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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ____
-----------------------
COMMISSION FILE NUMBER: 0-21823
FIBERCORE, INC.
(Exact name of registrant as specified in its charter)
Nevada 87-0445729
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
253 Worcester Road, P.O. Box 180
Charlton, MA 01507
------------------
(Address and Zip Code of principal executive offices)
(508) 248-3900
--------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
- ---------------------------------------
(Title of Class)
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
Yes X No
and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 12, 1998: $10,293,639.
Number of shares outstanding as of March 12, 1998: 35,774,822.
DOCUMENTS INCORPORATED BY REFERENCE
None
FIBERCORE, INC.
TABLE OF CONTENTS
PAGE
----
PART I................................................................... 3
ITEM 1. BUSINESS.............................................. 3
ITEM 2. PROPERTIES............................................ 16
ITEM 3. LEGAL PROCEEDINGS..................................... 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS............................................... 16
PART II ................................................................ 17
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS........................... 17
ITEM 6. SELECTED FINANCIAL DATA............................... 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................... 19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK..................................... 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........... 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................... 55
PART III ................................................................ 56
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT............................................ 56
ITEM 11. EXECUTIVE COMPENSATION................................ 57
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT........................................ 60
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........ 62
PART IV ................................................................ 65
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K........................................... 65
SIGNATURES............................................................... 68
2
PART I
ITEM 1. BUSINESS
GENERAL
FiberCore, Inc. ("FiberCore" or the "Company") is 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.
The Company's products include single-mode and multi-mode optical fiber
and optical fiber preforms. Preforms are the basic component from which optical
fiber is drawn and subsequently cabled. The Company has developed a patented
preform production process which management believes to be more cost effective
than existing production methods in use. Through its wholly owned subsidiary,
Automated Light Technologies, Inc. ("ALT"), the Company manufactures patented
cable monitoring systems, a patented long range fault locator, cable protection
devices, and electro-optical talk sets.
In June 1994, the Company formed a wholly owned subsidiary in Germany,
FiberCore Glasfaser Jena GmbH ("FCJ"), which leased a manufacturing facility in
Jena, Germany ("the Jena Facility") for a fixed monthly sum, and acquired
certain equipment located in that facility from SICO Quarzschmelze Jena GmbH
("SICO"). Until the year 2001, the Company's ownership of the equipment is
subject to the right of the German government, from which SICO purchased the
equipment, to repossess the equipment in the event the Company ceases
production. The agreement pursuant to which the Company acquired the equipment
provides for the issuance of 2,221,141 shares of Common Stock to SICO in
exchange for the equipment. The Jena Facility is an existing 26,500 square foot
optical fiber manufacturing plant which has been in operation since 1986.
On July 18, 1995, FiberCore, Incorporated, the predecessor to
FiberCore, Inc., incorporated under the laws of the State of Nevada in November
1993, merged into Venturecap, Inc. ("Venturecap"), an inactive corporation,
organized under the laws of the State of Nevada in 1987. Venturecap issued
3.671307 shares in exchange for each outstanding share of FiberCore,
Incorporated and, as a result, Venturecap issued a total of 24,617,133 shares
for all of the outstanding shares of FiberCore, Incorporated. After the merger,
Venturecap changed its name to FiberCore, Inc.
On September 18, 1995, the Company acquired Automated Light
Technologies, Inc. ALT, a Delaware corporation organized in 1986 and engaged in
the business of manufacturing equipment which monitors and identifies faults in
fiber optic cables, cable protection devices, and electro-optical talk sets.
In January 1996, the Company established a subsidiary, InfoGlass
Incorporated ("InfoGlass"), through which it intends eventually to conduct its
North American fiber optic business. InfoGlass is currently inactive.
In November, 1997, the Company entered into a joint-venture agreement
with PNB Equity Resource Corporation Sdn. Bhd. ("PERC") and Federal Power Sdn.
Bhd. ("FDP"), both of which are Malaysian corporations, to form FiberCore Asia
Sdn. Bhd. ("FCA"). FCA, which is incorporated in Malaysia, was established to
construct and operate a manufacturing facility in Malaysia for the production of
optical fiber and optical fiber preforms. The Company owns 51% of FCA, and FDP
and PERC own 37% and 12%, respectively.
3
BUSINESS (CONTINUED)
The Company granted FCA a license to use the Company's technology for
its 51% ownership, while FDP and PERC contributed cash and notes for their
respective ownership interest. FCA is in the process of raising the additional
debt financing required to construct and operate the plant and it is expected
that production will begin in 1999. The products of FCA will be marketed
principally in the Pacific Rim.
The following is an organizational chart depicting the Company's
principal subsidiaries and ownership percentage.
FIBERCORE, INC.
CORPORATE STRUCTURE
HEADQUARTERS
( USA )
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FIBERCORE ASIA FOI (PVT.) LTD. FIBERCORE GLASFASER JENA GMBH INFOGLASS, INC. FIBERCORE MIDEAST LTD. ALT, INC.
SDN. BHD. (PAKISTAN) (GERMANY) (USA) (ASIA) (USA)
(MALAYSIA) 30% OWNED 100% OWNED 100% OWNED 100% OWNED 100% OWNED
51% OWNED MIDDLE EAST FIBER CABLES CO. BY FCI
15% OWNED BY
FIBERCORE MID EAST LTD.
Company and ALT sales by product group for the last three years were as follows
(includes sales of ALT prior to its acquisition by the Company):
Years Ended December 31
-----------------------
(dollars in thousands)
1995 1996 1997
---- ---- ----
Optical Fiber and Preform....... $3,009 $7,907 $6,855
ALT Products.................... 246 189 223
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Total.................. $3,255 $8,096 $7,078
====== ====== ======
RECENT DEVELOPMENTS
In April 1995, the Company issued a note to AMP, Incorporated ("AMP")
(the "AMP Note"). The AMP Note is a ten year $5,000,000 convertible note. AMP, a
company listed on the New York Stock Exchange, with worldwide sales in excess of
$5.7 billion in 1997, is a manufacturer of electrical and optical connection
devices, systems and other equipment including fiber optic cable. Principal plus
accrued interest on the AMP Note at a rate of LIBOR plus one percent may be
converted into Common Stock through April 17, 2005. Until April 17, 2000, the
conversion price is $1.16 per share; thereafter the conversion price is equal to
the price per share paid by a third party investor in the private sale of Common
Stock immediately prior to such conversion. The AMP Note is collateralized by
the Company's patents, patent applications, licenses, rights and royalties
arising from such patents. The AMP Note is subject to prepayment on demand in
the event the Company is the issuer of securities to be sold by the Company
under an effective registration statement. On November 27, 1996 AMP converted
$3,000,000 of principal plus $540,985 of accrued interest into 3,058,833 shares
of Common Stock of the Company.
4
BUSINESS (CONTINUED)
In July 1996, AMP entered into a five year supply contract (renewable
at AMP's option for an additional five year period) with the Company whereby AMP
has undertaken to purchase from the Company at least 50% of AMP's future glass
optical fiber needs. On November 27, 1996, the Company obtained an additional
$3,000,000 loan at an interest rate of prime plus 1%, adjustable on the first
business day of each calendar quarter, from AMP to fund the expansion of the
Jena Facility. In exchange AMP received a 10 year note and common stock purchase
warrants exercisable for up to 1,382,648 shares of Common Stock at $1.45 per
share and expiring on November 27, 2001. In connection with the new AMP loan and
the expansion of the Jena Facility, the Company has been awarded a grant from
the German Government of approximately $2,700,000 and has received a loan from
Berliner Bank of approximately $4,280,000, which has been funded
contemporaneously with the new $3,000,000 AMP loan. The Company also agreed to
issue AMP additional shares of Common Stock in the event the Company's share
price does not exceed $2.17 for 30 consecutive trading days by November 27,
1998. The issuance of additional shares under the new AMP Loan would have a
dilutive effect on the Company's other shareholders and could adversely affect
the market price of the Common Stock. As part of the new $3,000,000 loan from
AMP, Mohd A. Aslami, Charles De Luca, M. Mahmud Awan and AMP entered into a
Voting Agreement pursuant to which they agreed to vote together to elect a slate
of directors to the Board of Directors of the Company. The proposed slate of
directors initially consists of Mohd A. Aslami, Charles De Luca, Hans F.W.
Moeller, one nominee of AMP and three outside directors, one of whom is Dr. M.
Mahmud Awan. The Voting Agreement also requires a classified and three year
staggered Board of Directors. Such Voting Agreement would remain in effect until
the earlier of (i) termination of the new AMP loan agreement, or (ii) an
underwritten public offering by the Company which generates at least $5,000,000.
In 1995, the Company, through its subsidiary, FiberCore MidEast Ltd.
("FME"), entered into a joint venture agreement (the "MidEast JV Agreement")
with Middle East Fiber Optic Manufacturing Company Limited ("MEOFC"), a Saudi
Arabian company and John Royle and Sons, Inc. ("Royle"), a manufacturer of cable
manufacturing systems. Pursuant to the agreement, the parties jointly own Middle
East Fiber Cables Co., ("MEFC"), a Saudi Arabian joint venture company. MEFC
will engage in the manufacture and sale of optical fiber and optical fiber cable
both inside and outside of Saudi Arabia. The Company and Royle each contributed
$500,000 to the venture and each holds a 15% interest in MEFC. MEOFC contributed
$2,330,000 and holds a 70% interest. The Company and MEFC have entered into a
long-term supply agreement for MEFC to purchase and the Company to supply fiber
and preforms totaling approximately $33,000,000 over the next five years.
Shipments under this agreement began in 1997. The Company may not transfer its
interest in MEFC to any entity other than Royle or MEOFC without the permission
of such parties.
In connection with the Company's participation in MEFC, on October 5,
1995, Middle East Specialized Cables Co., ("MESC") a Saudi Arabian Company in
which the owners of MEOFC have an interest, purchased 367,131 shares of Common
Stock at an aggregate price of $500,000. In November 1996, MESC purchased a
second block of 367,131 shares of Common Stock for an additional $500,000. The
proceeds of this sale were used as the Company's capital contribution to MEFC,
described above. In 1997, MESC was also issued 312,061 shares of Common Stock
and was granted Warrants to purchase 550,696 shares of Common Stock at an
exercise price of $1.63 per share through April 13, 1997, upon delivery of a
supply agreement, valued at $33 million, between the Company and MEFC. The
warrants expired without exercise.
5
BUSINESS (CONTINUED)
On November 1, 1995, the Company entered into an International
Distributor Agreement with Techman International Corp. ("Techman"). Under such
agreement, Techman will be issued Warrants for the exercise of up to 1,000,000
shares of Common Stock. The Warrants will be exercised and the applicable shares
will be issued ratably by the Company as commissions on Company sales generated
by Techman up to $200,000,000. Dr. M. Mahmud Awan, a former director of the
Company, is president and sole shareholder of Techman.
On January 11, 1996, pursuant to a Share Purchase Agreement, Techman
agreed to purchase for $1,000,000 a total of 734,260 shares of Common Stock, and
Warrants exercisable at $1.63 per share into 550,696 shares of Common Stock
expiring on January 11, 1998. The Warrants expired without exercise.
Additionally, Techman would be issued 312,061 shares of Common Stock upon the
delivery of a supply agreement between Fiber Optic Industries (Pvt.) Ltd.,
("FOI") and the Company. FOI is a joint venture between the Company and Techman
which was formed for the purpose of constructing and operating a fiberdraw and
optical fiber cable manufacturing facility in Pakistan. In 1996, the 734,260
shares and the 312,061 shares, above, were issued to Techman in exchange for the
payment of $1,000,000 and the delivery by Techman of a twenty year supply
agreement between the Company and FOI. The Company used $500,000 of the proceeds
as an additional capital contribution in FOI. The Company maintains a 30%
ownership interest in FOI. Due to a delay in the construction of the
manufacturing plant, in 1997 the supply agreement was canceled and the 312,061
shares have been canceled. The Company may enter into a new supply agreement in
the future with FOI when the plant is completed.
On July 31, 1996, the Company borrowed $500,000 under two loan
agreements with the spouses of the Chairman and Chief Executive Officer and the
Executive Vice President of the Company. The loans are in the amount of $250,000
each, bear interest at the prime rate plus one percent (currently 9.5%) and are
due on July 31, 1999. In conjunction with the loans, each lender received
Warrants to purchase 115,220 shares of Common Stock at a price of $1.81 per
share. The Warrants expire on July 31, 2001.
In September 1997, the Company borrowed $150,000 from Techman
International Corporation. The note bears interest at prime plus 1% per year and
matures on September 17, 1998. In conjunction with the note, Techman was granted
warrants to purchase 69,132 common shares of the Company at an exercise price of
$0.625 per share.
In April 1997, the Company borrowed $250,000 from Techman under a note
maturing in 2000. The annual interest rate on the note is the prime rate plus
1%, adjustable quarterly and payable quarterly. In conjunction with the note,
Techman was granted warrants to purchase 115,220 common shares of the Company at
an exercise price of $0.78 per share.
In addition to the above two notes with Techman, in 1997, the Company
borrowed $345,000 for working capital from the Chief Executive Officer,
shareholders, and certain companies of which certain directors of FiberCore are
shareholders. The loans bear interest at the prime rate plus one (1) percent per
year, and mature in 1998 ($125,000) and 2000 ($220,000).
In 1997, the expansion of the Jena facility was substantially
completed, more than doubling the production capacity of that plant. The
expansion was funded by German government grants and loans as described above.
6
BUSINESS (CONTINUED)
FIBER OPTIC PREFORM MANUFACTURING TECHNOLOGIES
Optical fibers are solid strands of hair-thin, high quality glass which
are usually combined to form cables for transmitting information via light
pulses from one point to another. The fibers consist of a core of high-purity
glass which transmits light encased within a covering layer designed to reduce
signal loss through the side walls of the fibers. Information transmitted
through optical fibers is converted from electrical impulses into light waves by
a laser or light emitting diode. At point of reception, the light waves are
converted back into electrical impulses by a photo-detector.
Communication by means of light waves guided through glass fibers
offers a number of advantages over conventional means of transmitting
information. Glass fibers carry significantly more information than metallic
conductors and, unlike metallic conductors, are not subject to electromagnetic
or radio frequency interference. Signals of equal strength can be transmitted
over much longer distances through optical fibers than through metallic
conductors and require the use of fewer repeaters (devices which strengthen a
signal). Further, fiber-optic cables, which typically consists of numerous
optical fibers encased in one or more plastic sheaths, are substantially smaller
and lighter than metallic conductor cables of the same capacity, so they can be
less expensive and more easily installed, particularly in limited conduit or
duct spaces.
There are two basic types of communication optical fibers: multi-mode
fiber and single-mode fiber. Multi-mode fiber has a larger core (the area where
the light travels) than single-mode fiber, carries less bandwidth and is more
expensive. It is generally used over relatively short distances in wiring
buildings and groups of buildings. The electronics and the connectors required
to work with multi-mode fiber are less costly than the electronics required for
single-mode fiber. For example, the light source for multi-mode fiber can be
light emitting diodes, while single-mode fiber requires laser light sources.
Single-mode fiber is used in long-distance trunk lines (cables between cities)
and fiber-to-the-curb (cable from a central office to the curb in front of an
office building or home).
The three basic technologies widely used to manufacture multi-mode and
single-mode optical fiber are:
1. Outside Vapor Deposition ("OVD"), otherwise known as the "Corning process."
2. Inside Vapor Deposition ("IVD"), which is also known as Modified Chemical
Vapor Deposition ("MCVD") or the "AT&T process". Due to its flexibility and
relative ease of operation, this process is the most widely used around the
world by independent manufacturers.
3. Axial Vapor Deposition ("AVD"), also known as the "Japanese process". This
process is similar to the Corning process.
The basic production unit from which fiber "is drawn" is a preform. A
preform is a cylindrical high purity glass rod with a high refractive index
glass material in the central part of the rod (the "core") and a low refractive
index glass material in the outer part of the rod (the "clad"). The rod can be
less than one inch to several inches in diameter and one to several meters in
length. From one such preform many thousands of meters of optical fiber can be
drawn. The OVD and AVD processes both manufacture 100% of the glass composing
the final preform and are comparable in terms of machine speeds that manufacture
glass per unit of time. These speeds are significantly higher than those of the
IVD process. In contrast,
7
BUSINESS (CONTINUED)
the IVD process manufactures only about one-third of the total glass required in
the manufacture of a preform, with the balance of the glass being purchased in
the form of a tube at costs significantly lower than that of either OVD or AVD,
thus balancing the overall expense.
Optical fiber cable is produced from optical fiber by first coloring
the coated fiber and then encasing the fiber in a protective jacket.
PROPRIETARY MANUFACTURING PROCESS AND PRODUCTS
The Company manufactures both multi-mode and single-mode preforms and
fiber, but does not manufacture optical fiber cable, although MEFC and FOI, in
which the Company has an interest, intends to draw fiber from preforms and to
manufacture fiber optic cable.
The Company's patented technology can be best described as a
"rod-and-tube" process, or as a hybrid of the OVD, IVD and the AVD processes.
The Company's process takes advantage of available high quality doped1 and
undoped fused silica rods and tubes during the manufacturing process to produce
more efficiently single-mode optical fiber preform and single-mode fiber at a
substantially reduced cost than the alternative processes.
Specifically, the Company's process places a high-purity "core" glass
rod inside a high-purity glass tube or "clad", which has a lower refractive
index than the core, and collapses the tube over the rod to form an intermediate
preform. The Company purchases the glass tubes and manufactures the "core" glass
inside of the purchased glass tube. The composite material is subsequently
converted to a glass rod referred to as an intermediate preform. Such
intermediate preform can also be manufactured by any of the other existing
processes. This intermediate preform is placed inside another purchased tube and
collapsed together to form a final preform, which has the proper ratio of
core-to-outside-diameter-glass. The preform is then drawn into finished fiber by
placing it inside a "draw furnace", heated to approximately 2000 degrees
Celsius, and "stretched" into tens of thousands of meters of hair-thin, flexible
glass fiber. The Company believes that its patented process offers
manufacturing-cost and capital-investment advantages over the processes
currently in use by competitors for the manufacture of optical fiber, because
(i) the machine time necessary to produce a given size preform is significantly
less, thereby allowing the Company to produce more preforms in the same time
period; and (ii) the Company purchases the tube while manufacturing a much
smaller portion of the clad and all of the core which accounts for approximately
5% of the preform, while the OVD process, for example, manufactures 100% of the
preform, requiring substantially more capital investment.
Prior to its acquisition by the Company, the Jena Facility was
manufacturing multi-mode fiber and preform for the Eastern European market. The
Company's lease of the Jena Facility provides a potentially efficient, low-cost,
existing manufacturing operation. Management believes the time and cost required
to achieve manufacturing efficiencies at the Jena Facility were minimized as a
result of management's knowledge and experience in fiber production and machine
design.
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1Doping means adding other glass materials, such as germanium dioxide to the
silica glass.
8
BUSINESS (CONTINUED)
ALT PRODUCTS
The Company's ALT subsidiary has four principal products, all of which
are manufactured at the Company's Charlton, Massachusetts facility and are
marketed by independent sales representatives.
ALT's Fiber Optic Cable Monitoring Systems ("FOCMS") facilitate the
continuous monitoring of fiber optic and copper cables. The FOCMS consist of
sensors housed in a protective cover placed at cable splice points and connected
to a central monitoring system. ALT holds two United States patents covering
this technology. ALT purchased one of these patents and know-how relating to
fiber optic cable monitoring systems on September 7, 1986, from Norscan, a
Canadian company. Norscan retained the right to use the technology in Canada and
the rights to a Canadian reissuance of the purchased patent and has had the
technology in operation on the Trans Canada fiber optic network since 1988. ALT
intends to make the technology widespread in other regions worldwide. A dispute
exists between ALT and Norscan with respect to Norscan selling FOCMS products,
in competition with ALT products, that utilize technology other than the
technology assigned to ALT pursuant to its agreement with Norscan. ALT contends
that, in so doing, Norscan is violating a non-competition provision of Norscan's
agreement with ALT. Failure by ALT and Norscan to resolve this dispute could
materially adversely affect the future sales of ALT products. (See Item 3. Legal
Proceedings)
ALT also manufactures patented long range fault locators, which are
generally used in pairs. Typically, each device is applied at a point on a fiber
optic cable, less than 100 miles from the other unit. These devices can detect
and locate cable faults between the units.
In addition, ALT manufactures cable protection devices, which are
applied at cable splice joints prior to cables entering a building to protect
against hazardous electrical currents that could otherwise be carried by metal
sheaths encasing optical fibers, and electro-optical talksets, which are used by
field personnel to communicate over optical fiber, twisted pair-cable (regular
telephone cable), and metal sheaths encasing optical fibers and copper cables.
Customers for the FOCMS and other ALT Products have included telephone
companies worldwide, including MCI Telecommunications Corp., AT&T Corp. and
Pacific Telesis.
ALT also has developed flood and leak detection devices for the home.
ALT is not actively marketing these products because of lack of resources, but
may attempt to market such products in the future.
RESEARCH AND DEVELOPMENT
The Company conducts research and development ("R&D") activities at its
Jena Facility and Charlton, Massachusetts offices. Additionally, the Company is
conducting product development R&D under two contracts with two scientific
research laboratories in Russia. The Company's research and development
activities consist primarily of optical fiber manufacturing process improvements
and optical fiber product development. The Company is currently conducting
research in Germany under three grants from the German government totaling
approximately $388,287.
9
BUSINESS (CONTINUED)
The Company incurred costs of $434,000, $420,000, and $75,000 for
research and process development for the fiscal years ended December 31, 1997,
1996, and 1995, respectively. The principal purpose of the research activity is
to improve the production process for the manufacturing of fiber preforms, with
concentration on reducing production time and reducing raw material consumption
per unit of product. ALT's expenditures are principally for product development
and enhancements of its products.
Seven of the Company's employees devote substantially all of their time
to research and development, which includes process and product development.
SALES AND MARKETING
The Company's initial marketing efforts are being primarily targeted at
the overseas markets, particularly toward developing nations whose
telecommunications infrastructure is in the early stages of evolution and where
competition is not well established. The Company is initially targeting the
large fiber optic cable manufacturing companies in Asia, the Middle East, the
Pacific Rim, and certain European and Eastern European markets.
The Company's sales and marketing objective is to develop long-term,
strategic relationship/supply contracts for both preform and fiber products as
rapidly as practical, emphasizing the cost advantages of the Company's patented
technology.
JOINT MARKETING ARRANGEMENTS
The Company is seeking to increase market penetration in optical fiber
markets through strategic alliances and/or joint ventures similar to the MEFC
joint venture. Currently, negotiations are underway with several potential new
joint venture partners. These relationships are being structured so that the
Company provides the preforms and the related technology requirements and the
partner provides the financing, operating and local marketing expertise. In this
way, it may be possible for the Company to rapidly obtain market penetration
with little, if any, capital investment. Discussions regarding similar joint
ventures and/or strategic alliances are underway in India, China and several
other countries, although there can be no assurances that such discussions will
lead to the consummation of any transactions.
CUSTOMERS, INVENTORY, BACKLOG AND ADVERTISING
A key element of the Company's marketing strategy is to maintain
sufficient raw material and finished goods inventories to enable the Company to
fill customer orders promptly. This strategy requires a substantial amount of
working capital to maintain inventories at a level sufficient to meet
anticipated demand.
10
BUSINESS (CONTINUED)
CUSTOMERS REPRESENTING OVER 10% OF SALES
The following table is based on the total sales of the Company for all
periods presented.
% OF SALES
1997
Customer A 42%
Customer B 18%
Customer C Less than 10%
1996
Customer A 56%
Customer B 15%
Customer C Less than 10%
1995
Customer A 60%
Customer B Less than 10%
Customer C 10%
The Company believes that only the loss of Customers A and B would have
a material adverse effect on the Company.
BACKLOG, SALES AND ADVERTISING
At December 31, 1997 the Company had a backlog of orders approximating
$4.1 million ($7.4 million at December 31, 1996). The decrease in backorders is
principally due to a decrease in demand for single mode fiber from one customer
in Germany and the delay in the start-up of MEFC. During 1997, four of the
Company's employees were engaged in sales activities as part of their duties,
and the Company utilized manufacturers sales representatives in certain
geographic markets. In 1998, the Company is planning to employ a full-time
international marketing/sales manager and one full time sales person for the
European market. Also in 1998, the Company intends to expand its independent
sales representative organization to provide broader representation primarily in
the Pacific Rim. Assisted by local representatives, management intends to
establish potential relationships with key managers of local cable and telephone
companies. In addition, other management executives are engaged in negotiating
long-term supply agreements with current and potential customers. Sales of ALT
products are made by one salaried full-time Company employee based in
Massachusetts, who is engaged in sales as only a portion of his duties, as well
as by a number of independent sales agents.
Due to the nature of the industry, the Company does not currently
engage in extensive advertising. The Company promotes its products principally
through direct mailings to potential customers, distribution of product
brochures through sales representatives and exhibiting at industry trade shows.
11
BUSINESS (CONTINUED)
COMPETITION
FIBER PREFORM
Management believes that there is limited competition in the sale of
preforms to cable manufacturers who draw their own fiber. Such competition,
however, is expected to grow. At present, the competition for single-mode
preforms on a world-wide basis is limited to two United States manufacturers,
SpecTran Corporation ("SpecTran"), and Alcatel U.S.A. SpecTran's product sales
are for unique fiber applications. Alcatel U.S.A. is marketing single mode
preforms and has the capability to market multi-mode preforms now and in the
future. In Europe, Lycom, Alcatel and Nokia, Shin-Etsu from Japan and DaiWoo
from Korea are marketing single mode preforms.
The predominant practice of most fiber manufacturers is to make fiber
optic preform only for their internal use and not to sell preform to other
fiber-optic manufacturers. Management believes these large companies will not
enter the preform market since demand for fiber currently exceeds supply and
fiber manufacturers have an inherent disincentive in selling preforms; they have
already invested heavily in plant, equipment and technology to convert preforms
into fiber and/or cable, and by selling preforms they would be giving up
value-added margins. The disadvantages associated with selling preforms to third
parties for companies like Corning and AT&T do not apply to the Company,
because, unlike those companies, the Company's customers are not vertically
integrated, and require preforms which are in limited supply.
Due to the current high demand for fiber, the Company has initially
concentrated on manufacturing and selling fiber and currently plans to increase
its fiber manufacturing capability. Because competition in the production of
preforms is somewhat limited, the Company plans to focus its future
manufacturing and marketing efforts on the preform segment of the market.
FIBER
The competition in multi-mode fiber products is limited to a few
manufacturers in North America and Europe. They include Corning Incorporated,
AT&T, Alcatel and SpecTran in the United States and Plasma Optical Fiber and
Alcatel in Europe. Management believes that Corning, AT&T, and Alcatel generally
supply the bulk of their production to their own cablers or joint venture
partners.
The competition in the single-mode fiber market is much more extensive
than in the preform market or the multi-mode fiber market. Most of the
competition for fiber comes from Corning and AT&T. Both Corning and AT&T have
several joint ventures throughout the world, but, it is believed by management,
they generally play significantly smaller roles than their partners. Competition
in the fiber market is primarily based on availability and quality. With some
exceptions, the Company's fiber is generally priced at comparable levels to
fiber manufactured by the larger producers.
12
BUSINESS (CONTINUED)
ALT PRODUCTS
The Company's management believes there is limited or no direct
competition for its FOCMS product line except Norscan. Most other competing
technologies and products are more complementary to the Company's products than
true competitors because these products and the Company's products are both
needed to perform short range and long range fault locating.
Numerous companies manufacture cable protection devices. The Company
believes, however, that it has the only product approved by Underwriters
Laboratories, an internationally recognized certifying organization.
Numerous companies manufacture field talksets that enable personnel to
communicate over either twisted pair, metal sheath or optical fiber. The Company
knows of no other company that manufactures a product that enables personnel to
communicate over all three media, although many companies have or can acquire
the technology to create such a device.
PRODUCT WARRANTIES
Customers may obtain refunds for any defective fiber and fiber preforms
shipped by the Company within 90 days of delivery. The Company extends one year
warranties on ALT Products.
PATENTS
The Company is the registered owner in the United States of U.S. Patent
No. 4,596,589 relating to optical fiber fabrication. The patent, which expires
in 2003, was acquired in 1993 from Gregory Perry, a co-founder of the Company.
The existing patent provides a more efficient method for fabricating a
single-mode optical fiber preform by substantially reducing the time and cost
required to produce the preform. The patent also provides an efficient method of
attaching cladding material around a single-mode fiber core. The Company has
filed an application in the United States and European Common Market improving
upon the process covered by the above patent, and intends to file in other
foreign jurisdictions, as well as filing further improvement patents for its
process.
In conjunction with its acquisition of equipment located at the Jena
Facility, the Company acquired the right and title to all SICO patents and
expertise developed or owned by SICO relating to fiber optics. In the event the
Company were to default on its obligations to SICO, the Company's title to these
patents could revert to SICO. Without the use of SICO patents and technology,
the Company's expense in manufacturing optical fiber and optical fiber preforms
could increase substantially.
In 1997, the Company filed a patent application in the U.S. for a
process which the Company believes will improve the cost and efficiency of
producing optical fiber preforms. The Company is currently in the process of
preparing additional patent applications for the production of optical fiber and
preforms which are expected to be filed in 1998.
13
BUSINESS (CONTINUED)
The Company is the registered owner in the United States of three
patents covering its cable monitoring systems and fault locating methods. The
Company acquired the first such U.S. patent, Patent No. 4,480,251, which covers
cable monitoring systems and expires in 2001, from Norscan. A patent issued by
the United Kingdom for the same technology was also acquired by the Company from
Norscan. The Company has filed international patent applications covering this
technology in various other countries around the world, although none have yet
been granted. Pursuant to the Company's agreement with Norscan, Norscan has the
right to a Canadian patent reissuance and may otherwise use the technology in
Canada. The Company has improved upon Norscan's technology and obtained a
European patent and United States patent, Patent No. 5,077,526, which expires in
2008 covering the improvements. The Company also owns a United States patent,
Patent No. 4,947,469 expiring in 2007, and a European patent covering a cable
fault location method. In addition, the Company owns a United States patent
covering the provision of backup power to optical communications systems.
The Company's ability to compete effectively will depend, in part, on
its ability to protect its patents. There can be no assurance that the steps
taken by the Company to protect its intellectual property will be adequate to
prevent misappropriation or that others will not develop competitive
technologies or products. Furthermore, there can be no assurance that others
will not independently develop products that are similar or superior to the
Company's products or technologies, duplicate any of the Company's technologies,
or design around the patents issued to the Company. In addition, the validity
and enforceability of a patent can be challenged after its issuance. While the
Company does not believe that its patents infringe upon the patents or other
proprietary rights of any other party, other parties may claim that the
Company's patents do infringe upon such patents or other proprietary rights.
There can be no assurance that the Company would be successful in defending
against such a claim of infringement. Moreover, the expense of defending against
such a claim could be substantial. (See Item 3. Legal Proceedings).
INTERNATIONAL OPERATIONS
The Company is subject to all the risks of conducting business
internationally. These risks include unexpected changes in legislative or
regulatory requirements and fluctuations in the United States dollar and the
German mark, and other currencies in which the Company is doing business from
time to time. The Company has limited foreign currency fluctuation exposure and
does not currently engage in foreign currency hedging transactions. The business
and operations of the Company's Germany subsidiary, FCJ, are subject to the
changing economic and political conditions prevailing from time to time in
Germany. Labor costs, corporate taxes and employee benefit expenses are high and
weekly working hours are shorter compared to the rest of the European Union, the
United States and Japan. The Company's joint venture, FCA, in Malaysia is
subject to similar international risks, including the currency fluctuations
recently experienced in the Pacific Rim region. The Company's participation in
MEFC and its investment in FOI are subject to the risks of doing business in
Saudi Arabia, and in the Middle East in general. These risks include, but are
not limited to, the threat of regional conflict. In 1997, 1996 and 1995, FCJ
accounted for 97%, 98%, and 90% of the Company's sales, respectively.
14
BUSINESS (CONTINUED)
TRADEMARKS
FCJ is the owner of the registered trademark InfoGlass(R) under which
it markets its optical fiber products. In 1997, the Company filed for
registration of the trademarks "EconoGrade" and "ValueGrade" for products it
intends to begin marketing in 1998. ALT is the owner of the registered trademark
Floodhound(R) which is used in the sale of the Company's water leak detection
devices. These products are not currently marketed by the Company.
SEASONALITY
The Company's business does not have strong seasonal fluctuations and
the Company does not expect material seasonal variations to revenue.
RAW MATERIALS
The Company presently can purchase all its raw material requirements
for its optical fiber and preform business. The major component of a preform is
silica glass tubing which is available in various sizes. Various high purity
gases such as oxygen, nitrogen, argon, helium, chlorine and chemicals such as
silicon tetrachloride, silicon tetra fluoride and germanium tetrachloride are
used in the process of manufacturing preform. During 1995, the Company's optical
fiber and preform business purchased approximately 90% of its key glass tubing
raw material from one supplier. This supplier accounted for over 46% and 50% of
the Company's glass tube requirements in 1996 and 1997, respectively. If the
Company becomes unable to continue to purchase raw materials from this supplier,
there can be no assurance that the Company will not face difficulties in
obtaining raw materials on commercially acceptable terms, which could have a
material adverse effect on the Company. To limit future shortages of key
materials, the Company successfully identified other suppliers of this material.
The Jena Facility has the capability to manufacture the high-purity synthetic
core glass using a first purchased cladding tube, as well as adding additional
purchased cladding tubes using the Company's patented production process.
The Company's ALT subsidiary uses raw materials widely available from
numerous suppliers.
EMPLOYEES
At December 31, 1997, the Company employed 84 persons, of whom 4 are
executives, 10 are engaged in sales and administration, 63 are engaged in
manufacturing and 7 are engaged principally in research and development.
Seventy-five (75) of the Company's employees are located in Jena, Germany. The
Company is not party to any collective bargaining agreements and the Company
does not maintain a pension plan. The Company considers its relations with
employees to be satisfactory and believes that its employee turnover does not
exceed the industry average.
15
ITEM 2. PROPERTIES
The Company leases 5,000 square feet of office space as its Corporate
Headquarters in Charlton, Massachusetts. The monthly rent is $2,250 and the
lease expires on September 30, 1998. The Company plans to renew the lease.
The Company's optical fiber and preform manufacturing facility is
located in Jena, Germany. The facility is leased from SICO. It occupies
approximately 26,500 sq. ft., including 17,200 sq. ft. of clean room
manufacturing space, 6,100 sq. ft. of office and storage space and an additional
3,200 sq. ft. of outside facilities for gas storage tanks. The Company owns all
machinery and equipment at the facility, subject to certain restrictions. The
lease expires in 2000 and is renewable for additional terms aggregating 25
years. The Company maintains casualty and liability insurance on the Jena
Facility. There is no assurance that in the event of a loss, policy limits will
not be exceeded.
ITEM 3. LEGAL PROCEEDINGS
In January 1998, Corning, Incorporated ("Corning") filed an action
against the Company claiming that the Company infringed a Corning patent by
marketing and selling certain optical fiber products in the United States. In
March 1998 the Company and Corning concluded a settlement agreement wherein the
Company has acknowledged the validity of Corning's patent and agreed, prior to
the expiration of the patent, not to make, market, and sell or offer to sell
infringing optical fiber or optical fiber preforms in the United States in
violation of Corning's patent except to certain customers. In turn, Corning has
agreed not to seek damages and will dismiss the action. The Company maintains
that it has not sold any significant amounts of fiber and preforms in the United
States in violation of Corning's patent which expires in July, 1999. Management
believes that the result of this action will not have a material adverse impact
on the Company.
The Company's FiberCore Jena subsidiary, SICO and SICO's president, Mr.
Walter Nadrag (who was previously the Managing Director of FiberCore Jena) are
defendants in a lawsuit in Germany brought against them by COIA GmbH ("COIA"), a
former customer, claiming damages of approximately $200,000 arising from
FiberCore Jena's alleged failure to comply with a sales contract. The case was
dismissed by the lower court and COIA appealed this decision. On appeal the
court found that although there was a contract, COIA was not entitled to
damages. COIA may seek fulfillment of the claimed contract. In addition to the
above, the Company is subject to various claims which arise in the ordinary
course of business. The Company believes such claims, individually or in the
aggregate, will not have a material adverse affect on the business of the
Company.
The Company's ALT subsidiary is in a dispute with Norscan, a Canadian
company, with respect to Norscan selling FOCMS products, in competition with ALT
products and in violation of a non-competition agreement between ALT and
Norscan. Although no litigation has commenced as of the date of this report with
respect to this dispute, ALT would be the claimant in any lawsuit brought in
connection with this matter. Failure by ALT and Norscan to resolve this dispute
could have a material adverse affect on the future sales of ALT Products.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's stock is traded on the Over the Counter (OTC) Bulletin
Board. There were 224 holders of record and approximately 800 beneficial owners
of Common Stock as of March 12, 1998. The public market for the Common Stock on
the Bulletin Board, where the stock trades under the symbol FBCE, is limited.
Set forth below for the periods indicated are the high and low closing prices
for the Common Stock as reported on the Bulletin Board.
STOCK PRICE AND DIVIDEND POLICY
Period High Bid Low Bid
------ -------- -------
1996
----
1st quarter $3.12 $2.00
2nd quarter $7.25 $1.75
3rd quarter $7.44 $3.00
4th quarter $4.13 $2.63
1997
----
1st quarter $6.25 $0.63
2nd quarter $1.50 $0.44
3rd quarter $1.06 $0.50
4th quarter $0.88 $0.31
The payment of dividends, if any, in the future is within the
discretion of the Board of Directors and will depend on the Company's earnings,
its capital requirements, financial condition, contractual and legal
restrictions and other relevant factors. The Company does not expect to declare
or pay any dividends in the foreseeable future. In addition, the ability of the
Company to pay cash dividends in the future will be subject to its ability to
meet certain other of its obligations.
17
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data of the Company for each of the
years 1997, 1996, 1995, 1994, and 1993, has been derived from the audited
financial statements and notes thereto of the Company and its predecessors. The
information set forth below is qualified by reference to, and should be read in
conjunction with, the consolidated financial statements and related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- ----------------------------------------------------------------------------------------------------------------------------
1997(1) 1996(1) 1995(1) 1994(2)(3) 1993(2)(3)
Operating Data:
Net sales............................... $ 7,078 $ 8,096 $ 3,094 $ 231 ---
------- ------- ------- -------
Costs and expenses:
Cost of sales........................... 5,702 7,200 4,509 1,064 ---
Research and development................ 434 420 75 90 ---
Selling, general, and administrative.... 3,148 4,324 2,100 700 $ 1
Interest expense, net................... 638 387 368 7 ---
Other expense (income), net............. 234 (102) 51 (5) ---
------- ------- ------- ------- ------
Loss before provision for income taxes.. (3,078) (4,133) (4,009) (1,625) (1)
Provision for income taxes.............. --- --- --- --- ---
------- ------- ------- ------- ------
Net loss................................ $ (3,078) $(4,133) $(4,009) $(1,625) $ (1)
======== ======= ======= ======== ==========
Basic and diluted loss per share.......... $ (0.09) $ (0.13) $ (0.15) $ (0.07) ---
======== ======= ======= ========
Weighted average shares
outstanding............................. 35,744,182 31,695,693 26,584,630 22,873,322 21,309,323
========== ========== ========== ========== ===========
Balance Sheet Data:
Working capital (deficit)............... 8,091 191 (277) (519) 403
Total assets............................ 26,107 17,642 14,783 4,270 645
Long-term obligations................... 9,851 4,587 5,000 456 ---
Total liabilities....................... 13,351 7,618 8,415 1,687 4
Minority interest....................... 3,217 --- --- --- ---
Accumulated deficit..................... (12,850) (9,772) (5,638) (1,628) (3)
Stockholders' equity.................... 9,539 10,024 6,368 2,583 641
- ---------
1. Includes the results of ALT from September 18, 1995.
2. Does not include the results of ALT.
3. Reflects the Venturecap merger as of the beginning of the period.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollars and Deutsche Marks in Thousands)
BACKGROUND
Certain statements in this Form 10-K constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). Such forward looking statements involve known and
unknown risks, uncertainties, and other factors which may cause the actual
results, performance, or achievements of the Company, or industry results, to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. The important factors
that could cause actual results to differ materially from those indicated by
such forward-looking statements include, but are not limited to (i) the
information being of a preliminary nature and therefore subject to further
adjustment; (ii) the ability of the Company to contain costs, to grow internally
or by acquisition and to integrate acquired businesses into the Company's group
of companies; (iii) the uncertainties of litigation; (iv) the Company's
dependence on significant customers; (v) changing conditions in the optical
fiber industry which could adversely affect the Company's business; (vi)
unsettled economic conditions in several of the countries in which the Company
operates; (vii) competitive actions by other companies, including the
development by competitors of new or superior services or products or the entry
into the market of new competitors; (viii) the ability of the Company to deal
with the Year 2000 Issue on a timely basis; (ix) all the risks inherent in the
development, introduction, and implementation of new products and services; and
other factors both referenced and not referenced in this Form 10-K. When used in
this Form 10-K, the words "estimate", "project", "anticipate", "expect",
"intend", "believe", and similar expressions are intended to identify
forward-looking statements, and the above described risks inherent therein.
FiberCore, Incorporated, the predecessor to the Company, was organized
under the laws of the State of Nevada on November 5, 1993. Venturecap, Inc. was
a development stage enterprise, with no significant operations, no significant
assets or liabilities and was inactive from 1990 until the time of the
Venturecap Merger with FiberCore, Incorporated on July 18, 1995. The Venturecap
Merger has been accounted for as a pooling of interests. Subsequent to the
Venturecap Merger, Venturecap changed its name to FiberCore, Inc. (hereinafter
"FiberCore" or the "Company").
The Company operates primarily through its FiberCore Jena subsidiary.
The Company maintains its headquarters in Charlton, Massachusetts which is
staffed by executive, research and engineering, accounting and administrative
personnel. The following discussion and analysis of the results of operations is
based on the Company's audited financial statements for the years ended December
31, 1997, 1996 and 1995.
RESULTS OF OPERATIONS
Year Ended December 31, 1997
Total revenues for the year ended December 31, 1997 were $7,078 or
12.6% lower than revenues
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
in 1996. The decrease was principally due to a decline in the value of the
German mark versus the U.S. dollar of 13.3%. Average selling prices were 26%
higher in 1997 compared to 1996, due to an increase in sales volume of
multi-mode fiber and a decrease in sales volume of single-mode fiber.
Substantially, all of the Company's sales are through its German subsidiary,
FiberCore Jena.
Cost of sales decreased by 20.8% from 1996 to 1997. This decrease was
attributable to the decline in the value of the German mark and a lower per unit
cost of production resulting from upgrades to the production equipment and
production process improvements. As a result of these improvements gross profit
for the year ended December 31, 1997 was $1,376 or 19.4% of sales compared to
$896 or 11.1% of sales in 1996.
Selling, general, and administrative costs decreased $1,176 in 1997
from 1996 or 27.2%. This decrease was principally due to the costs incurred in
1996 of $846 for the value of options granted to employees and $421 for the
costs associated with the registration of the Company's common stock with the
Securities and Exchange Commission. Additionally, FiberCore Jena's
administrative costs increased by approximately $135 after giving effect to the
decline in value of the mark. This increase was principally due to an increase
in administrative personnel and other administrative costs.
Interest expense increased 69.0% to $664 in 1997 compared to $393 in
1996. This increase was due to the increase in interest on the AMP loans of $172
resulting from a higher average interest rate on these loans in 1997 compared to
1996. Additionally, the Company incurred an increase in interest costs of $62 on
loans borrowed for working capital purposes, and approximately $40 of interest
and fees on the Berliner Bank loan. Interest of $176 on the Berliner Bank loan
was capitalized during the year for the expansion of the German plant.
Other expense was $234 in 1997 compared to other income-net of $102 in
1996. This change was principally due to an increase in foreign currency
exchange losses of $294 on the German mark deposit with the Berliner Bank that
is security for the loan and a decrease in German research grants of $58.
The net loss for the year 1997 was $3,078 compared to $4,133 for 1996,
a decrease of $1,055 or 25.5%. The primary cause of the decrease was the
increase in gross profit, the decrease in administration costs, offset by the
increase in interest expense and other expenses as described above.
Year Ended December 31, 1996
Total revenues for the year ended December 31, 1996 were $8,096
compared with revenues of $3,094 for the year ended December 31, 1995, an
increase of 162%. This increase in revenues was attributable to the Company's
increase of production capacity resulting from an upgrade of the Jena Facility,
and the Company's sales and marketing efforts resulting in the addition of new
customers.
Gross profit for the year ended December 31, 1996 was $896 compared to
a loss of $1,415 for the year ended December 31, 1995. This difference was
attributable to the higher volume of production and the upgrade of the Jena
Facility since its acquisition in July 1994. The improvement and upgrading of
machinery and equipment and production process technology changes resulted in
better production yields and lower per unit production costs.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Selling, general and administrative expenses were $4,324 for the year
ended December 31, 1996 compared to $2,100 for the year ended December 31, 1995,
an increase of 106%. This increase was due primarily to non-cash compensation
expense of $846 incurred in connection with the grant to employees and others of
options to acquire 382,184 shares of common stock of the Company, the
acquisition of ALT in September, 1995, which accounted for $704 of the increase
and approximately $421 of legal, accounting, and other costs incurred in
connection with the Company's registering its common stock with the Securities
and Exchange Commission. Additionally, the commencement of increased production
at the Jena Facility, the Company's increased sales and marketing efforts and
the addition of personnel in Germany, added to this increase in costs.
Interest expense for the year ended December 31, 1996 was $393 compared
to $516, a decrease of 24% from the year earlier comparable period. This
decrease was due to the repayment in 1995 of a working capital line of credit
that was outstanding for most of 1995, offset by the interest on the AMP Note.
Interest income was $6 for the year ended December 31, 1996 compared to
$148 in 1995. The decrease of $142 or 96% was principally due to the interest
earned on the short-term investment of the $5,000 AMP loan in 1995. The AMP loan
proceeds were used in 1995 to repay a line of credit and investments in the Jena
Facility.
Other income, net of other expense, was $102 for the year ended
December 31, 1996 compared to net expense of $51 in 1995. The increase in other
income in 1996 was principally due to the receipt of research grants of $109 in
Germany.
The net loss for the year ended December 31, 1996 was $4,133, an
increase of $124 (3%) from the loss of $4,009 in the corresponding period in
1995. The primary cause of the increase was the improvement in sales and gross
profit at the Jena Facility offset by the changes in administrative and interest
income and expense as described above.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company expects to continue to incur operating losses until such
time as the Jena Facility's recent expansion is fully operational, and
manufacturing inefficiencies are substantially eliminated. The Company has and,
with additional capital, will continue to transfer its more efficient and
productive technology to its Jena Facility with management's expectation of
improved operating results. The expansion of the Jena Facility, recently
completed, will result in improved production yields thus lowering production
costs per unit of preform and fiber. Additionally, the expansion will increase
throughput resulting in increased production volume. Management anticipates that
these increased sales combined with lower per unit production costs will lead to
profitability.
The Company, therefore, has sought additional financing for working
capital, expansion and technology development from one or more of the following
sources: (i) issuance of convertible
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
instruments or stock in private or public offerings; (ii) exercise of stock
Options and Warrants; and (iii) loans from officers, directors, and principal
stockholders of the Company. Funds for such loans to the Company from officers,
directors, and principal stockholders would be derived, in part, from sales or
pledges (to obtain loans) of Common Stock by such individuals. Additionally, the
Company, through its Malaysian subsidiary FCA, is in the process of raising
approximately $40.0 million in debt financing to finance the construction of the
FCA manufacturing plant. The Company's plan to construct the facility in
Malaysia, despite the current economic situation in the Pacific Rim, is
considered to be a long-term investment strategy. Management believes that the
Malaysian economy, despite recent events, is basically stable, and stronger than
the economies of other countries in the region. Additionally, the region
continues to invest in infrastructure projects of which optical fiber is a part.
Demand for the Company's products is projected to continue to grow in the
Pacific Rim region at a faster rate than in other major markets. Substantially
all of the products that are planned to be produced in the Malaysian facility
are targeted for export outside of Malaysia.
The Company believes that its success in raising additional capital is
dependent on investors' beliefs in the Company's technology, its position in the
fiber optics industry, and its strategic business plan. Achieving profitability
is dependent, in part, on raising additional funds to invest in capital
expenditures. In this regard, in 1996 the Company received a grant from the
German government of 4,000 Deutsche Marks (DM) (approximately $2,700) and a loan
from the Berliner Bank of 7,700 DM (approximately $4,280). These funds are
committed to the upgrade and expansion of the Jena Facility described above. On
November 27, 1996, AMP loaned the Company $3,000, part of which has been used as
collateral for the Berliner Bank Loan. As part of the AMP loan, AMP also
converted $3,000 of principal plus interest on the existing $5,000 loan into
3,058,833 shares of Common Stock.
The Company is not relying on the conversion of Warrants and Options to
fund the upgrade and expansion of the Jena Facility; however, if the Warrants
and Options are exercised, the total proceeds that the Company would receive
upon the exercise is approximately $7,182. To the extent that the Warrants and
Options are exercised, the Company intends to use the proceeds from the exercise
of such Warrants and Options for working capital purposes, including debt
service (approximately $80 per quarter beginning January 1997 through December
2001). There are long payment deferral periods on a substantial amount of the
Company's outstanding loans. Under the AMP Note, the remaining $2,000 in
principal and accrued interest are due and payable at maturity in April 2005.
Similarly, under the $3,000 AMP loan, payments of interest are deferred for the
first five years. Thereafter, accrued and unpaid interest is payable quarterly.
The principal and any remaining accrued interest is payable at maturity on
November 27, 2006. As for the German loan, principal is also due and payable at
the tenth anniversary of closing; however, interest at 6.25 % is due and payable
quarterly. The Company does not foresee any inability to meet its current debt
requirements.
The Company currently has a backlog of orders aggregating approximately
$4,100 which is scheduled to be shipped in 1998. The backlog at December 31,
1996 and 1995 was approximately $7,400 and $4,800, respectively. The decrease in
backorders is principally due to a decrease in demand for single-mode fiber from
one customer in Germany and the delay in the start-up of MEFC. Additionally, the
Company has entered into, or is negotiating, long-term supply agreements which,
in the opinion of management, could generate sales of up to approximately
$251,000 in the aggregate. These include supply agreements with MEFC, AMP, FOI
for Oman Fiber Optics Company and others. Pursuant
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
to the supply agreement with AMP, which provides for an initial term of five
years and for an additional five year term at AMP's option, AMP has undertaken
to purchase at least 50% of its global fiber requirements from the Company. The
Company estimates that this could amount to over $60,000 in sales over the five
year period, significantly improving the Company's cash flow and profits,
although there can be no assurance that actual sales will reach this amount.
Shipments to MEFC began in the fourth quarter 1997 and shipments to AMP in the
U.S. are expected to begin in 1998.
The following changes in balance sheet amounts are net of the effect of
the change in the currency exchange rates from December 31, 1996 to December 31,
1997.
Year Ended December 31, 1997
During the year ended December 31, 1997, the Company used $1,724 net of
depreciation and amortization for operations, before changes in working capital.
Accounts receivable increased by $354 principally due to the sales of ALT
products and a large sale to MEFC in December 1997. Inventories increased by
$1,398 as a result of the increase in production in FiberCore Jena and lower
than expected shipments of preforms to MEFC. This lower shipment was due to MEFC
not having completed the installation of their draw tower. The increase in other
receivables of $202 was due to an outstanding receivable for German government
grants of $422 reduced by a decrease in VAT taxes receivable.
Accounts payable increased $260, principally due to advances received
and to be repaid to one of the partners in FCA. Accrued liabilities increased by
$37 primarily due to increases in accrued interest for loans.
Cash used in investing activities was $2,551 for the year ended
December 31, 1997. This was principally due to the investment for expansion of
the Jena facility of $4,211 reduced by grants received from the German
government of $1,775.
Cash received from financing activities included $328 received from the
exercise of employee stock options and $394 in short-term borrowings for working
capital. The Company drew down $4,280 on the Berliner Bank loan for the
expansion of the Jena plant. Additionally, the Company borrowed $470 in
long-term loans to finance operations. Long-term interest payable increased $418
due to the interest on the AMP loans which is payable at maturity.
Year Ended December 31, 1996
During the year ended December 31, 1996, the Company used net cash of
$1,972 for operating activities, principally resulting from the loss for the
period of $4,133 reduced by depreciation and amortization of $1,226 and non-cash
compensation expense of $846. Inventory increased $514 due to the higher volume
of production during the year. Accounts payable was reduced by $159, while
accrued expenses increased by $829. The increase in accrued expenses is
principally attributable to an increase in accrued salaries, legal and audit
fees. Certain officers deferred payment of their salaries during the year to
improve the Company's cash available for other purposes. Also, during the period
the Company utilized cash in investing activities of $1,150, principally for
equipment ($1,161) and investments in joint ventures ($950), reduced by grants
from the German government ($960) used to acquire equipment. Cash
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
generated through financing totaled $2,479, principally from the sale of stock
($1,500) and new borrowings ($3,700), reduced by collateral for a bank loan to
finance investments in the Jena Facility ($2,498), and repayment of a note
($200).
The proceeds from the sale of stock noted above were received from
Techman under the Techman Share Purchase Agreement entered into in January 1996.
Under that Agreement, Techman subscribed to purchase 734,260 shares of the
Company for $1,000. The payment of $1,000 resulted in an increase in equity and
was used as working capital, improving the Company's ability to meet its current
obligations, and as a capital contribution for the FOI joint venture ($450). The
sale of stock to MESC ($500) was used as a capital contribution to the MEFC
joint venture.
ALT
ALT was acquired by the Company as of September 18, 1995. ALT has
historically operated at a loss, has cumulative losses from its date of
inception, and requires additional capital to operate. The Company intends to
raise additional funds for ALT, however, there is no assurance that such funds
will be available. In 1997, ALT received and filled an order from Pakistan
Telecom in the amount of $165, for a test installation of the fiber optic cable
monitoring system. The Company anticipates that Pakistan Telecom will place an
order for additional installations estimated to be valued at approximately
$1,600, although there can be no assurance that such sales will be realized.
Additionally, the Company plans to engage a full-time sales manager for ALT in
1998 which management believes will result in increased sales of ALT products.
YEAR 2000 ISSUES
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer systems that have time-sensitive software or hardware may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company is in the process of reviewing its systems and programs to
identify those that could potentially have an impact on the Company's
operations. In 1997, the Company's principal operating subsidiary, FiberCore
Jena, installed new accounting and administrative software and hardware which
the supplier has assured the Company is Year 2000 compliant. The Company will
verify this in 1998. The Company has not as yet completed an assessment of the
cost to bring other operating systems into compliance.
The Company does not have significant interface application with
customers, suppliers and others. However, the Company has initiated
communications with all of its significant suppliers and large customers to
determine the extent to which the Company's systems and operations are
vulnerable to those third parties' failure to remediate their own Year 2000
Issue. There can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted and would not have an
adverse effect on the Company's systems.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company will utilize both internal and external resources to
reprogram, or replace, and test its software for Year 2000 modifications. The
Company anticipates completing the Year 2000 project not later than June 30,
1999, which is prior to any anticipated impact on its operating systems. The
total cost to the Company of these Year 2000 Compliance activities has not been
and is not anticipated to be material to its financial position or results of
operations in any given year.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence as other
financial statements. Also in June 1997, the FASB issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information", which
changes the way public companies report information about segments. These
statements are effective for 1998. Management is currently evaluating the
effects of these statements on the Company's financial statements, however,
these statements will only effect disclosure and presentation in the financial
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Reports..............................................27-28
Consolidated Balance Sheets at December 31, 1997 and 1996.................. 29
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995...................................... 30
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1997, 1996 and 1995................................ 31
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995...................................... 32
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1997, 1996 and 1995...................................... 33
26
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
FiberCore, Inc.
Charlton, Massachusetts
We have audited the accompanying consolidated balance sheets of FiberCore, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
years then ended. 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 generally accepted auditing
standards. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of FiberCore, Inc. and subsidiaries as
of December 31, 1997 and 1996, and the results of their operations and cash
flows for the years then ended in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
March 27, 1998
27
LETTERHEAD OF MOTTLE MCGRATH BRANEY & FLYNN, P.C.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
FiberCore, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of operations, changes
in stockholders' equity, and cash flows of FiberCore, Inc. and Subsidiaries for
the year ended December 31, 1995. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations, changes in
stockholders' equity, and cash flows of FiberCore, Inc. and Subsidiaries for the
year ended December 31, 1995 in conformity with generally accepted accounting
principles.
/s/ MOTTLE McGRATH BRANEY & FLYNN, P.C.
---------------------------------------
MOTTLE McGRATH BRANEY & FLYNN, P.C.
Worcester, Massachusetts
July 29, 1996
28
FIBERCORE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(Dollars in thousands except share data) 1997 1996
---- ----
ASSETS
Current assets:
Cash....................................................................................... $ 2,128 $ 190
Accounts receivable, less allowance for doubtful accounts of $33 in 1997 and
$36 in 1996.............................................................................. 937 675
Notes receivable from joint venture partners............................................... 4,883 --
Other receivables.......................................................................... 564 418
Inventories................................................................................ 3,057 1,921
Prepaid and other current assets........................................................... 22 18
------- -------
Total current assets................................................................... 11,591 3,222
------- -------
Property and equipment.......................................................................... 6,559 5,244
Less accumulated depreciation................................................................... 1,751 1,473
------- -------
Property and equipment - net........................................................... 4,808 3,771
------- -------
Other assets:
Restricted cash............................................................................ 2,140 2,498
Patents, less accumulated amortization of $1,520 in 1997 and $861 in 1996.................. 6,014 6,648
Investments in joint ventures.............................................................. 1,425 1,375
Other...................................................................................... 129 128
-------- -------
Total other assets..................................................................... 9,708 10,649
------- -------
Total assets........................................................................... $26,107 $17,642
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.............................................................................. $ 594 $ 200
Accounts payable........................................................................... 1,778 1,653
Accrued expenses........................................................................... 1,128 1,178
------- -------
Total current liabilities.............................................................. 3,500 3,031
Long-term interest payable...................................................................... 460 42
Long-term debt.................................................................................. 9,391 4,545
------- -------
Total liabilities...................................................................... 13,351 7,618
------- -------
Minority interest .............................................................................. 3,217 ---
------- -------
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock, $.001 par value, authorized 10,000,000 shares; no shares issued
and outstanding............................................................................ --- ---
Common stock, $.001 par value, authorized 100,000,000 shares; shares issued and
outstanding: 35,774,822 in 1997 and 35,233,250 in 1996.................................... 36 35
Additional paid in capital................................................................. 23,221 19,545
Accumulated deficit........................................................................ (12,850) (9,772)
Accumulated translation adjustment......................................................... (868) 216
------- -------
Total stockholders' equity............................................................. 9,539 10,024
------- -------
Total liabilities and stockholders' equity............................................. $26,107 $17,642
======= =======
See accompanying notes to consolidated financial statements.
29
FIBERCORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands except share data)
1997 1996 1995
---- ---- ----
Net sales............................................... $ 7,078 $ 8,096 $ 3,094
Cost of sales .......................................... 5,702 7,200 4,509
--------------- --------------- ---------------
Gross profit (loss)................................ 1,376 896 (1,415)
Operating expenses:
Selling, general and administrative expenses ......... 3,148 4,324 2,100
Research and development.............................. 434 420 75
---------------- --------------- -----------------
Loss from operations............................... (2,206) (3,848) (3,590)
Interest income......................................... 26 6 148
Interest expense........................................ (664) (393) (516)
Other (expense) income.................................. (234) 102 (51)
--------------- --------------- ----------------
Net loss........................................... $ (3,078) $ (4,133) $ (4,009)
============== ============== ==============
Basic and diluted loss per share of common stock........ $ (0.09) $ (0.13) $ (0.15)
=============== =============== ===============
Weighted average shares outstanding..................... 35,744,182 31,695,693 26,548,630
=============== =============== ===============
See accompanying notes to consolidated financial statements.
30
FIBERCORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands except share data)
1997 1996 1995
---- ---- ----
Common Stock:
Balance, beginning of year.................................... $ 35 $ 30 $ 25
Stock issued for acquisition of ALT........................... 5
Sale of stock for cash........................................ 2
Reissuance of stock for conversion of debt.................... 3
Stock issued on exercise of options and warrants.............. 1
--------- --------- --------
Balance, end of year.......................................... $ 36 $ 35 $ 30
========= ========= ========
Additional Paid in Capital:
Balance, beginning of year.................................... $ 19,545 $ 11,761 $ 4,677
Issuance of stock for services................................ 44
Reissuance of treasury stock as loan incentive................ (455)
Stock issued for acquisition of ALT........................... 6,995
Sale of stock for cash........................................ 1,498 500
Issuance of stock for conversion of debt...................... 4,052
Issuance of stock for investment in joint venture............. 425 425
Discount on AMP note for value of warrants.................... 963
Compensation cost of options issued to employees.............. 846
Stock issued on exercise of options and warrants.............. 328
Contribution of capital in Malaysia joint venture (FCA)....... 3,348
Stock canceled on cancellation of supply agreement with FOI... (425)
--------- --------- ---------
Balance, end of year.......................................... $ 23,221 $ 19,545 $ 11,761
========= ========= ========
Accumulated Translation Adjustment:
Balance, beginning of year.................................... $ 216 $ 215 $ 10
Change in translation adjustment for the year................. (1,084) 1 205
--------- --------- --------
Balance, end of year.......................................... $ (868) $ 216 $ 215
========= ========= ========
Accumulated Deficit:
Balance, beginning of year.................................... $ (9,772) $ (5,639) $ (1,630)
Loss for the year............................................. (3,078) (4,133) (4,009)
--------- -------- --------
Balance, end of year.......................................... $ (12,850) $ (9,772) $ (5,639)
========= ======== ========
Treasury Stock:
Balance, beginning of year.................................... $ 0 $ 0 $ (500)
Issuance of stock as loan incentive........................... 0 0 500
--------- --------- --------
Balance, end of year.......................................... $ 0 $ 0 $ 0
========= ========= ========
See accompanying notes to consolidated financial statements
31
FIBERCORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(Dollars in thousands except share data) 1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net loss ........................................................... $(3,078) $(4,133) $(4,009)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization ..................................... 1,354 1,226 747
Compensation cost for stock options ............................... --- 846 ---
Foreign currency translation loss and other ........................ 319 105 73
Changes in assets and liabilities:
Accounts receivable .............................................. (354) (93) (555)
Other receivables .................................................. (202) (132) 11
Inventories ....................................................... (1,398) (514) (1,131)
Prepaid and other current assets ................................... (6) 11 (20)
Accounts payable ................................................... 260 (159) 853
Accrued expenses ................................................... 37 829 799
------- ------ -------
Net cash used in operating activities ............................ (3,068) (2,014) (3,232)
------- ------ -------
Cash flows from investing activities:
Purchase of property and equipment ................................. (4,211) (1,161) (1,817)
Reimbursement from government grant 1,775 960 ---
Investments in joint ventures ...................................... (50) (950) (54)
Other .............................................................. (65) 1 224
------- ------ -------
Net cash used in investing activities ........................... (2,551) (1,150) (1,647)
------- ------ -------
Cash flows from financing activities:
Cash contribution by minority shareholders in FCA .................. 1,683 --- ---
Proceeds from issuance of common stock on exercise of
options ......................................................... 328 1,500 500
Proceeds from long-term debt ....................................... 4,750 3,500 5,000
Restricted long-term cash deposits.................................. --- (2,498) ---
Proceeds from notes payable ........................................ 394 200 ---
Repayment of notes payable ......................................... --- (200) (7)
Increase in long-term interest payable.............................. 418 42 ---
Other............................................................... --- (23) (39)
------- ------ -------
Net cash provided by financing activities 7,573 2,521 5,454
------- ------ -------
Effect of foreign exchange rate change on cash......................... (16) --- ---
------- ------ -------
Increase (decrease) in cash............................................ 1,938 (643) 575
Cash, beginning of year ............................................... 190 833 258
------- ------ -------
Cash, end of year ..................................................... $ 2,128 $ 190 $ 833
======= ====== =======
Supplemental disclosure:
Cash paid during the year for interest $ 222 $ 18 $ 183
Shares issued for investment in joint venture $ 425 $ --- $ ---
Reduction of equipment book value due to
cancellation of capitalized lease $ --- $ --- $ 499
See accompanying notes to consolidated financial statements.
32
FIBERCORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Incorporation and nature of operations
FiberCore, Inc. (the "Company") is involved in the research, development,
production and sales of optical fiber and optical fiber preforms for the
telecommunications industry. FiberCore Glasfaser Jena GmbH ("FCJ"), the
Company's principal operating subsidiary located in Germany, manufactures
optical fiber and optical fiber preforms. Automated Light Technologies, Inc.
("ALT"), a wholly-owned subsidiary of the Company, is a manufacturer and
distributor of fiber optic cable monitoring and fault locating systems for the
telecommunications industry. FiberCore Asia Sdn. Bhd. ("FCA") was formed in 1997
to construct an optical-fiber manufacturing facility in Malaysia.
FiberCore Incorporated, the predecessor to FiberCore, Inc. was organized under
the laws of the State of Nevada on November 5, 1993. On July 18, 1995, FiberCore
Incorporated merged with Venturecap, Inc., ("Venturecap"), an inactive company
organized in the State of Nevada in 1987. Following the merger Venturecap
changed its name to FiberCore, Inc. The merger was accounted for as a pooling of
interests and, accordingly, the Company's consolidated financial statements have
been restated for all prior periods as if the merger took place at the beginning
of such periods. In January, 1997 the Company registered all its then
outstanding shares under an S-1 filing with the Securities and Exchange
Commission. The Company's common stock is traded on the
Over-The-Counter-Bulletin Board under the symbol "FBCE".
(b) Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
(c) Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation.
(d) Inventories
Inventories are valued at the lower of cost or market using the first-in,
first-out method.
(e) Property and equipment
Property and equipment is stated at cost, net of grants received applicable to
acquisitions. The cost of maintenance and repairs is charged to expense as
incurred. Expenditures for significant renewals or improvements to properties
and equipment are added to the basis of the asset.
33
FIBERCORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
In 1996 and 1997 the Company received grants from the German government to be
used in the expansion of the FCJ facility. All grant proceeds received have been
netted against the cost of the assets acquired.
Property and equipment is depreciated using the straight-line method over the
estimated useful lives of the assets.
(f) Restricted Cash
In connection with the expansion of the FCJ facility, the Company obtained a
loan from the Berliner Bank in Germany. Cash in the amount of German Marks 3,850
(U.S. $2,140), has been deposited with this institution as collateral for this
loan.
(g) Patents
Patents are amortized on a straight-line basis over seventeen years. The Company
evaluates the recoverability of patents from expected future cash flows.
(h) Investments in joint ventures
The Company has a 30% ownership interest in Fiber Optic Industries (Pvt.) Ltd.
("FOI"), which is accounted for using the equity method of accounting.
The Company's 15% ownership interest in Middle East Optical Fiber Cable Co.
("MEFC") is carried at cost.
The Company holds a 51% ownership in FCA which is consolidated in the Financial
Statements. Minority interest on the balance sheet reflects the Malaysian
partners' 49% ownership. There is no minority interest impact on the results of
operations as FCA had no activity in 1997.
(i) Fair value of financial instruments
The Company has financial instruments, which consist of cash, short-term
receivables, accounts payable and notes payable, for which their carrying
amounts approximate fair value due to the short maturity of those instruments.
The principal amount of the long-term debt approximates fair value because the
interest rates on these instruments approximate current market rates.
(j) Translation of foreign currencies
The translation of foreign subsidiaries financial statements into U.S. dollars
is performed for balance sheet accounts using current exchange rates in effect
at the balance sheet date and for revenue and expense
34
FIBERCORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
accounts using an average exchange rate for the period. Unrealized gains or
losses resulting from translation are included in stockholders' equity.
(k) Revenue
Revenue is recognized when earned which is principally when products are
shipped.
(l) Income taxes
The Company accounts for income taxes in accordance with the asset and liability
method. Deferred taxes are recognized for the future tax consequences
attributable to the differences between the book and tax basis of assets and
liabilities.
(m) Loss per share of common stock
Basic loss per share of common stock is computed based on the weighted average
shares outstanding during the year. The stock purchase warrants and stock
options have not been included in the computation of basic loss per share since
the effect would be anti-dilutive.
(n) Stock based compensation
FASB Statement No. 123 "Accounting for Stock-Based Compensation" defines a fair
value based method of accounting for an employee stock option or similar equity
instrument. However, the Company will continue to measure compensation cost for
employee stock compensation transactions using the intrinsic value based method
of accounting prescribed by APB Opinion No. 25 "Accounting for Stock Issued to
Employees".
(o) Reclassifications
Certain amounts in the prior year financial statements have been reclassified to
conform to the 1997 presentation.
(2) EARNINGS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share", issued by the Financial Accounting Standards Board. The
statement established new standards for computing and disclosure of earnings per
share ("EPS") and requires restatement of prior years EPS information. The
statement requires dual presentation of "basic" EPS and "diluted" EPS. Basic EPS
is based on the weighted average number of common shares outstanding, excluding
common stock equivalents. Diluted EPS reflects the potential dilution of EPS
that could occur if securities or other contracts to issue common shares were
exercised or converted. At December 31, 1997, 1996 and 1995,
35
FIBERCORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
(2) EARNINGS PER SHARE (CONTINUED):
there would have been no difference between basic and diluted earnings per share
due to the losses of the Company.
The following table shows securities outstanding as of December 31, that could
potentially dilute basic EPS in the future that were not included in the
computation of diluted EPS because to do so would have been antidilutive.
1997 1996 1995
---- ---- ----
Employee stock options 1,387,778 978,434 577,893
Warrants to acquire common stock 4,968,818 4,549,249 1,238,615
Common stock to be issued for
convertible debt 2,060,308 1,881,446 4,319,281
--------- --------- ---------
Total 8,416,904 7,409,129 6,135,789
========= ========= =========
(3) ACQUISITIONS AND STRATEGIC INVESTMENTS
In November, 1997, the Company entered into a joint-venture agreement with
Federal Power Sdn. Bhd. ("FDP") and PNB Equity Resource Corporation ("PERC") to
form FiberCore Asia Sdn. Bhd. ("FCA") in Malaysia. FCA was established to
construct and operate an optical fiber preform manufacturing facility in
Malaysia. The Company owns 51% of FCA, and FDP and PERC own 37% and 12%,
respectively.
The Company granted FCA a license to use the Company's technology for the
Company's ownership, and FDP and PERC contributed cash of $1,683 and notes of
$4,883 for their ownership. As part of the joint venture agreement, the Company
has entered into a put option agreement with FDP and PERC wherein the Company
has agreed to purchase FDP's and PERC's shares, at their option, in the event
that certain production benchmarks are not achieved.
The Company also entered into a support contract with FCA to provide design and
construction management for the facility, marketing services and administrative
support services.
On September 18, 1995, the Company acquired all the outstanding stock of ALT.
The purchase method of accounting for business combinations was used. The
operating results of ALT have been included in the Company's consolidated
results of operations from the date of acquisition. The acquisition, valued at
approximately $7,000, was made with the issuance of 8,811,137 shares of
restricted common stock of the Company valued at approximately $0.80 per share.
The fair value of assets acquired was approximately $7,700, of which
approximately $7,500 is attributable to patents developed or acquired by ALT.
36
FIBERCORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
(3) ACQUISITIONS AND STRATEGIC INVESTMENTS (CONTINUED):
In April 1995, the Board of Directors ratified actions by FiberCore Incorporated
to enter into a joint venture with John Royle & Sons Co. and Middle East
Specialized Cables Company ("MESC") for a period of 15 years to be known as
Middle East Fiber Cables Co. ("MEFC"). As part of the agreement the Company
issued to MESC 734,262 shares of common stock for $1,000, (approximately $1.36
per share). The agreement also provides that MESC will receive 312,061 shares of
common stock upon the completion and execution of a product supply contract
between the Company and MEFC. The agreement was completed and the shares issued
in 1997. The Company invested $500 of the $1,000 purchase price in MEFC as a
capital contribution to the joint venture, as required by the agreement, and in
the process acquired a 15% interest in MEFC. MEFC constructed it's manufacturing
facility in 1996 and 1997 and began operations in late 1997. The Company is a
co-guarantor with the other joint venture partners for certain credit facilities
provided by banks to MEFC. These credit facilities are also collateralized by
the assets of MEFC. At December 31, 1997 the Company was contingently liable for
these loans in the amount of $792.
On January 11, 1996, as part of a share purchase agreement with Techman
International Corporation ("Techman"), a related party, a joint venture was
established between the Company and Techman. The joint venture, FOI, is located
in Pakistan. The Company has a 30% ownership interest in FOI. The Company
acquired its interest in FOI by making a $500 capital contribution to the joint
venture and issuing 312,061 shares of Company common stock to Techman valued at
approximately $1.36 per share, ($425) for a long term agreement to supply fiber
and preforms to FOI. FOI was formed in 1996 and had no significant operations in
1996 or 1997. In December 1997, due to a delay in the construction of the
manufacturing plant, the supply agreement was canceled and the 312,061 shares
have been canceled. The Company may enter into a new supply agreement with FOI
when the plant is completed.
(4) RECEIVABLES
Activity in the allowance for doubtful accounts consisted of the following for
the years ended December 31:
1997 1996 1995
---- ---- ----
Balance at beginning of period.......... $ 36 $ 39 $ --
Additions charged to expense............ 1 28
Additions - Other....................... -- 11
Deductions.............................. 3(1) 4 --
---- ---- ----
Balance at end of period................ $ 33 $ 36 $ 39
==== ==== ====
(1) Includes the effect of foreign currency exchange rate changes.
37
FIBERCORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
(4) RECEIVABLES (CONTINUED):
Other receivables consist of the following at December 31:
1997 1996
---- ----
German government grants........... $423 $ --
Value added tax.................... 112 181
MEFC............................... -- 219
Other.............................. 29 18
---- ----
Total..................... $564 $418
==== ====
Notes receivable of $4,883 are due from the minority shareholders in FCA for the
balance of their capital contribution and are due in 1998.
(5) INVENTORIES
Inventories consist of the following at December 31:
1997 1996
---- ----
Raw materials............... $ 997 $ 841
Work-in-process............. 315 403
Finished goods.............. 1,745 677
------ ------
Total.............. $3,057 $1,921
====== ======
(6) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
ESTIMATED
USEFUL LIVES 1997 1996
------------ ---- ----
Office equipment................. 2-5 years $ 243 $ 156
Machinery and equipment.......... 2-12 years 5,619 5,068
Furniture and fixtures........... 5-7 years 21 18
Leasehold improvements........... 3-10 years 7 7
Construction in progress......... 3,267 955
------ ------
9,157 6,204
Less grant proceeds received..... (2,598) (960)
------ ------
Total................... $6,559 $5,244
====== ======
38
FIBERCORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
(6) PROPERTY AND EQUIPMENT (CONTINUED):
Depreciation on property and equipment charged to expense was $560 in 1997, $548
in 1996, and $523 in 1995. During 1997 the Company capitalized interest costs of
$178 on the expansion project at FiberCore Jena.
(7) ACCRUED EXPENSES
Accrued expenses consist of the following at December 31:
1997 1996
---- ----
Accrued interest......................... $ 116 $ 30
Accrued wages, benefits & taxes.......... 547 568
Accrued legal and audit.................. 80 170
Other.................................... 385 410
------ ------
Total........................... $1,128 $1,178
====== ======
39
FIBERCORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
(8) NOTES PAYABLE
Notes payable consist of the following at December 31:
1997 1996
---- ----
Convertible note payable to a director of ALT, interest at
the prime rate plus 1% (9.5%, at December 31, 1997)with
principal and interest due April 1, 1998, all principal and
accrued interest, if any, convertible into common stock of
the Company at approximately $1.36 per share. $218 $200
Note payable to an officer of the Company, interest at prime
plus 1%, due September 17, 1998. 50 ---
Note payable to Techman International Corporation with
interest at prime plus 1% due September 17, 1998. 150 ---
Note payable with interest at prime plus 1% due on
September 30, 1998. A director of the Company is a
principal of the lender. 25 ---
Notes payable with interest at prime plus 1% due on
September 30, 1998. 12 ---
Amount outstanding under a revolving line of credit from the
Berliner Bank with interest at 8.5%. 139 ---
---- ----
Total $594 $200
==== ====
In September 1997, the Company borrowed $150 from Techman International
Corporation. The note bears interest at prime plus 1% per year and matures on
September 17, 1998. In conjunction with the note, Techman was granted warrants
to purchase 69,132 common shares of the Company at an exercise price of $0.625
per share. Dr. M. Mahmud Awan, a former director of the Company is the President
and sole shareholder of Techman. In 1997, the Company incurred interest expense
of $4 on this note.
Also, during the year the Company borrowed $50 from the President of the
Company. The interest rate is prime plus 1% and the note matures on September
17, 1998. In conjunction with the note the lender was issued warrants to
purchase 62,500 common shares of the Company at an exercise price of $0.6875 per
share. Interest expense on this note was $1 in 1997.
In September and November, 1997 the Company also borrowed $75 under various
notes with interest at prime plus 1%. The notes mature on the earlier of the
receipt of proceeds from any new financing received by the Company or September
30, 1998. In conjunction with the notes the lenders were granted warrants to
purchase 55,000 common shares of the Company at an exercise price of $0.6875 per
share.
40
FIBERCORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
(8) NOTES PAYABLE (CONTINUED):
Mr. Steven Phillips, a director of the Company, is a principal of one of the
lenders. In December, 1997 the Company repaid $38 of these notes. Interest
expense on these notes was $2 in 1997.
During the year the Company's subsidiary, FiberCore Jena, drew down $139 under a
$556 revolving line of credit with the Berliner Bank. The note bears interest at
8.5% and the weighted average interest rate for 1997 was 8.5%.
All of the proceeds of the notes were used for working capital.
(9) LONG-TERM DEBT
Long-term debt consists of the following at December 31: 1997 1996
---- ----
Note payable to Berliner Bank, interest at 6.25%, due
September 30, 2006. $4,280 $ ---
Convertible note payable to AMP Incorporated ("AMP"),
interest at 3-month London Interbank Offered Rate plus
one percent (6.78% at December 31, 1997), due April 17,
2005. 2,000 2,000
Note payable to AMP, interest at prime plus one percent
(9.5% at December 31, 1997), due November 27, 2006. 3,000 3,000
Discount attributable to warrants issued in conjunction
with the $3,000 note above. (859) (955)
Note payable with interest at prime plus 1% (9.5% at
December 31, 1997) due March 6, 2000. 220 ---
Note payable to Techman International Corporation with
interest at prime plus 1% (9.5% at December 31, 1997),
due April 16, 2000. 250 ---
Notes payable to the spouses of officers of the
Company, with interest at prime plus one percent (9.5%
at December 31, 1997), due July 31, 1999. 500 500
------ -------
Total $9,391 $ 4,545
======= =======
During the year ended December 31, 1997, the Company drew down 7,700 German
Marks
41
FIBERCORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
(9) LONG-TERM DEBT (CONTINUED):
(approximately $4,280) under a loan agreement with the Berliner Bank. The
proceeds were used to fund the expansion of the Company's plant in Germany. The
loan bears interest at 6.25% annually and is due on September 30, 2006. The loan
is collateralized by a deposit with the bank of approximately $2,140.
In April 1995, FiberCore Incorporated issued to AMP, a floating rate,
collateralized, ten year debenture in the amount of $5,000, due April 17, 2005,
with interest, at an annualized rate adjusted quarterly, equal to the 3-month
London Interbank Offered Rate plus 1%, (6.78% at December 31, 1997). No interest
is due until the earlier of: AMP conversion of debt to stock, a public financing
by the Company and AMP elects to call the loan, or maturity. AMP has the option
to convert the outstanding loan plus accrued interest into common stock of the
Company at approximately $1.16 per share in years 1-5 or the per share price
provided for in the last third party private equity financing in years 6-10. On
November 27, 1996, AMP converted $3,000 of principal and $541 of accrued
interest relating to the original $5,000 ten year debenture, into shares of
common stock of the Company at the rate of approximately $1.16 per share
(3,058,833 shares) and entered into a multi-year supply agreement. The AMP notes
are collateralized by the Company's patents, patent applications, licenses,
rights and royalties resulting from such patents and the equipment of FCJ.
The remaining principal balance remained subject to the terms of the original
debenture agreement. The conversion agreement contains certain valuation
guarantees of the market value of the Company's common stock. Unless the closing
price of the Company's common shares equals or exceeds $1.7364 for 30
consecutive trading days during the first two (2) years following the closing at
a time when AMP was not restricted from selling such shares, then effective on
the second anniversary of the closing, an additional number of shares of Company
common stock shall be issued to AMP and an adjustment shall be made in the
conversion rate for the outstanding balance of the debenture such that the total
number of shares held and convertible by AMP would have a market value (based on
the average closing price of Company's shares during the last thirty (30)
trading days preceding the second anniversary of the closing) equal to $7,500;
provided, however, that not more than 6,478,810 Company shares will be issued or
issuable to AMP as a result of the conversion of the $5,000 debenture and this
guarantee.
In the alternative, the Company may satisfy this guarantee on the second
anniversary of the closing by offering or arranging for its designee to offer to
purchase from AMP the converted shares and the outstanding balance of the
debenture, including accrued interest, for $7,500 reduced prorata for any
intervening sales of shares by AMP. Such offer to purchase shall be for cash
only in immediately available funds.
As an additional part of this agreement, on November 27, 1996, AMP issued to the
Company $3,000 under a ten-year note, secured by equipment owned by the Company,
with interest at prime plus one percent, (9.5% at December 31, 1997). Terms of
the debenture state that interest shall be accrued, but not paid, for the first
five years of the loan and a portion of the proceeds are required to be used as
collateral for the German bank loan of approximately $4,280 for the expansion of
its FCJ facility. The principal will become due before the maturity date if the
major financing is repaid or the collateral is released by the German financial
institution. The loan agreement contains restrictive covenants including
financial
42
FIBERCORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
(9) LONG-TERM DEBT (CONTINUED):
ratio covenants. At December 31, 1997 the Company did not meet one of the
financial ratio covenants. AMP has agreed to waive this financial requirement
for the year ended December 31, 1997.
In conjunction with the $3,000 note above, AMP was issued five year warrants to
acquire 1,382,648 shares of the Company's stock at an exercise price of
approximately $1.45 per share. The Company has guaranteed the market value of
their stock. Unless the closing price of the Company's common shares equals or
exceeds $2.1697 for a period of thirty (30) consecutive trading days during the
first two (2) years following the closing at a time when AMP was not restricted
from selling such shares, then the exercise price of the warrants shall be
adjusted effective as of the second anniversary of the closing by multiplying
$1.4465 per share by a fraction the denominator of which is $2.1697 and the
numerator of which is the average closing price of the shares during the last
thirty (30) trading days preceding the second anniversary of the closing;
provided, however, that the adjusted exercise price shall not be less than
$0.7232 per share (50% of $1.4465). In the alternative, the Company or its
designee may offer to purchase the warrants on the second anniversary of the
closing for an amount equal to $1,000; provided, however, that AMP shall have
the right not to sell, in which case the guarantee will no longer be available.
Interest expense on the AMP notes was $418, $335, and $248, for the years ended
December 31, 1997, 1996 and 1995, respectively.
Also, during the year ended December 31, 1997, the Company borrowed $220 from a
shareholder under a note maturing in 2000. The annual interest rate on the note
is the prime rate plus 1% adjustable quarterly and payable quarterly. In
conjunction with the note, the lender was granted warrants to purchase 69,132
shares of common stock of the Company at an exercise price of $1.53 per share.
The warrants expire on March 7, 2002. The proceeds of the note were used for
working capital. Interest expense on this note was $14 in 1997.
In April 1997, the Company borrowed $250 from Techman under a note maturing in
2000. The annual interest rate on the note is the prime rate plus 1%, adjustable
quarterly and payable quarterly. In conjunction with the note, Techman was
granted warrants to purchase 115,220 common shares of the Company at an exercise
price of $0.78 per share. Dr. M. Mahmud Awan, a former director of the Company
is the sole shareholder of Techman. Interest expense on this note was $17 in
1997.
On July 31, 1996, the Company borrowed $500 under two loan agreements from the
spouses of Dr. Aslami and Mr. De Luca. The loans are in the amount of $250 each
and bear interest at the prime rate plus one percent (currently 9.5%), and are
due on July 31, 1999. In conjunction with
43
FIBERCORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
(9) LONG-TERM DEBT (CONTINUED):
the loans each lender received warrants to purchase 115,220 shares of Common
Stock at the rate of $1.81 per share. The warrants expire on July 31, 2001.
Interest expense on these notes was $48 and $17 in 1997 and 1996, respectively.
Scheduled principal maturities of long-term debt are as follows at December 31,
1997:
1999............................... $ 500
2000............................... 470
2005............................... 2,000
2006............................... 7,280
-------
Total............ $10,250
=======
(10) COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries have entered into various leases for its office
and production space. The Company's office lease has a monthly rental of $2 and
expires on September 30, 1998. The Company plans to renew this lease.
FCJ conducts its operations from premises under an operating lease with SICO
Quarzschmelze Jena GmbH ("SICO"). The lease has fixed monthly rental payments of
$30 through its expiration in June, 2000, and contains various renewal options.
Future minimum lease payments under noncancelable operating leases (with minimum
or remaining lease terms in excess of one year) are as follows:
FISCAL YEAR ENDING DECEMBER 31, AMOUNT
------------------------------- ------
1998..................................... $ 401
1999..................................... 381
2000..................................... 208
2001..................................... 31
------
Total........................... $1,021
======
Included in the statements of operations for the years ended December 31, 1997,
1996 and 1995 is rent expense of $411, $456 and $413, respectively.
Substantially all lease payments are to a related party, SICO.
44
FIBERCORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
(10) COMMITMENTS AND CONTINGENCIES (CONTINUED):
In January 1998, Corning, Incorporated ("Corning") filed an action against
the Company claiming that the Company infringed a Corning patent by marketing
and selling certain optical fiber products in the United States. In March 1998
the Company and Corning concluded a settlement agreement wherein the Company has
acknowledged the validity of Corning's patent and agreed, prior to the
expiration of the patent, not to make, market, and sell or offer to sell
infringing optical fiber or optical fiber preforms in the United States in
violation of Corning's patent except to certain customers. In turn, Corning has
agreed not to seek damages and will dismiss the action. The Company maintains
that it has not sold any significant amounts of fiber and preforms in the United
States in violation of Corning's patent which expires in July, 1999. Management
believes that the result of this action will not have a material adverse impact
on the Company.
The Company's FiberCore Jena subsidiary, SICO and SICO's president, Mr. Walter
Nadrag (who was previously the Managing Director of FiberCore Jena) are
defendants in a lawsuit in Germany brought against them by COIA GmbH ("COIA"), a
former customer, claiming damages of approximately $200 arising from FiberCore
Jena's alleged failure to comply with a sales contract. The case was dismissed
by the lower court and COIA appealed this decision. On appeal the court found
that although there was a contract, COIA was not entitled to damages. COIA may
seek fulfillment of the claimed contract. In addition to the above, the Company
is subject to various claims which arise in the ordinary course of business. The
Company believes such claims, individually or in the aggregate, will not have a
material adverse affect on the financial position or results of operations of
the Company.
The Company's ALT subsidiary is in a dispute with Norscan, a Canadian company,
with respect to Norscan selling FOCMS products, in competition with ALT products
and in violation of a non-competition agreement between ALT and Norscan.
Although no litigation has commenced as of the date of this report with respect
to this dispute, ALT would be the claimant in any lawsuit brought in connection
with this matter. Failure by ALT and Norscan to resolve this dispute could have
a material adverse affect on the future sales of ALT Products.
ALT is contingently liable for debt of a former subsidiary, Allied Controls,
Inc. ("Allied"), approximating $900, details of which are described below.
ALT and two of its key officers have issued the following guarantees and/or
security interests with respect to certain loans of its spun off former
subsidiary Allied. In a $250 financing of Allied from the State of Connecticut
acting through the Department of Economic Development ("DED"), dated as of
October 9, 1992, DED received a guarantee and security interest in certain
assets from ALT. In a $250 financing of Allied from the State of Connecticut,
acting through
45
FIBERCORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
(10) COMMITMENTS AND CONTINGENCIES (CONTINUED):
CDA, dated as of June 9, 1992, CDA received a guarantee from two key officers of
ALT.
Under a plan of reorganization, on May 14, 1991, the present Allied acquired the
assets and assumed certain liabilities of a corporation that had filed for
voluntary protection under Chapter 11 of the U.S. Bankruptcy Code. One of the
assumed liabilities was a $650 SBA loan dated May 29, 1989, (originally in the
amount of $1,000) from American National Bank, now Lafayette American National
Bank ("Lafayette"). As a condition of the loan assumption on March 21, 1991,
Lafayette obtained the guarantees of ALT and two key officers of ALT which
guarantees were in addition to the initial loan guarantees Lafayette already had
from other persons. Before commencing proceedings to enforce the guarantees
first against ALT and second against the two key officers, Lafayette must first
take all reasonable steps to realize upon the assets of Allied and the security
provided by the initial guarantors. In the event of a deficiency, Lafayette may
enforce its guarantee against ALT, provided that at all times it simultaneously
and diligently pursues actions to enforce its guarantees from the initial
individual loan guarantors.
Allied is current with its payments under this loan. In addition, Allied
management has been in discussions with several potential buyers of Allied
which, if successful, would eliminate the aforementioned guarantees that have
been provided by ALT.
The Company is a co-guarantor with the other joint venture partners for certain
credit facilities provided by banks to MEFC. These credit facilities are also
collateralized by the assets of MEFC. At December 31, 1997 the Company was
contingently liable for these loans in the amount of $792.
46
FIBERCORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
(11) STOCKHOLDERS' EQUITY
The following represents the stock option activity during the years ended
December 31, 1997, 1996, and 1995:
STOCK OPTIONS $.003 $0.68 $1.09 $1.16 $1.36 $1.43 $1.45 $1.50 $1.51 $1.58 $2.00
- ------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Balance,
Dec. 31, 1994 220,278 -- -- -- -- -- -- -- -- -- --
Granted in 1995 36,713 -- 33,042 -- -- -- -- -- -- -- --
Granted in 1995
in connection
with the ALT
acquisition -- -- -- -- -- 67,188 -- 41,993 178,679 -- --
-----------------------------------------------------------------------------------------------------------------
Balance,
Dec. 31, 1995 256,991 -- 33,042 -- -- 67,188 -- 41,993 178,679 -- --
Granted in 1996 18,357 64,248 -- 87,492 55,193 -- 148,709 -- -- -- 26,542
-----------------------------------------------------------------------------------------------------------------
Balance,
Dec. 31, 1996 275,348 64,248 33,042 87,492 55,193 67,188 148,709 41,993 178,679 -- 26,542
Granted in 1997 -- -- -- -- -- -- -- -- -- 709,500 --
Exercised in 1997 (201,921)(10,000) (33,042) -- (55,193) -- -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1997 73,427 54,248 0 87,492 0 67,188 148,709 41,993 178,679 709,500 26,542
====== ====== = ====== = ====== ======= ====== ======= ======= ======
Options
exercisable 36,713 54,248 0 87,492 0 67,188 148,709 41,993 178,679 430,500 26,542
====== ====== = ====== = ====== ======= ====== ======= ======= ======
Options vest at rates stated in each employees contract, principally at the
grant date or the anniversary date of the employee's date of hire. The options
have no expiration dates.
47
FIBERCORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
(11) STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the status of the Company's stock options and weighted average
prices are as follows:
1997 1996 1995
---- ---- ----
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- ----- ------- ----- ------- -----
Balance beginning of
year 978,434 $0.98 577,893 $0.81 220,278 $.003
Exercised (300,156) $0.40 --- $ --- --- $ ---
Granted 709,500 $1.58 400,541 $1.22 357,615 $1.30
-------- ------- -------
Balance
end of year 1,387,778 $1.41 978,434 $0.98 577,893 $0.81
========= ======= =======
Exercisable at end
of year 1,072,064 $1.42 905,008 $1.06 456,740 $1.02
========= ======= =======
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RANGE OF OPTIONS EXERCISE REMAINING OPTIONS EXERCISE
EXERCISE PRICE OUTSTANDING PRICE YEARS (1) EXERCISABLE PRICE
-------------- ----------- ----- --------- ----------- -----
$.003 73,427 $.003 -- 36,713 $.003
$0.68 - $1.16 141,740 $0.98 -- 141,740 $0.98
$1.43 - $2.00 1,172,611 $1.55 -- 893,611 $1.54
--------- ---- --------- -----
$.003 - $2.00 1,387,778 $1.41 -- 1,072,064 $1.42
========= ==== ========= =====
(1) Options granted and exercisable have no expiration date.
48
FIBERCORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
(11) STOCKHOLDERS' EQUITY (CONTINUED)
The Company applies APB Opinion 25 in accounting for its stock compensation
plans. Compensation cost charged to operations was $846 in 1996 related to
options granted at an exercise price less than the market price of the shares at
the dates of the grants. Had compensation cost been determined on the basis of
fair value pursuant to FASB Statement No. 123, net loss and loss per share would
have been as follows:
1997 1996 1995
---- ---- ----
Net loss
- --------
As reported $(3,078) $(4,133) $(4,009)
======= ======= =======
Pro forma $(3,174) $(4,295) $(4,535)
======= ======= =======
Basic and diluted loss per share
- --------------------------------
As reported $ (0.09) $ (0.13) $ (0.15)
======= ======= =======
Pro forma $ (0.09) $ (0.14) $ (0.17)
======= ======= =======
The weighted average fair value of options granted during 1997, 1996 and 1995
was $0.14, $2.52 and $1.48 per share, respectively.
The fair value of each option granted is estimated on the grant date using the
Black-Scholes model. The following assumptions were made in estimating fair
value:
Stock
Assumptions Plan
----------- ----
Dividend yield --
Risk-free interest rate 5.5%
Expected life 2 years
Expected volatility 20% in 1997 and 40% in 1996 and 1995
49
FIBERCORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
(11) STOCKHOLDERS' EQUITY (CONTINUED)
The following warrants to purchase common stock have been issued during the
years ended December 31, 1997, 1996, and 1995, at the exercise prices indicated.
WARRANTS $0.63 $0.69 $0.78 $0.82 $0.95 $1.31 $1.43 $1.45 $1.53 $1.63 $1.81
- -------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Balance,
Dec. 31, 1994 479,565
Issued in 1995 83,985 118,858 5,511 550,696
- -----------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1995 83,985 598,423 5,511 550,696
Issued in 1996 1,382,648 697,546 230,440
- -----------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1996 83,985 598,423 5,511 1,382,648 1,248,242 230,440
Issued in 1997 69,132 117,500 115,220 640,445 101,394
Expired in 1997 (550,696)
Exercised in 1997 (73,426)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1997 69,132 117,500 115,220 640,445 83,985 524,997 5,511 1,382,648 101,394 697,546 230,440
====== ======= ======= ======= ====== ======= ===== ========= ======= ======= =======
The weighted average fair value of warrants granted during 1997, 1996 and 1995
was $0.18, $1.05 and $1.63 based on total warrants of 1,043,691, 2,310,634 and
759,050 granted in 1997, 1996 and 1995, respectively. The warrants are
exercisable from the date of the grant and expire at various dates from January,
1998 to September 2002.
(12) INCOME TAXES
The significant components of the net deferred tax asset as of December 31, 1997
and 1996 were as follows:
1997 1996
---- ----
Net operating loss carry forwards $ 3,687 $ 2,687
Less valuation allowance (3,687) (2,687)
------- -------
Net deferred tax asset $ 0 $ 0
======= =======
The Company has incurred losses in 1995 through 1997, and, accordingly there is
no income tax provision.
50
FIBERCORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
(12) INCOME TAXES (CONTINUED)
The liability method of accounting for deferred income taxes requires a
valuation allowance against deferred tax assets if, based on the weight of
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized. Accordingly, a full valuation allowance has
been recorded due to the historical losses of the Company.
The Company has net operating loss carry forwards available of approximately
$6,802, at December 31, 1997 for federal and state tax purposes. The majority of
the net operating loss carry forward expires in the years 2009 through 2012.
FCJ has net operating loss carry forwards at December 31, 1997 of approximately
$2,147 for corporation tax and trade income tax purposes available to offset
future taxable income. Under German tax law the losses can be carried forward
indefinitely.
Because future profitability is uncertain, such benefits have been fully
reserved.
In addition, ALT has pre-acquisition net operating loss carry forwards available
of approximately $4,278, at December 31, 1997 for federal and state tax
purposes. The loss carry forwards expire between the years 2001 through 2010.
(13) MAJOR CUSTOMERS AND SUPPLIERS
The major customers listed below accounted for approximately the following
amounts and related percentages of the trade accounts receivable balance of the
Company at December 31:
CUSTOMER 1997 1996
-------- ---- ----
AMOUNT % AMOUNT %
------ - ------ -
A $ -- -- $ 167 23
B 87 9 211 30
C 37 4 109 15
E 381 39 --- ---
51
FIBERCORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
(13) MAJOR CUSTOMERS AND SUPPLIERS (CONTINUED)
The approximate net product sales by the Company to its major customers and the
related percentages are as follows:
CUSTOMER 1997 1996 1995
-------- ---- ---- ----
AMOUNT % AMOUNT % AMOUNT %
------ - ------ - ------ -
A $2,990 42 $4,524 56 $1,855 60
B 1,238 17 1,217 15 --- --
D --- -- --- -- 319 10
The Company purchases raw materials from various suppliers and in some cases
there are a limited number of suppliers for certain materials. In 1997, 1996 and
1995 one supplier accounted for 50%, 46% and 90%, respectively, of the Company's
requirement of one particular item. Although the Company maintains a good
relationship with this supplier the loss of this supplier could have a material
impact on the Company's ability to manufacture its required volume of product.
The Company has identified alternative sources for this material and continues
to seek alternative sources of supply.
(14) RELATED PARTY TRANSACTIONS
On August 19, 1995 and amended in January 1996, a capital lease agreement
between SICO and FCJ was revised. It was agreed that SICO would keep 2,221,141
shares, originally held as collateral, of the Company as payment for an
obligation under a capital lease. The outstanding lease obligation, which
amounted to $499 on August 19, 1995, was canceled. As a result, the net book
value of the assets was reduced by $499. The managing director of FCJ was the
controlling shareholder of SICO. In November 1995, this officer resigned from
his position with FCJ.
52
FIBERCORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
(14) RELATED PARTY TRANSACTIONS (CONTINUED)
Transactions with SICO during the years ended December 31, 1997, 1996 and 1995
consist of the following:
1997 1996 1995
---- ---- ----
Rent of premises................................... $331 $356 $315
Purchase of services and utilities................. 286 611 874
Purchase of materials.............................. --- 351
Interest........................................... --- --- 26
Other expenses..................................... 17 --- 22
Purchase price reduction of property and
equipment under capital lease.................... --- --- 499
Sales of fibers.................................... 49 176 131
In January 1996, the Company reached an agreement with Techman, whereby Techman
purchased 734,260 shares for $1 million ($1.36 per share). Techman is a related
party as the president and sole shareholder of Techman is a former director of
the Company. Upon acceptance of the offer and delivery of the 734,260 shares,
the Company delivered to Techman warrants, granting Techman the right to
purchase 550,696 shares of the Company at $1.63 per share exercisable in whole
or in part within a 2 year period. The warrants expired in January, 1998.
The Company maintains a consulting agreement with Techman under which Techman
provides administration, marketing, technical and personnel advisory services to
the Company. The agreement is on a month to month basis at a monthly fee of $4
in 1997 and $3 in 1996 and 1995 and is terminable at any time by the Company.
For the years ended December 31, 1997, 1996 and 1995, the Company incurred costs
of $54, $36 and $21, respectively, for such services.
The Company has a consulting agreement with Mr. Steven Phillips, a director,
wherein Mr. Phillips provides services as a senior financial advisor. For the
years ended December 31, 1997, 1996 and 1995, the Company incurred costs of $46,
$65, and $26, respectively for such services.
53
FIBERCORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
(15) FOREIGN OPERATIONS
The Company has operations in three principal geographic areas: the United
States (Company and ALT), Germany (FCJ), and Malaysia (FCA). Following is a
summary of information by area for the years ended December 31, 1997, 1996 and
1995:
1997 1996 1995
---- ---- ----
Net sales to customers:
United States..................................... $ 231 $ 196 $ 305
Germany........................................... 6,847 7,900 2,789
------- -------- --------
Net sales as reported in the accompanying
consolidated statements of operations............. $ 7,078 $ 8,096 $ 3,094
======= ======== ========
Income (loss) from operations:
United States .................................... (2,515) $ (3,893) $ (1,757)
Germany........................................... 309 45 (1,833)
------- -------- --------
(2,206) (3,848) (3,590)
Interest income..................................... 26 6 148
Interest expense.................................... (664) (393) (516)
Other income (expense).............................. (234) 102 (51)
------- -------- --------
Net loss as reported in the accompanying
consolidated statements of operations............. $(3,078) $ (4,133) $ (4,009)
======= ======== ========
Identifiable assets:
United States..................................... $10,508 $ 8,441
Germany........................................... 9,384 9,201
Malaysia.......................................... 6,215 ---
------- --------
Total assets as reported in the accompanying
consolidated balance sheets ................... $26,107 $17,642
======= =======
Inter-company sales are eliminated in consolidation and are excluded from net
sales reported in the accompanying consolidated statements of operations.
Identifiable assets are those that are identifiable with operations in each
geographic area. FCA (Malaysia) had no significant operations in 1997.
54
FIBERCORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
(16) ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence as other
financial statements. Also in June 1997, the FASB issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information", which
changes the way public companies report information about segments. These
statements are effective for 1998. Management is currently evaluating the
effects of these statements on the Company's financial statements, however,
these statements will only effect disclosure and presentation in the financial
statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
55
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The following tables set forth certain information with respect to each
person who was an executive officer or director of the Company as of December
31, 1997.
NAME AGE POSITION
Dr. Mohd A. Aslami 51 Chairman of the Board of Directors, Chief
Executive Officer, President and Director
Charles De Luca 60 Executive Vice President, Secretary and
Director of the Company and General Manager
of the Company's ALT subsidiary
Michael J. Beecher 53 Chief Financial Officer and Treasurer
Hans F.W. Moeller 68 Managing Director of FiberCore Glasfaser Jena
GmbH
Steven Phillips 52 Director
Dr. Aslami is a co-founder, Chairman of the Board of Directors and Chief
Executive Officer of the Company. Dr. Aslami has served as Chairman and Chief
Executive Officer of FiberCore Jena, the Company's wholly-owned subsidiary in
Germany, since 1994. Dr. Aslami also co-founded and became President, Chief
Executive Officer and a director of ALT in 1986. Dr. Aslami received a Ph.D. in
chemical engineering from the University of Cincinnati (1974).
Mr. De Luca is a co-founder, Executive Vice President, Secretary and a
director of the Company. Mr. De Luca also co-founded and became an Executive
Vice President and director of ALT in 1986. Mr. De Luca received his MBA in
marketing and business management from St. Johns University in 1974.
Mr. Beecher became Chief Financial Officer of the Company in April 1996.
Mr. Beecher was the Vice President/Treasurer and Chief Financial Officer at the
University of Bridgeport from 1989 through 1995. Mr. Beecher is a Certified
Public Accountant and is a member of the American Institute of Certified Public
Accountants.
Mr. Moeller became Managing Director of FiberCore Jena in the fourth
quarter of 1995 on a part time basis. He served as a director of FiberCore
Incorporated from 1994 through March 1996. As part of a reorganization of the
Company, he resigned his position as a director
56
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED):
and agreed to serve as a director of the Company's newly formed subsidiary
InfoGlass. From 1993 to 1994, he served as Vice Chairman of Schott Corporation
("Schott"), a United States subsidiary of Schott A.G., a corporation
specializing in the production of, among other things, optical glass. From 1989
to 1993, he served as President of Schott. Mr. Moeller was a member of the Board
of Directors of Schott from 1989 to 1994.
Mr. Phillips became a director of the Company in May 1995 and became a
director of ALT in 1989. Since co-founding the Winstar Government Securities
Company L. P., a registered U.S. Government securities dealer which specializes
in odd-lot securities transactions, Mr. Phillips has served as Chief Financial
Officer, Secretary, and a Director. Since August 1987, Mr. Phillips has served
as a director, Secretary and Chief Financial Officer of James Money Management,
Inc., a private investment company. Since June 1987, Mr. Phillips has served as
director and President of One Financial Group Incorporated, a financial
consulting company of which he is the majority stockholder.
ITEM 11. EXECUTIVE COMPENSATION
Following is a summary of the compensation earned and/or paid to the Company's
Chief Executive Officer and its most highly compensated executive officers for
the last three years.
SUMMARY COMPENSATION TABLE
-----------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION AWARDS
- -----------------------------------------------------------------------------------------------------------------------------
Name and Principal Position Fiscal Salary Bonus Other Restricted Securities
Year $ $ Annual Stock Underlying
Compensation Award(s) Options/
$ SARs(#)
- ----------------------------------------- --------- ----------- --------- ----------------- --------------- --------------
Dr. Mohd Aslami 1997 146,500 -- -- 359,752
Chairman, Chief Executive 1996 146,500 -- -- 60,913
Officer & President 1995 146,500 -- -- --
- ----------------------------------------- --------- ----------- --------- ----------------- --------------- --------------
Charles De Luca (1) 1997 98,398 -- -- 189,502
Executive Vice President 1996 98,398 -- -- 46,050
& Secretary 1995 28,699 -- -- --
- ----------------------------------------- --------- ----------- --------- ----------------- --------------- --------------
Michael J. Beecher (2) 1997 85,000 -- -- 120,000
Chief Financial Officer 1996 53,708 -- -- 64,248
& Treasurer 1995 -- -- -- --
- ----------------------------------------- --------- ----------- --------- ----------------- --------------- --------------
Hans Moeller (3) 1997 120,000 -- -- 300,000
Managing Director, 1996 98,596 -- -- 55,193
FiberCore Glasfaser Jena GmbH 1995 7,227 -- -- 33,042
- ----------------------------------------- --------- ----------- --------- ----------------- --------------- --------------
(1) From September 18, 1995 with the acquisition of ALT.
(2) Started employment on April 15, 1996.
(3) Started employment on October 1, 1995.
57
EXECUTIVE COMPENSATION (CONTINUED):
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- -------------------------------------
The following table lists the options granted to the executive officers during
the year ended December 31, 1997.
----------------------------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS
----------------------------------------------------------------------------------------------------------------
Name Number of % of Total Exercise Expiration Potential Potential
---- Securities Options/ or base Date realized values realized
Underlying SARs Granted price ---- at assumed values at
Options/ to Employees ($/Share) annual rates of assumed
SARs in Fiscal --------- stock price annual rates
Granted Year apprec. for of stock
(#) ---- option term price
--- ----------- apprec. for
5%($) option term
10% ($)
----------------------------------------------------------------------------------------------------------------
Dr. Mohd Aslami (b) 359,752 29% $0.82 2002 $ 6,191 $ 84,924
--------------------- -------------- -------------- ------------ ------------- ------------------ --------------
Charles De Luca (b) 189,502 15% $0.82 2002 $ 3,262 $ 44,735
--------------------- -------------- -------------- ------------ ------------- ------------------ --------------
Michael Beecher (a, 120,000 10% $1.58 --- $ 21,752 $ 77,100
c)
--------------------- -------------- -------------- ------------ ------------- ------------------ --------------
Hans Moeller 300,000 24% $1.58 --- $ 54,381 $192,751
(a, c)
--------------------- -------------- -------------- ------------ ------------- ------------------ --------------
Table
- -----
a. The term of options used in the potential realized value calculation is
five years.
b. The market value per share at the date of grant was $0.66.
c. The market value per share at the date of grant was $1.38.
58
EXECUTIVE COMPENSATION (CONTINUED):
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTIONS/SAR VALUES
The following table lists the options/SARs exercised during the year and the
options/SARs held by the executive officers that were unexercised at December
31, 1997.
- ------------------------- ------------------- -------------- -------------------------------- --------------------------------
Value of unexercised
Number of Securities in-the-money
underlying unexercised options/SARs at
Shares acquired Value options/SARs at FY-end (#) FY-end ($)
Name on exercise (#) realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
---- --------------- ------------ ------------------------- -------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Dr. Mohd Aslami --- --- 420,665/0 (Note 1)
- -----------------------------------------------------------------------------------------------------------------------------
Charles De Luca --- --- 235,552/0 (Note 1)
- ------------------------------------------------------------------------------------------------------------------------------
Michael J. Beecher 10,000 $34,440 94,248/80,000 (Note 1)
- ------------------------------------------------------------------------------------------------------------------------------
Hans Moeller 88,235 $(6,299) 200,000/100,000 (Note 1)
- ------------------------------------------------------------------------------------------------------------------------------
Note 1 - At December 31, 1997 the fair value was less than the exercise price.
COMPENSATION OF DIRECTORS
- -------------------------
The Company does not maintain any standard compensation arrangements or
plans for directors.
The Company, however, maintains a consulting agreement with Techman under
which Techman provides administration, marketing, technical and personnel
advisory services to the Company. Dr. M. Mahmud Awan, a former director of the
Company, is the President and sole shareholder of Techman. The agreement is on a
month to month basis at a monthly fee of $4,500 and is terminable at any time by
the Company. For the year ended December 31, 1997, Techman was paid $54,000 for
such services.
The Company has a consulting agreement with Mr. Phillips, a director of the
Company, wherein Mr. Phillips provides services as a senior financial advisor.
Mr. Phillips receives a retainer of $60,000 per year payable in monthly
installments of $5,000, based on an hourly rate of $185 per hour. The retainer
is adjusted quarterly based on actual hours of service. The agreement is for one
year from January 1, 1997 and is automatically renewed for one year periods
unless terminated by written notice 90 days prior to the expiration of each
renewal period. For the year ended December 31, 1997, Mr. Phillips' fee was
$45,665.
59
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SECURITY HOLDERS
The following table sets forth certain information regarding the ownership
of the Common Stock as of March 12, 1998, with respect to (i) each person known
by the Company to own beneficially more than 5% of the outstanding shares of
Common Stock, (ii) each executive officer named in the Executive Compensation
Table, (iii) each director of the Company and (iv) all the directors and
executive officers of the Company as a group. Unless otherwise indicated, each
of the shareholders has sole voting and investment power with respect to the
shares beneficially owned.
NAME
AND SHARES %
ADDRESS(1) OWNED OWNED
---------- ----- -----
Mohd Aslami................................ 7,789,948 (2), (9) 17.6
Charles De Luca............................ 4,765,778 (3), (9) 10.8
Steven Phillips............................ 964,090 (4) 2.2
Hans F.W. Moeller.......................... 388,235 (5) 0.9
Michael J. Beecher......................... 174,248 (6) 0.4
AMP Incorporated........................... 6,169,154 (7),(9) 14.0
Techman International Corporation.......... 2,469,308 (8), (9) 5.6
All directors and executive officers
as a group (5 persons)................... 14,082,299 31.9%
- ----------------------------
(1) The addresses of the persons and entities named in this table are as
follows: Messrs. Aslami, De Luca, Phillips, Moeller, and Beecher, c/o
FiberCore, Inc., P. O. Box 180, 253 Worcester Road, Charlton, MA 01507; M.
Mahmud Awan, 240 Sturbridge Road, Charlton, MA 01507; AMP Incorporated, 470
Friendship Road, Harrisburg, PA 17105.
(2) Includes 117,482 shares and Warrants to purchase 115,220 shares held by Dr.
Aslami's wife, 723,473 shares held by Dr. Aslami's children, 1,587,569,
104,296 and 608,914 shares held respectively by the Ariana Trust,
Children's Trust, and the Kabul Foundation, trusts of which Dr. Aslami's
wife and/or Dr. Aslami are trustees and of which Dr. Aslami's children are
beneficiaries, and 284,860 shares held by the Raja Foundation, a trust of
which Dr. Aslami's wife and Mr. De Luca's wife are trustees and of which
various organizations and family members are beneficiaries. Dr. Aslami
disclaims beneficial ownership of all such shares. Also includes 483,165
currently exercisable options and warrants to purchase shares of the
Company.
60
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (CONTINUED):
(3) Includes 1,395,097 shares and Warrants to purchase 115,220 shares held by
Elizabeth De Luca, Mr. De Luca's wife, 357,715 shares held by Mr. De Luca's
children, 608,914 shares held by the Dawn Foundation, a trust of which Mrs.
De Luca is trustee and of which Mr. De Luca's children are beneficiaries,
and 174,053 shares held by the Raja Foundation, a trust of which Dr.
Aslami's wife and Mr. De Luca's wife are trustees and of which various
organizations and family members are beneficiaries. Mr. De Luca disclaims
beneficial ownership of all shares. Also includes 235,552 currently
exercisable options.
(4) Includes 132,937 currently exercisable options and warrants issued to One
Financial Group, Incorporated and 27,500 warrants issued to Income Partners
LP. Mr. Phillips is a principal of these Companies
(5) Includes 300,000 options.
(6) Includes 174,248 options.
(7) Includes shares into which the AMP Note is convertible at $1.16 per share
and Warrants to purchase 1,382,648 shares.
(8) The shares are owned by Techman International Corporation and includes
shares issuable to Techman or its designee upon exercise of Warrants
(550,696), and shares (1,000,000) to be issued ratably as commissions on
Company sales up to $200 million. Dr. M. Mahmud Awan is the president and
sole shareholder of Techman, and a former director of the Company.
(9) Under the AMP loan, the Company, Mohd A. Aslami, Charles De Luca, M. Mahmud
Awan and AMP entered into a Voting Agreement pursuant to which they agreed
to vote together to elect a slate of directors to the Board of Directors of
the Company. Such slate of directors initially consists of Mohd A. Aslami,
Charles De Luca, Hans Moeller, one nominee of AMP and three outside
directors.
61
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DEALINGS WITH SICO
Since June 1994, FiberCore Jena has leased its office and manufacturing
facility in Germany from SICO Quarzschmelze Jena GmbH ("SICO"). The lease
payment is fixed for the initial term of the lease (which expires on June 30,
2000) at DM 50,205 per month (approximately $27,909). In 1995, SICO accounted
for approximately 10% and in 1996 and 1997 less than 1%, respectively, of
Company total sales.
DEALINGS WITH TECHMAN
Since 1995, the Company has maintained a working relationship with Techman,
a technology management company headquartered in Massachusetts since 1982. Dr.
M. Mahmud Awan, the President and sole shareholder of Techman, is a former
director of the Company. Techman specializes in sales of fiber optic products
and telecommunication systems.
On November 1, 1995, the Company entered into an International Distributor
Agreement with Techman to market the Company's products worldwide. Techman
agreed to receive customary sales commissions in the form of Warrants
exercisable into 1,000,000 shares of Common Stock to be issued to Techman for
sales of the Company's products up to $200,000,000. Such shares will be issued
upon receipt of the proceeds of any such sales.
Pursuant to the Techman Share Purchase Agreement dated January 11, 1996,
Techman purchased 734,260 shares of Common Stock for $1,000,000 (approximately
$1.36 per share) and was granted Warrants exercisable into 550,696 shares of
Common Stock at $1.63 per share. Additionally, the Company issued an additional
312,061 shares of Common Stock to Techman on (i) the formation of FOI (a joint
venture), in which the Company holds a 30% ownership interest, and (ii) the
completion of a supply agreement between FOI and the Company. Under the
agreement, $500,000 of the $1,000,000 share purchase price was invested by
Techman for the Company in FOI as an additional capital contribution. Due to a
delay in the construction of the manufacturing plant, in 1997 the supply
agreement was canceled and the 312,061 shares were canceled.
FOI, a company incorporated in Islamabad under the laws of Pakistan, was
formed to manufacture optical fiber products in Pakistan, and is in the process
of raising capital to fund the construction of a manufacturing facility. Since
its inception in June 1995, FOI has been funded primarily by Techman. FOI has
contracted with First Capital Securities Corporation Limited to arrange for
listing of FOI on the Karachi Stock Exchange.
62
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED):
In September 1997, the Company borrowed $150,000 from Techman International
Corporation. The note bears interest at prime plus 1% per year and matures on
September 17, 1998. In conjunction with the note, Techman was granted warrants
to purchase 69,132 common shares of the Company at an exercise price of $0.625
per share.
In April 1997, the Company borrowed $250,000 from Techman under a note
maturing in 2000. The annual interest rate on the note is the prime rate plus
1%, adjustable quarterly and payable quarterly. In conjunction with the note,
Techman was granted warrants to purchase 115,220 common shares of the Company at
an exercise price of $0.78 per share.
The Company maintains a consulting agreement with Techman under which
Techman provides administration, marketing, technical and personnel advisory
services to the Company. The agreement is on a month to month basis at a current
monthly fee of $4,500 and is terminable at any time by the Company. For the
years ended December 31, 1997, 1996 and 1995, Techman was paid $54,000, $36,000
and $21,000, respectively, for such services.
DEALINGS WITH AMP
In April 1995, the Company issued the AMP Note, which is a ten year
$5,000,000 convertible note, to AMP, Incorporated, a company listed on the New
York Stock Exchange and a manufacturer of electrical and optical connection
devices, systems and other equipment including fiber optic cable. Principal of
the AMP Note plus accrued interest at a rate of LIBOR plus one percent may be
converted into Common Stock through April 17, 2005. Until April 17, 2000, the
conversion price is $1.16 per share; thereafter the conversion price is equal to
the price per share paid by a third party investor in the private sale of Common
Stock immediately prior to such conversion. The AMP Note is subject to
prepayment on demand in the event the Company is the issuer of securities to be
sold by the Company under an effective registration statement.
In July 1996, AMP entered into a five year supply contract (renewable at
AMP's option for an additional five year period) with the Company whereby the
Company will supply AMP with at least 50% of AMP's future glass optical fiber
needs. On November 27, 1996 the Company obtained an additional $3,000,000 loan
at an interest rate of prime plus 1%, adjustable on the first business day of
each calendar quarter, from AMP to fund the expansion of the Jena Facility, in
exchange for a ten year note and $2,000,000 of common stock purchase warrants
exercisable for up to 1,382,648 shares of Common Stock at $1.45 and expiring on
November 27, 2001. AMP also converted $3,000,000 of principal plus $540,985 of
accrued interest on the AMP Note into 3,058,833 shares of Common Stock. In
connection with the new loan from AMP, the Company agreed to issue AMP
additional shares of Common Stock in the event the Company's share price does
not exceed $2.17 for 30 consecutive trading days by November 27, 1998. The
issuance of additional shares under the new AMP loan would have a dilutive
effect on the Company's other shareholders and could adversely affect the market
price of the Common Stock.
63
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED):
LOANS
On July 31, 1996, the Company borrowed $500,000 under two loan agreements
from the spouses of Dr. Aslami and Mr. De Luca. The loans are in the amount of
$250,000 each and bear interest at the prime rate plus one percent (currently
9.5%), and are due on July 31, 1999. In conjunction with the loans each lender
received warrants to purchase 115,220 shares of Common Stock at the rate of
$1.81 per share. The warrants expire on July 31, 2001.
Also, during the year the Company borrowed $50,000 from Dr. Aslami. The
interest rate is prime plus 1% and the note matures on September 17, 1998. In
conjunction with the note the lender was issued warrants to purchase 62,500
common shares of the Company at an exercise price of $0.6875 per share.
In September and November, 1997 the Company also borrowed $37,500 under a
note with interest at prime plus 1%. The note matures on the earlier of the
receipt of proceeds from any new financing received by the Company or September
30, 1998. In conjunction with the notes the lender was granted warrants to
purchase 27,500 common shares of the Company at an exercise price of $0.6875 per
share. Mr. Steve Phillips, a director of the Company, is a principal of the
lender. In December, 1997 the Company repaid $12,500 of these notes.
CONSULTING
The Company has a consulting agreement with Mr. Phillips, a director of the
Company, wherein Mr. Phillips provides services as a senior financial advisor.
Mr. Phillips receives a retainer of $60,000 per year payable in monthly
installments of $5,000, based on an hourly rate of $185 per hour. The retainer
is adjusted quarterly based on actual hours of service. The agreement is for one
year from January 1, 1997 and is automatically renewed for one year periods
unless terminated by written notice 90 days prior to the expiration of each
renewal period. For the year ended December 31, 1997, Mr. Phillips' fee was
$45,665.
64
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
--------------------
See Item 8 of this Report
2. FINANCIAL STATEMENT SCHEDULES
The required disclosures are included in the footnotes to the
Financial Statements
3. EXHIBITS
(+ denotes incorporated herein by reference to the Annual Report
on Form 10-K for the year ended December 31, 1996, filed with the
Commission on March 26, 1997)
(x denotes filed herewith)
EXHIBIT
NUMBER
+2.1 Agreement and Plan of Reorganization dated as of July 18, 1995
between Venturecap, Inc. and FiberCore Incorporated.
+2.2 Agreement of Merger dated as of July 18, 1995 between Venturecap,
Inc. and FiberCore Incorporated.
+2.3 Agreement and Plan of Reorganization dated as of September 18,
1995 between the FiberCore, Inc. Alt Merger Co., and Automated
Light Technologies, Inc. ("ALT").
+2.4 Agreement dated February 13, 1987 between Norscan Instruments
Ltd. and ALT.
+3.1 Certificate of Incorporation of FiberCore, Inc.
+3.2 By-Laws of FiberCore, Inc.
+10.1 Loan Agreement dated August 2, 1990 between ALT and Connecticut
Innovations, Inc. ("CII").
+10.2 Promissory Note issued by ALT to CII.
+10.3 Security Agreement dated as of August 1990 between ALT and CII.
+10.4 Subordination executed August 2, 1990 between CII, Mohd Aslami,
and Charles De Luca.
+10.5 Collateral Assignment and Security Agreement dated August 2, 1990
between ALT and CII.
+10.6 Loan Agreement dated December 5, 1990 between ALT and the
Connecticut Development Authority
("CDA").
+10.7 Promissory Note dated December 5, 1990 issued by ALT to CDA.
+10.8 Guaranty dated December 5, 1990 issued to CDA by Mohd Aslami and
Charles De Luca.
+10.9 Collateral Assignment and Security Agreement dated December 5,
1990 between ALT and CDA.
+10.10 Security Agreement dated as of December 5, 1990 between ALT and
CDA.
+10.11 Subordination dated November 5, 1990 between CDA, Mohd Aslami and
Charles De Luca.
+10.12 Form of Warrant issued by ALT to CDA.
+10.13 Form of Warrant issued by Agreement between ALT to Connecticut
Innovations Incorporated.
+10.14 Form of Warrant issued by ALT.
+10.15 Form of FiberCore Incorporated Warrant.
+10.16 Assignment dated November 8, 1993 by Gregory Perry to FiberCore
Incorporated of U.S. Patent No. 4,596,589.
+10.17 Lease executed January 31, 1994 between Cobra Realty Trust,
FiberCore Incorporated, Mohd Aslami and Charles De Luca.
65
+10.18 Agreement dated June 7, 1994 between Sico Quarzschmelze Jena,
GmbH ("Sico")and FiberCore Inc., to lease building and equipment
and to manufacture optical fiber and optical fiber preform.
+10.19 Agreement dated August 19, 1995 between Sico and FiberCore
Glasfaser Jena GmbH, with supplemental agreement by Walter
Nadrag.
+10.20 Cooperation Agreement dated December 19, 1995 between Sico and
FiberCore, Inc.
+10.21 Lease dated August 19, 1995 between Sico and FiberCore Glasfaser
Jena GmbH.
+10.22 Agreement dated January 25, 1996 between FiberCore, Inc.,
FiberCore Glasfaser, Jena and Sico.
+10.23 Share Purchase Agreement dated January 11, 1996 between
FiberCore, Inc. and Techman International, Corp. ("Techman").
+10.24 Escrow Agreement dated as of April 13, 1995 between FiberCore
Incorporated, Middle East Specialized Cables Co. ("MESC") and
Shawmut Bank, N.A.
+10.25 Escrow Amending Agreement dated September 15, 1995 between
FiberCore, Inc., Middle East Specialized Cables Co. ("MESC") and
Shawmut Bank, N.A.
+10.26 Share Purchase Agreement dated as of April 13, 1995 between
FiberCore Incorporated and MESC.
+10.27 Share Purchase Amending Agreement dated September 15, 1995
between the Registrant and MESC.
+10.28 onvertible Debenture Purchase Agreement effective as of April
17, 1995 between AMP Incorporated and FiberCore Incorporated,
with form of Convertible Debenture Attached, as Exhibit A.
+10.29 Cooperation Agreement dated June 17, 1994 between John Royle &
Sons and FiberCore Incorporated, with Amendment No. 1 executed on
the same date.
+10.30 Warrant issued by FiberCore, Inc. to Techman to purchase up to
550,696 shares of Common Stock.
+10.31 Agreement dated July 1, 1994 between FiberCore Incorporated and
FiberCore Glasfaser Jena GmbH.
+10.32 Joint Venture Agreement dated January 31, 1996 between Middle
East Optic Fiber Company ("MEOFC"), Royle Mid East Ltd. and
FiberCore Mid East Ltd.
+10.33 Convertible Note Purchase Agreement and Convertible Promissory
Note between FiberCore, Inc. and Hedayat Amin-Arsala in the
amount of $200,000, each dated March 15, 1996.
+10.34 Joint Venture Agreement dated May 21, 1995 between the Company,
Techman and the other parties named therein.
+10.35 International Distributor Agreement between Techman and the
Company, dated November 1, 1995.
+10.36 Term Loan Agreement by and between FiberCore, Inc. as borrower
and AMP Incorporated a lender dated November 27, 1996.
+10.37 Term Promissory Note in the original principal amount of $3
million dated November 27, 1996.
+10.38 Amendment No. 1 to Convertible Debenture Purchase Agreement
between FiberCore, Inc., as borrower and AMP Incorporated as
Lender dated November 27, 1996.
+10.39 Subsidiary Guarantee between FiberCore Glasfaser Jena GmbH and
AMP Incorporated dated November 27, 1996.
+10.40 Security Interest Agreement between FiberCore Glasfaser Jena GmbH
and AMP Incorporated dated November 27, 1996.
+10.41 Patent Security Agreement between FiberCore, Inc. and AMP
Incorporated dated November 27, 1996.
+10.42 Warrant issued to AMP Incorporated to purchase shares of Common
Stock of FiberCore, Inc. November 27, 1996.
+10.43 Amended and Restated Convertible Debenture dated April 17, 1995.
+10.44 Voting Agreement between FiberCore, Inc., AMP Incorporated, Mohd
Aslami, Charles De Luca and Dr. M. Mahmud Awan dated November 27,
1996.
+10.46 Supply contract between AMP Incorporated and FiberCore, Inc.
dated July 29, 1996.
+10.47 Loan Agreement between FiberCore, Inc. and Berliner Bank AG for
the amount of DM 7,700,000 dated September 6, 1996.
+10.48 Grants Agreements between FiberCore Glasfaser Jena GmbH and the
Ministry of Economics and
66
Infrastructure in the amount of DM 2,300,000 dated June 12, 1996
and December 30, 1995.
+10.49 Intercompany Loan Agreement between FiberCore, Inc. and FiberCore
Glasfaser Jena GmbH in connection with the loan from Berliner
Bank AG dated July 10, 1996.
+10.50 Form of Warrant issued by FiberCore, Inc. to Techman to exercise
up to 1,000,000 shares of Common Stock pursuant to the
International Distributor Agreement dated November 1, 1995.
+10.51 Note Purchase and Warrant Agreement between FiberCore, Inc. and
Bereshkai S. Aslami in the amount of $250,000 and granting
Warrants to purchase up to 115,220 shares of Common Stock.
+10.52 Note Purchase and Warrant Agreement between FiberCore, Inc. and
Elizabeth De Luca in the amount of $250,000 and granting Warrants
to purchase up to 115,220 shares of Common Stock.
+10.53 Forbearance Agreement between ALT and CDA Authority and granting
of Warrants dated August 27, 1996.
+10.54 Forbearance Agreement between ALT and CII and granting of
Warrants dated July 31, 1996.
+10.55 Long Term Preform Supply Agreement between FiberCore, Inc. and
Fiber Optic Industries (Pvt.) Limited dated July 25, 1996.
+10.56 Long-term supply agreement between FiberCore, Inc. and Middle
East Optical Fiber Cable Co. (MEFC) dated November 1, 1996.
x10.57 Joint Venture Agreement dated November 17, 1997 between
FiberCore, Inc., Federal Power Sdn. Bhd., and PNB Equity Resource
Corporation Sdn. Bhd.
x10.58 Put Option Agreement dated November 17, 1997 between FiberCore,
Inc., Federal Power Sdn. Bhd. and PNB Equity Resource Corporation
Sdn. Bhd.
x10.59 Note Purchase and Warrant Agreement dated September 17, 1997
between FiberCore, Inc. and Income Partners LP.
x10.60 Note Purchase and Warrant Agreement dated September 17, 1997
between FiberCore, Inc. And Techman International Corporation.
x10.61 Note Purchase and Warrant Agreement dated April 16, 1997 between
FiberCore, Inc. and Techman International Corporation.
x10.62 Note Purchase and Warrant Agreement dated September 17, 1997
between FiberCore, Inc. and Mohd A. Aslami.
x10.63 Consulting Agreement dated January 1, 1997 between One Financial
Group Incorporated and FiberCore, Inc.
+14.0 Copy of patents purchased from Sico.
x22 List of subsidiaries of FiberCore, Inc.
x27 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information
purposes only.
(b) REPORTS ON FORM 8-K
None.
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIBERCORE, INC.
(Registrant)
By: /s/ Mohd A. Aslami
--------------------------------------- March 26, 1998
Dr. Mohd A. Aslami
Chairman, Chief Executive Officer
and President (Principal Executive Officer)
By: /s/ Michael J. Beecher
--------------------------------------- March 26, 1998
Michael J. Beecher
Chief Financial Officer and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Mohd A. Aslami Chairman of the Board, March 26, 1998
- ------------------- President
Dr. Mohd A. Aslami Chief Executive Officer,
Director
(Principal Executive Officer)
/s/ Charles De Luca Executive Vice President March 26, 1998
- -------------------- Secretary and Director
Charles De Luca
/s/ Steven Phillips Director
- --------------------
Steven Phillips March 26, 1998
68