<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 February 29, 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 March 15, 2000
Common, no par value 11,004,371
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets --
February 29, 2000 and November 30, 1999 3-4
Condensed Consolidated Statements of Income --
Three Months Ended February 29, 2000 and 5
February 28, 1999
Condensed Consolidated Statements of Cash Flows --
Three Months Ended February 29, 2000 and 6
February 28, 1999
Notes to Condensed Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-19
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
<PAGE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DOLLAR AMOUNTS IN THOUSANDS
(UNAUDITED)
<CAPTION>
February 29, November 30,
2000 1999
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 147 $ 538
Accounts receivable, net of
allowances 19,589 19,330
Inventories
Finished goods 5,528 4,132
Work-in-process 9,171 9,626
Raw materials 11,754 10,859
Total inventories 26,453 24,617
Prepaid expenses and other
current assets 1,309 1,278
Total current assets 47,498 45,763
PROPERTY, PLANT AND EQUIPMENT,
at cost less accumulated
depreciation of $18,993
in 2000 and $17,836 in 1999 21,177 21,366
OTHER ASSETS
Goodwill 14,688 14,225
Patents and patent rights 310 321
Debt issuance costs 375 394
Deferred income taxes 108 108
Deferred charges 320 377
Total other assets 15,801 15,425
TOTAL ASSETS $84,476 $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>
February 29, November 30,
2000 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Short-term debt $ 6,030 $ 5,089
Accounts payable 11,343 8,801
Accrued salaries and wages 1,542 2,553
Accrued interest 64 103
Accrued other expenses 534 952
Current portion of long-term debt 4,276 4,276
Total current liabilities 23,789 21,774
LONG-TERM DEBT 17,891 19,011
DEFERRED INCOME TAXES 2,753 2,634
STOCKHOLDERS' EQUITY
Common stock, no par value,
authorized 25,000,000 shares,
issued 11,074,371 shares in 2000
and 11,018,703 in 1999 14,802 14,633
Retained earnings 26,327 25,268
Treasury stock, 70,000 shares in
2000 and 1999, at cost (294) (294)
40,835 39,607
Accumulated other comprehensive
income
Foreign currency translation
adjustment (792) (472)
Total stockholders' equity 40,043 39,135
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $84,476 $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
February 29, February 28,
2000 1999
<S> <C> <C>
Net sales $28,524 $15,325
Cost of products sold 22,018 10 913
Gross margin 6,506 4,412
Selling, general and
administrative expense 4,613 2,980
Income from operations 1,893 1,432
Other income (expense)
Interest expense (593) (53)
Other income and expense,
net 407 11
(186) (42)
Income before provision
for income taxes 1,707 1,390
Provision for
income taxes 648 527
Net income $ 1,059 $ 863
Earnings per common share:
Basic $ 0.10 $ 0.08
Diluted $ 0.09 $ 0.08
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>
Three Months Ended
February 29, February 28,
2000 1999
<S> <C> <C>
NET CASH PROVIDED BY
OPERATING ACTIVITIES $1,208 $ 128
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of property, plant
and equipment (987) (867)
Payment for acquired businesses (651) -
Net cash used in investing
activities (1,638) (867)
CASH FLOWS FROM FINANCING
ACTIVITIES
Net borrowings of
short-term debt 1,001 64
Repayment of long-term debt (1,120) (37)
Net proceeds from issuance
of common stock 169 -
Net cash provided by
financing activities 50 27
Effect of Exchange Rate
Changes on Cash (11) 16
Net Decrease in Cash
and Cash Equivalents (391) (696)
Cash and Cash Equivalents,
Beginning of Period 538 739
Cash and Cash Equivalents,
End of Period $ 147 $ 43
Cash Paid During the Period For:
Interest $ 632 $ 73
Income taxes 3 23
<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
February 29, 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
February 29, February 28,
2000 1999
<S> <C> <C>
Numerator for basic and
diluted earnings per
common share (in thousands):
Net income $ 1,059 $ 863
Denominator for basic
earnings per common
share (in thousands):
Weighted average
shares outstanding 10,972 10,887
Denominator for diluted
earnings per common
share (in thousands):
Weighted average
shares outstanding 10,972 10,887
Effect of dilutive securities:
Stock options 259 70
Stock warrants 53 -
11,284 10,957
Earnings per common share:
Basic $ 0.10 $ 0.08
Diluted $ 0.09 $ 0.08
</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
February 29, February 28,
2000 1999
Net income $ 1,059 $ 863
Foreign currency translation adjustment (320) (105)
Comprehensive income $ 739 $ 758
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 December 1, 1999, 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>
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 polices and procedures used to determine segment
income have been consistently applied.
Reportable segment information for the periods ended February 29, 2000 and
February 28, 1999 is as follows (in thousands):
Signal Power
Products Products Total
Three Months Ended
February 29, 2000:
Revenue from unaffiliated
customers $19,852 $ 8,672 $ 28,524
Segment income 3,604 2,212 5,816
Segment assets 37,166 8,744 45,910
Three Months Ended
February 28, 1999:
Revenue from unaffiliated
customers 10,248 5,077 15,325
Segment income 2,659 1,236 3,895
Segment assets 24,302 4,912 29,214
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
<TABLE>
A reconciliation of total reportable segment income to consolidated income
before provision for income taxes is as follows (in thousands):
<CAPTION>
Three Months Ended
February 29, February 28,
2000 1999
<S> <C> <C>
Total income for reportable segments $5,816 $3,895
Unallocated amounts:
Selling, general and administrative expense (3,923) (2,463)
Interest expense (593) (53)
Other income 407 11
Consolidated income before provision for
income taxes $1,707 $1,390
</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 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 communications
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 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 February 29, 2000 and February 28,
1999:
<CAPTION>
2000 1999
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of products sold 77.2 71.2
Gross margin 22.8 28.8
Selling, general and
administrative expense 16.2 19.4
Income from operations 6.6 9.4
Other income (expense)
Interest expense (2.1) (0.3)
Other income and expense, net 1.4 -
Income before provision
for income taxes 5.9 9.1
Provision for income taxes 2.2 3.5
Net income 3.7% 5.6%
</TABLE>
First Quarter 2000 Versus First Quarter 1999
Net Sales
Net sales increased $13.2 million or 86% during the period, with
consolidated net sales of $28.5 million in the first quarter of fiscal 2000
and $15.3 million in the comparable quarter of 1999. Of this increase, $9.6
million was generated from the sale of signal products, with sales of
discrete EMI low pass filters increasing $2.1 million and filtered
arrays/connectors increasing $7.5 million during the period. The increased
shipment of filtered arrays and connectors was primarily generated from the
sale of SCPD products. Sales of the Company's power product offerings
increased $3.6 million during the first quarter, 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 period as a result of competitive market pressures.
Overall demand for the Company's products was very strong during the period
with total customer orders of $37.7 million received in the first quarter of
fiscal 2000, an increase of $14.6 million or 63% from the first quarter of
last year.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
International sales, through the Company's German subsidiary, amounted to
$3.7 million or 13% of total consolidated sales in the first quarter of
fiscal 2000, compared to $2.2 million or 14% of consolidated sales in the
comparable quarter of 1999. The increase in international sales principally
reflects additional shipments to European customers. Management expects
international markets to continue to represent a significant portion of its
sales base.
Gross Margin
With additional sales volume, gross margin increased to $6.5 million in the
first quarter of fiscal 2000, compared to $4.4 million in the comparable
quarter of 1999. As a percentage of sales, gross margin declined during the
period, amounting to approximately 23% in 2000 and 29% in 1999. The
decrease in gross margin percentage primarily reflects manufacturing yield
losses and resultant higher labor costs incurred during the integration of
SCPD into the Company's Signal Products Group. As part of this integration,
the Company is redesigning certain SCPD products and production processes
which is expected to ultimately reduce manufacturing costs and improve
operating efficiencies. The Company currently anticipates the integration
process to be substantially completed by May 31, 2000. Accordingly,
management believes gross margin percentages will improve during the second
half of fiscal 2000 and approximate 29% to 30% of sales.
Selling, General and Administrative Expense
As a result of greater sales volume, selling expense increased during the
period. In the first quarter of fiscal 2000, selling expense amounted to
$2.8 million or 10% of sales, compared to $1.8 million or 11% of sales in
the same quarter of 1999. 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 $1.8 million in the first quarter of 2000, compared to $1.2
million in the comparable quarter of 1999. Of this increase, approximately
$150,000 arises from 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 primarily reflects additional
personnel costs, professional fees and other operating expenses associated
with the Company's increased business activity.
Other Income and Expense
Interest expense increased by $540,000 during the period, with interest
expense amounting to $593,000 in the first three months of fiscal 2000 and
$53,000 in the first three months 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 indebtedness. In
addition, weighted average short-term bank borrowings and interest rates
increased during the period.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
The Company holds numerous United States and foreign patents relating to
polymer multilayer ("PML") technology. During the first quarter 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% in 2000 and 1999, compared
to an applicable statutory income tax rate of approximately 40%.
Differences in the effective tax rate 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 fiscal year 2000, management
expects approximately 60% 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 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 February 29, 2000, the Company had borrowed $4.9 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
$1.8 million (3.5 million DM). At February 29, 2000, outstanding borrowings
under these lines of credit amounted to $1.1 million (2.2 million DM).
Borrowings under the lines of credit bear interest at rates below the
prevailing prime rate and are payable upon demand.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
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 February 29, 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 February 29, 2000, the Company had net working
capital of $23.7 million, compared to $24.0 million at November 30, 1999.
At the end of the first quarter of fiscal 2000, current assets were 2.00
times current liabilities, compared to 2.10 at the end of fiscal 1999.
During the first three months of fiscal 2000, the Company's cash
expenditures for property, plant and equipment amounted to $987,000. These
capital expenditures primarily related to manufacturing equipment for
capacity expansion within the Company's Signal Products Group. At February
29, 2000, the Company had not entered into any material commitments for
capital expenditures. However, the Company expects to lease an additional
45,000 square feet of manufacturing space during fiscal 2000 in order to
meet growing customer demand and production requirements.
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 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)
Despite additional inventory requirements, the Company's operating cash flow
increased during the period. During the first three months of fiscal 2000,
net cash generated from operations amounted to $1.2 million, an increase of
$1.1 million from the comparable period of 1999. During the first quarter
of fiscal 2000, inventories grew by $1.9 million. The increase in
inventories primarily reflects additional customer consigned inventory
requirements, as well as additional raw materials to support future shipment
requirements.
At February 29, 2000, goodwill represented 17% of total assets and 37% 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.
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% 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
In 1999, certain member countries of the European Union established fixed
conversion rates between their existing currencies and the European Union's
common currency, the Euro. The Company has completed 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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
<TABLE>
Interest Rate Exposure
The Company has market risk exposure relating 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 February 29, 2000:
<CAPTION>
Year of Maturity
Description 2000 2001 2002 2003 Thereafter
<S> <C> <C> <C> <C> <C>
Revolving credit
facility:
Principal amount $4,900,000
Actual floating
rate
Euro-rate portion 5.88%
Term loan:
Principal amount $2,727,000 $3,636,000 $3,636,000 $3,636,000 $5,456,000
Actual floating
rate
Euro-rate portion 5.88% 5.88% 5.88% 5.88% 5.88%
Interest rate swap
agreement:
PNC Bank, N.A.
Notional amount $2,727,000 $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)
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,
computer programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. The Company's time
- - sensitive software includes most of its business information systems,
computer systems embedded in production equipment, test equipment, and
personal computers. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail. With the
changeover to the year 2000, the Company did not experience any disruption
to its operations. There can be no assurance, however, that there will not
be future complications arising from the Year 2000 Issue.
The Company's program for addressing the Year 2000 Issue included an
assessment and evaluation of internal systems, which resulted in testing and
remediation efforts for year 2000 compliance. In addition, the Company
queried its important customers, vendors, and service providers to determine
the extent to which the Company was vulnerable to any failure by these
third-party providers and ascertain their readiness for the year 2000.
The Company used both internal and external resources to reprogram or
replace, test, and implement the software and production equipment for year
2000 modifications. Total year 2000 project costs were not material.
Although the Company believes that it has successfully addressed any
significant disruption from the Year 2000 Issue, management will continue to
monitor all critical systems for the appearance of delayed complications or
disruptions, as well as continue to monitor its suppliers and customers.
New Accounting Pronouncements
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. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
For a derivative not designated as a hedging instrument, changes in the fair
value of the derivative are recognized in earnings in the period of change.
If a derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of the derivative will either be offset against the change
in fair value of the hedged asset, liability, or firm commitment through
earnings, or recognized in other comprehensive income until the hedged item
is recognized in earnings. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000, with earlier application permitted. The
Company expects to adopt the new Statement effective December 1, 2000. The
Company does not expect the adoption of SFAS No. 133 to have a material
impact on the Company's financial position or results of operations.
<PAGE>
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
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: April 13, 2000 By: /s/ John P. Freeman
John P. Freeman, Vice President
and Chief Financial Officer
(Principal Accounting and
Financial Officer)
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFOMATION EXTRACTED FROM THE
SPECTRUM CONTROL, INC. CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) AT
FEBRUARY 29, 2000 AND CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED FEBRUARY 29, 2000 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO ITS FORM 10-Q FOR THE PERIOD ENDED FEBRUARY 29, 2000
</LEGEND>
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<NAME> SPECTRUM CONTROL, INC.
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