<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DOLLAR AMOUNTS IN THOUSANDS
(UNAUDITED)
<CAPTION>
May 31, 1999 Nov. 30, 1998
<S> <C> <C>
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
<FN>
The accompanying notes are an integral part of the financial
statements.
</TABLE>
<PAGE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DOLLAR AMOUNTS IN THOUSANDS
(UNAUDITED)
<CAPTION>
May 31, 1999 Nov. 30, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
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
<FN>
The accompanying notes are an integral part of the financial
statements.
</TABLE>
<PAGE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
(Dollars in Thousands Except Per Share Data)
Three Months Ended Six Months Ended
May 31 May 31
1999 1998 1999 1998
<S> <C> <C> <C> <C>
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 $ - $ - $ - $ -
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
DOLLAR AMOUNTS IN THOUSANDS
(UNAUDITED)
<CAPTION>
Six Months Ended
May 31
1999 1998
<S> <C> <C>
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
<FN>
The accompanying notes are an integral part of the financial
statements.
</TABLE>
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
<PAGE>
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.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 5 - Earnings Per Common Share
<TABLE>
The following table sets forth the computation of basic and diluted
earnings per common share for the periods indicated:
<CAPTION>
Three Months Ended Six Months Ended
May 31 May 31
1999 1998 1999 1998
<S> <C> <C> <C> <C>
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
</TABLE>
<PAGE>
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
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
<TABLE>
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):
<CAPTION>
Three Months Ended Six Months Ended
May 31 May 31
1999 1998 1999 1998
<S> <C> <C> <C> <C>
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
<FN>
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.
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis may be understood more fully by
reference to the consolidated financial statements, notes to the consolidated
financial statements, and management's discussion and analysis contained in
the Spectrum Control, Inc. and Subsidiaries annual report on Form 10-K for the
fiscal year ended November 30, 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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations
<TABLE>
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:
<CAPTION>
Three Months Ended Six Months Ended
May 31 May 31
1999 1998 1999 1998
<S> <C> <C> <C> <C>
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%
</TABLE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Quantitative and Qualitative Disclosures About Market Risk
<TABLE>
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:
<CAPTION>
Year of Maturity
Description 2000 2001 2002 2003 Thereafter
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
<PAGE>
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.
<PAGE>
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.
<PAGE>
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 -
<PAGE>
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.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPECTRUM CONTROL, INC.
(Registrant)
Date: July 14, 1999 By: /s/ John P. Freeman
John P. Freeman, Vice President
and Chief Financial Officer
(Principal Accounting and
Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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
</LEGEND>
<CIK> 0000092769
<NAME> SPECTRUM CONTROL, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-END> MAY-31-1999
<CASH> 73
<SECURITIES> 0
<RECEIVABLES> 17068
<ALLOWANCES> 465
<INVENTORY> 21464
<CURRENT-ASSETS> 39016
<PP&E> 39333
<DEPRECIATION> 18473
<TOTAL-ASSETS> 75316
<CURRENT-LIABILITIES> 16078
<BONDS> 20822
0
0
<COMMON> 14490
<OTHER-SE> 21623
<TOTAL-LIABILITY-AND-EQUITY> 75316
<SALES> 39867
<TOTAL-REVENUES> 39867
<CGS> 28444
<TOTAL-COSTS> 28444
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 388
<INCOME-PRETAX> 3824
<INCOME-TAX> 1451
<INCOME-CONTINUING> 2373
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2373
<EPS-BASIC> .22
<EPS-DILUTED> .22
</TABLE>
