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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 0-12489
SPECTRAN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2729372
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 Hall Road, Sturbridge, Massachusetts 01566
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 347-2261
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No.
The number of shares of the registrant's Common Stock outstanding as of
October 31, 1996, was 5,398,354.
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PART I - FINANCIAL INFORMATION
SPECTRAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
(UNAUDITED)
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------------- -----------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
Net Sales $ 44,915 $ 27,035 $ 16,161 $ 9,971
Cost of Sales 28,621 17,941 9,941 6,612
---------- ---------- ---------- ----------
Gross Profit 16,294 9,094 6,220 3,359
Selling and Administrative Expenses 9,909 6,698 3,641 2,532
Research and Development Costs 2,321 2,103 740 691
---------- ---------- ---------- ----------
Income from Operations 4,064 293 1,839 136
Other Income (Expense):
Interest Income 166 240 45 72
Interest Expense (528) (434) (208) (180)
Other, net 122 358 58 274
---------- ---------- ---------- ----------
(240) 164 (105) 166
---------- ---------- ---------- ----------
Income before Income Taxes 3,824 457 1,734 302
Income Tax Expense 1,300 187 727 123
---------- ---------- ---------- ----------
Net Income $ 2,524 $ 270 $ 1,007 $ 179
========== ========== ========== ==========
Weighted Average Number of Shares of
Common Stock Outstanding 5,929,796 5,409,585 6,003,798 5,478,445
========== ========== ========== ==========
Net Income per Share of Common Stock $ .43 $ .05 $ .17 $ .03
========== ========== ========== ==========
See accompanying notes to these condensed consolidated financial statements.
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SPECTRAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
September 30, 1996 December 31, 1995
------------------ -----------------
ASSETS (unaudited)
Current Assets:
Cash and Cash Equivalents $ 2,174 $ 1,625
Current Portion of Marketable Securities 972 4,088
Trade Accounts Receivable, net 10,201 7,799
Inventories 8,967 7,415
Current Deferred Income Taxes, net 685 588
Prepaid Expenses and Other Current Assets 567 513
------- -------
Total Current Assets 23,566 22,028
Property, Plant and Equipment, net 14,702 10,290
Other Assets:
Long-term Marketable Securities 1,422 1,133
License Agreements, net 854 1,004
Deferred Income Taxes, net 974 1,652
Goodwill, net 3,935 4,156
Other Long-term Assets 1,108 102
------- -------
Total Other Assets 8,293 8,047
------- -------
Total Assets $46,561 $40,365
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 2,727 $ 2,762
Income Taxes Payable 231 225
Accrued Liabilities 4,440 3,082
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Total Current Liabilities 7,398 6,069
Long-term Debt 12,000 10,000
Stockholders' Equity:
Common Stock, voting, $.10 par value; authorized
20,000,000 shares; outstanding 5,396,963 shares and 539 535
5,353,686 shares in 1996 and 1995, respectively
Common Stock, non-voting, $.10 par value;
authorized 250,000 shares; no shares outstanding -- --
Paid-in Capital 26,745 26,443
Net Unrealized Loss on Marketable Securities 15 (22)
Retained Earnings (Deficit) (136) (2,660)
------- -------
Total Stockholders' Equity 27,163 24,296
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Total Liabilities and Stockholders' Equity $46,561 $40,365
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See accompanying notes to these condensed consolidated financial statements.
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SPECTRAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
September 30,
-------------------------
1996 1995
------- --------
Cash Flows from Operating Activities:
Net income ........................................................ $ 2,524 $ 270
Reconciliation of net income to net cash
provided by operating activities
Add charges (deduct credits) not affecting cash:
Depreciation and amortization ............................... 2,189 1,688
Loss (gain) on sale of assets ............................... -- 4
Loss on sale of marketable securities ....................... 19 --
Changes in valuation accounts ............................... (242) (150)
Change in long-term deferred income taxes ................... 832 --
Change in other long-term assets ............................ (1,019) 18
Changes in assets and liabilities, net of effects from
purchase of businesses:
Current deferred income taxes ............................... 23 --
Accounts receivable ......................................... (2,508) (481)
Inventories ................................................. (1,479) (1,501)
Prepaid expenses and other current assets ................... (54) (451)
Income taxes payable/receivable ............................. 6 455
Accounts payable and accrued liabilities .................... 1,323 233
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Net Cash Provided by Operating Activities ............................ 1,614 85
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Cash Flows from Investing Activities:
Acquisition of businesses, net of cash acquired ................... -- (3,818)
Acquisition of property, plant and equipment ...................... (6,209) (1,552)
Purchase of marketable securities ................................. (7,380) (6,494)
Proceeds from sale/maturity of marketable securities .............. 10,218 7,496
Proceeds from sale of equipment ................................... -- --
Acquisitions of other assets, net ................................. -- --
------- --------
Net Cash Used in Investing Activities ................................ (3,371) (4,368)
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Cash Flows from Financing Activities:
Borrowings of long-term debt ...................................... 2,000 4,760
Reduction of debt ................................................. -- --
Tax effect of disqualifying disposition of ISO shares ............. -- --
Proceeds from exercise of stock options and warrants .............. 306 --
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Net Cash Provided by Financing Activities ............................ 2,306 4,760
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Increase (Decrease) in Cash and Cash Equivalents ..................... 549 477
Cash and Cash Equivalents at Beginning of Period ..................... 1,625 477
------- --------
Cash and Cash Equivalents at End of Period ........................... $ 2,174 $ 954
======= ========
See accompanying notes to consolidated financial statements.
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SPECTRAN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The financial information for the nine months and three months ended
September 30, 1996 and 1995, 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 periods. The results
of operations for the nine months ended September 30, 1996 and 1995, are not
necessarily indicative of the results for the entire year.
The consolidated results for the nine months ended September 30, 1996 and
1995, include the accounts of SpecTran Corporation (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"). 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,
1995, as contained in the Company's Form 10-K as filed with the United States
Securities and Exchange Commission.
2. INVENTORIES
Inventories consisted of:
September 30, 1996 December 31, 1995
------------------ -----------------
Raw Materials $4,142 $3,132
Work in Process 2,211 1,508
Finished Goods 2,614 2,775
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$8,967 $7,415
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3. PROPERTY, PLANT AND EQUIPMENT
September 30, 1996 December 31, 1995
------------------ -----------------
Property, plant and equipment consisted of:
Land and Land Improvements $ 497 $ 408
Buildings and Improvements 3,803 3,729
Machinery and Equipment 19,437 17,229
Construction in Progress 5,478 1,641
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29,215 23,007
Less Accumulated Depreciation and Amortization 14,513 12,717
------- -------
$14,702 $10,290
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4. INCOME PER SHARE OF COMMON STOCK
Income per share of common stock is based on the weighted average of the
number of shares outstanding during the periods, including common stock
equivalents of stock purchase warrants and stock options for both primary and
fully diluted earnings per share. Fully diluted income per share approximates
primary income per share.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
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Three and Nine Months Ended September 30, 1996 Compared with Three and Nine
---------------------------------------------------------------------------
Months Ended September 30, 1995
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Nine Months Ended Three Months Ended
September 30, September 30,
----------------- ------------------
(Unaudited) (Unaudited)
1996 1995 1996 1995
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 63.7% 66.4% 61.5% 66.3%
----- ----- ----- -----
Gross Profit 36.3% 33.6% 38.5% 33.7%
Operating Expenses
Selling and Administrative Expenses 22.1% 24.7% 22.5% 25.4%
Research and Development Costs 5.2% 7.8% 4.6% 6.9%
----- ----- ----- -----
Income from Operations 9.0% 1.1% 11.4% 1.4%
Other Income (Expense), net (0.5%) 0.6% (0.7%) 1.6%
----- ----- ----- -----
Income before Income Taxes 8.5% 1.7% 10.7% 3.0%
Income Tax Expense 2.9% 0.7% 4.5% 1.2%
----- ----- ----- -----
Net Income 5.6% 1.0% 6.2% 1.8%
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Net Sales
- ---------
Net sales increased $6.2 million, or 62.1%, from $10.0 million to $16.2
million for the three months ended September 30, 1996 and $17.9 million, or
66.1%, from $27.0 million to $44.9 million for the nine months ended September
30, 1996. This increase was primarily due to strong market demand for the
Company's multimode and single-mode communications fiber. The acquisition of APD
in May 1995 also contributed to the increase in net sales for the nine month
1996 period. Selling prices for multimode and single-mode fiber have increased
in 1996, largely due to the strong market demand and price adjustments related
to certain raw material cost increases in the case of multimode fiber. SpecTran
Communication represented approximately half of the Company's net sales with the
balance divided relatively evenly between SpecTran Specialty and APD.
Gross Profit
- ------------
Gross profit increased $2.8 million, or 85.1%, from $3.4 million to $6.2
million for the three months ended September 30, 1996 and $7.2 million, or
79.2%, from $9.1 million to $16.3 million for the nine months ended September
30, 1996. As a percentage of net sales, the gross profit increased to 38.5% in
the third quarter of 1996 from 33.7% in the third quarter of 1995 and to 36.3%
for the nine months ended September 30, 1996 from 33.6% for the nine months
ended September 30, 1995. This increase in gross profit in both 1996 periods was
primarily due to increased net sales in 1996 and lower production costs
resulting from manufacturing process and yield improvements. The increase in
gross margin was partially offset by lower margins at APD which was acquired in
May 1995 and at SpecTran Specialty.
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As a percentage the net sales, royalties increased from 1.9% for the three
months ended September 30, 1995 to 3.4% for the three months ended September 30,
1996 and decreased from 4.2% for the nine months ended September 30, 1995 to
3.8% for the nine months ended September 30, 1996. The three month period of
1995 reflects a retroactive adjustment made in the third quarter of that year.
The nine month period decrease in royalties as a percentage of net sales was
primarily due to a decrease in the net sales relative to the total sales
subject to royalties.
Selling and Administration
- --------------------------
Selling and administrative expenses increased by $1.1 million, or 43.8%,
from $2.5 million to $3.6 million for the three months ended September 30, 1996
and by $3.2 million, or 47.9%, from $6.7 million to $9.9 million for the nine
months ended September 30, 1996. This increase was primarily due to including a
full nine months of APD expenses in the 1996 period versus only four months in
the 1995 period. For the three and nine month periods ended September 30, 1996,
a substantially higher provision for incentive compensation also contributed to
the increase. As a percentage of net sales, selling and administrative expenses
decreased to 22.5% for the three months ended September 30, 1996 from 25.4% for
the three months ended September 30, 1995 and to 22.1% for the nine months ended
September 30, 1996 from 24.7% for the nine months ended September 30, 1995.
Research and Development
- ------------------------
Research and development expenses increased by $49,000, or 7.1%, from
$691,000 to $740,000 for the three months ended September 30, 1996 and by
$218,000, or 10.4%, from $2.1 million to $2.3 million for the nine months ended
September 30, 1996. As a percentage of net sales, research and development
expenses decreased from 6.9% for the three months ended September 30, 1995 to
4.6% for the three months ended September 30, 1996 and from 7.8% for the nine
months ended September 30, 1995 to 5.2% for the nine months ended September 30,
1996. The Company's increased research and development spending, in absolute
dollars, is primarily in programs designed to improve manufacturing cost and
product performance in both the multimode and single-mode product lines, to
develop new special performance fiber products and to develop alternative
process technologies.
Other Income (Expense), net
- ---------------------------
Other income (expense), net decreased by $271,000 from $166,000 of net
other income for the three months ended September 30, 1995 to a net other
expense of $105,000 for the same three month period in 1996. The decline was
primarily due to a non-recurring material recovery income received in the
third quarter of 1995 compared with no such income in the comparable 1996
period. Other income (expense), net declined by $404,000 in the 1996 nine
month period compared with the 1995 nine month period. The decline was caused
by higher interest expense of $94,000 (21.7%) and lower interest income of
$74,000 (30.8%) in the 1996 nine month period versus the comparable 1995
period, in addition to the absence of the non-recurring material recovery
income in the 1996 nine month period.
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Income Taxes
- ------------
A tax provision of 42% and 34% of pre-tax income was provided in the three
and nine month periods of 1996, respectively, compared to a tax provision of 41%
of pre-tax income in the comparable periods of 1995. The estimated effective tax
rate for 1996 of 34% is lower than the statutory and prior year's tax rates due
to an anticipated reduction 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 asset will be realized through the utilization of
operating loss and tax credit carryforwards. The higher rate in the 1996
September quarter was to adjust the year-to-date estimated tax rate up to 34%
from the 27% that had been used in the 1996 first half.
Net Income
- ----------
Net income for the three and nine months ended September 30, 1996 was $1.0
million, or 6.2% of net sales, and $2.5 million, or 5.6% of net sales,
respectively. Net income for the same periods in 1995 was $179,000, or 1.8% of
net sales, and $270,000, or 1.0% of net sales, respectively.
Liquidity and Capital Resources
- -------------------------------
The Company's principal sources of cash are cash flow from operations,
established bank credit facilities and existing cash balances. During the nine
months ended September 30, 1996, the Company generated $1.6 million in net cash
from operating activities, borrowed an additional $2 million under its bank
credit facility, and reduced its marketable securities by an additional
$2.8 million. Substantially all of this cash was used to fund capital
expenditures of approximately $6.2 million.
At September 30, 1996, the Company had approximately $4.6 million of cash,
cash equivalents and marketable securities, including approximately $1.4 million
in marketable securities classified at long-term which could be converted into
cash if necessary. The Company's net working capital position as of September
30, 1996 was approximately $16.2 million.
On April 25, 1996 and subsequently amended on September 4, 1996, SpecTran
and its subsidiaries entered into a Loan and Security Agreement with Fleet
National Bank ("Fleet Bank") pursuant to which the Company can borrow up to $22
million subject to certain limitations based on the Company's accounts
receivable and inventory and the appraisal value of certain machinery, equipment
and real property owned by the Company. The loan consists of a $14.5 million
revolving note which is payable April 1, 1999, a $4 million term note which is
payable in quarterly installments commencing January 1, 1997 and maturing on
April 1, 2001 and a $3.5 million mortgage note which is payable in quarterly
installments commencing July 1, 1997 and maturing on April 1, 2006. Interest on
each note is payable quarterly commencing July 1, 1996. The Company has the
option to select from time to time the interest rate on the notes at either
LIBOR rate plus 1.5% or the Fleet Bank's prime rate, provided that under certain
circumstances, Fleet Bank may deem that the LIBOR rate is not available. The
loans are secured by all of the Company's assets, including real property.
At September 30, 1996, the Company had outstanding $10 million under the
revolving credit agreement and $2 million under the term loan agreement with
Fleet Bank; the Company's September 30, 1996 borrowing base permits an
additional $5.2 million of borrowing.
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The Company has plans for capacity expansion requiring significant capital
expenditures through approximately the end of 1997. Planned expenditures for
capacity expansion include $32 million for SpecTran Communication and $9 million
for SpecTran Specialty. When completed, these expansions should increase
SpecTran Communication's capacity by 100% and SpecTran Specialty's by 50%. The
Company intends to finance a portion of these expansions through a combination
of cash flow from operations and borrowings under existing bank credit
agreements. The Company is in the process of arranging $24 million of long-term
debt. The senior secured debt is expected to mature in 7-8 years, with 5-6 equal
annual principal payments due beginning on the third anniversary of the date of
issuance and interest, payable semi-annually in the range of 325-340 basis
points over the interest rate for U.S. Treasury notes with comparable lives. The
terms of the senior secured debt are expected to include a first priority
security interest in all assets of the Company; certain financial and
non-financial covenants, including maintenance by the Company of a certain
consolidated adjusted net worth; and the obligation to repay if a person or
group of related persons acquires more than 50% of the Company's voting stock.
If the Company completes this financing the proceeds would be used principally
to refinance and replace existing credit facilities, and for planned expansion
and general corporate purposes. If the long-term financing is completed, the
company expects that Fleet Bank will establish a new $20 million revolving line
of credit for working capital and general corporate purposes. There is no
assurance that the long-term debt financing or the new revolving line of credit
will be completed. The Company is also exploring other ways of financing its
capacity expansion.
Subsequent Event
- ----------------
In October 1996, the Company announced a three year agreement to supply
Lucent Technologies Incorporated with multimode fiber valued at approximately
$35 million. Earlier in 1996, the Company had announced a three year agreement
to supply Corning Incorporated with multimode fiber valued at approximately $17
million. As previously announced, the optical fiber being manufactured and sold
under these contracts is not subject to certain volume restrictions contained in
the Company's patent license agreement from Corning.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10.75 Contractual Agreement Between Lucent Technologies,
Inc. and SpecTran Corporation dated October 3, 1996.
(Registrant has applied for confidential treatment for
portions of this Exhibit)
Exhibit 10.76 Three year multimode optical fiber supply contract
between Corning, Incorporated and SpecTran Corporation
dated as of July 1, 1996. (Registrant has applied for
confidential treatment for portions of this Exhibit)
Exhibit 10.77 First Amendment to Loan and Security Agreement by
SpecTran Corporation, SpecTran Specialty Optics
Company, Applied Photonic Devices, Inc., SpecTran
Communication Fiber Technologies, Inc. and Fleet
National Bank dated September 4, 1996.
Exhibit 10.78 First Amendment to Mortgage among SpecTran Corporation
in Favor of Fleet National Bank dated September 4,
1996.
Exhibit 10.79 Key Employee Incentive Plan effective as of January 1,
1996.
Exhibit 10.80 Employment Agreement between SpecTran Corporation and
Raymond E. Jaeger dated as of December 14, 1992.
Exhibit 10.81 Employment Agreement between SpecTran Corporation and
Bruce A. Cannon dated as of December 14, 1992.
Exhibit 10.82 Employment Agreement between SpecTran Corporation and
John E. Chapman dated as of December 14, 1992.
Exhibit 10.83 Employment Agreement between SpecTran Corporation and
Crawford L. Cutts dated as of January 1, 1994.
Exhibit 10.84 Employment Agreement between SpecTran Corporation and
William B. Beck dated as of February 18, 1994.
Exhibit 10.85 Employment Agreement between SpecTran Corporation and
Glenn E. Moore dated as of December 1995.
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(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter
which this report was filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPECTRAN CORPORATION
(Registrant)
Date: November 13, 1996 BY:
/s/ Glenn E. Moore
----------------------------------------
Glenn E. Moore
President and Chief Executive Officer
Date: November 13, 1996 BY:
/s/ Bruce A. Cannon
----------------------------------------
Bruce A. Cannon
Senior Vice President and Chief
Financial Officer
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