UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the fiscal year ended December 31, 1998 [ X ]
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OR THE
SECURITIES ACT OF 1934
For the transition period from ...................to .........................
Commission file number 0-12489
SPECTRAN CORPORATION
.........................................................................
(Exact name of the registrant as specified in its charter)
Delaware 04-2729372
..................................... ................................
State or other jurisdiction of (I.R.S. Employer Identification
No.)
incorporation or organization
50 Hall Road, Sturbridge, Massachusetts 01566
...................................................... .......................
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (508) 347-2261
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None Not Applicable
................................................................................
Securities registered pursuant to Section 12(g) of
the Act:
Common Stock, $.10 par value
................................................................................
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes: X No: __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
1
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the closing price of such stock, on
February 26, 1999: $36.3 million.
The number of shares outstanding of each of the Registrant's classes of common
stock, as of the latest practicable date: 7,003,850 shares of common stock, $.10
par value, outstanding on February 26, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
The information required for Part III hereof is incorporated by reference from
the Registrant's Proxy Statement for its 1999 Annual Meeting of Stockholders to
be filed with the Securities and Exchange Commission within 120 days after the
end of the Registrant's fiscal year.
PART I
Item 1. BUSINESS.
SpecTran Corporation ("SpecTran," the "Company" or the "Registrant")
operates through two wholly-owned subsidiaries, SpecTran Communication Fiber
Technologies, Inc. ("SpecTran Communication") and SpecTran Specialty Optics
Company ("SpecTran Specialty"), and through General Photonics, LLC ("General
Photonics"), a joint venture with General Cable Corporation ("General Cable").
In December 1996, the Company sold certain of the assets of its wholly-owned
subsidiary, Applied Photonic Devices, Inc. ("APD"), and then contributed the
remaining assets of APD to General Photonics for a 50% equity interest. (See
Note 14 to the Consolidated Financial Statements - "Acquisitions/Joint
Venture"). SpecTran Communication develops, manufactures and markets multimode
and single-mode optical fiber for data communications and telecommunications
applications. SpecTran Specialty, acquired in February 1994, develops,
manufactures and markets specialty multimode and single-mode fiber and
value-added fiber optic products for industrial, military/aerospace,
communication and medical applications. General Photonics develops, manufactures
and markets communications-grade fiber optic cable primarily for the customer
premises market in the United States, Canada and Mexico.
Technology
Fiber optic technology utilizing glass as a communications medium was
developed in the 1970s and offers numerous technical advantages over traditional
media such as copper. Optical fibers are hair-thin solid strands of high quality
glass usually combined in cables for transmitting information in the form of
light pulses. An optical fiber consists of a core of high purity glass, which
transmits light with little signal loss. This core is typically encased within a
covering layer of high purity glass or plastic polymer referred to as optical
cladding, which reduces signal loss through the side walls of the fiber. The
information to be transmitted is converted from electrical impulses into light
waves by a laser or light emitting diode. At the point of reception, the light
waves are commonly converted back into electrical impulses by a photo-detector.
2
Optical fiber's advantages include its high bandwidth, which permits
reliable transmission of complex signals such as multiple high-quality audio and
video channels and high-speed data formats such as Fiber Distributed Data
Interface (FDDI), Asynchronous Transfer Mode (ATM), Gigabit Ethernet Synchronous
Optical Network (SONET) and other communications protocols. Compared to
traditional copper cable used in telephony, optical fiber has thousands of times
the information carrying capacity, occupies less space and operates over greater
distances with significantly less attenuation. This high capacity and
reliability makes optical fiber systems well suited for interactive
applications, allowing digitally encoded voice, data and video signals to be
transmitted in large volumes at high speed. Furthermore, optical fiber is immune
to electrical surges (including from lightning strikes) and electromagnetic
interference which cause static or failure in copper wire transmission and
wireless communication. Optical fiber has technical advantages over wireless
communications media such as transmission quality and signal reliability.
Optical fiber is also a safer choice in flammable environments because it does
not conduct electricity. Additionally, communicating through optical fiber is
more secure than copper and wireless communications because tapping into fiber
optic cable without detection is more difficult.
Optical fiber quality is measured by several performance
characteristics and is reflected in the price of the fiber. These performance
characteristics include bandwidth, attenuation (signal loss over distance),
tensile strength, geometry and the dimensional and optical uniformity of the
fiber. Optical fiber users and manufacturers have established specifications and
standards for both multimode and single-mode fiber.
Products
The following table describes the Company's and General Photonics'
principal product areas and the markets they serve:
- --------------------------------------- ------------------------------------- --------------------------------------
Products Applications Target Customers
- --------------------------------------- ------------------------------------- --------------------------------------
- --------------------------------------- ------------------------------------- --------------------------------------
SpecTran Communication
- --------------------------------------- ------------------------------------- --------------------------------------
Data Communication grade multimode Data Communications, including Integrated cablers (e.g., Lucent,
fiber: 50, 62.5 and 100 micrometer FDDI and fast Ethernet; LANs; video Chromatic Technologies); independent
core diameters CCTV; computer peripherals channel cablers (e.g., Optical Cable
attachment Corporation, CommScope, General
Photonics)
- --------------------------------------- ------------------------------------- --------------------------------------
Telecommunication grade single-mode Telephony (principally in emerging Independent data communications
fiber economies); high-speed domestic cablers; international
short-distance data communication, telecommunications cablers
including Fibre Channel and FDDI (e.g., India, China, Mexico)
- --------------------------------------- ------------------------------------- --------------------------------------
3
- --------------------------------------- ------------------------------------- --------------------------------------
Products Applications Target Customers
- --------------------------------------- ------------------------------------- --------------------------------------
SpecTran Specialty
- --------------------------------------- ------------------------------------- --------------------------------------
Step & graded index multimode fiber & Factory LANs and PLC interconnects; Factory, transportation and medical
cable: Polymer clad/glass core, high mobile video: avuibucs; high-speed OEMs; systems designers and
numerical aperture, radiation ground-basedd transportation; integrators; geophysical exploration
tolerant, power delivery an high geophysical exploration and companies; US government and
temperature fiber; avionics cable monitoring; sensing; power military: utilities; telecom and
high dielectric strength cable transmission, including laser supercomputer OEMs; systems
tether cables surgery; blood gas monitoring; designers and integrators
including laser supercomputer OEMs; radiation resistant links; high-
monitoring; designers and integrators speed, short-distance telecom
interconnects (e.g., telephone
switching systems andPBXs);
supercomputer links
- --------------------------------------- ------------------------------------- --------------------------------------
- --------------------------------------- ------------------------------------- --------------------------------------
Specialty single-mode fiber and Metalized pigtails, couplers, Telecommunications; optoelectronic
cable: photo-sensitive, rare-earth amplifiers, geophysical exploration manufacturers; well-logging
delay line, fatique resistant fiber; and monitoring; gyroscopes; companies and system integrators;
avionics cable; tether cables wave-length division multiplexers defense contracts
- --------------------------------------- ------------------------------------- --------------------------------------
- --------------------------------------- ------------------------------------- --------------------------------------
Components and assemblies: crimp and Industrial automation; OEMs; systems designers and
cleave connectors; pigtails; fiber environmental monitoring; customer integrators; facilities managers;
optic arrays; specialty and hybrid premises networking; military spec utilities; optoelectronic devices
interconnects; tool kits and high reliablitity assemblies; manufacturers; defense contractors
high power laser delivery; sensing;
illumination; spectroscopy
- --------------------------------------- ------------------------------------- --------------------------------------
General Photonics
- --------------------------------------- ------------------------------------- --------------------------------------
Indoor cable: tight buffered Building backbones; riser and Networking systems and LAN OEMs;
distribution and breakout designs plenum installation systems designers and integrators;
installers; facilities managers
- --------------------------------------- ------------------------------------- --------------------------------------
- --------------------------------------- ------------------------------------- --------------------------------------
Outdoor cable: loose tube; Customer premises backbones, Networking systems and LAN OEMs;
gel-filled; direct burial; aerial; including densely populated systems designers and integrators;
armored; figure eight buildings and campuses; Fibre installers; facilities managers
Channel; FDDI; bypass telecom
- --------------------------------------- ------------------------------------- --------------------------------------
- --------------------------------------- ------------------------------------- --------------------------------------
Cable accessories: pulling devices; Customer premises systems and LAN Installers; system integrators; LAN
breakout, splitter and restoration installation & repair OEMs; utilities
kits; cable terminations
- --------------------------------------- ------------------------------------- --------------------------------------
Types of products produced by SpecTran Communication and SpecTran Specialty
accounted for approximately 72% and 28%, respectively, of 1998 consolidated
revenue and 73% and 27%, respectively, of 1997 consolidated revenue. In 1996,
types of products by SpecTran Communication, SpecTran Specialty and APD
accounted for approximately 59%, 21% and 20%, respectively, of consolidated
revenue.
4
Customers and Marketing
The Company sells its communication multimode and single-mode optical
fibers to various cable manufacturers, domestically and internationally, which
assemble them into cables for resale in configurations of their own design.
Specialty fiber products are sold directly to a large number of OEMs, by
developing specialty applications for customers, and to product development
groups, international distributors and manufacturers' representatives,
installers, universities and governmental agencies, primarily for use in the
industrial, medical, military, aerospace, transportation and telecommunications
and data communications markets. Optical fiber cable and cable accessories,
manufactured by General Photonics, are sold largely to distributors, systems
integrators and installers primarily for use in the customer premises market in
the United States, Canada and Mexico.
The Company markets its multimode and single-mode data communications
and telecommunications optical fiber products principally through a direct sales
force in the United States and through a network of manufacturers'
representatives internationally. Specialty fiber products are marketed
domestically through a direct technical field sales force and internationally
through a network of technical distributors and sales representatives. Optical
fiber cable and cable components produced by General Photonics are marketed
primarily through General Cable's direct sales force and sales representatives,
whose principal customers are largely distributors and end users. Marketing,
technical support and some direct sales and customer support are provided by
General Photonics personnel. The Company advertises in trade publications,
brochures and other material to its mailing list of potential customers
worldwide and participates at trade shows, technical symposia and standards
committees.
As a result of its diversification efforts and broader product offering,
the Company has increased its customer base over the last three years and plans
to continue to expand this base within its targeted markets. International
sales, primarily Asia and Europe, accounted for approximately 15%, 20% and 18%
of total sales in 1998, 1997 and 1996, respectively. See Note 16 to the
Consolidated Financial Statements - "Business Segements". For the year ended
December 31, 1998, sales to each of Optical Cable Corporation and Lucent
Technologies were equal to 10% or more of the Company's revenues. The loss of
either Optical Cable Corporation or Lucent Technologies would have a material
adverse affect on the Company.
5
Manufacturing and Quality Control
The basic raw materials required for the manufacture of the Company's
optical fiber products are high quality glass tubes and rods, various chemicals,
gases and certain polymers. The Company believes that its sources of supply of
these raw materials are adequate and that alternative sources are available. The
Company typically manufactures optical fibers by introducing vapors and gases of
varying chemical compositions into a special glass tube located in a clean,
controlled environment. In the modified chemical vapor deposition ("MCVD")
process, an inside vapor deposition process used by the Company, the glass tube,
which forms all or a portion of the optical cladding, and the introduced vapors
and gases are simultaneously heated, and oxide particles, formed through a
reaction of chemical vapors with oxygen, are deposited on and adhere to the
inside of the tube. As the particles attach to the tube wall, they are fused to
create a layer of high purity glass. Succeeding layers of glass of the same or
different compositions are deposited in this fashion to permit the transmission
of light in accordance with the desired specifications. The Company believes
that the MCVD process is well suited to the production of multimode fiber but
that it is not presently the most cost-effective process for making single-mode
fiber. As part of the acquisition of Ensign Bickford Optical Technologies the
Company acquired the patent rights to a process known as hybrid vapor deposition
("HVD"). Since its acquisition, the HVD process has been refined and engineered
for production and the Company expects it will be used in 1999 for the
manufacture of single-mode fiber.
In the MCVD process, once deposition is completed, the glass tube is
then collapsed into a rod, or primary preform, consisting of a deposited core,
in certain instances some deposited cladding and cladding provided by the glass
tube itself. In most cases, additional cladding is added to this primary
preform. The rod is then placed at the top of a fiber drawing tower, heated
until it softens and drawn into a fiber of predetermined diameter. The HVD
process does not use a glass starting tube but rather deposits glass soot on the
end of a target rod to produce the central portion of the fiber. After this
material has been fused into clear glass, additional soot is deposited to
increase the cladding volume. The deposited material is also fused into clear
glass and resulting rod or preform is subsequently drawn into fiber using the
same basic technology as with MCVD fiber draw.
6
The majority of the Company's specialty products use a proprietary
polymer clad glass core fiber drawn from manufactured or purchased silica rod.
This fiber is either sold to third parties or cabled and/or combined with
assemblies and sold. The Company owns certain hard polymer cladding, coating and
fiber termination technology known as "crimp/cleave," which facilitates
attachment of optical fibers to connectors and other components and has certain
proprietary technology used for the cabling of optical fiber. The Company has
developed proprietary technology related to the processing of a wide variety of
polymeric compounds for the manufacture of optical fiber cable. General
Photonics purchases fiber from the Company and protectively covers and bundles
the fibers into cable.
The Company believes that its quality control programs are essential to its
success. The Company's quality control programs are designed to maintain strict
tolerances during the manufacturing process and to assure performance standards
of its products. The Company performs quality control testing on all of its
products. The Company designs and builds much of the equipment it uses to
manufacture and test its optical fiber products. SpecTran Communication's
facility in Sturbridge, Massachusetts and SpecTran Specialty's facility in Avon,
Connecticut are ISO 9001 certified. All of the Company's operations utilize
internal testing procedures based on the internationally recognized "Fiber Optic
Test Procedures" and have in place and continue to develop specialized
proprietary testing systems and procedures to support the requirements of their
respective customers.
Environmental Matters
The Company uses certain hazardous materials in its research and
manufacturing operations. As a result, the Company is subject to federal, state
and local governmental regulations. During 1998, the Company invested $500,000
for the purchase and installation of additional air pollution control equipment
at SpecTran Communication's production facility in Sturbridge, Massachusetts.
There is no material spending pertaining to environmental compliance planned for
1999. The Company believes that it has complied with all regulations and has all
permits necessary to conduct its business.
7
Proprietary Rights
The Company and its subsidiaries consider its proprietary know-how with
respect to the development and manufacture of flexible glass fibers and
value-added optical fiber products to be a valuable asset. This know-how
includes formulation of new glass compositions, development of special fiber
coatings, coating applications, fiber designs, preform fabrication, fiber
drawing, optical fiber cabling methods, fiber cleaving, polishing and end
finishing techniques, proprietary testing capabilities, development and
implementation of manufacturing processes and quality control techniques, and
design and construction of manufacturing and quality control equipment. Product
and application knowledge are also considered to be valuable assets of the
Company and its subsidiaries.
Corning License. The Company has a limited, non-assignable,
non-exclusive, royalty-bearing license from Corning to make, use and sell fiber
under certain of Corning's United States patents with a filing date prior to
January 1, 1996 in the field of optical fiber. The license contains certain
annual quantity limitations. The Corning license is not applicable to sales made
directly or indirectly to certain customers such as Corning, Lucent and the
United States Government. The quantities that can be manufactured under the
license increase annually through the year 2000. The license has a term equal to
the life of the last to expire of the Corning or Company patents licensed under
the agreement. Corning has the right to terminate the license in the event that
more than 30% of the Company's voting stock is acquired, directly or indirectly,
by another manufacturing company. The Company granted back to Corning a
non-exclusive royalty-free license for any of its patents with a filing date
prior to January 1, 1996 in the field of optical fiber.
Lucent Licenses. The Company has a non-assignable, non-exclusive,
unlimited, royalty-bearing license from Lucent under all patents covering
optical fiber and optical fiber cable owned by Lucent or which Lucent and its
affiliates had the right to license on or before August 15, 1986. The Company
granted back to Lucent a non-exclusive, royalty-free license under patents the
Company may obtain relating to optical fiber inventions made on or before August
15, 1986. The license extends for the life of the last to expire of the patents
licensed under the agreement.
In October 1998, the Company and Lucent established a new worldwide,
non-exclusive license exchanging rights under their optical fiber patents issued
prior to January 1, 1998 and additional patents related to multimode fiber
based on applications filed through October 1998. SpecTran is licensed by Lucent
to make optical fiber at its existing factories for worldwide use, sale and
export from the United States. The license contains some product limitations
including certain exclusions to make or sell select specialty fibers for some
8
applications. Lucent receives non-exclusive, royalty-free worldwide rights.
SpecTran agreed to pay Lucent a $4.0 million license fee in installments and,
beginning in 2000, a royalty on sales. Lucent has the right to terminate the
agreement if the Company is acquired by an optical fiber manufacturer.
Sales Subject to Corning and Lucent License Agreements. Approximately 22%
of the Company's net sales during 1998, all of which were SpecTran Communication
sales, were subject to license requiring aggregate royalty payments by the
Company of approximately 5% of net sales of the Company's products manufactured
under license during 1998. The Company believes that certain Corning patents,
which may have been relevant to the Company's single-mode fiber, including
patents covered by a non-exclusive license from Corning to the Company, have
expired in many countries (including the United States). Therefore, the Company
believes that manufacturing and sale of its single-mode fiber is not subject to
the Corning license and has been marketing its single-mode fiber without
payments of royalties to Corning and without regard to the annual quantity
limitations of the Corning license since 1993. The Company presently does not
expect to need the Corning license for the manufacture of its multimode fiber
after 1999 because the Company believes that a Corning United States patent with
relevancy to its multimode fiber will expire in 1999.
Patents and Trademarks. The Company and its subsidiaries own 22 U.S.
patents relating to products, processes and equipment in the fields of optical
fibers, optical connectors, coatings and cleaving tools. The Company believes
that its patents afford it certain competitive advantages. Under the terms of
the Corning and Lucent license agreements, generally its optical fiber patents
are required to be made available royalty-free to Lucent and Corning.
The Company is using its trademark SPECTRAGUIDE(R) for its commercial
grade optical fiber and for certain of its value added fiber products. It also
uses the trademarks HCS(R) (Hard Clad Silica), Avioptics(TM), Flightguide(TM),
PYROCOAT(TM), V-System(TM), V-Pin(TM) and GigaGuideTM.
Research and Development
Research and development activities and the Company's ability to develop
and improve products employing both existing and new technology, are important
to the Company. During the fiscal years ended December 31, 1998, 1997 and 1996,
the Company spent $5.5 million, $3.3 million and $3.1 million, respectively, or
7.8%, 5.3% and 5.1%, respectively, of its net sales on research and development.
The Company has continued to invest in programs to reduce manufacturing cost and
improve product performance in both the single-mode and multimode product lines,
to develop new optical fiber products and to develop alternative process
technologies. The Company's personnel conduct substantially all of its research
and development activities. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
9
Backlog
As of January 31, 1999, the Company's backlog of orders was approximately
$16.6 million (approximately 42% of which was SpecTran Communication backlog),
as compared to a backlog of $35.2 million as of January 31, 1998. All of the
January 31, 1999 backlog is expected to be delivered during 1999.
Competition
The Company produces and sells optical fibers and value added optical
fiber components and assemblies for data communications, telecommunications and
specialized applications. Optical fiber cable and cable components are also sold
through General Photonics. While there may be less competition in the
specialized markets, all of the markets served by the Company and General
Photonics are very competitive. The Company's main competitors for its fibers
for data communications and telecommunications are its licensors, Corning and
Lucent, to whom the Company pays royalties and who have substantially greater
resources and operating experience than the Company. The Company also competes
with Alcatel, Plasma Optical Fibres, Yangzee Optical Fiber Corp., FiberCore and
other fiber producers throughout the world. The Company's main competitors for
its specialty fibers generally have been smaller operations, but some of those
competitors are part of companies with substantially greater resources than the
Company. General Photonics' main competitors for its optical fiber cable
products are large companies with substantially greater resources and operating
experience than the Company and General Photonics, some of which may also be
customers of SpecTran Communication. The Company competes for sales based upon
its ability to fill orders promptly at competitive prices, by developing
specialty applications for customers, product performance, product features,
unique proprietary products, flexibility, quality and service.
The Company believes that optical fibers offer a number of advantages
over and compete favorably with other means of transmitting information, such as
copper wire, radio frequency (RF) wireless, satellite and other line of sight
transmissions (e.g., microwaves). Many companies offering such other means of
transmitting information have substantially greater resources and operating
experience than the Company. The Company often competes with both mature
existing technology and new technology, some of which have cost advantages over
optical fiber for certain applications.
10
Competition may also result from technological innovation in the optical
fiber industry. New optical fiber designs could provide an advantage to
competitors of the Company. New single-mode dense wavelength division
multiplexing fibers produced by Lucent and Corning may, particularly in the
future, as, among other things, the cost of electronic connections decrease,
provide a competitive advantage to those companies, although the Company has
access to certain of Lucent's patents in this area through its 1998 license
agreement with Lucent.
The number of participants in the optical fiber industry is to some
extent limited by patents covering the fundamental optical fiber technology, the
need for substantial capital investment and the availability of highly
specialized equipment and personnel with the requisite technical expertise. The
Company believes that certain Corning patents, which may have been relevant to
the Company's single-mode fiber, including patents covered by a non-exclusive
license from Corning to the Company, have expired in many countries (including
the United States). The Company further believes that a certain Corning United
States patent, covered by this non-exclusive license, with relevance to the
Company's multimode fiber, expires in 1999. In addition, the Company believes
that a certain Lucent patent licensed to the Company relating to its multimode
and single-mode fiber expired in 1997. The expiration of these patents may or
may not reduce the patent barrier to entry by other companies.
Employees
As of December 31, 1998, the Company employed 531 persons, of whom 195
were employed in technology, 242 were employed in manufacturing operations and
94 provided marketing, administrative, management and other support services.
These numbers do not include 49 employees of General Photonics. The Company's
employees are not represented by a labor union. The Company believes its
employee relations are good.
Item 2. PROPERTIES.
The Company's administrative offices and the offices and production
facilities of SpecTran Communication are located in an approximately 98,000
square foot building. The building is situated on approximately 43 acres of land
owned by SpecTran Communication in Sturbridge, Massachusetts. SpecTran
Communication owns these buildings and land as well as a 5,000 square foot
office building, used for offices, that is next to this manufacturing facility.
SpecTran Specialty's offices and production facilities are located in
an approximately 54,000 square foot building situated on approximately 14 acres
of land located in Avon, Connecticut. This property is owned by the Company.
11
General Photonics has assumed APD's lease for offices and production
facilities in a 50,000 square foot facility located in Dayville, Connecticut
under a lease expiring February 6, 2001, which is subject to a three year
renewal option, followed by a two year renewal option.
Item 3. LEGAL PROCEEDINGS.
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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
12
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded on the NASDAQ National Market
System under the symbol "SPTR." Set forth below is high and low sales price
information for the Company's Common Stock for the periods indicated as reported
on the NASDAQ National Market:
Price
Fiscal Year Fiscal Quarter Ended High Low
1997 March 31, 1997 25 12-5/8
June 30, 1997 21 11-1/4
September 30, 1997 20-3/4 13-3/4
December 31, 1997 15-1/4 8-5/8
1998 March 31, 1998 11-1/8 6-7/8
June 30, 1998 10-1/4 6-15/16
September 30, 1998 7-13/16 4-5/32
December 31, 1998 7-5/8 3-9/16
On March 26 1999, the closing price of Common Stock as reported on the
NASDAQ National Market System was $4. The approximate number of
shareholders of record of the Company's Common Stock as of January 31, 1999 was
755 which includes all shares held in nominee names by brokerage firms and
financial institutions as one stockholder. It is estimated that shares held in
street name are held for approximately 5,602 stockholders.
The Company has not paid any cash dividends and does not intend to pay
cash dividends in the foreseeable future.
13
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA.
Years Ended December 31
(in thousands, except per share data)
---------------------------------------------------------------------
OPERATING RESULTS 1998 1997 1996 1995 1994
- ----------------- ---- ---- ---- ---- ----
Net Sales $ 70,856 $ 62,057 $ 61,571 $38,581 $26,926
Gross Profit 18,880 23,276 22,375 13,061 7,623
Income (Loss) Before Income Taxes and
Equity in Joint Venture 1,746 7,111 5,537 777 (487)
Net Income (Loss) 523 4,842 3,655 542 (487)
Earnings per Common Share-Basic .07 .72 .68 .10 (.09)
Earnings per Common Share-Diluted .07 .68 .61 .10 (.09)
Weighted Average Shares Outstanding 7,003 6,724 5,374 5,298 5,203
Weighted Average Shares Outstanding
Assuming Conversion 7,103 7,148 5,962 5,582 5,203
FINANCIAL POSITION
Total Assets 105,419 92,105 62,456 40,365 31,362
Long-Term Debt 30,800 24,000 24,000 10,000 5,240
Stockholders' Equity 57,312 56,759 28,403 24,296 23,104
See also Note 16 to the Consolidated Financial Statements - "Business
Segements".
14
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Overview
Currently, SpecTran develops, manufactures, and markets high quality
optical fiber, optical fiber cables and value-added optical fiber components and
assemblies. Prior to 1993, the Company had a narrow customer base and was
focused on the production of multimode fiber for the domestic market. In 1993
the Company began to implement a strategic plan to diversify its products,
markets and customer base. As part of this plan, the Company reintroduced
single-mode fiber in 1993 and began marketing it internationally. In 1994 the
Company acquired Ensign-Bickford's specialty fiber operations (which later
became SpecTran Specialty), allowing the Company to become a worldwide leader in
fiber optic specialty applications. The Company entered the fiber optic cable
market in May 1995 by acquiring APD in order to participate more extensively in
the rapid growth of the data communications market, the principal end market of
multimode fiber. In December 1996 the Company formed General Photonics, a joint
venture with General Cable, to develop, manufacture and market fiber optic
cable.
Results of Operations
The following table sets forth, for the periods indicated, certain
financial data as a percentage of net sales:
Years Ended December 31,
1998 1997 1996
---- ---- ----
Net Sales 100.00% 100.0% 100.0%
Cost of Sales 73.4% 62.5% 63.7%
----- ----- -----
Gross Profit 26.6% 37.5% 36.3%
Selling and Administrative Expenses 19.5% 22.5% 22.1%
Research and Development Cost 7.8% 5.3% 5.1%
---- ---- ----
Income (Loss) from Operations (0.6)% 9.7% 9.1%
Other Income (Expense), net 3.1% 1.8% (.1)%
---- ---- -----
Income before Income Taxes and Equity in Joint Venture 2.5% 11.5% 9.0%
Income (Loss) from Joint Venture (1.4)% (0.5)% --%
------ ------ ---
Income before Income Taxes 1.1% 11.0% 9.0%
Income Tax Expense .4% 3.2% 3.1%
--- ---- ----
Net Income .7% 7.8% 5.9%
=== ==== ====
15
Net Sales
Net sales increased $8.8 million, or 14.2% from $62.1 million in 1997
to $70.9 million in 1998. The increase was due to record annual revenues at both
SpecTran Communication, resulting from higher sales volume made possible by the
multimode expansion completed earlier in 1998, and at SpecTran Specialty. Sales
growth continued to be adversely affected by 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.
Gross Profit
Gross profit decreased $4.4 million, or 18.9% from $23.3 million in
1997 to $18.9 million in 1998. As a percentage of net sales, the gross profit
decreased to 26.6% for the year ended December 31, 1998, from 37.5% for the year
ended December 31, 1997. The decrease in gross profit was primarily due to
continued industry pricing pressures for standard communication fiber products
and to operational problems and inventory write-downs at SpecTran Specialty.
Selling & Administrative
As a percentage of net sales, selling and administrative expenses
decreased to 19.5% for the year ended December 31, 1998, from 22.5% for the year
ended December 31, 1997. Selling and administrative expense decreased $85,000,
or .6% from $14.0 million in 1997 to $13.8 million in 1998. The decrease is
primarily due to lower Incentive Compensation in 1998.
Research and Development
Research and development costs increased $2.2 million, or 67.0% from
$3.3 million in 1997 to $5.5 million in 1998. The Company in 1998 increased its
investment in programs to improve manufacturing costs and product performance in
both multimode and single-mode product lines, to develop new special performance
fiber products and to develop alternative process technologies.
16
Other Income (Expense), net
Other income (expense), net favorably increased $1.1 million, or 99.8%
from net other income of $1.1 million in 1997 to net other income of $2.2
million in 1998. Interest income decreased $1.1 million, or 83.1% from $1.3
million in 1997 to $200,000 in 1998 due to a lower level of cash available for
investment. Net interest expense increased $672,000, or 90.1% from $747,000 in
1997 to $1.4 million in 1998 primarily due to a higher level of borrowings under
the Company's revolving credit agreement and to a lower level of capitalized
interest associated with the Company's capacity expansion programs. Other net,
increased favorably $2.9 million, or 561.2% from $510,000 in 1997 to $3.4
million in 1998 due to the Company's settlement of a multi-year supply contract
with Corning.
Income Taxes
A tax provision of 32.0% of pre-tax income was provided for the year
ended December 31, 1998, compared to a tax provision of 29.0% for the year ended
December 31, 1997. The lower effective tax rate for 1997 was due to the Company
benefiting from tax credit carryforwards and low state income taxes as a result
of a high level of investment tax credits due to the capacity expansions.
Income From Equity in Joint Venture
The Company realized a loss of $974,000 and $287,000 for the years
ended 1998 and 1997 respectively, from its investment in General Photonics. This
joint venture was formed in December 1996 with General Cable. The loss in 1998
was primarily due to lower than anticipated revenues and gross profit due to
continued soft demand in the cable premise market, combined with continued price
declines for cable.
Net Income
Net income decreased $4.3 million, or 89.2% from $4.8 million in 1997 to
$523,000 in 1998. The decrease in earnings is due to reduced gross profit from
SpecTran Communication, primarily related to continued industry pricing
pressures for standard communication fiber products, to operational issues and
inventory write-downs at SpecTran Specialty and the loss from the Company's
equity in General Photonics.
17
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net Sales
Net sales increased $486,000, or .8%, from $61.6 million in 1996 to
$62.1 million in 1997. Net sales in 1997 did not include those of General
Photonics, whereas sales for 1996 included the sales of Applied Photonic
Devices, Inc. (APD), certain assets of which were sold in December 1996 to form
General Photonics, a joint venture with General Cable. On a comparative basis,
including General Photonics sales in 1997 would have resulted in an 18.4%
increase compared with 1996. Net sales increased at both SpecTran Communication
and SpecTran Specialty in 1997 as compared to 1996 due to continued market
demand. This was partially offset by industry pricing pressure for standard
communication fiber products experienced during the second half of 1997.
Gross Profit
Gross profit increased $901,000, or 4.0%, from $22.4 million in 1996 to
$23.3 million in 1997. As a percentage of net sales, the gross profit increased
to 37.5% for the year ended December 31, 1997, from 36.3% for the year ended
December 31, 1996. The increase in gross profit was primarily due to lower
production costs for the Company's standard communication fiber products
resulting from manufacturing process and yield improvements. This was partially
offset by lower margins at SpecTran Specialty, primarily due to greater than
planned costs incurred in connection with the consolidation and expansion into a
new facility.
As a percentage of net sales, royalties decreased from 3.7% in 1996 to
3.0% in 1997. This decrease in royalties as a percentage of net sales was
primarily due to an increase in 1997 in the net sales not subject to royalties.
Selling & Administrative
Selling and administrative expenses increased $325,000, or 2.4%, from
$13.6 million in 1996 to $14.0 million in 1997. This increase was primarily due
to costs associated with the Company's one-time management reorganization and
training costs slightly offset by a lower provision for incentive compensation
in 1997. As a percentage of net sales, selling and administrative expenses
slightly increased to 22.5% for the year ended December 31, 1997 from 22.2% for
the year ended December 31, 1996.
18
Research & Development
Research and development costs increased $157,000, or 5.0%, from $3.1
million in 1996 to $3.3 million in 1997. As a percentage of net sales, research
and development costs increased from 5.1% for the year ended December 31, 1996
to 5.3% for the year ended December 31, 1997. The Company continues to invest in
programs to improve manufacturing costs and product performance in both
multimode and single-mode product lines, to develop new special performance
fiber products and to develop alternative process technologies. The Company
intends to approximately double its research and development spending in 1998.
Other Income (Expense), net
Other income (expense), net favorably increased by $1.2 million to net
other income of $1.1 million in 1997 compared with net other expense of $65,000
in 1996. Interest income increased $1.1 million, or 487.2%, from $226,000 in
1996 to $1.3 million in 1997 due to a higher level of cash available for
investment as a result of the Company's secondary public offering in February
1997. Interest expense, net of capitalized interest, increased $276,000, or
58.6%, from $471,000 in 1996 to $747,000 in 1997 due to the increase in debt
related to the Company's capacity expansion.
Income Taxes
The effective tax rate declined from 34.0% in 1996 to 29.0% in 1997
primarily due to a lower provision for state income taxes in 1997 as a result of
investment tax credits associated with capacity expansion. The effective tax
rates for 1997 and 1996 were lower than the statutory combined federal and state
tax rates due primarily to a reduction of $300,000 in 1997 and $400,000 in 1996
in the valuation allowance for deferred tax assets due to the Company's belief
that it is more likely than not that the additional deferred tax assets will be
realized through the utilization of operating loss and tax credit carryforwards.
See Note 10 of "Notes to the Consolidated Financial Statements."
Income From Equity in Joint Venture
The Company realized a loss of $287,000, from its equity in General
Photonics, the joint venture formed in December 1996 with General Cable. The
loss in 1997, was primarily due to lower than anticipated revenues. In 1996, the
results of Applied Photonic Devices, Inc., the predecessor to General Photonics,
were included in the consolidated results.
Net Income (Loss)
Net income increased $1.2 million, or 32.5%, from $3.7 million in 1996
to $4.8 million for the year ended in 1997. The increase was primarily due to
improved operating results at Communication Fiber and higher interest income.
19
Liquidity and Capital Resources
As of December 31, 1998, the Company had approximately $1.7 million of
cash. In addition, the Company has a $20.0 million revolving credit agreement
with its principal bank maturing in April 2000. As of December 31, 1998, the
Company had borrowed $10.0 million against the revolving credit agreement.
The Company has a scheduled debt principal repayment of $3.2 million
on December 21, 1999.
The Company's net working capital position at December 31, 1998, was
approximately $11.8 million with a current ratio of 1.8 to 1.
During 1998 the Company used $10.0 million in cash provided from financing
activities, primarily from net borrowings under its revolving credit agreement,
$6.5 million of proceeds from the sale of marketable securities and positive
cash flow from operations of $3.0 million, to fund its capacity expansion.
The Company is continuing its capacity expansion, which will require
approximately $1 million in capital expenditures during 1999, resulting in total
expenditures for capacity expansion since 1996 of approximately $44 million for
SpecTran Communication and approximately $12 million for SpecTran Specialty,
including equipment purchases. When fully operational, expected in the second
quarter of 1999, 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, assuming the Company continues to meet its lenders
revised covenants. The Company had violated certain covenants contained in both
the revolving credit agreement and the senior secured notes triggered by its
second quarter 1998 results. In December 1998, the Company signed an agreement
to amend these covenants under its loan agreements with its principal bank and
the senior secured noteholders. With the signing of that agreement, the Company
remedied all violations under the original agreements. While the Company is
presently in compliance with all the revised covenants, there can be no
assurance that the Company,will in the future, be able to remain in compliance
with all the revised covenants.
The Company is exploring various financing alternatives, including seeking
additional capital or entering into strategic alliances in an attempt to reduce
its debt. The Company believes that successful completion of one or more of
these alternatives and/or renewal or extension of its revolving credit agreement
is necessary to meet its longer term cash requirements.
20
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 $1.2 million from $1.5 million. This includes
$222,000 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
50% 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.
21
The Company has initiated formal communications with a substantial
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.
Subsequent Events
In March 1999, Dr. Raymond E. Jaeger, who was Chairman of the Board of
Directors until December 31, 1998, resigned from his position as a director of
the Company and its subsidiaries. Dr. Jaeger remains a consultant to the
Company. Mr. Bruce A. Cannon, who had previously resigned from his executive
positions, entered into an agreement with the Company during the first quarter
of 1999, effective as of December 1, 1998, memorializing his resignation as an
officer and a director of the Company and its subsidiaries. Mr. Cannon remains a
consultant to the Company.
Recent Accounting Pronouncements
Effective January 1, 1998, the Company adopted: (1) Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income." The
statement requires the corporation to report "comprehensive income" as defined
therein. (2) Statement of Financial Accounting Standards No. 131, "Disclosure
about Segments of an enterprise and Related Information." The Statement changes
the criteria used to determine the segments for which the Company must report
information. This item is discussed herein; please also see the Notes to
Consolidated Financial Statements for more information; and (3) Statement of
Financial Accounting Standards No. 132, "Employers' Disclosure about Pension and
Other Postretirement Benefits." The Statement requires additional disclosures on
changes in the benefit obligations and fair values of plan assets during the
year. (4) Statement of Position 98-1 "Accounting for the Costs of Computer
Software Developed or obtained for Internal Use". The statement of position
provides guidance on accounting for the costs of computer software developed or
obtained for internal use. The adoption of this statement did not have a
material affect to the financial position or results of operations. (5)
Statement of Position 98-5 "Reporting on the Costs of Start-up Activities". The
adoption of this statement did not have a material affect to the financial
position or results of operations. Please refer to the Notes to Consolidated
Financial Statements for more information.
Other
This document contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, in Section 21E
of the Securities 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 costs, 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 person that the
objectives and plans of the Company will be achieved.
22
Item 7A. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's cash is invested in short-term dollar-denominated money
market funds. The Company does not engage in trading of these investments and
believes that they may present minimal market risk.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this Item is submitted as a separate section of
this Form 10-K.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
23
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information to be contained under the heading "Election of
Directors" in the Company's proxy statement relating to the 1999 Annual Meeting
of Shareholders (the "Proxy Statement") is hereby incorporated herein by
reference.
Item 11. EXECUTIVE COMPENSATION.
The information with respect to compensation of certain executive
officers and all executive officers of the Company as a group to be contained
under the heading "Compensation of Executive Officers and Directors" in the
Proxy Statement is hereby incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information with respect to ownership of the Company's Common Stock
by management and by certain other beneficial owners to be contained under the
heading "Principal Stockholders and Other Information" in the Proxy Statement is
hereby incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to certain relationships and related transactions
to be contained under the heading "Compensation and Incentive Stock Committee
Interlocks and Insider Participation " in the Proxy Statement is hereby
incorporated herein by reference.
24
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. & 2. Financial Statements and Financial Statement Schedules:
The response to this portion of Item 14 is submitted as a
separate section of this Form 10-K.
3. Exhibits:
See Exhibit Index on Pages 27 through 32 of this Form 10-K.
(b) Reports on Form 8-K filed during the final quarter of fiscal 1998: None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: SPECTRAN CORPORATION
March 27, 1999 By: /s/ Charles B. Harrison
------------------------
Charles B. Harrison
President,
Chief Executive Officer and
Chairman of the Board of Directors
March 27, 1999 By: /s/ John T. Rogers
-------------------
John T. Rogers
Acting Chief Financial Officer
Principal Accounting Officer
25
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
/s/ Charles B. Harrison President, Chief Executive Officer March 27, 1999
- ------------------------------ and Chairman of the Board of
Charles B. Harrison Directors (principal executive
officer)
/s/ John T. Rogers Acting Chief Financial Officer March 27, 1999
- ------------------------------ (principal accounting officer)
John T. Rogers
/s/ John E. Chapman Senior Vice President - Technology March 27, 1999
- -------------------------------
John E. Chapman and Director
/s/ Ira S. Nordlicht Director March 27, 1999
- -----------------------------------
Ira S. Nordlicht
/s/ Paul D. Lazay Director March 27, 1999
- ---------------------------------
Paul D. Lazay
/s/ Richard M. Donofrio Director March 27, 1999
- ----------------------------------
Richard M. Donofrio
/s/ Lily K. Lai Director March 27, 1999
- -------------------------------------
Lily K. Lai
/s/ Robert A. Schmitz Director March 27, 1999
- -------------------------------------
Robert A. Schmitz
26
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
3.1 Certificate of Incorporation of the Registrant, as amended.
(Incorporated by reference to Registrant's Annual Report on Form 10-K
for its fiscal year ended December 31, 1991.)
3.2 By-Laws of the Registrant, as amended. (Incorporated by reference to
Registrant's Annual Report on Form 10-K for its fiscal year ended
December 31, 1991.)
4.5* Form of Stock Certificate for Voting Common Stock.
10.7* License Agreement dated August 15, 1981, between the Registrant and
Western Electric Company, Incorporated. (Registrant has been granted
confidential treatment of portions of this Exhibit.)
10.49 License Agreement dated as of the first day of January 1991 by and
between the Registrant and Corning, Incorporated. (Registrant has
been granted confidential treatment of portions of this Exhibit.)
(Incorporated by reference to Registrant's Annual Report on Form 10-K
for its fiscal year ended December 31, 1991.)
10.61 Stock Purchase Agreement among APD Acquisition Corp. and Irving N.
Dwyer, David P. DaVia, The Irving N. Dwyer and Annette M. Dwyer
Charitable Remainder Trust and the DaVia Charitable Remainder Trust.
(Incorporated by reference to the Registrant's Report on Form 8-K
filed June 7, 1995.)
10.62 Directors Retirement Plan dated December 27, 1995. (Incorporated by
reference to the Registrant's Report on Form 10-K dated March 29,
1996.)
10.63 Registrant's Employee Profit Sharing Plan as revised and adopted
effective January 1, 1995. (Incorporated by reference to the
Registrant's Report on Form 10-K dated March 29, 1996).
10.65 Lease between Fabrilock, Inc. and Applied Photonic Devices,
Inc. dated February 6, 1996. (Incorporated by reference to the
Registrant's Report on Form 10-K dated March 29, 1996).
10.69 Supplemental Retirement Agreement between SpecTran Corporation and
Raymond E. Jaeger dated May 8, 1996. (Incorporated by reference to
the Registrant's Quarterly Report on Form 10-Q dated August 9, 1996.)
10.70 Supplemental Retirement Agreement between SpecTran Corporation and
Bruce A. Cannon dated May 8, 1996. (Incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q dated August 9, 1996.)
27
10.71 Supplemental Retirement Agreement between SpecTran Corporation and
Crawford L. Cutts dated May 8, 1996. (Incorporated by reference to
the Registrant's Quarterly Report on Form 10-Q dated August 9, 1996.
10.73 Supplemental Retirement Agreement between SpecTran Corporation and
John E. Chapman dated May 8, 1996. (Incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q dated August 9, 1996.)
10.74 Lease between CRJ Realty Trust and SpecTran Communication Fiber
Technologies, Inc. dated July 22, 1996. (Incorporated by reference to
the Registrant's Quarterly Report on Form 10-Q dated August 9, 1996.)
10.75 Contractual Agreement Between Lucent Technologies Inc. and SpecTran
Corporation dated October 3, 1996. (Registrant has been granted
confidential treatment for portions of this Exhibit.) (Incorporated
by reference to the Registrant's Quarterly Report on Form 10-Q dated
November 13, 1996.)
10.79 Key Employee Incentive Plan effective as of January 1, 1996.
(Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q dated November 13, 1996.)
10.80 Employment Agreement between SpecTran Corporation and Raymond E.
Jaeger dated as of December 14, 1992. (Incorporated by reference to
the Registrant's Quarterly Report on Form 10-Q dated November 13,
1996.)
10.81 Employment Agreement between SpecTran Corporation and Bruce A. Cannon
dated as of December 14, 1992. (Incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q dated November 13, 1996.)
10.82 Employment Agreement between SpecTran Corporation and John E. Chapman
dated as of December 14, 1992. (Incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q dated November 13, 1996.)
10.83 Employment Agreement between SpecTran Corporation and Crawford L.
Cutts dated as of January 1, 1996. (Incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q dated November 13, 1996.)
28
10.84 Employment Agreement between SpecTran Corporation and William B. Beck
dated as of February 18, 1994. (Incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q dated November 13, 1996.)
10.86 Note Purchase Agreement between SpecTran Corporation and
Massachusetts Mutual Life Insurance Company dated as of December 1,
1996. (Incorporated by reference to the Registrant's Current Report
on Form 8-K dated December 31, 1996.)
10.87 Note Purchase Agreement between SpecTran Corporation and CM Life
Insurance Company dated as of December 1, 1996. (Incorporated by
reference to the Registrant's Current Report on Form 8-K dated
December 31, 1996.)
10.88 Note Purchase Agreement between SpecTran Corporation and The Mutual
Life Insurance Company of New York dated as of December 1, 1996.
(Incorporated by reference to the Registrant's Current Report on Form
8-K dated December 31, 1996.)
10.89 Note Purchase Agreement between SpecTran Corporation and Atwell & Co.
dated as of December 1, 1996. (Incorporated by reference to the
Registrant's Current Report on Form 8-K dated December 31, 1996.)
10.90 Security Agreement among SpecTran Corporation, SpecTran Communication
Fiber Technologies, Inc., SpecTran Specialty Optics Company, Applied
Photonic Devices, Inc. and Fleet National Bank, as Trustee, dated as
of December 1, 1996. (Incorporated by reference to the Registrant's
Current Report on Form 8-K dated December 31, 1996.)
10.91 Trademark Security Agreement among SpecTran Corporation, SpecTran
Communication Fiber Technologies, Inc., SpecTran Specialty Optics
Company, Applied Photonic Devices, Inc. and Fleet National Bank, as
Trustee, dated as of December 1, 1996. (Incorporated by reference to
the Registrant's Current Report on Form 8-K dated December 31, 1996.)
10.92 Patent Collateral Assignment among SpecTran Corporation, SpecTran
Communication Fiber Technologies, Inc., SpecTran Specialty Optics
Company, Applied Photonic Devices, Inc. and Fleet National Bank, as
Trustee, dated as of December 1, 1996. (Incorporated by reference to
the Registrant's Current Report on Form 8-K dated December 31, 1996.)
10.93 Pledge Agreement among SpecTran Corporation, SpecTran Communication
Fiber Technologies, Inc., SpecTran Specialty Optics Company, Applied
Photonic Devices, Inc. and Fleet National Bank, as Trustee, dated as
of December 1, 1996. (Incorporated by reference to the Registrant's
Current Report on Form 8-K dated December 31, 1996.)
10.94 Mortgage, Assignment of Rents and Security Agreement by SpecTran
Communication Fiber Technologies, Inc. to Fleet National Bank, as
Trustee, dated as of December 1, 1996. (Incorporated by reference to
the Registrant's Current Report on Form 8-K dated December 31, 1996.)
10.95 Open-End Mortgage, Assignment of Rents and Security Agreement by
SpecTran Specialty Optics Company to Fleet National Bank, as Trustee,
dated as of December 1, 1996. (Incorporated by reference to the
Registrant's Current Report on Form 8-K dated December 31, 1996.)
29
10.96 Guaranty Agreement dated as of December 1, 1996 by SpecTran
Communication Fiber Technologies, Inc., SpecTran Specialty Optics
Company and Applied Photonic Devices, Inc. in favor of Massachusetts
Mutual Life Insurance Company, CM Life Insurance Company, The New
York Mutual Life Insurance Company and Atwell & Co. (Incorporated by
reference to the Registrant's Current Report on Form 8-K dated
December 31, 1996.)
10.97 Loan Agreement among SpecTran Corporation, SpecTran Communication
Fiber Technologies, Inc., SpecTran Specialty Optics Company, Applied
Photonic Devices, Inc. and Fleet National Bank dated as of December
1, 1996. (Incorporated by reference to the Registrant's Current
Report on Form 8-K dated December 31, 1996.)
10.98 Limited Liability Company Agreement of General Photonics, LLC between
Applied Photonic Devices, Inc. and General Cable Industries, Inc.
dated as of December 23, 1996. (Incorporated by reference to the
Registrant's Current Report on Form 8-K dated January 8, 1997.)
10.99 Asset Purchase Agreement among Applied Photonic Devices, Inc.,
SpecTran Corporation, General Cable Corporation and General Cable
Industries, Inc. dated as of December 23, 1996. (Incorporated by
reference to the Registrant's Current Report on Form 8-K dated
January 8, 1997.)
10.100 Investor's Representations, Contribution Agreement and Subscription
Agreement among Applied Photonic Devices, Inc., SpecTran Corporation
and General Photonics, LLC dated as of December 23, 1996.
(Incorporated by reference to the Registrant's Current Report on Form
8-K dated January 8, 1997.)
10.101 Non-Competition Agreement among General Cable Industries, Inc.,
General Cable Corporation, Applied Photonic Devices, Inc., SpecTran
Corporation and General Photonics, LLC dated December 23, 1996.
(Registrant has been granted confidential treatment for portions of
this Exhibit.) (Incorporated by reference to the Registrant's Current
Report on Form 8-K dated January 8, 1997.)
10.102 Standstill Agreement among General Cable Industries, Inc., General
Cable Corporation and SpecTran Corporation dated as of December 23,
1996. (Incorporated by reference to the Registrant's Current Report
on Form 8-K dated January 8, 1997.)
10.104 Letter amendment to Employment Agreement between SpecTran Specialty
Optics Company and William B. Beck dated April 18, 1996.
(Incorporated by reference to the Registrant's Current Report on Form
8-K dated January 8, 1997.)
30
10.105 Cross-Indemnity Agreement between SpecTran Corporation and Allen &
Company Incorporated. (Incorporated by reference to the
Registrant's Registration Statement on Form S-3 (Reg. No. 333-19449)
effective February 12, 1997.)
10.106 Common Stock Purchase Warrant issued to Allen & Company Incorporated.
(Incorporated by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1996.)
10.107 Settlement Agreement dated February 13, 1998, between Corning
Incorporated and SpecTran Corporation. (Incorpated by reference
to the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998.)
10.108 Employment Agreement between SpecTran Corporation and Charles B.
Harrison dated as of April 1, 1998. (Incorpated by reference to the
Registrant's Quarterly Report on Form 10-Q for the fiscal year
ended May 15, 1998.)
10.109 Employment Agreement between SpecTran Corporation and William B.
Beck dated as of June 20, 1998. (Incorpated by reference to the
Registrant's Quarterly Report on Form 10-Q for the fiscal year
ended August 14, 1998.)
10.110 Employment Agreement between SpecTran Corporation and Raymond E.
Jaeger dated as of April 13, 1998. (Incorpated by reference to the
Registrant's Quarterly Report on Form 10-Q for the fiscal year
ended August 14, 1998.)
10.111 Patent License Agreement between Lucent Technologies, Inc. and
SpecTran Corporation dated October 30, 1998.(Incorpated by reference
to the Registrant's Current Report on Form 8-K for the fiscal year
ended February 11, 1998.)(Registrant has been granted confidential
treatment for portions of this Exhibit.)
10.112 Agreement between SpecTran Corporation and Bruce A. Cannon dated as
of December 1,1998.
10.113 Employment Termination Agreement and Release between SpecTran
Corporation and William B. Beck dated as of October 7, 1998.
10.114 Employment Agreement between SpecTran Corporation and Martin Seifert
dated as of August 25, 1998.
31
10.115 Registrant's 1991 Incentive Stock Option Plan, as amended
10.116 First Amendment to Loan Agreement among SpecTran Corporation,
SpecTran Communication Fiber Technologies, Inc., SpecTran Specialty
Optics Company, Applied Photonic Devices, Inc. and Fleet National
Bank dated as of September 30, 1998.
10.117 First Amendment to Note Purchase Agreement by and among SpecTran
Corporation, and each of the purchasers listed on the signature page
thereto dated as of September 30, 1998.
10.118 First Amendment to Trademark Security Agreement among SpecTran
Corporation, SpecTran Communication Fiber Technology Inc., SpecTran
Specialty Optics Company, Applied Photonic Devices, Inc., and State
Street Bank and Trust Company, as Trustee, dated as of September 30,
1998.
10.119 First Amendment to Patent Collateral Assignment among SpecTran
Corporation, SpecTran Communication Fiber Technologies, Inc.,
SpecTran Specialty Optics Company, Applied Photonic Devices, Inc. and
State Street Bank and Trust Company, as Trustee, dated as of
September 30, 1998.
10.120 Modification Agreement between SpecTran Communication Fiber
Technologies, Inc. to State Street Bank and Trust Company, as
Trustee, dated as of September 30, 1998.
10.121 Modification Agreement between SpecTran Specialty Optics Company to
State Street Banks and Trust Company, as Trustee, dated as of
September 30, 1998.
10.122 General Photonics audited Financial Statements. (In compliance with
Regulation SX13, General Photonics' Financial Statements for period
ending December 31, 1998 will follow as an amendment. They are
currently unavailable.)
21.0 Subsidiaries.
- ------------------------------
* Incorporated by reference to Registrant's Registration Statement on Form
S-1 (Reg. No. 2-83172) effective June 2, 1983
32
SpecTran Corporation
Form 10-K
Items 8, 14 (a) (1) and (2)
Index to Consolidated Financial Statements and Schedule
The following consolidated financial statements of the registrant required to be
included in Item 8 and 14 (a) (1) are listed below:
Page
Independent Auditors' Report F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the Years Ended December 31,
1998,
1997 and 1996 F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998,
1997 and 1996 F-5
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7 through F-32
The following financial statement schedule of the registrant is included
pursuant to Item 14 (a) (2):
Financial Statement Schedule Page
I. Valuation and Qualifying Accounts F-32
Schedules other than those mentioned above are omitted because the conditions
requiring their filing do not exist or because the required information is
presented in the consolidated financial statements, including the notes thereto.
F-1
Independent Auditors' Report
The Board of Directors and Stockholders
SpecTran Corporation:
We have audited the consolidated financial statements of SpecTran Corporation as
of December 31, 1998 and 1997, and the related statements of operations and
comprehensive income, stockholders' equity and cash flows for each of the years
in the three year period ended December 31, 1998. In connection with our audits
of the consolidated financial statements, we also have audited the financial
statement schedule as listed in the accompanying index. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SpecTran Corporation
as of December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1998, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information included in
Schedule I is presented for the purposes of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinio, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
February 12, 1999
F-2
SpecTran Corporation
Consolidated Balance Sheets
Dollars in thousands
ASSETS (NOTE 8 AND 15)
1998 1997
---- ----
Current Assets:
Cash and Cash Equivalents $ 1,690 $ 445
Current Portion of Marketable Securities (Note 2) -- 5,535
Trade Accounts Receivable, net of allowance for doubtful
accounts of $523 and $389 in 1998 and 1997, respectively 12,568 8,622
Inventories (Note 3) 8,279 9,666
Income Taxes Receivable 644 --
Deferred Income Taxes, net (Note 11) 1,889 1,189
Prepaid Expenses and Other Current Assets 1,036 1,943
---------- ----------
Total Current Assets 26,106 27,400
---------- ----------
Investment in Joint Venture (Note 15) 3,239 4,213
Property, Plant and Equipment, net (Note 4) 68,495 55,409
Other Assets:
Long-term Marketable Securities (Note 2) -- 996
License Agreements, net (Notes 5 & 13) 4,335 603
Deferred Income Taxes, net (Note 11) -- 412
Goodwill, net (Note 6) 793 872
Other Long-Term Assets (Note 14) 2,451 2,200
---------- ----------
Total Other Assets 7,579 5,083
---------- ----------
Total Assets $ 105,419 $ 92,105
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities (Note 15):
Current Maturities of Long-term Debt (Note 8) $ 3,200 $ --
Current Portion of License Fees Payable (Note 13) 1,250 --
Accounts Payable 4,410 4,758
Income Taxes Payable -- 573
Accrued Defined Benefit Pension Liability (Note 14) 1,902 1,716
Deferred Income Taxes, net (Note 11) 478 --
Accrued Liabilities (Note 7) 3,317 4,299
---------- ----------
Total Current Liabilities 14,557 11,346
---------- ----------
Long-term portion of License Fee Payable (Notes 5 & 13) 2,750 --
Long-term Debt (Note 8) 30,800 24,000
---------- ----------
Stockholders' Equity (Note 9 ):
Common Stock, voting, $.10 par value; authorized 20,000,000 shares;
outstanding 7,003,850 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 50,252 50,223
Accumulated Other Comprehensive Income (Loss) -- (1)
Retained Earnings 6,360 5,837
---------- ----------
Total Stockholders' Equity 57,312 56,759
---------- ----------
Total Liabilities and Stockholders' Equity $ 105,419 $ 92,105
========== ==========
See accompanying notes to consolidated financial statements.
F-3
SpecTran Corporation
Consolidated Statements of Operations and Comprehensive Income
Dollars in thousands except per share amounts
Years Ended December 31,
---------------------------------------------------------
1998 1997 1996
---- ---- ----
Net Sales (Note 12) $ 70,856 $ 62,057 $ 61,571
Cost of Sales 51,976 38,781 39,196
---------- ---------- ----------
Gross Profit 18,880 23,276 22,375
Selling and Administrative Expenses 13,818 13,966 13,641
Research and Development Costs 5,493 3,289 3,132
---------- ---------- ----------
Income (Loss) from Operations (431) 6,021 5,602
---------- ---------- ----------
Other Income (Expense):
Interest Income 224 1,327 226
Interest Expense (1,419) (747) (471)
Other Net (Note 5) 3,372 510 180
---------- ---------- ----------
Other Income (Expense), net 2,177 1,090 (65)
---------- ---------- ----------
Income before Income Taxes and Equity in Joint Venture 1,746 7,111 5,537
Loss from Joint Venture (Note 15) (974) (287) --
---------- ---------- ----------
Income before Income Taxes 772 6,824 5,537
Income Tax Expense (Note 11) 249 1,982 1,882
---------- ---------- ----------
Net Income 523 4,842 3,655
---------- ---------- ----------
Other Comprehensive Income,
Net of Tax:
Unrealized Gains on Securities:
Unrealized Holdings Gains
Arising During the Period 1 11 4
Less Reclassification Adjustment
For (Gains)/Losses Included
In Net Income (12) (17) 13
---- -------- ----------
Other Comprehensive Income (Loss) (11) (6) 17
---- -------- ----------
Comprehensive Income $ 512 $ 4,836 3,672
========== ========== =========
Net earnings per Common Share (Note 10):
Basic $ .07 $ .72 $ .68
========== ============ ==========
Diluted $ .07 $ .68 $ .61
========== ============= =========
See accompanying notes to consolidated financial statements.
F-4
SpecTran Corporation
Consolidated Statements of Cash Flows
Dollars in thousands
Years Ended December 31,
1998 1997 1996
Cash Flows from Operating Activities:
Net income $ 523 $ 4,842 $ 3,655
Reconciliation of net income to net cash provided by operating
activities:
Depreciation and amortization 6,665 3,969 3,071
Loss (gain) on sale of marketable securities (18) (24) 19
Loss on disposition of equipment 178 61 --
Changes in valuation accounts 1,126 (532) (380)
Investment in joint venture 974 (78) (354)
Change in long-term deferred income taxes 1,221 402 1,118
Change in other long-term assets (4,349) (409) (344)
Changes in assets and liabilities:
Current deferred income taxes (700) (398) (83)
Accounts receivable (4,079) (1,172) (2,136)
Inventories 65 (1,709) (3,742)
Prepaid expenses and other current assets 894 (639) (50)
Income taxes payable/receivable (1,218) 273 (150)
Accounts payable and accrued liabilities 2,855 1,021 3,606
--------- --------- ---------
Net Cash Provided by Operating Activities 4,137 5,607 4,230
--------- --------- ---------
Cash Flows from Investing Activities:
Sale of Assets of Applied Photonic Devices -- -- 5,278
Acquisition of property, plant and equipment (19,471) (41,157) (11,100)
Purchase of marketable securities (9,652) (254,437) (29,658)
Proceeds from sale/maturity of marketable securities 16,202 263,368 19,439
--------- --------- ---------
Net Cash Used in Investing Activities (12,921) (32,226) (16,041)
--------- --------- ---------
Cash Flows from Financing Activities:
Borrowings of long-term debt 10,000 -- 28,000
Repayment of long-term debt -- -- (14,000)
Issuance of common stock, net -- 23,082 --
Tax effect of disqualifying disposition of ISO shares -- 43 117
Proceeds from exercise of stock options and warrants 29 374 329
Deferred financing costs -- -- (695)
--------- --------- ---------
Net Cash Provided by Financing Activities 10,029 23,499 13,751
--------- --------- ---------
Increase (Decrease) in Cash and Cash Equivalents 1,245 (3,120) 1,940
Cash and Cash Equivalents at Beginning of Year 445 3,565 1,625
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 1,690 $ 445 $ 3,565
========= ========= =========
See accompanying notes to consolidated financial statements.
F-5
SpecTran Corporation
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1998, 1997 and 1996
Dollars in thousands
Accumulated
Other Retained Total
Common Stock Paid-in Comprehensive Earnings Stockholders'
Shares Par Value Capital Income (Loss) (Deficit) Equity
Balance at December 31, 1995 5,353,686 $535 $26,443 $(22) $(2,660) $24,296
Exercise of Stock
Options (Note 9) 46,385 5 324 -- -- 329
Issuance of Shares in
Connection with
Acquisition (Note 15) -- -- 117 -- -- 117
Unrealized Gain on
Marketable Securities -- -- -- 6 -- 6
Net Income -- -- -- -- 3,655 3,655
--------- ------ -------- ------ -------- -----
Balance at December 31, 1996 5,400,071 540 26,884 (16) 995 28,403
Exercise of Stock
Options 100,563 10 364 -- -- 374
(Note 9)
Issuance of Shares in
Connection with Stock
Offering (Note 9) 1,500,000 150 22,932 -- -- 23,082
Tax Effect of Disqualifying
Disposition of ISO -- -- 43 -- -- 43
shares(Note 10)
Unrealized Gain on
Marketable Securities -- -- -- 15 -- 15
Net Income -- -- -- -- 4,842 4,842
--------- ------ -------- ------ -------- -----
Balance at December 31, 1997 7,000,634 700 50,223 (1) 5,837 56,759
Exercise of Stock Options
(Note 9) 3,216 -- 29 -- -- 29
Unrealized Gain on
Marketable Securities -- -- -- 1 -- 1
Net Income -- -- -- -- 523 523
--------- ------ -------- ------ -------- ---
Balance at December 31, 1998 7,003,850 $700 $50,252 $ -- $6,360 $57,312
========= ====== ======== ====== ======= =======
See accompanying notes to consolidated financia statements.
F-6
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997 and 1996
1 - Nature of Business and Summary of Significant Accounting Policies
Nature of Business
SpecTran Corporation (the "Company") develops, manufactures and markets
a wide range of fiber optic products. These include multimode and single-mode
optical fiber and cable for use in data communications and telecommunications
applications. The Company also develops special performance fibers, coatings,
cables, cable assemblies and other value-added products for use in a variety of
specialty markets.
Principles of Consolidation and Basis of Accounting
The consolidated financial statements include the accounts of the Company
and all wholly owned subsidiaries: SpecTran Communication Fiber Technologies,
Inc. ("SpecTran 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
(See Note 15). The investment in General Photonics is accounted for under the
equity method of accounting pursuant to which the Company records its 50%
interest in General Photonics' net operating results. Prior to the formation of
General Photonics, APD's results of operations, including net sales and
expenses, were consolidated with those of the Company. All significant
intercompany balances and transactions have been eliminated.
Management uses estimates and assumptions in preparing the financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and liabilities
and the reported revenue and expenses. Actual results may vary from the
estimates.
Certain 1997 and 1996 balances have been reclassified to be consistent with
the current year's presentation.
Revenue Recognition
Sales revenues are recognized upon shipment of goods. Customers generally
have the right to return for replacement any goods which do not meet the
customer's purchase order specifications. Sales revenues and cost of sales as
reported in the consolidated statements of operations and comprehensive income
are adjusted to reflect estimated returns and warranty costs.
F-7
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
Marketable Securities
Marketable securities are classified as available-for-sale and reported
at fair value, with unrealized gains and losses excluded from earnings and
reported as a separate component of stockholders' equity, net of estimated
income taxes. Gains and losses on the sale of marketable securities are
recognized at the time of sale on a specific identification basis.
Inventories
Inventories are stated at the lower of cost or market value. Cost is
determined by the first-in, first-out method.
Statements of Cash Flows
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with original maturities of three
months or less to be cash equivalents.
Supplemental disclosure of cash flow information includes cash paid during
the year for (in thousands):
1998 1997 1996
---- ---- ----
Interest $2,590 $2,120 $ 780
Income Taxes 1,316 2,159 1,044
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Machinery and equipment
assembled by the Company are valued at the cost of component parts purchased,
plus the approximate labor and overhead costs to the Company. Significant
renewals and betterments are capitalized. The cost of maintenance and repairs is
charged to expense as incurred. Repairs and maintenance costs amounted to $1.8
million, $1.6 million and $1.5 million in 1998, 1997 and 1996, respectively.
Depreciation is provided by the straight-line method. The principal
annual rates of depreciation are:
Buildings and building improvements..................4%
Machinery and equipment.......................14% to 33-1/3%
In 1997 the Company changed the rate of depreciation for all machinery and
equipment put in service after January 1, 1997, from 5 to 7 years, to more
accurately reflect the economic life of these assets.
Depreciation expense of property, plant and equipment amounted to $6.2
million, $3.6 million and $2.5 million in 1998, 1997 and 1996, respectively.
F-8
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
Cost in Excess of Net Assets Acquired and Other Intangibles
The Company monitors its cost in excess of net assets acquired
(goodwill) and its other intangibles to determine whether any impairment of
these assets has occurred. In making such determination with respect to
goodwill, the Company evaluates the performance, on an undiscounted basis, of
the underlying businesses which gave rise to such amount. Amortization of
goodwill is recorded on a straight-line basis over the estimated useful life of
15 years.
With respect to other intangibles, which include the cost of license
agreements and patents, the Company bases its determination of impairment on the
performance, on an undiscounted basis, of the related products.
License Agreements and Other Assets
The total cost of the license agreements obtained in 1991 and 1998 are
being amortized and charged to expense based on a ten year life. Amortization
expense amounted to $267,000 in 1998 and $201,000 for 1997 and 1996. Deferred
financing costs are amortized and charged to expense over the lives of the
related debt. Patents are being amortized over a ten year life.
Income Taxes
The Company accounts for income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities are recognized
for the estimated future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
F-9
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
Financial Instruments
Financial instruments of the Company consist of cash and cash
equivalents, marketable securities, accounts receivable, accounts payable,
accrued expenses, bank loan and senior secured notes. The carrying amounts of
these financial instruments approximate their fair value.
Stock-Based Compensation
Statement of Financial Accounting Standards Number 123, "Accounting for
Stock-Based Compensation," encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion Number
25, "Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock.
Comprehensive Income
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." This statement
establishes rules for the reporting of comprehensive income and its components.
The Company's comprehensive income consists of net earnings and unrealized gains
or losses on marketable securities and is presented in the Consolidated
Financial Statements. The adoption of SFAS 130 had no impact on net earnings or
on total shareholders' equity. Prior year financial statements have been
reclassified to conform to the SFAS 130 requirements.
F-10
2 - Marketable Securities
The Company had no marketable securities available for sale at December
31, 1998. A summary of marketable securities available for sale for the year
ended December 31, 1997 is as follows (in thousands):
Quoted
Purchase Amortized Unrealized Unrealized Market
Price Cost Gains Losses Value
1997
Money Market $ 88 $ 88 $ -- $ -- $ 88
U.S. Government and
Agency Obligations -- -- -- -- --
Corporate Debt Securities 4,451 4,446 -- 2 4,444
Commercial Paper 1,998 1,998 1 -- 1,999
---------- -------- ----- ------- ----------
Total $ 6,537 $ 6,532 $ 1 $ 2 $ 6,531
========== ======== ===== ======= ==========
The amortized cost and estimated market value of debt securities are shown below
(in thousands): 1997
Amortized Quoted
Cost Market Value
Expected Maturities:
Within one year $3,448 $3,448
One to five years 1,167 1,156
Proceeds from sales of marketable securities, prior to maturity, during
1998 and 1997 were $6.5 million and $4.8 million, respectively. Gains of $18,000
for 1998 and $24,000 for 1997 were recognized on these sales.
3 - Inventories
Inventories consisted of (in thousands):
December 31,
-------------------------------------------
1998 1997
---- ----
Raw Materials $ 3,096 $ 4,036
Work in Process 1,277 1,010
Finished Goods 3,906 4,620
---------- ----------
$ 8,279 $ 9,666
========== ==========
F-11
4 - Property, Plant and Equipment
Property, plant and equipment consisted of (in thousands):
December 31,
-----------------------------------------
1998 1997
---- ----
Land and Land Improvements $ 978 $ 978
Buildings and Improvements 24,909 10,453
Machinery and Equipment 48,983 33,567
Construction in Progress 16,220 27,694
---------- ----------
91,090 72,692
Less: Accumulated Depreciation 22,595 17,283
---------- ----------
Property, Plant and Equipment, net $ 68,495 $ 55,409
========== ==========
The Company is continuing its capacity expansion, which will require
approximately $1 million in capital expenditures during 1999, resulting in total
expenditures for capacity expansion since 1996 of approximately $44 million for
SpecTran Communication and approximately $12 million for SpecTran Specialty,
including equipment purchases. When fully operational, expected in the second
quarter of 1999, 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%.
In 1998 and 1997 the Company recorded approximately $1.4 million in
capitalized interest in each year related to the expansions.
5 - License Agreements
The Company has a limited, non-assignable non-exclusive royalty-bearing
license from Corning to make, use and sell optical fiber under certain of
Corning's United States patents with filing date prior to January 1, 1996 in the
field of optical fiber. The license contains annual quantity limitations. The
Corning license is not applicable to sales made directly or indirectly to
certain customers such as Corning, Lucent and the United States government. The
quantities that can be manufactured under the license increase annually through
the year 2000. The license has a term equal to the life of the last to expire of
the Corning or Company patents licensed under the agreement. Corning has the
right to terminate the license in the event that more than 30% of the Company's
voting stock is acquired, directly or indirectly, by another manufacturing
company. The Company granted to Corning a non-exclusive royalty-free license for
any of its patents with a filing date prior to January 1, 1996 in the field
of optical fiber.
The Company has a non-assignable, non-exclusive, unlimited, royalty-bearing
license from Lucent under all patents covering optical fiber and optical fiber
cable owned by Lucent or which Lucent and its affiliates had the right to
license on or before August 15, 1986. The Company granted back to Lucent a
non-exclusive, royalty-free license under patents the Company may obtain
relating to optical fiber inventions made on before August 15, 1986. The license
extends for the life of the last to expire of the patents licensed under the
agreement.
In October 1998, the Company and Lucent Technologies Inc. established a new
worldwide, non-exclusive license exchanging rights under their optical fiber
patents issued prior to January 1, 1998, and additional patents related to
multimode fiber based on applications filed through October 1998. SpecTran is
licensed by Lucent to make optical fiber at its existing factories for worldwide
use, sale and export from the United States. The license contains some product
limitations including certain exclusions to make or sell select specialty fibers
for some applications. Lucent receives non-exclusive, royalty-free worldwide
rights. SpecTran agreed to pay Lucent a $4.0 million license fee in installments
and, beginning in 2000, a royalty on sales. Lucent has the right to terminate
the agreement if the Company is acquired by an optical fiber manufacturer.
Approximately 22% of the Company's net sales during 1998, all of which were
SpecTran Communication sales, were subject to license requiring aggregate
royalty payments by the Company of approximately 5% of net sales of the
Company's products manufactured under license during 1998. The Company
believes that certain Corning patents, which may have been relevant to the
Company's single-mode fiber, including patents covered by a non-exclusive
license from Corning to the Company, have expired in many countries (including
the United States). Therefore, the Company believes that manufacturing and sale
of its single-mode fiber is not subject to the Corning license and has been
marketing its single-mode fiber without payments of royalties to Corning and
without regard to the annual quantity limitations of the Corning license since
1993. The Company presently does not expect to need the Corning license for the
manufacture of its multimode fiber after 1999 because the Company believes that
a Corning United States patent with relevancy to its multimode fiber will expire
in 1999.
Total royalties expensed during the years ended December 31, 1998, 1997 and
1996 were $.7 million, $1.9 million and $2.3 million, repectively.
F-12
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
6 - Goodwill
Goodwill consisted of (in thousands):
December 31,
-----------------------------------
1998 1997
---- ----
Goodwill $ 1,181 $ 1,181
Less Accumulated Amortization (388) (309)
-------- --------
$ 793 $ 872
======== ========
7 - Accrued Liabilities
Accrued liabilities consisted of (in thousands):
December 31,
--------------------------------------------
1998 1997
---- ----
Salaries and Wages $ 534 $ 612
Royalties 507 885
Health Insurance 682 486
Incentive Compensation 614 1,492
Interest Expense 254 50
Other 726 774
------- -------
$ 3,317 $ 4,299
======= =======
F-13
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
8 - Long-Term Debt
Long-term debt consisted of (in thousands):
December 31,
------------------------------------
1998 1997
---- ----
Revolving credit loan facility at the lower of prime or LIBOR
plus 1.5% $ 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
---------- ----------
34,000 24,000
Less Current Maturities 3,200 --
---------- ----------
$ 30,800 $ 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 (the "Notes"), consisting of $16.0 million of 9.24% interest
Series A Senior Secured Notes due December 26, 2003 (the "Series A Notes") and
$8.0 million of 9.39% interest Series B Senior Secured Notes due December 26,
2004 (the "Series B Notes"). Interest on the Notes is payable semi-annually,
with five equal annual principal repayments required beginning December 26, 1999
for Series A Notes and December 26, 2000 for Series B Notes. The Notes
constitute senior secured debt of the Company secured by a first priority
security interest in substantially all of the assets of the Company and all
current and hereinafter created or acquired subsidiaries, a pledge by the
Company of the issued and outstanding stock of its subsidiaries and mortgages on
real estate owned by the Company's subsidiaries. The Company's obligations are
also guaranteed by the Company's subsidiaries and rank on an equal basis with
all other senior secured indebtedness of the Company. The Notes also provide for
certain financial and non-financial covenants usual for this type of
transaction. During 1996 Company used approximately $14.0 million from the sale
of the Notes to repay all outstanding indebtedness and restructured its existing
$22.0 million of total borrowing capacity with its principal bank, composed of a
$14.5 million revolving credit agreement and $7.5 million in equipment and real
estate term loans, into a $20.0 million revolving credit agreement, maturing
December 1999, with the same security interest in the Company's assets as the
Notes. During 1996, the Company has the option to select from time to time the
interest rate on the revolving credit agreement at either the LIBOR rate plus
1.5% or Fleet Bank's prime rate provided that, under certain circumstances,
Fleet Bank may deem that the LIBOR rate is not available.
F-14
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
At both June 30, 1998 and September 30, 1998, the Company was in
violation of certain covenants. In December 1998 the Company signed an agreement
to amend the financial covenants under its loan agreements with its principal
bank and the senior secured noteholder. With the signing of this agreement
SpecTran remedied all violations under the original agreements and also extended
the maturing date of the revolving credit agreement to April 2000.
As of December 31, 1998 the Company had borrowed $10.0 million against
the revolving credit agreements.
9 - Stockholders' Equity
(a) Warrants
As part of an agreement entered into in September 1990 with Allen &
Company, Incorporated ("Allen"), warrants to purchase 350,000, 30,000 and 20,000
shares of SpecTran voting common stock at an exercise price of $2.00 through
August 14, 1999, were issued to Allen, Richard A.M.C. Johnson, who retired as a
director of the Company in 1996, and Patrick E. Brake, a former director of the
Company, respectively. In conjunction with the Company's public offering in
February 1997, Allen exercised warrants to purchase 200,000 shares and sold them
in the offering. At December 31, 1998 Allen owned none of the Company's
outstanding stock; if the remainder of the Allen warrant were exercised, Allen
would own approximately 2.1% of the Company's outstanding stock. In June 1992
the Johnson warrant was exercised and in January 1993 the Brake warrant was
exercised.
(b) Stock Options
Pursuant to the Company's Incentive Stock Option Plan adopted in November,
1981, as amended, incentive and nonqualified options may be granted to purchase
up to an aggregate of 455,000 shares of the Company's voting Common Stock, $.10
par value, at prices not less than 100% of the fair market value of the shares
at the time the options are granted. As of December 31, 1998, all options were
exercisable in full three years from the date of grant in cumulative annual
installments of 33 1/3% commencing one year after the date of grant, and expire
ten years after grant.
Under its provisions, no options were to be issued under the Incentive
Stock Option Plan adopted in November 1981 ("Old Plan") after the plan reached
its tenth anniversary. During the year ended December 31, 1991, a new Incentive
Stock Option Plan ("New Plan") was adopted. The terms of the New Plan are
identical to those of the Old Plan except that (1) the number of shares eligible
for issuance, upon adoption of the plan, was 160,490, (2) provision is made for
the non-discretionary grant of nonqualified options to directors who are not
full-time employees of the Company or any subsidiary ("outside directors") and
(3) provision is made for all outstanding options to vest upon the occurrence of
a change in control (as defined in the New Plan). Subsequent to December 31,
1998, the New Plan was amended to permit the committee discretion in
establishing the vesting schedule options. At the Company's Annual meeting in
1992, 1994, 1996 and 1998 the holders of Common Stock approved an amendment to
the New Plan increasing the number of shares of Common Stock reserved for
issuance by 210,000, 255,000, 250,000 and 325,000, respectively.
F-15
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
Activity in the plans for the years ended December 31, 1998, 1997 and
1996 is summarized below (dollars in thousands except per share amounts):
Shares Shares
Available Options Under Option
for Option Outstanding Price
---------- ----------- ------------
Balance at December 31, 1995 138,209 543,488 $1.375- $22.250
Increase in Shares Reserved 250,000 -- -- --
Options Granted (165,500) 165,500 $5.500- $21.750
Options Exercised -- (46,385) $1.37 - $15.250
Options Forfeited 11,900 (11,900) $3.375- $15.250
------ ------- ------ -------
Balance at December 31, 1996 234,609 650,703 $1.375- $22.250
Options Granted (123,450) 123,450 $10.875- $14.187
Options Exercised -- (100,563) $1.188- $8.875
Options Forfeited 3,668 (3,668) $5.500- $21.125
----- ------ ------ -------
Balance at December 31, 1997 114,827 669,922 $3.375- $22.250
Increase in Shares Reserved 325,000 -- -- --
Options Granted (388,533) 388,533 $4.125- $9.625
Options Exercised -- (3,216) $5.500- $6.000
Options Forfeited 110,302 (112,919) $3.375- $22.250
------- -------- ------ -------
Balance at December 31, 1998 161,596 942,320 $3.375- $22.250
======= ======= ====== =======
F-16
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
OUTSTANDING OPTIONS OPTIONS EXERCISABLE
----------------------------------------- --------------------------
Number Weighted Average Number of
Range of Outstanding at Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices 12/31/98 Contractual Life Exercise Price At 12/31/98 Exercise Price
3.375-5.063 60,937 8.190 4.278 20,937 4.362
5.064-7.595 223,999 7.530 6.055 146,398 5.658
7.596-11.394 362,384 7.853 8.324 117,183 8.654
11.395-17.093 180,250 6.143 13.993 113,744 14.096
17.094-22.250 114,750 7.478 20.899 60,749 21.166
As of December 31, 1998, options for 459,011 shares were vested and
exercisable at an aggregate exercise amount of $4.8 million ($10.48 per share).
The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock option plan. Accordingly, no
compensation cost has been recognized for its fixed stock options plan. Had
compensation cost for the Company's stock option plan been determined based on
the fair value at the grant dates for awards under the plan consistent with the
provisions of FASB Statement 123, the Company's net income and earnings per
share for the years ended December 31, 1998, 1997 and 1996 would have been
reduced to the pro forma amounts indicated as follows:
1998 1997 1996
---- ---- ----
Net income (in thousands):
As reported $523 $4,842 $3,655
Pro forma $158 $4,594 $3,640
Net income per share:
As reported $.07 $.68 $.61
Pro forma $.02 $.64 $.56
The fair value of options granted under the Company's fixed stock
option plan during 1998, 1997 and 1996 were estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used: no dividend yield, expected volatility 67% for 1998, 63% for
1997 and 64% for 1996, risk free interest rate of 7%, and expected life of five
years.
F-17
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
(c) Secondary Stock Offering
On February 18, 1997, the Company completed a secondary public offering
of 1,500,000 shares of common stock at a price of $19.00 per share. Of the
1,500,000 shares, 1,300,000 were sold by the Company and 200,000 by Allen and
Company, Incorporated, a selling stockholder.
10 - Computation of Earnings per Common Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings per Share" (SFAS 128) which has changed
the method of computing and presenting earnings per common share. All prior
periods presented have been restated in accordance with SFAS 128. This
restatement had an immaterial impact on the prior periods' earnings per common
share amounts calculated under previous standard.
Under SFAS 128, a 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 in 1998, 1997 and 1996.
F-18
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
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.
(dollars and shares in thousands:)
1998 1997 1996
---- ---- ----
Earnings per common share-basic
Earnings applicable to common stock $ 523 $ 4,842 $ 3,655
====== ======== =========
Weighted average shares outstanding 7,003 6,724 5,374
====== ======== =========
Earnings per common share-basic $ .07 $ .72 $ .68
====== ========= =========
Earnings per common share-diluted
Earnings applicable to common share $ 523 $ 4,842 $ 3,655
====== ======== =========
Weighted average shares outstanding 7,003 6,724 5,374
Plus shares issuable on:
Exercise of dilutive options 100 424 588
====== ======== =========
Weighted average shares outstanding
assuming conversion 7,103 7,148 5,962
====== ======== =========
Earnings per common share-diluted $ .07 $ .68 $ .61
======= ========= =========
F-19
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
11 - Income Taxes
Income tax expense attributable to income (loss) from operations
differs from the computed expected tax expense (benefit) determined by applying
the federal income tax rate of 34 percent as follows (in thousands):
1998 1997 1996
---- ----- ----
Computed expected tax expense at 34% $ 262 $ 2,320 $ 1,883
State income taxes, net of federal effect and change in
valuation allowance 189 14 298
Goodwill amortization -- -- 74
Decrease in valuation allowance for deferred income taxes
(230) (300) (400)
Other 28 (52) 27
--------- ---------- ---------
$ 249 $ 1,982 $ 1,882
========= ========= =========
Total income tax expense (benefit) for the years ended December 31,
1998, 1997 and 1996 was allocated as follows (in thousands):
1998 1997 1996
---- ----- ----
Income tax expense attributable to:
Income from operations $ 249 $ 1,982 $ 1,882
Stockholders' equity, for
compensation expense for tax purposes from the
disqualifying disposition of stock options
0 (43) (117)
----------- --------- ---------
$ 249 $ 1,939 $ 1,765
======= ========= =========
Income tax expense (benefit) attributable to income from continuing
operations consists of (in thousands):
Current Deferred Total
Year ended December 31, 1998:
Federal $ (149) $ 87 $ (62)
State 208 103 311
-------- -------- --------
$ 59 $ 190 $ 249
======== ======== ========
Year ended December 31, 1997:
Federal $ 1,577 $ 165 $ 1,742
State 401 (161) 240
-------- -------- --------
$ 1,978 $ 4 $ 1,982
======== ======== ========
Year ended December 31, 1996:
Federal $ 687 $ 668 $ 1,355
State 560 (33) 527
-------- -------- --------
$ 1,247 $ 635 $ 1,882
======== ======== ========
F-20
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
The significant components of deferred income tax expense (benefit)
attributable to income from operations for the years ended December 31, 1998,
1997 and 1996 are as follows (in thousands):
1998 1997 1996
---- ---- ----
Deferred tax expense (exclusive of the effects of
other components listed below)
$ 420 $ 304 $ 1,035
Decrease in valuation allowance for deferred income
taxes (230) (300) (400)
-------- --------- --------
Deferred income tax expense attributable to income
from operations $ 190 $ 4 $ 635
======== ======== ========
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below (in thousands):
1998 1997
---- ----
Deferred tax assets:
Accounts receivable $ 228 $ 169
Inventories 1,248 694
Accrued liability - compensation related expense 152 168
Accrued liability - pension 498 338
Other nondeductible reserves and accruals 9 9
Investment in Joint Venture 373 215
Net operating loss carryforward benefit 323 230
Credit carryforwards benefit 1,200 716
--------- ---------
Total gross deferred tax assets 4,031 2,539
Less valuation allowance (100) (330)
--------- ---------
Net deferred tax assets 3,931 2,209
Deferred tax liabilities (2,520) (608)
--------- ---------
Net deferred tax assets $ 1,411 $ 1,601
========= =========
F-21
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
The valuation allowance for deferred tax assets as of December 31, 1998
and 1997 was $100,000 and $330,000, respectively. Based on the Company's level
of net income and projected future earnings, the Company believes that it is
more likely than not that a portion of the deferred tax asset will be realized
in the future. During 1998, the portion of the deferred tax asset which is
expected to be realized increased from 1997; therefore, the Company reduced its
valuation allowance by $230,000. The remaining valuation allowance relates
primarily to the risk that a portion of the tax credit carryforwards and state
operating loss carryforwards will not be used before they expire.
At December 31, 1998, the Company had the following income tax credit
available to offset future income taxes (in thousands):
Amount Expires
Alternative Minimum Tax Credit $1,037 Indefinite
12 - Major Customers
The approximate net product sales by the Company to customers
accounting for 10% or more of total net annual sales are as follows (in
thousands):
1998 1997 1996
---- ---- ----
Customer Amount % Amount % Amount %
-------- ------ - ------ - ------ -
A 25,959 37 6,601 11
B 6,932 10 8,906 14
C $9,522 15 $7,902 13
Substantially all of the Company's business is to customers in the
telecommunications and data communications industries. International sales,
primarily in Asia and Europe, accounted for 15%, 20% and 18% of total sales in
1998, 1997 and 1996, respectively.
In 1998 due to the Company's settlement of a multi-year suppply contract
with Corning, the Company recognized other income of $3.5 million in 1998 and
$.5 million in 1997.
F-22
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
13 - Commitments
In October 1998, the Company entered into a new license agreement with
Lucent Technologies Inc. where by the Company is obligated to pay Lucent $4.0
million in four installments: $1,250,000 in 1999, $1,000,000 in 2000, $1,000,000
in 2001 and $750,000 in 2002.
All of the Company's leases are on a month to month basis. The Company has
no lease commitments for 1999 and 2000.
Total rent expense for the years ended December 31, 1998, 1997 and 1996 was
$58,000, $301,000 and $634,000, respectively.
14 - Employee Benefit Plans
a) Defined Benefit Pension Plan
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 132 (SFAS 132), "Employers' Disclosures about Pensions
and Other Post-retirement Benefits," which requires additional disclosures on
changes in the benefit obligation and fair value of plan assets during the year.
All prior periods presented have been restated in accordance with SFAS 132.
The Company sponsors a defined benefit pension plan covering substantially
all of its employees. The benefits are based on years of service and an average
of the employee's highest ten consecutive years of earnings. The Company's
funding policy has been to contribute annually the maximum amount that can be
deducted for federal income tax purposes. Contributions are intended to provide
not only for benefits attributed to service to date, but also for those expected
to be earned in the future.
F-23
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheets at December 31, 1998 and
1997.
Actuarial present value of benefit obligations (in thousands):
1998 1997
---- ----
Change in benefit obligation
Benefit obligation at beginning of year $ 2,229 $ 1,740
Service cost 375 285
Interest cost 167 130
Actuarial gain 360 74
Benefits paid (3) --
--------- ---------
Benefit obligation at end of year $ 3,128 $ 2,229
--------- ---------
Change in plan assets
Fair value of assets at beginning of year $ 1,848 $ 1,195
Actuarial return on plan assets 493 302
Employer contribution 252 350
Fair value of plan assets at end of year $ 2,593 $ 1,847
---------- ----------
Funded status $ (535) $ (382)
Unrecognized net actuarial loss 148 137
Unrecognized prior service cost (23) (25)
---------- ----------
Accrued pension cost $ (410) $ (270)
========== ==========
Net pension cost for 1998, 1997 and 1996 included the following
components:
1998 1997 1996
---- ---- ----
Service cost - benefits earned during period $ 375 $ 285 $ 289
Interest cost on projected benefit obligation 167 130 103
Actual return on assets (166) (302) (129)
Net amortization and deferral 17 213 65
--------- --------- ---------
Net pension cost $ 393 $ 326 $ 328
========= ========= =========
Assumptions used in the accounting as of December 31 were as follows:
1998 1997
---- ----
Discount rate 7.0% 7.5%
Rates of increase in compensation levels 5.0% 5.0%
Expected long-term rate of return on assets 8.5% 8.5%
F-24
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
b) Supplemental Retirement Agreements
The Company entered into supplemental retirement agreements with five
executive officers in 1996. These agreements provide benefits based on years of
service and average eligible pay for executives. The following table sets forth
the funded status of the agreements and amounts recognized in the Company's
consolidated balance sheets at December 31, 1998 and 1997.
Actuarial present value of benefit obligations (in thousands):
1998 1997
---- ----
Change in benefit obligation
Benefit obligation at beginning of year $ 1,526 $ 1,325
Service cost 113 111
Interest cost 107 90
-------- ---------
Benefit obligation at end of year $ 1,746 $ 1,526
-------- --------
Funded status $ (1,746) $ (1,526)
Unrecognized net actuarial loss (76) (76)
Unrecognized prior service cost 892 994
--------- ----------
Accrued pension cost $ (930) $ (608)
========= ==========
Net pension cost for 1998, 1997 and 1996 included the following
components:
1998 1997 1996
---- ---- ----
Service cost - benefits earned during period $ 113 $ 111 $ 116
Interest cost on projected benefit obligation 107 90 84
Net amortization and deferral 102 102 2
------- ------- -------
Net pension cost $ 322 $ 303 $ 202
======= ======= =======
Assumptions used in the accounting as of December 31 were as follows:
1998 1997
---- ----
Discount rate 7.0% 7.0%
Rates of increase in compensation levels 5.0% 5.0%
Expected long-term rate of return on assets 8.5% 8.5%
COLA increase 3.5% 3.5%
F-25
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
c) Defined Contribution Pension Plan
The Company sponsors a defined contribution pension plan covering
substantially all of its employees. Employer contributions to the plan are
discretionary and amounted to $300,000 and $361,000 in 1997 and 1996,
respectively. No contribution was provided for during 1998.
d) Directors Retirement Plan
In December 1995 the Company adopted a Directors Retirement Plan which
provides for retirement benefits for all outside directors with five full
calendar years of service as of the later of age 70 or the date of actual
retirement as a director. There was no expense in 1998, 1997 or 1996 to provide
for past service costs. During 1998, the plan was funded with $51,000.
e) Bonus Plans
The Company sponsors an Employee Profit Sharing Plan covering all
employees. This plans provide for the payment of bonuses if certain performance
objectives are obtained. Bonuses of $554,000, $1.367 million and $1.448 million,
respectively, were charged to operations in 1998, 1997 and 1996.
15 - Acquisitions/Joint Venture
a) Applied Photonic Devices, Inc.
On May 23, 1995 the Company purchased all the outstanding capital stock
of Applied Photonic Devices, Inc. ("APD") for cash and common stock worth
approximately $3.9 million. The Company also retired approximately $600,000 of
APD bank debt. The purchase method of accounting was used and the results of
operations of APD are included in the consolidated financial statements from May
23, 1995. Goodwill of $3.3 million resulted from the purchase and was being
amortized over 15 years. Amortization expense amounted to $217,000 in 1996.
In December 1996, the Company announced the formation of General Photonics,
a 50-50 joint venture between the Company and General Cable. General Cable
purchased certain assets of the Company's optical fiber cable subsidiary, APD,
for approximately $5.8 million and then contributed them to General Photonics
for a 50% equity interest. APD contributed its remaining assets to General
Photonics in exchange for its 50% equity interest. The net assets, including
goodwill, of General Photonics totaled $10.2 million at December 31, 1996. The
Company accounts for its interest in the joint venture under the equity method
and no gain or loss was recognized as a result of this transaction.
b) General Phontonics, LLC.
The following is summarized financial information for the Company's joint
venture.
1998 1997
---- ----
Current Assets $ 4,600 $ 7,006
Other Assets 4,480 3,908
Current Liablities 1,853 1,640
Total Revenues $ 9,507 $12,583
Net Income $(2,047) $ ( 708)
F-26
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
The following pro forma statement of operations for the year ended
December 31, 1996 presents the results of operations as if the Company had
entered into the joint venture as of January 1, 1996 (in thousands):
Statement of Operations (unaudited)
1996
----
Sales $51,413
Net Income $ 3,716
-------
Net income per Share of Common Stock $ .63
=======
16 - 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, Cabling, was sold in December
1996 in conjuction with the formation of General Photonics. SpecTran retains a
50% equity interest in General Photonics and SpecTran's share of General
Photonics financial results for 1997 and 1998 is reported on the equity method.
Optical Fiber develops, manufactures and markets specialty multimode
and single-mode fiber for data communications and telecommunications
applications.
Specialty Products develops, manufactures and markets specialty
multimode and single-mode fiber and value-added fiber optic products for
industrial, transportation, communication, medical applications and geophysical.
F-27
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
Cabling developed, manufactured and marketed communications-grade fiber
optic cable primarily for the customer premises market.
Summarized Financial information by business segment is as follows (in
thousands):
REVENUES
1998 1997 1996
---- ---- ----
Optical Fiber 50,801 44,871 34,274
Specialty Products 20,055 17,186 13,879
Cable -- -- 13,418
--------- --------- ------
70,856 62,057 61,571
====== ====== ======
INCOME (LOSS) FROM OPERATIONS
1998 1997 1996
---- ---- ----
Optical Fiber 6,276 10,357 7,684
----- ------ -----
Specialty Products (1,553) 234 1,752
------ ------- -----
Corporate (5,154) (4,570) (3,834)
------ -------- ------
(431) 6,021 5,602
====== ====== =====
F-28
ASSETS
1998 1997 1996
---- ---- ----
Optical Fiber 72,447 51,645 23,379
Specialty Products 19,953 22,867 10,760
Cable (APD) -- -- 5,277
Cable (Investment in JV) 3,458 4,420 --
Corporate 9,561 13,173 23,039
-------- -------- ----------
105,419 92,105 62,455
======== ======== ==========
DEPRECIATION
1998 1997 1996
---- ---- ----
Optical Fiber 3,817 1,650 1,359
Specialty Products 1,630 1,209 914
Cable -- -- 142
Corporate 760 716 124
----------- ---------- ---------
6,207 3,575 2,539
========== ========= =========
CAPITAL EXPENDITURES
1998 1997 1996
---- ---- ----
Optical Fiber 17,423 29,394 6,461
Specialty Products 868 11,379 2,725
Cable -- -- 761
Corporate 1,180 384 1,153
------------ ------------ ----------
19,471 41,157 11,100
=========== =========== ==========
The following table presents revenues by country based on the location
of the use of the product or services (in thousands):
1998 1997 1996
---- ---- ----
United States $ 60,321 $ 49,337 $ 50,481
Taiwan 12 1,352 1,737
Switzerland 1,221 1,272 2,406
Netherlands 1,372 180 130
Malaysia -- 1,488 111
Japan 1,138 642 225
Israel 1,675 100 142
India 415 998 577
Germany 845 770 1,112
China 954 2,825 2,030
Total Other 2,903 3,093 2,620
Total $ 70,856 $ 62,057 $ 61,571
F-29
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
17 - Quarterly Financial Information (unaudited)
In thousands of dollars except per share data
Quarters First Second Third Fourth
- --------------------------- ------------------ ------------------ ------------------ -----------------
1998
Net Sales (See A) $15,112 $16,358 $19,288 $20,098
Gross Profit 5,111 2,553 5,414 5,801
Net Income 864 (1,393) 504 536
Earnings per Common
Share-Basic .12 .20 .07 .08
Earnings per Common
Share-Diluted .12 (.20) .07 .08
1997
Net Sales $16,228 $15,881 $15,638 $14,310
Gross Profit 6,542 6,162 5,777 4,795
Net Income 1,122 1,330 1,151 1,239
Earnings per Common
Share-Basic .18 .19 .17 .18
Earnings per Common
Share-Diluted .17 .18 .16 .17
A) Due to a change in accounting treatment of certain fiber sales, sales and
cost of sales for the first three quarters of 1998 were reduced by
$115,000, $674,000 and $775,000 respectively. This change had no effect on
previously reported net income or earnings per share.
F-30
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
18 - 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.
19 - Related Parties
The Company paid approximately $158,000, in 1998 for legal fees to a firm
having a member who is also a director of the Company.
The Company paid approximately $38,000, in 1998 for consulting fees to a
firm having a member who is also a director of the Company.
F-31
SPECTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
Schedule I - Valuation and Qualifying Accounts
For the Years Ended December 31, 1998, 1997 and 1996
Dollars in Thousands
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Balance at Additions Balance
Beginning Charged to at End
Description of Period Expenses Deductions of Period
For the Year Ended December 31, 1998:
Allowance - Net Deferred Tax Asset $ 330 $ -- $ 230 $ 100
============== =========== ============ =============
Allowance for Doubtful Accounts $ 389 $ 624 $ 490 $ 523
============== =========== ============ =============
Allowance for Obsolete Inventory $ 976 $ 1,322 $ -- $ 2,298
============== =========== ============ =============
For the Year Ended December 31, 1997:
Allowance - Net Deferred Tax Asset $ 630 $ -- $ 300 $ 330
============== =========== ============ =============
Allowance for Doubtful Accounts $ 218 $ 171 $ -- $ 389
============== =========== ============ =============
Allowance for Obsolete Inventory $ 273 $ 703 $ -- $ 976
============== =========== ============ =============
For the Year Ended December 31, 1996:
Allowance - Net Deferred Tax Asset $ 1,030 $ -- $ 400 $ 630
============== =========== ============= =============
Allowance for Doubtful Accounts $ 265 $ -- $ 47 $ 218
============== =========== ============ =============
Allowance for Obsolete Inventory $ 467 $ -- $ 194 $ 273
============== =========== ============ =============
F-32