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: September 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 November
13, 2002 was 68,883,215.
1
FIBERCORE, INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I FINANCIAL INFORMATION..............................................3
ITEM 1. FINANCIAL STATEMENTS...................................3
CONDENSED CONSOLIDATED BALANCE SHEETS
AT SEPTEMBER 30, 2002 (UNAUDITED)
AND DECEMBER 31, 2001..................................3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
AND 2001 (UNAUDITED)...................................4
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS) FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 (UNAUDITED)................5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE NINE MONTHS ENDED SEPTEMBER 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..................................................19
ITEM 4. CONTROLS AND PROCEDURE................................20
PART II OTHER INFORMATION.................................................21
ITEM 1. LEGAL PROCEEDINGS.....................................21
ITEM 2. CHANGES IN SECURITIES.................................22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.......................22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...22
ITEM 5. OTHER INFORMATION.....................................22
ITEM 6. EXHIBITS & REPORTS ON FORM 8-K........................22
SIGNATURES AND CERTIFICATIONS.................................................23
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIBERCORE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share data) September 30 December 31
2002 2001
------------ -----------
(Unaudited)
ASSETS
Current assets:
Cash $ 638 $ 1,721
Accounts receivable - net 2,901 8,436
Receivable from government grants 2,687 --
Other receivables (principally value added taxes) 5,131 5,398
Inventories 7,683 8,099
Prepaid and other current assets 963 1,022
--------- ---------
Total current assets 20,003 24,676
--------- ---------
Property and equipment - net 48,596 43,556
--------- ---------
Other assets:
Notes receivable from joint venture partners 4,948 4,948
Restricted cash 1,944 1,753
Patents - net 3,547 3,855
Investments in joint ventures 925 925
Deferred tax asset 875 383
Goodwill, net 6,849 10,897
Other 2,161 1,990
-------- --------
Total other assets 21,249 24,751
--------- ---------
Total assets $ 89,848 $ 92,983
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current installment on
long-term debt $ 15,342 $ 10,859
Accounts payable 9,098 8,746
Accrued expenses 7,475 5,966
Other liabilities 350 424
--------- ---------
Total current liabilities 32,265 25,995
--------- ---------
Deferred income 1,257 1,021
Long-term debt 31,724 22,475
--------- ---------
Total liabilities 65,246 49,491
--------- ---------
Minority interest 3,273 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 1share; 1 share issued and
outstanding -- --
Common stock, $.001 par value, authorized
100,000,000 shares; shares issued and
outstanding: 68,883,215 at September 30, 2002
and 61,481,139 at December 31, 2001 69 61
Additional paid-in-capital 67,572 64,847
Accumulated deficit (33,752) (19,413)
Accumulated other comprehensive loss:
Accumulated translation adjustment (12,560) (7,120)
--------- ---------
Total stockholders' equity 21,329 38,375
--------- ---------
Total liabilities and stockholders' equity $ 89,848 $ 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 Three Months Ended Nine Months Ended
data) September 30, September 30,
----------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ----------- ------------
Net sales $ 6,107 $ 8,823 $ 20,366 $ 43,116
Cost of sales:
Cost of sales 5,103 5,734 17,557 25,980
Restructuring Costs -- -- 197 --
Write-down of inventory 333 -- 1,466 --
----------- ----------- ----------- ------------
Total cost of sales 5,436 5,734 19,220 25,980
----------- ----------- ----------- ------------
Gross profit 671 3,089 1,146 17,136
Operating expenses:
Selling, general and
administrative expenses 2,059 2,253 7,559 6,212
Research and development 375 502 1,369 1,524
Restructuring Costs -- -- 103 --
----------- ----------- ----------- ------------
Income (loss) from operations (1,763) 334 (7,885) 9,400
Interest expense, net (966) (943) (3,332) (1,609)
Foreign exchange loss - net (3,065) (1,617) (4,862) (1,827)
Other income - net 157 10 158 143
----------- ----------- ----------- ------------
Income (loss) before income taxes
and minority interest (5,637) (2,216) (15,921) 6,107
Benefit from (provision for) income
taxes 199 (308) 389 (2,103)
----------- ----------- ----------- ------------
Income (loss) before minority interest (5,438) (2,524) (15,532) 4,004
Minority interest in (income) loss of
subsidiary 320 283 1,193 (216)
----------- ----------- ----------- ------------
Net income (loss) $ (5,118) $ (2,241) $ (14,339) $ 3,788
=========== =========== =========== ============
Income (loss) per share of common stock:
Basic $ (0.08) $ (0.04) $ (0.23) $ 0.06
Diluted (0.08) (0.04) (0.23) 0.06
Weighted average shares outstanding:
Basic 67,435,959 60,205,880 63,535,551 59,636,649
Diluted 67,435,959 60,205,880 63,535,551 65,633,372
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 Nine Months Ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
-------- -------- --------- --------
Net income (loss)....................... $(5,118) $(2,241) $(14,339) $ 3,788
Other comprehensive loss:
Foreign currency translation
adjustments........................... (2,933) (1,481) (5,440) (6,348)
-------- -------- --------- --------
Total comprehensive (loss)............. $(8,051) $(3,722) $(19,779) $(2,560)
======== ======== ========= ========
See accompanying notes to the condensed consolidated financial statements.
5
FIBERCORE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands) Nine Months Ended
September 30,
2002 2001
--------- ---------
Cash flows from operating activities:
Net income (loss) $(14,339) $ 3,788
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization 1,930 2,632
Deferred income taxes (619) 536
Foreign currency (gain) loss and other 1,953 1,288
Non-cash interest expense 1,192 --
Write-down of inventory 1,466 --
(Decrease) increase in minority interest (1,193) 215
Changes in operating assets and liabilities:
Accounts receivable 4,452 (710)
Other receivables (894) (1,184)
Inventories (1,050) (5,579)
Prepaid and other current assets (266) (1,521)
Accounts payable 2,091 3,238
Accrued expenses 2,063 (1,028)
--------- ---------
Net cash (used in) provided by operating
activities (3,214) 1,675
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment (13,881) (19,178)
Reimbursement from government grants 2,299 1,383
Cash used for acquisition -- (295)
Cash acquired from acquisition -- 27
Other, net (241) (466)
--------- --------
Net cash used in investing activities (11,822) (18,529)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 157 2,874
Proceeds from long-term debt 1,038 11,300
Proceeds from notes payable 16,211 7,079
Repayment of long-term debt (66) (435)
Repayment of notes payable (2,277) (926)
Financing costs (722) (178)
--------- ---------
Net cash provided by financing activities 14,341 19,714
--------- ---------
Effect of foreign exchange rates change on cash (388) (460)
Increase (Decrease) in cash (1,083) 2,400
Cash, beginning of period 1,721 5,051
--------- ---------
Cash, end of period $ 638 $ 7,451
========= =========
Supplemental disclosure:
Property acquired under capital leases $ -- $ 3,471
Cash paid for interest 1,270 1,683
Cash paid for taxes 103 872
Common stock issued for conversion of debt -- 4,000
Common stock issued for payment of debt and
accrued interest 1,646 --
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, Europe and South America, as telecom carriers have dramatically reduced
capital expenditures. The rate of decline, however, appears to 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 second 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 60% in the first nine 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.
FiberCore, Inc. (the "Company", "we", "our" or "us") has 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 significantly higher
percentage of our revenue will be attributable to multi-mode fiber in 2002 as
can be seen through the first nine months results. One area that has shown some
resiliency has been Asia, and we have begun shipping product into Asia from Xtal
FiberCore Brasil, S.A. ("Xtal"). However, prices in Asia 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 September 30, 2002 and
related condensed consolidated statements of operations, comprehensive income
(loss), and cash flows for the three months ended September 30, 2002 and 2001
included herein have been prepared by 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 of America. Results for the third 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) September 30, December 31,
2002 2001
------------- ------------
Raw material $ 2,518 $ 3,913
Work-in-progress 1,011 1,379
Finished goods 4,154 2,807
------------- ------------
Total $ 7,683 $ 8,099
============= ============
Finished goods inventory reflects a write-down amounting to $1,466,000 to
account for the effect of declining prices on single-mode fiber during the first
nine 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 to
FiberCore Jena AG, our German subsidiary ("FCJ"). 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 $191,000 in the balance
sheet amount from December 31, 2001 to September 30, 2002 is the result of the
increase in the value of the Euro as compared to the U.S. Dollar as of September
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 NINE MONTHS OF 2002
The following describes the borrowing activity for the nine months ended
September 30, 2002:
i) $1,748,000 in short-term notes payable at Xtal for purchase of raw
materials and general working capital.
ii) $5,500,000 in 5% convertible subordinated debentures for the
capacity expansion and productivity initiatives in Germany, initial
funding for FiberCore Africa (Proprietary) Limited ("FiberCore
Africa") and other corporate purposes. Repayment of the $5,500,000
is scheduled at a rate of $500,000 per month, commencing April 1,
2002. $1,500,000 was repaid in cash in the second quarter. Pursuant
to the Company's option under the agreement the Company elected to
make the scheduled payments due July 1, August 1 and September 1 via
the issuance of stock. Under the agreement, upon 30 days prior
notice to the holders of the debentures, the Company can elect to
pay a scheduled payment in stock. If the Company elects to make a
payment in stock, the holders of the debentures can elect to either
increase the payment by up to 100% or decrease the payment by up to
50%. For the months of July, August and September 2002, a total of
$1,533,330 in principal was paid in common stock to the debenture
holders. In addition, $112,426 in accrued interest was paid in
stock. The total number of shares issued for the principal and
interest payments during the third quarter amounted to 7,293,682
shares, including 1,648,913 shares of restricted stock at an average
price per share of $.22564 per share. 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 period of the loan using an effective
interest rate method. The Company has the option, under certain
circumstances, of continuing to issue shares in payment of the
Debentures if the shares have been previously registered pursuant to
an effective registration statement.
8
Waiver with Respect to Payment Obligations
------------------------------------------
The Company is currently unable to pay in registered shares because
it does not have an effective registration statement registering
sufficient shares for such purpose. The Company did not have
sufficient funds to make the October 1, 2002 and November 1, 2002
monthly redemptions of the Debentures and received a waiver with
respect to such redemptions. Such waiver, however, is conditioned on
the Company reaching an agreement with the holders of the Debentures
on or prior to December 2, 2002 with respect to re-scheduling
redemption payments and collateralizing the Company's obligations.
The Company is currently engaged in discussions with the holders of
the Debentures. In the event that we do not reach agreement, there
will be a default on the Debentures and this would cause a
cross-default on the Fleet credit facility of $9,250,000 and Fleet
could accelerate the maturity date and the entire balance could
become immediately due. If an event of default on the Debentures
occurs, the maturity date could be accelerated and the entire
balance of $2,467,000 could become immediately due.
iii) $8,828,000 of short-term notes payable by FiberCore Jena ("FCJ").
These proceeds were used to fund a portion of the capacity expansion
at FCJ. Approximately $2,687,000 of these notes will be paid when
phase one grant funds, from the German government, which have been
recorded as a current receivable, are received. These funds are
expected to be received during the fourth quarter. The balance of
the notes will be (1) converted into long-term debt, (under an
existing agreement, which was signed, subsequent to the end of the
third quarter), (2) converted into an equipment lease, (3) repaid
from new grant funds associated with the Phase two expansion and (4)
a portion may remain as a part of a working capital line of credit
established after the close of the third quarter.
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 expected to be re-paid
during the fourth quarter of 2002.
v) $95,000 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 FiberCore Africa. The debentures are expected to
be repaid during the first quarter of 2003.
vi) $367,000 note payable by FiberCore Glas GmbH, a subsidiary of FCJ,
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 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
9
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
significantly 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 $8,900,000. 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 2003.
On July 8, 2002, 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
10
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. The Company will complete its annual test of impairment during
the fourth quarter of each year, beginning in 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 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 nine months ended September 30, 2001,
assuming the discontinuation of amortization of goodwill.
Three months Nine Months
Ended Ended
September 30, 2001 September 30, 2001
------------------ ------------------
Reported net (loss) income $(2,241,000) $ 3,788,000
Amortization of goodwill 133,000 397,000
------------ -------------
Pro forma net (loss) income $(2,108,000) $ 4,185,000
============ =============
Pro forma income per share of common
stock:
Basic and diluted:
Reported net (loss) income per share $ (0.04) $ 0.06
Amortization of goodwill -- 0.01
------------ -------------
Pro forma net income per share $ (0.04) $ 0.07
============ =============
Goodwill decreased $4,408,000 from December 31, 2001 to September 30, 2002
as a result of a foreign exchange difference between the Brazilian Real and the
U.S. Dollar.
11
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
September 30, 2002 December 31, 2001
------------------ -----------------
Gross carrying amount $8,220,922 $ 8,141,735
Accumulated amortization (4,674,328) (4,286,501)
---------- ------------
Net carrying amount $3,546,594 $ 3,855,234
========== ============
Nine Months Ended
September 30,
2002 2001
--------- ---------
Aggregate patent amortization expense $ 388,000 $ 508,000
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 has not had 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
12
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 quarterly savings from this reduction will be approximately
$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.
9) SUBSEQUENT EVENT
Subsequent to September 30, 2002, the Company completed negotiations with
a group of banks in Brazil to re-finance $8.9 million of partially secured
short-term notes payable. Approximately $8.1 million of the loans have been
converted to long-term debt with payments beginning one year from the date of
the agreements, with scheduled repayment over the succeeding three years. In
accordance with the provisions of SFAS No. 6, "Classification of Short-term
Obligations Expected to be Re-financed", the Company has reclassified $8.1
million of short-term notes payable to long-term debt as of September 30, 2002.
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 NINE MONTHS ENDED SEPTEMBER 30, 2002
AND 2001
The results for the three and nine-month periods ended September 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 nine months of 2002.
Sales for the three and nine month periods ended September 30, 2002
decreased by $2,716,000 and $22,750,000 or 30.8% and 52.8%, respectively, as
compared to the same periods in 2001. Sales
13
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 by 85% in all regions, while multimode sales increased by
approximately 25% for the nine-month period. The decline in the first nine
months of 2002 was partially attributable to the loss of sales from a major
customer who was in breach of contract in 2001 and the significant reduction in
sales from several other South American customers. Sales to that customer in the
first nine months of 2001 were $10,441,000. That customer's business in the
products that use our fiber has been negligible in 2002 and we currently have no
clear understanding as to when their purchases will resume and at what level.
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 nine months, the decrease in volume of shipments accounted for $19,361,000
of the decrease in sales of fiber, while the negative effects of pricing
decreases accounted for $4,001,000 of the decrease in sales of fiber. The offset
to the net decrease in sales is related to a $612,000 net increase in the sale
of other fiber products and sales of FCS, which was acquired June 1, 2001.
Gross profit was $671,000 and $1,146,000 or 11.0% and 5.6% of sales for
the three and nine-month periods ended September 30, 2002, respectively,
compared to $3,089,000 and $17,136,000 or 35.0% and 39.7% for the comparable
periods in the prior year. The $2,418,000 and $15,990,000 decreases in gross
profit from the comparable periods in 2001 are primarily attributable to
significantly lower shipment volume of single-mode fiber during the first nine
months of 2002, combined with lower pricing. The effect of inventory adjustments
during the first nine months 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 $333,000 for the third quarter and $1,466,000
for the nine-month period. Restructuring costs included in cost of sales for the
first nine months of 2002 amounted to $197,000. The result of restructuring at
Xtal has eliminated $219,000 from cost of sales as compared to second quarter
levels. 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
nine months of 2002 in response to the lower demand levels, including a 62%
reduction in staffing at the Xtal facility in Brazil and utilizing a reduced
work week in some areas of both plants. The Company believes that margins will
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 ("S,G&A") decreased $194,000 or
8.6% for the third quarter of 2002 compared to the comparable period in 2001 and
increased $1,450,000 or 23.3% for the first nine months of 2002 compared to the
comparable period in 2001. $103,000 of the $1,450,000 increase in S,G&A costs
for the first nine months of 2002 was attributable to restructuring costs at the
Company's Brazilian subsidiary. S,G&A costs, exclusive of restructuring charges
in 2002, were 37.1% of sales for the first nine months of 2002 as compared to
14.4% 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 nine months of 2002. S,G&A costs decreased in
the third quarter of 2002 by $828,000 compared to the second quarter of 2002,
exclusive of restructuring charges in the second quarter, as a result of cost
saving measures implemented during the first half of the year. FiberCore Africa,
which was first included in consolidated operations in June of 2002, accounted
for $128,000 of S,G&A costs in the third quarter of 2002 and $484,000 for the
first nine months of 2002. $332,000 of the nine-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 steps the Company has taken
to significantly reduce S,G&A costs during the second half of 2002 are expected
to continue into the fourth quarter as well as into 2003.
14
Research and development costs decreased $127,000 or 25.3% for the third
quarter of 2002 and $155,000 or 10.2% for the first nine 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. Research and development
costs dropped by $135,000 from second quarter levels. 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 and improved manufacturing technologies.
The combined reduction in S,G&A and Research and Development expenses from
second quarter levels totaled $963,000 or $3.9 million annualized, a reduction
of 28%. The Company is continuing its efforts to reduce these costs even
further.
Net interest expense increased by $23,000 or 2.4% and increased $1,723,000
or 107.1% for the three and nine month periods of 2002 as compared to the
comparable periods in 2001. The increase for the nine-month period is 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
$1,192,000 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. $734,000 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. Net interest expense for the quarter and nine months
includes a benefit of approximately $215,000 related to the difference between
the value of stock issued per the agreement and the value of the stock on the
date of issuance. Borrowings during the first nine months of $17,249,000 were
primarily related to the expansion of manufacturing facilities in Germany and
general working capital uses at all locations.
Net foreign exchange losses were $3,065,000 and $4,862,000 for the three
and nine-month periods in 2002 compared to losses of $1,617,000 and $1,827,000
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 U.S. 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 $199,000 and $389,000 for the three and nine-month periods ended
September 30, 2002 as compared to tax provisions of $308,000 and $2,103,000 for
the same periods in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company had available cash of $638,000 as of September 30, 2002 and
had $15,342,000 in notes payable and current installments on long-term debt. A
number of actions have been undertaken to address the cash flow situation.
Following the end of the quarter, the Company completed negotiations with a
group of banks in Brazil to re-finance $8.9 million of partially secured
short-term notes payable. $8.1 million of the loans have been converted to
long-term debt with payments beginning one year from the date of the agreements,
with scheduled repayment over the succeeding three years, and the $8.1 million
has been re-classified to long-term debt on the Balance Sheet as of September
30, 2002. The Company has short-term notes of approximately $8.9 million in
Germany, primarily associated with the expansion projects. Approximately $2.7
million will be paid with grant funds from the German government, that are
associated with the first phase of the expansion. Most of the balance of the
notes will be converted into long-term debt or equipment leases under the
recently completed $22 million financing agreements in Germany or paid down from
the receipt of additional grants. Under the agreements, FCJ will immediately
become eligible to receive approximately $8 million in government grants and
approximately $7 million in long-term bank loans and equipment leases against
funds already expended by the Company.
15
The Company has approximately $2.5 million of principal outstanding
against the Convertible Subordinated Debentures issued in January and June of
2002 ("the Debentures"). During the first nine months of 2002, the Company has
paid $1.5 million in cash payments and reduced the outstanding balance since the
start of the third quarter by $1.53 million through the issuance of common
stock, and has the option, under certain circumstances, of continuing to issue
shares in payment of the Debentures if the shares have been previously
registered pursuant to an effective registration statement. The Company is
currently unable to pay in registered shares because it does not have an
effective registration statement registering sufficient shares for such purpose.
The Company did not have sufficient funds to make the October 1, 2002 and
November 1, 2002 monthly redemptions of the Debentures and received a waiver
with respect to such redemptions. Such waiver, however, is conditioned on the
Company reaching an agreement with the holders of the Debentures on or prior to
December 2, 2002 with respect to re-scheduling redemption payments and
collateralizing the Company's obligations. The Company is currently engaged in
discussions with the holders of the Debentures. In the event that we do not
reach agreement, there will be a default on the Debentures and this would cause
a cross-default on the Fleet credit facility of $9,250,000 and Fleet could
accelerate the maturity date and the entire balance could become immediately
due. If an event of default on the Debentures occurs, the maturity date could be
accelerated and the entire balance of $2,467,000 could become immediately due.
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 $19.5 million of the $23 million in notes payable and current
installments on long-term debt at September 30, 2002. The remaining $3.5 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 break-even to positive cash flow from
operations for the balance of 2002. The revised plan consists of reductions to
production costs from operational improvements, a significant reduction in S,G&A
expenses and reduction in inventory levels. The Company is also currently
formulating its operational plan for 2003 with the objective of achieving a
positive cash flow from operations for that period as well. 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 $3,214,000 for the
first nine months of 2002, compared to positive cash flow of $1,675,000 for the
first nine months of 2001. However, the Company did achieve a positive cash flow
from operations of $2,730,000 during the third quarter as a result of
implementing the actions described above. The negative cash flow resulted from a
loss for the period of $14,339,000 plus depreciation and amortization of
$1,930,000, non-cash interest of $1,192,000, a write-down of inventory amounting
to $1,466,000 and other non-cash charges of $141,000. The changes in current
assets and current liabilities produced a net source of cash of $6,396,000.
Accounts receivable decreased by $4,452,000 as compared to an increase of
$710,000 for the first nine months of 2001. Other receivables increased by
$894,000 resulting from short-term deposits at FCJ, which were paid to vendors
in the amount of $2,152,000, in connection with the expansion. These funds are
expected to be repaid to FCJ during 2002. The number of days sales outstanding
in accounts receivable decreased from 83 days at December 31, 2001 to 46 at
September 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 $1,050,000 as compared to an increase of $5,579,000
for the nine months of 2001. The increase of $1,050,000 is before the effect of
the inventory write-down $1,466,000. Inventory decreased by approximately $3.2
million during the third quarter. Inventory turnover has decreased from
approximately 5 times at December 31, 2001 to approximately 4 times as of the
end of the third quarter of 2002 as a result of the slower sales volume.
16
The Company currently has a backlog of approximately $62,000,000, down
from $292,000,000 at the end of 2001. The Company has experienced significant
delivery rescheduling from many of its customers, particularly in the South
American market, which had the effect of delaying 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 an
accurate indicator of near-term sales demand. Also, due to the lack of
visibility into future demand from some customers, the Company has chosen to
remove or significantly reduce the backlog from those customers even though
there are still contracts in place at significantly higher levels. The Company
is in continuing dialogue with those customers to assure our position when
demand resumes. 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 end of the quarter. The Company has had
additional bookings in the second half of 2001 and 2002 as it added new business
in the Asia Pacific region.
The telecommunications industry, and specifically the fiber optic segment,
has been experiencing a severe downturn in business for the past 18 months.
While industry reports suggest that the industry may be at or near bottom, we
are currently unable to predict the timing and/or the magnitude of a recovery.
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 continued 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.
Approximately $27,000,000 of the backlog is currently scheduled for
delivery in the next 12 months. We anticipate further schedule changes are
possible, but expect that additional orders could offset those changes. We have
taken steps to reduce product and S,G&A costs, including the restructuring at
the Xtal facility, to minimize the effect of the market conditions. Moreover,
the Company estimates that due to 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 has $15,000,000 remaining on the
equity line of credit with Crescent International, Ltd. ("Crescent"), however,
due to the terms of the current agreement and restrictions associated with the
Debentures issued earlier this year, the Company cannot currently access this
credit line. Crescent and the Company have agreed to re-negotiate the terms of
the equity line, including an extension of the period of the line, and are
currently in discussions on this matter.
The Company invested $13,881,000 in new equipment and facilities at FCJ
and Xtal during the first nine months of 2002, with almost all of the investment
in FCJ. Grants received by FCJ related to the expansion in Germany amounted to
$2,299,000 during the first nine months of 2002. Grant funds reduce the cost
basis of the assets acquired. Most of the expenditures in Germany were under
purchase orders placed in 2001. The second phase financing discussed above,
including grants funds, will be utilized for funding a significant portion of
this investment.
As part of the shareholder's agreement associated with the acquisition of
Xtal in 2000, the Company has a call option to acquire from Algar the remaining
10% of the stock of Xtal upon payment of $2.5 million, plus 6% interest
calculated from June 20, 2000. Algar has a put option, exercisable on June 20,
2003 or at any time that the Company decides to sell, dispose or otherwise
transfer any portion of its interest in Xtal to a third party, that would
require the Company to acquire all of Algar's remaining shares
17
for a payment of $2.5 million, plus 6% interest calculated from June 20, 2000.
Algar's 10% shareholder position in Xtal, is being held by the Company to
collateralize Algar's indemnification provisions that are part of the Xtal
purchase agreements.
The Company received proceeds from short-term notes payable of $16,211,000
during the first nine months as follows:
i) $5,500,000 was received from an investor group.
ii) $8,828,000 was received from German banks related to the expansion
at FCJ
iii) $1,748,000 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.
v) The Company received proceeds of $5,500,000 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 capacity expansion and productivity
initiatives in Germany, initial funding for FiberCore Africa and
other corporate purposes. Repayment of the $5,500,000 is scheduled
at a rate of $500,000 per month, commencing April 1, 2002.
$1,500,000 was repaid in cash through the second quarter of 2002.
For the months of July, August and September, 2002, a total of
$1,533,330 in principal was paid to the debenture holders utilizing
common stock of the Company. In addition, $112,426 in accrued
interest was paid in stock. The total number of shares issued for
the principal and interest payments during the third quarter
amounted to 7,293,682 shares, including 1,648,913 shares of
restricted stock, at an average price per share of $.22564 per
share. 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 has the option, under
certain circumstances, of continuing to issue shares in payment of
the Debentures if the shares have been previously registered
pursuant to an effective registration statement. The Company is
currently unable to pay in registered shares because it does not
have an effective registration statement registering sufficient
shares for such purpose. The Company did not have sufficient funds
to make the October 1, 2002 and November 1, 2002 monthly redemptions
of the Debentures and received a waiver with respect to such
redemptions. Such waiver, however, is conditioned on the Company
reaching an agreement with the holders of the Debentures on or prior
to December 2, 2002 with respect to re-scheduling redemption
payments and collateralizing the Company's obligations. The Company
is currently engaged in discussions with the holders of the
Debentures. In the event that we do not reach agreement, there will
be a default on the Debentures and this would cause a cross-default
on the Fleet credit facility of $9,250,000 and Fleet could
accelerate the maturity date and the entire balance could become
immediately due. If an event of default on the Debentures occurs,
the maturity date could be accelerated and the entire balance of
$2,467,000 could become immediately due. 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.
FCJ received proceeds from short-term notes amounting to $8,828,000 during
the first nine months of 2002. Approximately $2,687,000 of these notes will be
repaid upon the receipt of government grants associated with phase one of the
FCJ expansion, and the balance will be (1) converted to long-term debt (under
the agreement signed during the third quarter), (2) converted into an equipment
lease, (3)
18
repaid from new grant funds associated with the phase two expansion and (4) a
portion may remain as a part of a working capital line of credit established
after the close of the third quarter.
Proceeds of $1,748,000 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 fourth quarter of the year.
FiberCore Africa assumed $95,000 in convertible debentures related to the
joint venture in South Africa. The debentures are expected to be repaid during
the first quarter of 2003.
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.
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 September 30, 2002, the Company had a long-term loan denominated in
Deutsche Marks (DM) totaling DM 7,700,000. 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 September 30, 2002, the Company had foreign currency exposure at Xtal
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 against this exposure. The Company has completed
negotiations on refinancing most of this debt after the end of the quarter. As a
result, most of the debt will be converted in to Brazilian Reals, which will
substantially reduce the foreign exchange exposure.
Substantially all of the Company's sales are through FCJ and Xtal.
Additionally, at September 30, 2002, 27%, 52% and 8% of the Company's assets are
at Xtal, FCJ, and the Company's Malaysian
19
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 nine-month period ended September 30, 2002, the
Company incurred foreign exchanges losses, primarily as a result of the weakness
of the Brazilian Real against the U.S. Dollar, the Japanese Yen and the European
Euro.
INTEREST RATE RISK. At September 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 nine
months of 2002 interest expense by approximately $24,000.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE AND PROCEDURES.
The Chief Executive Officer and Chief Financial Officer of the Company
evaluated the disclosure controls and procedures as of September 30, 2002 and
concluded the disclosure controls and procedures are functioning as intended to
ensure that the information required to be disclosed by the Company is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms.
CHANGE IN INTERNAL CONTROLS.
There were no significant changes in internal controls or in other factors
that could significantly affect the internal controls subsequent to September
30, 2002.
20
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
significantly 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 $8,900,000. 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 2003.
On July 8, 2002, 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 judgement 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.
21
The Company believes these claims to be without merit, has retained
counsel and will vigorously defend itself in this case.
ITEMS 2 -4
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
99.1 Certification by the Chief Executive Officer of the
Registrant pursuant to U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification by the Chief Financial Officer of the
Registrant pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
b. Current report on Form 8-K filed on July 11, 2002;
Current report on Form 8-K filed on August 13, 2002; and
Current report on Form 8-K filed on August 16, 2002.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FiberCore, Inc.
(Registrant)
Date: November 14, 2002 /s/ Mohd A. Aslami
---------------------------------------
Dr. Mohd A. Aslami
Chairman, President and Chief
Executive Officer
(Duly Authorized Officer)
Date: November 14, 2002 /s/ Robert P. Lobban
---------------------------------------
Robert P. Lobban
Chief Financial Officer and Treasurer
(Principal Financial Officer)
23
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Mohd A. Aslami, certify that:
1. I have reviewed this quarterly report on Form 10-Q of FiberCore, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could aversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002 /s/ Mohd A. Aslami
--------------------------------------
Mohd A. Aslami
Chairman, President and Chief
Executive Officer
24
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Robert P. Lobban, certify that:
1. I have reviewed this quarterly report on Form 10-Q of FiberCore, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could aversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002 /s/ Robert P. Lobban
--------------------------------------
Robert P. Lobban
Chief Financial Officer
25