-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Eph2ovauI1ibROmmLKfkHy0n8qV4o5SuQvLhV4j6NoEooMBgPhWG6vmbJkuSXmsR hKyHyl882go20/8OqIqJlA== 0000718487-98-000004.txt : 19981123 0000718487-98-000004.hdr.sgml : 19981123 ACCESSION NUMBER: 0000718487-98-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 DATE AS OF CHANGE: 19981120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPECTRAN CORP CENTRAL INDEX KEY: 0000718487 STANDARD INDUSTRIAL CLASSIFICATION: 3220 IRS NUMBER: 042729372 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12489 FILM NUMBER: 98753061 BUSINESS ADDRESS: STREET 1: 50 HALL ROAD CITY: STURBRIDGE STATE: MA ZIP: 01566 BUSINESS PHONE: 5083472261 10-Q 1 QUARTERLY REPORT OF SPECTRAN CORPORATION UNITED STATE 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, 1998 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, 1998, was 7,003,850. 1 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, 1998 1997 1998 1997 Net Sales $ 52,322 $ 47,747 $ 20,063 $ 15,638 Cost of Sales 39,244 29,266 14,649 9,861 ---------- ---------- --------- --------- Gross Profit 13,078 18,481 5,414 5,777 Selling and Administrative Expenses 10,260 11,021 3,608 3,133 Research and Development Costs 3,995 2,396 1,414 798 ---------- ---------- --------- --------- Income (Loss) from Operations (1,177) 5,064 392 1,846 Other Income (Expense): Interest Income 181 1,100 34 335 Interest Expense (938) (701) (462) (237) Other, net 2,526 (20) 943 (9) ---------- ---------- --------- --------- Other Income (Expense), net 1,769 379 515 89 ---------- ---------- --------- --------- Income before Income Taxes 592 5,443 907 1,935 Income Tax Expense 231 1,850 354 657 ---------- ---------- --------- --------- Income before Equity in Joint Venture 361 3,593 553 1,278 Income (Loss) from Joint Venture, Net of Income Taxes (375) 10 (49) (127) ---------- ---------- --------- --------- Net Income (Loss) $ (14) $ 3,603 $ 504 $ 1,151 ========== ========== ========= ========= Net Income (Loss) per Share of Common Stock Basic $(.00) $.54 $.07 $.17 ===== ==== ==== ==== Diluted $(.00) $.51 $.07 $.16 ===== ==== ==== ==== Weighted Average Number of Common Shares Outstanding Basic 7,003 6,644 7,004 6,932 ===== ===== ===== ===== Diluted 7,003 7,115 7,117 7,368 ===== ===== ===== =====
See accompanying notes to these condensed consolidated financial statements. 2 SPECTRAN CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) September 30, 1998 December 31, 1997 ------------------ ----------------- ASSETS (unaudited) Current Assets: Cash and Cash Equivalents $ 1,334 $ 445 Current Portion of Marketable Securities -- 5,535 Trade Accounts Receivable, net 12,369 8,622 Income Taxes, Receivable 511 -- Inventories, net 8,805 9,666 Deferred Income Taxes 1,189 1,189 Prepaid Expenses and Other Current Assets 1,268 1,943 --------- ---------- Total Current Assets 25,476 27,400 Investment in Joint Venture 3,838 4,213 Property, Plant and Equipment, net 68,372 55,409 Other Assets: Long-term Marketable Securities -- 996 License Agreements, net 452 603 Deferred Income Taxes 412 412 Goodwill, net 813 872 Other Long-term Assets 2,440 2,200 --------- ---------- Total Other Assets 4,117 5,083 --------- ---------- Total Assets $101,803 $ 92,105 ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current Maturities of Long-term Debt $ 34,000 -- Accounts Payable 5,633 $ 4,758 Income Taxes Payable -- 573 Accrued Liabilities 5,395 6,015 --------- ---------- Total Current Liabilities 45,028 11,346 Long-term Debt -- 24,000 Stockholders' Equity: 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 Net Unrealized (Loss) on Marketable Securities -- (1) Retained Earnings 5,823 5,837 --------- ---------- Total Stockholders' Equity 56,775 56,759 --------- ---------- Total Liabilities and Stockholders' Equity $ 101,803 $ 92,105 ========= ==========
See accompanying notes to these condensed consolidated financial statements. 3 SPECTRAN CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (unaudited) Nine Months Ended September 30, 1998 1997 Cash Flows from (used in) Operating Activities: Net Income $ (14) $ 3,603 Reconciliation of Net Income (Loss) to Net Cash Provided by Operating Activities: Depreciation and Amortization 4,721 3,070 Other Non-Cash Charges 2,403 (38) Loss (Equity) in Net Income of Unconsolidated Joint Venture 375 (17) Changes in Other Components of Working Capital (5,775) (2,848) Loss on Disposition of Equipment 178 62 --------- --------- Net Cash Provided by Operating Activities 1,888 3,832 Cash Flows from (used in) Investing Activities: Acquisition of property, plant and equipment (17,561) (28,723) Purchase of marketable securities (9,652) (240,110) Proceeds from sale/maturity of marketable securities 16,184 241,202 --------- --------- Net Cash Used in Investing Activities (11,029) (27,631) Cash Flows from Financing Activities: Borrowings of long-term debt 10,000 -- Proceeds from exercise of stock options and warrants 30 309 Issuance of Common Stock, net -- 23,077 --------- --------- Net Cash Provided by Financing Activities 10,030 23,386 --------- --------- Increase (Decrease) in Cash and Cash Equivalents 889 (413) Cash and Cash Equivalents at Beginning of Period 445 3,565 --------- --------- Cash and Cash Equivalents at End of Period $ 1,334 $ 3,152 ========= ========= Supplemental Disclosures of Cash paid during the period for: Interest $ 1,258 $ 1,115 ========= ========= Income Tax Payments $ 1,305 $ 1,675 ========= =========
See accompanying notes to consolidated financial statements. 4 SPECTRAN CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. BASIS OF PRESENTATION The financial information for the three months and nine months ended September 30, 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 periods. The results of operations for the three months and nine months ended September 30, 1998, are not necessarily indicative of the results for the entire year. The consolidated results for the three months and nine months ended September 30, 1998, include the accounts of SpecTran Corporation (the Company) and its wholly-owned subsidiaries, SpecTran Communication Fiber Technologies, Inc. ("SpecTran Communication"), SpecTran Specialty Optics Company ("SpecTran Specialty"), and Applied Photonic Devices, Inc. ("APD"), which holds the Company's investment in General Photonics, LLC, a 50-50 joint venture between the Company and General Cable Corporation ("General Cable"), a former subsidiary of Wassall plc. 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 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. These financial statements supplement, and should be read in conjunction with, the Company's audited financial statements for the year ended December 31, 1997, as contained in the Company's Form 10-K as filed with the United States Securities and Exchange Commission. 2. INVENTORIES Inventories, net consisted of (in thousands): September 30, 1998 December 31, 1997 ------------------ ----------------- Raw Materials $ 3,132 $ 4,036 Work in Process 1,949 1,010 Finished Goods 3,724 4,620 ------------- --------------- $ 8,805 $ 9,666 ============= ===============
5 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of (in thousands): September 30, 1998 December 31, 1997 ------------------ ----------------- (unaudited) Land and Land Improvements $ 978 $ 978 Buildings and Improvements 24,333 10,453 Machinery and Equipment 46,383 33,567 Construction in Progress 17,486 27,694 ------------- --------------- 89,180 72,692 Less Accumulated Depreciation and Amortization 20,808 17,283 ------------- --------------- $ 68,372 $ 55,409 ============= ===============
4. DEBT Long-term debt consisted of (in thousands): September 30, 1998 December 31, 1997 ------------------ ----------------- (unaudited) 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 -------- --------- Subtotal $ 34,000 $ 24,000 Less Current Portion 34,000 -- -------- --------- Total Long-term debt $ -- $ 24,000 ======== =========
In December 1996, the Company sold to a limited number of selected institutional investors an aggregate principal amount of $24.0 million of senior secured notes consisting of $16.0 million of 9.24% interest Series A Senior Secured Notes due December 26, 2003, and $8.0 million of 9.39% interest Series B Senior Secured Notes due December 26, 2004. The Company also has a $20.0 million revolving credit agreement with its principal bank, maturing in December 1999. As of September 30, 1998, the Company had borrowed $10.0 million against the revolving credit agreement. Due to the loss incurred in this year's second quarter, the Company was in violation, as of June 30, 1998, of certain covenants contained in both the revolving credit agreement and the senior secured notes. Subsequent to the end of the quarter, the Company obtained waivers of the violations as of June 30, 1998, from the bank regarding the revolving credit agreement and the note holders regarding the senior secured notes. As of September 30, 1998, the Company was and as of the date of this filing remains in violation of those certain covenants. The Company is in discussions with its lenders to obtain modifications of the covenants contained in the loan agreements and waivers of these violations but has not reached agreement with its lenders. To conform with generally accepted accounting principles, the Company has reclassified its long-term debt as current. 5. CORNING SETTLEMENT On March 13, 1998, the Company announced the settlement of Corning's obligation to purchase multimode fiber from the Company under a multiyear supply contract the companies entered into on January 1, 1996. Corning has terminated its purchase of multimode fiber from the Company in exchange for a series of cash payments to the Company totaling $4.1 million. For the three months and nine months ended September 30, 1998, the Company recognized income on the settlement of approximately $900,000 and $2.7 million, respectively. 6 6. COMPUTATION OF EARNINGS PER COMMON SHARE Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128 "Earnings per Share" (SFAS 128) which has changed the method of computing and presenting earnings per common share. All prior periods presented have been restated in accordance with SFAS 128. This restatement had an immaterial impact on prior periods' earnings per common share amounts calculated under previous standard. Under SFAS 128, primary earnings per common share has been replaced with basic earnings per common share. The basic earnings per share computation is based on the earnings applicable to common stock divided by the weighted average number of shares of common stock outstanding at September 30, 1998, and September 30, 1997. Fully diluted earnings per common share has been replaced with diluted earnings per common share. The diluted earnings per common share computation for the three months ended September 30, 1998, and for the three months and nine months ended September 30, 1997, 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. For the nine months ended September 30, 1998, diluted earnings per common share excludes the common share equivalency of options granted to employees under the stock incentive plan since the effects would be anti-dilutive. 7. SUBSEQUENT EVENT On October 30, 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 and sale, 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. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three and Nine Months Ended September 30, 1998 Compared to Three and Nine Months Ended September 30, 1997 Overview of Results for the Nine Months ended September 30, 1998 SpecTran results were essentially break-even for the nine months ended September 30, 1998, with the Company incurring a net loss of $14,000. Reduced earnings at the Communication fiber Technology subsidiary and losses at the other two operating units contributed to these results. The lower earnings at the Communication Fiber Technology subsidiary was caused by an industry-wide oversupply situation resulting in a highly competitive market environment and price weakness. Overall demand is still strong and while the overall volume of standard communication fiber sold during the first nine months of 1998 was up compared with the same period last year, declining selling prices, particularly for single-mode fiber, caused a reduction in gross profit margins. The loss at the Specialty Optics subsidiary resulted from operational issues and inventory write-downs rather than the lack of market demand. A revamped management team led by the new President of SpecTran Specialty, Martin F. Seifert, is implementing new policies and procedures to address these issues and appears to be making good progress at resolving them. General Photonics, the Company's cabling joint venture with General Cable, is experiencing lower than expected sales due to the soft domestic customer premises cable market and weak pricing, not unlike our competitors. Stringent cost control measures have been implemented in the second and third quarter and have already led to improved results at General Photonics in the third quarter. Due to the loss incurred during this year's second quarter, the Company was in violation of certain covenants with its debtholders. Subsequent to the end of the quarter, the Company obtained waivers of the violations as of June 30, 1998. As of September 30, 1998, the Company was and as of the date of this filing remains in violation of those certain covenants. The Company is in discussions with its lenders to obtain modifications of the covenants contained in the debt agreements and waivers of these violations but has not reached agreement with its lenders. To conform with generally accepted accounting principles, the Company has reclassified its long-term debt as current. 8 Results of Operations The following table sets forth, for the periods indicated, certain financial data as a percentage of net sales: Nine Months Ended September 30, Three Months Ended September 30, ---------------------------------- ---------------------------------- (Unaudited) (Unaudited) 1998 1997 1998 1997 ---- ---- ---- ---- Net Sales 100.0% 100.0% 100.0% 100.0% Cost of Sales 75.0% 61.3% 73.0% 63.1% ------- ------- -------- -------- Gross Profit 25.0% 38.7% 27.0% 36.9% Selling and Administrative Expenses 19.6% 23.1% 18.0% 20.0% Research and Development Costs 7.6% 5.0% 7.0% 5.1% ------- ------- -------- -------- Income (Loss) from Operations (2.2%) 10.6% 2.0% 11.8% Other Income (Expense), net 3.4% .8% 2.6% .6% ------- ------- -------- -------- Income before Income Taxes 1.2% 11.4% 4.6% 12.4% Income Tax Expense .4% 3.9% 1.8% 4.2% ------- ------- -------- -------- Income before Equity in Joint Venture .8% 7.5% 2.8% 8.2% Income (Loss) from Joint Venture, net (.8%) -- (.3%) (.8%) ------- -------- -------- --------- Net Income (0.0%) 7.5% 2.5% 7.4% ======= ======= ======== ========
Net Sales Net sales of $20.1 million and $52.3 million for the three months and nine months ended September 30, 1998, were $4.5 million, or 28.3%, and $4.6 million, or 9.6%, higher than the comparable periods of 1997. The increases were due to record quarterly revenues at both SpecTran Communication, resulting from higher sales volumes made possible by the multimode expansion completed earlier this year, and at SpecTran Specialty. Sales growth continued to be adversely effected 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. In addition, the volume of single-mode fiber sales for the nine months ended September 30, 1998 was substantially lower than in the comparable periods in 1997, in large part due to continued unsettled economic conditions and competitive market conditions in Asia. Gross Profit Gross profit of $5.4 million and $13.1 million for the three months and nine months ended September 30, 1998, was $363,000, or 6.3% and $5.4 million, or 29.2% lower than for the comparable periods in 1997. As a percentage of net sales the gross profit decreased to 27.0% and 25.0% for the three months and nine months ended September 30, 1998, from 36.9% and 38.7% for the three months and nine months ended September 30, 1997. The decrease in gross profit for both periods was primarily due to continued industry pricing pressures for standard communication fiber products and operational problems and inventory write-downs at SpecTran Specialty. As a percentage of net sales, royalty expense decreased from 2.9% for the nine months ended September 30, 1997, to 1.2% for the nine months ended September 30, 1998. The decrease was attributable to a decrease in the percentage of net sales subject to royalty. Selling and Administration As a percentage of net sales, selling and administrative expenses decreased to 18.0% and 19.6% for the three months and nine months ended September 30, 1998, from 20.0% for 23.1% the three months and nine months ended September 30, 1997. Selling and administrative expenses increased $474,000, or 15.1%, for the three months ended September 30, 1998, and decreased $761,000, or 6.9%, for the nine months ended September 30, 1998. The increase for the three months ended September 30, 1998, reflects higher expenses associated with the negotiations of waivers and possible modifications of certain covenants in the Company's loan agreements and with its review of SpecTran Specialty's operations. In addition, the three months ended September 30, 1997, included lower than anticipated training costs. The decrease for the nine months period in 1998 reflects the Company's one-time management reorganization and training costs in 1997. 9 Research and Development Research and development costs increased $616,000, or 77.3%, and $1.6 million, or 66.7% for the three months and nine months ended September 30, 1998. Assuming the Company obtains modifications from its debtholders, the Company plans to continue its investment in programs to improve manufacturing cost and product performance in both multimode and single-mode product lines, to develop new special performance fiber products and to develop alternative process technologies. As a percentage of net sales, research and development costs increased from 5.1% and 5.0% for the three months and nine months ended September 30, 1997, to 7.0% and 7.6% for the three months and nine months ended September 30, 1998. Other Income (Expense), net Other income (expense), net favorably increased by $425,000 or 475.1%, and $1.4 million, for the three months and nine months ended September 30, 1998, compared with the same periods in 1997, primarily due to income associated with the Corning Settlement. Interest income decreased for the three months and nine months ended September 30, 1998, $301,000 and $919,000, respectively due to lower level of cash available for investment. Net interest expense increased for the three months and nine months ended September 30, 1998, by $225,000 and $238,000 respectively. The increase for both the three months and nine months periods primarily relates 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 for the three months and nine months ended September 30, 1998, by $952,000 and $2.5 million, respectively, primarily due to the Company's settlement of a multi-year supply contract with Corning. Income Taxes A tax provision of 39.0% of pre-tax income was provided for the three months and nine months ended September 30, 1998, compared to a tax provision of 34.0% of pre-tax income for the comparable periods in 1997. The lower effective tax rate for the 1997 periods 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 losses of $49,000 and $375,000, net of tax, for the three months and nine months ended September 30, 1998, from its investment in General Photonics, the joint venture formed in December 1996 with General Cable. The losses were due to lower than anticipated revenues and gross profit. Net Income Net income for the three month period ended September 30, 1998, was $504,000 and the net loss for nine month period ended September 30, 1998, was $14,000 as compared to net income for the three months and nine months ended September 30, 1997, of $1.2 million and $3.6 million. Net income for the three month period ended September 30, 1998, is primarily due to earnings from SpecTran Communication. The loss of $14,000 for the nine months ended September 30, 1998, was due to the operational issues and inventory write-downs at SpecTran Specialty, the loss from its equity in General Photonics and a lower level of earnings at SpecTran Communication due to competitive market conditions. 10 Liquidity and Capital Resources Working capital decreased $33.9 million, from $16.1 million at the end of 1997 to ($19.5) million at September 30,1998. The negative working capital position is primarily attributable to the previously mentioned reclassification of long-term debt to current. During the first nine months of 1998 the Company used $10.0 million in cash provided from financing activities, primarily from net borrowings under its revolving credit agreement, plus $6.5 million of proceeds from the sale of marketable securities to fund its cash requirements for its capacity expansion. In addition, the Company generated positive cash flow from operations of $1.9 million for the first nine months of 1998. The results for the nine months ended September 30, 1998, have put the Company in violation of certain covenants with its debtholders. The Company was also in violation of these covenants at June 30, 1998, but obtained waivers of the violations for that period. The Company has been in negotiations with its debtholders to obtain modifications of these certain covenants in its debt agreements. There can be no assurance that any such modifications can be negotiated on terms acceptable to the debtholders and the Company. Should the debtholders seek immediate payment of the outstanding debt, the Company would be unable to do so and should the bank stop extending credit under the revolving credit agreement, after year end the Company would likely not have sufficient funds to maintain its operations, in both cases absent alternative sources of funds. To conform with generally accepted accounting principles the Company has reclassified its $34.0 million of long-term debt as current. The Company is continuing its capacity expansion which will require approximately $2.0 million in capital expenditures through the remainder of 1998, which will result in total expenditures for capacity expansion since 1996 of approximately $44.0 million at SpecTran Communication and $12.0 million at SpecTran Specialty. When fully operational, the expansion at SpecTran Communication will increase capacity there by 100% from 1996 levels. The expansion at SpecTran Specialty, which was completed in 1997, increased capacity by 50%. The Company intends to continue to finance this expansion through a combination of cash flow from operations and borrowings, assuming it obtains the appropriate covenant modifications from its debtholders. Other Matters In September, the Company announced that Martin F. Seifert had been appointed Vice President of SpecTran Corporation and President of SpecTran Specialty Optics Company. Pursuant to Rule 14a-4 adopted under the Securities Exchange Act of 1934, unless a stockholder who desires to introduce a proposal at the Company's annual meeting of stockholders notifies the Company at least 45 days prior to the month and day of the mailing of the prior year's proxy statement (i.e. by March 16, 1999), the proxyholders designated by management will be allowed to use their discretionary voting authority when the proposal is raised at the annual meeting, without any discussion of the matter in the proxy statement. 11 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 a material relationship could experience similar malfunctions which could, in turn, have a material impact on the Company. The Company has initiated an enterprise-wide assessment of its IT Systems and Non-IT Systems to evaluate the state of its preparedness for the Year 2000. The Company has completed 70% of such assessment and intends to complete the assessment phase in the fourth quarter of 1998. The internal assessment has principally been completed at SpecTran Communication Fiber Technologies, with the bulk of the remaining assessment to be conducted at the SpecTran Specialty Optics subsidiary. The Company has evaluated the issues that have derived from its internal assessment and has developed a plan for their remediation and continued testing. Parts of this plan have already been implemented. The Company anticipates spending $1.5 million during 1999 to address its Year 2000 issues, including $222,000 for software which will be expensed in 1999. Implementation of remedial efforts, which has already commenced, is expected to be completed by the third quarter of 1999. Based on currently known information, the Company's internal Year 2000 issues are not expected to have material effect upon the Company's financial position, results of operations, or cash flows in future periods. As part of its assessment of Year 2000 issues, the Company plans on communicating with certain key service providers, suppliers, and customers to obtain information regarding their plans to address Year 2000 issues, to the extent that they have such issues. There can be no assurance that third parties' systems upon which the Company may rely, will become Year 2000 compliant in a timely manner, or that any such failure by any of such third parties to become Year 2000 compliant will not have a materially adverse effect on the Company. The Company has not yet developed a Year 2000 contingency plan. The Company intends to prepare a contingency plan related to all areas of Year 2000 risk no later than the first quarter of 1999. Subsequent Events In October 1998 the Company announced that Bruce A. Cannon, Senior Vice President and Chief Financial Officer of SpecTran Corporation, had resigned for personal reasons and, effective year-end, the position of Chairman of the Board of Directors will transition from Dr. Raymond E. Jaeger to Mr. Charles B. Harrison, the Company's President and CEO. Dr.Jaeger will remain a director of the Company. On October 30, 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 and sale, 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. In November the Company appointed Mr. John Rogers as Acting Chief Financial Officer. 12 Recent Accounting Pronouncements Effective June 15, 1998, the provisions of Statements of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," applies to the Company. Application of this statement has had no effect on presentation of its financial information. Forward Looking Statements This report contains forward looking statements which are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations. Forward-looking statements involve risks and uncertainty, 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 include 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 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEDURES On November 6 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 6. EXHIBITS AND REPORTS ON FORM 8-K (a) 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 16, 1998 BY: /s/ Charles B. Harrison Charles B. Harrison President, Chief Executive Officer (Acting Principal Financial Officer) 14 EX-27 2 FDS --
5 (Replace this text with the legend) 0000718487 SpecTran Corporation 1,000 U.S. DOLLARS 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1 1,334 0 12,986 617 8,805 25,476 89,180 20,808 101,803 45,028 0 0 0 700 0 101,803 52,322 52,322 39,244 14,255 0 0 938 217 231 0 0 0 0 (14) (.00) (.00)
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