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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the fiscal year ended December 31, 1997 [ X ]
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OR THE
SECURITIES ACT OF 1934
For the transition period from .......................to .....................
Commission file number 0-12489
SPECTRAN CORPORATION
........................................................................
(Exact name of the registrant as specified in its charter)
Delaware 04-2729372
............................... ..............................
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
50 Hall Road, Sturbridge, Massachusetts 01566
...................................................... ............
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (508) 347-2261
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None Not Applicable
.....................................................................
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value
............................................................................
(Title of class)
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 such 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: __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
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The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the closing price of such stock, on
February 27, 1998: $61.7 million.
The number of shares outstanding of each of the Registrant's classes of common
stock, as of the latest practicable date: 6,998,683 shares of common stock, $.10
par value, outstanding on February 27, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
The information required for Part III hereof is incorporated by reference from
the Registrant's Proxy Statement for its 1998 Annual Meeting of Shareholders to
be filed with the Securities and Exchange Commission within 120 days after the
end of the Registrant's fiscal year.
PART I
Item 1. BUSINESS.
SpecTran Corporation ("SpecTran," the "Company" or the "Registrant")
operates through two wholly-owned subsidiaries, SpecTran Communication Fiber
Technologies, Inc. ("SpecTran Communication") and SpecTran Specialty Optics
Company ("SpecTran Specialty"), and through General Photonics, LLC ("General
Photonics"), a joint venture with General Cable Corporation ("General Cable").
In December 1996, the Company sold certain of the assets of its wholly-owned
subsidiary, Applied Photonic Devices, Inc. ("APD"), and then contributed the
remaining assets of APD to General Photonics for a 50% equity interest. (See
Note 14 to the Consolidated Financial Statements - "Acquisitions/Joint
Venture"). SpecTran Communication develops, manufactures and markets multimode
and single-mode optical fiber for data communications and telecommunications
applications. SpecTran Specialty, acquired in February 1994, develops,
manufactures and markets specialty multimode and single-mode fiber and
value-added fiber optic products for industrial, military/aerospace,
communication and medical applications. General Photonics develops, manufactures
and markets communications-grade fiber optic cable primarily for the customer
premises market in the United States, Canada and Mexico.
Technology
Fiber optic technology utilizing glass as a communications medium was
developed in the 1970s and offers numerous technical advantages over traditional
media such as copper. Optical fibers are hair-thin solid strands of high quality
glass usually combined in cables for transmitting information in the form of
light pulses. An optical fiber consists of a core of high purity glass which
transmits light with little signal loss. This core is typically encased within a
covering layer of high purity glass referred to as optical cladding, which
reduces signal loss through the side walls of the fiber. The information to be
transmitted is converted from electrical impulses into light waves by a laser or
light emitting diode. At the point of reception, the light waves are converted
back into electrical impulses by a photo-detector.
Optical fiber's advantages include its high bandwidth, which permits
reliable transmission of complex signals such as multiple high-quality audio and
video channels and high-speed data formats such as Fiber Distributed Data
Interface (FDDI), Asynchronous Transfer Mode (ATM) and other communications
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protocols. Compared to traditional copper cable used in telephony, optical fiber
has thousands of times the information carrying capacity, occupies less space
and operates over greater distances with significantly less attenuation. This
high capacity and reliability makes optical fiber systems well suited for
interactive applications, allowing digitally encoded voice, data and video
signals to be transmitted in large volumes at high speed. Furthermore, optical
fiber is immune to electrical surges and electromagnetic interference which
cause static in copper wire transmission and wireless communication. Optical
fiber has technical advantages over wireless communications media such as
transmission quality and signal reliability. Optical fiber is also a safer
choice in flammable environments because it does not carry electricity.
Additionally, communicating through optical fiber is more secure than copper and
wireless communications because tapping into fiber optic cable without detection
is very difficult.
Optical fiber quality is measured by several performance
characteristics and is reflected in the price of the fiber. These performance
characteristics include bandwidth, attenuation (signal loss over distance),
tensile strength, geometry and the dimensional and optical uniformity of the
fiber. Optical fiber users and manufacturers have established specifications and
standards for both multimode and single-mode fiber.
Products
The following table describes the Company's and General Photonics'
principal product areas and the markets they serve:
<TABLE>
<CAPTION>
- --------------------------------------- ------------------------------------- --------------------------------------
Products Applications Target Customers
- --------------------------------------- ------------------------------------- --------------------------------------
- --------------------------------------- ------------------------------------- --------------------------------------
SpecTran Communication
- --------------------------------------- ------------------------------------- --------------------------------------
<S> <C> <C>
Data communication grade multimode Data communications, including Integrated cablers (e.g., Lucent,
fiber: 50, 62.5 and 100 micrometer FDDI and fast Ethernet; LANs; video; Chromatic Technologies); independent
core diameters CCTV; computer peripherals channel cablers (e.g.,Optical Cable
attachment Corporation, CommScope, General
Photonics)
- --------------------------------------- ------------------------------------- --------------------------------------
Telephone grade single-mode fiber Telephony (principally in emerging Independent dat communications
economies); high-speed domestic cablers: international
short-distance data communication, telecommunications cablers
including Fibre Channel and FDDI (e.g., Indial, China, Mexico)
- --------------------------------------- ------------------------------------- --------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
- --------------------------------------- ------------------------------------- --------------------------------------
Products Applications Target Customers
- --------------------------------------- ------------------------------------- --------------------------------------
SpecTran Specialty
- --------------------------------------- ------------------------------------- --------------------------------------
<S> <C> <C>
Step & graded index multimode fiber & Factory LANs and PLC interconnects; Factory, transportation and medical
cable: polymer clad/glass core, high mobile video; avuibucs; high-speed OEMs; systems designers and
numerical aperture, radation ground-based transportation; integrators; geophysical exploration
tolerant, power delivery and high geophysical exploration and companies; US government and
temperature fiber; avionics cable; monitoring; sensing; power military: utilities; telecom and
high dielectric strength cable transmission, including laser supercomputer OEMs; systems
tether cables surgery; blood gas monitoring; designers and integrators
including laser supercomputer OEMs; radiation resistant links; high-
monitoring; designers and integrators speed, short-distance telecom
interconnects (e.g., telephone
switching systems and PBXs);
supercomputer links
- --------------------------------------- ------------------------------------- --------------------------------------
- --------------------------------------- ------------------------------------- --------------------------------------
Specialty single-mode fiber and Metallized pigtails, couplers, Telecommunication; optoelectronic
cable: photo-sensitive, rare-earth amplifiers, geophysical exploration manufacturers; well-logging
delay line, fatigue resistant fiber; and monitoring; gyroscopes; companies and system integrators;
avionics cable; tether cables wave-length division multiplexers defense contracts
- --------------------------------------- ------------------------------------- --------------------------------------
- --------------------------------------- ------------------------------------- --------------------------------------
Components and assemblies: crimp and Industrial automation; OEMs; systems designers and
cleave connectors; pigtails; fiber enviromental monitoring; customer integrators; facilities managers;
optic arrays; specialty and hybrid premises networking; military spec utilities; optoelectronic device
interconnects; tool kits and high reliability assemblies; manufactures; defense contractors
high power laser delivery; sensing;
illumination; spectroscopy
- --------------------------------------- ------------------------------------- --------------------------------------
General Photonics
- --------------------------------------- ------------------------------------- --------------------------------------
Indoor cable: tight buffered Building backbones; riser and Networking systems and LAN OEMs;
distribution and breakout designs plenum installation systems designers and integrators;
installers; facilities managers
- --------------------------------------- ------------------------------------- --------------------------------------
- --------------------------------------- ------------------------------------- --------------------------------------
Outdoor cable: loose tube; Customer premises backbones, Networking systems and LAN OEMs;
gel-filled; direct burial; aerial; including densely populated systems designers and integrators;
armored; figure eight buildings and campuses; Fibre installers; facilities managers
Channel; FDDI; bypass telecom
- --------------------------------------- ------------------------------------- --------------------------------------
- --------------------------------------- ------------------------------------- --------------------------------------
Cable accessories: pulling devices; Customer premises systems and LAN Installers; system integrators; LAN
breakout, splitter and restoration installation & repair OEMs; utilities
kits; cable terminations
- --------------------------------------- ------------------------------------- --------------------------------------
</TABLE>
Customers and Marketing
The Company sells its multimode and single-mode optical fibers to
various cable manufacturers, domestically and internationally, which assemble
them into cables for resale in configurations of their own design. Specialty
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fiber products are sold directly to a large number of OEMs, product development
groups, international distributors and manufacturers' representatives,
installers, universities and governmental agencies, primarily for use in the
industrial, medical, military, aerospace, transportation and telecommunications
and data communications markets. Optical fiber cable and cable accessories,
manufactured by General Photonics, are sold largely to distributors, systems
integrators and installers primarily for use in the customer premises market in
the United States, Canada and Mexico.
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The Company markets its multimode and single-mode data communications
and telecommunications optical fiber products principally through a direct sales
force in the United States and through a network of manufacturer's
representatives internationally. Specialty fiber products are marketed
domestically through a direct technical field sales force and internationally
through a network of technical distributors and sales representatives. Optical
fiber cable and cable components produced by General Photonics are marketed
primarily through General Cable's direct sales force and sales representatives.
Marketing, technical support and some direct sales and customer support are
provided by General Photonics personnel. The Company advertises in trade
publications, distributes brochures and other material to its mailing list of
potential customers worldwide and participates at trade shows, technical
symposia and standards committees.
As a result of its diversification efforts and broader product
offering, the Company has significantly increased its customer base over the
last three years and plans to continue to expand this base aggressively within
its targeted markets. International sales, primarily Asia and Europe, accounted
for 22% of total sales in 1997. For the year ended December 31, 1997, sales to
Corning Inc., Optical Cable Corporation and Lucent Technologies were equal to
10% or more of the Company's revenues. These three companies together accounted
for 40% of the Company's revenues in 1997.
Manufacturing and Quality Control
The basic raw materials required for the manufacture of the Company's
optical fiber products are high quality glass tubes and rods, various chemicals
and gases and certain polymers. The Company believes that its sources of supply
of these raw materials are adequate and that alternative sources are available.
The Company typically manufactures optical fibers by introducing vapors and
gases of varying chemical compositions into a special glass tube in a clean,
controlled environment. In the modified chemical vapor deposition ("MCVD")
process, an inside vapor deposition process used by the Company, the glass tube,
which forms all or a portion of the optical cladding, and the introduced vapors
and gases are simultaneously heated, and oxide particles, formed through a
reaction of chemical vapors with oxygen, are deposited on and adhere to the
inside of the tube. As the particles attach to the tube wall, they are fused to
create a layer of high purity glass. Succeeding layers of glass of the same or
different compositions are deposited in this fashion to permit the transmission
of light in accordance with the desired specifications. The Company believes
that the MCVD process is more flexible than other processes in the production of
optical fiber and uses it to produce both multimode and single-mode fiber. The
other main process for making optical fiber is the outside vapor deposition
process which, the Company believes, is less flexible overall, but more cost
effective for producing single-mode fiber. As part of its acquisition of
SpecTran Specialty, the Company acquired patent rights to outside vapor
deposition processes collectively known as hybrid vapor deposition ("HVD") which
it is continuing to develop for possible use in conjunction with its single-mode
fiber production process.
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In the MCVD process, once deposition is completed, the glass tube is
then collapsed into a rod, or primary preform, consisting of a deposited core,
in certain instances some deposited cladding and cladding provided by the glass
tube itself. In most cases, additional cladding is added to this primary
preform. The rod is then placed at the top of a fiber drawing tower, heated
until it softens and drawn into a fiber of predetermined diameter.
The majority of the Company's specialty products use a proprietary
polymer clad glass core fiber drawn from manufactured or purchased silica rod.
This fiber is either sold to third parties or cabled and/or combined with
assemblies and sold. The Company owns certain hard polymer cladding, coating and
fiber termination technology known as "crimp/cleave," which facilitates
attachment of optical fibers to connectors and other components and has certain
proprietary technology used for the cabling of optical fiber. The Company has
developed proprietary technology related to the processing of a wide variety of
polymeric compounds for the manufacture of optical fiber cable. General
Photonics purchases fiber from the Company and protectively covers and bundles
the fibers into cable. Certain of General Photonics' technology enables the
manufacture of nonflammable, low smoke, low toxicity cables for use both
outdoors and inside buildings, which the Company believes provides a significant
competitive advantage.
The Company believes that its quality control programs are essential to
its success. The Company's quality control programs are designed to maintain
strict tolerances during the manufacturing process and to assure performance
standards of its products. The Company performs quality control testing on all
of its products. The Company designs and builds much of the equipment its uses
to manufacture and test its optical fiber products. In November 1995, SpecTran
Communication's facility in Sturbridge, Massachusetts became certified under ISO
9001, an internationally recognized manufacturing standard designed to ensure
process consistency. SpecTran Specialty's Avon, Connecticut facility became ISO
9001 certified in March 1996. All of the Company's operations utilize internal
testing procedures based on the internationally recognized "Fiber Optic Test
Procedures" and have in place and continue to develop specialized proprietary
testing systems and procedures to support the requirements of their respective
customers.
Environmental Matters
The Company uses certain hazardous materials in its research and
manufacturing operations. As a result, the Company is subject to federal, state
and local governmental regulations. The Company believes that it has complied
with all regulations and has all permits necessary to conduct its business.
Proprietary Rights
The Company considers its proprietary know-how with respect to the
development and manufacture of flexible glass fibers and value-added optical
fiber products to be a valuable asset. This know-how includes formulation of new
glass compositions, development of special fiber coatings, coating applications,
fiber designs, preform fabrication, fiber drawing, optical fiber cabling
methods, fiber cleaving, polishing and end finishing techniques, proprietary
testing capabilities, development and implementation of manufacturing processes
and quality control techniques, and design and construction of manufacturing and
quality control equipment. Product and application knowledge are also considered
to be valuable assets of the Company.
Corning License. The Company has a limited, non-assignable,
non-exclusive, royalty-bearing license from Corning to make, use and sell fiber
under certain of Corning's United States patents with a filing date prior to
January 1, 1996, in the field of optical fiber. The license contains certain
annual quantity limitations. The Corning license is not applicable to sales made
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directly or indirectly to certain customers such as Corning, Lucent and the
United States Government. The quantities that can be manufactured under the
license increase annually through the year 2000. The license has a term equal to
the life of the last to expire of the Corning or Company patents licensed under
the agreement. Corning has the right to terminate the license in the event that
more than 30% of the Company's voting stock is acquired, directly or indirectly,
by another manufacturing company. The Company granted back to Corning a
non-exclusive royalty-free license for any of its patents with a filing date
prior to January 1, 1996, in the field of optical fiber.
Lucent License. The Company has a non-assignable, non-exclusive,
unlimited, royalty-bearing license from Lucent under all patents covering
optical fiber and optical fiber cable owned by Lucent or which Lucent and its
affiliates had the right to license on or before August 15, 1986. The Company
granted back to Lucent a non-exclusive, royalty-free license under patents the
Company may obtain relating to optical fiber inventions made on or before August
15, 1986. The license extends for the life of the last to expire of the patents
licensed under the agreement.
Sales Subject to Corning and Lucent License Agreements. Approximately
30% of the Company's net sales during 1997 were subject to the Corning license
and approximately 45% were subject to the Lucent license. These license
agreements required aggregate royalty payments by the Company of approximately
3% of net sales of the Company's products manufactured under the agreements
during 1997. The Company believes that certain Corning patents, which may have
been relevant to the Company's single-mode fiber, including patents covered by a
non-exclusive license from Corning to the Company, have expired in many
countries (including the United States). Therefore, the Company believes that
manufacturing and sale of its single-mode fiber is not subject to the Corning
license and has been marketing its single-mode fiber without payments of
royalties to Corning and without regard to the annual quantity limitations of
the Corning license since 1993. The Company presently does not expect to need
the Corning license for the manufacture of its multimode fiber after 1999
because the Company believes that a Corning United States patent with relevancy
to its multimode fiber will expire in 1999.
Patents and Trademarks. The Company and its subsidiaries own 24 U.S.
patents relating to products, processes and equipment in the fields of optical
fibers, optical connectors, coatings and cleaving tools. The Company believes
that its patents afford it certain competitive advantages. Under the terms of
the Corning and Lucent license agreements, the optical fiber patents are
required to be made available royalty-free to Corning and certain of those
patents are also required to be made available royalty-free to Lucent.
The Company is using its trademark SPECTRAGUIDE(R) for its commercial
grade optical fiber and for certain of its value added fiber products. It also
uses the trademarks HCS(R) (Hard Clad Silica), Avioptics(TM), Flightguide(TM),
PYROCOAT(TM), V-System(TM) and V-Pin(TM).
Research and Development
Research and development activities, and the Company's ability to
develop and improve products employing both existing and new technology, are
important to the Company. During the fiscal years ended December 31, 1997, 1996
and 1995, the Company spent $3.3 million, $3.1 million and $2.8 million,
respectively, or 5.3%, 5.1% and 7.3%, respectively, of its net sales on research
and development. The Company expects to continue to increase the annual dollar
amount of its research and development expenditures. The Company has continued
to invest in programs to reduce manufacturing cost and improve product
performance in both the single-mode and multimode product lines, to develop new
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optical fiber products and to develop alternative process technologies. The
Company's personnel conduct substantially all of its research and development
activities. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Backlog
As of January 31, 1998, the Company's backlog of orders was
approximately $35.2 million, as compared to a backlog of $69.4 million as of
January 31, 1997. Approximately $18.5 million of the January 31, 1998 backlog is
expected to be delivered during 1998.
Competition
The Company produces and sells optical fibers and value added optical
fiber components and assemblies for data communications, telecommunications and
specialized applications. Optical fiber cable and cable components are also sold
through General Photonics. While there may be less competition in the
specialized markets, all of the markets served by the Company and General
Photonics are very competitive. The Company's main competitors for its fibers
for data communications and telecommunications are its licensers, Corning and
Lucent, to whom the Company pays royalties and who have substantially greater
resources and operating experience than the Company. The Company's main
competitors for its specialty fibers generally have been smaller operations, but
some of those competitors are part of companies with substantially greater
resources than the Company. General Photonics' main competitors for its optical
fiber cable products are large companies with substantially greater resources
and operating experience than the Company and General Photonics, some of which
may also be customers of SpecTran Communications. The Company competes for sales
based upon its ability to fill orders promptly at competitive prices, product
performance, product features, unique proprietary products, flexibility, quality
and service.
The Company believes that optical fibers offer a number of advantages
over and compete favorably with other means of transmitting information, such as
copper wire, satellite and other line of sight transmissions (e.g., microwaves)
despite increased interest in wireless communications in the marketplace and
enhancements to the existing copper wire telephony infrastructure. Many
companies offering such other means of transmitting information have
substantially greater resources and operating experience than the Company. The
Company often competes with both mature existing technology and new technology,
some of which have cost advantages over optical fiber for certain applications.
The number of participants in the optical fiber industry is to some
extent limited by patents covering the fundamental optical fiber technology, the
need for substantial capital investment and the availability of highly
specialized equipment and personnel with the requisite technical expertise. The
Company believes that certain Corning patents, which may have been relevant to
the Company's single-mode fiber, including patents covered by a non-exclusive
license from Corning to the Company, have expired in many countries (including
the United States). The Company further believes that a certain Corning United
States patent, covered by this non-exclusive license, with relevance to the
Company's multimode fiber, expires in 1999. In addition, the Company believes
that a certain Lucent patent licensed to the Company relating to its multimode
and single-mode fiber expired in 1997. The expiration of these patents may or
may not reduce the patent barrier to entry by other participants. The Company
estimates that the initial investment required for a turn-key manufacturing
facility capable of producing 200,000 kilometers of world-class multimode
optical fiber annually is between $50 million and $100 million.
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Employees
As of December 31, 1997, the Company employed 504 persons, of whom 132
were employed in technology, 278 were employed in manufacturing operations and
94 provided marketing, administrative, management and other support services.
These numbers do not include 64 employees of General Photonics previously
employed by APD. The Company's employees are not represented by a labor union.
The Company believes its employee relations are good.
Item 2. PROPERTIES.
The Company's administrative offices and the offices and production
facilities of SpecTran Communication are located in an approximately 50,000
square foot building which the Company is in the process of expanding to
approximately 100,000 square feet. The building is situated on approximately 43
acres of land owned by SpecTran Communication in Sturbridge, Massachusetts.
SpecTran Communication also owns an approximately 5,000 square foot office
building used for offices that is next to this manufacturing facility.
SpecTran Specialty's offices and production facilities are located in an
approximately 58,000 square foot building. The building is situated on
approximately 14 acres of land located in Avon, Connecticut. All these
properties are owned by the Company.
General Photonics has assumed APD's lease for offices and production
facilities in an approximately 45,000 square foot facility located in Danielson,
Connecticut with a term of two years expiring May 31, 1998, subject to General
Photonics' right to renew the lease for two consecutive one year renewal terms.
General Photonics has also assumed APD's lease for offices and production
facilities in a 65,000 square foot facility located in Dayville, Connecticut
under a lease expiring February 6, 2001, which is subject to a three year
renewal option, followed by a second renewal option for an additional two years.
Item 3. LEGAL PROCEEDINGS.
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded on the NASDAQ National Market
System under the symbol "SPTR." Set forth below is high and low sales price
information for the Company's Common Stock for the periods indicated as reported
on the NASDAQ National Market:
Price
Fiscal Year Fiscal Quarter Ended High Low
1996 March 31, 1996 8-7/8 5-1/4
June 30, 1996 28-5/8 8
September 30, 1996 22-1/8 12-1/2
December 31, 1996 23-3/8 16-1/8
1997 March 31, 1997 25 12-5/8
June 30, 1997 21 11-1/4
September 30, 1997 20-3/4 13-3/4
December 31, 1997 15-1/4 8-5/8
The approximate number of shareholders of record of the Company's
Common Stock as of February 27, 1998 was 773 which includes all shares held in
nominee names by brokerage firms and financial institutions as one stockholder.
It is estimated that such shares held in street name are held for approximately
6,300 stockholders.
The Company has never declared or paid cash dividends.
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Item 6. SELECTED CONSOLIDATED FINANCIAL DATA.
<TABLE>
<CAPTION>
Years Ended December 31
(in thousands, except per share data)
---------------------------------------------------------------------
OPERATING RESULTS 1997 1996 1995 1994 1993
- ----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales $ 62,057 $ 61,571 $38,581 $26,926 $25,578
Gross Profit 23,276 22,375 13,061 7,623 9,615
Income (Loss) Before Income Taxes 7,111 5,537 777 (487) 5,629
Net Income (Loss) 4,842 3,655 542 (487) 3,655
Earnings per Common Share-Basic .72 .68 .10 (.09) .67
Earnings per Common Share-Diluted .68 .61 .10 (.09) .67
FINANCIAL POSITION
Total Assets 92,105 62,456 40,365 31,362 26,712
Long-Term Debt 24,000 24,000 10,000 5,240 300
Stockholders' Equity 56,759 28,403 24,296 23,104 23,614
</TABLE>
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Overview
Currently, SpecTran develops, manufactures, and markets high quality
optical fiber, optical fiber cables and value-added optical fiber components and
assemblies. Prior to 1993, the Company had a narrow customer base and was
focused on the production of multimode fiber for the domestic market. In 1993
the Company began to implement a strategic plan to diversify its products,
markets and customer base. As part of this plan, the Company reintroduced
single-mode fiber in 1993 and began marketing it internationally. In 1994 the
Company acquired Ensign-Bickford's specialty fiber operations (which later
became SpecTran Specialty), allowing the Company to become a world-wide leader
in fiber optic specialty applications. The Company entered the fiber optic cable
market in May 1995 by acquiring APD in order to participate more extensively in
the rapid growth of the data communications market, the principal end market of
multimode fiber. In December 1996 the Company formed General Photonics, a joint
venture with General Cable, to develop, manufacture and market fiber optic
cable.
Results of Operations
The following table sets forth, for the periods indicated, certain
financial data as a percentage of net sales:
<TABLE>
Years Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 62.5% 63.7% 66.1%
----- ----- -----
Gross Profit 37.5% 36.3% 33.9%
Selling and Administrative Expenses 22.5% 22.1% 25.1%
Research and Development Cost 5.3% 5.1% 7.3%
---- ---- ----
Income from Operations 9.7% 9.1% 1.5%
Other Income (Expense), net 1.8% (.1)% .5%
---- ----- ---
Income before Income Taxes 11.5% 9.0% 2.0%
Income Tax Expense 3.5% 3.1% 0.6%
---- ---- ----
Income before equity in Joint Venture 8.0% 5.9% 1.4%
Income (loss) from Joint Venture, net (.2)% -- --
----- -- --
Net Income 7.8% 5.9% 1.4%
==== ==== ====
</TABLE>
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Net Sales
Net sales increased $486,000, or .8%, from $61.6 million in 1996 to
$62.1 million in 1997. Net sales in 1997 did not include those of General
Photonics, whereas sales for 1996 included 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,
including General Photonics sales in 1997 would have resulted in an 18.4%
increase compared with 1996. Net sales increased at both SpecTran Communication
and SpecTran Specialty in 1997 as compared to 1996 due to continued market
demand. This was partially offset by industry pricing pressure for standard
communication fiber products experienced during the second half of 1997.
Gross Profit
Gross profit increased $901,000, or 4.0%, from $22.4 million in 1996 to
$23.3 million in 1997. As a percentage of net sales, the gross profit increased
to 37.5% for the year ended December 31, 1997, from 36.3% for the year ended
December 31, 1996. The increase in gross profit was primarily due to lower
production costs for the Company's standard communication fiber products
resulting from manufacturing process and yield improvements. This was partially
offset by lower margins at SpecTran Specialty, primarily due to greater than
planned costs incurred in connection with the consolidation and expansion into a
new facility.
As a percentage of net sales, royalties decreased from 3.7% in 1996 to
3.0% in 1997. This decrease in royalties as a percentage of net sales was
primarily due to an increase in 1997 in the net sales not subject to royalties.
Selling & Administrative
Selling and administrative expenses increased $325,000, or 2.4%, from
$13.6 million in 1996 to $14.0 million in 1997. This increase was primarily due
to costs associated with the Company's one-time management reorganization and
training costs partially offset by a lower provision for incentive compensation
in 1997. As a percentage of net sales, selling and administrative expenses
slightly increased to 22.5% for the year ended December 31, 1997 from 22.2% for
the year ended December 31, 1996.
Research and Development
Research and development costs increased $157,000, or 5.0%, from $3.1
million in 1996 to $3.3 million in 1997. As a percentage of net sales, research
and development costs increased from 5.1% for the year ended December 31, 1996
to 5.3% for the year ended December 31, 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. The Company
intends to approximately double its research and development spending in 1998.
13
<PAGE>
Other Income (Expense), net
Other income (expense), net favorably increased by $1.2 million to net
other income of $1.1 million in 1997 compared with net other expense of $65,000
in 1996. Interest income increased $1.1 million, or 487.2%, from $226,000 in
1996 to $1.3 million in 1997 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 $276,000, or
58.6%, from $471,000 in 1996 to $747,000 in 1997 due to the increase in debt
related to the Company's capacity expansion.
Income Taxes
The effective tax rate declined from 34.0% in 1996 to 29.9% in 1997
primarily due to a lower provision for state income taxes in 1997 as a result of
investment tax credits associated with capacity expansion. The effective tax
rates for 1997 and 1996 were lower than the statutory combined federal and state
tax rates due primarily to a reduction of $300,000 in 1997 and $400,000 in 1996
in the valuation allowance for deferred tax assets due to the Company's belief
that it is more likely than not that the additional deferred tax assets will be
realized through the utilization of operating loss and tax credit carryforwards.
See Note 11 of "Notes to the Consolidated Financial Statements."
Income From Equity in Joint Venture
The Company realized a loss of $145,000, net of tax from its equity in
General Photonics, the joint venture formed in December, 1996 with General
Cable. The loss in 1997 was primarily 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 increased $1.2 million, or 32.5%, from $3.7 million in 1996
to $4.8 million for the year ended in 1997. The increase was primarily due to
improved operating results at Communication Fiber and higher interest income.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net Sales
Net sales increased $23.0 million, or 59.6%, from $38.6 million to
$61.6 million in 1996. This increase was primarily due to strong market demand
for the Company's multimode and single-mode communications fiber. The
acquisition of APD in May 1995 also contributed to the increase in net sales.
Selling prices for multimode and single-mode fiber have increased in 1996,
largely due to the strong market demand and price adjustments related to certain
raw material cost increases in the case of multimode fiber. SpecTran
14
<PAGE>
Communication represented approximately half of the Company's net sales with the
balance divided relatively evenly between SpecTran Specialty and APD.
Gross Profit
Gross profit increased $9.3 million, or 71.3%, from $13.1 million to
$22.4 million in 1996. As a percentage of net sales, the gross profit increased
to 36.3% for the year ended December 31, 1996 from 33.9% for the year ended
December 31, 1995. This increase in gross profit was primarily due to increased
net sales in 1996 and lower production costs resulting from manufacturing
process and yield improvements. The increase in gross margin was partially
offset by lower margins at APD which was acquired in May 1995.
As a percentage of net sales, royalties decrease from 4.1% in 1995 to
3.7% in 1996. This decrease in royalties as a percentage of net sales was
primarily due to an increase in the net sales not subject to royalties.
Selling & Administrative
Selling and administrative expenses increased $3.9 million, or 41.1%,
from $9.7 million to $13.6 million for the year ended December 31, 1996. This
increase was primarily due to including a full year of APD expenses in 1996
versus only seven months in 1995. A substantially higher provision for incentive
compensation in the 1996 period also contributed to the increase. As a
percentage of net sales, selling and administrative expenses decreased to 22.1%
for the year ended December 31, 1996 from 25.1% for the year ended December 31,
1995.
Research & Development
Research and development costs increased $305,000, or 10.8%, from $2.8
million to $3.1 million for the year ended December 31, 1996. As a percentage of
net sales, research and development costs decreased from 7.3% for the year ended
December 31, 1995, to 5.1% for the year ended December 31, 1996. The Company's
increased research and development spending, in absolute dollars, is primarily
in programs designed to improve manufacturing cost 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 declined by $227,000 for the year ended
December 31, 1996 compared to the same period of 1995. The decline was caused
primarily by the absence of non-recurring income in 1996 partially offset by a
decrease in interest expense of $155,000 due to capitalization of interest in
1996 related to the Company's ongoing plant expansion.
15
<PAGE>
Income Taxes
A tax provision of 34% of pre-tax income was provided for the year
ended December 31, 1996 compared to a tax provision of 30% of pre-tax income in
1995. The effective tax rates for 1996 and 1995 were lower than the statutory
combined federal and state tax rates due primarily to a reduction of $400,000 in
1996 and $437,000 in 1995 in the valuation allowance for deferred tax assets due
to the Company's belief that it is more likely than not that the additional
deferred tax assets will be realized through the utilization of operating loss
and tax credit carryforwards. See Note 10 of "Notes to the Consolidated
Financial Statements."
Net Income (Loss)
Net income for the year ended December 31, 1996 was $3.7 million or 5.9% of
net sales. Net income for the same period in 1995 was $542,000, or 1.4% of net
sales.
Liquidity and Capital Resources
The Company's principal sources of cash are cash flow from operations,
established bank credit facilities and existing cash balances. During the year
ended December 31, 1997, the Company generated $5.6 million in net cash from
operating activities. In February 1997 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, including proceeds from the exercise of warrants by the selling
stockholder, raised approximately $23.0 million for the Company. This has been
used to fund the Company's continuing capacity expansion.
As of December 31, 1997, the Company had approximately $7.0 million of
cash, cash equivalents and marketable securities, including approximately $1.0
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's net
working capital position at December 31, 1997 was approximately $16.1 million
with a current ratio of 2.4 to 1.
The Company currently has underway capacity expansion which required
significant capital expenditures in 1997. Total planned expenditures for
capacity expansion include approximately $44.0 million for SpecTran
Communication (which will be completed in 1998) and approximately $9.0 million
for SpecTran Specialty, which was completed in 1997. The expansion at SpecTran
Specialty has increased capacity there by 50%. When fully operational, the
expansion at SpecTran Communication will increase capacity there by 100%. The
Company has and intends to continue to finance these expansions through a
combination of cash flow from operations, borrowings and existing cash and
marketable security balances.
16
<PAGE>
Other Matters
Management is aware of the potential software logic anomalies associated with
the year 2000 date change. The Company is in the process of evaluating the
potential issues that might need to be addressed in connection with its
operations. Based on preliminary information, costs of addressing the issue are
not expected to have any material effect upon the Company's financial position,
results of operations or cash flows in future periods.
Subsequent Events
On March 13, 1998 the Company announced the settlement of Corning's
obligation to purchase multimode optical fiber from the Company under a
multi-year supply contract the companies entered into on January 1, 1996.
Corning has terminated its purchase of multimode optical fiber from the Company
in exchange for a series of cash payments to the Company totaling $4.1 million.
Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 123, "Accounting for Stock-Based Compensation," which
established financial accounting and reporting standards for stock-based
compensation plans. Companies are encouraged, rather than required, to adopt a
new method that accounts for stock compensation awards based on their fair value
using an option pricing model. Companies that do not adopt this new method will
be required to make pro forma footnote disclosures of net income as if the fair
value-based method of accounting required by SFAS No. 123 had been applied. The
Company adopted SFAS No. 123 on January 1, 1996. Adoption of this pronouncement
did not have a material impact on the Company's financial position or results of
operations. The Company has made pro forma footnote disclosures in its December
31, 1997, financial statements (See "Note 9 to the Consolidated Financial
Statements - Stockholder's Equity").
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." This statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. This statement also requires that long-lived assets and
certain identifiable intangibles to be disposed of be reported at the lower of
carrying value or fair value less costs to sell. Adoption of the statement had
no impact on the Company's financial statements.
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 " Earnings per Share" (SFAS 128) which has changed
the method of computing and presenting earnings per common share. All prior
periods presented have been restated in accordance with SFAS 128. This
restatement had an immaterial impact on the prior periods' earning per common
share amounts calculated under the previous standard (See "Note 10 to the
Consolidated Financial Statements - Computation of Earnings per Common Share").
17
<PAGE>
Effective January 1, 1998, the provisions of Statements of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" and No. 131
"Disclosures about Segments of an Enterprise and Related Information" will apply
to the Company. The Company anticipates that application of these statements
will have an effect on presentation of its financial information.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this Item is submitted as a separate section of
this Form 10-K.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
18
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information to be contained under the heading "Election of
Directors" in the Company's proxy statement relating to the 1998 Annual Meeting
of Shareholders (the "Proxy Statement") is hereby incorporated herein by
reference.
Item 11. EXECUTIVE COMPENSATION.
The information with respect to compensation of certain executive
officers and all executive officers of the Company as a group to be contained
under the heading "Compensation of Executive Officers and Directors" in the
Proxy Statement is hereby incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information with respect to ownership of the Company's Common Stock
by management and by certain other beneficial owners to be contained under the
heading "Principal Stockholders and Other Information" in the Proxy Statement is
hereby incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information with respect to certain relationships and related
transactions to be contained under the heading "Certain Transactions" in the
Proxy Statement is hereby incorporated herein by reference.
19
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. & 2. Financial Statements and Financial Statement Schedules:
The response to this portion of Item 14 is submitted as a
separate section of this Form 10-K.
3. Exhibits:
See Exhibit Index on Pages 22 through 27 of this Form 10-K.
(b) Reports on Form 8-K filed during the final quarter of fiscal
1997: None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: SPECTRAN CORPORATION
March 27, 1998 By: /s/ Raymond E. Jaeger
----------------------
Raymond E. Jaeger
President,
Chief Executive Officer and
Chairman of the Board of Directors
March 27, 1998 By: /s/ Bruce A. Cannon
--------------------
Bruce A. Cannon
Senior Vice President,
Chief Financial Officer and
Chief Accounting Officer
20
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<PAGE>
<TABLE>
<CAPTION>
Signatures Title Date
<S> <C> <C>
/s/ Raymond E. Jaeger President, Chief Executive Officer March 27, 1998
- ------------------------------
Jaeger and Chairman of the Board of
Directors (principal executive
officer)
/s/ Bruce A. Cannon Senior Vice President, Chief March 27, 1998
Bruce A. Cannon Financial Officer, Secretary,
Treasurer and Director (principal
financial officer and principal
accounting officer)
/s/ John E. Chapman Senior Vice President - Technology March 27, 1998
- -------------------------------
John E. Chapman and Director
/s/ Ira S. Nordlicht Director March 27, 1998
- -----------------------------------
Ira S. Nordlicht
/s/ Paul D. Lazay Director March 27, 1998
- ---------------------------------
Paul D. Lazay
/s/ Richard M. Donofrio Director March 27, 1998
- ----------------------------------
Richard M. Donofrio
/s/ Lily K. Lai Director March 27, 1998
- -------------------------------------
Lily K. Lai
/s/ Charles B. Harrison Director March 27, 1998
- ---------------------------------------
Charles B. Harrison
</TABLE>
21
<PAGE>
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
3.1 Certificate of Incorporation of the Registrant, as amended.
(Incorporated by reference to Registrant's Annual Report on Form 10-K
for its fiscal year ended December 31, 1991.)
3.2 By-Laws of the Registrant, as amended. (Incorporated by reference to
Registrant's Annual Report on Form 10-K for its fiscal year ended
December 31, 1991.)
4.5* Form of Stock Certificate for Voting Common Stock.
10.1 Registrant's 1991 Incentive Stock Option Plan. (Incorporated by
reference to the Registrant's Proxy Statement dated April 9, 1991.)
10.7* License Agreement dated August 15, 1981, between the Registrant and
Western Electric Company, Incorporated. (Registrant has been granted
confidential treatment of portions of this Exhibit.)
10.49 License Agreement dated as of the first day of January 1991 by and
between the Registrant and Corning, Incorporated. (Registrant has
been granted confidential treatment of portions of this Exhibit.)
(Incorporated by reference to Registrant's Annual Report on Form 10-K
for its fiscal year ended December 31, 1991.)
10.61 Stock Purchase Agreement among APD Acquisition Corp. and Irving N.
Dwyer, David P. DaVia, The Irving N. Dwyer and Annette M. Dwyer
Charitable Remainder Trust and the DaVia Charitable Remainder Trust.
(Incorporated by reference to the Registrant's Report on Form 8-K
filed June 7, 1995.)
10.62 Directors Retirement Plan dated December 27, 1995. (Incorporated by
reference to the Registrant's Report on Form 10-K dated March 29,
1996.)
10.63 Registrant's Employee Profit Sharing Plan as revised and adopted
effective January 1, 1995. (Incorporated by reference to the
Registrant's Report on Form 10-K dated March 29, 1996).
10.64 Lease between Mark C. Yellin and Applied Photonic Devices, Inc. dated
January 15, 1996. (Incorporated by reference to the Registrant's
Report on Form 10-K dated March 29, 1996).
10.65 Lease between Fabrilock, Inc. and Applied Photonic Devices, Inc.
dated February 6, 1996.(Incorporated by reference to the
Registrant's Report on Form 10-K dated March 29, 1996).
22
<PAGE>
10.69 Supplemental Retirement Agreement between SpecTran Corporation and
Raymond E. Jaeger dated May 8, 1996. (Incorporated by reference to
the Registrant's Quarterly Report on Form 10-Q dated August 9, 1996.)
10.70 Supplemental Retirement Agreement between SpecTran Corporation and
Bruce A. Cannon dated May 8, 1996. (Incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q dated August 9, 1996.)
10.71 Supplemental Retirement Agreement between SpecTran Corporation and
Crawford L. Cutts dated May 8, 1996. (Incorporated by reference to
the Registrant's Quarterly Report on Form 10-Q dated August 9, 1996.)
10.72 Supplemental Retirement Agreement between SpecTran Corporation and
William B. Beck dated May 8, 1996. (Incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q dated August 9, 1996.)
10.73 Supplemental Retirement Agreement between SpecTran Corporation and
John E. Chapman dated May 8, 1996. (Incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q dated August 9, 1996.)
10.74 Lease between CRJ Realty Trust and SpecTran Communication Fiber
Technologies, Inc. dated July 22, 1996. (Incorporated by reference to
the Registrant's Quarterly Report on Form 10-Q dated August 9, 1996.)
10.75 Contractual Agreement Between Lucent Technologies Inc. and SpecTran
Corporation dated October 3, 1996. (Registrant has been granted
confidential treatment for portions of this Exhibit.) (Incorporated
by reference to the Registrant's Quarterly Report on Form 10-Q dated
November 13, 1996.)
10.76 Three Year Multimode Optical Fiber Supply Contract between Corning
Incorporated and SpecTran Corporation dated as of January 1, 1996.
(Registrant has been granted confidential treatment for portions of
this Exhibit.) (Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q dated November 13, 1996.)
10.79 Key Employee Incentive Plan effective as of January 1, 1996.
(Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q dated November 13, 1996.)
10.80 Employment Agreement between SpecTran Corporation and Raymond E.
Jaeger dated as of December 14, 1992. (Incorporated by reference to
the Registrant's Quarterly Report on Form 10-Q dated November 13,
1996.)
23
<PAGE>
10.81 Employment Agreement between SpecTran Corporation and Bruce A. Cannon
dated as of December 14, 1992. (Incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q dated November 13, 1996.)
10.82 Employment Agreement between SpecTran Corporation and John E. Chapman
dated as of December 14, 1992. (Incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q dated November 13, 1996.)
10.83 Employment Agreement between SpecTran Corporation and Crawford L.
Cutts dated as of January 1, 1996. (Incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q dated November 13, 1996.)
10.84 Employment Agreement between SpecTran Corporation and William B. Beck
dated as of February 18, 1994. (Incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q dated November 13, 1996.)
10.85 Employment Agreement between SpecTran Corporation and Glenn E. Moore
dated as of December 1995. (Incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q dated November 13, 1996.)
10.86 Note Purchase Agreement between SpecTran Corporation and
Massachusetts Mutual Life Insurance Company dated as of December 1,
1996. (Incorporated by reference to the Registrant's Current Report
on Form 8-K dated December 31, 1996.)
10.87 Note Purchase Agreement between SpecTran Corporation and CM Life
Insurance Company dated as of December 1, 1996. (Incorporated by
reference to the Registrant's Current Report on Form 8-K dated
December 31, 1996.)
10.88 Note Purchase Agreement between SpecTran Corporation and The Mutual
Life Insurance Company of New York dated as of December 1, 1996.
(Incorporated by reference to the Registrant's Current Report on Form
8-K dated December 31, 1996.)
10.89 Note Purchase Agreement between SpecTran Corporation and Atwell & Co.
dated as of December 1, 1996. (Incorporated by reference to the
Registrant's Current Report on Form 8-K dated December 31, 1996.)
10.90 Security Agreement among SpecTran Corporation, SpecTran Communication
Fiber Technologies, Inc., SpecTran Specialty Optics Company, Applied
Photonic Devices, Inc. and Fleet National Bank, as Trustee, dated as
of December 1, 1996. (Incorporated by reference to the Registrant's
Current Report on Form 8-K dated December 31, 1996.)
10.91 Trademark Security Agreement among SpecTran Corporation, SpecTran
Communication Fiber Technologies, Inc., SpecTran Specialty Optics
Company, Applied Photonic Devices, Inc. and Fleet National Bank, as
Trustee, dated as of December 1, 1996. (Incorporated by reference to
the Registrant's Current Report on Form 8-K dated December 31, 1996.)
24
<PAGE>
10.92 Patent Collateral Assignment among SpecTran Corporation, SpecTran
Communication Fiber Technologies, Inc., SpecTran Specialty Optics
Company, Applied Photonic Devices, Inc. and Fleet National Bank, as
Trustee, dated as of December 1, 1996. (Incorporated by reference to
the Registrant's Current Report on Form 8-K dated December 31, 1996.)
10.93 Pledge Agreement among SpecTran Corporation, SpecTran Communication
Fiber Technologies, Inc., SpecTran Specialty Optics Company, Applied
Photonic Devices, Inc. and Fleet National Bank, as Trustee, dated as
of December 1, 1996. (Incorporated by reference to the Registrant's
Current Report on Form 8-K dated December 31, 1996.)
10.94 Mortgage, Assignment of Rents and Security Agreement by SpecTran
Communication Fiber Technologies, Inc. to Fleet National Bank, as
Trustee, dated as of December 1, 1996. (Incorporated by reference to
the Registrant's Current Report on Form 8-K dated December 31, 1996.)
10.95 Open-End Mortgage, Assignment of Rents and Security Agreement by
SpecTran Specialty Optics Company to Fleet National Bank, as Trustee,
dated as of December 1, 1996. (Incorporated by reference to the
Registrant's Current Report on Form 8-K dated December 31, 1996.)
10.96 Guaranty Agreement dated as of December 1, 1996 by SpecTran
Communication Fiber Technologies, Inc., SpecTran Specialty Optics
Company and Applied Photonic Devices, Inc. in favor of Massachusetts
Mutual Life Insurance Company, CM Life Insurance Company, The New
York Mutual Life Insurance Company and Atwell & Co. (Incorporated by
reference to the Registrant's Current Report on Form 8-K dated
December 31, 1996.)
10.97 Loan Agreement among SpecTran Corporation, SpecTran Communication
Fiber Technologies, Inc., SpecTran Specialty Optics Company, Applied
Photonic Devices, Inc. and Fleet National Bank dated as of December
1, 1996. (Incorporated by reference to the Registrant's Current
Report on Form 8-K dated December 31, 1996.)
10.98 Limited Liability Company Agreement of General Photonics, LLC between
Applied Photonic Devices, Inc. and General Cable Industries, Inc.
dated as of December 23, 1996. (Incorporated by reference to the
Registrant's Current Report on Form 8-K dated January 8, 1997.)
25
<PAGE>
10.99 Asset Purchase Agreement among Applied Photonic Devices, Inc.,
SpecTran Corporation, General Cable Corporation and General Cable
Industries, Inc. dated as of December 23, 1996. (Incorporated by
reference to the Registrant's Current Report on Form 8-K dated
January 8, 1997.)
10.100 Investor's Representations, Contribution Agreement and Subscription
Agreement among Applied Photonic Devices, Inc., SpecTran Corporation
and General Photonics, LLC dated as of December 23, 1996.
(Incorporated by reference to the Registrant's Current Report on Form
8-K dated January 8, 1997.)
10.101 Non-Competition Agreement among General Cable Industries, Inc.,
General Cable Corporation, Applied Photonic Devices, Inc., SpecTran
Corporation and General Photonics, LLC dated December 23, 1996.
(Registrant has been granted confidential treatment for portions of
this Exhibit.) (Incorporated by reference to the Registrant's Current
Report on Form 8-K dated January 8, 1997.)
10.102 Standstill Agreement among General Cable Industries, Inc., General
Cable Corporation and SpecTran Corporation dated as of December 23,
1996. (Incorporated by reference to the Registrant's Current Report
on Form 8-K dated January 8, 1997.)
10.103 Letter amendment to Three Year Multimode Optical Fiber Supply
Contract between Corning Incorporated and SpecTran Corporation dated
as of January 1, 1996. (Registrant has been granted confidential
treatment for portions of this Exhibit.) (Incorporated by reference
to the Registrant's Current Report on Form 8-K dated January 8,
1997.)
10.104 Letter amendment to Employment Agreement between SpecTran Specialty
Optics Company and William B. Beck dated April 18, 1996.
(Incorporated by reference to the Registrant's Current Report on Form
8-K dated January 8, 1997.)
10.105 Cross-Indemnity Agreement between SpecTran Corporation and Allen
Company Incorporated. (Incorporated by reference to the
Registrant's Registration Statement on Form S-3 (Reg. No. 333-19449)
effective February 12,1997.)
10.106 Common Stock Purchase Warrant issued to Allen & Company Incorporated.
(Incorporated by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1996.)
10.107 Settlement Agreement dated February 13, 1998 between SpecTran
Corporation and Corning Incorporated.
21.0 Subsidiaries.
- ------------------------------
* Incorporated by reference to Registrant's Registration Statement on Form
S-1 (Reg. No. 2-83172) effective June 2, 1983
26
<PAGE>
SpecTran Corporation
Form 10-K
Items 8, 14 (a) (1) and (2)
Index to Consolidated Financial Statements and Schedule
The following consolidated financial statements of the registrant required to be
included in Item 8 and 14 (a) (1) are listed below:
<TABLE>
Page
<S> <C>
Independent Auditors' Report F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the Years Ended December 31,
1997,
1996 and 1995 F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997,
1996 and 1995 F-5
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7 through F-24
The following financial statement schedule of the registrant is included
pursuant to Item 14 (a) (2):
Financial Statement Schedule Page
I. Valuation and Qualifying Accounts F-25
Schedules other than that mentioned above are omitted because the conditions
requiring their filing do not exist or because the required information is
presented in the consolidated financial statements, including the notes thereto.
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
SpecTran Corporation:
We have audited the consolidated financial statements of SpecTran
Corporation as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited the financial
statement schedule as listed in the accompanying index. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SpecTran
Corporation as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
February 16, 1998
F-2
<PAGE>
SpecTran Corporation
Consolidated Balance Sheets
Dollars in thousands
<TABLE>
ASSETS (NOTE 8 AND 15)
1997 1996
---- ----
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 445 $ 3,565
Current Portion of Marketable Securities (Note 2) 5,535 13,822
Trade Accounts Receivable, net of allowance for doubtful
accounts of $389 and $218 in 1997 and 1996, respectively 8,622 7,621
Inventories (Note 3) 9,666 7,254
Deferred Income Taxes, net (Note 11) 1,189 791
Prepaid Expenses and Other Current Assets 1,943 1,316
---------- ----------
Total Current Assets 27,400 34,369
---------- ----------
Investment in Joint Venture (Note 15) 4,213 4,135
Property, Plant and Equipment, net (Note 4) 55,409 17,890
Other Assets:
Long-term Marketable Securities (Note 2) 996 1,595
License Agreements, net (Note 5) 603 804
Deferred Income Taxes, net (Note 11) 412 814
Goodwill, net (Note 6) 872 950
Other Long-Term Assets (Note 14) 2,200 1,899
---------- ----------
Total Other Assets 5,083 6,062
---------- ----------
Total Assets $ 92,105 $ 62,456
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities (Note 15):
Accounts Payable $ 4,758 $ 3,763
Income Taxes Payable 573 301
Accrued Defined Benefit Pension Liability (Note 14) 1,716 1,461
Accrued Liabilities (Note 7) 4,299 4,528
---------- ----------
Total Current Liabilities 11,346 10,053
---------- ----------
Long-term Debt (Note 8) 24,000 24,000
---------- ----------
Stockholders' Equity (Note 9):
Common Stock, voting, $.10 par value; authorized 20,000,000 shares;
outstanding 7,000,634 shares and 5,400,071 shares in 1997 and
1996, respectively 700 540
Common Stock, non-voting, $.10 par value;
authorized 250,000 shares, no shares outstanding -- --
Paid-in Capital 50,223 26,884
Net Unrealized Loss on Marketable Securities (Note 2) (1) (16)
Retained Earnings 5,837 995
---------- ----------
Total Stockholders' Equity 56,759 28,403
---------- ----------
Total Liabilities and Stockholders' Equity $ 92,105 $ 62,456
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SpecTran Corporation
Consolidated Statements of Operations
Dollars in thousands except per share amounts
<TABLE>
Years Ended December 31,
---------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Sales (Note 12) $ 62,057 $ 61,571 $ 38,581
Cost of Sales 38,781 39,196 25,520
---------- ---------- ----------
Gross Profit 23,276 22,375 13,061
Selling and Administrative Expenses 13,966 13,641 9,669
Research and Development Costs 3,289 3,132 2,827
---------- ---------- ----------
Income from Operations 6,021 5,602 565
---------- ---------- ----------
Other Income (Expense):
Interest Income 1,327 226 328
Interest Expense (747) (471) (626)
Other, Net 510 180 510
---------- ---------- ----------
Other Income (Expense), net 1,090 (65) 212
---------- ---------- ----------
Income before Income Taxes 7,111 5,537 777
Income Tax Expense (Note 11) 2,124 1,882 235
---------- ---------- ----------
Income before Equity in Joint Venture 4,987 3,655 542
Income (Loss) from Joint Venture, Net of
Income Taxes (145) -- --
---------- ---------- ----------
Net Income $ 4,842 $ 3,655 $ 542
========== ========== ==========
Net earnings per Common Share (Note 10):
Basic $ .72 $ .68 $ .10
======== ============= ========
Diluted $ .68 $ .61 $ .10
======== ============ ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SpecTran Corporation
Consolidated Statements of Cash Flows
Dollars in thousands
Years Ended December 31,
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 4,842 $ 3,655 $ 542
Reconciliation of net income to net cash provided by operating
activities:
Depreciation and amortization 3,969 3,071 2,338
Loss (gain) on sale of assets -- -- 8
Loss (gain) on sale of marketable securities (24) 19 17
Changes in valuation accounts (532) (380) (632)
Change in long-term deferred income taxes 402 1,118 576
Change in other long-term assets (409) (344) (110)
Changes in assets and liabilities, net of effects from purchase of
businesses:
Current deferred income taxes (398) (83) (339)
Accounts receivable (1,172) (2,136) (409)
Inventories (1,709) (3,742) (2,501)
Prepaid expenses and other current assets (639) (50) (260)
Income taxes payable/receivable 273 (150) 716
Accounts payable and accrued liabilities 1,021 3,606 1,854
--------- --------- ---------
Net Cash Provided by Operating Activities 5,624 4,584 1,800
--------- --------- ---------
Cash Flows from Investing Activities:
Sale of Assets of Applied Photonic Devices -- 5,278 --
Acquisition of businesses -- -- (3,822)
Acquisition of property, plant and equipment (41,157) (11,100) (2,540)
Loss on Disposition of Equipment 61 -- --
Purchase of marketable securities (254,437) (29,658) (10,894)
Proceeds from sale/maturity of marketable securities 263,368 19,439 11,839
Proceeds from sale of equipment -- -- 5
Investment in joint venture (78) (354) --
--------- --------- ---------
Net Cash Used in Investing Activities (32,243) (16,395) (5,412)
--------- --------- ---------
Cash Flows from Financing Activities:
Borrowings of long-term debt -- 28,000 4,760
Reduction of debt -- (14,000) --
Issuance of Common Stock, net 23,082 -- --
Tax effect of disqualifying disposition of ISO shares 43 117 --
Proceeds from exercise of stock options and warrants 374 329 --
Deferred financing costs -- (695) --
--------- --------- ---------
Net Cash Provided by Financing Activities 23,499 13,751 4,760
--------- --------- ---------
Increase (Decrease) in Cash and Cash Equivalents (3,120) 1,940 1,148
Cash and Cash Equivalents at Beginning of Year 3,565 1,625 477
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 445 $ 3,565 $ 1,625
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SpecTran Corporation
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1997, 1996 and 1995
Dollars in thousands
<TABLE>
<CAPTION>
Net
Unrealized
Gain(Loss) on
Retained Total
Common Stock Paid-in Marketable Earnings Stockholders'
Shares Par Value Capital Securities (Deficit) Equity
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 5,207,409 $520 $26,028 $(242) $(3,202) $23,104
Exercise of Stock Options
(Note 9) 1,833 -- 7 -- -- 7
Issuance of Shares in
Connection with
Acquisition (Note 15) 144,444 15 408 -- -- 423
Unrealized Gain on
Marketable Securities -- -- -- 220 -- 220
Net Income -- -- -- -- 542 542
------------ ------ -------- ------ --------- ----------
Balance at December 31, 1995 5,353,686 535 26,443 (22) (2,660) 24,296
Exercise of Stock Options
(Note 9) 46,385 5 324 -- -- 329
Tax Effect of Disqualifying
Disposition of ISO shares -- 117 -- -- 117
(Note 11)
Unrealized Gain on
Marketable Securities -- -- -- 6 -- 6
Net Income -- -- -- -- 3,655 3,655
------------ ------ -------- ------ --------- ----------
Balance at December 31, 1996 5,400,071 540 26,884 (16) 995 28,403
Exercise of Stock Options
(Note 9) 100,563 10 364 -- -- 374
Issuance of Shares in
Connection with Stock
Offering (Note 9) 1,500,000 150 22,932 -- -- 23,082
Tax Effect of Disqualifying
Disposition of ISO shares
(Note 11) -- -- 43 -- -- 43
Unrealized Gain on
Marketable Securities -- -- -- 15 -- 15
Net Income -- -- -- -- 4,842 4,842
----------- ------ -------- ------ --------- ----------
Balance at December 31, 1997 7,000,634 $700 $ 50,223 $ (1) $ 5,837 $ 56,759
========= ====== ======== ====== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
1 - Nature of Business and Summary of Significant Accounting Policies
Nature of Business
SpecTran Corporation (the "Company") develops, manufactures and markets
a wide range of fiber optic products. These include multimode and single-mode
optical fiber and cable for use in data communications and telecommunications
applications. The Company also develops special performance fibers, coatings,
cables, cable assemblies and other value-added products for use in a variety of
specialty markets.
Principles of Consolidation and Basis of Accounting
The consolidated financial statements include the accounts of the
Company and all wholly owned subsidiaries: SpecTran Communication Fiber
Technologies, Inc., SpecTran Specialty Optics Company 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. In December 1996, 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 (See Note 15). 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.
Management uses estimates and assumptions in preparing the financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and liabilities
and the reported revenue and expenses. Actual results may vary from the
estimates.
Certain 1996 and 1995 balances have been reclassified to be consistent
with the current year's presentation.
Revenue Recognition
Sales revenues are recognized upon shipment of goods. Customers
generally have the right to return for replacement any goods which do not meet
the customer's purchase order specifications. Sales revenues and cost of sales
as reported in the consolidated statements of operations are adjusted to reflect
estimated returns and warranty costs.
F-7
<PAGE>
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
Marketable Securities
Marketable securities are classified as available-for-sale and reported
at fair value, with unrealized gains and losses excluded from earnings and
reported as a separate component of stockholders' equity, net of estimated
income taxes. Gains and losses on the sale of marketable securities are
recognized at the time of sale on a specific identification basis.
Inventories
Inventories are stated at the lower of cost or market value. Cost is
determined by the first-in, first-out method.
Statements of Cash Flows
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with original maturities of three
months or less to be cash equivalents.
Supplemental disclosure of cash flow information includes cash paid during
the year for (in thousands):
1997 1996 1995
---- ---- ----
Interest $2,120 $780 $510
Income Taxes 2,159 1,044 100
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Machinery and
equipment assembled by the Company are valued at the cost of component parts
purchased, plus the approximate labor and overhead costs to the Company.
Significant renewals and betterments are capitalized. The cost of maintenance
and repairs is charged to income as incurred. Repairs and maintenance costs
amounted to $1.6 million, $1.5 million and $1.0 million in 1997, 1996 and 1995,
respectively.
Depreciation is provided by the straight-line method. The principal
annual rates of depreciation are:
Buildings and building improvements..................4%
Machinery and equipment.......................14% to 33-1/3%
In 1997 the Company changed the rate of depreciation for all machinery
and equipment put in service after January 1, 1997, from 5 to 7 years. This was
to more accurately reflect the economic life of these assets.
Depreciation expense of property, plant and equipment amounted to $3.6
million, $2.5 million and $1.9 million in 1997, 1996 and 1995, respectively.
F-8
<PAGE>
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
Cost in Excess of Net Assets Acquired and Other Intangibles
The Company monitors its cost in excess of net assets acquired
(goodwill) and its other intangibles to determine whether any impairment of
these assets has occurred. In making such determination with respect to
goodwill, the Company evaluates the performance, on an undiscounted basis, of
the underlying businesses which gave rise to such amount. Amortization of
goodwill is recorded on a straight-line basis over the estimated useful life of
15 years.
With respect to other intangibles, which include the cost of license
agreements and patents, the Company bases its determination of impairment on the
performance, on an undiscounted basis, of the related products.
License Agreement and Other Assets
The total cost of the license agreement obtained in 1991 is being
amortized and charged to expense based on a ten year life. Amortization expense
amounted to $201,000 for 1997, 1996 and 1995. Deferred financing costs are
amortized and charged to expense over the lives of the related debt. Patents are
being amortized over a seventeen year life.
Single-mode Fiber Manufacturing Development Costs
Manufacturing development costs are expensed as incurred. In addition
to research and development expenses for single-mode fiber, there were
manufacturing development start-up costs relating to single-mode fiber of
approximately $1.8 million in 1995 that were included in cost of sales. There
were no manufacturing development start-up costs relating to single-mode fiber
in 1997 and 1996.
Income Taxes
The Company accounts for income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities are recognized
for the estimated future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Income (Loss) per Share of Common Stock
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings per Share" (SFAS 128) which has changed
the method of computing and presenting earnings per common share. All prior
F-9
<PAGE>
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
periods presented have been restated in accordance with SFAS 128. This
restatement had an immaterial impact on the prior periods' earnings per common
share amounts calculated under the previous standard.
Financial Instruments
Financial instruments of the Company consist of cash and cash equivalents,
marketable securities, accounts receivable, accounts payable, accrued expenses
and senior secured notes. The carrying amounts of these financial instruments
approximate their fair value.
Stock-Based Compensation
Statement of Financial Accounting Standards Number 123, "Accounting for
Stock-Based Compensation", encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion Number
25, "Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock.
2 - Marketable Securities
A summary of marketable securities available for sale for the years
ended December 31, 1997 and 1996 is as follows (in thousands):
<TABLE>
Quoted
Purchase Amortized Unrealized Unrealized Market
Price Cost Gains Losses Value
----- ---- ----- ------ -----
<S> <C> <C> <C> <C> <C>
1997
Money Market $ 88 $ 88 $ -- $ -- $ 88
U.S. Government and
Agency Obligations -- -- -- -- --
Corporate Debt Securities 4,451 4,446 -- 2 4,444
Commercial Paper 1,998 1,998 1 -- 1,999
---------- -------- ----- ------- ----------
Total $ 6,537 $ 6,532 $ 1 $ 2 $ 6,531
========== ======== ===== ======= ==========
1996
Money Market $ 4,715 $ 4,715 $ -- $ -- $ 4,715
U.S. Government and
Agency Obligations 902 900 -- 12 888
Corporate Debt Securities 860 859 -- 3 856
Commercial Paper 8,959 8,959 -- 1 8,958
---------- -------- ----- ------- ----------
Total $ 15,436 $ 15,433 $ -- $ 16 $ 15,417
========== ======== ===== ======= ==========
</TABLE>
F-10
<PAGE>
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
The amortized cost and estimated market value of debt securities are shown
below (in thousands):
<TABLE>
1997 1996
Amortized Quoted Amortized Quoted
Cost Market Value Cost Market Value
---- ------------ ---- ------------
<S> <C> <C> <C> <C>
Expected Maturities:
Within one year $3,448 $3,448 $ 592 $ 588
One to five years 1,167 1,156 1,167 1,156
</TABLE>
Proceeds from sales of marketable securities, prior to maturity, during
1997 and 1996 were $4.8 million and $1 million, respectively. A pretax gain of
$24,000 for 1997 and a pretax loss $19,000 for 1996 were recognized on these
sales.
3 - Inventories
Inventories consisted of (in thousands):
December 31,
-----------------------------------------
1997 1996
---- ----
Raw Materials $ 4,036 $ 3,677
Work in Process 1,010 1,209
Finished Goods 4,620 2,368
---------- --------
$ 9,666 $ 7,254
========== ==========
4 - Property, Plant and Equipment
Property, plant and equipment consisted of (in thousands):
<TABLE>
December 31,
-----------------------------------
1997 1996
---- ----
<S> <C> <C>
Land and Land Improvements $ 978 $ 937
Buildings and Improvements 10,453 3,840
Machinery and Equipment 33,567 19,213
Construction in Progress 27,694 8,611
---------- ----------
72,692 32,601
Less: Accumulated Depreciation 17,283 14,711
---------- ----------
Property, Plant and Equipment, net $ 55,409 $ 17,890
========== ==========
</TABLE>
In 1997, the Company had underway capacity expansion requiring
significant capital expenditures. Total planned expenditures for capacity
expansion include approximately $44.0 million for SpecTran Communication
F-11
<PAGE>
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
(expected to be completed in 1998) and approximately $9.0 million for SpecTran
Specialty, which was completed in 1997.
In 1997, the Company recorded approximately $1.4 million in capitalized
interest related to the expansions.
5 - License Agreements
In February, 1983, the Company obtained from Corning, Incorporated
("Corning") a limited, non-assignable, non-exclusive royalty-bearing license to
make, use and sell optical fiber under certain of Corning's United States
patents owned or filed for on or before January 1, 1988. The Company granted to
Corning a non-exclusive royalty-free license for any United States patents filed
for on or before January 1, 1988 related to the subject matter of the Corning or
Company patents licensed under the agreement.
In January, 1991, the Company entered into a new fiber manufacturing
license agreement with Corning which expanded and extended the original 1983
agreement. The new agreement gives SpecTran the ability to increase
substantially its fiber production using Corning's United States patents,
providing for an immediate considerable increase in licensed fiber eligible for
manufacture by SpecTran in 1991, with further annual increases through the year
2000. The Company paid a $2 million fee for the new license agreement in four
semiannual installments of $500,000, beginning in January, 1991. The license
obtained from Corning is limited, non-assignable, non-exclusive and
royalty-bearing, to make, use and sell optical fiber under certain of Corning's
United States patents with a filing date prior to January 1, 1996. The license
has a term equal to the life of the last to expire of the Corning or Company
patents licensed under the agreement. Corning has the right to terminate the
license in the event that more than 30% of the Company's voting stock is
acquired, directly or indirectly, by another manufacturing company. The Company
granted to Corning a non-exclusive royalty-free license for any United States
patents filed prior to January 1, 1996 related to optical fiber. The Company
believes that its manufacturing and sale of single-mode fiber is not subject to
the Corning license agreement.
At December 31, 1997, the Company or its subsidiaries had a
non-assignable, non-exclusive, unlimited, royalty-bearing license from Lucent
Technologies Inc. ("Lucent"), formerly AT&T Technologies, Inc. and a
non-exclusive, royalty-bearing license granted by Sumitomo Electric Industries,
Ltd. to make, use and sell optical fibers under certain patents owned by those
companies. No payments are required under these licenses other than royalty
payments.
During 1997, approximately 30% and 45% of the Company's net sales,
respectively, were subject to the Corning and Lucent licenses. During 1996,
approximately 36% and 62% of the Company's net sales, respectively, were subject
to the Corning and Lucent licenses. The Corning license contains certain annual
quantity limitations which increase annually through the year 2000.
Total royalties expensed during the years ended December 31, 1997, 1996 and
1995 were $1.9 million, $2.3 million and $1.6 million, respectively.
6 - Goodwill
Goodwill consisted of (in thousands):
December 31,
-----------------------------------
1997 1996
---- ----
Goodwill $ 1,181 $ 1,181
Less Accumulated Amortization (309) (231)
-------- ---------
$ 872 $ 950
======== ========
F-12
<PAGE>
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
7 - Accrued Liabilities
Accrued liabilities consisted of (in thousands):
December 31,
-------------------------------------
1997 1996
---- ----
Salaries and Wages $ 612 $ 827
Royalties 885 1,149
Health Insurance 486 514
Incentive Compensation 1,492 1,451
Other 824 587
--------- ---------
$ 4,299 $ 4,528
========= =========
8 - Long-Term Debt
<TABLE>
Long-term debt consisted of (in thousands):
December 31,
------------------------------------
1997 1996
---- ----
<S> <C> <C>
Revolving credit loan facility at the lower of prime or LIBOR
plus 1.5%, repaid in April 1996 $ -- $ --
Series A Senior Secured Notes at 9.24% interest 16,000 16,000
Series B Senior Secured Notes at 9.39% interest 8,000 8,000
---------- ----------
Total $ 24,000 $ 24,000
========== ==========
</TABLE>
In December 1996, the Company sold to a limited number of selected
institutional investors an aggregate principal amount of $24.0 million of senior
secured notes (the "Notes"), consisting of $16.0 million of 9.24% interest
Series A Senior Secured Notes due December 26, 2003 (the "Series A Notes") and
$8.0 million of 9.39% interest Series B Senior Secured Notes due December 26,
2004 (the "Series B Notes"). Interest on the Notes is payable semi-annually,
with five equal annual principal repayments required beginning December 26, 1999
for Series A Notes and December 26, 2000 for Series B Notes. The Notes
constitute senior secured debt of the Company secured by a first priority
security interest in substantially all of the assets of the Company and all
current and hereinafter created or acquired subsidiaries, a pledge by the
Company of the issued and outstanding stock of its subsidiaries and mortgages on
real estate owned by the Company's subsidiaries. The Company's obligations are
also guaranteed by the Company's subsidiaries and rank on an equal basis with
all other senior secured indebtedness of the Company. The Notes also provide for
certain financial and non-financial covenants usual for this type of
transaction. The Company used approximately $14.0 million from the sale of the
Notes to repay all outstanding indebtedness and restructured its existing $22.0
million of total borrowing capacity with its principal bank, composed of a $14.5
million revolving credit agreement and $7.5 million in equipment and real estate
term loans, into a $20.0 million revolving credit agreement, maturing December
F-13
<PAGE>
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
1999, with the same security interest in the Company's assets as the Notes. The
Company has the option to select from time to time the interest rate on the
revolving credit agreement at either the LIBOR rate plus 1.5% or Fleet Bank's
prime rate provided that, under certain circumstances, Fleet Bank may deem that
the LIBOR rate is not available. As of December 31, 1997 the Company had no
borrowing against the revolving credit agreements.
9 - Stockholders' Equity
(a) Warrants
As part of an agreement entered into in September, 1990 with Allen &
Company, Incorporated (Allen), warrants to purchase 350,000, 30,000 and 20,000
shares of SpecTran voting common stock at an exercise price of $2.00 through
August 14, 1999, were issued to Allen, Richard A.M.C. Johnson, who retired as a
director of the Company in 1996, and Patrick E. Brake, a former director of the
Company, respectively. In conjunction with the Company's public offering in
February 1997, Allen exercised warrants to purchase 200,000 shares and sold them
in the offering. At December 31, 1997 Allen owned none of the Company's
outstanding stock; if the remainder of the Allen warrants were exercised, Allen
would own approximately 2.1% of the Company's outstanding stock. In June, 1992
the Johnson warrant was exercised and in January, 1993 the Brake warrant was
exercised.
(b) Stock Options
Pursuant to the Company's Incentive Stock Option Plan adopted in
November, 1981, as amended, incentive and nonqualified options may be granted to
purchase up to an aggregate of 455,000 shares of the Company's voting Common
Stock, $.10 par value, at prices not less than 100% of the fair market value of
the shares at the time the options are granted. Currently, all options are
exercisable in full three years from the date of grant in cumulative annual
installments of 33 1/3% commencing one year after the date of grant, and expire
ten years after grant.
Under its provisions, no options were to be issued under the Incentive
Stock Option Plan adopted in November, 1981 (Old Plan) after the plan reached
its tenth anniversary. During the year ended December 31, 1991, a new Incentive
Stock Option Plan (New Plan) was adopted. The terms of the New Plan are
identical to those of the Old Plan except that (1) the number of shares eligible
for issuance is 625,490, (2) provision is made for the non-discretionary grant
of nonqualified options to directors who are not full-time employees of the
Company or any subsidiary ("outside directors") and (3) provision is made for
all outstanding options to vest upon the occurrence of a change in control (as
defined in the New Plan).
At the Company's Annual meeting in 1996, the holders of Common Stock
approved an amendment to the New Plan increasing the number of shares of Common
Stock reserved for issuance by 250,000.
F-14
<PAGE>
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
Activity in the plans for the years ended December 31, 1997, 1996 and 1995
is summarized below (dollars in thousands except per share amounts):
<TABLE>
Shares
Available Shares Under Option
for Option Shares Price Amount
---------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 272,259 411,271 $1.188 - $22.250 $3,437
Options Granted (139,750) 139,750 $5.375 - $5.500 733
Options Exercised -- (1,833) $3.375 - $4.750 (6)
Options Forfeited 5,700 (5,700) $6.000 - $22.250 (57)
----- ------ ------ ------- ---
Balance at December 31, 1995 138,209 543,488 $1.375 - $22.250 4,107
Increase in Shares Reserved 250,000 -- -- -- --
Options Granted (165,500) 165,500 $5.500 - $21.750 2,594
Options Exercised -- (46,385) $1.375 - $15.250 (329)
Options Forfeited 11,900 (11,900) $3.375 - $15.250 (100)
------ ------- ------ ------- ----
Balance at December 31, 1996 234,609 650,703 $1.375 - $22.250 6,272
Options Granted (123,450) 123,450 $10.875- $14.187 1,711
Options Exercised -- (100,563) $1.188- $8.875 (374)
Options Forfeited 3,668 (3,668) $5,500- $21.125 (41)
----- ------ ------ ------- ---
Balance at December 31, 1997 114,827 669,922 $3.375- $22.250 $7,568
======= ======= ====== ======= ======
</TABLE>
As of December 31, 1997, options for 390,854 shares were vested and
exercisable at an aggregate exercise amount of $3.9 million ($9.96 per share).
The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock option plan. Accordingly, no
compensation cost has been recognized for its fixed stock options plan. Had
compensation cost for the Company's stock option plan been determined based on
the fair value at the grant dates for awards under the plan consistent with the
provisions of FASB Statement 123, the Company's net income and earnings per
share for the years ended December 31, 1997 and 1996 would have been reduced to
the pro forma amounts indicated as follows:
F-15
<PAGE>
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Net income (in thousands):
As reported $4,842 $3,655 $542
Pro forma $4,594 $3,340 $233
Net income per share:
As reported $.68 $.61 $.10
Pro forma $.64 $.56 $.04
The fair value of options granted under the Company's fixed stock option
plan during 1997, 1996 and 1995 were estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used: no dividend yield, expected volatility of 63% for 1997 and 64%
for 1996 and 1995, risk free interest rate of 7%, and expected life of five
years.
(c) Secondary Stock Offering
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.
10- Computation of Earnings per Common Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings per Share" (SFAS 128) which has changed
the method of computing and presenting earnings per common share. All prior
periods presented have been restated in accordance with SFAS 128. This
restatement had an immaterial impact on the prior periods' earnings per common
share amounts calculated under previous standard.
Under SFAS 128, primary earnings per common share has been replaced
with basic earnings per common share. The basic earnings per share computation
is based on the earnings applicable to common stock divided by the weighted
average number of shares of common stock divided by the weighted average number
of shares of common stock outstanding in 1997, 1996 and 1995.
Fully diluted earnings per common share has been replaced with diluted
earnings per common share. The diluted earnings per common share computation
includes the common stock equivalency of options granted to employees under the
stock incentive plan. Excluded from the diluted earnings per common share
calculation are options granted to employees that are anti-dilutive based on the
average stock price for the year.
F-16
<PAGE>
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Earnings per common share-basic
Earnings applicable to common stock $ 4,842 $ 3,655 $ 542
======== ========= =========
Weighted average shares outstanding 6,724 5,374 5,298
======== ========= =========
Earnings per common share-basic $ .72 $ .68 $ .10
========= ========== ==========
Earnings per common share-diluted
Earnings applicable to common share $ 4,842 $ 3,655 $ 542
======== ========= =========
Weighted average shares outstanding 6,724 5,374 5,298
Plus shares issuable on:
Exercise of dilutive options 424 588 284
-------- --------- ---------
Weighted average shares outstanding
assuming conversion 7,148 5,962 5,582
======== ========= =========
Earnings per common share-diluted $ .68 $ .61 $ .10
========= ========== ==========
</TABLE>
11- Income Taxes
Income tax expense attributable to income (loss) from operations
differs from the computed expected tax expense (benefit) determined by applying
the federal income tax rate of 34 percent as follows (in thousands):
<TABLE>
1997 1996 1995
---- ----- ----
<S> <C> <C> <C>
Computed expected tax expense at 34% $ 2,368 $ 1,883 $ 264
State income taxes, net of federal effect and change in
valuation allowance 14 298 81
Research and experimentation credits -- -- 244
Goodwill amortization -- 74 50
(Decrease) in valuation allowance for deferred income
taxes (300) (400) (437)
Other 42 27 33
--------- --------- -------
$ 2,124 $ 1,882 $ 235
========= ========= =======
</TABLE>
F-17
<PAGE>
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
Total income tax expense (benefit) for the years ended December 31, 1997,
1996 and 1995 was allocated as follows (in thousands):
<TABLE>
1997 1996 1995
---- ----- ----
<S> <C> <C> <C>
Income tax expense attributable to:
Income from operations $ 2,124 $ 1,882 $ 235
Stockholders' equity, for
compensation expense for tax purposes from the
disqualifying disposition of stock options
(43) (117) --
---------- --------- -------
$ 2,081 $ 1,765 $ 235
========= ========= =======
</TABLE>
Income tax expense (benefit) attributable to income from continuing
operations consists of (in thousands):
Current Deferred Total
------- -------- -----
Year ended December 31, 1997:
Federal $ 1,719 $ 165 $ 1,884
State 401 (161) 240
-------- -------- --------
$ 2,120 $ 4 $ 2,124
======== ======== ========
Year ended December 31, 1996:
Federal $ 687 $ 668 $ 1,355
State 560 (33) 527
-------- -------- --------
$ 1,247 $ 635 $ 1,882
======== ======== ========
Year ended December 31, 1995:
Federal $ 277 $ (120) $ 157
State 158 (80) 78
-------- --------- --------
$ 435 $ (200) $ 235
======== ======== ========
F-18
<PAGE>
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
The significant components of deferred income tax expense (benefit)
attributable to income from operations for the years ended December 31, 1997,
1996 and 1995 are as follows (in thousands):
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Deferred tax expense (exclusive of the effects of
other components listed below)
$ 304 $ 1,035 $ 237
(Decrease) in valuation allowance for deferred
income taxes (300) (400) (437)
--------- -------- --------
Deferred income tax expense (benefit) attributable
to income from operations $ 4 $ 635 $ (200)
======== ======== ========
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below (in thousands):
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Accounts receivable $ 169 $ 125
Inventories 694 536
Accrued liability - compensation related expense 168 115
Accrued liability - pension 338 219
Other nondeductible reserves and accruals 9 9
Investment in Joint Venture 215 --
Net operating loss carryforward benefit 230 204
Credit carryforwards benefit 716 1,583
--------- ---------
Total gross deferred tax assets 2,539 2,791
Less valuation allowance (330) (630)
---------- ----------
Net deferred tax assets 2,209 2,161
Deferred tax liabilities (608) (556)
---------- ----------
Net deferred tax assets 1,601 1,605
Less current portion 1,189 791
--------- ---------
Long-term deferred tax asset $ 412 $ 814
========= =========
</TABLE>
F-19
<PAGE>
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
The valuation allowance for deferred tax assets as of December 31, 1997
and 1996 was $330,000 and $630,000, respectively. Based on the Company's level
of net income and projected future earnings, the Company believes that it is
more likely than not that a portion of the deferred tax asset will be realized
in the future. During 1997, the portion of the deferred tax asset which is
expected to be realized increased from 1996; therefore, the Company reduced its
valuation allowance by $300,000. The remaining valuation allowance relates
primarily to the risk that a portion of the tax credit carryforwards and state
operating loss carryforwards will not be used before they expire.
At December 31, 1997, the Company had the following income tax credit
available to offset future income taxes (in thousands):
Amount Expires
------ -------
Alternative Minimum Tax Credit $ 686 Indefinite
12- Major Customers
The approximate net product sales by the Company to customers
accounting for 10% or more of total net annual sales are as follows (in
thousands):
1997 1996 1995
---- ---- ----
Customer Amount % Amount % Amount %
-------- ------ - ------ - ------ -
A $9,522 15 $7,902 13 $5,040 13
B 8,906 14 4,153 11
C 6,601 11
Substantially all of the Company's business is to customers in the
telecommunications and data communications industries. International sales,
primarily in Asia and Europe, accounted for 22%, 25% and 22% of total sales in
1997, 1996 and 1995, respectively.
13- Commitments
SpecTran Communication Fiber Technologies, Inc. leases office and
warehouse facilities under a lease through March 17, 1998 and leases additional
office space under a lease which operates on a month to month basis. SpecTran
Specialty leases several cars under leases which operate on a month to month
basis. The scheduled rental payments required under these operating leases for
1998 are $31,000. The Company has no lease commitments after 1998.
Total rent expense for the years ended December 31, 1997, 1996 and 1995
was $301,000, $634,000 and $364,000, respectively. A portion of the total rent
expense for 1996 and 1995 was for APD, since its acquisition in May, 1995.
F-20
<PAGE>
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
14- Employee Benefit Plans
a) Defined Benefit Pension Plan
The Company sponsors a defined benefit pension plan covering
substantially all of its employees. The benefits are based on years of service
and an average of the employee's highest ten consecutive years of earnings. The
Company's funding policy is, to the extent possible, to contribute annually the
maximum amount that can be deducted for federal income tax purposes.
Contributions are intended to provide not only for benefits attributed to
service to date, but also for those expected to be earned in the future.
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheets at December 31, 1997 and
1996.
Actuarial present value of benefit obligations (in thousands):
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Vested benefit obligation $ 1,041 $ 803
========= =========
Accumulated benefit obligation $ 1,156 $ 901
========= =========
Projected benefit obligation $ 2,155 $ 1,650
Plan assets at fair value - primarily mutual funds 1,847 1,195
--------- ---------
Projected benefit obligation in excess of plan assets 308 455
Unrecognized net gain 142 36
Unrecognized net obligation at January 1, 1991
being recognized over 17.4 years (180) (197)
--------- ---------
Accrued pension cost $ 270 $ 294
========= =========
</TABLE>
Net pension cost for 1997, 1996 and 1995 included the following
components:
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost - benefits earned during period $ 285 $ 289 $ 151
Interest cost on projected benefit obligation 130 103 66
Actual return on assets (302) (129) (186)
Net amortization and deferral 213 65 146
--------- --------- ---------
Net pension cost $ 326 $ 328 $ 177
========= ========= =========
</TABLE>
Assumptions used in the accounting as of December 31 were as follows:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Discount rate 7.5% 7.5%
Rates of increase in compensation levels 5.0% 5.0%
Expected long-term rate of return on assets 8.5% 8.5%
</TABLE>
F-21
<PAGE>
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
b) Supplemental Retirement Agreements
The Company entered into supplemental retirement agreements with five
executive officers in 1996. These agreements provide benefits based on years of
service and average eligible pay for executives. The following table sets forth
the plan's funded status and amounts recognized in the Company's consolidated
balance sheets at December 31, 1997 and 1996.
Actuarial present value of benefit obligations (in thousands):
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Vested benefit obligation $ 0 $ 0
========== ==========
Accumulated benefit obligation $ 1,271 $ 1,170
========== ==========
Projected benefit obligation $ 1,519 $ 1,398
Unrecognized net gain (loss) 83 --
Unrecognized prior service cost $ (994) $ (1,096)
---------- ----------
Accrued pension cost $ 608 $ 302
========== ==========
</TABLE>
Net pension cost for 1997, 1996 and 1995 included the following
components:
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost - benefits earned during period $ 111 $ 116 $ --
Interest cost on projected benefit obligation 92 84 --
Net amortization and deferral 102 2 100
--------- --------- ---------
Net pension cost $ 305 $ 202 $ 100
========= ========= =========
</TABLE>
Assumptions used in the accounting as of December 31 were as follows:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Discount rate 7.0% 7.0%
Rates of increase in compensation levels 5.0% 5.0%
Expected long-term rate of return on assets 8.5% 8.5%
COLA increase 3.5% 3.5%
</TABLE>
c) Defined Contribution Pension Plan
The Company sponsors a defined contribution pension plan covering
substantially all of its employees. Contributions to the plan are discretionary
and amounted to $300,000, $361,000 and $83,000 in 1997, 1996 and 1995,
respectively.
F-22
<PAGE>
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
d) Directors Retirement Plan
In December, 1995 the Company adopted a Directors Retirement Plan which
provides for retirement benefits for all outside directors with five full
calendar years of service as of the later of age 70 or the date of actual
retirement as a director. There was no expense in 1997 or 1996 to provide for
past service costs.
e) Bonus Plans
The Company sponsors an Employee Profit Sharing Plan covering all
employees. The Company also sponsored a transitional plan covering key employees
in 1995 and adopted a Key Employee Incentive Plan in 1996 which replaced an
Income Growth Incentive Plan in 1994. These plans provide for the payment of
bonuses if certain performance objectives are obtained. Bonuses of $1.4 million,
$1.4 million and $380,000, respectively, were charged to operations in 1997,
1996 and 1995.
15- Acquisitions/Joint Venture
a) Applied Photonic Devices, Inc.
On May 23, 1995 the Company purchased all the outstanding capital stock
of Applied Photonic Devices, Inc. ("APD") for cash and common stock worth
approximately $3.9 million. The Company also retired approximately $600,000 of
APD bank debt. APD, located in Danielson, Connecticut, manufactures and sells
fiber optic cable and related components.
The purchase method of accounting was used and the results of
operations of APD are included in the consolidated financial statements from May
23, 1995.
Goodwill of $3.3 million resulted from the purchase and was being
amortized over 15 years. Amortization expense amounted to $217,000 and $127,000
in 1996 and 1995, respectively.
In December 1996, the Company announced the formation of General
Photonics, a 50-50 joint venture between the Company and General Cable, a former
subsidiary of Wassall plc. General Cable purchased certain assets of the
Company's optical fiber cable subsidiary, APD, for approximately $5.8 million
and then contributed them to General Photonics for a 50% equity interest. APD
contributed its remaining assets to General Photonics in exchange for its 50%
equity interest. The net assets, including goodwill, of General Photonics
totaled $10.2 million at December 31, 1996. The Company accounts for its
interest in the joint venture under the equity method and no gain or loss was
recognized as a result of this transaction.
F-23
<PAGE>
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
The following pro forma statement of operations for the year ended
December 31, 1996 presents the results of operations as if the Company had
entered into the joint venture as of January 1, 1996 (in thousands):
Statements of Operations (unaudited)
<TABLE>
1996
----
<S> <C>
Sales $ 51,413
Cost of Sales 31,977
--------
Gross Profit 19,436
Operating Expenses 14,632
Equity in Earnings of Joint Venture 530
Other Income 297
--------
Income Before Taxes 5,631
Income Tax Expense 1,915
--------
Net Income $ 3,716
========
Net income per Share of Common Stock $ .63
========
Weighted Average shares Outstanding 5,926
========
</TABLE>
16- Subsequent Event
On March 13, 1998 the Company announced the settlement of Corning's
obligation to purchase multimode optical fiber from the Company under a
multi-year supply contract the companies entered into on January 1, 1996.
Corning has terminated its purchase of multimode fiber from the Company in
exchange for a series of cash payments to the Company totaling $4.1 million .
17- Quarterly Financial Information (unaudited)
In thousands of dollars except per share data
Quarters First Second Third Fourth
- ----------------------- ------------------ ------------ ------------ ----------
1997
Net Sales $16,228 $15,881 $15,638 $14,310
Gross Profit 6,542 6,162 5,777 4,795
Net Income 1,122 1,330 1,151 1,239
Earnings per Common
Share-Basic .18 .19 .17 .18
Earnings per Common
Share-Diluted .17 .18 .16 .17
1996
Net Sales $13,473 $15,281 $16,161 $16,656
Gross Profit 4,756 5,318 6,220 6,081
Net Income 684 833 1,007 1,131
Earnings per Common
Share-Basic .13 .15 .19 .21
Earnings per Common
Share-Diluted .12 .14 .17 .18
F-24
<PAGE>
SPECTRAN CORPORATION
Schedule I - Valuation and Qualifying Accounts
For the Years Ended December 31, 1997, 1996 and 1995
Dollars in Thousands
<TABLE>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Balance at Additions Balance
Beginning Charged to at End
Description of Period Expenses Deductions of Period
For the Year Ended December 31, 1997:
<S> <C> <C> <C> <C>
Allowance - Net Deferred Tax Asset $ 630 $ -- $ 300 $ 330
============== =========== ============ =============
Allowance for Doubtful Accounts $ 218 $ 171 $ -- $ 389
============== =========== ============ =============
Allowance for Obsolete Inventory $ 273 $ 703 $ -- $ 976
============== =========== ============ =============
For the Year Ended December 31, 1996:
Allowance - Net Deferred Tax Asset $ 1,030 $ -- $ 400 $ 630
============== =========== ============= =============
Allowance for Doubtful Accounts $ 265 $ -- $ 47 $ 218
============== =========== ============ =============
Allowance for Obsolete Inventory $ 467 $ -- $ 194 $ 273
============== =========== ============ =============
For the Year Ended December 31, 1995:
Allowance - Net Deferred Tax Asset $ 1,467 $ -- $ 437 $ 1,030
============== =========== ============== =============
Allowance for Doubtful Accounts $ 124 $ 141 $ -- $ 265
============== =========== ============ =============
Allowance for Obsolete Inventory $ 556 $ -- $ 89 $ 467
============== =========== ============ =============
</TABLE>
F-25
<PAGE>
SPECTRAN CORPORATION
Exhibit 10.107
SETTLEMENT AGREEMENT
1. Background. Corning Incorporated ("Corning") and SpecTran Corporation
("SpecTran") are parties to a Three Year Mutimode Optical Fiber Supply
Contract, dated as of January 1, 1996 ("Supply Contract"), and both
SpecTran and Corning wish to revise and amend their understandings and
agreements under the Supply Contract as provided in this Settlement
Agreement.
2. Supply Agreement. The parties that (i) Corning will have no further
obligation to purchase optical fiber from SpecTran under the Supply
Contract, (ii) SpecTran will have no further claims of any nature against
Corning under the Supply Contract and fully releases Corning, its
successors and assigns from all claims of any nature under the Supply
Contract and (iii) Corning fully releases SpecTran, its successors and
assigns from all claims of any nature under the Supply Contract.
3. Payment to SpecTran. Corning will pay SpecTran the sum of $4.056 million
(Four Million Fifty Six Thousand U.S. Dollars and no cents) as follows:
Payment Due No Later Than Payment Amount
Within 5 Business Days of
the Date of this Agreement $1,014,000
May 15, 1998 $1,014,000
August 14, 1998 $1,014,000
November 13, 1998 $1,014,000
----------
Total $4,056,000
4. Public Announcement; Confidentiality. Neither Corning nor SpecTran shall
make any press release or other public statement concerning this Agreement
except in a form agreed to in writing by both parties, provided, however,
that neither party shall be precluded from making any disclosure concerning
this Agreement which is required to comply with law.
Corning Incorporated SpecTran Corporation
By: By:
Printed Name: Wendell P. Weeks Printed Name: Dr. Raymond E. Jaeger
Title: Sr. Vice President Title: Chairman & Chief Executive Officer
Optoelectronics
<PAGE>
SPECTRAN CORPORATION
EXHIBIT 21.0
SUBSIDIARIES
Name of Subsidiary Jurisdiction of Incorporation
SpecTran Communication Fiber Technologies, Inc. Delaware
SpecTran Specialty Optics Company Delaware
Applied Photonic Devices, Inc. Delaware
<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> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 445
<SECURITIES> 5,535
<RECEIVABLES> 9,011
<ALLOWANCES> 389
<INVENTORY> 9,666
<CURRENT-ASSETS> 27,400
<PP&E> 72,692
<DEPRECIATION> 17,283
<TOTAL-ASSETS> 92,105
<CURRENT-LIABILITIES> 11,346
<BONDS> 0
0
0
<COMMON> 700
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 92,105
<SALES> 62,057
<TOTAL-REVENUES> 62,057
<CGS> 38,781
<TOTAL-COSTS> 17,255
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 747
<INCOME-PRETAX> 6,966
<INCOME-TAX> 2,124
<INCOME-CONTINUING> 4,842
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,842
<EPS-PRIMARY> .72
<EPS-DILUTED> .68
</TABLE>
