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Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from .............. to ............
Commission File Number 0-8796
Spectrum Control, Inc.
(a Pennsylvania Corporation)
(I.R.S. Employer Identification No. 25-1196447)
8031 Avonia Road, Fairview, Pennsylvania 16415
Telephone 814-835-1650
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
Common Stock - No Par Value The Nasdaq Stock Market
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, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K [ ].
At February 1, 2000, the aggregate market value of voting Common Stock held
by non-affiliates of the registrant based on a closing price of $13.0625
was $87,459,000. Shares of Common Stock held by each officer and director
and by each person who owns 5% or more of the outstanding Common Stock of
the Company have been excluded because such persons may be deemed to be
affiliates.
As of February 1, 2000, the registrant had outstanding 10,972,037 shares of
Common Stock, no par value.
Documents incorporated by reference
Portions of the registrant's Proxy Statement for the annual meeting of
shareholders to be held April 3, 2000 are incorporated by reference into
Part III of this Form 10-K.
PART I
ITEM 1. BUSINESS
Except for the historical information contained herein, the
following discussion contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially
from those discussed here. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in this
section, as well as in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in this report.
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 adapted its core EMI filter technology into a
complete line of capacitors, filters, filtered arrays, and filtered
connectors. In recent years, the Company has expanded its focus by developing
new lines of power products (commercial custom assemblies, military/aerospace
multisection assemblies, power distribution units, power entry modules, and
power line filters), microwave/wireless products (coaxial ceramic bandpass
filters, duplexers, and dielectric resonators), and specialty ceramic
products. The Company's products are used in virtually all industries
worldwide, including telecommunications, aerospace, military, medical,
computer, and industrial controls.
The need for EMI products results from the increasing dependency of
our society on electronic equipment of various kinds, including wireless
communication systems. This equipment both emits, and is sensitive to,
random electromagnetic waves over a broad spectrum of wave lengths, which can
interfere with and degrade the performance of other electronic equipment.
The Company's EMI products are designed to suppress the emission of unwanted
waves or to reduce their strength to an innocuous level, by reflecting them
from one component to another in series or by converting their energy into
heat which is then dissipated.
Spectrum Control, Inc. was incorporated in Pennsylvania in 1968. The
Company's Interconnect Products Division, which manufactures various EMI
filter products, is located in Fairview, Pennsylvania. The Company's
Control Products Division, which manufactures power products, operates
facilities in Erie, Pennsylvania and Wesson, Mississippi. Currently, the
Company manufactures its microwave/wireless product offerings at facilities
in Elizabethtown, Pennsylvania. The Company's executive offices are located
in Fairview, Pennsylvania.
Spectrum Control Technology, Inc., a wholly-owned subsidiary, maintains
a facility in New Orleans, Louisiana, with advanced manufacturing equipment
designed for the production of ceramic capacitors, resonators, and specialty
ceramic products. Presently, this subsidiary primarily manufactures ceramic
discoidal and tubular capacitors used in the Company's EMI filter products.
Spectrum Control, GmbH, a wholly-owned subsidiary of the Company
located in Schwabach, Germany, acts as a distributor for the Company's products
in the European market.
MARKETS
The Company's products are utilized in numerous applications including
industrial equipment, instrumentation, computers, and medical equipment.
The Company's primary markets, however, are communications equipment and
military/aerospace.
COMMUNICATIONS EQUIPMENT
For the past several years the communications industry has experienced
significant worldwide growth. This growth has primarily resulted from
increased business and consumer demand for wireless communication services
and internet access. Cost reductions and performance improvements in such
wireless communication products as cellular, personal communication services
(PCS), and satellite-based voice and data systems have also contributed to
this growth. As demand for wireless communication services grows, service
providers are expanding associated infrastructure. Wireless communication
systems can offer the functional advantages of wired communication systems
without the costly and time consuming development of an extensive wired
infrastructure. The relative advantages of wireless and wired communication
systems with respect to cost, transmission quality, reliability and other
factors depend on the specific applications for which such systems are used
and the existence of a wired or wireless infrastructure already in place.
The factors responsible for the market's growth, coupled with regulatory
changes in the United States and abroad as well as advances in wireless
communication technology, have led to significant growth in existing
wireless telecommunication systems and the emergence of new wireless
applications.
The Company provides filtered arrays, filtered connectors, and
power products to leading suppliers of communication systems. Using its
solutions-oriented approach, the Company provides its original equipment
manufacturer ("OEM") customers with products tailored to their specific
transmission needs, anticipating and solving system architecture and
performance.
Approximately 58% of the Company's total revenue during fiscal
year 1999 was derived from sales of its products to OEM customers in the
telecommunication industry. Most of these products are custom designed not
only to conform to the specifications and requirements of the particular
customer, but also to meet the performance and quality standards set by the
agency or other governmental body whose regulations are applicable to the
specific equipment or usage involved. A significant reduction in orders
from such customers would have a materially adverse effect on the Company's
business.
MILITARY/AEROSPACE
Military forces worldwide are dependent on sophisticated
electronic equipment. Military aircraft and naval vessels generally
contain extensive communication equipment, electronic countermeasure
equipment for defense against enemy weapons, and radar systems. The
Company provides low pass filters and multisection assemblies to major
equipment manufacturers for installation into these systems. The Company's
customers, in turn, sell their equipment to major aerospace manufacturers
or directly to governments.
In fiscal year 1999, military/aerospace sales accounted for
approximately 22% of the Company's total sales. The Company does not
expect such sales to increase from the levels achieved in the 1999 fiscal
year due to reductions in funding for new programs. While the Company has
developed and will continue to develop products for military/aerospace
programs, there can be no assurance that sales to such customers will not
decrease in the future.
PRODUCTS
The Company's current product offerings are organized into four
primary product families: interconnect filter products, power products,
microwave/wireless products, and specialty ceramic components.
INTERCONNECT FILTER PRODUCTS
Control of unwanted electromagnetic waves is accomplished through
various combinations of EMI suppression devices. The EMI suppression
devices produced by the Company include those that are utilized as circuit
components and whose function is to permit the desired frequencies to pass
through a circuit while rejecting or preventing the unwanted signals. The
majority of these products are composed of either reactive (reflecting
energy) or loss (dissipating energy) elements or at times, combinations of
the two. These products can be utilized as individual components or
combined in various configurations to provide the amount of EMI control
needed. The Company's interconnect products include discrete EMI filters,
filtered arrays, and filtered connectors.
DISCRETE EMI FILTERS
The Company's discrete EMI filter offerings include hermetically
sealed and resin sealed/solder-in filters and capacitors. The Company's
hermetically sealed filters are primarily used in military/secure
communications, aerospace, rocket ignitors, power supplies, signal lines,
and certain medical equipment. Resin sealed/solder-in filters are used in
a wide range of products including telecommunications equipment,
transceivers, and industrial control systems.
FILTERED ARRAYS
The Company's filtered array products consist of various filter
plate assemblies. Filter plates are predominantly utilized in
telecommunication equipment including cellular base stations, linear power
amplifiers, and cellular microcell repeaters. This product offering often
provides an economical method of meeting electromagnetic compatibility
(EMC) requirements.
FILTERED CONNECTORS
The Company offers a range of custom connectors, datacomm
interconnects, and D-Subminiature Connectors. These filtered connectors
are used in numerous applications including telecommunications equipment,
cellular base stations, secured communications, industrial process
equipment, and certain personal computers.
During the year ended November 30, 1999, approximately 65% of the
Company's total revenue was generated from the sale of interconnect filter
products.
POWER PRODUCTS
The Company's power product offerings currently include commercial
custom assemblies, multisection filters, power entry modules, power
distribution units, single line filters, and intelligent power management
and conditioning products. The Company's multisection products primarily
serve the military/aerospace market with applications in satellite
communications, electronic warfare, and ground/air weapon systems. Other
power products are principally used in communications equipment, including
telecommunication racks, cellular base stations, internet servers, and
networks.
During the year ended November 30, 1999 approximately 31% of the
Company's total revenue was generated from the sale of power products.
MICROWAVE/WIRELESS PRODUCTS
The Company manufactures and sells coaxial ceramic resonators,
bandpass filters, and duplexers. These products primarily serve the
communications industry with applications in cellular telephones and base
stations, satellite transceivers, wireless modems and LANS, and CATV.
During the year ended November 30, 1999, approximately 2% of the
Company's total revenue was generated from the sale of microwave/wireless
products.
SPECIALTY CERAMIC COMPONENTS
Spectrum Control Technology, Inc., a wholly-owned subsidiary of
the Company, manufactures and sells a broad range of specialty ceramic
capacitors including tubular and discoidal, single-layer microwave,
temperature compensating, high voltage, switch-mode, and high Q capacitors.
These products are primarily used in testing and measurement instruments,
high frequency power supplies, RF amplifiers, and other communications
equipment.
During the year ended November 30, 1999, approximately 2% of the
Company's total revenue was generated from the sale of specialty ceramic
components.
OPERATING SEGMENTS
The Company was founded as a solutions-oriented company, designing and
manuacturing products to suppress or eliminate electromagnetic interference
("EMI"). The Company has expanded its core EMI filter technology to a broad
line of control products and systems. Currently, the Company has two
reportable segments: interconnect products and control products.
The Company's Interconnect Products Division manufactures a wide range
of low pass filters, filtered arrays, and filtered connectors. The Company's
Control Products Division manufactures various power products (power
distribution units, intelligent power management and contidioning products,
power entry modules, and power line filters) and microwave products (coaxial
resonators, bandpass filters, and duplexers). Although the Company's products
are utilized in numerous applications and industries, the Company's primary
markets are communication equipment, military, and aerospace.
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 segment assets are comprised solely of property, plant,
equipment, and inventories.
The Company's reportable segments are operating divisions that offer
different products. The reportable segments are each managed separately
because they manufacture and distribute distinct products with different
production processes.
For the years ended November 30, 1999, 1998, and 1997, reportable segment
information is as follows(in thousands):
Interconnect Control
1999 Products Products Other Total
Revenue from unaffiliated
customers $63,355 $32,863 $1,511 $97,729
Depreciation expense 1,297 674 1,971
Segment income 21,507 7,739 29,246
Segment assets 20,236 8,752 28,988
Capital expenditures 1,085 1,640 2,725
Interconnect Control
1998 Products Products Other Total
Revenue from unaffiliated
customers $42,025 $16,235 $1,608 $59,868
Depreciation expense 1,171 499 1,670
Segment income 16,780 3,509 20,289
Segment assets 8,419 5,715 14,134
Capital expenditures 388 1,186 1,574
Interconnect Control
1997 Products Products Other Total
Revenue from unaffiliated
customers $44,709 $11,168 $ 589 $56,466
Depreciation expense 1,197 296 1,493
Segment income 16,841 1,255 18,096
Segment assets 9,312 4,487 13,799
Capital expenditures 713 1,134 1,847
Other revenue consists of sales of ceramic capacitors. The Company's
ceramic operations primarily manufacture and transfer ceramic capacitors and
resonators to the Company's Interconnect Products and Control Products
Divisions. Accordingly, the Company considers its ceramic capacitor operations
to be a functional department and not a reportable operating segment.
For the years ended November 30, 1999, 1998 and 1997, reconciliations
of reportable segment information to the Company's consolidated financial
statements are as follows (in thousands):
Depreciation expense 1999 1998 1997
Total depreciation expense
for reportable segments $ 1,971 $ 1,670 $ 1,493
Unallocated amounts:
Depreciation expense related to
the Company's ceramic
capacitor operations 1,484 1,545 1,375
Depreciation expense related to
selling, general and administrative
activities 464 372 419
Consolidated depreciation expense $ 3,919 $ 3,587 $ 3,287
Income before provision
for income taxes 1999 1998 1997
Total income for reportable segments $29,246 $20,289 $18,096
Unallocated amounts:
Manufacturing expense related to
the Company's ceramic
capacitor operations (4,272) (3,613) (2,173)
Selling, general and
administrative expense (14,810) (10,214) (10,137)
Interest expense (1,420) (228) (417)
Other income 96 85 141
Consolidated income before
provision for income taxes $ 8,840 $ 6,319 $ 5,510
Assets 1999 1998 1997
Total assets for reportable segments $28,988 $14,134 $13,799
Unallocated amounts:
Assets utilized in the
Company's ceramic
capacitor operations 13,434 12,805 12,097
Cash and cash equivalents 538 739 196
Accounts receivable 19,330 10,162 9,997
Goodwill 14,225 2,547 -
Other assets 6,039 3,752 3,967
Total consolidated assets $82,554 $44,139 $40,056
Captial expenditures 1999 1998 1997
Total capital expenditures for
reportable segments $ 2,725 $ 1,574 $ 1,847
Capital expenditures related
to the Company's ceramic
capacitor operations 864 1,335 1,289
Capital expenditures related
to the Company's selling,
general and administrative
activities 1,383 384 144
Total consolidated capital
expenditures $ 4,972 $ 3,293 $ 3,280
The Company has operations in the United States and Germany. Sales
are attributed to individual countries based upon the location responsible
for the sale. The company transfers products from one geographic region for
resale in another. These transfers are priced to provide both areas with an
equitable share of the overall profit. The geographic distribution of sales
and long-lived assets for 1999, 1998 and 1997 is as follows (in thousands):
United
1999 States Germany Total
Revenue from unaffiliated customers $82,662 $15,067 $97,729
Long-lived assets:
Property, plant and equipment 21,241 125 21,366
Intangible assets 14,940 - 14,940
United
1998 States Germany Total
Revenue from unaffiliated customers $50,864 $9,004 $59,868
Long-lived assets:
Property, plant and equipment 16,188 101 16,289
Intangible assets 2,941 - 2,941
United
1997 States Germany Total
Revenue from unaffiliated customers $48,148 $8,318 $56,466
Long-lived assets:
Property, plant and equipment 15,885 94 15,979
Intangible assets 499 - 499
Revenue attributed to Germany primarily reflects sales to European
customers. The Company expects that international sales will continue to
account for a significant portion of its total sales. There can be no
assurance, however, that the Company will be able to maintain or increase
international demand for the Company's products or that the Company will be
able to effectively meet that demand. The Company's international sales
are denominated in several different currencies including U.S. Dollars,
British Pounds, and the Euro. An increase in the value of these currencies
relative to other foreign currencies could make the Company's products more
expensive and, therefore, potentially less competitive in those markets.
Additional risks inherent in the Company's international business
activities include potentially adverse tax consequences, repatriation of
earnings, and the burdens of complying with a variety of foreign laws.
There can be no assurance that such factors will not have an adverse effect
on the Company's future results of operations.
In 1999 and 1998, the Company's largest single customer, an
original equipment manufacturer of telecommunication equipment, represented
18% and 11%, respectively, of total consolidated net sales. Sales to this
major customer principally consisted of control products. In 1997, the
Company's largest single customer represented 9% of total consolidated net
sales. Sales to this customer principally consisted of interconnect
products.
PRODUCTION
The Company substantially relies on its internal manufacturing
capabilities for production of its control products and systems. The
Company's Ceramic Components Division in New Orleans, Louisiana, designs
and manufactures various ceramic components including tubular capacitors,
discoidal capacitors, and resonators. The tubular and discoidal capacitors
are primarily utilized in the manufacture of electronic filter products at
the Company's Interconnect Products Division in Fairview, Pennsylvania.
Coaxial ceramic dielectric resonators are principally used in the
manufacture of bandpass filters and duplexers at the Company's facilities
in Elizabethtown, Pennsylvania. Assembly of power products is performed by
the Company's Control Products Division at facilities in Erie, Pennsylvania
and Wesson, Mississippi. Although the Company produces a standardized line
of products for sale from inventory or through distributors, most orders
require relatively short production runs of custom designed components.
The Company purchases brass bushings, castings, miniature metal
stampings, as well as other hardware used in the assembly and production of
its products. These items are available from numerous sources. The
principal raw materials used by the Company in the manufacture of ceramic
capacitors and resonators are barium titanate ceramic, silver, palladium,
and platinum. Precious metals are available from many sources; however,
their prices may be subject to significant fluctuations and such
fluctuations may have a material and adverse affect on the Company's
operating results.
The Company's customers demand a high level of quality. As a
result, the Company maintains an extensive quality control system designed
to meet the requirements of sophisticated defense and commercial
communications products. The Company has been approved by defense
customers under the requirements of the U.S. military quality system, which
approval is also often accepted by commercial customers. In addition, the
Company's Interconnect Products Division, Control Products Division, and
Ceramic Components Division have achieved and maintain ISO 9001
certification.
In recent years, a majority of the Company's capital investment
has been expended to establish new production lines, increase capacity, and
improve manufacturing processes. There can be no assurance that the
Company can continue to make such investments in a timely manner so as to
take advantage of market demand.
SALES AND DISTRIBUTION
The Company sells its products primarily through manufacturers'
representatives, managed by the Company's internal sales force, and
distribution. The Company maintains representatives throughout North
America and Europe, and portions of South America, Asia and the Middle
East. In fiscal 1999, approximately 12% of the Company's consolidated
sales was through distribution. Domestic distribution is done through
various national and regional distributors. International distribution is
done through the Company's wholly-owned German subsidiary, Spectrum Control
GmbH.
During fiscal year 1999, the Company sold its products to
approximately 1,500 accounts. Sales of products to the Company's top ten
customers represented 43% ($41.9 million) of total consolidated net sales
in 1999. The Company's largest single customer, an original equipment
manufacturer of telecommunications equipment, represented 18% in 1999, 11%
in 1998, and 9% in 1997 of total consolidated net sales. The Company's
second largest single customer represented 6% of total consolidated net
sales in 1999 and 1998, and 7% in 1997. All of the Company's major
customers are unaffiliated with Spectrum Control, Inc. and its
subsidiaries.
Shipments are made by common carrier. Most of the Company's
interconnect filter products are either small or miniaturized and light
weight. Accordingly, shipping charges for these products are not
significant to the Company's business. However, transportation costs for
the Company's power products and certain other product offerings may be
significant. Accordingly, shipping charges and delivery time for these
products may affect the Company's ability to compete for business,
particularly in international markets.
No material portion of the Company's business is subject to
renegotiation of profits or termination of contracts or sub-contracts at
the election of the U.S. Government.
BACKLOG
The Company's backlog, which consists of purchase orders by
customers, totaled approximately $50.0 million at November 30, 1999 and
$23.0 million at November 30, 1998. It is anticipated that approximately
90% of the Company's backlog as of November 30, 1999 will be shipped within
one year. Annual requirement contracts are taken into backlog only to the
extent that orders are actually released thereunder. Although the terms
and conditions contained in the Company's quotation forms place certain
restrictions on a customer's right to cancel, purchase orders generally
provide for cancellation. In practice, the Company negotiates each
cancellation and schedule change based on the cost it has incurred prior to
such occurrence. The Company expects to continually reduce its average
lead time (the length of time from the receipt of a customer order to
shipment of finished product to the customer). As a result, the Company's
backlog may decrease in the future due to reduced lead times.
EMPLOYEES
As of November 30, 1999, the Company had a total of 1,324
employees, including 79 in sales, marketing and customer support; 95 in
engineering and product development; 1,100 in manufacturing; and 50 in
finance and administration. The Company's future success depends in
significant part upon the continued service of its key technical and senior
management personnel and its continued ability to attract and retain highly
qualified technical and managerial personnel. Competition for such
personnel is intense, and there can be no assurance that the Company can
retain its key managerial and technical employees or that it can attract,
assimilate, or retain other highly qualified technical and managerial
personnel in the future. None of the Company's employees is represented by
a labor union. The Company has not experienced any work stoppages and
considers its relations with its employees to be good.
PROPRIETARY RIGHTS
In connection with the manufacture and sale of control products
and systems, the Company owns numerous United States and foreign patents
and has certain patents pending. None of these patents and patent
applications are critical to the Company's business. The Company's policy
is to file patent applications to protect proprietary technology,
inventions and improvements. There can be no assurance that patents will
issue from any of the Company's pending applications or that any claims
allowed from existing or pending patents will be sufficiently broad to
protect the Company's technology. While the Company intends to protect its
intellectual property rights vigorously, there can be no assurance that any
patents held by the Company will not be challenged, invalidated or
circumvented, or the rights granted thereunder will provide competitive
advantages to the Company.
The Company holds nineteen (19) United States patents and forty-
five (45) foreign patents relating to polymer multilayer technology. The
Company has entered into several agreements regarding licensing the
technology covered by these patents. However, it is not known what
commercial value, if any, these patents and related licenses may have.
GOVERNMENT REGULATIONS
The Company's products are incorporated into communications
systems which are subject to various FCC regulations. Regulatory changes,
including changes in the allocation of available frequency spectrum, could
significantly impact the Company's operations by restricting development
efforts by the Company's customers, obsoleting current products or
increasing the opportunity for additional competition. Changes in, or the
failure by the Company to comply with, applicable domestic and
international regulations could have an adverse effect on the Company's
business, operating results and financial condition. In addition, the
increasing demand for wireless communications has exerted pressure on
regulatory bodies worldwide to adopt new standards for such products and
services, generally following extensive investigation of and deliberation
over competing technologies. The delays inherent in this government
approval process may cause the cancellation, postponement or rescheduling
of the installation of communications systems by the Company's customers,
which in turn may have a material adverse effect on the sale of products by
the Company to such customers.
In order to qualify as an approved supplier of EMI/EMC products
for use in equipment purchased by the military services or aerospace
programs, the Company is required to meet the applicable portions of the
quality specifications and performance standards designed by the Air Force,
the Army, and the Navy. The Company's products must also conform to the
specifications of the Defense Electronic Supply Center for replacement
parts supplied to the military. To the extent required, the Company meets
or exceeds all of these specifications.
The Company is subject to numerous federal, state and local
regulations relating to air and water quality, the disposal of hazardous
waste materials, safety, and health. Compliance with applicable
environmental regulations has not significantly changed the Company's
competitive position, capital spending, or earnings in the past and the
Company does not presently anticipate that compliance with such regulations
will change its competitive position, capital spending, or earnings for the
foreseeable future. The Company continuously monitors regulatory matters
and believes that it is currently in compliance in all material respects
with applicable environmental laws and regulations.
COMPETITION
The markets for the Company's products are intensely competitive
and are characterized by price erosion, technological change, and product
obsolescence. Among the Company's principal competitors are: AVX,
Amphenol, Conec, ITT Canon, and Tusonix. Many of the Company's current and
potential competitors have significantly greater financial, technical,
manufacturing, and marketing resources than the Company. These competitors
may be able to engage in sustained price reductions in the Company's
primary markets to gain market share. Furthermore, the Company currently
supplies control products and systems to large OEM customers that are
continuously evaluating whether to manufacture their own products and
systems or purchase them from outside sources.
The Company believes that its ability to compete in its current
markets depends on factors both within and outside the Company's control,
including the timing and success of new product introductions by the
Company and its competitors, availability of ceramic and assembly
manufacturing capability, the Company's ability to support decreases in
selling price through operating cost reductions, adequate sources of raw
materials, product quality, and general economic conditions. There can be
no assurance that the Company will be able to compete successfully in the
future.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are focused on
expanding the Company's materials technology, improving existing product
offerings, developing new product offerings, and designing specialized
production equipment to improve manufacturing efficiencies. As of November
30, 1999, the Company employed 95 individuals in engineering and product
development. In addition to their design and development activities, the
engineering staff participates with the Company's marketing department in
proposal preparation and applications support for customers.
Research and development expense amounted to $1,184,000 in 1999,
$961,000 in 1998, and $807,000 in 1997.
OTHER MATTERS
The business of the Company is not subject to any significant
seasonal fluctuations.
The Company does not believe that it has any special practices or
special conditions affecting working capital items that are significant for
an understanding of its business.
ITEM 2. PROPERTIES
The Company's principal manufacturing and office facilities as of
November 30, 1999 are as follows:
PRINCIPAL
BALANCE
OUTSTANDING
APPROXIMATE AT 11/30/99
SQUARE FEET ON RELATED
LOCATION FUNCTION OF FLOOR AREA OWNERSHIP MORTGAGE
8061 Avonia Road Manufacturing, 38,000 Owned N/A
Fairview, PA EMI Testing
6000 West Ridge Road Manufacturing 41,000 Owned N/A
Erie, PA
4100 Michoud Blvd. Manufacturing 100,000 Owned $1,800,000
New Orleans, LA
3053 Hwy. 51N Manufacturing 25,000 Rented N/A
Wesson, MS
1593 Mount Joy St. Manufacturing 26,000 Owned N/A
Elizabethtown, PA
1595 Mount Joy St. Manufacturing 35,000 Owned N/A
Elizabethtown, PA
8031 Avonia Road Corporate Offices 10,000 Owned $ 787,000
Fairview, PA
(1) In addition to the above mortgages, the Company's domestic properties
are encumbered in connection with the collateralization of certain
short-term and long-term bank indebtedness.
(2) In fiscal year 2000, the Company expects to purchase or rent an
additional 40,000 square feet of manufacturing space. The Company's
office space is considered adequate for its existing requirements and
its projected business needs.
(3) In addition to the facilities described above, the Company leases
certain sales office and warehousing space.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any litigation of a
material nature.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the quarter ended November 30, 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the NASDAQ Stock Market under
the symbol SPEC. The high and low sales prices for the Common Stock for each
quarter during fiscal years 1999 and 1998 are set forth below.
High Low
Fiscal 1999
First quarter $ 4.94 $ 3.66
Second quarter 6.63 4.00
Third quarter 7.44 5.88
Fourth quarter 11.63 6.44
High Low
Fiscal 1998
First quarter $ 5.75 $ 4.88
Second quarter 7.16 5.06
Third quarter 6.38 4.44
Fourth quarter 4.63 3.75
At February 1, 2000, the Company had 10,972,037 shares of Common Stock
outstanding, which were held by approximately 2,000 registered stockholders.
In recent years, the Company has not paid cash dividends on its Common Stock.
While subject to periodic review, the current policy of the Board of Directors
is to retain all earnings to provide funds for the continued growth of the
Company.
ITEM 6. SELECTED FINANCIAL DATA
Years Ended November 30
(Dollar Amounts in Thousands
Except Per Share Data)
1999 1998 1997 1996 1995
Operating Data
Net sales $97,729 $59,868 $56,466 $57,327 $49,297
Gross margin 27,912 18,284 17,421 18,076 16,061
Income from operations 10,164 6,462 5,786 5,470 5,045
Interest expense 1,420 228 417 753 908
Income before provision
for income taxes 8,840 6,319 5,510 4,737 4,095
Net income 5,470 3,934 3,974 3,418 2,984
Earnings per common share:
Basic 0.50 0.36 0.37 0.32 0.28
Diluted 0.49 0.36 0.37 0.32 0.28
Dividends per share - - - - -
Financial Position
Working capital $23,989 $18,619 $16,881 $12,534 $ 9,967
Total assets 82,554 44,139 40,056 40,213 39,498
Long-term debt 19,011 2,500 3,330 4,072 6,569
Stockholders' equity 39,135 33,774 29,545 25,379 21,781
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 addition, the
Company has developed an extensive line of power products (power
distribution systems, power entry modules, power line filters, commercial
custom assemblies, and military/aerospace multisection assemblies),
microwave products (coaxial ceramic bandpass filters, duplexers, and
dielectric resonators), and specialty ceramic capacitors (single layer,
temperature compensating, high voltage, and switch mode). The Company's
products are used in virtually all industries worldwide, including
telecommunications, aerospace, military, medical, computer, automotive, and
industrial controls.
On March 26, 1999, the Company acquired substantially all of the assets of
the Signal Conditioning Products Division ("SCPD") of AMP Incorporated
("AMP"). AMP is a world leader in the manufacture of electrical,
electronic, fiber-optic and wireless interconnection devices and systems.
Through SCPD, AMP manufactured and sold a broad line of EMI interconnect
filter products. The acquisition was accounted for as a purchase and,
accordingly, the results of operations of the acquired business have been
included in the Company's financial statements since the date of
acquisition.
Forward-Looking Information
Management's Discussion and Analysis of Financial Condition and
Results of Operations includes certain forward-looking statements which
reflect management's current views with respect to future operating
performance, ongoing cash requirements, and the Year 2000 Issue. The words
"believe", "expect", "anticipate" and similar expressions identify forward-
looking statements. These forward-looking statements are subject to
certain risks and uncertainties which could cause actual results to differ
materially from historical results or those anticipated. Factors that
could cause or contribute to such differences include those discussed in
"Risk Factors That May Affect Future Results", as well as those discussed
elsewhere herein. Readers are cautioned not to place undue reliance on
these forward-looking statements.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Results of Operations
The following table sets forth certain financial data, as a
percentage of net sales, for the years ended November 30, 1999, 1998 and 1997:
1999 1998 1997
Net sales 100.0% 100.0% 100.0%
Cost of products sold 71.4 69.5 69.2
Gross margin 28.6 30.5 30.8
Selling, general and administrative expense 18.2 19.7 20.6
Income from operations 10.4 10.8 10.2
Other income (expense)
Interest expense (1.5) (0.4) (0.7)
Other income and expense, net 0.1 0.2 0.2
Income before provision for income taxes 9.0 10.6 9.7
Provision for income taxes 3.4 4.0 2.7
Net income 5.6% 6.6% 7.0%
1999 Compared to 1998
Net Sales
Consolidated 1999 net sales increased by $37.9 million or 63.2% from
1998. Of this increase, $21.3 million was generated from the sale of SCPD
and other interconnect filter products, with the remaining $16.6 million
primarily generated from the sale of power products. These power products
are principally used in communications equipment, including cellular base
stations, telephone switching networks, and internet servers. Overall
market demand in the telecommunication industry was very strong throughout
the year. In 1999, the Company received total customer orders of $119.8
million, an increase of 93.5% from 1998. In addition to these customer
orders, the Company assumed approximately $5.1 million of customer order
backlog in connection with the acquisition of SCPD. Average selling prices
declined slightly during the year as a result of market pressures.
Gross Margin
Gross margin was $27.9 million or 28.6% of sales in 1999, compared to
$18.3 million or 30.5% of sales in 1998. The decrease in gross margin
percentage reflects several factors, of relative equal significance,
including: additional production costs and inefficiencies 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; yield losses and resultant higher labor costs
incurred at the Company's Ceramic Components Division in New Orleans,
Louisiana; and lower average selling prices as indicated above. The
initial phase of SCPD integration was completed by November 30,1999. The
final phase, which includes certain cost reduction measures and production
process improvements, is expected to be completed by May 2000.
Accordingly, management believes gross margin percentages will improve
during fiscal 2000 and approximate 29.0% to 30.0% of sales.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Selling, General and Administrative Expense
As a result of greater sales volume, selling expense increased during
the period. Selling expense amounted to $9.7 million or 10.0% of sales in
1999, compared to $6.8 million or 11.4% in 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 $8.0 million in 1999, compared to $5.0 million in
1998. Of this increase, approximately $400,000 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
As a result of additional bank indebtedness, interest expense
increased by $1.2 million in 1999. To finance the acquisition of SCPD, the
Company secured a $20.0 million variable rate term loan from its principal
lending institutions. Interest on the term loan amounted to $990,000 in
1999, with an average interest rate of 7.25%. In addition, weighted
average short-term bank borrowings were $1.6 million in 1999, compared to
$28,000 in 1998.
The Company's German subsidiary transacts business with certain
customers and vendors in currencies other than the Deutsche Mark. As a
result, the Company recognizes gains and losses on foreign currency
transactions. The Company incurred net gains of $4,000 in 1999 and net
losses of $40,000 in 1998 on these foreign currency transactions. The
Company recognized other income of $79,000 in 1999 and $125,000 in 1998
from certain short-term investments and patent licensing fees.
Income Taxes
The Company's effective income tax rate was 38.1% in 1999 and 37.7%
in 1998, compared to an applicable federal and state statutory income tax
rate of approximately 40.0%. Differences between the effective tax rate
and statutory tax rate primarily arise from state tax provisions and
foreign income tax rates.
At November 30, 1999, the Company had recorded certain deferred tax
assets. The Company has assessed its past earnings history and trends, and
expiration dates of tax attribute carryforwards, and has determined that it
is more likely than not that these deferred tax assets will be realized to
offset future taxable income from ordinary and recurring operations.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
1998 Compared to 1997
Net Sales
Consolidated 1998 net sales increased by $3.4 million or 6.0% from
1997. The increase in sales primarily reflects additional shipment volume
of the Company's commercial custom assemblies which are used in various
telecommunication systems. Sales of these power products increased by $4.7
million in 1998. In addition, sales of ceramic capacitors increased $1.0
million in 1998., Shipments of the Company's interconnect filter products
decreased by $2.7 million during the year. The decrease primarily reflects
weak overall market demand in the passive electronic components industry
and sharp inventory reductions by original equipment manufacturers and
distributors. Average selling prices declined slightly during the year as
a result of competitive pressures. Overall demand for the Company's
products increased during the year with total customer orders of $61.9
million received in 1998, an increase of 1.6% from 1997.
Gross Margin
As a percentage of sales, gross margin declined slightly during the
period, amounting to 30.5% in 1998 and 30.8% in 1997. The decrease in
gross margin percentage principally reflects changes in sales mix among the
Company's four major product families: interconnect filter products, power
products, microwave products, and specialty ceramic components. As a
result of additional sales volume, gross margin increased to $18.3 million
in 1998, compared to $17.4 million in 1997.
Selling, General and Administrative Expense
Because of the greater sales volume, selling expense increased during
the period, amounting to $6.8 million in 1998 and $6.5 million in 1997.
General and administrative expense was approximately $5.0 million or 8.4%
of sales in 1998, compared to $5.1 million or 9.2% of sales in 1997. The
decrease in general and administrative expense primarily reflects lower
personnel costs and reduced discretionary spending.
Other Income and Expense
Interest expense decreased by $189,000 in 1998, with interest expense
amounting to $228,000 in 1998 and $417,000 in 1997. The decrease in
interest expense primarily reflects reduced bank indebtedness. In 1998,
the Company repaid $743,000 of long-term debt. In addition, weighted
average short-term bank borrowings were limited to $28,000 in 1998,
compared to $982,000 in 1997. Average interest rates declined slightly
during the period.
As previously indicated, the Company's German subsidiary transacts
business with certain customers and vendors in currencies other than the
Deutsche Mark. As a result, the Company incurred net losses of $40,000 in
1998 and net gains of $12,000 in 1997 on these foreign currency
transactions.
The Company recognized other income of $125,000 in 1998 and $137,000
in 1997 from certain short-term investments and patent licensing fees.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Income Taxes
The Company's effective income tax rate was 37.7% in 1998 and 27.9%
in 1997, compared to an applicable statutory income tax rate of
approximately 40.0%. In 1998, the difference between the effective tax
rate and statutory tax rate primarily arises from state tax provisions and
foreign income tax rates. In 1997, the difference in the effective tax
rate and statutory tax rate reflects a $1.2 million decrease in the
deferred tax asset valuation allowance, principally related to certain
German net operating loss carryforwards.
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 its competitors, new technologies, product
cost changes, changes in the overall economic climate, availability of raw
materials, and changes in product mix. In 1999, approximately 58% of the
Company's sales were to customers in the telecommunication industry. The
Company's largest single customer, an original equipment manufacturer of
telecommunication equipment, represented 18% of the Company's total
consolidated net sales in 1999. 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 has an aggregate $6.0 million line of credit with its
principal lending institutions (PNC Bank of Erie, Pennsylvania and M & T
Bank of Buffalo, New York). 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 prevailing prime rate. At
November 30, 1999, the Company had borrowed $4.4 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 $1.3 million (2.5 million DM). At November 30, 1999,
outstanding borrowings under these lines of credit amounted to $689,000
(1.3 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.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
On March 26, 1999, the Company entered into a credit agreement with
its two principal lending institutions 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 November 30, 1999, the Company was in
compliance with all covenants contained in the Agreement.
The Company's working capital continued to increase in 1999. At
November 30, 1999, the Company had net working capital of $ 24.0 million,
compared to $18.6 million at November 30, 1998 and $16.9 million at
November 30, 1997. Despite increases in short-term borrowings and current
maturities of long-term debt, the Company's current ratio remained strong
in 1999. At November 30, 1999, current assets were 2.10 times current
liabilities, compared to 4.23 at November 30, 1998 and 3.83 at November 30,
1997.
The Company's cash expenditures for property, plant and equipment
amounted to $5.0 million in 1999, compared to $3.3 million in each of the
years 1998 and 1997. The 1999 capital expenditures primarily related to
metal fabrication machinery and other manufacturing equipment for capacity
expansion at the Company's Control Products Division, facility expansion at
the Company's Interconnect Products Division, and construction of the
Company's new corporate administrative office facility in Fairview,
Pennsylvania. At November 30, 1999, the Company had not entered into any
material commitments for capital expenditures.
Income taxes paid during the fiscal years ended November 30, 1999,
1998 and 1997 amounted to $3.0 million, $1.5 million, and $854,000,
respectively. Management expects cash outlays for income taxes to be less
than income tax expense for the next three fiscal years.
In September 1998, the Company initiated a stock repurchase program.
Under the program, the Company may repurchase up to $4.0 million of the
Company's Common Stock. Acquired shares are to be purchased in the open
market, with the cost of the program financed out of available cash
reserves and borrowings under the Company's revolving line of credit
facility. The amount and timing of the shares repurchased are based on
management's ongoing assessment of the Company's capital structure,
liquidity, and the market price of the Company's stock. In 1999, no shares
were repurchased. During 1998, 70,000 shares were repurchased by the
Company at an aggregate cost of $294,000. The repurchased shares are held
as treasury stock.
Research and development expenditures, which encompass the personnel
and related expenses devoted to developing new products and processes,
amounted to $1.2 million in 1999, $961,000 in 1998, and $807,000 in 1997.
Management believes research and development expenses may increase in
fiscal 2000, as the Company continues to enhance existing product lines and
develop new products.
Current financial resources, including working capital and existing
lines of credit, and anticipated funds from operations are expected to be
sufficient to meet cash requirements throughout fiscal 2000. These cash
requirements include scheduled long-term debt repayment, planned capital
expenditures, research and development expenses, and possible stock
repurchases. There can be no assurance, however, that unplanned capital
replacement or other future events will not require the Company to seek
additional debt or equity financing and, if so required, that it will be
available on terms acceptable to the Company.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
As a result of increased working capital requirements, the Company's
operating cash flow decreased in 1999. Net cash generated from operations
amounted to $2.0 million in 1999, a decrease of $6.3 million from 1998.
During the year ended November 30, 1999, inventories increased by
approximately $6.4 million from operations. The increase in inventories
primarily reflects additional customer consigned inventory requirements, as
well as additional raw material and work-in-process inventories to support
anticipated future shipments.
In 1998 and 1997, the Company had strong operating cash flow. During
the year ended November 30, 1998, net cash generated from operations
amounted to $8.3 million and proceeds realized upon the exercise of
employee stock options amounted to $414,000. This cash flow was used to
fund capital additions of $3.3 million, debt repayment of $743,000, stock
repurchases of $294,000, and the aggregate purchase price of two acquired
businesses. In 1998, the Company acquired substantially all of the assets
of Republic Electronics Corporation, a manufacturer of subminiature ceramic
capacitors, and Potter Production Corporation, a manufacturer of electronic
filters and power products. The total cash purchase price of the acquired
assets amounted to $4.1 million. In 1997, net cash generated from
operations amounted to $8.5 million. With this positive cash flow, the
Company repaid $5.6 million of bank indebtedness and invested $3.3 million
in capital equipment and improvements.
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. Currency exchange rate gains
and losses, however, were not material during the three years ended
November 30, 1999. 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
On January 1, 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.
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.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
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 instruments in effect as of November
30, 1999:
Year of Maturity
Description 2000 2001 2002 2003 Thereafter
Revolving credit
facility:
Principal amount $4,400,000
Actual floating rate
Euro-rate portion 5.59%
Term loan:
Principal amount $3,636,000 $3,636,000 $3,636,000 $3,636,000 $5,456,000
Actual floating rate
Euro-rate portion 5.59% 5.59% 5.59% 5.59% 5.59%
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%
Environmental Matters
The Company is subject to various laws and governmental regulations
in the United States concerning environmental matters and employee health
and safety. Federal environmental legislation having particular impact on
the Company includes the Toxic Substances Control Act; the Resource
Conservation and Recovery Act; the Clean Water Act; and the Safe Drinking
Water Act. The Company is also subject to the Occupational Safety and
Health Administration ("OSHA") concerning employee safety and health
matters. The United States Environmental Protection Agency ("EPA"), OSHA,
and other federal agencies have the authority to promulgate regulations
that have an impact on the Company's operations.
In addition to these federal agencies, various states have been
delegated certain authority under the aforementioned federal statutes.
Many state and local governments have adopted environmental and employee
safety and health laws and regulations, some of which are similar to
federal requirements. State and federal authorities may seek fines and
penalties for violation of these laws and regulations. As part of its
continuing environmental program, the Company has been able to comply with
such environmental regulations without any materially adverse effect on its
business. The Company is not currently involved in any legal proceedings
involving environmental matters.
Impact of Inflation
In recent years, inflation has not had a significant impact on the
Company's operations. However, the Company continuously monitors operating
price increases, particularly in connection with the supply of precious
metals used in the Company's manufacturing of certain ceramic capacitors.
To the extent permitted by competition, the Company passes increased costs
on to its customers by increasing sales price over time. Sales increases
reported in the accompanying financial statements, however, have
substantially arisen from increased sales volume, not increases in selling
prices.
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, 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's plan to resolve the Year 2000 Issue involved four
phases: assessment, remediation, testing, and implementation. In 1998,
the Company 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 referred to as operating equipment) was
also at risk.
For its information technology exposures, the Company completed the
remediation phase for all material systems in February 1999, including
required software reprogramming and replacement. In August 1999, the
Company completed all of its testing and fully implemented its remediated
systems. With respect to operating equipment, the Company completed the
remediation phase of the resolution process in February 1999. Testing and
implementation of all affected equipment was completed by September 1999.
To date, the Company has not experienced any Year 2000 problems with its
information systems or operating equipment.
In 1999, the Company 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 are Year 2000 ready. The inability of those
parties to complete their Year 2000 resolution process could materially
impact the Company. In addition, the Company does not have a comprehensive
contingency plan with respect to the Year 2000 Issue.
The Company used both internal and external resources to reprogram or
replace, test, and implement the software and operating equipment for Year
2000 modifications. Total Year 2000 project costs were not material.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of Spectrum Control,
Inc. and subsidiaries are included herein:
Page
Number
Report of Independent Auditors
Consolidated Balance Sheets as of
November 30, 1999 and 1998
Consolidated Statements of Income for
the years ended November 30,
1999, 1998 and 1997
Consolidated Statements of Stockholders'
Equity for the years ended
November 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows
for the years ended November 30,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Spectrum Control, Inc.
We have audited the accompanying consolidated balance sheets of
Spectrum Control, Inc. and subsidiaries as of November 30, 1999 and 1998,
and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended November 30,
1999. Our audits also included the financial statement schedule listed in
the Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Spectrum Control, Inc. and subsidiaries at November 30, 1999
and 1998, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended November 30, 1999, in
conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
Pittsburgh, Pennsylvania
January 4, 2000 ERNST & YOUNG LLP
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1999 AND 1998
(Dollar Amounts in Thousands)
1999 1998
ASSETS
Current assets
Cash and cash equivalents $ 538 $ 739
Accounts receivable, less allowances of $673
in 1999 and $406 in 1998 19,330 10,162
Inventories (Note 3) 24,617 12,885
Deferred income taxes (Note 11) 579 409
Prepaid expenses and other current assets 699 184
Total current assets 45,763 24,379
Property, plant and equipment, net (Note 4) 21,366 16,289
Other assets (Note 5)
Goodwill, net 14,225 2,547
Other non-current assets 1,200 924
Total other assets 15,425 3,471
Total assets $ 82,554 $ 44,139
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt (Note 6) $ 5,089 $ 336
Accounts payable 8,801 2,719
Accrued salaries and wages 2,553 1,438
Accrued interest 103 63
Accrued federal and state income taxes - 93
Accrued other expenses 952 281
Current portion of long-term debt (Note 7) 4,276 830
Total current liabilities 21,774 5,760
Long-term debt (Note 7) 19,011 2,500
Deferred income taxes (Note 11) 2,634 2,105
Stockholders' equity
Common stock, no par value, authorized 25,000,000
shares, issued 11,018,703 shares
in 1999 and 10,957,008 in 1998 14,633 14,470
Retained earnings 25,268 19,798
Treasury stock, 70,000 shares in 1999 and 1998,
at cost (Note 9) (294) (294)
Accumulated other comprehensive income
Foreign currency translation adjustment (472) (200)
Total stockholders' equity 39,135 33,774
Total liabilities and stockholders' equity $ 82,554 $ 44,139
The accompanying notes are an integral part of the consolidated
financial statements.
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
(Dollar Amounts in Thousands Except Per Share Data)
1999 1998 1997
Net sales $ 97,729 $ 59,868 $ 56,466
Cost of products sold 69,817 41,584 39,045
Gross margin 27,912 18,284 17,421
Selling, general and administrative expense 17,748 11,822 11,635
Income from operations 10,164 6,462 5,786
Other income (expense)
Interest expense (1,420) (228) (417)
Other income and expense, net (Note 10) 96 85 141
(1,324) (143) (276)
Income before provision for income taxes 8,840 6,319 5,510
Provision for income taxes (Note 11) 3,370 2,385 1,536
Net income $ 5,470 $ 3,934 $ 3,974
Earnings per common share (Note 12):
Basic $ 0.50 $ 0.36 $ 0.37
Diluted $ 0.49 $ 0.36 $ 0.37
The accompanying notes are an integral part of the consolidated financial
statements.
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
(Dollar Amounts in Thousands)
Accumulated Total
Other Stock-
Common Retained Treasury Comprehensive Holders'
Stock Earnings Stock Income Equity
Balance-November 30, 1996 $13,755 $11,890 $ - $ (266) $25,379
Net income - 3,974 - - 3,974
Foreign currency translation
adjustment - - - (30) (30)
Comprehensive income - - - - 3,944
Issuance of 84,998 shares of
common stock 300 - - - 300
Purchase and retirement of
20,886 shares of common stock (103) - - - (103)
Tax benefits from exercise of
stock options 25 - - - 25
Balance-November 30, 1997 13,977 15,864 - (296) 29,545
Net income - 3,934 - - 3,934
Foreign currency translation
adjustment - - - 96 96
Comprehensive income - - - - 4,030
Issuance of 118,663 shares of
common stock 414 - - - 414
Purchase of 70,000 shares
of common stock - - (294) - (294)
Tax benefits from exercise of
stock options 79 - - - 79
Balance-November 30, 1998 14,470 19,798 (294) (200) 33,774
Net income - 5,470 - - 5,470
Foreign currency translation
adjustment - - - (272) (272)
Comprehensive income - - - - 5,198
Issuance of 68,663 shares of
common stock 182 - - - 182
Purchase and retirement of
6,968 shares of common
stock (56) - - - (56)
Tax benefits from exercise of
stock options 37 - - - 37
Balance-November 30, 1999 $14,633 $25,268 $ (294) $ (472) $39,135
The accompanying notes are an integral part of the consolidated financial
statements.
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
(Dollar Amounts in Thousands)
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,470 $ 3,934 $ 3,974
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 3,919 3,587 3,287
Amortization 624 135 219
Deferred income taxes 634 1,014 376
Tax benefits from exercise of stock options 37 79 25
Loss (gain) on sale of property, plant
and equipment (13) - 8
Changes in assets and liabilities,
excluding effects of business acquisitions:
Accounts receivable (8,734) (85) (67)
Inventories (6,380) 181 (188)
Prepaid expenses and other assets (742) 24 431
Accounts payable and accrued expenses 7,194 (595) 441
Net cash provided by operating
activities 2,009 8,274 8,506
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, plant
and equipment 13 - 10
Purchase of property, plant and equipment (4,972) (3,293) (3,280)
Payment for acquired businesses (21,846) (4,077) -
Net cash used in investing activities (26,805) (7,370) (3,270)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings(repayment) of short-term debt 4,532 282 (3,232)
Borrowings of long-term debt 20,800 - -
Repayment of long-term debt (843) (743) (2,391)
Purchase of common stock - (294) -
Net proceeds from issuance of common stock 126 414 196
Net cash provided by (used in)
financing activities 24,615 (341) (5,427)
Effect of exchange rate changes on cash (20) (20) (26)
Net increase (decrease) in cash and cash
equivalents (201) 543 (217)
Cash and cash equivalents, beginning of year 739 196 413
Cash and cash equivalents, end of year $ 538 $ 739 $ 196
The accompanying notes are an integral part of the consolidated financial
statements.
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of
Spectrum Control, Inc. and its subsidiaries (the "Company"). The fiscal
year of the Company's foreign subsidiary, Spectrum Control GmbH, ends
October 31 to facilitate timely reporting. All significant intercompany
accounts are eliminated upon consolidation.
Cash Equivalents
The Company considers all highly liquid money market
instruments with original maturities of three months or less to be cash
equivalents.
Financial Instruments
The Company utilizes interest rate swap agreements to minimize
the risks and costs associated with variable rate debt. The swap
agreements are contracts to exchange floating rate for fixed interest
payments periodically over the life of the agreements without the exchange
of the underlying notional amounts. The notional amounts of interest rate
agreements are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. Net cash amounts paid or
received on the agreements are accrued and recognized as an adjustment to
interest expense. The Company does not utilize interest rate agreements
for trading or other speculative purposes.
Inventories
Inventories are valued at the lower of cost or market, with
cost for raw materials, work-in-process and finished goods at standard
cost, which approximates the first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation
is computed over the estimated useful lives of the assets using the
straight-line method. Expenditures for maintenance and repairs are charged
against earnings in the year incurred; major replacements, renewals and
betterments are capitalized and depreciated over their estimated useful
lives. The cost and accumulated depreciation of assets sold or retired are
removed from the respective accounts and any gain or loss is reflected in
earnings.
Intangibles and Other Assets
Goodwill, representing the excess of cost over the fair value
of net tangible and identifiable intangible assets of acquired businesses,
is stated at cost and amortized to expense on a straight-line basis over a
period of 20 years. Patents and patent rights are amortized to expense on
a straight-line basis over periods not exceeding 17 years. The carrying
value of intangible assets is periodically reviewed by the Company and
impairments are recognized when the expected future operating cash flows
derived from such intangible assets is less than their carrying value. No
impairment losses have been recognized in any of the periods presented
herein.
Debt issuance costs are amortized to expense on a straight-line
basis over the term of the related indebtedness.
Income Taxes
The Company uses the liability method in accounting for income
taxes. Deferred tax assets and liabilities are recorded for temporary
differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements, using statutory tax rates in
effect for the year in which the differences are expected to reverse.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 year. 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 year in which the exchange rate changes.
Revenue Recognition
Product sales are recorded at the time of shipment. Service
revenues are recorded when the related services are performed.
Advertising and Promotion
Advertising and promotion costs are expensed as incurred.
Advertising and promotion expense amounted to $726,000 in 1999, $633,000 in
1998, and $574,000 in 1997.
Research and Development
Research and development costs are expensed as incurred.
Research and development expense amounted to $1,184,000 in 1999, $961,000
in 1998, and $807,000 in 1997.
Stock-Based Compensation
Stock options granted by the Company are accounted for in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). In accordance with APB 25, no
stock-based compensation expense has been recognized in the accompanying
financial statements, since the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date
of option grant.
Earnings Per Common Share
Basic earnings per common share is computed by dividing net
income by the weighted average number of common shares outstanding during
the period. Diluted earnings per common share is computed by dividing net
income by the weighted average number of common shares outstanding during
the period and the effect of all dilutive common stock equivalents, such as
stock options and warrants.
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, the disclosure of
contingent assets and liabilities, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
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. SFAS No. 133 is effective for fiscal
years beginning after June 15, 2000, with earlier application permitted.
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.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Acquisitions
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 $20,745,000. The Company also
assumed obligations in the aggregate amount of $1,866,000, including
liabilities of $ 776,000 to relocate or provide severance benefits to
certain employees of the acquired business. To finance the acquisition,
the Company secured a $20,000,000 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.
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 $11,694,000 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 year 1999 and 1998, respectively (in thousands, except
per share data):
1999 1998
Net sales $102,796 $ 83,457
Net income 5,253 3,420
Earnings per common share:
Basic 0.48 0.31
Diluted 0.48 0.31
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.
On September 21, 1998, the Company acquired substantially all
of the assets of Potter Production Corporation, a manufacturer of
electronic filters and power products used in various communication,
industrial control, and medical equipment. The aggregate price of the
acquired assets amounted to $2,918,0000, excluding future contingent
payments. The amount of the contingent payments are being determined based
upon the Company's sales of power products during the three years
subsequent to the acquisition date. In 1999, contingent payments under
this arrangement amounted to $514,000. The amount of the contingent
payments are being allocated to goodwill and amortized ratably over the
asset's remaining life. Also, in connection with this acquisition, the
Company issued warrants to purchase 100,000 shares of the Company's Common
Stock at an exercise price of $6.25 per share. The warrants are
immediately exercisable and expire on September 21, 2002. At November 30,
1999, all warrants remained outstanding.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Inventories
Inventories by major classification are as follows:
November 30
1999 1998
(in thousands)
Finished goods $ 4,132 $ 2,581
Work-in-process 9,626 5,070
Raw materials 10,859 5,234
$ 24,617 $ 12,885
4. Property, Plant and Equipment
Property, plant and equipment consist of the following:
November 30
1999 1998
(in thousands)
Land and improvements $ 1,524 $ 1,164
Buildings and improvement 11,351 9,409
Machinery and equipment 26,202 21,976
Construction in progress 125 371
39,202 32,920
Less accumulated depreciation 17,836 16,631
$ 21,366 $ 16,289
5. Other Assets
Other assets consist of the following:
November 30
1999 1998
(in thousands)
Goodwill $ 14,786 $ 2,577
Less accumulated amortization 561 30
Goodwill, net $ 14,225 $ 2,547
Patents and patent rights 566 466
Debt issuance costs 671 356
1,237 822
Less accumulated amortization 522 428
715 394
Deferred income taxes 108 383
Deferred charges 377 147
Other non-current assets $ 1,200 $ 924
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Short-Term Debt
Short-term debt consists of the following:
November 30
1999 1998
(in thousands)
Notes payable - domestic
line of credit (1) $ 4,400 $ -
Notes payable - foreign
lines of credit (2) 689 336
Total $ 5,089 $ 336
(1) The Company has an aggregate $6,000,000 line of credit
with its principal lending institutions. During 1999,
weighted average borrowings under the revolving credit
line amounted to $1,489,000, with average interest rates
of 7.35%, and maximum month-end borrowings of $4,400,000.
During 1998, there were no borrowings under the line of
credit. 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 prevailing prime rate. The current line
of credit agreement expires March 26, 2002.
(2) The Company's wholly-owned foreign subsidiary maintains
unsecured Deutsche Mark lines of credit with German
financial institutions aggregating $1,330,000
(2,500,000 DM) at November 30, 1999 and $1,818,000
(3,000,000 DM) at November 30, 1998. Weighted average
borrowings under the lines of credit amounted to $95,000
(179,000 DM) in 1999 and $28,000 (46,000 DM) in 1998,
with average interest rates of 6.50% in 1999 and 6.00%
in 1998. The maximum amount of borrowings under the
lines of credit at the end of any month was $689,000
(1,296,000 DM) in 1999 and $336,000 (554,000 DM) in 1998.
Borrowings bear interest at rates below the prevailing
prime rate and are payable upon demand.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Long-Term Debt
Long-term debt consists of the following:
November 30
1999 1998
(in thousands)
Term loan payable to bank at variable
interest rate (7.59% at November 30, 1999) (1) $ 20,000 $ -
Mortgage note payable to bank at an
interest rate of 8.50% (2) 787 -
Industrial development authority notes at
variable interest rate (4.00% at
November 30, 1999 and 3.40% at
November 30, 1998) (3) 1,800 2,100
Industrial development authority notes
at variable interest rate (4,35% at
November 30, 1999 and 3.81% at
November 30, 1998)(4) 700 1,100
Industrial development authority notes
and related bank mortgage notes at
interest rates ranging from 4.00% to
7.75% - 130
Total 23,287 3,330
Less current portion 4,276 830
Long-term debt $ 19,011 $ 2,500
(1) The term loan is collateralized by substantially all of the Company's
tangible and intangible assets. The loan bears interest at variable
rates at or below the prevailing prime rate and requires quarterly
principal payments of $909,000 from December 1999 to March 2005.
The Company has entered into a credit agreement with its principal
lending institutions covering the term loan and the Company's domestic
line of credit (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 $5,000,000 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 $28,000,000 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. At November 30, 1999, the Company was in compliance with
each of these covenants.
(2) The mortgage note payable is collateralized by certain land and
building and requires monthly principal payments of approximately
$3,000 through July 2009, with a final principal payment of $400,000
due in August 2009.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(3) The industrial development authority notes are collateralized by
certain land, building and equipment and an irrevocable letter of
credit issued by the Company, through one of its principal lending
institutions. The notes bear interest at approximately 50% of the
prevailing prime rate and require annual principal payments ranging
from $200,000 to $300,000 through the year 2007.
(4) The industrial development authority notes are collateralized by an
irrevocable letter of credit issued by the Company, through one of
its principal lending institutions. The notes bear interest at
approximately 50% of the prevailing prime rate and require annual
principal payments of $400,000 through the year 2000, with a final
principal payment of $300,000 due in the year 2001.
Each of the above irrevocable letters of credit is collateralized by
substantially all of the Company's tangible and intangible assets.
The aggregate maturities of all long-term debt during each of the five
years ending November 30, 2004, are $4,276,000, $4,176,000, $3,976,000,
$3,876,000, and $3,876,000, respectively.
8. Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, accounts
receivable, accounts payable, and accrued liabilities approximate fair
value due to the short-term maturities of these assets and liabilities.
The interest rates on substantially all of the Company's bank borrowings
are adjusted regularly to reflect current market rates. Accordingly, the
carrying amounts of the Company's short-term and long-term borrowings also
approximate fair value. The Company utilizes letters of credit to
collateralize certain long-term borrowings. The letters of credit reflect
fair value as a condition of their underlying purpose and are subject to
fees competitively determined in the marketplace.
During 1999, the Company entered into an interest rate swap
agreement to limit the effect of increases in interest rates on the
Company's variable rate debt. The swap agreement has an aggregate notional
amount of $10,000,000 and expires on December 31, 2001. The effect of the
agreement is to limit the interest rate exposure on $10,000,000 of the
Company's term loan and revolving credit loans. As a result of this
agreement, interest expense was increased by $46,000 in 1999. At
November 30, 1999, the estimated fair value of the interest rate swap
agreement is a net receivable of $73,000, based on current market rates and
settlement costs.
9. Treasury Stock
On September 30, 1998, the Board of Directors authorized the
Company to repurchase up to $4,000,000 of the Company's Common Stock at
market prices. The amount and timing of the shares to be repurchased will
be at the discretion of management. At November 30, 1999 and 1998, the
Company had repurchased 70,000 shares at an aggregate cost of $294,000.
10. Other Income and Expense
Other income and expense consist of the following
(in thousands):
1999 1998 1997
Investment income $ 72 $ 117 $ 31
Gain (loss) on foreign currency
transactions 4 (40) 12
Patent licensing fees 7 8 106
Gain (loss) on sale of property,
plant and equipment 13 - (8)
$ 96 $ 85 $ 141
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Income Taxes
For the years ended November 30, 1999, 1998 and 1997, income
before income taxes consists of the following (in thousands):
1999 1998 1997
U.S. operations $ 8,376 $ 5,884 $ 4,583
Foreign operations 464 435 927
$ 8,840 $ 6,319 $ 5,510
For the years ended November 30, 1999, 1998 and 1997, the
provision for income taxes consists of the following (in thousands):
1999 1998 1997
Current
Federal $ 2,396 $ 1,146 $ 1,055
State 340 225 105
Deferred 634 1,014 376
$ 3,370 $ 2,385 $ 1,536
The difference between the provision for income taxes and the
amount computed by applying the U.S. federal income tax rate in effect
for the years ended November 30, 1999, 1998 and 1997 consists of the
following (in thousands):
1999 1998 1997
Statutory federal income tax $ 3,006 $ 2,148 $ 1,873
State income taxes, net of federal
tax benefit 224 148 69
Foreign tax rates 74 70 148
Subpart F income, U.S. property investment - - 258
Decrease in deferred tax asset
valuation allowance - (62) (1,194)
Other items 66 81 382
$ 3,370 $ 2,385 $ 1,536
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Significant components of the Company's net deferred
tax assets and liabilities are as follows (in thousands):
November 30
Deferred tax assets: 1999 1998
Amortization of intangible assets $ 453 $ 512
Accrued compensation 318 237
Investment in subsidiaries 255 399
Net operating loss carryforwards 232 574
Allowance for doubtful accounts 170 103
Inventory valuation 110 68
Tax credit carryforwards 28 42
Property, plant and equipment - 116
Other 10 10
Deferred tax assets 1,576 2,061
Deferred tax liabilities:
Depreciation of plant and equipment 2,329 2,336
Investment in subsidiaries 1,107 1,034
Amortization of intangible assets 68 4
Other 19 -
Deferred tax liabilities 3,523 3,374
Net deferred tax assets (liabilities) $(1,947) $(1,313)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
November 30
1999 1998
(in thousands)
Net deferred tax assets
Current $ 579 $ 409
Noncurrent 108 383
Net deferred tax liabilities
Noncurrent (2,634) (2,105)
$(1,947) $(1,313)
The Company has not recorded deferred income taxes on the
undistributed earnings of its foreign subsidiary because of management's
intent to indefinitely reinvest such earnings. At November 30, 1999, the
undistributed earnings of the foreign subsidiary amounted to $2,836,000
(5,332,000 DM). Upon distribution of these earnings in the form of
dividends or otherwise, the Company may be subject to U.S. income taxes and
foreign withholding taxes. It is not practical, however, to estimate the
amount of taxes that may be payable on the eventual remittance of these
earnings. At November 30, 1999, the Company's foreign subsidiary had
approximately $216,000 (406,000 DM) of tax net operating loss carryforwards
available to be carried forward indefinitely.
The Company has assessed its past earnings history and trends,
and expiration dates of tax attribute carryforwards, and has determined
that it is more likely than not that its deferred tax assets will be
realized. Accordingly, no valuation allowance has been recorded at
November 30, 1999 or 1998. During the years ended November 30, 1998 and
1997, the Company reduced its previously recorded valuation allowance for
deferred tax assets to reflect the utilization of certain foreign net
operating loss carryforwards and changes in the expected future realization
of remaining foreign loss carryforwards.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Earnings Per Share
The following table sets forth the computation of basic and
diluted earnings per common share:
1999 1998 1997
Numerator for basic and diluted
earnings per common share
(in thousands):
Net income $ 5,470 $ 3,934 $ 3,974
Denominator for basic earnings
per common share
(in thousands):
Weighted average shares
outstanding 10,905 10,907 10,798
Denominator for diluted earnings
per common share
(in thousands):
Weighted average shares
outstanding 10,905 10,907 10,798
Effect of dilutive securities 139 109 71
Stock options 7 - -
Stock warrants
11,051 11,016 10,869
Earnings per common share:
Basic $ 0.50 $ 0.36 $ 0.37
Diluted $ 0.49 $ 0.36 $ 0.37
Options to purchase 143,500 shares of Common Stock at prices ranging
from $ 4.25 to $6.00 per share were outstanding during 1998 but were not
included in the computation of diluted earnings per share because the options'
exercise prices were greater than the average market price of the Company's
Common Stock and, therefore, would be antidilutive.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Supplemental Cash Flow Information
Supplemental cash flow information consists of the following
(in thousands):
1999 1998 1997
Cash paid during the year for:
Interest $ 1,380 $ 210 $ 420
Income taxes 2,986 1,466 854
Liabilities assumed in
connection with business
acquisitions 1,866 - -
14. Common Stock Options
The Company has several plans which provide for granting to
officers, directors, key employees and advisors options to purchase shares
of the Company's Common Stock. Under the plans, option prices are not less
than the market price of the Company's Common Stock on the date of the
grant. The options become exercisable at varying dates and generally
expire five years from the date of grant. At November 30, 1999, options to
purchase 1,141,392 shares of Common Stock were available for grant under
the Company's stock option plans.
A summary of the Company's stock option activity for the years
ended November 30, 1999, 1998 and 1997 is as follows:
Number
of Shares Option Price
Under Per Weighted
Option Share Average Aggregate
Outstanding - November 30, 1996 362,667 $1.88-4.25 $3.26 $1,183,000
Granted during the year 155,000 3.06-3.50 3.18 493,000
Exercised during the year (84,998) 1.88-4.25 3.52 (300,000)
Forfeitures and expirations (42,001) 1.88-3.06 2.85 (119,000)
Outstanding - November 30, 1997 390,668 1.88-4.25 3.22 1,257,000
Granted during the year 137,500 5.88-6.00 5.91 813,000
Exercised during the year (118,663) 1.88-4.25 3.49 (414,000)
Forfeitures and expirations (4,000) 1.88-3.06 2.77 (11,000)
Outstanding - November 30, 1998 405,505 1.88-6.00 4.06 1,645,000
Granted during the year 194,500 4.13-4.38 4.26 828,000
Exercised during the year (68,663) 1.83-3.56 2.65 (182,000)
Forfeitures and expirations (60,000) 3.00-5.88 4.15 (249,000)
Outstanding - November 30, 1999 471,342 $3.00-6.00 $4.33 $2,042,000
Exercisable
November 30, 1999 68,165 $3.00-3.50 $3.29 $224,000
November 30, 1998 44,497 $1.88-4.25 $3.10 $138,000
November 30, 1997 80,163 $1.88-4.25 $3.66 $293,000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the years ended November 30, 1999, 1998 and 1997, the
weighted average fair value of options granted amounted to $1.73, $2.45,
and $0.97 per share, respectively. At November 30, 1999, the weighted
average remaining contractual life of outstanding options was 3.8 years.
The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123") requires use of option valuation models that were not
developed for use in valuing employee stock options.
Pro forma information regarding net income and earnings per
share, required by SFAS No. 123, has been determined as if the Company had
accounted for its employee stock options under the fair value method of
SFAS No. 123. The fair value for options granted was estimated at the date
of grant using a Black-Scholes option pricing model with the following
assumptions for 1999, 1998, and 1997 respectively: risk-free interest rate
of 5.50%, 5.50%, and 6.00%; volatility factor of the expected market price
of the Company's Common Stock of 0.36, 0.37, and 0.30; dividend yield of
0.00%, 0.00%, and 2.00%; and a weighted average expected option life of
five years. For purposes of pro forma disclosures, the estimated fair
value of options is amortized to expense over the options' vesting period.
For the years ended November 30, 1999, 1998, and 1997, the Company's
reported and pro forma net income and earnings per share are as follows (in
thousands, except per share data):
1999 1998 1997
As reported
Net income $ 5,470 $ 3,934 $ 3,974
Earnings per common share:
Basic 0.50 0.36 0.37
Diluted 0.49 0.36 0.37
Pro forma:
Net income 5,314 3,837 3,935
Earnings per common share:
Basic 0.49 0.35 0.37
Diluted 0.48 0.35 0.37
15. Employee Savings Plan
The Company has a savings plan, available to substantially all
employees, which permits participants to make contributions by salary
reduction pursuant to Section 401(k) of the Internal Revenue Code. The
Company matches employee contributions up to a maximum of 2.5% of
compensation and may, at its discretion, make additional contributions to
the plan. The Company's contribution to the plan was $208,000 in 1999,
$190,000 in 1998, and $180,000 in 1997.
16. Concentration of Credit Risk
Financial instruments which potentially subject the Company to
a concentration of credit risk principally consist of cash, cash
equivalents and trade receivables. The Company invests available cash in
money market securities of high credit quality financial institutions. At
November 30, 1999 and 1998, approximately 58% and 49%, respectively, of the
Company's accounts receivable were from customers in the telecommunication
industry. To reduce credit risk, the Company performs periodic credit
evaluations of its customers, but does not generally require advance
payments or collateral. Credit losses to customers operating in the
telecommunication industry have not been material
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. OPERATING SEGMENTS
The Company was founded as a solutions-oriented company,
designing and manuacturing products to suppress or eliminate electromagnetic
interference ("EMI"). The Company has expanded its core EMI filter technology
to a broad line of control products and systems. Currently, the Company has
two reportable segments: interconnect products and control products.
The Company's Interconnect Products Division manufactures a
wide range of low pass filters, filtered arrays, and filtered connectors. The
Company's Control Products Division manufactures various power products (power
distribution units, intelligent power management and contidioning products,
power entry modules, and power line filters) and microwave products (coaxial
resonators, bandpass filters, and duplexers). Although the Company's products
are utilized in numerous applications and industries, the Company's primary
markets are communication equipment, military, and aerospace.
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 segment assets are comprised solely of property, plant,
equipment, and inventories.
The Company's reportable segments are operating divisions that
offer different products. The reportable segments are each managed separately
because they manufacture and distribute distinct products with different
production processes.
For the years ended November 30, 1999, 1998, and 1997, reportable segment
information is as follows(in thousands):
Interconnect Control
1999 Products Products Other Total
Revenue from unaffiliated
customers $63,355 $32,863 $1,511 $97,729
Depreciation expense 1,297 674 1,971
Segment income 21,507 7,739 29,246
Segment assets 20,236 8,752 28,988
Capital expenditures 1,085 1,640 2,725
Interconnect Control
1998 Products Products Other Total
Revenue from unaffiliated
customers $42,025 $16,235 $1,608 $59,868
Depreciation expense 1,171 499 1,670
Segment income 16,780 3,509 20,289
Segment assets 8,419 5,715 14,134
Capital expenditures 388 1,186 1,574
Interconnect Control
1997 Products Products Other Total
Revenue from unaffiliated
customers $44,709 $11,168 $ 589 $56,466
Depreciation expense 1,197 296 1,493
Segment income 16,841 1,255 18,096
Segment assets 9,312 4,487 13,799
Capital expenditures 713 1,134 1,847
Other revenue consists of sales of ceramic capacitors. The Company's
ceramic operations primarily manufacture and transfer ceramic capacitors and
resonators to the Company's Interconnect Products and Control Products
Divisions. Accordingly, the Company considers its ceramic capacitor operations
to be a functional department and not a reportable operating segment.
For the years ended November 30, 1999, 1998 and 1997, reconciliations
of reportable segment information to the Company's consolidated financial
statements are as follows (in thousands):
Depreciation expense 1999 1998 1997
Total depreciation expense
for reportable segments $ 1,971 $ 1,670 $ 1,493
Unallocated amounts:
Depreciation expense related to
the Company's ceramic
capacitor operations 1,484 1,545 1,375
Depreciation expense related to
selling, general and administrative
activities 464 372 419
Consolidated depreciation expense $ 3,919 $ 3,587 $ 3,287
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income before provision
for income taxes 1999 1998 1997
Total income for reportable segments $29,246 $20,289 $18,096
Unallocated amounts:
Manufacturing expense related to
the Company's ceramic
capacitor operations (4,272) (3,613) (2,173)
Selling, general and
administrative expense (14,810) (10,214) (10,137)
Interest expense (1,420) (228) (417)
Other income 96 85 141
Consolidated income before
provision for income taxes $ 8,840 $ 6,319 $ 5,510
Assets 1999 1998 1997
Total assets for reportable segments $28,988 $14,134 $13,799
Unallocated amounts:
Assets utilized in the
Company's ceramic
capacitor operations 13,434 12,805 12,097
Cash and cash equivalents 538 739 196
Accounts receivable 19,330 10,162 9,997
Goodwill 14,225 2,547 -
Other assets 6,039 3,752 3,967
Total consolidated assets $82,554 $44,139 $40,056
Captial expenditures 1999 1998 1997
Total capital expenditures for
reportable segments $ 2,725 $ 1,574 $ 1,847
Capital expenditures related
to the Company's ceramic
capacitor operations 864 1,335 1,289
Capital expenditures related
to the Company's selling,
general and administrative
activities 1,383 384 144
Total consolidated capital
expenditures $ 4,972 $ 3,293 $ 3,280
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company has operations in the United States and Germany. Sales
are attributed to individual countries based upon the location responsible
for the sale. The company transfers products from one geographic region for
resale in another. These transfers are priced to provide both areas with an
equitable share of the overall profit. The geographic distribution of sales
and long-lived assets for 1999, 1998 and 1997 is as follows (in thousands):
United
1999 States Germany Total
Revenue from unaffiliated customers $82,662 $15,067 $97,729
Long-lived assets:
Property, plant and equipment 21,241 125 21,366
Intangible assets 14,940 -- 14,940
United
1998 States Germany Total
Revenue from unaffiliated customers $50,864 $9,004 $59,868
Long-lived assets:
Property, plant and equipment 16,188 101 16,289
Intangible assets 2,941 -- 2,941
United
1997 States Germany Total
Revenue from unaffiliated customers $48,148 $8,318 $56,466
Long-lived assets:
Property, plant and equipment 15,885 94 15,979
Intangible assets 499 -- 499
In 1999 and 1998, the Company's largest single customer, an original
equipment manufacturer of telecommunication equipment, represented 18% and 11%,
respectively, of total consolidated net sales. Sales to this major customer
principally consisted of control products. In 1997, the Company's largest
single customer represented 9% of total consolidated net sales. Sales to this
customer principally consisted of interconnect products.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Quarterly Financial Data (Unaudited)
Year Ended November 30, 1999
First Second Third Fourth
(in thousands, except per share data)
Net sales $ 15,325 $ 24,542 $ 28,891 $ 28,971
Gross margin 4,412 7,011 8,074 8,415
Net income 863 1,510 1,597 1,500
Earnings per common share:
Basic 0.08 0.14 0.15 0.14
Diluted 0.08 0.14 0.14 0.13
Year Ended November 30, 1998
First Second Third Fourth
(in thousands, except per share data)
Net sales $ 14,641 $ 15,190 $ 14,023 $ 16,014
Gross margin 4,419 4,741 4,232 4,892
Net income 956 1,059 915 1,004
Earnings per common share:
Basic 0.09 0.10 0.08 0.09
Diluted 0.09 0.10 0.08 0.09
Earnings per common share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share may not
equal the total computed for the year.
19. Operating Leases
The Company has entered into several operating lease agreements,
primarily relating to sales office facilities and computer equipment.
These leases are noncancelable and expire on various dates through 2006.
Leases that expire generally are expected to be renewed or replaced by
other leases. Future minimum rental payments for all operating leases
having initial or remaining noncancelable terms in excess of one year are
as follows (in thousands):
2000 $ 149
2001 140
2002 85
2003 58
2004 56
Later years 89
$ 577
Total rent expense under all operating leases amounted to
$1,140,000 in 1999, $644,000 in 1998, and $517,000 in 1997.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under "Election of Directors" and
"Directors of the Company" on pages 3, 4 and 5 of the registrant's Proxy
Statement for the annual meeting of shareholders to be held April 3, 2000
(the "Proxy Statement") is incorporated herein by reference.
The following information is provided with respect to the
executive officers of the Company:
Name of Officer Age Position
John P. Freeman 45 Vice President, Chief Financial Officer
Lawrence G. Howanitz 47 Vice President Signal Products Group
James A. Siegel 58 Treasurer
Robert L. Smith 61 Vice President Quality and Technology
Richard A. Southworth 57 President, Chief Executive Officer
James F. Toohey 65 Secretary
Brian F. Ward 40 Vice President Sales and Marketing
Mr. Freeman is a graduate of Gannon University in Accounting and
is a Certified Public Accountant and Certified Management Accountant. He
joined the Company in 1988 as Controller. Prior to that time, he was a
principal in a public accounting firm. In January 1990, he was named Vice
President and Chief Financial Officer.
Mr. Howanitz is a graduate of Pennsylvania State University with a
bachelors degree in Business Administration. Since joining the Company in
1984, he has held several management positions. In 1997, he was appointed
General Manager of the Company's Interconnect Products Division. In
September of 1999, Mr. Howanitz was named Vice President Signal Products
Group. In this position, he is responsible for the Company's worldwide
signal products business which includes interconnect filter products,
microwave/wireless filters, and ceramic capacitors.
Mr. Siegel is a graduate of Gannon University in Accounting. He
joined the Company as Corporate Controller in 1974, was appointed Assistant
Treasurer in 1975, and Treasurer in 1984.
Mr. Smith is a graduate of Cleveland Institute of Electronics and
is a certified National Association of Radio and Telecommunications
Engineer. He joined the Company in 1978 as Manager of EMC testing services
and was named Vice President Quality and Technology in 1997. Prior to
joining the Company, Mr. Smith was Product Engineering Manager of Erie
Technological Products.
Mr. Southworth is a graduate of Gannon University in Mechanical
Engineering and Mathematics. He joined the Company in 1991 as Vice
President and General Manager. Prior to joining the Company, Mr.
Southworth held executive positions with National Water Specialties,
Philips Components, Murata Electronics North America, and Erie
Technological Products. In 1997, Mr. Southworth was named President and
Chief Executive Officer.
Mr. Toohey is a graduate of Gannon University and Dickinson School
of Law and is a practicing member of the Erie County Bar Association. He
is a member of the law firm of Quinn, Buseck, Leemhuis, Toohey & Kroto,
Inc., general counsel to the Company, and has been a Director and Secretary
of the Company since its organization.
Mr. Ward is a Marketing graduate of Franklin Pearce College of
Business. He joined the Company in 1994 as Director of Marketing and in
1997 was named Vice President Sales and Marketing. Prior to joining the
Company, Mr. Ward held managerial positions in Engineering and Marketing
with Clarostat Manufacturing Co. and Oak Grigsby, Inc.
All executive officers are elected by the Board of Directors and
serve at the discretion of the Board.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under "Executive Compensation" on pages
7 through 12 of the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under "Securities Ownership" on pages 5
and 6 of the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under "Certain Relationships and Related
Transactions" on page 7 of the Proxy Statement is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
(1) Financial Statements - The following consolidated financial
statements of Spectrum Control, Inc. and subsidiaries are
included in Part II, Item 8:
Page No.
Report of Independent Auditors
Consolidated Balance Sheets as of November 30, 1999 and 1998
Consolidated Statements of Income for the Years Ended
November 30, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the Years
Ended November 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended
November 30, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules - The following financial
statement schedule is submitted herewith for the periods
indicated therein.
Schedule II - Valuation and Qualifying Accounts
All other schedules are not submitted because they are not
required or are not applicable, or the required information is shown in the
consolidated financial statements or notes thereto. Columns omitted from
the schedule filed have been omitted because the information is not
applicable.
(3) Exhibits - The following is the index to exhibits for Spectrum
Control, Inc. and subsidiaries.
Description of Exhibit Page No.
Articles of Incorporation of registrant,
as amended, previously filed on February 25,
1981, as Exhibit 3.1 to Form S-1 registration
and incorporated herein by reference
By-laws of registrant, as amended,
previously filed on February 25, 1981, as
Exhibit 3.2 to Form S-1 registration and
incorporated herein by reference
Stock Option Plan of 1995, previously filed
under Form S-8 on January 22, 1996, and
incorporated herein by reference (10.1)
Non-Employee Directors' Stock Option Plan,
previously filed under Form S-8 on July 16,
1996, and incorporated herein by reference (10.2)
Subsidiaries of the registrant (21)
Consent of Independent Auditors(23)
(b) Reports on Form 8-K
None
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Three Years Ended November 30, 1999
(Dollar Amounts in Thousands)
Column A Column B Column C Column D Column E
Additions
Balance At Charged to Balance
Beginning Costs and at End
Description of Year Expenses Deductions of Year
Year ended November 30, 1997
Allowance for doubtful accts. $ 378 $ 128 $ 97(1) $ 409
Valuation allowance for
deferred tax assets 1,256 - 1,194(2) 62
$1,634 $ 128 $ 1,291 $ 471
Year ended November 30, 1998
Allowance for doubtful accts. $ 409 $ 101 $ 104(1) $ 406
Valuation allowance for
deferred tax assets 62 - 62(2) -
$ 471 $ 101 $ 166 $ 406
Year ended November 30, 1999
Allowance for doubtful accts. $ 406 $ 399 $ 132(1) $ 673
(1) Uncollectible accounts written off, net of recoveries.
(2) Decrease in valuation allowance, principally related to tax loss
carryforwards of the Company's foreign subsidiary.
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
(1) Spectrum Control, Inc.
100% - Owned Subsidiary
Incorporated in the State of Delaware
Investment Company
(2) Spectrum Engineering International, Inc.
100% - Owned Subsidiary
Incorporated in the State of Delaware
Interest Charge Domestic International Sales Corporation
(3) Spectrum Control Technology, Inc.
100% - Owned Subsidiary
Incorporated in the State of Delaware
Operating Company
(4) Spectrum Polytronics, Inc.
96% - Owned Subsidiary
Incorporated in the Commonwealth of Pennsylvania
Former Operating Company
(5) Spectrum Control GmbH
100% - Owned Subsidiary
Incorporated in Germany
Operating Company
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
on Form S-8 dated May 11, 1987 pertaining to the Spectrum Control, Inc.
Non-Qualified Stock Option Plan of 1987, the Registration Statement on Form
S-8 dated January 22, 1996 pertaining to the Spectrum Control, Inc. Stock
Option Plan of 1995, and the Registration Statement on Form S-8 dated July
16, 1996 pertaining to the Spectrum Control, Inc. 1996 Non-Employee
Directors' Stock Option Plan, of our report dated January 4, 2000, with
respect to the consolidated financial statements and schedule included in
this Form 10-K of Spectrum Control, Inc.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
February 23, 2000
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/Richard A. Southworth
February 28, 2000 Richard A. Southworth
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
/s/Edwin R. Bindseil Director February 28, 2000
/s/John P. Freeman Director, February 28, 2000
Chief Financial Officer,
and Principal
Accounting Officer
/s/J. Thomas Gruenwald Director February 28, 2000
/s/Melvin Kutchin Director February 28, 2000
/s/John M. Petersen Director February 28, 2000
/s/Gerald A. Ryan Director February 28, 2000
/s/James F. Toohey Director February 28, 2000