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Securities and Exchange Commission
Washington, D.C. 20549
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Form 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from .............. to ............
Commission File Number 0-8796
Spectrum Control, Inc.
(a Pennsylvania Corporation)
(I.R.S. Employer Identification No. 25-1196447)
8031 Avonia Road, Fairview, Pennsylvania 16415
Telephone 814-835-1650
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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 ____.
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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, 2001, the aggregate market value of voting Common Stock held by
non-affiliates of the registrant based on a closing price of $9.875 was
$108,495,000. 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, 2001, the registrant had outstanding 13,417,488 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 2, 2001 are incorporated by reference into Part
III of this Form 10-K.
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PART I
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ITEM 1. BUSINESS
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Except for the historical information contained herein, the
following discussion contains forward-looking statements that involve risks and
uncertainties. The Company intends these forward-looking statements to qualify
for the safe harbor from liability established by the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include, but are
not limited to, descriptions of management's expectations regarding the future
markets for the Company's products, future operating performance, and other
future plans and objectives. Words such as "expect", "anticipate", "believe",
"intend", and variations of such words identify forward-looking statements.
These forward-looking statements are only predictions and are not guarantees of
future performance. Actual results or events may differ materially from
historical results or those suggested by these forward-looking statements.
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 (hereinafter referred
to as "we", "us", or the "Company") design, manufacture and market a broad line
of control products and systems. The Company was founded as a solutions-oriented
company, designing and manufacturing products to suppress or eliminate
electromagnetic interference ("EMI"). The Company has adapted its core EMI
filter technology into a complete line of capacitors, filters, filtered arrays,
and filtered connectors. In recent years, the Company has expanded its focus by
developing new lines of power products (commercial custom assemblies,
military/aerospace multisection assemblies, power distribution units, power
entry modules, and power line filters), microwave/wireless products (coaxial
ceramic bandpass filters, duplexers, and dielectric resonators), and specialty
ceramic products. In fiscal year 2000, we developed and introduced an advanced
systems product offering to become a provider of more complex management
systems, including a line of digital radio-frequency control equipment for
remote and automatic electronic systems management. 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 Power
Technologies Group operates manufacturing facilities in Erie, Pennsylvania and
Wesson, Mississippi. Currently, the Company manufactures its microwave/wireless
product offerings at facilities in Elizabethtown, Pennsylvania. The Company's
executive offices are located in Fairview, Pennsylvania.
Spectrum Control Technology, Inc., a wholly-owned subsidiary,
maintains a facility in New Orleans, Louisiana, with advanced manufacturing
equipment designed for the production of ceramic capacitors, resonators, and
specialty ceramic products. Presently, this subsidiary primarily manufactures
ceramic discoidal and tubular capacitors used in the Company's EMI filter
products.
Spectrum Control, GmbH, a wholly-owned subsidiary of the Company
located in Schwabach, Germany, acts as a distributor for the Company's products
in the European market.
Spectrum Control de Mexico, a wholly-owned subsidiary of the
Company located in Juarez, Mexico, commenced operations in June 2000 as the
Company's low-cost manufacturing center. Currently, this subsidiary manufactures
various EMI products.
MARKETS
The Company's products are utilized in numerous applications
including industrial equipment, instrumentation, computers, automotive, and
medical equipment. The Company's primary markets, however, are
telecommunications equipment and military/aerospace.
TELECOMMUNICATIONS EQUIPMENT
For the past several years the telecommunications industry has
experienced significant worldwide growth. This growth has primarily resulted
from increased business and consumer demand for wireless communication services
and Internet access. Cost reductions and performance improvements in such
wireless communication products as cellular, personal communication services
("PCS"), and satellite-based voice and data systems have also contributed to
this growth. As demand for wireless communication services grows, service
providers are expanding associated infrastructure. Wireless communication
systems can offer the functional advantages of wired communication systems
without the costly and time consuming development of an extensive wired
infrastructure. The relative advantages of wireless and wired communication
systems with respect to cost, transmission quality, reliability and other
factors depend on the specific applications for which such systems are used and
the existence of a wired or wireless infrastructure already in place. The
factors responsible for the market's growth, coupled with regulatory changes in
the United States and abroad as well as advances in wireless communication
technology, have led to significant growth in existing wireless
telecommunication systems and the emergence of new wireless applications.
The products designed and manufactured by the Company support a
wide range of digital wireless communication protocols, systems and standards
including PCS, Code Division Multiple Access ("CDMA"), Global System for Mobile
Communications ("GSM"), Time Division Multiple Access ("TDMA"), and Third
Generation Wireless ("3G").
Worldwide demand for integrated voice, data and video
communications services is also growing rapidly. The volume of high-speed data
traffic across global communications networks has grown dramatically as the
public Internet and private business intranets have become essential for daily
communications and electronic commerce. The number of persons using the Internet
to buy and sell goods and services is expected to grow rapidly. Servicing the
increasing demand for higher bandwidth content and applications requires
cost-effective and high-speed connections, which are often unavailable or
inadequate over existing wire-based networks. For many users, wireless
communications provide an advantageous access solution for high-speed Internet
multimedia services. This is underscored by the increasing number of wireless
subscribers worldwide.
A typical mobile or fixed wireless communications system comprises
a geographic region containing a number of cells, each of which contains one or
more base stations, which are linked in a network to form a service provider's
coverage area. Each base station houses the equipment that receives incoming
telephone calls from the switching offices of the local wire-based telephone
company and broadcasts calls to the wireless users within the cell. A base
station can process a fixed number of radio channels through the use of multiple
transceivers, power amplifiers and tunable filters, along with an antenna to
transmit and receive signals to and from the wireless user. The Company provides
discrete EMI filters, filtered arrays, filtered connectors, and power products
to original equipment manufacturers ("OEM") of base station equipment. In
addition, the Company's products are used in numerous other telecommunication
applications including fiber optic networks and switching equipment, wireless
modems and LANs, Internet servers and global positioning systems. Using our
solutions-oriented approach, we provide our OEM customers with products tailored
to their specific transmission needs, anticipating and solving system
architecture and performance.
Approximately 64% of the Company's total revenue during fiscal
year 2000 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 2000, military/aerospace sales accounted for
approximately 17% of the Company's total sales. The Company does not expect such
sales to increase from the levels achieved in the 2000 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 products are organized into two groups: the Signal
Products Group and the Power Technologies Group. Within the Signal Products
Group, product offerings include various interconnect filter products,
microwave/wireless products, and specialty ceramic components. The Power
Technologies Group includes numerous power management and conditioning products
and advanced systems.
INTERCONNECT FILTER PRODUCTS
Control of unwanted electromagnetic waves is accomplished through
various combinations of EMI suppression devices. The EMI suppression devices
produced by the Company include those that are utilized as circuit components
and whose function is to permit the desired frequencies to pass through a
circuit while rejecting or preventing the unwanted signals. The majority of
these products are composed of either reactive (reflecting energy) or loss
(dissipating energy) elements or at times, combinations of the two. These
products can be utilized as individual components or combined in various
configurations to provide the amount of EMI control needed. The Company's
interconnect products include discrete EMI filters, filtered arrays, and
filtered connectors.
DISCRETE EMI FILTERS
The Company's discrete EMI filter offerings include hermetically
sealed and resin sealed/solder-in filters and capacitors. The Company's
hermetically sealed filters are primarily used in military/secure
communications, aerospace, rocket ignitors, power supplies, signal lines, and
certain medical equipment. Resin sealed/solder-in filters are used in a wide
range of products including telecommunications equipment, transceivers, and
industrial control systems.
FILTERED ARRAYS
The Company's filtered array products consist of various filter
plate assemblies. Filter plates are predominantly utilized in telecommunication
equipment including wireless base stations, linear power amplifiers, and
cellular microcell repeaters. This product offering often provides an economical
method of meeting electromagnetic compatibility ("EMC") requirements.
FILTERED CONNECTORS
The Company offers a range of custom connectors, datacomm
interconnects, and D-Subminiature Connectors. These filtered connectors are used
in numerous applications including telecommunications equipment, cellular base
stations, secured communications, industrial process equipment, and certain
personal computers.
During the year ended November 30, 2000, approximately 71% of the
Company's total revenue was generated from the sale of interconnect filter
products.
MICROWAVE/WIRELESS PRODUCTS
The Company manufactures and sells coaxial ceramic resonators,
bandpass filters, and duplexers. These products primarily serve the
communications industry with applications in cellular telephones and base
stations, satellite transceivers, wireless modems and LANS, and CATV.
During the year ended November 30, 2000, approximately 2% of the
Company's total revenue was generated from the sale of microwave/wireless
products.
SPECIALTY CERAMIC COMPONENTS
Spectrum Control Technology, Inc., a wholly-owned subsidiary of
the Company, manufactures and sells a broad range of specialty ceramic
capacitors including tubular and discoidal, single-layer microwave, temperature
compensating, high voltage, switch-mode, and high Q capacitors. These products
are primarily used in testing and measurement instruments, high frequency power
supplies, RF amplifiers, and other communications equipment.
During the year ended November 30, 2000, approximately 2% of the
Company's total revenue was generated from the sale of specialty ceramic
components.
POWER PRODUCTS
The Company's power product offerings currently include commercial
custom assemblies, multisection filters, power entry modules, power distribution
units, single line filters, and other 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,
wireless base stations, Internet servers, and networks.
During the year ended November 30, 2000, approximately 25% of the
Company's total revenue was generated from the sale of power products.
ADVANCED SYSTEMS
In fiscal 2000, we completed the development of our new advanced
systems product offering. Our initial advanced systems offering is a line of
digital radio-frequency control equipment designed to monitor various functions
and equipment and provide automatic management, as well as remote management,
through wireless or external communication links. These remote management
systems incorporate highly flexible software that will enable our customers to
control and monitor their systems from remote locations.
Based on our internal market analysis, we believe that the primary
markets for these systems include wireless base station infrastructure systems,
fire and "911" security systems, remote battery back-up or UPS server systems,
sonet switching systems and LAN/WAN network systems. We expect to receive our
first customer orders for these complex power management systems early in fiscal
2001.
OPERATING SEGMENTS
The Company was founded as a solutions-oriented company,
designing and manufacturing products to suppress or eliminate EMI. In recent
years, the Company has broadened its focus and product lines to become a control
products and systems company, providing a wide range of components and systems
used to condition, regulate, transmit, receive, or govern electronic
performance. In fiscal year 2000, the Company realigned its business segments to
better reflect its current strategic focus.
The Company's current operations are primarily conducted in two
segments: signal products and power products. The Company's Signal Products
Group manufactures a broad range of EMI filters, filtered arrays, filtered
connectors, wireless products (coaxial ceramic resonators, bandpass filters,
patch antennas, and duplexers), and specialty ceramic capacitors. The Power
Technologies Group currently manufactures various power management and
conditioning products including power line filters and power entry modules. The
reportable segments are each managed separately because they manufacture and
sell distinct products with different production processes.
The Company evaluates performance and allocates resources to its
operating segments based upon numerous factors, including segment income or loss
before income taxes. The accounting policies of the reportable segments are the
same as those utilized in the preparation of the Company's consolidated
financial statements. However, substantially all of the Company's selling
expenses, general and administrative expenses, and nonoperating expenses are not
allocated to the Company's reportable operating segments and, accordingly, these
expenses are not deducted in arriving at segment income or loss. In addition,
reportable assets are comprised solely of property, plant, equipment, and
inventories.
Prior period amounts in the following tables have been restated
to correspond with the new business segment presentation. For each period
presented, the accounting policies and procedures used to determine segment
income have been consistently applied.
For the years ended November 30, 2000, 1999 and 1998, reportable
segment information is as follows (in thousands):
Signal Power
2000 Products Products Total
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Revenue from unaffiliated customers $98,983 $33,656 $132,639
Depreciation expense 3,655 729 4,384
Segment income 27,748 8,840 36,588
Segment assets 36,562 8,525 45,087
Capital expenditures 4,846 1,469 6,315
Signal Power
1999 Products Products Total
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Revenue from unaffiliated customers $64,866 $32,863 $97,729
Depreciation expense 2,781 674 3,455
Segment income 17,235 7,739 24,974
Segment assets 33,670 8,752 42,422
Capital expenditures 1,949 1,640 3,589
Signal Power
1998 Products Products Total
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Revenue from unaffiliated customers $43,633 $16,235 $59,868
Depreciation expense 2,716 499 3,215
Segment income 13,167 3,509 16,676
Segment assets 21,224 5,715 26,939
Capital expenditures 1,723 1,186 2,909
For the years ended November 30, 2000, 1999 and 1998,
reconciliations of reportable segment information to the Company's consolidated
financial statements are as follows (in thousands):
Depreciation expense 2000 1999 1998
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Total depreciation expense
for reportable segments $4,384 $3,455 $3,215
Unallocated amounts:
Depreciation expense related to
selling, general and administrative
activities 373 464 372
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Consolidated depreciation expense $4,757 $3,919 $3,587
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Income before provision
for income taxes 2000 1999 1998
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Total income for reportable segments $36,588 $24,974 $16,676
Unallocated amounts:
Selling, general and
administrative expense (20,138) (14,810) (10,214)
Interest expense (1,788) (1,420) (228)
Other income 657 96 85
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Consolidated income before
provision for income taxes $15,319 $ 8,840 $ 6,319
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Assets 2000 1999 1998
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Total assets for reportable segments $45,087 $42,422 $26,939
Unallocated amounts:
Cash and cash equivalents 5,977 538 739
Accounts receivable 23,831 19,330 10,162
Goodwill 14,893 14,225 2,547
Other assets 5,435 6,039 3,752
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Total consolidated assets $95,223 $82,554 $44,139
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Capital expenditures 2000 1999 1998
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Total capital expenditures for
reportable segments $ 6,315 $ 3,589 $ 2,909
Capital expenditures related
to the Company's selling,
general and administrative
activities 590 1,383 384
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Total consolidated capital
expenditures $ 6,905 $ 4,972 $ 3,293
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The Company has operations in the United States, Mexico and
Germany. Sales are attributed to individual regions based upon the operating
location responsible for the sale. The Company transfers products from one
geographic region for resale in another. These transfers are priced to provide
both areas with an equitable share of the overall profit. The geographic
distribution of sales, operating income and long-lived assets for 2000, 1999 and
1998 is as follows (in thousands):
North
2000 America Europe Total
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Revenue from unaffiliated
customers $113,585 $19,054 $132,639
Operating income 16,102 348 16,450
Long-lived assets:
Property, plant and equipment 23,391 99 23,490
Intangible assets 15,290 - 15,290
North
1999 America Europe Total
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Revenue from unaffiliated
customers $ 82,662 $15,067 $ 97,729
Operating income 9,688 476 10,164
Long-lived assets:
Property, plant and equipment 21,241 125 21,366
Intangible assets 14,940 - 14,940
North
1998 America Europe Total
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Revenue from unaffiliated
customers $ 50,864 $ 9,004 $ 59,868
Operating income 5,984 478 6,462
Long-lived assets:
Property, plant and equipment 16,188 101 16,289
Intangible assets 2,941 - 2,941
The Company expects that international sales will continue to
account for a significant portion of its total sales. There can be no assurance,
however, that the Company will be able to maintain or increase international
demand for the Company's products or that the Company will be able to
effectively meet that demand. The Company's international sales are denominated
in several different currencies including U.S. Dollars, British Pounds, and the
Euro. An increase in the value of these currencies relative to other foreign
currencies could make the Company's products more expensive and, therefore,
potentially less competitive in those markets. Additional risks inherent in the
Company's international business activities include potentially adverse tax
consequences, repatriation of earnings, and the burdens of complying with a
variety of foreign laws. There can be no assurance that such factors will not
have an adverse effect on the Company's future results of operations.
In 2000 and 1999, the Company's largest single customer (Lucent
Technologies) represented 20% and 18%, respectively, of total consolidated net
sales. The Company's second largest customer (Nortel Networks) represented 13%
of total consolidated net sales in 2000 and 6% in 1999. Sales to each of these
customers consist of signal and power 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 and its low-cost manufacturing
center in Juarez, Mexico. Coaxial ceramic dielectric resonators are principally
used in the manufacture of bandpass filters and duplexers at the Company's
facilities in Elizabethtown, Pennsylvania. Assembly of power products is
performed by the Company's Power Technologies Group at facilities in Erie,
Pennsylvania and Wesson, Mississippi. The design and manufacture of the
Company's new advanced systems products will be incubated at its facilities in
Erie and Fairview, 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, Power Products Division, and Ceramic Components Division have
achieved and maintain ISO 9001 certification.
In recent years, a majority of the Company's capital investment
has been expended to establish new production lines, increase capacity, and
improve manufacturing processes. There can be no assurance that the Company can
continue to make such investments in a timely manner so as to take advantage of
market demand.
SALES AND DISTRIBUTION
The Company sells its products primarily through manufacturers'
representatives, managed by the Company's internal sales force, and
distribution. The Company maintains representatives throughout North America and
Europe, and portions of South America, Asia and the Middle East. To enhance our
product development and offerings for our largest customers, the Company
maintains key account managers. These key account managers oversee the marketing
and selling of our full range of product offerings and design capabilities to
these customers. The Company also maintains within its sales organization
employees dedicated to new business development as well as additional employees
dedicated to distribution sales management. In fiscal 2000, approximately 19% 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 2000, the Company sold its products to
approximately 1,600 accounts. Sales of products to the Company's top ten
customers represented 57% ($75.5 million) of total consolidated net sales in
2000. The Company's largest single customer, an original equipment manufacturer
of telecommunications equipment, represented 20% in 2000, 18% in 1999, and 11%
in 1998 of total consolidated net sales. The Company's second largest single
customer represented 13% of total consolidated net sales in 2000, and 6% in 1999
and 1998. All of the Company's major customers are unaffiliated with Spectrum
Control, Inc. and its subsidiaries.
Shipments are made by common carrier. Most of the Company's signal
products are either small or miniaturized and light weight. Accordingly,
shipping charges for these products are not significant to the Company's
business. However, transportation costs for the Company's power products and
advanced systems may be significant. Accordingly, shipping charges and delivery
time for these products may affect the Company's ability to compete for
business, particularly in international markets.
No material portion of the Company's business is subject to
renegotiation of profits or termination of contracts or sub-contracts at the
election of the U.S. Government.
BACKLOG
The Company's backlog, which consists of purchase orders by
customers, totaled approximately $65.0 million at November 30, 2000 and $50.0
million at November 30, 1999. It is anticipated that approximately 90% of the
Company's backlog as of November 30, 2000 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, 2000, the Company had a total of 1,724
employees, including 89 in sales, marketing and customer support; 127 in
engineering and product development; 1,433 in manufacturing; and 75 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
The Company relies on trade secrets, know-how, and to a lessor
extent patents, to establish and protect proprietary rights to technologies and
products. Trade secrets and know-how are protected through confidentiality
agreements and internal procedures. In connection with the manufacture and sale
of control products and systems, the Company owns numerous United States and
foreign patents and has certain patents pending. None of these patents and
patent applications are critical to the Company's business. The Company's policy
is to file patent applications to protect proprietary technology, inventions and
improvements. There can be no assurance that patents will issue from any of the
Company's pending applications or that any claims allowed from existing or
pending patents will be sufficiently broad to protect the Company's technology.
While the Company intends to protect its intellectual property rights
vigorously, there can be no assurance that any patents held by the Company will
not be challenged, invalidated or circumvented, or the rights granted thereunder
will provide competitive advantages to the Company.
The Company holds nineteen (19) United States patents and
forty-four (44) 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 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. The principal competitors of our Signal Products Group include AVX
Corporation, Amphenol Corporation, Conec Corporation, ITT Canon, an ITT
Industries Company, and Tusonix, Inc. The primary competitors of our Power
Technologies Group include Corcom, a division of CII Technologies, Delta Group
Electronics, Inc., Schaffner Holder AG and Captor Technology Company Ltd. We
expect the major competitors of our advanced systems products to include Astec
America, Inc., Peco II, Inc., Dataprobe, Inc., Western Telematic, Inc. and
Dantel, Inc. 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 position as a leading designer, developer and
manufacturer of signal and power products is largely the result of a long
history of technological innovation. 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, 2000, the Company employed 127 individuals in engineering and
product development. In addition to their design and development activities, the
engineering staff participates with the Company's marketing department in
proposal preparation and applications support for customers. Research and
development expense amounted to $1,535,000 in 2000, $1,184,000 in 1999, and
$961,000 in 1998.
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, 2000 are as follows:
PRINCIPAL
BALANCE
OUTSTANDING
APPROXIMATE AT 11/30/00
SQUARE FEET ON RELATED
LOCATION FUNCTION OF FLOOR AREA OWNERSHIP MORTGAGE
- ------------------------ -------------- ------------- --------- -----------
8061 Avonia Road Manufacturing, 38,000 Owned N/A
Fairview, PA EMI Testing
6000 West Ridge Road Manufacturing 41,000 Owned N/A
Erie, PA
4100 Michoud Blvd. Manufacturing 100,000 Owned $ 1,600,000
New Orleans, LA
3053 Hwy. 51N Manufacturing 50,000 Owned N/A
Wesson, MS
1593 Mount Joy St. Manufacturing 26,000 Owned N/A
Elizabethtown, PA
1595 Mount Joy St. Manufacturing 35,000 Owned N/A
Elizabethtown, PA
Boulevard Zaragoza 2910 Manufacturing 46,000 Rented N/A
Ciudad Juarez, Mexico
8031 Avonia Road Corporate Offices 10,000 Owned $ 747,000
Fairview, PA
(1) The Company's manufacturing and office space is considered adequate for
its existing requirements and its projected business needs.
(2) 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, 2000.
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 2000 and 1999 are set forth below.
High Low
------------ -------------
Fiscal 2000
First quarter $ 15.81 $ 9.13
Second quarter 17.25 8.13
Third quarter 20.25 10.38
Fourth quarter 19.25 11.94
High Low
------------ -------------
Fiscal 1999
First quarter $ 4.94 $ 3.66
Second quarter 6.63 4.00
Third quarter 7.44 5.88
Fourth quarter 11.63 6.44
At February 1, 2001, the Company had 13,408,488 shares of Common Stock
outstanding, which were held by approximately 1,900 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
--------------------------------------------------------------------------------
(Amounts in Thousands Except Per Share Data)
--------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Operating Data
Net sales $ 132,639 $ 97,729 $ 59,868 $ 56,466 $ 57,327
Gross margin 37,932 27,912 18,284 17,421 18,076
Income from operations 16,450 10,164 6,462 5,786 5,470
Interest expense 1,788 1,420 228 417 753
Income before provision for income taxes 15,319 8,840 6,319 5,510 4,737
Net income 9,503 5,470 3,934 3,974 3,418
Earnings per common share:
Basic 0.81 0.50 0.36 0.37 0.32
Diluted 0.79 0.49 0.36 0.37 0.32
Weighted average common shares outstanding:
Basic 11,694 10,905 10,907 10,798 10,731
Diluted 11,980 11,051 11,016 10,869 10,776
Financial Position
Working capital $ 42,962 $ 23,989 $ 18,619 $ 16,881 $ 12,534
Total assets 95,223 82,554 44,139 40,056 40,213
Long-term debt 2,107 19,011 2,500 3,330 4,072
Stockholders' equity 76,546 39,135 33,774 29,545 25,379
ITEM 7. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations
---------------------
Overview
We were founded as a solutions-oriented company, designing and
manufacturing products to suppress or eliminate electromagnetic interference
("EMI"). In recent years, we broadened our focus and product lines to become a
control products and systems company, providing a wide range of components and
systems used to condition, regulate, transmit, receive, or govern electronic
performance. Although our components and systems are used in many industries
worldwide, our largest market is the telecommunications industry. In 2000,
approximately 64% of our sales were to customers in the telecommunications
industry. Our products are used in numerous telecommunications systems including
wireless base stations, fiber optic networks and switching equipment, wireless
modems and LANs, Internet servers, and global positioning systems. Our growth is
being primarily driven by the expansion of the wireless and fiber optic
networking segments of the telecommunications industry, the increasing
electronic content and complexity of many end-products and the positive impact
of our strategic acquisitions.
Our operations are primarily conducted in two business segments:
signal products and power products. Our Signal Products Group manufactures a
broad line of discrete EMI filters, filtered arrays, filtered connectors,
wireless products (coaxial ceramic resonators, patch antennas, bandpass filters,
and duplexers), and specialty ceramic capacitors (single layer, temperature
compensating, high voltage, and switch mode). Our Power Technologies Group
currently manufactures various power management and conditioning products
including power distribution units, power line filters, and power entry modules.
Recently, our Power Technologies Group developed and introduced an advanced
systems product offering to become a provider of more complex power management
systems, including a line of digital radio-frequency control equipment for
remote and automatic electronic systems management.
On March 26, 1999, we acquired substantially all of the assets of the
Signal Conditioning Products Division ("SCPD") of AMP Incorporated ("AMP"). AMP
is a world leader in the manufacture of electrical, electronic, fiber optic and
wireless interconnection devices and systems. Through SCPD, AMP manufactured and
sold a broad line of EMI filter products with annual sales of approximately
$30.0 million. The acquisition was accounted for as a purchase and, accordingly,
the results of operations of the acquired business have been included in our
financial statements since the date of acquisition.
Forward-Looking Information
The following discussion includes certain "forward-looking statements"
within the meaning of the federal securities laws, including statements
regarding: (1) our belief as to our future operating margins, (2) our
anticipated capital expenditures and research and development expenses, (3) our
expected future operating requirements and financing needs and (4) our
anticipated manufacturing capacity expansion. The words "believe", "expect",
"anticipate" and similar expressions identify forward-looking statements. These
forward-looking statements are subject to certain risks and uncertainties which
could cause actual results to differ materially from historical results or those
anticipated. Factors that could cause or contribute to such differences include
those discussed in "Risk Factors That May Affect Future Results", as well as
those discussed elsewhere herein. Readers are cautioned not to place undue
reliance on these forward-looking statements.
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations (Continued)
- ---------------------
Results of Operations
The following table sets forth certain financial data, as a percentage
of net sales, for the years ended November 30, 2000, 1999, and 1998:
2000 1999 1998
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of products sold 71.4 71.4 69.5
---- ---- ----
Gross margin 28.6 28.6 30.5
Selling, general and administrative expense 16.2 18.2 19.7
---- ---- ----
Income from operations 12.4 10.4 10.8
Other income (expense)
Interest expense (1.3) (1.5) (0.4)
Other income and expense, net 0.5 0.1 0.2
---- ---- ----
Income before provision for income taxes 11.6 9.0 10.6
Provision for income taxes 4.4 3.4 4.0
---- ---- ----
Net income 7.2% 5.6% 6.6%
==== ==== ====
2000 Compared to 1999
Net Sales
Consolidated 2000 net sales increased by $34.9 million, or 35.7%, from
1999. Sales of signal products amounted to $99.0 million in 2000, an increase of
$34.1 million compared to 1999. Of this increase, approximately $9.0 million was
generated from the sale of SCPD products. The remaining $25.1 million increase
in signal product sales principally reflects higher shipment levels for EMI low
pass filters, filtered arrays, and filtered connectors. Among other
applications, these components are used in various telecommunication equipment
including fiber optic networks, wireless base stations, power amplifiers, and
transceivers. Sales of power products increased by $800,000 in 2000, primarily
reflecting additional shipments of power distribution units and single line
filters. These power products are principally used in telecommunications
equipment, including high-end Internet servers and networks. Selling prices were
relatively stable throughout 2000. Overall demand for our products was strong
throughout the year with total customer orders of $151.8 million received in
2000, an increase of $32.0 million, or 26.7%, from 1999.
Gross Margin
Gross margin was $37.9 million, or 28.6% of sales in 2000, compared to
$27.9 million, or 28.6% of sales in 1999. In April 1999, we commenced a program
to integrate SCPD into our Signal Products Group. This integration, which
included relocating SCPD manufacturing operations and redesigning certain SCPD
products and production processes, was completed in May 2000. With the
completion of this integration, operating efficiencies and manufacturing yields
improved during the second half of 2000. In June 2000, we commenced
manufacturing operations in our new 46,000 square foot facility in Juarez,
Mexico. Production in this leased facility is expected to be phased in
throughout fiscal 2001. In November 2000, we completed the construction of a
26,000 square foot addition to our Wesson, Mississippi facility. This facility
will be utilized in the manufacturing of our power product offerings.
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations (Continued)
- ---------------------
In addition to increasing our manufacturing capacity, we believe these new
facilities will improve our operating efficiencies and lower our overall
production costs. Accordingly, we expect gross margins to approximate 30.0% to
31.0% of sales in fiscal 2001.
Selling, General and Administrative Expense
With additional sales volume, selling expense increased during the
period. Selling expense amounted to $12.4 million, or 9.4% of sales in 2000,
compared to $9.7 million, or 10.0% of sales in 1999. The decrease in selling
expense as a percentage of sales principally reflects economies of scale
realized with additional sales volume. General and administrative expense was
$9.1 million in 2000, compared to $8.0 million in 1999. Of the $1.1 million
increase, approximately $200,000 arises from the amortization of goodwill
recognized in connection with our acquisition of SCPD and $241,000 arises from
the write-off of debt issuance costs upon the early payoff of certain
indebtedness. The remaining increase in general and administrative expense
primarily reflects additional personnel costs and professional fees incurred to
support business growth.
Other Income and Expense
Interest expense increased by $368,000 during the period, from $1.4
million in 1999 to $1.8 million in 2000. Of this increase, $277,000 reflects
greater short-term bank borrowings and higher average interest rates in 2000.
Weighted average short-term borrowings under our domestic line of credit were
$4.3 million in 2000, compared to $1.5 million in 1999. Weighted average
interest rates for borrowings under our domestic line of credit were
approximately 8.6% in 2000 and 7.4% in 1999. The remaining increase of $91,000
principally reflects additional interest under the term loan incurred to
substantially finance the acquisition of SCPD. As more fully discussed below,
all borrowings under the term loan and our domestic line of credit were repaid
in August 2000.
We hold numerous United States and foreign patents relating to polymer
multilayer ("PML") technology. In 2000, we realized $452,000 of license fee
income upon the granting of PML technology licenses. Although these licenses, as
well as other PML licenses that we have previously granted, require certain
royalties to be paid to us upon the sale of products utilizing PML technology,
it is not known what future commercial value, if any, these patents and related
licenses may have.
Our wholly-owned foreign subsidiaries transact business with certain
customers and vendors in currencies other than their local currency. As a
result, we recognize gains and losses on foreign currency transactions. We
incurred net gains of $7,000 in 2000 and $4,000 in 1999 on these foreign
currency transactions.
We realized interest income of $198,000 in 2000 and $72,000 in 1999
from temporary cash investments.
Income Taxes
Our effective income tax rate was 38.0% in 2000 and 38.1% in 1999,
compared to an applicable federal and state statutory income tax rate of
approximately 40.0%. Differences between the effective tax rate and statutory
tax rate primarily arise from state tax provisions and foreign income tax rates.
At November 30, 2000, we had recorded certain deferred tax assets. We
have assessed our past earnings history and trends, and expiration dates of tax
attribute carryforwards, and have determined that it is more likely than not
that these deferred tax assets will be realized to offset future taxable income
from ordinary and recurring operations.
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations (Continued)
- ---------------------
1999 Compared to 1998
Net Sales
Consolidated 1999 net sales increased by $37.9 million, or 63.2%, from
1998. Of this increase, $21.3 million was generated from the sale of SCPD and
other signal products, with the remaining $16.6 million primarily generated from
the sale of power products. These power products are principally used in
telecommunications equipment, including wireless base stations, telephone
switching networks, and Internet servers. Overall market demand in the
telecommunications industry was strong throughout the year. In 1999, we received
total customer orders of $119.8 million, an increase of 93.5% from 1998. In
addition to these customer orders, we assumed approximately $5.1 million of
customer order backlog in connection with the acquisition of SCPD. Average
selling prices declined slightly during the year as a result of market
pressures.
Gross Margin
Gross margin was $27.9 million, or 28.6% of sales in 1999, compared to
$18.3 million, or 30.5% of sales in 1998. The decrease in gross margin
percentage reflects several factors of relative equal significance, including:
additional production costs and inefficiencies incurred during the integration
of SCPD into our Signal Products Group; changes in sales mix from our signal
products to our power product offerings; yield losses and resultant higher labor
costs incurred at our ceramic components division in New Orleans, Louisiana; and
lower average selling prices as indicated above.
Selling, General and Administrative Expense
As a result of greater sales volume, selling expense increased during
the period. Selling expense amounted to $9.7 million, or 10.0% of sales in 1999,
compared to $6.8 million, or 11.4% in 1998. The decrease in selling expense as a
percentage of sales principally reflects economies of scale realized with the
additional sales volume. General and administrative expense was approximately
$8.0 million in 1999, compared to $5.0 million in 1998. Of this increase,
approximately $400,000 consisted of the amortization of goodwill recognized in
connection with our acquisition of SCPD in March 1999. The remaining increase in
general and administrative expense reflects additional personnel costs,
professional fees and other operating expenses associated with our increased
business activity.
Other Income and Expense
As a result of additional bank indebtedness, interest expense
increased by $1.2 million in 1999, from $228,000 to $1.4 million. In March 1999,
we secured a $20.0 million term loan to substantially finance the acquisition of
SCPD. Interest on the term loan was $990,000 in 1999, with an average interest
rate of approximately 7.3%. In addition, weighted average short-term bank
borrowings were $1.6 million in 1999, compared to $28,000 in 1998.
In 1999 and 1998, our wholly-owned German subsidiary transacted
business with certain customers and vendors in currencies other than the
Deutsche Mark. As a result, we realized net gains of $4,000 in 1999 and incurred
net losses of $40,000 in 1998 on these foreign currency transactions.
We recognized other income of $79,000 in 1999 and $125,000 in 1998
from certain short-term investments and patent licensing fees.
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations (Continued)
- ---------------------
Income Taxes
Our effective income tax rate was 38.1% in 1999 and 37.7% in 1998,
compared to an applicable federal and state statutory income tax rate of
approximately 40.0%. Differences between the effective tax rate and statutory
tax rate primarily arise from state tax provisions and foreign income tax rates.
In 1998, the effective tax rate also reflects the elimination of a deferred tax
asset valuation allowance previously recorded for certain foreign net operating
loss carryforwards.
Risk Factors That May Affect Future Results
Our results of operations may be affected in the future by a variety
of factors including: competitive pricing pressures, new product offerings by us
and our competitors, new technologies, product cost changes, changes in the
overall economic climate, availability of raw materials, changes in product mix,
and unexpected costs and delays in adding manufacturing capacity. In 2000,
approximately 64% of our sales were to customers in the telecommunications
industry. Our largest single customer, an original equipment manufacturer of
telecommunication equipment, represented 20% of our total consolidated net sales
in 2000. Any significant change in the activity level of this major customer, or
the overall telecommunications industry, would have a direct impact on our
performance.
Liquidity, Capital Resources and Financial Condition
On August 16, 2000, we sold 2.3 million shares of our Common Stock in
a public offering which resulted in net proceeds of $27.8 million, after
deducting issuance costs. The net proceeds of the offering were used to repay
$7.4 million of revolving line of credit indebtedness and $17.3 million of term
loan debt, with the remaining proceeds added to cash and cash equivalents
available for general corporate purposes.
We maintain a $12.0 million line of credit with our principal lending
institution, PNC Bank, N.A. of Erie, Pennsylvania. This revolving credit line is
unsecured, with interest rates on borrowings at or below the prevailing prime
rate. At November 30, 2000, no borrowings were outstanding under the line of
credit. The line of credit agreement contains certain covenants, the most
restrictive of which require us to maintain designated minimum levels of net
worth and profitability and impose certain restrictions on us regarding
additional indebtedness. At November 30, 2000, we were in compliance with all
debt covenants. The current line of credit agreement expires April 30, 2003.
Our wholly-owned German subsidiary maintains unsecured Deutsche Mark
lines of credit with several German financial institutions aggregating $1.5
million (DM 3.5 million). At November 30, 2000, no borrowings were outstanding
under these lines of credit. Future borrowings, if any, will bear interest at
rates below the prevailing prime rate and will be payable upon demand.
With the proceeds from our public stock offering and the related
retirement of debt, our working capital and current ratio improved significantly
in 2000. At November 30, 2000, we had net working capital of $43.0 million,
compared to $24.0 million at November 30, 1999 and $18.6 million at November 30,
1998. At November 30, 2000, current assets were 4.27 times current liabilities,
compared to 2.10 at November 30, 1999 and 4.23 at November 30, 1998.
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations (Continued)
- ---------------------
Our cash expenditures for property, plant and equipment amounted to
$6.9 million in 2000, compared to $5.0 million in 1999 and $3.3 million in 1998.
Capital expenditures in fiscal year 2000 primarily related to manufacturing
equipment for our new Mexican facility and other capacity expansion within our
Signal Products Group. The 1999 capital expenditures principally related to
metal fabrication machinery and other manufacturing equipment for capacity
expansion in our Power Technologies Group, domestic facility expansion within
our Signal Products Group, and construction of our new corporate administrative
office facility in Fairview, Pennsylvania. In order to meet expected customer
demand and production requirements for our power product offerings, we have
expanded our Wesson, Mississippi facility. A 26,000 square foot addition to our
existing facility was completed in November 2000. Financing for this $1.1
million project will be substantially provided by the State of Mississippi
through general obligation bonds in fiscal 2001. With the exception of this
project, we had not entered into any material commitments for capital
expenditures or debt financing at November 30, 2000.
Income taxes paid during the fiscal years ended November 30, 2000,
1999, and 1998 amounted to $3.8 million, $3.0 million, and $1.5 million,
respectively. We expect cash outlays for income taxes to be less than income tax
expense for the next three fiscal years.
In September 1998, we initiated a stock repurchase program. Under the
program, we may repurchase up to $4.0 million of our Common Stock. Acquired
shares are to be purchased in the open market, with the cost of the program
financed out of available cash reserves and borrowings under our revolving line
of credit facility. The amount and timing of the shares repurchased are based on
the ongoing assessment of our capital structure, liquidity, and the market price
of our Common Stock. In 2000 and 1999, no shares were repurchased. During 1998,
70,000 shares were repurchased at an aggregate cost of $294,000. The repurchased
shares are held as treasury stock.
Research and development expenditures, which encompass the personnel
and related expenses devoted to developing new products and processes, amounted
to $1.5 million in 2000, $1.2 million in 1999, and $961,000 in 1998. We expect
research and development expenses to increase in fiscal 2001, as we continue to
enhance existing product lines, design new signal and power products, and
develop our new advanced systems product offerings. We believe research and
development expenses will approximate 1.5% of sales in 2001.
Current financial resources, including working capital and existing
lines of credit, and anticipated funds from operations are expected to be
sufficient to meet cash requirements throughout fiscal 2001. These cash
requirements include scheduled long-term debt repayment, planned capital
expenditures, research and development expenses, and possible stock repurchases.
There can be no assurance, however, that unplanned capital replacement or other
future events will not require us to seek additional debt or equity financing
and, if so required, that it will be available on terms acceptable to us.
With additional profitability and reduced working capital requirements,
our operating cash flow increased significantly in 2000. For the year ended
November 30, 2000, net cash generated from operations amounted to $11.1 million,
an increase of $9.1 million from the comparable period of 1999. In 1999,
operating cash flow was negatively impacted by increased working capital
requirements. Net cash generated from operations amounted to $2.0 million in
1999, a decrease of $6.3 million from 1998. During the year ended November 30,
1999, inventories increased by approximately $6.4 million from operations. The
increase in inventories primarily reflects additional customer consigned
inventory requirements, as well as additional raw material and work-in-process
inventories to support increased production and shipment requirements.
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations (Continued)
- ---------------------
In 1998, we had strong operating cash flow. During the year ended
November 30, 1998, net cash generated from operations amounted to $8.3 million
and proceeds realized upon the exercise of employee stock options amounted to
$414,000. This cash flow was used to fund capital additions of $3.3 million,
debt repayment of $743,000, stock repurchases of $294,000, and the aggregate
purchase price of two acquired businesses. In 1998, we acquired substantially
all of the assets of Republic Electronics Corporation, a manufacturer of
subminiature ceramic capacitors, and Potter Production Corporation, a
manufacturer of electronic filters and power products. The total cash purchase
price of the acquired assets amounted to $4.1 million.
At November 30, 2000, goodwill represented 15.6% of total assets and
19.5% of stockholders' equity. A majority of this goodwill was recognized in
1999 in connection with our acquisition of SCPD. We amortize goodwill on a
straight-line basis over a period of 20 years and periodically review its
carrying value for possible impairment. Based upon a review of expected future
operating cash flows derived from the acquisition of SCPD, we have determined
that no impairment losses need be recognized in the accompanying financial
statements.
Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency
Certain of our European sales and related selling expenses are
denominated in German Deutsche Marks, British Pounds, and other local
currencies. In addition, certain of our operating expenses are denominated in
Mexican Pesos. As a result, fluctuations in currency exchange rates may affect
our operating results and cash flows. To manage our exposure to the Deutsche
Mark, we occasionally enter into forward currency exchange contracts. At
November 30, 2000, we had forward currency exchange contracts (to receive U.S.
Dollars and pay German Deutsche Marks) with aggregate notional amounts of
$850,000 and average contractual exchange rates of 2.06. For each of the three
years ended November 30, 2000, currency exchange rate gains and losses were not
material. In addition, an assumed 10.0% adverse change in all foreign currencies
in which we currently transact business would not have a material impact on our
operating results, financial position, or cash flows.
Euro
Certain member countries of the European Union have established fixed
conversion rates between their existing currencies and the European Union's
common currency, the Euro. We have implemented all the necessary enhancements to
our sales order, banking arrangements and operational procedures to ensure Euro
compliance. We are able to process orders, invoice customers and accept payment
in Euros throughout Europe. The introduction of the Euro has not had any
material adverse impact upon us. We continue to monitor the risk of price
erosion which could result from increased price transparency among countries
using the Euro.
Interest Rate Exposure
We have market risk exposure relating to possible fluctuations in
interest rates. From time to time, we utilize interest rate swap agreements to
minimize the risks and costs associated with variable rate debt. We do not enter
into derivative financial instruments for trading or speculative purposes. The
interest rate swap agreements are entered into with major financial institutions
thereby minimizing the risk of credit loss. At November 30, 2000, no interest
rate swap agreements were outstanding.
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations (Continued)
- ---------------------
Environmental Matters
We are subject to various laws and governmental regulations concerning
environmental matters and employee safety and health in the United States and
other countries. U.S. federal environmental legislation having particular impact
on us includes the Toxic Substances Control Act; the Resource Conservation and
Recovery Act; the Clean Air Act; the Clean Water Act; and the Safe Drinking
Water Act. We also are subject to regulation by 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 our operations.
In addition to these federal agencies, various states have been
delegated certain authority under the aforementioned federal statutes. Many
state and local governments have adopted environmental and employee safety and
health laws and regulations, some of which are similar to federal requirements.
State and federal authorities may seek fines and penalties for violation of
these laws and regulations. As part of our continuing environmental program, we
have been able to comply with such proceedings and orders without any materially
adverse effect on our business. We are not currently involved in any legal
proceedings involving environmental matters.
Impact of Inflation
In recent years, inflation has not had a significant impact on our
operations. However, we continuously monitor operating price increases,
particularly in connection with the supply of precious metals used in our
manufacturing of certain ceramic capacitors. To the extent permitted by
competition, we pass increased costs on to our 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.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and for Hedging Activities" ("SFAS No. 133"). SFAS No.
133 provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. For a
derivative not designated as a hedging instrument, changes in the fair value
of the derivative are recognized in earnings in the period of change. SFAS No.
133 is effective for fiscal years beginning after June 15, 2000. In December
1999, the Securities and Exchange Commission issued Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements" ("SAB No. 101"), which
clarifies the accounting rules for revenue recognition in financial statements.
We must implement SAB No. 101 by the fourth quarter of fiscal year 2001.
We do not expect the adoption of SFAS No. 133 or SAB No. 101 to have a
material impact on our financial position or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of Spectrum Control,
Inc. and subsidiaries are included herein:
Page
Number
------
Report of Independent Auditors 25
Consolidated Balance Sheets
as of November 30, 2000 and 1999 26
Consolidated Statements of Income
for the years ended November 30,
2000, 1999, and 1998 27
Consolidated Statements of Stockholders' Equity
for the years ended November 30, 2000,
1999, and 1998 28
Consolidated Statements of Cash Flows
for the years ended November 30,
2000, 1999, and 1998 29
Notes to Consolidated Financial Statements 30-47
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Spectrum Control, Inc.
We have audited the accompanying consolidated balance sheets of Spectrum
Control, Inc. and subsidiaries as of November 30, 2000 and 1999, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended November 30, 2000. Our audits also
included the financial statement schedule listed in the Index at Item 14 (a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Spectrum Control, Inc. and subsidiaries at November 30, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended November 30, 2000, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
January 3, 2001 ERNST & YOUNG LLP
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2000 AND 1999
(Dollar Amounts in Thousands)
2000 1999
---- ----
ASSETS
Current assets
Cash and cash equivalents $ 5,977 $ 538
Accounts receivable, less allowances of $766
in 2000 and $673 in 1999 23,831 19,330
Inventories (Note 3) 25,239 24,617
Deferred income taxes (Note 12) 779 579
Prepaid expenses and other current assets 293 699
----------- ----------
Total current assets 56,119 45,763
Property, plant and equipment, net (Note 4) 23,490 21,366
Other assets (Note 5)
Goodwill, net 14,893 14,225
Other noncurrent assets 721 1,200
----------- ----------
Total other assets 15,614 15,425
----------- ----------
Total assets $ 95,223 $ 82,554
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt (Note 6) $ - $ -
Accounts payable 8,714 8,801
Accrued salaries and wages 3,002 2,553
Accrued interest 75 103
Accrued federal and state income taxes 645 -
Accrued other expenses 181 952
Current portion of long-term debt (Note 7) 540 4,276
----------- ----------
Total current liabilities 13,157 21,774
Long-term debt (Note 7) 2,107 19,011
Deferred income taxes (Note 12) 3,413 2,634
Stockholders' equity
Common stock, no par value, authorized 25,000,000
shares, issued 13,448,052 shares
in 2000 and 11,018,703 in 1999 43,175 14,633
Retained earnings 34,771 25,268
Treasury stock, 70,000 shares in 2000 and 1999, at cost (Note 10) (294) (294)
Accumulated other comprehensive income
Foreign currency translation adjustment (1,106) (472)
----------- ----------
Total stockholders' equity 76,546 39,135
----------- ----------
Total liabilities and stockholders' equity $ 95,223 $ 82,554
=========== ==========
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, 2000, 1999 AND 1998
(Dollar Amounts in Thousands, Except Per Share Data)
2000 1999 1998
---- ---- ----
Net sales $ 132,639 $ 97,729 $ 59,868
Cost of products sold 94,707 69,817 41,584
--------- -------- --------
Gross margin 37,932 27,912 18,284
Selling, general and administrative expense 21,482 17,748 11,822
--------- -------- --------
Income from operations 16,450 10,164 6,462
Other income (expense)
Interest expense (1,788) (1,420) (228)
Other income and expense, net (Note 11) 657 96 85
--------- -------- --------
(1,131) (1,324) (143)
--------- -------- --------
Income before provision for income taxes 15,319 8,840 6,319
Provision for income taxes (Note 12) 5,816 3,370 2,385
--------- -------- --------
Net income $ 9,503 $ 5,470 $ 3,934
========= ======== ========
Earnings per common share (Note 13):
Basic $ 0.81 $ 0.50 $ 0.36
========= ======== ========
Diluted $ 0.79 $ 0.49 $ 0.36
========= ======== ========
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, 2000, 1999 AND 1998
(Dollar Amounts in Thousands)
Accumulated
Other Total
Common Stock Retained Treasury Comprehensive Stockholders'
------------
Shares Amount Earnings Stock Income Equity
------ ------ -------- -------- ------------- -------------
Balance - November 30, 1997 10,838,345 $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 common stock upon
exercise of employee stock options 118,663 414 - - - 414
Purchase of treasury stock - - - (294) - (294)
Tax benefits from exercise of stock options - 79 - - - 79
----------- ------- ------- ------ ------- ----------
Balance - November 30, 1998 10,957,008 14,470 19,798 (294) (200) 33,774
Net income - - 5,470 - - 5,470
Foreign currency translation adjustment - - - - (272) (272)
----------
Comprehensive income - - - - - 5,198
----------
Issuance of common stock upon
exercise of employee stock options 68,663 182 - - - 182
Purchase and retirement of common stock (6,968) (56) - - - (56)
Tax benefits from exercise of stock options - 37 - - - 37
----------- ------- ------- ------ ------- ----------
Balance - November 30, 1999 11,018,703 14,633 25,268 (294) (472) 39,135
Net income - - 9,503 - - 9,503
Foreign currency translation adjustment - - - - (634) (634)
----------
Comprehensive income - - - - - 8,869
----------
Issuance of common stock upon :
Exercise of employee stock options 64,801 197 - - - 197
Exercise of stock warrants 65,584 410 - - - 410
Public stock offering 2,300,000 27,836 - - - 27,836
Purchase and retirement of common stock (1,036) (18) - - - (18)
Tax benefits from exercise of stock options - 117 - - - 117
------------ ------- -------- ---------- ------------- -------------
Balance - November 30, 2000 13,448,052 $43,175 $34,771 $ (294) $ (1,106) $ 76,546
============ ======= ======== ========== ============= =============
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, 2000, 1999, AND 1998
(Dollar Amounts in Thousands)
2000 1999 1998
---- ---- -----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,503 $ 5,470 $ 3,934
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 4,757 3,919 3,587
Amortization 1,124 624 135
Deferred income taxes 687 634 1,014
Tax benefits from exercise of stock options 117 37 79
Gain on sale of property, plant and equipment - (13) -
Changes in assets and liabilities, excluding
effects of business acquisitions:
Accounts receivable (4,803) (8,734) ( 85)
Inventories (886) (6,380) 181
Prepaid expenses and other assets 355 (742) 24
Accounts payable and accrued expenses 296 7,194 (595)
--------- --------- ---------
Net cash provided by operating activities 11,150 2,009 8,274
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, plant and equipment - 13 -
Purchase of property, plant and equipment (6,905) (4,972) (3,293)
Payment for acquired businesses (1,450) (21,846) (4,077)
--------- --------- ---------
Net cash used in investing activities (8,355) (26,805) (7,370)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayment) of short-term debt (5,089) 4,532 282
Borrowings of long-term debt - 20,800 -
Repayment of long-term debt (20,640) (843) (743)
Purchase of common stock - - (294)
Net proceeds from issuance of common stock:
Exercise of employee stock options 179 126 414
Exercise of stock warrants 410 - -
Public stock offering 27,836 - -
--------- --------- ---------
Net cash provided by (used in)
financing activities 2,696 24,615 (341)
--------- --------- ---------
Effect of exchange rate changes on cash (52) (20) (20)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 5,439 (201) 543
Cash and cash equivalents, beginning of year 538 739 196
--------- --------- ---------
Cash and cash equivalents, end of year $ 5,977 $ 538 $ 739
========= ========= =========
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 German subsidiary, Spectrum Control GmbH, ends October 31 to
facilitate timely reporting. All significant intercompany accounts are
eliminated upon consolidation.
Cash Equivalents
----------------
The Company considers all highly liquid money market
instruments with original maturities of three months or less to be cash
equivalents.
Financial Instruments
---------------------
From time to time, the Company utilizes interest rate swap
agreements to minimize the risks and costs associated with variable rate debt.
The swap agreements are contracts to exchange floating rate for fixed interest
payments periodically over the life of the agreements without the exchange of
the underlying notional amounts. The notional amounts of interest rate
agreements are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. Net cash amounts paid or
received on the agreements are accrued and recognized as an adjustment to
interest expense. The Company does not utilize interest rate agreements for
trading or other speculative purposes.
The Company enters into forward currency exchange contracts in
the regular course of business to manage its exposure against foreign currency
fluctuations on sales denominated in foreign currencies. The terms of these
contracts are generally six months or less. Gains and losses related to these
agreements are recorded when the related transaction occurs.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
Foreign Currency Translation
----------------------------
The assets and liabilities of the Company's foreign operations
are translated into U.S. dollars at current exchange rates. Revenue and expense
accounts of these operations are translated at average exchange rates prevailing
during the year. These translation adjustments are accumulated in a separate
component of stockholders' equity.
Foreign currency transaction gains and losses are included in
determining net income for the year in which the exchange rate changes.
Revenue Recognition
-------------------
Product sales are generally recorded at the time of shipment.
Sales of consigned inventories are recorded when the customer has taken title
and assumed the risks and rewards of ownership as specified in the customer's
purchase order or sales agreement. 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 $1,060,000 in 2000, $726,000 in
1999, and $633,000 in 1998.
Research and Development
------------------------
Research and development costs are expensed as incurred.
Research and development expense amounted to $1,535,000 in 2000, $1,184,000 in
1999, and $961,000 in 1998.
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"). The exercise price of employee stock
options equals the market price of the underlying stock on the date of option
grant. Once granted, an option's exercise price and number of shares to be
issued remain fixed throughout the option term. Accordingly, in accordance with
APB 25, no stock-based compensation expense has been recognized in the
accompanying financial statements.
Earnings Per Common Share
-------------------------
Basic earnings per common share is computed by dividing net
income by the weighted average number of common shares outstanding during the
period. Diluted earnings per common share is computed by dividing net income by
the weighted average number of common shares outstanding during the period and
the effect of all dilutive common stock equivalents, such as stock options and
warrants.
Estimates
---------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements, the disclosure of contingent assets and
liabilities, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
New Accounting Pronouncements
-----------------------------
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and for Hedging Activities" ("SFAS No. 133"). SFAS No. 133 provides
a comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. For a derivative not
designated as a hedging instrument, changes in the fair value of the derivative
are recognized in earnings in the period of change. SFAS No. 133 is effective
for fiscal years beginning after June 15, 2000. In December 1999, the Securities
and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB No. 101"), which clarifies the
accounting rules for revenue recognition in financial statements. The Company
must implement SAB No. 101 by the fourth quarter of fiscal year 2001. Management
does not expect the adoption of SFAS No. 133 or SAB No. 101 to have a material
impact on the Company's financial position or results of operations.
Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform
with the current year presentation.
2. Acquisitions
On March 26, 1999, the Company acquired substantially all of
the assets of the Signal Conditioning Products Division ("SCPD") of AMP
Incorporated ("AMP"). Through SCPD, AMP manufactured and sold a broad line of
electromagnetic interference ("EMI") filters, filtered arrays, filtered
connectors, and related products. The aggregate cash purchase price of the
acquired assets, including related acquisition costs, was $20,745,000. The
Company also assumed obligations in the aggregate amount of $1,866,000. The
aggregate purchase price of the acquisition was allocated to the acquired assets
based upon their respective fair market values. The excess of the aggregate
purchase price over the fair value of the net assets acquired (goodwill)
amounted to $11,937,000 and is being amortized ratably over a period of 20
years.
On September 21, 1998, the Company acquired substantially all
of the assets of Potter Production Corporation, a manufacturer of electronic
filters and power products used in various communication, industrial control,
and medical equipment. The aggregate price of the acquired assets amounted to
$2,918,0000, excluding future contingent payments. The amount of the contingent
payments are being determined based upon the Company's sales of power products
during the three years subsequent to the acquisition date. Contingent payments
under this arrangement amounted to $1,207,000 in 2000 and $514,000 in 1999. The
amount of the contingent payments are being allocated to goodwill and amortized
ratably over the asset's remaining life. Also, in connection with this
acquisition, the Company issued warrants to purchase 100,000 shares of the
Company's Common Stock at an exercise price of $6.25 per share. The warrants are
immediately exercisable and expire on September 21, 2002. In 2000, warrants to
purchase 65,584 shares were exercised. At November 30, 2000, warrants to
purchase 34,416 shares remained outstanding.
These acquisitions were accounted for using the purchase
method of accounting and, accordingly, the results of operations of the acquired
businesses have been included in the accompanying consolidated financial
statements from their respective dates of acquisition.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Inventories
Inventories by major classification are as follows:
November 30
-------------------------------
2000 1999
---- ----
(in thousands)
Finished goods $ 4,111 $ 4,132
Work-in-process 10,357 9,626
Raw materials 10,771 10,859
--------- ----------
$ 25,239 $ 24,617
========= ==========
4. Property, Plant and Equipment
Property, plant and equipment consist of the following:
November 30
-------------------------------
2000 1999
---- ----
(in thousands)
Land and improvements $ 1,544 $ 1,524
Buildings and improvements 12,660 11,351
Machinery and equipment 29,940 26,202
Construction in progress 254 125
--------- ----------
44,398 39,202
Less accumulated depreciation 20,908 17,836
--------- ----------
$ 23,490 $ 21,366
========= ==========
5. Other Assets
Other assets consist of the following:
November 30
-------------------------------
2000 1999
---- ----
(in thousands)
Goodwill $ 16,236 $ 14,786
Less accumulated amortization 1,343 561
--------- ----------
Goodwill, net $ 14,893 $ 14,225
========= ==========
Patents and patent rights $ 571 $ 566
Debt issuance costs 375 671
--------- ----------
946 1,237
Less accumulated amortization 549 522
--------- ----------
397 715
Deferred income taxes - 108
Deferred charges 324 377
--------- ----------
Other noncurrent assets $ 721 $ 1,200
========= ==========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Short-Term Debt
Short-term debt consists of the following:
November 30
-------------------------------
2000 1999
---- ----
(in thousands)
Notes payable - domestic
line of credit (1) $ - $ 4,400
Notes payable - foreign
lines of credit (2) - 689
------- --------
Total $ - $ 5,089
======= ========
(1) The Company has a $12,000,000 unsecured line of credit with its
principal lending institution, with interest rates on borrowings
at or below the prevailing prime rate. During 2000, weighted
average borrowings under the revolving credit line amounted to
$4,275,000, with an average interest rate of 8.63%, and maximum
month-end borrowings of $7,400,000. During 1999, weighted
average borrowings amounted to $1,489,000, with an average
interest rate of 7.35%, and maximum month-end borrowings of
$4,400,000. The line of credit agreement contains certain
covenants, the most restrictive of which require the Company to
maintain designated minimum levels of net worth and
profitability and impose certain restrictions on the Company
regarding additional indebtedness. At November 30, 2000, the
Company was in compliance with all debt covenants. The current
line of credit agreement expires April 30, 2003.
(2) The Company's wholly-owned German subsidiary maintains unsecured
Deutsche Mark lines of credit with financial institutions
aggregating $1,502,000 (DM 3,500,000) at November 30, 2000 and
$1,330,000 (DM 2,500,000) at November 30, 1999. Weighted average
borrowings under the lines of credit amounted to $389,000 (DM
907,000) in 2000 and $95,000 (DM 179,000) in 1999, with average
interest rates of 7.50% in 2000 and 6.50% in 1999. The maximum
amount of borrowings under the lines of credit at the end of any
month was $961,000 (DM 2,238,000) in 2000 and $689,000 (DM
1,296,000) in 1999. 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
-------------------------
2000 1999
---- ----
(in thousands)
Industrial development authority notes at
variable interest rate (4.25% at
November 30, 2000 and 4.00% at
November 30, 1999) (1) $ 1,600 $ 1,800
Industrial development authority notes
at variable interest rate (4.87% at
November 30, 2000 and 4.35% at
November 30, 1999) (2) 300 700
Mortgage note payable to bank at an
interest rate of 8.50% (3) 747 787
Term loan payable to bank at variable
interest rate (7.59% at November 30, 1999) - 20,000
--------- --------
Total 2,647 23,287
Less current portion 540 4,276
--------- --------
Long-term debt $ 2,107 $ 19,011
========= ========
(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.
(3) The mortgage note payable is collateralized by certain land and building
and requires monthly principal payments of approximately $3,000 through
July 2009, with a final principal payment of $400,000 due in August 2009.
The aggregate maturities of all long-term debt during each of the five years
ending November 30, 2005, are $540,000, $340,000, $240,000, $240,000, and
$340,000, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, accounts receivable,
accounts payable, and accrued liabilities approximate fair value due to the
short-term maturities of these assets and liabilities. The interest rates on
substantially all of the Company's bank borrowings are adjusted regularly to
reflect current market rates. Accordingly, the carrying amounts of the Company's
short-term and long-term borrowings also approximate fair value. The Company
utilizes letters of credit to collateralize certain long-term borrowings. The
letters of credit reflect fair value as a condition of their underlying purpose
and are subject to fees competitively determined in the marketplace.
During 1999, the Company entered into an interest rate swap agreement
to limit the effect of increases in interest rates on the Company's variable
rate debt. The effect of the agreement, which had an aggregate notional amount
of $10,000,000, was to limit the interest rate exposure on $10,000,000 of the
Company's term loan and revolving credit loan. As a result of this agreement,
interest expense was decreased by $6,000 in 2000 and increased by $46,000 in
1999. The interest rate swap agreement was terminated on August 16, 2000. At
November 30, 1999, the estimated fair value of the interest rate swap agreement
was a net receivable of $73,000, based on quoted market rates and settlement
costs.
During 2000, the Company entered into forward currency exchange
contracts to manage its exposure to foreign currency fluctuations on sales
denominated in Deutsche Marks. At November 30, 2000, the Company had forward
currency exchange contracts with aggregate notional amounts of $850,000,
maturing in one month. The estimated fair value of the forward currency exchange
contracts was a net receivable of $78,000 at November 30, 2000, based on quoted
market prices.
9. Common Stock Offering
On August 16, 2000, the Company sold 2,300,000 shares of its Common
Stock in a public offering which resulted in net proceeds of $27,836,000, after
deducting issuance costs. The net proceeds of the offering were used to repay
$7,400,000 of revolving line of credit indebtedness and $17,273,000 of term loan
debt, with the remaining proceeds added to cash and cash equivalents available
for general corporate purposes.
10. 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, 2000 and 1999, the Company had repurchased 70,000
shares at an aggregate cost of $294,000.
11. Other Income and Expense
Other income and expense consist of the following (in thousands):
2000 1999 1998
---- ---- ----
Investment income $ 198 $ 72 $ 117
Gain (loss) on foreign currency
transactions 7 4 (40)
Patent licensing fees 452 7 8
Gain on sale of property,
plant and equipment - 13 -
------ ------ ------
$ 657 $ 96 $ 85
====== ====== ======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Income Taxes
For the years ended November 30, 2000, 1999 and 1998, income
before income taxes consists of the following (in thousands):
2000 1999 1998
---- ---- ----
U.S. operations $ 14,936 $ 8,376 $ 5,884
Foreign operations 383 464 435
-------- ------- -------
$ 15,319 $ 8,840 $ 6,319
======== ======= =======
For the years ended November 30, 2000, 1999 and 1998, the
provision for income taxes consists of the following (in thousands):
2000 1999 1998
---- ---- ----
Current
U.S. federal $ 4,460 $ 2,396 $ 1,146
Foreign 46 - -
State 623 340 225
Deferred 687 634 1,014
------- ------- -------
$ 5,816 $ 3,370 $ 2,385
======= ======= =======
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, 2000, 1999 and 1998 consists of the following (in
thousands):
2000 1999 1998
---- ---- ----
Statutory federal income tax $ 5,208 $ 3,006 $ 2,148
State income taxes, net of federal tax benefit 411 224 148
Foreign tax rates 50 74 70
Decrease in deferred tax asset
valuation allowance - - (62)
Other items 147 66 81
------- ------- -------
$ 5,816 $ 3,370 $ 2,385
======= ======= =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Significant components of the Company's net deferred
tax assets and liabilities are as follows (in thousands):
November 30
---------------------------
Deferred tax assets: 2000 1999
---- ----
Accrued compensation $ 440 $ 318
Amortization of intangible assets 389 453
Allowance for doubtful accounts 244 170
Investment in subsidiaries 108 255
Inventory valuation 95 110
Net operating loss carryforwards - 232
Tax credit carryforwards - 28
Other 10 10
---------- -----------
Deferred tax assets 1,286 1,576
---------- -----------
Deferred tax liabilities:
Depreciation of plant and equipment 2,486 2,329
Investment in subsidiaries 1,271 1,107
Amortization of intangible assets 163 68
Other - 19
---------- -----------
Deferred tax liabilities 3,920 3,523
---------- -----------
Net deferred tax assets (liabilities) $ (2,634) $ (1,947)
========== ===========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
November 30
------------------------------
2000 1999
---- ----
(in thousands)
Net deferred tax assets:
Current $ 779 $ 579
Noncurrent - 108
Net deferred tax liabilities:
Noncurrent (3,413) (2,634)
------------ ------------
$ (2,634) $ (1,947)
============ ============
The Company has not recorded deferred income taxes on the
undistributed earnings of its foreign subsidiaries because of management's
intent to indefinitely reinvest such earnings. At November 30, 2000, the
undistributed earnings of the foreign subsidiaries amounted to approximately
$3,174,000. 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.
The Company has assessed its past earnings history and trends, and
expiration dates of tax attribute carryforwards, and has determined that it is
more likely than not that its deferred tax assets will be realized. Accordingly,
no valuation allowance has been recorded at November 30, 2000 or 1999. During
the year ended November 30, 1998, the Company reduced its previously recorded
valuation allowance for deferred tax assets to reflect the utilization of
certain foreign net operating loss carryforwards and changes in the expected
future realization of remaining foreign loss carryforwards.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per common share:
2000 1999 1998
---- ---- ----
Numerator for basic and diluted
earnings per common share
(in thousands):
Net income $ 9,503 $ 5,470 $ 3,934
======= ======= =======
Denominator for basic earnings per
common share
(in thousands):
Weighted average shares
outstanding 11,694 10,905 10,907
======= ======= =======
Denominator for diluted earnings per
common share
(in thousands):
Weighted average shares
outstanding 11,694 10,905 10,907
Effect of dilutive securities:
Stock options 252 139 109
Stock warrants 34 7 -
------- ------- -------
11,980 11,051 11,016
======= ======= =======
Earnings per common share:
$ 0.81 $ 0.50 $ 0.36
Basic ======= ======= =======
$ 0.79 $ 0.49 $ 0.36
Diluted ======= ======= =======
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)
14. Supplemental Cash Flow Information
Supplemental cash flow information consists of the following (in
thousands):
2000 1999 1998
---- ---- ----
Cash paid during the year for:
Interest $ 1,816 $ 1,380 $ 210
Income taxes 3,827 2,986 1,466
Liabilities assumed in connection with
business acquisitions - 1,866 -
15. Common Stock Options
The Company has several plans which provide for granting to officers,
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, 2000, options to purchase 1,113,833 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, 2000, 1999 and 1998 is as follows:
Number
of Shares Option Price
-----------------------------------------------------
Under Per Weighted
Option Share Average Aggregate
------------- -------------- ------------- -----------------
Outstanding - November 30, 1997 390,668 $ 1.88-4.25 $ 3.22 $ 1,257,000
Granted during the year 137,500 5.88-6.00 5.91 813,000
Exercised during the year (118,663) 1.88-4.25 3.49 (414,000)
Forfeitures and expirations (4,000) 1.88-3.06 2.77 (11,000)
------------- -------------- ------------- -----------------
Outstanding - November 30, 1998 405,505 1.88-6.00 4.06 1,645,000
Granted during the year 194,500 4.13-4.38 4.26 828,000
Exercised during the year (68,663) 1.88-3.56 2.65 (182,000)
Forfeitures and expirations (60,000) 3.00-5.88 4.15 (249,000)
------------- -------------- ------------- -----------------
Outstanding - November 30, 1999 471,342 3.00-6.00 4.33 2,042,000
Granted during the year 193,000 10.75-11.25 10.86 2,096,000
Exercised during the year (64,801) 3.00-3.50 3.04 (197,000)
Forfeitures and expirations (1,000) 3.06 3.06 (3,000)
------------- -------------- ------------- -----------------
Outstanding - November 30, 2000 598,541 $ 3.00-11.25 $ 6.58 $ 3,938,000
============= ============== ============= =================
Exercisable
November 30, 2000 113,368 $ 3.00-6.00 $ 4.36 $ 494,000
============= ============== ============= =================
November 30, 1999 68,165 $ 3.00-3.50 $ 3.29 $ 224,000
============= ============== ============= =================
November 30, 1998 44,497 $ 1.88-4.25 $ 3.10 $ 138,000
============= ============== ============= =================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the years ended November 30, 2000, 1999 and 1998, the weighted
average fair value of options granted amounted to $5.62, $1.73, and $2.45 per
share, respectively. At November 30, 2000, the weighted average remaining
contractual life of outstanding options was 3.7 years.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees", and related Interpretations
in accounting for its employee stock options because the alternative fair value
accounting provided for under Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), requires use of
option valuation models that were not developed for use in valuing employee
stock options.
Pro forma information regarding net income and earnings per share,
required by SFAS No. 123, has been determined as if the Company had accounted
for its employee stock options under the fair value method of SFAS No. 123. The
fair value for options granted was estimated at the date of grant using a Black-
Scholes option pricing model with the following assumptions: risk-free interest
rate of 5.75% in 2000, and 5.50% in 1999 and 1998; volatility factor of the
expected market price of the Company's Common Stock of 0.52 in 2000, 0.36 in
1999, and 0.37 in 1998; dividend yield of 0.00% each year; 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, 2000, 1999 and
1998, the Company's reported and pro forma net income and earnings per share are
as follows (in thousands, except per share data):
2000 1999 1998
---- ---- ----
As reported:
Net income $ 9,503 $ 5,470 $ 3,934
Earnings per common share:
Basic 0.81 0.50 0.36
Diluted 0.79 0.49 0.36
Pro forma:
Net income 9,160 5,314 3,837
Earnings per common share:
Basic 0.78 0.49 0.35
Diluted 0.76 0.48 0.35
16. Employee Savings Plan
The Company has a savings plan, available to substantially all U.S.
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 $289,000 in 2000, $208,000 in 1999, and $190,000 in
1998.
17. Concentration of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of cash equivalents, foreign
currency exchange contracts, and trade receivables. The Company places its
temporary cash investments with high credit quality financial institutions which
invest primarily in U.S. Government instruments, commercial paper of prime
quality, certificates of deposit, and guaranteed bankers acceptances. The
counterparties to the Company's foreign currency exchange contracts are major
financial institutions. The Company has never experienced non-performance by any
of its counterparties. At November 30, 2000 and 1999, approximately 64% and 58%,
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)
18. Operating Segments
The Company was founded as a solutions-oriented company, designing and
manufacturing products to suppress or eliminate electromagnetic interference
("EMI"). In recent years, the Company has broadened its focus and product lines
to become a control products and systems company, providing a wide range of
components and systems used to condition, regulate, transmit, receive, or govern
electronic performance. In fiscal year 2000, the Company realigned its business
segments to better reflect its current strategic focus.
The Company's current operations are primarily conducted in two
segments: signal products and power products. The Company's Signal Products
Group manufactures a broad range of EMI filters, filtered arrays, filtered
connectors, wireless products (coaxial ceramic resonators, bandpass filters,
patch antennas, and duplexers), and specialty ceramic capacitors. The Power
Technologies Group currently manufactures various power management and
conditioning products including power line filters and power entry modules. The
reportable segments are each managed separately because they manufacture and
sell distinct products with different production processes.
The Company evaluates performance and allocates resources to its
operating segments based upon numerous factors, including segment income or loss
before income taxes. The accounting policies of the reportable segments are the
same as those utilized in the preparation of the Company's consolidated
financial statements. However, substantially all of the Company's selling
expenses, general and administrative expenses, and nonoperating expenses are not
allocated to the Company's reportable operating segments and, accordingly, these
expenses are not deducted in arriving at segment income or loss. In addition,
reportable assets are comprised solely of property, plant, equipment, and
inventories.
Prior period amounts in the following tables have been restated to
correspond with the new business segment presentation. For each period
presented, the accounting policies and procedures used to determine segment
income have been consistently applied.
For the years ended November 30, 2000, 1999 and 1998, reportable
segment information is as follows (in thousands):
Signal Power
2000 Products Products Total
---- -------- -------- -----
Revenue from unaffiliated customers $98,983 $33,656 $132,639
Depreciation expense 3,655 729 4,384
Segment income 27,748 8,840 36,588
Segment assets 36,562 8,525 45,087
Capital expenditures 4,846 1,469 6,315
PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Signal Power
1999 Products Products Total
------ -------- -------- -----
Revenue from unaffiliated customers $64,866 $32,863 $97,729
Depreciation expense 2,781 674 3,455
Segment income 17,235 7,739 24,974
Segment assets 33,670 8,752 42,422
Capital expenditures 1,949 1,640 3,589
Signal Power
1998 Products Products Total
------ -------- -------- -----
Revenue from unaffiliated customers $43,633 $16,235 $59,868
Depreciation expense 2,716 499 3,215
Segment income 13,167 3,509 16,676
Segment assets 21,224 5,715 26,939
Capital expenditures 1,723 1,186 2,909
For the years ended November 30, 2000, 1999 and 1998, reconciliations
of reportable segment information to the Company's consolidated financial
statements are as follows (in thousands):
Depreciation expense 2000 1999 1998
- -------------------- ---- ---- ----
Total depreciation expense
for reportable segments $ 4,384 $ 3,455 $ 3,215
Unallocated amounts:
Depreciation expense related to
selling, general and administrative
activities 373 464 372
------- ------- -------
Consolidated depreciation expense $ 4,757 $ 3,919 $ 3,587
======= ======= =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income before provision
for income taxes 2000 1999 1998
- ----------------------- ---- ---- ----
Total income for reportable segments $36,588 $24,974 $16,676
Unallocated amounts:
Selling, general and
administrative expense (20,138) (14,810) (10,214)
Interest expense (1,788) (1,420) (228)
Other income 657 96 85
------- ------- -------
Consolidated income before
provision for income taxes $15,319 $ 8,840 $ 6,319
======= ======= =======
Assets 2000 1999 1998
- ------ ---- ---- ----
Total assets for reportable segments $45,087 $42,422 $26,939
Unallocated amounts:
Cash and cash equivalents 5,977 538 739
Accounts receivable 23,831 19,330 10,162
Goodwill 14,893 14,225 2,547
Other assets 5,435 6,039 3,752
------- ------- -------
Total consolidated assets $95,223 $82,554 $44,139
======= ======= =======
Capital expenditures 2000 1999 1998
- -------------------- ---- ---- ----
Total capital expenditures for
reportable segments $ 6,315 $ 3,589 $ 2,909
Capital expenditures related
to the Company's selling,
general and administrative
activities 590 1,383 384
------- ------- -------
Total consolidated capital
expenditures $ 6,905 $ 4,972 $ 3,293
======= ======= =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company has operations in the United States, Mexico and Germany.
Sales are attributed to individual regions based upon the operating location
responsible for the sale. The Company transfers products from one geographic
region for resale in another. These transfers are priced to provide both areas
with an equitable share of the overall profit. The geographic distribution of
sales, operating income and long-lived assets for 2000, 1999 and 1998 is as
follows (in thousands):
North
2000 America Europe Total
- ---------------------------------- ------- ------ -----
Revenue from unaffiliated
customers $113,585 $19,054 $132,639
Operating income 16,102 348 16,450
Long-lived assets:
Property, plant and equipment 23,391 99 23,490
Intangible assets 15,290 - 15,290
North
1999 America Europe Total
- ---------------------------------- ------- ------ -----
Revenue from unaffiliated
customers $ 82,662 $15,067 $ 97,729
Operating income 9,688 476 10,164
Long-lived assets:
Property, plant and equipment 21,241 125 21,366
Intangible assets 14,940 - 14,940
North
1998 America Europe Total
- ---------------------------------- ------- ------ -----
Revenue from unaffiliated
customers $ 50,864 $ 9,004 $ 59,868
Operating income 5,984 478 6,462
Long-lived assets:
Property, plant and equipment 16,188 101 16,289
Intangible assets 2,941 - 2,941
Sales to the Company's largest single customer represented 20% in
2000, 18% in 1999, and 11% in 1998 of total consolidated net sales. The
Company's second largest customer represented 13% of total consolidated net
sales in 2000, and 6% in 1999 and 1998. Both of these customers are original
equipment manufacturers of telecommunication equipment. Sales to each of these
major customers consist of signal and power products.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. Quarterly Financial Data (Unaudited)
Year Ended November 30, 2000
----------------------------------------------------------------
First Second Third Fourth
----------------------------------------------------------------
(in thousands, except per share data)
Net sales $ 28,524 $ 32,087 $ 35,649 $ 36,379
Gross margin 6,506 9,117 11,435 10,874
Net income 1,059 2,126 2,902 3,416
Earnings per common share:
Basic 0.10 0.19 0.25 0.26
Diluted 0.09 0.19 0.25 0.25
Year Ended November 30, 1999
----------------------------------------------------------------
First Second Third Fourth
----------------------------------------------------------------
(in thousands, except per share data)
Net sales $ 15,325 $ 24,542 $ 28,891 $ 28,971
Gross margin 4,412 7,011 8,074 8,415
Net income 863 1,510 1,597 1,500
Earnings per common share:
Basic 0.08 0.14 0.15 0.14
Diluted 0.08 0.14 0.14 0.13
Earnings per common share are computed independently for each of the
quarters presented. Therefore, the sum of the quarterly earnings per share may
not equal the total computed for the year.
20. Operating Leases
The Company has entered into several operating lease agreements,
primarily relating to certain manufacturing facilities, computer equipment, and
sales offices. These leases are noncancelable and expire on various dates
through 2006. Leases that expire generally are expected to be renewed or
replaced by other leases. Future minimum rental payments for all operating
leases having initial or remaining noncancelable terms in excess of one year are
as follows (in thousands):
2001 $ 467
2002 387
2003 359
2004 354
2005 205
Later years 35
-------
$ 1,807
=======
Total rent expense under all operating leases amounted to $977,000 in
2000, $1,140,000 in 1999, and $644,000 in 1998.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
The information set forth under "Election of Directors" and
"Directors of the Company" on pages 3, 4 and 5 of the registrant's Proxy
Statement for the annual meeting of shareholders to be held April 2, 2001 (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 46 Senior Vice President, Chief Financial Officer
Lawrence G. Howanitz 48 Senior Vice President Signal Products Group
Thomas J. Krahling 43 Vice President Sales
Robert L. Smith 62 Vice President Quality and Technology
Richard A. Southworth 58 President, Chief Executive Officer
James F. Toohey 66 Secretary
Brian F. Ward 41 Senior Vice President
Power Technologies Group
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 1990, he was named Vice President and Chief Financial
Officer. In December of 2000, he was named Senior Vice President.
Mr. Howanitz is a graduate of Pennsylvania State University with a
bachelors degree in Business Administration. Since joining the Company in 1984,
he has held several management positions. In 1997, he was appointed General
Manager of the Company's Interconnect Products Division. In September of 1999,
Mr. Howanitz was named Vice President Signal Products Group. In this position,
he is responsible for the Company's worldwide signal products business which
includes interconnect filter products, microwave/wireless components, and
ceramic capacitors. In December of 2000, he was named Senior Vice President.
Mr. Krahling is a graduate of Salisbury State University with a
bachelors degree in Business Administration. Since joining the Company in 1990,
he has held several positions including Regional Sales Manager, Director of
Sales for Signal Products, and Director of North America Sales. In December of
2000, he was named Vice President Sales. Prior to joining the Company, Mr.
Krahling held various sales positions with Murata Electronics North America and
Chromerics.
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 EMI 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. In December of 2000, he was named
Senior Vice President Power Technologies Group. In this position, he is
responsible for the Company's worldwide power products and advanced systems
business. 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 25
Consolidated Balance Sheets as of November 30, 2000
and 1999 26
Consolidated Statements of Income for the Years Ended
November 30, 2000, 1999 and 1998 27
Consolidated Statements of Stockholders' Equity for
the Years Ended November 30, 2000, 1999 and 1998 28
Consolidated Statements of Cash Flows for the Years
Ended November 30, 2000, 1999 and 1998 29
Notes to Consolidated Financial Statements 30 - 47
(2) Financial Statement Schedules - The following financial
statement schedule is submitted herewith for the periods
indicated therein.
Schedule II - Valuation and Qualifying Accounts 52
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 the Company,
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 the Company, as amended,
previously filed on February 25, 1981, as
Exhibit 3.2 to Form S-1 registration and
incorporated herein by reference
Change in Control Agreement dated
June 26, 2000, by and between the Company
and Richard A. Southworth, previously filed
on July 6, 2000, as Exhibit 10.1 to Form S-3
registration and incorporated herein by reference
Change in Control Agreement dated
June 26, 2000, by and between the Company
and John P. Freeman, previously filed on
July 6, 2000, as Exhibit 10.2 to Form S-3
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
Non-Employee Directors' Stock Option Plan,
previously filed under Form S-8 on
July 16, 1996, and incorporated herein by
reference
Lease Contract dated March 15, 2000, by and
between Industrias de America, S.A. de C.V.
and Spectrum Control de Mexico, S.A. de C.V.,
previously filed on July 6, 2000, as Exhibit
10.6 to Form S-3 registration and incorporated
herein by reference.
Subsidiaries of the Company (21.1) 53
Consent of Ernst & Young LLP (23.1) 54
(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, 2000
(Dollar Amounts in Thousands)
Column A Column B Column C Column D Column E
Additions
Balance At Charged to Balance
Beginning Cost and at End
Description of Year Expenses Deductions of Year
- ----------- ----------- -------- ---------- -------
Year ended November 30, 1998:
Allowance for doubtful accts. $ 409 $ 101 $ 104 (1) $ 406
Valuation allowance for
deferred tax assets 62 - 62 (2) -
--------- --------- --------- ---------
$ 471 $ 101 $ 166 $ 406
========= ========= ========= =========
Year ended November 30, 1999:
Allowance for doubtful accts. $ 406 $ 399 $ 132 (1) $ 673
========= ========= ========= =========
Year ended November 30, 2000:
Allowance for doubtful accts. $ 673 $ 372 $ 279 (1) $ 766
========= ========= ========= =========
(1) Uncollectible accounts written off, net of recoveries.
(2) Decrease in valuation allowance, principally related to tax loss
carryforwards of the Company's German subsidiary.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Spectrum Control, Inc.
------------------------------------------
By: /s/ Richard A. Southworth
---------------------------------------
February 28, 2001 Richard A. Southworth
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
/s/ Edwin R. Bindseil Director, February 28, 2001
- -------------------------
/s/ John P. Freeman Director, February 28, 2001
- -------------------------
Chief Financial Officer,
and Principal Accounting
Officer
/s/ J. Thomas Gruenwald Director February 28, 2001
- -------------------------
/s/ Melvin Kutchin Director February 28, 2001
- -------------------------
/s/ John M. Petersen Director February 28, 2001
- -------------------------
/s/ Gerald A. Ryan Director February 28, 2001
- -------------------------
/s/ James F. Toohey Director February 28, 2001
- -------------------------