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 June 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
July 30, 1999, was 7,042,430.
1
<PAGE>
Spectran Corporation
Consolidated Statements of Operations
In thousands except per share amounts
(unaudited)
<TABLE>
Six Months Ended Three Months Ended
June 30 June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net Sales $ 42,966 $ 31,470 $ 22,587 $ 16,358
Cost of Sales 31,547 23,806 16,489 13,805
--------- --------- --------- ---------
Gross Profit 11,419 7,664 6,098 2,553
Selling and Administrative Expenses 6,749 6,652 3,666 3,518
Research and Development Costs 1,424 2,581 669 1,406
--------- --------- --------- ---------
Income (Loss) from Operations 3,246 (1,569) 1,763 (2,371)
--------- --------- --------- --------
Other Income (Expense):
Interest Income 126 147 98 33
Interest Expense (1,475) (476) (739) (352)
Other, Net (Note 5) 41 1,583 53 741
--------- --------- --------- ---------
Other Income (Expense), net (1,308) 1,254 (588) 422
--------- --------- --------- ---------
Income (Loss) before Income Taxes and Equity in Joint Venture 1,938 (315) 1,175 (1,949)
Income Taxes (Benefit) 756 (136) 458 (775)
--------- --------- --------- ---------
Net Income (Loss) Before Joint Venture 1,182 (179) 717 (1,174)
--------- --------- --------- ---------
Joint Venture:
Loss from Equity in Joint Venture, (235) (339) (2) (209)
less applicable taxes
Loss on Sale of Joint Venture, including
applicable tax expense of $947 (1336) (1,336)
--------- --------- ---------
Net Loss on Joint Venture (1,571) (339) (1,338) (209)
--------- --------- --------- ---------
Net Loss $ (389) $ (518) $ (621) $ (1,383)
========= ========= ========= =========
Net Loss per Common Share (Note 6):
Basic and Dilutive $ (0.06) $ (0.07) $ (0.09) $ (0.20)
========= ======== ========== ==========
Weighted Average Number of
Common Shares Outstanding:
Basic and Dilutive 7,004 7,002 7,005 7,002
========= ========= ========= =========
</TABLE>
See accompanying notes to these consolidated financial statements.
2
<PAGE>
Spectran Corporation
Consolidated Balance Sheets
Dollars in thousands
<TABLE>
June 30, 1999 December 31, 1998
------------- -----------------
(unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 7,483 $ 1,690
Trade Accounts Receivable, net 14,861 12,568
Inventories (Note 2) 8,346 8,279
Income Taxes Receivable -- 644
Deferred Income Taxes 1,889 1,889
Prepaid Expenses and Other Current Assets 798 1,036
---------- ----------
Total Current Assets 33,377 26,106
Investment in Joint Venture (Note 1) -- 3,239
Property, Plant and Equipment, net (Note 3) 67,631 68,495
Other Assets:
License Agreements, net 4,035 4,335
Goodwill, net 754 793
Other Long-term Assets 2,413 2,451
---------- ----------
Total Other Assets 7,202 7,579
---------- ----------
Total Assets $ 108,210 $ 105,419
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Maturities of Long-term Debt (Note 4) $ 14,200 $ 3,200
Current Portion of License Fees Payable 1,000 1,250
Accounts Payable 4,755 4,410
Income Taxes Payable 1,652 --
Accrued Defined Benefit Pension Liability 2,322 1,902
Deferred Income Taxes 478 478
Accrued Liabilities 3,827 3,317
---------- ----------
Total Current Liabilities 28,234 14,557
Long-term Portion of License Fee Payable 2,250 2,750
Long-term Debt (Note 4) 20,800 30,800
Stockholders' Equity:
Common Stock, voting, $.10 par value; authorized
20,000,000 shares; outstanding 7,004,850 shares and
7,003,850 shares in 1999 and 1998, respectively 700 700
Common Stock, non-voting, $.10 par value;
authorized 250,000 shares; no shares outstanding -- --
Paid-in Capital 50,255 50,252
Retained Earnings 5,971 6,360
---------- -----------
Total Stockholders' Equity 56,927 57,312
---------- ----------
Total Liabilities & Stockholders' Equity $ 108,210 $ 105,419
========== ==========
</TABLE>
See accompanying notes to these consolidated financial statements.
3
<PAGE>
Spectran Corporation
Consolidated Statements of Cash Flows
Dollars in thousands
(unaudited)
<TABLE>
Six Months Ended
1999 1998
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss $ (389) $ (518)
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and Amortization 4,205 2,972
Gain on sale of marketable securities -- --
Loss on disposition of equipment 27 204
Changes in valuation accounts (240) 5,022
Loss in joint venture 235 339
Loss from Sale of Joint Venture 1,336 --
Change in other long-term assets (35) 1
Changes in operating assets and liabilities:
Accounts receivable (2,151) (2,927)
Inventories 30 (5,283)
Prepaid expenses and other current assets 238 (697)
Income taxes payable/receivable 1,597 (1,401)
Accounts payable and accrued liabilities 525 1,111
--------- ---------
Net Cash Provided by (Used in) Operating Activities 5,378 (1,177)
--------- ---------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (2,956) (13,024)
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 (589) (6,492)
--------- ---------
Cash Flows from Financing Activities:
Borrowings of long-term debt 1,000 10,000
Proceeds from exercise of stock options and warrants 4 21
--------- ---------
Net Cash Provided by Financing Activities 1,004 10,021
--------- ------
Increase in Cash and Cash Equivalents 5,793 2,352
Cash and Cash Equivalents at Beginning of Period 1,690 445
--------- ---------
Cash and Cash Equivalents at End of Period $ 7,483 $ 2,797
========= =========
</TABLE>
See accompanying notes to these consolidated financial statements.
4
<PAGE>
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The financial information for the three months and six months ended June
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 six months ended June 30, 1999 are not necessarily
indicative of the results for the entire year.
The consolidated results for the three months and six months ended June
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 holds the
Company's investment in General Photonics, LLC, a 50-50 joint venture between
the Company and General Cable Corporation ("General Cable"). 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 was 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.
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 consisted of (in thousands):
<TABLE>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Raw Materials $ 2,471 $ 3,096
Work in Process 2,661 1,277
Finished Goods 3,214 3,906
--------------- ---------------
$ 8,346 $ 8,279
============== ===============
5
<PAGE>
</TABLE>
3. PROPERTY, PLANT & EQUIPMENT
<TABLE>
Property, plant and equipment consisted of (in thousands):
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Land and Land Improvements $ 978 $ 978
Buildings and Improvements 24,973 24,909
Machinery and Equipment 53,773 48,983
Construction in Progress 14,165 16,220
------------- -----------
93,889 91,090
Less Accumulated Depreciation and Amortization 26,258 22,595
------------- -----------
$ 67,631 $ 68,495
============= ===========
</TABLE>
4. LONG-TERM DEBT
<TABLE>
Long-term debt consisted of (in thousands):
June 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
------------ ----------
Total 35,000 34,000
Less current maturities 14,200 3,200
------------ ----------
$ 20,800 $ 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.
5. CORNING SETTLEMENT
On March 13, 1998, the Company announced the settlement of Corning's
obligation to purchase multimode fiber from the Company under a multiyear 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. For the three months and six
months ended June 30, 1998, the Company recognized income on the settlement of
approximately $900 thousand and $1.8 million, respectively.
6. COMPUTATION OF 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.
6
<PAGE>
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 six and three months
ended June 30, 1999 and June 30, 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>
Six Months Ended Three Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Loss per common share-basic
Loss applicable to common stock $ (389) $ (518) $ (621) $(1,383)
========= ======== ====== =======
Weighted average shares outstanding 7,004 7,002 7,005 7,002
========= ======= ====== ======
Loss per common share-basic $ (0.06) $ (0.07) $(0.09) $ (0.20)
========= ======== ====== =======
Loss per common share-diluted
Loss applicable to common share $ (389) $ (518) $ (621) $(1,383)
========= ======== ====== =======
Weighted average shares outstanding 7,004 7,002 7,005 7,002
Plus shares issuable on:
Exercise of dilutive options -- -- -- --
--------- --------- ------ --------
Weighted average shares outstanding
assuming conversion 7,004 7,002 7,005 7,002
========= ======= ===== =======
Loss per common share-diluted $ (0.06) $ (0.07) $(0.09) $ (0.20)
========= ======== ====== ========
</TABLE>
Options to purchase 716 thousand and 1.1 million shares of common stock
were outstanding at the six month period ending June 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. 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.
7
<PAGE>
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
six months ended June 30 is as follows (in thousands):
<TABLE>
REVENUES
Six Months ended June 30, Three Months Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Optical Fiber (see A) $ 29,432 $ 22,161 $ 16,154 $ 11,405
Specialty Products 13,534 9,309 6,433 4,953
----------- -------- ---------- ----------
$ 42,966 $ 31,470 $ 22,587 $ 16,358
=========== ======== ========== ==========
</TABLE>
<TABLE>
INCOME (LOSS) FROM OPERATIONS
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Optical Fiber $ 3,587 $ 1,530 $ 2,493 $ 114
Specialty Products 2,754 (803) 1,317 (1,123)
Corporate (3,095) (2,296) (2,047) (1,362)
-------- -------- --------- ------
$ 3,246 $(1,569) $ 1,763 $(2,371)
======== ======= ========= ======
</TABLE>
ASSETS
<TABLE>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Optical Fiber $ 73,528 $ 72,447
Specialty Products 19,650 19,953
Cable (Investment in JV) -- 3,458
Corporate 15,032 9,561
---------- ---------
$ 108,210 $ 105,419
========== =========
</TABLE>
A) Due to a change in accounting treatment of certain fiber sales, sales and
cost of sales for the second quarter and June year to date 1998 was reduced
by $674,000 and $789,000 respectively. This change had no effect on
previously reported net income or earnings per share.
8
<PAGE>
8. SUBSEQUENT 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.
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.
9
<PAGE>
9. 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 Six Months Ended June 30, 1999 Compared to Three and Six Months
Ended June 30, 1998
Second quarter revenues were $22.6 million up 38% from revenues of
$16.4 million for the same period last year. Operating income was $1.8 million;
up from an operating loss of $2.4 million incurred during the same quarter ended
1998. The 1998 operating loss included one-time charges, including inventory
write-downs at the SpecTran Specialty subsidiary. Net income (loss) before joint
venture for the second quarter and six months ended June 30, 1999 were $717
thousand and $1.2 million respectively. Both 1999 periods were up from the
losses of $1.2 million and $179 thousand for the same periods a year ago. The
loss incurred from the Joint Venture for the six month period ended June 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. The Company's overall net loss for the quarter was
$621 thousand or $.09 per diluted share, compared with a net loss of $1.4
million or $.20 per share for the same period last year.
Revenues for the first half of 1999 were $43.0 million, up 36% from
$31.5 million recognized during the same period for 1998. Revenue and income
from operations increases versus a year ago were offset by 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 of the
multi-year Corning supply contract and the increase of interest expense in 1999
associated with servicing the Company's debt. For the six months ended June 30,
1999 SpecTran incurred a net loss of $389 thousand or $.06 per diluted share,
compared to a net loss of $518 thousand or $.07 per share for the first half of
1998.
Results of Operations
The following table sets forth, for the periods indicated, certain
financial data as a percentage of net sales:
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30,
JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of Sales 73.4 75.6 73.0 84.4
----------- --------- ----------- ----------
Gross Profit 26.6 24.4 27.0 15.6
Selling and Administrative Expenses 15.7 21.2 16.2 21.5
Research and Development Cost 3.3 8.2 3.0 8.6
----------- --------- ----------- ----------
Income (Loss) from Operations 7.6 (5.0) 7.8 (14.5)
Other Income (Expense), net (3.1) 4.0 (2.6) 2.6
------------ --------- ------------ ----------
Income (Loss) from Operations
before Income Taxes and Joint Venture 4.5 (1.0) 5.2 (11.9)
Income Tax Expense 1.8 (0.4) 2.0 (4.7)
----------- ---------- ----------- -----------
Net (Loss) Before Joint Venture 2.7 (0.6) 3.2 (7.2)
Net (Loss) from Equity in Joint Venture (0.5) (1.1) -- (1.3)
Net (Loss) from sale of Joint Venture (3.1) -- (6.0) --
------------ --------- ------------ ----------
Net Income (0.9)% (1.7)% (2.8)% (8.5)%
============== ============ ============== ==========
</TABLE>
12
<PAGE>
Net Sales
Net sales of $22.6 million and $43.0 million for the three months ended
and six months ended June 30, 1999 were $6.2 million or 38% and $11.5 million or
36% higher than comparable periods of 1998. Sales volume increased at both
SpecTran Specialty and SpecTran Communication as compared to last year by 45%
and 33% respectively, for the first half ending June 30, 1999. SpecTran
Communication's sales in 1999 were favorably affected by the additional capacity
added during 1998. Optical fiber price erosion has slowed during the first half
of 1999, but some additional deterioration is possible during the second half of
the year. SpecTran Specialty continued to benefit from a strong demand during
the first half of 1999.
Gross Profit
Gross profit of $6.1 million and $11.4 million for the three months and
six months ended June 30, 1999 was $3.5 million or 139% and $3.8 million or 49%
greater than comparable periods in 1998. As a percentage of net sales the gross
profit increased to 27% from 16% for the quarter and to 27% from 24% for the
year, as compared to 1998 results.
Second quarter 1999 margins increased over the same 1998 period
primarily due to one-time charges, including inventory write-downs, during the
second quarter 1998 coupled with productivity and management improvements
implemented in late 1998 at SpecTran Specialty. Margins for the second quarter
and year as compared to the same periods last year continue to be affected by
pricing pressure for standard communication fiber products.
Selling and Administration
Selling and administration expenses were essentially flat on a quarter
and six-month comparative basis with 1998 at $3.7 million and $6.7 million
respectively. As a percentage of sales, selling and administration expenses in
1999 decreased to 16% for both the three months and six months periods compared
with 21% for the same periods a year ago.
Research and Development
Research and development costs for the three months and six months
periods ended June 30, 1999 decreased from the same period a year ago by $737
thousand or 52% and $1.2 million or 45% respectively. This decrease is
attributable to the realignment of expenses to cost of sales from research and
development as a result of 1999 restructuring at SpecTran Specialty coupled with
higher levels of research and development resources deployed during 1998 in
bringing the HVD production process on line. The Company is continuing its
initiative to improve manufacturing productivity and product performance in both
multimode and single mode product lines, while developing new performance fiber
products and alternative process technologies.
Other Income (Expense), net
Other income (expense), net was lower, by approximately $1.0 million
and $2.6 million for the three months and six months ended June 30, 1999 as
compared with the same periods for 1998. This was attributable to the absence of
approximately $900 thousand and $1.8 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. The remainder of the differences within other,
net for the three month and six month comparison are attributable to a series of
miscellaneous adjustments including loss on 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 $387 thousand or 110% and
$999 thousand or 210% for the three months and six months ended 1999 as compared
with the same periods for 1998. The Company's interest expense number 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 increased for the quarter and year by $52 thousand and $217
thousand, respectively. Capitalized interest decreased by $335 thousand and $782
thousand respectively. Interest income increased for the quarter by $65 thousand
and decreased for the six months period by $21 thousand.
13
<PAGE>
Income Taxes
A tax provision of 39% was provided for on the Company's operations for
both the three months and six months ended June 30, 1999 as compared with a tax
benefit associated with the pre-tax loss for the three months and six months
ended June 30, 1998.
Loss from Equity in Joint Venture
The Company realized a loss of $235 thousand and $2 thousand for the three
months and six months period ended June 30, 1999 compared with a loss of $339
thousand and $209 thousand for the same periods ended 1998. The Company sold its
interest in General Photonics to BICC General Cable Industries, Inc. on June 30,
1999 and recorded a loss and tax expense of $1.3 million.
Net Income
The net loss for the three months and six months ended June 30, 1999
was $621 thousand and $389 thousand as compared with net loss for the three
months and six months ended June 30, 1998 of $1.4 million and $518 thousand. 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.
Liquidity and Capital Resources
As of June 30, 1999, the Company had approximately $7.5 million of
cash. Additionally, the Company 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 credit agreement.
The Company has a scheduled debt principal repayment of $3.2 million on
December 26, 1999.
The Company's working capital position at June 30, 1999 was $5.1
million with a current ratio of 1.18 to 1. This is principally due to the
reclassification of $11.0 million revolving credit balance from long-term debt
to current.
14
<PAGE>
During the first six months of 1999 the Company generated $5.4 million
in positive cash flow from operating activities and borrowed $1.0 million under
its revolving credit agreement. The Company invested $3.0 million in the
acquisition of machinery and equipment.
The Company is continuing its capacity expansion, which will require
approximately $2.0 million in capital expenditures during 1999, resulting in
total expenditures for capacity expansion since 1996 of approximately $45.0
million for SpecTran Communication and approximately $12.0 million for SpecTran
Specialty, including equipment purchases. When fully operational, the expansion
at SpecTran Communication will increase its capacity by more than 100% from 1996
levels. The expansion at SpecTran Specialty increased capacity by more than 50%.
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. The Company has been exploring various financial
alternatives, including seeking additional capital or entering into strategic
alliances in an attempt to reduce its debt. 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 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 has completed a significant portion of the
Non-IT Systems remediation in connection with the recent capacity expansion at
both facilities. A significant portion of production equipment was replaced or
upgraded as part of this expansion. The Company has revised its estimate for
Year 2000 spending down to approximately $0.8 million from $1.0 million. This
includes $222 thousand for software, which will be expensed in 1999. The plan
calls for remediation to be complete on all systems critical to operate the
business by July 1999, with the remediation of the remaining non-critical
systems expected to be complete by the end of the third quarter. The Company
estimates that it is 93% complete with its remediation efforts for the Year
2000. 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 presently believes that with
modifications to existing software and conversions to new software, the Year
2000 issue can be mitigated. However, if such modifications and conversions are
not made or are not completely timely, the Year 2000 issue could have a material
adverse impact on the operations of the Company. The Company is developing
contingency plans in case its remediation efforts are unsuccessful. The Company
expects to complete the contingency plans in July 1999 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>
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.
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.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 9, "Contingencies," of Notes to Consolidated Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.2 Agreement of Merger, dated as of July 15, 1999, among Lucent,
the Purchaser and the Company, incorporated by reference to
the Company's Schedule 14D-9, dated July 21, 1999.
99.1 The Company's Information Statement pursuant to Section 14(f)
of the Securities Exchange Act of 1934 and Rule 14f-1
thereunder, incorporated by reference to the Company's Schedule
14D-9, dated July 21, 1999.
99.2 Chase v. Harrison, et al., C.A. No. 17312-NC, Complaint, filed
in the Court of Chancery of the State of Delaware in and for
New Castle County, incorporated by reference to the Company's
Amendment No. 1 to Schedule 14D-9, dated August 4, 1999 and
filed with the Commission on August 5, 1999.
99.3 Chase v. Harrison, et al., C.A. No. 17312-NC, Amended Class
Action Complaint, filed in the Court of Chancery of the State
of Delaware in and for New Castle County, incorporated by
reference to the Company's Amendment No. 1 to Schedule 14D-9,
dated August 4, 1999 and filed with the Commission on August
5, 1999.
99.4 Airmont Associates et al., v. SpecTran Corporation, et al.,
C.A. No. 17314-NC, filed in the Court of Chancery of the State
of Delaware in and for New Castle County, incorporated by
reference to the Company's Amendment No. 1 to Schedule 14D-9,
dated August 4, 1999 and filed with the Commission on August
5, 1999.
(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.
17
<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: August 16, 1999 BY:
/s/ Charles B. Harrison
Charles B. Harrison
President and
Chief Executive Officer
Date: August 16, 1999 BY:
/s/ George J. Roberts
George J. Roberts
Senior Vice President,
Chief Financial Officer and
Chief Accounting Officer
18
<PAGE>
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