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, 1997
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 [ ].
At January 30, 1998, the aggregate market value of voting Common
Stock held by non-affiliates of the registrant based on a closing
price of $5.375 was $52,777,012. Shares of Common Stock held by
each officer and director and by each person who owns 5% or more
of the outstanding Common Stock of the Company have been excluded
because such persons may be deemed to be affiliates.
As of January 30, 1998, the registrant had outstanding 10,869,510
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 6, 1998 are incorporated by
reference into Part III of this Form 10-K.
<PAGE>
PART I
ITEM 1. BUSINESS
Except for the historical information contained herein, the
following discussion contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially
from those discussed here. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in this
section, as well as in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations"
in this report.
GENERAL
Spectrum Control, Inc. and its subsidiaries (the "Company")
design, manufacture and market a broad line of control products and systems.
The Company was founded 29 years ago as a solutions-oriented company,
designing and manufacturing products to suppress or eliminate electromagnetic
interference ("EMI"). The Company has adapted its core EMI filter technology
into a complete line of capacitors, filters, filtered arrays, and filtered
connectors. In recent years, the Company has expanded its focus by
developing new lines of power products (commercial custom assemblies,
military/aerospace multisection assemblies, power entry modules, and power
line filters), microwave products (coaxial ceramic bandpass filters,
duplexers, and dielectric resonators), and specialty ceramic products. The
Company's products are used in virtually all industries worldwide, including
telecommunications, aerospace, military, medical, computer, and industrial
controls.
The need for EMI products results from the increasing dependency
of our society on electronic equipment of various kinds, including wireless
communication systems. This equipment both emits, and is sensitive to,
random electromagnetic waves over a broad spectrum of wave lengths, which
can interfere with and degrade the performance of other electronic equipment.
The Company's EMI products are designed to suppress the emission of unwanted
waves or to reduce their strength to an innocuous level, by reflecting them
from one component to another in series or by converting their energy into
heat which is then dissipated.
Spectrum Control, Inc. was incorporated in Pennsylvania in 1968.
The Company's Interconnect Products Division, which manufactures various
EMI filter products, is located in Fairview, Pennsylvania. The Company's
executive offices and Control Products Division, which manufactures
various power and microwave products, are located in Erie, Pennsylvania.
Spectrum Control Technology, Inc., a wholly-owned subsidiary,
maintains a facility in New Orleans, Louisiana, with advanced manufacturing
equipment designed for the production of ceramic capacitors, resonators,
and specialty ceramic products. Currently, this subsidiary primarily
manufactures ceramic discoidal and tubular capacitors used in the Company's
EMI filter products.
Spectrum Control, GmbH, a wholly-owned subsidiary of the Company
located in Schwabach, Germany, acts as a distributor for the Company's
products in the European market.
MARKETS
The Company's products are utilized in numerous applications
including industrial equipment, instrumentation, computers, and medical
equipment. The Company's primary markets, however, are communications
equipment and military/aerospace.
COMMUNICATIONS EQUIPMENT
For the past several years the communications industry has
experienced significant worldwide growth. This growth has primarily
resulted from increased business and consumer demand for wireless
communication services. Cost reductions and performance improvements in such
wireless communication products as cellular, personal communication services
(PCS), and satellite-based voice and data systems have also contributed to
this growth. As demand for wireless communication services grows, service
providers are expanding associated infrastructure. Wireless communication
systems can offer the functional advantages of wired communication systems
without the costly and time consuming development of an extensive wired
infrastructure. The relative advantages of wireless and wired communication
systems with respect to cost, transmission quality, reliability and other
factors depend on the specific applications for which such systems are used
and the existence of a wired or wireless infrastructure already in place.
The factors responsible for the market's growth, coupled with regulatory
changes in the United States and abroad as well as advances in wireless
communication technology, have led to significant growth in existing
wireless telecommunication systems and the emergence of new wireless
applications.
The Company provides filtered arrays, filtered connectors, and
power products to leading suppliers of communication systems. Using its
solutions-oriented approach, the Company provides its original equipment
manufacturer ("OEM") customers with products tailored to their specific
transmission needs, anticipating and solving system architecture and
performance.
Approximately 34% of the Company's total revenue during fiscal
year 1997 was derived from sales of its products to OEM customers in the
telecommunication industry. Most of these products are custom designed not
only to conform to the specifications and requirements of the particular
customer, but also to meet the performance and quality standards set by the
agency or other governmental body whose regulations are applicable to the
specific equipment or usage involved. A significant reduction in orders
from such customers would have a materially adverse effect on the Company's
business.
MILITARY/AEROSPACE
Military forces worldwide are dependent on sophisticated electronic
equipment. Military aircraft and naval vessels generally contain extensive
communication equipment, electronic countermeasure equipment for defense
against enemy weapons, and radar systems. The Company provides low pass
filters and multi-section assemblies to major equipment manufacturers for
installation into these systems. The Company's customers, in turn, sell
their equipment to major aerospace manufacturers or directly to governments.
In fiscal year 1997, military/aerospace sales accounted for
approximately 27% of the Company's total sales. The Company does not expect
such sales to increase from the levels achieved in the 1997 fiscal year due
to reductions in funding for new programs. While the Company has developed
and will continue to develop products for military/aerospace programs,
there can be no assurance that sales to such customers will not decrease
in the future.
PRODUCTS
The Company's current product offerings are organized into four
primary product families: interconnect filter products, power products,
microwave products, and specialty ceramic components.
INTERCONNECT FILTER PRODUCTS
Control of unwanted electromagnetic waves is accomplished through
various combinations of EMI suppression devices. The EMI suppression devices
produced by the Company include those that are utilized as circuit components
and whose function is to permit the desired frequencies to pass through a
circuit while rejecting or preventing the unwanted signals. The majority of
these products are composed of either reactive (reflecting energy) or loss
(dissipating energy) elements or at times, combinations of the two. These
products can be utilized as individual components or combined in various
configurations to provide the amount of EMI control needed. The Company's
interconnect products include low pass filters, filtered arrays, and filtered
connectors.
LOW PASS FILTERS
The Company's low pass filter offerings include hermetically sealed
and resin sealed/solder-in filters and capacitors. The Company's
hermetically sealed filters are primarily used in military/secure
communications, aerospace, rocket ignitors, power supplies, signal lines, and
certain medical equipment. Resin sealed/solder-in filters are used in a wide
range of products including telecommunications equipment, transceivers, and
industrial control systems.
FILTERED ARRAYS
The Company's filtered array products include filter plate
assemblies and filtered terminal blocks. Filter plates are predominantly
utilized in telecommunication equipment including cellular base statements,
linear power amplifiers, and cellular microcell repeaters. This product
offering often provides an economical method of meeting electromagnetic
compatibility (EMC) requirements. Filtered terminal blocks, which are
designed with a rugged construction to protect the filtering elements, are
primarily used in telecommunication equipment, industrial controls,
uninterruptible power supplies, and instrumentation.
FILTERED CONNECTORS
The Company offers a range of filtered D-Subminiature Connectors.
These filtered connectors are used in numerous applications including
telecommunications equipment, cellular base stations, secured communications,
industrial process equipment, and certain personal computers.
During the year ended November 30, 1997 approximately 80% of the
Company's total revenue was generated from the sale of interconnect filter
products.
POWER PRODUCTS
Commencing in fiscal year 1996, the Company expanded its product
offerings to include certain power products. This product offering currently
includes commercial custom assemblies, multi-section assemblies, and power
entry modules. Commercial custom assemblies consist of telecommunication
racks, power supplies, industrial controls, and other value-added assemblies.
The Company's multi-section products primarily serve the military/aerospace
market with applications in satellite communications, electronic warfare,
and ground/air weapon systems.
During the year ended November 30, 1997 approximately 17% of the
Company's total revenue was generated from the sale of power products.
MICROWAVE PRODUCTS
Recently, the Company commenced the manufacture and sale of coaxial
ceramic resonators, band pass filters, and duplexers. These products
primarily serve the communications industry with applications in cellular
telephones and base stations, satellite transceivers, wireless modems and
LANS, and CATV.
During the year ended November 30, 1997, approximately 2% of the
Company's total revenue was generated from the sale of microwave products.
SPECIALTY CERAMIC COMPONENTS
Spectrum Control Technology, Inc., a wholly-owned subsidiary of
the Company, is currently developing a line of specialty ceramics and
three-terminal devices. These products are primarily used in testing and
measurement instruments, high frequency power supplies, RF amplifiers, and
radio communication equipment.
In fiscal 1997, sales of specialty ceramic components were not
material.
BUSINESS SEGMENTS
The Company currently operates exclusively in a single industry as
manufacturer of electronic control products and systems.
<PAGE>
<TABLE>
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 1997, 1996, and 1995
is as follows(in thousands):
<CAPTION>
United
1997 States Germany Eliminations Total
<S> <C> <C> <C> <C>
Revenue from unaffiliated
customers $48,148 $8,318 $ - $56,466
Transfers between
geographic areas 5,735 - 5,735 -
Total revenues $53,883 $8,318 $5,735 $56,466
Operating income $ 4,864 $ 922 $ - $ 5,786
Identifiable assets at
November 30, 1997 $36,478 $4,078 $ 500 $40,056
<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
<FN>
In 1997, 1996, and 1995, the Company had export sales of
$10,028,000, $15,275,000, and $13,295,000, respectively. In each of these
years, export sales represented approximately 18%, 26%, and 27%, 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>
The Company expects that international sales will continue to
account for a significant portion of its total sales. There can be no
assurance, however, that the Company will be able to maintain or increase
international demand for the Company's products or that the Company will be
able to effectively meet that demand. The Company's international sales are
predominantly denominated in U.S. dollars and German Deutsche Marks. An
increase in the value of these currencies relative to other foreign
currencies could make the Company's products more expensive and, therefore,
potentially less competitive in those markets. Additional risks inherent in
the Company's international business activities include potentially adverse
tax consequences, repatriation of earnings, and the burdens of complying with
a variety of foreign laws. There can be no assurance that such factors will
not have an adverse effect on the Company's future results of operations.
PRODUCTION
The Company substantially relies on its internal manufacturing
capabilities for production of its control products and systems. The
Company's wholly-owned subsidiary, Spectrum Control Technology, Inc. in
New Orleans, Louisiana, designs and manufactures various ceramic components
including tubular capacitors, discoidal capacitors, and resonators. The
tubular and discoidal capacitors are primarily utilized in the manufacture
of electronic filter products at the Company's Interconnect Products Division
in Fairview, Pennsylvania. Coaxial ceramic dielectric resonators are
principally used in the manufacture of band pass filters and duplexers at
the Company's Control Products Division in Erie, Pennsylvania. Although
the Company produces a standardized line of products for sale from inventory
or through distributors, most orders require relatively short production
runs of custom designed components.
The Company purchases brass bushings, castings, miniature metal
stampings, as well as other hardware used in the assembly and production of
its products. These items are available from numerous sources. The
principal raw materials used by the Company in the manufacture of ceramic
capacitors and resonators are barium titanate ceramic, silver, palladium,
and platinum. Precious metals are available from many sources; however,
their prices may be subject to significant fluctuations and such fluctuations
may have a material and adverse affect on the Company's operating results.
The Company's customers demand a high level of quality. As a
result, the Company maintains an extensive quality control system designed
to meet the requirements of sophisticated defense and commercial
communications products. The Company has been approved by defense customers
under the requirements of the U.S. military quality system, which approval
is also often accepted by commercial customers. In addition, the Company's
Interconnect Products Division and Control Products Division have achieved
and maintain ISO 9001 certification. In fiscal year 1998, Management expects
the Company's Ceramic Components Division in New Orleans, Louisiana to also
achieve ISO 9001 certification. There is no assurance, however, that the
Division will achieve this quality certification.
In recent years, a majority of the Company's capital investment
has been expended to establish new production lines, increase capacity,
and improve manufacturing processes. There can be no assurance that the
Company can continue to make such investments in a timely manner so as to
take advantage of market demand.
SALES AND DISTRIBUTION
The Company sells its products primarily through manufacturers'
representatives, managed by the Company's internal sales force, and
distribution. Prior to fiscal 1997, the Company principally maintained
representatives in the United States, Canada, Israel, and Europe. In 1997,
the Company expanded its sales organization to include manufacturers'
representatives in Mexico, Brazil, Australia, and much of Asia. In fiscal
1997, approximately 20% of the Company's consolidated sales was through
distribution. Domestic distribution is done through various national and
regional distributors. International distribution is done through the
Company's wholly-owned German subsidiary, Spectrum Control GmbH.
During fiscal year 1997, the Company sold its products to
approximately 900 accounts. Sales of products to the Company's top ten
customers represented 44% ($24.9 million) of total consolidated net sales
in 1997. The company's largest single customer, an original equipment
manufacturer of telecommunications equipment, represented 9% in 1997,
12% in 1996, and 14% in 1995 of total consolidated net sales. The Company's
second largest single customer represented 7% of total consolidated net sales
in 1997, 8% in 1996, and 9% in 1995. All of the Company's major customers
are unaffiliated with Spectrum Control, Inc. and its subsidiaries.
Shipments are made by common carrier. Since most of the Company's
products are either small or miniaturized and light weight, shipping charges
do not affect the Company's ability to compete for business domestically or
abroad.
No material portion of the Company's business is subject to
renegotiation of profits or termination of contracts or sub-contracts at
the election of the U.S. Government.
BACKLOG
The Company's backlog, which consists of purchase orders by
customers, totaled approximately $21.0 million at November 30, 1997 and
$17.0 million at November 30, 1996. It is anticipated that approximately
90% of the Company's backlog as of November 30, 1997 will be shipped within
one year. Annual requirement contracts are taken into backlog only to the
extent that orders are actually released thereunder. Although the terms
and conditions contained in the Company's quotation forms place certain
restrictions on a customer's right to cancel, purchase orders generally
provide for cancellation. In practice, the Company negotiates each
cancellation and schedule change based on the cost it has incurred prior
to such occurrence. The Company expects to continually reduce its average
lead time (the length of time from the receipt of a customer order to
shipment of finished product to the customer). As a result, the Company's
backlog may decrease in the future due to reduced lead times.
EMPLOYEES
As of November 30, 1997, the Company had a total of 763 employees,
including 40 in sales, marketing and customer support; 63 in engineering and
product development; 618 in manufacturing; and 42 in finance and
administration. The Company's future success depends in significant part
upon the continued service of its key technical and senior management
personnel and its continued ability to attract and retain highly qualified
technical and managerial personnel. Competition for such personnel is
intense, and there can be no assurance that the Company can retain its key
managerial and technical employees or that it can attract, assimilate, or
retain other highly qualified technical and managerial personnel in the
future. None of the Company's employees is represented by a labor union.
The Company has not experienced any work stoppages and considers its
relations with its employees to be good.
PROPRIETARY RIGHTS
In connection with the manufacture and sale of control products and
systems, the Company owns two (2) United States and two (2) foreign patents
and has several patents pending. None of these patents and patent
applications are critical to the Company's business. The Company's policy
is to file patent applications to protect technology, inventions and
improvements that are important to its business. There can be no assurance
that patents will issue from any of the Company's pending applications or
that any claims allowed from existing or pending patents will be sufficiently
broad to protect the Company's technology. While the Company intends to
protect its intellectual property rights vigorously, there can be no
assurance that any patents held by the Company will not be challenged,
invalidated or circumvented, or the rights granted thereunder will provide
competitive advantages to the Company.
The Company holds twenty (20) United States patents and forty-five
(45) foreign patents relating to polymer multilayer technology. The Company
has entered into several agreements regarding licensing the technology
covered by these patents. However, it is not known what commercial value,
if any, these patents and related licenses may have.
GOVERNMENT REGULATIONS
The Company's products are incorporated into communications systems
which are subject to various FCC regulations. Regulatory changes, including
changes in the allocation of available frequency spectrum, could significantly
impact the Company's operations by restricting development efforts by the
Company's customers, obsoleting current products or increasing the
opportunity for additional competition. Changes in, or the failure by the
Company to comply with, applicable domestic and international regulations
could have an adverse effect on the Company's business, operating results and
financial condition. In addition, the increasing demand for wireless
communications has exerted pressure on regulatory bodies worldwide to adopt
new standards for such products and services, generally following extensive
investigation of and deliberation over competing technologies. The delays
inherent in this government approval process may cause the cancellation,
postponement or rescheduling of the installation of communications systems
by the Company's customers, which in turn may have a material adverse effect
on the sale of products by the Company to such customers.
In order to qualify as an approved supplier of EMI/EMC products
for use in equipment purchased by the military services or aerospace programs,
the Company is required to meet the applicable portions of the quality
specifications and performance standards designed by the Air Force, the Army,
and the Navy. The Company's products must also conform to the specifications
of the Defense Electronic Supply Center for replacement parts supplied to the
military. To the extent required, the Company meets or exceeds all of these
specifications.
The Company is subject to numerous federal, state and local
regulations relating to air and water quality, the disposal of hazardous
waste materials, safety, and health. Compliance with applicable
environmental regulations has not significantly changed the Company's
competitive position, capital spending, or earnings in the past and the
Company does not presently anticipate that compliance with such regulations
will change its competitive position, capital spending, or earnings for the
foreseeable future. The Company continuously monitors regulatory matters
and believes that it is currently in compliance in all material respects
with applicable environmental laws and regulations.
COMPETITION
The markets for the Company's products are intensely competitive
and are characterized by price erosion, technological change, and product
obsolescence. Among the Company's principal competitors are: Amp, AVX,
Amphenol, Tusonix, and Trans-Tech. Many of the Company's current and
potential competitors have significantly greater financial, technical,
manufacturing, and marketing resources than the Company. These competitors
may be able to engage in sustained price reductions in the Company's primary
markets to gain market share. Furthermore, the Company currently supplies
control products and systems to large OEM customers that are continuously
evaluating whether to manufacture their own products and systems or purchase
them from outside sources.
The Company believes that its ability to compete in its current
markets depends on factors both within and outside the Company's control,
including the timing and success of new product introductions by the Company
and its competitors, availability of ceramic and assembly manufacturing
capability, the Company's ability to support decreases in selling price
through operating cost reductions, adequate sources of raw materials,
product quality, and general economic conditions. There can be no assurance
that the Company will be able to compete successfully in the future.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are focused on
expanding the Company's materials technology, improving existing product
offerings, developing new product offerings, and designing specialized
production equipment to improve manufacturing efficiencies. As of
November 30, 1997, the Company employed 63 individuals in engineering and
product development. In addition to their design and development activities,
the engineering staff participates with the Company's marketing department
in proposal preparation and applications support for customers.
Research and development expense amounted to $807,000 in 1997,
$821,000 in 1996, and $771,000 in 1995.
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, 1997 are as follows:
<CAPTION>
PRINCIPAL
BALANCE
OUTSTANDING
APPROXIMATE AT 11/30/97
SQUARE FEET ON RELATED
LOCATION FUNCTION OF FLOOR AREA OWNERSHIP MORTGAGE
<S> <C> <C> <C> <C>
8061 Avonia Road Manufacturing, 38,000 Owned $ 257,000
Fairview, PA EMI Testing
6000 West Ridge Road Manufacturing, 25,000 Owned $ 15,000
Erie, PA Corporate Offices
4100 Michoud Blvd. Manufacturing 100,000 Owned $ 2,300,000
New Orleans, LA
</TABLE>
(1) In addition to the above mortgages, the Company's domestic properties
are encumbered in connection with the collateralization of certain
short-term and long-term bank indebtedness.
(2) In 1998, the Company expects to construct a 16,000 square foot addition
to its Erie, PA facility which will be used as additional manufacturing
space. The Company's office and other manufacturing space is considered
adequate for its existing requirements and its projected business needs.
(3) In addition to the facilities described above, the Company leases
certain sales office space.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any litigation of a
material nature.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the quarter ended November 30, 1997.
<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 1997 and 1996 are set forth below.
High Low
Fiscal 1997
First quarter $ 4.13 $ 3.00
Second quarter 4.00 3.13
Third quarter 5.00 3.81
Fourth quarter 6.00 4.63
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
At January 30, 1998, the Company had 10,869,510 shares of Common
Stock outstanding,which were held by approximately 2,300 registered
stockholders. In recent years, the Company has not paid cash dividends on
its Common Stock. While subject to periodic review, the current policy of
the Board of Directors is to retain all earnings to provide funds for the
continued growth of the Company.
<PAGE>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
<CAPTION>
Years Ended November 30
(Dollar Amounts in Thousands
Except Per Share Data)
1997 1996 1995 1994 1993
Operating Data
<S> <C> <C> <C> <C> <C>
Net sales $56,466 $57,327 $49,297 $43,659 $41,336
Income from continuing
operations 3,974 3,418 2,984 2,055 3,898
Loss from discontinued
operations(1) - - - - (2,916)
Extraordinary item (2) - - - - 4,012
Accounting change (3) - - - 1,845 -
Net income 3,974 3,418 2,984 3,900 4,994
Earnings (loss) per
common share:
Continuing operations 0.37 0.32 0.28 0.19 0.38
Discontinued operations - - - - (0.28)
Extraordinary item - - - - 0.39
Accounting change - - - 0.18 -
Net income 0.37 0.32 0.28 0.37 0.49
Dividends per share - - - - -
Financial Position
Total assets $40,056 $40,213 $39,498 $38,095 $38,192
Long-term debt 3,330 4,072 6,569 8,275 9,701
Stockholders' equity 29,545 25,379 21,781 18,583 14,165
</TABLE>
(1) In 1993, the Company discontinued its hybrid integrated circuit ("HIC")
operations and sold the related HIC assets. A loss of $2,916,000 was
recognized and charged against income in 1993, consisting of $483,000
of HIC operating losses and a loss of $2,433,000 on the disposal of
the HIC operations.
(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.
<PAGE>
<TABLE>
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
The following table sets forth certain financial data, as a
percentage of net sales, for the years ended November 30, 1997, 1996, and
1995:
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of products sold 69.2% 68.5% 67.4%
Gross margin 30.8% 31.5% 32.6%
Selling, general and administrative expense 20.6% 22.0% 22.4%
Income from operations 10.2% 9.5% 10.2%
Other income (expense)
Interest expense (0.7)% (1.3)% (1.8)%
Other income and expense, net 0.2% 0.1% (0.1)%
Income before provision for income taxes 9.7% 8.3% 8.3%
Provision for income taxes 2.7% 2.3% 2.2%
Net income 7.0% 6.0% 6.1%
</TABLE>
1997 Compared to 1996
Net Sales
Consolidated 1997 net sales decreased by $861,000 or 1.5% from 1996.
The decrease in sales primarily reflects reduced shipment volume of
electromagnetic interference ("EMI") filtered arrays used by customers in
telecommunications equipment, cellular base stations, and power amplifiers.
Overall demand for the Company's products remained strong, however, with
total customer orders of $60.9 million received in 1997, an increase of
7.8% from 1996.
Gross Margin
Gross margin was $17.4 million or 30.8% of sales in 1997 compared
to $18.1 million or 31.5% of sales in 1996. In addition to reduced sales
volume, the decrease in gross margin primarily reflects changes in sales
mix and the related impact of fixed manufacturing overhead and lower
production requirements at the Company's ceramic products division in
New Orleans, Louisiana.
Selling, General and Administrative Expense
Selling expense remained relatively constant in 1997, with total
selling expense of $6.5 million in 1997 and $6.6 million in 1996. General
and administrative expense decreased during the year, amounting to
$5.1 million or 9.2% of sales in 1997 and $6.0 million or 10.5% of sales
in 1996. The decrease in general and administrative expense primarily
reflects reduced expenses associated with the implementation of the Company's
Rapid Response program. Although Rapid Response will continue to be
implemented throughout 1998, the expenses associated with the program were
principally incurred by the Company during 1996 in the form of consulting
fees and employee education. Management believes that the full
implementation of Rapid Response will significantly reduce manufacturing
lead times, improve inventory turnover rates, and provide greater
responsiveness to customers.
Other Income and Expense
Interest expense decreased by $336,000, from $753,000 in 1996 to
$417,000 in 1997. The decrease in interest expense reflects the Company's
repayment of $5.6 million of bank indebtedness in 1997. The Company's
average short-term interest rates were 8.3% in 1997 and 7.5% in 1996.
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 $12,000 in 1997 and
$38,000 in 1996 on these foreign currency transactions.
In 1997, the Company recognized $106,000 of other income from
certain patent licensing activities.
Income Taxes
The Company's effective income tax rate was 27.9% in 1997 and
27.8% in 1996, compared to an applicable statutory income tax rate of
approximately 40.0%. Differences in the effective tax rate and statutory
tax rate primarily reflect decreases in the deferred tax asset valuation
allowance of $1.2 million in 1997 and $987,000 in 1996 relating to certain
German net operating loss carryforwards.
At November 30, 1997, the Company had recorded certain deferred
tax assets, primarily related to U.S. tax credit carryforwards and German
net operating loss carryforwards. Based upon the earnings history of the
Company's U.S. and German operations, Management believes that it is more
likely than not that these deferred tax assets will be realized during the
carryforward period to offset future taxable income from ordinary and
recurring operations.
1996 Compared to 1995
Net Sales
Consolidated 1996 net sales increased by $8.0 million or 16.3%
from 1995. The increase in sales primarily reflects additional shipment
volume of EMI filtered connectors and EMI filtered arrays used by customers
in the telecommunication industry. Overall, average selling prices declined
slightly in 1996 as a result of competitive and market pressures.
Gross Margin
Gross margin was $18.1 million or 31.5% of sales in 1996, compared
to $16.1 million or 32.6% of sales in 1995. Along with the selling price
pressures indicated above, 1996 gross margin was negatively affected by
changes in sales mix. These negative impacts were partially offset by
economies of scale realized with additional shipment volume.
Selling, General and Administrative Expense
Selling, general and administrative expense, as a percentage of
sales, was relatively stable during 1996 and 1995 at 22.0% and 22.4%,
respectively. Because of greater sales volume, selling expense increased
during the period, amounting to $6.6 million in 1996 and $6.2 million 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.
Other Income and Expense
Interest expense decreased by $155,000 in 1996, with interest expense
amounting to $753,000 in 1996 and $908,000 in 1995. The decrease in interest
expense primarily reflects reduced bank indebtedness. The Company repaid
indebtedness of $2.8 million in 1996 and $2.9 million in 1995. The Company's
average short-term interest rates were 7.5% in 1996 and 8.5% in 1995.
As previously indicated, the Company's German subsidiary transacts
business with certain customers and vendors in currencies other than the
Deutsche Mark. As a result, the Company incurred net gains of $38,000 in
1996 and net losses of $45,000 in 1995 on 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.
Income Taxes
The Company's effective income tax rate was 27.8% in 1996 and
27.1% in 1995. Differences in the effective tax rate and the applicable
statutory tax rate primarily reflect decreases in the deferred tax asset
valuation allowance of $987,000 in 1996 and $399,000 in 1995 relating to
certain German net operating loss carryforwards.
Risk Factors That May Affect Future Results
The Company's results of operations may be affected in the future
by a variety of factors including: competitive pricing pressures, new
product offerings by the Company and its competitors, new technologies,
product cost changes, and product mix. In 1997, approximately 34.0% of
the Company's sales were to customers in the telecommunication industry.
Accordingly, any significant change in the telecommunication industry's
activity level would have a direct impact on the Company's performance.
Liquidity, Capital Resources and Financial Condition
The Company has a $6.0 million line of credit with PNC Bank of
Erie, Pennsylvania (the "Bank"). Prior to March 18, 1997, borrowings and
required payments under the revolving credit line were based upon an asset
formula involving accounts receivable and inventories. On March 18, 1997,
the line of credit agreement was renewed through April 30, 1999. Under
the terms of the renewal, borrowings under the line of credit are no longer
limited by an asset formula. The revolving credit line is collateralized
by substantially all of the Company's tangible and intangible property,
with interest rates on borrowings at or below the Bank's prevailing prime
rate. At November 30, 1997, there were no borrowings outstanding under
this financing arrangement.
The Company's wholly-owned foreign subsidiary maintains unsecured
Deutsche Mark lines of credit with German financial institutions aggregating
$1.2 million (2.0 million DM). At November 30, 1997, outstanding borrowings
under these lines of credit amounted to $40,000 (69,000 DM). Borrowings
under the lines of credit bear interest at rates below the prevailing prime
rate and are payable upon demand.
The Company's liquidity continued to improve in 1997. At
November 30, 1997, the Company had net working capital of $16.9 million,
compared to $12.5 million at November 30, 1996 and $10.0 million at
November 30, 1995. The Company's current ratio also improved in 1997,
with current assets at 3.83 times current liabilities at November 30, 1997,
compared to 2.20 at November 30, 1996 and 1.89 at November 30, 1995.
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 1998, including scheduled
long-term debt repayment and planned capital expenditures.
The Company's cash expenditures for property, plant and equipment
amounted to $3.3 million in 1997, $3.8 million in 1996, and $3.1 million
in 1995. These capital expenditures primarily related to manufacturing
capacity expansion and establishing manufacturing capability for new
product lines. At November 30, 1997, the Company had not entered into
any material commitments for capital expenditures.
Income taxes paid during the fiscal years ended November 30, 1997,
1996, and 1995 amounted to $854,000, $1.2 million, and $218,000,
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 profitability and lower working capital
requirements, net cash from operations increased significantly in 1997.
Net cash provided by operations amounted to $8.5 million in 1997, compared
to $5.0 million in 1996. With the cash generated from operations in 1997,
the Company repaid $5.6 million of bank indebtedness and invested $3.3
million in capital equipment and improvements.
In addition to generating $5.0 million of net cash from operations
in 1996, the Company realized cash proceeds of $1.7 million on the sale of
certain land and building in Schwabach, Germany. This positive cash flow
was utilized for capital additions of $3.8 million and repayment of
$2.8 million of bank indebtedness.
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.
As indicated above, the Company continued to reduce its bank
indebtedness in 1997. The Company's total borrowed funds were $4.1 million
at November 30, 1997, $9.7 million at November 30, 1996, and $12.7 million
at November 30, 1995. The Company increased stockholders' equity by
$4.2 million in 1997, primarily through earnings. Accordingly, the
Company's debt to equity ratio continued to improve in 1997. Total
liabilities to net worth was 0.36 at November 30, 1997, 0.58 at
November 30, 1996, and 0.81 at November 30, 1995.
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 Inflation
In recent years, inflation has not had a significant impact on the
Company's operations. However, the Company continuously monitors operating
price increases, particularly in connection with the supply of precious
metals used in the Company's manufacturing of certain ceramic capacitors.
To the extent permitted by competition, the Company passes increased costs
on to its customers by increasing sales price over time. Sales increases
reported in the accompanying financial statements, however, have
substantially arisen from increased sales volume, not increases in selling
prices.
Impact of Recently Issued Accounting Standards
In February, 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 supersedes Accounting
Principles Board Opinion No. 15 and specifies the computation, presentation
and disclosure requirements for earnings per share. SFAS No. 128 is
effective for financial statements for both interim and annual periods
ending after December 15, 1997 and early application is not permitted.
Accordingly, the Company will apply SFAS No. 128 for the quarter ended
February 28, 1998 and restate prior period information as required under
the statement. The Company does not expect the adoption of SFAS No. 128
to have a material impact on reported earnings per share.
In June, 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting and Disclosures about Comprehensive Income"
and No. 131, "Disclosures about Segments of an Enterprise", which are
effective for fiscal years beginning after December 15, 1997. The Company
is currently evaluating the effects of these new standards.
Impact of Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. As a
result, any of the Company's computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including among other things, a temporary
inability to process transactions, prepare invoices, or engage in similar
normal business activities.
The Company has completed an assessment and determined that it will
have to modify or replace portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. In addition, the Company has initiated formal communications
with its significant suppliers and customers to determine the extent to
which the Company's interface systems are vulnerable to those third parties'
failure to remediate their own Year 2000 Issues. Based upon this
communication and assessment, Management anticipates that its total Year
2000 project costs will not be material.
The total project is expected to be completed on or before
December 31, 1998. The Company believes that with modifications to
existing software and conversions to new software, the Year 2000 Issues
will not pose significant operational problems for its computer systems.
However, if such modifications and conversions are not made, or are not
completed timely, the Year 2000 Issue could have a material impact on the
operations of the Company.
The costs of the project and the date on which the Company believes
it will complete the Year 2000 modifications are based on Management's
best estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but
are not limited to, the availability and cost of personnel trained in
this area, the ability to locate and correct all relevant computer codes,
and similar uncertainties.
Forward-Looking Information
Management's Discussion and Analysis of Financial Condition and
Results of Operations includes forward-looking statements which reflect
Management's current views with respect to future manufacturing and
operating performance, inventory turnover rates, and ongoing cash
requirements. These forward-looking statements are subject to certain
risks and uncertainties, including those identified below, which could
cause actual results to differ materially from historical results or those
anticipated. The words "believe", "expect", "anticipate" and similar
expressions identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements. The
following factors could cause actual results to differ materially from
historical results or those anticipated: (1) increased competition in
the Company's marketplace; (2) technology advances affecting the demand
for the Company's products; (3) other changes in market demand,
particularly among communications customers; (4) market acceptance and
penetration for the Company's new product offerings; (5) changes in the
overall economic climate; (6) operating cost fluctuations and availability
of raw materials; and (7) unplanned capital replacement or expansion.
<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, 1997 and 1996
Consolidated Statements of Income for
the years ended November 30,
1997, 1996, and 1995
Consolidated Statements of Stockholders'
Equity for the years ended
November 30, 1997, 1996, and 1995
Consolidated Statements of Cash Flows
for the years ended November 30,
1997, 1996, and 1995
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, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended November 30, 1997.
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, 1997
and 1996, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended November 30, 1997,
in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
January 7, 1998
<PAGE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1997 AND 1996
(Dollar Amounts in Thousands)
<CAPTION>
1997 1996
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $ 196 $ 413
Accounts receivable, less allowances of $409
in 1997 and $378 in 1996 9,997 10,202
Inventories (Note 2) 12,110 12,077
Deferred income taxes (Note 8) 360 96
Prepaid expenses and other current assets 174 207
Total current assets 22,837 22,995
Property, plant and equipment, net (Note 3) 15,979 16,017
Other assets (Note 4) 1,240 1,201
Total assets $ 40,056 $ 40,213
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt (Note 5) $ 40 $ 3,278
Accounts payable 3,302 3,038
Accrued salaries and wages 1,311 1,308
Accrued interest 45 48
Accrued federal and state income taxes 289 72
Accrued other expenses 226 325
Current portion of long-term debt (Note 6) 743 2,392
Total current liabilities 5,956 10,461
Long-term debt (Note 6) 3,330 4,072
Deferred income taxes (Note 8) 1,225 301
Stockholders' equity
Common stock, no par value, authorized 25,000,000
shares, issued and outstanding 10,838,345 shares
in 1997 and 10,774,233 in 1996 13,977 13,755
Retained earnings 15,864 11,890
Foreign currency translation adjustment (296) (266)
Total stockholders' equity 29,545 25,379
Total liabilities and stockholders' equity $ 40,056 $ 40,213
<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, 1997, 1996, AND 1995
(Dollar Amounts in Thousands Except Per Share Data)
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net sales $ 56,466 $ 57,327 $ 49,297
Cost of products sold 39,045 39,251 33,236
Gross margin 17,421 18,076 16,061
Selling, general and administrative expense 11,635 12,606 11,016
Income from operations 5,786 5,470 5,045
Other income (expense)
Interest expense (417) (753) (908)
Other income and expense, net (Note 7) 141 20 (42)
(276) (733) (950)
Income before provision for income taxes 5,510 4,737 4,095
Provision for income taxes (Note 8) 1,536 1,319 1,111
Net income $ 3,974 $ 3,418 $ 2,984
Earnings per common share $ 0.37 $ 0.32 $ 0.28
<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, 1997, 1996, AND 1995
(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, 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
Net income - 3,974 - 3,974
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
Foreign currency translation
adjustment - - (30) (30)
Balance - November 30, 1997 $13,977 $15,864 $(296) $29,545
<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, 1997, 1996, AND 1995
(Dollar Amounts in Thousands)
1997 1996 1995
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 3,974 $ 3,418 $ 2,984
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 3,287 2,811 2,319
Amortization 219 508 529
Deferred income taxes 376 402 676
Loss (gain) on sale of property, plant
and equipment 8 18 (3)
Changes in assets and liabilities:
Accounts receivable ( 67) (969) (1,507)
Inventories (188) (833) 115
Prepaid expenses and other assets 431 (121) (55)
Accounts payable and accrued expenses 466 (236) 970
Net cash provided by operating
activities 8,506 4,998 6,028
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, plant
and equipment 10 1,665 25
Purchase of property, plant and equipment (3,280) (3,824) (3,057)
Net cash used in investing activities (3,270) (2,159) (3,032)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds(repayment) of short-term debt (3,232) (912) 115
Repayment of long-term debt (2,391) (1,845) (3,062)
Net proceeds from issuance of common stock 196 154 94
Net cash used in financing activities (5,427) (2,603) (2,853)
Effect of exchange rate changes on cash (26) (25) (43)
Net increase (decrease) in cash and cash
equivalents (217) 211 100
Cash and cash equivalents, beginning of year 413 202 102
Cash and cash equivalents, end of year $ 196 $ 413 $ 202
Cash paid during the year for:
Interest $ 420 $ 756 $ 990
Income taxes 854 1,197 218
<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"). The fiscal
year of the Company's foreign subsidiary, Spectrum Control GmbH, ends
October 31 to facilitate timely reporting. All significant intercompany
accounts are eliminated upon consolidation.
Cash Equivalents
The Company considers all highly liquid money market instruments
with original maturities of three months or less to be cash equivalents.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, accounts payable,
and accrued liabilities approximate fair value due to the short-term
maturities of these assets and liabilities. The interest rates on
substantially all of the Company's bank borrowings are adjusted regularly
to reflect current market rates. Accordingly, the carrying amounts of the
Company's short-term and long-term borrowings also approximate fair value.
The Company utilizes letters of credit to collateralize certain long-term
borrowings. The letters of credit reflect fair value as a condition of
their underlying purpose and are subject to fees competitively determined
in the marketplace.
Inventories
Inventories are valued at the lower of cost or market, with cost
for raw materials, work-in-process and finished goods at standard cost,
which approximates the first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation
is computed over the estimated useful lives of the assets using the
straight line method. Expenditures for maintenance and repairs are
charged against earnings in the year incurred; major replacements,
renewals and betterments are capitalized and depreciated over their
estimated useful lives. The cost and accumulated depreciation of assets
sold or retired are removed from the respective accounts and any gain or
loss is reflected in earnings.
Intangibles and Other Assets
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 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income Taxes
The Company uses the liability method in accounting for income
taxes. Deferred tax assets and liabilities are recorded for temporary
differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements, using statutory tax rates
in effect for the year in which the differences are expected to reverse.
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.
Advertising and Promotion
Advertising and promotion costs are expensed as incurred.
Advertising and promotion expense amounted to $574,000 in 1997, $486,000
in 1996, and $526,000 in 1995.
Research and Development
Research and development costs are expensed as incurred. Research
and development expense amounted to $807,000 in 1997, $821,000 in 1996,
and $771,000 in 1995.
Stock-Based Compensation
Stock options granted by the Company are accounted for in
accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"). In accordance with APB 25,
no stock-based compensation expense has been recognized in the accompanying
financial statements, since the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date
of option grant.
Earnings Per Common Share
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 10,798,000 in 1997, 10,731,000 in 1996, and
10,585,000 in 1995. Although the Company has issued potentially dilutive
common stock equivalents in the form of stock options, 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Inventories
Inventories by major classification are as follows:
November 30
1997 1996
(in thousands)
Finished goods $ 2,159 $ 2,631
Work-in-process 5,364 5,549
Raw materials 4,587 3,897
$ 12,110 $ 12,077
3. Property, Plant and Equipment
Property, plant and equipment consist of the following:
November 30
1997 1996
(in thousands)
Land and improvements $ 1,161 $ 1,161
Buildings and improvements 8,701 8,669
Machinery and equipment 22,996 28,774
Construction in progress 478 144
33,336 38,748
Less accumulated depreciation 17,357 22,731
$ 15,979 $ 16,017
4. Other Assets
Other assets consist of the following:
November 30
1997 1996
(in thousands)
Patents and patent rights $ 540 $ 549
Technical documentation 2,260 2,260
Debt issuance costs 384 384
3,184 3,193
Less accumulated amortization 2,685 2,478
499 715
Deferred income taxes 566 281
Deferred charges 175 205
$ 1,240 $ 1,201
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Short-Term Debt
Short-term debt consists of the following:
November 30
1997 1996
(in thousands)
Notes payable - domestic
line of credit (1) $ - $ 2,300
Notes payable - foreign
lines of credit (2) 40 978
Total $ 40 $ 3,278
(1) The Company has a $6,000,000 line of credit with its
principal lending institution (the "Bank"). Weighted average
borrowings under the revolving credit line amounted to
$883,000 in 1997 and $4,261,000 in 1996, with average interest
rates of 8.30% in 1997 and 7.50% in 1996. The maximum amount
of borrowings under the line of credit at the end of any month
was $1,896,000 in 1997 and $5,164,000 in 1996. The revolving
credit line is collateralized by substantially all of the
Company's tangible and intangible property, with interest rates
on borrowings at or below the Bank's prevailing prime rate. The
line of credit agreement is subject to bi-annual Renegotiation
and renewal.
(2) The Company's wholly-owned foreign subsidiary maintains
unsecured Deutsche Mark lines of credit with German financial
institutions aggregating $1,161,000 (2,000,000 DM) at
November 30, 1997 and $1,325,000 (2,000,000 DM) at
November 30, 1996. Weighted average borrowings under the
lines of credit amounted to $99,000 (172,000 DM) in 1997 and
$437,000 (661,000 DM) in 1996, with average interest rates of
7.12% in 1997 and 6.85% in 1996. The maximum amount of
borrowings under the lines of credit at the end of any month
was $320,000 (551,000 DM) in 1997 and $1,034,000 (1,561,000 DM)
in 1996. Borrowings bear interest at rates below the prevailing
prime rate and are payable upon demand.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Long-Term Debt
Long-term debt consists of the following:
November 30
1997 1996
(in thousands)
Industrial development authority notes
at variable interest rate
(4.00% at November 30, 1997
and 3.65% at November 30, 1996) (1) $ 2,300 $ 2,500
Industrial development authority notes
at variable interest rate
(4.23% at November 30, 1997
and 3.95% at November 30, 1996)(2) 1,500 1,900
Notes payable to foreign bank at an
interest rate of 6.38% - 1,658
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 273 406
Total 4,073 6,464
Less current portion 743 2,392
Long-term debt $ 3,330 $ 4,072
(1) The industrial development authority notes are collateralized by
certain land, building and equipment and an irrevocable letter of
credit issued by the Company, through its principal lending
institution. The notes bear interest at approximately 50% of the
prevailing prime rate and require annual principal payments ranging
from $200,000 to $300,000 through the year 2007.
(2) The industrial development authority notes are collateralized by an
irrevocable letter of credit issued by the Company, through its
principal lending institution. The notes bear interest at
approximately 50% of the prevailing prime rate and require annual
principal payments of $400,000 through the year 2000 with a final
principal payment of $300,000 due in the year 2001.
Each of the above irrevocable letters of credit is collateralized by
substantially all of the Company's tangible and intangible assets.
The aggregate maturities of all long-term debt during each of the
five years ending November 30, 2002, are $743,000, $830,000,
$600,000, $500,000, and $300,000, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Other Income and Expense
Other income and expense consist of the following (in thousands):
1997 1996 1995
Patent licensing fees $ 106 $ - $ -
Investment income 31 - -
Gain (loss) on foreign currency
transactions 12 38 (45)
Gain (loss) on sale of property,
plant and equipment (8) (18) 3
$ 141 $ 20 $ (42)
8. Income Taxes
For the years ended November 30, 1997, 1996, and 1995, income before
income taxes consists of the following (in thousands):
1997 1996 1995
U.S. operations $ 4,583 $ 3,605 $ 3,140
Foreign operations 927 1,132 955
$ 5,510 $ 4,737 $ 4,095
For the years ended November 30, 1997, 1996, and 1995, the
provision for income taxes consists of the following (in thousands):
1997 1996 1995
Current
Federal $ 1,055 $ 806 $ 200
State 105 111 235
Deferred 376 402 676
$ 1,536 $ 1,319 $ 1,111
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The difference between the provision for income taxes and the
amount computed by applying the U.S. federal income tax rate in effect
for the years ended November 30, 1997, 1996, and 1995 consists of the
following (in thousands):
1997 1996 1995
Statutory federal income tax $ 1,873 $ 1,611 $ 1,392
State income taxes, net of federal
tax benefit 69 73 155
Subpart F income, U.S. property investment 258 166 -
Foreign tax rates 148 181 153
Decrease in deferred tax asset
valuation allowance (1,194) (987) (399)
Other items 382 275 (190)
$ 1,536 $ 1,319 $ 1,111
Significant components of the Company's net deferred
tax assets and liabilities are as follows (in thousands):
November 30
Deferred tax assets: 1997 1996
Net operating loss carryforwards $ 868 $ 1,561
Tax credit carryforwards 638 1,280
Intangible assets 574 579
Investment in subsidiaries 544 689
Accrued expenses 219 214
Property, plant and equipment 116 116
Other 176 194
Sub-total 3,135 4,633
Valuation allowance (principally related to
certain net operating loss carryforwards) 62 1,256
Deferred tax assets 3,073 3,377
Deferred tax liabilities:
Property, plant and equipment 2,431 2,463
Investment in subsidiaries 941 838
Deferred tax liabilities 3,372 3,301
Net deferred tax assets (liabilities) $ (299) $ 76
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
November 30
1997 1996
(in thousands)
Net deferred tax assets:
Current $ 360 $ 96
Noncurrent 566 281
Net deferred tax liabilities:
Noncurrent (1,225) (301)
$ (299) $ 76
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, 1997, the
undistributed earnings of the foreign subsidiary amounted to $1,937,000
(3,337,000 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, 1997, 1996, and 1995, the
decrease in valuation allowance for deferred tax assets principally related
to the utilization of certain foreign net operating loss carryforwards.
During the years ended November 30, 1997 and 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, 1997, 1996, and 1995, includes $25,000,
$108,000, and $49,000, respectively, relating to the allocation of tax
benefits directly to contributed capital associated with the exercise of
stock options.
At November 30, 1997, the Company had U.S. minimum tax credits of
$587,000 which may be carried forward indefinitely. At November 30, 1997,
the Company's foreign subsidiary had approximately $1,208,000 (2,082,000 DM)
of tax net operating loss carryforwards available to be carried forward
indefinitely.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
9. 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, 1997, options to purchase
1,095,467 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, 1996, and 1995 is a follows:
<CAPTION>
Number
of Shares Option Price
Under Weighted
Option Per Share Average Aggregate
<S> <C> <C> <C> <C>
Outstanding - November 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 - November 30, 1995 414,101 0.88-4.25 2.59 1,072,000
Granted during the year 141,500 3.00-3.50 3.11 440,000
Exercised during the year (138,834) 0.88-2.50 1.11 (154,000)
Forfeitures and expirations (54,100) 0.88-3.25 3.23 (175,000)
Outstanding - November 30, 1996 362,667 1.88-4.25 3.26 1,183,000
Granted during the year 155,000 3.06-3.50 3.18 493,000
Exercised during the year (84,998) 1.88-4.25 3.52 (300,000)
Forfeitures and expirations (42,001) 1.88-3.06 2.85 (119,000)
Outstanding - November 30, 1997 390,668 $1.88-4.25 $3.22 $1,257,000
Exercisable
November 30, 1997 80,163 $1.88-4.25 $3.66 $293,000
November 30, 1996 62,996 $3.75-4.25 $4.08 $257,000
November 30, 1995 161,599 $0.88-4.13 $1.55 $251,000
</TABLE>
During the years ended November 30, 1997 and 1996, the weighted
average fair value of options granted amounted to $0.97 per share and
$0.95 per share, respectively. At November 30, 1997, the weighted average
remaining contractual life of outstanding options was 3.0 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 1997 and 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 years ended November 30, 1997 and 1996, the Company's reported and
pro forma net income and earnings per share are as follows:
1997 1996
As reported:
Net income $3,974,000 $3,418,000
Earnings per common share $ 0.37 $ 0.32
Pro forma:
Net income $3,935,000 $3,396,000
Earnings per common share $ 0.37 $ 0.32
10. 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,
$182,000 in 1996, and $161,000 in 1995.
11. 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,
1997 and 1996, approximately 34% and 36%, 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.
12. Business Segments
The Company currently operates exclusively in a single industry as
manufacturer of electronic control products and systems. The Company's
products include electromagnetic interference ("EMI") filters, EMI filtered
arrays and connectors, power products, capacitors, dielectric resonators,
bandpass filters and duplexers. These products are principally sold to
manufacturers and distributors for use in numerous industries worldwide,
including telecommunications, aerospace, military, computer and industrial
controls.
<PAGE>
<TABLE>
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 1997, 1996, and 1995
is as follows(in thousands):
<CAPTION>
United
1997 States Germany Eliminations Total
<S> <C> <C> <C> <C>
Revenue from unaffiliated
customers $48,148 $8,318 $ - $56,466
Transfers between
geographic areas 5,735 - 5,735 -
Total revenues $53,883 $8,318 $5,735 $56,466
Operating income $ 4,864 $ 922 $ - $ 5,786
Identifiable assets at
November 30, 1997 $36,478 $4,078 $ 500 $40,056
<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
<FN>
In 1997, 1996, and 1995, the Company had export sales of
$10,028,000, $15,275,000, and $13,295,000, respectively. In each of these
years, export sales represented approximately 18%, 26%, and 27%, 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 telecommunication
equipment, represented 9% of total consolidated net sales in 1997, 12% in 1996,
and 14% in 1995.
</FN>
</TABLE>
<PAGE>
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Quarterly Financial Data (Unaudited)
<CAPTION>
Year Ended November 30, 1997
First Second Third Fourth
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales $ 12,712 $ 14,376 $ 13,969 $ 15,409
Gross margin 3,714 4,399 4,439 4,869
Net income 654 939 1,059 1,322
Earnings per common share 0.06 0.09 0.10 0.12
<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
<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>
14. 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:
1998 $ 195,000
1999 155,000
2000 74,000
2001 64,000
2002 63,000
Later years 221,000
$ 772,000
Total rent expense under all operating leases amounted to $517,000
in 1997, $397,000 in 1996, and $314,000 in 1995.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under "Election of Directors" and
"Directors of the Company" on pages 3 and 4 of the registrant's Proxy
Statement for the annual meeting of shareholders to be held April 6, 1998
(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 43 Vice President, Chief Financial Officer
Joseph J. Gaynor 47 Vice President, General Manager
of Spectrum Control Technology, Inc.
Robert J. McKenna 44 Vice President Resource Development
James A. Siegel 56 Treasurer
Robert L. Smith 59 Vice President Quality and Technology
Richard A. Southworth 55 President, Chief Executive Officer
James F. Toohey 63 Secretary
Brian F. Ward 38 Vice President Sales and Marketing
Mr. Freeman is a graduate of Gannon University in Accounting and
is a Certified Public Accountant and Certified Management Accountant. He
joined the Company in 1988 as Controller. Prior to that time, he was a
principal in a public accounting firm. In January, 1990, he was named
Vice President and Chief Financial Officer.
Mr. Gaynor is a graduate of the Georgia Institute of Technology
with a bachelors degree in Mechanical Engineering. He joined the Company
in 1991 as Vice President and General Manager of Spectrum Control Technology,
Inc. Mr. Gaynor's prior work experience includes various engineering and
manufacturing positions in specialty glass and electronic components.
Mr. McKenna is a graduate of Gannon University in General Science.
He was elected an officer of the Company in 1997 as Vice President Resource
Development. Prior to joining the Company in 1991, Mr. McKenna held
management positions with Advanced Cast Products and Johnson Controls.
Mr. Siegel is a graduate of Gannon University in Accounting. He
joined the Company as Corporate Controller in 1974, was appointed Assistant
Treasurer in 1975, and Treasurer in 1984.
Mr. Smith is a graduate of Cleveland Institute of Electronics and
is a certified National Association of Radio and Telecommunications Engineer.
He joined the Company in 1978 as Manager of EMC testing services and was
named Vice President Quality and Technology in 1997. Prior to joining the
Company, Mr. Smith was Product Engineering Manager of Erie Technological
Products.
Mr. Southworth is a graduate of Gannon University in Mechanical
Engineering and Mathematics. He joined the Company in 1991 as Vice President
and General Manager. Prior to joining the Company, Mr. Southworth held
executive positions with National Water Specialties, Philips Components,
Murata Electronics North America, and Erie Technological Products.
In 1997, Mr. Southworth was named President and Chief Executive Officer.
Mr. Toohey is a graduate of Gannon University and Dickinson School
of Law and is a practicing member of the Erie County Bar Association. He is
a member of the law firm of Quinn, Buseck, Leemhuis, Toohey & Kroto, Inc.,
general counsel to the Company, and has been a Director and Secretary of
the Company since its organization.
Mr. Ward is a Marketing graduate of Franklin Pearce College of
Business. He joined the Company in 1994 as Director of Marketing and in
1997 was named Vice President Sales and Marketing. Prior to joining the
Company, Mr. Ward held managerial positions in Engineering and Marketing
with Clarostat Manufacturing Co. and Oak Grigsby, Inc.
All executive officers are elected by the Board of Directors and
serve at the discretion of the Board.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under "Executive Compensation" on pages 6
through 11 of the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under "Securities Ownership" on pages 4
and 5 of the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under "Certain Relationships and Related
Transactions" on page 6 of the Proxy Statement is incorporated herein by
reference.
<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, 1997 and 1996
Consolidated Statements of Income for the Years Ended
November 30, 1997, 1996, and 1995
Consolidated Statements of Stockholders' Equity
for the Years Ended November 30, 1997, 1996, and 1995
Consolidated Statements of Cash Flows
for the Years Ended November 30, 1997, 1996, and 1995
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules - The following financial statement
schedule is submitted herewith for the periods indicated therein.
Schedule II - Valuation and Qualifying Accounts
All other schedules are not submitted because they are not required
or are not applicable, or the required information is shown in the
consolidated financial statements or notes thereto. Columns omitted from
the schedule filed have been omitted because the information is not
applicable.
(3) Exhibits - The following is the index to exhibits for Spectrum
Control, Inc. and subsidiaries.
Description of Exhibit Page No.
Articles of Incorporation of registrant,
as amended, previously filed on February 25,
1981, as Exhibit 3.1 to Form S-1 registration
and incorporated herein by reference
By-laws of registrant, as amended,
previously filed on February 25, 1981, as
Exhibit 3.2 to Form S-1 registration and
incorporated herein by reference
Stock Option Plan of 1995, previously filed under
Form S-8 on January 22, 1996, and incorporated
herein by reference (10.1)
Non-Employee Directors' Stock Option Plan,
previously filed under Form S-8 on July 16, 1996,
and incorporated herein by reference (10.2)
Subsidiaries of the registrant (21)
Consent of Independent Auditors(23)
(b) Reports on Form 8-K
None
<PAGE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Three Years Ended November 30, 1997
(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
Year ended November 30, 1995
<S> <C> <C> <C> <C>
Allowance for doubt-
ful accts. $ 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 November 30, 1996
Allowance for doubt-
ful accts. $ 306 $ 163 $ 91(1) $ 378
Valuation allowance for
deferred tax assets 2,243 - 987(2) 1,256
$ 2,549 $ 163 $ 1,078 $ 1,634
Year ended November 30, 1997
Allowance for doubt-
ful accts. $ 378 $ 128 $ 97(1) $ 409
Valuation allowance for
deferred tax assets 1,256 - 1,194(2) 62
$ 1,634 $ 128 $ 1,291 $ 471
<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>
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
<PAGE>
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 7, 1998,
with respect to the consolidated financial statements and schedule included
in this Form 10-K of Spectrum Control, Inc.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
February 23, 1998
<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/Richard A. Southworth
February 27, 1998 Richard A. Southworth
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/Edwin R. Bindseil Director February 27, 1998
/s/John P. Freeman Director, February 27, 1998
Chief Financial Officer,
and Principal Accounting Officer
/s/Melvin Kutchin Director February 27, 1998
/s/John M. Petersen Director February 27, 1998
/s/Gerald A. Ryan Director February 27, 1998
/s/James F. Toohey Director February 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Spectrum Control, Inc. Consolidated Balance Sheet at November 30, 1997
and Consolidated Statement of Income for the year ended November 30, 1997
and is qualified in its entirety by reference to its Form 10-K for the
year ended November 30, 1997.
</LEGEND>
<CIK> 0000092769
<NAME> SPECTRUM CONTROL, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> NOV-30-1997
<CASH> 196
<SECURITIES> 0
<RECEIVABLES> 10406
<ALLOWANCES> 409
<INVENTORY> 12110
<CURRENT-ASSETS> 22837
<PP&E> 33336
<DEPRECIATION> 17357
<TOTAL-ASSETS> 40056
<CURRENT-LIABILITIES> 5956
<BONDS> 3330
0
0
<COMMON> 13977
<OTHER-SE> 15568
<TOTAL-LIABILITY-AND-EQUITY> 40056
<SALES> 56466
<TOTAL-REVENUES> 56466
<CGS> 39045
<TOTAL-COSTS> 39045
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 417
<INCOME-PRETAX> 5510
<INCOME-TAX> 1536
<INCOME-CONTINUING> 3974
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3974
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.37
</TABLE>
