-----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, QYw4cHUsr/isP2+b1npRdLqFYYXayBQAGUCb07oe63HqMKBv7jJil5wrycwqbi26 MuNmhyORfa94RoKaDpllAw== 0000092769-99-000017.txt : 19991018 0000092769-99-000017.hdr.sgml : 19991018 ACCESSION NUMBER: 0000092769-99-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990831 FILED AS OF DATE: 19991006 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: 99723731 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 August 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) 835-1650 Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes X No __ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Number of Shares Outstanding Class as of September 15, 1999 Common, no par value 10,916,842 SPECTRUM CONTROL, INC. AND SUBSIDIARIES INDEX PAGE NO. PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets -- August 31, 1999 and November 30, 1998 3-4 Condensed Consolidated Statements of Income -- Three Months Ended and Nine Months Ended 5 August 31, 1999 and 1998 Condensed Consolidated Statements of Cash Flows -- Three Months Ended and Nine Months Ended 6 August 31, 1999 and 1998 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 6. Exhibits and Reports on Form 8-K 21 Signature 22 SPECTRUM CONTROL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS DOLLAR AMOUNTS IN THOUSANDS (UNAUDITED)
August 31 November 30 1999 1998 ASSETS CURRENT ASSETS Cash and cash equivalents $ 82 $ 739 Accounts receivable, net of allowances 18,375 10,162 Inventories Finished goods 4,356 2,581 Work-in-process 7,443 5,070 Raw materials 11,496 5,234 Total inventories 23,295 12,885 Prepaid expenses and other current assets 831 593 Total current assets 42,583 24,379 PROPERTY, PLANT AND EQUIPMENT, at cost less accumulated depreciation of $19,488 in 1999 and $16,631 in 1998 20,994 16,289 OTHER ASSETS Goodwill 13,498 2,547 Patents and patent rights 327 255 Debt issuance costs 415 139 Defered income taxes 383 383 Deferred charges 298 147 Total other assets 14,921 3,471 TOTAL ASSETS $78,498 $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)
August 31 November 30 1999 1998 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Short-term debt $ 2,260 $ 336 Accounts payable 9,559 2,719 Accrued salaries and wages 2,115 1,438 Accrued interest 96 63 Accrued federal and state income taxes 107 93 Accrued other expenses 383 281 Current portion of long-term debt 3,430 830 Total current liabilities 17,950 5,760 LONG-TERM DEBT 20,270 2,500 DEFERRED INCOME TAXES 2,486 2,105 STOCKHOLDERS' EQUITY Common stock, no par value, authorized 25,000,000 shares, issued 10,986,842 shares in 1999 and 10,957,008 in 1998 14,548 14,470 Retained earnings 23,768 19,798 Treasury stock, 70,000 shares in 1999 and 1998, at cost (294) (294) 38,022 33,974 Accumulated other comprehensive income Foreign currency translation adjustment (230) (200) Total stockholders' equity 37,792 33,774 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $78,498 $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 Nine Months Ended August 31 August 31 1999 1998 1999 1998 Net sales $28,891 $14,023 $68,758 $43,854 Cost of products sold 20,817 9,791 49,261 30,462 Gross margin 8,074 4,232 19,497 13,392 Selling, general and administrative expense 5,005 2,731 12,251 8,615 Income from operations 3,069 1,501 7,246 4,777 Other income (expense) Interest expense (512) (54) (900) (165) Other income and expense, net 23 48 58 82 (489) (6) (842) (83) Income before provision for income taxes 2,580 1,495 6,404 4,694 Provision for income taxes 983 580 2,434 1,764 Net income $ 1,597 $ 915 $ 3,970 $2,930 Earnings per common share: Basic $ 0.15 $ 0.08 $ 0.36 $ 0.27 Diluted $ 0.14 $ 0.08 $ 0.36 $ 0.27 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 August 31 1999 1998 NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,827 $ 6,721 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment (3,575) (2,419) Payment for acquired businesses (20,958) (1,159) Net cash used in investing activities (24,533) (3,578) CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings (repayment)of short-term debt 1,613 (40) Borrowings of long-term debt 20,800 - Repayment of long-term debt (430) (306) Net proceeds from issuance of common stock 78 411 Net cash provided by financing activities 22,061 65 Effect of Exchange Rate Changes on Cash (12) 14 Net Increase (Decrease) in Cash and Cash Equivalents (657) 3,222 Cash and Cash Equivalents, Beginning of Period 739 196 Cash and Cash Equivalents, End of Period $ 82 $ 3,418 Cash Paid During the Period For: Interest $ 867 $ 161 Income taxes 2,168 1,101 The accompanying notes are an integral part of the financial statements.
SPECTRUM CONTROL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS August 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): Nine Months Ended August 31 1999 1998 Net sales $ 73,825 $ 61,547 Net income 3,736 2,527 Earnings per common share: Basic 0.34 0.23 Diluted 0.34 0.23 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 Nine Months Ended August 31 August 31 1999 1998 1999 1998 Numerator for basic and diluted earnings per common share (in thousands): Net income $ 1,597 $ 915 $ 3,970 $ 2,930 Denominator for basic earnings per common share (in thousands): Weighted average shares outstanding 10,908 10,951 10,895 10,902 Denominator for diluted earnings per common share (in thousands): Weighted average shares outstanding 10,908 10,951 10,895 10,902 Effect of dilutive stock options 178 88 118 127 11,086 11,039 11,013 11,029 Earnings per common share: Basic $ 0 .15 $ 0 .08 $ 0 .36 $ 0 .27 Diluted $ 0 .14 $ 0 .08 $ 0 .36 $ 0 .27
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 Nine Months Ended August 31 August 31 1999 1998 1999 1998 Net income $ 1,597 $ 915 $ 3,970 $ 2,930 Foreign currency translation adjustment 24 19 (30) (75) Comprehensive income $ 1,621 $ 934 $ 3,940 $ 2,855 Note 7- Operating Segments The following table sets forth reportable segment information for the periods indicated (in thousands): Three Months Ended August 31: Interconnect Control Products Products Total 1999 Revenue from unaffiliated customers $19,560 $ 8,952 $ 28,512 Segment income 5,764 2,259 8,023 1998 Revenue from unaffiliated customers 9,694 3,774 13,468 Segment income 3,851 919 4,770 Nine Months Ended August 31: 1999 Revenue from unaffiliated customers 45,371 22,184 67,555 Segment income 15,145 5,107 20,252 1998 Revenue from unaffiliated customers 32,076 10,670 42,746 Segment income 12,734 2,200 14,934 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 Nine Months Ended August 31 August 31 1999 1998 1999 1998 Total income for reportable segments $ 8,023 $ 4,770 $ 20,252 $ 14,934 Unallocated amounts: Manufacturing expense related to the Company's ceramic capacitor operations (748) (951) (2,709) (2,717) Selling, general and administrative expense (4,206) (2,318) (10,297) (7,440) Interest expense (512) (54) (900) (165) Other income 23 48 58 82 Consolidated income before provision for income taxes $ 2,580 $ 1,495 $ 6,404 $ 4,694 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 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 (power distribution units, power entry modules, power line filters, commercial custom assemblies, and military/aerospace multisection assemblies), 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 nine months ended August 31, 1999 and 1998:
Three Months Ended Nine Months Ended August 31 August 31 1999 1998 1999 1998 Net sales 100.0% 100.0% 100.0% 100.0% Cost of products sold 72.1 69.8 71.7 69.5 Gross margin 27.9 30.2 28.3 30.5 Selling, general and administrative expense 17.3 19.5 17.8 19.6 Income from operations 10.6 10.7 10.5 10.9 Other income (expense) Interest expense (1.8) (0.4) (1.3) (0.4) Other income and expense, net 0.1 0.3 0.1 0.2 Income before provision for income taxes 8.9 10.6 9.3 10.7 Provision for income taxes 3.4 4.1 3.5 4.0 Net income 5.5% 6.5% 5.8% 6.7%
Third Quarter 1999 Versus Third Quarter 1998 Net Sales Net sales increased $14.9 million or 106.0% during the period, with consolidated net sales of $28.9 million in the third quarter of 1999 and $14.0 million in the comparable quarter of 1998. Of this increase, $9.4 million was generated from the sale of SCPD products, with the remaining $5.5 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 $31.6 million received in the third quarter of 1999, an $18.0 million or 131.6% increase from the third quarter of last year. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Gross Margin Gross margin was $8.1 million or 27.9% of sales in the third quarter of 1999, compared to $4.2 million or 30.2% of sales in the comparable quarter of 1998. During the third quarter of 1999, the Company continued the integration of SCPD into its Interconnect Products Division. As a result of this integration, the Company incurred certain changes in sales mix, production inefficiencies, and yield losses which negatively impacted gross margin as a percentage of sales. The integration of SCPD is expected to continue throughout fiscal 1999, with anticipated completion by November 30, 1999. Accordingly, management anticipates gross margin percentages for the remainder of 1999 to approximate 28.0% to 29.0% of sales. Selling, General and Administrative Expense As a result of greater sales volume, selling expense increased during the period. In the third quarter of 1999, selling expense amounted to $2.5 million or 8.5% of sales, compared to $1.6 million or 11.6% 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 $2.5 million in the third quarter of 1999, compared to $1.1 million in the comparable quarter of 1998. Of this 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. Primarily as a result of this indebtedness, interest expense increased $458,000 during the period, from $54,000 in 1998 to $512,000 in 1999. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Nine Months 1999 Versus Nine Months 1998 Net Sales For the first nine months of 1999 net sales increased $24.9 million or 56.8%, with net sales of $68.8 million in 1999 and $43.9 million in 1998. Of this increase, $14.8 million was generated from the sale of SCPD products, with the remaining $10.1 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 primarily 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 thirty-nine weeks of fiscal 1999, the Company received customer orders of $85.4 million, an increase of $41.0 million or 92.0% from the comparable period of 1998. Of this increase, approximately $22.1 million was generated by the Company's interconnect filter products and the remaining $18.9 million from the Company's power and microwave product offerings. In addition, during the first nine months of 1999, the Company assumed approximately $5.1 million of customer order backlog in connection with the acquisition of SCPD. Gross Margin For the first nine months of 1999, gross margin was $19.5 million or 28.3% of sales, compared to $13.4 million or 30.5% for the comparable period of 1998. The decrease in gross margin percentage reflects several factors, of relative equal significance, including: changes in sales mix and 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 nine months of 1999, selling expense amounted to $6.6 million or 9.6% of sales, compared to $4.9 million or 11.2% of sales for the same period last year. General and administrative expense amounted to $5.6 million in the first nine months of fiscal 1999, compared to $3.7 million in the comparable period of 1998. Of this $1.9 million increase, approximately $400,000 arises from the amortization of goodwill in connection with the Company's recent acquisitions. The remaining increase in general and administrative expense primarily reflects additional personnel costs, professional fees and other operating expenses associated with the Company's increased business volume. 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. Principally as a result of incurring this debt, interest expense increased $735,000 during the period, from $165,000 in 1998 to $900,000 in 1999. Average short-term borrowings and interest rates increased slightly throughout the period. Income Taxes The Company's effective income tax rate was 38.0% in 1999 and 37.6% 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 August 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 August 31, 1999, the Company had borrowed $54,000 (98,000 DM) under these lines of credit. Borrowings under the lines of credit bear interest at rates below the prevailing prime rate and are payable upon demand. The Company's working capital continued to increase during the period. At August 31, 1999, the Company had net working capital of $24.6 million, compared to $18.6 million at November 30, 1998. The Company's current ratio remained strong during the first nine months of fiscal 1999, with current assets at 2.37 times current liabilities at August 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 nine months of 1999, net cash generated from operations amounted to $1.8 million compared to $6.7 million for the comparable period of 1998. During the first nine months of 1999, inventories increased by approximately $5.1 million from operations. The increase in inventories primarily reflects additional customer consigned inventory requirements, as well as additional raw material and work-in-process inventories to support anticipated future shipment requirements. During the first nine months of fiscal 1999, the Company's cash expenditures for property, plant and equipment amounted to $3.6 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 August 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 August 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 5.35% 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 5.35% 5.35% 5.35% 5.35% 5.35% 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. As of August 31, 1999, the Company has completed all of its testing and has fully implemented its remediated systems. With respect to operating equipment, the Company has completed the remediation and testing phases of the resolution process. Implementation of affected equipment is expected to be completed by September 30, 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, 2000, 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 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. The financial statements filed consisted of the following: Statement of Assets Purchased and Liabilities Assumed of the Product Lines Acquired from AMP Incorporated as of December 31, 1998; and Statements of Revenue and Direct Costs and Expenses of the Product Lines Acquired from AMP Incorporated for the years ended December 31, 1998 and 1997. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SPECTRUM CONTROL, INC. (Registrant) Date: September 20, 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 August 31, 1999 and Condensed Consolidated Statement of Income (Unaudited) for the nine months ended August 31, 1999 and is qualified in its entirety by reference to its Form 10-Q for the period ended August 31, 1999 0000092769 SPECTRUM CONTROL, INC. 1000 9-MOS NOV-30-1999 AUG-31-1999 82 0 18952 577 23295 42583 40482 19488 78498 17950 20270 0 0 14548 23244 78498 68758 68758 49261 49261 0 0 900 6404 2434 3970 0 0 0 3970 .36 .36
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