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 March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR15 (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
April 30, 1998, was 7,001,683.
1
PART I - FINANCIAL INFORMATION
SPECTRAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Dollars in thousands except per share amounts
(unaudited)
Three Months Ended
March 31,
---------
1998 1997
---- ----
Net Sales $ 15,227 $ 16,228
Cost of Sales 10,116 9,686
--------------- ---------------
Gross Profit 5,111 6,542
Selling and Administrative Expenses 3,134 3,982
Research and Development Costs 1,176 781
--------------- ---------------
Income from Operations 801 1,779
--------------- ---------------
Other Income (Expense):
Interest Income 114 276
Interest Expense (124) (353)
Other, Net (Note 5) 842 (53)
--------------- ---------------
Other Income (Expense), net 832 (130)
--------------- ---------------
Income before Income Taxes 1,633 1,649
Income Tax Expense 637 567
--------------- ---------------
Income before Equity in Joint Venture 996 1,082
Equity (Loss) from Joint Venture (132) 40
--------------- ---------------
Net Income $ 864 $ 1,122
=============== ===============
Net Earnings per Common Shares:
Basic $.12 $.18
==== ====
Diluted $.12 $.17
==== ====
Weighted Average Number of
Common Shares Outstanding:
Basic 7,002 6,085
===== ======
Diluted 7,192 6,616
===== ======
See accompanying notes to these condensed consolidated financial statements.
2
SPECTRAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
Dollars in thousands
March 31, 1998 December 31, 1997
-------------- -----------------
(unaudited)
Current Assets:
Cash and Cash Equivalents $ 1,299 $ 445
Current Portion of Marketable Securities -- 5,535
Trade Accounts Receivable, net 12,394 8,622
Inventories 11,783 9,666
Deferred Income Taxes, net 1,189 1,189
Prepaid Expenses and Other Current Assets 2,112 1,943
---------------- ---------------
Total Current Assets 28,777 27,400
Investment in Joint Venture 4,081 4,213
Property, Plant and Equipment, net 61,376 55,409
Other Assets:
Long-term Marketable Securities -- 996
License Agreements, net 552 603
Deferred Income Taxes, net 412 412
Goodwill, net 852 872
Other Long-term Assets 2,173 2,200
---------------- ---------------
Total Other Assets 3,989 5,083
---------------- ---------------
Total Assets $ 98,223 $ 92,105
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 6,326 $ 4,758
Income Taxes Payable 735 573
Accrued Liabilities 5,523 6,015
--------------- ----------------
Total Current Liabilities 12,584 11,346
Long-term Debt (Note 4) 28,000 24,000
Stockholders' Equity:
Common Stock, voting, $.10 par value; authorized
20,000,000 shares; outstanding 7,001,349 shares and
7,000,634 shares in 1998 and 1997, respectively 700 700
Common Stock, non-voting, $.10 par value;
authorized 250,000 shares; no shares outstanding -- --
Paid-in Capital 50,238 50,223
Net Unrealized Loss on Marketable Securities -- (1)
Retained Earnings 6,701 5,837
--------------- ----------------
Total Stockholders' Equity 57,639 56,759
--------------- ----------------
Total Liabilities & Stockholders' Equity $ 98,223 $ 92,105
=============== ================
See accompanying notes to these condensed consolidated financial statements.
3
SPECTRAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in thousands
(unaudited)
Three Months Ended March 31,
1998 1997
---- ----
Cash Flows from Operating Activities:
Net Income $ 864 $ 1,122
Reconciliation of Net Income to Net Cash Provided by
Operating Activities:
Depreciation and Amortization 1,386 933
Other Non-Cash Charges (25) (243)
Changes in Other Components of Working Capital (4,798) (4,896)
--------------- ---------------
Net Cash Used in Operating Activities (2,573) (3,084)
Cash Flows from Investing Activities:
Loss on Disposition of Equipment 60 --
Acquisition of Property, Plant and Equipment (7,313) (4,848)
Purchase of Marketable Securities (9,652) (119,494)
Proceeds from Sale/Maturity of Marketable Securities 16,184 102,289
Investment in Joint Venture 132 (40)
--------------- ---------------
Net Cash Used in Investing Activities (589) (22,093)
Cash Flows from Financing Activities:
Borrowings of Long-term Debt 4,000 --
Proceeds from Exercise of Stock Options and Warrants 16 11
Issuance of Common Stock -- 23,170
--------------- ---------------
Cash Provided by Financing Activities 4,016 23,181
Increase (Decrease) in Cash and Cash Equivalents 854 (1,996)
Cash and Cash Equivalents at Beginning of Period 445 3,565
--------------- ---------------
Cash and Cash Equivalents at End of Period $ 1,299 $ 1,569
=============== ===============
See accompanying notes to these condensed consolidated financial statements.
4
SPECTRAN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The financial information for the three months ended March 31, 1998, is
unaudited but reflects all adjustments (consisting solely of normal recurring
adjustments) which the Company considers necessary for a fair statement of
results for the interim period. The results of operations for the three months
ended March 31, 1998, are not necessarily indicative of the results for the
entire year.
The consolidated results for the three months ended March 31, 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") a former subsidiary of Wassall plc. The
Company sold certain of the assets of APD to General Cable and then contributed
the remaining non-cash assets of APD to General Photonics for a 50% equity
interest. The investment in General Photonics is accounted under the equity
method of accounting pursuant to which the Company records its 50% interest in
General Photonics' net operating results. Prior to the formation of General
Photonics, APD's results of operations, including net sales and expenses, were
consolidated with those of the Company. All significant intercompany balances
and transactions have been eliminated.
These financial statements supplement, and should be read in
conjunction with, the Company's audited financial statements for the year ended
December 31, 1997, 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):
March 31, 1998 December 31, 1997
-------------- -----------------
Raw Materials $ 3,807 $ 4,036
Work in Process 1,762 1,010
Finished Goods 6,214 4,620
--------------- ---------------
$ 11,783 $ 9,666
=============== ===============
5
3. PROPERTY, PLANT & EQUIPMENT
Property, plant and equipment consisted of (in thousands):
March 31, 1998 December 31, 1997
-------------- -----------------
Land and Land Improvements $ 978 $ 978
Buildings and Improvements 11,773 10,453
Machinery and Equipment 37,837 33,567
Construction in Progress 28,790 27,694
---------------- ---------------
79,378 72,692
Less Accumulated Depreciation and Amortization 18,002 17,283
---------------- ---------------
$ 61,376 $ 55,409
================ ===============
4. LONG-TERM DEBT
Long-term debt consisted of (in thousands):
March 31, 1998 December 31, 1997
-------------- -----------------
Revolving Credit Loan Facility at the Lower of
Prime or LIBOR plus 1.5% $ 4,000 $ --
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 $ 28,000 $ 24,000
======== =========
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 December 1999. As of March
31, 1998 the Company had borrowed $4.0 million against the revolving agreement.
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. In the March 31, 1998
quarter the Company recognized income on the settlement of approximately
$900,000.
6
6. COMPUTATION OF EARNINGS PER COMMON SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings per Share" (SFAS 128) which has changed
the method of computing and presenting earnings per common share. All prior
periods presented have been restated in accordance with SFAS 128. This
restatement had an immaterial impact on prior periods' earnings per common share
amounts calculated under previous standard.
Under SFAS 128, primary earnings per common share has been replaced
with basic earnings per common share. The basic earnings per share computation
is based on the earnings applicable to common stock divided by the weighted
average number of shares of common stock outstanding at March 31, 1998 and March
31, 1997.
Fully diluted earnings per common share has been replaced with diluted
earnings per common share. The diluted earnings per common share computation
includes the common stock equivalency of options granted to employees under the
stock incentive plan. Excluded from the diluted earnings per common share
calculation are options granted to employees that are anti-dilutive based on the
average stock price for the year.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Results of Operations
The following table sets forth, for the periods indicated, certain
financial data as a percentage of net sales:
THREE MONTHS ENDED MARCH 31,
1998 1997
---- ----
Net Sales 100.0% 100.0%
Cost of Sales 66.4% 59.7%
----- -----
Gross Profit 33.6% 40.3%
Selling and Administrative Expenses 20.6% 24.5%
Research and Development Cost 7.7% 4.8%
---- ----
Income from Operations 5.3% 11.0%
Other income (Expense), net 5.5% (.8)%
---- -----
Income before Income Taxes 10.8% 10.2%
Income Tax Expense 4.2% 3.5%
---- ----
Income before Equity in Joint Venture 6.6% 6.7%
Income from Joint Venture, net (.9)% .2%
----- ---
Net Income 5.7% 6.9%
==== ====
Net Sales
- ---------
Net sales decreased $1.0 million, or 6.2%, from $16.2 million for the three
months ended March 31, 1997, to $15.2 million for the three months ended March
31, 1998. This decrease was primarily due to lower unit selling prices for both
multimode and single-mode fiber due to the highly competitive market conditions
caused by an industry-wide oversupply situation. In addition, the volume of
single-mode fiber sales in the March 1998 quarter was substantially lower than
in the same quarter last year, in large part due to unsettled economic
conditions in Asia and the strength of the dollar which requires lower selling
prices to match regional competition. These decreases were partially offset by
continued strong market demand for the Company's multimode communication fiber,
and increased revenues at SpecTran Specialty.
Gross Profit
- ------------
Gross profit decreased $1.4 million, or 21.9%, from $6.5 million for
the three months ended March 31, 1997, to $5.1 million for the three months
ended March 31, 1998. As a percentage of net sales, the gross profit decreased
to 33.6% for the three months ended March 31, 1998 from 40.3% for the three
months ended March 31, 1997. The decrease in gross profit was primarily due to
the decrease in net sales for the 1998 period and industry pricing pressure for
standard communication fiber products. This was partially offset by higher
manufacturing efficiencies at SpecTran Specialty following the consolidation of
its operations at its new facility. As a percentage of net sales, royalties
increased from 3.2% in the three months ended March 31, 1997 to 4.1% for the
three months ended March 31, 1998 primarily due to an increase in the percentage
of net sales subject to royalty.
8
Selling and Administration
- --------------------------
Selling and administrative expenses decreased $848,000, or 21.3%, from
$4.0 million for the three months ended March 31, 1997 to $3.1 million for the
three months ended March 31, 1998. Included in the three months of March 31,
1997 were $700,000 of costs associated with the Company's one-time management
reorganization and training costs. As a percentage of net sales, selling and
administrative expenses decreased to 20.6% for the three months ended March 31,
1998 from 24.5% for the three months ended March 31, 1997.
Research and Development
- ------------------------
Research and development costs increased $395,000, or 50.6%, from
$781,000 for the three months ended March 31, 1997 to $1.2 million for the three
months ended March 31, 1998. The Company continues to increase its investment in
programs to improve manufacturing cost and product performance in both multimode
and single-mode product lines, to develop new special performance fiber products
and to develop alternative process technologies. As a percentage of net sales,
research and development costs increased from 4.8% for the three months ended
March 31, 1997 to 7.7% for the three months ended March 31, 1998.
Other Income (Expense), net
- ---------------------------
Other income (expense), net favorably increased by $962,000 for the
three months ended March 31, 1998 compared to the same period of 1997, primarily
due to approximately $900,000 of other income related to the settlement of a
multi-year supply contract with Corning. Interest income decreased by $162,000,
or 58.7%, for the three months ended March 31, 1998, as compared to the same
period in 1997 due to a lower level of cash available for investment. Net
interest expense decreased by $229,000, or 64.9%, for the three months ended
March 31, 1998, compared to the same period in 1997 due to a higher level of
capitalized interest associated with the Company's capacity expansion programs.
Other income (expense) increased $895,000 primarily due to the Company's
settlement of a multi-year supply contract with Corning.
Income Taxes
- ------------
A tax provision of 39.0% of pre-tax income was provided for the three
months ended March 31, 1998 compared to a tax provision of 34.4% of pre-tax
income for the comparable period in 1997. The lower effective tax rate for the
1997 period was due to the Company benefiting from tax credit carryforwards and
low state income taxes as a result of the high level of investment tax credits
due to the capacity expansions.
Income from Equity in Joint Venture
- -----------------------------------
The Company realized a loss of $132,000, net of tax, from its equity in
General Photonics, the joint venture formed in December, 1996 with General
Cable. The loss was due to lower than anticipated revenues.
Net Income
Net income for the three months ended March 31, 1998 decreased
$258,000, or 23.0%, from the same period in 1997. Net income decreased primarily
as a result of the decreased sales and gross profit for the three months ended
March 31, 1998 compared to the same period in 1997.
9
Liquidity and Capital Resources
- -------------------------------
The Company's principal sources of cash are cash flow from operations,
established bank credit facilities and existing cash balances. As of March 31,
1998, the Company had approximately $1.3 million of cash and cash equivalents.
In addition, the Company has a $20.0 revolving credit agreement with its
principal bank, $16.0 million of which is currently available. The Company at
March 31, 1998, had working capital of approximately $16.2 million and a current
ratio of 2.3 to 1.
The Company is continuing its capacity expansion which will require
approximately $16.0 million in capital expenditures through the remainder of
1998, which will result in total expenditures for capacity expansion of
approximately $44.0 million at SpecTran Communication and $12.0 million at
SpecTran Speciality. When fully operational, the expansion at SpecTran
Communication will increase capacity there by 100%, and the expansion at
SpecTran Specialty which was completed in 1997 increased capacity there by 50%.
The Company intends to continue to finance this expansion through a combination
of cash flow from operations and borrowings.
Other Matters
- -------------
Charles B. Harrison, a Company Director since July 1997, was appointed
President and Chief Executive Officer of the Company, effective April 13, 1998,
succeeding Dr. Raymond E. Jaeger. Dr. Jaeger remains the Company's Chairman of
the Board.
Forward Looking Statements
- --------------------------
This report contains forward looking statements which are subject to a
number of risks and uncertainties that may cause actual results to differ
materially from expectations. These uncertainties include, but are not limited
to, general economic conditions and competitive conditions in markets served by
the Company.
10
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 10.108 Employment Agreement between SpecTran Corporation and Charles
B. Harrison dated as of April 1, 1998.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter
which this report was filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
SPECTRAN CORPORATION
(Registrant)
Date: May 15, 1998 BY:
/s/ Charles B. Harrison
------------------------
Charles B. Harrison
President and
Chief Executive Officer
Date: May 15, 1998 BY:
/s/ Bruce A. Cannon
--------------------
Bruce A. Cannon
Senior Vice President,
Chief Financial Officer and
Chief Accounting Officer
11