<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission file number 0-12489
SPECTRAN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2729372
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 Hall Road, Sturbridge, Massachusetts 01566
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 347-2261
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No.
The number of shares of the registrant's Common Stock outstanding as of
October 31, 1997, was 6,970,683.
1
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PART I - FINANCIAL INFORMATION
SPECTRAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share)
(unaudited)
<TABLE>
Nine Months Ended Three Months Ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales .................................................... $ 47,747 $ 44,915 $ 15,638 $ 16,161
Cost of Sales ................................................ 29,266 28,621 9,861 9,941
----------- ----------- ----------- --------
Gross Profit ................................................. 18,481 16,294 5,777 6,220
Selling and Administrative Expenses .......................... 11,021 9,909 3,133 3,641
Research and Development Costs ............................... 2,396 2,321 798 740
----------- ----------- ----------- --------
Income from Operations ....................................... 5,064 4,064 1,846 1,839
Other Income (Expense):
Interest Income ......................................... 1,100 166 335 45
Interest Expense ........................................ (701) (528) (237) (208)
Other, net .............................................. (20) 122 (9) 58
----------- ----------- ----------- --------
Other Income (Expense), net ............................. 379 (240) 89 (105)
----------- ----------- ----------- --------
Income before Income Taxes ................................... 5,443 3,824 1,935 1,734
Income Tax Expense ........................................... 1,850 1,300 657 727
----------- ----------- ----------- --------
Income before Equity in Joint Venture ........................ 3,593 2,524 1,278 1,007
Income (Loss) from Joint Venture, Net of
Income Taxes ............................................. 10 -- (127) --
----------- ----------- ----------- --------
Net Income ................................................... $ 3,603 $ 2,524 $ 1,151 $ 1,007
=========== =========== =========== ========
Weighted Average Number of Common Shares Outstanding 7,100,804 5,929,796 7,371,866 6,003,798
=========== =========== =========== ========
Net Income per Share of Common Stock ......................... $ .51 $ .43 $ .16 $ .17
=========== =========== =========== ========
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
2
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SPECTRAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
September 30, December 31,
1997 1996
------- --------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents ........................................................... $ 3,152 $ 3,565
Current Portion of Marketable Securities ............................................ 9,030 13,822
Trade Accounts Receivable, net ...................................................... 10,364 7,621
Inventories ......................................................................... 8,458 7,254
Deferred Income Taxes, net .......................................................... 791 791
Prepaid Expenses and Other Current Assets ........................................... 1,949 1,316
------- --------
Total Current Assets ......................................................... 33,744 34,369
Property, Plant and Equipment, net ....................................................... 43,778 17,890
Other Assets:
Long-term Marketable Securities ..................................................... 5,350 1,595
License Agreements, net ............................................................. 653 804
Deferred Income Taxes, net .......................................................... 1,114 814
Goodwill, net ....................................................................... 891 950
Investment in Joint Venture ......................................................... 4,152 4,135
Other Long-term Assets .............................................................. 2,228 1,899
------- --------
Total Other Assets .............................................................. 14,388 10,197
------- --------
Total Assets ................................................................... $91,910 $ 62,456
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable .................................................................... $ 5,444 $ 3,763
Income Taxes Payable ................................................................ 849 301
Accrued Liabilities ................................................................. 6,171 5,989
------- --------
Total Current Liabilities ..................................................... 12,464 10,053
Long-term Debt ........................................................................... 24,000 24,000
Stockholders' Equity:
Common Stock, voting, $.10 par value; authorized
20,000,000 shares; outstanding 6,958,667 shares and
5,400,071 shares in 1997 and 1996, respectively ................................. 696 540
Common Stock, non-voting, $.10 par value;
authorized 250,000 shares; no shares outstanding ................................ -- --
Paid-in Capital ..................................................................... 50,114 26,884
Net Unrealized Gain/(Loss) on Marketable Securities ................................. 38 (16)
Retained Earnings ................................................................... 4,598 995
------- --------
Total Stockholders' Equity ..................................................... 55,446 28,403
------- --------
Total Liabilities and Stockholders' Equity .................................... $91,910 $ 62,456
======= ========
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
3
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SPECTRAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
Nine Months Ended
September 30,
-------------
1997 1996
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income ........................................... $ 3,603 $ 2,524
Reconciliation of Net Income to Net Cash Provided by
Operating Activities:
Depreciation and Amortization ...................... 3,070 2,189
Other Non-Cash Charges ............................. (38) (242)
Loss on Sale of Marketable Securities .............. -- 19
Change in Long-term Deferred Income Taxes .......... (300) 832
Change in Other Long-term Assets ................... (409) (1,019)
Equity in Net Income of Unconsolidated Joint Venture (17) --
Changes in Other Components of Working Capital ..... (2,139) (2,689)
Loss on Disposition of Equipment ................... 62 --
--------- --------
Net Cash Provided by Operating Activities .......... 3,832 1,614
Cash Flows from Investing Activities:
Acquisition of Property, Plant and Equipment ......... (28,723) (6,209)
Purchase of Marketable Securities .................... (240,110) (7,380)
Proceeds from Sale/Maturity of Marketable Securities . 241,202 10,218
--------- --------
Net Cash Used in Investing Activities ................ (27,631) (3,371)
Cash Flows from Financing Activities:
Borrowings of Long-term Debt ......................... -- 2,000
Proceeds from Exercise of Stock Options and Warrants . 309 306
Issuance of Common Stock, net ........................ 23,077 --
--------- --------
Cash Provided by Financing Activities ................ 23,386 2,306
--------- --------
Increase (Decrease) in Cash and Cash Equivalents ........ (413) 549
Cash and Cash Equivalents at Beginning of Period ........ 3,565 1,625
--------- --------
Cash and Cash Equivalents at End of Period .............. $ 3,152 $ 2,174
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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SPECTRAN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The financial information for the three months and nine months ended
September 30, 1997 and 1996, is unaudited but reflects all adjustments
(consisting solely of normal recurring adjustments) which the Company considers
necessary for a fair statement of results for the interim period. The results of
operations for the nine months ended September 30, 1997 and 1996, are not
necessarily indicative of the results for the entire year.
The consolidated results for the three and nine months ended September
30, 1997 and 1996, include the accounts of SpecTran Corporation (the Company)
and all wholly-owned subsidiaries: SpecTran Communication Fiber Technologies,
Inc. ("SpecTran Communication"), SpecTran Specialty Optics Company ("SpecTran
Specialty"), and Applied Photonic Devices, Inc. ("APD") which holds the
Company's investment in General Photonics, LLC, a 50-50 joint venture between
the Company and General Cable Corporation ("General Cable"), a former subsidiary
of Wassall plc. The Company sold certain of the assets of APD to General Cable
and then contributed the remaining non-cash assets of APD to General Photonics
for a 50% equity interest. The investment in General Photonics is accounted for
under the equity method of accounting pursuant to which the Company records its
50% interest in General Photonics' net operating results. Prior to the formation
of General Photonics, APD's results of operations, including net sales and
expenses, were consolidated with those of the Company.
All significant intercompany balances and transactions have been eliminated.
These financial statements supplement, and should be read in
conjunction with, the Company's audited financial statements for the year ended
December 31, 1996, as contained in the Company's Form 10-K as filed with the
United States Securities and Exchange Commission.
2. INVENTORIES
Inventories consisted of (in thousands):
<TABLE>
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Raw Materials $ 3,866 $ 3,677
Work in Process 1,088 1,209
Finished Goods 3,504 2,368
---------- ---------
$ 8,458 $ 7,254
======== =========
</TABLE>
5
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3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of (in thousands):
<TABLE>
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Land and Land Improvements $ 978 $ 937
Buildings and Improvements 10,406 3,840
Machinery and Equipment 27,873 19,213
Construction in Progress 21,002 8,611
---------- ----------
60,259 32,601
Less Accumulated Depreciation and Amortization 16,481 14,711
---------- ----------
$ 43,778 $ 17,890
========== ==========
</TABLE>
4. INCOME PER SHARE OF COMMON STOCK
Income per share of common stock is based on the weighted average of
the number of shares outstanding during the periods, including common stock,
equivalents of stock purchase warrants and stock options for both primary and
fully diluted earnings per share. Fully diluted income per share approximates
primary income per share.
5. SECONDARY PUBLIC OFFERING OF COMMON STOCK
On February 18, 1997, the Company completed a secondary public
offering of 1,500,000 shares of common stock at a price of $19.00 per share. Of
the 1,500,000 shares, 1,300,000 were sold by the Company and 200,000 by Allen
and Company, Incorporated, a selling stockholder.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Three and Nine Months Ended September 30, 1997 Compared With Three and
Nine Months Ended September 30, 1996
<TABLE>
Nine Months Ended September 30, Three Months Ended September 30,
---------------------------------- ----------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 61.3% 63.7% 63.1% 61.5%
------- ------- -------- --------
Gross Profit 38.7% 36.3% 36.9% 38.5%
Selling and Administrative Expenses 23.1% 22.1% 20.0% 22.5%
Research and Development Costs 5.0% 5.2% 5.1% 4.6%
------- ------- -------- --------
Income from Operations 10.6% 9.0% 11.8% 11.4%
Other Income (Expense), net .8% (.5)% .6% (.7)%
------- ------- -------- --------
Income before Income Taxes 11.4% 8.5% 12.4% 10.7%
Income Tax Expense 3.9% 2.9% 4.2% 4.5%
------- ------- -------- --------
Income before Equity in Joint Venture 7.5% 5.6% 8.2% 6.2%
Income from Joint Venture, net -- -- (.8)% --
-------- -------- --------- --------
Net Income 7.5% 5.6% 7.4% 6.2%
======= ======= ======== ========
</TABLE>
Net Sales
- ---------
Net sales of $15.6 million for the three months ended September 30,
1997, were $523,000, or 3.2% lower than for the comparable period of 1996. Net
sales of $47.7 million for the nine months ended September 30, 1997, were $2.8
million, or 6.3% higher than for the comparable period of 1996. Sales for the
1996 periods include the sales of Applied Photonic Devices, Inc. (APD), certain
assets of which were sold in December, 1996 to form General Photonics, a joint
venture with General Cable. On a comparative basis, excluding APD sales from the
1996 periods, sales for the three months and nine months ended September 30,
1997, compared to the three months and nine months ended September 30, 1996,
increased 13.2% and 23.1%, respectively. Net sales for the nine months increased
in all business units reflecting continued market demand. Selling prices for
single-mode have increased in the first nine months of 1997 compared to the
comparable period of 1996, largely due to strong market demand but experienced a
slight decrease for the three months ended September 30, 1997, due to industry
pricing pressures. Selling prices for multimode have remained relatively stable
in 1997 compared to 1996.
7
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Gross Profit
- ------------
Gross profit of $5.8 million for the three months ended September 30,
1997, was $443,000 or 7.1% lower than for the comparable period of 1996. Gross
profit of $18.5 million for the nine months ended September 30, 1997, was $2.2
million, or 13.4%, higher than the comparative period of 1996. As a percentage
of net sales, the gross profit decreased from 38.5%, for the three months ended
September 30, 1996, to 36.9% for the three months ended September 30, 1997, and
increased from 36.3% for the nine months ended September 30, 1996, to 38.3%, for
the nine months ended September 30, 1997. The decrease in gross profit for the
three months ended was primarily due to the greater than planned costs incurred
in the consolidation and expansion of the Company's Specialty Optics subsidiary.
The increase in gross profit for the nine months period was primarily due to
lower production costs for the Company's standard products resulting from
manufacturing process and yield improvements and higher single-mode selling
prices. In addition, the 1997 results do not include the lower margin cabling
revenues of General Photonics. As a percentage of net sales, royalties decreased
from 3.4% and 3.8% in the three months and nine months ended September 30, 1996,
to 3.0% and 2.9% for the three months and nine months ended September 30, 1997,
primarily due to an increase in the percentage of net sales not subject to
royalty.
Selling and Administration
- --------------------------
Selling and administrative expenses decreased $508,000, or 13.9%, for the
three months ended September 30, 1997, primarily due to lower than anticipated
training costs. Selling and administrative expenses increased $1.1 million, or
11.2%, for the nine months ended September 30, 1997. Included in the nine months
ended September 30, 1997, is $1.1 million of costs associated with the Company's
one-time management reorganization and training costs, with the latter
continuing throughout the year. As a percentage of net sales, selling and
administrative expenses decreased to 20.0% for the three months ended September
30, 1997, from 22.5% for the comparable period in 1996, and increased to 23.1%
for the nine months ended September 30, 1997, from 22.1% for the comparable
period in 1996.
Research and Development
- ------------------------
Research and development costs increased $58,000, or 7.7%, and $75,000,
or 3.2%, for the three months and nine months ended September 30, 1997, compared
with the same periods in 1996. As a percentage of net sales, research and
development costs increased from 4.6% for the three months ended September 30,
1996, to 5.1% for the three months ended September 30, 1997, and decreased from
5.2% for the nine months ended September 30, 1996, to 5.0% for the nine months
ended September 30, 1997. The Company continues to invest in programs to improve
manufacturing costs and product performance in both multimode and single-mode
product lines, to develop new special performance fiber products and to develop
alternative process technologies.
Other Income (Expense), net
- ---------------------------
Other income (expense), net improved by $194,000 and $620,000 for the
three months and nine months ended September 30, 1997, compared with the same
periods for 1996. Interest income increased for the three months and nine months
ended September 30, 1997, by $289,000 and $934,000, respectively, due to a
higher level of cash available for investment as a result of the Company's
secondary public offering in February, 1997. Interest expense, net of
capitalized interest, increased for the three months and nine months ended
September 30, 1997, by $28,000 and $172,000, respectively, compared to the same
periods in 1996 due to the increase in debt related to the Company's capacity
expansion.
8
<PAGE>
Income Taxes
- ------------
A tax provision of 34.0% of pre-tax income was provided for the three
months and nine months ended September 30, 1997, compared to a tax provision of
42.0% and 34.0% of pre-tax income for the comparable periods in 1996. The
effective tax rates for the nine months ended September 30, 1996, and three
months and nine months ended September 30, 1997, were lower than the statutory
combined federal and state tax rates due primarily to reductions in the
valuation allowance for deferred tax assets. The higher rate for the three
months ended September 30, 1996, was to adjust the 1996 year-to-date estimated
tax rate up to 34.0% from the 27.0% that had been used in the first six months
of 1996.
Income From Equity in Joint Venture
- -----------------------------------
The Company realized a loss of $127,000 for the three months ended
September 30, 1997, net of tax, and income of $10,000 for the nine months ended
September 30, 1997, net of tax, from its equity in General Photonics, the joint
venture formed in December, 1996 with General Cable. The loss for the three
months period in 1997 was due to lower than anticipated revenues. In 1996, the
results of Applied Photonic Devices, Inc., the predecessor to General Photonics,
were included in the consolidated results.
Net Income
- ----------
Net income for the three and nine months ended September 30, 1997,
increased by $144,000, or 14.3%, and $1.1 million, or 42.8%, compared with the
same periods of 1996. The improvement was largely attributed to improved
manufacturing yields and efficiencies which resulted in higher production
available for sale at higher margins.
Liquidity and Capital Resources
- -------------------------------
The Company's principal sources of cash are cash flow from operations,
established bank credit facilities and existing cash balances. In February the
Company completed a secondary public offering for a total of 1,500,000 shares of
common stock at a price of $19.00 per share. Of the 1,500,000 shares, 1,300,000
were sold by the Company and 200,000 by Allen and Company, Incorporated, a
selling stockholder. This offering raised approximately $23.0 million for the
Company. This has been used to fund the Company's continuing capacity expansion.
As of September 30, 1997, the Company had approximately $17.5 million
in cash, cash equivalents and marketable securities, including approximately
$5.4 million in marketable securities, classified as long-term assets, which
could be converted to cash if necessary. In addition, the Company has an unused
$20.0 million revolving credit agreement with its principal bank. The Company at
September 30, 1997, had working capital of approximately $21.3 million and a
current ratio of 2.7 to 1.
The Company currently has underway capacity expansion requiring
significant capital expenditures through the remainder of 1997. Total planned
expenditures for capacity expansion include approximately $38.0 million for
SpecTran Communication and approximately $9.0 million for SpecTran Specialty,
the latter expenditure being substantially all of which was completed in the
third quarter. When fully operational, these expansions are expected to increase
SpecTran Communication's capacity by 100% and SpecTran Specialty's by 50%. The
Company has and intends to continue to finance these expansions through a
combination of cash flow from operations and existing cash and marketable
security balances.
Forward Looking Statements
- --------------------------
This report contains forward looking statements which are subject to a
number of risks and uncertainties that may cause actual results to differ
materially from expectations. These uncertainties include, but are not limited
to, general economic conditions and competitive conditions in markets served by
the Company.
9
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter
which this report was filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
SPECTRAN CORPORATION
(Registrant)
Date: November 14, 1997 BY:
/s/ Raymond E. Jaeger
----------------------
Raymond E. Jaeger
President,
Chief Executive Officer and
Chairman of the Board of Directors
Date: November 14, 1997 BY:
/s/ Bruce A. Cannon
--------------------
Bruce A. Cannon
Senior Vice President and
Chief Financial Officer
10
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000718487
<NAME> SpecTran Corporation
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 3,152
<SECURITIES> 9,030
<RECEIVABLES> 10,587
<ALLOWANCES> 223
<INVENTORY> 8,458
<CURRENT-ASSETS> 33,744
<PP&E> 60,259
<DEPRECIATION> 16,481
<TOTAL-ASSETS> 91,910
<CURRENT-LIABILITIES> 12,464
<BONDS> 0
0
0
<COMMON> 696
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 91,910
<SALES> 47,747
<TOTAL-REVENUES> 47,747
<CGS> 29,266
<TOTAL-COSTS> 13,417
<OTHER-EXPENSES> 20
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 701
<INCOME-PRETAX> 5,453
<INCOME-TAX> 1,850
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,603
<EPS-PRIMARY> .51
<EPS-DILUTED> .51
</TABLE>
