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: March 31, 2003
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 incorporation (I.R.S. Employer
or organization) Identification No.)
253 Worcester Road, P.O. Box 180
Charlton, MA 01507
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(Address and Zip Code of principal executive offices)
(508) 248-3900
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(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 [_}
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act
Yes [_] No [X]
(a) For accelerated filers (as defined in 17 CFR 240.12b-2):
(i) 90 days after the end of the fiscal year covered by the report for
fiscal years ending on or after December 15, 2002 and before
December 15, 2003;
(ii) 75 days after the end of the fiscal year covered by the report for
fiscal years ending on or after December 15, 2003 and before
December 15, 2004; and
(iii) 60 days after the end of the fiscal year covered by the report for
fiscal years ending on or after December 15, 2004; and
(b) 90 days after the end of the fiscal year covered by the report for all
other registrants.
(3) Transition reports on this Form shall be filed in accordance with the
requirements set forth in Rule 13a-10 (17 CFR 240.13a-10) or Rule 15d-10
(17 CFR 240.15d-10) applicable when the registrant changes its fiscal year
end.
(4) Notwithstanding paragraphs (2) and (3) of this General Instruction A., all
schedules required by Article 12 of Regulation S-X (17 CFR 210.12-01 -
210.12-29) may, at the option of the registrant, be filed as an amendment
to the report not later than 30 days after the applicable due date of the
report.
The number of shares of the Registrant's common stock outstanding as of May 20,
2003 - 68,876,094.
1
FIBERCORE, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I FINANCIAL INFORMATION ............................................ 3
ITEM 1. FINANCIAL STATEMENTS 3
CONDENSED CONSOLIDATED BALANCE SHEETS AT MARCH 31, 2003
AND DECEMBER 31, 2002 (UNAUDITED) ....................... 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (UNAUDITED) .. 4
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS) FOR THE THREE MONTHS ENDED MARCH 31, 2003
AND 2002 (UNAUDITED) .................................... 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (UNAUDITED) .. 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) ............................................. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ..................... 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK .................................................... 20
ITEM 4. CONTROLS AND PROCEDURES ................................. 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
(UNAUDITED)
(Dollars in thousands except share data)
March 31, December 31,
2003 2002
--------- ------------
ASSETS
Current assets:
Cash .......................................... $ 557 $ 1,392
Accounts receivable - net ..................... 2,659 2,958
Receivable from government grants ............. 4,182 7,571
Other receivables ............................. 4,405 2,289
Inventories ................................... 5,212 5,421
Prepaid and other current assets .............. 769 730
--------- ------------
Total current assets .................... 17,784 20,361
--------- ------------
Property and equipment .............................. 63,742 56,486
Less - accumulated depreciation ..................... (10,154) (9,049)
--------- ------------
Property and equipment - net .............. 53,588 47,437
--------- ------------
Other assets:
Restricted cash ............................... 2,069 1,990
Patents - net ................................. 352 354
Deposit on equipment .......................... 8 3,020
Investments in joint ventures ................. 925 925
Other ......................................... 3,274 1,516
--------- ------------
Total other assets ...................... 7,078 7,805
--------- ------------
Total assets ............................ $ 78,450 $ 75,603
========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ................................. $ 21,506 $ 17,558
Current installment on long-term debt ......... 14,354 15,114
Accounts payable .............................. 8,318 8,462
Accrued expenses .............................. 7,271 6,116
Other liabilities ............................. 482 463
--------- ------------
Total current liabilities ............... 54,931 47,713
--------- ------------
Deferred income ..................................... 1,681 1,713
Long-term debt ...................................... 23,892 21,700
--------- ------------
Total liabilities ....................... 77,504 71,126
--------- ------------
Minority interest ................................... 43 15
--------- ------------
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: 68,876,094 at March 31, 2003 and
December 31, 2002 ........................... 68 68
Additional paid-in-capital .................... 65,416 65,350
Accumulated deficit ........................... (54,495) (50,490)
Accumulated other comprehensive loss:
Accumulated translation adjustment ......... (10,086) (10,466)
--------- ------------
Total stockholders' equity .............. 903 4,462
--------- ------------
Total liabilities and stockholders' equity .... $ 78,450 $ 75,603
========= ============
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
March 31,
2003 2002
----------- -----------
Net sales ........................................ $ 4,609 $ 7,885
Cost of sales:
Cost of sales ................................. 5,457 7,283
Write-down of inventory ....................... -- 787
----------- -----------
Total cost of sales ................ 5,457 8,070
----------- -----------
Gross profit (loss) ................ (848) (185)
Operating expenses:
Selling, general and administrative expenses .. 1,861 2,612
Research and development ...................... 363 484
----------- -----------
Loss from operations ....................... (3,072) (3,281)
Foreign exchange gain (loss) - net ............... 181 (58)
Non-cash interest expense on convertible debt .... (27) (502)
Interest income .................................. 27 38
Interest expense ................................. (1,317) (621)
Other income (expense) - net ..................... 157 (27)
----------- -----------
Loss before income taxes and
minority interest ................... (4,051) (4,451)
(Provision for) benefit from income taxes ........ (1) 103
----------- -----------
Loss before minority interest .................... (4,052) (4,348)
Minority interest in loss of subsidiary .......... 47 270
----------- -----------
Net loss ................................... $ (4,005) $ (4,078)
=========== ===========
Loss per share of common stock:
Basic ............................................ $ (0.06) $ (0.07)
Diluted .......................................... (0.06) (0.07)
Weighted average shares outstanding:
Basic ............................................ 68,876,094 61,415,040
Diluted .......................................... 68,876,094 61,415,040
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
March 31,
2003 2002
-------- --------
Net loss ............................................... $ (4,005) $ (4,078)
Other comprehensive income (loss):
Foreign currency translation adjustments ............. 380 (715)
-------- --------
Total comprehensive loss ............................... $ (3,625) $ (4,793)
======== ========
See accompanying notes to the condensed consolidated financial statements.
5
FIBERCORE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three Months Ended
March 31,
2003 2002
-------- --------
Cash flows from operating activities:
Net loss ........................................... $ (4,005) $ (4,078)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization ....................... 827 961
Deferred income tax benefit ......................... -- (59)
Foreign currency translation (gain) loss and
other ............................................. 202 (510)
Non-cash interest expense ........................... 27 502
Write-down of inventory ............................. -- 787
Change in minority interest ......................... 47 (270)
Changes in operating assets and liabilities:
Accounts receivable ................................. 415 4,278
Other receivables ................................... (364) (1,785)
Inventories ......................................... 464 (1,867)
Prepaid and other current assets .................... (12) (468)
Accounts payable .................................... (452) 138
Accrued expenses .................................... 914 586
-------- --------
Net cash used in operating activities ............ (1,937) (1,785)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment .................. (8) (7,151)
Reimbursement from government grants ................ 3,692 171
Other, net .......................................... -- (200)
-------- --------
Net cash provided by (used in) investing
activities ..................................... 3,684 (7,180)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock .............. -- 157
Cash contribution from minority shareholders of
FC Africa ......................................... 65 --
Proceeds from long-term debt ........................ 322 --
Proceeds from notes payable ......................... 2,117 10,465
Repayment of long-term debt ......................... (1,023) (888)
Repayment of notes payable .......................... (4,073) (105)
Financing costs ..................................... -- (517)
-------- --------
Net cash (used in) provided by financing
activities ..................................... (2,592) 9,112
-------- --------
Effect of foreign exchange rates change on cash ........ 10 (6)
Increase (decrease)in cash ............................. (835) 141
Cash, beginning of period .............................. 1,392 1,721
-------- --------
Cash, end of period .................................... $ 557 $ 1,862
======== ========
Supplemental disclosure:
Property acquired under capital leases .............. $ 915 $ --
Cash paid for interest .............................. 489 341
Cash paid for taxes ................................. 22 77
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, GOING CONCERN AND LISTING STATUS
Prevailing Market Conditions
----------------------------
Demand for single-mode fiber for use in the long haul market has continued
to be weak. Prices appear to have stabilized at low levels. Published market
studies and industry sources indicate that the demand for single-mode fiber
appears to have bottomed out but the current market situation is unpredictable.
Demand for fiber to supply the metropolitan access and fiber-to-the-home markets
should begin increasing as carriers start to connect the long-haul fiber to the
end-user. Multi-mode fiber demand continues to be strong, although prices have
continued to decline in this market as well. Multi-mode fiber accounted for
approximately 81 % of revenues during the first quarter of 2003 and 52% for the
first quarter of 2002.
FiberCore, Inc. (the "Company", "we", "our" or "us") has experienced a
precipitous decline in the South American market and has taken steps to try to
offset some of this decline by shifting sales efforts to other markets, by
reducing 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. One market that has shown some stability in demand has been
Asia, and we began shipping product into Asia from Xtal FiberCore Brasil, S.A.
("Xtal") in late 2001. However, prices in Asia have declined more sharply than
in the rest of the world, as the large fiber manufacturers, including those from
Japan and Korea, reduce inventories and attempt to capture volume orders,
resulting in current prices below production costs. There have also been some
indications that demand is softening in that market as well with the exception
of Japan.
Going Concern
-------------
The Company continues to be in violation of certain covenants of its
Convertible Debentures and with Algar. These default conditions cause a
cross-default on the Fleet credit facility of $8,500,000 and on a $1,500,000
loan from Tyco International Finance Alpha GmbH. Accordingly, the Company is
also in default on these obligations and Fleet and/or Tyco may accelerate the
maturity date of their respective loans and the entire balances would become
immediately due. Additionally, Fleet may exercise the provisions of a guarantee
given by Tyco International Group S.A. to be paid in full by Tyco and Tyco would
then assume Fleet's position as a creditor of the Company. In this case, Tyco
would also have the right to assume control of the Company's Board of Directors.
Also, as shown in the financial statements, the Company's current liabilities
exceeded its current assets by $37,147,000 at March 31, 2003, including
$9,250,000 of long-term debt that has been classified as current as a result of
being in default. The Company believes it must raise approximately $5 million in
additional financing soon and/or restructure some of its obligations to address
its liquidity crisis. The Company is also attempting to renegotiate the terms on
approximately $18 million in short-term debt and notes payable, including the
$9.25 million discussed above, and an additional $3 - $5 million is planned to
be shifted to long-term debt based on financing activities associated with the
Phase 2 expansion of our German operation. These factors, among others, led our
auditors in their opinion included in our recent annual report on Form 10-K to
question the Company's ability to continue as a going concern. The Company's
continuation as a going concern is dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis and to obtain
additional financing or refinancing as may be required.
The Company is actively pursuing a number of actions to address it ability
to continue as a going concern. It has taken and continues to take steps to
reduce its cost structure. It has accelerated the
7
development and implementation of new technology, specifically its POVD and
other plasma-based technologies, which will have a substantial impact on the
production costs and capacity of its optical fiber and preform products. The
Company is actively pursuing new business opportunities, including some major
projects for Fiber to the Home (FTTH). The Company is also engaged in ongoing
discussions with several potential investment groups to raise at least the $5
million in additional capital described above. However, there can be no
assurance that the Company will be successful in these efforts and be able to
continue as a going concern.
Listing Status
- --------------
On June 3, 2002, the Company received a notice from the Nasdaq Stock
Market stating that for 30 consecutive trading days, the bid price for our
common stock closed below the minimum $1.00 per share requirement for continued
listing on the Nasdaq SmallCap Market. The notice indicated that pursuant to
applicable rules, the Company was provided with 180 days (i.e. until December 2,
2002), to regain compliance. If at any time before December 2, 2002 the bid
price of the Company's common stock closed at $1.00 per share or more for a
minimum of 10 consecutive trading days, the Company would have been in
compliance with the minimum bid requirement. The Company met initial listing
criteria as of December 2, 2002 and was granted an additional 180 day grace
period until May 29, 2003, to demonstrate compliance with the minimum bid
requirement.
Additionally, the Company on April 17, 2003 received a notification of
delisting from Nasdaq. The Company had not yet filed this Annual Report on Form
10-K with the SEC as of this date due to delays in finalizing the results from
its foreign subsidiaries. The Company had previously filed for an extension to
file this Annual Report on Form 12b-25, which expired on April 15, 2003. As a
result of not timely filing its 10-K, the Company received a Nasdaq staff
determination on April 17 indicating that the Company failed to comply with the
filing requirements for continued listing set forth in Marketplace Rule
4310(c)(14), and further that the Company was late in paying fees to Nasdaq
which is a failure to comply with Marketplace Rule 4310 (c) (13), and that its
securities would, therefore, be delisted from the Nasdaq SmallCap Market at the
opening of business on April 28, 2003. Accordingly, the trading symbol for the
Company's securities was changed from FBCE to FBCEE at the opening of business
on April 22, 2003. The Company filed for a hearing to contest this determination
and the hearing is scheduled for May 22, 2003. The delisting action has been
stayed until the hearing date. A delisting could materially and adversely affect
the trading market and prices for the Company's securities. If delisted, the
Company will endeavor to facilitate trading of its common stock on the
OTC-Bulletin Board.
2) BASIS OF PRESENTATION
The condensed consolidated balance sheet as of March 31, 2003 and related
condensed consolidated statements of operations, comprehensive loss, and cash
flows for the three months ended March 31, 2003 and 2002 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 first quarter may not be
indicative of the full year results.
8
The condensed consolidated financial statements do not contain certain
information included in the Company's 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, 2002 included in the Company's Annual Report on Form 10-K.
The accompanying financial statements for the year ended March 31, 2003
have been prepared assuming that the Company will continue as a going concern.
As discussed in Note 1, the Company is experiencing difficulty in generating
sufficient cash flows to meet its obligations and is in default under certain
loan agreements. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans concerning these
matters are described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
3) STOCK OPTIONS
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees,"
and related interpretations in accounting for stock options. Accordingly, no
compensation cost has been recognized for the stock options. Had compensation
cost for stock options been determined based on the fair value of the option at
date of grant consistent with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net loss and loss per share for the
three months ended March 31, 2003 and 2002 would have been reduced to the pro
forma amounts indicated below (dollar amounts in thousands except per share
data):
2003 2002
-------- --------
Net loss $ (4,005) $ (4,078)
Effect of stock based
compensation expense
determined SFAS No. 123 (256) (250)
-------- --------
Pro forma net loss $ (4,261) $ (4,328)
======== ========
Loss per share:
Basic-as reported $ (0.06) $ (0.07)
Basic-pro forma $ (0.06) $ (0.07)
Diluted-as reported $ (0.06) $ (0.07)
Diluted-pro forma $ (0.06) $ (0.07)
9
4) INVENTORIES
Inventories consist of the following:
(Dollars in thousands)
March 31, December 31,
2003 2002
--------- ------------
Raw materials $1,736 $2,072
Work-in-progress 582 526
Finished goods 2,894 2,823
--------- ------------
Total $5,212 $5,421
========= ============
Finished goods inventory reflects write-downs amounting to approximately
$3,388,000 in 2002, of which $787,000 related to the first quarter of 2002, to
account for the effect of declining prices on single-mode fiber. There were no
write-downs of finished goods inventory during the first quarter of 2003.
5) RESTRICTED CASH
Restricted cash represents the German Mark (DM) 3,850,000 deposit with
Sparkasse Jena securing the loan from Sparkasse Jena of DM 7,700,000. The
deposit is reflected in the financial statements in the U.S. Dollar equivalent
using the exchange rate in effect at the balance sheet dates. The increase of
$79,000 in the balance sheet amount from December 31, 2002 to March 31, 2003 is
the result of the exchange rate change. The change is accounted for as an
unrealized foreign exchange loss in the condensed consolidated statements of
operations.
6) EARNINGS PER SHARE
For purposes of computing Diluted Earnings Per Share (EPS), the Company
uses the treasury stock method. Additionally, when computing dilution related to
options and warrants, conversion is assumed as of the beginning of each period.
For the three months ended March 31, 2003 and 2002, assumed conversion of
options and warrants would have been anti-dilutive, therefore conversion was not
assumed for purposes of computing diluted EPS. For the periods ended March 31,
2003 and 2002, the number of potential common shares from the exercise of
options and warrants excluded from the computation were 270,427 and 4,037,897,
respectively, since assumed inclusion would also be anti-dilutive.
7) BORROWINGS DURING THE FIRST QUARTER OF 2003 AND DEFAULTS ON DEBT
The following describes the borrowing activity for the three months ended
March 31, 2003:
i) $2,093,000 was received from German banks as interim financing.
These loans will be repaid from the proceeds of receivables from
government grants. The interest rates on these loans range from
6.75% to 8.5% and are collateralized by trade accounts receivable
and inventory.
ii) $24,000 was received by Xtal for working capital purposes at 26.9%
interest, collateralized by inventory. The loan is due January 15,
2005.
iii) FCJ received proceeds from long-term notes amounting to $322,000
from German banks related to the Phase II expansion at FCJ at
interest rates from 5.6% to 6.4%, collateralized by land, buildings
and equipment. The loans are due March 31, 2011.
10
iv) Proceeds of $156,000 were received by Xtal for working capital
purposes at 26.9% interest, collateralized by equipment. The note is
due November 26, 2003.
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 2002, the Company paid $1.5 million in cash
payments and reduced the outstanding balance 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 has not had sufficient funds to make redemptions of the
Debentures since September of 2002 and had received a waiver with respect to
such redemptions required through December 1, 2002. Such waiver, however, was
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
has been engaged in discussions with the holders of the Debentures to reach a
revised agreement. However, the Company and the holders of the Debentures have
not been able to reach a final agreement and therefore the Company is currently
in a state of default with the holders of the Debentures. This causes a
cross-default on the Fleet credit facility of $8,500,000 and on a $1,500,000
loan from Tyco International Finance Alpha GmbH and Fleet and/or Tyco could
accelerate the maturity date of their respective loans and the entire balances
could become immediately due. If an event of default on the Debentures
continues, the holders have the right to accelerate the maturity date and the
entire balance of $2,467,000 could become immediately due.
Finally, $1.25 million due to Algar associated with the purchase of Xtal
was not paid on the due date of December 20, 2002. The Company has held
discussions with Algar to defer or otherwise adjust this requirement and these
discussions are continuing. However, the Company and Algar have not reached an
agreement and therefore the Company is currently in a state of default with
Algar under the terms of a Loan Agreement. This causes a cross-default on the
Fleet credit facility of $8,500,000 and on a $1,500,000 loan from Tyco
International Finance Alpha GmbH and Fleet and/or Tyco could accelerate the
maturity date of their respective loans and the entire balances could become
immediately due. In the event of a default of the Credit Facility, Fleet could
exercise the provisions of a guarantee given by Tyco International Group S.A. to
be paid in full by Tyco and Tyco would then assume Fleet's position as a
creditor of the Company. In this case, Tyco would also have the right to assume
control of the Company's Board of Directors. The result of these current events
of default with the Debenture holders and with Algar has caused the Company to
reclassify $7,750,000 of the Fleet Credit Facility and a $1,500,000 loan from
Tyco International Finance Alpha GmbH from long-term to short-term debt.
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 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.
8) LEGAL MATTERS
i) Xtal is party to a 3-year take-or-pay contract expiring in June
2003, with Shin Etsu for the delivery of single-mode preforms to
Xtal. In 2001 and 2002, Xtal purchased approximately $10,900,000 and
$1,118,000 respectively of product under the contact. The contract
calls for monthly purchases of preform with 50% of the volume at a
fixed price and 50% to be set
11
quarterly based on market prices. 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 and during most of 2002, 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 that is not a take-or-pay agreement.
The total amount in dispute as of March 31, 2003 is approximately
$11,400,000 with approximately $8,750,000 related to the take-or-pay
contract. Xtal and the Company have submitted their position to the
arbitration panel and the process is on going. The Company
anticipates a ruling from the arbitration panel during the second
quarter of 2003. However, if Xtal were to ultimately lose, Xtal
could be required to purchase the preforms in question and/or pay
damages as well as pay the costs of arbitration. In that case, the
legal costs of arbitration and any damages required would negatively
impact the Company's operating results, but the costs of the
material required to be purchased 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. If Xtal and the Company were to
lose in arbitration, and the judgment against the Company was
substantial, it could have a significant negative impact on the
liquidity of the Company and could potentially put the Company into
a state of insolvency.
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 was 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
sought 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
sought unspecified compensatory and treble damages, attorneys fees
and costs, and such other and further relief as is just and proper.
On December 13, 2002 the Court granted the Company's motion to
dismiss for lack of jurisdiction.
On December 18, 2002 Fitel USA Corp. re-filed the complaint in the
United States District Court Western District of North Carolina,
case number S02CV163V. The plaintiff makes the same allegations and
seeks the same redress as outlined in the previous filing. The
Company believes these claims to be without merit, has retained
counsel and will vigorously defend itself in this case. If this suit
is not settled and goes to trial, the legal costs associated with
defending itself could be significant for the Company. If the
Company were to ultimately lose this suit, it could have a
significant negative impact on the Company's ability to compete in
the marketplace for some period until the Company could adjust its
production processes, and could have a material negative effect on
the liquidity of the Company and could potentially put the Company
into a state of insolvency.
iii) The Company is currently in litigation with Techman International
Corp. ("Techman") and M. Mahmud Awan ("Awan") who controls Techman,
relating to certain investments, contracts and other claims. Both
parties are seeking approximately $500,000 in cash. In addition, the
Company is suing Techman and Awan for the return of shares that have
been canceled by the Company because of the failure of Techman and
Awan to satisfy certain conditions related to their issuance. The
litigation is in the discovery and motion phase. The Company
believes that its claims against Techman and Awan are good and that
it will ultimately prevail on its claims, but given the
uncertainties inherent in litigation, the outcome cannot be
predicted with any reasonable certainty at this time.
12
9) GOODWILL AND PATENTS
In July 2001, the FASB issued SFAS No. 141, Business Combinations, which
established 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 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. 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 completed its initial test of impairment, measured as of January 1, 2002
and concluded there was no impairment to goodwill as of the adoption date of
SFAS No. 142. Management completed the annual impairment test in the fourth
quarter of 2002 and recorded goodwill impairment charges of approximately $7.3
million. This represented a complete write-down of the goodwill associated with
FiberCore's acquisition of Xtal in 2000 and DCI in 2001.
13
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 (in thousands of dollars):
As of As of
March 31, 2003 December 31, 2002
-------------- -----------------
Gross carrying amount $456 $450
Accumulated amortization (104) (96)
-------------- -----------------
Net carrying amount $352 $354
============== =================
Three Months Ended
March 31,
2003 2002
-------- --------
Aggregate patent amortization expense $ 8 $ 24
Estimated annual patent amortization expense for fiscal years ending (in
thousands of dollars):
December 31, 2003 $26
December 31, 2004 $22
December 31, 2005 $22
December 31, 2006 $22
December 31, 2007 $22
10) NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS 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 did not have any impact 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, 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). SFAS No. 146 will affect any
restructuring activities of the Company after January 1, 2003.
In December 2002, the FASB issue SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure and amendment to SFAS No. 123", which
provides three optional transition methods for entities that decide to
voluntarily adopt the fair value recognition principles of SFAS No. 123,
"Accounting for Stock Issued to Employees", and modifies the disclosure
requirements of that statement. The Company has not adopted the fair value
recognition principles for SFAS No. 123; therefore this statement has had no
effect upon the Company's consolidated financial condition or results
14
of operations. The Company had adopted the disclosure requirements under SFAS
No. 148 as of December 31, 2002 and has included the additional quarterly
disclosures required for the Form 10-Q.
In November 2002, the FASB issued Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). The Interpretation
requires certain guarantees to be recorded at fair values and also requires a
guarantor to make new disclosures, even when the likelihood of making payment
under the guarantee is remote. The recognition provisions of FIN 45 are
effective on a prospective basis for guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for financial
statements of interim and annual periods ending after December 15, 2002.
Adoption of this statement did not have a material impact on the Company's
consolidated financial condition or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities", which requires an enterprise to assess if
consolidation is appropriate based upon its variable economic interest in
variable interest entities ("VIE"). Interpretation 46 is effective for new VIE's
established subsequent to February 1, 2003 and must be adopted for existing
VIE's by July 1, 2003. The Company does not invest in investment structures that
require analysis under the Interpretation and Interpretation 46 has no impact on
the Company's consolidated financial condition or results of operations.
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 MONTHS ENDED MARCH 31, 2003 AND 2002
The results for the three-month period ended March 31, 2003 include the
results of FiberCore Africa (FCAfrica), a 60% owned joint venture. FCAfrica is
in start-up mode and has primarily incurred administrative expenses during the
first three months of 2003.
Consolidated sales for the three months ended March 31, 2003 decreased by
$3,276,000 or 42% over the same period in 2002. Consolidated sales continued to
be negatively impacted by lack of shipments in South America, which is primarily
a single-mode market. Overall, single-mode sales were down in all regions, while
multimode sales decreased by approximately 10%. Company-wide, the decrease in
volume of shipments accounted for $224,000 of the decrease in sales of fiber,
while the
15
negative effects of pricing decreases accounted for $2,531,000 of the decrease
in sales of fiber. The balance of the difference is accounted for by an increase
in preform and other sales of approximately $521,000.
Gross profit (loss) was $(848,000) or (18)% of sales for the first quarter
of 2003, compared to ($185,000) or (2%) of sales for the first quarter of 2002.
The $663,000 decrease in gross profit from the first quarter of 2003 is
attributable to lower shipment volume in the first quarter of 2003 combined with
lower pricing for all products. The Company expects pricing pressure to continue
in the near term. Although the Company has reduced costs at both of its fiber
manufacturing facilities during 2002 in response to the softening demand,
including over a 60% reduction in staffing at it's Xtal facility in Brazil, and
currently continues to reduce costs at both locations to address the tight
market situation. The Company has also experienced higher production costs
during the first quarter of 2003 due to lower than normal yields during January
and February at its FCJ facility and production inefficiencies due to the lower
production volumes. Gross margins improved significantly in Germany on the
strength of a 50% increase in sales over January and February levels. The POVD
technology, which will lower costs further, has not been implemented yet due to
delays in financing.
Selling, general and administrative costs ("SG&A") decreased $751,000 or
29% in the first quarter of 2003 compared to the first quarter of 2002 as a
result of cost saving measures at all locations during 2002. The Company
continues to focus on cost savings in this area.
Research and development costs decreased $121,000 or 25% in the first
quarter of 2003 as compared to the first quarter of 2002. The reduction was due
to lower staffing levels in Brazil and reduced spending during the first quarter
of 2003 at FCJ. Despite the reduced spending 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.
Interest expense increased by $696,000, or 112%, compared to the same
period in 2002. The increase in the three-month period is the result of higher
short and long-term debt compared to the same period in the prior year.
Borrowings during the first quarter of $2,439,000 were primarily related to the
funding of expansion of manufacturing facilities in Germany and general working
capital uses at all locations.
Net foreign exchange gains were $181,000 in the first quarter of 2003
compared to a loss of $58,000 for the same period in 2002. The gain in 2003 is
principally due to the fluctuations in the value of the Brazilian Real versus
the Japanese Yen on raw material purchases and the strengthening of the Euro
versus the U.S Dollar on the deposit with Sparkasse Jena.
The Company recorded a tax provision of $1,000 related to the Company's
German subsidiaries for the three month period ended March 31, 2003 as compared
to a tax benefit of $103,000 for the same quarter in the prior year. The Company
has not recorded a tax benefit related to net operating loss carry-forwards for
the first quarter of 2003 due to the uncertainty of realization.
LIQUIDITY AND CAPITAL RESOURCES
As of the date of this Quarterly Report, the Company is currently in
default under its Convertible Debentures and with Algar. These default
conditions cause a cross-default on the Fleet credit facility of $8,500,000 and
on a $1,500,000 loan from Tyco International Finance Alpha GmbH and Fleet and/or
Tyco could accelerate the maturity date of their respective loans and the entire
balances could become immediately due. Since there is an event of default of the
Fleet Credit Facility, Fleet can exercise the provisions of a guarantee given by
Tyco International Group S.A. to be paid in full by Tyco and Tyco would then
assume Fleet's position as a creditor of the Company. In this case, Tyco would
also have the right to assume control of the Company's Board of Directors. Also,
as shown in the financial statements, the Company's current liabilities exceeded
its
16
current assets by $37,147,000 at March 31, 2003, including $9,250,000 of
long-term debt that has been classified as current as a result of being in
default. The Company must raise approximately $5 million in additional financing
soon and/or restructure some of its obligations to address its liquidity crisis.
The Company is also attempting to renegotiate the terms on approximately $18
million in short-term debt and notes payable, including the $9.25 million
discussed above, and an additional $3 - $5 million is planned to be shifted to
long-term debt based on financing activities associated with the Phase 2
expansion of our German operation. These factors, among others, indicate that
the Company may be unable to continue as a going concern. The Company's
continuation as a going concern is dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis and to obtain
additional financing or refinancing as may be required.
The downturn in the economy and the telecommunications industry in
particular as a result of cutbacks in capital spending, coupled with an
overcapacity of installed fiber, affected global demand for single-mode fiber
primarily in North America, South America and Europe starting in July, 2001.
During 2002, volume and pricing continued to deteriorate through the end of the
year. At this point there have been some signs that pricing has stabilized but
demand has not as yet shown any recovery.
The Company had negative cash flow from operations of $1,937,000 and
$1,785,000 for the first quarter of 2003 and 2002, respectively The negative
cash flow for the period resulted from a loss for the period of $4,005,000 plus
depreciation and amortization and other non-cash charges of $1,103,000 and a net
positive cash effect of changes in current assets and liabilities of $965,000.
Accounts receivable decreased by $415,000 as compared to the end of 2002. Days
sales outstanding increased from 50 days at December 31, 2002 to 63 days at
March 31, 2003. Inventories decreased by $464,000 as compared to the end of
2002. This decrease was primarily a result of the lower production levels to
stay in line with demand. Inventory turnover was approximately 4 times at March
31, 2003 and December 31, 2002.
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 2002, the Company paid $1.5 million in cash
payments and reduced the outstanding balance 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 has not had sufficient funds to make redemptions of the
Debentures since September of 2002 and had received a waiver with respect to
such redemptions required through December 1, 2002. Such waiver, however, was
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
has been engaged in discussions with the holders of the Debentures to reach a
revised agreement. However, the Company and the holders of the Debentures have
not been able to reach a final agreement and therefore the Company is currently
in a state of default with the holders of the Debentures. This causes a
cross-default on the Fleet credit facility of $8,500,000 and on a $1,500,000
loan from Tyco International Finance Alpha GmbH and Fleet and/or Tyco could
accelerate the maturity date of their respective loans and the entire balances
could become immediately due. Since there is an event of default on the
Debentures, the holders have the right to accelerate the maturity date and the
entire balance of $2,467,000 could become immediately due.
$1.25 million due to Algar associated with the purchase of Xtal was not
paid on the due date of December 20, 2002. The Company has held discussions with
Algar to defer or otherwise adjust this requirement and these discussions are
continuing. However, the Company and Algar have not reached an agreement and
therefore the Company is currently in a state of default with Algar under the
terms of a Loan Agreement. This causes a cross-default on the Fleet credit
facility of $8,500,000 and on a $1,500,000 loan from Tyco International Finance
Alpha GmbH and Fleet and/or Tyco could accelerate
17
the maturity date of their respective loans and the entire balances could become
immediately due. In the event of a default of the Credit Facility, Fleet could
exercise the provisions of a guarantee given by Tyco International Group S.A. to
be paid in full by Tyco and Tyco would then assume Fleet' position as a
creditor of the Company. In this case, Tyco would also have the right to assume
control of the Company' Board of Directors. The result of these current events
of default with the Debenture holders and with Algar has caused the Company to
reclassify $7,750,000 of the Fleet Credit Facility and a $1,500,000 loan from
Tyco International Finance Alpha GmbH from long-term to short-term debt.
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 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 currently has a backlog of approximately $37,500,000, down
from $41,000,000 at the end of 2002, with approximately $10,750,000 scheduled
for delivery during the remainder of 2003. This number may 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 telecommunications industry has been experiencing a severe downturn in
business for the past 2 years, 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.
The Company invested $8,000 in new equipment and facilities at the
Company's Brazilian subsidiary during the first quarter of 2003 and $915,000 for
equipment under a capital lease at its German subsidiary. Grants received
related to the expansion in Germany amounted to $3,692,000 during the first
quarter of 2003. Grant funds reduce the cost basis of the assets acquired.
The following describes the borrowing activity for the three months ended
March 31, 2003:
i) $2,093,000 was received from German banks as interim financing.
These loans will be repaid from the proceeds of receivables from
government grants. The interest rates on these loans range from
6.75% to 8.5% and are collateralized by trade accounts receivable
and inventory.
ii) $24,000 was received by Xtal for working capital purposes at 26.9%
interest, collateralized by inventory. The loan is due January 15,
2005.
iii) FCJ received proceeds from long-term notes amounting to $322,000
from German banks related to the Phase II expansion at FCJ at
interest rates from 5.6% to 6.4%, collateralized by land, buildings
and equipment. The loans are due March 31, 2011.
iv) Proceeds of $156,000 were received by Xtal for working capital
purposes at 26.9% interest, collateralized by equipment. The note is
due November 26, 2003.
18
CRITICAL ACCOUNTING POLICIES
The Condensed Consolidated Financial Statements and Notes to Condensed
Consolidated Financial Statements contain information that is pertinent to
management's discussion and analysis. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities.
The Consolidated Financial Statements and Notes to Consolidated Financial
Statements contain information that is pertinent to management's discussion and
analysis. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities.
The Company believes the following critical accounting policies involve
additional management judgment due to the sensitivity of the methods,
assumptions and estimates necessary in determining the related asset and
liability amounts.
REVENUE RECOGNITION:
The Company recognizes revenues in accordance with invoice terms,
typically when products are shipped and accruals for sales returns and other
allowances are provided at the time of shipment based upon past experience. If
actual future returns and allowances differ from past experience, additional
allowances may be required.
INVENTORY VALUATION:
Inventory is valued at the lower of actual cost to purchase and/or
manufacture the inventory or the estimated market value of the inventory. The
Company provides estimated inventory allowances for slow-moving and obsolete
inventory based on current assessments about future demands, market conditions
and related management initiatives. If market conditions are less favorable than
those projected by management, additional inventory allowances may be required.
ACCOUNTS RECEIVABLE:
We perform ongoing credit evaluations of our customers and adjust credit
limits based upon payment history and the customer's current credit worthiness,
as determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated credit losses based upon our historical experience and any specific
customer collection issues that we have identified. While such credit losses
have historically been within our expectations and the provisions established,
we cannot guarantee that we will continue to experience the same credit loss
rates that we have in the past. Since our accounts receivable are concentrated
in a relatively few number of customers, a significant change in the liquidity
or financial position of any one of these customers could have a material
adverse impact on the collectability of our accounts receivable and our future
operating results.
VALUATION OF LONG-LIVED ASSETS:
We periodically review the carrying value of our long-lived assets for
continued appropriateness. This review is based upon our projections of
anticipated future cash flows. While we believe that our estimates of future
cash flows are reasonable, different assumptions regarding such cash flows could
materially affect our evaluations
STOCK OPTIONS:
See Note 3 to the Condensed Consolidated Financial Statements.
19
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's two principal operating
subsidiaries are located outside of the United States. FCJ is located in Germany
and its functional currency is the Euro. Xtal is located in Brazil and its
functional currency is the Brazilian 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 March 31, 2003 the Company had no outstanding forward
exchange contracts.
As of March 31, 2003, the Company had a long-term loan denominated in
Deutsche Marks ("DM") totaling 7,700,000 DM. The principal of the loan is due at
maturity in September of 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 $26,000 for each of the years from 2003 through 2005, and by
approximately $19,000 in 2006.
Substantially all of the Company's sales are through FCJ and Xtal.
Additionally, as of March 31, 2003, 68% and 18% of the Company's assets are at
FCJ and Xtal, respectively. The Company, therefore, is subject to foreign
currency translation gains or losses in reporting its consolidated financial
position and results of operations.
INTEREST RATE RISK. As of March 31, 2003, the Company had long-term loans
with variable interest rates in the U.S and Brazil. Loans based on LIBOR are
adjusted quarterly. The loans in Brazil are based on Brazilian reference rates.
A 10% change in the interest rates on these loans would have increased or
decreased the first quarter 2003 interest expense by approximately $36,000.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
The Chief Executive Officer and Chief Financial Officer of the Company
evaluated the disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14 within the last 90 days. Based on that evaluation, the Chief
Executive Officer and the Chief Financial Officer 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. There have been no significant changes in
internal controls or in other factors that could significantly affect the
internal controls subsequent to the date the Chief Executive Officer and the
Chief Financial Officer completed their evaluation.
20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
i) Xtal is party to a 3-year take-or-pay contract expiring in June
2003, with Shin Etsu for the delivery of single-mode preforms to
Xtal. In 2001 and 2002, Xtal purchased approximately $10,900,000 and
$1,118,000 respectively of product under the contact. The contract
calls for monthly purchases of preform with 50% of the volume at a
fixed price and 50% to be set quarterly based on market prices.
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 and during most of 2002,
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
that is not a take-or-pay agreement. The total amount in dispute as
of March 31, 2003 is approximately $11,400,000 with approximately
$8,750,000 related to the take-or-pay contract. Xtal and the Company
have submitted their position to the arbitration panel and the
process is on going. The Company anticipates a ruling from the
arbitration panel during the second quarter of 2003. However, if
Xtal were to ultimately lose, Xtal could be required to purchase the
preforms in question and/or pay damages as well as pay the costs of
arbitration. In that case, the legal costs of arbitration and any
damages required would negatively impact the Company's operating
results, but the costs of the material required to be purchased
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. If Xtal and the
Company were to lose in arbitration, and the judgment against the
Company was substantial, it could have a significant negative impact
on the liquidity of the Company and could potentially put the
Company into a state of insolvency.
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 was 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
sought 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
sought unspecified compensatory and treble damages, attorneys fees
and costs, and such other and further relief as is just and proper.
On December 13, 2002 the Court granted the Company's motion to
dismiss for lack of jurisdiction.
On December 18, 2002 Fitel USA Corp. re-filed the complaint in the
United States District Court Western District of North Carolina,
case number S02CV163V. The plaintiff makes the same allegations and
seeks the same redress as outlined in the previous filing. The
Company believes these claims to be without merit, has retained
counsel and will vigorously defend itself in this case. If this suit
is not settled and goes to trial, the legal costs associated with
defending itself could be significant for the Company. If the
Company were to ultimately lose this suit, it could have a
significant negative impact on the Company's ability to compete in
the marketplace for some period until the Company could adjust its
production processes, and could have a material
21
negative effect on the liquidity of the Company and could
potentially put the Company into a state of insolvency.
iii) The Company is currently in litigation with Techman International
Corp. ("Techman") and M. Mahmud Awan ("Awan") who controls Techman,
relating to certain investments, contracts and other claims. Both
parties are seeking approximately $500,000 in cash. In addition, the
Company is suing Techman and Awan for the return of shares that have
been canceled by the Company because of the failure of Techman and
Awan to satisfy certain conditions related to their issuance. The
litigation is in the discovery and motion phase. The Company
believes that its claims against Techman and Awan are good and that
it will ultimately prevail on its claims, but given the
uncertainties inherent in litigation, the outcome cannot be
predicted with any reasonable certainty at this time.
ITEMS 2-5.
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 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
o Current Report on Form 8-K filed February 24, 2003
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: May 22, 2003 /s/ Dr. Mohd A. Aslami
----------------------------------------
Dr. Mohd A. Aslami
Chairman, President and Chief Executive
Officer
(Duly Authorized Officer)
Date: May 22, 2003 /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 of 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: May 22, 2003 /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 of 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: May 22, 2003 /s/ Robert P. Lobban
----------------------------------------
Robert P. Lobban
Chief Financial Officer
25