-----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, OKkMSkuDl/BebD+HM79lktLAI1S19ahcXdJZvop358VLS/Jp9BEwRvPHrxr1hKRN OhmMCqZlsC02CgRS1mKEpA== 0000718487-99-000015.txt : 19991122 0000718487-99-000015.hdr.sgml : 19991122 ACCESSION NUMBER: 0000718487-99-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 DATE AS OF CHANGE: 19991119 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: 99757016 BUSINESS ADDRESS: STREET 1: 50 HALL ROAD CITY: STURBRIDGE STATE: MA ZIP: 01566 BUSINESS PHONE: 5083472261 MAIL ADDRESS: STREET 1: 50 HALL ROAD CITY: STURBRIDGE STATE: MA ZIP: 01566 10-Q 1 QUARTERLY REPORT OF SPECTRAN CORPORATION 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 September 30, 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 October 31, 1999, was 7,194,430. 1 PART I - FINANCIAL INFORMATION SPECTRAN CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS In thousands except per share amounts (unaudited)
Nine Months Ended Three Months Ended September 30 September 30, 1999 1998 1999 1998 ---- ---- ---- ---- Net Sales $ 57,635 $ 50,758 $ 14,668 $ 19,288 Cost of Sales 43,857 37,680 12,310 13,874 ------ ------ ------- ------ Gross Profit 13,778 13,078 2,358 5,414 Selling and Administrative Expenses 10,184 10,260 3,435 3,608 Research and Development Costs 2,102 3,995 678 1,414 ------ ------ ------- ------ Income (Loss) from Operations 1,492 (1,177) (1,755) 392 ------ ------ -------- ------ Other Income (Expense): Interest Income 209 181 82 34 Interest Expense (2,219) (938) (743) (462) Other, Net (Note 5) (5) 2,526 (46) 943 ------ ------ ------- ------ Other Income (Expense), net (2,015) 1,769 (707) 515 ------ ------ ------- ------ Income (Loss) before Income Taxes and Equity in Joint Venture (523) 592 (2,462) 907 Income Taxes (Benefit) (204) 231 (960) 354 ------ ------ ------- ------ Net Income (Loss) Before Joint Venture (319) 361 (1,502) 553 ------ ------ ------- ------ Joint Venture: Loss from Equity in Joint Venture, less applicable taxes (235) (375) -- (49) Loss on Sale of Joint Venture, including applicable tax expense of $947 (1,336) -- -- -- ------ ------ -------- ------ Net Loss on Joint Venture (1,571) (375) -- (49) ------ ------ -------- ------ Net Income (Loss) $ (1,890) $ (14) $ (1,502) $ 504 ====== ===== ======= ====== Net Income (Loss) per Common Share (Note 6): Basic $ (0.27) $ (0.00) $ (0.21) $ 0.07 ======= ======= ======= ======= Dilutive $ (0.27) $ (0.00) $ (0.21) $ 0.07 ======= ======= ======= ======= Weighted Average Number of Common Shares Outstanding: Basic 7,040 7,003 7,111 7,004 ====== ====== ======= ====== Dilutive 7,040 7,003 7,111 7,117 ====== ====== ======= ======
See accompanying notes to these consolidated financial statements. 2 SPECTRAN CORPORATION Consolidated Balance Sheets Dollars in thousands September 30, 1999 December 31, 1998 ------------------ -----------------
ASSETS Current Assets: Cash and Cash Equivalents $ 3,741 $ 1,690 Trade Accounts Receivable, net 11,672 12,568 Inventories (Note 2) 12,618 8,279 Income Taxes Receivable -- 644 Deferred Income Taxes 1,889 1,889 Prepaid Expenses and Other Current Assets 978 1,036 -------- -------- Total Current Assets 30,898 26,106 Investment in Joint Venture (Note 1) -- 3,239 Property, Plant and Equipment, net (Note 3) 66,969 68,495 Other Assets: License Agreements, net 3,885 4,335 Goodwill, net 734 793 Other Long-term Assets 2,377 2,451 -------- -------- Total Other Assets 6,996 7,579 -------- -------- Total Assets $ 104,863 $ 105,419 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current Maturities of Long-term Debt (Note 4) $ 35,000 $ 3,200 Current Portion of License Fees Payable 1,000 1,250 Accounts Payable 4,115 4,410 Income Taxes Payable (250) -- Accrued Defined Benefit Pension Liability 2,305 1,902 Deferred Income Taxes 478 478 Accrued Liabilities 4,476 3,317 -------- -------- Total Current Liabilities 47,124 14,557 Long-term Portion of License Fee Payable 1,750 2,750 Long-term Debt (Note 4) 30,800 Stockholders' Equity: Common Stock, voting, $.10 par value; authorized 20,000,000 shares; outstanding 7,192,430 shares and 7,003,850 shares in 1999 and 1998, respectively 719 700 Common Stock, non-voting, $.10 par value; authorized 250,000 shares; no shares outstanding -- -- Paid-in Capital 50,800 50,252 Retained Earnings 4,470 6,360 -------- -------- Total Stockholders' Equity 55,989 57,312 -------- -------- Total Liabilities & Stockholders' Equity $ 104,863 $ 105,419 ======== ========
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, 1999 1998 ---- ---- Cash Flows from Operating Activities: Net Loss $ (1,890) $ (14) Reconciliation of net income to net cash provided by operating activities: Depreciation and Amortization 6,665 4,721 Loss on disposition of equipment 39 178 Changes in valuation accounts (762) 2,403 Loss in joint venture 235 375 Loss from Sale of Joint Venture 1,336 -- Change in other long-term assets 1 (322) Changes in operating assets and liabilities: Accounts receivable 1,135 (3,975) Inventories (3,817) (1,314) Prepaid expenses and other current assets 58 665 Income taxes payable/receivable (304) (1,084) Accounts payable and accrued liabilities 18 255 ------- ------- Net Cash Provided by Operating Activities 2,714 1,888 ------- ------- Cash Flows from Investing Activities: Acquisition of property, plant and equipment (4,596) (17,561) Proceeds from Sale of Joint Venture 2,367 -- Purchase of marketable securities -- (9,652) Proceeds from sale/maturity of marketable securities -- 16,184 ------- ------- Net Cash Used in Investing Activities (2,229) (11,029) ------- ------- Cash Flows from Financing Activities: Borrowings of long-term debt 1000 10,000 Proceeds from exercise of stock options and warrants 566 30 ------- ------- Net Cash Provided by Financing Activities 1,566 10,030 ------- ------- Increase in Cash and Cash Equivalents 2,051 889 Cash and Cash Equivalents at Beginning of Period 1,690 445 ------- ------- Cash and Cash Equivalents at End of Period $ 3,741 $ 1,334 ======= =======
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, 1999 and 1998, is unaudited but reflects all adjustments (consisting solely of normal recurring adjustments) which the Company considers necessary for fair presentation of results for the interim periods. The results of operations for the three months and nine months ended September 30, 1999 are not necessarily indicative of the results for the entire year. The consolidated results for the three months and nine months ended September 30, 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 held 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 was 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. On June 30, 1999, APD sold its fifty-percent interest in General Photonics, LLC to BICC General Cable Industries, Inc. (formerly known as General Cable Industries, Inc.). The purchase price paid by BICC General Cable Industries, Inc. for APD's interest in General Photonics was $2.4 million. As part of the transaction, General Photonics repaid a loan to SpecTran for $325,000 and BICC General Cable Industries, Inc. purchased approximately 30,000 kilometers of optical fiber from SpecTran Communication. 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 as filed with the United States Securities and Exchange Commission. 2. INVENTORIES Inventories, net consisted of (in thousands): September 30, 1999 December 31, 1998 ------------------ ----------------- Raw Materials $ 2,199 $ 3,096 Work in Process 4,289 1,277 Finished Goods 6,130 3,906 ------ ------ $ 12,618 $ 8,279 ======= ======
5 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of (in thousands): September 30, 1999 December 31, 1998 ------------------ ----------------- Land and Land Improvements $ 978 $ 978 Buildings and Improvements 24,973 24,909 Machinery and Equipment 66,560 48,983 Construction in Progress 2,657 16,220 ------ ------ 95,168 91,090 Less Accumulated Depreciation and Amortization 28,199 22,595 ------ ------ $ 66,969 $ 68,495 ====== ======
4. DEBT Long-term debt consisted of (in thousands): September 30, 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 ------ ------ Subtotal 35,000 34,000 Less Current Portion 35,000 3,200 ------ ------ Total Long-term debt Less Current Portion $ 0 $ 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 in April 2000. As of June 30, 1999, the Company had borrowed $11.0 million against the revolving agreement. This was reclassified to current portion of long-term debt as of April 1, 1999. On August 31, 1999 Seattle Acquisition Inc., a wholly owned subsidiary of Lucent Technologies Inc., purchased 60.9% of the outstanding Common Stock of the Company (approximately 53.3% on a fully diluted basis) pursuant to a tender offer that began on July 21, 1999. This transaction constitutes a "Change of Control" as defined in the Note Purchase Agreement. Pursuant to the Note Purchase Agreement, the Company offered to repay the senior secured notes within 20 business days. On October 7, 1999 the senior secured notes of $24,000,000 and on November 5, 1999 the outstanding balance of $11,000,000 on the revolving agreement with the Company's principal were paid off by Lucent Technologies on behalf of the Company. These notes have been replaced with notes from the Company to Lucent at the same interest rates due on December 2, 1999. 6 5. CORNING SETTLEMENT On March 13, 1998 the Company and Corning Incorporated announced a settlement of Corning's obligations to purchase multimode fiber from the Company under a multiyear supply contract that the companies entered into on January 1, 1996. Corning terminated its purchases of multimode optical fiber from the Company in exchange for a series of cash payments to the Company in 1998 totaling $4.056 million. For the three and nine month periods ended September 30, 1998 the Company recognized income on the settlement of approximately $900 thousand and $2.7 million , respectively. 6. COMPUTATION OF INCOME (LOSS) 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 nine and three months ended September 30, 1999 and 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. Exercise of options and warrants or conversion of convertible securities is not assumed if the result would be antidilutive, such as when a loss from continuing operations is reported. (dollars and shares in thousands) Nine Months Ended Three Months Ended September 30, September 30, 1999 1998 1999 1998 ---- ---- ---- ---- Income (Loss) per common share-basic Income (Loss) applicable to common stock $ (1,890) $ (14) $(1,502) $ 504 ====== ===== ====== ===== Weighted average shares outstanding 7,040 7,003 7,111 7,004 ====== ===== ====== ===== Income (Loss) per common share-basic $ (.27) $ (.00) $ (.21) $ .07 ====== ===== ====== ===== Income (Loss) per common share-diluted Income (Loss) applicable to common share $ (1,890) $ (14) $(1,502) $ 504 ====== ===== ====== ===== Weighted average shares outstanding 7,040 7,003 7,111 7,004 ====== ===== ====== ===== Plus shares issuable on: Exercise of dilutive options -- -- -- 13 ------ ----- ----- ----- Weighted average shares outstanding assuming conversion Basic 7,040 7,003 7,111 7,117 ===== ===== ====== ===== Diluted 7,040 7,003 7,111 7,117 ===== ===== ====== ===== Income (Loss) per common share-diluted Basic $ (.27) $ (.00) $ (.21) $ .07 ===== ===== ======= ===== Diluted $ (.27) $ (.00) $ (.21) $ .07 ===== ====== ======= =====
Options to purchase 1,035,000 and 692,000 shares of common stock were outstanding at the nine month period ending September 30, 1999 and 1998 respectively, but were not included in the computation of diluted loss per share because the effect of including such options would be anti-dilutive. 7 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 - Optical Fiber and Specialty Products. A third segment, Cable, was sold in December 1996 in conjunction with the formation of General Photonics. SpecTran retained a 50% equity interest in General Photonics through the first half of the year and sold its interest on June 30, 1999. SpecTran's share of General Photonics income (loss) for 1998 and 1999 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 and geophysical applications. 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 and nine months ended September 30 is as follows (in thousands): REVENUES Nine Months ended September 30, Three Months Ended September 30, 1999 1998 1999 1998 ---- ---- ---- ---- Optical Fiber (see A) $38,177 $36,449 $ 8,744 $14,288 Specialty Products 19,458 14,309 5,924 5,000 ------- ------ ------ ------ $57,635 $50,758 $14,668 $19,288 ======= ====== ====== ======
INCOME (LOSS) FROM OPERATIONS 1999 1998 1999 1998 ---- ---- ---- ---- Optical Fiber $ 2,548 $ 4,409 $ (1,038) $ 2,879 Specialty Products 4,615 (1,853) 1,861 (1,050) Corporate (5,671) (3,733) (2,578) (1,437) ------ ------ ------- ------- $ 1,492 $ (1,177) $ (1,755) $ 392 ======= ====== ====== =======
ASSETS September 30, December 31, 1999 1998 Optical Fiber $ 73,772 $ 72,447 Specialty Products 19,675 19,953 Cable (Investment in JV) -- 3,458 Corporate 11,416 9,561 ------- ------- $ 104,863 $ 105,419 ======= =======
A) Due to a change in accounting treatment of certain fiber sales, sales and cost of sales for the third quarter and September year to date 1998 were reduced by $775,000 and $1,564,000 respectively. This change had no effect on previously reported net income or earnings per share. These changes related to an agreement to supply Lucent with all of a certain product produced by the Company with a provision permitting Lucent to require the Company to purchase that same product should Lucent not be able to use all of that product. During the first three quarters of 1998, the Company purchased that product back from Lucent and sold it to another customer. During these three quarters, the Company had booked as sales the sale both to Lucent and the second customer and had booked as costs both the costs of producing the product and the cost of purchasing the product back from Lucent. In reviewing this treatment at year end, it was determined that better accounting treatment would be to account for this as one sale to the second customer with a concomitant cost of sale. As a result, sales and costs of sales for the first three quarters were reduced as mentioned above which did not affect net income, gross margin or earnings per share. This agreement did not extend beyond 1999. 8 8. ACQUISITION OF THE COMPANY BY LUCENT On July 15, 1999 SpecTran Corporation ("SpecTran") entered into an Agreement of Merger (the "Agreement of Merger") with Lucent Technologies Inc., a Delaware corporation ("Lucent") and its wholly-owned subsidiary Seattle Acquisition Inc., a Delaware corporation ("Purchaser"). Pursuant to the Agreement of Merger, Purchaser made a tender offer (the "Offer") disclosed in the Tender Offer Statement on Schedule 14D-1 dated July 21, 1999 (as amended or supplemented, the "Schedule 14D-1") filed with the Securities and Exchange Commission (the "Commission") by Lucent and the Purchaser to purchase all outstanding shares of the common stock, par value $.10 per share of SpecTran (the "Shares") at a price of $9.00 per share, net to the seller in cash, without interest thereon (the "Offer Price"), upon the terms and subject to the conditions set forth in the Offer to Purchase (the "Offer to Purchase") dated July 21, 1999, a copy of which is filed as an Exhibit to the Company's Schedule 14D-9 dated July 21, 1999 and filed with the Commission (as amended or supplemented, the "Schedule 14D-9"). The Agreement of Merger provides that, among other things, as soon as practicable after the purchase of Shares pursuant to the Offer and the satisfaction of the other conditions set forth in the Agreement of Merger and in accordance with the relevant provisions of the General Corporation Law of the State of Delaware ("Delaware Law" or the "DGCL"), the Purchaser will be merged with the Company (the "Merger"). Following consummation of the Merger, the Company will continue as the surviving corporation (the "Surviving Corporation") and will become a wholly owned subsidiary of Lucent. At the effective time of the Merger (the "Effective Time"), each Share issued and outstanding immediately prior to the Effective Time (other than Shares (i) owned or held in treasury by the Company, (ii) owned by the Purchaser or Parent, (iii) remaining outstanding held by any subsidiary of the Company or Parent or (iv) owned by stockholders who shall have demanded properly and perfected appraisal rights, if any, under Delaware Law) will be canceled and converted automatically into the right to receive the Offer Price (the "Merger Consideration"). The Agreement of Merger is summarized in Section 12 of the Offer to Purchase. A copy of the Agreement of Merger is filed as an Exhibit to the Schedule 14D-9 and is hereby incorporated by reference herein. In addition, attached to the Schedule 14D-9 as Annex A is the Information Statement of the Company (the "Information Statement") which describes, among other things, certain contracts, agreements, arrangements or understandings known to the Company between the Company or its affiliates and (i) certain of the Company's executive officers, directors or affiliates or (ii) certain of Parent's executive officers, directors or affiliates. The Information Statement was furnished to the Company's stockholders in connection with the Purchaser's right (after consummation of the Offer) to designate persons to be appointed to the Board of Directors of the Company other than at a meeting of the stockholders of the Company. The Information Statement is hereby incorporated by reference herein The Board of Directors of SpecTran has unanimously approved the Offer and the Merger and determined that the terms of the Offer and the Merger are fair to, and in the best interests of the stockholders of SpecTran and unanimously recommends that the stockholders of SpecTran accept the Offer and tender their Shares to the Purchaser pursuant to the terms of the Offer. As of August 4, 1999, the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, relating to the purchase of the Shares pursuant to the Offer had expired. On September 1, 1999 Lucent announced that the Offer expired at midnight on August 31, 1999, and that Lucent had accepted tendered Shares representing about 60.9% of the outstanding Shares (approximately 53.3% on a fully diluted basis), thereby meeting the minimum condition for the Offer that at least 50% of the Shares on a fully diluted basis be tendered. 9 9. SUBSEQUENT EVENTS In October 1999, Lucent agreed to purchase and the Company agreed to supply 1 million kilometers of depressed clad single-mode optical fiber from the Company in FY 2000. Lucent granted the Company a royalty free technology license for the fiber quantities to be delivered to Lucent. In order to provide the people and production assets necessary to deliver this size order coupled with issues concerning yield, process uncertainties and substantial additional costs involved in the HVD process, the Company has suspended further work on the HVD process at this time pending further evaluation. 10. 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. After the announcement of the Agreement of Merger by the Company and Lucent on July 15, 1999, two putative class action suits relating to the Merger were filed in the Court of Chancery for the state of Delaware: Chase v. Harrison et al., C.A. No.17312-NC and Airmont Associates et al., v. SpecTran Corporation, et. al., C.A. No. 17314-NC. The lawsuits were filed by plaintiffs claiming to be stockholders of the Company, purportedly on behalf of all the company's stockholders, against the Company, members of the board of directors of the Company and Lucent. The plaintiffs in both lawsuits allege, among other things, that the terms of the proposed Merger were not the result of an auction process or active market check, that $9.00 per share offered by Lucent is inadequate, and that the Company's directors breached their fiduciary duties to the stockholders of the Company in connection with the Agreement of Merger. Both lawsuits seek to have the Merger enjoined, or if the Merger is completed, to have it rescinded and to recover unspecified damages, fees and expenses. The Company and Lucent intend to vigorously oppose these lawsuits. 10 On July 29, 1999, the plaintiff in Chase v. Harrison, et al., Civil Action No. 17312-NC, filed an Amended Class Action Complaint (the "Amended Complaint") in Delaware Chancery Court. In the Amended Complaint, the plaintiff alleges, among other things, that (1) the proposed purchase price is inadequate; (2) the Company's Solicitation/Recommendation Statement on Schedule 14D-9 is misleading and omits material information in that it fails to disclose (a) the Company's financial results for the second fiscal quarter ended June 30, 1999, (b) why the Company's projected financial results, as announced by the Company on May 28, 1999, did not warrant that a substantial premium be paid for the Company relative to the existing market price, (c) information concerning the identity of other bidders for the Company and the terms of any competing bids or expressions of interest, (d) why the Company did not wait until after its third quarter ended September 30, 1999 financial results were available to determine whether Company C would make an offer to acquire the Company, (e) the reasons for Lazard Freres & Co. LLC's determination that the Merger was "fair", (f) the total amount of benefits that each of the Company's executive officers and directors will realize from the Merger, and (g) the value of the Company to Lucent and the benefits Lucent will derive from the Merger, including the equivalent amount that Lucent would have to spend to build the manufacturing capacity that it will be buying from the Company and that Lucent had approved a higher purchase price; and (3) the board of directors of the Company breached its fiduciary duty to the stockholders of the Company to exercise due care, loyalty and candor. The Amended Complaint further alleges that Lucent aided and abetted the breach of fiduciary duty by the individual defendants. The foregoing is qualified in its entirety by reference to the Amended Complaint, a copy of which is filed as an exhibit to the Company's Amendment No. 1 to Schedule 14D-9, dated August 4, 1999 and filed with the Commission on August 5, 1999, and is incorporated by reference herein. Concurrent with the filing of the Amended Complaint, the plaintiff in Chase v. Harrison, et al. petitioned the Delaware Chancery Court for expedited discovery and the scheduling of a hearing on a preliminary injunction. A telephone conference call was held by the Delaware Chancery Court on July 30, 1999, at which time the court declined to permit expedited discovery and declined to schedule a hearing on a preliminary injunction. Instead, the court scheduled a hearing on August 13, 1999 to hear arguments as to whether an order temporarily restraining consummation of the Merger should be issued. This scheduled hearing was subsequently canceled when, by letter dated August 2, 1999, plaintiff's counsel withdrew plaintiff's application for a temporary restraining order. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three and Nine Months Ended September 30, 1999 Compared to Three and Nine Months Ended September 30, 1998 Third quarter revenues were $14.7 million down 24% from revenues of $19.3 million for the same period last year. Operating loss was $(1.8) million, down from an operating income of $0.4 million incurred during the same quarter ended in 1998. These decreases in both revenue and operating income were due primarily to a significant reduction in orders for communication fiber in the third quarter related, at least in part, to certain customers reluctance to purchase in light of the Company's anticipated merger with Lucent. Operating income was also negatively impacted by recurring yield issues associated with bringing the single mode HVD process into production after the early July one week plant shutdown. Net income (loss), before Joint Venture, for the third quarter and nine months ended September 30, 1999 were $(1.5) million and $(0.3) million respectively. Both 1999 periods were down from income of $0.6 million and $0.3 million for the same periods a year ago. The loss incurred from the Joint Venture for the nine month period ended September 30, 1999 was $1.6 million, and was primarily attributable to the loss and associated tax expense incurred from the sale of the Company's Joint Venture with General Cable, General Photonics, which occurred in the second quarter. The Company's overall net loss for the quarter was $1.5 million or $.21 per share, compared with a net income of $0.5 million or $.07 per share for the same period last year. Revenues for the first nine months of 1999 were $57.6 million, up 14% from $50.8 million recognized during the same period for 1998. Revenue and net income (loss) from operations versus a year ago reflects the losses incurred as a result of the sale of the Company's interest in General Photonics, a decrease in non-recurring income recorded in 1998 from the settlement in the multi-year Corning supply contract and the increase of interest expense in 1999 associated with servicing the Company's debt. For the nine months ended September 30, 1999 SpecTran incurred a net loss of $1.9 million or $.27 per share, compared to a net loss of $14,000 or $.00 per share for the first nine months of 1998. 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, --------------------------------- ---------------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Net Sales 100.0% 100.0% 100.0% 100.0% Cost of Sales 76.1 74.2 83.9 71.9 ------ ------ ------- ------- Gross Profit 23.9 25.8 16.1 28.1 Selling and Administrative Expenses 17.7 20.2 23.4 18.7 Research and Development Costs 3.6 7.9 4.7 7.4 ------ ------ ------- ------- Income (Loss) from Operations 2.6 (2.3) (12.0) 2.0 Other Income (Expense), net (3.5) 3.5 (4.8) 2.7 ------ ------ ------- ------- Income (Loss) from Operations before Income Taxes and Joint Venture (0.9) 1.2 (16.8) 4.7 Income Taxes (Benefits) (0.3) 0.5 (6.6) 1.8 ------ ------ ------- ------- Income (Loss) before Joint Venture (0.6) 0.7 (10.2) 2.9 Net Loss on Joint Venture (0.3) (0.7) 0.0 (0.3) ------ ------- ------- ------- Net Income (Loss) (0.3%) 0.0% (10.2%) 2.6% ======= ======= ======== ========
12 Net Sales Net sales of $14.7 million and $57.6 million for the three months and nine months ended September 30, 1999, was lower by $4.6 million, or 24% and higher by $6.9 million, or 14% compared to the respective periods of September 30, 1998. Although third quarter revenues decreased at SpecTran Communication due to a significant decline in orders for communications fiber related, at least in part, to certain customers reluctance to purchase in light of the Company's anticipated merger with Lucent, results for the nine months ended September 30, 1999 still exceeded 1998 year-to-date volume because of a slowing of price erosion coupled with increased capacity availability due to production capacity expansion. SpecTran Specialty continued to benefit from strong market demand. Gross Profit Gross profit of $2.4 million and $13.8 million for the three months and nine months ended September 30, 1999 was lower by $3.1 million, or 56% and higher by $700,000 or 5% compared to their respective periods in 1998. As a percentage of net sales the gross profit decreased to 16% from 28% for the quarter and to 24% from 26% for the nine months as compared to 1998 results. The third quarter 1999 margin decrease compared to the same 1998 period is primarily due to lower cost absorption related to the lower volume coupled with the negative impact of recurring yield issues associated with bringing the single mode HVD process into production after the early July one week plant shutdown. Selling and Administration Selling and administration expenses were lower by $173,000 for the quarter and essentially flat for the nine months as compared to prior year results. As a percentage of net sales, selling and administrative expenses increased to 23% from 19% for the quarter and decreased to 18% from 20% for the nine months as compared to the same periods a year ago. Research and Development Research and development costs for the three and nine month periods ended September 30, 1999 decreased from the same period a year ago by $736,000 or 52% and $1.9 million or 47%, respectively. Higher levels of research and development resources were deployed during 1998 in bringing the HVD production process on-line, which are costs not recurring in 1999. This decrease is also attributable to the realignment of normal production support engineering expenses to cost of sales from research and development. As products progress beyond the research and development stage into commercial manufacture, expenses that previously were categorized as research and development costs are reclassified as production support and become part of costs of goods sold. The impact on operating margins was an initial decrease in operating margins at SpecTran Specialty of 8 percentage points, which operating margins should return to prior levels as more of these new products are sold. The Company is continuing its initiative to improve manufacturing productivity and products performance in both multimode and single-mode product lines while developing new performance fiber products and alternative process technologies. 13 Other Income (Expense), Net Other Income (Expense), Net was lower by $1.2 million and $3.8 million for the three and nine months ended September 30, 1999 as compared to the same periods for 1998. This was attributable to the absence of approximately $0.9 million and $2.7 million, respectively, of other income from the Company's 1998 settlement of a multi-year supply contract with Corning, which is non-recurring for 1999. These payments were recognized by the Company as Other Income and recorded during the periods in which the payments were received. This settlement adversely affected Net Sales, but recorded Other Income, which offset in part, some of the ongoing fixed cost associated with the initial agreement. The remainder of the differences within Other, Net are attributable to a series of miscellaneous adjustments including a loss on the sale of fixed assets, loan fees and an adjustment for the fair market value of the supplemental retirement programs. Additionally, the Company's Interest Expense increased $281,000 or 61% and $1.3 million or 136% for the three and nine months ended September 1999 as compared with the same periods for 1998. The Company's Interest Expense is net of capitalized interest that is associated with the Company's expansion programs which offsets interest expense on debt. The Company's Interest Expense on its long-term debt decreased for the quarter by $32,000 and increased for the year by $185,000. Capitalized interest decreased by $314,000 and $1.1 million, respectively. Interest income increased for the quarter by $48,000 and $28,000 for the nine months period. Income Taxes A tax benefit of 39.0% was provided for on the Company's operations for the three months and nine months ended September 1999. (Loss) From Equity in Joint Venture The Company realized losses of $235,000 the nine months ended September 30, 1999. This compares with a loss of $49,000 and $375,000 for the three and nine months ended September 30, 1998. Net Income The net loss for the three months and nine months ended September 30, 1999 was $1.5 million and $1.9 million, respectively as compared with a profit of $504,000 and a loss of $14,000 for the same periods of 1998. The net loss for 1999 was primarily attributable to the tax loss associated with the Company's sale of its interest in General Photonics during the second quarter of 1999. The three months and nine months ended September 30, 1999 was also impacted by a significant reduction in orders for communication fiber coupled with the negative impact related to the recurring yield issues associated with bringing the single mode HVD process into production after the early July one week plant shutdown. Liquidity and Capital Resources As of September 30, 1999 the Company had approximately $3.7 million in cash and cash equivalents. The Company's working capital position at September 30, 1999 was $(16.2) million with a current ratio of .66 to 1. This is principally due to the reclassification of $11.0 million revolving credit balance and $20.8 million of notes from long-term debt to current. During the first nine months of 1999 the Company generated $2.7 million in positive cash flow from operating activities and borrowed $1.0 million under its revolving credit agreement. The Company invested $4.6 million in the acquisition of machinery and equipment. The Company's completed capacity expansion at SpecTran Specialty increased its capacity by more than 50% permitting an increase in sales at SpecTran Specialty that, together with the productivity and management improvements, are expected to improve gross margins. The Company's capacity expansion at SpecTran Communication is not yet fully operational. Its impact on future operating results, when it is fully operational, will depend upon, among other things, the demand for the Company's standard communication fibers and the price customers are willing to pay for them. In October 1999, Lucent agreed to purchase and the Company agreed to supply 1 million kilometers of depressed clad single-mode optical fiber from the Company in FY 2000. Lucent granted the Company a royalty free technology license for the fiber quantities to be delivered to Lucent. In order to provide the people and production assets necessary to deliver this size order coupled with issues concerning yield, process uncertainties and substantial additional costs involved in the HVD process, the Company has suspended further work on the HVD process at this time pending further evaluation. The Company intends to continue to finance its capital and operational needs for the remainder of the year through a combination of cash flow from operations and borrowings from Lucent. On July 15, 1999 the Company entered into an Agreement to Merger with Lucent Technologies, Inc. which if consummated will satisfy the Company's long-term cash requirements. The company had a $20.0 million revolving credit agreement with it principal bank. As of the third quarter of 1999, the company had borrowed $11.0 million against that revolving credit agreement. The interest rate on this credit agreement was at Libor plus 150 basis points. The $11.0 million was essentially broken into three, 90 day increments, with one 90 day increment renewing every month. The average rate for the $11.0 million was approximately 6.8%. The remaining debt of $24.0 million was segregated as follows: $16.0 million Series A Senior Secured Notes 9.24% 8.0 million Series B Senior Secured Notes 9.39% On August 31, 1999 Seattle Acquisition Inc., a wholly owned subsidiary of Lucent Technologies Inc., purchased 60.9% of the outstanding Common Stock of the Company (approximately 53.3% on a fully diluted basis) pursuant to a tender offer that began on July 21, 1999. This transaction constitutes a "Change of Control" as defined in the Note Purchase Agreement. Pursuant to the Note Purchase Agreement, SpecTran offered to repay the senior secured notes within 20 business days. On October 7, 1999 the senior secured notes of $24,000,000 and on November 5, 1999 the outstanding balance of $11,000,000 on the revolving agreement with the Company's principal were paid off by Lucent Technologies in behalf of SpecTran. The former notes have been subsequently replaced with SpecTran/Lucent notes with the same interest rates and due on December 2, 1999. 14 The Year 2000 Issue The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's information technology systems (which the Company relies on to monitor and manage its operations, accounting, sales and administrative functions), such as computers, servers, networks, and software ("IT Systems") and other systems that use embedded microchip technology ("Non-IT Systems") that are date sensitive may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failure or miscalculations causing disruption of operations. Similarly, the date-sensitive IT Systems and Non-IT Systems of third party suppliers or customers with whom the Company has material relationships could experience similar malfunctions which could, in turn, have a material adverse impact on the Company. The Company has completed an enterprise-wide assessment of all mission critical IT Systems and Non-IT Systems to evaluate the state of its preparedness for the Year 2000. The Company has established teams by business unit to address the Year 2000 issue. The Company believes that it has effectively completed its remediation efforts for the Year 2000, with the exception of one piece of production equipment, which the Company believes will be remediated before the end of this year. A significant portion of production equipment was replaced or upgraded as part of the recent capacity expansion at both facilities and such replacements and upgrades are Year 2000 compliant. The Company has revised its estimate for Year 2000 spending down to approximately $400,000 from $800,000. This includes $275,000 for software, which will be expensed in 1999. 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 has completed development of contingency plans in case its remediation efforts are unsuccessful. The contingency planning was performed in conjunction with the implementation and testing of the critical business systems. The Company has initiated formal communications with a 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. 15 Other Events On July 15, 1999 SpecTran Corporation ("SpecTran") entered into an Agreement of Merger (the "Agreement of Merger") with Lucent Technologies Inc., a Delaware corporation ("Lucent") and its wholly-owned subsidiary Seattle Acquisition Inc., a Delaware corporation ("Purchaser"). Pursuant to the Agreement of Merger, Purchaser made a tender offer (the "Offer") disclosed in the Tender Offer Statement on Schedule 14D-1 dated July 21, 1999 (as amended or supplemented, the "Schedule 14D-1") filed with the Securities and Exchange Commission (the "Commission") by Lucent and the Purchaser to purchase all outstanding shares of the common stock, par value $.10 per share of SpecTran (the "Shares") at a price of $9.00 per share, net to the seller in cash, without interest thereon (the "Offer Price"), upon the terms and subject to the conditions set forth in the Offer to Purchase (the "Offer to Purchase") dated July 21, 1999, a copy of which is filed as an Exhibit to the Company's Schedule 14D-9 dated July 21, 1999 and filed with the Commission (as amended or supplemented, the "Schedule 14D-9"). The Agreement of Merger provides that, among other things, as soon as practicable after the purchase of Shares pursuant to the Offer and the satisfaction of the other conditions set forth in the Agreement of Merger and in accordance with the relevant provisions of the General Corporation Law of the State of Delaware ("Delaware Law" or the "DGCL"), the Purchaser will be merged with the Company (the "Merger"). Following consummation of the Merger, the Company will continue as the surviving corporation (the "Surviving Corporation") and will become a wholly owned subsidiary of Lucent. At the effective time of the Merger (the "Effective Time"), each Share issued and outstanding immediately prior to the Effective Time (other than Shares (i) owned or held in treasury by the Company, (ii) owned by the Purchaser or Parent, (iii) remaining outstanding held by any subsidiary of the Company or Parent or (iv) owned by stockholders who shall have demanded properly and perfected appraisal rights, if any, under Delaware Law) will be canceled and converted automatically into the right to receive the Offer Price (the "Merger Consideration"). The Agreement of Merger is summarized in Section 12 of the Offer to Purchase. A copy of the Agreement of Merger is filed as an Exhibit to the Schedule 14D-9 and is hereby incorporated by reference herein. 16 In addition, attached to the Schedule 14D-9 as Annex A is the Information Statement of the Company (the "Information Statement") which describes, among other things, certain contracts, agreements, arrangements or understandings known to the Company between the Company or its affiliates and (i) certain of the Company's executive officers, directors or affiliates or (ii) certain of Parent's executive officers, directors or affiliates. The Information Statement was furnished to the Company's stockholders in connection with the Purchaser's right (after consummation of the Offer) to designate persons to be appointed to the Board of Directors of the Company other than at a meeting of the stockholders of the Company. The Information Statement is hereby incorporated by reference herein The Board of Directors of SpecTran has unanimously approved the Offer and the Merger and determined that the terms of the Offer and the Merger are fair to, and in the best interests of the stockholders of SpecTran and unanimously recommends that the stockholders of SpecTran accept the Offer and tender their Shares to the Purchaser pursuant to the terms of the Offer. As of August 4, 1999, the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, relating to the purchase of the Shares pursuant to the Offer had expired. On September 1, 1999 Lucent announced that the Offer expired at midnight on August 31, 1999, and that Lucent had accepted tendered Shares representing about 60.9% of the outstanding Shares (approximately 53.3% on a fully diluted basis), thereby meeting the minimum condition for the Offer that at least 50% of the Shares on a fully diluted basis be tendered. Subsequent Events In October 1999, Lucent agreed to purchase and the Company agreed to supply 1 million kilometers of depressed clad single-mode optical fiber from the Company in FY 2000. Lucent granted the Company a royalty free technology license for the fiber quantities to be delivered to Lucent. In order to provide the people and production assets necessary to deliver this size order coupled with issues concerning yield, process uncertainties and substantial additional costs involved in the HVD process, the Company has suspended further work on the HVD process at this time pending further evaluation. 17 Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as "derivatives") and for hedging activities. This statement requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The statement also sets forth the criteria for determining whether a derivative may be specifically designated as a hedge of a particular exposure with the intent of measuring the effectiveness of the hedge in the statement of operations. In June 1999, the Financial Accounting Standards Board issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities, which amended the effective date of SFAS No. 133. SFAS No. 137 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company is currently evaluating SFAS No. 133 and has not determined the impact on the Company's Financial Statements. 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. 18 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Note 10, "Contingencies," of Notes to Consolidated Financial Statements. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None. (b) Reports on Form 8-K Current Report on Form 8-K dated July 14, 1999 with Exhibit 2.1 - Agreement among BICC General Cable Industries, Inc., Applied Photonic Devices, General Photonics, LLC, SpecTran Corporation and General Cable Corporation dated June 30, 1999. 19 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 15, 1999 BY: /s/ Charles B. Harrison ------------------------------------ Charles B. Harrison President, Chief Executive Officer (Acting Principal Financial Officer) Date: November 15, 1999 BY: /s/ George J. Roberts ----------------------------------- George J. Roberts Senior Vice President, Chief Financial Officer and Chief Accounting Officer 20 EX-27 2 FDS --
5 (Replace this text with the legend) 0000718487 SpecTran Corporation 1,000 U.S. Dollars 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 1 3,741 0 11,955 282 12,618 30,898 95,168 28,199 104,863 47,124 0 0 0 719 0 104,863 57,635 57,635 43,857 12,286 0 0 2,219 (319) 592 0 0 0 0 (1,890) (.27) (.27)
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