SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ......... to ..........
Commission File Number 0-8796
SPECTRUM CONTROL, INC.
(a Pennsylvania Corporation)
(I.R.S. Employer Identification No. 25-1196447)
6000 West Ridge Road, Erie, Pennsylvania 16506
Telephone 814-835-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock - No Par Value National Association of
Securities Dealers'
National Market
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for the past
90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ X ].
At January 31, 1997, the aggregate market value of voting Common
Stock held by non-affiliates of the registrant based on a closing
price of $3.75 was $36,526,350. As of January 31, 1997, the
registrant had outstanding 10,774,233 shares of Common Stock, no
par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the annual
meeting of shareholders to be held April 7, 1997 are incorporated
by reference into Part III of this Form 10-K.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Spectrum Control, Inc. was incorporated in Pennsylvania in 1968.
Spectrum Control, Inc. and its consolidated subsidiaries (the
"Company") design, manufacture and market a broad line of
electromagnetic compatibility (EMC) products designed to protect
electronic equipment against interference from random
electromagnetic waves. The Company provides an integrated
approach to EMC problem solving by offering customers consulting,
diagnostic testing and manufacturing services. These services
include testing for EMC problems (at the Company's own test
facilities or on location), analyzing test results, proposing
design solutions, producing the required components and supplying
these components on a continuing basis. A majority of the
Company's products are custom designed, in many instances at the
recommendation of Company engineers based upon their analysis of
test results. The Company sells its EMC testing services and
components to a broad base of customers for use in communication
systems, data processing, telecommunications, process control and
other equipment. On occasion, the Company also acts as an
engineering consultant with respect to EMC problems where no
purchase of the Company's product is contemplated. Less than 1%
of the Company's revenue is derived from pure consulting.
However, a number of the Company's manufactured product
applications result from consulting activity.
The need for EMC products results from the increasing dependency
of our society on electrical equipment of various kinds, ranging
from radios and televisions to sophisticated computers and
communication systems. This equipment both emits, and is
sensitive to, random electromagnetic waves over a broad spectrum
of wave lengths, which can interfere with and degrade the
performance of other electric equipment. The Company's 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 to EMC products, the Company recently expanded its
product offerings to include certain ceramic resonators and band
pass filters. Sales of these microwave products, however, were
not significant during the fiscal year ended November 30, 1996.
Spectrum Control Technology, Inc., a wholly-owned subsidiary,
maintains a facility in New Orleans, Louisiana, with advanced
manufacturing equipment designed for the production of ceramic
capacitors. Currently, this subsidiary primarily manufactures
ceramic discoidal and tubular capacitors used in the Company's
EMC filter products.
Spectrum Control, GmbH, a wholly-owned subsidiary of the Company
located in Schwabach, Germany (the "Subsidiary"), acts as a
distributor for the Company's electronic filter products in the
European market.
<PAGE>
PRODUCTS
Control of unwanted electromagnetic waves is accomplished through
various combinations of electromagnetic interference (EMI)
suppression devices. The EMI suppression devices currently
produced by the Company include those that are utilized as
circuit components and whose function is to permit the desired
frequencies to pass through a circuit while rejecting or
preventing the unwanted signals. The majority of these products
are composed of either reactive (reflecting energy) or loss
(dissipating energy) elements or at times, combinations of the
two. These products can be utilized as individual components or
combined in various configurations to provide the amount of EMI
control needed.
The Company also manufactures and sells passive electromagnetic
components including ceramic discoidal capacitors and tubular
capacitors (Spectrum Control Technology, Inc.).
The Company's products are sold to manufacturers of a wide
variety of electronic equipment, including telephone systems,
mobile radios and CATV systems; navigational aids and radio
communication systems used in military and commercial aircraft;
communications and telemetry systems used in aerospace programs;
computers and computer peripherals and various types of
electronic testing equipment.
Approximately 36% of the Company's total revenue during fiscal
year 1996 was derived from sales of its components for use in
telecommunications. Most of these components are custom designed
not only to conform to the specifications and requirements of the
particular purchaser, but also to meet the performance and
quality standards set by the agency or other governmental body
whose regulations are applicable to the specific equipment or
usage involved. A significant reduction in orders from such
customers would have a materially adverse effect on the Company's
business.
<PAGE>
<TABLE>
BUSINESS SEGMENTS
The Company currently operates exclusively in a single industry as
manufacturer of electronic components and a consultant in the field of
electromagnetic compatibility.
The Company has operations in the United States and Germany. Transfers
between geographic areas are recorded at amounts reflecting competitive
profit margins for resale activities. The geographic distribution of
sales, operating profit and identifiable assets for 1996, 1995, and 1994 is
as follows (in thousands):
<CAPTION>
United
1996 States Germany Eliminations Total
<S> <C> <C> <C> <C>
Revenue from unaffiliated
customers $47,541 $9,786 $ - $57,327
Transfers between
geographic areas 7,726 - 7,726 -
Total revenues $55,267 $9,786 $ 7,726 $57,327
Operating income $ 4,224 $1,246 $ - $ 5,470
Identifiable assets at
November 30, 1996 $35,937 $4,701 $ 425 $40,213
<CAPTION>
United
1995 States Germany Eliminations Total
<S> <C> <C> <C> <C>
Revenue from unaffiliated
customers $41,251 $8,046 $ - $49,297
Transfers between
geographic areas 5,347 - 5,347 -
Total revenues $46,598 $8,046 $ 5,347 $49,297
Operating income $ 3,854 $1,191 $ - $ 5,045
Identifiable assets at
November 30, 1995 $34,052 $5,746 $ 300 $39,498
<CAPTION>
United
1994 States Germany Eliminations Total
<S> <C> <C> <C> <C>
Revenue from unaffiliated
customers $37,970 $5,689 $ - $43,659
Transfers between
geographic areas 3,809 - 3,809 -
Total revenues $41,779 $5,689 $ 3,809 $43,659
Operating income $ 1,976 $1,320 $ - $ 3,296
Identifiable assets
at November 30, 1994 $33,857 $4,488 $ 250 $38,095
<FN>
In 1996, 1995, and 1994, the Company had export sales of $15,275,000,
$13,295,000, and $9,141,000 respectively. In each of these years, export
sales represented approximately 26%, 27%, and 21%, respectively, of the
Company's consolidated net sales. A substantial majority of the Company's
export sales are made to European customers.
</FN>
</TABLE>
<PAGE>
PRODUCTION
The Company's wholly-owned subsidiary, Spectrum Control
Technology, Inc. in New Orleans, Louisiana, designs and
manufactures ceramic capacitors. These elements are utilized in
the manufacture and assembly of various electronic filter
products at the Company's two Filter Products Group facilities,
both of which are located in Fairview, Pennsylvania. Although
the Company produces a standardized line of electronic filter
products for sale from inventory and to customer order, most
orders require relatively short production runs of custom
designed components.
The Company purchases brass bushings, castings, miniature metal
stampings, as well as other hardware used in the assembly and
production of its components. These items are available from
numerous sources. The principal raw materials used by the
Company in the manufacture of ceramic capacitors are silver,
palladium, platinum and barium titanate ceramic. Precious metals
are available from many sources; however, their prices may be
subject to significant fluctuations.
Historically, the Company has not experienced difficulty in
obtaining any of the component parts or raw materials necessary
for its manufacturing operations.
SALES AND DISTRIBUTION
The Company markets its products through direct factory sales,
its own field sales engineers, as well as sales representatives,
agents and distributors. The Company's field sales engineers are
able to match the Company's product offerings to customer
requirements through specifications provided by customer buyers
and design engineers. In so doing, the field sales engineer
serves a dual role of designing solutions to electromagnetic
compatibility problems, as well as conducting normal field sales
activities.
During fiscal year 1996, the Company sold its products to
approximately 1,200 accounts. Sales of components to the
Company's top ten customers represented 49% ($28.0 million) of
total consolidated net sales in 1996. The Company's largest
single customer, an original equipment manufacturer of
telecommunications equipment, represented 12% in 1996, 14% in
1995 and 12% in 1994 of total consolidated net sales. The
Company's second largest single customer represented 8% of total
consolidated net sales in 1996 and 9% in 1995 and 1994. All of
the Company's major customers are unaffiliated with Spectrum
Control, Inc. and its subsidiaries.
The Company maintains in inventory certain standard component
products. Domestic distribution is done through various national
and regional distributors. International distribution is done
through Spectrum Control GmbH.
<PAGE>
Shipments are made by common carrier. Since most components are
either small or miniaturized and light weight, shipping charges
do not affect the Company's ability to compete for business
domestically or abroad.
No material portion of the Company's business is subject to
renegotiation of profits or termination of contracts or
sub-contracts at the election of the U.S. Government.
BACKLOG
The Company's backlog, which consists of purchase orders by
customers, totalled approximately $17.3 million at November 30,
1996 and $18.7 million at November 30, 1995. It is anticipated
that approximately 90% of the Company's backlog as of November
30, 1996 will be shipped within one year. Annual requirement
contracts are taken into backlog only to the extent that orders
are actually released thereunder. Although the terms and
conditions contained in the Company's quotation forms place
certain restrictions on a customer's right to cancel, purchase
orders generally provide for cancellation. In practice, the
Company negotiates each cancellation and schedule change based on
the cost it has incurred prior to such occurrence. During the
next two years, the Company expects to significantly reduce its
average lead time (the length of time from the receipt of a
customer order to shipment of finished product to the customer).
As a result, the Company's backlog may decrease in the future due
to reduced lead times.
EMPLOYEES
At November 30, 1996, the Company employed 693 persons, including
officers. The Company has never suffered a work stoppage and
regards its employee relations as good. The employees are not
covered by collective bargaining agreements.
PATENTS
The Company is the owner of United States Patents for a
solderless mounting filter connection and filtered-shielded
D-Subminiature connectors. While these patents are believed to
have commercial value, they are not material to the Company's
business.
The Company holds twenty (20) United States Patents relating to
polymer multilayer technology. The Company has entered into
several agreements regarding licensing the technology covered by
these patents. However, it is not known what commercial value
these patents and related licenses may have.
None of the Company's issued patents have been legally
challenged.
<PAGE>
GOVERNMENTAL REGULATIONS
In order to qualify as an approved supplier of EMI/EMC products
for use in equipment purchased by the military services or
aerospace programs, the Company is required to meet the
applicable portions of the quality specifications and performance
standards designed by the Air Force, the Army, the Navy, NASA,
NSA and the AEC. The Company's products must also conform to the
specifications of the Defense Electronic Supply Center for
replacement parts supplied to the military. Components produced
by the Company for use in commercial and industrial equipment
must conform to the specifications of certain other agencies
concerned with EMC problems, including the Bureau of Radiological
Health, the Department of Transportation and the Department of
Defense, in addition to the FCC. To the extent required, the
Company meets or exceeds all of these specifications.
The Company is subject to numerous federal, state and local
regulations relating to air and water quality, the disposal of
hazardous waste materials, safety, and health. Compliance with
applicable environmental regulations has not significantly
changed the Company's competitive position, capital spending, or
earnings in the past and the Company does not presently
anticipate that compliance with such regulations will change its
competitive position, capital spending, or earnings for the
foreseeable future. The Company continuously monitors regulatory
matters and believes that it is currently in compliance in all
material respects with applicable environmental laws and
regulations.
COMPETITION
The Company is subject to competition in all of its marketing
areas. There are presently over twenty (20) other firms engaged
in producing electromagnetic compatibility components, a number
of which have substantially larger financial resources and
facilities. It is difficult to determine the annual sales volume
of competing firms, because a number of such competitors are also
engaged in other lines of business or are closely held and,
accordingly, authoritative statistics are not available.
Among the Company's principal competitors are: AMP, AVX,
Amphenol, Corcom and Tusonix. The Company believes that it is
competitive with these companies in the areas of quality,
delivery, price and technological innovation; however, to the
extent it produces a broader line of EMC products and provides
customers with more complete testing facilities, the Company
believes that it may enjoy a competitive advantage.
Obsolescence has not been a material factor in the Company's
business in the past; however, in common with other manufacturers
of sophisticated electrical products, the possibility exists that
technological developments by competitors may have an adverse
effect on the Company's business.
<PAGE>
RESEARCH AND DEVELOPMENT
In recent years, the Company's research and development efforts
have focused on expanding the Company's materials technology,
improving existing product offerings, developing product offering
variations, and designing specialized production equipment to
improve manufacturing efficiencies. Research and development
expense amounted to $821,000 in 1996, $771,000 in 1995, and
$237,000 in 1994.
OTHER MATTERS
The business of the Company is not subject to any significant
seasonal fluctuations.
The Company does not believe that it has any special practices or
special conditions affecting working capital items that are
significant for an understanding of its business.
<PAGE>
<TABLE>
ITEM 2. PROPERTIES
The Company's principal manufacturing and office facilities as of November
30, 1996 are as follows:
<CAPTION>
PRINCIPAL
BALANCE
OUTSTANDING
APPROXIMATE AT 11/30/96
SQUARE FEET ON RELATED
LOCATION FUNCTION OF FLOOR AREA OWNERSHIP MORTGAGE
<S> <C> <C> <C> <C>
8061 Avonia Road Manufacturing, 36,000 Owned $ 382,000
Fairview, PA EMI Testing
6000 West Ridge Road Manufacturing, 25,000 Owned $ 24,000
Fairview, PA Corporate Offices
4100 Michoud Blvd. Manufacturing 100,000 Owned $2,250,000
New Orleans, LA
</TABLE>
(1)In addition to the above mortgages, the Company's properties
are encumbered in connection with the collateralization of
certain short-term and long-term bank indebtedness.
(2)The Company's office and manufacturing space is adequate for
its existing requirements and its projected business needs.
(3) In addition to the facilities described above, the Company
leases certain sales office space.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any litigation of a
material nature.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq Stock Market
under the symbol SPEC. The high and low sales prices for the
Common Stock for each quarter during fiscal years 1996 and 1995
are set forth below.
High Low
Fiscal 1996
First quarter $3.75 $2.88
Second quarter 6.25 3.00
Third quarter 6.13 3.50
Fourth quarter 4.63 3.00
High Low
Fiscal 1995
First quarter $2.38 $1.63
Second quarter 3.00 2.00
Third quarter 4.25 2.25
Fourth quarter 4.50 3.13
At January 31, 1997, the Company had 10,774,233 shares of Common
Stock outstanding, which were held by approximately 3,000
registered shareholders. The Company has not paid cash dividends
on its Common Stock since 1988. While subject to periodic
review, the current policy of the Board of Directors is to retain
all earnings to provide funds for the continued growth of the
Company.
<PAGE>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
<CAPTION>
Years Ended November 30
(Dollar Amounts in Thousands
Except Per Share Data)
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Operating Data
Net sales $57,237 $49,297 $43,669 $41,336 $31,590
Income from continuing
operations 3,418 2,984 2,055 3,898 1,992
Loss from discontinued
operations (1) - - - (2,916) (560)
Extraordinary item (2) - - - 4,012 -
Accounting change (3) - - 1,845 - -
Net income 3,418 2,984 3,900 4,994 1,432
Earnings (loss) per
common share:
Continuing operations 0.32 0.28 0.19 0.38 0.20
Discontinued operations - - - (0.28) (0.05)
Extraordinary item - - - 0.39 -
Accounting change - - 0.18 - -
Net income 0.32 0.28 0.37 0.49 0.15
Dividends per share - - - - -
Financial Position
Total assets $40,213 $39,498 $38,095 $38,192 $37,034
Long-term debt 4,072 6,569 8,275 9,701 16,537
Stockholders' equity 25,379 21,781 18,583 14,165 9,132
</TABLE>
(1) In 1993, the Company adopted a formal plan to discontinue
its hybrid integrated circuit operations ("HIC") and sell the
related HIC assets. A loss of $2,433,000 on the disposal of the
discontinued HIC operations was provided for and charged against
income in 1993. HIC operating results have been segregated and
reported separately from continuing operations for each of the
years included above.
(2) In 1993, the Company recognized a gain on extinguishment of
debt of $4,012,000, net of applicable income taxes of $446,000.
(3) In 1994, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". The
cumulative effect, through November 30, 1993, of this change in
accounting amounted to $1,845,000 or $0.18 per share. See Note 2
of the Notes to Consolidated Financial Statements.
<PAGE>
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Consolidated 1996 net sales increased by $8.0 million or 16%
from 1995. In 1995, consolidated net sales increased by $5.6
million or 13% from 1994. In each year, the increase in sales
primarily reflects additional shipment volume of electromagnetic
interference ( EMI ) filtered connectors and EMI filtered arrays
used by customers in the telecommunication industry. Overall,
average selling prices declined slightly in 1996 and 1995 as a
result of competitive and market pressures.
Gross margin was $18.1 million or 32% of sales in 1996,
compared to $16.1 million or 33% of sales in 1995, and $13.0
million or 30% of sales in 1994. In 1994, gross margin was
negatively impacted by increased production costs at the
Company s ceramic capacitor manufacturing operations in New
Orleans, Louisiana. These ceramic capacitor production problems
were substantially corrected late in 1994. Along with the
selling price pressures indicated above, 1996 and 1995 gross
margins were negatively affected by changes in sales mix. These
negative impacts were offset by economies of scale realized with
additional shipment volume.
Selling, general and administrative expense, as a percentage
of sales, was stable during 1996, 1995, and 1994 at 22% of sales.
Because of greater sales volume, selling expense increased
throughout the period, amounting to $6.6 million in 1996, $6.2
million in 1995, and $5.4 million in 1994. In 1994, the Company
delayed or postponed certain discretionary expenditures. This
reduction in general and administrative expense was not
sustained. Accordingly, general and administrative expense
increased by approximately $500,000 in 1995. In 1996, general
and administrative expense amounted to $6.0 million, an increase
of $1.2 million from 1995. This increase primarily reflects
additional personnel costs, enhancements in the Company s
information system, and expenses associated with the Company s
Rapid Response program. Management believes that the Rapid
Response program, which will continue to be implemented
throughout 1997, will significantly reduce manufacturing lead
times, decrease inventories, and provide greater responsiveness
to customers.
Interest expense decreased by $155,000 in 1996, $95,000 in
1995, and $154,000 in 1994, with interest expense amounting to
$753,000 in 1996, $908,000 in 1995, and $1.0 million in 1994.
The decrease in interest expense primarily reflects reduced bank
indebtedness. The Company repaid indebtedness of $2.8 million in
1996, $2.9 million in 1995, and $3.0 million in 1994. The
Company s average short-term interest rates were 7.5% in 1996,
8.5% in 1995, and 7.5% in 1994.
<PAGE>
The Company s German subsidiary transacts business with
certain customers and vendors in currencies other than the
Deutsche Mark. As a result, the Company recognizes gains and
losses on foreign currency transactions. The Company incurred
net gains of $38,000 in 1996, and net losses of $45,000 in 1995
and $80,000 in 1994 on these foreign currency transactions.
In 1996, as part of management s ongoing efforts to reduce
operating costs, the Company sold certain land and building in
Schwabach, Germany at a net selling price of $1.7 million. A
loss of $27,000, representing the excess of the cost basis of the
land and building over the net selling price, was realized and
recorded as other expense in 1996. The land and building had
been utilized as the Company s European sales distribution office
and warehouse. As part of the sale agreement, the Company will
leaseback a portion of the property to continue its foreign sales
distribution function.
The Company s effective income tax rate was approximately
28% in 1996, 27% in 1995, and 23% in 1994. Differences in the
effective tax rate primarily reflect changes in the deferred tax
asset valuation allowance relating to certain foreign net
operating loss carryforwards.
Effective December 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, Accounting for Income
Taxes ( SFAS No. 109 ). Previously, the Company had recorded
income taxes in accordance with Statement of Financial Accounting
Standards No. 96. The changes in accounting for income taxes
required by SFAS No. 109 include, among other provisions, changes
in the criteria for recognizing deferred tax assets.
The cumulative effect, through November 30, 1993, of
adopting the new method of accounting for income taxes amounted
to approximately $1.8 million or $0.18 per share. As permitted
by SFAS No. 109, prior period financial statements were not
restated. Accordingly, the cumulative effect of this change in
accounting for income taxes has been included in net income in
the Company s Consolidated Statement of Income for the year ended
November 30, 1994.
At November 30, 1996, the Company had recorded net deferred
tax assets of $76,000, primarily related to U.S. tax credit
carryforwards and certain German net operating loss
carryforwards. Based upon the earnings history of the Company s
U.S. and German operations, management has determined that it is
more likely than not that these deferred tax assets will be
realized during the carryforward period to offset future taxable
income from ordinary and recurring operations.
<PAGE>
The Company s results of operations may be affected in the
future by a variety of factors including: competitive pricing
pressures, new product offerings by the Company and its
competitors, new technologies, product cost changes, and product
mix. In 1996, approximately 36% of the Company s sales were to
customers in the telecommunication industry. Accordingly, any
significant change in the telecommunication industry s activity
level would have a direct impact on the Company s performance.
Liquidity, Capital Resources and Financial Condition
The Company maintains a $6.0 million revolving line of
credit with PNC Bank of Erie, Pennsylvania (the Bank ). Under
the terms of the line of credit agreement, borrowings and
required payments under the revolving credit line are based upon
an asset formula involving accounts receivable and inventories.
At November 30, 1996 and 1995, the Company had borrowed $2.3
million and $3.6 million, respectively, under the line of credit
agreement. The revolving credit line is collateralized by
substantially all of the Company s tangible and intangible
property, with current interest rates on borrowings below the
Bank s prevailing prime rate. At November 30, 1996, the Company
had additional borrowing availability of approximately $3.7
million under the asset formula.
The Company s wholly-owned foreign subsidiary maintains
unsecured Deutsche Mark lines of credit with German financial
institutions aggregating $1.3 million (2.0 million DM) at
November 30, 1996, and $1.1 million (1.5 million DM) at November
30, 1995. The Company had borrowed $978,000 (1.5 million DM) at
November 30, 1996, and $682,000 (968,000 DM) at November 30,
1995, against these lines of credit. Borrowings under the lines
of credit currently bear interest at rates below the prevailing
prime rate and are payable upon demand.
The Company s working capital continued to increase in 1996.
At November 30, 1996, the Company had net working capital of
$12.5 million, compared to $10.0 million at November 30, 1995.
The Company s current ratio also improved in 1996, with current
assets at 2.20 times current liabilities at November 30, 1996 and
1.89 at November 30, 1995. Current assets increased in 1996,
reflected principally in higher accounts receivable and
inventories attributable to increased sales. Although accounts
receivable and inventories increased, turnover rates improved.
Accounts receivable turns were 5.6 in 1996, compared to 5.3 in
1995. Inventory turns improved to 3.3 in 1996 from 2.9 in 1995,
primarily reflecting the commencement of the Rapid Response
program. Current financial resources, including working capital
and existing lines of credit, and anticipated funds from
operations are expected to be sufficient to meet cash
requirements throughout 1997, including scheduled long-term debt
<PAGE>
repayment and planned capital expenditures. The Company's
current projection of 1997 cash requirements, however, may be
affected in the future by numerous factors including changes in
sales volume, operating cost fluctuations and unplanned capital
equipment replacement.
The Company s cash expenditures for property, plant and
equipment amounted to $3.8 million in 1996, $3.1 million in 1995,
and $1.7 million in 1994. These capital expenditures primarily
related to manufacturing capacity expansion and improvements. At
November 30, 1996, the Company had not entered into any material
commitments for capital expenditures.
Income taxes paid during the fiscal years ended November 30,
1996, 1995, and 1994 amounted to $1.2 million, $218,000, and
$336,000, respectively. Management expects cash outlays for
income taxes to be less than income tax expense for the next
three fiscal years.
As a result of increased accounts receivable and
inventories, net cash provided by operations decreased in 1996.
Net cash provided by operations amounted to $5.0 million in 1996,
a decrease of $1.0 million from 1995. In addition to generating
$5.0 million of net cash from operations, the Company realized
cash proceeds of $1.7 million in 1996 on the sale of certain land
and building in Schwabach, Germany. This positive cash flow was
utilized for capital additions of $3.8 million and repayment of
$2.8 million of bank indebtedness.
In 1995, net cash provided by operations amounted to $6.0
million. In addition to capital expenditures of $3.1 million,
this cash flow was utilized to repay $2.9 million in
indebtedness.
In 1994, net cash provided by operations amounted to $3.1
million. Other sources of cash during 1994 included $1.1 million
from the sale of certain property, plant and equipment and
$351,000 from the issuance of Common Stock upon the exercise of
employee stock options. In addition to capital expenditures of
$1.7 million, this positive cash flow was utilized to repay $3.0
million of indebtedness.
As indicated above, the Company continued to reduce its bank
indebtedness in 1996. The Company s total borrowed funds were
$9.7 million at November 30, 1996, $12.7 million at November 30,
1995, and $15.4 million at November 30, 1994. The Company
increased total stockholders equity by $3.6 million in 1996,
primarily through earnings. Accordingly, the Company s debt to
equity ratio continued to improve in 1996. Total liabilities to
net worth were 0.58 at November 30, 1996, 0.81 at November 30,
1995, and 1.05 at November 30, 1994.
<PAGE>
Environmental Matters
The Company is subject to various laws and governmental
regulations concerning environmental matters and employee health
and safety. U.S. federal environmental legislation having
particular impact on the Company includes the Toxic Substances
Control Act; the Resource Conservation and Recovery Act; the
Clean Water Act; and the Safe Drinking Water Act. The Company is
also subject to the Occupational Safety and Health Administration
( OSHA ) concerning employee safety and health matters. The
United States Environmental Protection Agency ( EPA ), OSHA, and
other federal agencies have the authority to promulgate
regulations that have an impact on the Company operations.
In addition to these federal activities, various states have
been delegated certain authority under the aforementioned federal
statutes. Many state and local governments have adopted
environmental and employee safety and health laws and
regulations, some of which are similar to federal requirements.
State and federal authorities may seek fines and penalties for
violation of these laws and regulations. As part of its
continuing environmental program, the Company has been able to
comply with such environmental regulations without any materially
adverse effect on its business. The Company is not currently
involved in any legal proceedings involving environmental
matters.
Impact of Recently Issued Accounting Standards
The Company believes that recently issued accounting
standards, including Statement of Financial Accounting Standards
No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities , will not have a
material impact on the Company s financial position or results of
operations.
Impact of Inflation
In recent years, inflation has not had a significant impact
on the Company s operations. However, the Company continuously
monitors operating price increases, particularly in connection
with the supply of precious metals used in the Company s
manufacturing of ceramic capacitors. To the extent permitted by
competition, the Company passes increased costs on to its
customers by increasing sales price over time. Sales increases
reported during the last three years in the accompanying
financial statements, however, have substantially arisen from
increased sales volume, not increases in selling prices.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of Spectrum
Control, Inc. and subsidiaries are included herein:
Page
Number
Report of Independent Auditors
Consolidated Balance Sheets as of
November 30, 1996 and 1995
Consolidated Statements of Income for
the years ended November 30, 1996,
1995, and 1994
Consolidated Statements of Stockholders'
Equity for the years ended
November 30, 1996, 1995, and 1994
Consolidated Statements of Cash Flows
for the years ended November 30,
1996, 1995, and 1994
Notes to Consolidated Financial Statements
<PAGE>
Report of Independent Auditors
To the Board of Directors and Shareholders
Spectrum Control, Inc.
We have audited the accompanying consolidated balance sheets of
Spectrum Control, Inc. and subsidiaries as of November 30, 1996
and 1995, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years
in the period ended November 30, 1996. Our audits also included
the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Spectrum Control, Inc. and
subsidiaries as of November 30, 1996 and 1995, and the
consolidated results of their operations and their cash flows for
each of the three years in the period ended November 30, 1996, in
conformity with generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information
set forth therein.
As discussed in Note 2 to the consolidated financial statements,
the Company changed its method of accounting for income taxes in
the year ended November 30, 1994.
ERNST & YOUNG LLP
Erie, Pennsylvania
January 9, 1997
<PAGE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1996 AND 1995
(Dollar Amounts in Thousands)
<CAPTION>
1996 1995
<S> <C> <C>
ASSETS
Current assets
Cash $ 413 $ 202
Accounts receivable, less allowances of $378
in 1996 and $306 in 1995 10,202 9,365
Inventories (Note 3) 12,077 11,322
Deferred income taxes (Note 9) 96 39
Prepaid expenses and other current assets 207 187
Total current assets 22,995 21,115
Property, plant and equipment, net (Note 4) 16,017 16,752
Other assets (Note 5) 1,201 1,631
Total assets $40,213 $39,498
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt (Note 6) $ 3,278 $ 4,252
Accounts payable 3,038 2,646
Accrued salaries and wages 1,308 1,725
Accrued interest 48 51
Accrued federal and state income taxes 72 224
Accrued other expenses 325 405
Current portion of long-term debt (Note 7) 2,392 1,845
Total current liabilities 10,461 11,148
Long-term debt (Note 7) 4,072 6,569
Deferred income taxes (Note 9) 301 -
Stockholders' equity
Common stock, no par value, authorized 25,000,000
shares, issued and outstanding 10,774,233 shares
in 1996 and 10,635,399 in 1995. 13,755 13,493
Retained earnings 11,890 8,472
Foreign currency translation adjustment (266) (184)
Total stockholders' equity 25,379 21,781
Total liabilities and stockholders' equity $40,213 $39,498
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED NOVEMBER 30, 1996, 1995 AND 1994
(Dollar Amounts in Thousands Except Per Share Data)
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Net sales $57,327 $49,297 $43,659
Cost of products sold 39,251 33,236 30,629
Selling, general and administrative expense 12,606 11,016 9,734
51,857 44,252 40,363
Income from operations 5,470 5,045 3,296
Other income(expense)
Interest expense (753) (908) (1,003)
Other income and expense, net (Note 8) 20 (42) 364
(733) (950) (639)
Income before provision for income taxes 4,737 4,095 2,657
Provision for income taxes (Note 9) 1,319 1,111 602
Income before cumulative effect of a
change in accounting principle 3,418 2,984 2,055
Cumulative effect on prior years of
changing the method of accounting for
income taxes (Note 2) -- -- 1,845
Net income $ 3,418 $ 2,984 $ 3,900
Earnings per common share
Income before cumulative effect of
accounting change $0.32 $0.28 $0.19
Cumulative effect of accounting change -- -- 0.18
Net income $0.32 $0.28 $0.37
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED NOVEMBER 30, 1996, 1995 AND 1994
(Dollar Amounts in Thousands)
<CAPTION>
FOREIGN TOTAL
CURRENCY STOCK-
COMMON RETAINED TRANSLATION HOLDERS'
STOCK EARNINGS ADJUSTMENT EQUITY
<S> <C> <C> <C> <C>
Balance - November 30, 1993 $12,881 $ 1,588 $(304) $14,165
Net income - 3,900 - 3,900
Issuance of 245,068 shares of
common stock 370 - - 370
Purchase and retirement of
6,482 shares of common stock (19) - - (19)
Tax benefits from exercise of
stock options 118 - - 118
Foreign currency translation
adjustment - - 49 49
Balance - November 30, 1994 13,350 5,488 (255) 18,583
Net income - 2,984 - 2,984
Issuance of 89,868 shares of
common stock 101 - - 101
Purchase and retirement of
3,009 shares of common stock (7) - - (7)
Tax benefits from exercise of
stock options 49 - - 49
Foreign currency translation
adjustment - - 71 71
Balance - November 30, 1995 13,493 8,472 (184) 21,781
Net income - 3,418 - 3,418
Issuance of 138,834 shares of
common stock 154 - - 154
Tax benefits from exercise of
stock options 108 - - 108
Foreign currency translation
adjustment - - (82) (82)
Balance - November 30, 1996 $13,755 $11,890 $(266) $25,379
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 1996, 1995 AND 1994
(Dollar Amounts in Thousands)
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,418 $ 2,984 $ 3,900
Adjustments to reconcile net income
to net cash provided by operating
activities
Cumulative effect of accounting change -- - (1,845)
Depreciation and amortization 3,319 2,848 2,603
Deferred income taxes 402 676 519
Loss(gain) on sale of property,
plant and equipment 18 (3) (125)
Changes in assets and liabilities:
Accounts receivable (969) (1,507) 404
Inventories (833) 115 (359)
Prepaid expenses and other assets (121) (55) (55)
Accounts payable and accrued expenses (236) 970 (1,915)
Net cash provided by operating
activities 4,998 6,028 3,127
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, plant
and equipment 1,665 25 1,077
Purchase of property, plant and
equipment (3,824) (3,057) (1,704)
Net cash used in investing
activities (2,159) (3,032) (627)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds(repayment) of short-term debt (912) 115 1,653
Repayment of long-term debt (1,845) (3,062) (4,654)
Net proceeds from issuance of
common stock 154 94 351
Net cash used in financing
activities (2,603) (2,853) (2,650)
Effect of exchange rate changes on cash (25) (43) (41)
Net increase(decrease) in cash 211 100 (191)
Cash, beginning of year 202 102 293
Cash, end of year $ 413 $ 202 $ 102
Cash paid during the year for:
Interest $ 756 $ 990 $ 998
Income taxes 1,197 218 336
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
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"), all
of which are wholly-owned, except for Spectrum Polytronics, Inc.
which is 96% owned. 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.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, accounts
payable, and accrued liabilities approximate fair value due to
the short-term maturities of these assets and liabilities. The
interest rates on substantially all of the Company's bank
borrowings are adjusted regularly to reflect current market
rates. Accordingly, the carrying amounts of the Company's
short-term and long-term borrowings also approximate fair value.
The Company utilizes letters of credit to collateralize certain
long-term borrowings. The letters of credit reflect fair value
as a condition of their underlying purpose and are subject to
fees competitively determined in the marketplace.
Inventories
Inventories are valued at the lower of cost or market, with cost
for raw materials, work-in-process and finished goods at standard
cost, which approximates the first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation
is computed over the estimated useful lives of the assets using
the straight line method. Expenditures for maintenance and
repairs are charged against earnings in the year incurred; major
replacements, renewals and betterments are capitalized and
depreciated over their estimated useful lives. The cost and
accumulated depreciation of assets sold or retired are removed
from the respective accounts and any gain or loss is reflected in
earnings.
Intangibles and Other Assets
Patents and patent rights are amortized to expense on a straight
line basis over periods not exceeding 17 years. Technical
documentation, consisting primarily of acquired engineering
drawings and manufacturing documentation, is stated at cost and
amortized on a straight line basis over five years. The carrying
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
Debt issuance costs are amortized to expense on a straight line
basis over the term of the related indebtedness.
Income Taxes
Effective December 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Accordingly, 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.
General business credits are accounted for by the flow through
method.
Foreign Currency Translation
The assets and liabilities of the foreign subsidiary are
translated into U.S. dollars at current exchange rates. Revenue
and expense accounts of these operations are translated at
average exchange rates prevailing during the year. These
translation adjustments are accumulated in a separate component
of stockholders' equity. Foreign currency transaction gains and
losses are included in determining net income for the year in
which the exchange rate changes.
Revenue Recognition
Product sales are recorded at the time of shipment. Service
revenues are recorded when the related services are performed.
Research and Development
Research and development costs are expensed as incurred. For
financial statement presentation purposes, these costs are
included in selling, general and administrative expense.
Research and development expense amounted to $821,000 in 1996,
$771,000 in 1995, and $237,000 in 1994.
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Earnings Per Common Share
Earnings per common share is computed based on the weighted
average number of shares of common stock outstanding during the
year. The weighted average number of shares was 10,731,000 in
1996, 10,585,000 in 1995, and 10,449,000 in 1994. Although the
Company has issued potentially dilutive common stock equivalents
in the form of stock options and warrants, the dilutive effect of
these securities in the aggregate is less than three percent of
earnings per common share.
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial
statements, the disclosure of contingent assets and liabilities,
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
2. ACCOUNTING CHANGE
Effective December 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS No. 109"). Previously, the Company had recorded
income taxes in accordance with Statement of Financial Accounting
Standards No. 96. The changes in accounting for income taxes
required by SFAS No. 109 include, among other provisions, changes
in the criteria for recognizing deferred tax assets.
The cumulative effect, through November 30, 1993, of adopting the
new method of accounting for income taxes amounted to $1,845,000
or $0.18 per share. As permitted by SFAS No. 109, prior period
financial statements have not been restated. Accordingly, the
cumulative effect of this change in accounting for income taxes
has been included in net income in the Company's Consolidated
Statement of Income for the year ended November 30, 1994.
3. INVENTORIES
Inventories by major classification are as follows:
11/30/96 11/30/95
(in thousands)
Finished goods $ 2,631 $ 1,876
Work-in-process 5,549 6,075
Raw materials 3,897 3,371
$12,077 $11,322
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
11/30/96 11/30/95
(in thousands)
Land and improvements $ 1,161 $ 1,578
Buildings and improvements 8,669 10,719
Machinery and equipment 28,774 25,186
Construction in progress 144 166
38,748 37,649
Less accumulated depreciation 22,731 20,897
$16,017 $16,752
5. OTHER ASSETS
Other assets consist of the following:
11/30/96 11/30/95
(in thousands)
Patents and patent rights $ 549 $ 526
Technical documentation 2,260 2,260
Debt issuance costs 384 384
3,193 3,170
Less accumulated amortization 2,478 1,969
715 1,201
Deferred income taxes 281 332
Deferred charges 205 98
$ 1,201 $ 1,631
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. SHORT-TERM DEBT
At November 30, 1996 and 1995, short-term debt included
$2,300,000 and $3,570,000, respectively, of borrowings under a
Line of Credit Agreement between the Company and its principal
lending institution (the "Bank"). Borrowings and required
payments under the revolving credit line are based upon an asset
formula involving accounts receivable and inventories, with
maximum borrowings limited to $6,000,000. At November 30, 1996,
the Company had additional borrowing availability of $3,700,000
under the asset formula. Weighted average borrowings under the
revolving credit line amounted to $4,261,000 in 1996, and
$3,210,000 in 1995, with average interest rates of 7.50% in 1996
and 8.45% in 1995. The maximum amount of borrowings under the
revolving credit line at the end of any month was $5,164,000 in
1996 and $3,893,000 in 1995. The revolving credit line is
collateralized by substantially all of the Company's tangible and
intangible property, with current interest rates on borrowings
below the Bank's prevailing prime rate. The Line of Credit
Agreement is subject to bi-annual renegotiation and renewal.
The Company's wholly-owned foreign subsidiary maintains unsecured
Deutsche Mark lines of credit with German financial institutions
aggregating $1,325,000 (2,000,000 DM) at November 30, 1996, and
$1,056,000 (1,500,000 DM) at November 30, 1995. The Company had
borrowed $978,000 (1,477,000 DM) at November 30, 1996 and
$682,000 (968,000 DM) at November 30, 1995, against these lines
of credit. Weighted average borrowings under the lines of credit
amounted to $437,000 (661,000 DM) in 1996 and $311,000 (442,000
DM) in 1995, with average interest rates of 6.85% in 1996 and
8.00% in 1995. The maximum amount of borrowings under the lines
of credit at the end of any month was $1,034,000 (1,561,000 DM)
in 1996 and $682,000 (968,000 DM) in 1995. Borrowings currently
bear interest at rates below the prevailing prime rate and are
payable upon demand.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. LONG-TERM DEBT
Long-term debt consists of the following:
11/30/96 11/30/95
(in thousands)
Industrial development authority notes
at variable interest rate (3.65% at
11/30/96 and 3.85% at 11/30/95)(1) $2,500 $2,800
Industrial development authority notes
at variable interest rate (3.95% at
11/30/96 and 4.29% at 11/30/95)(2) 1,900 2,300
Notes payable to foreign bank at an
interest rate of 6.38%(3) 1,658 2,068
Industrial development authority notes
and related bank mortgage notes at
interest rates ranging from 4.00% to
7.75%, collateralized by certain land
and buildings, and requiring monthly
principal and interest payments of
$13,000 through the year 1999 406 531
Term loan payable to bank at an
interest rate of 8.30% -- 715
Total 6,464 8,414
Less current portion 2,392 1,845
Long-term debt $4,072 $6,569
(1) The industrial development authority notes are collater-
alized by certain land, building and equipment and an irrevocable
letter of credit issued by the Company, through its principal
lending institution. The notes bear interest at approximately
50% of the prevailing prime rate and require annual principal
payments ranging from $200,000 to $300,000 through the year 2007.
(2) The industrial development authority notes are collater-
alized by an irrevocable letter of credit issued by the Company,
through its principal lending institution. The notes bear
interest at approximately 50% of the prevailing prime rate and
require annual principal payments of $400,000 through the year
2000 with a final principal payment of $300,000 due in the year
2001.
(3) The notes payable are collateralized by an irrevocable letter
of credit issued by the Company, through its principal lending
institution. The notes require quarterly principal payments of
$71,000 (108,000 DM) through June 15, 1997, with a final
principal payment of $1,445,000 (2,180,000 DM) due September 15,
1997.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2001 are: $2,392,000, $743,000,
$830,000, $600,000 and $500,000.
8. OTHER INCOME AND EXPENSE
Other income and expense consist of the following (in thousands):
1996 1995 1994
Patent licensing fees $ - $ - $ 303
Investment income - - 16
Gain(loss) on foreign currency
transactions 38 (45) (80)
Gain(loss) on sale of property,
plant and equipment (18) 3 125
$ 20 $ (42) $ 364
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. INCOME TAXES
For the years ended November 30, 1996, 1995, and 1994, income
before income taxes consists of the following (in thousands):
1996 1995 1994
U.S. operations $3,605 $3,140 $1,607
Foreign operations 1,132 955 1,050
$4,737 $4,095 $2,657
For the years ended November 30, 1996, 1995 and 1994, the
provision for income taxes consists of the following (in
thousands):
1996 1995 1994
Current
Federal $ 806 $ 200 $ 30
State 111 235 53
Deferred 402 676 519
$1,319 $1,111 $ 602
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, 1996, 1995, and 1994
consists of the following (in thousands):
1996 1995 1994
Statutory federal income tax $1,611 $1,392 $ 903
State income taxes, net of
federal tax benefit 73 155 35
Subpart F income, U.S.
property investment 166 -- --
Foreign tax rates 181 153 168
Decrease in deferred tax
asset valuation allowance (987) (399) (311)
Other items 275 (190) (193)
$1,319 $1,111 $ 602
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Significant components of the Company's net deferred tax assets
and liabilities are as follows (in thousands):
Deferred tax assets: 11/30/96 11/30/95
Net operating loss carryforwards $1,561 $3,507
Tax credit carryforwards 1,280 577
Investment in subsidiaries 689 857
Intangible assets 579 483
Accrued expenses 214 274
Property, plant and equipment 116 119
Other 194 142
Sub-total 4,633 5,959
Valuation allowance (principally
related to certain net operating
loss carryforwards) 1,256 2,243
Deferred tax assets 3,377 3,716
Deferred tax liabilities:
Property, plant and equipment 2,463 2,530
Investment in subsidiaries 838 815
Deferred tax liabilities 3,301 3,345
Net deferred tax assets and liabilities $ 76 $ 371
Net deferred tax assets:
Current $ 96 $ 39
Noncurrent 281 332
Net deferred tax liabilities:
Noncurrent (301) --
$ 76 $ 371
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 1996, the undistributed earnings of the foreign
subsidiary amounted to $1,010,000 (1,525,000 DM). Upon
distribution of these earnings in the form of dividends or
otherwise, the Company may be subject to U.S. income taxes and
foreign withholding taxes. It is not practical, however, to
estimate the amount of taxes that may be payable on the eventual
remittance of these earnings.
During the years ended November 30, 1996, 1995, and 1994, the
decrease in valuation allowance for deferred tax assets
principally related to the utilization of certain foreign net
operating loss carryforwards. During the year ended November 30,
1996, the valuation allowance also decreased as a result of
changes in the expected future realization of remaining foreign
net operating loss carryforwards. Income tax expense for the
years ended November 30, 1996, 1995, and 1994, includes $108,000,
$49,000, and $118,000, respectively, relating to tax benefits
associated with the exercise of stock options.
At November 30, 1996, the Company had U.S. general business tax
credit carryforwards of $234,000 expiring at varying dates
through the year 2006 and minimum tax credits of $1,001,000 which
may be carried forward indefinitely. At November 30, 1996, the
Company's foreign subsidiary had approximately $2,431,000
(3,671,000 DM) of tax net operating loss carryforwards available
to be carried forward indefinitely.
10. SUPPLEMENTAL CASH FLOW INFORMATION
The Company incurred obligations of $553,000 in 1994 in
connection with the acquisition of certain intangible assets
under an asset purchase agreement.
11. COMMON STOCK OPTIONS AND WARRANTS
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, 1996, options to purchase
1,076,850 shares of Common Stock were available for grant under
the Company's stock option plans.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
A summary of the Company's stock option activity for the years ended
November 30, 1996, 1995, and 1994 is a follows:
<CAPTION>
Number
of Shares OPTION PRICE
Under Weighted
Option Per Share Average Aggregate
<S> <C> <C> <C> <C>
OUTSTANDING-NOV. 30, 1993 560,908 $0.44-4.13 $1.72 $ 962,000
Granted during the year 122,000 2.50-4.25 3.85 470,000
Exercised during the year (245,068) 0.50-2.45 1.51 (370,000)
Forfeitures and expirations (8,371) 1.00-4.25 4.18 (35,000)
OUTSTANDING-NOV. 30, 1994 429,469 0.44-4.25 2.39 1,027,000
Granted during the year 84,500 1.88-3.56 2.04 172,000
Exercised during the year (89,868) 0.44-1.38 1.12 (101,000)
Forfeitures and expirations (10,000) 2.63 2.63 (26,000)
OUTSTANDING-NOV. 30, 1995 414,101 0.88-4.25 2.59 1,072,000
Granted during the year 141,500 3.00-3.50 3.11 440,000
Exercised during the year (138,834) 0.88-2.50 1.11 (154,000)
Forfeitures and expirations (54,100) 0.88-3.25 3.23 (175,000)
OUTSTANDING-NOV. 30, 1996 362,667 1.88-4.25 3.26 $1,183,000
EXERCISABLE-NOV. 30, 1996 62,996 3.75-4.25 4.08 $ 257,000
EXERCISABLE-NOV. 30, 1995 161,599 $0.88-4.13 $1.55 $ 251,000
</TABLE>
During the year ended November 30, 1996, the weighted average
fair value of options granted amounted to $0.95 per share. At
November 30, 1996, the weighted average remaining contractual
life of outstanding options was 3.1 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.
<PAGE>
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 in 1996 was estimated at the date of grant using a Black-
Scholes option pricing model with the following assumptions:
risk-free interest rate of 6.00%; volatility factor of the
expected market price of the Company's Common Stock of 0.30; a
weighted average expected option life of five years; and a 2.00%
dividend yield. For purposes of pro forma disclosures, the
estimated fair value of options is amortized to expense over the
options' vesting period. For the year ended November 30, 1996,
the Company's reported and pro forma net income and earnings per
share are as follows:
As reported:
Net income $3,418,000
Earnings per common share $ 0.32
Pro forma:
Net income $3,396,000
Earnings per common share $ 0.32
In 1993, in connection with restructuring certain industrial
development authority bond indebtedness, the Company granted
stock warrants that entitled the former bondholders to purchase
an aggregate of 275,000 shares of the Company's Common Stock
through February 28, 1996, at exercise prices ranging from $4.00
to $5.00 per share. On February 28, 1996, all of the warrants
expired unexercised.
12. EMPLOYEE SAVINGS PLAN
The Company has an employee savings plan which permits
participants to make contributions by salary reduction pursuant
to section 401(k) of the Internal Revenue Code. The Company
matches contributions up to a maximum of 2.5% of compensation and
may, at its discretion, make additional contributions to the
plan. In connection with the required match, the Company's
contribution to the plan was $182,000 in 1996, $161,000 in 1995,
and $130,000 in 1994.
13. BUSINESS SEGMENTS AND CONCENTRATION OF CREDIT RISK
The Company currently operates exclusively in a single industry
as manufacturer of electronic components and a consultant in the
field of electromagnetic compatibility. At November 30, 1996 and
1995, approximately 36% and 40%, respectively, of the Company's
accounts receivable were from customers in the telecommunication
industry. The Company performs periodic credit evaluations of
its customers and generally does not require advance payments or
collateral. Credit losses to customers dealing in the tele-
communication industry have not been material.
<PAGE>
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company has operations in the United States and Germany. Transfers
between geographic areas are recorded at amounts reflecting competitive
profit margins for resale activities. The geographic distribution of
sales, operating profit and identifiable assets for 1996, 1995, and 1994 is
as follows (in thousands):
<CAPTION>
United Elimina-
1996 States Germany tions Total
<S> <C> <C> <C> <C>
Revenue from unaffiliated customers $47,541 $9,786 $ -- $57,327
Transfers between geographic areas 7,726 -- 7,726 --
Total revenues $55,267 $9,786 $7,726 $57,327
Operating income $ 4,224 $1,246 $ -- $ 5,470
Identifiable assets at November 30, 1996 $35,937 $4,701 $ 425 $40,213
<CAPTION>
United Elimina-
1995 States Germany tions Total
<S> <C> <C> <C> <C>
Revenue from unaffiliated customers $41,251 $8,046 $ - $49,297
Transfers between geographic areas 5,347 - 5,347 -
Total revenues 46,598 8,046 5,347 49,297
Operating income $ 3,854 $1,191 $ - $ 5,045
Identifiable assets at November 30, 1995 $34,052 $5,746 $ 300 39,498
<CAPTION>
United Elimina-
1994 States Germany tions Total
<S> <C> <C> <C> <C>
Revenue from unaffiliated customers $37,970 $5,689 $ - $43,659
Transfers between geographic areas 3,809 - 3,809 -
Total revenues $41,779 $5,689 $3,809 $43,659
Operating income $ 1,976 $1,320 $ - $ 3,296
Identifiable assets at November 30, 1994 $33,857 $4,488 $ 250 $38,095
<FN>
In 1996, 1995, and 1994, the Company had export sales of $15,275,000,
$13,295,000, and $9,141,000, respectively. In each of these years, export
sales represented approximately 26%, 27% and 21%, respectively, of the
Company's consolidated net sales. A substantial majority of the Company's
export sales are made to European customers. The Company's largest single
customer, an original equipment manufacturer of telecommunications
equipment, represented 12% in 1996, 14% in 1995, and 12% in 1994 of total
consolidated net sales.
</FN>
</TABLE>
<PAGE>
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
<CAPTION>
Year Ended November 30, 1996
First Second Third Fourth
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales $13,869 $13,642 $14,930 $14,886
Gross margin 4,296 4,463 4,807 4,510
Net income 713 812 935 958
Earnings per common share 0.07 0.08 0.09 0.09
<CAPTION>
Year Ended November 30, 1995
First Second Third Fourth
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales $11,309 $12,081 $12,470 $13,437
Gross margin 3,442 3,807 4,124 4,688
Net income 501 708 862 913
Earnings per common share 0.05 0.07 0.08 0.09
<FN>
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.
</FN>
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. OPERATING LEASES
The Company has entered into several operating lease agreements,
primarily relating to sales office facilities and computer
equipment. These leases are noncancelable and expire on various
dates through 2006. Leases that expire generally are expected to
be renewed or replaced by other leases. Future minimum rental
payments for succeeding years under all operating leases are as
follows:
1997 $ 215,000
1998 199,000
1999 161,000
2000 84,000
2001 73,000
Later Years 325,000
$1,057,000
Total rent expense under all operating leases amounted to
$397,000 in 1996, $314,000 in 1995 and $377,000 in 1994.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under "Election of Directors" and
"Directors of the Company" on pages 3 and 4 of the registrant's
Proxy Statement for the annual meeting of shareholders to be held
April 7, 1997 (the "Proxy Statement") is incorporated herein by
reference.
The following information is provided with respect to the
executive officers of the Company:
NAME OF OFFICER AGE POSITION
John P. Freeman 42 Vice President,
Chief Financial Officer
Joseph J. Gaynor 46 Vice President, General
Manager of Spectrum Control
Technology, Inc.
James A. Siegel 55 Treasurer
Richard A. Southworth 54 Vice President, General Manager
of Filter Products Group
James F. Toohey 62 Secretary
Richard E. Zaday 57 Vice President of Sales
As a result of the untimely death on December 27, 1996, of
President and Chief Executive Officer, John L. Johnston, the
Board of Directors has created an Executive Committee to act in
lieu of, and to exercise all of the powers of the President and
Chief Executive Officer until a successor has been appointed.
The members of this Committee are: John P. Freeman, Chairman;
Joseph J. Gaynor; Gerald A. Ryan; and Richard A. Southworth.
Mr. Freeman is a graduate of Gannon University in Accounting and
is a Certified Public Accountant and Certified Management
Accountant. He joined the Company in 1988 as Controller. Prior
to that time, he was a principal in a public accounting firm. In
January, 1990, he was named Vice President and Chief Financial
Officer.
Mr. Gaynor is a graduate of the Georgia Institute of Technology
with a bachelors degree in Mechanical Engineering. He joined the
Company in 1991 as Vice President and General Manager of Spectrum
Control Technology, Inc. Mr. Gaynor's prior work experience
includes various engineering and manufacturing positions in
specialty glass and electronic components.
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (Continued)
Mr. Siegel is a graduate of Gannon University in Accounting. He
joined the Company as Corporate Controller in 1974, was appointed
Assistant Treasurer in 1975, and Treasurer in 1984.
Mr. Southworth is a graduate of Gannon University in Mechanical
Engineering and Mathematics. He joined the Company in 1991 as
Vice President and General Manager of the Electromagnetic
Division. Prior to joining the Company, Mr. Southworth held
executive positions with National Water Specialties, Philips
Components, Murata-Erie North America, and Erie Technological
Products. In 1996, Mr. Southworth was named General Manager of
the Company's Filter Products Group.
Mr. Toohey is a graduate of Gannon University and Dickinson
School of Law and is a practicing member of the Erie County Bar
Association. He is a member of the law firm of Quinn, Buseck,
Leemhuis, Toohey & Kroto, Inc., general counsel to the Company,
and has been a Director and Secretary of the Company since its
organization.
Mr. Zaday is a graduate of Cal State - LA in electronic
engineering. He joined the Company in 1990 as Distribution Sales
Manager and was named Vice President of Sales in 1994. Prior to
joining the Company, Mr. Zaday held sales positions with Spectrol
Electronics, Alpha Wire, and Triad-Utrad.
All executive officers are elected by the Board of Directors and
serve at the discretion of the Board.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under "Executive Compensation" on pages
6 through 11 of the Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information set forth under "Securities Ownership" on pages 4
and 5 of the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) Financial Statements and Schedules
(1) Financial Statements - The following consolidated
financial statements of Spectrum Control, Inc. and subsidiaries
are included in Part II, Item 8:
PAGE NO.
Report of Independent Auditors
Consolidated Balance Sheets as of
November 30, 1996 and 1995
Consolidated Statements of Income for the Years
Ended November 30, 1996, 1995, and 1994
Consolidated Statements of Stockholders' Equity for
the Years Ended November 30, 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the
Years Ended November 30, 1996, 1995, and 1994
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules - The following financial
statement schedule is submitted herewith for the periods
indicated therein.
Schedule II - Valuation and Qualifying Accounts
All other schedules are not submitted because they are not
required or are not applicable, or the required information is
shown in the consolidated financial statements or notes thereto.
Columns omitted from the schedule filed have been omitted because
the information is not applicable.
<PAGE>
(3) Exhibits - The following is the index to exhibits for
Spectrum Control, Inc. and subsidiaries.
Description of Exhibit Page No.
Articles of Incorporation of registrant,
as amended, previously filed on February 25,
1981, as Exhibit 3.1 to Form S-1 registration
and incorporated herein by reference
By-laws of registrant, as amended,
previously filed on February 25, 1981, as
Exhibit 3.2 to Form S-1 registration and
incorporated herein by reference
Subsidiaries of the registrant (21)
Consent of Independent Auditors(23)
(b) Reports on Form 8-K
None
<PAGE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Three Years Ended November 30, 1996
(Dollar Amounts in Thousands)
<CAPTION>
Column A Column B Column C Column D Column E
Additions
Balance At Charged to Balance
Beginning Costs and at End
Description of Year Expenses Deductions of Year
<S> <C> <C> <C> <C>
Year ended Nov. 30, 1994
Allowance for doubt- $ 188 $ 62 $ 29(1) $ 221
ful accounts
Valuation allowance for
deferred tax assets - 2,773 131(2) 2,642
$ 188 $2,835 $ 160 $2,863
Year ended Nov. 30, 1995
Allowance for doubt-
ful accounts $ 221 $ 130 $ 45(1) $ 306
Valuation allowance for
deferred tax assets 2,642 - 399(2) 2,243
$2,863 $ 130 $ 444 $2,549
Year ended Nov. 30, 1996
Allowance for doubt-
ful accounts $ 306 $ 163 $ 91(1) $ 378
Valuation allowance for
deferred tax assets 2,243 - 987(2) 1,256
$2,549 $ 163 $1,078 $1,634
<FN>
<F1>
(1) Uncollectible accounts written off, net of recoveries.
<F2>
(2) Decrease in valuation allowance, principally related to tax loss
carryforwards of the Company's foreign subsidiary.
</FN>
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SPECTRUM CONTROL, INC
By: /s/John P. Freeman February 17, 1997
John P. Freeman,
Chairman of
Executive Committee
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
/s/Edwin R. Bindseil Director February 17, 1997
/s/John P. Freeman Director, Principal February 17, 1997
Executive Officer,
Chief Financial r
Officer and Principal
Accounting Officer
/s/Gerald A. Ryan Director February 17, 1997
/s/James F. Toohey Director February 17, 1997
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
(1) Spectrum Control, Inc.
100% - Owned Subsidiary
Incorporated in the State of Delaware
Investment Company
(2) Spectrum Engineering International, Inc.
100% - Owned Subsidiary
Incorporated in the State of Delaware
Interest Charge Domestic International Sales Corporation
(3) Spectrum Control Technology, Inc.
100% - Owned Subsidiary
Incorporated in the State of Delaware
Operating Company
(4) Spectrum Polytronics, Inc.
96% - Owned Subsidiary
Incorporated in the Commonwealth of Pennsylvania
Former Operating Company
(5) Spectrum Control GmbH
100% - Owned Subsidiary
Incorporated in Germany
Operating Company
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement on Form S-8 dated May 11, 1987 pertaining to the
Spectrum
Control, Inc. Non-Qualified Stock Option Plan of 1987, the
Registration Statement on Form S-8 dated January 22, 1996
pertaining to the Spectrum Control, Inc. Stock Option Plan of
1995,
and the Registration Statement on Form S-8 dated July 16, 1996
pertaining to the Spectrum Control, Inc. 1996 Non-Employee
Directors' Stock Option Plan, of our report dated January 9,
1997,
with respect to the consolidated financial statements and
schedule
included in this Form 10-K of Spectrum Control, Inc.
ERNST & YOUNG LLP
Erie, Pennsylvania
February 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE SPECTRUM CONTROL, INC. CONSOLIDATED BALANCE SHEET AT
NOVEMBER 30, 1996 AND CONSOLIDATED STATEMENT OF INCOME FOR THE
YEAR ENDED NOVEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO ITS FORM 10-K FOR THE YEAR ENDED NOVEMBER 30, 1996
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> NOV-30-1996
<CASH> 413
<SECURITIES> 0
<RECEIVABLES> 10,580
<ALLOWANCES> 378
<INVENTORY> 12,077
<CURRENT-ASSETS> 22,995
<PP&E> 38,748
<DEPRECIATION> 22,731
<TOTAL-ASSETS> 40,213
<CURRENT-LIABILITIES> 10,461
<BONDS> 4,072
0
0
<COMMON> 13,755
<OTHER-SE> 11,624
<TOTAL-LIABILITY-AND-EQUITY> 40,213
<SALES> 57,327
<TOTAL-REVENUES> 57,347
<CGS> 39,251
<TOTAL-COSTS> 39,251
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 753
<INCOME-PRETAX> 4,737
<INCOME-TAX> 1,319
<INCOME-CONTINUING> 3,418
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,418
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
</TABLE>
