UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission file number 0-12489
SPECTRAN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2729372
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 Hall Road, Sturbridge, Massachusetts 01566
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 347-2261
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No.
The number of shares of the registrant's Common Stock outstanding as of
October 31, 1999, was 7,194,430.
1
<PAGE>
PART I - FINANCIAL INFORMATION
SPECTRAN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands except per share amounts
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 57,635 $ 50,758 $ 14,668 $ 19,288
Cost of Sales 43,857 37,680 12,310 13,874
------ ------ ------- ------
Gross Profit 13,778 13,078 2,358 5,414
Selling and Administrative Expenses 10,184 10,260 3,435 3,608
Research and Development Costs 2,102 3,995 678 1,414
------ ------ ------- ------
Income (Loss) from Operations 1,492 (1,177) (1,755) 392
------ ------ -------- ------
Other Income (Expense):
Interest Income 209 181 82 34
Interest Expense (2,219) (938) (743) (462)
Other, Net (Note 5) (5) 2,526 (46) 943
------ ------ ------- ------
Other Income (Expense), net (2,015) 1,769 (707) 515
------ ------ ------- ------
Income (Loss) before Income Taxes and Equity in Joint Venture
(523) 592 (2,462) 907
Income Taxes (Benefit) (204) 231 (960) 354
------ ------ ------- ------
Net Income (Loss) Before Joint Venture (319) 361 (1,502) 553
------ ------ ------- ------
Joint Venture:
Loss from Equity in Joint Venture,
less applicable taxes (235) (375) -- (49)
Loss on Sale of Joint Venture, including
applicable tax expense of $947 (1,336) -- -- --
------ ------ -------- ------
Net Loss on Joint Venture (1,571) (375) -- (49)
------ ------ -------- ------
Net Income (Loss) $ (1,890) $ (14) $ (1,502) $ 504
====== ===== ======= ======
Net Income (Loss) per Common Share (Note 6):
Basic $ (0.27) $ (0.00) $ (0.21) $ 0.07
======= ======= ======= =======
Dilutive $ (0.27) $ (0.00) $ (0.21) $ 0.07
======= ======= ======= =======
Weighted Average Number of
Common Shares Outstanding:
Basic 7,040 7,003 7,111 7,004
====== ====== ======= ======
Dilutive 7,040 7,003 7,111 7,117
====== ====== ======= ======
</TABLE>
See accompanying notes to these consolidated financial statements.
2
<PAGE>
SPECTRAN CORPORATION
Consolidated Balance Sheets
Dollars in thousands
<TABLE>
September 30, 1999 December 31, 1998
------------------ -----------------
<CAPTION>
ASSETS
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 3,741 $ 1,690
Trade Accounts Receivable, net 11,672 12,568
Inventories (Note 2) 12,618 8,279
Income Taxes Receivable -- 644
Deferred Income Taxes 1,889 1,889
Prepaid Expenses and Other Current Assets 978 1,036
-------- --------
Total Current Assets 30,898 26,106
Investment in Joint Venture (Note 1) -- 3,239
Property, Plant and Equipment, net (Note 3) 66,969 68,495
Other Assets:
License Agreements, net 3,885 4,335
Goodwill, net 734 793
Other Long-term Assets 2,377 2,451
-------- --------
Total Other Assets 6,996 7,579
-------- --------
Total Assets $ 104,863 $ 105,419
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Maturities of Long-term Debt (Note 4) $ 35,000 $ 3,200
Current Portion of License Fees Payable 1,000 1,250
Accounts Payable 4,115 4,410
Income Taxes Payable (250) --
Accrued Defined Benefit Pension Liability 2,305 1,902
Deferred Income Taxes 478 478
Accrued Liabilities 4,476 3,317
-------- --------
Total Current Liabilities 47,124 14,557
Long-term Portion of License Fee Payable 1,750 2,750
Long-term Debt (Note 4) 30,800
Stockholders' Equity:
Common Stock, voting, $.10 par value; authorized
20,000,000 shares; outstanding 7,192,430 shares and
7,003,850 shares in 1999 and 1998, respectively 719 700
Common Stock, non-voting, $.10 par value;
authorized 250,000 shares; no shares outstanding -- --
Paid-in Capital 50,800 50,252
Retained Earnings 4,470 6,360
-------- --------
Total Stockholders' Equity 55,989 57,312
-------- --------
Total Liabilities & Stockholders' Equity $ 104,863 $ 105,419
======== ========
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
3
<PAGE>
SpecTran Corporation
Consolidated Statements of Cash Flows
Dollars in thousands
(unaudited)
<TABLE>
Nine Months Ended
September 30,
1999 1998
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss $ (1,890) $ (14)
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and Amortization 6,665 4,721
Loss on disposition of equipment 39 178
Changes in valuation accounts (762) 2,403
Loss in joint venture 235 375
Loss from Sale of Joint Venture 1,336 --
Change in other long-term assets 1 (322)
Changes in operating assets and liabilities:
Accounts receivable 1,135 (3,975)
Inventories (3,817) (1,314)
Prepaid expenses and other current assets 58 665
Income taxes payable/receivable (304) (1,084)
Accounts payable and accrued liabilities 18 255
------- -------
Net Cash Provided by Operating Activities 2,714 1,888
------- -------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (4,596) (17,561)
Proceeds from Sale of Joint Venture 2,367 --
Purchase of marketable securities -- (9,652)
Proceeds from sale/maturity of marketable securities -- 16,184
------- -------
Net Cash Used in Investing Activities (2,229) (11,029)
------- -------
Cash Flows from Financing Activities:
Borrowings of long-term debt 1000 10,000
Proceeds from exercise of stock options and warrants 566 30
------- -------
Net Cash Provided by Financing Activities 1,566 10,030
------- -------
Increase in Cash and Cash Equivalents 2,051 889
Cash and Cash Equivalents at Beginning of Period 1,690 445
------- -------
Cash and Cash Equivalents at End of Period $ 3,741 $ 1,334
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
SPECTRAN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The financial information for the three months and nine months ended
September 30, 1999 and 1998, is unaudited but reflects all adjustments
(consisting solely of normal recurring adjustments) which the Company considers
necessary for fair presentation of results for the interim periods. The results
of operations for the three months and nine months ended September 30, 1999 are
not necessarily indicative of the results for the entire year.
The consolidated results for the three months and nine months ended
September 30, 1999 and 1998, include the accounts of SpecTran Corporation (the
"Company") and its wholly-owned subsidiaries, SpecTran Communication Fiber
Technologies, Inc. ("SpecTran Communication"), SpecTran Specialty Optics Company
("SpecTran Specialty"), and Applied Photonic Devices, Inc. ("APD"), which held
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. The investment in
General Photonics is accounted for under the equity method of accounting
pursuant to which the Company records its 50% interest was 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.
On June 30, 1999, APD sold its fifty-percent interest in General
Photonics, LLC to BICC General Cable Industries, Inc. (formerly known as General
Cable Industries, Inc.). The purchase price paid by BICC General Cable
Industries, Inc. for APD's interest in General Photonics was $2.4 million. As
part of the transaction, General Photonics repaid a loan to SpecTran for
$325,000 and BICC General Cable Industries, Inc. purchased approximately 30,000
kilometers of optical fiber from SpecTran Communication.
These financial statements supplement, and should be read in
conjunction with, the Company's audited financial statements for the year ended
December 31, 1998, as contained in the Company's Form 10-K as filed with the
United States Securities and Exchange Commission.
2. INVENTORIES
Inventories, net consisted of (in thousands):
<TABLE>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Raw Materials $ 2,199 $ 3,096
Work in Process 4,289 1,277
Finished Goods 6,130 3,906
------ ------
$ 12,618 $ 8,279
======= ======
</TABLE>
5
<PAGE>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of (in thousands):
<TABLE>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Land and Land Improvements $ 978 $ 978
Buildings and Improvements 24,973 24,909
Machinery and Equipment 66,560 48,983
Construction in Progress 2,657 16,220
------ ------
95,168 91,090
Less Accumulated Depreciation and Amortization 28,199 22,595
------ ------
$ 66,969 $ 68,495
====== ======
</TABLE>
4. DEBT
Long-term debt consisted of (in thousands):
<TABLE>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Revolving Credit Loan Facility at the Lower of
Prime or LIBOR plus 1.5% $ 11,000 $ 10,000
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
------ ------
Subtotal 35,000 34,000
Less Current Portion 35,000 3,200
------ ------
Total Long-term debt Less Current Portion $ 0 $ 30,800
====== ======
</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 consisting of $16.0 million of 9.24% interest Series A Senior
Secured Notes due December 26, 2003, and $8.0 million of 9.39% interest Series B
Senior Secured Notes due December 26, 2004. The Company also has a $20.0 million
revolving credit agreement with its principal bank, maturing in April 2000. As
of June 30, 1999, the Company had borrowed $11.0 million against the revolving
agreement. This was reclassified to current portion of long-term debt as of
April 1, 1999. On August 31, 1999 Seattle Acquisition Inc., a wholly owned
subsidiary of Lucent Technologies Inc., purchased 60.9% of the outstanding
Common Stock of the Company (approximately 53.3% on a fully diluted basis)
pursuant to a tender offer that began on July 21, 1999. This transaction
constitutes a "Change of Control" as defined in the Note Purchase Agreement.
Pursuant to the Note Purchase Agreement, the Company offered to repay the senior
secured notes within 20 business days. On October 7, 1999 the senior secured
notes of $24,000,000 and on November 5, 1999 the outstanding balance of
$11,000,000 on the revolving agreement with the Company's principal were paid
off by Lucent Technologies on behalf of the Company. These notes have been
replaced with notes from the Company to Lucent at the same interest rates due on
December 2, 1999.
6
5. CORNING SETTLEMENT
On March 13, 1998 the Company and Corning Incorporated announced a
settlement of Corning's obligations to purchase multimode fiber from the Company
under a multiyear supply contract that the companies entered into on January 1,
1996. Corning terminated its purchases of multimode optical fiber from the
Company in exchange for a series of cash payments to the Company in 1998
totaling $4.056 million. For the three and nine month periods ended September
30, 1998 the Company recognized income on the settlement of approximately $900
thousand and $2.7 million , respectively.
6. COMPUTATION OF INCOME (LOSS) 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 prior periods' earnings per common share
amounts calculated under the previous method.
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 outstanding at nine and three months
ended September 30, 1999 and 1998.
Fully diluted earnings per common share has been replaced with diluted
earnings per common share. The diluted earnings per common share computation
include 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.
Exercise of options and warrants or conversion of convertible
securities is not assumed if the result would be antidilutive, such as when a
loss from continuing operations is reported.
(dollars and shares in thousands)
<TABLE>
Nine Months Ended Three Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income (Loss) per common share-basic
Income (Loss) applicable to common stock $ (1,890) $ (14) $(1,502) $ 504
====== ===== ====== =====
Weighted average shares outstanding 7,040 7,003 7,111 7,004
====== ===== ====== =====
Income (Loss) per common share-basic $ (.27) $ (.00) $ (.21) $ .07
====== ===== ====== =====
Income (Loss) per common share-diluted
Income (Loss) applicable to common share $ (1,890) $ (14) $(1,502) $ 504
====== ===== ====== =====
Weighted average shares outstanding 7,040 7,003 7,111 7,004
====== ===== ====== =====
Plus shares issuable on:
Exercise of dilutive options -- -- -- 13
------ ----- ----- -----
Weighted average shares outstanding
assuming conversion
Basic 7,040 7,003 7,111 7,117
===== ===== ====== =====
Diluted 7,040 7,003 7,111 7,117
===== ===== ====== =====
Income (Loss) per common share-diluted
Basic $ (.27) $ (.00) $ (.21) $ .07
===== ===== ======= =====
Diluted $ (.27) $ (.00) $ (.21) $ .07
===== ====== ======= =====
</TABLE>
Options to purchase 1,035,000 and 692,000 shares of common stock were
outstanding at the nine month period ending September 30, 1999 and 1998
respectively, but were not included in the computation of diluted loss per share
because the effect of including such options would be anti-dilutive.
7
7. BUSINESS SEGMENTS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an
Enterprise and Related Information" which has changed the method of reporting
information about its businesses. Based upon the criteria described in SFAS 131,
the Company now reports three business segments, Optical Fiber, Specialty
Products and Cable. All prior periods presented have been restated in accordance
with SFAS 131.
The Company conducts its operations through two business segments -
Optical Fiber and Specialty Products. A third segment, Cable, was sold in
December 1996 in conjunction with the formation of General Photonics. SpecTran
retained a 50% equity interest in General Photonics through the first half of
the year and sold its interest on June 30, 1999. SpecTran's share of General
Photonics income (loss) for 1998 and 1999 is reported on the equity method.
Optical Fiber develops, manufactures and markets multimode and
single-mode fiber for data communications and telecommunications applications.
Specialty Products develops, manufactures and markets multimode and
single-mode fiber and value-added fiber optic products for industrial,
transportation, communication, medical and geophysical applications.
Cable develops, manufactures and markets communications-grade fiber
optic cable primarily for the customer premises market.
Summarized financial information by business segment for the three and
nine months ended September 30 is as follows (in thousands):
<TABLE>
REVENUES
Nine Months ended September 30, Three Months Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Optical Fiber (see A) $38,177 $36,449 $ 8,744 $14,288
Specialty Products 19,458 14,309 5,924 5,000
------- ------ ------ ------
$57,635 $50,758 $14,668 $19,288
======= ====== ====== ======
</TABLE>
<TABLE>
INCOME (LOSS) FROM OPERATIONS
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Optical Fiber $ 2,548 $ 4,409 $ (1,038) $ 2,879
Specialty Products 4,615 (1,853) 1,861 (1,050)
Corporate (5,671) (3,733) (2,578) (1,437)
------ ------ ------- -------
$ 1,492 $ (1,177) $ (1,755) $ 392
======= ====== ====== =======
</TABLE>
<TABLE>
ASSETS
September 30, December 31,
1999 1998
<S> <C> <C>
Optical Fiber $ 73,772 $ 72,447
Specialty Products 19,675 19,953
Cable (Investment in JV) -- 3,458
Corporate 11,416 9,561
------- -------
$ 104,863 $ 105,419
======= =======
</TABLE>
A) Due to a change in accounting treatment of certain fiber sales, sales
and cost of sales for the third quarter and September year to date 1998 were
reduced by $775,000 and $1,564,000 respectively. This change had no effect on
previously reported net income or earnings per share. These changes related to
an agreement to supply Lucent with all of a certain product produced by the
Company with a provision permitting Lucent to require the Company to purchase
that same product should Lucent not be able to use all of that product. During
the first three quarters of 1998, the Company purchased that product back from
Lucent and sold it to another customer. During these three quarters, the Company
had booked as sales the sale both to Lucent and the second customer and had
booked as costs both the costs of producing the product and the cost of
purchasing the product back from Lucent. In reviewing this treatment at year
end, it was determined that better accounting treatment would be to account for
this as one sale to the second customer with a concomitant cost of sale. As a
result, sales and costs of sales for the first three quarters were reduced as
mentioned above which did not affect net income, gross margin or earnings per
share. This agreement did not extend beyond 1999.
8
<PAGE>
8. ACQUISITION OF THE COMPANY BY LUCENT
On July 15, 1999 SpecTran Corporation ("SpecTran") entered into an
Agreement of Merger (the "Agreement of Merger") with Lucent Technologies Inc., a
Delaware corporation ("Lucent") and its wholly-owned subsidiary Seattle
Acquisition Inc., a Delaware corporation ("Purchaser"). Pursuant to the
Agreement of Merger, Purchaser made a tender offer (the "Offer") disclosed in
the Tender Offer Statement on Schedule 14D-1 dated July 21, 1999 (as amended or
supplemented, the "Schedule 14D-1") filed with the Securities and Exchange
Commission (the "Commission") by Lucent and the Purchaser to purchase all
outstanding shares of the common stock, par value $.10 per share of SpecTran
(the "Shares") at a price of $9.00 per share, net to the seller in cash, without
interest thereon (the "Offer Price"), upon the terms and subject to the
conditions set forth in the Offer to Purchase (the "Offer to Purchase") dated
July 21, 1999, a copy of which is filed as an Exhibit to the Company's Schedule
14D-9 dated July 21, 1999 and filed with the Commission (as amended or
supplemented, the "Schedule 14D-9"). The Agreement of Merger provides that,
among other things, as soon as practicable after the purchase of Shares pursuant
to the Offer and the satisfaction of the other conditions set forth in the
Agreement of Merger and in accordance with the relevant provisions of the
General Corporation Law of the State of Delaware ("Delaware Law" or the "DGCL"),
the Purchaser will be merged with the Company (the "Merger"). Following
consummation of the Merger, the Company will continue as the surviving
corporation (the "Surviving Corporation") and will become a wholly owned
subsidiary of Lucent. At the effective time of the Merger (the "Effective
Time"), each Share issued and outstanding immediately prior to the Effective
Time (other than Shares (i) owned or held in treasury by the Company, (ii) owned
by the Purchaser or Parent, (iii) remaining outstanding held by any subsidiary
of the Company or Parent or (iv) owned by stockholders who shall have demanded
properly and perfected appraisal rights, if any, under Delaware Law) will be
canceled and converted automatically into the right to receive the Offer Price
(the "Merger Consideration"). The Agreement of Merger is summarized in Section
12 of the Offer to Purchase. A copy of the Agreement of Merger is filed as an
Exhibit to the Schedule 14D-9 and is hereby incorporated by reference herein.
In addition, attached to the Schedule 14D-9 as Annex A is the
Information Statement of the Company (the "Information Statement") which
describes, among other things, certain contracts, agreements, arrangements or
understandings known to the Company between the Company or its affiliates and
(i) certain of the Company's executive officers, directors or affiliates or (ii)
certain of Parent's executive officers, directors or affiliates. The Information
Statement was furnished to the Company's stockholders in connection with the
Purchaser's right (after consummation of the Offer) to designate persons to be
appointed to the Board of Directors of the Company other than at a meeting of
the stockholders of the Company. The Information Statement is hereby
incorporated by reference herein
The Board of Directors of SpecTran has unanimously approved the Offer
and the Merger and determined that the terms of the Offer and the Merger are
fair to, and in the best interests of the stockholders of SpecTran and
unanimously recommends that the stockholders of SpecTran accept the Offer and
tender their Shares to the Purchaser pursuant to the terms of the Offer.
As of August 4, 1999, the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, relating to the purchase of the
Shares pursuant to the Offer had expired.
On September 1, 1999 Lucent announced that the Offer expired at
midnight on August 31, 1999, and that Lucent had accepted tendered Shares
representing about 60.9% of the outstanding Shares (approximately 53.3% on a
fully diluted basis), thereby meeting the minimum condition for the Offer that
at least 50% of the Shares on a fully diluted basis be tendered.
9
<PAGE>
9. SUBSEQUENT EVENTS
In October 1999, Lucent agreed to purchase and the Company agreed to
supply 1 million kilometers of depressed clad single-mode optical fiber from the
Company in FY 2000. Lucent granted the Company a royalty free technology license
for the fiber quantities to be delivered to Lucent. In order to provide the
people and production assets necessary to deliver this size order coupled with
issues concerning yield, process uncertainties and substantial additional costs
involved in the HVD process, the Company has suspended further work on the HVD
process at this time pending further evaluation.
10. CONTINGENCIES
On November 6, 1998, the Company announced that it would contest a
complaint filed in the United States District Court in Boston, MA on October 2,
1998, purportedly as a class action suit. Titled Cruise v. Cannon, et al., the
complaint alleges that the Company and three of its current or former officers
and directors violated securities laws by misrepresenting the Company's
financial condition and financial results during 1998. The suit purports to be a
class action on behalf of all individuals who purchased the Company's stock on
the open market from February 25, 1998 to July 17, 1998. The suit alleges, among
other things, that there were public misrepresentations or failures to disclose
material facts during that period which allegedly artificially inflated the
price of the Company's common stock in the marketplace. The complaint seeks an
undisclosed amount of compensatory damages and costs and expenses, including
plaintiff's attorney's fees and such further relief as the Court may deem just
and proper. The Company believes the action is totally without merit, believes
that it has highly meritorious defenses and it intends to defend itself
vigorously.
After the announcement of the Agreement of Merger by the Company and
Lucent on July 15, 1999, two putative class action suits relating to the Merger
were filed in the Court of Chancery for the state of Delaware: Chase v. Harrison
et al., C.A. No.17312-NC and Airmont Associates et al., v. SpecTran Corporation,
et. al., C.A. No. 17314-NC.
The lawsuits were filed by plaintiffs claiming to be stockholders of
the Company, purportedly on behalf of all the company's stockholders, against
the Company, members of the board of directors of the Company and Lucent. The
plaintiffs in both lawsuits allege, among other things, that the terms of the
proposed Merger were not the result of an auction process or active market
check, that $9.00 per share offered by Lucent is inadequate, and that the
Company's directors breached their fiduciary duties to the stockholders of the
Company in connection with the Agreement of Merger. Both lawsuits seek to have
the Merger enjoined, or if the Merger is completed, to have it rescinded and to
recover unspecified damages, fees and expenses. The Company and Lucent intend to
vigorously oppose these lawsuits.
10
<PAGE>
On July 29, 1999, the plaintiff in Chase v. Harrison, et al., Civil
Action No. 17312-NC, filed an Amended Class Action Complaint (the "Amended
Complaint") in Delaware Chancery Court. In the Amended Complaint, the plaintiff
alleges, among other things, that (1) the proposed purchase price is inadequate;
(2) the Company's Solicitation/Recommendation Statement on Schedule 14D-9 is
misleading and omits material information in that it fails to disclose (a) the
Company's financial results for the second fiscal quarter ended June 30, 1999,
(b) why the Company's projected financial results, as announced by the Company
on May 28, 1999, did not warrant that a substantial premium be paid for the
Company relative to the existing market price, (c) information concerning the
identity of other bidders for the Company and the terms of any competing bids or
expressions of interest, (d) why the Company did not wait until after its third
quarter ended September 30, 1999 financial results were available to determine
whether Company C would make an offer to acquire the Company, (e) the reasons
for Lazard Freres & Co. LLC's determination that the Merger was "fair", (f) the
total amount of benefits that each of the Company's executive officers and
directors will realize from the Merger, and (g) the value of the Company to
Lucent and the benefits Lucent will derive from the Merger, including the
equivalent amount that Lucent would have to spend to build the manufacturing
capacity that it will be buying from the Company and that Lucent had approved a
higher purchase price; and (3) the board of directors of the Company breached
its fiduciary duty to the stockholders of the Company to exercise due care,
loyalty and candor. The Amended Complaint further alleges that Lucent aided and
abetted the breach of fiduciary duty by the individual defendants. The foregoing
is qualified in its entirety by reference to the Amended Complaint, a copy of
which is filed as an exhibit to the Company's Amendment No. 1 to Schedule 14D-9,
dated August 4, 1999 and filed with the Commission on August 5, 1999, and is
incorporated by reference herein.
Concurrent with the filing of the Amended Complaint, the plaintiff in
Chase v. Harrison, et al. petitioned the Delaware Chancery Court for expedited
discovery and the scheduling of a hearing on a preliminary injunction. A
telephone conference call was held by the Delaware Chancery Court on July 30,
1999, at which time the court declined to permit expedited discovery and
declined to schedule a hearing on a preliminary injunction. Instead, the court
scheduled a hearing on August 13, 1999 to hear arguments as to whether an order
temporarily restraining consummation of the Merger should be issued. This
scheduled hearing was subsequently canceled when, by letter dated August 2,
1999, plaintiff's counsel withdrew plaintiff's application for a temporary
restraining order.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 1999 Compared to Three and Nine
Months Ended September 30, 1998
Third quarter revenues were $14.7 million down 24% from revenues of
$19.3 million for the same period last year. Operating loss was $(1.8) million,
down from an operating income of $0.4 million incurred during the same quarter
ended in 1998. These decreases in both revenue and operating income were due
primarily to a significant reduction in orders for communication fiber in the
third quarter related, at least in part, to certain customers reluctance to
purchase in light of the Company's anticipated merger with Lucent. Operating
income was also negatively impacted by recurring yield issues associated with
bringing the single mode HVD process into production after the early July one
week plant shutdown.
Net income (loss), before Joint Venture, for the third quarter and nine
months ended September 30, 1999 were $(1.5) million and $(0.3) million
respectively. Both 1999 periods were down from income of $0.6 million and $0.3
million for the same periods a year ago. The loss incurred from the Joint
Venture for the nine month period ended September 30, 1999 was $1.6 million, and
was primarily attributable to the loss and associated tax expense incurred from
the sale of the Company's Joint Venture with General Cable, General Photonics,
which occurred in the second quarter. The Company's overall net loss for the
quarter was $1.5 million or $.21 per share, compared with a net income of $0.5
million or $.07 per share for the same period last year.
Revenues for the first nine months of 1999 were $57.6 million, up 14%
from $50.8 million recognized during the same period for 1998. Revenue and net
income (loss) from operations versus a year ago reflects the losses incurred as
a result of the sale of the Company's interest in General Photonics, a decrease
in non-recurring income recorded in 1998 from the settlement in the multi-year
Corning supply contract and the increase of interest expense in 1999 associated
with servicing the Company's debt. For the nine months ended September 30, 1999
SpecTran incurred a net loss of $1.9 million or $.27 per share, compared to a
net loss of $14,000 or $.00 per share for the first nine months of 1998.
Results of Operations
The following table sets forth, for the periods indicated, certain
financial data as a percentage of net sales:
<TABLE>
Nine Months Ended September 30, Three Months Ended September 30,
--------------------------------- ----------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 76.1 74.2 83.9 71.9
------ ------ ------- -------
Gross Profit 23.9 25.8 16.1 28.1
Selling and Administrative Expenses 17.7 20.2 23.4 18.7
Research and Development Costs 3.6 7.9 4.7 7.4
------ ------ ------- -------
Income (Loss) from Operations 2.6 (2.3) (12.0) 2.0
Other Income (Expense), net (3.5) 3.5 (4.8) 2.7
------ ------ ------- -------
Income (Loss) from Operations before Income
Taxes and Joint Venture (0.9) 1.2 (16.8) 4.7
Income Taxes (Benefits) (0.3) 0.5 (6.6) 1.8
------ ------ ------- -------
Income (Loss) before Joint Venture (0.6) 0.7 (10.2) 2.9
Net Loss on Joint Venture (0.3) (0.7) 0.0 (0.3)
------ ------- ------- -------
Net Income (Loss) (0.3%) 0.0% (10.2%) 2.6%
======= ======= ======== ========
</TABLE>
12
<PAGE>
Net Sales
Net sales of $14.7 million and $57.6 million for the three months and
nine months ended September 30, 1999, was lower by $4.6 million, or 24% and
higher by $6.9 million, or 14% compared to the respective periods of September
30, 1998. Although third quarter revenues decreased at SpecTran Communication
due to a significant decline in orders for communications fiber related, at
least in part, to certain customers reluctance to purchase in light of the
Company's anticipated merger with Lucent, results for the nine months ended
September 30, 1999 still exceeded 1998 year-to-date volume because of a slowing
of price erosion coupled with increased capacity availability due to production
capacity expansion. SpecTran Specialty continued to benefit from strong market
demand.
Gross Profit
Gross profit of $2.4 million and $13.8 million for the three months and
nine months ended September 30, 1999 was lower by $3.1 million, or 56% and
higher by $700,000 or 5% compared to their respective periods in 1998. As a
percentage of net sales the gross profit decreased to 16% from 28% for the
quarter and to 24% from 26% for the nine months as compared to 1998 results.
The third quarter 1999 margin decrease compared to the same 1998 period
is primarily due to lower cost absorption related to the lower volume coupled
with the negative impact of recurring yield issues associated with bringing the
single mode HVD process into production after the early July one week plant
shutdown.
Selling and Administration
Selling and administration expenses were lower by $173,000 for the
quarter and essentially flat for the nine months as compared to prior year
results. As a percentage of net sales, selling and administrative expenses
increased to 23% from 19% for the quarter and decreased to 18% from 20% for the
nine months as compared to the same periods a year ago.
Research and Development
Research and development costs for the three and nine month periods
ended September 30, 1999 decreased from the same period a year ago by $736,000
or 52% and $1.9 million or 47%, respectively. Higher levels of research and
development resources were deployed during 1998 in bringing the HVD production
process on-line, which are costs not recurring in 1999. This decrease is also
attributable to the realignment of normal production support engineering
expenses to cost of sales from research and development. As products progress
beyond the research and development stage into commercial manufacture, expenses
that previously were categorized as research and development costs are
reclassified as production support and become part of costs of goods sold. The
impact on operating margins was an initial decrease in operating margins at
SpecTran Specialty of 8 percentage points, which operating margins should return
to prior levels as more of these new products are sold. The Company is
continuing its initiative to improve manufacturing productivity and products
performance in both multimode and single-mode product lines while developing new
performance fiber products and alternative process technologies.
13
<PAGE>
Other Income (Expense), Net
Other Income (Expense), Net was lower by $1.2 million and $3.8 million for
the three and nine months ended September 30, 1999 as compared to the same
periods for 1998. This was attributable to the absence of approximately $0.9
million and $2.7 million, respectively, of other income from the Company's 1998
settlement of a multi-year supply contract with Corning, which is non-recurring
for 1999. These payments were recognized by the Company as Other Income and
recorded during the periods in which the payments were received. This settlement
adversely affected Net Sales, but recorded Other Income, which offset in part,
some of the ongoing fixed cost associated with the initial agreement. The
remainder of the differences within Other, Net are attributable to a series of
miscellaneous adjustments including a loss on the sale of fixed assets, loan
fees and an adjustment for the fair market value of the supplemental retirement
programs. Additionally, the Company's Interest Expense increased $281,000 or 61%
and $1.3 million or 136% for the three and nine months ended September 1999 as
compared with the same periods for 1998. The Company's Interest Expense is net
of capitalized interest that is associated with the Company's expansion programs
which offsets interest expense on debt. The Company's Interest Expense on its
long-term debt decreased for the quarter by $32,000 and increased for the year
by $185,000. Capitalized interest decreased by $314,000 and $1.1 million,
respectively. Interest income increased for the quarter by $48,000 and $28,000
for the nine months period.
Income Taxes
A tax benefit of 39.0% was provided for on the Company's operations for the
three months and nine months ended September 1999.
(Loss) From Equity in Joint Venture
The Company realized losses of $235,000 the nine months ended September 30,
1999. This compares with a loss of $49,000 and $375,000 for the three and nine
months ended September 30, 1998.
Net Income
The net loss for the three months and nine months ended September 30,
1999 was $1.5 million and $1.9 million, respectively as compared with a profit
of $504,000 and a loss of $14,000 for the same periods of 1998. The net loss for
1999 was primarily attributable to the tax loss associated with the Company's
sale of its interest in General Photonics during the second quarter of 1999. The
three months and nine months ended September 30, 1999 was also impacted by a
significant reduction in orders for communication fiber coupled with the
negative impact related to the recurring yield issues associated with bringing
the single mode HVD process into production after the early July one week plant
shutdown.
Liquidity and Capital Resources
As of September 30, 1999 the Company had approximately $3.7 million in
cash and cash equivalents.
The Company's working capital position at September 30, 1999 was
$(16.2) million with a current ratio of .66 to 1. This is principally due to the
reclassification of $11.0 million revolving credit balance and $20.8 million of
notes from long-term debt to current.
During the first nine months of 1999 the Company generated $2.7 million
in positive cash flow from operating activities and borrowed $1.0 million under
its revolving credit agreement. The Company invested $4.6 million in the
acquisition of machinery and equipment.
The Company's completed capacity expansion at SpecTran Specialty
increased its capacity by more than 50% permitting an increase in sales at
SpecTran Specialty that, together with the productivity and management
improvements, are expected to improve gross margins. The Company's capacity
expansion at SpecTran Communication is not yet fully operational. Its impact on
future operating results, when it is fully operational, will depend upon, among
other things, the demand for the Company's standard communication fibers and the
price customers are willing to pay for them.
In October 1999, Lucent agreed to purchase and the Company agreed to
supply 1 million kilometers of depressed clad single-mode optical fiber from the
Company in FY 2000. Lucent granted the Company a royalty free technology license
for the fiber quantities to be delivered to Lucent. In order to provide the
people and production assets necessary to deliver this size order coupled with
issues concerning yield, process uncertainties and substantial additional costs
involved in the HVD process, the Company has suspended further work on the HVD
process at this time pending further evaluation.
The Company intends to continue to finance its capital and operational
needs for the remainder of the year through a combination of cash flow from
operations and borrowings from Lucent. On July 15, 1999 the Company entered into
an Agreement to Merger with Lucent Technologies, Inc. which if consummated will
satisfy the Company's long-term cash requirements.
The company had a $20.0 million revolving credit agreement with it
principal bank. As of the third quarter of 1999, the company had borrowed $11.0
million against that revolving credit agreement. The interest rate on this
credit agreement was at Libor plus 150 basis points. The $11.0 million was
essentially broken into three, 90 day increments, with one 90 day increment
renewing every month. The average rate for the $11.0 million was approximately
6.8%.
The remaining debt of $24.0 million was segregated as follows:
$16.0 million Series A Senior Secured Notes 9.24%
8.0 million Series B Senior Secured Notes 9.39%
On August 31, 1999 Seattle Acquisition Inc., a wholly owned subsidiary
of Lucent Technologies Inc., purchased 60.9% of the outstanding Common Stock of
the Company (approximately 53.3% on a fully diluted basis) pursuant to a tender
offer that began on July 21, 1999. This transaction constitutes a "Change of
Control" as defined in the Note Purchase Agreement. Pursuant to the Note
Purchase Agreement, SpecTran offered to repay the senior secured notes within 20
business days. On October 7, 1999 the senior secured notes of $24,000,000 and on
November 5, 1999 the outstanding balance of $11,000,000 on the revolving
agreement with the Company's principal were paid off by Lucent Technologies in
behalf of SpecTran. The former notes have been subsequently replaced with
SpecTran/Lucent notes with the same interest rates and due on December 2, 1999.
14
<PAGE>
The Year 2000 Issue
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's information technology systems (which the Company relies on to monitor
and manage its operations, accounting, sales and administrative functions), such
as computers, servers, networks, and software ("IT Systems") and other systems
that use embedded microchip technology ("Non-IT Systems") that are date
sensitive may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in system failure or miscalculations causing disruption
of operations. Similarly, the date-sensitive IT Systems and Non-IT Systems of
third party suppliers or customers with whom the Company has material
relationships could experience similar malfunctions which could, in turn, have a
material adverse impact on the Company.
The Company has completed an enterprise-wide assessment of all mission
critical IT Systems and Non-IT Systems to evaluate the state of its preparedness
for the Year 2000. The Company has established teams by business unit to address
the Year 2000 issue. The Company believes that it has effectively completed its
remediation efforts for the Year 2000, with the exception of one piece of
production equipment, which the Company believes will be remediated before the
end of this year. A significant portion of production equipment was replaced or
upgraded as part of the recent capacity expansion at both facilities and such
replacements and upgrades are Year 2000 compliant. The Company has revised its
estimate for Year 2000 spending down to approximately $400,000 from $800,000.
This includes $275,000 for software, which will be expensed in 1999. The costs
of the project and the date the Company plans to complete Year 2000
modifications are based on management's best estimates. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans. The Company has completed development of
contingency plans in case its remediation efforts are unsuccessful. The
contingency planning was performed in conjunction with the implementation and
testing of the critical business systems.
The Company has initiated formal communications with a majority of its
significant customers and suppliers to determine their plans to address the Year
2000 issue. While the Company expects a successful resolution of all issues
there can be no guarantee that the systems of other companies on which the
Company relies will be completed in a timely manner or that these issues would
not have a material adverse effect on the Company.
15
<PAGE>
Other Events
On July 15, 1999 SpecTran Corporation ("SpecTran") entered into an
Agreement of Merger (the "Agreement of Merger") with Lucent Technologies Inc., a
Delaware corporation ("Lucent") and its wholly-owned subsidiary Seattle
Acquisition Inc., a Delaware corporation ("Purchaser"). Pursuant to the
Agreement of Merger, Purchaser made a tender offer (the "Offer") disclosed in
the Tender Offer Statement on Schedule 14D-1 dated July 21, 1999 (as amended or
supplemented, the "Schedule 14D-1") filed with the Securities and Exchange
Commission (the "Commission") by Lucent and the Purchaser to purchase all
outstanding shares of the common stock, par value $.10 per share of SpecTran
(the "Shares") at a price of $9.00 per share, net to the seller in cash, without
interest thereon (the "Offer Price"), upon the terms and subject to the
conditions set forth in the Offer to Purchase (the "Offer to Purchase") dated
July 21, 1999, a copy of which is filed as an Exhibit to the Company's Schedule
14D-9 dated July 21, 1999 and filed with the Commission (as amended or
supplemented, the "Schedule 14D-9"). The Agreement of Merger provides that,
among other things, as soon as practicable after the purchase of Shares pursuant
to the Offer and the satisfaction of the other conditions set forth in the
Agreement of Merger and in accordance with the relevant provisions of the
General Corporation Law of the State of Delaware ("Delaware Law" or the "DGCL"),
the Purchaser will be merged with the Company (the "Merger"). Following
consummation of the Merger, the Company will continue as the surviving
corporation (the "Surviving Corporation") and will become a wholly owned
subsidiary of Lucent. At the effective time of the Merger (the "Effective
Time"), each Share issued and outstanding immediately prior to the Effective
Time (other than Shares (i) owned or held in treasury by the Company, (ii) owned
by the Purchaser or Parent, (iii) remaining outstanding held by any subsidiary
of the Company or Parent or (iv) owned by stockholders who shall have demanded
properly and perfected appraisal rights, if any, under Delaware Law) will be
canceled and converted automatically into the right to receive the Offer Price
(the "Merger Consideration"). The Agreement of Merger is summarized in Section
12 of the Offer to Purchase. A copy of the Agreement of Merger is filed as an
Exhibit to the Schedule 14D-9 and is hereby incorporated by reference herein.
16
<PAGE>
In addition, attached to the Schedule 14D-9 as Annex A is the
Information Statement of the Company (the "Information Statement") which
describes, among other things, certain contracts, agreements, arrangements or
understandings known to the Company between the Company or its affiliates and
(i) certain of the Company's executive officers, directors or affiliates or (ii)
certain of Parent's executive officers, directors or affiliates. The Information
Statement was furnished to the Company's stockholders in connection with the
Purchaser's right (after consummation of the Offer) to designate persons to be
appointed to the Board of Directors of the Company other than at a meeting of
the stockholders of the Company. The Information Statement is hereby
incorporated by reference herein
The Board of Directors of SpecTran has unanimously approved the Offer
and the Merger and determined that the terms of the Offer and the Merger are
fair to, and in the best interests of the stockholders of SpecTran and
unanimously recommends that the stockholders of SpecTran accept the Offer and
tender their Shares to the Purchaser pursuant to the terms of the Offer.
As of August 4, 1999, the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, relating to the purchase of the
Shares pursuant to the Offer had expired.
On September 1, 1999 Lucent announced that the Offer expired at
midnight on August 31, 1999, and that Lucent had accepted tendered Shares
representing about 60.9% of the outstanding Shares (approximately 53.3% on a
fully diluted basis), thereby meeting the minimum condition for the Offer that
at least 50% of the Shares on a fully diluted basis be tendered.
Subsequent Events
In October 1999, Lucent agreed to purchase and the Company agreed to
supply 1 million kilometers of depressed clad single-mode optical fiber from the
Company in FY 2000. Lucent granted the Company a royalty free technology license
for the fiber quantities to be delivered to Lucent. In order to provide the
people and production assets necessary to deliver this size order coupled with
issues concerning yield, process uncertainties and substantial additional costs
involved in the HVD process, the Company has suspended further work on the HVD
process at this time pending further evaluation.
17
<PAGE>
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as "derivatives") and for
hedging activities. This statement requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The statement also sets forth the criteria for
determining whether a derivative may be specifically designated as a hedge of a
particular exposure with the intent of measuring the effectiveness of the hedge
in the statement of operations.
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities, which amended the
effective date of SFAS No. 133. SFAS No. 137 is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company is currently
evaluating SFAS No. 133 and has not determined the impact on the Company's
Financial Statements.
Forward Looking Statements
This document contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities and Exchange Act of 1934, as amended, which are intended
to be covered by the safe harbors created thereby. Investors are cautioned that
all forward-looking statements involve risks and uncertainties that may cause
results to differ materially from expectations, including without limitation,
the ability of the Company to market and develop its products, general economic
conditions and competitive conditions in markets served by the Company.
Forward-looking statements include, but are not limited to, global economic
conditions, product demand, competitive products and pricing, manufacturing
efficiencies, cost reductions, manufacturing capacity, facility expansions and
new plant start up cost, the rate of technology change and other risks. Although
the Company believes that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions could be
inaccurate, and therefore, there can be no assurance that the forward-looking
statements included in this filing will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 10, "Contingencies," of Notes to Consolidated Financial
Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
Current Report on Form 8-K dated July 14, 1999 with Exhibit
2.1 - Agreement among BICC General Cable Industries, Inc.,
Applied Photonic Devices, General Photonics, LLC, SpecTran
Corporation and General Cable Corporation dated June 30, 1999.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPECTRAN CORPORATION
(Registrant)
Date: November 15, 1999 BY: /s/ Charles B. Harrison
------------------------------------
Charles B. Harrison
President,
Chief Executive Officer
(Acting Principal Financial Officer)
Date: November 15, 1999 BY: /s/ George J. Roberts
-----------------------------------
George J. Roberts
Senior Vice President,
Chief Financial Officer and
Chief Accounting Officer
20
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