424B1 1 0001.txt PROSPECTUS Filed pursuant to Rule 424(b)(1) Registration No. 333-40918 2,060,584 Shares [LOGO OF SPECTRUM CONTROL, INC.] SPECTRUM CONTROL, INC. Common Stock ----------------------------------- We are selling 2,000,000 shares of common stock and the shareholders of Spectrum named in this prospectus are selling 60,584 shares of common stock. We will not receive any proceeds from the sale of common stock by the selling shareholders. Our common stock is traded on the Nasdaq National Market under the symbol "SPEC." On August 16, 2000, the last reported sale price of our common stock on the Nasdaq National Market was $14.00 per share. ----------------------------------- Before investing you should review the "Risk Factors" beginning on page 5.
Per Share Total ------ ----------- Public offering price..................................... $13.00 $26,787,592 Underwriting discount..................................... $ 0.78 $ 1,607,256 Proceeds to Spectrum, before expenses..................... $12.22 $24,440,000 Proceeds to selling shareholders.......................... $12.22 $ 740,336
The underwriters have an option to purchase up to an additional 300,000 shares of common stock from us at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over- allotments. ----------------------------------- Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The shares of common stock will be ready for delivery on or about August 21, 2000. ----------------------------------- Janney Montgomery Scott LLC Needham & Company, Inc. The date of this prospectus is August 16, 2000. INSIDE FRONT COVER GRAPHICS: In the middle of the page appears The Spectrum logo under which appears the following text: A Control Products & Systems Company Spectrum is a leading designer and manufacturer of products used to condition, regulate and govern electronic performance, including filter products used to protect electronic equipment against electromagnetic interference. Although our components and systems are used in many industries worldwide, our largest market is the telecommunications industry which represented 58% of our sales in 1999. Spectrum products are used in numerous telecommunications systems including cellular base stations, fiber optic networks and switching equipment, wireless modems and LANS, and Internet servers. Also shown are three depictions of telecommunication equipment and systems in which Spectrum's products are used as follows: Depiction 1 (top right hand corner of page) shows products used in fiber optic transmission applications and contains the following phrases: OC 48 Broadband OC 12 ISP Bandwidth Manager OC192 Sonet Lightwave -------------------------------------------- Depiction 2 (left hand middle of page) shows products used in wired transmission applications and contains the following phrases: LAN/WAN Networks ATM Frame Relay PSTN T1-T3 POP DSL LEC VPN -------------------------------------------- Depiction 3 (bottom left hand corner of page) shows products used in wireless transmission applications and contains the following phrases: SMR 3G CDMA TDMA Wireless GSM PCS -------------------------------------------- TABLE OF CONTENTS
Page ---- Prospectus Summary....................................................... 1 Forward-Looking Statements............................................... 4 Risk Factors............................................................. 5 Use of Proceeds.......................................................... 9 Price Range of Common Stock.............................................. 10 Dividend Policy.......................................................... 10 Capitalization........................................................... 11 Selected Consolidated Financial Data..................................... 12 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 13 Our Company.............................................................. 20 Management............................................................... 30 Selling Shareholders..................................................... 32 Description of Capital Stock............................................. 33 Underwriting............................................................. 34 Shares Eligible For Future Sale.......................................... 35 Legal Matters............................................................ 37 Experts.................................................................. 37 Incorporation Of Certain Documents By Reference.......................... 37 Where You Can Find More Information...................................... 38 Index to Consolidated Financial Statements............................... F-1
---------------- You should rely only on the information contained in this prospectus. We have not, nor have the selling shareholders or the underwriters, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, nor are the selling shareholders or the underwriters, making an offer to sell these securities in any jurisdiction where the offer and sale is not permitted. You should assume that the information appearing in this prospectus is only accurate as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date. The information in this prospectus may not contain all of the information that may be important to you. You should read the entire prospectus, as well as the documents incorporated by reference in the prospectus, before making an investment decision. All references to "we," "us," "our," "our company" or "Spectrum" in this prospectus mean Spectrum Control, Inc. and its subsidiaries. PROSPECTUS SUMMARY This summary calls your attention to selected information in this document, but may not contain all of the information that is important to you. Unless otherwise indicated, we have assumed in presenting information about the outstanding shares of common stock, including per share information, that the underwriters' over-allotment option will not be exercised. In addition, unless otherwise indicated, all references to a "year" or "years" in this prospectus mean our fiscal year or years ending November 30. You should read this entire document carefully, including particularly the "RISK FACTORS" section as well as the documents we have referred you to in the section called "WHERE YOU CAN FIND MORE INFORMATION." SPECTRUM CONTROL, INC. We are a leader in the design and manufacture of control products and systems used to condition, regulate and govern electronic performance, including filter products used to protect electronic equipment against electromagnetic interference, or EMI. Over the past several years we have leveraged our core EMI filtering expertise to offer our customers a broad line of signal products, microwave/wireless products and power products. In addition, we recently formed our Advanced Systems Group to provide our customers with more complex power management systems and have introduced a line of digital radio-frequency control equipment for remote and automatic electronic systems management. Using a solutions-oriented approach, we provide products tailored to meet our customers' specific needs by anticipating and solving their systems architecture and performance problems. We combine engineering expertise, design and testing capabilities, vertically integrated manufacturing processes and flexible production schedules to provide custom solutions in a wide variety of large electronics markets, including: . telecommunications equipment . computers and office equipment . medical devices and instrumentation . industrial equipment and controls . military/aerospace systems . automotive and consumer electronics In 1999, approximately 58% of our sales were to original equipment manufacturer (OEM) customers in the telecommunications industry, which is our largest and fastest-growing market. Our products are used in numerous telecommunications systems, including cellular base stations, fiber optic networks and switching equipment, wireless modems and LANs, Internet servers and global positioning systems. Our largest customers are Lucent, Nortel and Motorola, who respectively accounted for 18%, 8% and 6% of our sales in 1999. We expect the markets for our products to continue to expand, driven primarily by continuing growth of the wireless and fiber optic networking segments of the telecommunications industry and the increasing electronic content and complexity of many end-products. We believe we are well positioned to capitalize on our market opportunities because we offer: . a broad range of signal and power products; . integrated design, development and testing services; . flexible, low-cost production capabilities; and . high quality, high performance products. 1 Key elements of our strategy include: . leveraging our status as a strategic supplier to our OEM customers; . introducing new signal and power product lines; . expanding in markets for higher margin advanced systems; . pursuing acquisitions that enhance our product offerings; and . remaining a low-cost, efficient producer. We maintain our principal executive offices at 8031 Avonia Road, Fairview, Pennsylvania 16415 and our telephone number is (814) 835-1650. THE OFFERING Common stock offered by Spectrum............ 2,000,000 shares Common stock offered by selling shareholders............................... 60,584 shares Common stock outstanding after the offering................................... 13,073,052 shares(/1/) Nasdaq National Market symbol............... SPEC Use of Proceeds............................. We will use the net proceeds of this offering to repay outstanding indebtedness. Risk Factors................................ See "Risk Factors" for a discussion of factors that you should carefully consider before deciding to invest in shares of our common stock.
-------- (1) Based on the number of shares outstanding as of July 31, 2000 and excluding an aggregate of 599,541 shares issuable upon the exercise of stock options outstanding as of July 31, 2000, at a weighted average exercise price of $6.57 per share, and 39,416 shares issuable upon the exercise of immediately exercisable common stock purchase warrants outstanding as of July 31, 2000 at $6.25 per share. Warrants covering an additional 60,584 shares of common stock were also outstanding as of July 31, 2000, which warrants will be exercised by the selling shareholders in connection with their sale of shares in this offering. Of the shares of common stock issuable upon the exercise of stock options outstanding, 115,029 shares were subject to immediately exercisable stock options at a weighted average exercise price of $4.34 per share. 2 SUMMARY CONSOLIDATED FINANCIAL INFORMATION This table includes certain summary financial data about us. You should read this table together with the discussion under the headings "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and accompanying notes that we include in this prospectus and similar sections in the documents that we incorporate by reference into this prospectus.
Six Months Year Ended November 30, Ended May 31, --------------------------------------- --------------- 1995 1996 1997 1998 1999 1999 2000 ------- ------- ------- ------- ------- ------- ------- (in thousands, except per share data) Consolidated Income Statement Data: Net sales............... $49,297 $57,327 $56,466 $59,868 $97,729 $39,867 $60,611 Gross margin............ 16,061 18,076 17,421 18,284 27,912 11,423 15,623 Income from operations.. 5,045 5,470 5,786 6,462 10,164 4,177 5,881 Income before provision for income taxes....... 4,095 4,737 5,510 6,319 8,840 3,824 5,137 Net income.............. 2,984 3,418 3,974 3,934 5,470 2,373 3,185 Earnings per common share: Basic................. $ 0.28 $ 0.32 $ 0.37 $ 0.36 $ 0.50 $ 0.22 $ 0.29 Diluted............... $ 0.28 $ 0.32 $ 0.37 $ 0.36 $ 0.49 $ 0.22 $ 0.28 Shares used in per share calculations: Basic................. 10,585 10,731 10,798 10,907 10,905 10,888 10,992 Diluted............... 10,655 10,776 10,869 11,016 11,051 10,975 11,268
May 31, 2000 ------------------- As Actual Adjusted(1) ------- ----------- Consolidated Balance Sheet Data: Cash and cash equivalents................................... $ 641 $ 641 Working capital............................................. 24,779 34,654 Total assets................................................ 87,758 87,504 Total debt, including current portion....................... 28,381 3,960 Total stockholders' equity.................................. 42,254 66,518
-------- (1) The consolidated balance sheet data under the "as adjusted" column at May 31, 2000, reflects the sale by us of 2,000,000 shares of our common stock in this offering at a public offering price of $13.00 per share, net proceeds to us of approximately $24.4 million after deducting the underwriting discount and estimated offering expenses payable by us, and our use of the estimated net proceeds to repay debt as described in the "Use of Proceeds" section of this prospectus. In addition, the "as adjusted" column gives effect to the exercise of outstanding common stock purchase warrants held by the selling shareholders for the 60,584 shares of common stock to be sold by them in this offering. 3 FORWARD-LOOKING STATEMENTS We discuss in this prospectus and in documents which we incorporate by reference into this prospectus certain matters which are not historical facts, but which are "forward-looking statements." We intend these forward-looking statements to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, descriptions of management's expectations regarding the future markets for our products, future operating performance, future plans, objectives, expectations and events concerning various matters such as on-going cash requirements, our capital expenditures, expansion plans, acquisitions, earnings, and growth potential. Words such as we "expect," "anticipate," "approximate," "believe," "estimate," "intend," and "hope" and variations of such words and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are only predictions. We have based these statements on our current expectations and projections about future events. These forward- looking statements are not guarantees of future performance. Actual results or events may differ materially from historical results or those suggested by these forward-looking statements. Certain factors that may cause actual results to differ from those suggested by these statements include the risks associated with these statements set forth under "RISK FACTORS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." We are under no duty and are not promising to make any public announcement when we think forward-looking statements in this prospectus are no longer accurate, whether as a result of new information, future events or for any other reason. In this prospectus, we rely on and refer to information and statistics regarding the markets in which we compete. We obtained this information and these statistics from various third party sources, discussions with our customers and our own internal estimates. We believe that these sources and estimates are reliable, but we have not independently verified them and we cannot guarantee that they are accurate. 4 RISK FACTORS Risks involved in investing in our common stock are described below. These risks are not the only ones we face. Before deciding to invest in our common stock, you should carefully consider these risks and all of the information both in this prospectus and in other documents we refer you to in the sections called "Incorporation of Certain Documents By Reference" and "Where You Can Find More Information." The current strong demand for our products may not continue. Our largest single market is the telecommunications industry. In 1999, 58% of our sales were made to customers in this industry. Demand for our products reflects overall demand for products in the telecommunications industry and the electronics industry in general. The current strong demand for our products may not continue because it would be affected by a downturn or reduction in the growth rate of the telecommunications industry or the electronics industry. An increase in supply due to the expansion of production capacity by our competitors could also cause a significant drop in the demand for our products or in our average sales prices. Any such decrease in current demand or drop in average sales prices could cause a reduction in our gross margins and operating profits. A loss of a key customer could reduce our sales and profits. In 1999, Lucent, Nortel and Motorola accounted for approximately 18%, 8% and 6% of our sales, respectively. We do not have minimum purchase commitments from any of these customers. The loss of any of these customers or any other large customer would adversely affect our business and operating results. We may incur unexpected costs and delays in creating needed manufacturing capacity. We are in the process of increasing our manufacturing capacity to accommodate increased business activity, the introduction of our Advanced Systems Group products and the integration of operations resulting from recent acquisitions. We are preparing additional manufacturing space in our facilities in Wesson, Mississippi and Juarez, Mexico to provide us with this needed increased capacity. There may be unexpected costs and delays in starting or increasing capacity at these facilities. Our new facility in Mexico will be vulnerable to local political and economic conditions. Any delay in bringing these facilities on-line will limit our ability to meet increased customer demand and adversely affect our operating results. Our introduction of products through our newly-formed Advanced Systems Group may be unsuccessful. We have recently begun to offer a line of new digital radio-frequency control equipment through our Advanced Systems Group. These new products monitor and manage the functioning of various types of electronic equipment. In addition, these products provide automatic management and remote management capabilities through wireless or external communication links. Our efforts to expand into this new market will require capital expenditures and will present new operational issues including our ability to design, manufacture and deliver high quality products. In addition, we used internal estimates to identify the market size and opportunities available for these products. We may have overestimated or underestimated the opportunity in this market or we may be unsuccessful in managing our additional capital expenditures and operational needs to optimize our expansion into this market. If our efforts are unsuccessful, it may have an adverse impact on our business or operating results. Our strategy to grow through acquisitions may be unsuccessful. We intend to grow through acquisitions of product lines and companies that complement our existing business. We may not be able to identify acquisitions or, once identified, complete them on terms acceptable to us. We will compete for acquisitions with competitors and others who have substantially greater resources. 5 Acquisitions present many risks including: . difficulties in integrating the operations and products of an acquired business or in realizing projected efficiencies and cost savings; . entry into markets in which we may have limited or no experience; . diversion of management's attention from our core business; . potential loss of key employees or customers of the acquired businesses; . inaccurate assessments of undisclosed liabilities; and . increases in our indebtedness and a limitation on our ability to access additional capital when needed. Our labor relations may affect our productivity. In 1999, our employee productivity levels declined below historical levels at our Erie and Fairview facilities when labor organizers unsuccessfully attempted to organize our manufacturing employees at these facilities. If union organizers were again to attempt to organize our employees at these facilities, our productivity at these facilities may again decline below historical levels. If union organizers were to successfully organize our employees at these facilities, our labor costs may increase. In either case, our profits may be reduced. We may not be able to satisfy evolving customer requirements. Our future success depends in part on continuous, timely development and introduction of new products that address evolving customer requirements and expectations. Many of our customers, particularly our largest customers, rely on us to design and manufacture products that are developed for the particular needs of their end-products. We dedicate significant resources to develop products and technologies for current and potential customers. Our inability, for technological or other reasons, to successfully develop and introduce new and enhanced products or satisfy increased or new customer demands could adversely affect our business and operating results. The value of inventories held for customers may not be realized. Some of our customers require us to maintain their finished product inventory on a consignment basis. Further, we maintain certain minimum levels of inventory of raw materials and finished products to meet customers' just-in- time requests. If our relationship with one or more of the customers for whom we hold finished goods or raw materials terminates, we may be unable to recognize the value of these finished goods or unused raw materials, which could reduce our profits. We cannot control changes in availability and cost of our key raw materials. We currently use precious metals, including palladium, platinum and silver, and a variety of rare earth elements in the production of our products. Platinum is mined primarily in Russia and South Africa. Historically, the markets for palladium and platinum have experienced a substantial amount of price volatility. The lack of availability of, or significant price increases for, palladium, platinum, silver or other raw materials could adversely affect our operating results. Our international sales expose us to material risks. Sales to our customers for delivery outside of the United States represented 28%, 21% and 18% of net sales for fiscal 1999, 1998 and 1997, respectively. We expect sales from foreign markets to continue to represent a significant portion of total sales. There are risks inherent in doing business internationally that may adversely affect our ability to remain competitive in these markets and may adversely affect our operating results and our profitability. These risks include transportation delays, the need to provide longer payment terms 6 in international markets, difficulties in collecting receivables and enforcing contracts in various countries in which we do business, changes in import/export regulations, tariffs and freight rates and currency exchange rate fluctuations. Reductions in military spending could reduce demand for our products. In 1999, 22% of our sales were made to customers in the military/aerospace industries. A reduction in military spending by the United States federal government could decrease demand for some of our products. A reduction in military spending may occur and is beyond our control. If there is a reduction in military spending, our business and operating results could be adversely affected. New technology could produce alternative EMI filters or eliminate the need for filters. Technology in the electronics industry changes very quickly. New technology may result in a different method of filtering EMI or even create media for power and signal transfer which do not generate EMI. These alternatives may be superior to the technology we currently utilize and could create competition which could adversely affect our business and operating results. We face significant competition and downward price pressures. Our business is highly competitive. Customers in our industry are price- sensitive and there is substantial and continuing pressure from customers to reduce the prices for our products. Some of our competitors are smaller than we are and, while they produce only a limited number of the products that we make, they may have the advantage of lower overhead costs, allowing them to sell their products at lower prices. Other competitors are larger than we are and have greater financial resources, giving them certain advantages including research and development and marketing. Our ability to remain competitive depends on our ability to meet price pressures while maintaining market share and, to the extent possible, protecting our margins from price erosion. To remain competitive, we must achieve continuous cost reductions through improved manufacturing processes and product improvements, including production time, product flow, equipment retooling, employee training and inventory control. We must also meet our customers' demands for assistance in minimizing their shipping and inventory financing costs by producing and shipping on a just-in- time basis. Our sales and profits will suffer if our competitors are more successful than we are in reducing product costs and, to the extent that we are unable to remain competitive, our business and operating results will suffer. We are dependent upon our key personnel. Our future performance depends to a significant degree upon the continued contributions of our senior management and key technical personnel. Our products are technical in nature. Only qualified and trained engineers have the necessary skills to develop our products. The loss of any member of senior management or any key technical employee could significantly harm us. We face intense competition for these professionals from our competitors, our customers and other companies operating in our industry. To the extent that the services of our senior management and key technical personnel would be unavailable to us for any reason, we would be required to hire other personnel. We may not be able to locate and employ other qualified personnel on acceptable terms. We may not be able to recruit and retain qualified employees to grow our business. Our ability to grow internally depends in large part upon our ability to attract, train, retain and motivate skilled employees. Employees who have experience in technology and engineering are in demand in numerous industries. Although we believe we offer competitive salaries and benefits, we may have to increase salaries and benefits in order to attract and retain employees. Any inability to attract, train, retain and motivate employees may cause us to be unable to grow our business at the rate we desire or at all. 7 We may be unable to protect our intellectual property and proprietary rights. Proprietary rights, trade secrets and know-how are important to our business. We rely on trade secrets and know-how, which we protect through confidentiality agreements, internal procedures and, to a lesser extent, patents, to establish and protect our proprietary rights to our technologies and products. We cannot guarantee that the steps we have taken or will take to protect our proprietary rights will be adequate to deter misappropriation of our intellectual property. If our trade secrets become known, we may lose some of our competitive advantages. In addition, we may not be able to detect the unauthorized use of our intellectual property and take appropriate steps to enforce our rights. If third parties infringe upon or misappropriate our intellectual property, our business could be seriously harmed. Competitors may design around our technology or develop competing technologies that do not infringe on our rights. In addition, protection of intellectual property in many foreign countries is weaker and less reliable than in the United States and Europe, and as we expand in world markets, we face increased risks in protecting our intellectual property in certain foreign countries. The failure to comply with environmental regulations could result in liabilities and fines. We are subject to a variety of governmental regulations related to the discharge or disposal of toxic, volatile or otherwise hazardous chemical substances used in our manufacturing processes. Current or future regulations could require us to purchase expensive equipment or to incur other substantial expenses to comply with environmental regulations. Any failure by us to control the use of, or adequately restrict the discharge or disposal of, hazardous chemical substances could subject us to future liabilities or result in fines being imposed on us. We have various mechanisms in place to discourage takeover attempts, which may reduce or eliminate your ability to sell your shares for a premium in a change of control transaction. Various provisions of our articles of incorporation and bylaws and Pennsylvania corporate law may discourage, delay or prevent a change in control or takeover attempt of our company by a third party which is opposed by our management and board of directors. Public shareholders who might desire to participate in such a transaction may not have the opportunity to do so. These provisions include: . our ability to prevent the removal of our entire board of directors at one time because we have a staggered board of directors with three classes where only one class is elected each year at our annual meeting; . our ability to issue "blank check" preferred stock without consulting our shareholders to frustrate a takeover attempt by increasing the number of outstanding shares; . our ability to determine the individuals who may be able to call special shareholder meetings; . the ability of the board of directors under Pennsylvania corporate law to consider the interests of groups other than our shareholders when evaluating a takeover proposal; . the ability of each holder of voting shares to require a person, or a group of persons acting in concert, who acquires voting power over 20% or more of the voting shares to purchase such holder's shares for their fair value; and . the inability of a shareholder to enter into a business combination with us within five years of becoming a beneficial owner of 20% or more of the outstanding voting shares without the timely approval of our board of directors. The anti-takeover provisions listed above could substantially impede the ability of public shareholders to benefit from a change of control or change in our management and board of directors. 8 USE OF PROCEEDS We estimate that our proceeds from the sale of 2,000,000 shares of common stock in this offering at an offering price of $13.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $24.4 million, or $28.1 million if the underwriters exercise their over-allotment option in full. We will not receive any proceeds from the sale of 60,584 shares of common stock by the selling shareholders. We plan to use the net proceeds of this offering to repay the following indebtedness: . $6.2 million of the amount outstanding under our revolving credit facility, approximately $6.4 million at May 31, 2000; and . all amounts outstanding under a bank term loan, approximately $18.2 million at May 31, 2000. Borrowings under the revolving credit agreement bore interest at 8.38% as of May 31, 2000. The revolving credit agreement expires on March 31, 2002. Borrowings under the term loan bore interest at 8.62% as of May 31, 2000. The term loan requires quarterly principal payments of approximately $900,000 from December 26, 1999 through March 31, 2005, at which time all amounts under the term loan are due. After application of the proceeds of this offering as described above, we will have approximately $4.0 million of indebtedness outstanding, $3.8 million of which indebtedness bore interest at a weighted average rate of 5.5% as of May 31, 2000. 9 PRICE RANGE OF COMMON STOCK Our common stock is listed on the Nasdaq National Market and trades under the symbol SPEC. On August 16, 2000, we had 11,012,468 shares of common stock outstanding, which were held by approximately 2,000 holders of record. The following table sets forth, for the fiscal periods indicated, the high and low closing sales prices for the common stock on the Nasdaq National Market:
High Low ------ ----- Year ended November 30, 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 Year ended November 30, 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 Year ending November 30, 2000 First Quarter..................................................... $15.81 $9.13 Second Quarter.................................................... 17.25 8.13 Third Quarter (through August 16)................................. 18.56 10.38
On August 16, 2000, the last reported sale price of our common stock on the Nasdaq National Market was $14.00. DIVIDEND POLICY We have not paid cash dividends on our common stock since 1987, and we do not intend to pay cash dividends in the foreseeable future. We currently intend to retain any earnings to further develop and grow our business. While this dividend policy is subject to periodic review by our board of directors, there can be no assurance that we will declare and pay dividends in the future. 10 CAPITALIZATION The following table sets forth our capitalization, as of May 31, 2000 and as adjusted to give effect to our sale of 2,000,000 shares of common stock in this offering at an offering price of $13.00 per share, after deducting underwriting discounts and estimated offering expenses, and the application of the net proceeds of this offering to repay debt as described under the heading "Use of Proceeds." In addition, the capitalization as adjusted assumes and gives effect to the exercise of outstanding common stock purchase warrants held by the selling shareholders for the 60,584 shares of common stock to be sold by them in this offering. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and accompanying notes included elsewhere in this prospectus.
May 31, 2000 -------------------- As Actual Adjusted(1) ------- ----------- (in thousands) Total debt, including current portion...................... $28,381 $ 3,960 ======= ======= Stockholders' equity Common stock, no par value; authorized 25,000,000 shares; 11,081,801 issued, actual; 13,142,385 shares issued, as adjusted................................................ $14,810 $39,231 Retained earnings(2)..................................... 28,453 28,296 Treasury stock, 70,000 shares, at cost................... (294) (294) Accumulated other comprehensive income Foreign currency translation adjustment................ (715) (715) ------- ------- Total stockholders' equity............................... 42,254 66,518 ------- ------- Total capitalization....................................... $70,635 $70,478 ======= =======
-------- (1) The table above excludes 600,208 shares of common stock issuable upon the exercise of stock options outstanding as of May 31, 2000, at a weighted average exercise price of $6.57 per share. Of these, 115,029 shares of common stock were subject to immediately exercisable stock options at a weighted average exercise price of $4.34 per share. (2) Retained earnings, as adjusted, reflects the after-tax effect of unamortized debt issuance costs to be charged against earnings upon the repayment of our outstanding term loan. 11 SELECTED CONSOLIDATED FINANCIAL DATA You should read the following selected consolidated financial data along with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the accompanying notes, each of which is included in this prospectus. We derived the income statement data for each of the three years in the period ended November 30, 1999 and the balance sheet data as of November 30, 1998 and 1999 from our consolidated financial statements, which have been audited by Ernst & Young LLP, independent auditors, and are included in this prospectus. We derived the income statement data for each of the two years in the period ended November 30, 1996 and the balance sheet data as of November 30, 1995, 1996 and 1997 from our audited consolidated financial statements which are not included in this prospectus. We derived the income statement data for the six months ended May 31, 1999 and 2000 and the balance sheet data as of May 31, 1999 and 2000 from our unaudited consolidated financial statements, which are included in this prospectus. In the opinion of our management, the unaudited consolidated financial data includes all adjustments, consisting of only normal recurring adjustments, considered necessary for a fair presentation of such information. Our results of operations for the six month period ended May 31, 2000 are not necessarily indicative of the results that we may achieve for the full fiscal year.
Six Months Year Ended November 30, Ended May 31, ------------------------------------------- ---------------- 1995 1996 1997 1998 1999 1999 2000 ------- ------- ------- ------- ------- ------- ------- (in thousands, except per share data) Consolidated Income Statement Data: Net sales............... $49,297 $57,327 $56,466 $59,868 $97,729 $39,867 $60,611 Cost of products sold... 33,236 39,251 39,045 41,584 69,817 28,444 44,988 ------- ------- ------- ------- ------- ------- ------- Gross margin............ 16,061 18,076 17,421 18,284 27,912 11,423 15,623 Selling, general and administrative expense................ 11,016 12,606 11,635 11,822 17,748 7,246 9,742 ------- ------- ------- ------- ------- ------- ------- Income from operations.. 5,045 5,470 5,786 6,462 10,164 4,177 5,881 Other income (expense) Interest expense....... (908) (753) (417) (228) (1,420) (388) (1,179) Other income and expense, net.......... (42) 20 141 85 96 35 435 ------- ------- ------- ------- ------- ------- ------- Income before provision for income taxes....... 4,095 4,737 5,510 6,319 8,840 3,824 5,137 Provision for income taxes.................. 1,111 1,319 1,536 2,385 3,370 1,451 1,952 ------- ------- ------- ------- ------- ------- ------- Net income.............. $ 2,984 $ 3,418 $ 3,974 $ 3,934 $ 5,470 $ 2,373 $ 3,185 ======= ======= ======= ======= ======= ======= ======= Earnings per common share: Basic.................. $ 0.28 $ 0.32 $ 0.37 $ 0.36 $ 0.50 $ 0.22 $ 0.29 Diluted................ $ 0.28 $ 0.32 $ 0.37 $ 0.36 $ 0.49 $ 0.22 $ 0.28 Shares used in per share calculations: Basic.................. 10,585 10,731 10,798 10,907 10,905 10,888 10,992 Diluted................ 10,655 10,776 10,869 11,016 11,051 10,975 11,268 As of November 30, As of May 31, ------------------------------------------- ---------------- 1995 1996 1997 1998 1999 1999 2000 ------- ------- ------- ------- ------- ------- ------- Consolidated Balance Sheet Data: Cash and cash equivalents............ $ 202 $ 413 $ 196 $ 739 $ 538 $ 73 $ 641 Working capital......... 9,967 12,534 16,881 18,619 23,989 22,938 24,779 Total assets............ 39,498 40,213 40,056 44,139 82,554 75,316 87,758 Total debt, including current portion........ 12,666 9,742 4,113 3,666 28,376 25,600 28,381 Total stockholders' equity................. 21,781 25,379 29,545 33,774 39,135 36,113 42,254
We acquired the Signal Conditioning Products Division of AMP Incorporated ("SCPD") on March 26, 1999 and Potter Production Corporation on September 21, 1998. Each of the acquisitions was accounted for as a purchase and, accordingly, the results of operations of the acquired businesses are included in the above data since the dates of acquisition. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We were founded in 1968 as a solutions-oriented company, designing and manufacturing products to suppress or eliminate EMI. In recent years, we broadened our focus and product lines to become a leading designer and manufacturer of control products and systems, providing a wide range of products used to condition, regulate, transmit, receive, and govern electronic performance. Although our components and systems are used in many industries worldwide, our largest market is the telecommunications industry. In 1999, approximately 58% of our sales were to customers in the telecommunications industry. Our products are used in numerous telecommunications systems including cellular base stations, fiber optic networks and switching equipment, wireless modems and LANs, Internet servers, and global positioning systems. Our growth is being driven by the expansion of the wireless and fiber optic networking segments of the telecommunications industry, the increasing electronic content and complexity of many end-products and the positive impact of our strategic acquisitions. Our operations are primarily conducted in two business segments: signal products and power products. Our Signal Products Group manufactures a broad line of discrete EMI filters, filtered arrays, filtered connectors, wireless products (coaxial ceramic resonators, bandpass filters, and duplexers), and specialty ceramic capacitors (single layer, temperature compensating, high voltage, and switch mode). Our Power Products Group manufactures various power management and conditioning products including power distribution systems, power line filters, and power entry modules. Recently, we formed our Advanced Systems Group to become a provider of more complex power management systems, and have introduced a line of digital radio-frequency control equipment for remote and automatic electronic systems management. We believe demand for our electronic components and systems will continue to increase. As a result, we have significantly increased our production capacity in recent years through continued investment in our plants, including those acquired from SCPD, and in equipment. We believe that, in addition to increased worldwide demand for electronic components and systems, other factors that provide opportunities for continued improvements in profitability include: . the growth of our strategic relationships with customers as a growing number of OEMs outsource the development and manufacturing of components and systems; . capacity expansion programs in low labor cost areas; . continuous improvements in our production processes; and . the introduction of higher-margin Advanced Systems Group products. On March 26, 1999, we acquired substantially all of the assets of SCPD. AMP is a world leader in the manufacture of electrical, electronic, fiber optic and wireless interconnection devices and systems. Through SCPD, AMP manufactured and sold a broad line of EMI filter products, with annual sales of approximately $30.0 million. The acquisition was accounted for as a purchase and, accordingly, the results of operations of SCPD have been included in our financial statements since the date of acquisition. 13 Results of Operations The following table sets forth the percentage relationship to net sales of certain income statement items for the periods presented:
Six Months Years Ended Ended November 30, May 31, ------------------- ------------ 1997 1998 1999 1999 2000 ----- ----- ----- ----- ----- Net sales.................................. 100.0% 100.0% 100.0% 100.0% 100.0% Cost of products sold...................... 69.2 69.5 71.4 71.3 74.2 ----- ----- ----- ----- ----- Gross margin............................... 30.8 30.5 28.6 28.7 25.8 Selling, general and administrative expense................................... 20.6 19.7 18.2 18.2 16.1 ----- ----- ----- ----- ----- Income from operations..................... 10.2 10.8 10.4 10.5 9.7 Other income (expense) Interest expense......................... (0.7) (0.4) (1.5) (1.0) (1.9) Other income and expense, net............ 0.2 0.2 0.1 0.1 0.7 ----- ----- ----- ----- ----- Income before provision for income taxes... 9.7 10.6 9.0 9.6 8.5 Provision for income taxes................. 2.7 4.0 3.4 3.6 3.2 ----- ----- ----- ----- ----- Net income................................. 7.0% 6.6% 5.6% 6.0% 5.3% ===== ===== ===== ===== =====
Six Months Ended May 31, 2000 Compared to Six Months Ended May 31, 1999 Net Sales. For the first half of 2000, consolidated net sales increased by $20.7 million, or 52.0%. Sales of signal products amounted to $43.4 million during the first six months of 2000, an increase of $16.4 million compared to the same period of 1999. Of this increase, approximately $9.0 million was generated from the sale of SCPD products. The remaining $7.4 million increase in signal product sales principally reflects higher shipment levels to original equipment manufacturers of telecommunications equipment. Sales of power products increased by $4.3 million during the first half of 2000, primarily reflecting additional shipments of power distribution systems and single line filters. These power products are principally used in telecommunications equipment, including high-end Internet servers and networks. Selling prices declined slightly during the first half of 2000 as a result of competitive pressures. Overall demand for our products was strong throughout the period with total customer orders of $76.1 million received in the first six months of 2000, an increase of $22.3 million, or 41.3%, from the same period last year. Gross Margin. For the first six months of 2000, gross margin was $15.6 million, or 25.8% of sales, compared to $11.4 million, or 28.7% of sales for the first half of 1999. The decrease in gross margin percentage primarily reflects manufacturing yield losses and higher labor costs incurred during the first three months of 2000 related to the integration of SCPD into our Signal Products Group. This integration, which included the redesign of certain SCPD products and production processes, was completed during the second quarter of 2000. To increase manufacturing capacity we are expanding our production and assembly operations. In June 2000, we established manufacturing operations in a new 46,000 square foot facility in Juarez, Mexico. Production in this leased facility is expected to be phased in throughout 2000. We also anticipate constructing a 26,000 square foot addition to our Wesson, Mississippi facility later this year. We believe that these expansions will improve operating efficiencies and lower production costs. Accordingly, gross margin percentages are expected to improve during the second half of 2000 and approximate 29.0% to 30.0% of sales. Selling, General and Administrative Expense. With additional sales volume, selling expense increased during the first half of 2000 to $5.8 million, or 9.6% of sales, compared to $4.1 million, or 10.4% of sales for the same period in 1999. The decrease in selling expense as a percentage of sales principally reflects economies 14 of scale realized with additional sales volume. General and administrative expense was $3.9 million in the first six months of 2000, compared to $3.1 million in the comparable period of 1999. Of this $800,000 increase, approximately $200,000 consisted of the amortization of goodwill recognized in connection with our acquisition of SCPD in March 1999. The remaining increase in general and administrative expense reflects additional personnel costs, professional fees and other operating expenses associated with our increased business activity. Other Income and Expense. In March 1999, we secured a $20.0 million term loan to substantially finance the acquisition of SCPD. Principally as a result of incurring this debt, interest expense increased by $791,000 during the period, from $388,000 in 1999 to $1.2 million in 2000. In addition, weighted average short-term bank borrowings and interest rates increased during 2000. We hold numerous United States and foreign patents relating to polymer multilayer ("PML") technology. During the first half of 2000, we realized $375,000 of license fee income upon the granting of a PML capacitor license. Although the license, as well as other PML technology licenses that we have previously granted, requires certain royalties to be paid to us upon the sale of products utilizing PML technology, it is not known what future commercial value, if any, these patents and related licenses may have. Income Taxes. Our effective income tax rate was 38.0% in the first six months of 2000 and 1999, compared to an applicable statutory income tax rate of approximately 40.0%. Differences in the effective tax rate and statutory income tax rate principally arise from state tax provisions and foreign income tax rates. Year Ended November 30, 1999 Compared to Year Ended November 30, 1998 Net Sales. Consolidated 1999 net sales increased by $37.9 million, or 63.2%, from 1998. Of this increase, $21.3 million was generated from the sale of SCPD and other signal products, with the remaining $16.6 million primarily generated from the sale of power products. These power products are principally used in telecommunications equipment, including cellular base stations, telephone switching networks, and Internet servers. Overall market demand in the telecommunications industry was strong throughout the year. In 1999, we received total customer orders of $119.8 million, an increase of 93.5% from 1998. In addition to these customer orders, we assumed approximately $5.1 million of customer order backlog in connection with the acquisition of SCPD. Average selling prices declined slightly during the year as a result of market pressures. Gross Margin. Gross margin was $27.9 million, or 28.6% of sales in 1999, compared to $18.3 million or 30.5% of sales in 1998. The decrease in gross margin percentage reflects several factors of relative equal significance, including: additional production costs and inefficiencies incurred during the integration of SCPD into our Signal Products Group; changes in sales mix from our signal products to our power product offerings; yield losses and resultant higher labor costs incurred at our ceramic components division in New Orleans, Louisiana; and lower average selling prices as indicated above. Selling, General and Administrative Expense. As a result of greater sales volume, selling expense increased during the period. Selling expense amounted to $9.7 million, or 10.0% of sales in 1999, compared to $6.8 million, or 11.4% in 1998. The decrease in selling expense as a percentage of sales principally reflects economies of scale realized with the additional sales volume. General and administrative expense was approximately $8.0 million in 1999, compared to $5.0 million in 1998. Of this increase, approximately $400,000 consisted of the amortization of goodwill recognized in connection with our acquisition of SCPD in March 1999. The remaining increase in general and administrative expense primarily reflects additional personnel costs, professional fees and other operating expenses associated with our increased business activity. Other Income and Expense. As a result of additional bank indebtedness, interest expense increased by $1.2 million in 1999, from $228,000 to $1.4 million. To finance the acquisition of SCPD, we secured a $20.0 million variable rate term loan from our principal lending institutions. Interest on the term loan was 15 $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. Our wholly-owned German subsidiary transacts business with certain customers and vendors in currencies other than the Deutsche Mark. As a result, we recognize gains and losses on foreign currency transactions. We incurred net gains of $4,000 in 1999 and net losses of $40,000 in 1998 on these foreign currency transactions. We recognized other income of $79,000 in 1999 and $125,000 in 1998 from certain short-term investments and patent licensing fees. Income Taxes. Our effective income tax rate was 38.1% in 1999 and 37.7% in 1998, compared to an applicable federal and state statutory income tax rate of approximately 40.0%. Differences between the effective tax rate and statutory tax rate primarily arise from state tax provisions and foreign income tax rates. At November 30, 1999, we had recorded certain deferred tax assets. We have assessed our past earnings history and trends, and expiration dates of tax attribute carryforwards, and have determined that it is more likely than not that these deferred tax assets will be realized to offset future taxable income from ordinary and recurring operations. Year Ended November 30, 1998 Compared to Year Ended November 30, 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 our commercial custom assemblies which are used in various telecommunications 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 our other signal products decreased by $2.7 million during the year, primarily reflecting 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 our 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 to 30.5% in 1998 from 30.8% in 1997. The decrease in gross margin percentage principally reflects changes in sales mix. 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 to $6.8 million in 1998 from $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 from $417,000 in 1997 to $228,000 in 1998. The decrease in interest expense primarily reflects the repayment in 1998 of $743,000 of long-term debt. In addition, weighted average short-term bank borrowings were only $28,000 in 1998, compared to $982,000 in 1997. Average interest rates also declined slightly during 1998. As previously indicated, our wholly-owned German subsidiary transacts business with certain customers and vendors in currencies other than the Deutsche Mark. As a result, we incurred net losses of $40,000 in 1998 and net gains of $12,000 in 1997 on these foreign currency transactions. We recognized other income of $125,000 in 1998 and $137,000 in 1997 from certain short-term investments and patent licensing fees. 16 Income Taxes. Our 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. Liquidity, Capital Resources and Financial Condition We maintain a revolving line of credit with our principal lending institutions, PNC Bank, N.A. of Erie, Pennsylvania and M&T Bank of Buffalo, New York. Effective March 21, 2000, the line of credit was increased from $6.0 million to $10.0 million. This revolving credit line is collateralized by substantially all of our tangible and intangible property, with interest rates on borrowings at or below the prevailing prime rate. At May 31, 2000, we had borrowed $6.4 million under this financing arrangement. The line of credit agreement expires March 26, 2002. Our wholly-owned German subsidiary maintains unsecured Deutsche Mark lines of credit with several German financial institutions aggregating $1.6 million (DM 3.5 million). At May 31, 2000, outstanding borrowings under these lines of credit amounted to $732,000 (DM 1.6 million). Borrowings under the lines of credit bear interest at rates below the prevailing prime rate and are payable upon demand. We acquired substantially all of the assets of SCPD on March 26, 1999. The aggregate cash purchase price of the acquired assets was approximately $20.7 million. To finance the acquisition we secured an aggregate $20.0 million term loan from PNC Bank, N.A. and M&T Bank. 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 credit agreement covering the $20.0 million term loan and our revolving credit facility requires us to comply with certain covenants. These covenants generally restrict us from granting additional liens on our 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 credit agreement also imposes certain restrictions on our future acquisitions. In addition, the credit agreement requires that we meet the following quarterly financial covenants: maintain a minimum net worth of $28.0 million plus 50% of our net income for each year ended 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 May 31, 2000, we were in compliance with all covenants contained in the credit agreement. Our working capital has increased since November 30, 1997, reflecting higher inventory and receivables in connection with the growth of the business. At May 31, 2000, we had net working capital of $24.8 million, compared to $24.0 million at November 30, 1999, $18.6 million at November 30, 1998 and $16.9 million at November 30, 1997. At May 31, 2000, current assets were 1.97 times current liabilities, compared to 2.10 at November 30, 1999, 4.23 at November 30, 1998 and 3.83 at November 30, 1997. During the first six months of 2000 our cash expenditures for property, plant and equipment amounted to $2.5 million. These capital expenditures primarily related to manufacturing equipment for capacity expansion within our Signal Products Group. At May 31, 2000, we had not entered into any material commitments for capital expenditures. However, in order to meet growing customer demand and production requirements for our power product offerings, we expect to construct a 26,000 square foot addition to our Wesson, Mississippi facility later this year. We are currently evaluating financing alternatives for this $1.0 million project. Our 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 manufacturing equipment for our Power Products Group capacity expansion, facility expansion for our Signal Products Group, and construction of our corporate administrative office facility. 17 Current financial resources, including proceeds of the offering, working capital and existing lines of credit, and anticipated funds from operations are expected to be sufficient to meet operating cash requirements throughout year 2000, including scheduled long-term debt repayment and planned capital equipment expenditures. There can be no assurance, however, that unplanned capital replacement or other future events will not require us to seek additional debt or equity financing and, if so required, that it will be available on terms acceptable to us. Despite additional inventory requirements, our operating cash flow increased during the first half of 2000. For the first six months of 2000, net cash generated from operations amounted to $3.3 million, an increase of $2.4 million from the comparable period of 1999. During the first half of 2000, inventories grew by $2.7 million. The increase in inventories primarily reflects additional customer consigned inventory requirements, as well as additional raw materials and work-in-process to support future shipment requirements. As a result of increased working capital requirements, net cash generated from operations amounted to $2.0 million in 1999, a decrease of $6.3 million from 1998. In 1998, $8.3 million of net cash generated from operations was used to fund capital additions of $3.3 million, debt repayment of $743,000, and the aggregate purchase price of two acquired businesses. In 1998, we acquired substantially all of the assets of Republic Electronics Corporation, a manufacturer of subminiature ceramic capacitors, and Potter Production Corporation, a manufacturer of electronic filters and power products. The total cash purchase price of the acquired assets amounted to $4.1 million. In 1997, net cash generated from operations amounted to $8.5 million, with which we repaid bank indebtedness and invested $3.3 million in capital equipment and improvements. At May 31, 2000, goodwill represented 16.8% of total assets and 35.0% of shareholders' equity. A majority of this goodwill was recognized in 1999 in connection with our acquisition of SCPD. We amortize goodwill on a straight- line basis over a period of 20 years and periodically review its carrying value for possible impairment. Based upon a review of expected future operating cash flows derived from the acquisition of SCPD, our management has determined that no impairment losses need be recognized in the current period. Quantitative and Qualitative Disclosures About Market Risk Foreign Currency Certain of our 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 our operating results and cash flow. Currency exchange rate gains and losses, however, were not material during the three years ended November 30, 1999 and for each of the six months ended May 31, 1999 and May 31, 2000. In addition, an assumed 10.0% adverse change in all foreign currencies in which we currently transact business would not have a material impact on our operating results, financial position, or cash flows. Euro Certain member countries of the European Union have established fixed conversion rates between their existing currencies and the European Union's common currency, the Euro. We have implemented all the necessary enhancements to our sales order, banking arrangements and operational procedures to ensure Euro compliance. We are able to process orders, invoice customers and accept payment in Euros throughout Europe. The introduction of the Euro has not had any material adverse impact upon us. We continue to monitor the risk of price erosion which could result from increased price transparency among countries using the Euro. Interest Rate Exposure We have market risk exposure relating to possible fluctuations in interest rates. Our policy is to manage interest rate risk by utilizing interest rate swap agreements to convert a portion of the floating interest rate debt 18 to fixed interest rates. We do not enter into derivative financial instruments for trading or speculative purposes. The interest rate swap agreements are entered into with major financial institutions thereby minimizing the risk of credit loss. The following table presents information about our market sensitive financial instruments as of May 31, 2000. The table sets forth the principal and notional amounts, as well as the year of maturity and applicable interest rates for all significant financial and derivative financial instruments in effect as of May 31, 2000:
Year of Maturity ---------------------------------------------------------- Description 2000 2001 2002 2003 Thereafter ----------- ---------- ---------- ---------- ---------- ---------- Revolving credit facility: Principal amount...... $6,400,000 Actual floating Euro-rate portion.... 6.38% Term loan: Principal amount...... $1,818,000 $3,636,000 $3,636,000 $3,636,000 $5,456,000 Actual floating Euro-rate portion.... 6.62% 6.62% 6.62% 6.62% 6.62% Interest rate swap agreement: PNC Bank, N.A. Notional amount....... $1,818,000 $3,636,000 $2,728,000 Actual fixed interest pay rate............. 5.89% 5.89% 5.89%
We expect to repay the indebtedness described above upon completion of this offering and to settle our outstanding swap agreement with PNC Bank, N.A. See "Use of Proceeds". Settlement of the outstanding swap agreement is not expected to be material to our financial position or results of operations. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and for Hedging Activities" ("SFAS No. 133"). SFAS No. 133 provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. SFAS No. 133 is effective for years beginning after June 15, 2000. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB No. 101"), which clarifies the accounting rules for revenue recognition in financial statements. We expect to adopt SAB No. 101 in our third quarter of year 2000. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation ("Interpretation No. 44"), which provides guidance on several implementation issues related to the accounting for employee stock options. Interpretation No. 44 clarifies the definition of employee and the accounting for stock options that have been repriced. We do not expect the adoption of SFAS No. 133, SAB No. 101, or Interpretation No. 44 to have a material impact on our financial position or results of operations. 19 OUR COMPANY Introduction We are a leader in the design and manufacture of control products and systems used to condition, regulate and govern electronic performance, including filter products used to protect electronic equipment against electromagnetic interference, or EMI. Over the past several years, we have leveraged our core EMI filtering expertise to offer our customers a broad line of signal products (including microwave/wireless products) and power products. In addition, we recently formed our Advanced Systems Group, to become a provider of more complex power management systems, and we have introduced a line of digital radio-frequency control equipment for remote and automatic electronic systems management. Our Markets The telecommunications industry is our largest and fastest growing market, having experienced significant worldwide growth over the past several years. 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. Our products are used in numerous applications within this telecommunications infrastructure, such as cellular and personal communication system base stations, broadband switching equipment, power amplifiers and Internet servers. Our key telecommunications customers include Lucent, Nortel, Motorola, Nokia and Ericsson. Our other principal markets and customers include: . Military/Aerospace--We are a market leader in the design and manufacture of EMI products used in navigation, communication and weapons systems. Key customers include Raytheon Company, Lockheed Martin Corporation, General Dynamics Corporation and Smiths Industries Aerospace & Defense Systems, Inc. . Industrial Equipment Instrumentation--We design sophisticated products and power systems for use in equipment testing, process control and measurement instruments. Key customers include Honeywell, Inc., Fischer- Rosemount, a division of Emerson Co., Allen-Bradley Company, Inc. and Siemens AG. . Medical Devices and Instruments--We manufacture components for implantables and electronic testing and monitoring equipment. Key customers include Medrad, Inc., GE Medical Systems, a division of General Electric Company, and GSI Lumonics Corporation. . Computer and Office Equipment--We design and manufacture products used in specialty laptop and notebook computers, computer printers and storage devices. Key customers include Hewlett Packard Company, Sun Microsystems, Inc. and Xerox Corporation. . Automotive Electronics--We design and manufacture products for automobile electronics systems. Key customers include M/A-COM Inc., Robert Bosch GmbH and DaimlerChrysler Corporation. . Consumer Electronics--We manufacture components used in household electronic equipment. Key customers include Black & Decker (U.S.) Inc. and Royal Vendors, Inc. Market Opportunities We expect our future opportunities will be driven primarily by continuing growth of the wireless and fiber optic networking segments of the telecommunications industry, increasing electronic content and complexity of many end-products and increased outsourcing by OEMs. Continuing Growth of the Telecommunications Industry. We believe the telecommunications industry will continue to grow significantly as a result of many factors, including increased business and consumer demand for connectivity and functionality from wireless and Internet service providers and devices, the conversion to high speed fiber optic transmission and a favorable regulatory climate in the United States and worldwide. 20 According to estimates by International Data Corporation ("IDC"), an independent market research firm, the number of worldwide Internet users will increase from 196 million in 1999 to 399 million by 2002, and the number of worldwide subscribers for wireless phone service will grow from 303 million in 1998 to 1.1 billion in 2003. As a result, telecommunications service providers are making substantial investments in the equipment and infrastructure required to support anticipated growth. According to the MultiMedia Telecommunications Association, total U.S. spending for telecommunications equipment and services will grow from $517.6 billion in 1999 to $794 billion in 2003. Increasing Electronic Content and Complexity of Many Products. The need for our products results from society's increasing dependence on electronic equipment of many kinds. At the same time, the electronic content of products such as home appliances, automobiles, medical equipment and wireless phones is increasing. 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. Our 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. In addition, many products, such as personal computers, computer networks and Internet servers, use state-of-the-art microprocessors that are more susceptible to interference and require additional control products to regulate and govern their performance. Increased Outsourcing by OEMs. Rapid technological advances have significantly shortened the life cycle of electronic control products and systems and increased the pressure on manufacturers of telecommunications and other equipment to develop and introduce new products quickly. These manufacturers are also seeking to minimize their investment in equipment, research and development and ongoing operating costs to respond to worldwide competition. To avoid delays in new product introductions and reduce manufacturing costs, OEMs are increasingly turning to suppliers capable of producing electronic products from development, design and quick-turn prototyping through volume production and assembly. The accelerated time-to- market requirements of manufacturers have resulted in increased collaboration with qualified suppliers capable of providing product design support, just-in- time product deliveries, flexible production schedules, and a broad and integrated product offering. Many OEMs now seek to use a small number of technically qualified, strategic suppliers with these broad capabilities. Our Solution We believe we are well positioned to capitalize on our market opportunities. We combine engineering expertise, design and testing capabilities and vertically integrated and flexible manufacturing processes to provide custom solutions to our customers' control products and systems needs. We Offer a Broad Range of Signal and Power Products. Our products are used in a wide variety of electronics applications, including telecommunications equipment, military/aerospace systems, medical devices and instrumentation, computers and office equipment, industrial equipment and controls, as well as automotive and consumer electronics. Our broad range of signal and power product offerings enable us to provide customers with a custom-designed product that most efficiently meets their functionality, cost and performance needs. During 1999, our Signal Products Group manufactured approximately 5,400 different types of products, of which 900 were new designs, and our Power Products Group manufactured approximately 240 different types of products, of which 150 were new designs. We believe that no competitor is capable of offering a comparable range of products. We Offer Integrated Design, Development and Testing Services. We provide an integrated approach to problem solving by offering our customers consulting, diagnostic testing and design services. We believe that our testing facilities and capabilities exceed those of our major competitors and, accordingly, may give us a competitive advantage. Our engineers typically work closely with customers to develop a product or system design. Although our customers generally provide the initial engineering guidelines for a particular product, our design engineers are often called upon to work together with a customer's design team to develop a solution. 21 An important part of our solution is ensuring at an early stage, before time and money are spent on manufacturing, that the product design will meet all performance specifications and can be produced efficiently and cost- effectively. Our design engineers include EMI, power and wireless specialists. We believe that by integrating our product design and development efforts with those of our customers, we create increased reliance on us and increased incentives to utilize us as a single source strategic supplier. We Offer Flexible, Low-Cost Production Capabilities. Once a design is completed, we apply our vertically integrated manufacturing processes to produce a solution that meets our customers' functionality and cost objectives. We maintain two state-of-the-art ceramic production facilities with advanced manufacturing equipment designed for the production of ceramic capacitors and resonators. These ceramic products are critical components of our signal and wireless products. Our extensive ceramic capability and expertise enable us to maintain short lead times for our signal product prototyping and production orders. We also maintain a metal fabrication facility with computer numerically controlled (CNC) equipment to manufacture the metal utilized in many of our power product offerings. By performing the metal fabrication in-house, we are able to shorten the lead time for our power product offerings and reduce our overall material costs. Our philosophy of vertical integration, along with utilizing demand flow manufacturing processes, enables us to meet the growing OEM customer demands for flexible production schedules and just-in-time inventories. We Offer High Quality, High Performance Products. Our customers demand a high level of quality and performance. We believe we meet our customers' requirements for high quality products manufactured to increasingly exacting specifications, including performance and quality standards that are set by agencies and other governmental bodies whose regulations may apply to specific telecommunications or other equipment. We emphasize a quality culture, driving continuous product improvement and a company-wide commitment to quality. As part of our commitment to high quality manufacturing, all of our U.S. facilities have achieved and maintain ISO 9001 certification, and we have been approved by defense customers under the requirements of the U.S. military quality system. We have received numerous quality awards from customers such as Nortel, Ericsson, Powerwave Technologies, Honeywell, Hughes and Lockheed Martin. Our Strategy Our goal is to increase sales and profits by expanding in our existing markets and by entering new markets where we can apply our design and manufacturing capabilities. Key elements of our strategy for achieving this goal include: Leveraging Our Status as a Strategic Supplier to our OEM Customers. Our status as a strategic supplier to our OEM customers presents us with opportunities to develop and design new products for these customers on a collaborative, solutions-oriented basis giving us an advantage over our competitors. We use our position as a strategic supplier to these OEM customers to accelerate the introduction of new, more complex electronic control products and systems at higher profit margins. We seek to solidify our status as a strategic supplier to our OEM customers by continuing to provide: . High levels of service; . Custom and collaborative product design and manufacturing capabilities; . Product delivery flexibility and reliability; and . High quality products. Strategic supplier or other similar long-term relationships with OEMs accounted for approximately 60% of our sales for 1999. Introducing New Signal and Power Product Lines. We are broadening our product lines to include a more comprehensive range of signal and power products focusing primarily on new higher-margin products to exploit the growing market for wireless, fiber optic networking as well as other telecommunications applications. Our customers increasingly look for greater capability to produce value-added systems integrating our existing signal 22 and power products. To respond to our customers' needs, we intend increasingly to design and manufacture more sophisticated electronic control systems and assemblies. In our Signal Products Group, new products will also include solderless installations and assemblies which incorporate both existing and newly developed products. In our Power Products Group, new products will expand our family of complex power modules to incorporate more sophisticated capabilities such as surge protection and multilayered bus bars for power distribution. Expanding in Markets for Higher Margin Advanced Systems. We formed the Advanced Systems Group to leverage our core competencies in design, manufacturing and assembly to become a provider of more complex, higher margin power management systems. We have recently introduced a new product line of digital radio-frequency control equipment, which can monitor various equipment and provide automatic management, as well as remote management capabilities, through wireless or external communication links. We intend to introduce additional higher-margin product offerings in the future through the Advanced Systems Group. Pursuing Acquisitions that Enhance Our Product Offerings. We continue to pursue acquisitions complementary to our core business. With OEMs increasingly demanding higher levels of service and lower overall product costs from their electronic component and systems suppliers, we believe that acquisition opportunities will increase as smaller suppliers with insufficient technical and design expertise and limited access to capital choose to sell to larger organizations with greater technical and financial resources. We also expect to continue to see acquisition opportunities, such as our acquisition of the Signal Conditioning Products Division of AMP Incorporated, as larger manufacturers seek to focus product offerings on their core competencies. Remaining a Low-Cost, Efficient Producer. Our customers are under worldwide competitive pressure to reduce their product costs and these pressures are passed along to component and systems manufacturers. We are constantly seeking to reduce our material and labor costs, develop cost-efficient manufacturing equipment and processes and design our manufacturing plants for efficient production. We have been able to reduce the manufacturing cost of our products by increasing materials utilization efficiency and production yields. In addition, we have taken steps to reduce assembly direct labor costs by locating plants in areas with relatively low-cost labor. We opened an assembly plant in Juarez, Mexico in June 2000. We also are expanding our facilities in Wesson, Mississippi and doubling the capacity of our state-of-the-art ceramics operation in New Orleans, Louisiana. Products Our products are organized into three groups: the Signal Products Group, the Power Products Group and the newly established Advanced Systems Group. We work in concert with our customers to design custom products to control interference, manage a power source or to achieve a combination of each as they develop new technology for use in the rapidly evolving electronics industry. We believe that our customers place significant value on the benefits of having a stable, reliable, quality-driven supplier who is able to design, manufacture and supply a broad range of products and systems to meet their end-use requirements. To meet our customers' needs, we offer an extensive array of signal and power products. We believe that no competitor is capable of offering a comparable range of products. Signal Products Group We manufacture a full line of signal products and consider this group to be our core technology and the foundation of our business. Our Signal Products Group includes Electromagnetic Interference Components and Wireless Components. Through our acquisitions and continued commitment to research and development, we have significantly expanded our signal product offerings as well as our custom capabilities. During 1999, our Signal Products Group manufactured approximately 5,400 different types of products, of which 900 were new designs. 23 Electromagnetic Interference Components. The need for EMI products results from society's increasing dependence on electronic equipment, including wireless telecommunications systems. Because electronic equipment both emits, and is sensitive to, random electromagnetic waves over a broad spectrum of wave lengths, these electronic waves, or EMI, can interfere with and as a result degrade the performance of other electronic equipment. Our EMI filter components are designed to address this need and are used either separately or in unique custom-designed configurations to reduce, eliminate or control EMI in the end-products that our customers manufacture. To achieve the EMI control desired by our customers, our filters permit the desired electronic frequencies to pass through a circuit while reducing or eliminating EMI signals that negatively affect a product's performance. Our EMI filter products include low pass filters, filtered arrays and filtered connectors. Low Pass Filters Products Principal Applications Key Features -------------------------------------------------------------------------------- . Filter Chips . Cellular base . High reliability . Microwave Discrete stations . High predictability Filters . Medical equipment . Design flexibility . Power Surface . Military/secure . Small size options Mount and Square communications with solder-in and Surface Mount . Computer and press-in features Filters peripherals . Square mechanical . Capacitors and . Home electronics geometry enhances Filters . Power amplifiers and soldering to a PCB supplies . Temperature and motor controls . Industrial control systems Filtered Arrays Products Principal Applications Key Features -------------------------------------------------------------------------------- . Filter Plate . Cellular base . Outperforms surface Assemblies stations mount filters at . Shrouded Latch . Linear power most frequencies Plates amplifiers . Reduced installation . Microcircuit . Medical equipment time and lower Packages . Scientific equipment overall cost . Filtered Terminal . Industrial controls . Protects filter Blocks . Uninterruptible element from power supplies potential damage Filtered Connectors Products Principal Applications Key Features -------------------------------------------------------------------------------- . Custom Filtered . Cellular base . High performance Connectors stations . Superior high . Filtered . PBX equipment frequency filtering Subminiature . Medical electronics . High level of EMI Connectors and . Secure shielding Adapters communications . Power surge protection . Dataline Surge . Satellites . Maintains shielding Suppressors . Personal computers across seams or gaps . Filtered Miniature . Networking equipment Datacomm . Power supplies Connectors . Gasketing & Shielding 24 Wireless Components. For wireless applications, we design and manufacture a broad family of products including ferrite beads, ceramic chip inductors, single layer capacitors, high Q capacitors, ceramic resonators, bandpass filters, duplexers, and patch antennas. Our wireless product offerings are available with a wide range of performance characteristics and sizes to provide system designers the flexibility to satisfy varied filtering and performance concerns. Wireless Components Product Examples Principal Applications Key Features -------------------------------------------------------------------------------- . Ferrite Beads . Networking equipment . High reliability . Ceramic Chip . Cellular telephones . High predictability Inductors and base stations . Easy installation . Coaxial Ceramic . Medical devices . Precise frequency Inductors . Global positioning performance . Single Layer Chip systems . Design flexibility Capacitors . Surveying equipment . Small size . High Q Chip . Voltage oscillators . Low cost Capacitors . Ceramic Resonators . Bandpass Filters . Duplexers . Patch Antennas Power Products Group Our power products incorporate our core EMI filtering technologies and consist of power distribution systems with multi-power conditioning functions in single enclosed units of varying sizes and configurations as required for specific uses in our customers' products. Our power products currently include commercial custom assemblies, multisection filters, power entry devices, power distribution units and single line filters. These custom products and systems incorporate power conditioning solutions such as back panels with surge protection, circuit breakers and voltage cut-off for use in a variety of industries. During 1999, our Power Products Group manufactured approximately 240 different types of products of which 150 were new designs. Power Products Product Examples Principal Applications Key Features -------------------------------------------------------------------------------- . Single Line Power . Cellular base . Economical solutions Filters stations to meet customers' . Power Line Filters . Power supplies specific requirements . Multi-section . Power amplifiers and . Protects filtering Filters servers element . Terminal Blocks . Networking equipment . Low leakage for . Power PCB mounted . Industrial controls medical applications Filters . Medical equipment . Precise frequency . Power Entry Devices . Computers and performance . Power Distribution peripherals . Incorporates multiple Systems . Secure power conditioning . Commercial Custom communications functions in a single Assemblies . Measuring enclosed unit instruments 25 Advanced Systems Group Our Advanced Systems Group is the next step in our evolution from an EMI filter manufacturer to a provider of custom control products and systems. The initial product offering of our Advanced Systems Group is a new line of digital radio-frequency control equipment designed to monitor various functions and equipment and provide automatic management, as well as remote management through wireless or external communication links. Our remote management systems incorporate highly flexible software that enables our customers to control and monitor their systems, such as cellular or other isolated telecommunications systems, from remote locations. We have designed these advanced systems to provide unique capabilities not readily available in the markets in which we compete. For example, these systems provide our telecommunications customers with the capability to manage the power and regulate other aspects of a cellular communications system on a tower located on a distant mountain. These systems offer other benefits including remote switch capabilities, AC/DC remote reboot systems and alarm management, among others, to manage remote systems. Based on our internal market analysis, we believe that the primary markets for these systems include wireless base station infrastructure systems, fire and "911" security systems, remote battery back-up or UPS server systems, sonet switching systems and LAN/WAN network systems. Manufacturing and Facilities We are headquartered in Fairview, Pennsylvania where our administrative offices are located. We have seven manufacturing facilities located in Erie, Elizabethtown and Fairview, Pennsylvania, Wesson, Mississippi, New Orleans, Louisiana and Juarez, Mexico. We rely on our internal, vertically integrated manufacturing capabilities for design, development, production and testing of our signal products, power products and advanced systems. Most orders require relatively short production runs of custom designed products, although we also produce a standardized line of products for sale from inventory or through distributors. Each of our manufacturing and assembly facilities produce a family of closely related products to shorten manufacturing time, optimize product flow, and avoid costly equipment retooling and employee training time. We are expanding our operations in Wesson, Mississippi and we recently commenced operations in Juarez, Mexico. Upon the completion of this expansion, we believe we will have sufficient capacity to meet our current and projected manufacturing and distribution needs. We believe that our property and equipment is in good condition. 26 Our principal manufacturing and office facilities are as follows:
Approximate SquareFeet Location Function of Floor Area Ownership -------- ----------------- ------------- --------- 8061 Avonia Road Manufacturing, 38,000 Owned Fairview, PA EMI Testing 6000 West Ridge Road Manufacturing 41,000 Owned Erie, PA 4100 Michoud Blvd. Manufacturing 100,000 Owned New Orleans, LA 3053 Hwy. 51N Manufacturing 25,000 Rented Wesson, MS 1593 Mount Joy St. Manufacturing 26,000 Owned Elizabethtown, PA 1595 Mount Joy St. Manufacturing 35,000 Owned Elizabethtown, PA 8031 Avonia Road Corporate Offices 10,000 Owned Fairview, PA Boulevard Zaragoza 2910 Manufacturing 46,000 Rented Juarez, Mexico
In addition to the facilities described above, the Company leases certain sales office and warehousing space. Marketing, Sales and Distribution We market and sell our products primarily through manufacturers' representatives and agents, managed by our internal sales force. Our network of sales representative organizations currently includes 19 in North America, nine in Europe and 12 throughout South America, Asia and the Middle East. To enhance our product development and offerings for our largest customers, we maintain two key account managers. These key account managers oversee the marketing and selling of our full range of product offerings and design capabilities to these customers. We also maintain within our sales organization employees dedicated to new business development as well as additional employees dedicated to distribution sales management. In 1999, approximately 12% of our sales were through third party distribution, including distribution through 15 national and regional distributors in the United States. Financial information relating to our geographic operations is set forth in our consolidated financial statements in this prospectus. Shipments are made by common carrier. Most of the our signal products are either small or miniaturized and light weight. Accordingly, shipping charges for these products are not significant. However, transportation costs for our power products and advanced systems may be significant. No material portion of our business is subject to renegotiation of profits or termination of contracts or sub-contracts at the election of the U.S. Government. Inventory and Backlog We had a backlog of orders by customers of approximately $62.0 million at May 31, 2000, $50.0 million at November 30, 1999 and $23.0 million at November 30, 1998. We expect to ship approximately 90% of our 27 backlog as of May 31, 2000 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 our quotation forms place certain restrictions on a customer's right to cancel, purchase orders generally provide for cancellation. In practice, we negotiate each cancellation and schedule change based on the cost incurred prior to a cancellation or schedule change. We expect to continually reduce our 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, our backlog may decrease in the future due to reduced lead times. Proprietary Rights We rely on trade secrets and know-how, which we protect through confidentiality agreements and internal procedures, and, to a lesser extent, patents, to establish and protect our proprietary rights to our technologies and products. To date we have been granted 34 U.S. patents and 77 foreign patents related to our polymer multilayer technology or our signal products. We also have nine U.S. patents and 47 foreign patents pending in connection with our signal and power products. We do not believe that any of these patents and patent applications are critical to us. Our policy is to file patent applications to protect proprietary technology, inventions and improvements to provide broad coverage where we believe it is needed for the technology or concepts employed. We have also entered into several agreements regarding licensing the technology covered by these patents. We do not know what commercial value, if any, these patents and related licenses may have. Research, Development and Engineering Our position as a leading designer, developer and manufacturer of signal and power products is largely the result of our long history of technological innovation. Our research and development efforts are focused on expanding our materials technology, improving existing product offerings, developing new product offerings, and designing specialized production equipment to improve manufacturing efficiencies. We currently have 122 engineers and technicians who are dedicated to our research, engineering and product development. Our engineers and technicians work with our customers to assist in designing and developing new products and enhancing our current product offerings to meet the needs of our customers. In addition to their design and development activities, the engineering staff participates with our marketing department in proposal preparation and applications support for our customers. Raw Materials We purchase bushings, castings, miniature metal stampings, as well as other hardware used in the assembly and production of our products. We believe that we have reliable suppliers for these items and we would be able to replace any of our current suppliers as these items are available from numerous sources. We also use a combination of raw materials to manufacture ceramic components including barium titanate and precious metals such as gold, palladium and platinum. Precious metals are available from multiple sources and we have not experienced any significant interruptions or delays in obtaining raw materials in the past; however, prices for these raw materials are subject to significant fluctuations. While we attempt to minimize inventory levels, we maintain minimum safety stock levels of critical raw materials. Competition We have encountered strong competition in our various product lines from both domestic and foreign manufacturers. Competitive factors in the markets include price, product quality and reliability, breadth of product line, customer service, technological innovation, timely delivery and technological change. We believe that we compete favorably on the basis of each of these factors and we are a market leader in our Signal Products Group. The principal competitors of our Signal Products Group include AVX Corporation, Amphenol Corporation, Conec Corporation, ITT Canon, an ITT Industries company, and Tusonix, Inc. The primary 28 competitors of our Power Products Group include Corcom, a division of CII Technologies, Delta Group Electronics, Inc., Schaffner Holder AG and Captor Technology Company Ltd. We expect the major competitors of our Advanced Systems Group to include Astec America, Inc., Peco II, Inc., Dataprobe Inc., Western Telematic, Inc. and Dantel, Inc. Government Regulations Our products are incorporated into telecommunications systems which are subject to various FCC regulations. Regulatory changes, including changes in the allocation of the available frequency spectrum, could significantly impact our operations by restricting development efforts by our customers, rendering current products obsolete or increasing the opportunity for additional competition. 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 our customers. In order to qualify as an approved supplier of EMI products for use in equipment purchased by the military services or aerospace programs, we are required to meet the applicable portions of the quality specifications and performance standards designed by the Air Force, the Army and the Navy. We must also design our products to conform to the specifications of the Defense Electronic Supply Center for replacement parts supplied to the military. To the extent required, we meet or exceed all of these specifications. Environmental Matters We are subject to numerous federal, state and local regulations relating to air and water quality, the disposal of hazardous waste materials, safety, and health in the United States and to the environmental laws and regulations of the other countries in which we have manufacturing facilities. Compliance with applicable environmental regulations has not significantly changed our competitive position, capital spending, or earnings in the past and we do not anticipate that compliance with such regulations will change our competitive position, capital spending, or earnings for the foreseeable future. We continuously monitor regulatory matters and we believe that we are currently in compliance in all material respects with applicable environmental laws and regulations. Employees As of May 31, 2000, we had 1,466 employees, including 47 in sales, marketing and customer support, 122 in engineering and product development, 1,146 in manufacturing, and 151 in finance and administration. Our future success depends in significant part upon the continued service of our key technical and senior management personnel and our continued ability to attract and retain highly qualified technical and managerial personnel. None of our employees is represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good. Legal Proceedings From time to time we are involved in various lawsuits and claims incidental to our business. In the opinion of management, the ultimate liabilities, if any, resulting from these lawsuits and claims, will not materially affect our financial position or results of operations. 29 MANAGEMENT Executive Officers and Directors The following table sets forth certain information regarding our directors, executive officers and key employees:
Name Age Position ---- --- -------- Richard A. Southworth (1).................... 57 President, Chief Executive Officer and Director John P. Freeman (1)..... 45 Vice President, Chief Financial Officer and Director Robert L. Smith......... 61 Vice President, Quality and Technology Brian F. Ward........... 40 Vice President, Sales and Marketing Lawrence G. Howanitz.... 47 Vice President, Signal Products Group James A. Siegel......... 58 Treasurer Gerald A. Ryan (1)(2)(3).............. 64 Chairman of the Board and Director James F. Toohey (3)..... 65 Secretary and Director Edwin R. Bindseil (1)(3)................. 69 Director J. Thomas Gruenwald (2).................... 52 Director Melvin Kutchin (1)...... 74 Director John M. Petersen (2)(3)................. 71 Director
-------- (1) Member of Acquisition, Divestiture and Major New Business Development Committee of the Board of Directors (2) Member of Audit Committee of the Board of Directors (3) Member of Compensation Committee of the Board of Directors Richard A. Southworth has served as President and Chief Executive Officer of our company since 1997 and has been a Director since 1998. He joined our company in 1991 as Vice President and General Manager. Prior to joining our company, Mr. Southworth held executive positions with National Water Specialities, Philips Components, Murata Electronics North America, and Erie Technological Products. Mr. Southworth is a graduate of Gannon University in Mechanical Engineering and Mathematics. John P. Freeman has served as Vice President and Chief Financial Officer of our company since 1990 and has been a Director since 1991. He joined the company in 1988 as Controller. Prior to that time, he was a principal in a public accounting firm. Mr. Freeman is a graduate of Gannon University in Accounting and is a Certified Public Accountant and Certified Management Accountant. Robert L. Smith has served as Vice President, Quality and Technology of our company since 1997. Mr. Smith joined us in 1978 as Manager of EMC Testing Services. Prior to joining our company, Mr. Smith was Product Engineering Manager of Erie Technological Products. Mr. Smith is a graduate of Cleveland Institute of Electronics and is a certified National Association of Radio and Telecommunications Engineer. Brian F. Ward has served as Vice President, Sales and Marketing of our company since 1997. Mr. Ward joined us in 1994 as Director of Marketing. Prior to joining our company, Mr. Ward held managerial positions in engineering and marketing with Clarostat Manufacturing Co. and Oak Grigsby, Inc. Mr. Ward is a marketing graduate of Franklin Pearce College of Business. Lawrence G. Howanitz has served as Vice President, Signal Products Group of our company since 1999. Since joining us in 1984, he has held several management positions. In 1997, he was appointed General Manager of our Interconnect Products Division (the predecessor of the Signal Products Group). Mr. Howanitz is a graduate of Pennsylvania State University with a bachelor's degree in business administration. 30 James A. Siegel has served as Treasurer of our company since 1984. Mr. Siegel joined us as Corporate Controller in 1974 and was appointed Assistant Treasurer in 1975. Mr. Siegel obtained his undergraduate degree from Gannon University in accounting. Gerald A. Ryan has served as the Chairman of the Board since 1991 and as a Director of our company since its inception. Mr. Ryan is a principal with Erie Business Management Corporation, Pennsylvania, which invests in and manages various businesses. Mr. Ryan serves as Chairman of the Board of Automated Industrial Systems, Inc. and Director/Chairman Emeritus of Rent-Way, Inc. a company listed on the New York Stock Exchange in the rental-purchase business. Mr. Ryan is a graduate of the Massachusetts Institute of Technology. James F. Toohey has served as the Secretary of our company and a Director since 1968. Mr. Toohey is a practicing member of the Erie County Bar Association, a member of the law firm of Quinn, Buseck, Leemhuis, Toohey & Kroto, Inc. and general counsel to our company. Mr. Toohey is a graduate of Gannon University and Dickinson School of Law. Edwin R. Bindseil has served as a Director of our company since 1991. In 1989, Mr. Bindseil retired from AMSCO after 31 years of service, 22 years of which he served in senior executive management positions, including general management, marketing, operations, research and development, acquisitions and corporate strategic planning. Since 1990, Mr. Bindseil has been an independent businessman, consultant and entrepreneur. He also serves as a Director of a number of privately held companies. Mr. Bindseil obtained his undergraduate degree in Chemical Engineering from the University of Detroit and an MBA from Harvard University. J. Thomas Gruenwald has served as a Director of our company since 1999. He has been employed by Tellabs, Inc. since 1991, serving in various executive positions including Vice President of Strategic Resources and Director of Engineering--Network Access Division. Currently, Mr. Gruenwald serves as Vice President and General Manager of the Broadband Media Group and Network Solutions Group. Prior to joining Tellabs, Mr. Gruenwald served as President of UNI Quality, Inc., a professional services firm, and held several executive and technical positions with AT&T. Mr. Gruenwald obtained his undergraduate degree in Physics from the University of Cincinnati, and his Masters degree and Ph.D. in Theoretical Physics from Purdue University. Melvin Kutchin has served as a Director of our company since 1994. He served as President of Kitchen and Kutchin, Inc., manufacturer's representative of electronic components, from 1961 through January 1994 when he became Chairman of the Board. From 1980 through 1990, he was President of JBM Electronics, manufacturer of delay lines and other magnetic devices. Mr. Kutchin is a graduate of the University of Pennsylvania. John M. Petersen was a founder of our company and has served as a Director since 1970. He is the retired President and Chief Executive Officer of Erie Family Life Insurance Company, Erie Indemnity Company, Erie Insurance Company and Flagship City Insurance Company, comprising the Erie Insurance Group, and serves as a Director of each of these companies. Since 1995, he has been an investment consultant. Mr. Petersen is a graduate of the University of Pittsburgh. Classes of the Board We have a staggered Board of Directors that is divided into three classes and one class is elected each year at our annual meeting to serve a three-year term. The terms of Messrs. Petersen, Southworth and Toohey expire at the 2001 annual meeting of shareholders. The terms of Messrs. Bindseil and Freeman expire at the 2002 annual meeting of shareholders. The terms of Messrs. Gruenwald, Kutchin and Ryan expire at the 2003 annual meeting of shareholders. Change in Control Agreements We do not have any employment agreements with our executive officers, but they are subject to our standard confidentiality agreement which requires them to treat all information concerning the Company as 31 confidential during and after their employment with the Company. In June 2000, we entered into Change in Control Agreements with each of Mr. Southworth and Mr. Freeman. Pursuant to Mr. Southworth's agreement he will receive, if terminated within twelve months of a change of control of our Company, a minimum compensation package equal to the salary and "at risk compensation" that he received under our At-Risk Compensation Plan for the fiscal year prior to the change of control. Mr. Southworth has received compensation for the current fiscal year as determined by the Compensation Committee of our Board of Directors and under the terms of our At-Risk Compensation Plan. Pursuant to Mr. Freeman's agreement, he will receive, if terminated within twelve months of a change of control of our Company, a minimum compensation package equal to the salary and "at risk compensation" that he received under our At-Risk Compensation Plan for the fiscal year prior to the change of control. Mr. Freeman has received compensation for the current fiscal year as determined by the Compensation Committee of our Board of Directors and under the terms of our At-Risk Compensation Plan. SELLING SHAREHOLDERS The following table sets forth certain information with respect to the selling shareholders and their beneficial ownership of common stock. Each of the selling shareholders is a holder of a portion of the common stock purchase warrant entered into between Potter Production Corporation and us in connection with our acquisition of certain assets of Potter on September 21, 1998. Each selling shareholder named has sole voting and dispositive power with respect to his shares of common stock. The selling shareholders will acquire the shares of common stock they are offering upon exercise of their warrant. The exercise price for the warrant is $6.25 per share.
Shares Number Shares to be Beneficially of Shares Beneficially Owned Prior Being Owned to Offering Offered after Offering -------------- --------- -------------- Selling Shareholders Number Percent Number Percent -------------------- ------ ------- ------ ------- Robert Smith............................ 6,761 * 6,761 -- * Babu Aharam............................. 63,285 * 33,000 30,285 * Henry Ballard........................... 582 * 582 -- * Clayton Hatzenbuhler.................... 11,211 * 11,211 -- * Daniel Sullivan......................... 7,982 * 7,982 -- * Hank Howell............................. 936 * 936 -- * Brent Doyle............................. 112 * 112 -- *
-------- * Represents less than 1% of the outstanding shares of common stock. 32 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 25,000,000 shares of common stock and 1,000,000 shares of undesignated "blank check" preferred stock. The rights, preferences and classes of the undesignated stock may be established from time to time by the Board of Directors. As of July 31, 2000, there were options outstanding to purchase 599,541 shares of common stock and warrants outstanding to purchase 100,000 shares of common stock. The following discussion summarizes the material provisions of our capital stock and the anti-takeover provisions that are contained in our Articles of Incorporation and Bylaws. Additional information concerning anti-takeover provisions in our Articles of Incorporation and Bylaws and under Pennsylvania law appears in the last risk factor paragraph on page 8. Common Stock Holders of our common stock are entitled to one vote per share for all matters to be voted upon by the shareholders. The holders of common stock have cumulative voting rights which means that in any election of directors, every shareholder has the right to multiply the number of shares which he is entitled to vote by the number of candidates for director and may cast the whole number of votes for one candidate or distribute them among two or more candidates. The right to vote cumulatively is intended to give minority shareholders the ability to secure representation on our Board of Directors. Subject to preferences of any preferred stock that may be issued in the future, at the discretion of the Board of Directors, the holders of common stock are entitled to receive dividends as may be declared by our Board of Directors. Preferred Stock The Board of Directors is authorized, without further action by the holders of the common stock, to issue shares of preferred stock in one or more series from time-to-time. The Board of Directors will have discretion to determine the designations, preferences, qualifications, privileges, limitations, restrictions, options, conversion rights and other special or relative rights of any series of preferred stock. Satisfaction of any dividend preference on outstanding shares of any preferred stock would reduce the amount of funds available for the payment of dividends on the shares of our common stock. In some circumstances, the issuance of preferred shares may render more difficult or discourage a merger, tender offer at a price in excess of the then current market price of the common stock or proxy contest, the assumption of control by a holder of a large block of our securities, or the removal of incumbent management. We have no current intention to issue any shares of preferred stock. Options As of July 31, 2000, options to purchase a total of 599,541 shares of our common stock were outstanding and options to acquire up to 1,112,833 shares of common stock may be granted in the future under our existing stock option plans. Common Stock Purchase Warrants We issued a common stock purchase warrant covering 100,000 shares to Potter Production Corporation upon our acquisition of certain assets of Potter on September 21, 1998. The warrant was divided among several holders in April 2000, as permitted under the terms of the warrant. The warrants may be exercised in whole or in part at any time until September 21, 2002. The exercise price for the warrants is $6.25 per share. Of the shares underlying these warrants, 60,584 are being included in this offering pursuant to the terms of registration rights granted in connection with the issuance of the initial warrant. See the section of this prospectus entitled "Selling Shareholders" for information regarding the shareholders selling shares in this offering. Transfer Agent and Registrar The Transfer Agent and Registrar for the common stock is ChaseMellon Shareholder Services, L.L.C. 33 UNDERWRITING We are offering the shares of common stock described in this prospectus through a number of underwriters. Janney Montgomery Scott LLC and Needham & Company, Inc. are the representatives of the underwriters. Subject to the terms and conditions of the underwriting agreement, we have agreed to sell and the selling shareholders have agreed to sell to the underwriters, and each underwriter has agreed to purchase, the number of shares of common stock listed next to its name below at the public offering prices less the underwriting discount on the cover page of this prospectus.
Number of Underwriters Shares ------------ --------- Janney Montgomery Scott LLC 1,030,292 Needham & Company, Inc. 1,030,292 --------- Total.............................................................. 2,060,584 =========
The underwriting agreement is subject to a number of terms and conditions and provides that the underwriters must buy all of the shares if they buy any of them. The underwriters will sell the shares to the public when and if the underwriters buy the shares from us. The common stock is offered subject to a number of conditions including: . receipt and acceptance of the common stock by the underwriters; and . the right on the part of the underwriters to reject orders in whole or in part. The underwriters will initially offer the shares to the public at the price per share shown on the cover page of this prospectus and to certain dealers at such price less a concession not in excess of $0.45 per share. The underwriters may also allow, and any other dealers may reallow, a concession of not more than $0.10 per share to certain other dealers. After the public offering of the common stock is complete, if all of the shares are not sold at the public offering price, the underwriters may change the public offering price and the other selling terms. No change in the selling terms will vary the proceeds to be received by us as specified on the cover page of this prospectus. We have granted the underwriters an option to buy up to 300,000 additional shares of common stock, at the same price per share as the public offering price, less the underwriting discount shown on the cover page of this prospectus. The underwriters may exercise this option at any time within 30 days after the date of this prospectus only to cover over-allotments in the sale of the shares of common stock offered by this prospectus. The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters. These amounts are shown assuming no exercise and full exercise of the underwriters' overallotment option to purchase additional shares.
No exercise Full exercise ----------- ------------- Per share underwriting discounts and commissions.... $ 0.78 $ 0.78 Total underwriting discounts and commissions to be paid by us and the selling shareholders............ $1,607,256 $1,841,256
The expenses of the offering, not including underwriting discounts and commissions, are estimated to be approximately $350,000 and will be paid by us. Expenses of the offering, exclusive of underwriting discounts and commissions, include the SEC filing fee, printing expenses, transfer agent and registration and other miscellaneous fees. 34 We and our executive officers and directors have entered into lock-up agreements with the underwriters. Under these agreements, subject to certain exceptions, our officers and directors have agreed that they will not, directly or indirectly, offer, sell, contract to sell, or otherwise dispose of or hedge any common stock or securities convertible into or exchangeable for shares of common stock (including any shares issued upon exercise of options) without the underwriters' prior written consent. These restrictions will be in effect for a period of 90 days after the commencement of this offering. Together, this group owns, prior to the offering, approximately 9.0% of the outstanding shares of common stock and approximately 82% of the outstanding options to purchase common stock. We also have agreed to make no such sales during this period except in connection with the issuance of shares pursuant to our stock option plans. We have agreed to indemnify the underwriters and persons who control the underwriters against, or contribute to losses arising out of, certain liabilities that may be incurred in connection with this offering, including liabilities under the Securities Act. In connection with this offering and in compliance with applicable securities laws, the underwriters may over-allot (i.e. sell more shares of common stock than is shown on the cover page of this prospectus) and may effect transactions on the Nasdaq National Market which stabilize, maintain or otherwise affect the market price of the common stock at levels above those which might otherwise prevail in the open market. These transactions may include placing bids for the common stock or effecting purchases of the common stock for the purpose of pegging, fixing or maintaining the price of the common stock or for the purpose of reducing a short position created in connection with the offering. A short position may be covered by exercise of the over- allotment option described above in place of or in addition to open market purchases. The underwriters are not required to engage in any of these activities and if the underwriters commence any of these activities, they may discontinue them at any time. In connection with this offering, the underwriter, selling group members or their respective affiliates who are qualified market makers on the Nasdaq National Market may engage in passive market making transactions in our common stock on the Nasdaq National Market in accordance with Rule 103 of Regulation M under the Securities Exchange Act of 1934, as amended, during the five business days prior to the pricing of the offering before the commencement of offers and sales of the common stock. Passive market makers must comply with applicable volume and price limitations and must be identified as such. In general, a passive market maker must display its bid at a price not in excess of the highest independent bid for such security. If all independent bids are lowered below the passive market maker's bid, however, such bid must then be lowered when certain purchase limits are exceeded. We and the underwriters make no representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, we and the underwriters make no representation that the underwriters will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. SHARES ELIGIBLE FOR FUTURE SALE After the offering, we will have 13,073,052 shares of common stock outstanding and will have reserved for issuance (i) 39,416 shares of common stock issuable upon the exercise of outstanding common stock purchase warrants (at an exercise price of $6.25 per share) and (ii) 599,541 shares of common stock issuable upon exercise of outstanding stock options (at exercise prices ranging from $3.00 to $11.25 per share). Of the 11,012,468 shares currently outstanding, 10,057,454 shares are currently traded or available for sale in the open market, and all of the 2,060,584 shares sold in the offering (2,360,584 shares if the underwriters' over-allotment option is exercised in full), will be freely tradeable without restriction or further registration under the Securities Act, unless acquired by an "affiliate" of ours as that term is defined in Rule 144 described below. All of the shares of common stock issuable upon exercise of the stock options described above will similarly be freely tradeable upon issuance as such shares are registered for resale by the holders thereof under the Securities Act. 35 The remaining 955,014 shares outstanding and any shares issued on exercise of the outstanding warrants will be "restricted securities" within the meaning of Rule 144, all of which shares are held by our directors and executive officers. Our directors and executive officers have agreed that they will not, directly or indirectly, sell or otherwise dispose of their shares of common stock, as discussed above under "Underwriting." All of such shares will become eligible for sale in the public market 90 days after commencement of this offering subject to the provisions of Rule 144. In general, under Rule 144 as currently in effect, a person who has beneficially owned restricted securities for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: . 1% of the number of shares of common stock then outstanding, which will equal approximately 13,073 shares immediately after this offering; and . the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks preceding the receipt of a sale order by a broker to sell the shares with respect to the sale. Sales under Rule 144 are also subject to requirements with respect to manner of sale, notice and the availability of current public information about us. Under Rule 144(k), a person who is not deemed to have been our affiliate at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, may sell these shares without complying with the manner of sale, public information, volume limitation or notice requirements of Rule 144. We are unable to predict the effect that sales made under Rule 144, pursuant to future registration statements, or otherwise, may have on any then prevailing market price for shares of the common stock. Nevertheless, sales of a substantial amount of common stock in the public market, or the perception that such sales could occur, could adversely affect market prices. We have also agreed with the underwriters not to sell any shares of common stock or securities exercisable for shares of our common stock for a period of 90 days after commencement of this offering without the underwriters' prior written consent. However, even without such consent, we may issue stock upon exercise of the warrants or the stock options described above. 36 LEGAL MATTERS Certain legal matters relating to the validity of the shares of common stock being offered by this prospectus will be passed upon for us by Hodgson, Russ, Andrews, Woods & Goodyear, LLP, Buffalo, New York. Certain legal matters will be passed upon for the underwriters by Ballard Spahr Andrews & Ingersoll, LLP, Philadelphia, Pennsylvania. EXPERTS Ernst & Young LLP, independent auditors, have audited our consolidated financial statements and schedule at November 30, 1999 and 1998 and for each of the three years in the period ended November 30, 1999, as set forth in their reports. We have included our consolidated financial statements and incorporated by reference our financial statement schedule for the years ended November 30, 1999, 1998, and 1997 included in our Form 10-K for 1999 filed with the Securities and Exchange Commission (the "Commission") in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's reports given their authority as experts in accounting and auditing. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Commission's rules allow us to "incorporate by reference" the information that we file with the Commission, which means we can disclose important information to you by referring you to those documents. The information incorporated by reference is an important part of this prospectus and information that we file later with the Commission will automatically update and supercede this information. We incorporate by reference the documents listed below and any future filings we make with the Commission under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, until we sell all of securities. We incorporate: . our Annual Report on Form 10-K for the year ended November 30, 1999 (including information specifically incorporated by reference into our Form 10-K from our definitive Proxy Statement for our 1999 Annual Meeting of Shareholders); . our Quarterly Reports on Form 10-Q for the quarter ended February 29, 2000 and for the quarter ended May 31, 2000; . our Current Report on Form 8-K, reporting the acquisition of the Signal Conditioning Products Division of AMP Incorporated, filed on April 12, 1999; . Amendment No. 1 to Form 8-K filed April 12, 1999 which was filed on Form 8-K/A on June 9, 1999; and . the description of our common stock under the caption "Item 1. Description of Registrant's Securities to be Registered" contained in our Registration Statement on Form 8-A dated February 26, 1990. We will provide a copy of this filing to any person to whom a prospectus is delivered, including any beneficial owner. You should direct your oral or written request for a copy of this filing to: Spectrum Control, Inc. 8031 Avonia Road, Fairview, Pennsylvania 16415, Attention: Investor Relations (telephone (814) 835-1507). You will not be charged for copies unless you request exhibits, for which we will charge you a minimal fee. However, you will not be charged for exhibits in any case where an exhibit you request is specifically incorporated by reference to another document which is incorporated by this prospectus. 37 WHERE YOU CAN FIND MORE INFORMATION We have filed with the Commission a registration statement on Form S-3 under the Securities Act relating to the common stock being sold in this offering. This prospectus constitutes a part of that registration statement. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement because some parts have been omitted in accordance with the rules and regulations of the Commission. For further information about us and the common stock being sold to you in this offering, you should refer to the registration statement and the exhibits and schedules filed as part of the registration statement. Statements made in this prospectus regarding the contents of any agreement, contract or other document referred to are not necessarily complete. Reference is made in each instance to the copy of the contract or document filed as an exhibit to the registration statement. Each statement is qualified by reference to the exhibit. Copies of the registration statement and its exhibits are on file at the offices of the Commission and may be obtained upon payment of the prescribed fee or may be examined without charge at the Commission's principal office in Washington, D.C. or over the Internet at the Commission's web site listed below. We also file annual, quarterly and special reports and other information with the Commission. You may also read and copy any of the reports and other information we file at the Commission's public reference facilities located: . in Washington at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549; . in New York at 7 World Trade Center, Suite 1300, New York, New York 10048; and . in Chicago at Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may call the Commission at 1-800-SEC-0330 for further information about the public reference rooms. Copies of such material can be obtained at prescribed rates. Our Commission filings are also available to the public over the Internet at the Commission's web site which is located at the following address: http://www.sec.gov. 38 Spectrum Control, Inc. and Subsidiaries Index to Consolidated Financial Statements
Page ---- Report of Independent Auditors........................................... F-2 Consolidated Balance Sheets as of November 30, 1998, 1999 and May 31, 2000 (unaudited).................... F-3 Consolidated Statements of Income for the years ended November 30, 1997, 1998, 1999 and the six months ended May 31, 1999 and 2000 (unaudited)... F-4 Consolidated Statements of Stockholders' Equity for the years ended November 30, 1997, 1998, 1999 and the six months ended May 31, 2000 (unaudited)............................................................. F-5 Consolidated Statements of Cash Flows for the years ended November 30, 1997, 1998, 1999 and the six months ended May 31, 1999 and 2000 (unaudited)............................................................. F-6 Notes to Consolidated Financial Statements............................... F-7
F-1 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. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 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. /S/ ERNST & YOUNG LLP Pittsburgh, Pennsylvania January 4, 2000, except for Note 17 as to which the date is February 1, 2000 F-2 SPECTRUM CONTROL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollar Amounts in Thousands)
November 30, ---------------- May 31, 1998 1999 2000 ------- ------- ----------- (unaudited) ASSETS Current assets Cash and cash equivalents..................... $ 739 $ 538 $ 641 Accounts receivable, less allowances of $406 in 1998, $673 in 1999 and $714 in 2000....... 10,162 19,330 21,473 Inventories (Note 3).......................... 12,885 24,617 27,159 Deferred income taxes (Note 11)............... 409 579 579 Prepaid expenses and other current assets..... 184 699 465 ------- ------- ------- Total current assets........................ 24,379 45,763 50,317 Property, plant and equipment, net (Note 4)..... 16,289 21,366 21,536 Other assets (Note 5) Goodwill, net................................. 2,547 14,225 14,785 Other non-current assets...................... 924 1,200 1,120 ------- ------- ------- Total other assets.......................... 3,471 15,425 15,905 ------- ------- ------- Total assets................................ $44,139 $82,554 $87,758 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short-term debt (Note 6)...................... $ 336 $ 5,089 $ 7,132 Accounts payable.............................. 2,719 8,801 10,694 Accrued salaries and wages.................... 1,438 2,553 1,995 Accrued interest.............................. 63 103 118 Accrued federal and state income taxes........ 93 -- 208 Accrued other expenses........................ 281 952 1,115 Current portion of long-term debt (Note 7).... 830 4,276 4,276 ------- ------- ------- Total current liabilities................... 5,760 21,774 25,538 Long-term debt (Note 7)......................... 2,500 19,011 16,973 Deferred income taxes (Note 11)................. 2,105 2,634 2,993 Stockholders' equity Common stock, no par value, authorized 25,000,000 shares, issued 10,957,008 shares in 1998, 11,018,703 in 1999 and 11,081,801 in 2000......................................... 14,470 14,633 14,810 Retained earnings............................. 19,798 25,268 28,453 Treasury stock, 70,000 shares, at cost (Note 9)........................................... (294) (294) (294) Accumulated other comprehensive income Foreign currency translation adjustment....... (200) (472) (715) ------- ------- ------- Total stockholders' equity.................. 33,774 39,135 42,254 ------- ------- ------- Total liabilities and stockholders' equity.. $44,139 $82,554 $87,758 ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements F-3 SPECTRUM CONTROL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollar Amounts in Thousands, Except Per Share Data)
Six Months Ended Year Ended November 30, May 31, ------------------------- ---------------- 1997 1998 1999 1999 2000 ------- ------- ------- ------- ------- (unaudited) Net sales........................ $56,466 $59,868 $97,729 $39,867 $60,611 Cost of products sold............ 39,045 41,584 69,817 28,444 44,988 ------- ------- ------- ------- ------- Gross margin..................... 17,421 18,284 27,912 11,423 15,623 Selling, general and administrative expense.......... 11,635 11,822 17,748 7,246 9,742 ------- ------- ------- ------- ------- Income from operations........... 5,786 6,462 10,164 4,177 5,881 Other income (expense) Interest expense............... (417) (228) (1,420) (388) (1,179) Other income and expense, net (Note 10)....................... 141 85 96 35 435 ------- ------- ------- ------- ------- (276) (143) (1,324) (353) (744) ------- ------- ------- ------- ------- Income before provision for income taxes.................... 5,510 6,319 8,840 3,824 5,137 Provision for income taxes (Note 11)............................. 1,536 2,385 3,370 1,451 1,952 ------- ------- ------- ------- ------- Net income....................... $ 3,974 $ 3,934 $ 5,470 $ 2,373 $ 3,185 ======= ======= ======= ======= ======= Earnings per common share (Note 12): Basic.......................... $ 0.37 $ 0.36 $ 0.50 $ 0.22 $ 0.29 ======= ======= ======= ======= ======= Diluted........................ $ 0.37 $ 0.36 $ 0.49 $ 0.22 $ 0.28 ======= ======= ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements F-4 SPECTRUM CONTROL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (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 Net income (unaudited)...... -- 3,185 -- -- 3,185 Foreign currency translation adjustment (unaudited)..... -- -- -- (243) (243) ------- Comprehensive income (unaudited)................ -- -- -- -- 2,942 ------- Issuance of 64,134 shares of common stock (unaudited)... 195 -- -- -- 195 Purchase and retirement of 1,036 shares of common stock (unaudited).......... (18) -- -- -- (18) ------- ------- ----- ----- ------- Balance--May 31, 2000 (unaudited)................ $14,810 $28,453 $(294) $(715) $42,254 ======= ======= ===== ===== =======
The accompanying notes are an integral part of the consolidated financial statements. F-5 SPECTRUM CONTROL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollar Amounts in Thousands)
Six Months Ended Year Ended November 30, May 31, -------------------------- ----------------- 1997 1998 1999 1999 2000 ------- ------- -------- -------- ------- (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................... $ 3,974 $ 3,934 $ 5,470 $ 2,373 $ 3,185 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation................ 3,287 3,587 3,919 1,882 2,336 Amortization................ 219 135 624 210 436 Deferred income taxes....... 376 1,014 634 198 359 Tax benefits from exercise of stock options........... 25 79 37 -- -- Loss (gain) on sale of property, plant and equipment.................. 8 -- (13) -- -- Changes in assets and liabilities, excluding effects of business acquisitions: Accounts receivable....... (67) (85) (8,734) (5,711) (2,737) Inventories............... (188) 181 (6,380) (3,242) (2,742) Prepaid expenses and other assets................... 431 24 (742) (167) 671 Accounts payable and accrued expenses......... 441 (595) 7,194 5,354 1,766 ------- ------- -------- -------- ------- Net cash provided by operating activities... 8,506 8,274 2,009 897 3,274 ------- ------- -------- -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of property, plant and equipment.................... 10 -- 13 -- -- Purchase of property, plant and equipment................ (3,280) (3,293) (4,972) (2,426) (2,523) Payment for acquired businesses................... -- (4,077) (21,846) (20,745) (935) ------- ------- -------- -------- ------- Net cash used in investing activities................. (3,270) (7,370) (26,805) (23,171) (3,458) ------- ------- -------- -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayment) of short-term debt.............. (3,232) 282 4,532 1,495 2,152 Borrowings of long-term debt.. -- -- 20,800 20,550 -- Repayment of long-term debt... (2,391) (743) (843) (428) (2,038) Purchase of common stock...... -- (294) -- -- -- Net proceeds from issuance of common stock................. 196 414 126 20 177 ------- ------- -------- -------- ------- Net cash provided by (used in) financing activities... (5,427) (341) 24,615 21,637 291 ------- ------- -------- -------- ------- Effect of exchange rate changes on cash........................ (26) (20) (20) (29) (4) ------- ------- -------- -------- ------- Net increase (decrease) in cash and cash equivalents........... (217) 543 (201) (666) 103 Cash and cash equivalents, beginning of period............ 413 196 739 739 538 ------- ------- -------- -------- ------- Cash and cash equivalents, end of period...................... $ 196 $ 739 $ 538 $ 73 $ 641 ======= ======= ======== ======== =======
The accompanying notes are an integral part of the consolidated financial statements F-6 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. Unaudited Interim Financial Statements The interim consolidated financial statements as of May 31, 2000 and for the six months ended May 31, 1999 and 2000, together with the related notes, are unaudited. These interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the interim consolidated financial statements include all adjustments which are normal, recurring and necessary to present fairly the financial information set forth therein. The results of operations for the interim period ended May 31, 2000 are not necessarily indicative of the results which may be reported for any other interim period or for the year ending November 30, 2000. 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. F-7 SPECTRUM CONTROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. 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 $574,000 in 1997, $633,000 in 1998, and $726,000 in 1999. Research and Development Research and development costs are expensed as incurred. Research and development expense amounted to $807,000 in 1997, $961,000 in 1998 and $1,184,000 in 1999. 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. F-8 SPECTRUM CONTROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 fiscal 1999 presentation. 2. Acquisitions On March 26, 1999, the Company acquired substantially all of the assets of the Signal Conditioning Products Division ("SCPD") of AMP Incorporated ("AMP"). 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. F-9 SPECTRUM CONTROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 1998 and 1999, respectively (in thousands, except per share data):
1998 1999 ------- -------- Net sales............................................... $83,457 $102,796 Net income.............................................. 3,420 5,253 Earnings per common share: Basic................................................. 0.31 0.48 Diluted............................................... 0.31 0.48
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 $2,918,000, 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 and May 31, 2000 (unaudited), all warrants remained outstanding. F-10 SPECTRUM CONTROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 3. Inventories Inventories by major classification are as follows (in thousands):
November 30, May 31, --------------- ----------- 1998 1999 2000 ------- ------- ----------- (unaudited) Finished goods................................ $ 2,581 $ 4,132 $ 4,911 Work-in-process............................... 5,070 9,626 10,693 Raw materials................................. 5,234 10,859 11,555 ------- ------- ------- $12,885 $24,617 $27,159 ======= ======= =======
4. Property, Plant and Equipment Property, plant and equipment consist of the following (in thousands):
November 30, May 31, --------------- ----------- 1998 1999 2000 ------- ------- ----------- (unaudited) Land and improvements......................... $ 1,164 $ 1,524 $ 1,537 Buildings and improvements.................... 9,409 11,351 11,529 Machinery and equipment....................... 21,976 26,202 28,468 Construction in progress...................... 371 125 138 ------- ------- ------- 32,920 39,202 41,672 Less accumulated depreciation................. 16,631 17,836 20,136 ------- ------- ------- $16,289 $21,366 $21,536 ======= ======= =======
5. Other Assets Other assets consist of the following (in thousands):
November 30, May 31, -------------- ----------- 1998 1999 2000 ------ ------- ----------- (unaudited) Goodwill....................................... $2,577 $14,786 $15,721 Less accumulated amortization.................. 30 561 936 ------ ------- ------- Goodwill, net.................................. $2,547 $14,225 $14,785 ====== ======= ======= Patents and patent rights...................... $ 466 $ 566 $ 569 Debt issuance costs............................ 356 671 671 ------ ------- ------- 822 1,237 1,240 Less accumulated amortization.................. 428 522 582 ------ ------- ------- 394 715 658 Deferred income taxes.......................... 383 108 108 Deferred charges............................... 147 377 354 ------ ------- ------- Other non-current assets....................... $ 924 $ 1,200 $ 1,120 ====== ======= =======
F-11 SPECTRUM CONTROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 6. Short-Term Debt Short-term debt consists of the following (in thousands):
November 30, May 31, ----------- ----------- 1998 1999 2000 ---- ------ ----------- (unaudited) Notes payable - domestic line of credit (1)............. $ -- $4,400 $6,400 Notes payable - foreign lines of credit (2)............. 336 689 732 ---- ------ ------ Total................................................. $336 $5,089 $7,132 ==== ====== ======
-------- (1) At November 30, 1999, the Company had an aggregate $6,000,000 line of credit with its principal lending institutions, which was increased to $10,000,000 effective March 21, 2000. 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 $1,818,000 (DM 3,000,000 ) at November 30, 1998 and $1,330,000 (DM 2,500,000) at November 30, 1999. Weighted average borrowings under the lines of credit amounted to $28,000 (DM 46,000) in 1998 and $95,000 (DM 179,000) in 1999, with average interest rates of 6.00% in 1998 and 6.50% in 1999. The maximum amount of borrowings under the lines of credit at the end of any month was $336,000 (DM 554,000) in 1998 and $689,000 (DM 1,296,000) in 1999. Borrowings bear interest at rates below the prevailing prime rate and are payable upon demand. F-12 SPECTRUM CONTROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7. Long-Term Debt Long-term debt consists of the following (in thousands):
November 30, May 31, -------------- ----------- 1998 1999 2000 ------ ------- ----------- (unaudited) Term loan payable to bank at variable interest rate (7.59% at November 30, 1999 and 8.62% (unaudited) at May 31, 2000) (1).. $ -- $20,000 $18,182 Mortgage note payable to bank at an interest rate of 8.50% (2)........................... -- 787 767 Industrial development authority notes at variable interest rate (3.40% at November 30, 1998, 4.00% at November 30, 1999 and 4.40% (unaudited) at May 31,2000) (3)....... 2,100 1,800 1,600 Industrial development authority notes at variable interest rate (3.81% at November 30, 1998, 4.35% at November 30, 1999 and 4.78% (unaudited) at May 31, 2000) (4)...... 1,100 700 700 Industrial development authority notes and related bank mortgage notes at interest rates ranging from 4.00% to 7.75%........... 130 -- -- ------ ------- ------- Total...................................... 3,330 23,287 21,249 Less current portion....................... 830 4,276 4,276 ------ ------- ------- Long-term debt............................. $2,500 $19,011 $16,973 ====== ======= =======
-------- (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 and May 31, 2000 (unaudited), 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. (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 F-13 SPECTRUM CONTROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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, 1998 and 1999, 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):
Year Ended Six Months Ended November 30, May 31, ---------------- ---------------- 1997 1998 1999 2000 ---- ---- ---- ---- (unaudited) Investment income..................... $ 31 $117 $72 $ 29 Gain (loss) on foreign currency transactions......................... 12 (40) 4 31 Patent licensing fees................. 106 8 7 375 Gain (loss) on sale of property, plant and equipment........................ (8) -- 13 -- ---- ---- --- ---- $141 $ 85 $96 $435 ==== ==== === ====
F-14 SPECTRUM CONTROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 11. Income Taxes For the years ended November 30, 1997, 1998 and 1999, income before income taxes consists of the following (in thousands):
1997 1998 1999 ------ ------ ------ U.S. operations...................................... $4,583 $5,884 $8,376 Foreign operations................................... 927 435 464 ------ ------ ------ $5,510 $6,319 $8,840 ====== ====== ======
For the years ended November 30, 1997, 1998 and 1999, the provision for income taxes consists of the following (in thousands):
1997 1998 1999 ------ ------ ------ Current Federal............................................ $1,055 $1,146 $2,396 State.............................................. 105 225 340 Deferred............................................. 376 1,014 634 ------ ------ ------ $1,536 $2,385 $3,370 ====== ====== ======
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, 1997, 1998 and 1999 consists of the following (in thousands):
1997 1998 1999 ------- ------ ------ Statutory federal income tax.................... $ 1,873 $2,148 $3,006 State income taxes, net of federal tax benefit.. 69 148 224 Foreign tax rates............................... 148 70 74 Subpart F income, U.S. property investment...... 258 -- -- Decrease in deferred tax asset valuation allowance...................................... (1,194) (62) -- Other items..................................... 382 81 66 ------- ------ ------ $ 1,536 $2,385 $3,370 ======= ====== ======
F-15 SPECTRUM CONTROL, INC. AND SUBSIDIARIES 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, ---------------- 1998 1999 ------- ------- Deferred tax assets: Amortization of intangible assets.................... $ 512 $ 453 Accrued compensation................................. 237 318 Investment in subsidiaries........................... 399 255 Net operating loss carryforwards..................... 574 232 Allowance for doubtful accounts...................... 103 170 Inventory valuation.................................. 68 110 Tax credit carryforwards............................. 42 28 Property, plant and equipment........................ 116 -- Other................................................ 10 10 ------- ------- Deferred tax assets................................ 2,061 1,576 ------- ------- Deferred tax liabilities: Depreciation of plant and equipment.................. 2,336 2,329 Investment in subsidiaries........................... 1,034 1,107 Amortization of intangible assets.................... 4 68 Other................................................ -- 19 ------- ------- Deferred tax liabilities........................... 3,374 3,523 ------- ------- Net deferred tax assets (liabilities).................. $(1,313) $(1,947) ======= ======= November 30, ---------------- 1998 1999 ------- ------- Net deferred tax assets: Current.............................................. $ 409 $ 579 Noncurrent........................................... 383 108 Net deferred tax liabilities: Noncurrent........................................... (2,105) (2,634) ------- ------- $(1,313) $(1,947) ======= =======
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 (DM 5,332,000). Upon distribution of these earnings in the form of dividends or otherwise, the Company may be subject to U.S. income taxes and foreign withholding taxes. It is not practical, however, to estimate the amount of taxes that may be payable on the eventual remittance of these earnings. At November 30, 1999, the Company's foreign subsidiary had approximately $216,000 (DM 406,000) 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, 1998 or 1999. During the years ended November 30, 1997 and 1998, the Company reduced its previously recorded valuation allowance for deferred F-16 SPECTRUM CONTROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. 12. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per common share:
Year Ended November Six Months Ended 30, May 31, -------------------- ----------------- 1997 1998 1999 1999 2000 ------ ------ ------ -------- -------- (unaudited) Numerator for basic and diluted earnings per common share (in thousands): Net income....................... $3,974 $3,934 $5,470 $ 2,373 $ 3,185 ====== ====== ====== ======== ======== Denominator for basic earnings per common share (in thousands): Weighted average shares outstanding..................... 10,798 10,907 10,905 10,888 10,992 ====== ====== ====== ======== ======== Denominator for diluted earnings per common share (in thousands): Weighted average shares outstanding..................... 10,798 10,907 10,905 10,888 10,992 Effect of dilutive securities: Stock options.................... 71 109 139 87 230 Stock warrants................... -- -- 7 -- 46 ------ ------ ------ -------- -------- 10,869 11,016 11,051 10,975 11,268 ====== ====== ====== ======== ======== Earnings per common share: Basic............................ $ 0.37 $ 0.36 $ 0.50 $ 0.22 $ 0.29 ====== ====== ====== ======== ======== Diluted.......................... $ 0.37 $ 0.36 $ 0.49 $ 0.22 $ 0.28 ====== ====== ====== ======== ========
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 antidulutive. 13. Supplemental Cash Flow Information Supplemental cash flow information consists of the following (in thousands):
Six Months Ended Year Ended November 30, May 31, ------------------------ ----------------- 1997 1998 1999 1999 2000 --------------- -------- -------- -------- (unaudited) Cash paid during the year for: Interest................... $ 420 $ 210 $ 1,380 $ 359 $ 1,164 Income taxes............... 854 1,466 2,986 1,271 993 Liabilities assumed in connection with business acquisitions................ -- -- 1,866 -- --
F-17 SPECTRUM CONTROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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, 1997, 1998 and 1999 and the six month period ended May 31, 2000 is as follows:
Number of Option Price Shares ------------------------------- 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) 1.88-3.56 2.65 (182,000) Forfeitures and expirations....... (60,000) 3.00-5.88 4.15 (249,000) -------- ----------- ------ ---------- Outstanding--November 30, 1999...... 471,342 3.00-6.00 4.33 2,042,000 Granted during the period (unaudited)...................... 193,000 10.75-11.25 10.86 2,097,000 Exercised during the period (unaudited)...................... (64,134) 3.00-3.50 3.04 (195,000) Forfeitures and expirations (unaudited)...................... -- -- -- -- -------- ----------- ------ ---------- Outstanding -- May 31, 2000 (unaudited)........................ 600,208 $3.00-11.25 $ 6.57 $3,944,000 ======== =========== ====== ========== Exercisable May 31, 2000 (unaudited).......... 115,029 $ 3.00-6.00 $ 4.34 $ 499,000 ======== =========== ====== ========== November 30, 1999................. 68,165 $ 3.00-3.50 $ 3.29 $ 224,000 ======== =========== ====== ========== November 30, 1998................. 44,497 $ 1.88-4.25 $ 3.10 $ 138,000 ======== =========== ====== ========== November 30, 1997................. 80,163 $ 1.88-4.25 $ 3.66 $ 293,000 ======== =========== ====== ==========
During the years ended November 30, 1997, 1998 and 1999, the weighted average fair value of options granted amounted to $0.97, $2.45, and $1.73 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. F-18 SPECTRUM CONTROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Pro forma information regarding net income and earnings per share, required by SFAS No. 123, has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123. The fair value for options granted was estimated at the date of grant using a Black- Scholes option pricing model with the following assumptions for 1997, 1998, and 1999 respectively: risk-free interest rate of 6.00%, 5.50%, and 5.50%; volatility factor of the expected market price of the Company's Common Stock of 0.30, 0.37, and 0.36; dividend yield of 2.00%, 0.00%, and 0.00%; 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, 1997, 1998, and 1999, the Company's reported and pro forma net income and earnings per share are as follows (in thousands, except per share data):
1997 1998 1999 ------ ------ ------ As reported: Net income........................................ $3,974 $3,934 $5,470 Earnings per common share: Basic........................................... 0.37 0.36 0.50 Diluted......................................... 0.37 0.36 0.49 Pro forma: Net income........................................ 3,935 3,837 5,314 Earnings per common share: Basic........................................... 0.37 0.35 0.49 Diluted......................................... 0.37 0.35 0.48
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 $180,000 in 1997, $190,000 in 1998, and $208,000 in 1999. 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, 1998 and 1999, approximately 49% and 58%, respectively, of the Company's accounts receivable were from customers in the telecommunication industry. To reduce credit risk, the Company performs periodic credit evaluations of its customers, but does not generally require advance payments or collateral. Credit losses to customers operating in the telecommunication industry have not been material. 17. Operating Segments The Company was founded as a solutions-oriented company, designing and manufacturing products to suppress or eliminate electromagnetic interference. In recent years, the Company has broadened its focus and product lines to become a control products and systems company, providing a wide range of components and systems used to condition, regulate, transmit, receive, or govern electronic performance. Effective February 1, 2000, the Company realigned its business segments to better reflect its current strategic focus. F-19 SPECTRUM CONTROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company's operating results are now reported in two segments: signal products and power products. The Company's Signal Products Group manufactures a broad range of low pass filters, filtered arrays, filtered connectors, wireless products (coaxial ceramic resonators, bandpass filters and duplexers), and specialty ceramic capacitors. The Power Products Group manufactures various power management and conditioning products including power distribution systems, power line filters, and power entry modules. The reportable segments are each managed separately because they manufacture and sell distinct products with different production processes. The Company evaluates performance and allocates resources to its operating segments based upon numerous factors, including segment income or loss before income taxes. The accounting policies of the reportable segments are the same as those utilized in the preparation of the Company's consolidated financial statements. However, substantially all of the Company's selling expenses, general and administrative expenses, and non-operating expenses are not allocated to the Company's reportable operating segments and, accordingly, these expenses are not deducted in arriving at segment income or loss. In addition, reportable assets are comprised solely of property, plant, equipment, and inventories. Prior period amounts in the following table have been restated to correspond with the new business segment presentation. For each period presented, the accounting policies and procedures used to determine segment income have been consistently applied. For the years ended November 30, 1997, 1998 and 1999 and the six month periods ended May 31, 1999 and 2000, reportable segment information is as follows (in thousands):
Signal Power Year Ended November 30, 1997 Products Products Total ---------------------------- -------- -------- ------- Revenue from unaffiliated customers............ $45,298 $11,168 $56,466 Depreciation expense........................... 2,572 296 2,868 Segment income................................. 14,668 1,255 15,923 Segment assets................................. 21,409 4,487 25,896 Capital expenditures........................... 2,002 1,134 3,136 Signal Power Year Ended November 30, 1998 Products Products Total ---------------------------- -------- -------- ------- Revenue from unaffiliated customers............ $43,633 $16,235 $59,868 Depreciation expense........................... 2,716 499 3,215 Segment income................................. 13,167 3,509 16,676 Segment assets................................. 21,224 5,715 26,939 Capital expenditures........................... 1,723 1,186 2,909 Signal Power Year Ended November 30, 1999 Products Products Total ---------------------------- -------- -------- ------- Revenue from unaffiliated customers............ $64,866 $32,863 $97,729 Depreciation expense........................... 2,781 674 3,455 Segment income................................. 17,235 7,739 24,974 Segment assets................................. 33,670 8,752 42,422 Capital expenditures........................... 1,949 1,640 3,589
F-20 SPECTRUM CONTROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Signal Power Six Months Ended May 31, 1999 (unaudited) Products Products Total ----------------------------------------- -------- -------- ------- Revenue from unaffiliated customers........... $27,113 $12,754 $39,867 Depreciation expense.......................... 1,455 248 1,703 Segment income................................ 7,082 3,134 10,216 Segment assets................................ 33,497 7,229 40,726 Capital expenditures.......................... 1,316 887 2,203 Signal Power Six Months Ended May 31, 2000 (unaudited) Products Products Total ----------------------------------------- -------- -------- ------- Revenue from unaffiliated customers........... $43,498 $17,113 $60,611 Depreciation expense.......................... 1,851 327 2,178 Segment income................................ 10,271 4,337 14,608 Segment assets................................ 38,463 8,466 46,929 Capital expenditures.......................... 2,069 222 2,291
For the years ended November 30, 1997, 1998 and 1999, and the six month periods ended May 31, 1999 and 2000, reconciliation's of reportable segment information to the Company's consolidated financial statements are as follows (in thousands):
Six Months Ended Depreciation expense Year Ended November 30, May 31, -------------------- ----------------------------- ---------------- 1997 1998 1999 1999 2000 -------- -------- --------- ------- ------- (unaudited) Total depreciation expense for reportable segments.......... $ 2,868 $ 3,215 $ 3,455 $ 1,703 $ 2,178 Unallocated amounts: Depreciation expense related to selling, general and administrative activities.. 419 372 464 179 158 -------- -------- --------- ------- ------- Consolidated depreciation expense...................... $ 3,287 $ 3,587 $ 3,919 $ 1,882 $ 2,336 ======== ======== ========= ======= ======= Six Months Ended Year Ended November 30, May 31, Income before provision for ----------------------------- ---------------- income taxes 1997 1998 1999 1999 2000 --------------------------- -------- -------- --------- ------- ------- (unaudited) Total income for reportable segments..................... $ 15,923 $ 16,676 $ 24,974 $10,216 $14,608 Unallocated amounts: Selling, general and administrative expense..... (10,137) (10,214) (14,810) (6,039) (8,727) Interest expense............ (417) (228) (1,420) (388) (1,179) Other income................ 141 85 96 35 435 -------- -------- --------- ------- ------- Consolidated income before provision for income taxes... $ 5,510 $ 6,319 $ 8,840 $ 3,824 $ 5,137 ======== ======== ========= ======= =======
F-21 SPECTRUM CONTROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Six Months Ended Year Ended November 30, May 31, ----------------------- --------------- Assets 1997 1998 1999 1999 2000 ------ ------- ------- ------- ------- ------- (unaudited) Total assets for reportable segments... $25,896 $26,939 $42,422 $40,726 $46,929 Unallocated amounts: Cash and cash equivalents............ 196 739 538 73 641 Accounts receivable.................. 9,997 10,162 19,330 16,603 21,473 Goodwill............................. -- 2,547 14,225 14,167 14,785 Other assets......................... 3,967 3,752 6,039 3,747 3,930 ------- ------- ------- ------- ------- Total consolidated assets.............. $40,056 $44,139 $82,554 $75,316 $87,758 ======= ======= ======= ======= ======= Six Months Ended Year Ended November 30, May 31, ----------------------- --------------- Capital expenditures 1997 1998 1999 1999 2000 -------------------- ------- ------- ------- ------- ------- (unaudited) Total capital expenditures for reportable segments................... $ 3,136 $ 2,909 $ 3,589 $ 2,203 $ 2,291 Capital expenditures related to the Company's selling, general and administrative activities............. 144 384 1,383 223 232 ------- ------- ------- ------- ------- Total consolidated capital expenditures.......................... $ 3,280 $ 3,293 $ 4,972 $ 2,426 $ 2,523 ======= ======= ======= ======= =======
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 1997, 1998 and 1999 is as follows (in thousands):
United 1997 States Germany Total ---- ------- ------- ------- Revenue from unaffiliated customers.................... $48,148 $ 8,318 $56,466 Long-lived assets: Property, plant and equipment........................ 15,885 94 15,979 Intangible assets.................................... 499 -- 499 United 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 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
In 1998 and 1999, the Company's largest single customer, an original equipment manufacturer of telecommunication equipment, represented 11% and 18%, respectively, of total consolidated net sales. Sales to this major customer principally consisted of power products. In 1997, the Company's largest single customer represented 9%, of total consolidated net sales. Sales to this customer principally consisted of signal products. F-22 SPECTRUM CONTROL, INC. AND SUBSIDIARIES 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 $517,000 in 1997, $644,000 in 1998, and $1,140,000 in 1999. F-23 INSIDE BACK COVER GRAPHICS: In the upper right corner of the page appears the Spectrum logo under which appears the following text: As a control products and systems company, we offer our customers a broad line of signal and power products. In addition, our recently formed Advanced Systems Group designs and manufactures complex power management systems. In the upper left corner and middle of the page appear examples of Spectrum's signal products and the following text: SIGNAL PRODUCTS GROUP EMI Filters & Filter Solutions Wireless Compenents In the bottom left corner of the page appear examples of Spectrum's advanced systems products and the following text: ADVANCED SYSTEMS GROUP AC/DC Power Distribution Units & Remote Management Systems In the bottom right corner of the page appear examples of Spectrum's power products and the following text: POWER PRODUCTS GROUP Custom Assemblies Power Entry Devices Single Line Filters [LOGO OF SPECTRUM CONTROL, INC.] SPECTRUM CONTROL, INC.