<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, 2000 Commission File Number 0-8796
Spectrum Control, Inc.
Exact name of registrant as specified in its charter
Pennsylvania 25-1196447
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8031 Avonia Road; Fairview, Pennsylvania 16415
(Address) (Zip Code)
Registrant's telephone number, including area code: (814) 835-1650
Former name, former address and former fiscal year, if changed since
last report
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to the filing requirements for at least the past 90 days.
Yes X No __
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Number of Shares Outstanding
Class as of June 15, 2000
Common, no par value 11,012,468
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets --
May 31, 2000 and November 30, 1999
Condensed Consolidated Statements of Income --
Three Months Ended and Six Months Ended
May 31, 2000 and 1999
Condensed Consolidated Statements of Cash Flows --
Three Months Ended and Six Months Ended
May 31, 2000 and 1999
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signature
<PAGE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DOLLAR AMOUNTS IN THOUSANDS
(UNAUDITED)
<CAPTION>
May 31, 2000 Nov. 30, 1999
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 641 $ 538
Accounts receivable, net of
allowances 21,473 19,330
Inventories
Finished goods 4,911 4,132
Work-in-process 10,693 9,626
Raw materials 11,555 10,859
Total inventories 27,159 24,617
Prepaid expenses and other
current assets 1,044 1,278
Total current assets 50,317 45,763
PROPERTY, PLANT AND EQUIPMENT,
at cost less accumulated
depreciation of $20,136
in 2000 and $17,836 in 1999 21,536 21,366
OTHER ASSETS
Goodwill 14,785 14,225
Patents and patent rights 301 321
Debt issuance costs 356 394
Deferred income taxes 108 108
Deferred charges 355 377
Total other assets 15,905 15,425
TOTAL ASSETS $87,758 $82,554
<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, 2000 Nov.30, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Short-term debt $ 7,132 $ 5,089
Accounts payable 10,694 8,801
Accrued salaries and wages 1,995 2,553
Accrued interest 118 103
Accrued other expenses 1,323 952
Current portion of long-term debt 4,276 4,276
Total current liabilities 25,538 21,774
LONG-TERM DEBT 16,973 19,011
DEFERRED INCOME TAXES 2,993 2,634
STOCKHOLDERS' EQUITY
Common stock, no par value,
authorized 25,000,000 shares,
issued 11,081,801 shares in 2000
and 11,018,703 shares in 1999 14,810 14,633
Retained earnings 28,453 25,268
Treasury stock, 70,000 shares in
2000 and 1999, at cost (294) (294)
42,969 39,607
Accumulated other comprehensive income
Foreign currency translation
adjustment (715) (472)
Total stockholders' equity 42,254 39,135
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $87,758 $82,554
<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
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net sales $32,087 $24,542 $60,611 $39,867
Cost of products sold 22,970 17,531 44,988 28,444
Gross margin 9,117 7,011 15,623 11,423
Selling, general and
administrative expense 5,129 4,266 9,742 7,246
Income from operations 3,988 2,745 5,881 4,177
Other income (expense)
Interest expense (586) (335) (1,179) (388)
Other income and expense,
net 28 24 435 35
(558) (311) (744) (353)
Income before provision
for income taxes 3,430 2,434 5,137 3,824
Provision for
income taxes 1,304 924 1,952 1,451
Net income $ 2,126 $ 1,510 $ 3,185 $2,373
Earnings per common share:
Basic $ 0.19 $ 0.14 $ 0.29 $ 0.22
Diluted $ 0.19 $ 0.14 $ 0.28 $ 0.22
Dividends declared per
common share $ - $ - $ - $ -
<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
2000 1999
<S> <C> <C>
NET CASH PROVIDED BY
OPERATING ACTIVITIES $3,274 $ 897
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of property, plant and
equipment (2,523) (2,426)
Payment for acquired businesses (935) (20,745)
Net cash used in investing
activities (3,458) (23,171)
CASH FLOWS FROM FINANCING
ACTIVITIES
Net borrowings of short-term debt 2,152 1,495
Borrowings of long-term debt - 20,550
Repayment of long-term debt (2,038) (428)
Net proceeds from issuance
of common stock 177 20
Net cash provided by
financing activities 291 21,637
Effect Of Exchange Rate
Changes On Cash (4) (29)
Net Increase (Decrease)In Cash
And Cash Equivalents 103 (666)
Cash And Cash Equivalents,
Beginning Of Period 538 739
Cash And Cash Equivalents,
End Of Period $ 641 $ 73
Cash Paid During The Period For:
Interest $1,164 $ 359
Income taxes 993 1,271
<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, 2000
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and notes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, the accompanying financial statements include all
adjustments which are normal, recurring and necessary to present fairly
the results for the interim periods. Operating results for interim
periods are not necessarily indicative of the results that may be
expected for the year.
The balance sheet at November 30, 1999 has been derived from the audited
financial statements at that date but does not include all of the
information and notes required by generally accepted accounting
principles for complete financial statements.
For further information, refer to the consolidated financial statements
and notes thereto included in the Spectrum Control, Inc. and Subsidiaries
annual report on Form 10-K for the fiscal year ended November 30, 1999.
Note 2 - Principles of Consolidation
The condensed consolidated financial statements include the accounts of
Spectrum Control, Inc. and its Subsidiaries (the Company). To facilitate
timely reporting, the fiscal quarters of a foreign subsidiary are based
upon a fiscal year which ends October 31. All significant intercompany
accounts are eliminated upon consolidation.
Note 3 - Foreign Currency Translation
The assets and liabilities of the Company's foreign operations are
translated into U.S. dollars at current exchange rates. Revenue and
expense accounts of these operations are translated at average exchange
rates prevailing during the period. These translation adjustments are
accumulated in a separate component of stockholders' equity. Foreign
currency transaction gains and losses are included in determining net
income for the period in which the exchange rate changes.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 4 - 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
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Numerator for basic and
diluted earnings per
common share
(in thousands):
Net income $ 2,126 $ 1,510 $ 3,185 $ 2,373
Denominator for basic
earnings per common
share (in thousands):
Weighted average
shares outstanding 11,011 10,890 10,992 10,888
Denominator for diluted
earnings per common
share (in thousands):
Weighted average
shares outstanding 11,011 10,890 10,992 10,888
Effect of dilutive
securities:
Stock options 200 105 230 87
Stock warrants 40 - 46 -
11,251 10,995 11,268 10,975
Earnings per common share:
Basic $ 0.19 $ 0.14 $ 0 .29 $ 0 .22
$ 0.19 $ 0.14 $ 0 .28 $ 0 .22
Diluted
</TABLE>
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 5- Comprehensive Income
The following table sets forth the computation of comprehensive income
for the periods indicated (in thousands):
Three Months Ended Six Months Ended
May 31 May 31
2000 1999 2000 1999
Net income $ 2,126 $ 1,510 $ 3,185 $ 2,373
Foreign currency
translation adjustment 77 51 (243) (54)
Comprehensive income $ 2,203 $ 1,561 $ 2,942 $ 2,319
Note 6- Operating Segments
The Company was founded as a solutions - oriented company, designing and
manufacturing products to suppress or eliminate electromagnetic
interference. In recent years, the Company has broadened its focus and
product lines to become a control products and systems company, providing
a wide range of components and systems used to condition, regulate,
transmit, receive, or govern electronic performance. Effective February
1, 2000, the Company realigned its business segments to better reflect
its current strategic focus.
The Company's operating results are now reported in two segments: signal
products and power products. The Company's Signal Products Group
manufactures a broad range of low pass filters, filtered arrays, filtered
connectors, wireless products (coaxial ceramic resonators, bandpass
filters and duplexers), and specialty ceramic capacitors. The Power
Products Group manufactures various power management and conditioning
products including power distribution systems, power line filters, and
power entry modules. The reportable segments are each managed separately
because they manufacture and sell distinct products with different
production processes.
The Company evaluates performance and allocates resources to its
operating segments based upon numerous factors, including segment income
or loss before income taxes. The accounting policies of the reportable
segments are the same as those utilized in the preparation of the Company's
consolidated financial statements. However, substantially all of the
Company's selling expenses, general and administrative expenses, and
non-operating expenses are not allocated to the Company's reportable
operating segments and, accordingly, these expenses are not deducted in
arriving at segment income or loss. In addition, reportable assets are
comprised solely of property, plant, equipment, and inventories.
<PAGE>
<TABLE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Prior period amounts in the following tables have been restated to
correspond with the new business segment presentation. For each period
presented, the accounting policies and procedures used to determine
segment income have been consistently applied.
Reportable segment information for the periods ended May 31, 2000 and
1999 is as follows (in thousands):
<CAPTION>
Three Months Ended May 31: Signal Power
Products Products Total
<S> <C> <C> <C>
2000
Revenue from unaffiliated
customers $23,646 $ 8,441 $ 32,087
Segment income 6,667 2,125 8,792
Segment assets 38,463 8,466 46,929
1999
Revenue from unaffiliated
customers 16,865 7,677 24,542
Segment income 4,423 1,898 6,321
Segment assets 33,497 7,229 40,726
Six Months Ended May 31:
2000
Revenue from unaffiliated
customers 43,498 17,113 60,611
Segment income 10,271 4,337 14,608
Segment assets 38,463 8,466 46,929
1999
Revenue from unaffiliated
customers 27,113 12,754 39,867
Segment income 7,082 3,134 10,216
Segment assets 33,497 7,229 40,726
</TABLE>
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
<TABLE>
A reconciliation of total reportable segment income to consolidated
income before provision for income taxes for the periods ended May 31,
2000 and 1999 is as follows (in thousands):
<CAPTION>
Three Months Ended Six Months Ended
May 31 May 31
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Total income for
reportable segments $ 8,792 $ 6,321 $ 14,608 $ 10,216
Unallocated amounts:
Selling, general and
administrative expense (4,804) (3,576) (8,727) (6,039)
Interest expense (586) (335) (1,179) (388)
Other income 28 24 435 35
Consolidated income
before provision
for income taxes $ 3,430 $ 2,434 $ 5,137 $ 3,824
</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 (the
"Company") annual report on Form 10-K for the fiscal year ended
November 30, 1999.
General
Spectrum Control, Inc. was founded as a solutions - oriented company,
designing and manufacturing products to suppress or eliminate
electromagnetic interference ("EMI"). In recent years, the Company has
broadened its focus and product lines to become a control products and
systems company, providing a wide range of components and systems used to
condition, regulate, transmit, receive, or govern electronic performance.
The Company's operations are primarily conducted in two business segments:
signal products and power products. The Company's Signal Products Group
manufactures a broad line of discrete EMI filters, filtered arrays,
filtered connectors, wireless products (coaxial ceramic resonators,
bandpass filters, and duplexers), and specialty ceramic capacitors
(single layer, temperature compensating, high voltage, and switch mode).
The Power Products Group manufactures various power management and
conditioning products including power distribution systems, power line
filters, and power entry modules. Although these signal and power
products are used in virtually all industries worldwide, the Company's
largest market segment is telecommunications equipment. Approximately
60% of the Company's sales are to customers in the telecommunication
industry.
On March 26, 1999, the Company acquired substantially all of the assets
of the Signal Conditioning Products Division ("SCPD") of AMP
Incorporated ("AMP"). AMP is a world leader in the manufacture of
electrical, electronic, fiber-optic and wireless interconnection devices
and systems. Through SCPD, AMP manufactured and sold a broad line of EMI
filter products. The acquisition was accounted for as a purchase and,
accordingly, the results of operations of the acquired business have been
included in the Company's financial statements since the date of
acquisition.
Forward-Looking Information
Management's Discussion and Analysis of Financial Condition and Results
of Operations includes certain forward-looking statements which reflect
management's current views with respect to future operating performance,
ongoing cash requirements, and production capacity expansion. The words
"believe", "expect", "anticipate" and similar expressions identify
forward-looking statements. These forward-looking statements are subject
to certain risks and uncertainties which could cause actual results to
differ materially from historical results or those anticipated. Factors
that could cause or contribute to such differences include those
discussed in "Risk Factors That May Affect Future Results", as well as
those discussed elsewhere herein. Readers are cautioned not to place
undue reliance on these forward-looking statements.
<PAGE>
<TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations
The following table sets forth certain financial data, as a percentage of
net sales, for the three months and six months ended May 31, 2000 and
1999:
<CAPTION>
Three Months Ended Six Months Ended
May 31 May 31
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of product sold 71.6 71.4 74.2 71.3
Gross margin 28.4 28.6 25.8 28.7
Selling, general and
administrative expense 16.0 17.4 16.1 18.2
Income from operations 12.4 11.2 9.7 10.5
Other income (expense)
Interest expense (1.8) (1.4) (1.9) (1.0)
Other income and
expense, net 0.1 0.1 0.7 0.1
Income before provision
for income taxes 10.7 9.9 8.5 9.6
Provision for income taxes 4.1 3.7 3.2 3.6
Net income 6.6% 6.2% 5.3% 6.0%
</TABLE>
Second Quarter 2000 Versus Second Quarter 1999
Net Sales
Net sales increased $7.6 million or 30.7% during the period, with
consolidated net sales of $32.1 million in the second quarter of fiscal
2000 and $24.5 million in the comparable quarter of 1999. Of this
increase, $6.8 million was generated from the sale of signal products,
with sales of discrete EMI low pass filters increasing $2.2 million,
filtered arrays and connectors increasing $4.4 million, and microwave/
wireless products increasing approximately $200,000. The increase in
signal product sales primarily reflects additional shipment volume of
components used in various telecommunication equipment including cellular
base stations, power amplifiers and transceivers. Overall demand for
the Company's products was strong during the period with total customer
orders of $38.3 million received in the second quarter of fiscal 2000, an
increase of $7.6 million or 24.8% from the second quarter of last year.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Gross Margin
With additional sales generated, gross margin increased to $9.1 million
in the second quarter of fiscal 2000, compared to $7.0 million in the
comparable quarter of 1999. As a percentage of sales, gross margin was
relatively stable throughout the period, amounting to 28.4% in 2000 and
28.6% in 1999. Economies of scale realized with additional shipment
volume were substantially offset by changes in sales mix within the
Company's signal and power product offerings.
Selling, General and Administrative Expense
Selling expense increased during the period as a result of greater sales
volume,. In the second quarter of fiscal 2000, selling expense amounted
to $3.0 million or 9.3% of sales, compared to $2.4 million or 9.8% of
sales in the same quarter of 1999. General and administrative expense
was approximately $2.1 million in the second quarter of 2000, compared to
$1.9 million in the comparable quarter of 1999. The increase in general
and administrative expense reflects additional personnel costs and
operating expenses associated with the Company's increased business
activity.
Other Income and Expense
Interest expense increased by $251,000 during the period, with interest
expense amounting to $586,000 in the second quarter of fiscal 2000 and
$335,000 in the comparable quarter of 1999. To finance the acquisition
of SCPD, the Company secured an aggregate $20.0 million term loan from
its principal lending institutions. The six year term loan bears
interest at variable rates at or below the prevailing prime rate. The
increase in interest expense primarily reflects this term loan and
additional short-term bank borrowings used to finance growing working
capital requirements.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Six Months 2000 Versus Six Months 1999
Net Sales
For the first half of fiscal 2000, net sales increased $20.7 million or
52.0%, with consolidated sales of $60.6 million in 2000 and $39.9 million
in 1999. Sales of the Company's signal products amounted to $43.4 million
during the first six months of fiscal 2000, an increase of $16.4 million
from same period of 1999. Of this increase, approximately $9.0 million was
generated from the sale of SCPD products. The remaining $7.4 million
increase in signal product sales principally reflects higher shipment levels
to original equipment manufacturers of telecommunication equipment. Sales
of the Company's power product offerings increased $4.3 million during the
first half of fiscal 2000, primarily reflecting additional shipments of
power distribution systems and single line filters. These power products
are principally used in communications equipment including high-end internet
servers and networks. Selling prices declined slightly during the first half
of fiscal 2000 as a result of competitive pressures. Overall demand for the
Company's products was strong throughout the period with total customer
orders of $76.1 million received in the first six months of fiscal 2000, an
increase of $22.3 million or 41.3% from the same period last year.
Gross Margin
For the first six months of fiscal 2000, gross margin was $15.6 million
or 25.8% of sales, compared to $11.4 million or 28.7% of sales for the
first half of 1999. The decrease in gross margin percentage primarily
reflects manufacturing yield losses and higher labor costs incurred during
the first three months of fiscal 2000 related to the integration of SCPD
into the Company's Signal Products Group. This integration, which included
the redesign of certain SCPD products and production processes, was completed
during the second quarter of fiscal 2000. To increase manufacturing
capacity, the Company is expanding its production and assembly operations.
In June 2000, the Company established manufacturing operations in a new
46,000 square foot facility in Juarez, Mexico. Production in this leased
facility is expected to be phased-in throughout fiscal 2000. Later this
year, the Company anticipates constructing a 26,000 square foot addition to
its Wesson, Mississippi facility. Management believes that these capacity
expansions will improve operating efficiencies and lower production costs.
Accordingly, management believes gross margin percentages will improve
during the second half of fiscal 2000 and approximate 29.0% to 30.0% of sales.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Selling, General and Administrative Expense
With additional sales volume, selling expense increased during the
period. During the first half of fiscal 2000, selling expense amounted
to $5.8 million or 9.6% of sales, compared to $4.1 million or 10.4% of
sales for the same period last year. The decrease in selling expense, as
a percentage of sales, principally reflects economies of scale realized
with additional sales volume. General and administrative expense
amounted to $3.9 million in the first six months of 2000, compared to
$3.1 million in the comparable period of 1999. Of this $800,000 increase,
approximately $200,000 consisted of the amortization of goodwill recognized
in connection with the Company's acquisition of SCPD in March 1999. The
remaining increase in general and administrative expense reflects
additional personnel costs, professional fees and other operating expenses
associated with the Company's increased business activity.
Other Income and Expense
The Company secured a $20.0 million term loan to substantially finance the
acquisition of SCPD. Principally as a result of incurring this debt,
interest expense increased $791,000 during the period, from $388,000 in
1999 to $1.2 million in fiscal 2000. In addition, weighted average
short-term bank borrowings and interest rates increased during the period.
The Company holds numerous United States and foreign patents relating to
polymer multilayer ("PML") technology. During the first half of fiscal
2000, the Company realized $375,000 of license fee income upon the
granting of a PML capacitor license. Although the license, as well as
other PML technology licenses previously granted by the Company, requires
certain royalties to be paid to the Company upon the sale of products
utilizing PML technology, it is not known what future commercial value,
if any, these patents and related licenses may have.
Income Taxes
The Company's effective income tax rate was 38.0% in 2000 and 1999,
compared to an applicable statutory income tax rate of approximately
40.0%. Differences in the effective tax rate and statutory income tax
rate principally arise from state tax provisions and foreign income tax
rates.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Risk Factors That May Affect Future Results
The Company's results of operations may be affected in the future by a
variety of factors including: competitive pricing pressures, new product
offerings by the Company and it's competitors, new technologies, product
cost changes, changes in the overall economic climate, availability of raw
materials, and changes in product mix. In fiscal year 2000, management
expects approximately 60.0% of the Company's sales will be to customers in
the telecommunication industry. The Company's largest single customer, an
original equipment manufacturer of telecommunication equipment, is expected
to represent approximately 18.0% of the Company's total consolidated net
sales in 2000. Any significant change in the activity level of this major
customer, or the overall telecommunication industry, would have a direct
impact on the Company's performance.
Liquidity, Capital Resources and Financial Condition
The Company maintains a line of credit with its principal lending
institutions (PNC Bank of Erie, Pennsylvania and M & T Bank of Buffalo,
New York). Effective March 21, 2000, the aggregate line of credit was
increased from $6.0 million to $10.0 million. This revolving credit line
is collateralized by substantially all of the Company's tangible and
intangible property, with interest rates on borrowings at or below the
prevailing prime rate. At May 31, 2000, the Company had borrowed $6.4
million under this financing arrangement. The current line of credit
agreement expires March 26, 2002.
The Company's wholly-owned foreign subsidiary maintains unsecured
Deutsche Mark lines of credit with several German financial institutions
aggregating $1.6 million (3.5 million DM). At May 31, 2000, outstanding
borrowings under these lines of credit amounted to $732,000 (1.6 million
DM). Borrowings under the lines of credit bear interest at rates below
the prevailing prime rate and are payable upon demand.
As previously indicated, the Company acquired substantially all of the
assets of the Signal Conditioning Products Division of AMP Incorporated
on March 26, 1999. The aggregate cash purchase price of the acquired
assets was approximately $20.7 million. To finance the acquisition, the
Company secured an aggregate $20.0 million term loan from its principal
lending institutions. The term loan bears interest at variable rates at
or below the prevailing prime rate and requires quarterly principal
payments of $909,000 from December 26, 1999 through March 26, 2005.
On March 26, 1999, the Company entered into a credit agreement with its
principal lending institutions covering the $20.0 million term loan and
the Company's revolving credit facility (the "Agreement"). The
Agreement requires the Company to comply with certain covenants. These
covenants generally restrict the Company from granting additional liens
on its assets, disposing of assets other than in the ordinary course of
business, and incurring additional indebtedness other than purchase money
indebtedness and debt not exceeding $5.0 million in the aggregate. The
Agreement also imposes certain restrictions on future acquisitions by the
Company. In addition, the Agreement requires the Company to meet the
following quarterly financial covenants: maintain a minimum net worth of
$28.0 million plus 50% of the Company's net income for each fiscal year
ending after November 30, 1998; maintain a minimum ratio of EBITDA (earnings
before interest, taxes, depreciation, and amortization) to fixed charges of
1.2 to 1.0; and maintain a maximum ratio of total indebtedness to EBITDA
of 3.5 to 1.0. As of May 31, 2000, the Company was in compliance with all
covenants contained in the Agreement.
The Company's working capital and current ratio were relatively constant
throughout the period. At May 31, 2000, the Company had net working
capital of $24.8 million, compared to $24.0 million at November 30, 1999.
At the end of the first six months of fiscal 2000, current assets were
1.97 times current liabilities, compared to 2.10 at the end of fiscal
1999.
During the first six months of fiscal 2000, the Company's cash
expenditures for property, plant and equipment amounted to $2.5 million.
These capital expenditures primarily related to manufacturing equipment
for capacity expansion within the Company's Signal Products Group. At
May 31, 2000, the Company had not entered into any material commitments
for capital expenditures. However, in order to meet growing customer
demand and production requirements for our power product offerings, the
Company expects to construct a 26,000 square foot addition to its Wesson,
Mississippi facility later this year. The Company is currently
evaluating financing alternatives for this $1.0 million project.
Current financial resources, including working capital and existing lines
of credit, and anticipated funds from operations are expected to be
sufficient to meet operating cash requirements throughout fiscal year
2000, including scheduled long-term debt repayment and planned capital
equipment expenditures. There can be no assurance, however, that
unplanned capital replacement or other future events will not require the
Company to seek additional debt or equity financing and, if so required,
that it will be available on terms acceptable to the Company.
Despite additional inventory requirements, the Company's operating cash
flow increased during the period. During the first six months of fiscal
2000, net cash generated from operations amounted to $3.3 million, an
increase of $2.4 million from the comparable period of 1999. During the
first half of fiscal 2000, inventories grew by $2.7 million. The
increase in inventories primarily reflects additional customer consigned
inventory requirements, as well as additional raw materials and work-in-
process to support future shipment requirements.
At May 31, 2000, goodwill represented 16.8% of total assets and 35.0% of
stockholders' equity. A majority of this goodwill was recognized in 1999
in connection with the Company's acquisition of SCPD. The Company
amortizes goodwill on a straight-line basis over a period of 20 years and
periodically reviews its carrying value for possible impairment. Based
upon a review of expected future operating cash flows derived from the
acquisition of SCPD, management has determined that no impairment losses
need be recognized in the current period.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency
Certain of the Company's European sales and related selling expenses are
denominated in German Deutsche Marks, British Pounds, and other local
currencies. As a result, fluctuations in currency exchange rates may
affect the Company's operating results and cash flow. For each of the
periods presented herein, however, currency exchange rate gains and losses
were not material. In addition, an assumed 10.0% adverse change in all
foreign currencies in which the Company currently transacts business would
not have a material impact on the Company's operating results, financial
position, or cash flows.
Euro
Certain member countries of the European Union have established fixed
conversion rates between their existing currencies and the European
Union's common currency, the Euro. The Company has implemented all the
necessary enhancements to its sales order, banking arrangements and
operational procedures to ensure Euro compliance. The Company is able to
process orders, invoice customers and accept payment in Euros throughout
Europe. The introduction of the Euro has not had any material adverse
impact upon the Company. The Company continues to monitor the risk of
price erosion which could result from increased price transparency among
countries using the Euro.
Interest Rate Exposure
The Company has market risk exposure relating to possible fluctuations in
interest rates. The Company's policy is to mange interest rate risk by
utilizing interest rate swap agreements to convert a portion of the
floating interest rate debt to fixed interest rates. The Company does
not enter into derivative financial instruments for trading or
speculative purposes. The interest rate swap agreements are entered into
with major financial institutions thereby minimizing the risk of credit
loss.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
<TABLE>
The following table presents information about the Company's market
sensitive financial instruments. The table sets forth the principal and
notional amounts, as well as the year of maturity and applicable interest
rates for all significant financial and derivative financial instruments
in effect as of May 31, 2000:
<CAPTION>
Year of Maturity
Description 2000 2001 2002 2003 Thereafter
<S> <C> <C> <C> <C> <C>
Revolving credit
facility:
Principal amount $6,400,000
Actual floating
rate
Euro-rate portion 6.38%
Term loan:
Principal amount $1,818,000 $3,636,000 $3,636,000 $3,636,000 $5,456,000
Actual floating
rate
Euro-rate portion 6.62% 6.62% 6.62% 6.62% 6.62%
Interest rate swap
agreement:
PNC Bank, N.A.
Notional amount $1,818,000 $3,636,000 $2,728,000
Actual fixed
interest pay
rate 5.89% 5.89% 5.89%
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and for Hedging Activities" ("SFAS No. 133").
SFAS No. 133 provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. SFAS
No. 133 is effective for fiscal years beginning after June 15, 2000. In
December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB No. 101"), which clarifies the accounting rules for
revenue recognition in financial statements. The Company expects to adopt
SAB No. 101 in its third quarter of fiscal year 2000. In March
2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation ("Interpretation No. 44"),
which provides guidance on several implementation issues related to the
accounting for employee stock options. Interpretation No. 44 clarifies
the definition of employee and the accounting for stock options that have
been repriced.
The Company does not expect the adoption of SFAS No. 133, SAB No. 101, or
Interpretation No. 44 to have a material impact on the Company's
financial position or results of operations.
<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 3,
2000, at the Bel-Aire Hotel, 2800 West Eighth Street, Erie, Pennsylvania
at 9:00 a.m. All proposals as described in the Company's Proxy Statement
dated March 1, 2000 were approved. Below are details of the matters voted
upon at the meeting:
Proposal 1 - Election of Directors
Elections were held for three (3) directors to serve until the 2003
Annual Meeting of Shareholders. The results of the votes are as follows:
Votes Votes Broker
Name For Against Abstentions Non-Votes
J. Thomas Gruenwald 9,769,746 56,857 - -
Melvin Kutchin 9,651,271 175,332 - -
Gerald A. Ryan 9,786,201 40,402 - -
The terms of the following directors extend beyond the Annual Meeting
date: Edwin R. Bindseil, John P. Freeman, John M. Petersen, Richard A.
Southworth, and James F. Toohey.
Proposal 2 - Appointment of Auditors
Upon recommendation of the Audit Committee, the Board of Directors resolved to
appoint Ernst & Young LLP as the Company's auditors for the fiscal year ending
November 30, 2000, subject only to ratification by the shareholders. The
results of the votes are as follows:
Votes Votes Broker
For Against Abstentions Non-Votes
9,791,258 25,614 9,731 -
<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
No reports on Form 8-K were filed during the quarter for which
this report is filed.
<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: June 30, 2000 By: /s/ John P. Freeman
John P. Freeman, Vice President
and Chief Financial Officer
(Principal Accounting and
Financial Officer)
