william r. krull, individually and on ) richard...

Case 1: 11 -cv-001 05-SJM Document 1 Filed 05/09/11 of 17

UNITED STATES DISTRICT COURT FOR THEWESTERN DISTRICT OF PENNSYLVANIA

WILLIAM R. KRULL, individually and on ) Civil Action No.:behalf of all others similarly situated, and )derivatively on behalf of SPECTRUM ) ERIE DIVISIONCONTROL, INC., )

)Plaintiff, )

)v. )

)RICHARD SOUTHWORTH, GERALD )RYAN, JOHN FREEMAN, JAMES )TOOHEY, J. THOMAS GRUENWALD, )GEORGE BEHRINGER, CHARLES )MAHAN, SPECTRUM CONTROL, INC., )API TECHNOLOGIES, CORP., and ERIE )MERGER CORP., )

))

Defendants. ) JURY TRIAL DEMANDED

CLASS ACTION COMPLAINT

Plaintiff, William Krull, by his attorneys, alleges upon information and belief, except for

his own acts, which are alleged on knowledge, as follows:

INTRODUCTION

1. Plaintiff brings this shareholder class action on behalf of the public common

stockholders of Spectrum Control, Inc. (“Spectrum” or the “Company”) and on behalf of

Spectrum against Spectrum’s Board of Directors (the “Board” or the “Individual Defendants”)

for their breaches of fiduciary duties arising out of their attempt to sell the Company to API

Technologies, Corp. (“API”) (the “Proposed Transaction”) pursuant to a materially misleading

Case 1:11-cv-00105-SJM Document 1 Filed 05/09/11 of 17

definitive proxy statement filed on Schedule 14A with the Securities and Exchange Commission

("SEC") on May 4, 2011 (the "Definitive Proxy").

2. In the Definitive Proxy, Defendants have announced that a special meeting of

shareholders of Spectrum will be held on Friday, May 27, 2011 at 10:00a.m. Eastern time, at the

Company's headquarters and have stated that the Board has unanimously determined that the

"merger is advisable, fair and in the best interests of the company and its shareholders" and has

recommended that Spectrum shareholders vote "FOR" the approval of the Proposed Transaction.

Defendants are asking Spectrum shareholders to base their vote on the Proposed Transaction

based on the information contained in the Definitive Proxy. In connection with the Definitive

Proxy, however, Defendants have breached their fiduciary duty of candor by failing to disclose

material information to the Spectrum shareholders necessary for them to determine whether to

vote in favor of the Proposed Transaction. Defendants have also violated Section 14(a) of the

Exchange Act and Rule 14a-9 promulgated thereunder, 17 C.F.R. §240.14a-9, by omitting

material facts necessary to render the Definitive Proxy non-misleading.

3. The misrepresentations and omissions in the Definitive Proxy are material to

Plaintiff and the class he seeks to represent. Without this information, Plaintiff and the other

Spectrum shareholders will be deprived of their entitlement to cast a fully informed vote should

these misrepresentations and omissions not be cured prior to the May 27, 2011 vote on the

Proposed Transaction.

JURISDICTION AND VENUE

4. This Court has subject matter jurisdiction pursuant to Section 27 of the Exchange

Act [15 U.S.C. § 78aa] and 28 U.S.C. § 1331. The claims asserted herein arise under Section

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14(a) of the Exchange Act [15 U.S.C. § 78n(a)] and Pennsylvania common law. This court has

jurisdiction over the state law claims pursuant to 28 U.S.C. § 1367.

5. Venue is proper in this District because many of the acts and practices

complained of herein occurred in substantial part in this District, Defendant Spectrum is

headquartered in this District, and Plaintiff believes several other Defendants reside in this

District.

PARTIES

6. Plaintiff William Krull, is, and has been at all relevant times, the owner of shares

of common stock of Spectrum.

7. Spectrum is a corporation organized and existing under the laws of the

Commonwealth of Pennsylvania. It maintains its principal corporate offices at 8031 Avonia

Road, Fairview, Erie County, Pennsylvania 16415. Spectrum develops, designs, and

manufactures high performance, custom solutions for the defense, aerospace, industrial, and

medical industries worldwide.

8. Defendant Richard Southworth (“Southworth”) has been the President and Chief

Executive Officer of the Company since 1997, and a director of the Company since 1998.

9. Defendant Gerald Ryan (“Ryan”) has been Chairman of the Board of the

Company since 1991.

10. Defendant John Freeman (“Freeman”) is Chief Financial Officer, Senior Vice

President, and a director of the Company. Freeman has been Chief Financial Officer since 1990,

Senior Vice President since 2000, and a director since 1991.

11. Defendant James Toohey (“Toohey”) has been a director of the Company since

1968.

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12. Defendant J. Thomas Gruenwald (“Gruenwald”) has been a director of the

Company since 2000.

13. Defendant George Behringer (“Behringer”) has been a director of the Company

since 2008.

14. Defendant Charles Mahan (“Mahan”) has been a director of the Company since

2009.

15. Defendants referenced in NN 8 through 14 are collectively referred to as Individual

Defendants and/or the Board.

16. Defendant API is a Delaware corporation with its headquarters located in

Orlando, Florida that through its subsidiaries, provides engineered systems, components and

secure communications as well as high quality engineering services, new product introduction,

and turnkey manufacturing for electronic assembly, test, and build services to the global defense

and aerospace industry.

17. Defendant Erie Merger Corp. is a Pennsylvania corporation wholly owned by API

that was created for the purposes of effectuating the Proposed Transaction.

CLASS ACTION ALLEGATIONS

18. Plaintiff brings this action on its own behalf and as a class action pursuant to Fed.

R. Civ. P. 23 on behalf of all owners of Spectrum common stock and their successors in interest,

except Defendants and their affiliates (the “Class”).

19. This action is properly maintainable as a class action for the following reasons:

(a) the Class is so numerous that joinder of all members is impracticable. As

of April 11, 2011, Spectrum has approximately 13.14 million shares outstanding.

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(b) questions of law and fact are common to the Class, including, inter alia,

the following:

(i) Have the Individual Defendants breached their fiduciary duties of

candor in connection with the material misrepresentations and/or

omissions contained in the Definitive Proxy; and

(ii) Have the Defendants violated Section 14(a) of the Exchange Act

in connection with the material misrepresentations and/or

omissions contained in the Definitive Proxy.

(c) Plaintiff is committed to prosecuting this action, is an adequate

representative of the Class, and has retained competent counsel experienced in litigation of this

nature.

(d) Plaintiff’s claims are typical of those of the other members of the Class.

(e) Plaintiff has no interests that are adverse to the Class.

(f) The prosecution of separate actions by individual members of the Class

would create the risk of inconsistent or varying adjudications for individual members of the

Class and of establishing incompatible standards of conduct for the party opposing the Class.

(g) Conflicting adjudications for individual members of the Class might as a

practical matter be dispositive of the interests of the other members not parties to the

adjudications or substantially impair or impede their ability to protect their interests.

(h) Plaintiff anticipates that there will be no difficulty in the management of

this litigation. A class action is superior to other available methods for the fair and efficient

adjudication of this controversy

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SUBSTANTIVE ALLEGATIONS

20. Spectrum develops, designs, and manufactures high performance, custom

solutions for the defense, aerospace, industrial, and medical industries worldwide. It operates in

four segments: Advanced Specialty Products, Microwave Components and Systems, Power

Management Systems, and Sensors and Controls.

Spectrum's Financial Performance

21. The Company has been performing very well recently. On January 10, 2011, the

Company announced its financial results for the fourth quarter and fiscal year ending November

30, 2010. For the fourth quarter of fiscal 2010, the Company reported net income of $3.3 million

on sales of $42.7 million, compared to net income of $2.1 million on sales of $34.1 million for

the same period the prior year. For the fiscal year 2010, the Company had net income of $12.8

million on sales of $163.9 million compared to net income of just $8.6 million on sales of $132.3

million in 2009.

22. In the press release announcing the financial results, defendant Southworth, the

Company’s President and Chief Executive Officer, commented on the Company’s strong year,

stating: “We are very proud of our fiscal year 2010 performance. Compared to a year ago, our

2010 annual revenue grew 24%, and our net income and earnings per share each increased by

approximately 50%. Fiscal year 2010 customer orders totaled $162.0 million, an increase of

$29.8 million or 23% from fiscal year 2009. This current year performance reflects the continued

success of our strategic plan to supplement ongoing organic growth with targeted business

acquisitions. During 2010, we consummated and integrated three business acquisitions, each

bringing new technologies and product capabilities to our Company. Throughout fiscal 2011, we

hope to build upon this success.” Continuing, Southworth further commented on the Company’s

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longer-term prospects stating that “we remain very optimistic about the future of our Company

as overall market conditions improve, principal applications for our military/defense products

continue to be strong, and we continuously develop new and innovative solutions for our

customers.”

23. The Company’s success continued into fiscal 2011. On March 28, 2011, the

Company reported its financial results for the first quarter ending February 28, 2011. For the

quarter, the Company reported net income of $3.3 million compared to net income of $2.4

million for the same period in 2010. Commenting on the strong quarter, defendant Southworth

stated: “Compared to a year ago, our 2011 first quarter revenue grew 9%, principally driven by

the successful integration of our recent business acquisitions. Demand for our products in various

commercial applications continues to increase, reflecting improved general economic conditions

and the impact from several of our new product offerings and capabilities. In the first quarter of

fiscal 2011, our total sales into commercial markets amounted to $16.0 million, up $1.3 million

or 9% from the same quarter of 2010. These positive factors helped to offset a military/defense

market which continues to be somewhat tentative, as many of our military/defense customers

proceed cautiously during this period of defense spending scrutiny and reassessed priorities.

With our overall increase in shipments, and our ability to leverage our operating costs and

manufacturing capacity over greater sales volume, our profitability improved significantly. Our

net income grew to $3.3 million in the current period, up 36% from a year ago, and our earnings

per share increased by 32%.”

24. Continuing, Mr. Southworth commented on the Company’s outlook for future

growth, stating: “Regarding our military/defense business, we believe that the current market

uncertainty may persist for several more months, before improving in the second half of fiscal

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2011 when overall defense spending priorities and programs are clarified. Based on these current

market conditions, we presently anticipate fiscal 2011 second quarter sales of $42.0 to $44.0

million, with earnings of 26 to 29 cents per share. If these operating results are achieved, we

would once again have meaningful growth from the comparable period of a year ago, with sales

up 6% to 11% and earnings per share up 4% to 12%. Beyond the second quarter of this year, we

remain very optimistic about our business outlook as market conditions improve, and we

continuously develop new and innovative solutions for our customers.”

Background of the Proposed Transaction

25. In August 2010, the Board determined to conduct a review of the Company’s

strategic alternatives and directed management to interview investment banking firms to assist in

that review.

26. On November 10, 2010, management met with representatives of a potential

strategic buyer, called Party A, that had, from time to time, previously expressed to management

an interest in acquiring the Company. Party A indicated that it would be interested in acquiring

the Company at a valuation of $16.00-18.00 per share. Both sides agreed that they were

significantly apart in valuation, and no plans were made to continue any discussions.

27. On January 17, 2011, the Board held a regular meeting at which it discussed the

ongoing review of the Company’s strategic alternatives begun in August 2010. At this meeting,

the Board received, reviewed and discussed financial projections of the Company for the 2011-

2015 fiscal years that had been prepared by management in late 2010.

28. In late January 2011, a representative of Party A left a message for the

Company’s Senior Vice President and Chief Financial Officer ("CFO"), that it may be able to

offer $20.00 per share in cash for the Company. Defendant Southworth and the CFO concluded

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it was unlikely to lead to a credible offer given that the Company’s prior efforts to follow-up on

Party A’s expressions of interest had been unproductive, and determined not to respond.

29. On January 28, 2011, the Chairman and Chief Executive Officer ("CEO") of API,

contacted Defendant Southworth to reiterate his prior interest in an acquisition of the Company.

Defendant Southworth stated that although the Company was not for sale, he believed that the

board of directors would be willing to listen to acquisition proposals with a minimum price per

share of $20.00. In response, API's CEO stated that API would only be interested in exploring a

transaction at that valuation if the Company were to agree to negotiate exclusively with API.

30. On February 11, 2011, the Board held a special telephonic meeting to discuss the

API proposal. The Board authorized management to pursue the API proposal and to engage

UBS Securities LLC (“UBS”) as the Company’s financial advisor. The late January 2011

approach from Party A was not discussed by the Board at this meeting.

31. After this meeting, the Board instructed UBS to engage in discussions with API

regarding its proposal.

32. On February 23, 2011, the Board held a special telephonic meeting and reviewed

and discussed the updated financial projections for the 2011-2015 fiscal years that had been

prepared and presented by management. After discussion, the Board approved the updated

projections and authorized their use by management in connection with the review of the

Company’s strategic alternatives, including the API proposal.

33. On March 1, 2011, the Company signed an engagement letter with UBS effective

as of January 16, 2011.

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34. On March 3, 2011, the Board authorized management to enter into an exclusivity

agreement with API providing for exclusivity through the end of March 2011. After this, the

parties began negotiating the terms of a merger agreement.

35. On March 22, 2011, Defendant Southworth received an unsolicited telephone call

from representatives of one of the investment banks that the Company had interviewed in 2010,

but not hired. This bank advised that it had been in contact with a potential strategic buyer for the

Company regarding the buyer’s acquisition program and that the Company had been among the

targets discussed. The bank asked whether the Company was interested in talking to this

potential buyer. In light of the status and timing of the discussions with API, the exclusivity

agreement between the Company and API, and because the investment bank did not represent

the potential buyer, management, after consultation with the Board, determined not to respond to

this inquiry. The Company had no further contact with this bank prior to announcement of the

merger agreement.

36. On March 28, 2011, the Company, API and Merger Sub executed the merger

agreement and the Company and API publicly announced the Proposed Transaction.

37. Later in the day on March 28, 2011, UBS, at the direction of the Company, began

soliciting potential acquisition proposals as permitted pursuant to the go-shop provision of the

merger agreement. UBS has contacted a total of 57 potential strategic and financial buyers to

solicit interest in an acquisition of the Company. To date, the Company has not received any

acquisition proposals. Under the merger agreement, the go-shop period ended on May 7, 2011.

Misrepresentations and Omissions in the Definitive Proxy

38. The Definitive Proxy, filed with the SEC on May 4, 2011 fails to provide

Spectrum shareholders with material information and/or provides them with materially

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Case 1: 11 -cv-001 05-SJM Document 1 Filed 05/09/11 of 17

misleading information thereby rendering them inadequate to make an informed decision on

whether to vote in favor of the Proposed Transaction.

39. First, considering the positive recent financial results of Spectrum, the Individual

Defendants have failed to disclose the reasons why they determined entering into the Proposed

Transaction with API would "result in greater value to our shareholders than the value that could

be generated from other strategic alternatives available to us, including the option of remaining

independent and pursuing our current business plan, taking into account the potential risks and

uncertainties associated with these alternatives as compared to the liquidity and certainty of

value provided by the $20.00 per share in cash to be paid to our shareholders pursuant to the

merger agreement." This statement fails to disclose why the option of remaining independent

and pursuing the Company's current business plan would not generate more value for

shareholders given UBS's Discounted Cash Flow Analysis showing a high present value of

$21.60 per share based on management projections. This information is clearly material to

shareholders who are voting whether to accept the merger consideration and who do not have

appraisal rights to pursue if they feel the price is not fair.

40. The Individual Defendants have also failed to disclose whether UBS, who

rendered the fairness opinion, has any conflicts of interest with any of the Individual Defendants

or API that would impede its ability to provide an impartial fairness opinion. Given that the

Individual Defendants are recommending the Proposed Transaction to Spectrum shareholders

based on UBS's fairness opinion, Spectrum shareholders need to be apprised of any conflicts in

order to assess the credibility and impartiality of UBS.

41. Additionally, with regard to UBS, the Individual Defendants have failed to

disclose what portion of UBS's expected $4.4 million dollar fee is contingent upon

11


consummation of the merger. Shareholders need this information in order to assess the

credibility and impartiality of UBS.

42. The Individual Defendants have also failed to disclose how UBS decided upon the

57 potential and strategic buyers it contacted during the go-shop. The Definitive Proxy's

statement that "UBS has contacted a total of 57 potential strategic and financial buyers" is

misleading in that the number itself seems sufficient, but without additional information

regarding how UBS decided upon the parties to contact, Spectrum shareholders cannot properly

assess the credibility of this post-signing market check.

43. The Definitive Proxy is also materially misleading in that, regarding the go-shop,

it says "[t]o date, the Company has not received any acquisition proposals," but does not define

"acquisition proposal" for the shareholders. Shareholders should be informed whether any of the

57 parties contacted responded, replied or otherwise followed up to UBS's contact and whether

any developments occurred during the go-shop in order to be able to assess whether UBS

conducted a sufficient go-shop.

44. The Definitive Proxy fails to disclose the free cash flow forecasts for the

Company for years 2011 through 2015 prepared by Spectrum management and used by UBS in

its fairness opinion, as well as projections of all line items necessary to calculate the free cash

flow amounts. The Proxy should also disclose the assumptions used by Spectrum management

in preparing the financial projections. This information is material to shareholders

comprehension of the value being offered in the Proposed Transaction and is material to their

decision regarding how to vote.

45. The Proxy completely fails to disclose the underlying methodologies, key inputs

and multiples relied upon and observed by UBS so that shareholders can properly assess the

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credibility of the various analyses performed by UBS and relied upon by the Board in

recommending the Proposed Transaction.

a. With respect to the Discounted Cash Flow Analysis, the Proxy fails to, but should,

disclose (a) the criteria used to select the perpetuity growth rates of 2.5% to 4.5%

used in the analysis; and (b) the key inputs and method used to calculate the

discount rate range of 12.5% to 14.5% used in the analysis.

b. With respect to the Selected Companies Analysis, the Proxy fails to, but should,

disclose (a) the criteria used to select the companies used in the analysis; (b) the

multiples observed for each company in the analysis, as well as the mean and

median multiples had Comtech Telecommunications Corp.’s multiples been

included; and (c) the conclusions drawn by UBS from the analysis.

c. With regards to the Selected Transactions Analysis, the Proxy fails to, but should,

disclose (a) the criteria used to select the transactions used in the analysis; (b) the

multiples observed for each company in the analysis, which is especially

important considering the wide date range among which the selected transactions

were selected from; and (c) the conclusions drawn by UBS from the analysis.

46. Accordingly, Plaintiff seeks injunctive and other equitable relief to prevent the

irreparable injury that Company shareholders will continue to suffer absent judicial intervention.

CLAIMS FOR RELIEF

COUNT I

Breach of Fiduciary Duty -- Disclosure(Against Individual Defendants)

47. Plaintiffs repeat all previous allegations as if set forth in full herein.

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48. The fiduciary duties of the Individual Defendants in the circumstances of the

Proposed Transaction require them to disclose to Plaintiffs and the Class all information material

to the decisions confronting Spectrum’s shareholders.

49. As set forth above, the Individual Defendants have breached their fiduciary duty

through materially inadequate disclosures and material disclosure omissions

50. As a result, Plaintiffs and the Class members are being harmed irreparably.

51. Plaintiffs and the Class have no adequate remedy at law.

COUNT IIViolations of Section 14(a) of the Exchange Act

and Rule 14a-9 Promulgated Thereunder

52. Plaintiffs repeat all previous allegations as if set forth in full herein.

53. Defendants have issued the Definitive Proxy with the intention of soliciting

shareholder support of the Proposed Transaction.

54. Rule 14a-9, promulgated by SEC pursuant to Section 14(a) of the Exchange Act

provides that a proxy statement shall not contain “any statement which, at the time and in the

light of the circumstances under which it is made, is false or misleading with respect to any

material fact, or which omits to state any material fact necessary in order to make the statements

therein not false or misleading.” 17 C.F.R. §240.14a-9.

55. Specifically, the Proxy violates the Section 14(a) and Rule 14a-9 because it omits

material facts, including those set forth above. Moreover, in the exercise of reasonable care,

Defendants should have known that the Proxy is materially misleading and omits material facts

that are necessary to render them non-misleading.

56. The misrepresentations and omissions in the Proxy are material to Plaintiffs and

the Class, and Plaintiffs and the Class will be deprived of their entitlement to cast a fully

14


informed vote if such misrepresentations and omissions are not corrected prior to the vote on the

Proposed Transaction.

WHEREFORE, Plaintiff demands judgment against defendants jointly and severally, as

follows:

(A) declaring this action to be a class action and certifying Plaintiff as the

Class representatives and his counsel as Class counsel;

(B) enjoining, preliminarily and permanently, the Proposed Transaction;

(C) in the event that the transaction is consummated prior to the entry of this

Court’s final judgment, rescinding it or awarding Plaintiff and the Class rescissory damages;

(D) awarding Plaintiff the costs of this action, including a reasonable

allowance for the fees and expenses of Plaintiff’s attorneys and experts; and

(E) granting Plaintiff and the other members of the Class such further relief as

the Court deems just and proper.

JURY TRIAL DEMANDED

Plaintiff hereby demands a trial by jury.

Dated: May 9, 2011

LAW OFFICE OF ALFRED G. YATES, JR., P.C.

By: s/ Alfred G. Yates, Jr. Alfred G. Yates, Jr., Esq. (PA17419)Gerald L. Rutledge, Esq. (PA62027)519 Allegheny Building429 Forbes AvenuePittsburgh, PA 15219Tel: (412) 391-5164Fax: (412) [email protected]

15


LEVI & KORSINSKY, LLPDonald J. Enright, Esq.Elizabeth K. Tripodi, Esq.1101 30th Street, NWSuite 115Washington, DC 20007Tel: (202) 524-4290Fax: (202) 333-2121

Counsel for Plaintiff

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william r. krull, individually and on ) richard...

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