Filed Pursuant to Rule 424(b)(3)
Registration No. 333-40406
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THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SOLICIT AN OFFER TO BUY
THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
9,442,757 SHARES OF
FIBERCORE, INC.
COMMON STOCK
This prospectus relates to the public offering by FiberCore, Inc. and the
selling shareholders of up to a maximum of 9,442,757 shares of the common stock
of FiberCore, Inc., representing approximately 18% of the outstanding shares of
FiberCore, Inc.'s common stock on August 10, 2000. The 5,242,757 shares of our
common stock, representing approximately 10.3% of the outstanding shares of
FiberCore, Inc.'s common stock on August 10, 2000, being offered for resale on
behalf of selling shareholders consist of:
o 1,886,145 shares of our common stock issued to Crescent International Ltd.
on June 9, 2000 and June 26, 2000;
o 500,000 shares of our common stock issuable upon exercise of a warrant
issued to Crescent International Ltd. on June 9, 2000;
o 199,726 shares of our common stock issuable upon exercise of a warrant
issued to Crescent International Ltd. on June 9, 2000;
o 2,200,000 shares of our common stock issuable to Crescent upon the
conversion of an outstanding balance of $4 million of convertible debt sold
to Crescent on June 9, 2000, and $1.5 million of convertible debt sold to
Crescent on July 5, 2000; and
o 456,886 shares of our common stock issuable upon exercise of warrants issued
to Gruntal & Co., LLC
Had Crescent exercised its warrants and converted the convertible notes on
August 10, 2000, Crescent would have received 1,795,620 shares of common stock,
and been able to offer for resale a total of 3,681,765 shares of our common
stock (including the 1,886,145 shares of our common stock currently held by
Crescent).
If Gruntal were to have exercised its warrants on August 10, 2000, or any
date after Gruntal's receipt of the warrants, Gruntal could offer for resale
456,886 shares of our common stock.
The remaining 4,200,000 shares of our common stock, representing
approximately 8% of the outstanding shares of FiberCore, Inc.'s common stock on
August 10, 2000, are being registered for underwritten sales by FiberCore from
time to time. The names of any underwriters or agents will be set forth in the
accompanying prospectus supplement.
The prices at which the selling shareholders and we may sell the shares of
common stock that are part of this offering will be determined by the prevailing
market price for the shares at the time the shares are sold.
Our OTC Bulletin Board symbol for our common stock is FBCE. On September
18, 2000, the last reported sale price for our common stock was $7.123 per
share.
This prospectus may not be used to consummate sales of securities unless
it is accompanied by a prospectus supplement.
INVESTING IN THESE SECURITIES INVOLVES SUBSTANTIAL RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 29, 2000.
TABLE OF CONTENTS
THE OFFERING.................................................................6
ABOUT THIS PROSPECTUS........................................................7
THE COMPANY..................................................................8
OUR BUSINESS.................................................................8
RISK FACTORS.................................................................9
FORWARD-LOOKING INFORMATION.................................................18
WHERE YOU CAN FIND MORE INFORMATION.........................................19
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.............................19
RECENT EVENTS...............................................................20
RECENTLY ISSUED SECURITIES..................................................22
USE OF PROCEEDS.............................................................27
SELLING STOCKHOLDERS........................................................28
PLAN OF DISTRIBUTION........................................................32
DESCRIPTION OF CAPITAL STOCK................................................34
SECURITIES AND EXCHANGE COMMISSION POSITION ON INDEMNIFICATION..............35
LEGAL MATTERS...............................................................36
EXPERTS.....................................................................36
5
THE OFFERING
In the registration statement of which this prospectus is a part, we are
registering for resale shares of our common stock issued and issuable to
Crescent International Ltd., the resale of shares of our common stock issuable
to Gruntal & Co., LLC, and the primary sale of shares of our common stock that
we may sell through underwriters to the public market. Specifically, the shares
of our common stock included in this offering consist of:
o 1,886,145 shares of common stock previously issued to Crescent, consisting
of (i) 1,200,274 shares of our common stock issued on June 9, 2000 pursuant
to the Securities Purchase Agreement between us and Crescent, and (ii)
685,871 shares of our common stock issued on June 26, 2000 upon Crescent's
conversion of $2 million of a $6 million convertible note sold to Crescent
on June 9, 2000;
o up to 2,200,000 shares of our common stock issuable to Crescent upon
conversion of our convertible notes held by Crescent, consisting of: (i) up
to 1,600,000 shares of our common stock issuable upon the conversion of a $4
million note (the remaining principal balance on our original $6 million
convertible note) issued to Crescent on June 9, 2000, and (ii) up to 600,000
shares of our common stock issuable upon conversion of our $1.5 million
convertible note issued to Crescent on July 5, 2000 pursuant to the
Securities Purchase Agreement between us and Crescent, dated June 9, 2000;
o Crescent may convert the $4 million convertible note into shares of our
common stock at a per share conversion price equal to $4.2326 or 93% of
the lowest volume weighted average price on three consecutive days
during the 22 trading day period immediately preceding the date of
conversion, whichever is lower.
o Crescent may convert the $1.5 million convertible note into shares of
our common stock at a per share conversion price equal to $5.0415 or 93%
of the lowest volume weighted average price on three consecutive days
during the 22 trading day period immediately preceding the date of
conversion, whichever is lower.
o We have limited rights to delay the conversion of either note for up
to 180 days from the date triggering those rights if the conversion
price determined by the above formula is below $2.50 per share of
our common stock. Accordingly, in determining the number of shares
of our common stock issuable as described above upon conversion of
the $4 million and $1.5 million convertible notes, we estimated a
price of $2.50 per share of our common stock.
o 500,000 shares of our common stock issuable upon exercise of a warrant, with
an exercise price of $4.374 per Share, issued to Crescent on June 9, 2000;
o 199,726 shares of our common stock issuable upon exercise of a warrant
(which is exercisable only if the per share price of our common stock on the
date the registration statement of which this prospectus is a part becomes
effective is lower than $2.916) issued to Crescent. This prospectus includes
199,726 shares because the number of shares of our common stock that would
be issuable if on the date the registration statement of which this
prospectus is a part becomes effective, the market price for our common
stock would be $2.50 per share;
o 456,886 shares of our common stock issuable upon the exercise of a warrant
held by Gruntal & Co., LLC and received in connection with and as
consideration for Gruntal's provision of financial services to us,
consisting of:
o 300,000 shares of our common stock issuable upon exercise of a warrant,
with an exercise price of $3.906 per share of our common stock, issued
to Gruntal on April 14, 2000;
o 30,000 shares of our common stock issuable upon exercise of a warrant,
with an exercise price of $4.374 per share of our common stock, issued
to Gruntal on June 9, 2000;
6
o 72,016 shares of our common stock issuable upon exercise of a warrant,
with an exercise price of $2.916 per share of our common stock, issued
to Gruntal on June 9, 2000; and
o 54,870 shares of our common stock issuable upon exercise of a warrant,
with an exercise price of $2.916 per Share, issued to Gruntal on June
26, 2000;
o and 4,200,000 shares of our common stock registered by us for sale from time
to time in an underwritten offering, at a price to be determined at the time
of the offering. Although we have not established a definitive plan to do
so, we are considering in engaging in an underwritten offering in the
future. We will file a post-effective amendment to the registration
statement of which this prospectus is a part setting forth the details of
the offering and our plan of distribution if and when we decide to proceed
with the underwritten offering.
Had Crescent exercised its warrants and converted the convertible notes on
August 10, 2000, Crescent would have received 1,795,620 shares of common stock
and would have been able to offer for resale a total of 3,681,765 shares of our
common stock (including the 1,886,145 shares of our common stock currently held
by Crescent).1
Had Gruntal exercised its warrants on any date after Gruntal's receipt of
the warrants, Gruntal could offer for resale 456,886 shares of our common stock.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
SEC utilizing a "shelf" registration process. Under this shelf registration
process, we and Crescent International Ltd. may sell the securities covered by
this prospectus in one or more offerings. This prospectus provides you with a
general description of the common stock that we may offer. Each time we sell
securities pursuant to the registration statement of which this prospectus is a
part, we will provide purchasers with a prospectus supplement that will contain
specific information about the terms of the offering. The prospectus supplement
may also add, update or change information contained in this prospectus. This
prospectus, together with applicable prospectus supplements, includes all
material information relating to this offering.
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1 The 3,681,765 shares of our common stock consists of:
o 1,200,274 shares of our common stock issued to Crescent International Ltd.
on June 9, 2000;
o 500,000 shares of our common stock issuable upon exercise of a warrant
issued to Crescent on June 9, 2000;
o 685,871 shares of our common stock issued to Crescent upon conversion of $2
million on June 26, 2000, of a total $6 million convertible note, which was
originally issued by us to Crescent on June 9, 2000;
o 945,046 shares of our common stock issuable upon the conversion of the
outstanding principal balance of $4 million on our convertible note issued
to Crescent International Ltd. on June 9, 2000, at a conversion price of
$4.2326 per share (the conversion price is the lower of
o $4.2326 and
o 93% of the lowest 3 consecutive trading prices during the 22 trading
days prior to conversion, which was $4.2787 based on a conversion date
of August 10, 2000,
resulting in a conversion price of $4.2326);
o and 350,574 shares issuable upon conversion of our $1.5 million note issued
to Crescent on July 5, 2000, at a conversion price of $4.2787 per share (the
conversion price is the lower of
o $5.0415 and
o 93% of the lowest 3 consecutive trading prices during the 22 trading
days prior to conversion, which was 4.2787 based on a conversion date of
August 10, 2000,
resulting in a conversion price of $4.2787).
7
THE COMPANY
We were incorporated as FiberCore Incorporated in Nevada in November 1993,
and commenced commercial operations at that time. In July 1995, we merged with
and into Venturecap, Inc., an inactive Nevada corporation traded on the OTC
Bulletin Board. Following the merger, Venturecap changed its name to FiberCore,
Inc. Our executive offices are located at 253 Worcester Road, Charlton,
Massachusetts, 01507 and our telephone number is (508) 248-3900. Our World Wide
Web site address is www.FiberCoreUSA.com. The information in our Web site is not
a part of this prospectus and is not incorporated by reference into this
prospectus.
OUR BUSINESS
We are primarily engaged in the business of developing, manufacturing, and
marketing single-mode and multi-mode optical fiber and optical fiber preforms
for the telecommunications and data communications industry. Preforms are the
basic component from which optical fiber is drawn and subsequently cabled. We
have developed a patented preform production process which management believes
to be competitive with other existing production methods in use. Our principal
operating units are FiberCore Jena GmbH, our wholly-owned subsidiary in Germany,
and Xtal Fibras Opticas, S.A., a Brazilian Company we recently acquired.
Our strategy in the fiber optic manufacturing and marketing business is to
become a low-cost supplier of fiber optic preforms and optical fiber to
independent manufacturers of fiber optic cable. In addition to our recent
acquisition of Xtal Fibras Opticas, S.A., which was acquired by us as of June 1,
2000, FiberCore, through FiberCore Jena GmbH, operates a manufacturing facility
in Jena, Germany, established in 1986 by Jena Glaswerk (a division of Schott
Glass), which we acquired in July 1994. While our initial marketing efforts were
focused in Western Europe, we are now selling into North and South America,
Africa, the Middle East, and the Asia Pacific regions. By establishing strategic
distribution alliances in developing countries where demand for fiber optic
cable is growing more rapidly than in North America, we believe we can
accelerate market penetration, establish long-term customer relationships and
reduce competitive risk. We believe that customers producing fiber from preforms
will enjoy the benefit of our low-cost production methodology and avoid import
duties on the value added in the fiber optic cable manufacturing process.
In pursuit of our strategy, we have undertaken to form strategic alliances
on a worldwide basis. These strategic alliances include but are not limited to:
long-term supply agreements with our key customers, investment by our key
customers in FiberCore, joint-ventures such as FiberCore Asia Sdn. Bhd., and
direct investments in related businesses by us. We expect that product demand
will be generated from these strategic alliances, as well as from independent
manufacturers of fiber optic cable. Independent market analysts, such as Kessler
Marketing Intelligence of Newport, Rhode Island, have projected strong growth in
the fiber optic market. Our strategy also includes mergers with and acquisitions
of companies such as Xtal Fibras Opticas, S.A. We intend to capitalize on the
projected growth by constructing and/or acquiring facilities to produce optical
fiber preforms and optical fiber in Western Europe, South America, the United
States, Asia and elsewhere. We have already upgraded our Jena facility and have
begun planning the construction of a new facility in Jena. Our strategy also
includes constructing joint-venture owned facilities in selected areas. We will
attempt to continually improve the manufacturing processes at our facilities by
implementing our patented technology, by developing new techniques that lower
production costs, and offering new and more competitive products, thereby
enhancing our already low cost producer strategy.
On September 18, 1995, we acquired Automated Light Technologies, Inc., a
Delaware corporation organized in 1986. Automated Light Technologies, Inc.
manufactures equipment that monitors and identifies faults in fiber optic
cables, cable protection devices which are used in outdoor fiber optic cable
installations to provide lightning protection, and electro-optical talk sets
which are used during fiber optic cable installations and subsequent maintenance
work. We have focused our resources on developing our optical fiber and preform
business and, therefore, have not been actively developing Automated Light
Technologies, Inc.'s business. However, we intend to devote resources and
efforts to Automated Light Technologies, Inc. products as resources become
available.
8
RISK FACTORS
The securities offered under this prospectus are highly speculative and
subject to numerous and substantial risks. Therefore, prospective investors
should carefully consider the following risk factors as well as the information
contained elsewhere in this prospectus.
1.) WE HAVE A HISTORY OF OPERATING LOSSES AND OUR ABILITY TO BECOME
PROFITABLE AND GENERATE SUFFICIENT PROFITS TO SUSTAIN THE GROWTH OF OUR BUSINESS
IS UNCERTAIN.
We have a history of operating losses. If our efforts to attain profitable
operations are unsuccessful, purchasers of our securities could lose their
entire investment. We have incurred operating losses since our inception in
1993, and losses are expected to continue until at least December 31, 2000. We
incurred a net loss of $2,004,000 for the year ended December 31, 1999. We
believe our history of losses is principally a result of our failure both to
fully implement our more efficient manufacturing technology and to sufficiently
increase our manufacturing capacity in order to attain economies of scale
leading to lower unit production costs. To attain profitable operations, we must
successfully overcome the risks disclosed in this prospectus and our efforts may
not be successful. Even if we become profitable, we may never generate
sufficient profits to sustain the growth of our business. As of June 30, 2000,
we had an accumulated deficit of approximately $23,025,000.
2.) IF WE ARE NOT SUCCESSFUL IN OUR EFFORTS TO OBTAIN FINANCING OF
APPROXIMATELY $50 MILLION BY DECEMBER 31, 2000, WE MAY BE UNABLE TO ENGAGE IN
THE EXPANSION NECESSARY FOR ATTAINING PROFITABILITY.
We estimate that we need to obtain additional financing of approximately
$50 million by December 31, 2000, primarily to fund planned capacity expansion
at our Xtal and Jena facilities. This expansion is necessary for us to meet our
contractual obligations and satisfy customer demand, thereby increasing sales
and attaining profitability. Although the current equity commitment from
Crescent International of $19 million will provide part of this capital funding,
we will need additional funds to complete our expansion plans. The $9.5 million
financing that we received from Crescent International Ltd. on June 9, 2000 was
used for our acquisition of Xtal. The additional $1.5 million received upon
issuance of a convertible note to Crescent on July 5, 2000, will be used toward
capacity expansion.
Our continuing operations will depend upon the success of our financing,
marketing and manufacturing efforts, which efforts may not be successful. We
have incurred net losses in each year of our operation. Our history of prior
losses could adversely affect our ability to obtain financing. For 1999, net
cash used in operations was approximately $348,000, down from $1,281,000 for
1998, and $2,650,000 for 1997. For the 6 months ended June 30, 2000, net cash
provided from operations was approximately $1.6 million. Nevertheless, we may
not be able to internally fund our potential operating losses and cannot fund
the planned amount of capital expenditures solely from our current cash and cash
equivalents.
3.) THE PROCEEDS FROM THE EXERCISE OF OPTIONS AND WARRANTS MAY NOT BE
REALIZED IF THE HOLDERS OF THESE SECURITIES DO NOT EXERCISE, OR IF THE HOLDERS
EXERCISE IN A CASHLESS MANNER, RESULTING IN LOWER THAN ANTICIPATED PROCEEDS FOR
WORKING CAPITAL AND GENERAL CORPORATE PURPOSES.
If the holders of our options and warrants do not exercise them by paying
in cash, we will have lower proceeds than anticipated for use as working capital
and for general corporate purposes. Although we would receive all of the
proceeds from the cash exercise of our outstanding warrants and options (up to
approximately $9,600,000), these securities may not be exercised by the holders
and these holders may use a "cashless" exercise. In a cashless exercise, a
holder may use all or a portion of the "equity value" of the option or warrant
being exercised, or may surrender shares of common stock issuable upon exercise
of the option or warrants, to exercise the option or warrant without paying
additional money. The equity value of an option or warrant for this purpose is
the difference between the market value of our common stock on the date of the
exercise and the exercise price of the option or warrant. We intend to utilize
the proceeds of the exercise of options and warrants, if any, for working
capital, capacity expansion and general corporate purposes and not for discharge
of debt prior to maturity.
9
4.) SHAREHOLDERS MAY SUFFER DILUTION FROM THIS OFFERING AND FROM THE
EXERCISE OF EXISTING OPTIONS, WARRANTS AND CONVERTIBLE NOTES; THE TERMS UPON
WHICH WE WILL BE ABLE TO OBTAIN ADDITIONAL EQUITY CAPITAL COULD BE ADVERSELY
AFFECTED.
Our common stock may become diluted if warrants and options to purchase
our common stock are exercised and if Crescent International Ltd. converts our
$5.5 million of outstanding convertible debt into shares of our common stock. As
of August 10, 2000, the weighted average exercise price of all of the Company's
outstanding options and warrants was $0.694 and $1.71, respectively, and the
weighted average conversion price of all of the convertible notes was $1.436.
Crescent has informed us that it has no current intent to convert our
convertible notes into shares of our common stock and that any decision as to
whether to convert in full or in part will be based on relevant facts,
circumstances and market conditions existing at the time of the decision.
Similarly, Gruntal has informed us that it has no current intent to exercise its
warrants and that any decision as to whether to exercise in full or in part will
be based on relevant facts, circumstances and market conditions existing at the
time of the decision. We have no current plans to require Crescent to purchase
additional shares of our common stock but will continuously evaluate our capital
needs and sources and, based on prevailing conditions, will decide whether to
require Crescent to purchase shares of our common stock.
In addition, the interests of current holders of our common stock will be
diluted as a result of the offering and the issuance of shares issuable to
officers, directors and affiliates on exercise of options, warrants and the
conversion of debt by such persons. Prior to the offering, the net tangible book
value per share was $0.08. After the offering, including shares that may be
issued to officers, directors and affiliates on exercise of options, warrants
and the conversion of convertible debt, the net tangible book value per share
will be $0.47, resulting in an increase in net tangible book value per share of
$0.39. The amount of the immediate dilution to the new investors from the public
offering price of $5.00 per share is $4.53. The effective cash contribution of
officers, directors and affiliates on the exercise of options, warrants and the
conversion of convertible debt would be $0.63 per share compared to the proposed
offering price of $5.00 per share.
The terms upon which we will be able to obtain additional equity capital
could also be adversely affected. Immediately after this offering, we will have
a number of options, warrants, and convertible notes outstanding, pursuant to
which we are obligated to issue up to approximately 13,000,000 shares of our
common stock, including shares being sold by Crescent and Gruntal pursuant to
this prospectus. In addition, the sale of common stock offered by this
prospectus, or merely the possibility that these sales could occur, could have
an adverse effect on the market price of our common stock.
Conversion of convertible notes issued to Crescent could further dilute
our common stock. The conversion price of Crescent's remaining balance of
convertible debt is the lower of $4.4263 and a price based on a formula
determined at the time of conversion. We have limited rights to delay conversion
for up to 180 days from the date triggering those rights if the conversion price
determined by the formula is below $2.50 per share. At the minimum trade price
of $2.50, conversion by Crescent of its convertible debt would result in the
issuance of 2,200,000 shares. We are required to register for resale shares
issued upon conversion of the convertible debt to the extent they are not
registered under the registration statement of which this prospectus is a part.
In addition to the dilution resulting from a conversion of our convertible
debt, we could be subject to further dilution upon exercise of a warrant held by
Crescent. If the purchase price of our common stock, as determined by the
formula, on the date when the registration statement of which this prospectus is
a part becomes effective is less than $2.916, then our common stock could be
subject to further dilution upon Crescent's exercise of an "early put" warrant
to purchase shares of our common stock at an exercise price of $0.001 per share.
The number of shares of our common stock that can be purchased upon exercise of
the early put warrant is equal to the number of whole shares of our common stock
that is determined by subtracting (x) 1,200,274 from (y) 3,500,000 divided by
the purchase price, determined in accordance with our agreement with Crescent
International Ltd., for one share of our common stock on the date the
registration statement of which this prospectus is a part becomes effective. For
example, if the purchase price for our common stock on the date when the
registration statement of which this prospectus is a part becomes effective by
the Securities and Exchange Commission is $1.75, as determined in accordance
with the formula, then the number of shares issuable upon exercise of the early
put warrant would be 799,726.
10
Irrespective of whether Crescent exercises warrants or converts debt, our
common stock is subject to further dilution upon the issuance of an aggregate of
up to 7,600,000 shares of our common stock to Crescent that could occur if we
require Crescent to purchase additional shares of our common stock for up to $19
million (assuming a purchase price of $2.50 per share). Our agreements with
Crescent obligate us to register any shares of our common stock that we require
Crescent to purchase. See page 21 of the section entitled "Recently Issued
Securities" for a more complete description of our agreements with Crescent.
The exercise of warrants held by Gruntal to purchase 456,886 shares of our
common stock (consisting of: 300,000 shares of our common stock at an exercise
price of $3.906 per share, 30,000 shares of our common stock at an exercise
price of $4.374 per share; 72,016 shares of our common stock at an exercise
price of $2.916 per share; and 54,870 shares of our common stock at an exercise
price of $2.916 per share), the resale of which is included in this prospectus,
would also subject shareholders of our common stock to dilution. Furthermore,
upon Crescent's conversion of its convertible debt, we are obligated to issue
additional warrants to Gruntal to purchase a number of shares of our common
stock equal to 8% of the aggregate number of shares issued to Crescent upon
conversion. Upon our requiring Crescent to purchase additional shares of our
common stock, we are obligated to issue additional warrants to Gruntal to
purchase a number of shares of our common stock equal to 6% of the aggregate
number of shares issued to Crescent. Gruntal would have demand and piggyback
registration rights with respect to shares of our common stock issuable upon the
exercise of any additional warrants so issued to Gruntal. Because we do not know
whether and when Crescent will convert its convertible debt or whether and when
we will require Crescent to purchase additional shares of our common stock, we
cannot currently determine the number of shares of our common stock, if any,
that we could be required to issue to Gruntal. See page 20 of the section
entitled "Recent Events" for a more complete description of our agreement with
Gruntal and page 25 of the section entitled "Recently Issued Securities for a
description of the warrants we issued to Gruntal.
The market value of shares of our common stock may decline if we register
shares of our common stock owned by Tyco Electronics Corporation. In the event
our common stock becomes listed on the Nasdaq National Market, we are required
to register for resale by Tyco, under the Securities Act of 1933, 2,765,487
shares of our common stock issued upon exercise of a warrant held by Tyco, upon
Tyco's demand, but only to the extent that registration will not impair the
rights of Crescent International Ltd. In addition, in the event we file a
registration statement registering shares of our common stock, Tyco may require
us to engage in a "piggyback registration" to include all or part of an
additional 2,765,487 shares of our common stock held by Tyco, in the
registration statement. We have notified Tyco of the current registration
statement of which this prospectus is a part and Tyco has informed us that it
will not require us to include its shares of our common stock in the current
registration statement.
5.) WE HAVE LIMITED PRODUCTION CAPACITY IN OUR JENA AND XTAL FACILITIES
AND NEED TO EXPAND OUR PRODUCTION FACILITIES TO MEET OUR CONTRACTUAL OBLIGATIONS
AND TO ATTAIN PROFITABILITY.
We lack the production capacity needed to meet our current demand and the
failure to expand our capacity could prevent us from attaining profitability and
from retaining our current market share. Our Jena facility (which until our
recent acquisition of Xtal Fibras Optics, S.A. was our only facility for the
manufacture of optical fiber and optical fiber preform) is currently operating
at full capacity. At our current capacity, and given current prices for our
products, the Jena facility and the Xtal facility cannot produce sufficient
quantities to satisfy our present and long-term requirements. Although we expect
to receive additional financing for the purchase of more equipment and the
expansion of our Jena facility, we may not obtain the financing necessary to
expand. Furthermore, we are adding equipment to our Xtal facility, and if we
fail to incorporate the new equipment into our facility on schedule, we may not
be able to meet our contractual obligations.
In addition, while we have initiated plans to build a new manufacturing
facility in Jena, our expansion efforts may not be completed on time and/or
within our budget, and we may not avoid manufacturing delays or problems or a
decrease in production yields. We are exposed to risk associated with operating
inefficiencies that can accompany the start-up of a new manufacturing facility
and are subject to the risk that adequate equipment and personnel will not be
available to operate the new facility. If adequate funds are not available to
complete the expansion, we may be required to scale-down the expansion. Delays
or problems in implementing our capacity expansion plans could have a material
adverse effect on our business, results of operations or financial condition.
11
6.) OUR PLANS TO EXPAND THROUGH ACQUISITIONS COULD LEAD TO SIGNIFICANT
EXPENDITURES AND INTEGRATION COSTS, INCLUDING THE LOSS OF KEY PERSONNEL, AND
COULD STRAIN OUR MANAGEMENT, FINANCIAL, AND OPERATIONAL RESOURCES.
We are currently undergoing a period of rapid growth, both internally and
through acquisitions, and our rapid expansion could entail significant
expenditures and integration costs that could strain our monetary and human
resources. If we are unable to manage growth effectively, our business,
financial condition and results of operations could be materially and adversely
affected. In addition, our results of operations would be adversely affected if
sales do not achieve growth sufficient to offset increased expenditures
associated with expansion.
We may continue to pursue the acquisition of manufacturing facilities for
our core business and for new or complementary businesses, including individual
products or technologies, in an effort to expand capacity, enter new markets and
diversify our sources of revenue. We recently acquired Xtal Fibras Opticas, S.A.
Growth through acquisitions, such as the Xtal Fibras Opticas, S.A. acquisition,
may not be sustained or managed successfully. Acquisitions and/or expansions may
require significant additional expenditures, prior to obtaining any benefits of
integration resulting from them, including integration and absorption costs, and
these expenditures may strain management, financial and operational resources.
We may also lose key personnel from our operations or those of any acquired
business. Our ability to effectively manage our operations and growth requires
us to continue to improve our operational, financial and management controls,
reporting systems and procedures and to attract and retain sufficient numbers of
talented employees.
Additionally, future acquisitions may also result in potentially dilutive
issuances of equity securities, the incurring of additional debt, the assumption
of known and unknown liabilities, and the amortization of expenses related to
goodwill and other intangible assets, all of which could harm our business,
financial condition and operating results. Acquisitions in foreign countries may
pose additional problems, and we could experience inefficiencies in conducting
our business as we integrate new operations and manage geographically dispersed
operations. We may not succeed in hiring and retaining qualified management,
sales, customer support and technical personnel to integrate acquired
operations, manage future growth effectively and accomplish our overall
objectives. Competition for qualified personnel is intense.
7.) WE ARE RESTRICTED FROM RELOCATING OUR JENA MANUFACTURING OPERATION AND
SOME OF THE EQUIPMENT IN OUR JENA FACILITY HAS REVERSION RIGHTS AFFECTING OUR
ABILITY TO TAKE ADVANTAGE OF LESS EXPENSIVE LABOR MARKETS AND POTENTIALLY
ADVERSELY IMPACTING OUR PROFITABILITY.
Our contractual restriction from moving our manufacturing equipment out of
the Jena facility until 2001 could adversely affect our ability to take
advantage of less expensive labor markets and, consequently, adversely impact
our Company's profitability. In June 1994, we leased the Jena facility for a
fixed monthly sum and acquired some equipment located in that facility from Sico
Quartzschmelze GmbH. In the event we default on our agreement with Sico
Quartzschmelze GmbH, the equipment purchased from Sico Quartzschmelze GmbH could
revert to Sico Quartzschmelze GmbH and Sico Quartzschmelze GmbH could purchase
any additional equipment owned by FiberCore Jena GmbH at fair market value.
Until the year 2001, our ownership of the equipment is subject to the right of
the German government, from whom Sico Quartzschmelze GmbH purchased the
equipment, to repossess the equipment in the event we cease production. In
addition, the manufacturing equipment at the Jena facility could revert to a
German governmental entity if we do not properly maintain the Jena facility or
continue to employ a minimum number of 35 employees. We currently have more than
90 employees.
8.) WE ARE SUBJECT TO RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS,
INCLUDING POLITICAL AND ECONOMIC CHANGES IN THE COUNTRIES WE OPERATE IN, WHICH
COULD AFFECT OUR PROFITABILITY.
Economic, financial, and political changes could affect the conduct of our
business internationally, particularly at our German and Brazilian facilities,
thereby affecting the profitability of our business. For example, we could be
subject to unexpected changes in legislative or regulatory requirements and
fluctuations in the United States dollar, the Brazilian real, the Euro and other
currencies in which we do business. While we engage in foreign currency hedging
transactions, we do not attempt to eliminate all foreign currency risk from our
business. The
12
business and operations of FiberCore Jena GmbH and Xtal Fibras Opticas S.A., are
subject to the changing economic and political conditions prevailing from time
to time in Germany and Brazil, respectively. Labor costs, corporate taxes and
employee benefit expenses are high and working hours are shorter than in the
rest of the European Union, the United States and Japan. Further, our Malaysian
joint-venture has been delayed because of a recent financial crisis in Asia.
There is also the threat of regional conflict. For example, our Middle East
joint venture, Middle East Fiber Cable Company, is headquartered in Saudi Arabia
and could be affected by local instability.
9.) WE ARE DEPENDENT ON A LIMITED NUMBER OF CUSTOMERS, THE LOSS OF WHOM
COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS; WE MAY NOT BE ABLE TO
EXPAND OUR CUSTOMER BASE IN THE NEAR FUTURE.
Our dependence on a limited number of customers, such as Furakawa
Industrial S/A, Pirelli (a new customer), and Telcon Fios E Cabos S/A subjects
us to additional risk, and the loss of either of our two largest customers could
have a material adverse effect on us. Historically, we have been dependent on
relatively few customers for the majority of our sales. Although our customer
concentration level with respect to our Jena facility has improved, with our top
two customers accounting for approximately 45% of sales in 1999 as compared to
the same top two customers accounting for 59% of sales in 1997, we must continue
to expand our customer base, but we may not be successful in doing so.
We are contractually committed to provide at least 50% of Tyco Electronics
Corporation's (formerly AMP Incorporated) forecasted requirements of optical
fiber for an initial term of five years, which expires on December 31, 2000, and
an additional five year term at Tyco's option. In the event that the agreement
expires because Tyco outsources its cable manufacturing to third parties, rather
than manufacture its own cable, Tyco has agreed to ensure that its third party
cable suppliers initiate discussions to purchase optical fibers from us. Tyco is
currently outsourcing much of its cable manufacturing requirements. We have been
selling to Pinacl Ltd., a supplier of cable to Tyco, in lieu of selling directly
to Tyco. In 1991, Pinacl accounted for 21% of our total sales. In the event that
Tyco's requirements change for any reason, or Tyco does not continue to
encourage Pinacl or other suppliers to purchase optical fiber from us, we may be
in the position of having committed significant resources to accommodate Tyco's
needs, by way of capacity expansion, without having Tyco purchase or encourage
others to purchase our products. Additionally, we may not reach agreement with a
third party supplier, or the terms and conditions of any agreement with Tyco's
suppliers may not be favorable to us.
The following table lists the customers that accounted for more than 10%
of our sales for the last three fiscal years:
% of Sales
Customer 1999 1998 1997
-------- ---- ---- ----
Leone AG 24% 23% 42%
Pinacl Ltd. 21% 22% 17%
Siemens AG 10% 13% 0%
Optical Cable Corp. 10% 0% 0%
Belden Wire & Cable 5% 10% 0%
The following table lists the customers that accounted for more than 10%
of Xtal's sales for the last three fiscal years:
% of Sales
Customer 1999 1998 1997
-------- ---- ---- ----
Telcon Fios E Cabos S/A 24% 11% 20%
Alcatel Cabos Brasil S/A 22% 22% 0%
Furakawa Industrial S/A 17% 45% 28%
Alcoa Aluminos S/A 0% 0% 24%
13
% of Sales
Customer 1999 1998 1997
-------- ---- ---- ----
Marsicano S/A 0% 0% 11%
Ficap-Fios Cabos 0% 28% 10%
10.) OUR DEPENDENCE ON THIRD-PARTY SUPPLIERS COULD RESULT IN OUR INABILITY
TO OBTAIN IN A TIMELY MANNER THE NECESSARY MATERIALS FOR OUR BUSINESS.
Our dependence on third party suppliers, particularly Heraeus Quarz Glas
GmbH & Co. K.G., subjects us to the risk that we may not be able to timely and
efficiently obtain material essential to our business. We rely on outside
parties for the manufacture of our raw materials, including our principal raw
material, glass tubing. Accordingly, we are dependent on the capabilities of
these outside parties for the successful manufacture of their products.
Currently, we purchase over 95% of our required glass tubing from Heraeus. At
the beginning of each year, we negotiate a firm commitment with this supplier
for our annual glass tubing requirements. While Heraeus has committed to supply
our tube requirements based on current usage, Heraeus has not yet committed to
meet our projected long-term glass requirements. To reduce the possibility of
future glass shortages, we have identified other suppliers. These manufacturers
may not be able to meet our needs in a satisfactory and timely manner in the
event our current supplier is unable or unwilling to do so. The Jena facility
has the capability to manufacture very small quantities of the high-purity
synthetic glass as additional cladding material using our new proprietary and
patented (and patents pending) production process, but cannot supply all of our
requirements. Xtal Fibras Opticas, S.A., a company we recently acquired, also
has similar dependency on raw materials. Furthermore, Xtal Fibras Opticas, S.A.
is highly dependent on, Shin Etsu, a Japanese preform manufacturer and a
significant competitor of the Company, for over 50% of its preform requirements.
Xtal Fibras Opticas, S.A. is in the process of entering into a long term
multi-year supply agreement with this preform manufacturer. However, this
supplier may not be able to satisfy our future requirements.
Although we believe that the possibility of securing alternative suppliers
as well as our ability for glass manufacturing capability at our facilities in
Germany and Brazil should limit the risk, we may have problems in obtaining
glass tubing or other raw materials in the future.
11.) WE HAVE SUBSTANTIAL COMPETITION, AND SEVERAL OF OUR COMPETITORS HAVE
MUCH GREATER RESOURCES THAN US, ENABLING THEM TO PROVIDE MORE COMPETITIVELY
PRICED PRODUCTS; THIS COMPETITION COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
PERFORMANCE.
We are subject to intense competition, which could have a negative effect
on our performance. The optical fiber business is highly competitive, and there
are several competitors that have substantially greater resources than we do.
These competitors are providing, or are capable of providing, competitively
priced products that are similar to the products we produce. They may also
introduce new products that could directly compete with our products in all
markets. If these competitors were to aggressively target our market segment, we
could be materially adversely affected.
The competition for our multi-mode fiber products is primarily composed of
Corning, Inc., Lucent Technologies, Inc., Alcatel, SpecTran Corporation
(recently acquired by Lucent Technologies, Inc.) and Plasma Optical Fiber. While
we believe that there is limited competition in the sale of preforms to cable
manufacturers who draw their own fiber, we anticipate that competition will
grow. The largest preform competitor is Shin Etsu. Competition in the
single-mode fiber optic market is significantly more extensive than either the
preform or the multi-mode fiber markets. In that market, our primary competitors
are Corning, Inc. and Lucent Technologies, Inc.
Our fiber optic products also compete with other existing products,
including products associated with copper wire and wireless communications. Over
the past two decades, optical fiber has successfully competed with copper wire.
Wireless communications depends heavily on a fiber optic backbone. Any
improvements in these competing products or the introduction of new competing
technologies may have a material adverse effect on our marketability and
profitability.
12.) THE CONDITIONS OF OUR INDUSTRY COULD CHANGE IF THE SUPPLY OF OPTICAL
FIBER AND PREFORM BEGINS TO EXCEED MARKET DEMAND, OR IF SLOWING IN INTERNET
RELATED GROWTH OR SLOWING OF INFRASTRUCTURE GROWTH IN DEVELOPING
14
COUNTRIES DECREASES DEMAND, LEADING TO A DECLINE IN THE PRICES OF OUR PRODUCTS
AND REDUCING OUR ANTICIPATED PROFITS.
We are exposed to industry-wide risk, and to the extent that future market
supply begins to exceed market demand, or to the extent that our products are no
longer in demand, prices for our products may decline from current levels.
Decreased growth in telecommunications in general and in the use of the internet
in particular in the United States and Western Europe could reduce demand for
our products, which are used in the transmission of data over the internet, and
could result in a decline in prices for our products. Furthermore, developing
countries, including China and Malaysia and developing regions, including the
Pacific Rim and Middle East, are large consumers of fiber optics as they build
telecommunications infrastructures. A slowing of growth and modernization in
these countries and regions could decrease the demand for our products and
result in a decline in prices. We may also be burdened by the costs associated
with excess capacity. These factors could prevent us from attaining
profitability or could result in substantially lower profitability than we have
anticipated. Based on published market studies and industry sources, we believe
that the current demand for optical fiber products exceeds the supply, but this
may change in the future.
13.) THE OPTICAL FIBER INDUSTRY IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE,
AND OUR FAILURE TO INTRODUCE NEW OR ENHANCED PRODUCTS ON A TIMELY BASIS COULD
PREVENT OUR ABILITY TO ATTAIN PROFITABILITY.
The failure to introduce new or enhanced products on a timely and cost
competitive basis could have a material adverse effect on our business, results
of operations and financial condition. Optical fiber products are characterized
by rapid technological advances and evolving industry standards. Any failure by
us to anticipate or respond adequately to technological developments or end user
requirements could damage our competitive position in the marketplace and reduce
our revenues and/or profits. Our ability to attain and maintain profitably
depends, in large part, upon our timely access to, or development of,
technological advances and the ability to use those advances to improve existing
products, develop new products and manufacture those products efficiently. We
may not be successful in these endeavors.
14.) WE ARE DEPENDENT ON KEY PERSONNEL THE LOSS OF WHOM COULD AFFECT THE
SUCCESS OF OUR BUSINESS.
The loss of any of our key executives could have a material adverse effect
on our business. We do not have employment agreements with any of our executive
officers. While we intend to apply, as resources become available, for a key-man
life insurance policy on Dr. Aslami, our Chairman, President and Chief Executive
Officer, with the Company as the sole beneficiary, we currently have no policy
of this type.
Our success depends, to a significant extent, upon the performance of our
key executive officers and key technical employees. Our future success will also
depend in large part upon our ability to attract and retain additional highly
skilled managerial, technical and marketing personnel. Because of recent and
rapid growth in the fiber optic industry, the demand for skilled personnel has
increased and the supply of qualified and experienced personnel may not
sufficiently rise to meet demand. In addition, we are a relatively small company
and our recruitment efforts must compete with those of larger and more
well-known competitors in our industry. We may not be successful in attracting
and retaining the necessary highly skilled personnel.
15.) WE ARE CONTROLLED BY A FEW INDIVIDUALS WHO COULD CONTROL OR STRONGLY
AFFECT THE VOTES OF SHAREHOLDERS FOR OUR DIRECTORS.
Several persons each own, on a fully diluted basis, over 5% of our common
stock and could influence the company's decisions. Dr. Aslami, our President and
Chief Executive Officer, owns 14.35 %, Mr. DeLuca, our Secretary, beneficially
owns 9.40 %, and Tyco Electronics Corporation owns 17.41%. These persons and
Tyco Electronics Corporation, acting alone or together, could control or
strongly affect the votes of shareholders for directors of FiberCore. Although
Tyco has entered into an agreement restricting itself from exercising control
over the election of directors, and us generally, until May 2002, after the
expiration of that agreement, or upon amendment of that agreement, Tyco's
ability to singly or jointly become more involved in our corporate governance
would be unrestricted.
15
16.) OUR PATENTS AND PROPRIETARY RIGHTS COULD BE CHALLENGED, AND OUR
FAILURE TO RESOLVE DISPUTES REGARDING THEM COULD AFFECT OUR ABILITY TO COMPETE
EFFECTIVELY WITH OUR COMPETITORS.
Our failure to resolve patent and proprietary rights disputes could affect
our ability to compete effectively with our competitors. The steps taken by us
to protect our intellectual property may not be adequate to prevent
misappropriation of our intellectual property and others may develop competitive
technologies or products. Furthermore, other companies may independently develop
products that are similar or superior to our products or technologies, duplicate
any of our technologies, or design around the patents issued us. In addition,
the validity and enforceability of a patent can be challenged after its
issuance. While we do not believe that our patents infringe upon the patents or
other proprietary rights of any other party and we are unaware of any claim of
patent infringement, other parties may claim that our patents and manufacturing
processes infringe upon their patents or other proprietary rights. We may not be
successful in defending against any claims of infringement. Moreover, the
expense of defending against those claims could be substantial.
17.) WE HAVE NOT PAID DIVIDENDS AND DO NOT PLAN TO PAY DIVIDENDS IN THE
FORESEEABLE FUTURE.
We have never paid cash dividends on our common stock and we do not
anticipate paying any cash dividends in the foreseeable future. We intend to use
any future earnings to finance the growth and development of our business.
18.) WE HAVE GUARANTEED THE DEBTS OF OTHER COMPANIES AND WE COULD BE
LIABLE FOR DEBTS OVER WHICH WE HAVE NO CONTROL.
We could be liable for debts owed by third parties over whom we have no
control. Automated Light Technologies, Inc. is the primary guarantor of
approximately $240,000 in loan obligations of Allied Controls, Inc., a former
subsidiary of Automated Light Technologies, Inc., to the Department of Economic
Development for the State of Connecticut. The loan, which is due in 2006,
provides for monthly principal payments of $500 until April 2001, and
thereafter, $3,500 and interest at 1% per annum. As of the date of this
prospectus, Allied Controls, Inc. is current in its payments to the Department
of Economic Development.
In addition, we are a co-guarantor with other joint venture partners for
credit facilities provided by banks to Middle East Fiber Cables Co., a Saudi
Arabian joint venture. These credit facilities are collateralized by the assets
of the joint venture company. As of June 30, 2000, we were contingently liable
with respect to these loans in the amount of $792,000.
19.) OUR COMMON STOCK IS TRADED ON A LIMITED MARKET AND IT HAS BEEN
SUBJECT TO FREQUENT SIGNIFICANT PRICE FLUCTUATIONS.
Our common stock is quoted on the Nasdaq OTC-Bulletin Board, and has been
subject to frequent significant price fluctuations. The OTC-Bulletin Board does
not provide the wide base of shareholders that other national markets and
exchanges provide. Additionally, the trading prices of stocks traded on the
OTC-Bulletin Board have a tendency to be more volatile than the prices of stocks
traded on national exchanges and our common stock has been subject to frequent
significant price fluctuations, due in part to speculative activity.
20.) OUR COMMON STOCK PRICE IS VOLATILE AND IT IS POSSIBLE THAT THE PRICE
OF OUR COMMON STOCK WILL DECLINE IN THE FUTURE.
The market for our common stock has been subject to wide fluctuations and
it is possible that the price of our common stock will decline in the future.
These fluctuations are in response to variations in our anticipated or actual
results of operations, speculation and market conditions which may be unrelated
to our operating performance.
16
As of September 19, 2000, our officers and directors held 14,701,724
shares and Tyco Electronic Corporation held 11,628,204 shares of the 54,068,988
shares outstanding. If all the common stock and warrants under this offering are
sold, 9,442,757 additional shares of common stock will be registered under the
Securities Act, subject to the requirement of maintaining a current prospectus
for these additional securities. It is possible that the price of our common
stock will decline after the offering described in this prospectus is priced
into the market.
17
The following table reflects the high and low closing prices for our
common stock for the last two years:
PERIOD HIGH LOW
2000
----
3rd quarter $ 8.68 $4.4688
(until September
19, 2000)
2nd quarter $ 6.13 $2.88
1st quarter $10.31 $2.53
1999
----
4th quarter $ 2.13 $0.39
3rd quarter $ 0.69 $0.22
2nd quarter $ 0.36 $0.16
1st quarter $ 0.50 $0.13
1998
----
4th quarter $ 0.19 $0.11
3rd quarter $ 0.44 $0.14
2nd quarter $ 0.50 $0.25
1st quarter $ 0.75 $0.29
The significant fluctuation in the price for our common stock during 2000
roughly tracks market trends in our industry and similar market fluctuation in
the future could negatively affect the stability of our stock price.
21.) WE ARE SUBJECT TO ENVIRONMENTAL REGULATIONS WORLDWIDE AND FAILURE TO
COMPLY WITH THESE REGULATIONS MAY RESULT IN FINES AND THE SUSPENSION OF OUR
OPERATIONS.
Our company is subject to environmental protection laws in both Jena,
Germany and Campinas, Brazil concerning the use, storage, and disposal of any
toxic and hazardous materials. Any failure to comply with these regulations may
result in the issuance of fines and the suspension of operations. Neither
FiberCore Jena GmbH nor Xtal Fibras Opticas, S.A. has been cited in the past for
any environmental violations. Algar S. A. has agreed to remedy any existing
violations associated with Xtal Fibras Opticas, S.A. at the time of our
acquisition of Xtal Fibras Opticas S.A. and to indemnify us for any losses
caused by any existing violation until it is remedied. This indemnification is
subject to the risk that Algar may fail to perform due to illiquidity or other
reasons. Algar's indemnification is secured by their 10% shareholder interest in
Xtal Fibras Opticas, S.A.
DILUTION
The interests of current holders of our common stock will be diluted as a
result of the offering and the issuance of shares issuable to officers,
directors and affiliates upon the exercise of options, warrants and the
conversion of debt by such persons. Prior to the offering, the net tangible book
value per share was $0.08. After the offering, including shares that may be
issued to officers, directors and affiliates upon the exercise of options,
warrants and the conversion of convertible debt, the net tangible book value per
share will be $0.47, resulting in an increase in the net tangible book value per
share of $0.39. The amount of the immediate dilution to the new investors from
the public offering price of $5.00 per share is $4.53. The effective cash
contribution of officers, directors and affiliates upon the exercise of options,
warrants and the conversion of convertible debt would be $0.63 per share
compared to the proposed public offering price of $5.00 per share.
FORWARD-LOOKING INFORMATION
This prospectus contains or incorporates forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. You can identify these forward-looking statements by our use
18
of the words "believes," "anticipates," "plans," "expects," "may," "will,"
"would," "intends," "estimates" and similar expressions, whether in the negative
or affirmative. We cannot guarantee that we will actually achieve these plans,
intentions or expectations. Actual results or events could differ materially
from the plans, intentions and expectations disclosed in the forward-looking
statements we make. We have included important factors in the cautionary
statements in this prospectus, particularly under the heading "Risk Factors,"
that we believe could cause our actual results to differ materially from the
forward-looking statements that we make. The forward-looking statements do not
reflect the potential impact of any future acquisitions, mergers or
dispositions. We do not assume any obligation to update or revise any
forward-looking statement we make as a result of new information, future events
or otherwise.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and other reports, proxy statements and other
documents with the Securities and Exchange Commission. You may read and copy any
document we file at the SEC's public reference room at Judiciary Plaza Building,
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. You should call
1-800-SEC-0330 for more information on the public reference room. Our SEC
filings are also available to you on the SEC's Internet site at
http://www.sec.gov.
This prospectus is part of a registration statement and does not contain
all of the information included in the registration statement. Whenever a
reference is made in this prospectus to any contract or other document of ours,
you should refer to the exhibits that are a part of the registration statement
or the prospectus supplement for a copy of the referenced contract or document.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" into this prospectus
information that we file with the SEC in other documents. This means that we can
disclose important information to you by referring to other documents that
contain that information. The information incorporated by reference is an
important part of this prospectus, and information that we file with the SEC in
the future and incorporate by reference will automatically update and may
supersede the information contained in this prospectus. We incorporate by
reference the following documents:
o The description of our common stock contained in our registration statement
on Form 8-A filed with the SEC on December 5, 1996, including any amendments
or reports filed for the purpose of updating our common stock description;
o Our Annual Report on Form 10-K for the fiscal year ended December 31, 1999,
as amended on Form 10-K/A on September 19, 2000;
o Our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
2000;
o Our Current Report on Form 8-K Report filed on June 9, 2000;
o Our Current Report on Form 8-K Report filed on June 15, 2000;
o Our Current Report on Form 8-K Report filed on July 3, 2000, as amended on
July 10, 2000;
o Our Current Report on Form 8-K Report filed on August 9, 2000;
o Our Current Report on Form 8-K Report filed on August 15, 2000;
o Our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
2000; and
o Our Current Report on Form 8-K Report filed on September 8, 2000.
All documents that FiberCore will file with the SEC under the provisions
of Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934,
after the date of this prospectus and prior to the termination of any offering
19
of securities under this prospectus shall be deemed to be incorporated by
reference, and to be a part of this prospectus from the date such documents are
filed.
Each of these documents is available from the SEC's web site and public
reference rooms described above. You may also request a copy of these documents,
excluding exhibits, at no cost, by contacting: Mr. Steven Phillips, Interim
Chief Financial Officer, FiberCore, Inc., 253 Worcester Road, P.O. Box 180,
Charlton, Massachusetts 01501, telephone number (508) 248-3900.
You should rely only on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have not authorized
anyone else to provide you with different information.
We are not making an offer of the securities covered by this prospectus in
any state where the offer is not permitted. You should not assume that the
information in this prospectus or any prospectus supplement is accurate as of
any date other than the date on the front of those documents.
RECENT EVENTS
Since May 16, 2000, we completed six transactions involving the issuance
of our securities. The transactions consist of:
1) a private placement pursuant to which we issued 485,002 shares to ten
offshore accredited investors.
2) a private placement with Crescent International Ltd pursuant to
agreements entered into with Crescent International Ltd. Specifically, we:
o issued 1,886,145 shares of our common stock, of which 1,200,274
shares were sold for $3.5 million and 685,871 were issued upon
conversion of $2 million of convertible debt;
o issued $7.5 million in debt convertible into shares of our common
stock, of which $5.5 million is currently outstanding, and $2
million was converted into 685,871 shares of our common stock; and
o can require Crescent to purchase up to 7,600,000 shares of our
common stock for proceeds of up to $19 million;
3) a private placement in connection with our transactions with Crescent,
pursuant to which we issued to Gruntal & Co, LLC, our investment banker and
agent, warrants to purchase up to 456,886 shares of our common stock;
4) a private placement pursuant to which we issued a total of 7,216,996
shares of our common stock to Tyco Electronics Corporation, a wholly owned
subsidiary of Tyco International, upon its conversion of outstanding debt and
exercise of warrants to purchase shares of our common stock;
5) a private placement pursuant to which we issued 1,352,275 shares of our
common stock to Tyco Sigma Limited, a wholly owned subsidiary of Tyco
International;
6) a Regulation S offering pursuant to which we issued 155,718 shares of
our common stock to two venture capital companies outside the United States.
Each of these transactions is more fully described in the section entitled
"Recently Issued Securities" beginning on page 22.
ACQUISITION OF XTAL FIBRAS OPTICAS, S.A.
On June 20, 2000, we closed on an agreement to acquire, as of June 1,
2000, full ownership of Xtal Fibras Opticas, S. A., a wholly owned subsidiary of
Algar S. A. Xtal Fibras Opticas, S.A., a company located in Campinas, Brazil,
manufactures primarily singlemode optical fiber for sale mainly in Brazil. The
$25 million purchase price is
20
payable over a three year period, and is subject to some adjustments. At the
closing, we paid $10 million in cash and issued to Algar a $10 million, 6% note,
payable on December 31, 2000. According to the terms of our agreement, we were
entitled to receive a $1 million discount if we redeemed the $10 million note by
August 31, 2000. On August 29, 2000, Algar's Chief Operating Officer, on behalf
of Algar, agreed to allow us to receive the discount if we paid the remaining $9
million of the note by September 8, 2000 and on September 8 we paid that amount,
together with interest, to Algar using proceeds from Tyco's recent investment in
our securities. (See the section entitled "Recently Issued Securities" at page
25.) Subsequently, Algar has informed us that it disputes our understanding that
Algar extended the time within which we may prepay the note to receive the
discount. Accordingly, we are currently engaged in discussions with Algar to
resolve the matter. At the closing, we also issued a $2.5 million, 6% note,
payable in two installments of $1.25 million each, on September 20, 2001, and on
December 20, 2002, respectively. Our obligation to repay the $2.5 million note
is contingent on Xtal's attaining specified profitability targets in 2000 and
2001. We will acquire the remaining 10% of the stock upon payment of an
additional $2.5 million on or before June 20, 2003.
We need to expand capacity in order to attain profitability, maintain
market share, and to meet customer demand. The acquisition of Xtal provides us
with an immediate opportunity to satisfy these objectives. Xtal provides us with
the opportunity to transfer technology from Jena, in order to improve Xtal's
gross profit margins and Xtal has the physical space to accommodate new
equipment for capacity expansion.
Since we need more capacity than Xtal could currently provide, even with
the planned increases, preparations for the expansion of Jena are continuing.
With respect to our Jena facility, we currently have the framework of a $25
million financing structure that is similar to the arrangement that we entered
into in November 1996, and have identified the participating banks. Under this
structure, we would provide $2.5 million or 10% of the project cost as
collateral to secure the remaining $22.5 million in loans and grants we would
receive. The grants, which are arranged by agencies of the German government,
account for an estimated $9.5 million of the $22.5 million. We expect to
finalize negotiations within the next three months.
AGREEMENTS WITH TYCO ELECTRONICS CORPORATION
On May 19, 2000, we entered into a two-year standstill agreement with Tyco
Electronics Corporation, a unit of Tyco International Ltd. under which Tyco
terminated a previous shareholder voting agreement. The standstill agreement
provided, among other things, that until May 19, 2002 Tyco will not, directly or
indirectly engage in activities that could exercise control over us, such as
subjecting our stock to any voting agreement, soliciting proxies or written
consents of stockholders with respect to our common stock, calling a special
meeting of stockholders to elect or remove any member of our board of directors,
or to approve or disapprove any reorganization of FiberCore. In addition, Tyco
has agreed to vote all of its shares of our common stock in favor of our
management nominees to our board of directors who are reasonably acceptable to
Tyco.
On May 19, 2000, we also entered into an agreement with Tyco Electronics
Corporation pursuant to which Tyco exercised warrants to purchase, and converted
the outstanding balance on a convertible note and a term loan into, a total of
7,216,996 shares of our common stock. (See the section entitled "Recently Issued
Securities" below on page 19.) The agreement also provided, among other things,
that
o we are required to assist Tyco Electronics Corporation in completing
private placement transactions involving shares of our common stock
recently acquired by Tyco (- assistance would include attending
meetings arranged by Tyco with prospective private placement
investors, if necessary, attending road-shows arranged by Tyco in
connection with sales by Tyco of our securities, and generally
assisting Tyco in the promotion of the Company);
o if, as a result of those private placement transactions, Tyco no
longer owns 10% or more of the outstanding shares of our common
stock, Tyco will relinquish all registration rights currently held
by it with respect to our common stock; and
o in the event that the Purchase Agreement entered into between Tyco
Electronics Corporation and us in July 1996 expires on December 31,
2000, because Tyco outsources its cable manufacturing to third
parties, rather than manufacture its own cable, Tyco will ensure
that its third party cable suppliers initiate
21
discussions to purchase optical fibers from us. Tyco is currently
outsourcing much of its cable manufacturing requirements, and we
have been selling to Tyco Electronics Corporation's cable suppliers
in lieu of selling directly to Tyco Electronics Corporation.
On September 5, 2000, we sold 1,352,275 additional shares of our common
stock to a wholly owned subsidiary of Tyco, as more fully described on page 25
of the section entitled "Recently Issued Securities".
AGREEMENT WITH GRUNTAL & CO., LLC
On April 14, 2000, we entered into an agreement with Gruntal & Co., LLC
requiring Gruntal to work with us and our management to obtain financing,
prepare documents describing our business for use with prospective investors,
and provide us with assistance in entering into transactions.
Gruntal received fee compensation and warrants to purchase shares of our
common stock in connection with assistance provided in entering into agreements
with Crescent, as more fully described in the section entitled "Recently Issued
Securities" on page 24. Upon Crescent's conversion of its convertible debt, we
are obligated to issue additional warrants to Gruntal to purchase a number of
shares of our common stock equal to 8% of the aggregate number of shares issued
to Crescent upon conversion. Upon our requiring Crescent to purchase additional
shares of our common stock, we are obligated to issue additional warrants to
Gruntal to purchase a number of shares of our common stock equal to 6% of the
aggregate number of shares issued to Crescent.
Because we do not know whether and when Crescent will convert its
convertible debt or whether and when we will require Crescent to purchase
additional shares of our common stock, we cannot currently determine the number
of shares of our common stock, if any, that we could be required to issue to
Gruntal.
RESIGNATION OF OUR CHIEF FINANCIAL OFFICER
On July 31, 2000, Michael J. Beecher, our Treasurer and Chief Financial
Officer, resigned. Mr. Beecher, who resigned for personal reasons, will assist
in the transition of his duties. Mr. Steven Phillips, who has been a director
and financial consultant to us for many years, has assumed the role of interim
Treasurer and Chief Financial Officer until a permanent replacement is
recruited.
STATUS OF OUR EFFORTS IN THE PACIFIC RIM, MALAYSIA AND OTHER ACTIVITIES
With the economic climate in the Pacific Rim improving, we see an
opportunity to reactivate and capitalize upon initial efforts made in that
region a few years ago. In that regard, we have started looking for additional
equity partners and lending sources. The need for this additional equity is a
direct result of the tightened lending requirements imposed by banks since the
economic crisis. We have identified two Malaysian investor groups and a lending
institution as potential participants, but we have not entered into any
agreements.
While we presently do not employ the human resources necessary to commence
the building of new facilities in the Pacific Rim and in Germany, as well as the
capacity expansion at Xtal, we have identified personnel that could be employed
as and when funding is secured. In addition, these projects commence and end at
different points in time, which allows for maximum use of personnel.
RECENTLY ISSUED SECURITIES
COMMON STOCK ISSUED AND SECURITIES ISSUABLE TO CRESCENT INTERNATIONAL LTD.
On June 9, 2000, we entered into an agreement that allows us to issue and
sell and requires Crescent International Ltd. to purchase, upon our request,
equity and debt securities for consideration of up to $30,000,000 (minus
applicable fees and expenses). Specifically, the agreement provided for our
issuing $7.5 million in debt and $3.5 million in equity to Crescent, and enables
us to require Crescent to purchase shares of our common stock for up to $19
million. In connection with the transaction we issued to Crescent
22
o 1,200,274 shares of our common stock, issued to Crescent on June 9,
2000, for consideration of $3,500,000;
o a secured $6 million convertible note, issued to Crescent on June 9,
2000 and due on June 9, 2002, of which $2 million has been converted
into 685,871 shares of our common stock;
o an additional $1.5 million convertible note, issued to Crescent on
July 5, 2000 and due July 5, 2002, and
o related warrants, each as described more fully below.
The net proceeds received by us from the issuance of our common stock and the
convertible notes after adjustment for fees and amounts held in escrow were
$10,436,469.
Under the agreement with Crescent International Ltd., we can obtain,
subject to applicable fees and expenses and the terms and conditions of the
agreement, an additional $19 million by selling up to 7,600,000 shares of our
common stock to Crescent at various points in time, beginning 22 days after the
registration statement of which this prospectus is a part becomes effective.
Additionally, Crescent has the right to assign its obligation to purchase shares
of our common stock to affiliates of Crescent; however, Crescent has informed us
that it has no current or future plans to assign its obligations.
Specifically, with regard to sale of shares of our common stock to
Crescent International Ltd., we can from time to time at our option and subject
to the limitations described in this prospectus, issue and sell shares of our
common stock with an aggregate purchase price of up to twice the average daily
trading value during the 22 trading day period immediately preceding the date of
the notice by us requiring Crescent to purchase, but no more than $3.5 million
at one time; or in the event the trade price on each trading day between the
date we notify Crescent that we will sell them shares of our common stock and
the date the sale occurs is less than $2.50 per share, up to $20,000. The
purchase price, with respect to the purchase of common stock as required by us,
is determined by taking 93% of the average of the lowest three consecutive
volume-weighted average prices as reported by Bloomberg L.P. during the 22-day
trading period immediately preceding the applicable purchase date.
Under the agreement we are required to register the shares issued and
issuable to Crescent through the registration statement of which this prospectus
is a part and subsequent registration statements.
The closing market price for shares of our common stock on June 9, 2000,
the day we entered into the agreement with Crescent, was $5.50 per share.
On June 26, 2000, Crescent converted $2 million of a total $6 million
convertible note, which was issued by us to Crescent on June 9, 2000, into
685,871 shares of our common stock.
Termination of Crescent International Ltd.'s Obligations
Crescent's International Ltd.'s commitment to provide the aforementioned
funds expires on June 9, 2002. We have the right to terminate the agreement
under which Crescent must purchase additional equity at any time upon 30 days'
written notice. Crescent has the right to terminate the agreement in the event
that we fail to perform specified obligations under that agreement.
WARRANTS ISSUED TO CRESCENT INTERNATIONAL LTD.
Early Put Warrant
On June 9, 2000, we issued an early put warrant to purchase shares of our
common stock to Crescent International Ltd. at an exercise price of $0.01 per
share. The early put warrant is exercisable only if the purchase price
(determined in accordance with the agreement with Crescent) for one share of our
common stock on the date on which the registration statement of which this
prospectus is a part becomes effective is lower than $2.916 per share. The
number of shares of our common stock that can be purchased upon exercise of the
early put warrant is equal to the number of whole shares of our common stock
that is determined by subtracting (x) 1,200,274 from (y) 3,500,000 divided by
the purchase price, determined in accordance with our agreement with Crescent
International
23
Ltd., for one share of our common stock on the date the registration statement
of which this prospectus is a part becomes effective. At its sole option,
Crescent may effect a cashless exercise of the early put warrant. In this
cashless exercise Crescent may surrender shares of common stock issuable upon
exercise of the early put warrant in order to exercise this option or warrant
without paying additional monies. The equity value of the early put warrant for
this purpose is the difference between the market value of our common stock on
the date the of exercise and $0.01.
According to the terms of the warrant, we may, in lieu of issuing shares
of common stock upon Crescent International Ltd.'s exercise of the early put
warrant, with respect to all or part of the shares of our common stock issuable
upon the exercise of the early put warrant, pay to Crescent International Ltd.
an amount equal to the product of
o the price of one share of common stock on the trading day
immediately preceding the day on which the warrant is exercised
multiplied by
o the number of shares of common stock for which we elect to pay.
We may elect to execute this cash-out option in the event that, among other
things, the sum of
o the number of shares issuable upon exercise of the warrant plus
o 1,200,274
exceeds the number of shares registered pursuant to the registration statement
of which this prospectus is a part.
See the "Risk Factors" subsection entitled "Stockholders May Suffer Dilution
From the Exercise of Options, Warrants and Convertible Notes."
Incentive Warrant
On June 9, 2000, we issued an incentive warrant to Crescent International
Ltd. to purchase up to 500,000 shares of our common stock at an exercise price
of $4.374 per share. The incentive warrant is exercisable in whole or in part at
any time until June 9, 2005, subject to possible extensions, according to the
terms of the agreement. At its sole option, Crescent may effect a cashless
exercise of the incentive warrant. In this cashless exercise Crescent may
surrender shares of common stock issuable upon exercise of the incentive warrant
to exercise the incentive warrant without paying additional monies. The equity
value of the incentive warrant for this purpose is the difference between the
market value of our common stock on the date of exercise and $4.374.
CONVERTIBLE NOTE ISSUED TO CRESCENT INTERNATIONAL LTD.
On June 9, 2000, we issued a $6 million secured convertible note, due June
9, 2002, to Crescent International Ltd., and on July 5, 2000, we issued an
additional $1.5 million secured convertible note, due July 5, 2002, to Crescent.
Interest on the convertible notes is at a fixed rate of 8.0% per annum and has
been waived unless we fail to issue the shares of our common stock due upon
conversion of the convertible notes or fail to issue certificates representing
those shares within ten trading days of conversion. The notes are subject to
optional redemption by us according to the terms and conditions specified in the
notes.
Conversion of the June 9, 2000 Note
At the option of the holder, the convertible notes may be converted into
shares of our common stock at a per share conversion price equal to $4.2326 or
93% of the lowest volume weighted average price on three consecutive days during
the 22 trading day period immediately preceding the date of conversion,
whichever is lower.
We have limited rights to delay conversion for up to 180 days from the
date triggering those rights if the conversion price determined by the above
formula is below $2.50 per share.
24
The warrants and the convertible notes are subject to typical adjustment
to protect Crescent's shares from dilution. See the "Risk Factors" subsection
entitled "Stockholders May Suffer Dilution From the Exercise of Options,
Warrants and Convertible Notes."
Conversion of the July 5, 2000 Note
At the option of the holder, the convertible notes may be converted into
shares of our common stock at a per share conversion price equal to $5.0415 or
93% of the lowest volume weighted average price on three consecutive days during
the 22 trading day period immediately preceding the date of conversion,
whichever is lower.
We have limited rights to delay conversion for up to 180 days from the
date triggering those rights if the conversion price determined by the above
formula is below $2.50 per share.
The warrants and the convertible notes are subject to typical adjustment
to protect Crescent's shares from dilution. See the "Risk Factors" subsection
entitled "Stockholders May Suffer Dilution From the Exercise of Options,
Warrants and Convertible Notes."
Collateral Securing the Convertible Notes
To secure our payment obligation with respect to the convertible note, we
caused FiberCore Jena GmbH to enter into a security agreement with Crescent
International Ltd. pursuant to which we transferred machinery and equipment in
our Jena facility for security purposes (as part of a standard arrangement to
effect a security interest under German law) to Crescent International Ltd. The
machinery and equipment collateral will be proportionately released to the
extent that the book value of the collateral exceeds 120% of the outstanding
balance on the convertible notes.
We also pledged all the capital stock of FiberCore Jena GmbH, our wholly
owned subsidiary, to Crescent International Ltd. to secure our payment
obligations with respect to the convertible notes. Crescent International Ltd.
has agreed to release the pledge once the outstanding balance on the convertible
notes is equal to 120% of the book value of the machinery and equipment
collateral.
LIQUIDATED DAMAGES
Pursuant to our Registration Rights Agreement with Crescent, dated June 9,
2000, we are required to pay Crescent liquidated damages if we fail to obtain
the effectiveness of any registration statement when required or to maintain its
effectiveness for the period required. Because we failed to obtain effectiveness
of the registration statement of which this prospectus is a part by September 7,
2000, we are required under the Registration Rights Agreement to pay to Crescent
an amount equal to 2% of the aggregate purchase price paid by Crescent for
securities that are registered for resale by Crescent as described in this
propectus, for each calendar month and for each portion of a calendar month, pro
rata, after September 7, 2000 until the registration statement of which this
prospectus is a part becomes effective.
We will also be liable for liquidated damages similarly computed if we
fail to keep any required registration statement effective for a period of time
ending 180 days after the termination of Crescent's obligation to purchase
shares of our common stock, plus one day for each day that we have failed to
obtain or maintain effectiveness of the registration statement.
Pursuant to the Registration Rights Agreement, Crescent retained $250,000
in an escrow account to secure our registration obligations and from which to
collect liquidated damages.
25
RIGHT OF FIRST REFUSAL
Crescent International Ltd. has the right of first refusal on any proposed
sale by us of our securities in a private placement transaction exempt from
registration under the Securities Act of 1933, subject to certain terms and
conditions.
10% LIMITATION WITH RESPECT TO CRESCENT INTERNATIONAL LTD.
Under the terms of the transaction with Crescent International Ltd., the
number of shares to be purchased by Crescent or to be obtained upon exercise of
warrants or conversion of the convertible note held by Crescent cannot exceed
the number of shares that, when combined with all other shares of common stock
and securities then owned by Crescent, would result in Crescent owning more than
9.9% of our outstanding common stock at any given point of time.
WARRANTS ISSUED TO GRUNTAL & CO., LLC
We recently issued warrants to Gruntal & Co., LLC to purchase up to
456,886 shares of our common stock. Specifically:
o on April 14, 2000, we issued warrants, expiring April 13, 2005, to purchase
300,000 shares of our common stock at an exercise price of $3.906 per share;
o on June 9, 2000, we issued warrants, expiring June 8, 2005, to purchase
30,000 shares of our common stock at an exercise price of $4.374 per share;
o on June 9, 2000, we issued warrants, expiring June 8, 2005, to purchase
72,016 shares of our common stock at an exercise price of $2.916 per share;
and
o on June 26, 2000, we issued warrants, expiring June 25, 2005, to purchase
54,870 shares of our common stock at an exercise price of $2.916 per share.
The warrants were issued pursuant to an agreement with Gruntal, in which we
retained Gruntal to represent us as our exclusive investment banker and agent in
connection with the transaction with Crescent described above.
Upon Crescent's conversion of its convertible debt and/or upon our
requiring Crescent to purchase additional shares of common stock, or upon our
entering into subsequent transactions with the assistance of Gruntal, we are
required to issue additional warrants to Gruntal.
COMMON STOCK ISSUED TO TYCO ELECTRONICS CORPORATION
On May 19, 2000, we signed an agreement with Tyco Electronics Corporation.
Under the agreement, among other things, Tyco
o exercised its warrant to purchase 2,765,487 shares of our common
stock at a purchase price of $2.0 million;
o converted the outstanding balance of $2.46 million on our
convertible note, issued to Tyco in April 1995, into 3,419,977
shares of our common stock and
o converted the $4.13 million balance of its term loan to us into
1,031,532 shares of our common stock and released its liens on all
collateral of ours held by Tyco. Tyco holds no additional warrants
to purchase, or securities convertible into, our common stock.
In the event our common stock becomes listed on the Nasdaq National
Market, we are required, to register for resale by Tyco Electronics Corporation
under the Securities Act of 1933, 2,765,487 shares issued upon exercise of the
warrant held by Tyco, upon Tyco's demand, but only to the extent that
registration will not impair the rights of Crescent International Ltd. In
addition, in the event we file a registration statement registering shares of
our
26
common stock, Tyco may require us to include all or part of the 2,765,487 shares
of our common stock in the registration statement. We have notified Tyco of the
current registration statement of which this prospectus is a part and Tyco has
informed us that it will not require us to include its shares of our common
stock in the current registration.
In the event that as the result of the private placements contemplated by
the standstill agreement between us and Tyco, Tyco holds less than ten percent
of the outstanding shares of our common stock, Tyco will relinquish all demand
registration rights that it has under the November 20, 1996 warrant and under
the April 17, 1995 Convertible Debenture Purchase Agreement between Tyco and us,
Tyco will only have rights to piggyback registration upon our approval.
On September 5, 2000, we sold 1,352,275 shares of our common stock to Tyco
Sigma Limited, a wholly owned subsidiary of Tyco International Ltd., and
received proceeds of $9 million. Tyco does not have registration rights with
respect to the 1,352,275 shares. We used the proceeds to prepay the $10 million
note to Algar, incurred in connection with our acquisition of Xtal, at a $1
million discount for early payment. Algar has informed us that it disputes our
understanding that Algar extended the time within which we may prepay the note
to receive the discount and we are currently engaged in discussions with Algar
to resolve the matter. See page 19 of the section entitled "Recent Events" for a
more complete description of the context in which the dispute arose.
COMMON STOCK ISSUED TO OTHERS
On May 16, 2000, upon completion of a private placement of our common
stock, we issued and sold 485,002 shares of our common stock at a purchase price
of $3.20 per share to ten offshore accredited investors, raising total gross
capital of $1,555,000. The purchasers were located outside of the United States
and included both individual investors who purchased 185,000 shares of our
common stock, and venture capital companies, which purchased 300,002 shares of
our common stock. On September 13, 2000, upon completion of an additional sale
to two venture capital companies outside of the United States pursuant to
Regulation S under the Securities Act of 1933, we issued 155,718 shares of our
common stock at a purchase price of $7.179 per share, raising total gross
capital of $1,117,900. The investors in both these transactions did not receive
registration rights.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of our common
stock being offered by the selling stockholders under this prospectus. We may
receive proceeds of up to $2,187,000 upon a full exercise of the incentive
warrant, issued to Crescent on June 9, 2000, to purchase up to 500,000 shares of
our common stock, although Crescent may perform a cashless exercise which would
not result in our receiving any proceeds. Similarly, we may receive proceeds of
up to $1,673, 0202 upon Gruntal's exercise of warrants to purchase up to 456,886
shares of our common stock, although Gruntal may perform a cashless exercise
which would not result in our receiving any proceeds. We intend to utilize the
proceeds of the exercise of options and warrants, if any, for working capital
and general corporate purposes and not for discharge of debt prior to maturity.
Of the estimated $20 million of proceeds, net of expenses, that we expect
to receive from sale of the up to 4,200,000 shares registered for primary sale
by us, we plan to use approximately
o $5.0 million for capacity expansion at our Jena facility;
o $5.0 million for capacity expansion at our Xtal Facility;
- ---------------
2 Specifically, we could receive up to
o $1,171,800 upon the purchase of 300,000 shares of our common stock at an
exercise price of $3.906 per share;
o $ 131,220 upon the purchase of 30,000 shares of our common stock at an
exercise price of $4.374 per share; and
o $370,000 upon the purchase of 126,886 shares of our common stock at an
exercise price of $2.916 per share.
27
o $1 million toward Automated Light Technologies, Inc. to be used for
working capital, product enhancement and marketing;
o $4.0 million for research and development activities; and
o $5.0 million for working capital and other corporate purposes.
We plan to build additional manufacturing facilities in the United States
and Pacific Rim and expect the funds to finance the facilities will come from
other sources. The present estimated project cost for both projects is $50
million. With regard to the Asian facility, we expect local equity partners to
contribute approximately $14 million in cash and realty in exchange for a 46%
ownership interest in the Asian facility, and we expect to contribute
approximately $16 million in exchange for a 54% interest in the Asian facility.
$12.5 million dollars of our contribution will be in the form of technology and
know-how. The remaining $20 million will be financed through banks. At present,
we are considering different alternatives to finance a U.S. facility.
We may, however, change the allocation of these proceeds in response to
developments or changes that affect our business or industry. A significant
decrease in customer demand, development of better technology, and a reduction
in the ability to finance the Xtal and Jena capacity expansions would probably
prompt us to modify our allocation of the proceeds of this offering. Depending
upon the specific event, funding for the projects would be scaled down,
eliminated, or combined. If borrowing opportunities on terms anticipated by us
decrease amid strong customer demand, we would have to raise funds by reducing
our share of equity in the projects and/or reducing the size of the projects.
Pending use of the net proceeds for the above purposes, we plan to invest
these funds in short-term, investment grade, interest-bearing securities.
SELLING STOCKHOLDERS
Crescent International Ltd., a selling stockholder, acquired or may
acquire the shares of our common stock being registered for resale by Crescent
by the registration statement of which this prospectus is a part:
o through our issuance of 1,200,274 shares of our common stock to
Crescent in a private placement transaction on June 9, 2000;
o through our issuance of 685,871 shares of our common stock on June
26, 2000, upon conversion of $2 million of a total $6 million
convertible note, issued to Crescent on June 9, 2000;
o upon exercise of warrants issued in connection with the June 9, 2000
private placement; and
o upon conversion of the outstanding $5.5 million in convertible notes
issued to Crescent
Crescent has informed the Company that Mel Craw and Maxi Brezzi,
respectively Managing Director and Director of Crescent's investment advisor,
GreenLight (Switzerland) SA, have voting and investment control over our
securities held by Crescent. On June 16, 2000, Crescent and its investment
advisor filed a Form 13G disclosing voting and investment control over such
securities. Crescent has the right to assign its obligation to purchase shares
of our common stock to affiliates of Crescent; however, Crescent has informed us
that it has no current or future plans to assign its obligations.
Gruntal & Co., LLC, a selling stockholder, may acquire the shares of our
common stock being registered for resale by Gruntal by the registration
statement of which this prospectus is a part upon the exercise of warrants to
purchase up to 456,886 shares of our common stock.
Gruntal has informed us that it is controlled by its management, which
owns 60% of Gruntal; Zurich Holdings Group owns the remaining 40%. Gruntal's
Chairman is Robert P. Rittereiser. The Home Insurance
28
Company is the owner of a minority interest in Gruntal. Mr. John Starr,
Executive Vice President of Gruntal, has investment control over our securities
owned by Gruntal.
We have agreed to file a registration statement, of which this prospectus
is a part, to register the shares of the selling stockholders described above in
order to permit the selling stockholders to sell these shares from time to time
in the public market or in privately-negotiated transactions.
We cannot determine the actual number of shares of our common stock that
we will issue, because of the variables discussed herein. Pursuant to the
Securities Purchase Agreement by and between us and Crescent, we may, after this
registration statement becomes effective, require Crescent to purchase shares of
our common stock on a monthly basis over a two-year period, until June 9, 2002.
The price per share will be 93% of the average of the lowest three consecutive
weighted-average trading prices during the 22 trading days prior to the notice
to Crescent to purchase shares. We are limited to a maximum of $3.5 million for
each sale of common stock during any 22 day trading period. In the event the
trade price on each trading day between the date of notice to Crescent to
purchase shares and the date of purchase of our common stock is less than $2.50
per share, the limitation for each sale of common stock will be up to $20,000.
Shares of our common stock sold to Crescent pursuant to the Securities
Purchase Agreement will not be freely tradable by Crescent until they are
registered under applicable securities laws or an exemption from such
registration is available. However, we are required, pursuant to the
Registration Rights Agreement, entered into on June 9, 2000, by and between us
and Crescent, to register for resale all shares of our common stock that we
require Crescent to purchase, all shares of our common stock issued upon
conversion of our convertible notes currently held by Crescent, and all shares
of our common stock issued upon exercise of our warrants held by Crescent.
In general, it is possible that we may be required to register additional
shares of our common stock. We plan to file prospectus supplements, as
necessary, to set forth the exact number of shares that the selling stockholders
are actually issued upon conversion, exchange or exercise of the related
securities. See the "Risk Factors" subsection entitled "Stockholders May Suffer
Dilution From the Exercise of Options, Warrants and Convertible Notes."
The following table sets forth the number of shares of our common stock
issued or issuable to the selling stockholders:
- --------------------------------------------------------------------------------
SELLING STOCKHOLDERS NUMBER OF NUMBER OF NUMBER OF
SHARES OF SHARES OF SHARES OF
COMMON COMMON STOCK COMMON STOCK
STOCK HELD AFTER OFFERED ON
HELD COMPLETION OF BEHALF OF
PRIOR TO OFFERING(3) SELLING
COMPLETION STOCKHOLDERS
OF
OFFERING
- --------------------------------------------------------------------------------
Crescent International Ltd. 4,785,871(4) 0 4,785,871
- --------------------------------------------------------------------------------
- ---------------
3 Assumes Crescent and Gruntal will offer and sell all of the shares
registered by the registration statement of which this prospectus is a part.
4 The shares of our common stock being offered on behalf of Crescent
International Ltd. consist of
o 1,200,274 shares of our common stock issued to Crescent on June 9, 2000;
o 500,000 shares of our common stock issuable upon exercise of a warrant
issued to Crescent on June 9, 2000;
29
- --------------------------------------------------------------------------------
SELLING STOCKHOLDERS NUMBER OF NUMBER OF NUMBER OF
SHARES OF SHARES OF SHARES OF
COMMON COMMON STOCK COMMON STOCK
STOCK HELD AFTER OFFERED ON
HELD COMPLETION OF BEHALF OF
PRIOR TO OFFERING(5) SELLING
COMPLETION STOCKHOLDERS
OF
OFFERING
- --------------------------------------------------------------------------------
Gruntal & Co., LLC,
William McClusky, 456,886(7) 0 456,886
McCluskey,
Richard Serrano,
Derek Woodworth,
Mitchell Kosches,
Erik Choy,
Julia Hoo,
Jack Schwartz(5) and
John Starr(6)
- --------------------------------------------------------------------------------
TOTAL: 5,242,757 0 5,242,757
- --------------------------------------------------------------------------------
Crescent has informed us that it has no immediate plans to sell shares of
our common stock, but will evaluate market conditions, and any decision as to
whether to sell shares of our common stock, and how many shares Crescent may
sell, will be based on relevant facts, circumstances and market conditions
existing at the time of the decision.
Gruntal has informed us that it has no immediate plans to sell shares of
our common stock, but will evaluate market conditions, and any decision as to
whether to sell shares of our common stock, and how many shares Gruntal may
sell, will be based on relevant facts, circumstances and market conditions
existing at the time of the decision.
- ---------------
o 199,726 shares of our common stock issuable upon exercise of a warrant
issued to Crescent on June 9, 2000, based on an assumed share price of
$2.50 on the date the registration statement of which this prospectus is
a part becomes effective;
o 685,871 shares of our common stock issued to Crescent upon conversion on
June 26, 2000, of $2 million of a total $6 million convertible note,
which was issued to Crescent on June 9, 2000 and
o 2,200,000 shares of our common stock issuable upon the conversion of the
outstanding principal balance of $4 million of our convertible note
issued to Crescent on June 9, 2000, based on an assumed conversion price
of $2.50 per share, and upon conversion of our $1.5 million note issued
to Crescent on July 5, 2000, based upon a conversion price of $2.50 per
share.
The number of shares of common stock issuable upon exercise of the early put
warrant and the conversion of the convertible note has been assumed for
purposes of registering shares of common stock under the registration
statement of which this prospectus is a part; the actual number of shares so
issuable may be higher and have a dilutive effect on other shareholders. See
the "Risk Factors" subsection entitled "Stockholders May Suffer Dilution
From the Exercise of Options, Warrants and Convertible Notes."
5 Each of the named individuals is an officer, member or employee of Gruntal &
Co. LLC to whom Gruntal may transfer the warrants issued to Gruntal.
6 Mr. Starr is the Executive Vice President of Gruntal & Co., LLC and has
investment control over our securities owned by Gruntal.
7 The shares of our common stock being offered on behalf of Gruntal & Co., LLC
consists of:
o 300,000 shares of our common stock issuable upon exercise of a warrant
issued to Gruntal on April 14, 2000;
o 30,000 shares of our common stock issuable upon exercise of warrant upon
exercise of a warrant issued to Gruntal on June 9, 2000;
o 72,016 shares of our common stock issuable upon exercise of a warrant
issued to Gruntal on June 9, 2000; and
o 54,870 shares of our common stock issuable upon exercise of a warrant
issued to Gruntal on June 26, 2000.
30
The selling stockholders and we are not making any representation that any
shares covered by the prospectus will or will not be offered for sale or resale.
The selling stockholders reserve the right to accept or reject, in whole or in
part, any proposed sale of shares. The shares offered by this prospectus may be
offered from time to time by the selling stockholders named above and by us. In
addition to the number of shares held by the selling stockholders, Crescent may
be required to purchase additional shares of our common stock for up to $19
million.
31
MAXIMUM NUMBER OF SHARES ISSUABLE TO CRESCENT AND GRUNTAL
The maximum number of shares of our common stock we may issue to Crescent
pursuant to our agreements with Crescent is impossible to determine at the
present time because our convertible debt held by Crescent can be converted into
an unlimited number of shares of our common stock, subject to our right to delay
conversion for 180 days if the conversion price would be below $2.50 per share.
See page 24 of the section entitled "Recently Issued Securities" for a
description of the conversion price. However, assuming that the conversion price
of our convertible debt held by Crescent is not below $2.50, the maximum number
of shares issuable to Crescent, including shares already issued, is
12,385,871(8). Under the terms of our agreement with Crescent, the number of
shares to be purchased by Crescent or to be obtained upon exercise of warrants
or conversion of the convertible debt by Crescent cannot exceed the number of
shares that, when combined with all other shares of common stock and securities
then owned by Crescent, would result in Crescent owning more than 9.9% of our
outstanding common stock at any given point of time.
The maximum number of shares of our common stock we may issue to Gruntal
upon exercise of warrants currently held by Gruntal is 456,886.
PRIOR RELATIONSHIPS BETWEEN SELLING STOCKHOLDERS AND THE COMPANY
We are not aware of any material relationship between us and Crescent
within the past three years other than as a result of the ownership of the
stockholders' shares. We entered into an agreement with Gruntal on April 14,
2000, pursuant to which we retained Gruntal to represent us as our exclusive
investment banker and agent, and issued warrants to purchase 456,886 shares of
our common stock and are not aware of any other material relationship between us
and Gruntal within the past three years.
PLAN OF DISTRIBUTION
Of the 9,442,757 shares of our common stock offered by this prospectus, we
may sell 4,200,000 shares of our common stock in underwritten "at the market"
sales from time to time, or in privately negotiated transactions.
The selling stockholders may sell the remaining 5,242,757 shares of our
common stock from time to time in the public markets, through agents,
underwriters or dealers, at prices and on the terms then prevailing or at prices
related to then-current market price, or directly to one or more purchasers in
negotiated transactions.
Crescent has informed the Company that it will dispose of the common stock
it receives upon exercise of warrants, pursuant to purchases required by us and
on conversion of convertible debt in open market transactions through a U.S.
registered broker-dealer.
Gruntal has informed the Company that it will dispose of the common stock
it receives upon exercise of warrants and on conversion of convertible debt in
open market transactions through a U.S. registered broker-dealer.
The methods by which the shares may be sold by the selling stockholders may
include, but are not limited to, the following:
o a block trade in which the broker or dealer so engaged will attempt to sell
the shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker or dealer as principal and resale by the broker or
dealer for its account;
- ---------------
8 The shares consist of the 4,785,871 shares being registered pursuant to this
agreement plus up to an additional 7,600,000 shares which we may require
Crescent to purchase pursuant our agreement with Crescent, (described on
page 22 of the section entitled "Recently Issued Securities")
32
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
o privately negotiated transactions;
o and a combination of any of the above methods of sale.
In effecting sales, brokers or dealers engaged by the selling stockholders may
arrange for other brokers or dealers to participate. Brokers or dealers may
receive commissions or discounts from the selling stockholders or from the
purchasers in amounts to be negotiated immediately prior to the sale. The
selling stockholders may also sell the shares in accordance with Rule 144 under
the Securities Act of 1933.
AGENTS
The selling stockholders and/or we may designate agents who agree to use
their best efforts to solicit purchases for the period of their appointment or
to sell securities on a continuing basis.
UNDERWRITERS
We will use an underwriter to sell any shares of our common stock offered
by us "at the market." Crescent will be an underwriter only with respect to
shares of our common stock issued to and purchased by Crescent in the future, if
required by us under our agreement with Crescent.
If the selling stockholders and/or we use underwriters for the sale of
securities, the underwriters will act as principals or as agents for the selling
stockholders or us, as applicable. The underwriters may resell the securities in
one or more transactions, including negotiated transactions, at a fixed public
offering price or at varying prices determined at the time of sale. The
obligations of the underwriters will be subject to the conditions set forth in
the applicable underwriting agreements. Any public offering price and any
discounts or concessions allowed or paid to dealers may be changed from time to
time. Underwriters, dealers and agents that participate in the distribution of
the securities may be underwriters as defined in the Securities Act of 1933 and
any discounts or commissions they receive from us and any profit on their resale
of the securities may be treated as underwriting discounts and commissions under
the Securities Act of 1933. The applicable prospectus supplement will identify
any underwriters, dealers and agents whom we have agreed to indemnify against
civil liabilities under the Securities Act of 1933. Underwriters, dealers and
agents may engage in transactions with or perform services for us or our
subsidiaries in the ordinary course of their businesses.
DIRECT SALES
The selling stockholders might also sell securities to one or more
purchasers without using underwriters or agents.
SHORT SALES AND STABILIZATION ACTIVITIES
Crescent is contractually restricted from engaging in short sales of our
common stock and has informed us that it does not intend to engage in short
sales or other stabilization activities.
Any underwriter may engage in over-allotment, stabilizing transactions,
short covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934. Over-allotment involves sales in
excess of the offering size, which create a short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Any underwriter may make
short sales of shares of our stock and may purchase shares of our stock on the
open market to cover positions created by short sales. Short sales involve the
sale by the underwriters of a greater number of shares than they are required to
purchase in the offering. "Covered" short sales are sales made in an amount not
greater than the underwriters' "overallotment" option to purchase additional
shares in the offering. Any underwriter may close out any covered short position
by either exercising their overallotment option or purchasing shares in the open
market. In determining the source of shares to close out the covered short
position, any underwriter will consider, among other things, the price of shares
available for purchase in the open market as compared to the price at which they
may
33
purchase shares through the overallotment option. "Naked" short sales are sales
in excess of the overallotment option. The underwriter must close out any naked
short position by purchasing shares in the open market. A naked short position
is more likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the shares in the open market after pricing
that could adversely affect investors who purchase the shares. Similar to other
purchase transactions, the underwriters' purchases to cover short sales may have
the effect of raising or maintaining the market price of our stock or preventing
or retarding a decline in the market price of our stock. As a result, the price
of our stock may be higher than the price that might otherwise exist in the open
market. If commenced, the underwriters may discontinue any of these activities
at any time.
DESCRIPTION OF CAPITAL STOCK
The following description of our common stock and preferred stock
summarizes the material terms and provisions of these types of securities. For
the complete terms of our common stock and preferred stock, please refer to our
Certificate of Incorporation and bylaws, which are incorporated by reference
into the registration statement, of which this prospectus is a part.
Under our Certificate of Incorporation, our authorized capital stock
consists of 100,000,000 shares of common stock, $0.001 par value per share, and
10,000,000 shares of preferred stock, $0.001 par value per share.
COMMON STOCK
As of September 19, 2000, 54,068,988 shares of our common stock were
issued and outstanding. All outstanding shares of our common stock are duly
authorized, validly issued, fully paid and non-assessable. Please refer to the
description of our common stock contained in our registration statement on Form
8-A filed with the SEC on December 5, 1996, including any amendments or reports
filed for the purpose of updating that section which is incorporated by
reference into this prospectus.
TRANSFER AGENT AND REGISTRAR
Interstate Transfer Company, 10 West Broadway, Suite 510, Salt Lake City,
Utah 84301 is the transfer agent and registrar of our common stock.
PREFERRED STOCK
As of September 19, 2000, no shares of preferred stock were outstanding.
Our Certificate of Incorporation authorizes our board of directors to issue
preferred stock in one or more series and to determine the voting rights and
dividend rights, dividend rates, liquidation preferences, conversion rights,
redemption rights, including sinking fund provisions and redemption prices, and
other terms and rights of each of these series.
NEVADA ANTI-TAKEOVER LAWS
We are incorporated under the laws of the State of Nevada and are
therefore subject to various provisions of the Nevada corporation laws which may
have the effect of delaying or deterring a change in control or management of
us.
Nevada's "Combination with Interested Stockholders Statute," Nevada
Revised Statutes 78.411-78.444, which applies to Nevada corporations like us
having at least 200 stockholders, prohibits an "interested stockholder" from
entering into a "combination" with the corporation, unless specific conditions
are met. A "combination" includes:
o any merger with an "interested stockholder," or any other corporation
which is or after the merger would be, an affiliate or associate of the
interested stockholder,
o any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of assets, in one transaction or a series of transactions,
to an "interested stockholder," having (i) an aggregate market value
equal to 5% or
34
more of the aggregate market value of the corporation's assets, (ii) an
aggregate market value equal to 5% or more of the aggregate market value
of all outstanding shares of the corporation, or (iii) representing 10%
or more of the earning power or net income of the corporation,
o any issuance or transfer of shares of the corporation or its
subsidiaries, to the "interested stockholder," having an aggregate
market value equal to 5% or more of the aggregate market value of all
the outstanding shares of the corporation,
o the adoption of any plan or proposal for the liquidation or dissolution
of the corporation proposed by the "interested stockholder,"
o certain transactions which would have the effect of increasing the
proportionate share of outstanding shares of the corporation owned by
the "interested stockholder," or
o the receipt of benefits, except proportionately as a stockholder, of any
loans, advances or other financial benefits by an "interested
stockholder." An "interested stockholder" is a person who (i) directly
or indirectly owns 10% or more of the voting power of the outstanding
voting shares of the corporation or (ii) an affiliate or associate of
the corporation which at any time within three years before the date in
question was the beneficial owner, directly or indirectly, of 10% or
more of the voting power of the then outstanding shares of the
corporation.
A corporation to which the statute applies may not engage in a
"combination" within three years after the interested stockholder acquired its
shares, unless the combination or the interested stockholder's acquisition of
the shares that caused the interested stockholder to become an interested
stockholder was approved by the board of directors before the interested
stockholder acquired those shares. If this approval was not obtained, then after
the three-year period expires, the combination may be consummated if all the
requirements in the Company's Certificate of Incorporation are met and either
o (i) the board of directors of the corporation approves, prior to the
person becoming an "interested stockholder," the combination or the
purchase of shares by the "interested stockholder" or (ii) the
combination is approved by the affirmative vote of holders of a majority
of voting power not beneficially owned by the "interested stockholder"
at a meeting called no earlier than three years after the date the
"interested stockholder" became one or
o the aggregate amount of cash and the market value of consideration other
than cash to be received by holders of common shares and holders of any
other class or series of shares meets the minimum requirements set forth
in Sections 78.411 through 78.443, inclusive, and prior to the
consummation of the combination, except in limited circumstances, the
"interested stockholder" will not have become the beneficial owner of
additional voting shares of the corporation.
The above provisions do not apply to corporations that so elect in a
charter amendment approved by a majority of the disinterested shares. Such a
charter amendment, however, would not become effective for 18 months after its
passage and would apply only to stock acquisitions occurring after its effective
date. Our Certificate of Incorporation does not exclude us from the restrictions
imposed by the above provisions.
Nevada's "Control Share Acquisition Statute," Sections 78.378 through
78.3793 of the Nevada Revised Statutes, prohibits an acquirer, in particular
circumstances, from exercising voting rights of shares of a target corporation's
stock after crossing specific threshold ownership percentages, except those
voting rights that are granted by the target corporation's stockholders.
SECURITIES AND EXCHANGE COMMISSION POSITION ON INDEMNIFICATION
Our by-laws provide for a broad right for indemnification for any person
who is or was involved in any manner in any threatened, pending, or completed
investigation, claim, action, suit, or proceeding by reason of the fact that the
person had agreed to become a director, officer, employee, or agent of our
company.
35
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been informed that in the opinion of the Securities and Exchange
Commission this type of indemnification is against public policy as expressed in
the Act and is, therefore unenforceable. In the event that a claim for
indemnification against liabilities arising under the Securities Act of 1933
(other than the payment by the registrant of expenses incurred or paid by a
director, officer, or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by any director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of the
submitted issue.
LEGAL MATTERS
The validity of the securities we are offering will be passed upon for us
by Lionel, Sawyer & Collins, Nevada.
EXPERTS
The financial statements incorporated in this prospectus by reference from
the Company's Annual Report on Form 10-K/A (Amendment No.2) for the year ended
December 31, 1999 have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report, which is incorporated herein by reference,
and have been so incorporated in reliance upon the report of Deloitte & Touche
LLP, given upon their authority as experts in accounting and auditing.
The financial statements of Xtal Fibras Opticas S.A. as of December 31,
1999 and 1998, and for each of the years then ended, included in this prospectus
have been audited by Deloitte Touche Tohmatsu, Auditores Independentes, as
stated in their report appearing herein, and have been so included in reliance
upon the report of Deloitte Touche Tohmatsu given upon their authority as
experts in accounting and auditing.
36
FIBERCORE, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined statements of operations for
the year ended December 31, 1999 and the six months ended June 30, 2000 give
effect to; (i) the acquisition of 90% of Xtal Fibras Opticas S.A. ("Xtal"),
accounted for under the purchase method of accounting; (ii) the private
placement of the $6.0 million convertible note (of which $2.0 million was
converted on June 26, 2000) and sale of FiberCore, Inc. common stock of $3.5
million to Crescent International Ltd. ("Crescent") and related use of net
proceeds, for the acquisition; (iii) the issuance of common stock to Tyco
Electronics Corporation ("Tyco") on the exercise of common stock warrants in the
amount of $2.0 million, and the related use of proceeds for the acquisition;
and, (iv) the purchase of 1,352,275 shares of common stock for $9,000,000 by
Tyco, and the related use of proceeds to prepay the $10,000,000 note to Algar at
a discount of $1,000,000 for early payment, as if they occurred at the beginning
of the respective periods. The balance sheet of Xtal as of June 30, 2000 has
been included in the consolidated balance sheet of FiberCore, Inc. included in
the report on Form 10Q for the period ended June 30, 2000. The historical
financial information has been derived from the respective historical financial
statements of FiberCore, Inc. and Xtal, and should be read in conjunction with
these financial statements and the related notes contained elsewhere herein or
incorporated herein by reference.
Pro forma adjustments are based upon preliminary estimates, available
information and certain assumptions that management deems appropriate. The total
estimated purchase cost of Xtal has been allocated on a preliminary basis to the
assets and liabilities based on management's estimates of their fair value with
the excess cost over the net assets acquired allocated to goodwill. Subsequent
to closing, the assets purchased and liabilities assumed will be fair valued and
the necessary studies completed to ascribe values to assets and indentifiable
intangibles, if any.
The unaudited pro forma combined information is presented for illustrative
purposes only and is not necessarily indicative of the operating results or
financial position that would have occurred if the transactions had been
consummated at the dates indicated, nor is it necessarily indicative of future
operating results or financial position of the combined company.
FIBERCORE, INC.
PRO FORMA Income Statement
For the Year Ended December 31, 1999
(Dollars in thousands) FIBERCORE XTAL PRO FORMA COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
Net sales $ 12,126 $ 17,772 $ 29,898
Cost of sales 9,820 16,043 25,863
----------- ------------ ---------- -----------
Gross profit 2,306 1,729 4,035
Operating expenses:
Selling, general and administrative
expenses 3,237 2,256 514 (b) 6,007
Research and development 722 0 722
----------- ------------ ---------- -----------
Income (loss) from operations (1,653) (527) (514) (2,694)
Interest income 110 405 515
Interest expense (1,062) (2,646) (438)(c) (4,146)
Minority interest in income (loss)
of subsidiary 301 (d) 301
Other income (expense) net (336) (233) (569)
----------- ------------ ---------- -----------
Income (loss) before income taxes (2,941) (3,001) (651) (6,593)
Provision for income taxes 937 (8) 929
----------- ------------ ---------- -----------
Net income (loss) $ (2,004) $ (3,009) $ (651) $ (5,664)
=========== ============ ========== ===========
Basic and diluted income (loss) per
share of common stock $ (0.05) $ (0.13)
=========== ============ ========== ===========
Weighted average shares outstanding 36,610,544 6,003,907 (e) 42,614,451
=========== ============ ========== ===========
FIBERCORE, INC.
PRO FORMA Income Statement
Six Months Ended June 30, 2000
(Dollars in thousands) FIBERCORE XTAL PRO FORMA COMBINED
HISTORICAL(a) HISTORICAL(a) ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
Net sales $ 9,866 $ 11,489 $ 21,355
Cost of sales 7,444 9,829 17,273
----------- ---------- ------------ ------------
Gross profit 2,422 1,660 4,082
Operating expenses:
Selling, general and administrative
expenses 1,673 954 210 (b) 2,837
Research and development 430 0 430
----------- ---------- ------------ ------------
Income (loss) from operations 319 706 (210) 815
Interest income 81 143 224
Interest expense (5,824) (81) (240)(c) (6,145)
Foreign exchange income (loss) net (34) (8) (42)
Minority Interest (37) (59)(d) (96)
Other income (expense) - net 61 (22) 39
----------- ---------- ------------ ------------
Income (loss) before income taxes (5,434) 738 (509) (5,205)
Provision for income taxes (395) (150) (545)
----------- ---------- ------------ ------------
Net income (loss) $ (5,829) $ 588 $ (509) $ (5,750)
=========== ========== ============ ===========
Basic and diluted income (loss)
per share of common stock $ (0.13) $ (0.12)
=========== ===========
Weighted average shares outstanding 44,176,241 5,186,592 (e) 49,362,833
=========== ============ ===========
FIBERCORE, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
(a) For the six month period ended June 30, 2000, the FiberCore Historical data
includes the operations of Xtal for the month of June 2000, as the
acquisition was effective on June 1, 2000.
(b) Adjustment to reflect amortization of $10,280 goodwill reported on the
purchase of Xtal over 20 years.
(c) Adjustment to reflect the interest on two (2) notes ( Algar for $10,000 less
the $1,000 discount for early payment and Crescent for $4,000). The Algar
note is at 6% per year and was paid 80 days following the closing, and the
Crescent note is at 8% per year and is due in June 9, 2002. The calculation
of the interest adjustment is as follows:
Year Ended Six months Ended
Dec. 31,1999 Jun. 30, 2000
------------ ----------------
Algar note $9,000 interest at 6%
for 80 days. $ 118 $ 100 (1)
Crescent note $4,000 interest at
8% for 12 months in 1999, and
for 6 months in 2000 $ 320 $ 140 (2)
----- -----
Total $ 438 $ 240
===== =====
(1) The interest on the $9,000 ($10,000 less $1,000 discount) Algar note for
the six month period ended June 30, 2000 is calculated at 80 days
interest, $118, less the actual interest included in the FiberCore
historical of $18.
(2) The interest on the Crescent note for the six month period ended June
30, 2000 is calculated at 1/2 years interest, $160, less the actual
interest included in the FiberCore historical of $20.
(d) Adjustment to reflect the minority interest of 10% to Algar.
Year Ended Six months Ended
Dec. 31,1999 Jun. 30, 2000
------------ ----------------
Minority interest $ 301 $ (59)(1)
(1) The minority interest adjustment for the six months ending June 30, 2000
is calculated at $96, which is 10% of the unadjusted net income for
Xtal, less the actual minority interest included in the FiberCore
historical of $37.
(e) The increase in the weighted average shares outstanding for the year ended
December 31, 1999 and the six months ended June 30, 2000 are as follows:
Year Ended Six months Ended
Dec. 31,1999 Jun. 30, 2000
------------ ----------------
Exercise of common stock warrants
by Tyco.......................... 2,765,487 2,112,103
Purchase of common stock by Tyco... 1,352,275 1,352,275
Sale of common stock to Crescent... 1,200,274 1,055,186
Issuance of common stock on partial
conversion of Crescent note...... 685,871 667,028
------------ ----------------
6,003,907 5,186,592
============ ================
XTAL FIBRAS
OPTICAS S.A.
Financial Statements as of
December 31, 1999 and 1998 and for each
of the years then ended
Deloitte Touche Tohmatsu Auditores Independentes
INDEX TO FINANCIAL STATEMENTS PAGE
----
REPORT OF INDEPENDENT AUDITORS F-1
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999 AND 1998
AND FOR EACH OF THE YEARS THEN ENDED
Balance Sheets F-2
Statements of Operations F-4
Statements of Comprehensive Loss F-5
Statements of Changes in Shareholders' Equity F-6
Statements of Cash Flows F-7
Notes to the Financial Statements F-9
FINANCIAL STATEMENTS AS OF MARCH 31, 2000 AND DECEMBER 31, 1999
AND FOR THE THREE MONTH PERIOD THEN ENDED
Interim Balance Sheets F-30
Interim Statements of Operations F-32
Interim Statements of Comprehensive Income F-33
Interim Statements of Changes in Shareholders' Equity F-34
Interim Statements of Cash Flows F-35
Notes to the Interim Financial Statements F-37
REPORT OF INDEPENDENT AUDITORS
- ------------------------------
To the Board of Directors and Shareholders of XTAL Fibras Opticas S.A.:
We have audited the accompanying balance sheets of XTAL Fibras Opticas S.A. as
of December 31, 1999 and 1998, and the related statements of operations,
comprehensive loss, cash flows and changes in shareholders' equity for each of
the years then ended, all expressed in United States dollars. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the accompanying financial statements present fairly, in all
material respects, the financial position of XTAL Fibras Opticas S.A. as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE TOUCHE TOHMATSU Campinas, Brazil
Auditores Independentes May 31, 2000
F-1
XTAL FIBRAS OPTICAS S.A.
- ------------------------
BALANCE SHEETS
(Expressed in thousands of United States dollars)
- ------------------------------------------------------------------------------
December 31
------------------
1999 1998
-------- --------
ASSETS
Current assets
Cash and cash equivalents 225 36
Trade accounts receivable, net (note 5) 4,807 1,838
Inventories (note 6) 4,053 7,829
Prepaid expenses, other 497 1,076
-------- --------
Total current assets 9,582 10,779
-------- --------
Property, plant and equipment, net (note 8) 10,378 16,446
Recoverable taxes 101 149
Loans - related parties - 57
Escrow deposits (note 7) 7 10
-------- --------
108 216
-------- --------
Total assets 20,068 27,441
======== ========
(Continue)
F-2
XTAL FIBRAS OPTICAS S.A.
- ------------------------
BALANCE SHEETS
(Expressed in thousands of United States dollars) (continued)
- ------------------------------------------------------------------------------
December 31
------------------
1999 1998
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Trade accounts payable - suppliers 4,952 4,177
Current portion of long-term debt (note 9) 340 68
Taxes other than income 356 46
Payroll and other charges 614 668
Other 21 144
-------- --------
Total current liabilities 6,283 5,103
-------- --------
NON-CURRENT LIABILITIES
Long-term debt (note 9) 288 55
Intercompany (note 10) 624 -
Long-term taxes 852 1,028
Other long-term liabilities (note 14 (a)) 741 341
Deferred income tax (note 4) 41 48
-------- --------
Total non-current liabilities 2,546 1,472
Commitments and contingencies (note 14)
SHAREHOLDERS' EQUITY
Preferred stock - no par value, 49,963,256 shares authorized
and 5,137,571 and 472,033 issued and outstanding at
December 31, 1999 and 1998, respectively 11,497 5,194
Common stock - no par value, 49,963,256 shares authorized
and 5,137,571 and 472,033 issued and outstanding at
December 31, 1999 and 1998, respectively 11,497 5,194
Appropriated retained earnings:
Legal reserve 140 140
Unappropriated retained (deficit) (8,113) (9,672)
Accumulated other comprehensive (loss) income (3,782) 2,836
Advance for future increase of Capital (note 14 (b)) - 17,174
-------- --------
Total shareholders' equity 11,239 20,866
-------- --------
Total liabilities and shareholders' equity 20,068 27,441
======== ========
The accompanying notes are an integral part of these financial statements.
- ------------------------------------------------------------------------------
F-3
XTAL FIBRAS OPTICAS S.A.
- ------------------------
STATEMENTS OF OPERATIONS
(Expressed in thousands of United States dollars)
- ------------------------------------------------------------------------------
Years ended
December 31
------------------
1999 1998
-------- --------
GROSS SALES
Total gross sales 25,164 13,944
Value-added and excise tax on sales (7,392) (3,220)
-------- --------
NET SALES 17,772 10,724
-------- --------
Cost of sales (16,043) (11,869)
-------- --------
GROSS PROFIT (LOSS) 1,729 (1,145)
Selling and marketing expenses (456) (1,870)
General and administrative expenses (1,500) (2,461)
Depreciation (300) (79)
-------- --------
Operating expenses (2,256) (4,410)
NON-OPERATING (EXPENSES) INCOME
Interest income (note 3) 405 129
Interest expenses (note 3) (2,646) (2,937)
Other non-operating (expense) income, net (233) 39
-------- --------
LOSS BEFORE INCOME TAX AND SOCIAL CONTRIBUTION (3,001) (8,324)
INCOME TAX (EXPENSES) BENEFIT AND SOCIAL CONTRIBUTION (8) 21
-------- --------
NET (LOSS) (3,009) (8,303)
======== ========
The accompanying notes are an integral part of these financial statements.
- ------------------------------------------------------------------------------
F-4
XTAL FIBRAS OPTICAS S.A.
- ------------------------
STATEMENTS OF COMPREHENSIVE LOSS
(Expressed in thousands of United States dollars) (Continued)
- ------------------------------------------------------------------------------
Years ended
December 31
------------------
1999 1998
-------- --------
NET LOSS (3,009) (8,303)
-------- --------
Other comprehensive loss:
Foreign currency translation adjustment (6,618) (701)
Recognition of deferred tax liability on change in
functional
Currency (note 2 (b)) - (74)
-------- --------
Net translation (loss) in the year (6,618) (775)
-------- --------
COMPREHENSIVE LOSS (9,627) (9,078)
======== ========
The accompanying notes are an integral part of these financial statements.
- ------------------------------------------------------------------------------
F-5
XTAL FIBRAS OPTICAS S.A.
- ------------------------
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Expressed in thousands of United States dollars)
- ------------------------------------------------------------------------------
Advance
Appropriated Accumulated For
retained Unappropriated other future
earnings retained comprehensive increase
Common Preferred legal earnings income of
stock stock reserve (deficit) (loss) capital Total
--------- -------- --------------- -------------- ------------- ---------- ------------
BALANCES AS OF JANUARY, 1, 1998 5,194 5,194 140 (1,369) 3,611 - 12,770
Net loss to common and preferred shares - - - (8,303) - - (8,303)
Recognition of deferred tax liability
on change
in functional currency (note 2 (b)) - - - - (74) - (74)
Net translation loss for the year - - - - (701) - (701)
Advance for future increase of capital - - - - - 17,174 17,174
--------- -------- --------------- -------------- --------------- ------------ -------
BALANCES AS OF DECEMBER 31, 1998 5,194 5,194 140 (9,672) 2,836 17,174 20,866
--------- -------- --------------- -------------- --------------- ------------ -------
Net loss to common and preferred shares - - - (3,009) - - (3,009)
Net translation loss for the year (6,618) (6,618)
Increase in capital (note 14 (b)) 6,303 6,303 - 4,568 - (17,174) -
--------- -------- --------------- -------------- --------------- ------------ -------
BALANCES AS OF DECEMBER 31, 1999 11,497 11,497 140 (8,113) (3,782) - 11,239
========= ======== =============== ============== =============== ============ =======
The accompanying notes are an integral part of these financial statements.
- ------------------------------------------------------------------------------
F-6
XTAL FIBRAS OPTICAS S.A.
- ------------------------
STATEMENTS OF CASH FLOWS
(Expressed in thousands of United States dollars)
- ------------------------------------------------------------------------------
Years ended
December 31
------------------
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (3,009) (8,303)
Adjustments to reconcile net loss to cash provided by (used
in)
operating activities:
Depreciation 1,116 1,294
Allowance for doubtful accounts - 1,367
Write-down for slow moving inventories 136 -
Write-down for investments - 36
Gain or loss on disposal of fixed assets (12) (1)
Exchange translation (578) 1,111
Deferred income tax 8 (21)
Decrease (increase) in assets
Trade accounts receivable (2,969) 1,241
Inventories 3,640 (1,444)
Other current assets 579 (744)
Recoverable taxes 48 (47)
Escrow deposits 3 1
Increase (decrease) in liabilities
Trade accounts payable 775 (1,121)
Taxes other than income 310 (91)
Payroll and other charges (54) 124
Other current liabilities (123) 144
Long-term taxes (176) 258
Other long-term liabilities 400 195
-------- --------
Net cash provided by (used in) operating activities 94 (6,001)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (900) (2,789)
Proceeds on disposal of property, plant and equipment 317 32
-------- --------
Net cash (used in) investing activities (583) (2,757)
-------- --------
(Continue)
F-7
XTAL FIBRAS OPTICAS S.A.
- ------------------------
STATEMENTS OF CASH FLOWS
(Expressed in thousands of United States dollars) (Continued)
- ------------------------------------------------------------------------------
Years ended
December 31
------------------
1999 1998
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt:
Proceeds 726 21,622
Repayments (110) (14,153)
Intercompany loans:
Proceeds 5,177 9,181
Repayments (5,103) (7,971)
-------- --------
Net cash provided by financing activities 690 8,679
-------- --------
Effect of exchange rate changes on cash and cash equivalents (12) (10)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 201 (79)
Cash and cash equivalents, as of beginning of the year 36 125
-------- --------
Cash and cash equivalents, as of end of the year 225 36
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest 34 459
Taxes on income - -
The accompanying notes are an integral part of these financial statements.
- ------------------------------------------------------------------------------
F-8
XTAL FIBRAS OPTICAS S.A.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(Expressed in thousands of United States dollars, except number of shares and
where otherwise noted)
- ------------------------------------------------------------------------------
1. THE COMPANY AND ITS OPERATIONS
Xtal Fibras Opticas S.A. ("the Company") is a privately held corporation
organized under the laws of the Federative Republic of Brazil and
headquartered in Uberlandia, state of Minas Gerais, with manufacturing
facilities in Campinas, state of Sao Paulo.
The Company is engaged in the business of manufacturing, marketing and
selling optical fibers and optical components, byproducts or similar
products.
XTAL is a subsidiary of Algar S.A. Empreendimentos e Participacoes
("Algar"), which owns approximately 99.99% of the total outstanding capital
shares. Algar has subsidiaries working in Telecommunications (telephone
services, engineering construction and maintenance of communications
networks and long distance transmission), Agribusiness, Services and
Leisure. Algar has approximately 23 companies and 4 divisions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of presentation
The accompanying financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America ("U.S. GAAP"), which differ in certain respects from generally
accepted accounting principles in Brazil ("Brazilian GAAP"), as
applied by the Company in the preparation of its statutory financial
statements and for other purposes.
Shareholders' equity and operations included in these financial
statements differ from those included in the statutory accounting
records as a result of (i) the effects of differences between the rate
of devaluation of the Brazilian real ("R$") against the United States
dollar ("$", "U.S.$", or "U.S. dollar"), and (ii) differences in the
methods of measuring amounts under U.S. GAAP and Brazilian GAAP.
b) Foreign currency translation
The Company, which transacts the majority of its business in Brazilian
reais, and, to a lesser extent, in U.S. dollars, has selected the U.S.
dollar as its reporting currency. The U.S. dollar amounts for all
periods presented have been remeasured (translated) following the
guidelines established in Statement of Financial Accounting Standards
("SFAS") No. 52, "Foreign Currency Translation" ("SFAS 52").
F-9
Prior to December 31, 1997 and pursuant to SFAS 52 and Emerging Issues
Task Force ("EITF") D-55, "Determining a Highly Inflationary Economy",
Brazil was considered to have a highly-inflationary economy.
Accordingly, the Company's reporting currency (US$) was defined as its
functional currency and the remeasurement procedures adopted by the
Company through this date were as follows:
(i) Inventories, property, plant and equipment and accumulated
depreciation, as well as shareholders' equity accounts, were
translated at historical exchange rates and monetary assets and
liabilities denominated in Brazilian currency were translated at
period-end exchange rates (December 31, 1997 - R$ 1.1164: US$
1.00);
(ii) Depreciation and other costs and expenses relating to assets
remeasured at historical exchange rates were calculated based on
the U.S. dollar amount of the assets. Other accounts in the
statements of operations and cash flows were translated at the
average exchange rates prevailing during the period;
(iii) the translation gain or loss resulting from this remeasurement
process was included in the statements of operations currently;
and
(iv) pursuant to paragraph 9(f) of SFAS No. 109 "Accounting for Income
Taxes" ("SFAS 109"), deferred taxes were not recorded with
respect to differences relating to assets and liabilities
translated at historical rates that resulted from changes in
exchange rates or indexing for Brazilian tax purposes.
As from January 1, 1998 the Company concluded that the Brazilian
economy had ceased to be highly inflationary and changed its
functional currency from the reporting currency (U.S. dollars) to the
local currency (R$). Accordingly, as of January 1, 1998 the Company
translated the U.S. dollar amounts of non-monetary assets and
liabilities into reais at the current exchange rate and those amounts
became the new accounting bases for such assets and liabilities. The
resulting deferred taxes associated with the differences between the
new functional currency bases and the tax bases ((iv) above) were
reflected as a deferred tax liability with a corresponding debit taken
directly to the cumulative translation adjustment component of
shareholders' equity.
In mid-January 1999, significant changes occurred in the Brazilian
government's foreign exchange rate policy, which resulted in the
elimination of exchange controls referred to as trading bands. These
trading bands ensured that the real to U.S. dollar exchange rate
remained within a given range. On January 15, 1999, the Brazilian
Central Bank ceased to intervene in the foreign exchange market,
except in exceptional circumstances to mitigate excessive volatility,
and the real to U.S. dollar exchange rate was allowed to fluctuate
freely. On July 30, 1999, the real was trading at approximately R$
1.7892 to US$ 1.00, as compared to the exchange rates in effect on
December 31, 1998 of R$ 1.2087 to US$ 1.00 and on December 31, 1999 of
R$ 1.7890 to US$ 1.00.
The effects of the real devaluation has resulted in a net translation
loss, arising from the translation of the balance sheet accounts
(monetary and non-monetary assets and liabilities) from Brazilian
reais to U.S. dollars. The translation loss has been allocated
directly to the cumulative translation account in shareholders'
equity.
F-10
c) Foreign currency transactions
Monetary assets and liabilities of Xtal, denominated in currencies
other than the functional currency are measured into their respective
functional currencies at exchange rates in effect at the balance sheet
date. The resulting exchange gains or losses are included in the
statement of operations.
d) Use of estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of
the dates of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. In the preparation
of these financial statements, estimates and assumptions have been
made by management concerning the selection of useful lives of
property, plant and equipment, provisions necessary for trade
receivables, inventories and contingent liabilities, income tax
valuation allowances and other similar evaluations. Actual results may
vary from those estimates.
e) Cash and cash equivalents
Cash and cash equivalents include cash on hand, interest-bearing time
deposits and other interest-bearing short-term securities denominated
in Brazilian reais. Time deposits classified as cash equivalents have
original maturities of three months or less.
f) Accounts receivable
Accounts receivables are stated at estimated realizable values.
Allowances are recorded, when necessary, in an amount considered by
management to be sufficient to meet probable future losses related to
uncollectible accounts.
g) Inventories
Inventories are stated at the lower of average cost of acquisition or
production, or market.
h) Property, plant and equipment
Owned property, plant and equipment is recorded at cost. Expenditures
for maintenance and repairs are charged to expense when incurred.
F-11
Depreciation is provided on a straight-line basis over the useful
lives of the assets as follows:
Years
-------
Buildings and improvements 10-25
Machinery and equipment 3-10
Furniture and fixtures 5-10
Installations 6-10
Vehicles 5
EDP equipment 3
Assets under construction are not depreciated until they are placed in
service.
i) Recoverability of long-lived assets
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of" ("SFAS
121"), management reviews long-lived assets, primarily property, plant
and equipment to be held and used in the business and certain deposits
and tax incentive investments, for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset
or group of assets may not be recoverable.
Assets are grouped and evaluated for possible impairment at a plant
level; impairment is assessed based on undiscounted cash flows from
forecasted operating results of the business over the estimated
remaining lives of the assets.
j) Compensated absences
Vacation expense is fully accrued in the period the employee renders
services to earn such vacation.
F-12
k) Income taxes
Brazilian income taxes comprise federal income tax and social
contribution, the latter a federally mandated tax based on income, as
recorded in XTAL's respective accounting records. There are no state
or local income taxes in Brazil.
For the purposes of these financial statements, the Company has
applied SFAS 109 for all periods presented. SFAS 109 requires the
application of the comprehensive liability method of accounting for
income taxes. Under this method, a company is required to recognize a
deferred tax asset or liability for all temporary differences and
operating losses, except that, prior to 1998 and in accordance with
paragraph 9(f) of SFAS 109, deferred taxes were not recorded for
differences relating to certain assets and liabilities that were
remeasured from reais to U.S. dollars at historical exchange rates and
that resulted from changes in exchange rates or indexing to inflation
in local currency for tax purposes. Such accumulated differences were
recognized in shareholders' equity when the Company adopted the real
as the functional currency on January 1, 1998.
Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary differences are
expected to be recovered or settled. Under SFAS 109, the effect on
deferred tax assets and liabilities of changes in tax rates is
recognized in income in the period that includes the enactment date.
Deferred tax assets and liabilities are reduced through the
establishment of a valuation allowance, as appropriate, if, based on
the weight of evidence, it is more likely than not that the deferred
tax assets will not be realized.
l) Summary of Brazilian tax structure
Taxes in Brazil are levied by the federal, state, and municipal
governments. Additionally, certain taxes are levied related to
employment of personnel. The principal federal taxes applicable to
Xtal are:
o Corporate Income Tax (IRPJ)
o Social contribution on net profits (CSLL)
o Social contribution on turnover (COFINS)
o Social integration contribution on turnover (PIS)
o Financial transactions tax (IOF)
The main state tax is the merchandise circulation tax (ICMS), or
simply the state value added tax (VAT). The principal municipal tax is
the service tax (ISS).
F-13
Corporate Income Tax: In general, all business entities are liable for
corporate income tax, including both corporations (S.A.'s) and limited
liability companies (limitadas). A consortium is not regarded as a
separate taxable entity for tax purposes; each company belonging to
the consortium is taxed individually. The corporate income tax rate is
15% on annual net income of $R240,000 or less and 25% on net income
before taxes greater than $R240,000. Additionally an 8% tax is levied
on net income before taxes for social contribution (discussed below)
and, as such, brings the total effective tax rate to 33%. The total
33% is a creditable for US income tax purposes.
Social Contribution on Net Profit: The social contribution on net
profit (CSLL) is intended to fund social and welfare programs and is
paid in addition to the corporate income tax. The rate is calculated
as 8% of net income before taxes.
Social Contribution on Turnover: Social contribution on turnover
(COFINS) is levied at 2% of monthly sales to finance social security
and welfare programs.
Social Integration Contribution on Turnover: Legal entities must
contribute 0.65% of monthly sales to a federal program (PIS), whose
purpose is to allow employees to participate in Brazil's economic
growth.
Financial Transaction Tax: The financial transaction tax (IOF) is
levied on specific Brazilian and foreign financial transactions. The
tax is payable by borrowers, purchases of securities and foreign
currency. The rates vary according to the maturity terms and types of
transactions. The rate has been as high as 25%. Currently a tax of 2%
is levied on foreign loans with initial terms less than two years. The
tax is used by the government in the implementation of monetary
policy.
F-14
ICMS: ICMS is a sales value added tax levied by the states on the
circulation of merchandise and transportation services and represents
the major source of revenue for the states. It is charged on each
delivery of goods from the production stage to the consumer stage.
Assets imported from abroad are also taxable. Other taxable items
include interstate and inter municipal transportation services,
communication services, and the generation and distribution of
electric energy. ICMS rates vary from 0% to 25% but are most commonly
found in the 17%-18% range. The tax is usually paid monthly and is
calculated by successive sellers collecting ICMS on all sales (output
tax) and subtracting ICMS paid during the month on purchases (input
tax). If the output tax exceeds the input tax the excess must be
remitted to the state, conversely if the input tax exceeds the output
tax the residual is carried forward to be used against future output
tax collections.
Service Tax: Service tax (ISS) is levied on gross sales derived from
services rendered. The tax rates vary between 2% and 10%, but the
typical rate is 5%. Activities classified as services are set forth in
federal legislation. The following activities are normally considered
services: consulting, advertising, engineering, building,
transportation, activities of hospitals, public entertainment,
tourism, leasing of equipment, activities of hotels, and movie
studios.
Recoverable taxes: The recoverable taxes included in the balance
sheet accounts relate to excise tax (IPI) imposed on goods or products
imported or manufactured in Brazil. The tax is levied on the price of
transactions, inclusive of ancillary expenses and ICMS. Tax rates
differ according to the characterization of product, with luxury items
subject to the highest rate of 365%, and the average rate being 15%.
Limited exemptions may apply. The tax is "equivalent" (as determined
under the IPI laws) to a value added tax; that is, entities are
entitled to record input tax credits for IPI paid and collect
offsetting IPI debits from their customers.
m) Pension plan
The Company participates in a single-employer funded
defined-contribution pension plan (the "Fundo Integrativo Dos
Funcionarios do Grupo Algar"). Pension plan benefits for the Fundo
Integrativo Dos Funcionarios do Grupo Algar Plan, are based primarily
on participants' compensation on retirement and years of service. The
Plan is available to substantially all employees of the Company.
n) Other assets and liabilities
Other assets and liabilities are stated at known or likely amounts
plus related charges and monetary adjustments and provisions for
market value adjustment, if applicable.
o) Sales and expenses
Sales revenues are recognized as finished goods and other products are
shipped. Expenses and costs are recognized on the accrual basis.
F-15
p) Environmental expenditures
Expenditures relating to ongoing compliance with environmental
regulations, designed to minimize the environmental impact of the
Company's operations, are charged against earnings on the date
expended. Provisions for expenditures are charged against earnings at
the time that they are considered to be probable and reasonably
estimable. Management believes that, at present, its plant is in
substantial compliance with the environmental regulations applicable
to it.
q) Marketing costs
Marketing costs are reported in selling and marketing expenses and
include costs of advertising and other marketing activities.
r) Start-up costs
In accordance with the American Institute of Certified Public
Accountants ("AICPA") Statement of Position ("SOP") 98-5, "Reporting
the Costs of Start-Up Activities", start-up costs are expensed as
incurred.
s) Concentration of credit risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, are principally bank deposits and
accounts receivable. Cash and cash equivalents are deposited with high
credit quality financial institutions. Accounts receivables typically
represent purchases and are derived from the revenues earned from
customers in Brazil and are denominated in Brazilian reais. The
company maintains an allowance for uncollectible accounts based upon
the expected collectibility of accounts receivable. During the years
ended December 31, 1999 and 1998, approximately 53 % and 56 % in gross
sales were generated from two clients.
t) Comprehensive income (loss)
Effective January 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." Under SFAS 130 changes in net assets
of an entity resulting from transactions and other events and
circumstances from non-owner sources are reported in a financial
statement for the period in which they are recognized. Adoption of
SFAS 130 did not impact the financial statements of the Company.
u) Segment Reporting
Effective January 1, 1998, the Company adopted SFAS 131, "Disclosures
about Segments of an Enterprise and Related Information." The company
operates as a single segment and will evaluate additional segment
disclosure requirements as it expands its operations.
F-16
v) New accounting pronouncements
In June 1999, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No.
133", which defers the effective date of SFAS No. 133 to all fiscal
quarters of all fiscal years beginning after June 15, 2000. SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities",
issued in June 1998, requires that all derivative financial
instruments be reflected on the balance sheet at fair value, with
changes in fair value recognized periodically in earnings or as a
component of other comprehensive income, depending on the nature of
the underlying item being hedged. In the event that an entity does not
effectively hedge against an underlying item, changes in the fair
value of the derivative will be recognized currently in the statement
of operations. The impact of adopting this statement is not expected
to be material to the Company.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software developed or Obtained for Internal Use." SOP 98-1
provides guidance on accounting for the costs of computer software
developed or obtained for internal use. The pronouncement identifies
the characteristics of internal use software and provides guidance on
new cost recognition principles. The impact of adopting this statement
was not material to the Company.
3. INTEREST INCOME AND EXPENSES
For the years
Ended December 31
-----------------
1999 1998
------- -------
Interest income
Interest income on cash equivalents 3 27
Interest income on intercompany credit 152 12
Exchange rate variations 248 78
Other 2 12
------- -------
405 129
======= =======
Interest expense
Interest expense on loan debt - (737)
Interest expense on Intercompany loan (795) (246)
Exchange rate variations on loans/supplies (1,300) (637)
Interest on liabilities other than loans (39) (51)
Banking charges, taxes and other (512) (1,266)
------- -------
(2,646) (2,937)
======= =======
F-17
4. INCOME TAXES
Income taxes in Brazil include federal income tax and social contribution.
The Brazilian statutory rates for the years presented are as follows:
Year ended
December 31,
-----------------
1999 1998
-------- -------
% %
- -
Federal income tax 25.00 25.00
Social contribution 12.00 8.00
-------- -------
Composite income tax rate 37.00 33.00
======== =======
The amount reported as income tax (expense) benefit in the consolidated
statements of operations is reconciled to tax expense at the statutory
federal income tax rate as follows:
Year ended
December 31,
-----------------
1999 1998
-------- -------
$ $
- -
Income before income taxes (3,009) (8,303)
======== =======
Tax benefit, at statutory rates 1,113 2,740
Increase in valuation allowance (1,113) (2,740)
Effect of changes in tax rates (2) -
Effects of differences between indexation and
translation;
Depreciation on a different asset base 13 24
Other (19) (3)
-------- -------
Tax (expense) benefit as reported in the
Statement of operations (8) 21
======== =======
The major components of the deferred tax accounts are as follows:
As of December 31
--------------------
1999 1998
--------- ---------
Brazilian net operating loss carryforwards 2,459 2,044
Deferred income tax relating to temporary differences 620 629
--------- ---------
Gross deferred income tax assets 3,079 2,673
Valuation allowance (3,079) (2,673)
--------- ---------
Deferred income tax assets, net of valuation - -
allowances
========= =========
As of December 31
--------------------
1999 1998
--------- ---------
Deferred income tax liabilities:
Deferred non current income tax liability on change
in functional
Currency 41 48
--------- ---------
Total non-current deferred income tax liabilities 41 48
========= =========
F-18
5. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivables relate primarily to sales to domestic customers.
The Company has concentration credit risk for accounts receivable from some
customers, which is subject to business cycle variations. Such customers
held balances at each year-end as follows:
December 31
-----------------
1999 1998
------- --------
Furukawa Ind. S/A Produtos Eletronicos 899 -
Marsicano S/A Ind. e Cond. Eletricos 923 1,367
Cabelte Cabos Eletricos 585 -
Telcon Fios e Cabos para Telecomunicacao 836 346
Alcatel Telecomunicacoes S/A 2,028 -
Cabelte Industris Brasileira Ltda. - 847
Other 459 645
------- --------
5,730 3,205
Allowance for doubtful account (923) (1,367)
------- --------
Total 4,807 1,838
======= ========
6. INVENTORIES
December 31
-----------------
1999 1998
------- --------
Finished products 640 3,777
Work in process 772 556
Raw materials and indirect materials 2,332 2,552
Resale materials 153 336
Imports in progress 292 608
------- --------
4,189 7,829
Allowance for slow-moving inventory (136) -
------- --------
4,053 7,829
======= ========
7. ESCROW DEPOSITS
The Company is contesting the payment of certain taxes and has made
court-approved escrow deposits of equivalent amounts pending final
decisions. Deposits of US$ 7 (1998- US$ 10), which relate to proceedings
for which the Company has received favorable rulings or for which loss is
not considered probable, have no offsetting allowances.
F-19
8. PROPERTY, PLANT AND EQUIPMENT
Years 1999 1998
------ -------- ---------
Land 140 207
Buildings and improvements 10-25 4,228 5,817
Machinery and equipment 3-10 8,972 8,749
Furniture and fixtures 5-10 163 218
Installations 6-10 934 728
Vehicles 5 29 53
EDP equipment 3 238 222
-------- --------
14,704 15,994
Accumulated depreciation (4,344) (4,773)
Projects in progress 18 5,225
-------- --------
10,378 16,446
======== ========
9. LONG-TERM DEBT
Long-term loans and financing relate primarily to permanent asset import
financing, at an interest rate of LIBOR plus 0.75% to 2.18% per annum,
secured by Algar S.A. Empreendimentos e Participacoes. The maturities of
long-term debt are as follows:
December 31
------------
1999
---------
2000 340
2001 288
---------
Total long-term debt 628
Current portion of long-term debt 340
---------
Total 288
=========
F-20
10. RELATED PARTY TRANSACTIONS/BALANCES
Transactions/balances with related parties were as follows:
Administrative Interest
Assets Liabilities expenses expense, net
----------- --------------- ------------------- -----------------
1999
----
Due to related parties:
Algar S.A. Empreendimentos
e Participacoes - 624 203 770
Algar Telecom S.A. - 203 -
----------- --------------- ------------------- -----------------
- 624 406 770
=========== =============== =================== =================
1998
----
Due from related parties:
Algar S.A. Empreendimentos
e Participacoes 57 - - -
Due to related parties:
Algar S.A. Empreendimentos
e Participacoes - - 308 281
----------- --------------- ------------------- -----------------
57 - 308 281
=========== =============== =================== =================
The $624 loan matures on September 30, 2000 and carries interest at a rate
of 17.81%. Company management considers related-party transactions/balances
as usual market transactions. Administrative expenses paid to Algar by the
Company represent normal and recurring costs of conducting the Company's
operations. In the opinion of management, these costs represent the costs
that would be incurred on a stand-alone basis. Intercompany
transactions/balances relate to contracts at average interest rates, which
during the year approximated the market rates.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation sale. Significant
differences can arise between the fair value and carrying amounts of
financial instruments that are recognized at historical cost amounts.
F-21
The carrying amounts and fair values of the Company's financial instruments
as of December 31 are as follows:
As of December 31
-----------------------------------
1999 1998
----------------- -----------------
Carrying Fair Carrying Fair
Amount value Amount Value
--------- ------ --------- ------
On balance sheet financial instruments:
Cash and cash equivalents 225 225 36 36
Escrow deposits 7 7 10 10
Long-term debt (including current
portion) 628 628 123 123
The values provided are representative of the fair values as of December
31, 1999 and 1998 and do not reflect subsequent changes in the economy,
interest and tax rates, and other variables that may impact determination
of fair value. The following methods and assumptions were used in
estimating fair values for financial instruments:
Cash and cash equivalents and short-term investments: The carrying amount
reported in the balance sheet for cash and cash equivalents and short-term
investments approximates fair value due to the short maturity of these
instruments.
Escrow deposits: The carrying amount of escrow deposits approximates fair
value, as interest is receivable on such deposits at a variable market
rate.
Long-term debt: The carrying value of the Company's long term debt
approximates fair value due to the interest rates of these instruments.
12. SHAREHOLDERS' EQUITY
Capital and shareholder rights
(i) Share capital
Subscribed and paid-in capital comprises 10,275,142 shares of no par
value, of which 5,137,571 are common shares and 5,137,571 are
preferred shares.
F-22
(ii) Share rights
Common shares have the right to vote at shareholder meetings while
preferred shares are non-voting. Preferred shares do, however, have
priority in the return of capital in the event of liquidation and in
the receipt of a mandatory non-cumulative dividend (the "Mandatory
dividend") of 25% of consolidated net income as determined in
accordance with Brazilian Corporate Law, due to both preferred and
common shareholders. Under Brazilian Corporate Law, any payment of
interim dividends and interest attributable to shareholders equity is
netted off against the amount of the Mandatory Dividend in the year of
payment (applicable). In any year, the board of directors of the
Company may determine that it is inadvisable in view of the Company's
financial position to pay the Mandatory Dividend. In this case, any
retained earnings of the Company must be allocated to a special
reserve account. Furthermore, in the event that the Mandatory Dividend
is omitted for three consecutive years, the preferred shares acquire
voting rights until payment of such dividends is reserved.
(iii) Appropriated retained earnings
Under Brazilian Corporate Law, Xtal is required to appropriate 5% of
its annual statutory accounting basis local currency earnings, after
absorbing accumulated losses, to a statutory reserve until each such
reserve equals 20% of paid capital. The reserve may be used to
increase capital or absorb losses, but may not be distributed as
dividends.
(iv) Unappropriated retained earnings
Dividend distributions are limited to retained earnings of the Company
as determined in accordance with the Brazilian Corporate Law. There
were no distributable retained earnings as of December 31, 1999 and
1998, respectively.
(v) Dividends
Dividends are payable in Brazilian reais, and are reflected in the
financial statements upon approval. Brazilian Law permits the payment
of dividends only from retained earnings based on the amounts stated
in the Company's statutory accounting records. No dividends were
declared or paid for the years ended 1999 and 1998, respectively.
F-23
13. PAYROLL, PROFIT SHARING AND RELATED CHARGES
Approximately 100% of the Company's production and industrial employees are
members of the Participacao nos Resultados da Epresa (the "Union"). The
collective bargaining agreement (between the Union and Xtal - covering all
Company employees who are formally members of the Union, executives are not
covered), provides for an annual distribution to employees of a specified
amount, as agreed by the Union and the Company in the first quarter of each
year, for the following year. On an individual employee basis, the
distribution is dependent on department and grade. Expenses of the Company
under these programs are included in general and administrative expenses
and amounted to $ 119 and $65 for the years ended December 31, 1999, and
1998, respectively.
14. COMMITMENTS AND CONTINGENCIES
(a) Accrued liability for legal proceedings
The Company is contesting the payment of certain taxes and
contributions and has made court escrow deposits (restricted deposits
for legal proceedings) of equivalent or lesser amounts pending final
legal decisions. Probable losses, provided as liabilities of the
Company based on the advice of outside legal counsel, are summarized
below:
December 31
----------------
1999 1998
-------- -------
Labor claims (1) 41 -
Income tax withheld at source - Intercompany loan 310 -
Income tax and social contribution 60 81
Value-added sales taxes ("ICMS") 164 129
Value-added sales taxes ("IPI") 146 126
Other 20 5
-------- -------
Total accrued liabilities for legal proceedings 741 341
======== =======
-----------------
(1) The Company is party to a number of lawsuits filed by former
employees related to overtime, dangerous working conditions and
various employment relationships. As of December 31, 1999 the Company
has accrued $ 41 relating to such lawsuits. Escrow deposits against
probable losses relating to labor claims totaled $ 150 as of December
31, 1999.
Management believes, based on advice from its attorneys, that the
provision for contingencies is sufficient to meet probable and
reasonably estimable losses, and that the ultimate resolution will not
have a significant effect on the Company's liquidity, consolidated
financial position or results of operations.
F-24
(b) Financial guarantee and recourse arrangement (Advance for future
increase of capital)
On December 1, 1998, XTAL entered into an agreement of Advance of
Financial Resources to offset various supplier and financial debt with
Algar S.A. Empreendimentos e Participacoes ("Algar" or Parent Company)
for a total amount of US$ 4.2 million (advance for future increase of
capital). Such agreement was accounted for by the Parent Company as a
capital contribution and Xtal duly amended their by-laws and Social
Contract on April 27, 1999, to effectively increase capital. At
December 31, 1999, (pound)627 (approximately US$ 1,013) remained
payable in the name of Xtal to Unibanco at an interest rate of LIBOR
plus 11.79%. Several machines are given as guaranty for this loan. In
connection with the acquisition agreement described in Note 16, Algar
assumed the (pound)627 liability. This amount is not recorded as a
liability in the accompanying financial statements.
On December 31, 1998, XTAL entered into a second agreement of Advance
of Financial Resources for Future Capital Increase with Algar S.A.
Empreendimentos e Participacoes ("Algar") for a total amount of $13
million (Advance for future increase of capital) and such amount was
consigned in an account on behalf of Algar. This agreement was also
accounted for by the Parent Company as a capital contribution whereby
Xtal amended their by-laws and Social Contract to effectively increase
capital. In association with this agreement, there were two other
Agreements for the Assumption of Debt by the parties with the
following terms:
Algar assumes the debts of Xtal before various banks for a total of
US$ 8 million Algar assumes the debts of Xtal for a supplier totaling
US$ 3.5 million
Such agreements, added to the balance of intercompany loans payable in
the amount of US$ 1.5 million, were also accounted for by the Parent
company as a capital contribution. Xtal effectively registered these
amounts by amending and registering their Social Contract on April 27,
1999, to effectively increase capital. Approximately US$ 1.5 million,
due September 19, 2000, remains payable in the name of Xtal to Banco
Brascan S/A at an interest rate of LIBOR plus 2% per year. Also, US$
384 thousand and US$ 288 thousand, due October 31 and August 31, 2000
respectively, remain payable in the name of Xtal to Dresdner Bank
Lateinamerika AG at an interest rate of LIBOR plus 0.75% per year.
Algar remained the guaranty for this amount should Xtal default. In
connection with the acquisition agreement described in Note 16, Algar
assumed these liabilities, totaling approximately US$ 2,172. These
amounts are not recorded as liabilities in the accompanying financial
statements.
F-25
(c) Postemployment benefits
The Company makes monthly contributions based on payroll expense to
the government pension, social security and severance indemnity plans.
Such payments are expensed as incurred.
In addition, certain payments are due on dismissal of employees
pursuant to Article 18 of Law 8.036 (dated May 11, 1990) being
principally (i) one month's salary, and (ii) a severance payment based
on the accumulated balance of each employees government severance
indemnity account. The Company makes contributions to the government
severance indemnity plan for each of its employees on a monthly basis;
the additional severance payment made by the Company is calculated at
40% of the balance of this account. Severance benefits payable to
employees do not vest or accumulate.
(d) Environmental issues
The Company is subject to Federal, State and Local laws and
regulations relating to the environment. These laws generally provide
for control of air and effluent emissions and require responsible
parties to undertake remediation of hazardous waste disposal sites.
Civil penalties may be imposed for noncompliance.
Future information and developments will require the Company to
continually reassess the expected impact of environmental matters.
However, the Company has evaluated its total environmental exposure
based on current available data and believes that compliance with all
applicable laws and regulations will not have a material impact on the
Company's liquidity, consolidated financial position or results of
operations.
F-26
15. SEGMENT INFORMATION
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131"). SFAS 131 adopts a
"management approach" for segment reporting; this approach designates the
internal organization that is used by management for making decisions and
assessing performance as the source of the Company's reportable segments.
SFAS 131 also requires disclosure about products and services, geographical
areas, and major customers.
(a) Description of the types of products and services from which the
reportable segment derives its revenues
The Company has one reportable segment: optical fibers and related
byproducts. The segment produces two types of communication optical
fibers (as of December 31, 1999); multi-mode and single-mode fiber.
The Company has one production facility in Campinas.
(b) Measurement of segment profit and loss and segment assets
The accounting policies underlying the financial information provided
for the one segment is based on Brazilian GAAP. These amounts do not
differ from US GAAP. The Company's reportable segment offers separate
products. The reportable segment is the responsibility of one product
manager who has knowledge of product lines, operational risks and
opportunities.
(c) Geographical areas
International sales and operations for the Company account for
approximately 4% of consolidated net sales and long-lived assets,
respectively.
16. SUBSEQUENT EVENTS
o Changes in tax legislation
In 1999, the Government introduced changes to the income tax law with
effective dates throughout 2000. The significant provisions of these
changes are summarized below:
(i) The COFINS (tax for social security financing) rate remains
unchanged at 3%; however, beginning in January 2000, 33.33% of
COFINS can no longer be offset against Social Contribution on Net
Income ("CSSL");
(ii) The CSSL rate was reduced from 12% to 9% beginning in February
2000, and from 9% to 8% beginning January 2003; and
(iii) The assumed credit of IPI (Excise tax) can be offset against PIS
(Employees' Profit Participation Program) and COFINS.
F-27
o Firm Commitment for the Acquisition of the Company
On April 26, 2000, the Company consummated an agreement with
Fibercore, Inc. (the "Buyer") and Algar S.A. (the "Seller") which sets
forth the terms and conditions for the sale of 90% of the outstanding
common stock or substantially all the assets and specified liabilities
of XTAL, subject to Algar holding a 10% equity interest in Xtal. On
the closing date (not to exceed 60 days from acceptance of the
acquisition agreement), a shareholders agreement shall be entered into
providing certain criteria. The purchase price for XTAL shall be US$
25 million, payable as follows and subject to the following terms and
conditions:
(i) Within 30 days of the signing or May 31, 2000, whichever is
later, Buyer shall pay the seller a sum of US$ 2 million in the
form of a deposit. This deposit may be returned to the buyer,
inclusive of accrued interest, based on reasonable interest
rates, if certain events do not transpire.
(ii) An additional US$ 8 million shall be paid in cash on closing
date, which is to be 60 days from the April 26, 2000 agreement or
June 30, 2000, whichever date is later.
(iii) US$ 10 million via a promissory note, bearing interest at 6%,
delivered at the closing date, and payable 180 days following the
close, or December 31, 2000, whichever is later. The promissory
note may be reduced in principal to US$ 7.5 million in the event
the seller does not deliver to the Buyer on the closing date, an
executed non cancelable 3 year purchase order (the "Purchase
Order"), at prevailing market prices which covers 50% of the
fiber optical requirements of Algar. The purchase price can be
reduced further, to US$ 6.5 million, provided that the Buyer
makes all payments thereunder on or before August 31, 2000.
(iv) In the event the Buyer does not make the payment under the
promissory note above, the buyer shall pay an additional 3%, in
addition to the original 6% per annum, plus the following
extensions:
(v) US$ 1.25 million through a promissory note bearing interest at 6%
per annum, payable 450 days following the closing date. The
principal and interest amount of the promissory note may be
reduced proportionately in the event the gross profit of Xtal for
the year 2000 does not achieve certain levels. US$ 1.25 million
through a promissory note bearing interest at 6% per annum,
payable 810 days following the closing date. The principal and
interest amount of the promissory note may be reduced
proportionately in the event the gross profit of Xtal for the
year 2001 does not achieve certain levels.
F-28
(vi) On the date which is 1,080 days following the closing date, the
Buyer shall, pursuant to the Buyer's call option, acquire the
remaining shares held by the Seller in Xtal or in the purchasing
entity upon payment in cash of US$ 2.5 million plus interest at a
rate of 6% per annum. The Buyer reserves the right to prepay this
amount at any time without penalty.
o Employment agreements
As part of the acquisition agreement, reasonable efforts are to be
made in executing agreements with key employees by XTAL or the buyer
for not less than one year, under customary terms and conditions.
These include, where appropriate, non-compete, confidentiality and
non-solicitation customer agreements.
- ------------------------------------------------------------------------------
F-29
XTAL FIBRAS OPTICAS S.A.
- ------------------------
INTERIM BALANCE SHEETS
(Expressed in thousands of United States dollars)
- ------------------------------------------------------------------------------
March 31, December 31,
2000 1999
------------ ------------
ASSETS (Unaudited)
Current assets
Cash and cash equivalents 49 225
Trade accounts receivable, net 4,186 4,807
Inventories (note 3) 3,578 4,053
Prepaid expenses, other 999 497
------------ ------------
Total current assets 8,812 9,582
------------ ------------
Property, plant and equipment, net 10,467 10,378
Recoverable taxes 145 101
Other 7 7
------------ ------------
152 108
------------ ------------
Total assets 19,431 20,068
============ ============
(Continued)
F-30
XTAL FIBRAS OPTICAS S.A.
- ------------------------
INTERIM BALANCE SHEETS
(Expressed in thousands of United States dollars) (Continued)
- ------------------------------------------------------------------------------
March 31, December 31,
2000 1999
------------ ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Trade accounts payable - suppliers 4,011 4,952
Current portion of long-term debt 290 340
Taxes other than income 441 356
Payroll and other charges 818 614
Other 19 21
------------ ------------
Total current liabilities 5,579 6,283
------------ ------------
NON-CURRENT LIABILITIES
Long-term debt - 288
Intercompany 733 624
Long-term taxes 651 852
Other long-term liabilities 801 741
Deferred income tax 46 41
------------ ------------
2,231 2,546
Commitments and contingencies (note 4)
SHAREHOLDERS' EQUITY
Preferred stock - no par value, 49,963,256 shares
authorized and 5,137,571 issued and outstanding
at March 31, 2000 and December 31, 1999 11,497 11,497
Common stock - no par value, 49,963,256 shares
authorized and 5,137,571 issued and
outstanding at
March 31, 2000 and December 31, 1999 11,497 11,497
Appropriated retained earnings:
Legal reserve 140 140
Unappropriated retained (deficits) (8,015) (8,113)
Accumulated other comprehensive (loss) (3,498) (3,782)
------------ ------------
Total shareholders' equity 11,621 11,239
------------ ------------
Total liabilities and shareholders' equity 19,431 20,068
============ ============
The accompanying notes are an integral part of these Financial Statements.
- ------------------------------------------------------------------------------
F-31
XTAL FIBRAS OPTICAS S.A.
- ------------------------
INTERIM STATEMENTS OF OPERATIONS
(Expressed in thousands of United States dollars)
- ------------------------------------------------------------------------------
March 31, March 31,
2000 1999
------------ -----------
(Unaudited) (Unaudited)
GROSS SALES
Total gross sales 9,454 1,201
Value-added and excise tax on sales (2,660) (287)
------------ -----------
Net sales 6,794 914
Cost of sales (6,270) (885)
------------ -----------
GROSS PROFIT 524 29
Selling and marketing expenses (106) (106)
General and administrative expenses (150) (339)
Depreciation (24) (26)
------------ -----------
Operating expenses (280) (471)
NON-OPERATING (EXPENSES) INCOME
Interest income 13 231
Interest expenses (91) (1,674)
Other non-operating (expense) income, net (60) 3
------------ -----------
INCOME (LOSS) BEFORE INCOME TAX AND
SOCIAL CONTRIBUTION 106 (1,882)
INCOME TAX (EXPENSES) BENEFIT AND SOCIAL (8) (131)
CONTRIBUTION
------------ -----------
Net income (loss) 98 (2,013)
============ ===========
The accompanying notes are an integral part of these Financial Statements.
- ------------------------------------------------------------------------------
F-32
XTAL FIBRAS OPTICAS S.A.
- ------------------------
INTERIM STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Expressed in thousands of United States dollars) (Continued)
- ------------------------------------------------------------------------------
March 31, March 31,
2000 1999
------------ ------------
(Unaudited) (Unaudited)
Net income (loss) 98 (2,013)
------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX:
Foreign currency translation adjustment 284 (3,468)
------------ ------------
Other comprehensive income (loss) 284 (3,468)
------------ ------------
Comprehensive income (loss) 382 (5,481)
============ ============
The accompanying notes are an integral part of these Financial Statements.
- ------------------------------------------------------------------------------
F-33
XTAL FIBRAS OPTICAS S.A.
- ------------------------
INTERIM STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Expressed in thousands of United States dollars)
- ------------------------------------------------------------------------------
Appropriated
retained Unappropriated Accumulated
earnings retained other
Common Preferred legal earnings Comprehensive
stock stock reserve (deficit) income (loss) Total
----- ----- ------- --------- ------------- -----
BALANCES AS OF 11,497 11,497 140 (8,113) (3,782) 11,239
JANUARY 1, 2000 (AUDITED)
Net income available to common
and preferred shares - - - 98 - 98
Net translation gain for the period - - - - 284 284
------- ------- ------- -------` ------- -------
BALANCES AS OF
MARCH 31, 2000 (UNAUDITED) 11,497 11,497 140 (8,015) (3,498) 11,621
======= ======= ======= ======= ======= =======
The accompanying notes are an integral part of these Financial Statements.
- ------------------------------------------------------------------------------
F-34
XTAL FIBRAS OPTICAS S.A.
- ------------------------
INTERIM STATEMENTS OF CASH FLOWS
(Expressed in thousands of United States dollars)
- ------------------------------------------------------------------------------
Years ended
March 31
---------------------
2000 1999
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES (Unaudited) (Unaudited)
Net income (loss) 98 (2,013)
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Depreciation 329 239
Allowance for doubtful accounts-reversal (53) -
Exchange translation 55 (802)
Deferred income taxes 8 131
Decrease (increase) in assets:
Trade accounts receivable 674 999
Inventories 475 1,162
Other current assets (502) 92
Recoverable tax (44) 44
Other assets - 3
Increase (decrease) in liabilities
Trade accounts payable (941) (2,941)
Taxes other than on income 85 (15)
Payroll and other charge 204 (205)
Other current liabilities (2) (24)
---------- ---------
Long-term taxes (201) (256)
---------- ---------
Other long-term liabilities 60 (80)
---------- ---------
Net cash provided by (used in) operating activities 245 (3,666)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (170) (840)
Proceeds on disposal of property, plant and equipment 1 237
---------- ---------
Net cash used in investing activities (169) (603)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt
Proceeds 13 680
Repayments (343) (102)
Intercompany
Proceeds 345 3,872
Repayments (272) (132)
---------- ---------
Net cash (used in) provided by financing activities (257) 4,318
---------- ---------
(Continue)
F-35
XTAL FIBRAS OPTICAS S.A.
- ------------------------
INTERIM STATEMENTS OF CASH FLOWS
(Expressed in thousands of United States dollars) (Continued)
- ------------------------------------------------------------------------------
Years ended
March 31
---------------------
2000 1999
---------- ---------
(Unaudited) (Unaudited)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 5 (11)
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (181) 49
CASH AND CASH EQUIVALENTS AS OF
BEGINNING OF THE YEAR 225 36
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR 49 74
========== =========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for:
Interest 55 25
Taxes on income - -
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these Financial Statements.
- ------------------------------------------------------------------------------
F-36
XTAL FIBRAS OPTICAS S.A.
- ------------------------
NOTES TO THE INTERIM FINANCIAL INFORMATION
(Expressed in thousands of United States dollars, except number of shares and
where otherwise noted) (Continued)
- ------------------------------------------------------------------------------
1 INTERIM FINANCIAL STATEMENTS
The interim financial statements (the "Interim Financial Statements") of
XTAL Fibras Opticas S.A. (the "Company") has been prepared in accordance
with generally accepted accounting principles in the United States ("U.S.
GAAP"), which differ in certain respects from generally accepted accounting
principles in Brazil ("Brazilian GAAP"), as applied by the Company in the
preparation of its statutory financial statements and for other purposes.
Shareholders' equity and net (loss) income included in these Interim
Financial Statements differ from those included in the accounting records
as a result of (i) the effects of differences between the rate of
devaluation of the Brazilian real ("R$") against the United States dollar
("$", "US$ "or "U.S. dollar") and (ii) differences in the methods of
measuring amounts under U.S.GAAP and Brazilian GAAP.
These Interim Financial Statements should be read in conjunction with the
U.S. GAAP financial statements and related notes as of December 31, 1999
and 1998, and for each of the years then ended. For purposes of these
Interim Financial Statements, certain information and note disclosures
normally included in annual financial statements prepared in accordance
with generally accepted accounting principles have been omitted. The
Company believes that the disclosures made are adequate to make the
information not misleading.
The Interim Financial Statements are unaudited. In the opinion of
management, however, they include all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of results of such
interim periods. The interim results for the period ended March 31, 2000,
are not necessarily indicative of results for the full calendar year.
2 BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
There have been no material changes in the basis of presentation or the
accounting policies adopted by the Company during the current period.
(a) Foreign currency translation
The U.S. dollar amounts for the periods presented have been remeasured
(translated) from the Brazilian currency amounts in accordance with
the criteria set forth in Statement of Financial Accounting Standards
("SFAS") No. 52, "Foreign currency translation" ("SFAS 52").
F-37
Xtal has translated all assets and liabilities into U.S. dollars at
the current exchange rate (March 31, 2000 - R$ 1.7473: US$ 1.00 and
March 31, 1999 - R$ 1.7220: US$ 1.00, respectively), and all accounts
in the statements of operations and cash flows at the average rates of
exchange in effect during the periods (R$ 1.7737: US$ 1.00 for the
period ended March 31, 2000 and R$ 1.7708: US$ 1.00 for the period
ended March 31, 1999, respectively). The translated amounts include
local currency indexation and exchange variances on assets and
liabilities denominated in foreign currencies. The related translation
adjustments are made directly to the cumulative translation adjustment
account in shareholders' equity.
In mid-January 1999, significant changes occurred in the Brazilian
government's foreign exchange rate policy, which resulted in the
elimination of exchange controls, referred to as trading bands. These
trading bands ensured that the real to U.S. dollar exchange rate
remained within a given range. On January 15, 1999, the Brazilian
Central Bank ceased to intervene in the foreign exchange market,
except in exceptional circumstances to mitigate excessive volatility,
and the real to U.S. dollar exchange rate was allowed to fluctuate
freely. On July 30, 1999, the real was trading at approximately R$
1.7892 to US$ 1.00, as compared to the exchange rate in effect on
December 31, 1998 of R$ 1.2087 to US$ 1.00.
The effects of the real devaluation has resulted in a net translation
loss, arising from the translation of the balance sheet accounts
(monetary and non-monetary assets and liabilities) from Brazilian
reais to U.S. dollars. The translation loss has been allocated
directly to the cumulative translation account in shareholders'
equity. Foreign exchange transaction gains or losses are reflected
directly in income currently.
3. INVENTORIES
March 31, December 31,
2000 1999
------------ ------------
(Unaudited)
Finished products 525 640
Work in process 675 772
Raw material and indirect materials 2,300 2,332
Resale materials 144 153
Imports in progress 73 292
------------ ------------
3,717 4,189
Allowance for slow-moving inventory (139) (136)
------------ ------------
3,578 4,053
============ ============
F-38
4. COMMITMENTS AND CONTINGENCIES
(a) Tax and legal claims
The Company is contesting the payment of certain taxes and
contributions and has made court escrow deposits (restricted deposits
for legal proceedings) of equivalent or lesser amounts pending final
legal decisions. Probable losses, provided as liabilities of the
Company based on the advice of outside legal counsel, are summarized
below:
March 31, December 31,
2000 1999
----------- ------------
(Unaudited)
Labor claims (1) 42 41
Income tax withheld at source - 329 310
Intercompany loan
Income tax and Social contribution 63 60
Value-added sales taxes ("ICMS") 183 164
Value-added sales taxes ("IPI") 154 146
Others 30 20
----------- ------------
Total accrued liabilities for legal 801 741
proceedings
=========== ============
-----------------
(1) The Company is party to a number of lawsuits filed by former
employees. As of March 31, 2000 the Company has accrued $ 42
relating to such lawsuits. Escrow deposits (restricted deposits
for legal proceedings) against probable losses relating to labor
claims totaled $ 150.00 as of March 31, 2000 (1999 - $ 0.00).
Management believes, based on advice from its attorneys, that the
provision for contingencies is sufficient to meet probable and
reasonably estimable losses in the event of unfavorable rulings, and
that the ultimate resolution will not have a significant effect on the
Company's liquidity, consolidated financial position or results of
operations.
Financial guarantee and recourse arrangement (Advance for future increase
of capital)
On December 1, 1998, XTAL entered into an agreement of Advance of
Financial Resources to offset various supplier and financial debt with
Algar S.A. Empreendimentos e Participacoes ("Algar" or Parent Company)
for a total amount of US$ 4.2 million (advance for future increase of
capital). Such agreement was accounted for by the Parent Company as a
capital contribution and Xtal duly amended their by-laws and Social
Contract on April 27, 1999, to effectively increase capital. At March
31, 2000, (pound)502 (approximately US$ 800) remained payable in the
name of Xtal to Unibanco at an interest rate of LIBOR plus 11.79%.
Several machines are given as guaranty for this loan. In connection
with the acquisition agreement described in Note 16 of the annual
financial statements, Algar assumed the (pound)502 liability. This
amount is not recorded as a liability in the accompanying financial
statements.
F-39
On December 31, 1998, XTAL entered into a second agreement of Advance
of Financial Resources for Future Capital Increase with Algar S.A.
Empreendimentos e Participacoes ("Algar") for a total amount of $13
million (Advance for future increase of capital) and such amount was
consigned in an account on behalf of Algar. This agreement was also
accounted for by the Parent Company as a capital contribution whereby
Xtal amended their by-laws and Social Contract to effectively increase
capital. In association with this agreement, there were two other
Agreements for the Assumption of Debt by the parties with the
following terms:
Algar assumes the debts of Xtal before various banks for a total of
US$ 8 million Algar assumes the debts of Xtal for a supplier totaling
US$ 3.5 million.
Such agreements, added to the balance of intercompany loans payable in
the amount of US$ 1.5 million, were also accounted for by the Parent
company as a capital contribution. Xtal effectively registered these
amounts by amending and registering their Social Contract on April 27,
1999, to effectively increase capital. Approximately US$ 1.5 million,
due September 19, 2000, remains payable in the name of Xtal to Banco
Brascan S/A at an interest rate of LIBOR plus 2% per year. Also, US$
384 thousand and US$ 288 thousand, due October 31 and August 31, 2000
respectively, remain payable in the name of Xtal to Dresdner Bank
Lateinamerika AG at an interest rate of LIBOR plus 0.75% per year.
Algar remained the guaranty for this amount should Xtal default. In
connection with the acquisition agreement described in Note 16 of the
annual financial statements, Algar assumed these liabilities, totaling
approximately US$ 2,172. These amounts are not recorded as liabilities
in the accompanying financial statements.
(c) Postemployment benefits
The Company makes monthly contributions based on payroll expense to
the government pension, social security and severance indemnity plans.
Such payments are expensed as incurred.
In addition, certain payments are due on dismissal of employees
pursuant to Article 18 of Law 8.036 (dated May 11, 1990) being
principally (i) one month's salary, and (ii) a severance payment based
on the accumulated balance of each employees government severance
indemnity account. The Company makes contributions to the government
severance indemnity plan for each of its employees on a monthly basis;
the additional severance payment made by the Company is calculated at
40% of the balance of this account. Severance benefits payable to
employees do not vest or accumulate.
(d) Environmental issues
The Company is subject to Federal, State and Local laws and
regulations relating to the environment. These laws generally provide
for control of air and effluent emissions and require responsible
parties to undertake remediation of hazardous waste disposal sites.
Civil penalties may be imposed for noncompliance.
Future information and developments will require the Company to
continually reassess the expected impact of environmental matters.
However, the Company has evaluated its total environmental exposure
based on current available data and believes that compliance with all
applicable laws and regulations will not have a material impact on the
Company's liquidity, consolidated financial position or results of
operations.
*****
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F-40
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We have not authorized any person to
make a statement that differs from what
is in this prospectus. If any person
does make a statement that differs from
what is in this prospectus, you should FIBERCORE, INC.
not rely on it. This prospectus is not
an offer to sell, nor is it seeking an
offer to buy, these securities in any
state in which the offer or sale is not 9,442,757 SHARES
permitted. The information in this OF COMMON STOCK
prospectus is complete and accurate as
of its date, but the information may
change after that date.
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PROSPECTUS
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September 29, 2000
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37