UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to __________________ Commission file number 0-12489 SPECTRAN CORPORATION (Exact name of registrant as specified in its charter) Delaware 04-2729372 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 50 Hall Road, Sturbridge, Massachusetts 01566 - --------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (508) 347-2261 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ . The number of shares of the registrant's Common Stock outstanding as of April 30, 1999, was 7,004,850. 1 SPECTRAN CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME Dollars in thousands except per share amounts (unaudited) Three Months Ended March 31, ------------------ 1999 1998 ----- ---- Net Sales $ 20,380 $ 15,112 Cost of Sales 15,059 10,001 -------- --------- Gross Profit 5,321 5,111 Selling and Administrative Expenses 3,082 3,134 Research and Development Costs 755 1,176 -------- --------- Income from Operations 1,484 801 -------- --------- Other Income (Expense): Interest Income 28 114 Interest Expense (736) (124) Other, Net (Note 5) (12) 842 -------- --------- Other Income (Expense), net (720) 832 -------- --------- Income before Income Taxes and Equity in Joint 764 1,633 Venture Loss from Joint Venture (382) (252) -------- ---------- Income before Income Taxes 382 1,381 Income Tax Expense 149 517 -------- --------- Net Income 233 864 -------- --------- Other Comprehensive Income, Net of Tax: Unrealized Gains on Securities: -- -- Unrealized Holdings Gains Arising During the Period -- 1 Less Reclassification Adjustment For (Gains)/Losses Included In Net Income -- (12) -------- --------- Other Comprehensive Income Loss -- (11) -------- --------- Comprehensive Income $ 233 $ 853 ======= ========= Net Earnings per Common Share: Basic $.03 $.12 ==== ==== Diluted $.03 $.12 ==== ==== Weighted Average Number of Common Shares Outstanding: Basic 7,004 7,002 ===== ===== Diluted 7,099 7,192 ===== ===== See accompanying notes to these consolidated financial statements. 2 SPECTRAN CORPORATION CONSOLIDATED BALANCE SHEETS Dollars in thousands March 31, 1999 December 31, 1998 -------------- ----------------- (unaudited) ASSETS Current Assets: Cash and Cash Equivalents $ 4,767 $ 1,690 Trade Accounts Receivable, net 14,052 12,568 Inventories 8,054 8,279 Income Taxes Receivable -- 644 Deferred Income Taxes 1,889 1,889 Prepaid Expenses and Other Current Assets 1,439 1,036 ---------- ---------- Total Current Assets 30,201 26,106 ---------- ---------- Investment in Joint Venture 2,857 3,239 Property, Plant and Equipment, net 67,851 68,495 Other Assets: License Agreements, net 4,185 4,335 Goodwill, net 774 793 Other Long-term Assets 2,366 2,451 ---------- ---------- Total Other Assets 7,325 7,579 ---------- ---------- Total Assets $ 108,234 $ 105,419 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current Maturities of Long-term Debt $ 3,200 $ 3,200 Current Portion of License Fees Payable 1,000 1,250 Accounts Payable 5,065 4,410 Income Taxes Payable 521 -- Accrued Defined Benefit Pension Liability 2,123 1,902 Deferred Income Taxes 478 478 Accrued Liabilities 4,252 3,317 ---------- ---------- Total Current Liabilities 16,639 14,557 ---------- ---------- Long-term Portion of License Fee Payable 2,250 2,750 Long-term Debt (Note 4) 31,800 30,800 ---------- ---------- Stockholders' Equity: Common Stock, voting, $.10 par value; authorized 20,000,000 shares; outstanding 7,003,850 shares and 7,003,850 shares in 1999 and 1998, respectively 700 700 Common Stock, non-voting, $.10 par value; authorized 250,000 shares; no shares outstanding -- -- Paid-in Capital 50,252 50,252 Retained Earnings 6,593 6,360 ---------- --------- Total Stockholders' Equity 57,545 57,312 ---------- --------- Total Liabilities & Stockholders' Equity $ 108,234 $ 105,419 ========== ========= See accompanying notes to these consolidated financial statements. 3 SPECTRAN CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Dollars in thousands (unaudited) Three Months Ended March 31, 1999 1998 Cash Flows from Operating Activities: Net Income $ 233 $ 864 Reconciliation of net income to net cash provided by operating activities: Depreciation and Amortization 2,021 1,386 Gain on sale of marketable securities -- (18) Loss on disposition of equipment 2 60 Changes in valuation accounts 437 (25) Investment in joint venture 382 132 Change in other long-term assets 55 -- Changes in operating assets and liabilities: Accounts receivable (1,441) (3,908) Inventories (255) (1,956) Prepaid expenses and other current assets (404) (172) Income taxes payable/receivable 1,166 162 Accounts payable and accrued liabilities 1,061 1,076 --------- -------- Net Cash Provided by (Used in) Operating Activities 3,257 (2,399) --------- -------- Cash Flows from Investing Activities: Acquisition of property, plant and equipment (1,180) (7,313) Purchase of marketable securities -- (9,652) Proceeds from sale/maturity of marketable securities -- 16,202 --------- -------- Net Cash Used in Investing Activities (1,180) (763) --------- -------- Cash Flows from Financing Activities: Borrowings of long-term debt 1,000 4,000 Proceeds from exercise of stock options and warrants -- 16 --------- -------- Net Cash Provided by Financing Activities 1,000 4,016 Increase in Cash and Cash Equivalents 3,077 854 Cash and Cash Equivalents at Beginning of Period 1,690 445 --------- -------- Cash and Cash Equivalents at End of Period $ 4,767 $ 1,299 ========= ======== See accompanying notes to these consolidated financial statements. 4 SPECTRAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. BASIS OF PRESENTATION The financial information for the three months ended March 31, 1999 and 1998 is unaudited but reflects all adjustments (consisting solely of normal recurring adjustments) which the Company considers necessary for a fair statement of results for the interim period. The results of operations for the three months ended March 31, 1999 are not necessarily indicative of the results for the entire year. The consolidated results for the three months ended March 31, 1999 and 1998 include the accounts of SpecTran Corporation (the "Company") and its wholly-owned subsidiaries: SpecTran Communication Fiber Technologies, Inc. ("SpecTran Communication"), SpecTran Specialty Optics Company ("SpecTran Specialty"), and Applied Photonic Devices, Inc. ("APD"), which holds the Company's investment in General Photonics, LLC, a 50-50 joint venture between the Company and General Cable Corporation ("General Cable"). In December 1996, the Company sold certain of the assets of APD to General Cable and then contributed the remaining non-cash assets of APD to General Photonics for a 50% equity interest. The investment in General Photonics is accounted under the equity method of accounting pursuant to which the Company records its 50% interest in General Photonics' net operating results. Prior to the formation of General Photonics, APD's results of operations, including net sales and expenses, were consolidated with those of the Company. All significant intercompany balances and transactions have been eliminated. These financial statements supplement, and should be read in conjunction with, the Company's audited financial statements for the year ended December 31, 1998 as contained in the Company's Form 10-K filed with the United States Securities and Exchange Commission. 2. INVENTORIES Inventories consisted of (in thousands): March 31, 1999 December 31, 1998 -------------- ----------------- Raw Materials $ 2,245 $ 3,096 Work in Process 2,220 1,277 Finished Goods 3,589 3,906 --------------- --------------- $ 8,054 $ 8,279 =============== =============== 5 3. PROPERTY, PLANT & EQUIPMENT March 31, 1999 December 31, 1998 -------------- ----------------- Property, plant and equipment consisted of (in thousands): Land and Land Improvements $ 978 $ 978 Buildings and Improvements 24,951 24,909 Machinery and Equipment 50,934 48,983 Construction in Progress 15,341 16,220 ------------ ----------- 92,204 91,090 Less Accumulated Depreciation and Amortization 24,353 22,595 ------------ ----------- Property, Plant and Equipment, net $ 67,851 $ 68,495 ============ =========== 4. LONG-TERM DEBT Long-term debt consisted of (in thousands): March 31, 1999 December 31, 1998 -------------- ----------------- Revolving Credit Loan Facility at the Lower of Prime or LIBOR plus 1.5% $ 11,000 $ 10,000 Series A Senior Secured Notes at 9.24% Interest 16,000 16,000 Series B Senior Secured Notes at 9.39% Interest 8,000 8,000 ----------- ----------- Total 35,000 34,000 Less current maturities 3,200 3,200 ----------- ----------- $ 31,800 $ 30,800 =========== =========== In December 1996, the Company sold to a limited number of selected institutional investors an aggregate principal amount of $24.0 million of senior secured notes consisting of $16.0 million of 9.24% interest Series A Senior Secured Notes due December 26, 2003 and $8.0 million of 9.39% interest Series B Senior Secured Notes due December 26, 2004. The Company also has a $20.0 million revolving credit agreement with its principal bank, maturing on April 1, 2000. As of March 31, 1999 the Company had borrowed $11.0 million against the revolving agreement. 5. CORNING SETTLEMENT On March 13, 1998, the Company announced the settlement of Corning's obligation to purchase multimode fiber from the Company under a multiyear supply contract the companies entered into on January 1, 1996. Corning terminated its purchase of multimode fiber from the Company in exchange for a series of cash payments to the Company totaling $4.1 million. In the March 31, 1998 quarter the Company recognized income on the settlement of approximately $900,000. 6 6. COMPUTATION OF EARNINGS PER COMMON SHARE Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128 "Earnings per Share" (SFAS 128) which has changed the method of computing and presenting earnings per common share. All prior periods presented have been restated in accordance with SFAS 128. This restatement had an immaterial impact on prior periods' earnings per common share amounts calculated under the previous method. Under SFAS 128, primary earnings per common share has been replaced with basic earnings per common share. The basic earnings per share computation is based on the earnings applicable to common stock divided by the weighted average number of shares of common stock outstanding at March 31, 1999 and March 31, 1998. Fully diluted earnings per common share has been replaced with diluted earnings per common share. The diluted earnings per common share computation include the common stock equivalency of options granted to employees under the stock incentive plan. Excluded from the diluted earnings per common share calculation are options granted to employees that are anti-dilutive based on the average stock price for the year. (dollars and shares in thousands) 1999 1998 ---- ---- Earnings per common share-basic Earnings applicable to common stock $ 233 $ 864 ====== ====== Weighted average shares outstanding 7,004 7002 ====== ====== Earnings per common share-basic $ .03 $ .12 ====== ====== Earnings per common share-diluted Earnings applicable to common share $ 233 $ 864 ====== ====== Weighted average shares outstanding 7,004 7,002 Plus shares issuable on: Exercise of dilutive options 95 190 ----- ------ Weighted average shares outstanding assuming conversion 7,099 7,192 ====== ====== Earnings per common share-diluted $ .03 $ .12 ====== ====== 7. BUSINESS SEGMENTS Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information" which has changed the method of reporting information about its businesses. Based upon the criteria described in SFAS 131, the Company now reports three business segments, Optical Fiber, Specialty Products and Cable. All prior periods presented have been restated in accordance with SFAS 131. The Company conducts its operations through two business segments - 7 Optical Fiber and Specialty Products. A third segment, Cable, was sold in December 1996 in conjunction with the formation of General Photonics. SpecTran retains a 50% equity interest in General Photonics and SpecTran's share of General Photonics for 1997 and 1998 is reported on the equity method. Optical Fiber develops, manufactures and markets multimode and single-mode fiber for data communications and telecommunications applications. Specialty Products develops, manufactures and markets multimode and single-mode fiber and value-added fiber optic products for industrial, transportation, communication, medical applications and geophysical. Cable develops, manufactures and markets communications-grade fiber optic cable primarily for the customer premises market. Summarized Financial information by business segment for the three months ended March 31 is as follows (in thousands): REVENUES 1999 1998 ---- ---- Optical Fiber (see A) $ 13,278 $ 10,756 Specialty Products 7,102 4,356 ------------ --------- $ 20,380 $ 15,112 ============ ========= INCOME (LOSS) FROM OPERATIONS 1999 1998 ---- ---- Optical Fiber $ 1,094 $ 1,416 Specialty Products 1,438 320 Corporate (1,048) (935) ---------- --------- $ 1,484 $ 801 ========= ======== ASSETS 1999 1998 ---- ---- Optical Fiber $ 72,204 $ 72,447 Specialty Products 20,266 19,953 Cable (Investment in JV) 3,205 3,458 Corporate 12,559 9,561 ----------- --------- $ 108,234 $ 105,419 =========== ========= DEPRECIATION 1999 1998 ---- ---- Optical Fiber $ 1,232 $ 725 Specialty Products 385 401 Corporate 203 160 ------------ ----------- $ 1,820 $ 1,286 =========== =========== 8 CAPITAL EXPENDITURES 1999 1998 ---- ---- Optical Fiber $ 865 $ 6,250 Specialty Products 17 963 Cable -- -- Corporate 298 100 ------------ ------------- $ 1,180 $ 7,313 ============ ============ A) Due to a change in accounting treatment of certain fiber sales, sales and cost of sales for the first quarter of 1998 was reduced by $115,000. This change had no effect on previously reported net income or earnings per share. 8. SUBSEQUENT EVENTS George J. Roberts was appointed Senior Vice President, Chief Financial Officer, Secretary and Treasurer of the Company as of April 1999, succeeding John Rogers who had been the Acting Chief Financial Officer since November 1998. 9. CONTINGENCIES On November 6, 1998, the Company announced that it would contest a complaint filed in the United States District Court in Boston, MA on October 2, 1998, purportedly as a class action suit. Titled Cruise v. Cannon, et al., the complaint alleges that the Company and three of its current or former officers and directors violated securities laws by misrepresenting the Company's financial condition and financial results during 1998. The suit purports to be a class action on behalf of all individuals who purchased the Company's stock on the open market from February 25, 1998 to July 17, 1998. The suit alleges, among other things, that there were public misrepresentations or failures to disclose material facts during that period which allegedly artificially inflated the price of the Company's common stock in the marketplace. The complaint seeks an undisclosed amount of compensatory damages and costs and expenses, including plaintiff's attorney's fees and such further relief as the Court may deem just and proper. The Company believes the action is totally without merit, believes that it has highly meritorious defenses and it intends to defend itself vigorously. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998 Overview for the Results of the March 1999 Quarter - -------------------------------------------------- First quarter net income was $233,000 or $.03 per diluted share compared with earnings of $864,000 or $.12 per diluted share for the same period last year. The Company recognized record sales of $20.4 million, up 35% from the quarter ended March 1998. As compared to the same period last year, in summary, the lower earnings were attributable to a lower overall margin as a percentage of sales, the loss of income from the multi-year Corning settlement and increased interest expense as a result of the Company's outstanding long-term debt. Sales and income from operations at SpecTran Specialty improved over last year's results attributable in large part to strong demand for specialty optics products and improved margins. The improved margins resulted from management and operational changes implemented in the second half of 1998. Sales volume was up at SpecTran Communication with fiber production increasing 54% as compared to the same period in 1998 primarily due to added capacity and continued yield improvements. Income from operations for the first quarter continued to be adversely affected by price erosion for standard communication fibers and remaining costs associated with the new hybrid vapor deposition (HVD) process coming on line. General Photonics, the Company's cabling joint venture with General Cable, incurred a loss for the quarter due to continued pricing pressures and lack of volume. General Photonics is continuing to implement cost control measures. Results of Operations The following table sets forth, for the periods indicated, certain financial data as a percentage of net sales: THREE MONTHS ENDED MARCH 31, 1999 1998 ---- ---- Net Sales 100.0% 100.0% Cost of Sales 73.9 66.2 ---- ---- Gross Profit 26.1 33.8 Selling and Administrative Expenses 15.1 20.7 Research and Development Cost 3.7 7.8 --- --- Income from Operations 7.3 5.3 Other income (Expense), net (3.5) 5.5 ---- --- Income before Income Taxes and Equity in Joint Venture 3.8 10.8 Loss from Joint Venture (1.9) (1.7) ---- ---- Income before Income Taxes 1.9 9.1 Income Tax Expense (0.7) (3.4) ----- ---- Net Income 1.2% 5.7% ==== ==== 10 Net Sales Net sales increased $5.3 million, or 35% from $15.1 million for the three months ended March 31, 1998, to $20.4 million for the three months ended March 31, 1999. Sales volume for both SpecTran Communication and SpecTran Specialty achieved record growth over the same period last year. Sales of the Company's multimode products increased significantly, while there was moderate growth in its single-mode product line. Sales growth continued to be adversely affected by lower unit selling prices for both single-mode and multimode fiber due to the highly competitive market conditions caused by an industry-wide oversupply condition. Although the rate of price erosion for optical fiber has slowed in the last few months, some further deterioration is possible during the remainder of 1999. Additionally, sales of the Company's specialty optics products, including fiber cable and assembly, experienced significant growth as compared to the same period last year. Gross Profit Gross Profit increased $210,000, or 4% from $5.1million for the three months ended March 31, 1998 to $5.3 million for the three months ended March 31, 1999. As a percentage of net sales, the gross profit decreased to 26.1% for the period ended March 31, 1999 from 33.8% for the three months ended March 31, 1998. The decrease in gross profit, as compared to last year, was largely impacted by industry-wide pricing pressure for standard communication fiber products, particularly as it relates to the multimode product line and remaining costs associated with the HVD process. These factors were partially offset by improved margins at SpecTran Specialty and lower royalty expenses. As a percentage of sales, royalty expense decreased from 4.1% for the first quarter in 1998 to 2.1% for the first quarter in 1999 primarily due to an increase in first quarter 1999 net sales not subject to royalty. Selling and Administration Selling and administrative expenses were essentially flat at $3.1 million on a quarter to quarter comparison. As a percentage of sales, selling and administrative expenses decreased to 15.1% for the three months ended March 31, 1999 from 20.7% for the same period last year. Research and Development Research and development costs decreased by $420,000, or 35.8% from $1.2 million for the three months ended March 31, 1998 to $0.8 million for the three months ended March 31, 1999 for two main reasons. During 1998 increased levels of research and development resources were deployed in bringing the HVD production process on line and during 1999 SpecTran Specialty restructured the organization resulting in some expenses being realigned to cost of sales from research and development. As a percentage of sales, research and development costs decreased from 7.8% for the three months ended March 31, 1998 to 3.7% for the three months ended March 31, 1999. The Company continues its initiative to improve manufacturing costs and product performance in both multimode and single-mode product lines, while developing new special performance fiber products and alternative process technologies. Other Income (Expense), net Other income (expense) decreased unfavorably by $1.6 million for the three months ended March 31, 1999 compared to the same period for 1998. This was attributable to the absence of approximately $900,000 of other income from the Company's 1998 settlement of a multi-year supply contract with Corning, which is non-recurring for 1999. Additionally, the Company's interest expense increased by $612,000, or 492% as compared to the same period last year, due to an increase of $165,000, or 29% for the interest expense on the Company's long-term debt and the lack of $447,000 of capitalized interest, which offsets interest expense, associated with the Company's capacity expansion programs. Interest income decreased by $86,000, or 75% for the current period as compared to the same period last year. 11 Income Taxes A tax provision of 39.0% of pre-tax income was provided for the three months ended March 31, 1999 compared to a tax provision of 37.4% of pre-tax income for the comparable period in 1998. The lower effective tax rate for the 1998 period was due to the Company benefiting from a reduction in valuation allowance. Loss from Equity in Joint Venture The Company realized a loss of $382,000 and $252,000, for the three months ended March 31, 1999 and 1998 respectively, from its equity in General Photonics, the joint venture formed in December 1996 with General Cable. The loss was due to continued pricing pressures and lack of volume. Net Income Net income for the three months ended March 31, 1999 decreased $631,000 or 73% as compared to the same period in 1998. Reduced net income was primarily because of higher interest expense, the loss of income associated with the Corning settlement, and increased loss incurred from the Company's joint venture. Liquidity and Capital Resources As of March 31, 1999, the Company had approximately $4.8 million of cash. Additionally, the Company has a $20.0 million revolving credit agreement with its principal bank maturing in April 2000. As of March 31, 1999 the Company had borrowed $11.0 million against the revolving credit agreement. The Company has a scheduled debt principal repayment of $3.2 million on December 26, 1999. The Company's working capital position at March 31, 1999 was $13.6 million with a current ratio of 1.82 to 1. During the first three months of 1999 the Company generated $3.2 million in positive cash flow from operating activities and borrowed $1.0 million under its revolving credit agreement. The Company invested $1.2 million in the acquisition of machinery and equipment. The Company is continuing its capacity expansion, which will require approximately $2.0 million in capital expenditures during 1999, resulting in total expenditures for capacity expansion since 1996 of approximately $45.0 million for SpecTran Communication and approximately $12.0 million for SpecTran Specialty, including equipment purchases. When fully operational, the expansion at SpecTran Communication will increase its capacity by more than 100% from 1996 levels. The expansion at SpecTran Specialty increased capacity by more than 50%. The Company intends to 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 is exploring various financial 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. 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 12 and manage its operations, accounting, sales and administrative functions), such as computers, servers, networks, and software ("IT Systems") and other systems that use embedded microchip technology ("Non-IT Systems") that are date sensitive may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failure or miscalculations causing disruption of operations. Similarly, the date-sensitive IT Systems and Non-IT Systems of third party suppliers or customers with whom the Company has material relationships could experience similar malfunctions which could, in turn, have a material adverse impact on the Company. The Company has completed an enterprise-wide assessment of all mission critical IT Systems and Non-IT Systems to evaluate the state of its preparedness for the Year 2000. The Company has established teams by business unit to address the Year 2000 issue. The Company has completed a significant portion of the Non-IT Systems remediation in connection with the recent capacity expansion at both facilities. A significant portion of production equipment was replaced or upgraded as part of this expansion. The Company has revised its estimate for Year 2000 spending down to approximately $1.0 million from $1.2 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 80% complete with its remediation efforts for the Year 2000. The costs of the project and the date the Company plans to complete Year 2000 modifications are based on management's best estimates. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. The Company presently believes that with modifications to existing software and conversions to new software, the Year 2000 issue can be mitigated. However, if such modifications and conversions are not made or are not completely timely, the Year 2000 issue could have a material adverse impact on the operations of the Company. The Company is developing contingency plans in case its remediation efforts are unsuccessful. The Company expects to complete the contingency plans in July 1999 in conjunction with the implementation and testing of the critical business systems. The Company has initiated formal communications with a 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. Forward-Looking Statements This document contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. Investors are cautioned that all forward-looking statements involve risks and uncertainties that may cause results to differ materially from expectations, including without limitation, the ability of the Company to market and develop its products, general economic conditions and competitive conditions in markets served by the Company. Forward-looking statements include, but are not limited to, global economic conditions, product demand, competitive products and pricing, manufacturing efficiencies, cost reductions, manufacturing capacity, facility expansions and new plant start up cost, the rate of technology change and other risks. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this filing will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. 13 Recent Accounting Pronouncements In June 1998, the Financial Standard Accounting Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities. It requires that an entity recognize all derivatives as either assets or liabilities in the Balance Sheet and measure those instruments at fair value. SFAS No. 133 is effective for fiscal year beginning after June 15, 1999. The Company is currently evaluating SFAS No. 133 and has not determined the impact on the Company's Consolidated Financial Statements. 14 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Footnote 9 of Financials. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) 10.123 Employment Agreement executed as of April 1, 1999 between SpecTran Corporation and George Roberts. (b) Reports on Form 8-K Current Report on Form 8-K dated February 11, 1999 with Exhibit 10.111-Patent License Agreement between Lucent Technologies and SpecTran Communication dated as of October 30, 1998. (The Company has been granted confidential treatment for portions of this Exhibit.) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SPECTRAN CORPORATION (Registrant) Date: May 14, 1999 BY: /s/ Charles B. Harrison ------------------------ Charles B. Harrison President and Chief Executive Officer Date: May 14, 1999 BY: /s/ George J. Roberts ---------------------- George J. Roberts Senior Vice President, Chief Financial Officer, Secretary and Treasurer 15