external resources to reprogram, or replace, test, and implement the software and operating equipment for Year 2000 modifications. Management anticipates that its total year 2000 project costs will not be material. The Company's plans to complete Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. Estimates on the status of completion and the expected completion dates are based on hours expended to date compared to total expected hours. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel training in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. Other Matters 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 fiscal years beginning after June 15, 1999, with earlier application permitted. Effective January 1, 1999, the European Monetary Union ("EMU") created a single currency (the "Euro") for its member countries and the exchange rates of the participating currencies have been fixed against the Euro. The EMU has established a three year transition period from January 1, 1999 to December 31, 2001, for the introduction of the Euro. The Company does not expect the adoption of SFAS No. 133 or the introduction of the Euro 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 5, 1999, 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 3, 1999, were approved. Below are details of the matters voted upon at the meeting: Proposal 1 - Election of Directors Elections were held for two (2) directors to serve until the 2002 Annual Meeting of Shareholders. The results of the votes are as follows: Votes Votes Broker Name For Against Abstentions Non-Votes Edwin R. Bindseil 9,192,414 251,098 - - John P. Freeman 9,192,414 251,098 - - The terms of the following directors extend beyond the Annual Meeting date: Melvin Kutchin, John M. Petersen, Gerald A. Ryan, 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, 1999, subject only to ratification by the shareholders. The results of the votes are as follows: Votes Votes Broker For Against Abstentions Non-Votes 9,228,695 46,599 168,218 - 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 On April 12, 1999, the Company filed a Current Report on Form 8-K dated March 26, 1999, reporting the Company's acquisition of substantially all of the assets of the Signal Conditioning Products Division of AMP Incorporated. The Current Report did not include any financial statements. Financial statements of the business acquired and unaudited pro forma financial information were filed by subsequent amendment on June 9, 1999, pursuant to Form 8-K/A. 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: July 14, 1999 By: /s/ John P. Freeman John P. Freeman, Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SPECTRUM CONTROL, INC. CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) AT MAY 31, 1999 AND CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) FOR THE SIX MONTHS ENDED MAY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO ITS FORM 10-Q FOR THE PERIOD ENDED MAY 31, 1999 0000092769 SPECTRUM CONTROL, INC. 1000 6-MOS NOV-30-1999 MAY-31-1999 73 0 17068 465 21464 39016 39333 18473 75316 16078 20822 0 0 14490 21623 75316 39867 39867 28444 28444 0 0 388 3824 1451 2373 0 0 0 2373 .22 .22
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