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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, 1998
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)
6000 West Ridge Road, Erie, Pennsylvania 16506
Telephone 814-835-4000
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, 1999, the aggregate market value of voting Common Stock held by
non-affiliates of the registrant based on a closing price of $4.00 was
$30,699,000. 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, 1999, the registrant had outstanding 10,887,008 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 5, 1999 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 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 and microwave products, operates
facilities in Erie, Pennsylvania and Wesson, Mississippi. The Company's
executive offices are located in Erie, 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. Currently, 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. 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 49% of the Company's total revenue during fiscal year 1998
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 1998, military/aerospace sales accounted for
approximately 24% of the Company's total sales. The Company does not expect
such sales to increase from the levels achieved in the 1998 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 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 low pass filters, filtered arrays, and filtered
connectors.
LOW PASS FILTERS
The Company's low pass 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 include filter plate assemblies
and filtered terminal blocks. 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 terminal blocks, which are designed with a rugged
construction to protect the filtering elements, are primarily used in
telecommunication equipment, industrial controls, uninterruptible power
supplies, and instrumentation.
FILTERED CONNECTORS
The Company offers a range of custom connectors 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, 1998 approximately 70% 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 assemblies, power entry modules, power
distribution units, 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 and power supplies.
During the year ended November 30, 1998, approximately 25% of the
Company's total revenue was generated from the sale of power products.
MICROWAVE 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, 1998, approximately 2% of the
Company's total revenue was generated from the sale of microwave 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, 1998, approximately 3% 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 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 (commercial
custom assemblies, multisection assemblies, power distribution units, and power
entry modules) 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, 1998, 1997 and 1996, reportable segment
information is as follows(in thousands):
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
Interconnect Control
1996 Products Products Other Total
Revenue from unaffiliated
customers $49,512 $ 7,103 $ 712 $57,327
Depreciation expense 998 119 1,117
Segment income 18,245 733 18,978
Segment assets 9,413 3,770 13,183
Capital expenditures 1,089 475 1,564
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, 1998, 1997 and 1996, reconciliations
of reportable segment information to the Company's consolidated financial
statements are as follows (in thousands):
Depreciation expense 1998 1997 1996
Total depreciation expense
for reportable segments $ 1,670 $ 1,493 $ 1,117
Unallocated amounts:
Depreciation expense related to
the Company's ceramic
capacitor operations 1,545 1,375 1,185
Depreciation expense related to
selling, general and administrative
activities 372 419 509
Consolidated depreciation expense $ 3,587 $ 3,287 $ 2,811
Income before provision
for income taxes 1998 1997 1996
Total income for reportable segments $20,289 $18,096 $18,978
Unallocated amounts:
Manufacturing expense related to
the Company's ceramic
capacitor operations (3,613) (2,173) (3,191)
Selling, general and
administrative expense (10,214) (10,137) (10,317)
Interest expense (228) (417) (753)
Other income 85 141 20
Consolidated income before
provision for income taxes $ 6,319 $ 5,510 $ 4,737
Assets 1998 1997 1996
Total assets for reportable segments $14,134 $13,799 $13,183
Unallocated amounts:
Assets utilized in the
Company's ceramic
capacitor operations 12,805 12,097 12,059
Cash and cash equivalents 739 196 413
Accounts receivable 10,162 9,997 10,202
Other assets 6,299 3,967 4,356
Total consolidated assets $44,139 $40,056 $40,213
Captial expenditures 1998 1997 1996
Total capital expenditures for
reportable segments $ 1,574 $ 1,847 $ 1,564
Capital expenditures related
to the Company's ceramic
capacitor operations 1,335 1,289 1,514
Other capital expenditures 384 144 746
Total consolidated capital
expenditures $ 3,293 $ 3,280 $ 3,824
The Company has operations in the United States and Germany. Sales
are attributed to individual countries based upon the location from which the
shipment originates. The geographic distribution of sales and long-lived
assets for 1998, 1997 and 1996 is as follows (in thousands):
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
United
1996 States Germany Total
Revenue from unaffiliated customers $47,541 $9,786 $57,327
Long-lived assets:
Property, plant and equipment 15,907 110 16,017
Intangible assets 715 -- 715
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
predominantly denominated in U.S. Dollars and German Deutsche Marks. 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 1998, the Company's largest single customer, an original equipment
manufacturer of telecommunication equipment, represented 11% of total
consolidated net sales. Sales to this major customer principally consisted of
control products. In 1997 and 1996, the Company's largest single customer
represented 9% and 12%, respectively, 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 Control Products Division in Erie, Pennsylvania.
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. Prior to fiscal 1997, the Company principally maintained
representatives in the United States, Canada, Israel, and Europe. In 1997
and 1998, the Company expanded its sales organization to include manufacturers'
representatives in Mexico, Brazil, Australia, and much of Asia. In fiscal 1998,
approximately 16% 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 1998, the Company sold its products to approximately
1,000 accounts. Sales of products to the Company's top ten customers
represented 42% ($24.9 million) of total consolidated net sales in 1998. The
Company's largest single customer, an original equipment manufacturer of
telecommunications equipment, represented 11% in 1998, 9% in 1997, and 12% in
1996 of total consolidated net sales. The Company's second largest single
customer represented 6% of total consolidated net sales in 1998, 7% in 1997,
and 8% in 1996. All of the Company's major customers are unaffiliated with
Spectrum Control, Inc. and its subsidiaries.
Shipments are made by common carrier. Since most of the Company's
products are either small or miniaturized and light weight, shipping charges
do not affect the Company's ability to compete for business domestically or
abroad.
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 $22.8 million at November 30, 1998 and $21.0 million at
November 30, 1997. It is anticipated that approximately 90% of the Company's
backlog as of November 30, 1998 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, 1998, the Company had a total of 792 employees,
including 45 in sales, marketing and customer support; 70 in engineering and
product development; 635 in manufacturing; and 42 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 several 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 technology, inventions and improvements that are
important to its business. 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: AMP, AVX,
Amphenol, Tusonix, and Trans-Tech. 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, 1998, the Company
employed 70 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 $961,000 in 1998, $807,000
in 1997, and $821,000 in 1996.
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, 1998 are as follows:
PRINCIPAL
BALANCE
OUTSTANDING
APPROXIMATE AT 11/30/98
SQUARE FEET ON RELATED
LOCATION FUNCTION OF FLOOR AREA OWNERSHIP MORTGAGE
8061 Avonia Road Manufacturing, 38,000 Owned $ 124,000
Fairview, PA EMI Testing
6000 West Ridge Road Manufacturing, 41,000 Owned $ 6,000
Erie, PA Corporate Offices
4100 Michoud Blvd. Manufacturing 100,000 Owned $2,100,000
New Orleans, LA
3004 Hwy. 51N Manufacturing 40,000 Rented N/A
Wesson, MS
(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 1999, the Company expects to construct a 10,000 square foot corporate
office building in Fairview, PA. The Company's other office and
manufacturing 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, 1998.
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 1998 and 1997 are set forth below.
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
High Low
Fiscal 1997
First quarter $ 4.13 $ 3.00
Second quarter 4.00 3.13
Third quarter 5.00 3.81
Fourth quarter 6.00 4.63
At February 1, 1999, the Company had 10,887,008 shares of Common Stock
outstanding, which were held by approximately 2,300 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)
1998 1997 1996 1995 1994
Operating Data
Net sales $59,868 $56,466 $57,327 $49,297 $43,659
Income before accounting
change 3,934 3,974 3,418 2,984 2,055
Accounting change (1) - - - - 1,845
Net income 3,934 3,974 3,418 2,984 3,900
Earnings per
common share:
Basic:
Income before
accounting change 0.36 0.37 0.32 0.28 0.19
Accounting change - - - - 0.18
Net income 0.36 0.37 0.32 0.28 0.37
Diluted:
Income before
accounting change 0.36 0.37 0.32 0.28 0.19
Accounting change - - - - 0.18
Net income 0.36 0.37 0.32 0.28 0.37
Dividends per share - - - - -
Financial Position
Working capital $18,619 $16,881 $12,534 $ 9,967 $ 8,251
Total assets 44,139 40,056 40,213 39,498 38,095
Long-term debt 2,500 3,330 4,072 6,569 8,275
Stockholders' equity 33,774 29,545 25,379 21,781 18,583
(1) In 1994, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes". The cumulative
effect, through November 30, 1993, of this change in accounting
amounted to $1,845,000 or $0.18 per share.
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 recent years, the Company broadened its focus by developing
new lines of power products (commercial custom assemblies, military/aerospace
multisection assemblies, power entry modules, and power line filters), microwave
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.
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.
Results of Operations
The following table sets forth certain financial data, as a percentage
of net sales, for the years ended November 30, 1998, 1997 and 1996:
1998 1997 1996
Net sales 100.0% 100.0% 100.0%
Cost of products sold 69.5% 69.2% 68.5%
Gross margin 30.5% 30.8% 31.5%
Selling, general and administrative expense 19.7% 20.6% 22.0%
Income from operations 10.8% 10.2% 9.5%
Other income (expense)
Interest expense (0.4)% (0.7)% (1.3)%
Other income and expense, net 0.2% 0.2% 0.1%
Income before provision for income taxes 10.6% 9.7% 8.3%
Provision for income taxes 4.0% 2.7% 2.3%
Net income 6.6% 7.0% 6.0%
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 consist of telecommunication
racks, power supplies, industrial controls, and other value-added assemblies.
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 and market
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
As a result of 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.
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 losses of $40,000 in 1998 and net gains of $12,000
in 1997 on these foreign currency transactions.
The Company recognized $125,000 in 1998 and $137,000 in 1997 from
certain short-term investments and patent licensing fees.
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.
At November 30, 1998, the Company had recorded certain deferred tax
assets, primarily related to U.S. and German net operating loss carryforwards.
Based upon the earnings history of the Company's U.S. and German operations,
management believes that it is more likely than not that these deferred tax
assets will be realized during the carryforward period to offset future taxable
income from ordinary and recurring operations.
1997 Compared to 1996
Net Sales
Consolidated 1997 net sales decreased by $861,000 or 1.5% from 1996.
The decrease in sales primarily reflects reduced shipment volume of EMI filtered
arrays used by customers in telecommunications equipment, cellular base
stations, and power amplifiers. Overall demand for the Company's products
remained strong, however, with total customer orders of $60.9 million received
in 1997, an increase of 7.8% from 1996.
Gross Margin
Gross margin was $17.4 million or 30.8% of sales in 1997 compared
$18.1 million or 31.5% of sales in 1996. In addition to reduced sales volume,
the decrease in gross margin primarily reflects changes in sales mix and the
related impact of fixed manufacturing overhead and lower production requirements
at the Company's ceramic components division in New Orleans, Louisiana.
Selling, General and Administrative Expense
Selling expense remained relatively constant in 1997, with total
selling expense of $6.5 million in 1997 and $6.6 million in 1996. General and
administrative expense decreased during the year, amounting to $5.1 million
or 9.2% of sales in 1997 and $6.0 million or 10.5% of sales in 1996. The
decrease in general and administrative expense primarily reflects reduced
expenses associated with the implementation of the Company's Rapid Response
Program. Although Rapid Response continues to be implemented throughout the
Company, the expenses associated with the program were principally incurred
during 1996 in the form of consulting fees and employee education. Management
believes that the full implementation of Rapid Response will significantly
reduce manufacturing lead times, improve inventory turnover rates, and provide
greater responsiveness to customers.
Other Income and Expense
Interest expense decreased by $336,000, from $753,000 in 1996 to
$417,000 in 1997. The decrease in interest expense reflects the Company's
repayment of $5.6 million of bank indebtedness in 1997. The Company's average
short-term interest rates were 8.3% in 1997 and 7.5% in 1996.
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 gains of $12,000 in 1997
and $38,000 in 1996 on these foreign currency transactions.
In 1997, the Company recognized $106,000 of other income from certain
patent licensing activities.
Income Taxes
The Company's effective income tax rate was 27.9% in 1997 and 27.8% in
1996, compared to an applicable statutory income tax rate of approximately
40.0%. Differences in the effective tax rate and statutory tax rate primarily
reflect decreases in the deferred tax asset valuation allowance of $1.2 million
in 1997 and $987,000 in 1996 relating 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 product mix. In 1998, approximately 49.0% of the Company's
sales were to customers in the telecommunication industry. Accordingly, any
significant change in the telecommunication industry's activity level would
have a direct impact on the Company's performance.
Liquidity, Capital Resources and Financial Condition
The Company has a $6.0 million line of credit with PNC Bank of Erie,
Pennsylvania (the "Bank"). The revolving credit line is collateralized by
substantially all of the Company's tangible and intangible property, with
interest rates on borrowings at or below the Bank's prevailing prime rate.
At November 30, 1998, there were no borrowings outstanding under this financing
arrangement. The current line of credit agreement expires April 30, 2000.
The Company's wholly-owned foreign subsidiary maintains unsecured
Deutsche Mark lines of credit with several German financial institutions
aggregating $1.8 million (3.0 million DM). At November 30, 1998, outstanding
borrowings under these lines of credit amounted to $336,000 (554,000 DM).
Borrowings under the lines of credit bear interest at rates below the
prevailing prime rate and are payable upon demand.
The Company's liquidity continued to improve in 1998. At November 30,
1998, the Company had net working capital of $18.6 million, compared to $16.9
million at November 30, 1997 and $12.5 million at November 30, 1996. The
Company's current ratio also improved in 1998, with current assets at 4.23
times current liabilities at November 30, 1998, compared to 3.83 at November 30,
1997 and 2.20 at November 30, 1996.
The Company's cash expenditures for property, plant and equipment
amounted to $3.3 million in 1998, $3.3 million in 1997, and $3.8 million in
1996. These capital expenditures primarily related to manufacturing capacity
expansion and establishing manufacturing capability for new product lines. At
November 30, 1998, the Company had not entered into any material commitments
for capital expenditures.
Income taxes paid during the fiscal years ended November 30, 1998,
1997 and 1996 amounted to $1.5 million, $854,000, and $1.2 million,
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 instituted a stock repurchase program.
Under the program, the Company may repurchase up to $4.0 million of the
Company's Common Stock. The shares will be purchased in the open market and
the cost of the program will be financed out of available cash reserves and
borrowings under the Company's revolving line of credit facility. The amount
and timing of the shares to be repurchased will be based on management's
ongoing assessment of the Company's capital structure, liquidity, and the
market price of the Company's stock. During 1998, 70,000 shares were
repurchased by the Company at an aggregate cost of $294,000.
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 1999. These cash requirements
include scheduled long-term debt repayment, planned capital expenditures, 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.
In 1998, the Company acquired substantially all of the assets of
Republic Electronics Corp., a manufacturer of subminiature ceramic capacitors,
and Potter Production Corporation, a manufacturer of electronic filters and
power products. The aggregate cash purchase price of the acquired assets
amounted to $4.1 million.
In 1998, the Company's operating cash flow remained strong. 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 utilized for capital additions of
$3.3 million and debt repayment of $743,000, as well as the aggregate cash
purchase price of the acquired businesses described above.
As a result of increased profitability and lower working capital
requirements, net cash from operations increased significantly in 1997. Net
cash provided by operations amounted to $8.5 million in 1997, compared to
$5.0 million in 1996. With the cash generated from operations in 1997, the
Company repaid $5.6 million of bank indebtedness and invested $3.3 million in
capital equipment and improvements.
In addition to generating $5.0 million of net cash from operations in
1996, the Company realized cash proceeds of $1.7 million on the sale of certain
land and building in Schwabach, Germany. This positive cash flow was utilized
for capital additions of $3.8 million and repayment of $2.8 million of bank
indebtedness.
As indicated above, the Company continued to reduce its bank
indebtedness in 1998. The Company's total borrowed funds were $3.7 million
at November 30, 1998, $4.1 million at November 30, 1997, and $9.7 million at
November 30, 1996. The Company increased stockholders' equity by $4.2 million
in 1998, primarily through earnings. Accordingly, the Company's debt to equity
ratio continued to improve in 1998. Total liabilities to net worth was 0.31
at November 30, 1998, 0.36 at November 30, 1997, and 0.58 at November 30, 1996.
Environmental Matters
The Company is subject to various laws and governmental regulations
concerning environmental matters and employee health and safety. U.S. 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 activities, 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.
Impact of Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. As a result,
any of the Company's computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including among other things, a temporary inability to process
transactions, prepare invoices, or engage in similar normal business activities.
The Company has completed an assessment and determined that it will
have to modify or replace portions of its software so that its computer systems
will function properly with respect to dates in the year 2000 and thereafter.
The Company presently believes that with modifications and replacement of
existing software, the Year 2000 Issue can be mitigated. However, if such
modifications and replacements are not made, or are not completed timely, the
Year 2000 Issue could have a material impact on the operations of the Company.
The Company's plan to resolve the Year 2000 Issue involves four phases:
assessment, remediation, testing, and implementation. To date, the Company
has fully completed its assessment of all material systems that could be
affected by the Year 2000 Issue. The completed assessment indicated that most
of the Company's significant information technology systems could be affected.
The assessment also indicated that software used in certain manufacturing
equipment (hereafter also referred to as operating equipment) is also at risk.
If not resolved on a timely basis, these systems could hamper the Company's
ability to manufacture and ship product from which the Company derives a
significant portion of its revenues.
For its information technology exposures, to date, the Company is 90%
complete on the remediation phase for all material systems and expects to
complete software reprogramming and replacement no later than January 1999.
After completing the reprogramming and replacement of software, the Company's
plans call for testing and implementing its information technology systems.
To date, the Company has completed 70% of its testing and has implemented 70%
of its remediated systems. Completion of the testing phase is expected by
February 1999, with all remediated systems fully implemented by March 1999.
With respect to operating equipment, the Company is 90% complete in the
remediation phase of the resolution process. Testing of this equipment is
currently 70% complete. Once testing is complete, the operating equipment
will be ready for immediate use. The Company expects to complete its
remediation efforts by January 1999. Testing and implementation of affected
equipment is expected to be completed by March 1999.
The Company has queried its important suppliers and vendors to assess
their Year 2000 readiness. To date, the Company is not aware of any problems
that would materially impact results of operations, liquidity, or capital
resources. However, the Company has no means of ensuring that these suppliers
and vendors will be Year 2000 ready. The inability of those parties to
complete their Year 2000 resolution process could materially impact the Company.
The Company will utilize both internal and external resources to
reprogram, or replace, test, and implement the software and operating equipment
for Year 2000 modifications. Management anticipates that its total Year 2000
project costs will not be material.
The Company's plans to complete Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources
and other factors. Estimates on the status of completion and the expected
completion dates are based on hours expended to date compared to total expected
hours. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel training in this area,
the ability to locate and correct all relevant computer codes, and similar
uncertainties.
Other Matters
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and for Hedging Activities" ("SFAS No. 133"). SFAS No. 133
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. SFAS No 133 is effective
for fiscal years beginning after June 15, 1999, with earlier application
permitted.
Effective January 1, 1999, the European Monetary Union ("EMU") will
create a single currency (the "Euro") for its member countries and the
exchange rates of the participating currencies will be fixed against the Euro.
The EMU has established a three year transition period from January 1, 1999 to
December 31, 2001, for the introduction of the Euro.
The Company does not expect the adoption of SFAS No. 133 or the
introduction of the Euro to have a material impact on the Company's financial
position or results of operations.
On February 1, 1999, the Company announced the signing of a letter of
intent to acquire substantially all of the assets of the Signal Conditioning
Products Division of AMP Incorporated ("SCPD"). Under the proposed agreement,
the Company would purchase SCPD's ceramic filter manufacturing technology and
related product lines, as well as certain product lines related to capacitive
film and EMI gaskets. SCPD sales of these product offerings amounted to
approximately $30.0 million in 1998. The Company has secured a commitment
letter from its principal lending institution to substantially finance the
transaction. Consummation of the proposed acquisition is subject to many
factors including execution of a definitive asset purchase agreement, results
of due diligence, and completion of financing.
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, 1998 and 1997
Consolidated Statements of Income for
the years ended November 30,
1998, 1997 and 1996
Consolidated Statements of Stockholders'
Equity for the years ended
November 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows
for the years ended November 30,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Spectrum Control, Inc.
We have audited the accompanying consolidated balance sheets of Spectrum
Control, Inc. and subsidiaries as of November 30, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended November 30, 1998. 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 generally accepted auditing
standards. 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 consolidated 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 as of November 30, 1998 and 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended November 30, 1998, in conformity with
generally accepted accounting principles. 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.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
January 6, 1999
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1998 AND 1997
(Dollar Amounts in Thousands)
1998 1997
ASSETS
Current assets
Cash and cash equivalents $ 739 $ 196
Accounts receivable, less allowances of $406
in 1998 and $409 in 1997 10,162 9,997
Inventories (Note 3) 12,885 12,110
Deferred income taxes (Note 10) 409 360
Prepaid expenses and other current assets 184 174
Total current assets 24,379 22,837
Property, plant and equipment, net (Note 4) 16,289 15,979
Other assets (Note 5) 3,471 1,240
Total assets $ 44,139 $ 40,056
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt (Note 6) $ 336 $ 40
Accounts payable 2,719 3,302
Accrued salaries and wages 1,438 1,311
Accrued interest 63 45
Accrued federal and state income taxes 93 289
Accrued other expenses 281 226
Current portion of long-term debt (Note 7) 830 743
Total current liabilities 5,760 5,956
Long-term debt (Note 7) 2,500 3,330
Deferred income taxes (Note 10) 2,105 1,225
Stockholders' equity
Common stock, no par value, authorized 25,000,000
shares, issued 10,957,008 shares
in 1998 and 10,838,345 in 1997 14,470 13,977
Retained earnings 19,798 15,864
Treasury stock, 70,000 shares in 1998,at cost (Note 8) (294) -
33,974 29,841
Accumulated other comprehensive income
Foreign currency translation adjustment (200) (296)
Total stockholders' equity 33,774 29,545
Total liabilities and stockholders' equity $ 44,139 $ 40,056
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, 1998, 1997, AND 1996
(Dollar Amounts in Thousands Except Per Share Data)
1998 1997 1996
Net sales $ 59,868 $ 56,466 $ 57,327
Cost of products sold 41,584 39,045 39,251
Gross margin 18,284 17,421 18,076
Selling, general and administrative expense 11,822 11,635 12,606
Income from operations 6,462 5,786 5,470
Other income (expense)
Interest expense (228) (417) (753)
Other income and expense, net (Note 9) 85 141 20
(143) (276) (733)
Income before provision for income taxes 6,319 5,510 4,737
Provision for income taxes (Note 10) 2,385 1,536 1,319
Net income $ 3,934 $ 3,974 $ 3,418
Earnings per common share (Note 11):
Basic $ 0.36 $ 0.37 $ 0.32
Diluted $ 0.36 $ 0.37 $ 0.32
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, 1998, 1997, AND 1996
(Dollar Amounts in Thousands)
Accumulated Total
Other Stock-
Common Retained Treasury Comprehensive Holders'
Stock Earnings Stock Income Equity
Balance-November 30, 1995 $13,493 $ 8,472 $ - $ (184) $21,781
Net income - 3,418 - - 3,418
Foreign currency translation
adjustment - - - (82) (82)
Comprehensive income - - - - 3,336
Issuance of 138,834 shares of
common stock 154 - - - 154
Tax benefits from exercise of
stock options 108 - - - 108
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
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, 1998, 1997, AND 1996
(Dollar Amounts in Thousands)
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,934 $ 3,974 $ 3,418
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 3,587 3,287 2,811
Amortization 135 219 508
Deferred income taxes 1,014 376 402
Tax benefits from exercise of stock options 79 25 108
Loss on sale of property, plant
and equipment - 8 18
Changes in assets and liabilities:
Accounts receivable (85) (67) (969)
Inventories 181 (188) (833)
Prepaid expenses and other assets 24 431 (121)
Accounts payable and accrued expenses (595) 441 (344)
Net cash provided by operating
activities 8,274 8,506 4,998
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, plant
and equipment - 10 1,665
Purchase of property, plant and equipment (3,293) (3,280) (3,824)
Payment for acquired businesses (4,077) - -
Net cash used in investing activities (7,370) (3,270) (2,159)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings(repayment) of short-term debt 282 (3,232) (912)
Repayment of long-term debt (743) (2,391) (1,845)
Purchase of common stock (294) - -
Net proceeds from issuance of common stock 414 196 154
Net cash used in financing activities (341) (5,427) (2,603)
Effect of exchange rate changes on cash (20) (26) (25)
Net increase (decrease) in cash and cash
equivalents 543 (217) 211
Cash and cash equivalents, beginning of year 196 413 202
Cash and cash equivalents, end of year $ 739 $ 196 $ 413
Cash paid during the year for:
Interest $ 210 $ 420 $ 756
Income taxes 1,466 854 1,197
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.
Fair Value of Financial Instruments
The carrying amounts of cash, 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.
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 foreign subsidiary 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 $633,000 in 1998, $574,000 in
1997, and $486,000 in 1996.
Research and Development
Research and development costs are expensed as incurred. Research
and development expense amounted to $961,000 in 1998, $807,000 in 1997, and
$821,000 in 1996.
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.
Comprehensive Income
During the year ended November 30, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130") issued by the Financial Accounting Standards Board.
SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components. The adoption of the new rules,
however, does not impact the Company's net income or stockholders' equity.
The new standard requires the Company's foreign currency translation
adjustments, which prior to adoption were reported separately in stockholders'
equity, to be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of
SFAS No. 130.
Operating Segments
Effective November 30, 1998, the Company adopted Statement of
Financial Accounting Standards No.131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131") issued by the Financial
Accounting Standards Board ("FASB"). SFAS No. 131, which supersedes FASB
Statement No. 14, "Financial Reporting for Segments of a Business Enterprise",
requires public business enterprises to report certain information about
operating segments in annual and interim financial statements. In addition,
SFAS No. 131 establishes standards for related disclosures about products and
services, geographic areas, and major customers. The adoption of SFAS No. 131
does not affect the Company's reported results of operations or financial
position, but does affect the disclosure of segment information presented
elsewhere herein.
Earnings Per Common Share
During the year ended November 30, 1998, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128"). SFAS No. 128 requires, among other things, dual presentation
of basic and diluted earnings per share on the face of the income statement.
Under the new standard, basic earnings per share is computed using only the
weighted average number of common shares outstanding during the period, while
diluted earnings per share is computed assuming the conversion of all dilutive
common stock equivalents, such as stock options. In accordance with SFAS No.
128, prior year per share amounts have been revised to reflect the new
computation and presentation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
2. Acquisitions
On April 22, 1998, the Company acquired substantially all of the
assets of Republic Electronics Corp., a manufacturer of subminiature ceramic
capacitors used in telecommunications and microwave (high frequency
applications. The aggregate purchase price of the acquired assets amounted to
$1,159,000, excluding possible future contingent payments. The amount of the
contingent payments will be determined based upon the sales of the acquired
product lines during the two years subsequent to the acquisition date.
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 purchase price of the acquired assets amounted
to $2,918,000, excluding possible future contingent payments. The amount of
the contingent payments will be determined based upon the Company's sales of
power products during the three years subsequent to the acquisition date. In
connection with this acquisition, the Company also 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, 1998, all warrants remained outstanding.
These acquisitions were funded through available cash reserves. The
aggregate purchase price of each acquisition has been allocated to the acquired
assets based upon their respective fair market values. The excess of the
aggregate purchase prices over the fair value of net assets acquired (goodwill)
amounted to $2,577,000 and is being amortized ratably over a period of 20 years.
The amount of contingent payments, if any, will be allocated to goodwill and
amortized ratably over the assets remaining life when the contingent payments
are determinable.
Each of the above acquisitions was accounted for as a purchase and,
accordingly, the results of operations of the acquired businesses have been
included in the accompanying financial statements since their respective
acquisition date. The following unaudited pro forma consolidated results of
operations have been prepared as if the acquisitions had occurred as of the
beginning of fiscal year 1997 (in thousands, except per share data):
1998 1997
Net sales $ 67,295 $ 65,763
Net income 3,935 3,893
Earnings per common share:
Basic 0.36 0.36
Diluted 0.36 0.36
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 acquisitions had taken place on the basis
assumed above, nor are they necessarily indicative of the results of future
combined operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Inventories
Inventories by major classification are as follows:
November 30
1998 1997
(in thousands)
Finished goods $ 2,581 $ 2,159
Work-in-process 5,070 5,364
Raw materials 5,234 4,587
$ 12,885 $ 12,110
4. Property, Plant and Equipment
Property, plant and equipment consist of the following:
November 30
1998 1997
(in thousands)
Land and improvements $ 1,164 $ 1,161
Buildings and improvements 9,409 8,701
Machinery and equipment 21,976 22,996
Construction in progress 371 478
32,920 33,336
Less accumulated depreciation 16,631 17,357
$ 16,289 $ 15,979
5. Other Assets
Other assets consist of the following:
November 30
1998 1997
(in thousands)
Goodwill $ 2,577 $ -
Patents and patent rights 466 540
Debt issuance costs 356 384
3,399 924
Less accumulated amortization 458 425
2,941 499
Deferred income taxes 383 566
Deferred charges 147 175
$ 3,471 $ 1,240
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Short-Term Debt
Short-term debt consists of the following:
November 30
1998 1997
(in thousands)
Notes payable - domestic
line of credit (1) $ - $ -
Notes payable - foreign
lines of credit (2) 336 40
Total $ 336 $ 40
(1) The Company has a $6,000,000 line of credit with its principal
lending institution (the "Bank"). During 1998, there were no
borrowings under the line of credit. During 1997, weighted
average borrowings under the revolving credit line amounted to
$883,000, with average interest rates of 8.30%, and maximum
month-end borrowings of $1,896,000. The revolving credit line
is collateralized by substantially all of the Company's tangible
and intangible property, with interest rates on borrowings at or
below the Bank's prevailing prime rate. The line of credit
agreement is subject to biannual renegotiation and renewal.
(2) The Company's wholly-owned foreign subsidiary maintains
unsecured Deutsche Mark lines of credit with German financial
institutions aggregating $1,818,000 (3,000,000 DM) at
November 30, 1998 and $1,161,000 (2,000,000 DM) at
November 30, 1997. Weighted average borrowings under the lines
of credit amounted to $28,000 (46,000 DM) in 1998 and $99,000
(172,000 DM) in 1997, with average interest rates of 6.00% in
1998 and 7.12% in 1997. The maximum amount of borrowings under
the lines of credit at the end of any month was $336,000
(554,000 DM) in 1998 and $320,000 (551,000 DM) in 1997.
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
1998 1997
(in thousands)
Industrial development authority notes
at variable interest rate
(3.40% at November 30, 1998
and 4.00% at November 30, 1997) (1) $ 2,100 $ 2,300
Industrial development authority notes
at variable interest rate
(3.81% at November 30, 1998
and 4.23% at November 30, 1997)(2) 1,100 1,500
Industrial development authority notes
and related bank mortgage notes at
interest rates ranging from 4.00% to
7.75%, collateralized by certain land
and buildings, and requiring monthly
principal and interest payments of
$13,000 through the year 1999 130 273
Total 3,330 4,073
Less current portion 830 743
Long-term debt $ 2,500 $ 3,330
(1) The industrial development authority notes are collateralized by certain
land, building and equipment and an irrevocable letter of credit issued
by the Company, through its principal lending institution. 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.
(2) The industrial development authority notes are collateralized by an
irrevocable letter of credit issued by the Company, through its principal
lending institution. 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, 2003, are $830,000, $600,000, $500,000, $300,000,
and $200,000, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. 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, 1998, the Company had repurchased 70,000 shares
at an aggregate cost of $294,000.
9. Other Income and Expense
Other income and expense consist of the following (in thousands):
1998 1997 1996
Investment income $ 117 $ 31 $ -
Gain (loss) on foreign currency
transactions (40) 12 38
Patent licensing fees 8 106 -
Loss on sale of property,
plant and equipment - (8) (18)
$ 85 $ 141 $ 20
10. Income Taxes
For the years ended November 30, 1998, 1997 and 1996, income before
income taxes consists of the following (in thousands):
1998 1997 1996
U.S. operations $ 5,884 $ 4,583 $ 3,605
Foreign operations 435 927 1,132
$ 6,319 $ 5,510 $ 4,737
For the years ended November 30, 1998, 1997 and 1996, the
provision for income taxes consists of the following (in thousands):
1998 1997 1996
Current
Federal $ 1,146 $ 1,055 $ 806
State 225 105 111
Deferred 1,014 376 402
$ 2,385 $ 1,536 $ 1,319
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 1998, 1997 and 1996 consists of the
following (in thousands):
1998 1997 1996
Statutory federal income tax $ 2,148 $ 1,873 $ 1,611
State income taxes, net of federal
tax benefit 148 69 73
Subpart F income, U.S. property investment - 258 166
Foreign tax rates 70 148 181
Decrease in deferred tax asset
valuation allowance (62) (1,194) (987)
Other items 81 382 275
$ 2,385 $ 1,536 $ 1,319
Significant components of the Company's net deferred
tax assets and liabilities are as follows (in thousands):
November 30
Deferred tax assets: 1998 1997
Net operating loss carryforwards $ 574 $ 868
Amortization of intangible assets 512 574
Investment in subsidiaries 399 544
Accrued compensation 237 219
Property, plant and equipment 116 116
Allowance for doubtful accounts 103 103
Inventory valuation 68 63
Tax credit carryforwards 42 638
Other 10 10
Sub-total 2,061 3,135
Valuation allowance (principally related to
certain net operating loss carryforwards) - 62
Deferred tax assets 2,061 3,073
Deferred tax liabilities:
Depreciation of plant and equipment 2,336 2,431
Investment in subsidiaries 1,034 941
Other 4 -
Deferred tax liabilities 3,374 3,372
Net deferred tax assets (liabilities) $(1,313) $ (299)
November 30
1998 1997
(in thousands)
Net deferred tax assets
Current $ 409 $ 360
Noncurrent 383 566
Net deferred tax liabilities
Noncurrent (2,105) (1,225)
$(1,313) $ (299)
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, 1998, the undistributed
earnings of the foreign subsidiary amounted to $2,372,000 (3,914,000 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.
During the years ended November 30, 1998, 1997 and 1996, the
decrease in valuation allowance for deferred tax assets principally related to
the utilization of certain foreign net operating loss carryforwards and changes
in the expected future realization of remaining foreign loss carryforwards.
At November 30, 1998, the Company's foreign subsidiary had
approximately $765,000 (1,263,000 DM) of tax net operating loss carryforwards
available to be carried forward indefinitely.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per common share:
1998 1997 1996
Numerator for basic and diluted
earnings per common share
(in thousands):
Net income $ 3,934 $ 3,974 $ 3,418
Denominator for basic earnings
per common share
(in thousands):
Weighted average shares
outstanding 10,907 10,798 10,731
Denominator for diluted earnings
per common share
(in thousands):
Weighted average shares
outstanding 10,907 10,798 10,731
Effect of dilutive stock options 109 71 45
11,016 10,869 10,776
Earnings per common share:
Basic $ 0.36 $ 0.37 $ 0.32
Diluted $ 0.36 $ 0.37 $ 0.32
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)
12. 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, 1998, options to purchase 1,123,587
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, 1998, 1997 and 1996 is as follows:
Number
of Shares Option Price
Under Weighted
Option Per Share Average Aggregate
Outstanding - November 30, 1995 414,101 $0.88-4.25 $2.59 $1,072,000
Granted during the year 141,500 3.00-3.50 3.11 440,000
Exercised during the year (138,834) 0.88-2.50 1.11 (154,000)
Forfeitures and expirations (54,100) 0.88-3.25 3.23 (175,000)
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
Exercisable
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
November 30, 1996 62,996 $3.75-4.25 $4.08 $257,000
During the years ended November 30, 1998, 1997 and 1996, the
weighted average fair value of options granted amounted to $2.45, $0.97, and
$0.95 per share, respectively. At November 30, 1998, the weighted average
remaining contractual life of outstanding options was 3.9 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 1998,
1997, and 1996, respectively: risk-free interest rate of 5.50%, 6.00%, and
6.00%; volatility factor of the expected market price of the Company's Common
Stock of 0.37, 0.30, and 0.30; dividend yield of 0.00%, 2.00%, 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,
1998, 1997 and 1996, the Company's reported and pro forma net income and
earnings per share are as follows (in thousands, except per share data):
1998 1997 1996
As reported:
Net income $ 3,934 $ 3,974 $ 3,418
Earnings per common share:
Basic 0.36 0.37 0.32
Diluted 0.36 0.37 0.32
Pro forma:
Net income 3,837 3,935 3,396
Earnings per common share:
Basic 0.35 0.37 0.32
Diluted 0.35 0.37 0.32
13. 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 $190,000 in 1998, $180,000 in 1997, and $182,000
in 1996.
14. 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, 1998
and 1997, approximately 49% and 34%, 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)
15. OPERATING SEGMENTS
The Company was founded as a solutions-oriented company, designing and
manuacturing products to suppress or eliminate 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 (commercial
custom assemblies, multisection assemblies, power distribution units, and power
entry modules) 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, 1998, 1997 and 1996, reportable segment
information is as follows(in thousands):
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Interconnect Control
1997 Products Products Other Total
Revenue from unaffiliated
customers $44,709 $11,168 $ 589 $55,466
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
Interconnect Control
1996 Products Products Other Total
Revenue from unaffiliated
customers $49,512 $ 7,103 $ 712 $57,327
Depreciation expense 998 119 1,117
Segment income 18,245 733 18,978
Segment assets 9,413 3,770 13,183
Capital expenditures 1,089 475 1,564
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, 1998, 1997 and 1996, reconciliations
of reportable segment information to the Company's consolidated financial
statements are as follows (in thousands):
Depreciation expense 1998 1997 1996
Total depreciation expense
for reportable segments $ 1,670 $ 1,493 $ 1,117
Unallocated amounts:
Depreciation expense related to
the Company's ceramic
capacitor operations 1,545 1,375 1,185
Depreciation expense related to
selling, general and administrative
activities 372 419 509
Consolidated depreciation expense $ 3,587 $ 3,287 $ 2,811
Income before provision
for income taxes 1998 1997 1996
Total income for reportable segments $20,289 $18,096 $18,978
Unallocated amounts:
Manufacturing expense related to
the Company's ceramic
capacitor operations (3,613) (2,173) (3,191)
Selling, general and
administrative expense (10,214) (10,137) (10,317)
Interest expense (228) (417) (753)
Other income 85 141 20
Consolidated income before
provision for income taxes $6,319 $5,510 $4,737
Assets 1998 1997 1996
Total assets for reportable segments $14,134 $13,799 $13,183
Unallocated amounts:
Assets utilized in the
Company's ceramic
capacitor operations 12,805 12,097 12,059
Cash and cash equivalents 739 196 413
Accounts receivable 10,162 9,997 10,202
Other assets 6,299 3,967 4,356
Total consolidated assets $44,139 $40,056 $40,213
Captial expenditures 1998 1997 1996
Total capital expenditures for
reportable segments $1,574 $1,847 $1,564
Capital expenditures related
to the Company's ceramic
capacitor operations 1,335 1,289 1,514
Other capital expenditures 384 144 746
Total consolidated capital
expenditures $3,293 $3,280 $3,824
The Company has operations in the United States and Germany. Sales
are attributed to individual countries based upon the location from which the
shipment originates. The geographic distribution of sales and long-lived
assets for 1998, 1997 and 1996 is as follows (in thousands):
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
United
1996 States Germany Total
Revenue from unaffiliated customers $47,541 $9,786 $57,327
Long-lived assets:
Property, plant and equipment 15,907 110 16,017
Intangible assets 715 -- 715
In 1998, the Company's largest single customer, an original
equipment manufacturer of telecommunication equipment, represented 11%
of total consolidated net sales. Sales to this major customer principally
consisted of control products. In 1997 and 1996, the Company's largest
single customer represented 9% and 12%, respectively, of total consolidated
net sales. Sales to this customer principally consisted of interconnect
products.
16. Quarterly Financial Data (Unaudited)
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
Year Ended November 30, 1997
First Second Third Fourth
(in thousands, except per share data)
Net sales $ 12,712 $ 14,376 $ 13,969 $ 15,409
Gross margin 3,714 4,399 4,439 4,869
Net income 654 939 1,059 1,322
Earnings per common share:
Basic 0.06 0.09 0.10 0.12
Diluted 0.06 0.09 0.10 0.12
1997 earnings per share amounts have been restated to comply with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share".
17. 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 succeeding years under all operating leases
are as follows (in thousands):
1999 $ 158
2000 77
2001 67
2002 66
2003 66
Later years 165
$ 599
Total rent expense under all operating leases amounted to $644,000
in 1998, $517,000 in 1997, and $397,000 in 1996.
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 and 4 of the registrant's Proxy Statement
for the annual meeting of shareholders to be held April 5, 1999 (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 44 Vice President, Chief Financial Officer
Joseph J. Gaynor 48 Vice President, General Manager
of Spectrum Control Technology, Inc.
Robert J. McKenna 45 Vice President Resource Development
James A. Siegel 57 Treasurer
Robert L. Smith 60 Vice President Quality and Technology
Richard A. Southworth 56 President, Chief Executive Officer
James F. Toohey 64 Secretary
Brian F. Ward 39 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. Gaynor is a graduate of the Georgia Institute of Technology with
a bachelors degree in Mechanical Engineering. He joined the Company in 1991
as Vice President and General Manager of Spectrum Control Technology, Inc.
Mr. Gaynor's prior work experience includes various engineering and
manufacturing positions in specialty glass and electronic components.
Mr. McKenna is a graduate of Gannon University in General Science.
He was elected an officer of the Company in 1997 as Vice President Resource
Development. Prior to joining the Company in 1991, Mr. McKenna held management
positions with Advanced Cast Products and Johnson Controls.
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
6 through 11 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 6 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, 1998 and 1997
Consolidated Statements of Income for the Years Ended
November 30, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity
for the Years Ended November 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows
for the Years Ended November 30, 1998, 1997 and 1996
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, 1998
(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, 1996
Allowance for doubtful accts. $ 306 $ 163 $ 91(1) $ 378
Valuation allowance for
deferred tax assets 2,243 - 987(2) 1,256
$2,549 $ 163 $ 1,078 $ 1,634
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
(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 6, 1999, 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, 1999
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 26, 1999 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 26, 1999
/s/John P. Freeman Director, February 26, 1999
Chief Financial Officer,
and Principal
Accounting Officer
/s/Melvin Kutchin Director February 26, 1999
/s/John M. Petersen Director February 26, 1999
/s/Gerald A. Ryan Director February 26, 1999
/s/James F. Toohey Director February 26, 1999