Item 1. BUSINESS.
SpecTran Corporation ("SpecTran," the "Company" or the "Registrant") operates through two wholly-owned subsidiaries, SpecTran Communication Fiber Technologies, Inc. ("SpecTran Communication") and SpecTran Specialty Optics Company ("SpecTran Specialty"), and through General Photonics, LLC ("General Photonics"), a joint venture with General Cable Corporation ("General Cable"). In December 1996, the Company sold certain of the assets of its wholly-owned subsidiary, Applied Photonic Devices, Inc. ("APD"), and then contributed the remaining assets of APD to General Photonics for a 50% equity interest. (See Note 14 to the Consolidated Financial Statements - "Acquisitions/Joint Venture"). SpecTran Communication develops, manufactures and markets multimode and single-mode optical fiber for data communications and telecommunications applications. SpecTran Specialty, acquired in February 1994, develops, manufactures and markets specialty multimode and single-mode fiber and value-added fiber optic products for industrial, military/aerospace, communication and medical applications. General Photonics develops, manufactures and markets communications-grade fiber optic cable primarily for the customer premises market in the United States, Canada and Mexico.
Technology
Fiber optic technology utilizing glass as a communications medium was developed in the 1970s and offers numerous technical advantages over traditional media such as copper. Optical fibers are hair-thin solid strands of high quality glass usually combined in cables for transmitting information in the form of light pulses. An optical fiber consists of a core of high purity glass which transmits light with little signal loss. This core is typically encased within a covering layer of high purity glass referred to as optical cladding, which reduces signal loss through the side walls of the fiber. The information to be transmitted is converted from electrical impulses into light waves by a laser or light emitting diode. At the point of reception, the light waves are converted back into electrical impulses by a photo-detector.
Optical fiber's advantages include its high bandwidth, which permits reliable transmission of complex signals such as multiple high-quality audio and video channels and high-speed data formats such as Fiber Distributed Data Interface (FDDI), Asynchronous Transfer Mode (ATM) and other communications
protocols. Compared to traditional copper cable used in telephony, optical fiber has thousands of times the information carrying capacity, occupies less space and operates over greater distances with significantly less attenuation. This high capacity and reliability makes optical fiber systems well suited for interactive applications, allowing digitally encoded voice, data and video signals to be transmitted in large volumes at high speed. Furthermore, optical fiber is immune to electrical surges and electromagnetic interference which cause static in copper wire transmission and wireless communication. Optical fiber has technical advantages over wireless communications media such as transmission quality and signal reliability. Optical fiber is also a safer choice in flammable environments because it does not carry electricity. Additionally, communicating through optical fiber is more secure than copper and wireless communications because tapping into fiber optic cable without detection is very difficult.
Optical fiber quality is measured by several performance characteristics and is reflected in the price of the fiber. These performance characteristics include bandwidth, attenuation (signal loss over distance), tensile strength, geometry and the dimensional and optical uniformity of the fiber. Optical fiber users and manufacturers have established specifications and standards for both multimode and single-mode fiber.
Products
The following table describes the Company's and General Photonics' principal product areas and the markets they serve:
Customers and Marketing
The Company sells its multimode and single-mode optical fibers to various cable manufacturers, domestically and internationally, which assemble them into cables for resale in configurations of their own design. Specialty
fiber products are sold directly to a large number of OEMs, product development groups, international distributors and manufacturers' representatives, installers, universities and governmental agencies, primarily for use in the industrial, medical, military, aerospace, transportation and telecommunications and data communications markets. Optical fiber cable and cable accessories, manufactured by General Photonics, are sold largely to distributors, systems integrators and installers primarily for use in the customer premises market in the United States, Canada and Mexico.
The Company markets its multimode and single-mode data communications and telecommunications optical fiber products principally through a direct sales force in the United States and through a network of manufacturer's representatives internationally. Specialty fiber products are marketed domestically through a direct technical field sales force and internationally through a network of technical distributors and sales representatives. Optical fiber cable and cable components produced by General Photonics are marketed primarily through General Cable's direct sales force and sales representatives. Marketing, technical support and some direct sales and customer support are provided by General Photonics personnel. The Company advertises in trade publications, distributes brochures and other material to its mailing list of potential customers worldwide and participates at trade shows, technical symposia and standards committees.
As a result of its diversification efforts and broader product offering, the Company has significantly increased its customer base over the last three years and plans to continue to expand this base aggressively within its targeted markets. International sales, primarily Asia and Europe, accounted for 22% of total sales in 1997. For the year ended December 31, 1997, sales to Corning Inc., Optical Cable Corporation and Lucent Technologies were equal to 10% or more of the Company's revenues. These three companies together accounted for 40% of the Company's revenues in 1997.
Manufacturing and Quality Control
The basic raw materials required for the manufacture of the Company's optical fiber products are high quality glass tubes and rods, various chemicals and gases and certain polymers. The Company believes that its sources of supply of these raw materials are adequate and that alternative sources are available. The Company typically manufactures optical fibers by introducing vapors and gases of varying chemical compositions into a special glass tube in a clean, controlled environment. In the modified chemical vapor deposition ("MCVD") process, an inside vapor deposition process used by the Company, the glass tube, which forms all or a portion of the optical cladding, and the introduced vapors and gases are simultaneously heated, and oxide particles, formed through a reaction of chemical vapors with oxygen, are deposited on and adhere to the inside of the tube. As the particles attach to the tube wall, they are fused to create a layer of high purity glass. Succeeding layers of glass of the same or different compositions are deposited in this fashion to permit the transmission of light in accordance with the desired specifications. The Company believes that the MCVD process is more flexible than other processes in the production of optical fiber and uses it to produce both multimode and single-mode fiber. The other main process for making optical fiber is the outside vapor deposition process which, the Company believes, is less flexible overall, but more cost effective for producing single-mode fiber. As part of its acquisition of SpecTran Specialty, the Company acquired patent rights to outside vapor deposition processes collectively known as hybrid vapor deposition ("HVD") which it is continuing to develop for possible use in conjunction with its single-mode fiber production process.
In the MCVD process, once deposition is completed, the glass tube is then collapsed into a rod, or primary preform, consisting of a deposited core, in certain instances some deposited cladding and cladding provided by the glass tube itself. In most cases, additional cladding is added to this primary preform. The rod is then placed at the top of a fiber drawing tower, heated until it softens and drawn into a fiber of predetermined diameter.
The majority of the Company's specialty products use a proprietary polymer clad glass core fiber drawn from manufactured or purchased silica rod. This fiber is either sold to third parties or cabled and/or combined with assemblies and sold. The Company owns certain hard polymer cladding, coating and fiber termination technology known as "crimp/cleave," which facilitates attachment of optical fibers to connectors and other components and has certain proprietary technology used for the cabling of optical fiber. The Company has developed proprietary technology related to the processing of a wide variety of polymeric compounds for the manufacture of optical fiber cable. General Photonics purchases fiber from the Company and protectively covers and bundles the fibers into cable. Certain of General Photonics' technology enables the manufacture of nonflammable, low smoke, low toxicity cables for use both outdoors and inside buildings, which the Company believes provides a significant competitive advantage.
The Company believes that its quality control programs are essential to its success. The Company's quality control programs are designed to maintain strict tolerances during the manufacturing process and to assure performance standards of its products. The Company performs quality control testing on all of its products. The Company designs and builds much of the equipment its uses to manufacture and test its optical fiber products. In November 1995, SpecTran Communication's facility in Sturbridge, Massachusetts became certified under ISO 9001, an internationally recognized manufacturing standard designed to ensure process consistency. SpecTran Specialty's Avon, Connecticut facility became ISO 9001 certified in March 1996. All of the Company's operations utilize internal testing procedures based on the internationally recognized "Fiber Optic Test Procedures" and have in place and continue to develop specialized proprietary testing systems and procedures to support the requirements of their respective customers.
Environmental Matters
The Company uses certain hazardous materials in its research and manufacturing operations. As a result, the Company is subject to federal, state and local governmental regulations. The Company believes that it has complied with all regulations and has all permits necessary to conduct its business.
Proprietary Rights
The Company considers its proprietary know-how with respect to the development and manufacture of flexible glass fibers and value-added optical fiber products to be a valuable asset. This know-how includes formulation of new glass compositions, development of special fiber coatings, coating applications, fiber designs, preform fabrication, fiber drawing, optical fiber cabling methods, fiber cleaving, polishing and end finishing techniques, proprietary testing capabilities, development and implementation of manufacturing processes and quality control techniques, and design and construction of manufacturing and quality control equipment. Product and application knowledge are also considered to be valuable assets of the Company.
Corning License. The Company has a limited, non-assignable, non-exclusive, royalty-bearing license from Corning to make, use and sell fiber under certain of Corning's United States patents with a filing date prior to January 1, 1996, in the field of optical fiber. The license contains certain annual quantity limitations. The Corning license is not applicable to sales made
directly or indirectly to certain customers such as Corning, Lucent and the United States Government. The quantities that can be manufactured under the license increase annually through the year 2000. The license has a term equal to the life of the last to expire of the Corning or Company patents licensed under the agreement. Corning has the right to terminate the license in the event that more than 30% of the Company's voting stock is acquired, directly or indirectly, by another manufacturing company. The Company granted back to Corning a non-exclusive royalty-free license for any of its patents with a filing date prior to January 1, 1996, in the field of optical fiber.
Lucent License. The Company has a non-assignable, non-exclusive, unlimited, royalty-bearing license from Lucent under all patents covering optical fiber and optical fiber cable owned by Lucent or which Lucent and its affiliates had the right to license on or before August 15, 1986. The Company granted back to Lucent a non-exclusive, royalty-free license under patents the Company may obtain relating to optical fiber inventions made on or before August 15, 1986. The license extends for the life of the last to expire of the patents licensed under the agreement.
Sales Subject to Corning and Lucent License Agreements. Approximately 30% of the Company's net sales during 1997 were subject to the Corning license and approximately 45% were subject to the Lucent license. These license agreements required aggregate royalty payments by the Company of approximately 3% of net sales of the Company's products manufactured under the agreements during 1997. The Company believes that certain Corning patents, which may have been relevant to the Company's single-mode fiber, including patents covered by a non-exclusive license from Corning to the Company, have expired in many countries (including the United States). Therefore, the Company believes that manufacturing and sale of its single-mode fiber is not subject to the Corning license and has been marketing its single-mode fiber without payments of royalties to Corning and without regard to the annual quantity limitations of the Corning license since 1993. The Company presently does not expect to need the Corning license for the manufacture of its multimode fiber after 1999 because the Company believes that a Corning United States patent with relevancy to its multimode fiber will expire in 1999.
Patents and Trademarks. The Company and its subsidiaries own 24 U.S. patents relating to products, processes and equipment in the fields of optical fibers, optical connectors, coatings and cleaving tools. The Company believes that its patents afford it certain competitive advantages. Under the terms of the Corning and Lucent license agreements, the optical fiber patents are required to be made available royalty-free to Corning and certain of those patents are also required to be made available royalty-free to Lucent.
The Company is using its trademark SPECTRAGUIDE(R) for its commercial grade optical fiber and for certain of its value added fiber products. It also uses the trademarks HCS(R) (Hard Clad Silica), Avioptics(TM), Flightguide(TM), PYROCOAT(TM), V-System(TM) and V-Pin(TM).
Research and Development
Research and development activities, and the Company's ability to develop and improve products employing both existing and new technology, are important to the Company. During the fiscal years ended December 31, 1997, 1996 and 1995, the Company spent $3.3 million, $3.1 million and $2.8 million, respectively, or 5.3%, 5.1% and 7.3%, respectively, of its net sales on research and development. The Company expects to continue to increase the annual dollar amount of its research and development expenditures. The Company has continued to invest in programs to reduce manufacturing cost and improve product performance in both the single-mode and multimode product lines, to develop new
optical fiber products and to develop alternative process technologies. The Company's personnel conduct substantially all of its research and development activities. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
Backlog
As of January 31, 1998, the Company's backlog of orders was approximately $35.2 million, as compared to a backlog of $69.4 million as of January 31, 1997. Approximately $18.5 million of the January 31, 1998 backlog is expected to be delivered during 1998.
Competition
The Company produces and sells optical fibers and value added optical fiber components and assemblies for data communications, telecommunications and specialized applications. Optical fiber cable and cable components are also sold through General Photonics. While there may be less competition in the specialized markets, all of the markets served by the Company and General Photonics are very competitive. The Company's main competitors for its fibers for data communications and telecommunications are its licensers, Corning and Lucent, to whom the Company pays royalties and who have substantially greater resources and operating experience than the Company. The Company's main competitors for its specialty fibers generally have been smaller operations, but some of those competitors are part of companies with substantially greater resources than the Company. General Photonics' main competitors for its optical fiber cable products are large companies with substantially greater resources and operating experience than the Company and General Photonics, some of which may also be customers of SpecTran Communications. The Company competes for sales based upon its ability to fill orders promptly at competitive prices, product performance, product features, unique proprietary products, flexibility, quality and service.
The Company believes that optical fibers offer a number of advantages over and compete favorably with other means of transmitting information, such as copper wire, satellite and other line of sight transmissions (e.g., microwaves) despite increased interest in wireless communications in the marketplace and enhancements to the existing copper wire telephony infrastructure. Many companies offering such other means of transmitting information have substantially greater resources and operating experience than the Company. The Company often competes with both mature existing technology and new technology, some of which have cost advantages over optical fiber for certain applications.
The number of participants in the optical fiber industry is to some extent limited by patents covering the fundamental optical fiber technology, the need for substantial capital investment and the availability of highly specialized equipment and personnel with the requisite technical expertise. The Company believes that certain Corning patents, which may have been relevant to the Company's single-mode fiber, including patents covered by a non-exclusive license from Corning to the Company, have expired in many countries (including the United States). The Company further believes that a certain Corning United States patent, covered by this non-exclusive license, with relevance to the Company's multimode fiber, expires in 1999. In addition, the Company believes that a certain Lucent patent licensed to the Company relating to its multimode and single-mode fiber expired in 1997. The expiration of these patents may or may not reduce the patent barrier to entry by other participants. The Company estimates that the initial investment required for a turn-key manufacturing facility capable of producing 200,000 kilometers of world-class multimode optical fiber annually is between $50 million and $100 million.
Employees
As of December 31, 1997, the Company employed 504 persons, of whom 132 were employed in technology, 278 were employed in manufacturing operations and 94 provided marketing, administrative, management and other support services. These numbers do not include 64 employees of General Photonics previously employed by APD. The Company's employees are not represented by a labor union. The Company believes its employee relations are good.
Item 2.
Item 2. PROPERTIES.
The Company's administrative offices and the offices and production facilities of SpecTran Communication are located in an approximately 50,000 square foot building which the Company is in the process of expanding to approximately 100,000 square feet. The building is situated on approximately 43 acres of land owned by SpecTran Communication in Sturbridge, Massachusetts. SpecTran Communication also owns an approximately 5,000 square foot office building used for offices that is next to this manufacturing facility.
SpecTran Specialty's offices and production facilities are located in an approximately 58,000 square foot building. The building is situated on approximately 14 acres of land located in Avon, Connecticut. All these properties are owned by the Company.
General Photonics has assumed APD's lease for offices and production facilities in an approximately 45,000 square foot facility located in Danielson, Connecticut with a term of two years expiring May 31, 1998, subject to General Photonics' right to renew the lease for two consecutive one year renewal terms. General Photonics has also assumed APD's lease for offices and production facilities in a 65,000 square foot facility located in Dayville, Connecticut under a lease expiring February 6, 2001, which is subject to a three year renewal option, followed by a second renewal option for an additional two years.
Item 3.
Item 3. LEGAL PROCEEDINGS.
None.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the NASDAQ National Market System under the symbol "SPTR." Set forth below is high and low sales price information for the Company's Common Stock for the periods indicated as reported on the NASDAQ National Market:
Price Fiscal Year Fiscal Quarter Ended High Low
1996 March 31, 1996 8-7/8 5-1/4 June 30, 1996 28-5/8 8 September 30, 1996 22-1/8 12-1/2 December 31, 1996 23-3/8 16-1/8
1997 March 31, 1997 25 12-5/8 June 30, 1997 21 11-1/4 September 30, 1997 20-3/4 13-3/4 December 31, 1997 15-1/4 8-5/8
The approximate number of shareholders of record of the Company's Common Stock as of February 27, 1998 was 773 which includes all shares held in nominee names by brokerage firms and financial institutions as one stockholder. It is estimated that such shares held in street name are held for approximately 6,300 stockholders.
The Company has never declared or paid cash dividends.
Item 6.
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Overview
Currently, SpecTran develops, manufactures, and markets high quality optical fiber, optical fiber cables and value-added optical fiber components and assemblies. Prior to 1993, the Company had a narrow customer base and was focused on the production of multimode fiber for the domestic market. In 1993 the Company began to implement a strategic plan to diversify its products, markets and customer base. As part of this plan, the Company reintroduced single-mode fiber in 1993 and began marketing it internationally. In 1994 the Company acquired Ensign-Bickford's specialty fiber operations (which later became SpecTran Specialty), allowing the Company to become a world-wide leader in fiber optic specialty applications. The Company entered the fiber optic cable market in May 1995 by acquiring APD in order to participate more extensively in the rapid growth of the data communications market, the principal end market of multimode fiber. In December 1996 the Company formed General Photonics, a joint venture with General Cable, to develop, manufacture and market fiber optic cable.
Results of Operations
The following table sets forth, for the periods indicated, certain financial data as a percentage of net sales:
Net Sales
Net sales increased $486,000, or .8%, from $61.6 million in 1996 to $62.1 million in 1997. Net sales in 1997 did not include those of General Photonics, whereas sales for 1996 included the sales of Applied Photonic Devices, Inc. (APD), certain assets of which were sold in December 1996 to form General Photonics, a joint venture with General Cable. On a comparative basis, including General Photonics sales in 1997 would have resulted in an 18.4% increase compared with 1996. Net sales increased at both SpecTran Communication and SpecTran Specialty in 1997 as compared to 1996 due to continued market demand. This was partially offset by industry pricing pressure for standard communication fiber products experienced during the second half of 1997.
Gross Profit
Gross profit increased $901,000, or 4.0%, from $22.4 million in 1996 to $23.3 million in 1997. As a percentage of net sales, the gross profit increased to 37.5% for the year ended December 31, 1997, from 36.3% for the year ended December 31, 1996. The increase in gross profit was primarily due to lower production costs for the Company's standard communication fiber products resulting from manufacturing process and yield improvements. This was partially offset by lower margins at SpecTran Specialty, primarily due to greater than planned costs incurred in connection with the consolidation and expansion into a new facility.
As a percentage of net sales, royalties decreased from 3.7% in 1996 to 3.0% in 1997. This decrease in royalties as a percentage of net sales was primarily due to an increase in 1997 in the net sales not subject to royalties.
Selling & Administrative
Selling and administrative expenses increased $325,000, or 2.4%, from $13.6 million in 1996 to $14.0 million in 1997. This increase was primarily due to costs associated with the Company's one-time management reorganization and training costs partially offset by a lower provision for incentive compensation in 1997. As a percentage of net sales, selling and administrative expenses slightly increased to 22.5% for the year ended December 31, 1997 from 22.2% for the year ended December 31, 1996.
Research and Development
Research and development costs increased $157,000, or 5.0%, from $3.1 million in 1996 to $3.3 million in 1997. As a percentage of net sales, research and development costs increased from 5.1% for the year ended December 31, 1996 to 5.3% for the year ended December 31, 1997. The Company continues to invest in programs to improve manufacturing costs and product performance in both multimode and single-mode product lines, to develop new special performance fiber products and to develop alternative process technologies. The Company intends to approximately double its research and development spending in 1998.
Other Income (Expense), net
Other income (expense), net favorably increased by $1.2 million to net other income of $1.1 million in 1997 compared with net other expense of $65,000 in 1996. Interest income increased $1.1 million, or 487.2%, from $226,000 in 1996 to $1.3 million in 1997 due to a higher level of cash available for investment as a result of the Company's secondary public offering in February, 1997. Interest expense, net of capitalized interest, increased $276,000, or 58.6%, from $471,000 in 1996 to $747,000 in 1997 due to the increase in debt related to the Company's capacity expansion.
Income Taxes
The effective tax rate declined from 34.0% in 1996 to 29.9% in 1997 primarily due to a lower provision for state income taxes in 1997 as a result of investment tax credits associated with capacity expansion. The effective tax rates for 1997 and 1996 were lower than the statutory combined federal and state tax rates due primarily to a reduction of $300,000 in 1997 and $400,000 in 1996 in the valuation allowance for deferred tax assets due to the Company's belief that it is more likely than not that the additional deferred tax assets will be realized through the utilization of operating loss and tax credit carryforwards. See Note 11 of "Notes to the Consolidated Financial Statements."
Income From Equity in Joint Venture
The Company realized a loss of $145,000, net of tax from its equity in General Photonics, the joint venture formed in December, 1996 with General Cable. The loss in 1997 was primarily due to lower than anticipated revenues. In 1996, the results of Applied Photonic Devices, Inc., the predecessor to General Photonics, were included in the consolidated results.
Net Income
Net income increased $1.2 million, or 32.5%, from $3.7 million in 1996 to $4.8 million for the year ended in 1997. The increase was primarily due to improved operating results at Communication Fiber and higher interest income.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net Sales
Net sales increased $23.0 million, or 59.6%, from $38.6 million to $61.6 million in 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. 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 $9.3 million, or 71.3%, from $13.1 million to $22.4 million in 1996. As a percentage of net sales, the gross profit increased to 36.3% for the year ended December 31, 1996 from 33.9% for the year ended December 31, 1995. This increase in gross profit 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.
As a percentage of net sales, royalties decrease from 4.1% in 1995 to 3.7% in 1996. This decrease in royalties as a percentage of net sales was primarily due to an increase in the net sales not subject to royalties.
Selling & Administrative
Selling and administrative expenses increased $3.9 million, or 41.1%, from $9.7 million to $13.6 million for the year ended December 31, 1996. This increase was primarily due to including a full year of APD expenses in 1996 versus only seven months in 1995. A substantially higher provision for incentive compensation in the 1996 period also contributed to the increase. As a percentage of net sales, selling and administrative expenses decreased to 22.1% for the year ended December 31, 1996 from 25.1% for the year ended December 31, 1995.
Research & Development
Research and development costs increased $305,000, or 10.8%, from $2.8 million to $3.1 million for the year ended December 31, 1996. As a percentage of net sales, research and development costs decreased from 7.3% for the year ended December 31, 1995, to 5.1% for the year ended December 31, 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 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 declined by $227,000 for the year ended December 31, 1996 compared to the same period of 1995. The decline was caused primarily by the absence of non-recurring income in 1996 partially offset by a decrease in interest expense of $155,000 due to capitalization of interest in 1996 related to the Company's ongoing plant expansion.
Income Taxes
A tax provision of 34% of pre-tax income was provided for the year ended December 31, 1996 compared to a tax provision of 30% of pre-tax income in 1995. The effective tax rates for 1996 and 1995 were lower than the statutory combined federal and state tax rates due primarily to a reduction of $400,000 in 1996 and $437,000 in 1995 in the valuation allowance for deferred tax assets due to the Company's belief that it is more likely than not that the additional deferred tax assets will be realized through the utilization of operating loss and tax credit carryforwards. See Note 10 of "Notes to the Consolidated Financial Statements."
Net Income (Loss)
Net income for the year ended December 31, 1996 was $3.7 million or 5.9% of net sales. Net income for the same period in 1995 was $542,000, or 1.4% of net sales.
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 year ended December 31, 1997, the Company generated $5.6 million in net cash from operating activities. In February 1997 the Company completed a secondary public offering for a total of 1,500,000 shares of common stock at a price of $19.00 per share. Of the 1,500,000 shares, 1,300,000 were sold by the Company and 200,000 by Allen and Company, Incorporated, a selling stockholder. This offering, including proceeds from the exercise of warrants by the selling stockholder, raised approximately $23.0 million for the Company. This has been used to fund the Company's continuing capacity expansion.
As of December 31, 1997, the Company had approximately $7.0 million of cash, cash equivalents and marketable securities, including approximately $1.0 million in marketable securities classified as long-term assets, which could be converted to cash if necessary. In addition, the Company has an unused $20.0 million revolving credit agreement with its principal bank. The Company's net working capital position at December 31, 1997 was approximately $16.1 million with a current ratio of 2.4 to 1.
The Company currently has underway capacity expansion which required significant capital expenditures in 1997. Total planned expenditures for capacity expansion include approximately $44.0 million for SpecTran Communication (which will be completed in 1998) and approximately $9.0 million for SpecTran Specialty, which was completed in 1997. The expansion at SpecTran Specialty has increased capacity there by 50%. When fully operational, the expansion at SpecTran Communication will increase capacity there by 100%. The Company has and intends to continue to finance these expansions through a combination of cash flow from operations, borrowings and existing cash and marketable security balances.
Other Matters
Management is aware of the potential software logic anomalies associated with the year 2000 date change. The Company is in the process of evaluating the potential issues that might need to be addressed in connection with its operations. Based on preliminary information, costs of addressing the issue are not expected to have any material effect upon the Company's financial position, results of operations or cash flows in future periods.
Subsequent Events
On March 13, 1998 the Company announced the settlement of Corning's obligation to purchase multimode optical fiber from the Company under a multi-year supply contract the companies entered into on January 1, 1996. Corning has terminated its purchase of multimode optical fiber from the Company in exchange for a series of cash payments to the Company totaling $4.1 million.
Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 123, "Accounting for Stock-Based Compensation," which established financial accounting and reporting standards for stock-based compensation plans. Companies are encouraged, rather than required, to adopt a new method that accounts for stock compensation awards based on their fair value using an option pricing model. Companies that do not adopt this new method will be required to make pro forma footnote disclosures of net income as if the fair value-based method of accounting required by SFAS No. 123 had been applied. The Company adopted SFAS No. 123 on January 1, 1996. Adoption of this pronouncement did not have a material impact on the Company's financial position or results of operations. The Company has made pro forma footnote disclosures in its December 31, 1997, financial statements (See "Note 9 to the Consolidated Financial Statements - Stockholder's Equity").
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This statement also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying value or fair value less costs to sell. Adoption of the statement had no impact on the Company's financial statements.
Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128 " Earnings per Share" (SFAS 128) which has changed the method of computing and presenting earnings per common share. All prior periods presented have been restated in accordance with SFAS 128. This restatement had an immaterial impact on the prior periods' earning per common share amounts calculated under the previous standard (See "Note 10 to the Consolidated Financial Statements - Computation of Earnings per Common Share").
Effective January 1, 1998, the provisions of Statements of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" and No. 131 "Disclosures about Segments of an Enterprise and Related Information" will apply to the Company. The Company anticipates that application of these statements will have an effect on presentation of its financial information.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this Item is submitted as a separate section of this Form 10-K.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information to be contained under the heading "Election of Directors" in the Company's proxy statement relating to the 1998 Annual Meeting of Shareholders (the "Proxy Statement") is hereby incorporated herein by reference.
Item 11.
Item 11. EXECUTIVE COMPENSATION.
The information with respect to compensation of certain executive officers and all executive officers of the Company as a group to be contained under the heading "Compensation of Executive Officers and Directors" in the Proxy Statement is hereby incorporated herein by reference.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information with respect to ownership of the Company's Common Stock by management and by certain other beneficial owners to be contained under the heading "Principal Stockholders and Other Information" in the Proxy Statement is hereby incorporated herein by reference.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information with respect to certain relationships and related transactions to be contained under the heading "Certain Transactions" in the Proxy Statement is hereby incorporated herein by reference.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. & 2. Financial Statements and Financial Statement Schedules: The response to this portion of Item 14 is submitted as a separate section of this Form 10-K.
3. Exhibits:
See Exhibit Index on Pages 22 through 27 of this Form 10-K.
(b) Reports on Form 8-K filed during the final quarter of fiscal 1997: None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: SPECTRAN CORPORATION
March 27, 1998 By: /s/ Raymond E. Jaeger ---------------------- Raymond E. Jaeger President, Chief Executive Officer and Chairman of the Board of Directors
March 27, 1998 By: /s/ Bruce A. Cannon -------------------- Bruce A. Cannon Senior Vice President, Chief Financial Officer and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
3.1 Certificate of Incorporation of the Registrant, as amended. (Incorporated by reference to Registrant's Annual Report on Form 10-K for its fiscal year ended December 31, 1991.)
3.2 By-Laws of the Registrant, as amended. (Incorporated by reference to Registrant's Annual Report on Form 10-K for its fiscal year ended December 31, 1991.)
4.5* Form of Stock Certificate for Voting Common Stock.
10.1 Registrant's 1991 Incentive Stock Option Plan. (Incorporated by reference to the Registrant's Proxy Statement dated April 9, 1991.)
10.7* License Agreement dated August 15, 1981, between the Registrant and Western Electric Company, Incorporated. (Registrant has been granted confidential treatment of portions of this Exhibit.)
10.49 License Agreement dated as of the first day of January 1991 by and between the Registrant and Corning, Incorporated. (Registrant has been granted confidential treatment of portions of this Exhibit.) (Incorporated by reference to Registrant's Annual Report on Form 10-K for its fiscal year ended December 31, 1991.)
10.61 Stock Purchase Agreement among APD Acquisition Corp. and Irving N. Dwyer, David P. DaVia, The Irving N. Dwyer and Annette M. Dwyer Charitable Remainder Trust and the DaVia Charitable Remainder Trust. (Incorporated by reference to the Registrant's Report on Form 8-K filed June 7, 1995.)
10.62 Directors Retirement Plan dated December 27, 1995. (Incorporated by reference to the Registrant's Report on Form 10-K dated March 29, 1996.)
10.63 Registrant's Employee Profit Sharing Plan as revised and adopted effective January 1, 1995. (Incorporated by reference to the Registrant's Report on Form 10-K dated March 29, 1996).
10.64 Lease between Mark C. Yellin and Applied Photonic Devices, Inc. dated January 15, 1996. (Incorporated by reference to the Registrant's Report on Form 10-K dated March 29, 1996).
10.65 Lease between Fabrilock, Inc. and Applied Photonic Devices, Inc. dated February 6, 1996.(Incorporated by reference to the Registrant's Report on Form 10-K dated March 29, 1996).
10.69 Supplemental Retirement Agreement between SpecTran Corporation and Raymond E. Jaeger dated May 8, 1996. (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q dated August 9, 1996.)
10.70 Supplemental Retirement Agreement between SpecTran Corporation and Bruce A. Cannon dated May 8, 1996. (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q dated August 9, 1996.)
10.71 Supplemental Retirement Agreement between SpecTran Corporation and Crawford L. Cutts dated May 8, 1996. (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q dated August 9, 1996.)
10.72 Supplemental Retirement Agreement between SpecTran Corporation and William B. Beck dated May 8, 1996. (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q dated August 9, 1996.)
10.73 Supplemental Retirement Agreement between SpecTran Corporation and John E. Chapman dated May 8, 1996. (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q dated August 9, 1996.)
10.74 Lease between CRJ Realty Trust and SpecTran Communication Fiber Technologies, Inc. dated July 22, 1996. (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q dated August 9, 1996.)
10.75 Contractual Agreement Between Lucent Technologies Inc. and SpecTran Corporation dated October 3, 1996. (Registrant has been granted confidential treatment for portions of this Exhibit.) (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q dated November 13, 1996.)
10.76 Three Year Multimode Optical Fiber Supply Contract between Corning Incorporated and SpecTran Corporation dated as of January 1, 1996. (Registrant has been granted confidential treatment for portions of this Exhibit.) (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q dated November 13, 1996.)
10.79 Key Employee Incentive Plan effective as of January 1, 1996. (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q dated November 13, 1996.)
10.80 Employment Agreement between SpecTran Corporation and Raymond E. Jaeger dated as of December 14, 1992. (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q dated November 13, 1996.)
10.81 Employment Agreement between SpecTran Corporation and Bruce A. Cannon dated as of December 14, 1992. (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q dated November 13, 1996.)
10.82 Employment Agreement between SpecTran Corporation and John E. Chapman dated as of December 14, 1992. (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q dated November 13, 1996.)
10.83 Employment Agreement between SpecTran Corporation and Crawford L. Cutts dated as of January 1, 1996. (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q dated November 13, 1996.)
10.84 Employment Agreement between SpecTran Corporation and William B. Beck dated as of February 18, 1994. (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q dated November 13, 1996.)
10.85 Employment Agreement between SpecTran Corporation and Glenn E. Moore dated as of December 1995. (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q dated November 13, 1996.)
10.86 Note Purchase Agreement between SpecTran Corporation and Massachusetts Mutual Life Insurance Company dated as of December 1, 1996. (Incorporated by reference to the Registrant's Current Report on Form 8-K dated December 31, 1996.)
10.87 Note Purchase Agreement between SpecTran Corporation and CM Life Insurance Company dated as of December 1, 1996. (Incorporated by reference to the Registrant's Current Report on Form 8-K dated December 31, 1996.)
10.88 Note Purchase Agreement between SpecTran Corporation and The Mutual Life Insurance Company of New York dated as of December 1, 1996. (Incorporated by reference to the Registrant's Current Report on Form 8-K dated December 31, 1996.)
10.89 Note Purchase Agreement between SpecTran Corporation and Atwell & Co. dated as of December 1, 1996. (Incorporated by reference to the Registrant's Current Report on Form 8-K dated December 31, 1996.)
10.90 Security Agreement among SpecTran Corporation, SpecTran Communication Fiber Technologies, Inc., SpecTran Specialty Optics Company, Applied Photonic Devices, Inc. and Fleet National Bank, as Trustee, dated as of December 1, 1996. (Incorporated by reference to the Registrant's Current Report on Form 8-K dated December 31, 1996.)
10.91 Trademark Security Agreement among SpecTran Corporation, SpecTran Communication Fiber Technologies, Inc., SpecTran Specialty Optics Company, Applied Photonic Devices, Inc. and Fleet National Bank, as Trustee, dated as of December 1, 1996. (Incorporated by reference to the Registrant's Current Report on Form 8-K dated December 31, 1996.)
10.92 Patent Collateral Assignment among SpecTran Corporation, SpecTran Communication Fiber Technologies, Inc., SpecTran Specialty Optics Company, Applied Photonic Devices, Inc. and Fleet National Bank, as Trustee, dated as of December 1, 1996. (Incorporated by reference to the Registrant's Current Report on Form 8-K dated December 31, 1996.)
10.93 Pledge Agreement among SpecTran Corporation, SpecTran Communication Fiber Technologies, Inc., SpecTran Specialty Optics Company, Applied Photonic Devices, Inc. and Fleet National Bank, as Trustee, dated as of December 1, 1996. (Incorporated by reference to the Registrant's Current Report on Form 8-K dated December 31, 1996.)
10.94 Mortgage, Assignment of Rents and Security Agreement by SpecTran Communication Fiber Technologies, Inc. to Fleet National Bank, as Trustee, dated as of December 1, 1996. (Incorporated by reference to the Registrant's Current Report on Form 8-K dated December 31, 1996.)
10.95 Open-End Mortgage, Assignment of Rents and Security Agreement by SpecTran Specialty Optics Company to Fleet National Bank, as Trustee, dated as of December 1, 1996. (Incorporated by reference to the Registrant's Current Report on Form 8-K dated December 31, 1996.)
10.96 Guaranty Agreement dated as of December 1, 1996 by SpecTran Communication Fiber Technologies, Inc., SpecTran Specialty Optics Company and Applied Photonic Devices, Inc. in favor of Massachusetts Mutual Life Insurance Company, CM Life Insurance Company, The New York Mutual Life Insurance Company and Atwell & Co. (Incorporated by reference to the Registrant's Current Report on Form 8-K dated December 31, 1996.)
10.97 Loan Agreement among SpecTran Corporation, SpecTran Communication Fiber Technologies, Inc., SpecTran Specialty Optics Company, Applied Photonic Devices, Inc. and Fleet National Bank dated as of December 1, 1996. (Incorporated by reference to the Registrant's Current Report on Form 8-K dated December 31, 1996.)
10.98 Limited Liability Company Agreement of General Photonics, LLC between Applied Photonic Devices, Inc. and General Cable Industries, Inc. dated as of December 23, 1996. (Incorporated by reference to the Registrant's Current Report on Form 8-K dated January 8, 1997.)
10.99 Asset Purchase Agreement among Applied Photonic Devices, Inc., SpecTran Corporation, General Cable Corporation and General Cable Industries, Inc. dated as of December 23, 1996. (Incorporated by reference to the Registrant's Current Report on Form 8-K dated January 8, 1997.)
10.100 Investor's Representations, Contribution Agreement and Subscription Agreement among Applied Photonic Devices, Inc., SpecTran Corporation and General Photonics, LLC dated as of December 23, 1996. (Incorporated by reference to the Registrant's Current Report on Form 8-K dated January 8, 1997.)
10.101 Non-Competition Agreement among General Cable Industries, Inc., General Cable Corporation, Applied Photonic Devices, Inc., SpecTran Corporation and General Photonics, LLC dated December 23, 1996. (Registrant has been granted confidential treatment for portions of this Exhibit.) (Incorporated by reference to the Registrant's Current Report on Form 8-K dated January 8, 1997.)
10.102 Standstill Agreement among General Cable Industries, Inc., General Cable Corporation and SpecTran Corporation dated as of December 23, 1996. (Incorporated by reference to the Registrant's Current Report on Form 8-K dated January 8, 1997.)
10.103 Letter amendment to Three Year Multimode Optical Fiber Supply Contract between Corning Incorporated and SpecTran Corporation dated as of January 1, 1996. (Registrant has been granted confidential treatment for portions of this Exhibit.) (Incorporated by reference to the Registrant's Current Report on Form 8-K dated January 8, 1997.)
10.104 Letter amendment to Employment Agreement between SpecTran Specialty Optics Company and William B. Beck dated April 18, 1996. (Incorporated by reference to the Registrant's Current Report on Form 8-K dated January 8, 1997.)
10.105 Cross-Indemnity Agreement between SpecTran Corporation and Allen Company Incorporated. (Incorporated by reference to the Registrant's Registration Statement on Form S-3 (Reg. No. 333-19449) effective February 12,1997.)
10.106 Common Stock Purchase Warrant issued to Allen & Company Incorporated. (Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.)
10.107 Settlement Agreement dated February 13, 1998 between SpecTran Corporation and Corning Incorporated.
21.0 Subsidiaries.
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* Incorporated by reference to Registrant's Registration Statement on Form S-1 (Reg. No. 2-83172) effective June 2, 1983
SpecTran Corporation
Form 10-K
Items 8, 14 (a) (1) and (2)
Index to Consolidated Financial Statements and Schedule
The following consolidated financial statements of the registrant required to be included in Item 8 and 14 (a) (1) are listed below:
Independent Auditors' Report
The Board of Directors and Stockholders SpecTran Corporation:
We have audited the consolidated financial statements of SpecTran Corporation as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SpecTran Corporation as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Boston, Massachusetts February 16, 1998
SpecTran Corporation Consolidated Balance Sheets Dollars in thousands
See accompanying notes to consolidated financial statements.
SpecTran Corporation Consolidated Statements of Operations Dollars in thousands except per share amounts
See accompanying notes to consolidated financial statements.
SpecTran Corporation Consolidated Statements of Cash Flows Dollars in thousands Years Ended December 31,
See accompanying notes to consolidated financial statements.
SpecTran Corporation Consolidated Statements of Stockholders' Equity For the Years Ended December 31, 1997, 1996 and 1995 Dollars in thousands
See accompanying notes to consolidated financial statements.
SPECTRAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995
1 - Nature of Business and Summary of Significant Accounting Policies
Nature of Business
SpecTran Corporation (the "Company") develops, manufactures and markets a wide range of fiber optic products. These include multimode and single-mode optical fiber and cable for use in data communications and telecommunications applications. The Company also develops special performance fibers, coatings, cables, cable assemblies and other value-added products for use in a variety of specialty markets.
Principles of Consolidation and Basis of Accounting
The consolidated financial statements include the accounts of the Company and all wholly owned subsidiaries: SpecTran Communication Fiber Technologies, Inc., SpecTran Specialty Optics Company 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 (See Note 15). The investment in General Photonics is accounted for under the equity method of accounting pursuant to which the Company records its 50% interest in General Photonics' net operating results. Prior to the formation of General Photonics, APD's results of operations, including net sales and expenses, were consolidated with those of the Company. All significant intercompany balances and transactions have been eliminated.
Management uses estimates and assumptions in preparing the financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities and the reported revenue and expenses. Actual results may vary from the estimates.
Certain 1996 and 1995 balances have been reclassified to be consistent with the current year's presentation.
Revenue Recognition
Sales revenues are recognized upon shipment of goods. Customers generally have the right to return for replacement any goods which do not meet the customer's purchase order specifications. Sales revenues and cost of sales as reported in the consolidated statements of operations are adjusted to reflect estimated returns and warranty costs.
SPECTRAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995
Marketable Securities
Marketable securities are classified as available-for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity, net of estimated income taxes. Gains and losses on the sale of marketable securities are recognized at the time of sale on a specific identification basis.
Inventories
Inventories are stated at the lower of cost or market value. Cost is determined by the first-in, first-out method.
Statements of Cash Flows
For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents.
Supplemental disclosure of cash flow information includes cash paid during the year for (in thousands): 1997 1996 1995 ---- ---- ---- Interest $2,120 $780 $510 Income Taxes 2,159 1,044 100
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Machinery and equipment assembled by the Company are valued at the cost of component parts purchased, plus the approximate labor and overhead costs to the Company. Significant renewals and betterments are capitalized. The cost of maintenance and repairs is charged to income as incurred. Repairs and maintenance costs amounted to $1.6 million, $1.5 million and $1.0 million in 1997, 1996 and 1995, respectively.
Depreciation is provided by the straight-line method. The principal annual rates of depreciation are:
Buildings and building improvements..................4% Machinery and equipment.......................14% to 33-1/3%
In 1997 the Company changed the rate of depreciation for all machinery and equipment put in service after January 1, 1997, from 5 to 7 years. This was to more accurately reflect the economic life of these assets.
Depreciation expense of property, plant and equipment amounted to $3.6 million, $2.5 million and $1.9 million in 1997, 1996 and 1995, respectively.
SPECTRAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995
Cost in Excess of Net Assets Acquired and Other Intangibles
The Company monitors its cost in excess of net assets acquired (goodwill) and its other intangibles to determine whether any impairment of these assets has occurred. In making such determination with respect to goodwill, the Company evaluates the performance, on an undiscounted basis, of the underlying businesses which gave rise to such amount. Amortization of goodwill is recorded on a straight-line basis over the estimated useful life of 15 years.
With respect to other intangibles, which include the cost of license agreements and patents, the Company bases its determination of impairment on the performance, on an undiscounted basis, of the related products.
License Agreement and Other Assets
The total cost of the license agreement obtained in 1991 is being amortized and charged to expense based on a ten year life. Amortization expense amounted to $201,000 for 1997, 1996 and 1995. Deferred financing costs are amortized and charged to expense over the lives of the related debt. Patents are being amortized over a seventeen year life.
Single-mode Fiber Manufacturing Development Costs
Manufacturing development costs are expensed as incurred. In addition to research and development expenses for single-mode fiber, there were manufacturing development start-up costs relating to single-mode fiber of approximately $1.8 million in 1995 that were included in cost of sales. There were no manufacturing development start-up costs relating to single-mode fiber in 1997 and 1996.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Income (Loss) per Share of Common Stock
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
SPECTRAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995
periods presented have been restated in accordance with SFAS 128. This restatement had an immaterial impact on the prior periods' earnings per common share amounts calculated under the previous standard.
Financial Instruments
Financial instruments of the Company consist of cash and cash equivalents, marketable securities, accounts receivable, accounts payable, accrued expenses and senior secured notes. The carrying amounts of these financial instruments approximate their fair value.
Stock-Based Compensation
Statement of Financial Accounting Standards Number 123, "Accounting for Stock-Based Compensation", encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion Number 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock.
2 - Marketable Securities
A summary of marketable securities available for sale for the years ended December 31, 1997 and 1996 is as follows (in thousands):
SPECTRAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995
The amortized cost and estimated market value of debt securities are shown below (in thousands):
Proceeds from sales of marketable securities, prior to maturity, during 1997 and 1996 were $4.8 million and $1 million, respectively. A pretax gain of $24,000 for 1997 and a pretax loss $19,000 for 1996 were recognized on these sales.
3 - Inventories
Inventories consisted of (in thousands):
December 31, ----------------------------------------- 1997 1996 ---- ----
Raw Materials $ 4,036 $ 3,677 Work in Process 1,010 1,209 Finished Goods 4,620 2,368 ---------- -------- $ 9,666 $ 7,254 ========== ==========
4 - Property, Plant and Equipment
Property, plant and equipment consisted of (in thousands):
In 1997, the Company had underway capacity expansion requiring significant capital expenditures. Total planned expenditures for capacity expansion include approximately $44.0 million for SpecTran Communication
SPECTRAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995
(expected to be completed in 1998) and approximately $9.0 million for SpecTran Specialty, which was completed in 1997.
In 1997, the Company recorded approximately $1.4 million in capitalized interest related to the expansions.
5 - License Agreements
In February, 1983, the Company obtained from Corning, Incorporated ("Corning") a limited, non-assignable, non-exclusive royalty-bearing license to make, use and sell optical fiber under certain of Corning's United States patents owned or filed for on or before January 1, 1988. The Company granted to Corning a non-exclusive royalty-free license for any United States patents filed for on or before January 1, 1988 related to the subject matter of the Corning or Company patents licensed under the agreement.
In January, 1991, the Company entered into a new fiber manufacturing license agreement with Corning which expanded and extended the original 1983 agreement. The new agreement gives SpecTran the ability to increase substantially its fiber production using Corning's United States patents, providing for an immediate considerable increase in licensed fiber eligible for manufacture by SpecTran in 1991, with further annual increases through the year 2000. The Company paid a $2 million fee for the new license agreement in four semiannual installments of $500,000, beginning in January, 1991. The license obtained from Corning is limited, non-assignable, non-exclusive and royalty-bearing, to make, use and sell optical fiber under certain of Corning's United States patents with a filing date prior to January 1, 1996. The license has a term equal to the life of the last to expire of the Corning or Company patents licensed under the agreement. Corning has the right to terminate the license in the event that more than 30% of the Company's voting stock is acquired, directly or indirectly, by another manufacturing company. The Company granted to Corning a non-exclusive royalty-free license for any United States patents filed prior to January 1, 1996 related to optical fiber. The Company believes that its manufacturing and sale of single-mode fiber is not subject to the Corning license agreement.
At December 31, 1997, the Company or its subsidiaries had a non-assignable, non-exclusive, unlimited, royalty-bearing license from Lucent Technologies Inc. ("Lucent"), formerly AT&T Technologies, Inc. and a non-exclusive, royalty-bearing license granted by Sumitomo Electric Industries, Ltd. to make, use and sell optical fibers under certain patents owned by those companies. No payments are required under these licenses other than royalty payments.
During 1997, approximately 30% and 45% of the Company's net sales, respectively, were subject to the Corning and Lucent licenses. During 1996, approximately 36% and 62% of the Company's net sales, respectively, were subject to the Corning and Lucent licenses. The Corning license contains certain annual quantity limitations which increase annually through the year 2000.
Total royalties expensed during the years ended December 31, 1997, 1996 and 1995 were $1.9 million, $2.3 million and $1.6 million, respectively.
6 - Goodwill
Goodwill consisted of (in thousands):
December 31, ----------------------------------- 1997 1996 ---- ----
Goodwill $ 1,181 $ 1,181 Less Accumulated Amortization (309) (231) -------- ---------
$ 872 $ 950 ======== ========
SPECTRAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995
7 - Accrued Liabilities
Accrued liabilities consisted of (in thousands):
December 31, ------------------------------------- 1997 1996 ---- ----
Salaries and Wages $ 612 $ 827 Royalties 885 1,149 Health Insurance 486 514 Incentive Compensation 1,492 1,451 Other 824 587 --------- --------- $ 4,299 $ 4,528 ========= =========
8 - Long-Term Debt
In December 1996, the Company sold to a limited number of selected institutional investors an aggregate principal amount of $24.0 million of senior secured notes (the "Notes"), consisting of $16.0 million of 9.24% interest Series A Senior Secured Notes due December 26, 2003 (the "Series A Notes") and $8.0 million of 9.39% interest Series B Senior Secured Notes due December 26, 2004 (the "Series B Notes"). Interest on the Notes is payable semi-annually, with five equal annual principal repayments required beginning December 26, 1999 for Series A Notes and December 26, 2000 for Series B Notes. The Notes constitute senior secured debt of the Company secured by a first priority security interest in substantially all of the assets of the Company and all current and hereinafter created or acquired subsidiaries, a pledge by the Company of the issued and outstanding stock of its subsidiaries and mortgages on real estate owned by the Company's subsidiaries. The Company's obligations are also guaranteed by the Company's subsidiaries and rank on an equal basis with all other senior secured indebtedness of the Company. The Notes also provide for certain financial and non-financial covenants usual for this type of transaction. The Company used approximately $14.0 million from the sale of the Notes to repay all outstanding indebtedness and restructured its existing $22.0 million of total borrowing capacity with its principal bank, composed of a $14.5 million revolving credit agreement and $7.5 million in equipment and real estate term loans, into a $20.0 million revolving credit agreement, maturing December
SPECTRAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995
1999, with the same security interest in the Company's assets as the Notes. The Company has the option to select from time to time the interest rate on the revolving credit agreement at either the LIBOR rate plus 1.5% or Fleet Bank's prime rate provided that, under certain circumstances, Fleet Bank may deem that the LIBOR rate is not available. As of December 31, 1997 the Company had no borrowing against the revolving credit agreements.
9 - Stockholders' Equity
(a) Warrants
As part of an agreement entered into in September, 1990 with Allen & Company, Incorporated (Allen), warrants to purchase 350,000, 30,000 and 20,000 shares of SpecTran voting common stock at an exercise price of $2.00 through August 14, 1999, were issued to Allen, Richard A.M.C. Johnson, who retired as a director of the Company in 1996, and Patrick E. Brake, a former director of the Company, respectively. In conjunction with the Company's public offering in February 1997, Allen exercised warrants to purchase 200,000 shares and sold them in the offering. At December 31, 1997 Allen owned none of the Company's outstanding stock; if the remainder of the Allen warrants were exercised, Allen would own approximately 2.1% of the Company's outstanding stock. In June, 1992 the Johnson warrant was exercised and in January, 1993 the Brake warrant was exercised.
(b) Stock Options
Pursuant to the Company's Incentive Stock Option Plan adopted in November, 1981, as amended, incentive and nonqualified options may be granted to purchase up to an aggregate of 455,000 shares of the Company's voting Common Stock, $.10 par value, at prices not less than 100% of the fair market value of the shares at the time the options are granted. Currently, all options are exercisable in full three years from the date of grant in cumulative annual installments of 33 1/3% commencing one year after the date of grant, and expire ten years after grant. Under its provisions, no options were to be issued under the Incentive Stock Option Plan adopted in November, 1981 (Old Plan) after the plan reached its tenth anniversary. During the year ended December 31, 1991, a new Incentive Stock Option Plan (New Plan) was adopted. The terms of the New Plan are identical to those of the Old Plan except that (1) the number of shares eligible for issuance is 625,490, (2) provision is made for the non-discretionary grant of nonqualified options to directors who are not full-time employees of the Company or any subsidiary ("outside directors") and (3) provision is made for all outstanding options to vest upon the occurrence of a change in control (as defined in the New Plan).
At the Company's Annual meeting in 1996, the holders of Common Stock approved an amendment to the New Plan increasing the number of shares of Common Stock reserved for issuance by 250,000.
SPECTRAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995
Activity in the plans for the years ended December 31, 1997, 1996 and 1995 is summarized below (dollars in thousands except per share amounts):
As of December 31, 1997, options for 390,854 shares were vested and exercisable at an aggregate exercise amount of $3.9 million ($9.96 per share).
The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option plan. Accordingly, no compensation cost has been recognized for its fixed stock options plan. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the provisions of FASB Statement 123, the Company's net income and earnings per share for the years ended December 31, 1997 and 1996 would have been reduced to the pro forma amounts indicated as follows:
SPECTRAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995
1997 1996 1995 ---- ---- ---- Net income (in thousands): As reported $4,842 $3,655 $542 Pro forma $4,594 $3,340 $233
Net income per share: As reported $.68 $.61 $.10 Pro forma $.64 $.56 $.04
The fair value of options granted under the Company's fixed stock option plan during 1997, 1996 and 1995 were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used: no dividend yield, expected volatility of 63% for 1997 and 64% for 1996 and 1995, risk free interest rate of 7%, and expected life of five years.
(c) Secondary Stock Offering
On February 18, 1997, the Company completed a secondary public offering of 1,500,000 shares of common stock at a price of $19.00 per share. Of the 1,500,000 shares, 1,300,000 were sold by the Company and 200,000 by Allen and Company, Incorporated, a selling stockholder.
10- Computation of Earnings per Common Share
Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128 "Earnings per Share" (SFAS 128) which has changed the method of computing and presenting earnings per common share. All prior periods presented have been restated in accordance with SFAS 128. This restatement had an immaterial impact on the prior periods' earnings per common share amounts calculated under previous standard.
Under SFAS 128, 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 divided by the weighted average number of shares of common stock outstanding in 1997, 1996 and 1995.
Fully diluted earnings per common share has been replaced with diluted earnings per common share. The diluted earnings per common share computation includes the common stock equivalency of options granted to employees under the stock incentive plan. Excluded from the diluted earnings per common share calculation are options granted to employees that are anti-dilutive based on the average stock price for the year.
SPECTRAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995
11- Income Taxes
Income tax expense attributable to income (loss) from operations differs from the computed expected tax expense (benefit) determined by applying the federal income tax rate of 34 percent as follows (in thousands):
SPECTRAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995
Total income tax expense (benefit) for the years ended December 31, 1997, 1996 and 1995 was allocated as follows (in thousands):
Income tax expense (benefit) attributable to income from continuing operations consists of (in thousands):
Current Deferred Total ------- -------- -----
Year ended December 31, 1997: Federal $ 1,719 $ 165 $ 1,884 State 401 (161) 240 -------- -------- --------
$ 2,120 $ 4 $ 2,124 ======== ======== ========
Year ended December 31, 1996: Federal $ 687 $ 668 $ 1,355 State 560 (33) 527 -------- -------- --------
$ 1,247 $ 635 $ 1,882 ======== ======== ========
Year ended December 31, 1995: Federal $ 277 $ (120) $ 157 State 158 (80) 78 -------- --------- --------
$ 435 $ (200) $ 235 ======== ======== ========
SPECTRAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995
The significant components of deferred income tax expense (benefit) attributable to income from operations for the years ended December 31, 1997, 1996 and 1995 are as follows (in thousands):
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below (in thousands):
SPECTRAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995
The valuation allowance for deferred tax assets as of December 31, 1997 and 1996 was $330,000 and $630,000, respectively. Based on the Company's level of net income and projected future earnings, the Company believes that it is more likely than not that a portion of the deferred tax asset will be realized in the future. During 1997, the portion of the deferred tax asset which is expected to be realized increased from 1996; therefore, the Company reduced its valuation allowance by $300,000. The remaining valuation allowance relates primarily to the risk that a portion of the tax credit carryforwards and state operating loss carryforwards will not be used before they expire.
At December 31, 1997, the Company had the following income tax credit available to offset future income taxes (in thousands): Amount Expires ------ -------
Alternative Minimum Tax Credit $ 686 Indefinite
12- Major Customers
The approximate net product sales by the Company to customers accounting for 10% or more of total net annual sales are as follows (in thousands):
1997 1996 1995 ---- ---- ---- Customer Amount % Amount % Amount % -------- ------ - ------ - ------ -
A $9,522 15 $7,902 13 $5,040 13 B 8,906 14 4,153 11 C 6,601 11
Substantially all of the Company's business is to customers in the telecommunications and data communications industries. International sales, primarily in Asia and Europe, accounted for 22%, 25% and 22% of total sales in 1997, 1996 and 1995, respectively.
13- Commitments
SpecTran Communication Fiber Technologies, Inc. leases office and warehouse facilities under a lease through March 17, 1998 and leases additional office space under a lease which operates on a month to month basis. SpecTran Specialty leases several cars under leases which operate on a month to month basis. The scheduled rental payments required under these operating leases for 1998 are $31,000. The Company has no lease commitments after 1998.
Total rent expense for the years ended December 31, 1997, 1996 and 1995 was $301,000, $634,000 and $364,000, respectively. A portion of the total rent expense for 1996 and 1995 was for APD, since its acquisition in May, 1995.
SPECTRAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995
14- Employee Benefit Plans
a) Defined Benefit Pension Plan
The Company sponsors a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and an average of the employee's highest ten consecutive years of earnings. The Company's funding policy is, to the extent possible, to contribute annually the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future.
The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated balance sheets at December 31, 1997 and 1996.
Actuarial present value of benefit obligations (in thousands):
Net pension cost for 1997, 1996 and 1995 included the following components:
Assumptions used in the accounting as of December 31 were as follows:
SPECTRAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995
b) Supplemental Retirement Agreements
The Company entered into supplemental retirement agreements with five executive officers in 1996. These agreements provide benefits based on years of service and average eligible pay for executives. The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated balance sheets at December 31, 1997 and 1996.
Actuarial present value of benefit obligations (in thousands):
Net pension cost for 1997, 1996 and 1995 included the following components:
Assumptions used in the accounting as of December 31 were as follows:
c) Defined Contribution Pension Plan
The Company sponsors a defined contribution pension plan covering substantially all of its employees. Contributions to the plan are discretionary and amounted to $300,000, $361,000 and $83,000 in 1997, 1996 and 1995, respectively.
SPECTRAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995
d) Directors Retirement Plan
In December, 1995 the Company adopted a Directors Retirement Plan which provides for retirement benefits for all outside directors with five full calendar years of service as of the later of age 70 or the date of actual retirement as a director. There was no expense in 1997 or 1996 to provide for past service costs.
e) Bonus Plans
The Company sponsors an Employee Profit Sharing Plan covering all employees. The Company also sponsored a transitional plan covering key employees in 1995 and adopted a Key Employee Incentive Plan in 1996 which replaced an Income Growth Incentive Plan in 1994. These plans provide for the payment of bonuses if certain performance objectives are obtained. Bonuses of $1.4 million, $1.4 million and $380,000, respectively, were charged to operations in 1997, 1996 and 1995.
15- Acquisitions/Joint Venture
a) Applied Photonic Devices, Inc.
On May 23, 1995 the Company purchased all the outstanding capital stock of Applied Photonic Devices, Inc. ("APD") for cash and common stock worth approximately $3.9 million. The Company also retired approximately $600,000 of APD bank debt. APD, located in Danielson, Connecticut, manufactures and sells fiber optic cable and related components.
The purchase method of accounting was used and the results of operations of APD are included in the consolidated financial statements from May 23, 1995.
Goodwill of $3.3 million resulted from the purchase and was being amortized over 15 years. Amortization expense amounted to $217,000 and $127,000 in 1996 and 1995, respectively.
In December 1996, the Company announced the formation of General Photonics, a 50-50 joint venture between the Company and General Cable, a former subsidiary of Wassall plc. General Cable purchased certain assets of the Company's optical fiber cable subsidiary, APD, for approximately $5.8 million and then contributed them to General Photonics for a 50% equity interest. APD contributed its remaining assets to General Photonics in exchange for its 50% equity interest. The net assets, including goodwill, of General Photonics totaled $10.2 million at December 31, 1996. The Company accounts for its interest in the joint venture under the equity method and no gain or loss was recognized as a result of this transaction.
SPECTRAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995
The following pro forma statement of operations for the year ended December 31, 1996 presents the results of operations as if the Company had entered into the joint venture as of January 1, 1996 (in thousands):
Statements of Operations (unaudited)
16- Subsequent Event
On March 13, 1998 the Company announced the settlement of Corning's obligation to purchase multimode optical fiber from the Company under a multi-year 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 .
17- Quarterly Financial Information (unaudited) In thousands of dollars except per share data
Quarters First Second Third Fourth - ----------------------- ------------------ ------------ ------------ ---------- Net Sales $16,228 $15,881 $15,638 $14,310 Gross Profit 6,542 6,162 5,777 4,795 Net Income 1,122 1,330 1,151 1,239 Earnings per Common Share-Basic .18 .19 .17 .18 Earnings per Common Share-Diluted .17 .18 .16 .17
Net Sales $13,473 $15,281 $16,161 $16,656 Gross Profit 4,756 5,318 6,220 6,081 Net Income 684 833 1,007 1,131 Earnings per Common Share-Basic .13 .15 .19 .21 Earnings per Common Share-Diluted .12 .14 .17 .18
SPECTRAN CORPORATION Schedule I - Valuation and Qualifying Accounts For the Years Ended December 31, 1997, 1996 and 1995
Dollars in Thousands