EXHIBIT 99.1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIBERCORE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in thousands except share data)
June 30, December 31,
2003 2002
---- ----
ASSETS
Current assets:
Cash ................................................................. $ 251 $ 1,392
Accounts receivable - net ............................................ 2,400 2,958
Receivable from government grants .................................... 4,412 7,571
Other receivables .................................................... 6,817 2,289
Inventories .......................................................... 4,070 5,421
Prepaid and other current assets ..................................... 871 730
-------- --------
Total current assets ........................................ 18,821 20,361
-------- --------
Property and equipment ........................................................ 67,425 56,486
Less - accumulated depreciation ............................................... (11,778) (9,049)
-------- --------
Property and equipment - net ....................................... 55,647 47,437
-------- --------
Other assets:
Restricted cash ...................................................... 2,183 1,990
Patents - net ........................................................ 339 354
Deposit on equipment ................................................. -- 3,020
Investments in joint ventures ........................................ 925 925
Other ................................................................ 1,491 1,516
-------- --------
Total other assets .......................................... 4,938 7,805
-------- --------
Total assets ................................................ $ 79,406 75,603
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ........................................................ $ 15,622 $ 17,558
Current installment on long-term debt ................................ 20,259 15,114
Accounts payable ..................................................... 9,929 8,462
Accrued expenses ..................................................... 7,178 6,116
Other liabilities .................................................... 503 463
-------- --------
Total current liabilities ................................... 53,491 47,713
-------- --------
Deferred income ............................................................... 1,667 1,713
Long-term debt ................................................................ 26,045 21,700
-------- --------
Total liabilities ........................................... 81,203 71,126
-------- --------
Minority interest ............................................................. 22 15
-------- --------
Stockholders' equity:
Preferred stock, $.001 par value, authorized 10,000,000 shares; no
shares issued and outstanding ...................................... -- --
Series A preferred stock, $.001 par value, authorized 1share; 1 share
issued and outstanding ............................................. -- --
Common stock, $.001 par value, authorized 100,000,000 shares; shares
issued and outstanding: 69,826,094 at June 30, 2003 and 68,876,094 at
December 31, 2002 .................................................. 69 68
Additional paid-in-capital ........................................... 65,546 65,350
Accumulated deficit .................................................. (59,706) (50,490)
Accumulated other comprehensive loss:
Accumulated translation adjustment ................................ (7,728) (10,466)
-------- --------
Total stockholders' equity .................................. (1,819) 4,462
-------- --------
Total liabilities and stockholders' equity ........................... $ 79,406 $ 75,603
======== ========
See accompanying notes to the condensed consolidated financial statements.
1
FIBERCORE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Dollars in thousands except share data) Three Months Ended Six Months Ended
June 30, June 30,
-------- -------
2003 2002 2003 2002
---- ---- ---- ----
Net sales ....................................... $ 5,151 $ 6,374 $ 9,760 $ 14,259
Cost of sales:
Cost of sales ................................ 6,560 5,172 12,016 12,455
Restructuring Costs .......................... -- 197 -- 197
Write-down of inventory ...................... 107 346 107 1,133
------------ ------------ ------------ ------------
Total cost of sales ............... 6,667 5,715 12,123 13,785
------------ ------------ ------------ ------------
Gross profit (loss) ............... (1,516) 659 (2,363) 474
Operating expenses:
Selling, general and administrative expenses 1,810 2,887 3,672 5,500
Research and development ................... 389 510 752 993
Restructuring Costs ........................ -- 103 -- 103
------------ ------------ ------------ ------------
Loss from operations ................... (3,715) (2,841) (6,787) (6,122)
Foreign exchange gains (loss) - net ............. (112) (1,737) 69 (1,795)
Non-cash interest on convertible debt ........... -- -- (27) --
Interest income ................................. 27 260 54 298
Interest expense ................................ (1,543) (1,540) (2,860) (2,664)
Other income (expense) - net ................... 111 27 268 --
------------ ------------ ------------ ------------
Loss before income taxes and
minority interest .................. (5,232) (5,831) (9,283) (10,283)
(Provision for) benefit from income taxes ....... -- 86 (1) 190
------------ ------------ ------------ ------------
Loss before minority interest ................... (5,232) (5,745) (9,284) (10,093)
Minority interest in (income) loss of subsidiary. 21 602 67 872
------------ ------------ ------------ ------------
Net loss ............................... $ (5,211) $ (5,143) $ (9,217) $ (9,221)
============ ============ ============ ============
Loss per share of common stock:
Basic ........................................... $ (0.08) $ (0.08) $ (0.13) $ (0.15)
Diluted ......................................... (0.08) (0.08) (0.13) (0.15)
Weighted average shares outstanding:
Basic ........................................... 68,886,534 61,589,533 68,881,343 61,553,024
Diluted ......................................... 68,886,534 61,589,533 68,881,343 61,553,024
See accompanying notes to the condensed consolidated financial statements.
2
FIBERCORE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(Dollars in thousands) Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
Net loss .................................. $ (5,211) $ (5,143) $ (9,217) $ (9,221)
Other comprehensive income (loss):
Foreign currency translation adjustments 2,357 (1,793) 2,738 (2,507)
-------- -------- -------- --------
Total comprehensive income (loss) ......... $ (2,854) $ (6,936) $ (6,479) $(11,728)
======== ======== ======== ========
See accompanying notes to the condensed consolidated financial statements.
3
FIBERCORE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands) Six Months Ended
June 30,
--------
2003 2002
---- ----
Cash flows from operating activities:
Net loss ............................................................. $ (9,217) $ (9,221)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ........................................ 1,653 1,419
Deferred income taxes ................................................ -- (172)
Foreign currency translation (gain) loss and other ................... 473 735
Non-cash interest expense ............................................ 27 1,027
Write-down of inventory .............................................. 107 1,133
Increase (decrease) in minority interest ............................. 8 (707)
Changes in operating assets and liabilities:
Accounts receivable .................................................. 919 4,956
Other receivables .................................................... (225) (864)
Inventories .......................................................... 2,132 (4,281)
Prepaid and other current assets ..................................... (46) (197)
Accounts payable ..................................................... 578 (839)
Accrued expenses ..................................................... 306 1,067
--------- ---------
Net cash used in operating activities ............................ (3,285) (5,944)
--------- ---------
Cash flows provided by (used in) investing activities:
Purchase of property and equipment ................................... (192) (9,395)
Reimbursement from government grants ................................. 5,393 1,577
Other ................................................................ -- (216)
--------- ---------
Net cash provided by (used) in investing activities .............. 5,201 (8,034)
--------- ---------
Cash flows (used in) provided by financing activities:
Proceeds from issuance of common stock ............................... -- 157
Cash contribution from minority shareholders of FC Africa ............ 65 --
Proceeds from long-term debt ......................................... 458 467
Proceeds from notes payable .......................................... 2,117 15,565
Repayment of long-term debt .......................................... (312) (31)
Repayment of notes payable ........................................... (5,411) (2,002)
Financing costs ...................................................... -- (633)
--------- ---------
Net cash (used in) provided by financing activities .............. (3,083) 13,523
--------- ---------
Effect of foreign exchange rates change on cash ........................... 26 (182)
Decrease in cash .......................................................... (1,141) (637)
Cash, beginning of period ................................................. 1,392 1,721
--------- ---------
Cash, end of period ....................................................... $ 251 $ 1,084
========= =========
Supplemental disclosure:
Cash paid for interest ............................................... $ 1,140 $ 874
Cash paid for taxes .................................................. 118 8
Common stock issued for conversion of debt ........................... 133,000 --
See accompanying notes to the condensed consolidated financial statements.
4
FIBERCORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(THE COMPANY'S OUTSIDE AUDITORS HAVE NOT REVIEWED THE FINANCIAL STATEMENTS AND
ACCOMPANYING FOOTNOTES. IN ADDITION, ITEMS 2 - 3 OF PART 1 AND ALL ITEMS
COMPRISING PART 2 OF A STANDARD FORM 10-Q HAVE BEEN OMITTED. ACCORDINGLY, THE
FINANCIALS ARE NOT IN COMPLIANCE WITH SEC REQUIREMENTS. NEVERTHELESS, THE
COMPANY BELIEVES THE FINANCIALS, SUBJECT TO THE ACCOMPANYING FOOTNOTES, PROVIDE
A FAIR PRESENTATION OF THE COMPANY'S FINANCIAL CONDITION.)
1) PREVAILING MARKET CONDITIONS, GOING CONCERN, AND LISTING STATUS
Prevailing Market Conditions
----------------------------
Demand for single-mode fiber for use in the long haul market has
continued to be weak and prices appear to have stabilized, albeit at low levels.
Published market studies and industry sources indicate that the demand for
single-mode fiber appears to have bottomed out but the current market situation
is unpredictable. Demand for fiber to supply the metropolitan access and
fiber-to-the-home markets should begin increasing as carriers start to connect
the long-haul fiber to the end-user. Multi-mode fiber demand shows modest
improvement, although prices have continued to soften in this market as well.
FiberCore, Inc. (the "Company", "we", "our" or "us") has experienced a
precipitous decline in the predominantly single-mode South American market, with
most, if not all, of its South American customers either filing for
reorganization/insolvency or ceasing production. The Company has taken steps to
try to offset some of this decline by shifting sales efforts to other markets,
by reducing production levels to better match current and expected near-term
demand levels, and by shifting, to the extent possible, production to multi-mode
from singlemode fiber. One market that has shown some stability in demand has
been Asia, and we began shipping product into Asia from Xtal FiberCore Brasil,
S.A. ("Xtal") in late 2001. However, prices in Asia have declined more sharply
than in the rest of the world, as the large fiber manufacturers, including those
from Japan and Korea, reduce inventories and attempt to capture volume orders,
resulting in current prices below production costs, especially for single-mode
fiber. Current prices for singlemode in other world markets are also below the
Company's present manufacturing costs, which effectively has caused the
side-lining of the Company's single-mode business. Accordingly, approximately
80% of sales are attributable to multi-mode fiber maufactured in Germany.
With respect to its other offshore activities in Malaysia, Thailand and
South Africa, the Company has been liquidating/winding down these entities and
attempting to recoup any remaining value. The liquidation of these activities is
not expected to have a material adverse effect on the Company's financial
condition, as the Malaysian operation, the largest of the group, was already
written off as of December 31, 2002. Xtal is exploring the possibility of a
management buyout with potential investors in Brazil, although there can be no
assurance that Xtal's efforts will be successful.
5
Going Concern
-------------
The Company continues to be in violation of certain covenants of its
Convertible Debentures and with Algar. These default conditions caused a
cross-default on the Fleet credit facility of $8,500,000 and on a $1,500,000
loan from Tyco International Finance Alpha GmbH. On June 3, 2003 the Company
received a notification of default and acceleration from Fleet National Bank
("Fleet") under the terms of the loan agreement dated December 20, 2000, with an
outstanding balance of $8,500,000, plus accrued interest. In addition, Tyco
could accelerate the maturity date of their loan and the balance of $1,500,000
could become immediately due. Further, on June 12, 2003 the Company received a
notification of default from Riverview Group LLC, Laterman & Co., and
Forevergreen Partners (the "Holders") of the 5% Subordinated Convertible
Debentures (the "Debentures"). If the event of default continues, the Holders
have the right to accelerate the maturity date and the entire amount of
approximately $2.3 million could become immediately due.
Additionally, the Company expects that Fleet will exercise the
provisions of a guarantee given by Tyco International Group S.A. to be paid in
full by Tyco. Tyco would then assume Fleet's position as a creditor of the
Company. In this case, Tyco would also have the right to assume control of the
Company's Board of Directors. Also, as shown in the financial statements, the
Company's current liabilities exceeded its current assets by $34,670,000 at June
30, 2003, including $9,250,000 of long-term debt that has been classified as
current as a result of being in default. The Company has been attempting to
raise approximately $5 million in additional financing to address its liquidity
crisis in the U.S., but has not been successful. Funding efforts in Germany also
continue with respect to the $3 - $5 million associated with the Phase 2
expansion. While $1.7 million of these funds were received during the second
quarter as proceeds from grants, the German operation still requires at least $3
million due to continuing operational losses. The proceeds from grants were used
to repay interim financing of grants. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flow to meet
its obligations on a timely basis and to obtain additional financing or
refinancing as may be required. As indicated in previous filings and
disclosures, the Company has been experiencing a severe liquidity crisis, which
continues to worsen. While the Company continues to seek additional funding,
there can be no assurance that additional funding will be received. Absent such
funds, it is increasingly likely that the Company will be forced to to file a
bankruptcy petition.
Notwithstanding the liquidity crisis, the Company continues to channel
available resources into the development and implementation of new technology,
specifically its POVD and other plasma-based technologies, which will have a
substantial impact on the production costs and capacity of its optical fiber and
preform products. In that regard, the Company has recently expanded the
application of its POVD technology into non-fiber related speciality glass
products.
Listing and Registration Status
-------------------------------
The Company was delisted from the Nasdaq SmallCap market effective June
19, 2003 and immediately began trading on the OTC Bulletin Board under the
symbol FBCE. On August 14, 2003, the Company announced it would not be filing
its quarterly results on Form 10-Q, but would file the results on Form 8-K. An
independent auditor has not reviewed these results. By failing to file Form 10-Q
in accordance with SEC requirements, the Company is not in compliance with the
listing requirements of the OTC Bulletin Board, which will result in the
Company's shares being delisted from the OTC Bulletin Board. The Company started
the process
6
necessary to ensure its shares will be quoted in the "pink sheets", however
there can be no assurance the Company's shares will be quoted in the "pink
sheets" or that there will not be a break in trading activity during the
process.
Concurrently, the Company is considering filing a Form 15 in order to
deregister its common stock with the SEC. Filing a Form 15 immediately relieves
the Company of its obligation to file certain reports and forms, including Forms
10-K, 10-Q and 8-K with the SEC as well as other reporting requirements. If a
Form 15 were filed, the Company anticipates that deregistration would become
effective within 90 days.
2) BASIS OF PRESENTATION
The condensed consolidated balance sheet as of June 30, 2003 and
related condensed consolidated statements of operations, comprehensive loss, and
cash flows for the six months ended June 30, 2003 and 2002 included herein have
been prepared by FiberCore, Inc. (the "Company"). These statements are unaudited
and have not been reviewed by independent accountants. In the opinion of
management, all adjustments necessary for a fair presentation of such financial
statements have been included and such adjustments consist of normal recurring
items necessary for their fair presentation in conformity with accounting
principles generally accepted in the United States. Results for the second
quarter may not be indicative of the full year results.
The condensed consolidated financial statements do not contain certain
information included in the Company's annual audited financial statements. These
condensed consolidated financial statements should be read in conjunction with
the annual audited financial statements and notes thereto for the year-ended
December 31, 2002 included in the Company's Annual Report on Form 10-K.
Although the accompanying financial statements for the quarter and
six-month period ended June 30, 2003 have been prepared assuming that the
Company will continue as a going concern, as discussed in Note 1, the Company is
experiencing a severe liquidity crisis and is unable to fully meet its
obligations. Accordingly, the Company anticipates that a bankruptcy filing may
be increasingly likely. In addition, the financial statements do not include any
adjustments that might result from a bankruptcy filing.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
3) STOCK OPTIONS
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for stock options.
Accordingly, no compensation cost has been recognized for the stock options. Had
compensation cost for stock options been determined based on the fair value of
the option at date of grant consistent with the provisions of
7
SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net loss
and loss per share for the six months ended June 30, 2003 and 2002 would have
been reduced to the pro forma amounts indicated below (dollar amounts in
thousands except per share data):
2003 2002
----- -----
Net loss $(9,217) $(9,221)
Effect of stock based compensation expense
determined under SFAS No. 123 (315) (420)
------- -------
Pro forma net loss $(9,532) $(9,641)
======= =======
Loss per share:
Basic-as reported $ (0.13) $ (0.15)
Basic-pro forma $ (0.14) $ (0.16)
Diluted-as reported $ (0.13) $ (0.15)
Diluted-pro forma $ (0.14) $ (0.16)
4) INVENTORIES
Inventories consist of the following:
(Dollars in thousands)
June 30, December 31,
2003 2002
---- ----
Raw materials $ 1,736 $ 2,072
Work-in-progress 363 526
Finished goods 1,971 2,823
------- -------
Total $ 4,070 $ 5,421
======= =======
Finished goods inventory reflects write-downs amounting to
approximately $107,000 in the second quarter of 2003 and $3,388,000 in 2002, of
which $787,000 related to the first quarter of 2002, to account for the effect
of declining prices on single-mode fiber. There were no write-downs of finished
goods inventory during the first quarter of 2003.
5) RESTRICTED CASH
Restricted cash represents the German Mark (DM) 3,850,000 deposit with
Sparkasse Jena securing the loan from Sparkasse Jena of DM 7,700,000. The
deposit is reflected in the financial statements in the U.S. Dollar equivalent
using the exchange rate in effect at the balance sheet dates. The increase of
$193,000 in the balance sheet amount from December 31, 2002 to June 30, 2003 is
the result of the exchange rate change. The change is accounted for as an
unrealized foreign exchange loss in the condensed consolidated statements of
operations.
8
6) EARNINGS PER SHARE
For purposes of computing Diluted Earnings Per Share (EPS), the Company
uses the treasury stock method. Additionally, when computing dilution related to
options and warrants, conversion is assumed as of the beginning of each period.
For the six months ended June 30, 2003 and 2002, assumed conversion of
options and warrants would have been anti-dilutive, therefore conversion was
not assumed for purposes of computing diluted EPS. For the periods ended June
30, 2003 and 2002, the number of potential common shares from the exercise of
options, warrants and shares issuable upon the conversion of subordinated
convertible debentures excluded from the computation were 44,839 and
3,290,229, respectively, since assumed inclusion would be also anti-dilutive.
7) BORROWINGS DURING THE SECOND QUARTER OF 2003 AND DEFAULTS ON DEBT
The following describes the borrowing activity for the six months ended June 30,
2003:
i) $2,093,000 was received from German banks as interim financing
of government grants. $1.7 million of these loans were repaid
in the second quarter. The balance will be repaid from future
proceeds of receivables from government grants. The interest
rates on these loans range from 6.75% to 8.5% and are
collateralized by trade accounts receivable and inventory.
ii) $24,000 was received by Xtal for working capital purposes at
26.9% interest, collateralized by inventory. The loan is due
January 15, 2005.
iii) FCJ received proceeds from long-term notes amounting to
$398,000 from German banks related to the Phase II expansion
at FCJ at interest rates from 5.6% to 6.4%, collateralized by
land, buildings and equipment. The loans are due March 31,
2011.
The Company has approximately $2.3 million of principal outstanding
against the 5% Convertible Subordinated Debentures issued in January and June of
2002. During 2002, the Company paid $1.5 million in cash payments and reduced
the outstanding balance by $1.53 million through the issuance of common stock,
and has the option, under certain circumstances, of continuing to issue shares
in payment of the Debentures if the shares have been previously registered
pursuant to an effective registration statement. The Company is currently unable
to pay in registered shares because it does not have an effective registration
statement registering sufficient shares for such purpose. As of June 30, 2003,
$133,000 was paid to Holders of the Debentures by issuing 950,000 unregistered
shares of the Company's common stock. On June 12, 2003 the Company received a
notification of default from the Holders of the Debentures. If the event of
default continues, the Holders have the right to accelerate the maturity date
and the entire amount could become immediately due. This default caused a
cross-default on the Fleet credit facility of $8,500,000 and on a $1,500,000
loan from Tyco International Finance Alpha GmbH. On June 3, 2003 the Company
received a notification of default and acceleration from Fleet National Bank
("Fleet") under the terms of the loan agreement dated December 20, 2000, with an
outstanding balance of $8,500,000, plus accrued interest. In addition, Tyco
could accelerate the maturity date of its loan and the balance of $1,500,000
could become immediately due.
9
Finally, $1.25 million due to Algar associated with the purchase of
Xtal was not paid on the due date of December 20, 2002. The Company has held
discussions with Algar to defer or otherwise adjust this requirement and these
discussions are continuing. However, the Company and Algar have not reached an
agreement and therefore the Company is currently in a state of default with
Algar under the terms of a Loan Agreement. In the event of a default of the
Credit Facility, Fleet could exercise the provisions of a guarantee given by
Tyco International Group S.A. to be paid in full by Tyco and Tyco would then
assume Fleet's position as a creditor of the Company. In this case, Tyco would
also have the right to assume control of the Company's Board of Directors. The
result of these current events of default with the Debenture holders and with
Algar has caused the Company to reclassify $7,750,000 of the Fleet Credit
Facility and a $1,500,000 loan from Tyco International Finance Alpha GmbH from
long-term to short-term debt.
As part of the shareholder's agreement associated with the acquisition
of Xtal in 2000, the Company has a call option to acquire from Algar the
remaining 10% of the stock of Xtal upon payment of $2.5 million, plus 6%
interest calculated from June 20, 2000. Algar has a put option, exercisable on
June 20, 2003 or at any time that the Company decides to sell, dispose or
otherwise transfer any portion of its interest in Xtal to a third party, that
would require the Company to acquire all of Algar's remaining shares for a
payment of $2.5 million, plus 6% interest calculated from June 20, 2000. Algar's
10% shareholder position in Xtal, is being held by the Company to collateralize
Algar's indemnification provisions that are part of the Xtal purchase
agreements. Under the terms of the Shareholder Agreement and other related
documents, the Company believes it has meritorious defenses that negate the
terms of Algar's put option. Accordingly, the financial statements do not
reflect the liability related to the put option.
8) LEGAL MATTERS
i) Xtal was party to a 3-year, fixed price, take-or-pay contract
expiring in June 2003, with Shin Etsu for the delivery of single-mode
preforms to Xtal. The Company received notification of the results of
the arbitration between the Company and Shin Etsu Chemical Co., Ltd.
("Shin Etsu") The Japanese Commercial Arbitration Association (the
"Tribunal") awarded Shin Etsu damages consisting of loss of profit for
the quantities not taken by the Company under certain agreements.
According to the Tribunal's calculation, the Company must pay
637,020,011 Japanese Yen, (including 1,145,011 Japanese Yen as
settlement payment for the cost of arbitration) or approximately $5.3
million. The amount of the liability, which is joint and several
between FiberCore Inc. and Xtal FiberCore Brasil S/A, is severely
limiting the Company's ability to raise funds. New funds are necessary
to ease the present liquidity crisis. Recently, Shin Etsu filed suit in
the United States District Court (the "Court") of Massachusetts seeking
to obtain a preliminary injunction with respect to the transfer of
assets as well as to confirm the award of the Tribunal. On July 17,
2003 the Court preliminarily enjoined the Company from disposing,
selling, conveying or encumbering any of its assets, including cash or
receivables outside of the "ordinary course of business" except by
leave of the Court and upon ten days prior written notice to Shin Etsu.
While the Company is seeking to reach a settlement with Shin Etsu, no
assurance can be given that its efforts will be successful. If the
Company is unsuccessful in its efforts to reach a settlement, a
bankruptcy filing is highly likely. The court has not yet ruled on the
confirmation of the award. The Company has not recorded a liability for
this ruling due to the fact that the Court has not confirmed the award
and if is does, it is unlikely that Shin Etsu will collect, as it would
force the Company into a state of insolvency.
10
ii) On August 2, 2002 a patent infringement suit was filed against the
Company. The complaint was filed in the United States District Court
for the Northern District of Georgia, Atlanta Division, case number
1:02CV2149. The action was brought by Fitel USA Corp., and alleges
infringement by the Company of three patents held by Fitel. The
plaintiff alleges in the complaint that the Company has infringed and
continues to infringe on U.S. Patent No. 4,909,816, on U.S. Patent No.
5,298,047 and on U.S. Patent No. 5,418,881. The plaintiff sought an
injunction permanently prohibiting the Company from directly infringing
on the named patents or inducing or contributing to the infringement of
the U.S. Patent No. 5,418,881 by others, and sought unspecified
compensatory and treble damages, attorneys fees and costs, and such
other and further relief as is just and proper. On December 13, 2002
the Court granted the Company's motion to dismiss for lack of
jurisdiction.
On December 18, 2002 Fitel USA Corp. re-filed the complaint in the
United States District Court Western District of North Carolina, case
number S02CV163V. The plaintiff makes the same allegations and seeks
the same redress as outlined in the previous filing. The Company
believes these claims to be without merit, has retained counsel and
will vigorously defend itself in this case. If this suit is not settled
and goes to trial, the legal costs associated with defending itself
could be significant for the Company. If the Company were to ultimately
lose this suit, it could have a significant negative impact on the
Company's ability to compete in the marketplace for some period until
the Company could adjust its production processes, and could have a
material negative effect on the liquidity of the Company and could
potentially put the Company into a state of insolvency.
iii) The Company is currently in litigation with Techman International
Corp. ("Techman") and M. Mahmud Awan ("Awan") who controls
Techman, relating to certain investments, contracts and other
claims. Both parties are seeking approximately $500,000 in cash.
In addition, the Company is suing Techman and Awan for the return
of shares that have been canceled by the Company because of the
failure of Techman and Awan to satisfy certain conditions related
to their issuance. The litigation is in the discovery and motion
phase. The Company believes that its claims against Techman and
Awan are good and that it will ultimately prevail on its claims,
but given the uncertainties inherent in litigation, the outcome
cannot be predicted with any reasonable certainty at this time.
iv) On July 16, 2003 Samuel Goldman and Melvyn A. Reiser (the
"Plaintiffs") filed a complaint in New York Supreme, New York Co.
(Index No. 113110/03) alleging that the Company owes the
plaintiffs $400,000 as a commission, which they claim was earned
in the summer of 2002 in connection with a tender offer. The
Company believes the claim is without merit and that it will
prevail on this matter.
9) GOODWILL AND PATENTS
In July 2001, the FASB issued SFAS No. 141, Business Combinations,
which established financial accounting and reporting for business combinations
and supersedes Accounting Principles Board ("APB") Opinion No. 16, Business
Combinations. It requires that all business combinations in the scope of this
Statement be to be accounted for using one method, the purchase method. The
provisions of this Statement apply to all business combinations initiated
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after June 30, 2001, and also apply to all business combinations accounted for
using the purchase method for which the date of acquisition is July 1, 2001 or
later. The Company has adopted SFAS No. 141, and the adoption of SFAS No. 141
had no material impact on the financial reporting and related disclosures.
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets, which establishes financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No. 17,
Intangible Assets. It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition, and after they have been initially recognized in the financial
statements. The Company adopted SFAS No.142 beginning with the first quarter of
fiscal 2002. SFAS No.142 requires that goodwill and intangible assets that have
indefinite useful lives will not be amortized, but rather they will be tested at
least annually for impairment. Intangible assets that have finite useful lives
will continue to be amortized over their useful lives. The goodwill test for
impairment consists of a two-step process that begins with an estimation of the
fair value of a reporting unit. The first step is a screen for potential
impairment and the second step measures the amount of impairment, if any. SFAS
No. 142 requires an entity to complete the first step of the transitional
goodwill impairment test within six months of adopting the Statement. The
Company completed its initial test of impairment, measured as of January 1, 2002
and concluded there was no impairment to goodwill as of the adoption date of
SFAS No. 142. Management completed the annual impairment test in the fourth
quarter of 2002 and recorded goodwill impairment charges of approximately $7.3
million. This represented a complete write-down of the goodwill associated with
FiberCore's acquisition of Xtal in 2000 and DCI in 2001.
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Following are patent costs classified as intangible assets that will
continue to be subject to amortization over the patent's expected useful lives,
which are generally seventeen years (in thousands of dollars):
As of As of
June 30, 2003 December 31, 2002
------------- -----------------
Gross carrying amount $ 456 $ 450
Accumulated amortization (112) (96)
----- -----
Net carrying amount $ 344 $ 354
===== =====
Six Months Ended
June 30,
--------
2003 2002
---- ----
Aggregate patent amortization expense $ 15 $ 24
Estimated annual patent amortization expense for fiscal years ending (in
thousands of dollars):
December 31, 2003 $26
December 31, 2004 $22
December 31, 2005 $22
December 31, 2006 $22
December 31, 2007 $22
10) NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (SFAS No. 145). SFAS No. 145 rescinds SFAS No. 4, Reporting Gains
and Losses from Extinguishment of Debt, and an amendment of that statement, SFAS
No. 64, Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements. SFAS
No. 145 also rescinds SFAS No. 44, Accounting for Intangible Assets of Motor
Carriers. SFAS No. 145 amends SFAS No. 13, Accounting for Leases, to eliminate
an inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS No. 145 also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The adoption of SFAS No. 145 did not have any impact on the
Company's financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146, nullifies Emerging
Issues Task Force ("EITF") Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). SFAS No. 146 will affect any
restructuring activities of the Company after January 1, 2003.
In December 2002, the FASB issue SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure and amendment to SFAS No.
123", which provides three optional transition methods for entities that decide
to voluntarily adopt the fair value recognition principles of SFAS No. 123,
"Accounting for Stock Issued to Employees", and
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modifies the disclosure requirements of that statement. The Company has not
adopted the fair value recognition principles for SFAS No. 123; therefore this
statement has had no effect upon the Company's consolidated financial condition
or results of operations. The Company had adopted the disclosure requirements
under SFAS No. 148 as of December 31, 2002 and has included the additional
quarterly disclosures required for the Form 10-Q.
In November 2002, the FASB issued Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). The Interpretation
requires certain guarantees to be recorded at fair values and also requires a
guarantor to make new disclosures, even when the likelihood of making payment
under the guarantee is remote. The recognition provisions of FIN 45 are
effective on a prospective basis for guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for financial
statements of interim and annual periods ending after December 15, 2002.
Adoption of this statement did not have a material impact on the Company's
consolidated financial condition or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities", which requires an enterprise to assess if
consolidation is appropriate based upon its variable economic interest in
variable interest entities ("VIE"). Interpretation 46 is effective for new VIE's
established subsequent to February 1, 2003 and must be adopted for existing
VIE's by July 1, 2003. The Company does not invest in investment structures that
require analysis under the Interpretation and Interpretation 46 has no impact on
the Company's consolidated financial condition or results of operations.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE AND PROCEDURES.
The Chief Executive Officer and Interim Chief Financial Officer of the
Company evaluated the disclosure controls and procedures pursuant to Exchange
Act Rule v13a-14 within 90 days. Based on that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded the disclosure controls and
procedures are functioning as intended to ensure that the information required
to be disclosed by the Company is recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange Commission's
rules and forms. There have been no significant changes in internal controls or
in other factors that could significantly affect the internal controls
subsequent to the date the Chief Executive Officer and the Interim Chief
Financial Officer completed their evaluation.
PART 1
Items 2-3 - omitted
Part 2 - all items omitted
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