<PAGE>
As filed with the Securities and Exchange Commission on July 6, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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SPECTRUM CONTROL, INC.
(Exact name of Registrant as specified in its charter)
------------
Pennsylvania 25-1196447
(State or Other (I.R.S. Employer
Jurisdiction of Identification Number)
Incorporation or
Organization)
8031 Avonia Road
Fairview, Pennsylvania 16415
(814) 835-1650
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
------------
Richard A. Southworth, Chief Executive Officer
Spectrum Control, Inc.
8031 Avonia Road
Fairview, Pennsylvania 16415
(814) 835-1650
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------
Copies to:
John J. Zak, Esq. Justin P. Klein, Esq.
Mary Catherine Malley, Esq. Gary Arlen Smith, Esq.
Hodgson, Russ, Andrews, Woods & Ballard Spahr Andrews & Ingersoll, LLP
Goodyear, LLP 1735 Market Street, 51st Floor
One M & T Plaza, Suite 2000 Philadelphia, Pennsylvania 19103
Buffalo, New York 14203
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed
Amount Proposed Maximum Maximum
Title of Each Class of to be Offering Price Aggregate Amount of
Securities to be Registered Registered(1) Per Share(2) Offering Price(2) Registration Fee
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, without par
value......................... 2,935,584 $12.53 $36,782,867.52 $9,710.67
</TABLE>
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(1) Includes 375,000 shares that the Underwriters have the option to purchase
from the Company to cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) based on the average of the bid and asked
prices for the shares of common stock as reported on The Nasdaq National
Market on June 28, 2000.
------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and is not soliciting an offer to buy these +
+securities in any state where an offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Preliminary prospectus dated July , 2000
2,560,584 Shares
[LOGO OF SPECTRUM CONTROL, INC.]
SPECTRUM CONTROL, INC.
Common Stock
-----------------------------------
We are selling 2,500,000 shares of common stock and the shareholders of
Spectrum named in this prospectus are selling 60,584 shares of common stock. We
will not receive any proceeds from the sale of common stock by the selling
shareholders. Our common stock is traded on the Nasdaq National Market under
the symbol "SPEC." On July 5, 2000, the last reported sale price of our common
stock on the Nasdaq National Market was $13.75 per share.
-----------------------------------
Before investing you should review the "Risk Factors" beginning on page 5.
<TABLE>
<CAPTION>
Per Share Total
--------- ---------
<S> <C> <C>
Public offering price.................................... $ $
Underwriting discount.................................... $ $
Proceeds to Spectrum, before expenses.................... $ $
Proceeds to selling shareholders......................... $ $
</TABLE>
The underwriters have an option to purchase up to an additional 375,000 shares
of common stock from us at the public offering price, less the underwriting
discount, within 30 days from the date of this prospectus to cover over-
allotments.
-----------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares of common stock will be ready for delivery on or about , 2000.
-----------------------------------
Janney Montgomery Scott LLC Needham & Company, Inc.
The date of this prospectus is , 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Forward-Looking Statements............................................... 4
Risk Factors............................................................. 5
Use of Proceeds.......................................................... 9
Price Range of Common Stock.............................................. 10
Dividend Policy.......................................................... 10
Capitalization........................................................... 11
Selected Consolidated Financial Data..................................... 12
Management's Discussion and Analysis of Financial Condition and Results
of Operation............................................................ 13
Our Company.............................................................. 20
Management............................................................... 30
Selling Shareholders..................................................... 32
Description of Capital Stock............................................. 33
Underwriting............................................................. 34
Shares Eligible For Future Sale.......................................... 35
Legal Matters............................................................ 37
Experts.................................................................. 37
Incorporation Of Certain Documents By Reference.......................... 37
Where You Can Find More Information...................................... 38
Index to Consolidated Financial Statements............................... F-1
</TABLE>
----------------
You should rely only on the information contained in this prospectus. We
have not, nor have the selling shareholders or the underwriters, authorized any
other person to provide you with different information. If anyone provides you
with different or inconsistent information, you should not rely on it. We are
not, nor are the selling shareholders or the underwriters, making an offer to
sell these securities in any jurisdiction where the offer and sale is not
permitted. You should assume that the information appearing in this prospectus
is only accurate as of the date on the front cover of this prospectus. Our
business, financial condition, results of operations and prospects may have
changed since that date.
The information in this prospectus may not contain all of the information
that may be important to you. You should read the entire prospectus, as well as
the documents incorporated by reference in the prospectus, before making an
investment decision. All references to "we," "us," "our," "our company" or
"Spectrum" in this prospectus mean Spectrum Control, Inc. and its subsidiaries.
<PAGE>
PROSPECTUS SUMMARY
This summary calls your attention to selected information in this document,
but may not contain all of the information that is important to you. Unless
otherwise indicated we have assumed, in presenting information about the
outstanding shares of common stock, including per share information, that the
underwriters' over-allotment option will not be exercised. In addition, unless
otherwise indicated, all references to a "year" or "years" in this prospectus
mean our fiscal year or years ending November 30. You should read this entire
document carefully, including particularly the "RISK FACTORS" section as well
as the documents we have referred you to in the section called "WHERE YOU CAN
FIND MORE INFORMATION."
SPECTRUM CONTROL, INC.
We are a leader in the design and manufacture of control products and
systems used to condition, regulate and govern electronic performance,
including filter products used to protect electronic equipment against
electromagnetic interference, or EMI. Over the past several years, we have
leveraged our core EMI filtering expertise to offer our customers a broad line
of signal products, microwave/wireless products and power products. In
addition, we recently formed our Advanced Systems Group to provide our
customers with more complex power management systems and have introduced a line
of digital radio-frequency control equipment for remote and automatic
electronic systems management.
Using a solutions-oriented approach, we provide products tailored to meet
our customers' specific needs by anticipating and solving their systems
architecture and performance problems. We combine engineering expertise, design
and testing capabilities, vertically integrated manufacturing processes and
flexible production schedules to provide custom solutions in a wide variety of
large electronics market, including:
. telecommunications equipment . computers and office equipment
. medical devices and instrumentation . industrial equipment and controls
. military/aerospace systems . automotive and consumer electronics
In 1999, approximately 58% of our sales were to original equipment
manufacturer (OEM) customers in the telecommunications industry, which is our
largest and fastest-growing market. Our products are used in numerous
telecommunications systems, including cellular base stations, fiber optic
networks and switching equipment, wireless modems and LANs, Internet servers
and global positioning systems. Our largest customers are Lucent, Nortel, and
Motorola, who respectively accounted for 18%, 8% and 6% of our sales in 1999.
We expect the markets for our products to continue to expand, driven primarily
by continuing growth of the wireless and fiber optic networking segments of the
telecommunications industry and the increasing electronic content and
complexity of many end-products.
We believe we are well positioned to capitalize on our market opportunities
because we offer:
. a broad range of signal and power products;
. integrated design, development and testing services;
. flexible, low-cost production capabilities; and
. high quality, high performance products.
1
<PAGE>
Key elements of our strategy include:
. leveraging our status as a strategic supplier to our OEM customers;
. introducing new signal and power product lines;
. expanding in markets for higher margin advanced systems;
. pursuing acquisitions that enhance our product offerings; and
. remaining a low-cost, efficient producer.
We maintain our principal executive offices at 8031 Avonia Road, Fairview,
Pennsylvania 16415 and our telephone number is (814) 835-1650.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Spectrum............ 2,500,000 shares
Common stock offered by selling
shareholders............................... 60,584 shares
Common stock outstanding after the
offering................................... 13,573,052 shares(/1/)
Nasdaq National Market symbol............... SPEC
Use of Proceeds............................. We will use the net proceeds of this
offering to repay outstanding indebtedness.
Any net proceeds available after repayment
of outstanding indebtedness will be used for
general corporate purposes.
Risk Factors................................ See "Risk Factors" for a discussion of
factors that you should carefully consider
before deciding to invest in shares of our
common stock.
</TABLE>
--------
(1) Based on our shares outstanding as of May 31, 2000 and excluding an
aggregate of 600,208 shares issuable upon the exercise of stock options
outstanding as of May 31, 2000, at a weighted average exercise price of
$6.57 per share, and 39,416 shares issuable upon the exercise of
immediately exercisable common stock purchase warrants outstanding as of
May 31, 2000 at $6.25 per share. Warrants covering an additional 60,584
shares of common stock were also outstanding as of May 31, 2000, which
warrants will be exercised by the selling shareholders in connection with
their sale of shares in this offering. Of the shares of common stock
issuable upon the exercise of stock options outstanding, 115,029 shares
were subject to immediately exercisable stock options at a weighted average
exercise price of $4.34 per share.
2
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
This table includes certain summary financial data about us. You should read
this table together with the discussion under the headings "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and accompanying notes that we include in this prospectus and
similar sections in the documents that we incorporate by reference into this
prospectus.
<TABLE>
<CAPTION>
Six Months
Year Ended November 30, Ended May 31,
--------------------------------------- ---------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Income Statement
Data:
Net sales............... $49,297 $57,327 $56,466 $59,868 $97,729 $39,867 $60,611
Gross margin............ 16,061 18,076 17,421 18,284 27,912 11,423 15,623
Income from operations.. 5,045 5,470 5,786 6,462 10,164 4,177 5,881
Income before provision
for income taxes....... 4,095 4,737 5,510 6,319 8,840 3,824 5,137
Net income.............. 2,984 3,418 3,974 3,934 5,470 2,373 3,185
Earnings per common
share:
Basic................. $ 0.28 $ 0.32 $ 0.37 $ 0.36 $ 0.50 $ 0.22 $ 0.29
Diluted............... $ 0.28 $ 0.32 $ 0.37 $ 0.36 $ 0.49 $ 0.22 $ 0.28
Shares used in per share
calculations:
Basic................. 10,585 10,731 10,798 10,907 10,905 10,888 10,992
Diluted............... 10,655 10,776 10,869 11,016 11,051 10,975 11,268
</TABLE>
<TABLE>
<CAPTION>
May 31, 2000
-------------------
As
Actual Adjusted(1)
------- -----------
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents................................... $ 641 $ 8,350
Working capital............................................. 24,779 42,523
Total assets................................................ 87,758 95,213
Total debt, including current portion....................... 28,381 3,799
Total stockholders' equity.................................. 42,254 74,388
</TABLE>
--------
(1) The consolidated balance sheet data under the "as adjusted" column at May
31, 2000, reflects the sale by us of 2,500,000 shares of our common stock
in this offering at an assumed public offering price of $13.75 per share,
net proceeds to us of approximately $32.3 million after deducting the
underwriting discount and estimated offering expenses payable by us, and
our use of the estimated net proceeds to repay debt as described in the
"Use of Proceeds" section of this prospectus. In addition, the "as
adjusted" column gives effect to the exercise of outstanding common stock
purchase warrants held by the selling shareholders for the 60,584 shares
of common stock to be sold by them in this offering.
3
<PAGE>
FORWARD-LOOKING STATEMENTS
We discuss in this prospectus and in documents which we incorporate by
reference into this prospectus certain matters which are not historical facts,
but which are "forward-looking statements." We intend these forward-looking
statements to qualify for the safe harbor from liability established by the
Private Securities Litigation Reform Act of 1995.
These forward-looking statements include, but are not limited to,
descriptions of management's expectations regarding the future markets for our
products, future operating performance, future plans, objectives, expectations
and events concerning various matters such as on-going cash requirements, our
capital expenditures, expansion plans, acquisitions, earnings, and growth
potential.
Words such as we "expect," "anticipate," "approximate," "believe,"
"estimate," "intend," and "hope" and variations of such words and similar
expressions are intended to identify such forward-looking statements. These
forward-looking statements are only predictions. We have based these statements
on our current expectations and projections about future events. These forward-
looking statements are not guarantees of future performance. Actual results or
events may differ materially from historical results or those suggested by
these forward-looking statements. Certain factors that may cause actual results
to differ from those suggested by these statements include the risks associated
with these statements set forth under "RISK FACTORS" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
We are under no duty and are not promising to make any public announcement
when we think forward-looking statements in this prospectus are no longer
accurate, whether as a result of new information, future events or for any
other reason.
In this prospectus, we rely on and refer to information and statistics
regarding the markets in which we compete. We obtained this information and
statistics from various third party sources, discussions with our customers and
our own internal estimates. We believe that these sources and estimates are
reliable, but we have not independently verified them.
4
<PAGE>
RISK FACTORS
Risks involved in investing in our common stock are described below. These
risks are not the only ones we face. Before deciding to invest in our common
stock, you should carefully consider these risks and all of the information
both in this prospectus and in other documents we refer you to in the sections
called "Incorporation of Certain Documents By Reference" and "Where You Can
Find More Information."
The current strong demand for our products may not continue.
Our largest single market is the telecommunications industry. In 1999, 58%
of our sales were made to customers in this industry. Demand for our products
reflects overall demand for products in the telecommunications industry and the
electronics industry in general. The current strong demand for our products may
not continue because it would be affected by a downturn or reduction in the
growth rate of the telecommunications industry or the electronics industry. An
increase in supply due to the expansion of production capacity by our
competitors could also cause a significant drop in the demand for our products
or in our average sales prices. Any such decrease in current demand or drop in
average sales prices could cause a reduction in our gross margins and operating
profits.
A loss of a key customer could reduce our sales and profits.
In 1999, Lucent, Nortel and Motorola accounted for approximately 18%, 8% and
6% of our sales, respectively. We do not have minimum purchase commitments from
any of these customers. The loss of these customers or any other large customer
would adversely affect our business and operating results.
We may incur unexpected costs and delays in creating needed manufacturing
capacity.
We are in the process of increasing our manufacturing capacity to
accommodate increased business activity, the introduction of our Advanced
Systems Group products and the integration of operations resulting from recent
acquisitions. We are preparing additional manufacturing space in Wesson,
Mississippi and Juarez, Mexico to provide us with this needed increased
capacity. There may be unexpected costs and delays in starting or increasing
capacity at these facilities. Our new facility in Mexico will be vulnerable to
local political and economic conditions. Any delay in bringing these facilities
on-line will limit our ability to meet increased customer demand and adversely
affect our operating results.
Our introduction of products through our newly-formed Advanced Systems Group
may be unsuccessful.
We have recently begun to offer a line of new digital radio-frequency
control equipment through our Advanced Systems Group. These new products
monitor and manage the functioning of various types of electronic equipment. In
addition, these products provide automatic management and remote management
through wireless or external communication links. Our efforts to expand into
this new market will require capital expenditures and will present new
operational issues including our ability to design, manufacture and deliver
high quality products. In addition, we used internal estimates to identify the
market size and opportunities available for these products. We may have
incorrectly identified the opportunity in this market or we may be unsuccessful
in managing our additional capital expenditures and operational needs to
optimize our expansion into this market. If our efforts are unsuccessful, it
may have an adverse impact on our business or operating results.
Our strategy to grow through acquisitions may be unsuccessful.
We intend to grow through acquisitions of product lines and companies that
complement our existing business. We may not be able to identify acquisitions
or, once identified, complete them on terms acceptable to us. We will compete
for acquisitions with competitors and others who have substantially greater
resources.
5
<PAGE>
Acquisitions present many risks including:
. difficulties in integrating the operations and products of an acquired
business or in realizing projected efficiencies and cost savings;
. entry into markets in which we may have limited or no experience;
. diversion of management's attention from our core business;
. potential loss of key employees or customers of the acquired businesses;
. inaccurate assessments of undisclosed liabilities; and
. increases in our indebtedness and a limitation in our ability to access
additional capital when needed.
Our labor relations may affect our productivity.
In 1999, our employee productivity levels declined below historical levels
at our Erie and Fairview facilities when labor organizers unsuccessfully
attempted to organize our manufacturing employees at these facilities. If union
organizers were again to attempt to organize our employees at these facilities
our productivity at these facilities may again decline below historical levels.
If union organizers were to successfully organize our employees at these
facilities, our labor costs may increase. In either case, our profits may be
reduced.
We may not be able to satisfy evolving customer requirements.
Our future success depends in part on continuous, timely development and
introduction of new products that address evolving customer requirements and
expectations. Many of our customers, particularly our largest customers, rely
on us to design and manufacture products that are developed for the particular
needs of their end-products. We dedicate significant resources to develop
products and technologies for current and potential customers. Our inability,
for technological or other reasons, to successfully develop and introduce new
and enhanced products or satisfy increased customer demands could adversely
affect our business and operating results.
The value of inventories held for customers may not be realized.
Some of our customers require us to maintain their finished product
inventory on a consignment basis. Further, we maintain certain minimum levels
of inventory of raw materials and finished products to meet customers' just-in-
time requests. If our relationship with one or more of the customers for whom
we hold finished goods or raw materials terminates, we may be unable to
recognize the value of these finished goods or unused raw materials, which
could reduce our profits.
We cannot control changes in availability and cost of our key raw materials.
We currently use precious metals, including palladium, platinum and silver,
and a variety of rare earth elements in the production of our products.
Platinum is mined primarily in Russia and South Africa. Historically, the
markets for palladium and platinum have experienced a substantial amount of
price volatility. The lack of availability of, or significant price increases
for, palladium, platinum, silver or other raw materials could adversely affect
our operating results.
Our international sales expose us to material risks.
Sales to our customers for delivery outside of the United States represented
28%, 21% and 18% of net sales for fiscal 1999, 1998 and 1997, respectively. We
expect sales from foreign markets to continue to represent a significant
portion of total sales. There are risks inherent in doing business
internationally that may adversely affect our ability to remain competitive in
these markets and may adversely affect our operating results and our
profitability. These risks include transportation delays, the need to provide
longer payment terms
6
<PAGE>
in international markets, difficulties in collecting receivables and enforcing
contracts in various countries in which we do business, changes in
import/export regulations, tariffs and freight rates and currency exchange rate
fluctuations.
Reductions in military spending could reduce demand for our products.
In 1999, 22% of our sales were made to customers in the military/aerospace
industries. A reduction in military spending by the United States federal
government could decrease demand for some of our products. A reduction in
military spending may occur and is beyond our control. If there is a reduction
in military spending, our business and operating results could be adversely
affected.
New technology could produce alternative EMI filters or eliminate the need for
filters.
Technology in the electronics industry changes very quickly. New technology
may result in a different method of filtering EMI or even create media for
power and signal transfer which do not generate EMI. These alternatives may be
superior to the technology we currently utilize and could create competition
which could adversely affect our business and operating results.
We face significant competition and downward price pressures.
Our business is highly competitive. Customers in our industry are price-
sensitive and there is substantial and continuing pressure from customers to
reduce the prices for our products. Some of our competitors are smaller than we
are and, while they produce only a limited number of the products that we make,
they may have the advantage of lower overhead costs, allowing them to sell
their products at lower prices. Other competitors are larger than we are and
have greater financial resources, giving them certain advantages including
research and development and marketing. Our ability to remain competitive
depends on our ability to meet price pressures while maintaining market share
and, to the extent possible, protecting our margins from price erosion. To
remain competitive, we must achieve continuous cost reductions through improved
manufacturing processes and product improvements, including production time,
product flow, equipment retooling, employee training and inventory control. We
must also meet our customers' demands for assistance in minimizing their
shipping and inventory financing costs by producing and shipping on a just-in-
time basis. Our sales and profits will suffer if our competitors are more
successful than we are in reducing product costs and, to the extent that we are
unable to remain competitive, our business and operating results will suffer.
We are dependent upon our key personnel.
Our future performance depends to a significant degree upon the continued
contributions of our senior management and key technical personnel. Our
products are technical in nature. Only qualified and trained engineers have the
necessary skills to develop our products. The loss of any member of senior
management or any key technical employee could significantly harm us. We face
intense competition for these professionals from our competitors, our customers
and other companies operating in our industry. To the extent that the services
of our senior management and key technical personnel would be unavailable to us
for any reason, we would be required to hire other personnel. We may not be
able to locate and employ other qualified personnel on acceptable terms.
We may not be able to recruit and retain qualified employees to grow our
business.
Our ability to grow internally depends in large part upon our ability to
attract, train, retain and motivate skilled employees. Employees who have
experience in technology and engineering are in demand in numerous industries.
Although we believe we offer competitive salaries and benefits, we may have to
increase salaries and benefits in order to attract and retain employees. Any
inability to attract, train, retain and motivate employees may cause us to be
unable to grow our business at the rate we desire or at all.
7
<PAGE>
We may be unable to protect our intellectual property and proprietary rights.
Proprietary rights, trade secrets and know-how are important to our
business. We rely on trade secrets and know-how, which we protect through
confidentiality agreements, internal procedures and, to a lesser extent,
patents, to establish and protect our proprietary rights to our technologies
and products. We cannot guarantee that the steps we have taken or will take to
protect our proprietary rights will be adequate to deter misappropriation of
our intellectual property. If our trade secrets become known, we may lose some
of our competitive advantages.
In addition, we may not be able to detect the unauthorized use of our
intellectual property and take appropriate steps to enforce our rights. If
third parties infringe upon or misappropriate our intellectual property, our
business could be seriously harmed. Competitors may design around our
technology or develop competing technologies that do not infringe on our
rights. In addition, protection of intellectual property in many foreign
countries is weaker and less reliable than in the United States and Europe, and
as we expand in world markets, we face increased risks in protecting our
intellectual property in certain foreign countries.
The failure to comply with environmental regulations could result in
liabilities and fines.
We are subject to a variety of governmental regulations related to the
discharge or disposal of toxic, volatile or otherwise hazardous chemical
substances used in our manufacturing processes. Current or future regulations
could require us to purchase expensive equipment or to incur other substantial
expenses to comply with environmental regulations. Any failure by us to control
the use of, or adequately restrict the discharge or disposal of, hazardous
chemical substances could subject us to future liabilities or result in fines
being imposed on us.
We have various mechanisms in place to discourage takeover attempts, which may
reduce or eliminate your ability to sell your shares for a premium in a change
of control transaction.
Various provisions of our articles of incorporation and bylaws and in
Pennsylvania corporate law may discourage, delay or prevent a change in control
or takeover attempt of our company by a third party which is opposed by our
management and board of directors. Public shareholders who might desire to
participate in such a transaction may not have the opportunity to do so. These
provisions include:
. our ability to prevent the removal of our entire board of directors at
one time because we have a staggered board of directors with three classes
where only one class is elected each year at our annual meeting;
. our ability to issue "blank check" preferred stock to frustrate a
takeover attempt by increasing the number of outstanding shares;
. our ability to determine the individuals who may be able to call special
shareholder meetings; and
. the ability of the board of directors under Pennsylvania corporate law to
consider the interests of groups other than our shareholders when
evaluating a takeover proposal.
The anti-takeover provisions listed above could substantially impede the
ability of public shareholders to benefit from a change of control or change in
our management and board of directors.
8
<PAGE>
USE OF PROCEEDS
We estimate that our proceeds from the sale of 2,500,000 shares of common
stock in this offering at an offering price of $13.75 per share, after
deducting underwriting discounts and commissions and estimated offering
expenses payable by us, will be approximately $32.3 million, or $37.1 million
if the underwriters exercise their over-allotment option in full. We will not
receive any proceeds from the sale of 60,584 shares of common stock by the
selling shareholders.
We plan to use the net proceeds of this offering to repay the following
indebtedness:
. all amounts outstanding under our revolving credit facility,
approximately $6.4 million at May 31, 2000; and
. all amounts outstanding under a bank term loan, approximately $18.2
million at May 31, 2000.
We plan to use any remaining net proceeds for general corporate purposes.
Pending their use, we intend to invest the offering's net proceeds in short-
term interest-bearing securities.
Borrowings under the revolving credit agreement bore interest at 8.38% as of
May 31, 2000. The revolving credit agreement expires on March 26, 2002.
Borrowings under the term loan bore interest at 8.62% as of May 31, 2000. The
term loan requires quarterly principal payments of approximately $900,000 from
December 26, 1999 through March 26, 2005, at which time all amounts under the
term loan are due.
After application of the proceeds of this offering as described above, we
will have approximately $3.8 million of indebtedness outstanding, which
indebtedness bore interest at a weighted average rate of 5.5% as of May 31,
2000.
9
<PAGE>
PRICE RANGE OF COMMON STOCK
Our common stock is listed on the Nasdaq National Market and trades under
the symbol SPEC. On July 5, 2000, we had 11,012,468 shares of common stock
outstanding, which were held by approximately 2,000 holders of record. The
following table sets forth, for the fiscal periods indicated, the high and low
closing sales prices for the common stock on the Nasdaq National Market:
<TABLE>
<CAPTION>
High Low
------ -----
Year ended November 30, 1998
<S> <C> <C>
First Quarter..................................................... $ 5.75 $4.88
Second Quarter.................................................... 7.16 5.06
Third Quarter..................................................... 6.38 4.44
Fourth Quarter.................................................... 4.63 3.75
<CAPTION>
Year ended November 30, 1999
<S> <C> <C>
First Quarter..................................................... $ 4.94 $3.66
Second Quarter.................................................... 6.63 4.00
Third Quarter..................................................... 7.44 5.88
Fourth Quarter.................................................... 11.63 6.44
<CAPTION>
Year ended November 30, 2000
<S> <C> <C>
First Quarter..................................................... $15.81 $9.13
Second Quarter.................................................... 17.25 8.13
Third Quarter (through July 5).................................... 14.81 10.38
</TABLE>
On July 5, 2000, the closing bid and asked prices of our common stock on the
Nasdaq National Market were $13.44 and $13.75, respectively.
DIVIDEND POLICY
We have not paid cash dividends on our common stock since 1987, and we do
not intend to pay cash dividends in the foreseeable future. We currently intend
to retain any earnings to further develop and grow our business. While this
dividend policy is subject to periodic review by our board of directors, there
can be no assurance that we will declare and pay dividends in the future.
10
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization, as of May 31, 2000 and as
adjusted to give effect to our sale of 2,500,000 shares of common stock in this
offering at an assumed offering price of $13.75 per share (the last reported
sale price of our common stock on July 5, 2000), after deducting underwriting
discounts and estimated offering expenses, and the application of the net
proceeds of this offering to repay debt as described under the heading "Use of
Proceeds." In addition, the capitalization as adjusted assumes and gives effect
to the exercise of outstanding common stock purchase warrants held by the
selling shareholders for the 60,584 shares of common stock to be sold by them
in this offering. This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and accompanying notes included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
May 31, 2000
--------------------
As
Actual Adjusted(1)
------- -----------
(in thousands)
<S> <C> <C>
Total debt, including current portion...................... $28,381 $ 3,799
======= =======
Stockholders' equity
Common stock, no par value; authorized 25,000,000 shares;
11,081,801 issued, actual; 13,642,385 shares issued, as
adjusted................................................ $14,810 $47,101
Retained earnings(2)..................................... 28,453 28,296
Treasury stock, 70,000 shares, at cost................... (294) (294)
Accumulated other comprehensive income
Foreign currency translation adjustment................ (715) (715)
------- -------
Total stockholders' equity............................... 42,254 74,388
------- -------
Total capitalization....................................... $70,635 $78,187
======= =======
</TABLE>
--------
(1) The table above excludes 600,208 shares of common stock issuable upon the
exercise of stock options outstanding as of May 31, 2000, at a weighted
average exercise price of $6.57 per share. Of these, 115,029 shares of
common stock were subject to immediately exercisable stock options at a
weighted average exercise price of $4.34 per share.
(2) Retained earnings, as adjusted, reflects the after-tax effect of
unamortized debt issuance costs to be charged against earnings upon the
repayment of our outstanding term loan.
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data along
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our consolidated financial statements and the accompanying
notes, each of which is included in this prospectus. We derived the income
statement data for each of the three years in the period ended November 30,
1999 and the balance sheet data as of November 30, 1998 and 1999 from our
consolidated financial statements, which have been audited by Ernst & Young
LLP, independent auditors, and are included in this prospectus. We derived the
income statement data for each of the two years in the period ended November
30, 1996 and the balance sheet data as of November 30, 1995, 1996 and 1997 from
our audited consolidated financial statements which are not included in this
prospectus. We derived the income statement data for the six months ended May
31, 1999 and 2000 and the balance sheet data as of May 31, 1999 and 2000 from
our unaudited consolidated financial statements, which are included in this
prospectus. In the opinion of our management, the unaudited consolidated
financial data includes all adjustments, consisting of only normal recurring
adjustments, considered necessary for a fair presentation of such information.
Our results of operations for the six month period ended May 31, 2000 are not
necessarily indicative of the results that we may achieve for the full fiscal
year.
<TABLE>
<CAPTION>
Six Months
Year Ended November 30, Ended May 31,
------------------------------------------- ----------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Income
Statement Data:
Net sales............... $49,297 $57,327 $56,466 $59,868 $97,729 $39,867 $60,611
Cost of products sold... 33,236 39,251 39,045 41,584 69,817 28,444 44,988
------- ------- ------- ------- ------- ------- -------
Gross margin............ 16,061 18,076 17,421 18,284 27,912 11,423 15,623
Selling, general and
administrative
expense................ 11,016 12,606 11,635 11,822 17,748 7,246 9,742
------- ------- ------- ------- ------- ------- -------
Income from operations.. 5,045 5,470 5,786 6,462 10,164 4,177 5,881
Other income (expense)
Interest expense....... (908) (753) (417) (228) (1,420) (388) (1,179)
Other income and
expense, net.......... (42) 20 141 85 96 35 435
------- ------- ------- ------- ------- ------- -------
Income before provision
for income taxes....... 4,095 4,737 5,510 6,319 8,840 3,824 5,137
Provision for income
taxes.................. 1,111 1,319 1,536 2,385 3,370 1,451 1,952
------- ------- ------- ------- ------- ------- -------
Net income.............. $ 2,984 $ 3,418 $ 3,974 $ 3,934 $ 5,470 $ 2,373 $ 3,185
======= ======= ======= ======= ======= ======= =======
Earnings per common
share:
Basic.................. $ 0.28 $ 0.32 $ 0.37 $ 0.36 $ 0.50 $ 0.22 $ 0.29
Diluted................ $ 0.28 $ 0.32 $ 0.37 $ 0.36 $ 0.49 $ 0.22 $ 0.28
Shares used in per share
calculations:
Basic.................. 10,585 10,731 10,798 10,907 10,905 10,888 10,992
Diluted................ 10,655 10,776 10,869 11,016 11,051 10,975 11,268
<CAPTION>
As of November 30, As of May 31,
------------------------------------------- ----------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $ 202 $ 413 $ 196 $ 739 $ 538 $ 73 $ 641
Working capital......... 9,967 12,534 16,881 18,619 23,989 22,938 24,779
Total assets............ 39,498 40,213 40,056 44,139 82,554 75,316 87,758
Total debt, including
current portion........ 12,666 9,742 4,113 3,666 28,376 25,600 28,381
Total stockholders'
equity................. 21,781 25,379 29,545 33,774 39,135 36,113 42,254
</TABLE>
We acquired the Signal Conditioning Products Division of AMP Incorporated on
March 26, 1999 and Potter Production Corporation on September 21, 1998. Each of
the acquisitions was accounted for as a purchase and, accordingly, the results
of operations of the acquired businesses are included in the above data since
the date of acquisition.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We were founded in 1968 as a solutions-oriented company, designing and
manufacturing products to suppress or eliminate EMI. In recent years, we
broadened our focus and product lines to become a leading designer and
manufacturer of control products and systems, providing a wide range of
products used to condition, regulate, transmit, receive, and govern electronic
performance. Although our components and systems are used in many industries
worldwide, our largest market is the telecommunications industry. In 1999,
approximately 58% of our sales were to customers in the telecommunications
industry. Our products are used in numerous telecommunications systems
including cellular base stations, fiber optic networks and switching equipment,
wireless modems and LANS, Internet servers, and global positioning systems. Our
growth is being driven by the expansion of the wireless and fiber optic
networking segments of the telecommunications industry, the increasing
electronic content and complexity of many end-products and the positive impact
of our strategic acquisitions.
Our operations are primarily conducted in two business segments: signal
products and power products. Our Signal Products Group manufactures a broad
line of discrete EMI filters, filtered arrays, filtered connectors, wireless
products (coaxial ceramic resonators, bandpass filters, and duplexers), and
specialty ceramic capacitors (single layer, temperature compensating, high
voltage, and switch mode). Our Power Products Group manufactures various power
management and conditioning products including power distribution systems,
power line filters, and power entry modules. Recently, we formed our Advanced
Systems Group to become a provider of more complex power management systems,
and have introduced a line of digital radio-frequency control equipment for
remote and automatic electronic systems management.
We believe demand for our electronic components and systems will continue to
increase. As a result, we have significantly increased our production capacity
in recent years through continued investment in our plants, including those
acquired from SCPD, and in equipment. We believe that, in addition to increased
worldwide demand for electronic components and systems, other factors that
provide opportunities for continued improvements in profitability include:
. the growth of our strategic relationships with customers as a growing
number of OEMs outsource the development and manufacturing of components
and systems;
. capacity expansion programs in low labor cost areas;
. continuous improvements in our production processes; and
. the introduction of higher-margin Advanced Systems Group products.
On March 26, 1999, we acquired substantially all of the assets of the Signal
Conditioning Products Division ("SCPD") of AMP Incorporated. AMP is a world
leader in the manufacture of electrical, electronic, fiber optic and wireless
interconnection devices and systems. Through SCPD, AMP manufactured and sold a
broad line of EMI filter products, with annual sales of approximately $30.0
million. The acquisition was accounted for as a purchase and, accordingly, the
results of operations of SCPD have been included in our financial statements
since the date of acquisition.
13
<PAGE>
Results of Operations
The following table sets forth the percentage relationship to net sales of
certain income statement items for the periods presented:
<TABLE>
<CAPTION>
Six Months
Years Ended Ended
November 30, May 31,
------------------- ------------
1997 1998 1999 1999 2000
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of products sold...................... 69.2 69.5 71.4 71.3 74.2
----- ----- ----- ----- -----
Gross margin............................... 30.8 30.5 28.6 28.7 25.8
Selling, general and administrative
expense................................... 20.6 19.7 18.2 18.2 16.1
----- ----- ----- ----- -----
Income from operations..................... 10.2 10.8 10.4 10.5 9.7
Other income (expense)
Interest expense......................... (0.7) (0.4) (1.5) (1.0) (1.9)
Other income and expense, net............ 0.2 0.2 0.1 0.1 0.7
----- ----- ----- ----- -----
Income before provision for income taxes... 9.7 10.6 9.0 9.6 8.5
Provision for income taxes................. 2.7 4.0 3.4 3.6 3.2
----- ----- ----- ----- -----
Net income................................. 7.0% 6.6% 5.6% 6.0% 5.3%
===== ===== ===== ===== =====
</TABLE>
Six Months Ended May 31, 2000 Compared to Six Months Ended May 31, 1999
Net Sales. For the first half of 2000, consolidated net sales increased by
$20.7 million, or 52.0%. Sales of signal products amounted to $43.4 million
during the first six months of 2000, an increase of $16.4 million compared to
the same period of 1999. Of this increase, approximately $9.0 million was
generated from the sale of SCPD products. The remaining $7.4 million increase
in signal product sales principally reflects higher shipment levels to original
equipment manufacturers of telecommunications equipment. Sales of power
products increased by $4.3 million during the first half of 2000, primarily
reflecting additional shipments of power distribution systems and single line
filters. These power products are principally used in telecommunications
equipment, including high-end Internet servers and networks. Selling prices
declined slightly during the first half of 2000 as a result of competitive
pressures. Overall demand for our products was strong throughout the period
with total customer orders of $76.1 million received in the first six months of
2000, an increase of $22.3 million, or 41.3%, from the same period last year.
Gross Margin. For the first six months of 2000, gross margin was $15.6
million, or 25.8% of sales, compared to $11.4 million, or 28.7% of sales for
the first half of 1999. The decrease in gross margin percentage primarily
reflects manufacturing yield losses and higher labor costs incurred during the
first three months of 2000 related to the integration of SCPD into our Signal
Products Group. This integration, which included the redesign of certain SCPD
products and production processes, was completed during the second quarter of
2000. To increase manufacturing capacity we are expanding our production and
assembly operations. In June 2000, we established manufacturing operations in a
new 46,000 square foot facility in Juarez, Mexico. Production in this leased
facility is expected to be phased in throughout 2000. We also anticipate
constructing a 26,000 square foot addition to our Wesson, Mississippi facility
later this year. We believe that these capacity expansions will improve
operating efficiencies and lower production costs. Accordingly, gross margin
percentages are expected to improve during the second half of 2000 and
approximate 29.0% to 30.0% of sales.
Selling, General and Administrative Expense. With additional sales volume,
selling expense increased during the first half of 2000 to $5.8 million, or
9.6% of sales, compared to $4.1 million, or 10.4% of sales for the same period
in 1999. The decrease in selling expense as a percentage of sales principally
reflects economies
14
<PAGE>
of scale realized with additional sales volume. General and administrative
expense was $3.9 million in the first six months of 2000, compared to $3.1
million in the comparable period of 1999. Of this $800,000 increase,
approximately $200,000 consisted of the amortization of goodwill recognized in
connection with our acquisition of SCPD in March 1999. The remaining increase
in general and administrative expense reflects additional personnel costs,
professional fees and other operating expenses associated with our increased
business activity.
Other Income and Expense. In March 1999 we secured a $20.0 million term loan
to substantially finance the acquisition of SCPD. Principally as a result of
incurring this debt, interest expense increased by $791,000 during the period,
from $388,000 in 1999 to $1.2 million in 2000. In addition, weighted average
short-term bank borrowings and interest rates increased during 2000.
We hold numerous United States and foreign patents relating to polymer
multilayer ("PML") technology. During the first half of 2000 we realized
$375,000 of license fee income upon the granting of a PML capacitor license.
Although the license, as well as other PML technology licenses that we have
previously granted, requires certain royalties to be paid to us upon the sale
of products utilizing PML technology, it is not known what future commercial
value, if any, these patents and related licenses may have.
Income Taxes. Our effective income tax rate was 38.0% in the first six
months of 2000 and 1999, compared to an applicable statutory income tax rate of
approximately 40.0%. Differences in the effective tax rate and statutory income
tax rate principally arise from state tax provisions and foreign income tax
rates.
Year Ended November 30, 1999 Compared to Year Ended November 30, 1998
Net Sales. Consolidated 1999 net sales increased by $37.9 million, or 63.2%,
from 1998. Of this increase, $21.3 million was generated from the sale of SCPD
and other signal products, with the remaining $16.6 million primarily generated
from the sale of power products. These power products are principally used in
telecommunications equipment, including cellular base stations, telephone
switching networks, and Internet servers. Overall market demand in the
telecommunications industry was strong throughout the year. In 1999, we
received total customer orders of $119.8 million, an increase of 93.5% from
1998. In addition to these customer orders, we assumed approximately $5.1
million of customer order backlog in connection with the acquisition of SCPD.
Average selling prices declined slightly during the year as a result of market
pressures.
Gross Margin. Gross margin was $27.9 million, or 28.6% of sales in 1999,
compared to $18.3 million or 30.5% of sales in 1998. The decrease in gross
margin percentage reflects several factors of relative equal significance,
including: additional production costs and inefficiencies incurred during the
integration of SCPD into our Signal Products Group; changes in sales mix from
our signal products to our power product offerings; yield losses and resultant
higher labor costs incurred at our ceramic components division in New Orleans,
Louisiana; and lower average selling prices as indicated above.
Selling, General and Administrative Expense. As a result of greater sales
volume, selling expense increased during the period. Selling expense amounted
to $9.7 million, or 10.0% of sales in 1999, compared to $6.8 million, or 11.4%
in 1998. The decrease in selling expense as a percentage of sales principally
reflects economies of scale realized with the additional sales volume. General
and administrative expense was approximately $8.0 million in 1999, compared to
$5.0 million in 1998. Of this increase, approximately $400,000 consisted of the
amortization of goodwill recognized in connection with our acquisition of SCPD
in March 1999. The remaining increase in general and administrative expense
primarily reflects additional personnel costs, professional fees and other
operating expenses associated with our increased business activity.
Other Income and Expense. As a result of additional bank indebtedness,
interest expense increased by $1.2 million in 1999, from $228,000 to $1.4
million. To finance the acquisition of SCPD, we secured a $20.0 million
variable rate term loan from our principal lending institutions. Interest on
the term loan was
15
<PAGE>
$990,000 in 1999, with an average interest rate of 7.25%. In addition, weighted
average short-term bank borrowings were $1.6 million in 1999, compared to
$28,000 in 1998.
Our wholly-owned German subsidiary transacts business with certain customers
and vendors in currencies other than the Deutsche Mark. As a result, we
recognize gains and losses on foreign currency transactions. We incurred net
gains of $4,000 in 1999 and net losses of $40,000 in 1998 on these foreign
currency transactions. We recognized other income of $79,000 in 1999 and
$125,000 in 1998 from certain short-term investments and patent licensing fees.
Income Taxes. Our effective income tax rate was 38.1% in 1999 and 37.7% in
1998, compared to an applicable federal and state statutory income tax rate of
approximately 40.0%. Differences between the effective tax rate and statutory
tax rate primarily arise from state tax provisions and foreign income tax
rates.
At November 30, 1999, we had recorded certain deferred tax assets. We have
assessed our past earnings history and trends, and expiration dates of tax
attribute carryforwards, and have determined that it is more likely than not
that these deferred tax assets will be realized to offset future taxable income
from ordinary and recurring operations.
Year Ended November 30, 1998 Compared to Year Ended November 30, 1997
Net Sales. Consolidated 1998 net sales increased by $3.4 million, or 6.0%,
from 1997. The increase in sales primarily reflects additional shipment volume
of our commercial custom assemblies which are used in various
telecommunications systems. Sales of these power products increased by $4.7
million in 1998. In addition, sales of ceramic capacitors increased $1.0
million in 1998. Shipments of our other signal products decreased by $2.7
million during the year, primarily reflecting weak overall market demand in the
passive electronic components industry and sharp inventory reductions by
original equipment manufacturers and distributors. Average selling prices
declined slightly during the year as a result of competitive pressures. Overall
demand for our products increased during the year with total customer orders of
$61.9 million received in 1998, an increase of 1.6% from 1997.
Gross Margin. As a percentage of sales, gross margin declined slightly
during the period to 30.5% in 1998 from 30.8% in 1997. The decrease in gross
margin percentage principally reflects changes in sales mix. As a result of
additional sales volume, gross margin increased to $18.3 million in 1998,
compared to $17.4 million in 1997.
Selling, General and Administrative Expense. Because of the greater sales
volume, selling expense increased during the period to $6.8 million in 1998
from $6.5 million in 1997. General and administrative expense was approximately
$5.0 million or 8.4% of sales in 1998, compared to $5.1 million or 9.2% of
sales in 1997. The decrease in general and administrative expense primarily
reflects lower personnel costs and reduced discretionary spending.
Other Income and Expense. Interest expense decreased by $189,000 from
$417,000 in 1997 to $228,000 in 1998. The decrease in interest expense
primarily reflects the repayment in 1998 of $743,000 of long-term debt. In
addition, weighted average short-term bank borrowings were only $28,000 in
1998, compared to $982,000 in 1997. Average interest rates also declined
slightly during 1998.
As previously indicated, our wholly-owned German subsidiary transacts
business with certain customers and vendors in currencies other than the
Deutsche Mark. As a result, we incurred net losses of $40,000 in 1998 and net
gains of $12,000 in 1997 on these foreign currency transactions.
We recognized other income of $125,000 in 1998 and $137,000 in 1997 from
certain short-term investments and patent licensing fees.
16
<PAGE>
Income Taxes. Our effective income tax rate was 37.7% in 1998 and 27.9% in
1997, compared to an applicable statutory income tax rate of approximately
40.0%. In 1998, the difference between the effective tax rate and statutory tax
rate primarily arises from state tax provisions and foreign income tax rates.
In 1997, the difference in the effective tax rate and statutory tax rate
reflects a $1.2 million decrease in the deferred tax asset valuation allowance,
principally related to certain German net operating loss carryforwards.
Liquidity, Capital Resources and Financial Condition
We maintain a revolving line of credit with our principal lending
institutions, PNC Bank, N.A. of Erie, Pennsylvania and M&T Bank of Buffalo, New
York. Effective March 21, 2000, the line of credit was increased from $6.0
million to $10.0 million. This revolving credit line is collateralized by
substantially all of our tangible and intangible property, with interest rates
on borrowings at or below the prevailing prime rate. At May 31, 2000, we had
borrowed $6.4 million under this financing arrangement. The line of credit
agreement expires March 26, 2002.
Our wholly-owned German subsidiary maintains unsecured Deutsche Mark lines
of credit with several German financial institutions aggregating $1.6 million
(DM 3.5 million). At May 31, 2000, outstanding borrowings under these lines of
credit amounted to $732,000 (DM 1.6 million). Borrowings under the lines of
credit bear interest at rates below the prevailing prime rate and are payable
upon demand.
We acquired substantially all of the assets of SCPD on March 26, 1999. The
aggregate cash purchase price of the acquired assets was approximately $20.7
million. To finance the acquisition we secured an aggregate $20.0 million term
loan from PNC Bank, N.A. and M&T Bank. The term loan bears interest at variable
rates at or below the prevailing prime rate and requires quarterly principal
payments of $909,000 from December 26, 1999 through March 26, 2005.
The credit agreement covering the $20.0 million term loan and our revolving
credit facility requires us to comply with certain covenants. These covenants
generally restrict us from granting additional liens on our assets, disposing
of assets other than in the ordinary course of business, and incurring
additional indebtedness other than purchase money indebtedness and debt not
exceeding $5.0 million in the aggregate. The credit agreement also imposes
certain restrictions on our future acquisitions. In addition, the credit
agreement requires that we meet the following quarterly financial covenants:
maintain a minimum net worth of $28.0 million plus 50% of our net income for
each year ending after November 30, 1998; maintain a minimum ratio of EBITDA
(earnings before interest, taxes, depreciation, and amortization) to fixed
charges of 1.2 to 1.0; and maintain a maximum ratio of total indebtedness to
EBITDA of 3.5 to 1.0. As of May 31, 2000, we were in compliance with all
covenants contained in the credit agreement.
Our working capital has increased since November 30, 1997, reflecting higher
inventory and receivables in connection with the growth of the business. At May
31, 2000, we had net working capital of $24.8 million, compared to $24.0
million at November 30, 1999, $18.6 million at November 30, 1998 and $16.9
million at November 30, 1997. At May 31, 2000, current assets were 1.97 times
current liabilities, compared to 2.10 at November 30, 1999, 4.23 at November
30, 1998 and 3.83 at November 30, 1997.
During the first six months of 2000 our cash expenditures for property,
plant and equipment amounted to $2.5 million. These capital expenditures
primarily related to manufacturing equipment for capacity expansion within our
Signal Products Group. At May 31, 2000 we had not entered into any material
commitments for capital expenditures. However, in order to meet growing
customer demand and production requirements for our power product offerings, we
expect to construct a 26,000 square foot addition to our Wesson, Mississippi
facility later this year. We are currently evaluating financing alternatives
for this $1.0 million project. Our cash expenditures for property, plant and
equipment amounted to $5.0 million in 1999, compared to $3.3 million in each of
the years 1998 and 1997. The 1999 capital expenditures primarily related to
manufacturing equipment for our Power Products Group capacity expansion,
facility expansion for our Signal Products Group, and construction of our
corporate administrative office facility.
17
<PAGE>
Current financial resources, including proceeds of the offering, working
capital and existing lines of credit, and anticipated funds from operations are
expected to be sufficient to meet operating cash requirements throughout year
2000, including scheduled long-term debt repayment and planned capital
equipment expenditures. There can be no assurance, however, that unplanned
capital replacement or other future events will not require us to seek
additional debt or equity financing and, if so required, that it will be
available on terms acceptable to us.
Despite additional inventory requirements, our operating cash flow increased
during the first half of 2000. For the first six months of 2000, net cash
generated from operations amounted to $3.3 million, an increase of $2.4 million
from the comparable period of 1999. During the first half of 2000, inventories
grew by $2.7 million. The increase in inventories primarily reflects additional
customer consigned inventory requirements, as well as additional raw materials
and work-in-process to support future shipment requirements.
As a result of increased working capital requirements, net cash generated
from operations amounted to $2.0 million in 1999, a decrease of $6.3 million
from 1998. In 1998, $8.3 million of net cash generated from operations was used
to fund capital additions of $3.3 million, debt repayment of $743,000, and the
aggregate purchase price of two acquired businesses. In 1998, we acquired
substantially all of the assets of Republic Electronics Corporation, a
manufacturer of subminiature ceramic capacitors, and Potter Production
Corporation, a manufacturer of electronic filters and power products. The total
cash purchase price of the acquired assets amounted to $4.1 million. In 1997,
net cash generated from operations amounted to $8.5 million, with which we
repaid bank indebtedness and invested $3.3 million in capital equipment and
improvements.
At May 31, 2000, goodwill represented 16.8% of total assets and 35.0% of
shareholders' equity. A majority of this goodwill was recognized in 1999 in
connection with our acquisition of SCPD. We amortize goodwill on a straight-
line basis over a period of 20 years and periodically review its carrying value
for possible impairment. Based upon a review of expected future operating cash
flows derived from the acquisition of SCPD, our management has determined that
no impairment losses need be recognized in the current period.
Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency
Certain of our European sales and related selling expenses are denominated
in German Deutsche Marks, British Pounds, and other local currencies. As a
result, fluctuations in currency exchange rates may affect our operating
results and cash flow. Currency exchange rate gains and losses, however, were
not material during the three years ended November 30, 1999 and for each of the
six months ended May 31, 1999 and May 31, 2000. In addition, an assumed 10.0%
adverse change in all foreign currencies in which we currently transact
business would not have a material impact on our operating results, financial
position, or cash flows.
Euro
Certain member countries of the European Union have established fixed
conversion rates between their existing currencies and the European Union's
common currency, the Euro. We have implemented all the necessary enhancements
to our sales order, banking arrangements and operational procedures to ensure
Euro compliance. We are able to process orders, invoice customers and accept
payment in Euros throughout Europe. The introduction of the Euro has not had
any material adverse impact upon us. We continue to monitor the risk of price
erosion which could result from increased price transparency among countries
using the Euro.
Interest Rate Exposure
We have market risk exposure relating to possible fluctuations in interest
rates. Our policy is to manage interest rate risk by utilizing interest rate
swap agreements to convert a portion of the floating interest rate debt
18
<PAGE>
to fixed interest rates. We do not enter into derivative financial instruments
for trading or speculative purposes. The interest rate swap agreements are
entered into with major financial institutions thereby minimizing the risk of
credit loss.
The following table presents information about our market sensitive
financial instruments as of May 31, 2000. The table sets forth the principal
and notional amounts, as well as the year of maturity and applicable interest
rates for all significant financial and derivative financial instruments in
effect as of May 31, 2000:
<TABLE>
<CAPTION>
Year of Maturity
----------------------------------------------------------
Description 2000 2001 2002 2003 Thereafter
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revolving credit
facility:
Principal amount...... $6,400,000
Actual floating
Euro-rate portion.... 6.38%
Term loan:
Principal amount...... $1,818,000 $3,636,000 $3,636,000 $3,636,000 $5,456,000
Actual floating
Euro-rate portion.... 6.62% 6.62% 6.62% 6.62% 6.62%
Interest rate swap
agreement:
PNC Bank, N.A.
Notional amount....... $1,818,000 $3,636,000 $2,728,000
Actual fixed interest
pay rate............. 5.89% 5.89% 5.89%
</TABLE>
We expect to repay the indebtedness described above upon completion of this
offering and to settle our outstanding swap agreement with PNC Bank, N.A. See
"Use of Proceeds". Settlement of the outstanding swap agreement is not expected
to be material to our financial position or results of operations.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and for Hedging Activities" ("SFAS No. 133"). SFAS No. 133 provides
a comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS No. 133 is effective for years
beginning after June 15, 2000. In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB No. 101"), which clarifies the accounting rules for
revenue recognition in financial statements. We expect to adopt SAB No. 101 in
our third quarter of year 2000. In March 2000, the FASB issued Interpretation
No. 44, "Accounting for Certain Transactions Involving Stock Compensation
("Interpretation No. 44"), which provides guidance on several implementation
issues related to the accounting for employee stock options. Interpretation No.
44 clarifies the definition of employee and the accounting for stock options
that have been repriced.
We do not expect the adoption of SFAS No. 133, SAB No. 101, or
Interpretation No. 44 to have a material impact on our financial position or
results of operations.
19
<PAGE>
OUR COMPANY
Introduction
We are a leader in the design and manufacture of control products and
systems used to condition, regulate and govern electronic performance,
including filter products used to protect electronic equipment against
electromagnetic interference, or EMI. Over the past several years, we have
leveraged our core EMI filtering expertise to offer our customers a broad line
of signal products (including microwave/wireless products) and power products.
In addition, we recently formed our Advanced Systems Group, to become a
provider of more complex power management systems, and we have introduced a
line of digital radio-frequency control equipment for remote and automatic
electronic systems management.
Our Markets
The telecommunications industry is our largest and fastest growing market,
having experienced significant worldwide growth over the past several years.
This growth has primarily resulted from increased business and consumer demand
for wireless communication services and Internet access. Cost reductions and
performance improvements in such wireless communication products as cellular,
personal communication services (PCS), and satellite-based voice and data
systems have also contributed to this growth. As demand for wireless
communication services grows, service providers are expanding associated
infrastructure. Our products are used in numerous applications within this
telecommunications infrastructure, such as cellular and personal communication
system base stations, broadband switching equipment, power amplifiers and
Internet servers. Our key telecommunications customers include Lucent, Nortel,
Motorola, Nokia and Ericsson.
Our other principal markets and customers include:
. Military/Aerospace--We are a market leader in the design and manufacture
of EMI products used in navigation, communication and weapons systems.
Key customers include Raytheon Company, Lockheed Martin Corporation,
General Dynamics Corporation and Smiths Industries Aerospace & Defense
Systems, Inc.
. Industrial Equipment Instrumentation--We design sophisticated products
and power systems for use in equipment testing, process control and
measurement instruments. Key customers include Honeywell, Inc., Fischer-
Rosemount, a division of Emerson Co., Allen-Bradley Company, Inc. and
Siemens AG.
. Medical Devices and Instruments--We manufacture components for
implantables and electronic testing and monitoring equipment. Key
customers include Medrad, Inc., GE Medical Systems, a division of
General Electric Company, and GSI Lumonics Corporation.
. Computer and Office Equipment--We design and manufacture products used
in specialty laptop and notebook computers, computer printers and
storage devices. Key customers include Hewlett Packard Company, Sun
Microsystems, Inc. and Xerox Corporation.
. Automotive Electronics--We design and manufacture products for
automobile electronics systems. Key customers include M/A-COM Inc.,
Robert Bosch GmbH and DaimlerChrysler Corporation.
. Consumer Electronics--We manufacture components used in household
electronic equipment. Key customers include Black & Decker (U.S.) Inc.
and Royal Vendors, Inc.
Market Opportunities
We expect our future opportunities will be primarily driven by continuing
growth of the wireless and fiber optic networking segments of the
telecommunications industry, increasing electronic content and complexity of
many end-products and increased outsourcing by OEMs.
Continuing Growth of the Telecommunications Industry. We believe the
telecommunications industry will continue to grow significantly as a result of
many factors, including increased business and consumer demand for connectivity
and functionality from wireless and Internet service providers and devices, the
conversion to high speed fiber optic transmission and a favorable regulatory
climate in the United States and worldwide.
20
<PAGE>
According to estimates by International Data Corporation ("IDC"), an
independent market research firm, the number of worldwide Internet users will
increase from 196 million in 1999 to 399 million by 2002, and the number of
worldwide subscribers for wireless phone service will grow from 303 million in
1998 to 1.1 billion in 2003. As a result, telecommunications service providers
are making substantial investments in the equipment and infrastructure required
to support anticipated growth. According to the MultiMedia Telecommunications
Association, total U.S. spending for telecommunications equipment and services
will grow from $517.6 billion in 1999 to $794 billion in 2003.
Increasing Electronic Content and Complexity of Many Products. The need for
our products results from society's increasing dependence on electronic
equipment of many kinds. At the same time, the electronic content of products
such as home appliances, automobiles, medical equipment and wireless phones is
increasing. This equipment both emits, and is sensitive to, random
electromagnetic waves over a broad spectrum of wave lengths, which can
interfere with and degrade the performance of other electronic equipment. 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, many products, such as personal computers,
computer networks and Internet servers, use state-of-the-art microprocessors
that are more susceptible to interference and require additional control
products to regulate and govern their performance.
Increased Outsourcing by OEMs. Rapid technological advances have
significantly shortened the life cycle of electronic control products and
systems and increased the pressure on manufacturers of telecommunications and
other equipment to develop and introduce new products quickly. These
manufacturers are also seeking to minimize their investment in equipment,
research and development and ongoing operating costs to respond to worldwide
competition. To avoid delays in new product introductions and reduce
manufacturing costs, OEMs are increasingly turning to suppliers capable of
producing electronic products from development, design and quick-turn
prototyping through volume production and assembly. The accelerated time-to-
market requirements of manufacturers have resulted in increased collaboration
with qualified suppliers capable of providing product design support, just-in-
time product deliveries, flexible production schedules, and a broad and
integrated product offering. Many OEMs now seek to use a small number of
technically qualified, strategic suppliers with these broad capabilities.
Our Solution
We believe we are well positioned to capitalize on our market opportunities.
We combine engineering expertise, design and testing capabilities and
vertically integrated and flexible manufacturing processes to provide custom
solutions to our customers' control products and systems needs.
We Offer a Broad Range of Signal and Power Products. Our products are used
in a wide variety of electronics applications, including telecommunications
equipment, military/aerospace systems, medical devices and instrumentation,
computers and office equipment, industrial equipment and controls, as well as
automotive and consumer electronics. Our broad range of signal and power
product offerings enable us to provide customers with a custom-designed product
that most efficiently meets their functionality, cost and performance needs.
During 1999, our Signal Products Group manufactured approximately 5,400
different types of products, of which 900 were new designs, and our Power
Products Group manufactured approximately 240 different types of products, of
which 150 were new designs. We believe that no competitor is capable of
offering a comparable range of products.
We Offer Integrated Design, Development and Testing Services. We provide an
integrated approach to problem solving by offering our customers consulting,
diagnostic testing and design services. We believe that our testing facilities
and capabilities exceed those of our major competitors and, accordingly, may
give us a competitive advantage. Our engineers typically work closely with
customers to develop a product or system design. Although our customers
generally provide the initial engineering guidelines for a particular product,
our design engineers are often called upon to work together with a customer's
design team to develop a solution.
21
<PAGE>
An important part of our solution is ensuring at an early stage, before time
and money are spent on manufacturing, that the product design will meet all
performance specifications and can be produced efficiently and cost-
effectively. Our design engineers include EMI, power and wireless specialists.
We believe that by integrating our product design and development efforts with
those of our customers, we create increased reliance on us and increased
incentives to utilize us as a single source strategic supplier.
We Offer Flexible, Low-Cost Production Capabilities. Once a design is
completed, we apply our vertically integrated manufacturing processes to
produce a solution that meets our customer's functionality and cost objectives.
We maintain two state-of-the-art ceramic production facilities with advanced
manufacturing equipment designed for the production of ceramic capacitors and
resonators. These ceramic products are critical components of our signal and
wireless products. Our extensive ceramic capability and expertise enables us to
maintain short lead times for our signal product prototyping and production
orders. We also maintain a metal fabrication facility with computer numerically
controlled (CNC) equipment to manufacture the metal utilized in many of our
power product offerings. By performing the metal fabrication in-house, we are
able to shorten the lead time for our power product offerings and reduce our
overall material costs. Our philosophy of vertical integration, along with
utilizing demand flow manufacturing processes, enables us to meet the growing
OEM customer demands for flexible production schedules and just-in-time
inventories.
We Offer High Quality, High Performance Products. Our customers demand a
high level of quality and performance. We believe we meet our customers'
requirements for high quality products manufactured to increasingly exacting
specifications, including performance and quality standards that are set by
agencies and other governmental bodies whose regulations may apply to specific
telecommunications or other equipment. We emphasize a quality culture, driving
continuous product improvement and a company-wide commitment to quality. As
part of our commitment to high quality manufacturing, all of our U.S.
facilities have achieved and maintain ISO 9001 certification, and we have been
approved by defense customers under the requirements of the U.S. military
quality system. We have received numerous quality awards from customers such as
Nortel, Ericsson, Powerwave Technologies, Honeywell, Hughes and Lockheed
Martin.
Our Strategy
Our goal is to increase sales and profits by expanding in our existing
markets and by entering new markets where we can apply our design and
manufacturing capabilities. Key elements of our strategy for achieving this
goal include:
Leveraging Our Status as a Strategic Supplier to our OEM Customers. Our
status as a strategic supplier to our OEM customers presents us with
opportunities to develop and design new products for these customers on a
collaborative, solutions-oriented basis giving us an advantage over our
competitors. We use our position as a strategic supplier to these OEM customers
to accelerate the introduction of new, more complex electronic control products
and systems at higher profit margins. We seek to solidify our status as a
strategic supplier to our OEM customers by continuing to provide:
. High levels of service;
. Custom and collaborative product design and manufacturing capabilities;
. Product delivery flexibility and reliability; and
. High quality products.
Strategic supplier or other similar long-term relationships with OEMs
accounted for approximately 60% of our sales for 1999.
Introducing New Signal and Power Product Lines. We are broadening our
product lines to include a more comprehensive range of signal and power
products focusing primarily on new higher-margin products to exploit the
growing market for wireless, fiber optic networking as well as other
telecommunications applications. Our customers increasingly look for greater
capability to produce value-added systems integrating our existing signal
22
<PAGE>
and power products. To respond to our customers' needs, we intend to
increasingly design and manufacture more sophisticated electronic control
systems and assemblies. In our Signal Products Group, new products will also
include solderless installations and assemblies which incorporate both existing
and newly developed products. In our Power Products Group, new products will
expand our family of complex power modules to incorporate more sophisticated
capabilities such as surge protection and multilayered bus bars for power
distribution.
Expanding in Markets for Higher Margin Advanced Systems. We formed the
Advanced Systems Group to leverage our core competencies in design,
manufacturing and assembly to become a provider of more complex, higher margin
power management systems. We have recently introduced a new product line of
digital radio-frequency control equipment, which can monitor various equipment
and provide automatic management, as well as remote management, through
wireless or external communication links. We intend to introduce additional
higher-margin product offerings in the future through the Advanced Systems
Group.
Pursuing Acquisitions that Enhance Our Product Offerings. We continue to
pursue acquisitions complementary to our core business. With OEMs increasingly
demanding higher levels of service and lower overall product costs from their
electronic component and systems suppliers, we believe that acquisition
opportunities will increase as smaller suppliers with insufficient technical
and design expertise and limited access to capital choose to sell to larger
organizations with greater technical and financial resources. We also expect to
continue to see acquisition opportunities, such as our acquisition of the
Signal Conditioning Products Division of AMP Incorporated, as larger
manufacturers seek to focus product offerings on their core competencies.
Remaining a Low-Cost, Efficient Producer. Our customers are under worldwide
competitive pressure to reduce their product costs and these pressures are
passed along to component and systems manufacturers. We are constantly seeking
to reduce our material and labor costs, develop cost-efficient manufacturing
equipment and processes and design our manufacturing plants for efficient
production. We have been able to reduce the manufacturing cost of our products
by increasing materials utilization efficiency and production yields. In
addition, we have taken steps to reduce assembly direct labor costs by locating
plants in areas with relatively low-cost labor. We opened an assembly plant in
Juarez, Mexico in June 2000. We also are expanding our facilities in Wesson,
Mississippi and doubling the capacity of our state-of-the-art ceramics
operation in New Orleans, Louisiana.
Products
Our products are organized into three groups: the Signal Products Group, the
Power Products Group and the newly established Advanced Systems Group. We work
in concert with our customers to design custom products to control
interference, manage a power source or to achieve a combination of each as they
develop new technology for use in the rapidly evolving electronics industry. We
believe that our customers place significant value on the benefits of having a
stable, reliable, quality-driven supplier who is able to design, manufacture
and supply a broad range of products and systems to meet their end-use
requirements. To meet our customer's needs, we offer an extensive array of
signal and power products. We believe that no competitor is capable of offering
a comparable range of products.
Signal Products Group
We manufacture a full line of signal products and consider this group to be
our core technology and the foundation of our business. Our Signal Products
Group includes Electromagnetic Interference Components and Wireless Components.
Through our acquisitions and continued commitment to research and development,
we have significantly expanded our signal product offerings as well as our
custom capabilities. During 1999, our Signal Products Group manufactured
approximately 5,400 different types of products, of which 900 were different
designs.
23
<PAGE>
Electromagnetic Interference Components. The need for EMI products results
from society's increasing dependence on electronic equipment, including
wireless telecommunications systems. Because electronic equipment both emits,
and is sensitive to, random electromagnetic waves over a broad spectrum of wave
lengths, these electronic waves, or EMI, can interfere with and as a result
degrade the performance of other electronic equipment. Our EMI filter
components are designed to address this need and are used either separately or
in unique custom-designed configurations to reduce, eliminate or control EMI in
the end-products that our customers manufacture. To achieve the EMI control
desired by our customers, our filters permit the desired electronic frequencies
to pass through a circuit while reducing or eliminating EMI signals that
negatively affect a product's performance. Our EMI filter products include low
pass filters, filtered arrays and filtered connectors.
Low Pass Filters
Products Principal Applications Key Features
--------------------------------------------------------------------------------
. Filter Chips . Cellular base . High reliability
. Microwave Discrete stations . High predictability
Filters . Medical equipment . Design flexibility
. Power Surface . Military/secure . Small size options
Mount and Square communications with solder-in and
Surface Mount . Computer and press-in features
Filters peripherals . Square mechanical
. Capacitors and . Home electronics geometry enhances
Filters . Power amplifiers and soldering to a PCB
supplies
. Temperature and
motor controls
. Industrial control
systems
Filtered Arrays
Products Principal Applications Key Features
--------------------------------------------------------------------------------
. Filter Plate . Cellular base . Outperforms surface
Assemblies stations mount filters at
. Shrouded Latch . Linear power most frequencies
Plates amplifiers . Reduced installation
. Microcircuit . Medical equipment time and lower
Packages . Scientific equipment overall cost
. Filtered Terminal . Industrial controls . Protects filter
Blocks . Uninterruptible element from
power supplies potential damage
Filtered Connectors
Products Principal Applications Key Features
--------------------------------------------------------------------------------
. Custom Filtered . Cellular base . High performance
Connectors stations . Superior high
. Filtered . PBX equipment frequency filtering
Subminiature . Medical electronics . High level of EMI
Connectors and . Secure shielding
Adapters communications . Power surge protection
. Dataline Surge . Satellites . Maintains shielding
Suppressors . Personal computers across seams or gaps
. Filtered Miniature . Networking equipment
Datacomm . Power supplies
Connectors
. Gasketing &
Shielding
24
<PAGE>
Wireless Components. For wireless applications, we design and manufacture a
broad family of products including ferrite beads, ceramic chip inductors,
single layer capacitors, high Q capacitors, ceramic resonators, bandpass
filters, duplexers, and patch antennas. Our wireless product offerings are
available with a wide range of performance characteristics and sizes to provide
system designers the flexibility to satisfy varied filtering and performance
concerns.
Wireless Components
Product Examples Principal Applications Key Features
--------------------------------------------------------------------------------
. Ferrite Beads . Networking equipment . High reliability
. Ceramic Chip . Cellular telephones . High predictability
Inductors and base stations . Easy installation
. Coaxial Ceramic . Medical devices . Precise frequency
Inductors . Global positioning performance
. Single Layer Chip systems . Design flexibility
Capacitors . Surveying equipment . Small size
. High Q Chip . Voltage oscillators . Low cost
Capacitors
. Ceramic Resonators
. Bandpass Filters
Power Products Group
. Duplexers
Our power products incorporate our core EMI filtering technologies and
consist of power distribution systems with multi-power conditioning functions
in single enclosed units of varying sizes and configurations as required for
specific uses in our customers' products. Our power products currently include
commercial custom assemblies, multisection filters, power entry devices, power
distribution units and single line filters. These custom products and systems
incorporate power conditioning solutions such as back panels with surge
protection, circuit breakers and voltage cut-off for use in a variety of
industries. During 1999, our Power Products Group manufactured approximately
240 different types of products of which 150 were new designs.
. Patch Antennas
Power Products
Product Examples Principal Applications Key Features
--------------------------------------------------------------------------------
. Single Line Power . Cellular base . Economical solutions
Filters stations to meet customers'
. Power Line Filters . Power supplies specific requirements
. Multi-section . Power amplifiers and . Protects filtering
Filters servers element
. Terminal Blocks . Networking equipment . Low leakage for
. Power PCB mounted . Industrial controls medical applications
Filters . Medical equipment . Precise frequency
. Power Entry Devices . Computers and performance
. Power Distribution peripherals . Incorporates multiple
Systems . Secure power conditioning
. Commercial Custom communications functions in a single
Assemblies . Measuring enclosed unit
instruments
25
<PAGE>
Advanced Systems Group
Our Advanced Systems Group is the next step in our evolution from an EMI
filter manufacturer to a provider of custom control products and systems. The
initial product offering of our Advanced Systems Group is a new line of digital
radio-frequency control equipment designed to monitor various functions and
equipment and provide automatic management, as well as remote management
through wireless or external communication links.
Our remote management systems incorporate highly flexible software that
enables our customers to control and monitor their systems, such as cellular or
other isolated telecommunications systems, from remote locations. We have
designed these advanced systems to provide unique capabilities not readily
available in the markets in which we compete. For example, these systems
provide our telecommunications customers with the capability to manage the
power and regulate other aspects of a cellular communications system on a tower
located on a distant mountain. These systems offer other benefits including
remote switch capabilities, AC/DC remote reboot systems and alarm management,
among others, to manage remote systems.
Based on our internal market analysis, we believe that the primary markets
for these systems include wireless base station infrastructure systems, fire
and "911" security systems, remote battery back-up or UPS server systems, sonet
switching systems and LAN/WAN network systems.
Manufacturing and Facilities
We are headquartered in Fairview, Pennsylvania where our administrative
offices are located. We have seven manufacturing facilities located in Erie,
Elizabethtown and Fairview, Pennsylvania, Wesson, Mississippi, New Orleans,
Louisiana and Juarez, Mexico. We rely on our internal, vertically integrated
manufacturing capabilities for design, development, production and testing of
our signal products, power products and advanced systems.
Most orders require relatively short production runs of custom designed
products, although we also produce a standardized line of products for sale
from inventory or through distributors. Each of our manufacturing and assembly
facilities produce a family of closely related products to shorten
manufacturing time, optimize product flow, and avoid costly equipment retooling
and employee training time.
We are expanding our operations in Wesson, Mississippi and we recently
commenced operations in Juarez, Mexico. Upon the completion of this expansion,
we believe we will have sufficient capacity to meet our current and projected
manufacturing and distribution needs. We believe that our property and
equipment is in good condition.
26
<PAGE>
Our principal manufacturing and office facilities are as follows:
<TABLE>
<CAPTION>
Approximate
SquareFeet
Location Function of Floor Area Ownership
-------- ----------------- ------------- ---------
<S> <C> <C> <C>
8061 Avonia Road Manufacturing, 38,000 Owned
Fairview, PA EMI Testing
6000 West Ridge Road Manufacturing 41,000 Owned
Erie, PA
4100 Michoud Blvd. Manufacturing 100,000 Owned
New Orleans, LA
3053 Hwy. 51N Manufacturing 25,000 Rented
Wesson, MS
1593 Mount Joy St. Manufacturing 26,000 Owned
Elizabethtown, PA
1595 Mount Joy St. Manufacturing 35,000 Owned
Elizabethtown, PA
8031 Avonia Road Corporate Offices 10,000 Owned
Fairview, PA
Boulevard Zaragoza 2910 Manufacturing 46,000 Rented
Juarez, Mexico
</TABLE>
In addition to the facilities described above, the Company leases certain
sales office and warehousing space.
Marketing, Sales and Distribution
We market and sell our products primarily through manufacturers'
representatives and agents, managed by our internal sales force. Our network
of sales representative organizations currently includes 19 in North America,
nine in Europe and 12 throughout South America, Asia and the Middle East. To
enhance our product development and offerings for our largest customers, we
maintain two key account managers. These key account managers oversee the
marketing and selling of our full range of product offerings and design
capabilities to these customers.
We also maintain within our sales organization employees dedicated to new
business development as well as additional employees dedicated to distribution
sales management. In 1999, approximately 12% of our sales were through third
party distribution, including distribution through 15 national and regional
distributors in the United States.
Financial information relating to our geographic operations is set forth in
our consolidated financial statements in this prospectus.
Shipments are made by common carrier. Most of the our signal products are
either small or miniaturized and light weight. Accordingly, shipping charges
for these products are not significant. However, transportation costs for our
power products and advanced systems may be significant.
No material portion of our business is subject to renegotiation of profits
or termination of contracts or sub-contracts at the election of the U.S.
Government.
Inventory and Backlog
We had a backlog of orders by customers of approximately $62.0 million at
May 31, 2000, $50.0 million at November 30, 1999 and $23.0 million at November
30, 1998. We expect to ship approximately 90% of our
27
<PAGE>
backlog as of May 31, 2000 within one year. Annual requirement contracts are
taken into backlog only to the extent that orders are actually released
thereunder. Although the terms and conditions contained in our quotation forms
place certain restrictions on a customer's right to cancel, purchase orders
generally provide for cancellation. In practice, we negotiate each cancellation
and schedule change based on the cost incurred prior to a cancellation or
schedule change. We expect to continually reduce our average lead time (the
length of time from the receipt of a customer order to shipment of finished
product to the customer). As a result, our backlog may decrease in the future
due to reduced lead times.
Proprietary Rights
We rely on trade secrets and know-how, which we protect through
confidentiality agreements and internal procedures, and, to a lesser extent,
patents, to establish and protect our proprietary rights to our technologies
and products. To date we have been granted 34 U.S. patents and 77 foreign
patents related to our polymer multilayer technology or our signal products. We
also have nine U.S. patents and 47 foreign patents pending in connection with
our signal and power products.
We do not believe that any of these patents and patent applications are
critical to us. Our policy is to file patent applications to protect
proprietary technology, inventions and improvements to provide broad coverage
where we believe it is needed for the technology or concepts employed. We have
also entered into several agreements regarding licensing the technology covered
by these patents. We do not know what commercial value, if any, these patents
and related licenses may have.
Research, Development and Engineering
Our position as a leading designer, developer and manufacturer of signal and
power products is largely the result of our long history of technological
innovation. Our research and development efforts are focused on expanding our
materials technology, improving existing product offerings, developing new
product offerings, and designing specialized production equipment to improve
manufacturing efficiencies. We currently have 122 engineers and technicians who
are dedicated to our research, engineering and product development. Our
engineers and technicians work with our customers to assist in designing and
developing new products and enhancing our current product offerings to meet the
needs of our customers. In addition to their design and development activities,
the engineering staff participates with our marketing department in proposal
preparation and applications support for our customers.
Raw Materials
We purchase bushings, castings, miniature metal stampings, as well as other
hardware used in the assembly and production of our products. We believe that
we have reliable suppliers for these items and we would be able to replace any
of our current suppliers as these items are available from numerous sources. We
also use a combination of raw materials to manufacture ceramic components
including barium titanate and precious metals such as gold, palladium and
platinum. Precious metals are available from multiple sources and we have not
experienced any significant interruptions or delays in obtaining raw materials
in the past; however, prices for these raw materials are subject to significant
fluctuations. While we attempt to minimize inventory levels, we maintain
minimum safety stock levels of critical raw materials.
Competition
We have encountered strong competition in our various product lines from
both domestic and foreign manufacturers. Competitive factors in the markets
include price, product quality and reliability, breadth of product line,
customer service, technological innovation, timely delivery and technological
change. We believe that we compete favorably on the basis of each of these
factors and we are a market leader in our Signal Products Group. The principal
competitors of our Signal Products Group include AVX Corporation, Amphenol
Corporation, Conec Corporation, ITT Canon, an ITT Industries company, and
Tusonix, Inc. The primary
28
<PAGE>
competitors of our Power Products Group include Corcom, a division of CII
Technologies, Delta Group Electronics, Inc., Schaffner Holder AG and Captor
Technology Company Ltd. We expect the major competitors of our Advanced Systems
Group to include Astec America, Inc., Peco II, Inc., Dataprobe Inc., Western
Telematic, Inc. and Dantel, Inc.
Government Regulations
Our products are incorporated into telecommunications systems which are
subject to various FCC regulations. Regulatory changes, including changes in
the allocation of the available frequency spectrum, could significantly impact
our operations by restricting development efforts by our customers, rendering
current products obsolete or increasing the opportunity for additional
competition. In addition, the increasing demand for wireless communications has
exerted pressure on regulatory bodies worldwide to adopt new standards for such
products and services, generally following extensive investigation of and
deliberation over competing technologies. The delays inherent in this
government approval process may cause the cancellation, postponement or
rescheduling of the installation of communications systems by our customers.
In order to qualify as an approved supplier of EMI products for use in
equipment purchased by the military services or aerospace programs, we are
required to meet the applicable portions of the quality specifications and
performance standards designed by the Air Force, the Army and the Navy. We must
also design our products to conform to the specifications of the Defense
Electronic Supply Center for replacement parts supplied to the military. To the
extent required, we meet or exceed all of these specifications.
Environmental Matters
We are subject to numerous federal, state and local regulations relating to
air and water quality, the disposal of hazardous waste materials, safety, and
health in the United States and to the environmental laws and regulations of
the other countries in which we have manufacturing facilities. Compliance with
applicable environmental regulations has not significantly changed our
competitive position, capital spending, or earnings in the past and we do not
anticipate that compliance with such regulations will change our competitive
position, capital spending, or earnings for the foreseeable future. We
continuously monitor regulatory matters and we believe that we are currently in
compliance in all material respects with applicable environmental laws and
regulations.
Employees
As of May 31, 2000, we had 1,466 employees, including 47 in sales, marketing
and customer support, 122 in engineering and product development, 1,146 in
manufacturing, and 151 in finance and administration. Our future success
depends in significant part upon the continued service of our key technical and
senior management personnel and our continued ability to attract and retain
highly qualified technical and managerial personnel. None of our employees is
represented by a labor union. We have not experienced any work stoppages and
consider our relations with our employees to be good.
Legal Proceedings
From time to time we are involved in various lawsuits and claims incidental
to our business. In the opinion of management, the ultimate liabilities, if
any, resulting from these lawsuits and claims, will not materially affect our
financial position or results of operations.
29
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information regarding our directors,
executive officers and key employees:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Richard A. Southworth
(1).................... 57 President, Chief Executive Officer and Director
John P. Freeman (1)..... 45 Vice President, Chief Financial Officer and Director
Robert L. Smith......... 61 Vice President, Quality and Technology
Brian F. Ward........... 40 Vice President, Sales and Marketing
Lawrence G. Howanitz.... 47 Vice President, Signal Products Group
James A. Siegel......... 58 Treasurer
Gerald A. Ryan
(1)(2)(3).............. 64 Chairman of the Board and Director
James F. Toohey (3)..... 65 Secretary and Director
Edwin R. Bindseil
(1)(3)................. 69 Director
J. Thomas Gruenwald
(2).................... 52 Director
Melvin Kutchin (1)...... 74 Director
John M. Petersen
(2)(3)................. 71 Director
</TABLE>
--------
(1) Member of Acquisition, Divestiture and Major New Business Development
Committee of the Board of Directors
(2) Member of Audit Committee of the Board of Directors
(3) Member of Compensation Committee of the Board of Directors
Richard A. Southworth has served as President and Chief Executive Officer of
our company since 1997 and has been a Director since 1998. He joined our
company in 1991 as Vice President and General Manager. Prior to joining our
company, Mr. Southworth held executive positions with National Water
Specialities, Philips Components, Murata Electronics North America, and Erie
Technological Products. Mr. Southworth is a graduate of Gannon University in
Mechanical Engineering and Mathematics.
John P. Freeman has served as Vice President and Chief Financial Officer of
our company since 1990 and has been a Director since 1991. He joined the
company in 1988 as Controller. Prior to that time, he was a principal in a
public accounting firm. Mr. Freeman is a graduate of Gannon University in
Accounting and is a Certified Public Accountant and Certified Management
Accountant.
Robert L. Smith has served as Vice President, Quality and Technology of our
company since 1997. Mr. Smith joined us in 1978 as Manager of EMC Testing
Services. Prior to joining our company, Mr. Smith was Product Engineering
Manager of Erie Technological Products. Mr. Smith is a graduate of Cleveland
Institute of Electronics and is a certified National Association of Radio and
Telecommunications Engineer.
Brian F. Ward has served as Vice President, Sales and Marketing of our
company since 1997. Mr. Ward joined us in 1994 as Director of Marketing. Prior
to joining our company, Mr. Ward held managerial positions in engineering and
marketing with Clarostat Manufacturing Co. and Oak Grigsby, Inc. Mr. Ward is a
marketing graduate of Franklin Pearce College of Business.
Lawrence G. Howanitz has served as Vice President, Signal Products Group of
our company since 1999. Since joining us in 1984, he has held several
management positions. In 1997, he was appointed General Manager of our
Interconnect Products Division (the predecessor of the Signal Products Group).
Mr. Howanitz is a graduate of Pennsylvania State University with a bachelor's
degree in business administration.
30
<PAGE>
James A. Siegel has served as Treasurer of our company since 1984. Mr.
Siegel joined us as Corporate Controller in 1974 and was appointed Assistant
Treasurer in 1975. Mr. Siegel obtained his undergraduate degree from Gannon
University in accounting.
Gerald A. Ryan has served as the Chairman of the Board since 1991 and as a
Director of our company since its inception. Mr. Ryan is a principal with Erie
Business Management Corporation, Pennsylvania, which invests in and manages
various businesses. Mr. Ryan serves as Chairman of the Board of Automated
Industrial Systems, Inc. and Director/Chairman Emeritus of Rent-Way, Inc. a
company listed on the New York Stock Exchange in the rental-purchase business.
Mr. Ryan is a graduate of the Massachusetts Institute of Technology.
James F. Toohey has served as the Secretary of our company and a Director
since 1968. Mr. Toohey is a practicing member of the Erie County Bar
Association, a member of the law firm of Quinn, Buseck, Leemhuis, Toohey &
Kroto, Inc. and general counsel to our company. Mr. Toohey is a graduate of
Gannon University and Dickinson School of Law.
Edwin R. Bindseil has served as a Director of our company since 1991. In
1989, Mr. Bindseil retired from AMSCO after 31 years of service, 22 years of
which he served in senior executive management positions, including general
management, marketing, operations, research and development, acquisitions and
corporate strategic planning. Since 1990, Mr. Bindseil has been an independent
businessman, consultant and entrepreneur. He also serves as a Director of a
number of privately held companies. Mr. Bindseil obtained his undergraduate
degree in Chemical Engineering from the University of Detroit and an MBA from
Harvard University.
J. Thomas Gruenwald has served as a Director of our company since 1999. He
has been employed by Tellabs, Inc. since 1991, serving in various executive
positions including Vice President of Strategic Resources and Director of
Engineering--Network Access Division. Currently, Mr. Gruenwald serves as Vice
President and General Manager of the Broadband Media Group and Network
Solutions Group. Prior to joining Tellabs, Mr. Gruenwald served as President of
UNI Quality, Inc., a professional services firm, and held several executive and
technical positions with AT&T. Mr. Gruenwald obtained his undergraduate degree
in Physics from the University of Cincinnati, and his Masters degree and Ph.D.
in Theoretical Physics from Purdue University.
Melvin Kutchin has served as a Director of our company since 1994. He served
as President of Kitchen and Kutchin, Inc., manufacturer's representative of
electronic components, from 1961 through January 1994 when he became Chairman
of the Board. From 1980 through 1990, he was President of JBM Electronics,
manufacturer of delay lines and other magnetic devices. Mr. Kutchin is a
graduate of the University of Pennsylvania.
John M. Petersen was a founder of our company and has served as a Director
since 1970. He is the retired President and Chief Executive Officer of Erie
Family Life Insurance Company, Erie Indemnity Company, Erie Insurance Company
and Flagship City Insurance Company, comprising the Erie Insurance Group, and
serves as a Director of each of these companies. Since 1995, he has been an
investment consultant. Mr. Petersen is a graduate of the University of
Pittsburgh.
Classes of the Board
We have a staggered Board of Directors that is divided into three classes
and one class is elected each year at our annual meeting to serve a three-year
term. The terms of Messrs. Petersen, Southworth and Toohey expire at the 2001
annual meeting of shareholders. The terms of Messrs. Bindseil and Freeman
expire at the 2002 annual meeting of shareholders. The terms of Messrs.
Gruenwald, Kutchin and Ryan expire at the 2003 annual meeting of shareholders.
Change of Control Agreements
We do not have any employment agreements with our executive officers, but
they are subject to our standard confidentiality agreement which requires them
to treat all information concerning the Company as
31
<PAGE>
confidential during and after their employment with the Company. In June 2000,
we entered into Change of Control Agreements with each of Mr. Southworth and
Mr. Freeman.
Pursuant to Mr. Southworth's agreement he will receive, if terminated within
twelve months of a change of control of our Company, a minimum compensation
package equal to the salary and "at risk compensation" that he received under
our At-Risk Compensation Plan for the fiscal year prior to the change of
control. Mr. Southworth has received compensation for the current fiscal year
as determined by the Compensation Committee of our Board of Directors and under
the terms of our At-Risk Compensation Plan.
Pursuant to Mr. Freeman's agreement, he will receive, if terminated within
twelve months of a change of control of our Company, a minimum compensation
package equal to the salary and "at risk compensation" that he received under
our At-Risk Compensation Plan for the fiscal year prior to the change of
control. Mr. Freeman has received compensation for the current fiscal year as
determined by the Compensation Committee of our Board of Directors and under
the terms of our At-Risk Compensation Plan.
SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
selling shareholders and their beneficial ownership of common stock. Each of
the selling shareholders is a holder of a portion of the common stock purchase
warrant entered into between Potter Production Corp. ("Potter") and us in
connection with our acquisition of certain assets of Potter on September 21,
1998. Each selling shareholder named has sole voting and dispositive power with
respect to his shares of common stock. The selling shareholders will acquire
the shares of common stock they are offering upon exercise of their warrant.
The exercise price for the warrant is $6.25 per share.
<TABLE>
<CAPTION>
Shares Number Shares to be
Beneficially of Shares Beneficially
Owned Prior Being Owned
to Offering Offered after Offering
-------------- --------- --------------
Selling Shareholders Number Percent Number Percent
-------------------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Robert Smith............................ 6,761 * 6,761 -- *
Babu Aharam............................. 63,285 * 33,000 30,285 *
Henry Ballard........................... 582 * 582 -- *
Clayton Hatzenbuhler.................... 11,211 * 11,211 -- *
Daniel Sullivan......................... 7,982 * 7,982 -- *
Hank Howell............................. 936 * 936 -- *
Brent Doyle............................. 112 * 112 -- *
</TABLE>
--------
* Represents less than 1% of the outstanding shares of common stock.
32
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 25,000,000 shares of
common stock and 1,000,000 shares of undesignated "blank check" preferred
stock. The rights, preferences and classes of the undesignated stock may be
established from time to time by the Board of Directors. As of May 31, 2000,
there were options outstanding to purchase 600,208 shares of common stock and
warrants outstanding to purchase 100,000 shares of common stock. The following
discussion summarizes the material provisions of our capital stock and the
anti-takeover provisions that are contained in our Articles of Incorporation
and Bylaws.
Common Stock
Holders of our common stock are entitled to one vote per share for all
matters to be voted upon by the shareholders. The holders of common stock have
cumulative voting rights which means that in any election of directors, every
stockholder has the right to multiply the number of shares which he is entitled
to vote by the number of candidates for director and may cast the whole number
of votes for one candidate or distribute them among two or more candidates. The
right to vote cumulatively is intended to give minority shareholders the
ability to secure representation on our Board of Directors. Subject to
preferences of any preferred stock that may be issued in the future, at the
discretion of the Board of Directors, the holders of common stock are entitled
to receive dividends as may be declared by our Board of Directors.
Preferred Stock
The Board of Directors is authorized, without further action by the holders
of the common stock, to issue shares of preferred stock in one or more series
from time-to-time. The Board of Directors will have discretion to determine the
designations, preferences, qualifications, privileges, limitations,
restrictions, options, conversion rights and other special or relative rights
of any series of preferred stock. Satisfaction of any dividend preference on
outstanding shares of any preferred stock would reduce the amount of funds
available for the payment of dividends on the shares of our common stock. In
some circumstances, the issuance of preferred shares may render more difficult
or discourage a merger, tender offer or proxy contest, the assumption of
control by a holder of a large block of our securities, or the removal of
incumbent management. We have no current intention to issue any shares of
preferred stock.
Options
As of May 31, 2000, options to purchase a total of 600,208 shares of our
common stock were outstanding and options to acquire up to 1,112,833 shares of
common stock may be granted in the future under our existing stock option
plans.
Common Stock Purchase Warrants
We entered into a common stock purchase warrant covering 100,000 shares with
Potter Production Corp. upon our acquisition of certain assets of Potter on
September 21, 1998. The warrant was divided among several holders in April
2000, as permitted under the terms of the warrant. The warrants may be
exercised in whole or in part at any time until September 21, 2002. The
exercise price for the warrants is $6.25 per share. 60,584 of the shares
underlying these warrants are being included in this offering pursuant to the
terms of registration rights granted in connection with the issuance of the
initial warrant. See the section of this prospectus entitled "Selling
Shareholders" for information regarding the shareholders selling shares in this
offering.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the common stock is ChaseMellon
Shareholder Services, L.L.C.
33
<PAGE>
UNDERWRITING
We are offering the shares of common stock described in this prospectus
through a number of underwriters. Janney Montgomery Scott LLC and Needham &
Company, Inc. are the representatives of the underwriters. Subject to the terms
and conditions of the underwriting agreement, we have agreed to sell and the
selling shareholders have agreed to sell to the underwriters, and each
underwriter has agreed to purchase, the number of shares of common stock listed
next to its name below at the public offering prices less the underwriting
discount on the cover page of this prospectus.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Janney Montgomery Scott LLC........................................ 1,536,350
Needham & Company, Inc............................................. 1,024,234
---------
Total.............................................................. 2,560,584
=========
</TABLE>
The underwriting agreement is subject to a number of terms and conditions
and provides that the underwriters must buy all of the shares if they buy any
of them. The underwriters will sell the shares to the public when and if the
underwriters buy the shares from us. The common stock is offered subject to a
number of conditions including:
. receipt and acceptance of the common stock by the underwriters; and
. the right on the part of the underwriters to reject orders in whole or in
part.
The underwriters will initially offer the shares to the public at the price
per share shown on the cover page of this prospectus. The underwriters may also
allow, and any other dealers may reallow, a concession of not more than $ per
share to certain other dealers. After the public offering of the common stock
is complete, if all of the shares are not sold at the public offering price,
the underwriters may change the public offering price and the other selling
terms. No change in the selling terms will vary the proceeds to be received by
us as specified on the cover page of this prospectus.
We have granted the underwriters an option to buy up to 375,000 additional
shares of common stock, at the same price per share as the public offering
price, less the underwriting discount shown on the cover page of this
prospectus. The underwriter may exercise this option at any time within 30 days
after the date of this prospectus only to cover over-allotments in the sale of
the shares of common stock offered by this prospectus.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters. These amounts are shown assuming no
exercise and full exercise of the underwriters' overallotment option to
purchase additional shares.
<TABLE>
<CAPTION>
No exercise Full exercise
----------- -------------
<S> <C> <C>
Per share underwriting discounts and commissions.... $ $
Total underwriting discounts and commissions to be
paid by us......................................... $ $
</TABLE>
The expenses of the offering, not including underwriting discounts and
commissions, are estimated to be approximately $350,000 and will be paid by us.
Expenses of the offering, exclusive of underwriting discounts and commissions,
include the SEC filing fee, printing expenses, transfer agent and registration
and other miscellaneous fees.
We and our executive officers and directors have entered into lock-up
agreements with the underwriters. Under these agreements, subject to certain
exceptions, our officers and directors have agreed that they will not, directly
or indirectly, offer, sell, contact to sell, or otherwise dispose of or hedge
any common stock or securities convertible into or exchangeable for shares of
common stock (including any shares issued upon
34
<PAGE>
exercise of options). These restrictions will be in effect for a period of 90
days after the commencement of this offering, without the underwriter's prior
written consent. Together, this group owns, prior to the offering,
approximately 9.0% of the outstanding shares of common stock and approximately
82% of the outstanding options to purchase common stock. We also have agreed to
make no such sales during this period except in connection with the issuance of
shares pursuant to our stock option plans.
We have agreed to indemnify the underwriter and persons who control the
underwriter against, or contribute to losses arising out of, certain
liabilities that may be incurred in connection with this offering, including
liabilities under the Securities Act.
In connection with this offering and in compliance with applicable
securities laws, the underwriter may over-allot (i.e. sell more shares of
common stock than is shown on the cover page of this prospectus) and may effect
transactions on the Nasdaq National Market which stabilize, maintain or
otherwise affect the market price of the common stock at levels above those
which might otherwise prevail in the open market. These transactions may
include placing bids for the common stock or effecting purchases of the common
stock for the purpose of pegging, fixing or maintaining the price of the common
stock or for the purpose of reducing a short position created in connection
with the offering. A short position may be covered by exercise of the over-
allotment option described above in place of or in addition to open market
purchases. The underwriter is not required to engage in any of these activities
and if the underwriter commences any of these activities, it may discontinue
them at any time.
In connection with this offering, the underwriter, selling group members or
their respective affiliates who are qualified market makers on the Nasdaq
National Market may engage in passive market making transactions in our common
stock on the Nasdaq National Market in accordance with Rule 103 of Regulation M
under the Securities Exchange Act of 1934, as amended, during the five business
days prior to the pricing of the offering before the commencement of offers and
sales of the common stock. Passive market makers must comply with applicable
volume and price limitations and must be identified as such. In general, a
passive market maker must display its bid at a price not in excess of the
highest independent bid for such security. If all independent bids are lowered
below the passive market maker's bid, however, such bid must then be lowered
when certain purchase limits are exceeded.
We and the underwriter make no representation or prediction as to the
direction or magnitude of any effect that the transactions described above may
have on the price of the common stock. In addition, we and the underwriter make
no representation that the underwriter will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
SHARES ELIGIBLE FOR FUTURE SALE
After the offering, we will have 13,573,052 shares of common stock
outstanding and will have reserved for issuance (i) 39,416 shares of common
stock issuable upon the exercise of outstanding common stock purchase warrants
(at an exercise price of $6.25 per share) and (ii) 599,541 shares of common
stock issuable upon exercise of outstanding stock options (at exercise prices
ranging from $3.00 to $11.25 per share). Of the 11,012,468 shares currently
outstanding, 10,057,454 shares are currently traded or available for sale in
the open market, and all of the 2,560,584 shares sold in the offering
(2,935,584 shares if the underwriters' over-allotment option is exercised in
full), will be freely tradeable without restriction or further registration
under the Securities Act, unless acquired by an "affiliate" of ours as that
term is defined in Rule 144 described below. All of the shares of common stock
issuable upon exercise of the stock options described above will similarly be
freely tradeable upon issuance as such shares are registered for resale by the
holders thereof under the Securities Act.
The remaining 955,014 shares outstanding and any shares issued on exercise
of the outstanding warrant will be "restricted securities" within the meaning
of Rule 144, all of which shares are held by directors and
35
<PAGE>
executive officers of the Company. The Company's directors and executive
officers have agreed that they will not, directly or indirectly, sell or
otherwise dispose of their shares of common stock, as discussed above under
"Underwriting." All of such shares will become eligible for sale in the public
market 90 days after commencement of this offering subject to the provisions of
Rule 144.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately 13,573 shares immediately after this offering; and
. the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the receipt of a
sale order by a broker to sell the shares with respect to the sale.
Sales under Rule 144 are also subject to requirements with respect to manner
of sale, notice and the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, may sell these
shares without complying with the manner of sale, public information, volume
limitation or notice requirements of Rule 144.
We are unable to predict the effect that sales made under Rule 144, pursuant
to future registration statements, or otherwise, may have on any then
prevailing market price for shares of the common stock. Nevertheless, sales of
a substantial amount of common stock in the public market, or the perception
that such sales could occur, could adversely affect market prices.
We have also agreed with the underwriters not to sell any shares of common
stock or securities exercisable for shares of our common stock for a period of
90 days after commencement of this offering without the underwriter's prior
written consent. However, even without such consent, the Company may issue
stock upon exercise of the warrants or the stock options described above.
36
<PAGE>
LEGAL MATTERS
Certain legal matters relating to the validity of the shares of common stock
being offered by this prospectus will be passed upon for us by Hodgson, Russ,
Andrews, Woods & Goodyear, LLP, Buffalo, New York. Certain legal matters will
be passed upon for the underwriters by Ballard Spahr Andrews & Ingersoll, LLP,
Philadelphia, Pennsylvania.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at November 30, 1999 and 1998 and for each of
the three years in the period ended November 30, 1999, as set forth in their
reports. We have included our consolidated financial statements and
incorporated by reference our financial statement schedule for the years ended
November 30, 1999, 1998, and 1997 included in our Form 10-K for 1999 filed with
the Commission in the prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLP's reports given their authority as experts in
accounting and auditing.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Commission's rules allow us to "incorporate by reference" the
information that we file with the Commission, which means we can disclose
important information to you by referring you to those documents. The
information incorporated by reference is an important part of this prospectus
and information that we file later with the Commission will automatically
update and supercede this information. We incorporate by reference the
documents listed below and any future filings we make with the Commission under
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, until we sell all of securities. We incorporate:
. our Annual Report on Form 10-K for the year ended November 30, 1999
(including information specifically incorporated by reference into our
Form 10-K from our definitive Proxy Statement for our 1999 Annual Meeting
of Shareholders);
. our Quarterly Reports on Form 10-Q for the quarter ended February 29,
2000 and for the quarter ended May 31, 2000;
. our Current Report on Form 8-K, reporting the acquisition of the Signal
Conditioning Products Division of AMP Incorporated, filed on April 12,
1999;
. Amendment No. 1 to Form 8-K filed April 12, 1999 which was filed on Form
8-K/A on June 9, 1999; and
. the description of our common stock under the caption "Item 1.
Description of Registrant's Securities to be Registered" contained in our
Registration Statement on Form 8-A dated February 26, 1990.
We will provide a copy of this filing to any person to whom a prospectus is
delivered, including any beneficial owner. You should direct your oral or
written request for a copy of this filing to: Spectrum Control, Inc. 8031
Avonia Road, Fairview, Pennsylvania 16415, Attention: Investor Relations
(telephone (814) 835-1507). You will not be charged for copies unless you
request exhibits, for which we will charge you a minimal fee. However, you will
not be charged for exhibits in any case where an exhibit you request is
specifically incorporated by reference to another document which is
incorporated by this prospectus.
37
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission (the "Commission")
a registration statement on Form S-3 under the Securities Act relating to the
common stock being sold in this offering. This prospectus constitutes a part of
that registration statement. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits and
schedules to the registration statement because some parts have been omitted in
accordance with the rules and regulations of the Commission. For further
information about us and the common stock being sold to you in this offering,
you should refer to the registration statement and the exhibits and schedules
filed as part of the registration statement. Statements made in this prospectus
regarding the contents of any agreement, contract or other document referred to
are not necessarily complete. Reference is made in each instance to the copy of
the contract or document filed as an exhibit to the registration statement.
Each statement is qualified by reference to the exhibit. Copies of the
registration statement and its exhibits are on file at the offices of the
Commission and may be obtained upon payment of the prescribed fee or may be
examined without charge at the Commission's principal office in Washington,
D.C. or over the Internet at the Commission's web site listed below.
We also file annual, quarterly and special reports and other information
with the Commission. You may also read and copy any of the reports and other
information we file at the Commission's public reference facilities located:
. in Washington at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549;
. in New York at 7 World Trade Center, Suite 1300, New York, New York
10048; and
. in Chicago at Northwest Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661.
You may call the Commission at 1-800-SEC-0330 for further information about
the public reference rooms. Copies of such material can be obtained at
prescribed rates. Our Commission filings are also available to the public over
the Internet at the Commission's web site which is located at the following
address: http://www.sec.gov.
38
<PAGE>
Spectrum Control, Inc. and Subsidiaries
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors........................................... F-2
Consolidated Balance Sheets as of
November 30, 1998, 1999 and May 31, 2000 (unaudited).................... F-3
Consolidated Statements of Income for the years ended November 30, 1997,
1998, 1999 and the six months ended May 31, 1999 and 2000 (unaudited)... F-4
Consolidated Statements of Stockholders' Equity for the years ended
November 30, 1997, 1998, 1999 and the six months ended May 31, 2000
(unaudited)............................................................. F-5
Consolidated Statements of Cash Flows for the years ended November 30,
1997, 1998, 1999 and the six months ended May 31, 1999 and 2000
(unaudited)............................................................. F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Spectrum Control, Inc.
We have audited the accompanying consolidated balance sheets of Spectrum
Control, Inc. and subsidiaries as of November 30, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended November 30, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Spectrum
Control, Inc. and subsidiaries at November 30, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended November 30, 1999, in conformity with
accounting principles generally accepted in the United States.
/S/ ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
January 4, 2000, except for Note 17
as to which the date is February 1, 2000
F-2
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
November 30,
---------------- May 31,
1998 1999 2000
------- ------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents..................... $ 739 $ 538 $ 641
Accounts receivable, less allowances of $406
in 1998, $673 in 1999 and $714 in 2000....... 10,162 19,330 21,473
Inventories (Note 3).......................... 12,885 24,617 27,159
Deferred income taxes (Note 11)............... 409 579 579
Prepaid expenses and other current assets..... 184 699 465
------- ------- -------
Total current assets........................ 24,379 45,763 50,317
Property, plant and equipment, net (Note 4)..... 16,289 21,366 21,536
Other assets (Note 5)
Goodwill, net................................. 2,547 14,225 14,785
Other non-current assets...................... 924 1,200 1,120
------- ------- -------
Total other assets.......................... 3,471 15,425 15,905
------- ------- -------
Total assets................................ $44,139 $82,554 $87,758
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt (Note 6)...................... $ 336 $ 5,089 $ 7,132
Accounts payable.............................. 2,719 8,801 10,694
Accrued salaries and wages.................... 1,438 2,553 1,995
Accrued interest.............................. 63 103 118
Accrued federal and state income taxes........ 93 -- 208
Accrued other expenses........................ 281 952 1,115
Current portion of long-term debt (Note 7).... 830 4,276 4,276
------- ------- -------
Total current liabilities................... 5,760 21,774 25,538
Long-term debt (Note 7)......................... 2,500 19,011 16,973
Deferred income taxes (Note 11)................. 2,105 2,634 2,993
Stockholders' equity
Common stock, no par value, authorized
25,000,000 shares, issued 10,957,008 shares
in 1998, 11,018,703 in 1999 and 11,081,801 in
2000......................................... 14,470 14,633 14,810
Retained earnings............................. 19,798 25,268 28,453
Treasury stock, 70,000 shares, at cost (Note
9)........................................... (294) (294) (294)
Accumulated other comprehensive income
Foreign currency translation adjustment....... (200) (472) (715)
------- ------- -------
Total stockholders' equity.................. 33,774 39,135 42,254
------- ------- -------
Total liabilities and stockholders' equity.. $44,139 $82,554 $87,758
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-3
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollar Amounts in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended November 30, May 31,
------------------------- ----------------
1997 1998 1999 1999 2000
------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales........................ $56,466 $59,868 $97,729 $39,867 $60,611
Cost of products sold............ 39,045 41,584 69,817 28,444 44,988
------- ------- ------- ------- -------
Gross margin..................... 17,421 18,284 27,912 11,423 15,623
Selling, general and
administrative expense.......... 11,635 11,822 17,748 7,246 9,742
------- ------- ------- ------- -------
Income from operations........... 5,786 6,462 10,164 4,177 5,881
Other income (expense)
Interest expense............... (417) (228) (1,420) (388) (1,179)
Other income and expense, net
(Note 10)....................... 141 85 96 35 435
------- ------- ------- ------- -------
(276) (143) (1,324) (353) (744)
------- ------- ------- ------- -------
Income before provision for
income taxes.................... 5,510 6,319 8,840 3,824 5,137
Provision for income taxes (Note
11)............................. 1,536 2,385 3,370 1,451 1,952
------- ------- ------- ------- -------
Net income....................... $ 3,974 $ 3,934 $ 5,470 $ 2,373 $ 3,185
======= ======= ======= ======= =======
Earnings per common share (Note
12):
Basic.......................... $ 0.37 $ 0.36 $ 0.50 $ 0.22 $ 0.29
======= ======= ======= ======= =======
Diluted........................ $ 0.37 $ 0.36 $ 0.49 $ 0.22 $ 0.28
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-4
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Accumulated Total
Other Stock-
Common Retained Treasury Comprehensive Holders'
Stock Earnings Stock Income Equity
------- -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
Balance--November 30, 1996.. $13,755 $11,890 $ -- $(266) $25,379
Net income.................. -- 3,974 -- -- 3,974
Foreign currency translation
adjustment................. -- -- -- (30) (30)
-------
Comprehensive income........ -- -- -- -- 3,944
-------
Issuance of 84,998 shares of
common stock............... 300 -- -- -- 300
Purchase and retirement of
20,886 shares of common
stock...................... (103) -- -- -- (103)
Tax benefits from exercise
of stock options........... 25 -- -- -- 25
------- ------- ----- ----- -------
Balance--November 30, 1997.. 13,977 15,864 -- (296) 29,545
Net income.................. -- 3,934 -- -- 3,934
Foreign currency translation
adjustment................. -- -- -- 96 96
-------
Comprehensive income........ -- -- -- -- 4,030
-------
Issuance of 118,663 shares
of common stock............ 414 -- -- -- 414
Purchase of 70,000 shares of
common stock............... -- -- (294) -- (294)
Tax benefits from exercise
of stock options........... 79 -- -- -- 79
------- ------- ----- ----- -------
Balance--November 30, 1998.. 14,470 19,798 (294) (200) 33,774
Net income.................. -- 5,470 -- -- 5,470
Foreign currency translation
adjustment................. -- -- -- (272) (272)
-------
Comprehensive income........ -- -- -- -- 5,198
-------
Issuance of 68,663 shares of
common stock............... 182 -- -- -- 182
Purchase and retirement of
6,968 shares of common
stock...................... (56) -- -- -- (56)
Tax benefits from exercise
of stock options........... 37 -- -- -- 37
------- ------- ----- ----- -------
Balance--November 30, 1999.. 14,633 25,268 (294) (472) 39,135
Net income (unaudited)...... -- 3,185 -- -- 3,185
Foreign currency translation
adjustment (unaudited)..... -- -- -- (243) (243)
-------
Comprehensive income
(unaudited)................ -- -- -- -- 2,942
-------
Issuance of 64,134 shares of
common stock (unaudited)... 195 -- -- -- 195
Purchase and retirement of
1,036 shares of common
stock (unaudited).......... (18) -- -- -- (18)
------- ------- ----- ----- -------
Balance--May 31, 2000
(unaudited)................ $14,810 $28,453 $(294) $(715) $42,254
======= ======= ===== ===== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended November 30, May 31,
-------------------------- -----------------
1997 1998 1999 1999 2000
------- ------- -------- -------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income.................... $ 3,974 $ 3,934 $ 5,470 $ 2,373 $ 3,185
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation................ 3,287 3,587 3,919 1,882 2,336
Amortization................ 219 135 624 210 436
Deferred income taxes....... 376 1,014 634 198 359
Tax benefits from exercise
of stock options........... 25 79 37 -- --
Loss (gain) on sale of
property, plant and
equipment.................. 8 -- (13) -- --
Changes in assets and
liabilities, excluding
effects of business
acquisitions:
Accounts receivable....... (67) (85) (8,734) (5,711) (2,737)
Inventories............... (188) 181 (6,380) (3,242) (2,742)
Prepaid expenses and other
assets................... 431 24 (742) (167) 671
Accounts payable and
accrued expenses......... 441 (595) 7,194 5,354 1,766
------- ------- -------- -------- -------
Net cash provided by
operating activities... 8,506 8,274 2,009 897 3,274
------- ------- -------- -------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sale of
property, plant and
equipment.................... 10 -- 13 -- --
Purchase of property, plant
and equipment................ (3,280) (3,293) (4,972) (2,426) (2,523)
Payment for acquired
businesses................... -- (4,077) (21,846) (20,745) (935)
------- ------- -------- -------- -------
Net cash used in investing
activities................. (3,270) (7,370) (26,805) (23,171) (3,458)
------- ------- -------- -------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings (repayment) of
short-term debt.............. (3,232) 282 4,532 1,495 2,152
Borrowings of long-term debt.. -- -- 20,800 20,550 --
Repayment of long-term debt... (2,391) (743) (843) (428) (2,038)
Purchase of common stock...... -- (294) -- -- --
Net proceeds from issuance of
common stock................. 196 414 126 20 177
------- ------- -------- -------- -------
Net cash provided by (used
in) financing activities... (5,427) (341) 24,615 21,637 291
------- ------- -------- -------- -------
Effect of exchange rate changes
on cash........................ (26) (20) (20) (29) (4)
------- ------- -------- -------- -------
Net increase (decrease) in cash
and cash equivalents........... (217) 543 (201) (666) 103
Cash and cash equivalents,
beginning of period............ 413 196 739 739 538
------- ------- -------- -------- -------
Cash and cash equivalents, end
of period...................... $ 196 $ 739 $ 538 $ 73 $ 641
======= ======= ======== ======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-6
<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.
Unaudited Interim Financial Statements
The interim consolidated financial statements as of May 31, 2000 and for the
six months ended May 31, 1999 and 2000, together with the related notes, are
unaudited. These interim financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, the interim consolidated financial statements
include all adjustments which are normal, recurring and necessary to present
fairly the financial information set forth therein.
The results of operations for the interim period ended May 31, 2000 are not
necessarily indicative of the results which may be reported for any other
interim period or for the year ending November 30, 2000.
Cash Equivalents
The Company considers all highly liquid money market instruments with
original maturities of three months or less to be cash equivalents.
Financial Instruments
The Company utilizes interest rate swap agreements to minimize the risks and
costs associated with variable rate debt. The swap agreements are contracts to
exchange floating rate for fixed interest payments periodically over the life
of the agreements without the exchange of the underlying notional amounts. The
notional amounts of interest rate agreements are used to measure interest to be
paid or received and do not represent the amount of exposure to credit loss.
Net cash amounts paid or received on the agreements are accrued and recognized
as an adjustment to interest expense. The Company does not utilize interest
rate agreements for trading or other speculative purposes.
Inventories
Inventories are valued at the lower of cost or market, with cost for raw
materials, work-in-process and finished goods at standard cost, which
approximates the first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed
over the estimated useful lives of the assets using the straight-line method.
Expenditures for maintenance and repairs are charged against earnings in the
year incurred; major replacements, renewals and betterments are capitalized and
depreciated over their estimated useful lives. The cost and accumulated
depreciation of assets sold or retired are removed from the respective accounts
and any gain or loss is reflected in earnings.
F-7
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangibles and Other Assets
Goodwill, representing the excess of cost over the fair value of net
tangible and identifiable intangible assets of acquired businesses, is stated
at cost and amortized to expense on a straight-line basis over a period of 20
years. Patents and patent rights are amortized to expense on a straight-line
basis over periods not exceeding 17 years. The carrying value of intangible
assets is periodically reviewed by the Company and impairments are recognized
when the expected future operating cash flows derived from such intangible
assets is less than their carrying value. No impairment losses have been
recognized in any of the periods presented herein.
Debt issuance costs are amortized to expense on a straight-line basis over
the term of the related indebtedness.
Income Taxes
The Company uses the liability method in accounting for income taxes.
Deferred tax assets and liabilities are recorded for temporary differences
between the tax basis of assets and liabilities and their reported amounts in
the financial statements, using statutory tax rates in effect for the year in
which the differences are expected to reverse.
Foreign Currency Translation
The assets and liabilities of the Company's foreign operations are
translated into U.S. dollars at current exchange rates. Revenue and expense
accounts of these operations are translated at average exchange rates
prevailing during the year. These translation adjustments are accumulated in a
separate component of stockholders' equity. Foreign currency transaction gains
and losses are included in determining net income for the year in which the
exchange rate changes.
Revenue Recognition
Product sales are recorded at the time of shipment. Service revenues are
recorded when the related services are performed.
Advertising and Promotion
Advertising and promotion costs are expensed as incurred. Advertising and
promotion expense amounted to $574,000 in 1997, $633,000 in 1998, and $726,000
in 1999.
Research and Development
Research and development costs are expensed as incurred. Research and
development expense amounted to $807,000 in 1997, $961,000 in 1998 and
$1,184,000 in 1999.
Stock-Based Compensation
Stock options granted by the Company are accounted for in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). In accordance with APB 25, no stock-based compensation
expense has been recognized in the accompanying financial statements, since the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of option grant.
F-8
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Earnings Per Common Share
Basic earnings per common share is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per common share is computed by dividing net income by the weighted
average number of common shares outstanding during the period and the effect of
all dilutive common stock equivalents, such as stock options and warrants.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements, the disclosure of contingent assets and
liabilities, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and for Hedging Activities" ("SFAS No. 133"). SFAS No. 133 provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. For a derivative not
designated as a hedging instrument, changes in the fair value of the derivative
are recognized in earnings in the period of change. SFAS No. 133 is effective
for fiscal years beginning after June 15, 2000, with earlier application
permitted. The Company does not expect the adoption of SFAS No. 133 to have a
material impact on the Company's financial position or results of operations.
Reclassifications
Certain prior year amounts have been reclassified to conform with the fiscal
1999 presentation.
2. Acquisitions
On March 26, 1999, the Company acquired substantially all of the assets of
the Signal Conditioning Products Division ("SCPD") of AMP Incorporated ("AMP").
AMP is a world leader in the manufacture of electrical, electronic, fiber-optic
and wireless interconnection devices and systems. Through SCPD, AMP
manufactured and sold a broad line of electromagnetic interference ("EMI")
filters, filtered arrays, filtered connectors, and related products.
The aggregate cash purchase price of the acquired assets, including related
acquisition costs, was $20,745,000. The Company also assumed obligations in the
aggregate amount of $1,866,000, including liabilities of $776,000 to relocate
or provide severance benefits to certain employees of the acquired business. To
finance the acquisition, the Company secured a $20,000,000 term loan from its
principal lending institutions. The term loan bears interest at variable rates
at or below the prevailing prime rate and requires quarterly principal payments
of $909,000 from December 26, 1999 through March 26, 2005.
The aggregate purchase price of the acquisition has been allocated to the
acquired assets based upon their respective fair market values. The excess of
the aggregate purchase price over the fair value of the net assets acquired
(goodwill) amounted to $11,694,000 and is being amortized ratably over a period
of 20 years.
The acquisition has been accounted for as a purchase and, accordingly, the
results of operations of the acquired business have been included in the
accompanying financial statements since the date of acquisition.
F-9
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following unaudited pro forma consolidated results of operations have been
prepared as if the acquisition had occurred as of the beginning of fiscal year
1998 and 1999, respectively (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1999
------- --------
<S> <C> <C>
Net sales............................................... $83,457 $102,796
Net income.............................................. 3,420 5,253
Earnings per common share:
Basic................................................. 0.31 0.48
Diluted............................................... 0.31 0.48
</TABLE>
The above amounts are based upon certain assumptions and estimates, and do
not reflect any benefits from economies which might be achieved from combined
operations. The pro forma results do not necessarily represent results which
would have occurred if the acquisition had taken place on the basis assumed
above, nor are they necessarily indicative of the results of future combined
operations.
On September 21, 1998, the Company acquired substantially all of the assets
of Potter Production Corporation, a manufacturer of electronic filters and
power products used in various communication, industrial control, and medical
equipment. The aggregate price of the acquired assets amounted to $2,918,000,
excluding future contingent payments. The amount of the contingent payments are
being determined based upon the Company's sales of power products during the
three years subsequent to the acquisition date. In 1999, contingent payments
under this arrangement amounted to $514,000. The amount of the contingent
payments are being allocated to goodwill and amortized ratably over the asset's
remaining life. Also, in connection with this acquisition, the Company issued
warrants to purchase 100,000 shares of the Company's Common Stock at an
exercise price of $6.25 per share. The warrants are immediately exercisable and
expire on September 21, 2002. At November 30, 1999 and May 31, 2000
(unaudited), all warrants remained outstanding.
F-10
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Inventories
Inventories by major classification are as follows (in thousands):
<TABLE>
<CAPTION>
November 30, May 31,
--------------- -----------
1998 1999 2000
------- ------- -----------
(unaudited)
<S> <C> <C> <C>
Finished goods................................ $ 2,581 $ 4,132 $ 4,911
Work-in-process............................... 5,070 9,626 10,693
Raw materials................................. 5,234 10,859 11,555
------- ------- -------
$12,885 $24,617 $27,159
======= ======= =======
</TABLE>
4. Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
November 30, May 31,
--------------- -----------
1998 1999 2000
------- ------- -----------
(unaudited)
<S> <C> <C> <C>
Land and improvements......................... $ 1,164 $ 1,524 $ 1,537
Buildings and improvements.................... 9,409 11,351 11,529
Machinery and equipment....................... 21,976 26,202 28,468
Construction in progress...................... 371 125 138
------- ------- -------
32,920 39,202 41,672
Less accumulated depreciation................. 16,631 17,836 20,136
------- ------- -------
$16,289 $21,366 $21,536
======= ======= =======
</TABLE>
5. Other Assets
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
November 30, May 31,
-------------- -----------
1998 1999 2000
------ ------- -----------
(unaudited)
<S> <C> <C> <C>
Goodwill....................................... $2,577 $14,786 $15,721
Less accumulated amortization.................. 30 561 936
------ ------- -------
Goodwill, net.................................. $2,547 $14,225 $14,785
====== ======= =======
Patents and patent rights...................... $ 466 $ 566 $ 569
Debt issuance costs............................ 356 671 671
------ ------- -------
822 1,237 1,240
Less accumulated amortization.................. 428 522 582
------ ------- -------
394 715 658
Deferred income taxes.......................... 383 108 108
Deferred charges............................... 147 377 354
------ ------- -------
Other non-current assets....................... $ 924 $ 1,200 $ 1,120
====== ======= =======
</TABLE>
F-11
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Short-Term Debt
Short-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
November
30, May 31,
----------- -----------
1998 1999 2000
---- ------ -----------
(unaudited)
<S> <C> <C> <C>
Notes payable - domestic line of credit (1)............. $ -- $4,400 $6,400
Notes payable - foreign lines of credit (2)............. 336 689 732
---- ------ ------
Total................................................. $336 $5,089 $7,132
==== ====== ======
</TABLE>
--------
(1) At November 30, 1999, the Company had an aggregate $6,000,000 line of
credit with its principal lending institutions, which was increased to
$10,000,000 effective March 21, 2000. During 1999, weighted average
borrowings under the revolving credit line amounted to $1,489,000, with
average interest rates of 7.35%, and maximum month-end borrowings of
$4,400,000. During 1998, there were no borrowings under the line of
credit. The revolving credit line is collateralized by substantially all
of the Company's tangible and intangible property, with interest rates on
borrowings at or below the prevailing prime rate. The current line of
credit agreement expires March 26, 2002.
(2) The Company's wholly-owned foreign subsidiary maintains unsecured Deutsche
Mark lines of credit with German financial institutions aggregating
$1,818,000 (DM 3,000,000 ) at November 30, 1998 and $1,330,000 (DM
2,500,000) at November 30, 1999. Weighted average borrowings under the
lines of credit amounted to $28,000 (DM 46,000) in 1998 and $95,000 (DM
179,000) in 1999, with average interest rates of 6.00% in 1998 and 6.50%
in 1999. The maximum amount of borrowings under the lines of credit at the
end of any month was $336,000 (DM 554,000) in 1998 and $689,000 (DM
1,296,000) in 1999. Borrowings bear interest at rates below the prevailing
prime rate and are payable upon demand.
F-12
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Long-Term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
November 30, May 31,
-------------- -----------
1998 1999 2000
------ ------- -----------
(unaudited)
<S> <C> <C> <C>
Term loan payable to bank at variable
interest rate (7.59% at November 30, 1999
and 8.62% (unaudited) at May 31, 2000) (1).. $ -- $20,000 $18,182
Mortgage note payable to bank at an interest
rate of 8.50% (2)........................... -- 787 767
Industrial development authority notes at
variable interest rate (3.40% at November
30, 1998, 4.00% at November 30, 1999 and
4.40% (unaudited) at May 31,2000) (3)....... 2,100 1,800 1,600
Industrial development authority notes at
variable interest rate (3.81% at November
30, 1998, 4.35% at November 30, 1999 and
4.78% (unaudited) at May 31, 2000) (4)...... 1,100 700 700
Industrial development authority notes and
related bank mortgage notes at interest
rates ranging from 4.00% to 7.75%........... 130 -- --
------ ------- -------
Total...................................... 3,330 23,287 21,249
Less current portion....................... 830 4,276 4,276
------ ------- -------
Long-term debt............................. $2,500 $19,011 $16,973
====== ======= =======
</TABLE>
--------
(1) The term loan is collateralized by substantially all of the Company's
tangible and intangible assets. The loan bears interest at variable rates
at or below the prevailing prime rate and requires quarterly principal
payments of $909,000 from December 1999 to March 2005.
The Company has entered into a credit agreement with its principal lending
institutions covering the term loan and the Company's domestic line of
credit (the "Agreement"). The Agreement requires the Company to comply
with certain covenants. These covenants generally restrict the Company
from granting additional liens on its assets, disposing of assets other
than in the ordinary course of business, and incurring additional
indebtedness other than purchase money indebtedness and debt not exceeding
$5,000,000 in the aggregate. The Agreement also imposes certain
restrictions on future acquisitions by the Company. In addition, the
Agreement requires the Company to meet the following quarterly financial
covenants: maintain a minimum net worth of $28,000,000 plus 50% of the
Company's net income for each fiscal year ending after November 30, 1998;
maintain a minimum ratio of EBITDA (earnings before interest, taxes,
depreciation and amortization) to fixed charges of 1.2 to 1.0; and
maintain a maximum ratio of total indebtedness to EBITDA of 3.5 to 1.0. At
November 30, 1999 and May 31, 2000 (unaudited), the Company was in
compliance with each of these covenants.
(2) The mortgage note payable is collateralized by certain land and building
and requires monthly principal payments of approximately $3,000 through
July 2009, with a final principal payment of $400,000 due in August 2009.
(3) The industrial development authority notes are collateralized by certain
land, building and equipment and an irrevocable letter of credit issued by
the Company, through one of its principal lending institutions. The
F-13
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
notes bear interest at approximately 50% of the prevailing prime rate and
require annual principal payments ranging from $200,000 to $300,000
through the year 2007.
(4) The industrial development authority notes are collateralized by an
irrevocable letter of credit issued by the Company, through one of its
principal lending institutions. The notes bear interest at approximately
50% of the prevailing prime rate and require annual principal payments of
$400,000 through the year 2000, with a final principal payment of $300,000
due in the year 2001.
Each of the above irrevocable letters of credit is collateralized by
substantially all of the Company's tangible and intangible assets.
The aggregate maturities of all long-term debt during each of the five years
ending November 30, 2004, are $4,276,000, $4,176,000, $3,976,000, $3,876,000,
and $3,876,000, respectively.
8. Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, accounts receivable,
accounts payable, and accrued liabilities approximate fair value due to the
short-term maturities of these assets and liabilities. The interest rates on
substantially all of the Company's bank borrowings are adjusted regularly to
reflect current market rates. Accordingly, the carrying amounts of the
Company's short-term and long-term borrowings also approximate fair value. The
Company utilizes letters of credit to collateralize certain long-term
borrowings. The letters of credit reflect fair value as a condition of their
underlying purpose and are subject to fees competitively determined in the
marketplace.
During 1999, the Company entered into an interest rate swap agreement to
limit the effect of increases in interest rates on the Company's variable rate
debt. The swap agreement has an aggregate notional amount of $10,000,000 and
expires on December 31, 2001. The effect of the agreement is to limit the
interest rate exposure on $10,000,000 of the Company's term loan and revolving
credit loans. As a result of this agreement, interest expense was increased by
$46,000 in 1999. At November 30, 1999, the estimated fair value of the interest
rate swap agreement is a net receivable of $73,000, based on current market
rates and settlement costs.
9. Treasury Stock
On September 30, 1998, the Board of Directors authorized the Company to
repurchase up to $4,000,000 of the Company's Common Stock at market prices. The
amount and timing of the shares to be repurchased will be at the discretion of
management. At November 30, 1998 and 1999, the Company had repurchased 70,000
shares at an aggregate cost of $294,000.
10. Other Income and Expense
Other income and expense consist of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended Six Months Ended
November 30, May 31,
---------------- ----------------
1997 1998 1999 2000
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Investment income..................... $ 31 $117 $72 $ 29
Gain (loss) on foreign currency
transactions......................... 12 (40) 4 31
Patent licensing fees................. 106 8 7 375
Gain (loss) on sale of property, plant
and equipment........................ (8) -- 13 --
---- ---- --- ----
$141 $ 85 $96 $435
==== ==== === ====
</TABLE>
F-14
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Income Taxes
For the years ended November 30, 1997, 1998 and 1999, income before income
taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
U.S. operations...................................... $4,583 $5,884 $8,376
Foreign operations................................... 927 435 464
------ ------ ------
$5,510 $6,319 $8,840
====== ====== ======
</TABLE>
For the years ended November 30, 1997, 1998 and 1999, the provision for
income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Current
Federal............................................ $1,055 $1,146 $2,396
State.............................................. 105 225 340
Deferred............................................. 376 1,014 634
------ ------ ------
$1,536 $2,385 $3,370
====== ====== ======
</TABLE>
The difference between the provision for income taxes and the amount
computed by applying the U.S. federal income tax rate in effect for the years
ended November 30, 1997, 1998 and 1999 consists of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------- ------ ------
<S> <C> <C> <C>
Statutory federal income tax.................... $ 1,873 $2,148 $3,006
State income taxes, net of federal tax benefit.. 69 148 224
Foreign tax rates............................... 148 70 74
Subpart F income, U.S. property investment...... 258 -- --
Decrease in deferred tax asset valuation
allowance...................................... (1,194) (62) --
Other items..................................... 382 81 66
------- ------ ------
$ 1,536 $2,385 $3,370
======= ====== ======
</TABLE>
F-15
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant components of the Company's net deferred tax assets and
liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
November 30,
----------------
1998 1999
------- -------
<S> <C> <C>
Deferred tax assets:
Amortization of intangible assets.................... $ 512 $ 453
Accrued compensation................................. 237 318
Investment in subsidiaries........................... 399 255
Net operating loss carryforwards..................... 574 232
Allowance for doubtful accounts...................... 103 170
Inventory valuation.................................. 68 110
Tax credit carryforwards............................. 42 28
Property, plant and equipment........................ 116 --
Other................................................ 10 10
------- -------
Deferred tax assets................................ 2,061 1,576
------- -------
Deferred tax liabilities:
Depreciation of plant and equipment.................. 2,336 2,329
Investment in subsidiaries........................... 1,034 1,107
Amortization of intangible assets.................... 4 68
Other................................................ -- 19
------- -------
Deferred tax liabilities........................... 3,374 3,523
------- -------
Net deferred tax assets (liabilities).................. $(1,313) $(1,947)
======= =======
<CAPTION>
November 30,
----------------
1998 1999
------- -------
<S> <C> <C>
Net deferred tax assets:
Current.............................................. $ 409 $ 579
Noncurrent........................................... 383 108
Net deferred tax liabilities:
Noncurrent........................................... (2,105) (2,634)
------- -------
$(1,313) $(1,947)
======= =======
</TABLE>
The Company has not recorded deferred income taxes on the undistributed
earnings of its foreign subsidiary because of management's intent to
indefinitely reinvest such earnings. At November 30, 1999, the undistributed
earnings of the foreign subsidiary amounted to $2,836,000 (DM 5,332,000). Upon
distribution of these earnings in the form of dividends or otherwise, the
Company may be subject to U.S. income taxes and foreign withholding taxes. It
is not practical, however, to estimate the amount of taxes that may be payable
on the eventual remittance of these earnings. At November 30, 1999, the
Company's foreign subsidiary had approximately $216,000 (DM 406,000) of tax net
operating loss carryforwards available to be carried forward indefinitely.
The Company has assessed its past earnings history and trends, and
expiration dates of tax attribute carryforwards, and has determined that it is
more likely than not that its deferred tax assets will be realized.
Accordingly, no valuation allowance has been recorded at November 30, 1998 or
1999. During the years ended November 30, 1997 and 1998, the Company reduced
its previously recorded valuation allowance for deferred
F-16
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
tax assets to reflect the utilization of certain foreign net operating loss
carryforwards and changes in the expected future realization of remaining
foreign loss carryforwards.
12. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per common share:
<TABLE>
<CAPTION>
Year Ended November Six Months Ended
30, May 31,
-------------------- -----------------
1997 1998 1999 1999 2000
------ ------ ------ -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Numerator for basic and diluted
earnings per common share (in
thousands):
Net income....................... $3,974 $3,934 $5,470 $ 2,373 $ 3,185
====== ====== ====== ======== ========
Denominator for basic earnings per
common share (in thousands):
Weighted average shares
outstanding..................... 10,798 10,907 10,905 10,888 10,992
====== ====== ====== ======== ========
Denominator for diluted earnings
per common share (in thousands):
Weighted average shares
outstanding..................... 10,798 10,907 10,905 10,888 10,992
Effect of dilutive securities:
Stock options.................... 71 109 139 87 230
Stock warrants................... -- -- 7 -- 46
------ ------ ------ -------- --------
10,869 11,016 11,051 10,975 11,268
====== ====== ====== ======== ========
Earnings per common share:
Basic............................ $ 0.37 $ 0.36 $ 0.50 $ 0.22 $ 0.29
====== ====== ====== ======== ========
Diluted.......................... $ 0.37 $ 0.36 $ 0.49 $ 0.22 $ 0.28
====== ====== ====== ======== ========
</TABLE>
Options to purchase 143,500 shares of Common Stock at prices ranging from
$4.25 to $6.00 per share were outstanding during 1998 but were not included in
the computation of diluted earnings per share because the options' exercise
prices were greater than the average market price of the Company's Common Stock
and, therefore, would be antidulutive.
13. Supplemental Cash Flow Information
Supplemental cash flow information consists of the following (in thousands):
<TABLE>
<CAPTION>
Six Months Ended
Year Ended November 30, May 31,
------------------------ -----------------
1997 1998 1999 1999 2000
--------------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash paid during the year
for:
Interest................... $ 420 $ 210 $ 1,380 $ 359 $ 1,164
Income taxes............... 854 1,466 2,986 1,271 993
Liabilities assumed in
connection with business
acquisitions................ -- -- 1,866 -- --
</TABLE>
F-17
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Common Stock Options
The Company has several plans which provide for granting to officers,
directors, key employees and advisors options to purchase shares of the
Company's Common Stock. Under the plans, option prices are not less than the
market price of the Company's Common Stock on the date of the grant. The
options become exercisable at varying dates and generally expire five years
from the date of grant. At November 30, 1999, options to purchase 1,141,392
shares of Common Stock were available for grant under the Company's stock
option plans.
A summary of the Company's stock option activity for the years ended
November 30, 1997, 1998 and 1999 and the six month period ended May 31, 2000 is
as follows:
<TABLE>
<CAPTION>
Number
of Option Price
Shares -------------------------------
Under Per Weighted
Option Share Average Aggregate
-------- ----------- -------- ----------
<S> <C> <C> <C> <C>
Outstanding--November 30, 1996...... 362,667 $ 1.88-4.25 $ 3.26 $1,183,000
Granted during the year........... 155,000 3.06-3.50 3.18 493,000
Exercised during the year......... (84,998) 1.88-4.25 3.52 (300,000)
Forfeitures and expirations....... (42,001) 1.88-3.06 2.85 (119,000)
-------- ----------- ------ ----------
Outstanding--November 30, 1997...... 390,668 1.88-4.25 3.22 1,257,000
Granted during the year........... 137,500 5.88-6.00 5.91 813,000
Exercised during the year......... (118,663) 1.88-4.25 3.49 (414,000)
Forfeitures and expirations....... (4,000) 1.88-3.06 2.77 (11,000)
-------- ----------- ------ ----------
Outstanding--November 30, 1998...... 405,505 1.88-6.00 4.06 1,645,000
Granted during the year........... 194,500 4.13-4.38 4.26 828,000
Exercised during the year......... (68,663) 1.88-3.56 2.65 (182,000)
Forfeitures and expirations....... (60,000) 3.00-5.88 4.15 (249,000)
-------- ----------- ------ ----------
Outstanding--November 30, 1999...... 471,342 3.00-6.00 4.33 2,042,000
Granted during the period
(unaudited)...................... 193,000 10.75-11.25 10.86 2,097,000
Exercised during the period
(unaudited)...................... (64,134) 3.00-3.50 3.04 (195,000)
Forfeitures and expirations
(unaudited)...................... -- -- -- --
-------- ----------- ------ ----------
Outstanding -- May 31, 2000
(unaudited)........................ 600,208 $3.00-11.25 $ 6.57 $3,944,000
======== =========== ====== ==========
Exercisable
May 31, 2000 (unaudited).......... 115,029 $ 3.00-6.00 $ 4.34 $ 499,000
======== =========== ====== ==========
November 30, 1999................. 68,165 $ 3.00-3.50 $ 3.29 $ 224,000
======== =========== ====== ==========
November 30, 1998................. 44,497 $ 1.88-4.25 $ 3.10 $ 138,000
======== =========== ====== ==========
November 30, 1997................. 80,163 $ 1.88-4.25 $ 3.66 $ 293,000
======== =========== ====== ==========
</TABLE>
During the years ended November 30, 1997, 1998 and 1999, the weighted
average fair value of options granted amounted to $0.97, $2.45, and $1.73 per
share, respectively. At November 30, 1999, the weighted average remaining
contractual life of outstanding options was 3.8 years.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees", and related Interpretations in
accounting for its employee stock options because the alternative fair value
accounting provided for under Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") requires use of
option valuation models that were not developed for use in valuing employee
stock options.
F-18
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro forma information regarding net income and earnings per share, required
by SFAS No. 123, has been determined as if the Company had accounted for its
employee stock options under the fair value method of SFAS No. 123. The fair
value for options granted was estimated at the date of grant using a Black-
Scholes option pricing model with the following assumptions for 1997, 1998, and
1999 respectively: risk-free interest rate of 6.00%, 5.50%, and 5.50%;
volatility factor of the expected market price of the Company's Common Stock of
0.30, 0.37, and 0.36; dividend yield of 2.00%, 0.00%, and 0.00%; and a weighted
average expected option life of five years. For purposes of pro forma
disclosures, the estimated fair value of options is amortized to expense over
the options' vesting period. For the years ended November 30, 1997, 1998, and
1999, the Company's reported and pro forma net income and earnings per share
are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
As reported:
Net income........................................ $3,974 $3,934 $5,470
Earnings per common share:
Basic........................................... 0.37 0.36 0.50
Diluted......................................... 0.37 0.36 0.49
Pro forma:
Net income........................................ 3,935 3,837 5,314
Earnings per common share:
Basic........................................... 0.37 0.35 0.49
Diluted......................................... 0.37 0.35 0.48
</TABLE>
15. Employee Savings Plan
The Company has a savings plan, available to substantially all employees,
which permits participants to make contributions by salary reduction pursuant
to Section 401(k) of the Internal Revenue Code. The Company matches employee
contributions up to a maximum of 2.5% of compensation and may, at its
discretion, make additional contributions to the plan. The Company's
contribution to the plan was $180,000 in 1997, $190,000 in 1998, and $208,000
in 1999.
16. Concentration of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of cash, cash equivalents and
trade receivables. The Company invests available cash in money market
securities of high credit quality financial institutions. At November 30, 1998
and 1999, approximately 49% and 58%, respectively, of the Company's accounts
receivable were from customers in the telecommunication industry. To reduce
credit risk, the Company performs periodic credit evaluations of its customers,
but does not generally require advance payments or collateral. Credit losses to
customers operating in the telecommunication industry have not been material.
17. Operating Segments
The Company was founded as a solutions-oriented company, designing and
manufacturing products to suppress or eliminate electromagnetic interference.
In recent years, the Company has broadened its focus and product lines to
become a control products and systems company, providing a wide range of
components and systems used to condition, regulate, transmit, receive, or
govern electronic performance. Effective February 1, 2000, the Company
realigned its business segments to better reflect its current strategic focus.
F-19
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's operating results are now reported in two segments: signal
products and power products. The Company's Signal Products Group manufactures a
broad range of low pass filters, filtered arrays, filtered connectors, wireless
products (coaxial ceramic resonators, bandpass filters and duplexers), and
specialty ceramic capacitors. The Power Products Group manufactures various
power management and conditioning products including power distribution
systems, power line filters, and power entry modules. The reportable segments
are each managed separately because they manufacture and sell distinct products
with different production processes.
The Company evaluates performance and allocates resources to its operating
segments based upon numerous factors, including segment income or loss before
income taxes. The accounting policies of the reportable segments are the same
as those utilized in the preparation of the Company's consolidated financial
statements. However, substantially all of the Company's selling expenses,
general and administrative expenses, and non-operating expenses are not
allocated to the Company's reportable operating segments and, accordingly,
these expenses are not deducted in arriving at segment income or loss. In
addition, reportable assets are comprised solely of property, plant, equipment,
and inventories.
Prior period amounts in the following table have been restated to correspond
with the new business segment presentation. For each period presented, the
accounting policies and procedures used to determine segment income have been
consistently applied.
For the years ended November 30, 1997, 1998 and 1999 and the six month
periods ended May 31, 1999 and 2000, reportable segment information is as
follows (in thousands):
<TABLE>
<CAPTION>
Signal Power
Year Ended November 30, 1997 Products Products Total
---------------------------- -------- -------- -------
<S> <C> <C> <C>
Revenue from unaffiliated customers............ $45,298 $11,168 $56,466
Depreciation expense........................... 2,572 296 2,868
Segment income................................. 14,668 1,255 15,923
Segment assets................................. 21,409 4,487 25,896
Capital expenditures........................... 2,002 1,134 3,136
<CAPTION>
Signal Power
Year Ended November 30, 1998 Products Products Total
---------------------------- -------- -------- -------
<S> <C> <C> <C>
Revenue from unaffiliated customers............ $43,633 $16,235 $59,868
Depreciation expense........................... 2,716 499 3,215
Segment income................................. 13,167 3,509 16,676
Segment assets................................. 21,224 5,715 26,939
Capital expenditures........................... 1,723 1,186 2,909
<CAPTION>
Signal Power
Year Ended November 30, 1999 Products Products Total
---------------------------- -------- -------- -------
<S> <C> <C> <C>
Revenue from unaffiliated customers............ $64,866 $32,863 $97,729
Depreciation expense........................... 2,781 674 3,455
Segment income................................. 17,235 7,739 24,974
Segment assets................................. 33,670 8,752 42,422
Capital expenditures........................... 1,949 1,640 3,589
</TABLE>
F-20
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Signal Power
Six Months Ended May 31, 1999 (unaudited) Products Products Total
----------------------------------------- -------- -------- -------
<S> <C> <C> <C>
Revenue from unaffiliated customers........... $27,113 $12,754 $39,867
Depreciation expense.......................... 1,455 248 1,703
Segment income................................ 7,082 3,134 10,216
Segment assets................................ 33,497 7,229 40,726
Capital expenditures.......................... 1,316 887 2,203
<CAPTION>
Signal Power
Six Months Ended May 31, 2000 (unaudited) Products Products Total
----------------------------------------- -------- -------- -------
<S> <C> <C> <C>
Revenue from unaffiliated customers........... $43,498 $17,113 $60,611
Depreciation expense.......................... 1,851 327 2,178
Segment income................................ 10,271 4,337 14,608
Segment assets................................ 38,463 8,466 46,929
Capital expenditures.......................... 2,069 222 2,291
</TABLE>
For the years ended November 30, 1997, 1998 and 1999, and the six month
periods ended May 31, 1999 and 2000, reconciliation's of reportable segment
information to the Company's consolidated financial statements are as follows
(in thousands):
<TABLE>
<CAPTION>
Six Months
Ended
Depreciation expense Year Ended November 30, May 31,
-------------------- ----------------------------- ----------------
1997 1998 1999 1999 2000
-------- -------- --------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Total depreciation expense for
reportable segments.......... $ 2,868 $ 3,215 $ 3,455 $ 1,703 $ 2,178
Unallocated amounts:
Depreciation expense related
to selling, general and
administrative activities.. 419 372 464 179 158
-------- -------- --------- ------- -------
Consolidated depreciation
expense...................... $ 3,287 $ 3,587 $ 3,919 $ 1,882 $ 2,336
======== ======== ========= ======= =======
<CAPTION>
Six Months
Ended
Year Ended November 30, May 31,
Income before provision for ----------------------------- ----------------
income taxes 1997 1998 1999 1999 2000
--------------------------- -------- -------- --------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Total income for reportable
segments..................... $ 15,923 $ 16,676 $ 24,974 $10,216 $14,608
Unallocated amounts:
Selling, general and
administrative expense..... (10,137) (10,214) (14,810) (6,039) (8,727)
Interest expense............ (417) (228) (1,420) (388) (1,179)
Other income................ 141 85 96 35 435
-------- -------- --------- ------- -------
Consolidated income before
provision for income taxes... $ 5,510 $ 6,319 $ 8,840 $ 3,824 $ 5,137
======== ======== ========= ======= =======
</TABLE>
F-21
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended November 30, May 31,
----------------------- ---------------
Assets 1997 1998 1999 1999 2000
------ ------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Total assets for reportable segments... $25,896 $26,939 $42,422 $40,726 $46,929
Unallocated amounts:
Cash and cash equivalents............ 196 739 538 73 641
Accounts receivable.................. 9,997 10,162 19,330 16,603 21,473
Goodwill............................. -- 2,547 14,225 14,167 14,785
Other assets......................... 3,967 3,752 6,039 3,747 3,930
------- ------- ------- ------- -------
Total consolidated assets.............. $40,056 $44,139 $82,554 $75,316 $87,758
======= ======= ======= ======= =======
<CAPTION>
Six Months
Ended
Year Ended November 30, May 31,
----------------------- ---------------
Capital expenditures 1997 1998 1999 1999 2000
-------------------- ------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Total capital expenditures for
reportable segments................... $ 3,136 $ 2,909 $ 3,589 $ 2,203 $ 2,291
Capital expenditures related to the
Company's selling, general and
administrative activities............. 144 384 1,383 223 232
------- ------- ------- ------- -------
Total consolidated capital
expenditures.......................... $ 3,280 $ 3,293 $ 4,972 $ 2,426 $ 2,523
======= ======= ======= ======= =======
</TABLE>
The Company has operations in the United States and Germany. Sales are
attributed to individual countries based upon the location responsible for the
sale. The Company transfers products from one geographic region for resale in
another. These transfers are priced to provide both areas with an equitable
share of the overall profit. The geographic distribution of sales and long-
lived assets for 1997, 1998 and 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
United
1997 States Germany Total
---- ------- ------- -------
<S> <C> <C> <C>
Revenue from unaffiliated customers.................... $48,148 $ 8,318 $56,466
Long-lived assets:
Property, plant and equipment........................ 15,885 94 15,979
Intangible assets.................................... 499 -- 499
<CAPTION>
United
1998 States Germany Total
---- ------- ------- -------
<S> <C> <C> <C>
Revenue from unaffiliated customers.................... $50,864 $ 9,004 $59,868
Long-lived assets:
Property, plant and equipment........................ 16,188 101 16,289
Intangible assets.................................... 2,941 -- 2,941
<CAPTION>
United
1999 States Germany Total
---- ------- ------- -------
<S> <C> <C> <C>
Revenue from unaffiliated customers.................... $82,662 $15,067 $97,729
Long-lived assets:
Property, plant and equipment........................ 21,241 125 21,366
Intangible assets.................................... 14,940 -- 14,940
</TABLE>
In 1998 and 1999, the Company's largest single customer, an original
equipment manufacturer of telecommunication equipment, represented 11% and 18%,
respectively, of total consolidated net sales. Sales to this major customer
principally consisted of power products. In 1997, the Company's largest single
customer represented 9%, of total consolidated net sales. Sales to this
customer principally consisted of signal products.
F-22
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
18. Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Year Ended November 30, 1999
-------------------------------
First Second Third Fourth
------- ------- ------- -------
(in thousands, except per share
data)
<S> <C> <C> <C> <C>
Net sales...................................... $15,325 $24,542 $28,891 $28,971
Gross margin................................... 4,412 7,011 8,074 8,415
Net income..................................... 863 1,510 1,597 1,500
Earnings per common share:
Basic........................................ 0.08 0.14 0.15 0.14
Diluted...................................... 0.08 0.14 0.14 0.13
<CAPTION>
Year Ended November 30, 1998
-------------------------------
First Second Third Fourth
------- ------- ------- -------
(in thousands, except per share
data)
<S> <C> <C> <C> <C>
Net sales...................................... $14,641 $15,190 $14,023 $16,014
Gross margin................................... 4,419 4,741 4,232 4,892
Net income..................................... 956 1,059 915 1,004
Earnings per common share:
Basic........................................ 0.09 0.10 0.08 0.09
Diluted...................................... 0.09 0.10 0.08 0.09
</TABLE>
Earnings per common share are computed independently for each of the
quarters presented. Therefore, the sum of the quarterly earnings per share may
not equal the total computed for the year.
19. Operating Leases
The Company has entered into several operating lease agreements, primarily
relating to sales office facilities and computer equipment. These leases are
noncancelable and expire on various dates through 2006. Leases that expire
generally are expected to be renewed or replaced by other leases. Future
minimum rental payments for all operating leases having initial or remaining
noncancelable terms in excess of one year are as follows (in thousands):
<TABLE>
<S> <C>
2000................. $149
2001................. 140
2002................. 85
2003................. 58
2004................. 56
Later years.......... 89
----
$577
----
</TABLE>
Total rent expense under all operating leases amounted to $517,000 in 1997,
$644,000 in 1998, and $1,140,000 in 1999.
F-23
<PAGE>
[Back Page]
[Spectrum Control, Inc. Logo]
Until , 2000, all dealers that buy, sell or trade our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth the fees and expenses payable by the
registrant in connection with the sale and distribution of the securities being
registered, other than underwriting discounts and commissions. No fees or
expenses will be paid by the selling shareholders. All of the amounts shown are
estimates, except the Securities and Exchange Commission ("SEC") registration
fee and the filing fee with the National Association of Securities Dealers,
Inc. ("NASD").
<TABLE>
<S> <C>
SEC Registration Fee..................................................... $
NASD Filing Fee.......................................................... $
Printing Expenses........................................................ $
Accountants' Fee and Expenses ........................................... $
Legal Fees and Expenses.................................................. $
Blue Sky Qualification Fees and Expenses................................. $
Transfer Agent and Registrar Fees........................................ $
Miscellaneous............................................................ $
-----
Total.................................................................... $
=====
</TABLE>
Item 15. Indemnification of Directors and Officers.
The provisions of Sections 1741 through 1750 of the Pennsylvania Business
Corporation Law provide that a corporation shall have the power to indemnify
any person who was or is a party or is threatened to be made a party to any
action or proceeding, whether civil, criminal, administrative or investigative,
by reason of the fact that he or she is or was a representative of the
corporation, against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with the action or proceeding if they acted in good faith and in a
manner they reasonably believed to be in, or not opposed to, the best interests
of the corporation. To the extent that a representative of the corporation has
been successful on the merits or otherwise in defense of any action or
proceeding or in defense of any claim, issue or matter therein, the corporation
is required by the Pennsylvania Business Corporation Law to indemnify them
against expenses actually and reasonably incurred by them in connection with
such defense.
The Company's bylaws allow it to indemnify a person in the same manner and
under the same circumstances as put forth in Sections 1741 through 1750 of the
Pennsylvania Business Corporation Law.
The Underwriters have agreed to indemnify the Company and its directors,
officers and controlling persons as to any losses, claims, damages, expenses or
liabilities arising out of any untrue statement or omission in the Registration
Statement based on information relating to the Underwriters furnished in
writing by such Underwriters for use in the Registration Statement.
Item 16. Exhibits.
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Articles of Incorporation of the Company, as amended, previously filed
on February 25, 1981, as Exhibit 3.1 to Form S-1 registration and
incorporated herein by reference.
3.2 Bylaws of the Company, previously filed on February 25, 1981, as
Exhibit 3.2 to Form S-1 registration and incorporated herein by
reference.
5.1* Opinion of Hodgson, Russ, Andrews, Woods & Goodyear, LLP
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.1 Change in Control Agreement dated June 26, 2000, by and between the
Company and Richard A. Southworth.
10.2 Change in Control Agreement dated June 26, 2000, by and between the
Company and John P. Freeman
10.3 Stock Option Plan of 1995, previously filed under Form S-8 on January
22, 1996, and incorporated herein by reference.
10.4 Non-Employee Directors' Stock Option Plan, previously filed under Form
S-8 on July 16, 1996, and incorporated herein by reference.
10.5 Lease Agreement dated September 21, 1998 by and between Potter
Production Corporation and Spectrum Control, Inc.
10.6 Lease Contract dated March 15, 2000 by and between Industrias de
America, S.A. de C.V. and Spectrum Control de Mexico, S.A. de C.V.
10.7 Credit Agreement dated March 26, 1999 by and among Spectrum Control,
Inc., its subsidiaries, PNC Bank, N.A. and M&T Bank.
23.1* Consent of Hodgson, Russ, Andrews, Woods & Goodyear, LLP (included in
Exhibit 5.1)
23.2 Consent of Ernst & Young LLP
24.1 Power of Attorney (included on signature page to this Registration
Statement)
</TABLE>
--------
* To be filed by amendment.
Item 17. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represents a fundamental change in the information set forth
in this Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) ((S)230.424(b) of this
chapter) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective Registration Statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration
Statement;
Provided, however, That paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed
with or furnished to the Commission by the Registrant pursuant to
Section 13 or Section 15(d) of the Exchange Act that are incorporated
by reference in this Registration Statement.
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<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act , each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the Registrant's annual
report pursuant to Section 13(a) of Section 15(d) of the Exchange Act (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in this Registration Statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(d) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing provisions, the Registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3 and has duly
caused this Registration Statement to be signed on its behalf by the
undersigned there and to duly authorize, in the City of Erie, Pennsylvania, on
the 6th day of July, 2000.
SPECTRUM CONTROL, INC.
/s/ Richard A. Southworth
By: _________________________________
Richard A. Southworth
President and Chief Executive
Officer
July 6, 2000
POWER OF ATTORNEY
The undersigned directors and officers of Spectrum Control, Inc.
("Spectrum") do hereby constitute and appoint Richard A. Southworth and John P.
Freeman, and each of them, with full power of substitution, our true and lawful
attorneys-in-fact and agents to do any and all acts and things in our name and
behalf in our capacities indicated below which such person may deem necessary
or advisable to enable Spectrum to comply with the Securities Act of 1933, as
amended and any rules, regulations and requirements of the Securities and
Exchange Commission, in connection with this registration statement, including
specifically, but not limited to, power and authority to sign for us, or any of
us, in the capacities indicated below and any and all amendments (including
pre-effective and post-effective amendments or any other registration statement
filed pursuant to the provision of Rule 462(b) under the Act) hereto; and we do
hereby ratify and confirm that all such person or persons shall do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Edwin R. Bindseil Director July 6, 2000
____________________________________
Edwin R. Bindseil
/s/ John P. Freeman Director, Chief Financial July 6, 2000
____________________________________ Officer and Principal
John P. Freeman Accounting Officer
/s/ J. Thomas Gruenwald Director July 6, 2000
____________________________________
J. Thomas Gruenwald
/s/ Melvin Kutchin Director July 6, 2000
____________________________________
Melvin Kutchin
/s/ John M. Petersen Director July 6, 2000
____________________________________
John M. Petersen
/s/ Gerald A. Ryan Director July 6, 2000
____________________________________
Gerald A. Ryan
/s/ James F. Toohey Director July 6, 2000
____________________________________
James F. Toohey
</TABLE>
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