UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2002
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: 0-21823
FIBERCORE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 87-0445729
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
253 Worcester Road, P.O. Box 180
Charlton, MA 01507
- --------------------------------------------------------------------------------
(Address and Zip Code of principal executive offices)
(508) 248-3900
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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 such 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 August
12, 2002 was 67,920,814.
FIBERCORE, INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I FINANCIAL INFORMATION..............................................3
ITEM 1. FINANCIAL STATEMENTS...................................3
CONDENSED CONSOLIDATED BALANCE SHEETS
AT JUNE 30, 2002 (UNAUDITED) AND DECEMBER 31, 2001.....3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND
2001 (UNAUDITED).......................................4
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS) FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2002 AND 2001 (UNAUDITED)..........................5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)............................................6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)............................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK..................................................18
PART II OTHER INFORMATION.................................................19
ITEM 1. LEGAL PROCEEDINGS.....................................19
ITEM 2. CHANGES IN SECURITIES.................................19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.......................19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...19
ITEM 5. OTHER INFORMATION.....................................19
ITEM 6. EXHIBITS & REPORTS ON FORM 8-K........................19
SIGNATURES AND CERTIFICATION..................................................20
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIBERCORE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share data) June 30, December 31,
2002 2001
-------- ------------
(Unaudited)
ASSETS
Current assets:
Cash ........................................... $ 1,084 $ 1,721
Accounts receivable - net ...................... 3,150 8,436
Receivable from government grants .............. 2,681 --
Other receivables (principally value added taxes) 5,829 5,398
Inventories .................................. 10,862 8,099
Prepaid and other current assets ............. 1,076 1,022
-------- --------
Total current assets ....................... 24,682 24,676
-------- --------
Property and equipment - net ..................... 48,336 43,556
-------- --------
Other assets:
Notes receivable from joint venture
partners ..................................... 4,948 4,948
Restricted cash ................................ 1,941 1,753
Patents - net .................................. 3,662 3,855
Investments in joint ventures .................. 925 925
Deferred tax asset ............................. 508 383
Goodwill, net .................................. 9,016 10,897
Other .......................................... 2,243 1,990
-------- --------
Total other assets ........................... 23,243 24,751
-------- --------
Total assets ................................. $ 96,261 $ 92,983
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current installment
on long-term debt ............................ $ 24,433 $ 10,859
Accounts payable ............................... 7,238 8,746
Accrued expenses ............................... 7,015 5,966
Other liabilities .............................. 331 424
-------- --------
Total current liabilities .................... 39,017 25,995
-------- --------
Deferred income .................................. 1,345 1,021
Long-term debt ................................... 23,652 22,475
-------- --------
Total liabilities ............................ 64,014 49,491
-------- --------
Minority interest ................................ 4,410 5,117
-------- --------
Stockholders' equity:
Preferred stock, $.001 par value,
authorized 10,000,000 shares; no
shares issued and outstanding ................ -- --
Series A preferred stock, $.001 par
value, authorized 1 share; 1 share
issued and outstanding ....................... -- --
Common stock, $.001 par value,
authorized 100,000,000 shares;
shares issued and outstanding:
61,589,533 at June 30, 2002 and
61,481,139 at December 31, 2001 .............. 61 61
Additional paid-in-capital ..................... 66,037 64,847
Accumulated deficit ............................ (28,634) (19,413)
Accumulated other comprehensive loss:
Accumulated translation adjustment ........... (9,627) (7,120)
-------- --------
Total stockholders' equity ................. 27,837 38,375
-------- --------
Total liabilities and stockholders'
equity ....................................... $ 96,261 $ 92,983
======== ========
See accompanying notes to the condensed consolidated financial statements.
3
FIBERCORE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Dollars in thousands except share data) Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales ........................................ $ 6,374 $ 18,066 $ 14,259 $ 34,292
Cost of sales:
Cost of sales ................................. 5,172 10,836 12,455 20,471
Restructuring Costs ........................... 197 -- 197 --
Write-down of inventory ....................... 346 -- 1,133 --
----------- ----------- ----------- -----------
Total cost of sales ................ 5,715 10,836 13,785 20,471
----------- ----------- ----------- -----------
Gross profit ....................... 659 7,230 474 13,821
Operating expenses:
Selling, general and administrative expenses ..... 2,887 2,037 5,500 3,734
Research and development ......................... 510 581 993 1,021
Restructuring Costs .............................. 103 -- 103 --
----------- ----------- ----------- -----------
Income (loss) from operations .................... (2,841) 4,612 (6,122) 9,066
Interest income .................................. 260 37 298 133
Interest expense ................................. (1,540) (518) (2,664) (798)
Foreign exchange loss - net ...................... (1,737) (250) (1,795) (210)
Other income - net ............................... 27 321 -- 130
----------- ----------- ----------- -----------
Income (loss) before income taxes and
minority interest ................... (5,831) 4,202 (10,283) 8,321
Benefit from (provision for) income taxes ........ 86 (937) 190 (1,794)
----------- ----------- ----------- -----------
Income (loss) before minority interest ........... (5,745) 3,265 (10,093) 6,527
Minority interest in (income) loss of subsidiary . 602 (216) 872 (499)
----------- ----------- ----------- -----------
Net income (loss) ................................ $ (5,143) $ 3,049 $ (9,221) $ 6,028
=========== =========== =========== ===========
Income (loss) per share of common stock:
Basic ............................................ $ (0.08) $0 .05 $ (0.15) $0 .10
Diluted .......................................... (0.08) 0 .05 (0.15) 0 .09
Weighted average shares outstanding:
Basic ............................................ 61,589,533 59,565,539 61,553,024 59,263,000
Diluted .......................................... 61,589,533 65,533,406 61,553,024 65,230,867
See accompanying notes to the condensed consolidated financial statements.
4
FIBERCORE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(Dollars in thousands) Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
2002 2001 2002 2001
------- ------- -------- -------
Net income (loss) ................. $(5,143) $ 3,049 $ (9,221) $ 6,028
Other comprehensive loss:
Foreign currency translation
adjustments ..................... (1,793) (1,480) (2,507) (4,867)
------- ------- -------- -------
Total comprehensive income (loss) . $(6,936) $ 1,569 $(11,728) $ 1,161
======= ======= ======== =======
See accompanying notes to the condensed consolidated financial statements.
5
FIBERCORE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands) Six Months Ended
June 30,
----------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net income (loss) ................................ $ (9,221) $ 6,028
Adjustments to reconcile net income
(loss) to net cash (used in) provided
by operating activities:
Depreciation and amortization .................... 1,419 1,552
Deferred income taxes ............................ (172) 441
Foreign currency translation (gain)
loss and other ................................. 735 (303)
Non-cash interest expense ........................ 1,027 --
Write-down of inventory .......................... 1,133 --
(Decrease) increase in minority interest ......... (707) 499
Changes in operating assets and liabilities:
Accounts receivable .............................. 4,956 (4,781)
Other receivables ................................ (864) (1,720)
Inventories ...................................... (4,281) (1,276)
Prepaid and other current assets ................. (197) (1,031)
Accounts payable ................................. (839) 1,090
Accrued expenses ................................. 1,067 (336)
-------- --------
Net cash (used in) provided by operating
activities ................................... (5,944) 163
-------- --------
Cash flows from investing activities:
Purchase of property and equipment ............... (9,395) (15,744)
Reimbursement from government grants ............. 1,577 --
Cash used for acquisition ........................ -- (250)
Cash acquired from acquisition ................... -- 27
Other ............................................ (216) (269)
-------- --------
Net cash used in investing activities .......... (8,034) (16,236)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock ........... 157 29
Proceeds from long-term debt ..................... 467 11,627
Proceeds from notes payable ...................... 15,565 4,871
Repayment of long-term debt ...................... (31) (82)
Repayment of notes payable ....................... (2,002) (1,003)
Financing costs .................................. (633) (276)
-------- --------
Net cash provided by financing
activities ................................... 13,523 15,166
-------- --------
Effect of foreign exchange rates change
on cash .......................................... (182) (482)
Decrease in cash ................................... (637) (1,389)
Cash, beginning of period .......................... 1,721 5,051
-------- --------
Cash, end of period ................................ $ 1,084 $ 3,662
======== ========
Supplemental disclosure:
Cash paid for interest ........................... $ 874 $ 658
Cash paid for taxes .............................. 8 396
Common stock issued for conversion
of debt ........................................ -- 4,000
See accompanying notes to the condensed consolidated financial statements.
6
FIBERCORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1) PREVAILING MARKET CONDITIONS
Demand for single-mode fiber for use in the long haul market has
significantly weakened and prices have fallen, most notably in the United States
and South America, as telecom carriers have dramatically reduced capital
expenditures. The decline, however, may be leveling off or easing as published
market studies and industry sources indicate that the demand for single-mode
fiber should start to increase during the first half of 2003 and that the demand
for fiber to supply the metropolitan access and fiber-to-the-home markets will
begin increasing as carriers start to connect the long-haul fiber to the
end-user. For the most part, multi-mode fiber, which accounted for approximately
35% of our revenues in 2001 and has increased to over 50% in the first six
months of 2002, has been less affected by these recent events, experiencing
approximately 15% price declines although volumes have increased. Nevertheless,
there is no clear indication as to whether the expected demand will materialize
and whether prices will improve with the expected increases in demand.
We have experienced a precipitous decline in the South American market and
have taken steps to offset this decline by shifting sales efforts to other
markets, by managing production levels to better match current and expected
near-term demand levels, and by shifting, to the extent possible, production to
multi-mode from single mode fiber. We anticipate that as this trend continues, a
higher percentage of our revenue will be attributable to multi-mode fiber in
2002 as can be seen through the first six months results. One area that has
shown some resiliency has been China, and we have begun shipping product into
China from Brazil. However, prices in China have also been weakening, as the
large fiber manufacturers, including those from Japan and Korea, reduce
inventories and attempt to capture volume orders, and there have been some
recent indications that demand may be softening. In view of its sizeable
long-term fiber requirements, China has recently passed laws that will eliminate
the importation of fiber by 2005. Accordingly, as the only fiber manufacturer
that does not manufacture cable and therefore does not compete with our
customers, we have been approached by several Chinese cable manufacturers and
others to enter joint ventures to build facilities in China. At present,
discussions with several groups are in process.
2) BASIS OF PRESENTATION
The condensed consolidated balance sheet as of June 30, 2002 and related
condensed consolidated statements of operations, comprehensive income (loss),
and cash flows for the three months ended June 30, 2002 and 2001 included herein
have been prepared by FiberCore, Inc. (the "Company") in accordance with the
rules and regulations of the Securities and Exchange Commission for reports on
Form 10-Q. These statements are unaudited. In the opinion of management, all
adjustments necessary for a fair presentation of such financial statements have
been included and such adjustments consist of normal recurring items necessary
for their fair presentation in conformity with accounting principles generally
accepted in the United States. Results for the second quarter may not be
indicative of the full year results.
The condensed consolidated financial statements do not contain certain
information included in the Company's annual audited financial statements. These
condensed consolidated financial statements should be read in conjunction with
the annual audited financial statements and notes thereto for the year-ended
December 31, 2001 included in the Company's Annual Report on Form 10-K.
7
3) INVENTORIES
Inventories consist of the following:
(Dollars in thousands) June 30, 2002 December 31, 2001
------------- -----------------
Raw material $ 3,276 $3,913
Work-in-progress 2,161 1,379
Finished goods 5,425 2,807
------- ------
Total $10,862 $8,099
======= ======
Finished goods inventory reflects a write-down amounting to $1,133,000 to
account for the effect of declining prices on single-mode fiber during the first
six months of 2002.
4) RESTRICTED CASH
Restricted cash represents the German Mark (DM) 3,850,000 deposit with the
Sparkasse Jena securing the loan from the Sparkasse Jena of DM 7,700,000. The
deposit is reflected in the financial statements in the U.S. Dollar equivalent
using the exchange rates in effect at the balance sheet date. The increase of
$188,000 in the balance sheet amount from December 31, 2001 to June 30, 2002 is
the result of the increase in the value of the Euro as compared to the US Dollar
as of June 30, 2002. The change is accounted for as an unrealized foreign
exchange gain in the condensed consolidated statement of operations.
5) BORROWINGS DURING THE FIRST SIX MONTHS OF 2002
The following describes the borrowing activity for the six months ended
June 30, 2002:
i) $2,348,000 in short-term notes payable at Xtal FiberCore Brasil S.
A. ("Xtal") for purchase of raw materials and general working
capital.
ii) $5,000,000 in 5% convertible subordinated debentures for the
recently announced capacity expansion and productivity initiatives
in Germany, initial funding for FiberCore Africa and other corporate
purposes. Repayment of the $5,000,000 is scheduled at a rate of
$500,000 per month, commencing April 1, 2002. $1,500,000 has been
repaid to date in the second quarter. On June 3, 2002, subsequent to
the effectiveness of the Company's Form S-3, an additional $500,000
was received by the Company, which was used immediately to make the
payment due on June 1, 2002. Repayment of the $500,000 received in
June will be made by December, 2002. Warrants were issued in
connection with the 5% convertible subordinated debentures. The fair
value of the warrants was recorded as debt discount on the
accompanying condensed consolidated balance sheet. The debt discount
is being amortized over the course of 2002 on an effective interest
rate method.
iii) $7,582,000 of short-term notes payable by FiberCore Jena ("FCJ").
These proceeds were used to fund a portion of the capacity expansion
at FCJ. Approximately $3,192,000 of these notes will be paid when
grant funds from the German government, which have been recorded as
a current receivable, are received. The funds are expected to be
received during the third quarter. The balance of the notes will be
converted into long-term debt, under an existing agreement, by the
end of the third quarter.
8
iv) $135,000 in short-term notes payable to an officer and a director of
the Company, for general working capital purposes. The notes bear
interest at an annual rate of 12% and are payable by September 30,
2002.
v) $96,000 in convertible debentures payable by FiberCore Africa. The
notes bear interest at an annual interest rate of 11.5%. The notes
are redeemable one to three years from the date of the notes. During
the term of three years, the note holders have the option to convert
the notes in ordinary shares of FiberCore Africa, otherwise they
will be redeemed by the Company. The debentures are expected to be
repaid during the first quarter of 2003.
vi) $371,000 note payable by FiberCore Glas GmbH due November 11, 2007
with interest at 6.38% secured by machinery and equipment.
Lien Attachment
Pursuant to the Loan Agreement between Fleet National Bank ("Fleet") and
the Company, dated as of December 20, 2000 (the "Loan Agreement"), Fleet has the
right to attach a lien on 65% of the equity in the Company's subsidiaries and
substantially all of the Company's other assets, and to increase the interest
rate on the Company's obligations to Fleet by 1%, if the credit rating of Tyco
International Group S.A. ("Tyco"), the guarantor of such obligations, falls
below certain levels. The Company is in compliance with its obligations under
the Loan Agreement, which does not contain any financial covenants. Recent
downgrades of Tyco's credit triggered Fleet's ability to attach the lien and
increase the interest rate. On June 28, 2002, Fleet Bank exercised its right to
attach the liens and also increased the interest rate on the loan, effective on
the date of the downgrade of Tyco's credit rating.
6) LEGAL MATTERS
i) Xtal is party to a three-year take-or-pay contract expiring in June
2003, with Shin Etsu for the delivery of single-mode preforms to
Xtal. In 2001, Xtal purchased approximately $10,900,000 of product
under the contact. There are provisions in the contract that provide
for exceptions for both parties regarding the requirements to ship
or purchase preforms. In the fourth quarter of 2001, Xtal elected
not to take most of the contracted volume under one of these
provisions. Shin Etsu is contesting Xtal's interpretation of the
contract and has submitted a claim to arbitration relative to this
volume and additional volumes under a non-related agreement, which
is not a take-or-pay agreement. The initial amount in dispute was
approximately $4,400,000, with approximately $1,750,000 related to
the take-or-pay contract. The Company contends that the amounts
under the non-related agreements are not subject to arbitration in
Japan and is contesting the jurisdiction of the arbitration panel in
this matter. Xtal and the Company have submitted their position on
all items to the arbitration panel. If Xtal were to ultimately lose,
Xtal could be required to purchase the preforms in question as well
as pay the costs of arbitration. In that case, the legal costs of
arbitration would negatively impact the Company's operating results,
but the costs of the material would become part of inventory/cost of
sales. This could potentially have a negative operating impact as
well, depending on the price of the preforms determined in the
arbitration ruling versus the market price of the preforms at the
time of the ruling. The parties have had settlement discussions
during this period, but have been unable to reach an agreement at
this time. Xtal has continued to purchase preforms from Shin Etsu
under the contract since the fourth quarter of 2001, but at levels
below those called for in the contract due to market and economic
conditions. Shin Etsu has amended their arbitration claim to include
the difference between the quantity actually purchased and the
quantity originally contracted for since their initial claim was
filed. This increases their total claim to approximately $6,600,000.
The Company has submitted additional defenses to the arbitration
panel
9
including the dramatic change in economic circumstances in the
industry. A ruling is not expected from the arbitration panel until
late 2002 or early 2003.
Subsequent to the close of the quarter, Shin Etsu filed suit in the
United States District Court of Massachusetts. This suit seeks to
compel the Company to arbitrate agreements in Japan that the Company
believes are not subject to arbitration. It also seeks summary
judgment of $2.7 million if the court does not rule in its favor on
the arbitration question. The $2.7 million is part of the original
$4.4 million claim discussed above. The Company filed a response to
this suit on August 12, 2002 and will defend itself vigorously.
ii) On August 2, 2002 a patent infringement suit was filed against the
Company. The complaint was filed in the United States District Court
for the Northern District of Georgia, Atlanta Division, case number
1:02CV2149. The action is brought by Fitel USA Corp., and alleges
infringement by the Company of three patents held by Fitel. The
plaintiff alleges in the complaint that the Company has infringed
and continues to infringe on U.S. Patent No. 4,909,816, on U.S.
Patent No. 5,298,047 and on U.S. Patent No. 5,418,881. The plaintiff
seeks an injunction permanently prohibiting the Company from
directly infringing on the named patents or inducing or contributing
to the infringement of the U.S. Patent No. 5,418,881 by others, and
seeks unspecified compensatory and treble damages, attorneys fees
and costs, and such other and further relief as is just and proper.
The Company believes these claims to be without merit, has retained
counsel and will vigorously defend itself in this case.
7) NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141 Business Combinations, which establishes financial accounting and
reporting for business combinations and supersedes Accounting Principles Board
("APB") Opinion No. 16, Business Combinations. It requires that all business
combinations in the scope of this Statement are to be accounted for using one
method, the purchase method. The provisions of this Statement apply to all
business combinations initiated after June 30, 2001, and also apply to all
business combinations accounted for using the purchase method for which the date
of acquisition is July 1, 2001 or later. The Company has adopted SFAS No. 141,
and the adoption of SFAS No. 141 had no material impact on the financial
reporting and related disclosures.
In July 2001, the FASB issued SFAS No. 142 Goodwill and Other Intangible
Assets, which establishes financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion No. 17,
Intangible Assets. It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition, and after they have been initially recognized in the financial
statements. The Company has adopted SFAS No.142 beginning with the first quarter
of fiscal 2002.
SFAS No.142 requires that goodwill and intangible assets that have
indefinite useful lives will not be amortized, but rather they will be tested at
least annually for impairment. Intangible assets that have finite useful lives
will continue to be amortized over their useful lives. Application of the
non-amortization provisions of SFAS No. 142 is expected to result in an increase
in net income of approximately $530,000 in fiscal 2002. The goodwill test for
impairment consists of a two-step process that begins with an estimation of the
fair value of a reporting unit. The first step is a screen for potential
impairment and the second step measures the amount of impairment, if any. SFAS
No. 142 requires an
10
entity to complete the first step of the transitional goodwill impairment test
within six months of adopting the Statement. The Company has completed its
initial test of impairment, measured as of January 1, 2002 and has concluded
there is no impairment to goodwill as of the adoption date of SFAS No. 142.
Pro forma results for the three and six months ended June 30, 2001,
assuming the discontinuation of amortization of goodwill.
Three months Six Months
Ended Ended
June 30, 2001 June 30, 2001
------------- -------------
Reported net income $3,049,000 $6,028,000
Amortization of goodwill 125,000 264,000
---------- ----------
Pro forma net income $3,174,000 $6,292,000
========== ==========
Pro forma income per share of common stock:
Basic:
Reported net income per share $ 0.05 $ 0.10
Amortization of goodwill -- 0.01
---------- ----------
Pro forma net income per share $ 0.05 $ 0.11
========== ==========
Diluted:
Reported net income per share $ 0.05 $ 0.09
Amortization of goodwill -- 0.01
---------- ----------
Pro forma net income per share $ 0.05 $ 0.10
========== ==========
Following are patent costs classified as intangible assets that will
continue to be subject to amortization over the patent's expected useful lives,
which are generally seventeen years:
As of As of
June 30, 2002 December 31, 2001
------------- -----------------
Gross carrying amount $ 8,206,889 $ 8,141,735
Accumulated amortization (4,545,053) (4,286,501)
----------- -----------
Net carrying amount $ 3,661,836 $ 3,855,234
=========== ===========
Six Months Ended
June 30,
--------------------
2002 2001
-------- --------
Aggregate patent amortization expense $258,552 $329,267
11
Estimated annual patent amortization expense for fiscal years ending:
December 31, 2002 $517,000
December 31, 2003 $513,000
December 31, 2004 $509,000
December 31, 2005 $509,000
December 31, 2006 $509,000
In October 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets", which supercedes SFAS No. 121,
however it retains the fundamental provisions of SFAS No. 121. Effective January
1, 2002, the Company adopted SFAS No. 144, which did not have an effect on the
Company's condensed consolidated statements of financial position or results of
operations.
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 145, "Rescission of FASB
Statements No. 4,44,and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" (SFAS No. 145). SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains
and Losses from Extinguishment of Debt", and an amendment of that statement,
SFAS No. 64, "Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements".
SFAS No. 145 also rescinds SFAS No. 44, "Accounting for Intangible Assets of
Motor Carriers". SFAS No. 145 amends SFAS No. 13, "Accounting for Leases", to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. SFAS No.
145 also amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability under
changed conditions. The adoption of SFAS No. 145 is not expected to have a
material result on the Company's financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146,
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". The Company is
in the process of determining the effect of the adoption of SFAS No. 146 on the
Company's consolidated financial statements.
8) RESTRUCTURING
During the second quarter of 2002, the Company initiated a restructuring
program. Under that program, the Company reduced the number of personnel at Xtal
by 105 people from 170 to 65. The amount charged to operations during the second
quarter as a result of the restructuring amounted to $300,000 ($197,000 of which
is included in cost of sales), which was all incurred and paid as of June 30,
2002. The anticipated quarterly savings from this reduction in the future are
estimated to be $323,000. The restructuring costs included termination benefits
for the employees involved. The numbers of employees by category were as
follows:
Manufacturing - Direct and indirect labor 88
R&D 4
Sales 4
Administrative 9
This reduction was considered necessary to decrease costs until such time
as demand returns to the marketplace.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-looking Statements
This report includes "forward-looking statements" made pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause the actual results,
performance or achievements of the Company to differ materially from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such risks, uncertainties and other important
factors include, among others: general economic and business conditions; ability
to obtain required financing; loss of market share through competition; major
equipment failure; currency fluctuations; ability to increase capacity;
introduction of competing products by other companies; changes in industry
capacity; dependence on limited manufacturing facilities; pressure on prices
from competition or from purchasers of the Company's products; availability of
qualified personnel; changes in, or the failure or inability to comply with,
government regulation; and the loss of any significant customers. These
forward-looking statements speak only as of the date of this report. The Company
expressly disclaims any obligation or undertaking to disseminate any updates to
any forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
The results for the three and six-month periods ended June 30, 2002
include the operations of DCI FiberCore, Inc., which was merged into Automated
Light Technologies ("ALT"), a wholly owned subsidiary of the Company on June 1,
2001 and FiberCore Africa (FCAfrica), a 60% owned joint venture. Effective July
16, 2002, the name of DCI FiberCore, Inc. has been changed to FiberCore Systems,
Inc. ("FCS"). FCAfrica is in start-up mode and has primarily incurred
administrative expenses during the first six months of 2002.
Sales for the three and six-month periods ended June 30, 2002 decreased by
$11,692,000 and $20,033,000 or 64.7% and 58.4%, respectively, as compared to the
same periods in 2001. Sales continued to be negatively impacted by a 95% decline
in shipments to South America, which is primarily a single-mode market. Overall,
single-mode sales were down in all regions, while multimode sales increased by
approximately 21%. The decline in the first six months of 2002 was partially
attributable to the loss of sales from a major customer who was in breach of
contract in 2001. Sales to that customer in the first half of 2001 were
$10,141,000. We continue to expect shipments to resume in the second half of
2002, but at a significantly slower rate than indicated in the settlement
agreement due to continued weakness in the Brazilian single-mode fiber market.
The Company expects to be the primary supplier of optical fiber to this customer
over the next several years and that sales to this customer will return to
previous levels when the South American market strengthens to the level of early
2001 performance assuming our customer is able to secure contracts at similar
levels to its previous performance. There can be no assurance as to when and if
these two conditions will occur. The Company has taken steps to offset this
weakness by shifting sales to other markets, managing production levels to
better match near-term demand levels, and shifting, to the extent possible,
production to multimode from single-mode fiber, but we cannot assure the success
of our efforts. Company-wide for the first six months, the decrease in volume of
shipments accounted for $17,011,793 of the decrease in sales of fiber, while the
negative effects of pricing decreases accounted for $3,352,570 of the decrease
in sales of fiber. The balance of the net decrease in sales is related to a
$331,058 net increase in the sale of other fiber products and sales of FCS,
which was acquired June 1, 2001.
Gross profit was $659,000 and $474,000 or 10.3% and 3.3% of sales for the
three and six month periods ended June 30, 2002, respectively, compared to
$7,230,000 and $13,821,000 or 40.0% and 40.3%
13
for the comparable periods in the prior year. The $6,571,000 and $13,347,000
decreases in gross profit from the comparable periods in 2001 are primarily
attributable to significantly lower shipment volume during the first half of
2002, combined with lower pricing. The effect of adjustments during the first
half of 2002 to raw materials and finished goods inventory to account for the
continuing effect of declining prices of fiber on inventory valuation amounted
to $346,000 for the second quarter and $1,133,000 for the six month period.
Restructuring costs included in cost of sales for the second quarter amounted to
$197,000. The result of restructuring at Xtal should improve gross profit by
$219,000. Without both of these adjustments, gross profit for the second quarter
would have been $1,202,000 or 18.9%. This compares to a gross profit (6.8%) in
the fourth quarter of 2001 and 7.6% in the first quarter of 2002 after
adjustment for inventory write-downs. Gross profit for the first six months of
2002 would have been $1,804,000 or 12.7% of sales without the adjustments. The
Company expects pricing pressure to continue in the near-term. The Company has
reduced costs at both of its fiber manufacturing facilities in the first and
second quarters of 2002 in response to the softening demand, including a 62%
reduction in staffing at the Xtal facility in Brazil. Margins are expected to
improve over the longer term as a result of higher production levels as volume
increases and as a result of continued cost reduction efforts, process
improvements and integration of technology between operations. Some variation
can be expected from quarter to quarter as (i) incremental costs are incurred in
connection with the installation and start-up of new equipment, and (ii) pricing
variation due to scheduled market-pricing adjustments made on a quarterly basis
in accordance with the terms of new and existing contracts.
Selling, general and administrative costs ("SG&A") increased $850,000 or
41.7% and $1,766,000 or 47.3% for the second quarter and first six months of
2002 as compared to the comparable periods in 2001. SG&A costs were 39% of sales
for the first six months of 2002 as compared to 11% for the same period in 2001.
The increase as a percentage of sales is attributable to the higher level of
these costs relative to a significantly lower sales base during the first six
months of 2002. FiberCore Africa accounted for $481,000 of the second quarter
and six month increases as compared to the comparable periods in 2001. FiberCore
Jena ("FCJ"), the Company's German plant, accounted for $613,000 of the 6 month
increase in 2002 as compared to the prior year. $157,000 of the six month
increase was a result of the inclusion of FCS into operations for 2002, which
was acquired on June 1, 2001. Increases in personnel, legal fees, travel and
trade show expenses accounted for increases at all other locations. The Company
has taken steps to significantly reduce SG&A costs during the second half of
2002 as a result of actions taken during the first and second quarters of 2002.
Research and development costs decreased $71,000 or 12.2% for the second
quarter of 2002 and $28,000 or 3% for the first six months of 2002 as compared
to the comparable periods in 2001. The decrease was a result of lower
expenditures at the Company's Brazilian subsidiary. The Company intends to
continue its research and development to increase production efficiency, reduce
manufacturing costs and develop new products. The Company believes that this
investment will result in increased profitability through increased production
efficiency.
Interest expense increased by $1,022,000 or 197% and $1,866,000 or 234%
for the three and six-month periods of 2002 as compared to the comparable
periods in 2001. The increases are the result of higher short and long-term debt
related to operations at Xtal combined with the additional interest costs
related to the expansion activities at FCJ and $1,027,000 of non-cash interest
expense in connection with the amortization of deferred financing costs, the
deemed beneficial conversion feature and the fair value of warrants issued to a
group of investors consisting of Riverview Group LLC, Laterman & Co. and
Forevergreen Partners, related to the $5,500,000 in 5% convertible subordinated
debentures. $578,000 of the non-cash charge to interest expense, related to the
fair value of the warrants issued and the beneficial conversion feature related
to the debentures was offset by an increase to additional paid-in-capital. This
had no effect on the net equity, cash flow, or operations of the Company.
Borrowings during the first half of $16,032,000 were primarily related to the
expansion of manufacturing facilities in Germany and general working capital
uses at all locations.
14
Net foreign exchange losses were $1,737,000 and $1,795,000 for the three
and six-month periods in 2002 compared to a losses of $250,000 and $210,000 for
the same periods in 2001. The net losses in 2002 are due principally to the
significant decline in the value of the Brazilian Real versus the US Dollar, the
Japanese Yen and the European Euro on raw material purchases offset by the
strengthening of the Euro versus the U.S Dollar on the deposit with Sparkasse
Jena.
The Company recorded tax benefits related to the Company's foreign
subsidiaries of $86,000 and $190,000 for the three and six-month periods ended
June 30, 2002 as compared to tax provisions of $937,000 and $1,794,000 for the
same periods in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company had available cash of $1,084,000 as of June 30, 2002 and had
$24,433,000 in notes payable and current installments on long-term debt. A
number of actions have been undertaken to address the cash flow situation.
Currently, the Company is in negotiations with a group of banks in Brazil to
form a syndication on approximately $9.5 million of unsecured short-term notes
and convert this to long-term debt with payments against the principal amount to
begin after one year. The Company expects to close on the syndication during the
third quarter. The Company had short-term notes of approximately $7.6 million in
Germany associated with the expansion projects. Approximately $3.2 million of
these notes will be paid when grant funds from the German government, which have
been recorded as a current receivable, are received within the next few months
under the agreement. The Company also has a bank commitment letter for the
financing of the second phase of the expansion in Germany and expects it to be
finalized during the third quarter. Once the financing is complete, the Company
will immediately become eligible to receive approximately $8.5 million in
government grants and bank loans against funds already expended by the Company.
The $4.4 million balance of currently outstanding German notes will be paid out
of these funds or converted into long-term debt. Additionally, the Company had
$4 million outstanding against the Convertible Debentures issued earlier this
year. The Company has reduced the outstanding balance since the start of the
third quarter by $1.35 million through the issuance of common stock, and has the
option of continuing to issue shares against the debentures if cash flow does
not provide sufficient funds to make the payments in cash. Finally, $1.25
million is due to Algar associated with the purchase of Xtal. The Company has
initiated discussions with Algar to defer or otherwise adjust this requirement.
Successful completion of these actions would address approximately $22 million
of the $24 million in notes payable and current installments on long-term debt.
The remaining $2 million due over the next twelve months will be paid from cash
flow and some additional re-financing, if necessary.
Additionally, the Company has put in place a revised plan for the balance
of 2002 that is expected to result in a breakeven to positive cash flow from
operations for the balance of 2002. The revised plan consists of improvements in
the gross margin from operational improvements, a significant reduction in SG&A
expenses and reduction in inventory levels. However, the Company can make no
assurances that all the negotiations and actions described above will be
successful. If the Company is not successful, it could face a cash shortfall
unless additional financing can be arranged.
The Company had negative cash flow from operations of $5,944,000 for the
first six months of 2002, compared to positive cash flow of $163,000 for the
first six months of 2001. The negative cash flow resulted from a loss for the
period of $9,221,000 plus depreciation and amortization of $1,419,000, non-cash
interest of $1,027,000, a write-down of inventory amounting to $1,133,000 and
other non-cash charges of ($144,000). The changes in current assets and current
liabilities produced a net source of cash of $158,000. Accounts receivable
decreased by $4,956,000 as compared to an increase of $4,781,000 for the first
half of 2001. Other receivables increased by $864,000 resulting from a
short-term deposit at FCJ, which was paid to a vendor in the amount of
$1,258,000, in connection with the expansion. This amount is expected to be
repaid to FCJ during 2002. Increases in refundable taxes in Germany and Brazil
were responsible for the balance of the increase in other receivables. The
number of days sales outstanding in
15
accounts receivable decreased from 83 days at December 31, 2001 to 43 at June
30, 2002. We do not anticipate that the number of days sales in accounts
receivable will climb back to the level experienced at December 31, 2001.
Inventory increased by $4,281,000 as compared to a decrease of $1,276,000 for
the first half of 2001. The increase of $4,281,000 is before the effect of the
inventory write-down ($1,133,000) and the change in valuation due to the net
decrease of foreign exchange rates of $386,000. This increase was primarily a
result of the lower sales activity in the first half of 2002. Inventory levels
are expected to be reduced in the third and fourth quarters to equalize levels
with demand. Inventory turnover has decreased from approximately 5 times at
December 31, 2001 to approximately 3 times as of the end of the second quarter
of 2002 as a result of the slower sales volume.
The Company currently has a backlog of approximately $279,000,000, down
from $292,000,000 at the end of 2001. The Company has experienced significant
rescheduling from many of its customers, particularly in the South American
market, which had the effect of pushing out the planned delivery schedule of the
backlog. The result of the rescheduling is that most of the backlog will be
shipped in future years and, accordingly, the total backlog is not a good
indicator of near-term sales demand. The backlog number may continue to change
as a result of re-pricing mechanisms in the Company's contracts and rescheduling
due to changing business conditions. All backlog numbers are calculated based on
pricing levels in effect as of the date indicated. The size of the order backlog
reflects the strong market for fiber during the first half of 2001, which
resulted in the Company booking a significant number of multi-year contracts, as
well as the Company's position as the only "pure" fiber supplier in the Western
Hemisphere and Europe. The Company also had additional bookings in the second
half of 2001 as it added new business in the Asia Pacific region. However, these
bookings were more than offset by the shipments during the second half of 2001
and the first half of 2002 and the re-pricing of existing backlog under the
periodic price setting structure of most of the Company's long-term contracts
with customers.
The telecommunications industry has been experiencing a severe downturn in
business for the past 21 months. And, while industry reports suggest that the
industry may be at or near bottom and due to rebound, we are currently unable to
predict the timing and/or the magnitude of the improvement. If conditions do not
improve and/or we are unable to reduce product costs, the Company will continue
to be adversely affected, which could result in continuing pressure on gross
margins, further losses and negative cash flows from operations. This could have
an impact on the Company's ability to meet its current obligations and to raise
additional financing.
While approximately $34,000,000 of this backlog is currently scheduled for
delivery in the second half of 2002, we anticipate further schedule changes and
for planning purposes are anticipating approximately half of this amount will
ship yet this year. In addition, we have taken steps to reduce product and SG&A
costs, including the restructuring at the Xtal facility, so as to minimize the
effect of the market conditions. Moreover, the Company estimates that between
continuing improvements during the year in operating cash flow, the slowing
and/or postponing of expansion activities, the rescheduling of notes payable as
discussed above and the finalization of grants and loans associated with the
expansion in Germany, the Company will have sufficient liquidity to meet ongoing
cash flow needs. If any of the above anticipated items should not occur as
planned, the Company could face a cash shortfall unless additional financing can
be arranged.
In the current environment in the telecommunications industry, the
financial markets, and at the current prices of the Company's common stock,
raising additional equity financing is difficult and would be significantly
dilutive to existing shareholders. The Company still has the ability to utilize
the remaining $ 15,000,000 of the equity line of credit with Crescent
International, Ltd. ("Crescent"), however, due to the terms of the current
agreement that limits monthly draw-downs based on the current stock price and
trading volumes, the Company would only be able to access approximately $200,000
during the last 4 months of 2002. This facility will be available 90 days after
the June 3, 2002 effective date of the S-3 registration statement related to the
$5,000,000 in convertible debentures. Crescent and the Company have agreed to
re-negotiate the terms of the equity line, including an extension of the period
of the line.
16
The Company invested $9,395,000 in new equipment and facilities at the
Company's German and Brazilian subsidiaries during the first six months of 2002,
with almost all of the investment in Germany. Grants received related to the
expansion in Germany amounted to $1,577,000 during the first six months of 2002.
Grant funds reduce the cost basis of the assets acquired.
The Company received proceeds from short-term notes payable of $15,565,000
during the first half as follows:
i) $5,500,000 was received from an investor group.
ii) $7,582,000 was received from German banks related to the expansion
at FCJ
iii) $2,348,000 was received by Xtal for working capital purposes.
iv) $135,000 was received from an officer and a director of the Company
for general working capital purposes.
The Company received proceeds of $5,000,000 from an investor group in
consideration of 5% convertible subordinated debentures. The proceeds have been
used to support the Company's capital expenditure program, including the
recently announced capacity expansion and productivity initiatives in Germany,
initial funding for FiberCore Africa and other corporate purposes. Repayment of
the $5,000,000 is scheduled at a rate of $500,000 per month, commencing April 1,
2002. $1,500,000 has been repaid to date through June 30, 2002. Warrants were
issued in connection with the 5% convertible subordinated debentures. The fair
market value of the warrants was recorded as a debt discount on the accompanying
condensed consolidated balance sheet. The Company's recently filed S-3
registration statement was declared effective by the SEC on June 3, 2002. The
Company received an additional $500,000 in convertible debentures from the
investor group, which was used to make the payment due June 1, 2001. Subsequent
to the effectiveness of the registration statement on June 3, the Company may,
upon timely notice pay all or part of the monthly redemption in shares of its
common stock as well as accrued interest on the debentures. If the Company
elects to make a monthly payment in shares of the Company, the investor group
may, at its option, either increase the amount of the payment by as much as
100%, or decrease the payment by as much as 50%. The July and August principal
payments as well as the July 15th, 2002 semi-annual interest payment were made
by issuing shares of the Company's common stock. The investor group elected to
increase the July payment to $966,664 from $500,000 and decrease the August
payment to $383,333. The number of shares issuable under the agreement is based
upon a calculation of the volume weighted average price for the Company's stock
for the July and August principal payments, as well as the July 15th semi-annual
interest payment amounted to 6,331,281 shares. Payments of principal and/or
interest payments in common shares of the Company will have the effect of
increasing dilution for existing shareholders of the Company.
Pursuant to the Loan Agreement between Fleet National Bank ("Fleet") and
the Company, dated as of December 20, 2000 (the "Loan Agreement"), Fleet has the
right to attach a lien on 65% of the equity in the Company's subsidiaries and
substantially all of the Company's other assets, and to increase the interest
rate on the Company's obligations to Fleet by 1%, if the credit rating of Tyco
International Group S.A. ("Tyco"), the guarantor of such obligations, falls
below certain levels. The Company is in compliance with its obligations under
the Loan Agreement, which does not contain any financial covenants. Recent
downgrades of Tyco's credit triggered Fleet's ability to attach the lien and
increase the interest rate. On June 28, 2002, Fleet Bank exercised its right to
attach the liens and also increased the interest rate on the loan, effective on
the date of the downgrade of Tyco's credit rating.
FCJ received proceeds from short-term notes amounting to $7,582,000 during
the first half of 2002. Approximately $3,192,000 of these notes will be paid
when grant funds from the German government, which have been recorded as a
current receivable, are received within the next few months. The balance of the
notes will be converted into long-term debt, under an existing agreement, by the
end of the third quarter.
Proceeds of $2,348,000 were short-term working capital loans related to
the Company's Brazilian subsidiary.
Proceeds of $135,000 were received from an officer and a director of the
Company on a short-term basis. These funds were used for general working capital
and are expected to be re-paid during the third quarter of the year.
17
The Company assumed $96,000 in convertible debentures related to the joint
venture in South Africa. The debentures are expected to be repaid during the
first quarter of 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Company is exposed to market risks from changes in foreign currency
exchange rates and interest rates. The Company has two principal operating
subsidiaries, FCJ, which is located in Germany and Xtal, which is located in
Campinas, Brazil. FCJ's functional currency is the EURO and Xtal's functional
currency is the Real.
FOREIGN CURRENCY RISK. FCJ may, from time to time, purchase short-term
forward exchange contracts to hedge payments and/or receipts due in currencies
other than the Euro. As of June 30, 2002, the Company had no outstanding forward
exchange contracts.
At June 30, 2002, the Company had a long-term loan denominated in Deutsche
Marks (DM) totaling DM7,700,000. The principal of the loan is due at maturity in
September 2006. Interest on the loan is payable quarterly at the fixed rate of
6.25% per annum. A 10% change in the DM exchange rate to the U.S. dollar could
increase or decrease the cash flow requirements of the Company by approximately
$24,000 for each of the years 2002 through 2005, and $18,000 in 2006.
At June 30, 2002, the Company had foreign currency exposure at it's Xtal
subsidiary in Japanese Yen, European Euro and U.S. Dollar denominated notes and
accounts payables of approximately $8.3 million. A combined 10% change in the
exchange rate of the Brazilian Real against these three currencies could cause
foreign exchange gains or losses of $830,000. The Company currently does not
have credit lines sufficient to hedge this exposure.
Substantially all of the Company's sales are through FCJ and Xtal.
Additionally, at June 30, 2002, 37%, 43% and 8% of the Company's assets are at
Xtal, FCJ, and the Company's Malaysian subsidiary, respectively. The Company,
therefore, is subject to foreign currency translation gains or losses in
reporting its consolidated financial position and results of operations. For the
six month period ended June 30, 2002, the Company incurred foreign exchanges
losses, primarily as a result of the weakness of the Brazilian Real against the
US Dollar, the Japanese Yen and the European Euro.
INTEREST RATE RISK. At June 30, 2002, the Company had short and long-term
loans with interest rates based on the prime rate and LIBOR, which are adjusted
quarterly based on the prevailing market rates. A 10% change in the interest
rates on these loans would have increased or decreased the first six months of
2002 interest expense by approximately $29,000.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
i) Xtal is party to a three-year take-or-pay contract expiring in
June 2003, with Shin Etsu for the delivery of single-mode
preforms to Xtal. In 2001, Xtal purchased approximately
$10,900,000 of product under the contact. There are provisions
in the contract that provide for exceptions for both parties
regarding the requirements to ship or purchase preforms. In
the fourth quarter of 2001, Xtal elected not to take most of
the contracted volume under one of these provisions. Shin Etsu
is contesting Xtal's interpretation of the contract and has
submitted a claim to arbitration relative to this volume and
additional volumes under a non-related agreement, which is not
a take-or-pay agreement. The initial amount in dispute was
approximately $4,400,000, with approximately $1,750,000
related to the take-or-pay contract. The Company contends that
the amounts under the non-related agreements are not subject
to arbitration in Japan and is contesting the jurisdiction of
the arbitration panel in this matter. Xtal and the Company
have submitted their position on all items to the arbitration
panel. If Xtal were to ultimately lose, Xtal could be required
to purchase the preforms in question as well as pay the costs
of arbitration. In that case, the legal costs of arbitration
would negatively impact the Company's operating results, but
the costs of the material would become part of inventory/cost
of sales. This could potentially have a negative operating
impact as well, depending on the price of the preforms
determined in the arbitration ruling versus the market price
of the preforms at the time of the ruling. The parties have
had settlement discussions during this period, but have been
unable to reach an agreement at this time. Xtal has continued
to purchase preforms from Shin Etsu under the contract since
the fourth quarter of 2001, but at levels below those called
for in the contract due to market and economic conditions.
Shin Etsu has amended their arbitration claim to include the
difference between the quantity actually purchased and the
quantity originally contracted for since their initial claim
was filed. This increases their total claim to approximately
$6,600,000. The Company has submitted additional defenses to
the arbitration panel including the dramatic change in
economic circumstances in the industry. A ruling is not
expected from the arbitration panel until late 2002 or early
2003.
Subsequent to the close of the quarter, Shin Etsu filed suit
in the United States District Court of Massachusetts. This
suit seeks to compel the Company to arbitrate agreements in
Japan that the Company believes are not subject to
arbitration. It also seeks summary judgment of $2.7 million
if the court does not rule in its favor on the arbitration
question. The $2.7 million is part of the original $4.4
million claim discussed above. The Company filed a response to
this suit on August 12, 2002 and will defend itself
vigorously.
ii) On August 2, 2002 a patent infringement suit was filed against
the Company. The complaint was filed in the United States
District Court for the Northern District of Georgia, Atlanta
Division, case number 1:02CV2149. The action is brought by
Fitel USA Corp., and alleges infringement by the Company of
three patents held by Fitel. The plaintiff alleges in the
complaint that the Company has infringed and continues to
infringe on U.S. Patent No. 4,909,816, on U.S. Patent No.
5,298,047 and on U.S. Patent No. 5,418,881. The plaintiff
seeks an injunction permanently prohibiting the Company from
directly infringing on the named patents or inducing or
contributing to the infringement of the U.S. Patent No.
5,418,881 by others, and seeks unspecified compensatory and
treble damages, attorneys fees and costs, and such other and
further relief as is just and proper.
The Company believes these claims to be without merit, has
retained counsel and will vigorously defend itself in this
case.
ITEMS 2 - 5.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
i. Exhibits
None.
ii. Current report on Form 8-K Report filed on May 29, 2002;
Current report on Form 8-K Report filed on June 28, 2002
19
SIGNATURES AND CERTIFICATION
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.
Each of the undersigned hereby certifies in his capacity as an officer of
FiberCore, Inc. (the "Company") that, to the best of their knowledge, the
Quarterly Report of the Company on Form 10-Q for the period ended June 30, 2002
fully complies with the requirements of Section 13(a) of the Securities Exchange
Act of 1934 and that the information contained in such report fairly presents,
in all material respects, the financial condition of the Company at the end of
such period and the results of operations of the Company for such period.
FiberCore, Inc.
(Registrant)
Date: August 14, 2002 /s/ Mohd Aslami
----------------------------------------
Dr. Mohd A. Aslami
Chairman, President and Chief Executive
Officer
(Duly Authorized Officer)
Date: August 14, 2002 /s/ Robert P. Lobban
----------------------------------------
Robert P. Lobban
Chief Financial Officer and Treasurer
(Principal Financial Officer)
20