-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ULRl7OQjCVnno+tCnigQG8Zpi+UFada/N89q2YN4Ju9qj12vZy2Hu2TenedabTyt ExqiJFrC4Rng/mPMB3PVog== 0000092769-00-000002.txt : 20000229 0000092769-00-000002.hdr.sgml : 20000229 ACCESSION NUMBER: 0000092769-00-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991130 FILED AS OF DATE: 20000228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPECTRUM CONTROL INC CENTRAL INDEX KEY: 0000092769 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 251196447 STATE OF INCORPORATION: PA FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-08796 FILM NUMBER: 555677 BUSINESS ADDRESS: STREET 1: 8031 AVONIA ROAD CITY: FAIRVIEW STATE: PA ZIP: 16415 BUSINESS PHONE: 8148351650 MAIL ADDRESS: STREET 1: 8031 AVONIA ROAD CITY: FAIRVIEW STATE: PA ZIP: 16415 10-K 1 Securities and Exchange Commission Washington, D.C. 20549 Form 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended November 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from .............. to ............ Commission File Number 0-8796 Spectrum Control, Inc. (a Pennsylvania Corporation) (I.R.S. Employer Identification No. 25-1196447) 8031 Avonia Road, Fairview, Pennsylvania 16415 Telephone 814-835-1650 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class Name of each exchange on which registered Common Stock - No Par Value The Nasdaq Stock Market Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. At February 1, 2000, the aggregate market value of voting Common Stock held by non-affiliates of the registrant based on a closing price of $13.0625 was $87,459,000. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock of the Company have been excluded because such persons may be deemed to be affiliates. As of February 1, 2000, the registrant had outstanding 10,972,037 shares of Common Stock, no par value. Documents incorporated by reference Portions of the registrant's Proxy Statement for the annual meeting of shareholders to be held April 3, 2000 are incorporated by reference into Part III of this Form 10-K. PART I ITEM 1. BUSINESS Except for the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section, as well as in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report. GENERAL Spectrum Control, Inc. and its subsidiaries (the "Company") design, manufacture and market a broad line of control products and systems. The Company was founded as a solutions-oriented company, designing and manufacturing products to suppress or eliminate electromagnetic interference ("EMI"). The Company has adapted its core EMI filter technology into a complete line of capacitors, filters, filtered arrays, and filtered connectors. In recent years, the Company has expanded its focus by developing new lines of power products (commercial custom assemblies, military/aerospace multisection assemblies, power distribution units, power entry modules, and power line filters), microwave/wireless products (coaxial ceramic bandpass filters, duplexers, and dielectric resonators), and specialty ceramic products. The Company's products are used in virtually all industries worldwide, including telecommunications, aerospace, military, medical, computer, and industrial controls. The need for EMI products results from the increasing dependency of our society on electronic equipment of various kinds, including wireless communication systems. This equipment both emits, and is sensitive to, random electromagnetic waves over a broad spectrum of wave lengths, which can interfere with and degrade the performance of other electronic equipment. The Company's EMI products are designed to suppress the emission of unwanted waves or to reduce their strength to an innocuous level, by reflecting them from one component to another in series or by converting their energy into heat which is then dissipated. Spectrum Control, Inc. was incorporated in Pennsylvania in 1968. The Company's Interconnect Products Division, which manufactures various EMI filter products, is located in Fairview, Pennsylvania. The Company's Control Products Division, which manufactures power products, operates facilities in Erie, Pennsylvania and Wesson, Mississippi. Currently, the Company manufactures its microwave/wireless product offerings at facilities in Elizabethtown, Pennsylvania. The Company's executive offices are located in Fairview, Pennsylvania. Spectrum Control Technology, Inc., a wholly-owned subsidiary, maintains a facility in New Orleans, Louisiana, with advanced manufacturing equipment designed for the production of ceramic capacitors, resonators, and specialty ceramic products. Presently, this subsidiary primarily manufactures ceramic discoidal and tubular capacitors used in the Company's EMI filter products. Spectrum Control, GmbH, a wholly-owned subsidiary of the Company located in Schwabach, Germany, acts as a distributor for the Company's products in the European market. MARKETS The Company's products are utilized in numerous applications including industrial equipment, instrumentation, computers, and medical equipment. The Company's primary markets, however, are communications equipment and military/aerospace. COMMUNICATIONS EQUIPMENT For the past several years the communications industry has experienced significant worldwide growth. This growth has primarily resulted from increased business and consumer demand for wireless communication services and internet access. Cost reductions and performance improvements in such wireless communication products as cellular, personal communication services (PCS), and satellite-based voice and data systems have also contributed to this growth. As demand for wireless communication services grows, service providers are expanding associated infrastructure. Wireless communication systems can offer the functional advantages of wired communication systems without the costly and time consuming development of an extensive wired infrastructure. The relative advantages of wireless and wired communication systems with respect to cost, transmission quality, reliability and other factors depend on the specific applications for which such systems are used and the existence of a wired or wireless infrastructure already in place. The factors responsible for the market's growth, coupled with regulatory changes in the United States and abroad as well as advances in wireless communication technology, have led to significant growth in existing wireless telecommunication systems and the emergence of new wireless applications. The Company provides filtered arrays, filtered connectors, and power products to leading suppliers of communication systems. Using its solutions-oriented approach, the Company provides its original equipment manufacturer ("OEM") customers with products tailored to their specific transmission needs, anticipating and solving system architecture and performance. Approximately 58% of the Company's total revenue during fiscal year 1999 was derived from sales of its products to OEM customers in the telecommunication industry. Most of these products are custom designed not only to conform to the specifications and requirements of the particular customer, but also to meet the performance and quality standards set by the agency or other governmental body whose regulations are applicable to the specific equipment or usage involved. A significant reduction in orders from such customers would have a materially adverse effect on the Company's business. MILITARY/AEROSPACE Military forces worldwide are dependent on sophisticated electronic equipment. Military aircraft and naval vessels generally contain extensive communication equipment, electronic countermeasure equipment for defense against enemy weapons, and radar systems. The Company provides low pass filters and multisection assemblies to major equipment manufacturers for installation into these systems. The Company's customers, in turn, sell their equipment to major aerospace manufacturers or directly to governments. In fiscal year 1999, military/aerospace sales accounted for approximately 22% of the Company's total sales. The Company does not expect such sales to increase from the levels achieved in the 1999 fiscal year due to reductions in funding for new programs. While the Company has developed and will continue to develop products for military/aerospace programs, there can be no assurance that sales to such customers will not decrease in the future. PRODUCTS The Company's current product offerings are organized into four primary product families: interconnect filter products, power products, microwave/wireless products, and specialty ceramic components. INTERCONNECT FILTER PRODUCTS Control of unwanted electromagnetic waves is accomplished through various combinations of EMI suppression devices. The EMI suppression devices produced by the Company include those that are utilized as circuit components and whose function is to permit the desired frequencies to pass through a circuit while rejecting or preventing the unwanted signals. The majority of these products are composed of either reactive (reflecting energy) or loss (dissipating energy) elements or at times, combinations of the two. These products can be utilized as individual components or combined in various configurations to provide the amount of EMI control needed. The Company's interconnect products include discrete EMI filters, filtered arrays, and filtered connectors. DISCRETE EMI FILTERS The Company's discrete EMI filter offerings include hermetically sealed and resin sealed/solder-in filters and capacitors. The Company's hermetically sealed filters are primarily used in military/secure communications, aerospace, rocket ignitors, power supplies, signal lines, and certain medical equipment. Resin sealed/solder-in filters are used in a wide range of products including telecommunications equipment, transceivers, and industrial control systems. FILTERED ARRAYS The Company's filtered array products consist of various filter plate assemblies. Filter plates are predominantly utilized in telecommunication equipment including cellular base stations, linear power amplifiers, and cellular microcell repeaters. This product offering often provides an economical method of meeting electromagnetic compatibility (EMC) requirements. FILTERED CONNECTORS The Company offers a range of custom connectors, datacomm interconnects, and D-Subminiature Connectors. These filtered connectors are used in numerous applications including telecommunications equipment, cellular base stations, secured communications, industrial process equipment, and certain personal computers. During the year ended November 30, 1999, approximately 65% of the Company's total revenue was generated from the sale of interconnect filter products. POWER PRODUCTS The Company's power product offerings currently include commercial custom assemblies, multisection filters, power entry modules, power distribution units, single line filters, and intelligent power management and conditioning products. The Company's multisection products primarily serve the military/aerospace market with applications in satellite communications, electronic warfare, and ground/air weapon systems. Other power products are principally used in communications equipment, including telecommunication racks, cellular base stations, internet servers, and networks. During the year ended November 30, 1999 approximately 31% of the Company's total revenue was generated from the sale of power products. MICROWAVE/WIRELESS PRODUCTS The Company manufactures and sells coaxial ceramic resonators, bandpass filters, and duplexers. These products primarily serve the communications industry with applications in cellular telephones and base stations, satellite transceivers, wireless modems and LANS, and CATV. During the year ended November 30, 1999, approximately 2% of the Company's total revenue was generated from the sale of microwave/wireless products. SPECIALTY CERAMIC COMPONENTS Spectrum Control Technology, Inc., a wholly-owned subsidiary of the Company, manufactures and sells a broad range of specialty ceramic capacitors including tubular and discoidal, single-layer microwave, temperature compensating, high voltage, switch-mode, and high Q capacitors. These products are primarily used in testing and measurement instruments, high frequency power supplies, RF amplifiers, and other communications equipment. During the year ended November 30, 1999, approximately 2% of the Company's total revenue was generated from the sale of specialty ceramic components. OPERATING SEGMENTS The Company was founded as a solutions-oriented company, designing and manuacturing products to suppress or eliminate electromagnetic interference ("EMI"). The Company has expanded its core EMI filter technology to a broad line of control products and systems. Currently, the Company has two reportable segments: interconnect products and control products. The Company's Interconnect Products Division manufactures a wide range of low pass filters, filtered arrays, and filtered connectors. The Company's Control Products Division manufactures various power products (power distribution units, intelligent power management and contidioning products, power entry modules, and power line filters) and microwave products (coaxial resonators, bandpass filters, and duplexers). Although the Company's products are utilized in numerous applications and industries, the Company's primary markets are communication equipment, military, and aerospace. The Company evaluates performance and allocates resources to its operating segments based upon numerous factors, including segment income or loss before income taxes. The accounting policies of the reportable segments are the same as those utilized in the preparation of the Company's consolidated financial statements. However, substantially all of the Company's selling expenses, general and administrative expenses, and non-operating expenses are not allocated to the Company's reportable operating segments and, accordingly, these expenses are not deducted in arriving at segment income or loss. In addition, reportable segment assets are comprised solely of property, plant, equipment, and inventories. The Company's reportable segments are operating divisions that offer different products. The reportable segments are each managed separately because they manufacture and distribute distinct products with different production processes. For the years ended November 30, 1999, 1998, and 1997, reportable segment information is as follows(in thousands):
Interconnect Control 1999 Products Products Other Total Revenue from unaffiliated customers $63,355 $32,863 $1,511 $97,729 Depreciation expense 1,297 674 1,971 Segment income 21,507 7,739 29,246 Segment assets 20,236 8,752 28,988 Capital expenditures 1,085 1,640 2,725 Interconnect Control 1998 Products Products Other Total Revenue from unaffiliated customers $42,025 $16,235 $1,608 $59,868 Depreciation expense 1,171 499 1,670 Segment income 16,780 3,509 20,289 Segment assets 8,419 5,715 14,134 Capital expenditures 388 1,186 1,574 Interconnect Control 1997 Products Products Other Total Revenue from unaffiliated customers $44,709 $11,168 $ 589 $56,466 Depreciation expense 1,197 296 1,493 Segment income 16,841 1,255 18,096 Segment assets 9,312 4,487 13,799 Capital expenditures 713 1,134 1,847 Other revenue consists of sales of ceramic capacitors. The Company's ceramic operations primarily manufacture and transfer ceramic capacitors and resonators to the Company's Interconnect Products and Control Products Divisions. Accordingly, the Company considers its ceramic capacitor operations to be a functional department and not a reportable operating segment.
For the years ended November 30, 1999, 1998 and 1997, reconciliations of reportable segment information to the Company's consolidated financial statements are as follows (in thousands):
Depreciation expense 1999 1998 1997 Total depreciation expense for reportable segments $ 1,971 $ 1,670 $ 1,493 Unallocated amounts: Depreciation expense related to the Company's ceramic capacitor operations 1,484 1,545 1,375 Depreciation expense related to selling, general and administrative activities 464 372 419 Consolidated depreciation expense $ 3,919 $ 3,587 $ 3,287 Income before provision for income taxes 1999 1998 1997 Total income for reportable segments $29,246 $20,289 $18,096 Unallocated amounts: Manufacturing expense related to the Company's ceramic capacitor operations (4,272) (3,613) (2,173) Selling, general and administrative expense (14,810) (10,214) (10,137) Interest expense (1,420) (228) (417) Other income 96 85 141 Consolidated income before provision for income taxes $ 8,840 $ 6,319 $ 5,510 Assets 1999 1998 1997 Total assets for reportable segments $28,988 $14,134 $13,799 Unallocated amounts: Assets utilized in the Company's ceramic capacitor operations 13,434 12,805 12,097 Cash and cash equivalents 538 739 196 Accounts receivable 19,330 10,162 9,997 Goodwill 14,225 2,547 - Other assets 6,039 3,752 3,967 Total consolidated assets $82,554 $44,139 $40,056 Captial expenditures 1999 1998 1997 Total capital expenditures for reportable segments $ 2,725 $ 1,574 $ 1,847 Capital expenditures related to the Company's ceramic capacitor operations 864 1,335 1,289 Capital expenditures related to the Company's selling, general and administrative activities 1,383 384 144 Total consolidated capital expenditures $ 4,972 $ 3,293 $ 3,280
The Company has operations in the United States and Germany. Sales are attributed to individual countries based upon the location responsible for the sale. The company transfers products from one geographic region for resale in another. These transfers are priced to provide both areas with an equitable share of the overall profit. The geographic distribution of sales and long-lived assets for 1999, 1998 and 1997 is as follows (in thousands):
United 1999 States Germany Total Revenue from unaffiliated customers $82,662 $15,067 $97,729 Long-lived assets: Property, plant and equipment 21,241 125 21,366 Intangible assets 14,940 - 14,940 United 1998 States Germany Total Revenue from unaffiliated customers $50,864 $9,004 $59,868 Long-lived assets: Property, plant and equipment 16,188 101 16,289 Intangible assets 2,941 - 2,941 United 1997 States Germany Total Revenue from unaffiliated customers $48,148 $8,318 $56,466 Long-lived assets: Property, plant and equipment 15,885 94 15,979 Intangible assets 499 - 499
Revenue attributed to Germany primarily reflects sales to European customers. The Company expects that international sales will continue to account for a significant portion of its total sales. There can be no assurance, however, that the Company will be able to maintain or increase international demand for the Company's products or that the Company will be able to effectively meet that demand. The Company's international sales are denominated in several different currencies including U.S. Dollars, British Pounds, and the Euro. An increase in the value of these currencies relative to other foreign currencies could make the Company's products more expensive and, therefore, potentially less competitive in those markets. Additional risks inherent in the Company's international business activities include potentially adverse tax consequences, repatriation of earnings, and the burdens of complying with a variety of foreign laws. There can be no assurance that such factors will not have an adverse effect on the Company's future results of operations. In 1999 and 1998, the Company's largest single customer, an original equipment manufacturer of telecommunication equipment, represented 18% and 11%, respectively, of total consolidated net sales. Sales to this major customer principally consisted of control products. In 1997, the Company's largest single customer represented 9% of total consolidated net sales. Sales to this customer principally consisted of interconnect products. PRODUCTION The Company substantially relies on its internal manufacturing capabilities for production of its control products and systems. The Company's Ceramic Components Division in New Orleans, Louisiana, designs and manufactures various ceramic components including tubular capacitors, discoidal capacitors, and resonators. The tubular and discoidal capacitors are primarily utilized in the manufacture of electronic filter products at the Company's Interconnect Products Division in Fairview, Pennsylvania. Coaxial ceramic dielectric resonators are principally used in the manufacture of bandpass filters and duplexers at the Company's facilities in Elizabethtown, Pennsylvania. Assembly of power products is performed by the Company's Control Products Division at facilities in Erie, Pennsylvania and Wesson, Mississippi. Although the Company produces a standardized line of products for sale from inventory or through distributors, most orders require relatively short production runs of custom designed components. The Company purchases brass bushings, castings, miniature metal stampings, as well as other hardware used in the assembly and production of its products. These items are available from numerous sources. The principal raw materials used by the Company in the manufacture of ceramic capacitors and resonators are barium titanate ceramic, silver, palladium, and platinum. Precious metals are available from many sources; however, their prices may be subject to significant fluctuations and such fluctuations may have a material and adverse affect on the Company's operating results. The Company's customers demand a high level of quality. As a result, the Company maintains an extensive quality control system designed to meet the requirements of sophisticated defense and commercial communications products. The Company has been approved by defense customers under the requirements of the U.S. military quality system, which approval is also often accepted by commercial customers. In addition, the Company's Interconnect Products Division, Control Products Division, and Ceramic Components Division have achieved and maintain ISO 9001 certification. In recent years, a majority of the Company's capital investment has been expended to establish new production lines, increase capacity, and improve manufacturing processes. There can be no assurance that the Company can continue to make such investments in a timely manner so as to take advantage of market demand. SALES AND DISTRIBUTION The Company sells its products primarily through manufacturers' representatives, managed by the Company's internal sales force, and distribution. The Company maintains representatives throughout North America and Europe, and portions of South America, Asia and the Middle East. In fiscal 1999, approximately 12% of the Company's consolidated sales was through distribution. Domestic distribution is done through various national and regional distributors. International distribution is done through the Company's wholly-owned German subsidiary, Spectrum Control GmbH. During fiscal year 1999, the Company sold its products to approximately 1,500 accounts. Sales of products to the Company's top ten customers represented 43% ($41.9 million) of total consolidated net sales in 1999. The Company's largest single customer, an original equipment manufacturer of telecommunications equipment, represented 18% in 1999, 11% in 1998, and 9% in 1997 of total consolidated net sales. The Company's second largest single customer represented 6% of total consolidated net sales in 1999 and 1998, and 7% in 1997. All of the Company's major customers are unaffiliated with Spectrum Control, Inc. and its subsidiaries. Shipments are made by common carrier. Most of the Company's interconnect filter products are either small or miniaturized and light weight. Accordingly, shipping charges for these products are not significant to the Company's business. However, transportation costs for the Company's power products and certain other product offerings may be significant. Accordingly, shipping charges and delivery time for these products may affect the Company's ability to compete for business, particularly in international markets. No material portion of the Company's business is subject to renegotiation of profits or termination of contracts or sub-contracts at the election of the U.S. Government. BACKLOG The Company's backlog, which consists of purchase orders by customers, totaled approximately $50.0 million at November 30, 1999 and $23.0 million at November 30, 1998. It is anticipated that approximately 90% of the Company's backlog as of November 30, 1999 will be shipped within one year. Annual requirement contracts are taken into backlog only to the extent that orders are actually released thereunder. Although the terms and conditions contained in the Company's quotation forms place certain restrictions on a customer's right to cancel, purchase orders generally provide for cancellation. In practice, the Company negotiates each cancellation and schedule change based on the cost it has incurred prior to such occurrence. The Company expects to continually reduce its average lead time (the length of time from the receipt of a customer order to shipment of finished product to the customer). As a result, the Company's backlog may decrease in the future due to reduced lead times. EMPLOYEES As of November 30, 1999, the Company had a total of 1,324 employees, including 79 in sales, marketing and customer support; 95 in engineering and product development; 1,100 in manufacturing; and 50 in finance and administration. The Company's future success depends in significant part upon the continued service of its key technical and senior management personnel and its continued ability to attract and retain highly qualified technical and managerial personnel. Competition for such personnel is intense, and there can be no assurance that the Company can retain its key managerial and technical employees or that it can attract, assimilate, or retain other highly qualified technical and managerial personnel in the future. None of the Company's employees is represented by a labor union. The Company has not experienced any work stoppages and considers its relations with its employees to be good. PROPRIETARY RIGHTS In connection with the manufacture and sale of control products and systems, the Company owns numerous United States and foreign patents and has certain patents pending. None of these patents and patent applications are critical to the Company's business. The Company's policy is to file patent applications to protect proprietary technology, inventions and improvements. There can be no assurance that patents will issue from any of the Company's pending applications or that any claims allowed from existing or pending patents will be sufficiently broad to protect the Company's technology. While the Company intends to protect its intellectual property rights vigorously, there can be no assurance that any patents held by the Company will not be challenged, invalidated or circumvented, or the rights granted thereunder will provide competitive advantages to the Company. The Company holds nineteen (19) United States patents and forty- five (45) foreign patents relating to polymer multilayer technology. The Company has entered into several agreements regarding licensing the technology covered by these patents. However, it is not known what commercial value, if any, these patents and related licenses may have. GOVERNMENT REGULATIONS The Company's products are incorporated into communications systems which are subject to various FCC regulations. Regulatory changes, including changes in the allocation of available frequency spectrum, could significantly impact the Company's operations by restricting development efforts by the Company's customers, obsoleting current products or increasing the opportunity for additional competition. Changes in, or the failure by the Company to comply with, applicable domestic and international regulations could have an adverse effect on the Company's business, operating results and financial condition. In addition, the increasing demand for wireless communications has exerted pressure on regulatory bodies worldwide to adopt new standards for such products and services, generally following extensive investigation of and deliberation over competing technologies. The delays inherent in this government approval process may cause the cancellation, postponement or rescheduling of the installation of communications systems by the Company's customers, which in turn may have a material adverse effect on the sale of products by the Company to such customers. In order to qualify as an approved supplier of EMI/EMC products for use in equipment purchased by the military services or aerospace programs, the Company is required to meet the applicable portions of the quality specifications and performance standards designed by the Air Force, the Army, and the Navy. The Company's products must also conform to the specifications of the Defense Electronic Supply Center for replacement parts supplied to the military. To the extent required, the Company meets or exceeds all of these specifications. The Company is subject to numerous federal, state and local regulations relating to air and water quality, the disposal of hazardous waste materials, safety, and health. Compliance with applicable environmental regulations has not significantly changed the Company's competitive position, capital spending, or earnings in the past and the Company does not presently anticipate that compliance with such regulations will change its competitive position, capital spending, or earnings for the foreseeable future. The Company continuously monitors regulatory matters and believes that it is currently in compliance in all material respects with applicable environmental laws and regulations. COMPETITION The markets for the Company's products are intensely competitive and are characterized by price erosion, technological change, and product obsolescence. Among the Company's principal competitors are: AVX, Amphenol, Conec, ITT Canon, and Tusonix. Many of the Company's current and potential competitors have significantly greater financial, technical, manufacturing, and marketing resources than the Company. These competitors may be able to engage in sustained price reductions in the Company's primary markets to gain market share. Furthermore, the Company currently supplies control products and systems to large OEM customers that are continuously evaluating whether to manufacture their own products and systems or purchase them from outside sources. The Company believes that its ability to compete in its current markets depends on factors both within and outside the Company's control, including the timing and success of new product introductions by the Company and its competitors, availability of ceramic and assembly manufacturing capability, the Company's ability to support decreases in selling price through operating cost reductions, adequate sources of raw materials, product quality, and general economic conditions. There can be no assurance that the Company will be able to compete successfully in the future. RESEARCH AND DEVELOPMENT The Company's research and development efforts are focused on expanding the Company's materials technology, improving existing product offerings, developing new product offerings, and designing specialized production equipment to improve manufacturing efficiencies. As of November 30, 1999, the Company employed 95 individuals in engineering and product development. In addition to their design and development activities, the engineering staff participates with the Company's marketing department in proposal preparation and applications support for customers. Research and development expense amounted to $1,184,000 in 1999, $961,000 in 1998, and $807,000 in 1997. OTHER MATTERS The business of the Company is not subject to any significant seasonal fluctuations. The Company does not believe that it has any special practices or special conditions affecting working capital items that are significant for an understanding of its business. ITEM 2. PROPERTIES The Company's principal manufacturing and office facilities as of November 30, 1999 are as follows: PRINCIPAL BALANCE OUTSTANDING APPROXIMATE AT 11/30/99 SQUARE FEET ON RELATED LOCATION FUNCTION OF FLOOR AREA OWNERSHIP MORTGAGE 8061 Avonia Road Manufacturing, 38,000 Owned N/A Fairview, PA EMI Testing 6000 West Ridge Road Manufacturing 41,000 Owned N/A Erie, PA 4100 Michoud Blvd. Manufacturing 100,000 Owned $1,800,000 New Orleans, LA 3053 Hwy. 51N Manufacturing 25,000 Rented N/A Wesson, MS 1593 Mount Joy St. Manufacturing 26,000 Owned N/A Elizabethtown, PA 1595 Mount Joy St. Manufacturing 35,000 Owned N/A Elizabethtown, PA 8031 Avonia Road Corporate Offices 10,000 Owned $ 787,000 Fairview, PA (1) In addition to the above mortgages, the Company's domestic properties are encumbered in connection with the collateralization of certain short-term and long-term bank indebtedness. (2) In fiscal year 2000, the Company expects to purchase or rent an additional 40,000 square feet of manufacturing space. The Company's office space is considered adequate for its existing requirements and its projected business needs. (3) In addition to the facilities described above, the Company leases certain sales office and warehousing space. ITEM 3. LEGAL PROCEEDINGS The Company is not currently involved in any litigation of a material nature. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended November 30, 1999. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the NASDAQ Stock Market under the symbol SPEC. The high and low sales prices for the Common Stock for each quarter during fiscal years 1999 and 1998 are set forth below. High Low Fiscal 1999 First quarter $ 4.94 $ 3.66 Second quarter 6.63 4.00 Third quarter 7.44 5.88 Fourth quarter 11.63 6.44 High Low Fiscal 1998 First quarter $ 5.75 $ 4.88 Second quarter 7.16 5.06 Third quarter 6.38 4.44 Fourth quarter 4.63 3.75 At February 1, 2000, the Company had 10,972,037 shares of Common Stock outstanding, which were held by approximately 2,000 registered stockholders. In recent years, the Company has not paid cash dividends on its Common Stock. While subject to periodic review, the current policy of the Board of Directors is to retain all earnings to provide funds for the continued growth of the Company. ITEM 6. SELECTED FINANCIAL DATA
Years Ended November 30 (Dollar Amounts in Thousands Except Per Share Data) 1999 1998 1997 1996 1995 Operating Data Net sales $97,729 $59,868 $56,466 $57,327 $49,297 Gross margin 27,912 18,284 17,421 18,076 16,061 Income from operations 10,164 6,462 5,786 5,470 5,045 Interest expense 1,420 228 417 753 908 Income before provision for income taxes 8,840 6,319 5,510 4,737 4,095 Net income 5,470 3,934 3,974 3,418 2,984 Earnings per common share: Basic 0.50 0.36 0.37 0.32 0.28 Diluted 0.49 0.36 0.37 0.32 0.28 Dividends per share - - - - - Financial Position Working capital $23,989 $18,619 $16,881 $12,534 $ 9,967 Total assets 82,554 44,139 40,056 40,213 39,498 Long-term debt 19,011 2,500 3,330 4,072 6,569 Stockholders' equity 39,135 33,774 29,545 25,379 21,781
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations General Spectrum Control, Inc. and its subsidiaries (the "Company") design, manufacture and market a broad line of control products and systems. The Company was founded as a solutions-oriented company, designing and manufacturing products to suppress or eliminate electromagnetic interference ("EMI"). The Company has expanded its core EMI filter technology into a complete line of interconnect filter products (discrete filters, filtered arrays, and filtered connectors). In addition, the Company has developed an extensive line of power products (power distribution systems, power entry modules, power line filters, commercial custom assemblies, and military/aerospace multisection assemblies), microwave products (coaxial ceramic bandpass filters, duplexers, and dielectric resonators), and specialty ceramic capacitors (single layer, temperature compensating, high voltage, and switch mode). The Company's products are used in virtually all industries worldwide, including telecommunications, aerospace, military, medical, computer, automotive, and industrial controls. On March 26, 1999, the Company acquired substantially all of the assets of the Signal Conditioning Products Division ("SCPD") of AMP Incorporated ("AMP"). AMP is a world leader in the manufacture of electrical, electronic, fiber-optic and wireless interconnection devices and systems. Through SCPD, AMP manufactured and sold a broad line of EMI interconnect filter products. The acquisition was accounted for as a purchase and, accordingly, the results of operations of the acquired business have been included in the Company's financial statements since the date of acquisition. Forward-Looking Information Management's Discussion and Analysis of Financial Condition and Results of Operations includes certain forward-looking statements which reflect management's current views with respect to future operating performance, ongoing cash requirements, and the Year 2000 Issue. The words "believe", "expect", "anticipate" and similar expressions identify forward- looking statements. These forward-looking statements are subject to certain risks and uncertainties which could cause actual results to differ materially from historical results or those anticipated. Factors that could cause or contribute to such differences include those discussed in "Risk Factors That May Affect Future Results", as well as those discussed elsewhere herein. Readers are cautioned not to place undue reliance on these forward-looking statements. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Results of Operations The following table sets forth certain financial data, as a percentage of net sales, for the years ended November 30, 1999, 1998 and 1997:
1999 1998 1997 Net sales 100.0% 100.0% 100.0% Cost of products sold 71.4 69.5 69.2 Gross margin 28.6 30.5 30.8 Selling, general and administrative expense 18.2 19.7 20.6 Income from operations 10.4 10.8 10.2 Other income (expense) Interest expense (1.5) (0.4) (0.7) Other income and expense, net 0.1 0.2 0.2 Income before provision for income taxes 9.0 10.6 9.7 Provision for income taxes 3.4 4.0 2.7 Net income 5.6% 6.6% 7.0%
1999 Compared to 1998 Net Sales Consolidated 1999 net sales increased by $37.9 million or 63.2% from 1998. Of this increase, $21.3 million was generated from the sale of SCPD and other interconnect filter products, with the remaining $16.6 million primarily generated from the sale of power products. These power products are principally used in communications equipment, including cellular base stations, telephone switching networks, and internet servers. Overall market demand in the telecommunication industry was very strong throughout the year. In 1999, the Company received total customer orders of $119.8 million, an increase of 93.5% from 1998. In addition to these customer orders, the Company assumed approximately $5.1 million of customer order backlog in connection with the acquisition of SCPD. Average selling prices declined slightly during the year as a result of market pressures. Gross Margin Gross margin was $27.9 million or 28.6% of sales in 1999, compared to $18.3 million or 30.5% of sales in 1998. The decrease in gross margin percentage reflects several factors, of relative equal significance, including: additional production costs and inefficiencies incurred during the integration of SCPD into the Company's Interconnect Products Division; changes in sales mix from the Company's interconnect filter products to its power product offerings; yield losses and resultant higher labor costs incurred at the Company's Ceramic Components Division in New Orleans, Louisiana; and lower average selling prices as indicated above. The initial phase of SCPD integration was completed by November 30,1999. The final phase, which includes certain cost reduction measures and production process improvements, is expected to be completed by May 2000. Accordingly, management believes gross margin percentages will improve during fiscal 2000 and approximate 29.0% to 30.0% of sales. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Selling, General and Administrative Expense As a result of greater sales volume, selling expense increased during the period. Selling expense amounted to $9.7 million or 10.0% of sales in 1999, compared to $6.8 million or 11.4% in 1998. The decrease in selling expense, as a percentage of sales, principally reflects economies of scale realized with the additional sales volume. General and administrative expense was approximately $8.0 million in 1999, compared to $5.0 million in 1998. Of this increase, approximately $400,000 arises from the amortization of goodwill recognized in connection with the Company's acquisition of SCPD in March 1999. The remaining increase in general and administrative expense primarily reflects additional personnel costs, professional fees and other operating expenses associated with the Company's increased business activity. Other Income and Expense As a result of additional bank indebtedness, interest expense increased by $1.2 million in 1999. To finance the acquisition of SCPD, the Company secured a $20.0 million variable rate term loan from its principal lending institutions. Interest on the term loan amounted to $990,000 in 1999, with an average interest rate of 7.25%. In addition, weighted average short-term bank borrowings were $1.6 million in 1999, compared to $28,000 in 1998. The Company's German subsidiary transacts business with certain customers and vendors in currencies other than the Deutsche Mark. As a result, the Company recognizes gains and losses on foreign currency transactions. The Company incurred net gains of $4,000 in 1999 and net losses of $40,000 in 1998 on these foreign currency transactions. The Company recognized other income of $79,000 in 1999 and $125,000 in 1998 from certain short-term investments and patent licensing fees. Income Taxes The Company's effective income tax rate was 38.1% in 1999 and 37.7% in 1998, compared to an applicable federal and state statutory income tax rate of approximately 40.0%. Differences between the effective tax rate and statutory tax rate primarily arise from state tax provisions and foreign income tax rates. At November 30, 1999, the Company had recorded certain deferred tax assets. The Company has assessed its past earnings history and trends, and expiration dates of tax attribute carryforwards, and has determined that it is more likely than not that these deferred tax assets will be realized to offset future taxable income from ordinary and recurring operations. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 1998 Compared to 1997 Net Sales Consolidated 1998 net sales increased by $3.4 million or 6.0% from 1997. The increase in sales primarily reflects additional shipment volume of the Company's commercial custom assemblies which are used in various telecommunication systems. Sales of these power products increased by $4.7 million in 1998. In addition, sales of ceramic capacitors increased $1.0 million in 1998., Shipments of the Company's interconnect filter products decreased by $2.7 million during the year. The decrease primarily reflects weak overall market demand in the passive electronic components industry and sharp inventory reductions by original equipment manufacturers and distributors. Average selling prices declined slightly during the year as a result of competitive pressures. Overall demand for the Company's products increased during the year with total customer orders of $61.9 million received in 1998, an increase of 1.6% from 1997. Gross Margin As a percentage of sales, gross margin declined slightly during the period, amounting to 30.5% in 1998 and 30.8% in 1997. The decrease in gross margin percentage principally reflects changes in sales mix among the Company's four major product families: interconnect filter products, power products, microwave products, and specialty ceramic components. As a result of additional sales volume, gross margin increased to $18.3 million in 1998, compared to $17.4 million in 1997. Selling, General and Administrative Expense Because of the greater sales volume, selling expense increased during the period, amounting to $6.8 million in 1998 and $6.5 million in 1997. General and administrative expense was approximately $5.0 million or 8.4% of sales in 1998, compared to $5.1 million or 9.2% of sales in 1997. The decrease in general and administrative expense primarily reflects lower personnel costs and reduced discretionary spending. Other Income and Expense Interest expense decreased by $189,000 in 1998, with interest expense amounting to $228,000 in 1998 and $417,000 in 1997. The decrease in interest expense primarily reflects reduced bank indebtedness. In 1998, the Company repaid $743,000 of long-term debt. In addition, weighted average short-term bank borrowings were limited to $28,000 in 1998, compared to $982,000 in 1997. Average interest rates declined slightly during the period. As previously indicated, the Company's German subsidiary transacts business with certain customers and vendors in currencies other than the Deutsche Mark. As a result, the Company incurred net losses of $40,000 in 1998 and net gains of $12,000 in 1997 on these foreign currency transactions. The Company recognized other income of $125,000 in 1998 and $137,000 in 1997 from certain short-term investments and patent licensing fees. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Income Taxes The Company's effective income tax rate was 37.7% in 1998 and 27.9% in 1997, compared to an applicable statutory income tax rate of approximately 40.0%. In 1998, the difference between the effective tax rate and statutory tax rate primarily arises from state tax provisions and foreign income tax rates. In 1997, the difference in the effective tax rate and statutory tax rate reflects a $1.2 million decrease in the deferred tax asset valuation allowance, principally related to certain German net operating loss carryforwards. Risk Factors That May Affect Future Results The Company's results of operations may be affected in the future by a variety of factors including: competitive pricing pressures, new product offerings by the Company and its competitors, new technologies, product cost changes, changes in the overall economic climate, availability of raw materials, and changes in product mix. In 1999, approximately 58% of the Company's sales were to customers in the telecommunication industry. The Company's largest single customer, an original equipment manufacturer of telecommunication equipment, represented 18% of the Company's total consolidated net sales in 1999. Any significant change in the activity level of this major customer, or the overall telecommunication industry, would have a direct impact on the Company's performance. Liquidity, Capital Resources and Financial Condition The Company has an aggregate $6.0 million line of credit with its principal lending institutions (PNC Bank of Erie, Pennsylvania and M & T Bank of Buffalo, New York). The revolving credit line is collateralized by substantially all of the Company's tangible and intangible property, with interest rates on borrowings at or below the prevailing prime rate. At November 30, 1999, the Company had borrowed $4.4 million under this financing arrangement. The current line of credit agreement expires March 26, 2002. The Company's wholly-owned foreign subsidiary maintains unsecured Deutsche Mark lines of credit with several German financial institutions aggregating $1.3 million (2.5 million DM). At November 30, 1999, outstanding borrowings under these lines of credit amounted to $689,000 (1.3 million DM). Borrowings under the lines of credit bear interest at rates below the prevailing prime rate and are payable upon demand. As previously indicated, the Company acquired substantially all of the assets of the Signal Conditioning Products Division of AMP Incorporated on March 26, 1999. The aggregate cash purchase price of the acquired assets was approximately $20.7 million. To finance the acquisition, the Company secured an aggregate $20.0 million term loan from its principal lending institutions. The term loan bears interest at variable rates at or below the prevailing prime rate and requires quarterly principal payments of $909,000 from December 26, 1999 through March 26, 2005. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) On March 26, 1999, the Company entered into a credit agreement with its two principal lending institutions covering the $20.0 million term loan and the Company's $6.0 million revolving credit facility (the "Agreement"). The Agreement requires the Company to comply with certain covenants. These covenants generally restrict the Company from granting additional liens on its assets, disposing of assets other than in the ordinary course of business, and incurring additional indebtedness other than purchase money indebtedness and debt not exceeding $5.0 million in the aggregate. The Agreement also imposes certain restrictions on future acquisitions by the Company. In addition, the Agreement requires the Company to meet the following quarterly financial covenants: maintain a minimum net worth of $28.0 million plus 50% of the Company's net income for each fiscal year ending after November 30, 1998; maintain a minimum ratio of EBITDA (earnings before interest, taxes, depreciation, and amortization) to fixed charges of 1.2 to 1.0; and maintain a maximum ratio of total indebtedness to EBITDA of 3.5 to 1.0. As of November 30, 1999, the Company was in compliance with all covenants contained in the Agreement. The Company's working capital continued to increase in 1999. At November 30, 1999, the Company had net working capital of $ 24.0 million, compared to $18.6 million at November 30, 1998 and $16.9 million at November 30, 1997. Despite increases in short-term borrowings and current maturities of long-term debt, the Company's current ratio remained strong in 1999. At November 30, 1999, current assets were 2.10 times current liabilities, compared to 4.23 at November 30, 1998 and 3.83 at November 30, 1997. The Company's cash expenditures for property, plant and equipment amounted to $5.0 million in 1999, compared to $3.3 million in each of the years 1998 and 1997. The 1999 capital expenditures primarily related to metal fabrication machinery and other manufacturing equipment for capacity expansion at the Company's Control Products Division, facility expansion at the Company's Interconnect Products Division, and construction of the Company's new corporate administrative office facility in Fairview, Pennsylvania. At November 30, 1999, the Company had not entered into any material commitments for capital expenditures. Income taxes paid during the fiscal years ended November 30, 1999, 1998 and 1997 amounted to $3.0 million, $1.5 million, and $854,000, respectively. Management expects cash outlays for income taxes to be less than income tax expense for the next three fiscal years. In September 1998, the Company initiated a stock repurchase program. Under the program, the Company may repurchase up to $4.0 million of the Company's Common Stock. Acquired shares are to be purchased in the open market, with the cost of the program financed out of available cash reserves and borrowings under the Company's revolving line of credit facility. The amount and timing of the shares repurchased are based on management's ongoing assessment of the Company's capital structure, liquidity, and the market price of the Company's stock. In 1999, no shares were repurchased. During 1998, 70,000 shares were repurchased by the Company at an aggregate cost of $294,000. The repurchased shares are held as treasury stock. Research and development expenditures, which encompass the personnel and related expenses devoted to developing new products and processes, amounted to $1.2 million in 1999, $961,000 in 1998, and $807,000 in 1997. Management believes research and development expenses may increase in fiscal 2000, as the Company continues to enhance existing product lines and develop new products. Current financial resources, including working capital and existing lines of credit, and anticipated funds from operations are expected to be sufficient to meet cash requirements throughout fiscal 2000. These cash requirements include scheduled long-term debt repayment, planned capital expenditures, research and development expenses, and possible stock repurchases. There can be no assurance, however, that unplanned capital replacement or other future events will not require the Company to seek additional debt or equity financing and, if so required, that it will be available on terms acceptable to the Company. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) As a result of increased working capital requirements, the Company's operating cash flow decreased in 1999. Net cash generated from operations amounted to $2.0 million in 1999, a decrease of $6.3 million from 1998. During the year ended November 30, 1999, inventories increased by approximately $6.4 million from operations. The increase in inventories primarily reflects additional customer consigned inventory requirements, as well as additional raw material and work-in-process inventories to support anticipated future shipments. In 1998 and 1997, the Company had strong operating cash flow. During the year ended November 30, 1998, net cash generated from operations amounted to $8.3 million and proceeds realized upon the exercise of employee stock options amounted to $414,000. This cash flow was used to fund capital additions of $3.3 million, debt repayment of $743,000, stock repurchases of $294,000, and the aggregate purchase price of two acquired businesses. In 1998, the Company acquired substantially all of the assets of Republic Electronics Corporation, a manufacturer of subminiature ceramic capacitors, and Potter Production Corporation, a manufacturer of electronic filters and power products. The total cash purchase price of the acquired assets amounted to $4.1 million. In 1997, net cash generated from operations amounted to $8.5 million. With this positive cash flow, the Company repaid $5.6 million of bank indebtedness and invested $3.3 million in capital equipment and improvements. Quantitative and Qualitative Disclosures About Market Risk Foreign Currency Certain of the Company's European sales and related selling expenses are denominated in German Deutsche Marks, British Pounds, and other local currencies. As a result, fluctuations in currency exchange rates may affect the Company's operating results and cash flow. Currency exchange rate gains and losses, however, were not material during the three years ended November 30, 1999. In addition, an assumed 10% adverse change in all foreign currencies in which the Company currently transacts business would not have a material impact on the Company's operating results, financial position, or cash flows. Euro On January 1, 1999, certain member countries of the European Union established fixed conversion rates between their existing currencies and the European Union's common currency, the Euro. The Company has completed all the necessary enhancements to its sales order, banking arrangements and operational procedures to ensure Euro compliance. The Company is able to process orders, invoice customers and accept payment in Euros throughout Europe. The introduction of the Euro has not had any material adverse impact upon the Company. The Company continues to monitor the risk of price erosion which could result from increased price transparency among countries using the Euro. Interest Rate Exposure The Company has market risk exposure relating to possible fluctuations in interest rates. The Company's policy is to manage interest rate risk by utilizing interest rate swap agreements to convert a portion of the floating interest rate debt to fixed interest rates. The Company does not enter into derivative financial instruments for trading or speculative purposes. The interest rate swap agreements are entered into with major financial institutions thereby minimizing the risk of credit loss. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The following table presents information about the Company's market sensitive financial instruments. The table sets forth the principal and notional amounts, as well as the year of maturity and applicable interest rates for all significant financial instruments in effect as of November 30, 1999: Year of Maturity Description 2000 2001 2002 2003 Thereafter Revolving credit facility: Principal amount $4,400,000 Actual floating rate Euro-rate portion 5.59% Term loan: Principal amount $3,636,000 $3,636,000 $3,636,000 $3,636,000 $5,456,000 Actual floating rate Euro-rate portion 5.59% 5.59% 5.59% 5.59% 5.59% Interest rate swap agreement: PNC Bank, N.A. Notional amount $3,636,000 $3,636,000 $2,728,000 Actual fixed interest pay rate 5.89% 5.89% 5.89% Environmental Matters The Company is subject to various laws and governmental regulations in the United States concerning environmental matters and employee health and safety. Federal environmental legislation having particular impact on the Company includes the Toxic Substances Control Act; the Resource Conservation and Recovery Act; the Clean Water Act; and the Safe Drinking Water Act. The Company is also subject to the Occupational Safety and Health Administration ("OSHA") concerning employee safety and health matters. The United States Environmental Protection Agency ("EPA"), OSHA, and other federal agencies have the authority to promulgate regulations that have an impact on the Company's operations. In addition to these federal agencies, various states have been delegated certain authority under the aforementioned federal statutes. Many state and local governments have adopted environmental and employee safety and health laws and regulations, some of which are similar to federal requirements. State and federal authorities may seek fines and penalties for violation of these laws and regulations. As part of its continuing environmental program, the Company has been able to comply with such environmental regulations without any materially adverse effect on its business. The Company is not currently involved in any legal proceedings involving environmental matters. Impact of Inflation In recent years, inflation has not had a significant impact on the Company's operations. However, the Company continuously monitors operating price increases, particularly in connection with the supply of precious metals used in the Company's manufacturing of certain ceramic capacitors. To the extent permitted by competition, the Company passes increased costs on to its customers by increasing sales price over time. Sales increases reported in the accompanying financial statements, however, have substantially arisen from increased sales volume, not increases in selling prices. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Impact of Year 2000 Issue The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. As a result, computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including among other things, a temporary inability to process transactions, prepare invoices, or engage in similar normal business activities. The Company's plan to resolve the Year 2000 Issue involved four phases: assessment, remediation, testing, and implementation. In 1998, the Company completed its assessment of all material systems that could be affected by the Year 2000 Issue. The completed assessment indicated that most of the Company's significant information technology systems could be affected. The assessment also indicated that software used in certain manufacturing equipment (hereafter referred to as operating equipment) was also at risk. For its information technology exposures, the Company completed the remediation phase for all material systems in February 1999, including required software reprogramming and replacement. In August 1999, the Company completed all of its testing and fully implemented its remediated systems. With respect to operating equipment, the Company completed the remediation phase of the resolution process in February 1999. Testing and implementation of all affected equipment was completed by September 1999. To date, the Company has not experienced any Year 2000 problems with its information systems or operating equipment. In 1999, the Company queried its important suppliers and vendors to assess their Year 2000 readiness. To date, the Company is not aware of any problems that would materially impact results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that these suppliers and vendors are Year 2000 ready. The inability of those parties to complete their Year 2000 resolution process could materially impact the Company. In addition, the Company does not have a comprehensive contingency plan with respect to the Year 2000 Issue. The Company used both internal and external resources to reprogram or replace, test, and implement the software and operating equipment for Year 2000 modifications. Total Year 2000 project costs were not material. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and for Hedging Activities" ("SFAS No. 133"). SFAS No. 133 provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. For a derivative not designated as a hedging instrument, changes in the fair value of the derivative are recognized in earnings in the period of change. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000, with earlier application permitted. The Company expects to adopt the new Statement effective December 1, 2000. The Company does not expect the adoption of SFAS No. 133 to have a material impact on the Company's financial position or results of operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of Spectrum Control, Inc. and subsidiaries are included herein: Page Number Report of Independent Auditors Consolidated Balance Sheets as of November 30, 1999 and 1998 Consolidated Statements of Income for the years ended November 30, 1999, 1998 and 1997 Consolidated Statements of Stockholders' Equity for the years ended November 30, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the years ended November 30, 1999, 1998 and 1997 Notes to Consolidated Financial Statements REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of Spectrum Control, Inc. We have audited the accompanying consolidated balance sheets of Spectrum Control, Inc. and subsidiaries as of November 30, 1999 and 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended November 30, 1999. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Spectrum Control, Inc. and subsidiaries at November 30, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended November 30, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Pittsburgh, Pennsylvania January 4, 2000 ERNST & YOUNG LLP SPECTRUM CONTROL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS NOVEMBER 30, 1999 AND 1998 (Dollar Amounts in Thousands)
1999 1998 ASSETS Current assets Cash and cash equivalents $ 538 $ 739 Accounts receivable, less allowances of $673 in 1999 and $406 in 1998 19,330 10,162 Inventories (Note 3) 24,617 12,885 Deferred income taxes (Note 11) 579 409 Prepaid expenses and other current assets 699 184 Total current assets 45,763 24,379 Property, plant and equipment, net (Note 4) 21,366 16,289 Other assets (Note 5) Goodwill, net 14,225 2,547 Other non-current assets 1,200 924 Total other assets 15,425 3,471 Total assets $ 82,554 $ 44,139 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short-term debt (Note 6) $ 5,089 $ 336 Accounts payable 8,801 2,719 Accrued salaries and wages 2,553 1,438 Accrued interest 103 63 Accrued federal and state income taxes - 93 Accrued other expenses 952 281 Current portion of long-term debt (Note 7) 4,276 830 Total current liabilities 21,774 5,760 Long-term debt (Note 7) 19,011 2,500 Deferred income taxes (Note 11) 2,634 2,105 Stockholders' equity Common stock, no par value, authorized 25,000,000 shares, issued 11,018,703 shares in 1999 and 10,957,008 in 1998 14,633 14,470 Retained earnings 25,268 19,798 Treasury stock, 70,000 shares in 1999 and 1998, at cost (Note 9) (294) (294) Accumulated other comprehensive income Foreign currency translation adjustment (472) (200) Total stockholders' equity 39,135 33,774 Total liabilities and stockholders' equity $ 82,554 $ 44,139 The accompanying notes are an integral part of the consolidated financial statements.
SPECTRUM CONTROL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997 (Dollar Amounts in Thousands Except Per Share Data)
1999 1998 1997 Net sales $ 97,729 $ 59,868 $ 56,466 Cost of products sold 69,817 41,584 39,045 Gross margin 27,912 18,284 17,421 Selling, general and administrative expense 17,748 11,822 11,635 Income from operations 10,164 6,462 5,786 Other income (expense) Interest expense (1,420) (228) (417) Other income and expense, net (Note 10) 96 85 141 (1,324) (143) (276) Income before provision for income taxes 8,840 6,319 5,510 Provision for income taxes (Note 11) 3,370 2,385 1,536 Net income $ 5,470 $ 3,934 $ 3,974 Earnings per common share (Note 12): Basic $ 0.50 $ 0.36 $ 0.37 Diluted $ 0.49 $ 0.36 $ 0.37 The accompanying notes are an integral part of the consolidated financial statements.
SPECTRUM CONTROL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997 (Dollar Amounts in Thousands)
Accumulated Total Other Stock- Common Retained Treasury Comprehensive Holders' Stock Earnings Stock Income Equity Balance-November 30, 1996 $13,755 $11,890 $ - $ (266) $25,379 Net income - 3,974 - - 3,974 Foreign currency translation adjustment - - - (30) (30) Comprehensive income - - - - 3,944 Issuance of 84,998 shares of common stock 300 - - - 300 Purchase and retirement of 20,886 shares of common stock (103) - - - (103) Tax benefits from exercise of stock options 25 - - - 25 Balance-November 30, 1997 13,977 15,864 - (296) 29,545 Net income - 3,934 - - 3,934 Foreign currency translation adjustment - - - 96 96 Comprehensive income - - - - 4,030 Issuance of 118,663 shares of common stock 414 - - - 414 Purchase of 70,000 shares of common stock - - (294) - (294) Tax benefits from exercise of stock options 79 - - - 79 Balance-November 30, 1998 14,470 19,798 (294) (200) 33,774 Net income - 5,470 - - 5,470 Foreign currency translation adjustment - - - (272) (272) Comprehensive income - - - - 5,198 Issuance of 68,663 shares of common stock 182 - - - 182 Purchase and retirement of 6,968 shares of common stock (56) - - - (56) Tax benefits from exercise of stock options 37 - - - 37 Balance-November 30, 1999 $14,633 $25,268 $ (294) $ (472) $39,135 The accompanying notes are an integral part of the consolidated financial statements.
SPECTRUM CONTROL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997 (Dollar Amounts in Thousands)
1999 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,470 $ 3,934 $ 3,974 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 3,919 3,587 3,287 Amortization 624 135 219 Deferred income taxes 634 1,014 376 Tax benefits from exercise of stock options 37 79 25 Loss (gain) on sale of property, plant and equipment (13) - 8 Changes in assets and liabilities, excluding effects of business acquisitions: Accounts receivable (8,734) (85) (67) Inventories (6,380) 181 (188) Prepaid expenses and other assets (742) 24 431 Accounts payable and accrued expenses 7,194 (595) 441 Net cash provided by operating activities 2,009 8,274 8,506 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of property, plant and equipment 13 - 10 Purchase of property, plant and equipment (4,972) (3,293) (3,280) Payment for acquired businesses (21,846) (4,077) - Net cash used in investing activities (26,805) (7,370) (3,270) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings(repayment) of short-term debt 4,532 282 (3,232) Borrowings of long-term debt 20,800 - - Repayment of long-term debt (843) (743) (2,391) Purchase of common stock - (294) - Net proceeds from issuance of common stock 126 414 196 Net cash provided by (used in) financing activities 24,615 (341) (5,427) Effect of exchange rate changes on cash (20) (20) (26) Net increase (decrease) in cash and cash equivalents (201) 543 (217) Cash and cash equivalents, beginning of year 739 196 413 Cash and cash equivalents, end of year $ 538 $ 739 $ 196 The accompanying notes are an integral part of the consolidated financial statements.
SPECTRUM CONTROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Spectrum Control, Inc. and its subsidiaries (the "Company"). The fiscal year of the Company's foreign subsidiary, Spectrum Control GmbH, ends October 31 to facilitate timely reporting. All significant intercompany accounts are eliminated upon consolidation. Cash Equivalents The Company considers all highly liquid money market instruments with original maturities of three months or less to be cash equivalents. Financial Instruments The Company utilizes interest rate swap agreements to minimize the risks and costs associated with variable rate debt. The swap agreements are contracts to exchange floating rate for fixed interest payments periodically over the life of the agreements without the exchange of the underlying notional amounts. The notional amounts of interest rate agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. Net cash amounts paid or received on the agreements are accrued and recognized as an adjustment to interest expense. The Company does not utilize interest rate agreements for trading or other speculative purposes. Inventories Inventories are valued at the lower of cost or market, with cost for raw materials, work-in-process and finished goods at standard cost, which approximates the first-in, first-out basis. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation is computed over the estimated useful lives of the assets using the straight-line method. Expenditures for maintenance and repairs are charged against earnings in the year incurred; major replacements, renewals and betterments are capitalized and depreciated over their estimated useful lives. The cost and accumulated depreciation of assets sold or retired are removed from the respective accounts and any gain or loss is reflected in earnings. Intangibles and Other Assets Goodwill, representing the excess of cost over the fair value of net tangible and identifiable intangible assets of acquired businesses, is stated at cost and amortized to expense on a straight-line basis over a period of 20 years. Patents and patent rights are amortized to expense on a straight-line basis over periods not exceeding 17 years. The carrying value of intangible assets is periodically reviewed by the Company and impairments are recognized when the expected future operating cash flows derived from such intangible assets is less than their carrying value. No impairment losses have been recognized in any of the periods presented herein. Debt issuance costs are amortized to expense on a straight-line basis over the term of the related indebtedness. Income Taxes The Company uses the liability method in accounting for income taxes. Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, using statutory tax rates in effect for the year in which the differences are expected to reverse. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Foreign Currency Translation The assets and liabilities of the Company's foreign operations are translated into U.S. dollars at current exchange rates. Revenue and expense accounts of these operations are translated at average exchange rates prevailing during the year. These translation adjustments are accumulated in a separate component of stockholders' equity. Foreign currency transaction gains and losses are included in determining net income for the year in which the exchange rate changes. Revenue Recognition Product sales are recorded at the time of shipment. Service revenues are recorded when the related services are performed. Advertising and Promotion Advertising and promotion costs are expensed as incurred. Advertising and promotion expense amounted to $726,000 in 1999, $633,000 in 1998, and $574,000 in 1997. Research and Development Research and development costs are expensed as incurred. Research and development expense amounted to $1,184,000 in 1999, $961,000 in 1998, and $807,000 in 1997. Stock-Based Compensation Stock options granted by the Company are accounted for in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). In accordance with APB 25, no stock-based compensation expense has been recognized in the accompanying financial statements, since the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of option grant. Earnings Per Common Share Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period and the effect of all dilutive common stock equivalents, such as stock options and warrants. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and for Hedging Activities" ("SFAS No. 133"). SFAS No. 133 provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. For a derivative not designated as a hedging instrument, changes in the fair value of the derivative are recognized in earnings in the period of change. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000, with earlier application permitted. The Company does not expect the adoption of SFAS No. 133 to have a material impact on the Company's financial position or results of operations. Reclassifications Certain prior year amounts have been reclassified to conform with the current year presentation. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. Acquisitions On March 26, 1999, the Company acquired substantially all of the assets of the Signal Conditioning Products Division ("SCPD") of AMP Incorporated ("AMP"). AMP is a world leader in the manufacture of electrical, electronic, fiber-optic and wireless interconnection devices and systems. Through SCPD, AMP manufactured and sold a broad line of electromagnetic interference ("EMI") filters, filtered arrays, filtered connectors, and related products. The aggregate cash purchase price of the acquired assets, including related acquisition costs, was $20,745,000. The Company also assumed obligations in the aggregate amount of $1,866,000, including liabilities of $ 776,000 to relocate or provide severance benefits to certain employees of the acquired business. To finance the acquisition, the Company secured a $20,000,000 term loan from its principal lending institutions. The term loan bears interest at variable rates at or below the prevailing prime rate and requires quarterly principal payments of $909,000 from December 26, 1999 through March 26, 2005. The aggregate purchase price of the acquisition has been allocated to the acquired assets based upon their respective fair market values. The excess of the aggregate purchase price over the fair value of the net assets acquired (goodwill) amounted to $11,694,000 and is being amortized ratably over a period of 20 years. The acquisition has been accounted for as a purchase and, accordingly, the results of operations of the acquired business have been included in the accompanying financial statements since the date of acquisition. The following unaudited pro forma consolidated results of operations have been prepared as if the acquisition had occurred as of the beginning of fiscal year 1999 and 1998, respectively (in thousands, except per share data): 1999 1998 Net sales $102,796 $ 83,457 Net income 5,253 3,420 Earnings per common share: Basic 0.48 0.31 Diluted 0.48 0.31 The above amounts are based upon certain assumptions and estimates, and do not reflect any benefits from economies which might be achieved from combined operations. The pro forma results do not necessarily represent results which would have occurred if the acquisition had taken place on the basis assumed above, nor are they necessarily indicative of the results of future combined operations. On September 21, 1998, the Company acquired substantially all of the assets of Potter Production Corporation, a manufacturer of electronic filters and power products used in various communication, industrial control, and medical equipment. The aggregate price of the acquired assets amounted to $2,918,0000, excluding future contingent payments. The amount of the contingent payments are being determined based upon the Company's sales of power products during the three years subsequent to the acquisition date. In 1999, contingent payments under this arrangement amounted to $514,000. The amount of the contingent payments are being allocated to goodwill and amortized ratably over the asset's remaining life. Also, in connection with this acquisition, the Company issued warrants to purchase 100,000 shares of the Company's Common Stock at an exercise price of $6.25 per share. The warrants are immediately exercisable and expire on September 21, 2002. At November 30, 1999, all warrants remained outstanding. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. Inventories Inventories by major classification are as follows: November 30 1999 1998 (in thousands) Finished goods $ 4,132 $ 2,581 Work-in-process 9,626 5,070 Raw materials 10,859 5,234 $ 24,617 $ 12,885 4. Property, Plant and Equipment Property, plant and equipment consist of the following: November 30 1999 1998 (in thousands) Land and improvements $ 1,524 $ 1,164 Buildings and improvement 11,351 9,409 Machinery and equipment 26,202 21,976 Construction in progress 125 371 39,202 32,920 Less accumulated depreciation 17,836 16,631 $ 21,366 $ 16,289 5. Other Assets Other assets consist of the following: November 30 1999 1998 (in thousands) Goodwill $ 14,786 $ 2,577 Less accumulated amortization 561 30 Goodwill, net $ 14,225 $ 2,547 Patents and patent rights 566 466 Debt issuance costs 671 356 1,237 822 Less accumulated amortization 522 428 715 394 Deferred income taxes 108 383 Deferred charges 377 147 Other non-current assets $ 1,200 $ 924 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. Short-Term Debt Short-term debt consists of the following: November 30 1999 1998 (in thousands) Notes payable - domestic line of credit (1) $ 4,400 $ - Notes payable - foreign lines of credit (2) 689 336 Total $ 5,089 $ 336 (1) The Company has an aggregate $6,000,000 line of credit with its principal lending institutions. During 1999, weighted average borrowings under the revolving credit line amounted to $1,489,000, with average interest rates of 7.35%, and maximum month-end borrowings of $4,400,000. During 1998, there were no borrowings under the line of credit. The revolving credit line is collateralized by substantially all of the Company's tangible and intangible property, with interest rates on borrowings at or below the prevailing prime rate. The current line of credit agreement expires March 26, 2002. (2) The Company's wholly-owned foreign subsidiary maintains unsecured Deutsche Mark lines of credit with German financial institutions aggregating $1,330,000 (2,500,000 DM) at November 30, 1999 and $1,818,000 (3,000,000 DM) at November 30, 1998. Weighted average borrowings under the lines of credit amounted to $95,000 (179,000 DM) in 1999 and $28,000 (46,000 DM) in 1998, with average interest rates of 6.50% in 1999 and 6.00% in 1998. The maximum amount of borrowings under the lines of credit at the end of any month was $689,000 (1,296,000 DM) in 1999 and $336,000 (554,000 DM) in 1998. Borrowings bear interest at rates below the prevailing prime rate and are payable upon demand. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. Long-Term Debt Long-term debt consists of the following: November 30 1999 1998 (in thousands) Term loan payable to bank at variable interest rate (7.59% at November 30, 1999) (1) $ 20,000 $ - Mortgage note payable to bank at an interest rate of 8.50% (2) 787 - Industrial development authority notes at variable interest rate (4.00% at November 30, 1999 and 3.40% at November 30, 1998) (3) 1,800 2,100 Industrial development authority notes at variable interest rate (4,35% at November 30, 1999 and 3.81% at November 30, 1998)(4) 700 1,100 Industrial development authority notes and related bank mortgage notes at interest rates ranging from 4.00% to 7.75% - 130 Total 23,287 3,330 Less current portion 4,276 830 Long-term debt $ 19,011 $ 2,500 (1) The term loan is collateralized by substantially all of the Company's tangible and intangible assets. The loan bears interest at variable rates at or below the prevailing prime rate and requires quarterly principal payments of $909,000 from December 1999 to March 2005. The Company has entered into a credit agreement with its principal lending institutions covering the term loan and the Company's domestic line of credit (the "Agreement"). The Agreement requires the Company to comply with certain covenants. These covenants generally restrict the Company from granting additional liens on its assets, disposing of assets other than in the ordinary course of business, and incurring additional indebtedness other than purchase money indebtedness and debt not exceeding $5,000,000 in the aggregate. The Agreement also imposes certain restrictions on future acquisitions by the Company. In addition the Agreement requires the Company to meet the following quarterly financial covenants: maintain a minimum net worth of $28,000,000 plus 50% of the Company's net income for each fiscal year ending after November 30, 1998; maintain a minimum ratio of EBITDA (earnings before interest, taxes, depreciation and amortization) to fixed charges of 1.2 to 1.0; and maintain a maximum ratio of total indebtedness to EBITDA of 3.5 to 1.0. At November 30, 1999, the Company was in compliance with each of these covenants. (2) The mortgage note payable is collateralized by certain land and building and requires monthly principal payments of approximately $3,000 through July 2009, with a final principal payment of $400,000 due in August 2009. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (3) The industrial development authority notes are collateralized by certain land, building and equipment and an irrevocable letter of credit issued by the Company, through one of its principal lending institutions. The notes bear interest at approximately 50% of the prevailing prime rate and require annual principal payments ranging from $200,000 to $300,000 through the year 2007. (4) The industrial development authority notes are collateralized by an irrevocable letter of credit issued by the Company, through one of its principal lending institutions. The notes bear interest at approximately 50% of the prevailing prime rate and require annual principal payments of $400,000 through the year 2000, with a final principal payment of $300,000 due in the year 2001. Each of the above irrevocable letters of credit is collateralized by substantially all of the Company's tangible and intangible assets. The aggregate maturities of all long-term debt during each of the five years ending November 30, 2004, are $4,276,000, $4,176,000, $3,976,000, $3,876,000, and $3,876,000, respectively. 8. Fair Value of Financial Instruments The carrying amounts of cash, cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value due to the short-term maturities of these assets and liabilities. The interest rates on substantially all of the Company's bank borrowings are adjusted regularly to reflect current market rates. Accordingly, the carrying amounts of the Company's short-term and long-term borrowings also approximate fair value. The Company utilizes letters of credit to collateralize certain long-term borrowings. The letters of credit reflect fair value as a condition of their underlying purpose and are subject to fees competitively determined in the marketplace. During 1999, the Company entered into an interest rate swap agreement to limit the effect of increases in interest rates on the Company's variable rate debt. The swap agreement has an aggregate notional amount of $10,000,000 and expires on December 31, 2001. The effect of the agreement is to limit the interest rate exposure on $10,000,000 of the Company's term loan and revolving credit loans. As a result of this agreement, interest expense was increased by $46,000 in 1999. At November 30, 1999, the estimated fair value of the interest rate swap agreement is a net receivable of $73,000, based on current market rates and settlement costs. 9. Treasury Stock On September 30, 1998, the Board of Directors authorized the Company to repurchase up to $4,000,000 of the Company's Common Stock at market prices. The amount and timing of the shares to be repurchased will be at the discretion of management. At November 30, 1999 and 1998, the Company had repurchased 70,000 shares at an aggregate cost of $294,000. 10. Other Income and Expense Other income and expense consist of the following (in thousands): 1999 1998 1997 Investment income $ 72 $ 117 $ 31 Gain (loss) on foreign currency transactions 4 (40) 12 Patent licensing fees 7 8 106 Gain (loss) on sale of property, plant and equipment 13 - (8) $ 96 $ 85 $ 141 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 11. Income Taxes For the years ended November 30, 1999, 1998 and 1997, income before income taxes consists of the following (in thousands): 1999 1998 1997 U.S. operations $ 8,376 $ 5,884 $ 4,583 Foreign operations 464 435 927 $ 8,840 $ 6,319 $ 5,510 For the years ended November 30, 1999, 1998 and 1997, the provision for income taxes consists of the following (in thousands): 1999 1998 1997 Current Federal $ 2,396 $ 1,146 $ 1,055 State 340 225 105 Deferred 634 1,014 376 $ 3,370 $ 2,385 $ 1,536 The difference between the provision for income taxes and the amount computed by applying the U.S. federal income tax rate in effect for the years ended November 30, 1999, 1998 and 1997 consists of the following (in thousands): 1999 1998 1997 Statutory federal income tax $ 3,006 $ 2,148 $ 1,873 State income taxes, net of federal tax benefit 224 148 69 Foreign tax rates 74 70 148 Subpart F income, U.S. property investment - - 258 Decrease in deferred tax asset valuation allowance - (62) (1,194) Other items 66 81 382 $ 3,370 $ 2,385 $ 1,536 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Significant components of the Company's net deferred tax assets and liabilities are as follows (in thousands): November 30 Deferred tax assets: 1999 1998 Amortization of intangible assets $ 453 $ 512 Accrued compensation 318 237 Investment in subsidiaries 255 399 Net operating loss carryforwards 232 574 Allowance for doubtful accounts 170 103 Inventory valuation 110 68 Tax credit carryforwards 28 42 Property, plant and equipment - 116 Other 10 10 Deferred tax assets 1,576 2,061 Deferred tax liabilities: Depreciation of plant and equipment 2,329 2,336 Investment in subsidiaries 1,107 1,034 Amortization of intangible assets 68 4 Other 19 - Deferred tax liabilities 3,523 3,374 Net deferred tax assets (liabilities) $(1,947) $(1,313) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) November 30 1999 1998 (in thousands) Net deferred tax assets Current $ 579 $ 409 Noncurrent 108 383 Net deferred tax liabilities Noncurrent (2,634) (2,105) $(1,947) $(1,313) The Company has not recorded deferred income taxes on the undistributed earnings of its foreign subsidiary because of management's intent to indefinitely reinvest such earnings. At November 30, 1999, the undistributed earnings of the foreign subsidiary amounted to $2,836,000 (5,332,000 DM). Upon distribution of these earnings in the form of dividends or otherwise, the Company may be subject to U.S. income taxes and foreign withholding taxes. It is not practical, however, to estimate the amount of taxes that may be payable on the eventual remittance of these earnings. At November 30, 1999, the Company's foreign subsidiary had approximately $216,000 (406,000 DM) of tax net operating loss carryforwards available to be carried forward indefinitely. The Company has assessed its past earnings history and trends, and expiration dates of tax attribute carryforwards, and has determined that it is more likely than not that its deferred tax assets will be realized. Accordingly, no valuation allowance has been recorded at November 30, 1999 or 1998. During the years ended November 30, 1998 and 1997, the Company reduced its previously recorded valuation allowance for deferred tax assets to reflect the utilization of certain foreign net operating loss carryforwards and changes in the expected future realization of remaining foreign loss carryforwards. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per common share: 1999 1998 1997 Numerator for basic and diluted earnings per common share (in thousands): Net income $ 5,470 $ 3,934 $ 3,974 Denominator for basic earnings per common share (in thousands): Weighted average shares outstanding 10,905 10,907 10,798 Denominator for diluted earnings per common share (in thousands): Weighted average shares outstanding 10,905 10,907 10,798 Effect of dilutive securities 139 109 71 Stock options 7 - - Stock warrants 11,051 11,016 10,869 Earnings per common share: Basic $ 0.50 $ 0.36 $ 0.37 Diluted $ 0.49 $ 0.36 $ 0.37 Options to purchase 143,500 shares of Common Stock at prices ranging from $ 4.25 to $6.00 per share were outstanding during 1998 but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the Company's Common Stock and, therefore, would be antidilutive. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. Supplemental Cash Flow Information Supplemental cash flow information consists of the following (in thousands): 1999 1998 1997 Cash paid during the year for: Interest $ 1,380 $ 210 $ 420 Income taxes 2,986 1,466 854 Liabilities assumed in connection with business acquisitions 1,866 - - 14. Common Stock Options The Company has several plans which provide for granting to officers, directors, key employees and advisors options to purchase shares of the Company's Common Stock. Under the plans, option prices are not less than the market price of the Company's Common Stock on the date of the grant. The options become exercisable at varying dates and generally expire five years from the date of grant. At November 30, 1999, options to purchase 1,141,392 shares of Common Stock were available for grant under the Company's stock option plans. A summary of the Company's stock option activity for the years ended November 30, 1999, 1998 and 1997 is as follows:
Number of Shares Option Price Under Per Weighted Option Share Average Aggregate Outstanding - November 30, 1996 362,667 $1.88-4.25 $3.26 $1,183,000 Granted during the year 155,000 3.06-3.50 3.18 493,000 Exercised during the year (84,998) 1.88-4.25 3.52 (300,000) Forfeitures and expirations (42,001) 1.88-3.06 2.85 (119,000) Outstanding - November 30, 1997 390,668 1.88-4.25 3.22 1,257,000 Granted during the year 137,500 5.88-6.00 5.91 813,000 Exercised during the year (118,663) 1.88-4.25 3.49 (414,000) Forfeitures and expirations (4,000) 1.88-3.06 2.77 (11,000) Outstanding - November 30, 1998 405,505 1.88-6.00 4.06 1,645,000 Granted during the year 194,500 4.13-4.38 4.26 828,000 Exercised during the year (68,663) 1.83-3.56 2.65 (182,000) Forfeitures and expirations (60,000) 3.00-5.88 4.15 (249,000) Outstanding - November 30, 1999 471,342 $3.00-6.00 $4.33 $2,042,000 Exercisable November 30, 1999 68,165 $3.00-3.50 $3.29 $224,000 November 30, 1998 44,497 $1.88-4.25 $3.10 $138,000 November 30, 1997 80,163 $1.88-4.25 $3.66 $293,000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) During the years ended November 30, 1999, 1998 and 1997, the weighted average fair value of options granted amounted to $1.73, $2.45, and $0.97 per share, respectively. At November 30, 1999, the weighted average remaining contractual life of outstanding options was 3.8 years. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") requires use of option valuation models that were not developed for use in valuing employee stock options. Pro forma information regarding net income and earnings per share, required by SFAS No. 123, has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123. The fair value for options granted was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions for 1999, 1998, and 1997 respectively: risk-free interest rate of 5.50%, 5.50%, and 6.00%; volatility factor of the expected market price of the Company's Common Stock of 0.36, 0.37, and 0.30; dividend yield of 0.00%, 0.00%, and 2.00%; and a weighted average expected option life of five years. For purposes of pro forma disclosures, the estimated fair value of options is amortized to expense over the options' vesting period. For the years ended November 30, 1999, 1998, and 1997, the Company's reported and pro forma net income and earnings per share are as follows (in thousands, except per share data): 1999 1998 1997 As reported Net income $ 5,470 $ 3,934 $ 3,974 Earnings per common share: Basic 0.50 0.36 0.37 Diluted 0.49 0.36 0.37 Pro forma: Net income 5,314 3,837 3,935 Earnings per common share: Basic 0.49 0.35 0.37 Diluted 0.48 0.35 0.37 15. Employee Savings Plan The Company has a savings plan, available to substantially all employees, which permits participants to make contributions by salary reduction pursuant to Section 401(k) of the Internal Revenue Code. The Company matches employee contributions up to a maximum of 2.5% of compensation and may, at its discretion, make additional contributions to the plan. The Company's contribution to the plan was $208,000 in 1999, $190,000 in 1998, and $180,000 in 1997. 16. Concentration of Credit Risk Financial instruments which potentially subject the Company to a concentration of credit risk principally consist of cash, cash equivalents and trade receivables. The Company invests available cash in money market securities of high credit quality financial institutions. At November 30, 1999 and 1998, approximately 58% and 49%, respectively, of the Company's accounts receivable were from customers in the telecommunication industry. To reduce credit risk, the Company performs periodic credit evaluations of its customers, but does not generally require advance payments or collateral. Credit losses to customers operating in the telecommunication industry have not been material NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 17. OPERATING SEGMENTS The Company was founded as a solutions-oriented company, designing and manuacturing products to suppress or eliminate electromagnetic interference ("EMI"). The Company has expanded its core EMI filter technology to a broad line of control products and systems. Currently, the Company has two reportable segments: interconnect products and control products. The Company's Interconnect Products Division manufactures a wide range of low pass filters, filtered arrays, and filtered connectors. The Company's Control Products Division manufactures various power products (power distribution units, intelligent power management and contidioning products, power entry modules, and power line filters) and microwave products (coaxial resonators, bandpass filters, and duplexers). Although the Company's products are utilized in numerous applications and industries, the Company's primary markets are communication equipment, military, and aerospace. The Company evaluates performance and allocates resources to its operating segments based upon numerous factors, including segment income or loss before income taxes. The accounting policies of the reportable segments are the same as those utilized in the preparation of the Company's consolidated financial statements. However, substantially all of the Company's selling expenses, general and administrative expenses, and non-operating expenses are not allocated to the Company's reportable operating segments and, accordingly, these expenses are not deducted in arriving at segment income or loss. In addition, reportable segment assets are comprised solely of property, plant, equipment, and inventories. The Company's reportable segments are operating divisions that offer different products. The reportable segments are each managed separately because they manufacture and distribute distinct products with different production processes. For the years ended November 30, 1999, 1998, and 1997, reportable segment information is as follows(in thousands):
Interconnect Control 1999 Products Products Other Total Revenue from unaffiliated customers $63,355 $32,863 $1,511 $97,729 Depreciation expense 1,297 674 1,971 Segment income 21,507 7,739 29,246 Segment assets 20,236 8,752 28,988 Capital expenditures 1,085 1,640 2,725 Interconnect Control 1998 Products Products Other Total Revenue from unaffiliated customers $42,025 $16,235 $1,608 $59,868 Depreciation expense 1,171 499 1,670 Segment income 16,780 3,509 20,289 Segment assets 8,419 5,715 14,134 Capital expenditures 388 1,186 1,574 Interconnect Control 1997 Products Products Other Total Revenue from unaffiliated customers $44,709 $11,168 $ 589 $56,466 Depreciation expense 1,197 296 1,493 Segment income 16,841 1,255 18,096 Segment assets 9,312 4,487 13,799 Capital expenditures 713 1,134 1,847 Other revenue consists of sales of ceramic capacitors. The Company's ceramic operations primarily manufacture and transfer ceramic capacitors and resonators to the Company's Interconnect Products and Control Products Divisions. Accordingly, the Company considers its ceramic capacitor operations to be a functional department and not a reportable operating segment.
For the years ended November 30, 1999, 1998 and 1997, reconciliations of reportable segment information to the Company's consolidated financial statements are as follows (in thousands):
Depreciation expense 1999 1998 1997 Total depreciation expense for reportable segments $ 1,971 $ 1,670 $ 1,493 Unallocated amounts: Depreciation expense related to the Company's ceramic capacitor operations 1,484 1,545 1,375 Depreciation expense related to selling, general and administrative activities 464 372 419 Consolidated depreciation expense $ 3,919 $ 3,587 $ 3,287 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Income before provision for income taxes 1999 1998 1997 Total income for reportable segments $29,246 $20,289 $18,096 Unallocated amounts: Manufacturing expense related to the Company's ceramic capacitor operations (4,272) (3,613) (2,173) Selling, general and administrative expense (14,810) (10,214) (10,137) Interest expense (1,420) (228) (417) Other income 96 85 141 Consolidated income before provision for income taxes $ 8,840 $ 6,319 $ 5,510 Assets 1999 1998 1997 Total assets for reportable segments $28,988 $14,134 $13,799 Unallocated amounts: Assets utilized in the Company's ceramic capacitor operations 13,434 12,805 12,097 Cash and cash equivalents 538 739 196 Accounts receivable 19,330 10,162 9,997 Goodwill 14,225 2,547 - Other assets 6,039 3,752 3,967 Total consolidated assets $82,554 $44,139 $40,056 Captial expenditures 1999 1998 1997 Total capital expenditures for reportable segments $ 2,725 $ 1,574 $ 1,847 Capital expenditures related to the Company's ceramic capacitor operations 864 1,335 1,289 Capital expenditures related to the Company's selling, general and administrative activities 1,383 384 144 Total consolidated capital expenditures $ 4,972 $ 3,293 $ 3,280
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Company has operations in the United States and Germany. Sales are attributed to individual countries based upon the location responsible for the sale. The company transfers products from one geographic region for resale in another. These transfers are priced to provide both areas with an equitable share of the overall profit. The geographic distribution of sales and long-lived assets for 1999, 1998 and 1997 is as follows (in thousands):
United 1999 States Germany Total Revenue from unaffiliated customers $82,662 $15,067 $97,729 Long-lived assets: Property, plant and equipment 21,241 125 21,366 Intangible assets 14,940 -- 14,940 United 1998 States Germany Total Revenue from unaffiliated customers $50,864 $9,004 $59,868 Long-lived assets: Property, plant and equipment 16,188 101 16,289 Intangible assets 2,941 -- 2,941 United 1997 States Germany Total Revenue from unaffiliated customers $48,148 $8,318 $56,466 Long-lived assets: Property, plant and equipment 15,885 94 15,979 Intangible assets 499 -- 499
In 1999 and 1998, the Company's largest single customer, an original equipment manufacturer of telecommunication equipment, represented 18% and 11%, respectively, of total consolidated net sales. Sales to this major customer principally consisted of control products. In 1997, the Company's largest single customer represented 9% of total consolidated net sales. Sales to this customer principally consisted of interconnect products. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 18. Quarterly Financial Data (Unaudited)
Year Ended November 30, 1999 First Second Third Fourth (in thousands, except per share data) Net sales $ 15,325 $ 24,542 $ 28,891 $ 28,971 Gross margin 4,412 7,011 8,074 8,415 Net income 863 1,510 1,597 1,500 Earnings per common share: Basic 0.08 0.14 0.15 0.14 Diluted 0.08 0.14 0.14 0.13 Year Ended November 30, 1998 First Second Third Fourth (in thousands, except per share data) Net sales $ 14,641 $ 15,190 $ 14,023 $ 16,014 Gross margin 4,419 4,741 4,232 4,892 Net income 956 1,059 915 1,004 Earnings per common share: Basic 0.09 0.10 0.08 0.09 Diluted 0.09 0.10 0.08 0.09 Earnings per common share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share may not equal the total computed for the year.
19. Operating Leases The Company has entered into several operating lease agreements, primarily relating to sales office facilities and computer equipment. These leases are noncancelable and expire on various dates through 2006. Leases that expire generally are expected to be renewed or replaced by other leases. Future minimum rental payments for all operating leases having initial or remaining noncancelable terms in excess of one year are as follows (in thousands): 2000 $ 149 2001 140 2002 85 2003 58 2004 56 Later years 89 $ 577 Total rent expense under all operating leases amounted to $1,140,000 in 1999, $644,000 in 1998, and $517,000 in 1997. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth under "Election of Directors" and "Directors of the Company" on pages 3, 4 and 5 of the registrant's Proxy Statement for the annual meeting of shareholders to be held April 3, 2000 (the "Proxy Statement") is incorporated herein by reference. The following information is provided with respect to the executive officers of the Company: Name of Officer Age Position John P. Freeman 45 Vice President, Chief Financial Officer Lawrence G. Howanitz 47 Vice President Signal Products Group James A. Siegel 58 Treasurer Robert L. Smith 61 Vice President Quality and Technology Richard A. Southworth 57 President, Chief Executive Officer James F. Toohey 65 Secretary Brian F. Ward 40 Vice President Sales and Marketing Mr. Freeman is a graduate of Gannon University in Accounting and is a Certified Public Accountant and Certified Management Accountant. He joined the Company in 1988 as Controller. Prior to that time, he was a principal in a public accounting firm. In January 1990, he was named Vice President and Chief Financial Officer. Mr. Howanitz is a graduate of Pennsylvania State University with a bachelors degree in Business Administration. Since joining the Company in 1984, he has held several management positions. In 1997, he was appointed General Manager of the Company's Interconnect Products Division. In September of 1999, Mr. Howanitz was named Vice President Signal Products Group. In this position, he is responsible for the Company's worldwide signal products business which includes interconnect filter products, microwave/wireless filters, and ceramic capacitors. Mr. Siegel is a graduate of Gannon University in Accounting. He joined the Company as Corporate Controller in 1974, was appointed Assistant Treasurer in 1975, and Treasurer in 1984. Mr. Smith is a graduate of Cleveland Institute of Electronics and is a certified National Association of Radio and Telecommunications Engineer. He joined the Company in 1978 as Manager of EMC testing services and was named Vice President Quality and Technology in 1997. Prior to joining the Company, Mr. Smith was Product Engineering Manager of Erie Technological Products. Mr. Southworth is a graduate of Gannon University in Mechanical Engineering and Mathematics. He joined the Company in 1991 as Vice President and General Manager. Prior to joining the Company, Mr. Southworth held executive positions with National Water Specialties, Philips Components, Murata Electronics North America, and Erie Technological Products. In 1997, Mr. Southworth was named President and Chief Executive Officer. Mr. Toohey is a graduate of Gannon University and Dickinson School of Law and is a practicing member of the Erie County Bar Association. He is a member of the law firm of Quinn, Buseck, Leemhuis, Toohey & Kroto, Inc., general counsel to the Company, and has been a Director and Secretary of the Company since its organization. Mr. Ward is a Marketing graduate of Franklin Pearce College of Business. He joined the Company in 1994 as Director of Marketing and in 1997 was named Vice President Sales and Marketing. Prior to joining the Company, Mr. Ward held managerial positions in Engineering and Marketing with Clarostat Manufacturing Co. and Oak Grigsby, Inc. All executive officers are elected by the Board of Directors and serve at the discretion of the Board. ITEM 11. EXECUTIVE COMPENSATION The information set forth under "Executive Compensation" on pages 7 through 12 of the Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under "Securities Ownership" on pages 5 and 6 of the Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under "Certain Relationships and Related Transactions" on page 7 of the Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements and Schedules (1) Financial Statements - The following consolidated financial statements of Spectrum Control, Inc. and subsidiaries are included in Part II, Item 8: Page No. Report of Independent Auditors Consolidated Balance Sheets as of November 30, 1999 and 1998 Consolidated Statements of Income for the Years Ended November 30, 1999, 1998 and 1997 Consolidated Statements of Stockholders' Equity for the Years Ended November 30, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the Years Ended November 30, 1999, 1998 and 1997 Notes to Consolidated Financial Statements (2) Financial Statement Schedules - The following financial statement schedule is submitted herewith for the periods indicated therein. Schedule II - Valuation and Qualifying Accounts All other schedules are not submitted because they are not required or are not applicable, or the required information is shown in the consolidated financial statements or notes thereto. Columns omitted from the schedule filed have been omitted because the information is not applicable. (3) Exhibits - The following is the index to exhibits for Spectrum Control, Inc. and subsidiaries. Description of Exhibit Page No. Articles of Incorporation of registrant, as amended, previously filed on February 25, 1981, as Exhibit 3.1 to Form S-1 registration and incorporated herein by reference By-laws of registrant, as amended, previously filed on February 25, 1981, as Exhibit 3.2 to Form S-1 registration and incorporated herein by reference Stock Option Plan of 1995, previously filed under Form S-8 on January 22, 1996, and incorporated herein by reference (10.1) Non-Employee Directors' Stock Option Plan, previously filed under Form S-8 on July 16, 1996, and incorporated herein by reference (10.2) Subsidiaries of the registrant (21) Consent of Independent Auditors(23) (b) Reports on Form 8-K None SPECTRUM CONTROL, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the Three Years Ended November 30, 1999 (Dollar Amounts in Thousands)
Column A Column B Column C Column D Column E Additions Balance At Charged to Balance Beginning Costs and at End Description of Year Expenses Deductions of Year Year ended November 30, 1997 Allowance for doubtful accts. $ 378 $ 128 $ 97(1) $ 409 Valuation allowance for deferred tax assets 1,256 - 1,194(2) 62 $1,634 $ 128 $ 1,291 $ 471 Year ended November 30, 1998 Allowance for doubtful accts. $ 409 $ 101 $ 104(1) $ 406 Valuation allowance for deferred tax assets 62 - 62(2) - $ 471 $ 101 $ 166 $ 406 Year ended November 30, 1999 Allowance for doubtful accts. $ 406 $ 399 $ 132(1) $ 673 (1) Uncollectible accounts written off, net of recoveries. (2) Decrease in valuation allowance, principally related to tax loss carryforwards of the Company's foreign subsidiary.
Exhibit 21 SUBSIDIARIES OF THE REGISTRANT (1) Spectrum Control, Inc. 100% - Owned Subsidiary Incorporated in the State of Delaware Investment Company (2) Spectrum Engineering International, Inc. 100% - Owned Subsidiary Incorporated in the State of Delaware Interest Charge Domestic International Sales Corporation (3) Spectrum Control Technology, Inc. 100% - Owned Subsidiary Incorporated in the State of Delaware Operating Company (4) Spectrum Polytronics, Inc. 96% - Owned Subsidiary Incorporated in the Commonwealth of Pennsylvania Former Operating Company (5) Spectrum Control GmbH 100% - Owned Subsidiary Incorporated in Germany Operating Company Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement on Form S-8 dated May 11, 1987 pertaining to the Spectrum Control, Inc. Non-Qualified Stock Option Plan of 1987, the Registration Statement on Form S-8 dated January 22, 1996 pertaining to the Spectrum Control, Inc. Stock Option Plan of 1995, and the Registration Statement on Form S-8 dated July 16, 1996 pertaining to the Spectrum Control, Inc. 1996 Non-Employee Directors' Stock Option Plan, of our report dated January 4, 2000, with respect to the consolidated financial statements and schedule included in this Form 10-K of Spectrum Control, Inc. ERNST & YOUNG LLP Pittsburgh, Pennsylvania February 23, 2000 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Spectrum Control, Inc. By: /s/Richard A. Southworth February 28, 2000 Richard A. Southworth President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/Edwin R. Bindseil Director February 28, 2000 /s/John P. Freeman Director, February 28, 2000 Chief Financial Officer, and Principal Accounting Officer /s/J. Thomas Gruenwald Director February 28, 2000 /s/Melvin Kutchin Director February 28, 2000 /s/John M. Petersen Director February 28, 2000 /s/Gerald A. Ryan Director February 28, 2000 /s/James F. Toohey Director February 28, 2000 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SPECTRUM CONTROL, INC. CONSOLIDATED BALANCE SHEET AT NOVEMBER 30, 1999 AND CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED NOVEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO ITS FORM 10-K FOR THE YEAR ENDED NOVEMBER 30, 1999 0000092769 SPECTRUM CONTROL, INC. 1,000 12-MOS NOV-30-1999 NOV-30-1999 538 0 20,003 673 24,617 45,763 39,202 17,836 82,554 21,774 19,011 0 0 14,633 24,502 82,554 97,729 97,729 69,817 69,817 0 0 1,420 8,840 3,370 5,470 0 0 0 5,470 0.50 0.49
-----END PRIVACY-ENHANCED MESSAGE-----