UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended December 28, 2002 or
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______________ to
______________.
Commission file number 0-31162
O P T I C N E T, I N C.
(Exact name of Registrant as specified in its charter)
Delaware 94-3368561
- ------------------------ ------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
One Post Street, Suite 2500
San Francisco, California 94104
----------------------------------------
(Address of principal executive offices)
(415) 956-4477
-------------------------------
(Registrant's telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock: $.0001 Par Value; 3,093,202 shares of Voting Common Stock and
2,998,902 shares of Nonvoting Common Stock outstanding as of December 28, 2002.
Page 1 of 23
OPTICNET, INC.
(a development stage company)
INDEX
PART 1. FINANCIAL INFORMATION PAGE
--------------------- ----
Item 1. Financial Statements
Condensed Balance Sheets--December 28, 2002 and
September 28, 2002 3
Condensed Statements of Operations--Quarters
ended December 28, 2002 and December 29, 2001
and the period from February 23, 2000
(inception) to December 28, 2002 4
Condensed Statements of Cash Flows-- Quarters
ended December 28, 2002 and December 29, 2001
and the period from February 23, 2000
(inception) to December 28, 2002 5
Notes to Condensed Financial Statements--
December 28, 2002 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure About Market
Risk 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
(a) Exhibits
(b) Reports on Form 8-K
SIGNATURES 18
Page 2 of 23
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
OPTICNET, INC.
(a development stage company)
CONDENSED BALANCE SHEETS
December 28, September 28,
2002 2002
(Unaudited) (See note below)
----------- --------------
ASSETS
Cash and cash equivalents $ 57,945 $ 4,881
Prepaid expenses 9,114 3,263
Other current assets 324 324
----------- -----------
Total current assets 67,383 8,468
Other assets 728 728
----------- -----------
$ 68,111 $ 9,196
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable $ -- $ 13,713
Accrued expenses and other liabilities 12,707 40,394
Other related party liability 244,577 214,078
Note payable to related party 2,656,338 2,656,338
Customer funded research and development liability 70,500 --
----------- -----------
Total current liabilities 2,984,122 2,924,523
Stockholders' deficit (2,916,011) (2,915,327)
----------- -----------
$ 68,111 $ 9,196
=========== ===========
Note: The balance sheet at September 28, 2002 has been derived from the audited
balance sheet at that date.
See notes to condensed financial statements.
Page 3 of 23
OPTICNET, INC.
(a development stage company)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Quarters Ended
---------------------------------
Period from
February 23,
2000
(inception) to
December 28, December 29, December 28,
2002 2001 2002
----------- ----------- -----------
Revenues $ -- $ 87,500 $ 611,500
Cost of revenues -- 43,752 343,441
----------- ----------- -----------
Gross margin -- 43,748 268,059
Selling, general and administrative expenses 59,011 288,342 2,222,019
Research and development expenses 63,124 463,566 3,895,963
----------- ----------- -----------
Loss from operations (122,135) (708,160) (5,849,923)
Interest expense 39,623 18,780 188,938
Other income -- 9,000 65,173
----------- ----------- -----------
Deficit accumulated in the development stage $ (161,758) $ (717,940) $(5,973,688)
=========== =========== ===========
Basic and diluted net loss per share $ (0.03) $ (0.13) $ (1.33)
=========== =========== ===========
Weighted average shares used in computation of
basic and diluted loss per share 5,857,331 5,433,406 4,505,524
=========== =========== ===========
See notes to condensed financial statements.
Page 4 of 23
OPTICNET, INC.
(a development stage company)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Quarters Ended
-----------------------------
Period from
February 23,
2000
(inception) to
December 28, December 29, December 28,
2002 2001 2002
----------- ----------- -----------
Cash flows from operating activities:
Deficit accumulated in the development stage $ (161,758) $ (717,940) $(5,973,688)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 5,091 7,879 56,650
Other 53,748 (148,773) 318,346
----------- ----------- -----------
Net cash used by operating activities (102,919) (858,834) (5,598,692)
Cash flows from investing activities:
Purchase of property and equipment -- (1,158) (24,492)
Other -- -- (728)
----------- ----------- -----------
Net cash used by investing activities -- (1,158) (25,220)
Cash flows from financing activities:
Proceeds from borrowing on line of credit from related party -- 562,396 2,820,331
Principal payments on line of credit from related party -- -- (163,993)
Proceeds from equity funding from a related party 155,983 -- 1,970,625
Proceeds from issuance of convertible preferred stock, net -- -- 1,000,000
Proceeds from issuance of common stock -- -- 54,894
----------- ----------- -----------
Net cash provided by financing activities 155,983 562,396 5,681,857
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 53,064 (297,596) 57,945
Cash and cash equivalents at beginning of period 4,881 828,489 --
----------- ----------- -----------
Cash and cash equivalents at end of period $ 57,945 $ 530,893 $ 57,945
=========== =========== ===========
Supplemental Disclosure of Non Cash Items:
Grants of restricted stock $ -- $ -- $ 95,040
Contribution of treasury stock -- -- 14,720
Repurchase of restricted stock -- -- 19,208
Conversion of equity funding to preferred stock 1,814,642 -- 1,814,642
Reclassification of prior period funding $ 33,062 $ -- $ 33,062
See notes to condensed financial statements.
Page 5 of 23
OPTICNET, INC.
(a development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
interim periods presented are not necessarily indicative of the results that may
be expected for the fiscal year ending September 27, 2003. For further
information, refer to the financial statements and footnotes thereto in the
Company's annual report on Form 10-K, as amended January 24, 2003.
OpticNet, Inc. ("OpticNet" or the "Company") was incorporated on February 23,
2000 in the State of Delaware. From its inception (February 23, 2000) through
December 31, 2000, OpticNet operated as a controlled subsidiary of BEI
Technologies, Inc. ("BEI Technologies"). BEI Technologies accumulated the costs
associated with OpticNet's operations in the period from February 23, 2000
through December 31, 2000 including all expenses directly attributable to
OpticNet and an allocation of the costs of shared facilities, salaries and
employee benefits attributable to OpticNet based on relative headcount. These
allocations were based on assumptions that management believes are reasonable
under the circumstances. However, these allocations and estimates are not
necessarily indicative of the costs that would have resulted if OpticNet had
been operated on a stand-alone basis during this period.
As of October 30, 2000, BEI Technologies distributed 3,578,387 shares to BEI
Technologies' stockholders ("Distribution"), substantially all of the Company's
voting common stock held by BEI Technologies. In the Distribution, each holder
of record of BEI Technologies common stock as of October 30, 2000 received one
share of OpticNet common stock for every two shares of BEI Technologies common
stock held, and cash in lieu of any fractional share of OpticNet common stock.
After the Distribution, BEI Technologies continued to hold securities of the
Company in the form of convertible preferred and common stock, representing an
aggregate ownership interest of approximately 25% in the Company up until the
issuance of the Company's Series B nonconvertible preferred stock to BEI
Technologies during the first quarter of fiscal 2003.
The principal focus of the Company's business is to develop, manufacture and
market fiber optic components and subsystems for the telecommunications market.
OpticNet's primary activities since inception have been devoted to developing
its product offerings and related technologies, recruiting key management and
technical personnel and attempting to raise capital to fund operations. OpticNet
has not recognized significant revenues since inception. All revenue recognized
to date consisted of engineering work performed under engineering agreements
with unaffiliated customers and not from the sale of fiber optic components and
subsystems. As a result, the accompanying financial statements are presented in
accordance with Financial Accounting Standards ("FAS") No. 7, "Accounting and
Reporting by Development Stage Enterprises."
OpticNet's operations are subject to significant risks and uncertainties,
including competitive, financial, developmental, operational, growth and
expansion, technological, regulatory and other risks associated with an emerging
business.
These financial statements have been prepared assuming that the Company will
continue as a going concern. Since its inception, the Company has had recurring
operating losses and negative cash flows from operations and has an accumulated
deficit of $6.0 million at December 28, 2002. These conditions raise substantial
doubt about the
Page 6 of 23
Company's ability to continue as a going concern.
During fiscal 2002 and the first quarter of fiscal 2003, the Company continued
to be unsuccessful in attracting outside financing despite management's efforts
and continued operations on a reduced basis. Management and the Company's board
of directors decided in March 2002 to reduce the level of incremental spending
for research and development and to reduce operations to a level that would
solely support the current customer base. Management's plan to enable the
Company to continue as a going concern calls for the Company's operations to be
frozen at a minimal level, sufficient to support current product delivery
commitments. The Company reduced its fixed cost base to an absolute minimum and
no longer maintains any employees of its own other than officers of the Company,
each of whom provide services to the Company on a part time basis. The majority
of OpticNet's operating costs are paid by BEI Technologies, who shares the
Hayward facility and from whom engineering and other services are rented on an
as-required basis. The cash outlay for the Company's portion of these costs are
recorded as additional investment in the Company by BEI Technologies. Future
operating expenses are expected to be funded by product and prototype revenue
under existing contracts. In addition, new prototype or product contracts will
not be initiated if these contracts cannot generate positive cash flows within
the next 12 months. Management believes that additional funding of less than
$1.0 million will enable the Company to continue on a reduced basis as a going
concern through September 30, 2003 and that such funding will be available from
BEI Technologies, if required. However, management cannot be certain such
additional funding will be on desirable, or acceptable, terms to the Company.
Management continues to seek additional equity financing from existing sources
on an opportunistic and as-available basis. Management plans to defer
substantially all research and development activity in the absence of additional
equity financing.
These financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
During the third and fourth quarters of fiscal 2002, BEI Technologies provided
the Company with approximately $1.8 million in financing, which was advanced
with the understanding that such amount would be converted into a form of
nonvoting equity in the Company. Effective September 28, 2002, the Company and
BEI Technologies determined the Company would authorize and issue to BEI
Technologies a series of nonvoting preferred stock. In November 2002, the
Company issued a total of 18,146,420 shares of the Company's newly authorized
nonvoting Series B Preferred Stock to BEI Technologies, in consideration of the
approximately $1.8 million advanced.
The Company received approximatley $190,000 in equity funding from BEI
Technologies during the first quarter of fiscal 2003, used for general operating
expenses. The parties have been discussing the authorization by the Company of
additional equity securities for issuance to BEI Technologies representing this
sum. The final terms of such an equity investment would be determined when, and
if, such an equity investment is consummated.
Use of Estimates
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ materially from those estimates. The judgments and assumptions used
by management are based on historical experience and other factors, which are
believed to be reasonable under the circumstances.
Long-Lived Assets
The Company recognizes impairment losses in accordance with FAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of." Long-lived assets, including property and equipment and other
assets, are reviewed and impairment recognized when indicators of impairment are
present and undiscounted cash flows estimated to be generated by those assets
are less than the carrying amounts of the assets. Indicators of impairment were
present during the periods presented. Total net realizable fair value of all
long-lived assets at December 28, 2002 was $728.
Page 7 of 23
NOTE 2. TRANSACTIONS WITH RELATED PARTIES
On October 6, 2000, the Company and BEI Technologies entered into a Technology
Transfer and Distribution Agreement (the "Distribution Agreement") whereby BEI
Technologies contributed to the Company certain assets and intellectual property
related to the fiber optic components technology developed by BEI Technologies
and BEI Technologies' majority-owned subsidiary, SiTek, Inc. ("SiTek") in
exchange for 3,616,000 shares of the Company's common stock. BEI Technologies
later distributed 3,578,387 of these shares to its stockholders on November 21,
2000 in connection with the Company's separation from BEI Technologies.
In connection with the Distribution Agreement, on October 6, 2000, the Company
and SiTek entered into a License and Technical Assistance Agreement whereby
Sitek agreed to license certain technology to the Company, assist the Company in
certain research and development efforts following the Distribution and also
fabricate and supply certain components utilized in the Company's products.
Further, Sitek granted to the Company a perpetual, royalty free, worldwide,
exclusive license to develop, make, use and sell products within the field of
telecommunications data transmission utilizing technology now possessed or later
developed by SiTek, and the Company has granted to SiTek a corresponding
perpetual, royalty free, worldwide, exclusive license to develop, make, use and
sell products outside of the Company's defined market utilizing technology now
possessed or later developed by the Company. This agreement shall continue in
effect for five years and automatically renew thereafter for consecutive
one-year terms unless either party gives written notice of termination.
On October 27, 2000, the Company and BEI Technologies entered into an
InterCompany Services Agreement (the "Services Agreement") whereby BEI
Technologies agreed to make available to the Company certain office and facility
space, personnel support and supervision, financial and administrative services,
record-keeping functions and other assistance, with BEI Technologies being
reimbursed for the costs and expenses incurred in connection with the provision
of these services to OpticNet. Charges for these services were allocated to the
Company based upon usage, headcount and other methods that management believes
to be reasonable. In the fiscal quarter ended June 29, 2002, BEI Technologies
agreed to suspend charges for the third and fourth quarters of fiscal 2002 and
future quarters' service charges, due to the Company's inability to obtain
significant strategic partners or third party financing and reduced services to
a minimal level.
The Services Agreement further provided for a line of credit from BEI
Technologies to the Company for up to $2.0 million with interest at prime plus
1.5%, expiring on September 28, 2002, unless extended by mutual agreement of the
parties. During fiscal 2002, BEI Technologies increased this line of credit by
$1.0 million. As of September 28, 2002 and December 28, 2002, the Company had
outstanding borrowings totaling approximately $2.7 million on this line of
credit. During the fiscal quarter ended June 29, 2002, the Company was informed
by BEI Technologies that no further advances would be made to the Company under
this line of credit beyond the approximately $2.7 million funded as of March 30,
2002. During October 2002, BEI Technologies extended the maturity date of the
line of credit to December 31, 2002. The parties intend to extend the maturity
date of the line of credit. The final terms of such an extension would be
determined when, and if, such an extension is consummated. To maintain
sufficient liquidity in the future and to fund operations, the Company will need
to obtain additional financing, which may be on unfavorable terms in light of
the Company's credit position.
On September 28, 2001 the Company entered into a general equipment sublease
agreement with BEI Technologies as the lessor, which is subordinate to a master
lease agreement entered into by BEI Technologies as the lessee. On September 28,
2001, December 20, 2001 and March 28, 2002, the Company executed equipment lease
schedules under the general equipment sublease with BEI Technologies. The total
value of the scheduled equipment under the sublease agreement was approximately
$7.0 million, with an initial lease term of 36 months. Rental payments are due
on a quarterly basis and the amount determined by the Company's level of usage
of the equipment, the cost of the equipment and applicable interest. Payment due
for the quarter ended December 28, 2002 was approximately $46,000.
The Company originally entered into a sublease agreement in October 2001 with
BEI Technologies for a 15,571 square feet facility for administration, research
and development and manufacturing activities in Hayward, California, expiring
December 2005. As of March 30, 2002, the Company, in recognition of its
inability to obtain significant strategic partners or third party financing,
concluded it was necessary to reduce operating costs. The
Page 8 of 23
Company agreed with BEI Technologies that this reduction in operations would
lower usage of the equipment and the subleased facilities described above.
Accordingly, the annual lease payments to BEI Technologies have been prorated
beginning March 31, 2002, based on the portion of the facilities the Company
requires to support its current customers.
In the six months ended September 28, 2002, BEI Technologies advanced an
additional $1.8 million to the Company. Effective September 28, 2002, the
Company and BEI Technologies had determined the Company would authorize and
issue to BEI Technologies a series of nonvoting preferred stock. In November
2002, the Company issued a total of 18,146,420 shares of the Company's newly
authorized nonvoting Series B Preferred Stock to BEI Technologies, in
consideration of the approximately $1.8 million advanced noted above.
The Company received approximately $190,000 in equity funding from BEI
Technologies during the first quarter of fiscal 2003, used for general operating
expenses. The parties have been discussing the authorization by the Company of
additional equity securities for issuance to BEI Technologies representing this
sum. The final terms of such an equity investment would be determined when, and
if, such an equity investment is consummated.
All of the arrangements outlined above were negotiated by related parties and
may not represent transactions at arms length and the Company may not be able to
obtain terms as favorable with third parties if and when the arrangements with
BEI Technologies come to an end.
NOTE 3. NOTE PAYABLE TO RELATED PARTY
During fiscal 2001, the Company entered into a line of credit agreement with BEI
Technologies, a minority investor. Under the terms of the agreement, BEI
Technologies has made available to the Company from time to time until December
31, 2002, an amount not to exceed at any time the aggregate principle amount of
$3.0 million, as amended. The Company's obligation to repay the loans
outstanding is due in full on December 31, 2002, unless extended by mutual
agreement of the parties. The parties intend to extend the maturity date of the
line of credit. The final terms of such an extension would be determined when,
and if, such an extension is consummated. During the fiscal quarter ended June
29, 2002, the Company was informed by BEI Technologies that no further advances
would be made to the Company under this line of credit beyond the approximately
$2.7 million funded as of March 30, 2002 in view of the Company's inability to
obtain outside financing to date and other general indications of investor
disaffection with businesses in the telecommunications market. Borrowings
outstanding on the line of credit were as follows:
December 28, December 29,
2002 2001
---------- ----------
Unsecured revolving promissory note from BEI
Technologies due 12/31/02, at a rate of prime
plus 1.5%; 6.25% and 5.75% at December 28, 2002
and December 29, 2001, respectively $2,656,338 $1,729,004
---------- ----------
$2,656,338 $1,729,004
========== ==========
No interest was paid during the quarter ended December 28, 2002 or in the
quarter ended December 29, 2001. Accrued interest expense was approximately
$189,000 and $19,000 at December 28, 2002 and December 29, 2001, respectively.
The interest payable of approximately $189,000 at December 28, 2002 was recorded
as an other related party liability.
NOTE 4. REDUCTION IN FORCE
In April 2002, the Company underwent a reduction in force resulting in eight
individuals departing employment with the Company, including engineering,
manufacturing and marketing personnel. Severance pay for affected persons was
per Company policy, including cash payment and the acceleration of the vesting
of options for certain affected individuals. Total cash costs related to the
reduction in force of approximately $86,000 was recorded in the fiscal quarter
ending June 29, 2002 within research and development expenses.
Page 9 of 23
To further reduce costs for the Company in the near term, during July 2002, all
of the Company's remaining 15 employees were released from their employment with
the Company and accepted employment with a subsidiary of BEI Technologies, as
agreed to by both companies, but still perform services for OpticNet. The
Company's newly appointed President and Chief Technical Officer have also become
employees of this same subsidiary of BEI Technologies, but continue to serve as
executive officers of the Company. The services of certain key individuals,
including the Company's newly appointed President and Chief Technical Officer,
are expected to continue to be available to the Company on an as needed basis,
with reimbursement by the Company to their present employer for the time value
of their services.
NOTE 5. CONTINGENCIES AND LITIGATION
The Company has pending various legal actions arising in the normal course of
business. Management believes that none of these legal actions, individually or
in the aggregate, will have a material impact on the Company's business,
financial condition or operating results. The Company is a codefendant in a
dispute with a former employee, which at December 28, 2002, cannot be reasonably
estimated to the future financial impact. The Company believes this claim has no
merit and is defending the allegation.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those expressed in, or
implied by, such forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in this section, and those discussed in the Company's Form 10-K, as amended
January 24, 2003, in particular, within the "Risk Factors" section thereof.
See "Critical accounting policies and the use of estimates" for a description of
the Company's critical accounting policies.
Quarters ended December 28, 2002 and December 29, 2001
Revenues during the first quarter of fiscal 2002 were $87,500, reflecting work
performed under engineering agreements with unaffiliated customers. There were
no revenues during the first quarter of fiscal 2003. The decrease is primarily
due to the continued slow down of demand for new telecommunications equipment
components compared to prior periods.
In addition, during the first quarters of fiscal 2002 and 2003, the Company made
prototype deliveries to one customer. In the first quarter of fiscal 2002, cost
of revenues as a percentage of revenues was 50%, resulting in gross profit of
approximately $44,000. Cost of revenues includes salaries, materials and
production overhead.
Selling, general and administrative expenses in the first quarter of fiscal 2003
decreased approximately $229,000 from $288,000 in the same quarter of the prior
fiscal year to $59,000. During fiscal 2002, the Company, in recognition of its
inability to obtain significant strategic partners or third party financing,
concluded it was necessary to reduce operating costs. The Company agreed with
BEI Technologies that this reduction in operations would lower usage of the
subleased facilities. Accordingly, the annual lease payments to BEI Technologies
are now prorated based on the portion of the facilities the Company requires to
support its current customers. In the first quarter of fiscal 2002, selling,
general and administrative expenses included a payment of $25,000 made to BEI
Technologies for accounting, human resources and other administrative services
provided by BEI Technologies pursuant to the Services Agreement between the two
companies. Commencing with the second fiscal quarter of 2002, these charges have
been waived in light of the Company's financial position.
Page 10 of 23
Research and development expenses in the first quarter of fiscal 2003 decreased
approximately $401,000 from $464,000 in the same quarter of the prior fiscal
year to $63,000. The decrease was primarily due to the Company's decision to
significantly reduce operations to support its current customers. During the
first quarter of fiscal 2002 the Company recorded approximately $900 for
deliveries of prototype products as an offset against research and development
expense.
Interest expense in the first quarter of fiscal 2003 increased approximately
$21,000 from $19,000 in the same quarter of the prior fiscal year to $40,000 due
to the increased outstanding balance on the Company's line of credit agreement
with BEI Technologies.
Financing from Related Party
Since inception, all operating capital of the Company has been provided by BEI
Technologies as debt or equity financing. The Company has been unable to gain
outside financing from independent parties to date, in light of the severe
downturn in the optical networking industry.
In October 2000, BEI Technologies agreed to provide OpticNet with a line of
credit originally established for up to $2.0 million. During fiscal 2002, the
line of credit was amended to allow for borrowings up to $3.0 million. During
the fiscal quarter ended June 29, 2002, BEI Technologies suspended the
availability of advances to the Company under the line of credit, under which
amounts outstanding at such time totaled approximately $2.7 million in principal
amount. As of March 30, 2002, the Company was advised by BEI Technologies that,
in view of the Company's inability to obtain outside financing to date and other
general indications of investor dissatisfaction with businesses in the
telecommunications market, further debt financing would not be provided by BEI
Technologies. During October 2002, BEI Technologies extended the maturity date
of the line of credit to December 31, 2002. The parties intend to extend the
maturity date of the line of credit. The final terms of such an extension would
be determined when, and if, such an extension is consummated. In the six months
ending September 28, 2002, BEI Technologies provided an additional $1.8 million,
approximately, of financing to the Company, which was advanced with the intent
to convert such cash advances into additional equity. Effective September 28,
2002, the Company and BEI Technologies had determined the Company would
authorize and issue to BEI Technologies a series of nonvoting preferred stock.
In November 2002, the Company issued a total of 18,146,420 shares of nonvoting
and nonconvertible Series B Preferred Stock to BEI Technologies, in
consideration of the $1.8 million advanced during the third and fourth quarters
In the quarter ended December 28, 2002, BEI Technologies provided additional
funding of approximately $190,000 to the Company for general operating expenses.
The parties have been discussing the authorization by the Company of additional
equity securities for issuance to BEI Technologies representing this sum. The
final terms of such an equity investment would be determined when, and if, such
an equity investment is consummated.
Pursuant to the facilities sublease agreement, equipment sublease agreement and
the Services Agreement described above, payments due to BEI Technologies were as
follows:
Page 11 of 23
Period from
February 23,
Fiscal Year Quarter 2000
Ended Ended (inception) to
September 28, December 28, December 28,
2002 2002 2002
---------- ---- ----------
(unaudited)
Subleases
Facilities sublease $ 134,585 $ 4,477 $361,117
Equipment sublease 660,449 46,009 706,458
---------- ------ ----------
Total amounts financed under subleases 795,034 50,486 1,067,575
Intercompany services charges 50,000 -- 125,000
---------- ------- ----------
Total payments due $ 845,034 $50,486 $1,192,575
========== ======= ==========
Liquidity and Capital Resources
During the first quarter of fiscal 2003, total cash used by operations was
approximately $103,000. Cash provided by operations included the positive impact
of non-cash charges from depreciation and amortization of $5,000. In addition,
positive impacts to cash resources resulted from increases in customer funded
research and development liabilty and accrued expenses and other liabilities of
approximately $71,000 and $3,000, respectively. These cash inflows were offset
by an increase in prepaid expenses of approximately $6,000, a decrease in
accounts payable of approximately $14,000 and a net loss of $161,758. Cash
provided by financing activities consisted of net proceeds since inception of
approximately $2,656,000 from borrowings on the Company's note payable to BEI
Technologies under its related party line of credit arrangement. The borrowings
were used to fund daily operations, capital investments and product development.
In March 2002, BEI Technologies increased this line of credit by $1.0 million
and in October 2002, the maturity date was extended to December 31, 2002. Also
during the first quarter of fiscal 2003, cash from financing activities included
an investment of approximately $190,000 by BEI Technologies.
If the Company continues as a going concern, the Company anticipates incurring
substantial additional losses over at least the next several years. Since
inception, the Company has incurred recurring operating losses and negative cash
flows from operations. As of December 28, 2002, the Company had an accumulated
deficit of $6.0 million. After extensive discussions with prospective outside
investors throughout fiscal 2002, during March 2002 the Company became aware
that none of these discussions would result in near term equity financing for
the Company. As of March 30, 2002, the Company was advised by BEI Technologies
that, in view of the Company's inability to obtain outside financing to date and
other general indications of investor disaffection with businesses in the
telecommunications market, further debt financing would not be provided by BEI
Technologies. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. In the first quarter of fiscal 2003, the
Company issued nonvoting preferred stock to BEI Technologies in consideration of
amounts received in the third and fourth quarters of fiscal 2002. As of the end
of the Company's March 30, 2002 fiscal quarter, management determined that the
Company would not have sufficient financing for the remainder of its 2002 fiscal
year without modifying the Company's business plan, implementing strict
cost-cutting measures and obtaining additional financing was obtained.
Therefore, management and the Company's board of directors reduced the level of
spending by the Company for research and development and facility and equipment
expenditures and to reduce operations to a level that will solely support the
current customer base. The Company intends to continue to operate in such a
scaled back manner until additional outside financing is available or other
prospects are realized by the Company.
In April 2002, the Company underwent a reduction in force resulting in eight
individuals terminating employment with the Company, including engineering,
manufacturing and marketing personnel. Severance pay for affected persons was
per Company policy, including cash payment and the acceleration of the vesting
of options for certain affected individuals. Total cash costs related to the
reduction in force of approximately $86,000 was recorded in the fiscal quarter
ending June 29, 2002. No costs related to the reduction in force was recorded in
the first quarter of fiscal 2003.
Page 12 of 23
To further reduce costs for the Company in the near term, during July 2002, all
of the Company's remaining 15 employees were released from their employment with
the Company and accepted employment with a subsidiary of BEI Technologies, as
agreed to by both companies. The Company's newly appointed President and Chief
Technical Officer have also become employees of this same subsidiary of BEI
Technologies, but continue to serve as executive officers of the Company. The
services of certain key individuals, including the Company's newly appointed
President and Chief Technical Officer, are expected to continue to be available
to the Company on an as needed basis, with reimbursement by the Company to their
present employer for the time value of their services.
Effects of Inflation
Management believes that, for the periods presented, inflation has not had a
material effect on the Company's operations.
Critical Accounting Policies and the Use of Estimates
Management's discussion and analysis of financial condition and results of
operations is based upon the Company's financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The Company reviews the accounting policies used in
reporting its financial results on a regular basis. The preparation of these
financial statements requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosure of contingent assets and liabilities. The estimates are based
on historical experience and on various other assumptions that management
believes to be reasonable under the circumstances. On an ongoing basis, the
Company evaluates its estimates. Results may differ from these estimates due to
actual outcomes being different from those on which the Company based its
assumptions. The Company believes the following critical accounting policies
affect significant judgments and estimates used in the preparation of its
financial statements.
Allowance for Doubtful Accounts
The Company continuously monitors collections and payments from its customers
and from time to time maintains allowances for doubtful accounts based upon
historical experience and any specific customer collection issues that the
Company has identified. While such credit losses have historically been within
management's expectations, there can be no assurance that the Company will
continue to experience the same relative level of credit losses that it has in
the past. In addition, the Company's revenues and accounts receivable are
concentrated in a relatively few number of customers. A significant change in
the liquidity or financial position of any one of these customers or a further
deterioration in the economic environment or telecommunications industry, in
general, could have a material adverse impact on the collectability of the
Company's accounts receivable and future operating results, including a
reduction in future revenues and additional allowances for doubtful accounts.
If, at the time revenue is recognized, the Company determines that collection of
a receivable is not reasonably assured, the revenue is deferred and recognized
at the time collection becomes reasonably assured, which is generally upon
receipt of payment.
Litigation
The Company reserves for legal claims when payments associated with the claims
become probable and can be reasonably estimated. Due to the difficulty in
estimating costs of resolving legal claims, actual costs may be substantially
higher than the amounts reserved.
Environmental Matters
The Company reserves for known environmental claims, of which there are none in
the quarter ended December 28, 2002, when payments associated with the claims
become probable and the costs can be reasonably estimated. The Company's
environmental reserves, for all periods presented, are recorded at the expected
payment amount. The actual cost of resolving environmental issues may be higher
than that reserved primarily due to difficulty in
Page 13 of 23
estimating such costs and potential changes in the status of government
regulations.
Significant Accounting Policies
Revenue Recognition
The Company recognizes revenue using the guidance from SEC Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements." Under these
guidelines, revenue recognition is deferred on transactions where (i) persuasive
evidence of an arrangement does not exist, (ii) revenue recognition is
contingent upon performance of one or more obligations of the Company, (iii) the
price is not fixed or determinable or (iv) payment is not reasonably assured.
To date, the Company has not recognized revenue related to non-prototype product
offerings. All revenue recognized to date consisted of engineering work
performed under engineering agreements with unaffiliated customers. Revenue for
this engineering work is recognized based on customer acknowledgement of the
achievement of milestones in the engineering agreement.
Research and Development Expense
The Company's products are highly technical in nature and require a significant
level of research and development effort. Research and development costs are
charged to expense as incurred in accordance with FAS No. 2, "Accounting for
Research and Development Costs." Payments and receivables recorded from
customers for the delivery under contracts of prototype units of approximately
$187,000, $900 and $398,000 were offset against research and development expense
in the statements of operations for the quarters ended December 29, 2001,
December 28, 2002, and from inception through the quarters ended December 28,
2002, respectively. Eight prototype units were delivered during the quarter
ended December 28, 2002.
Property, Plant and Equipment and Related Depreciation
The Company records property, plant and equipment at cost, which is depreciated
using the straight-line method for structures and accelerated or straight-line
methods for equipment over their estimated useful lives. Leasehold improvements
and assets acquired under capital leases are amortized over the shorter of the
lease term or their estimated useful lives. Management reviews the estimated
useful lives of property, plant and equipment to verify that the assets are
being depreciated in accordance with their usage and all assets no longer in
service are fully depreciated.
Accrued Expenses and Other Liabilities
The Company records liabilities for services or products received in the period
in which the benefit was recognized. Due to the difficulty in estimating costs
of these services or products received, actual costs may be substantially higher
than the amounts recorded.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company was incorporated in February 2000 and commenced independent
operations in November 2000. The Company has not yet generated revenues from
sales of its products but only from engineering work performed for three
customers to date. The Company expects to incur net losses for the foreseeable
future. The Company may never achieve profitability and may not succeed as a
going concern and its independent auditor has included a statement to this
effect in their most recently issued audit report.
The Company believes that there have been no material changes in the reported
market risks faced by the Company since those discussed in the Company's Form
10-K, as amended January 24, 2003, under the heading corresponding to that set
forth above. The Company's exposure to market risk is limited to interest income
sensitivity, which is
Page 14 of 23
affected by changes in the general level of U.S. interest rates, as a portion of
the Company's cash equivalents are in short-term debt securities issued by
corporations. The Company's cash equivalents are placed with high-quality
issuers and the Company attempts to limit the amount of credit exposure to any
one issuer. Due to the nature of the Company's short-term investments, the
Company believes that it is not subject to any material market risk exposure.
The Company does not have any foreign currency or other derivative financial
instruments.
Page 15 of 23
OPTICNET, INC.
(a development stage company)
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Listing of Exhibits
Exhibit
Numbers Description Footnote
- ------- ----------- --------
2.1 Technology Transfer and Distribution Agreement between BEI Technologies, Inc. and
the registrant i
3.1 Amended and Restated Certificate of Incorporation ii
3.2 Bylaws i
3.3 Certificate of Designation of Powers, Preferences and Rights of Series B Preferred
Stock iv
4.1 Specimen Voting Common Stock certificate i
4.2 Bylaws (see Exhibit 3.2) i
4.3 Amendment to Preferred Stock Purchase Agreement between BEI Technologies, Inc. and
the registrant i
10.1 InterCompany Agreement between BEI Technologies, Inc. and the registrant i
10.2 License and Technical Assistance Agreement between BEI Technologies, Inc. and the
registrant i
10.3 Sublease Agreement between BEI Technologies, Inc. and the registrant ii
10.4 Equipment Sublease Agreement between BEI Technologies, Inc. and the registrant i
10.5 Amended and Restated 2000 Equity Incentive Plan of the registrant i
10.6 Form of option agreement under 2000 Equity Incentive Plan i
10.7 Form of Leave of Absence Agreements between BEI Technologies, Inc. and Certain
Named Executive Officers of the registrant i
Page 16 of 23
10.8 Revolving Line of Credit Note executed by the registrant in favor of BEI
Technologies, Inc. i
10.9 Form of Indemnity Agreement to be entered into by the registrant with each of its
directors and executive officers ii
10.10 Consulting Agreement between Danforth Joslyn and the registrant ii
10.11 Consulting Agreement between Gary D. Wrench and BEI Technologies, Inc. iii
10.12 Amendment No. 1 to License and Technical Assistance Agreement between the
registrant and SiTek, Inc. iii
99.1 Preliminary Information Statement of BEI Technologies, Inc. dated September 30, 2000 i
99.2 Final Information Statement of BEI Technologies, Inc. dated November 17, 2000 i
99.3 President Certification Pursuant to 18 U.S.C. as adopted Pursuant to Section 906 of
the Sarbanes - Oxley Act of 2002
99.4 CFO Certification Pursuant to 18 U.S.C. as adopted Pursuant to Section 906 of the
Sarbanes - Oxley Act of 2002
(i) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Information Statement on Form 10 (file no. 0-31162) as
filed on January 25, 2002.
(ii) Incorporated by reference. Previously filed as an exhibit to Amendment
No. 1 to the Registrant's Information Statement on Form 10 (file no.
0-31162) as filed on March 22, 2002.
(iii) Incorporated by reference. Previously filed as an exhibit to Amendment
No. 2 to the Registrant's Information Statement on Form 10 (file no.
0-31162) as filed on April 25, 2002.
(iv) Incorporated by reference. Previously filed as an exhibit to Form 10-K
(file no. 0-31162) as filed on January 10, 2003.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during fiscal
quarter ended December 28, 2002
Page 17 of 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized on February 10, 2003.
OpticNet, Inc.
By: /s/ Gary D. Wrench
---------------------
Gary D. Wrench
Chief Financial
Officer
Page 18 of 23
CERTIFICATION OF
PRESIDENT
I, Gerald D. Brasuell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of OpticNet, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors and material weakness in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated February 10, 2003
-------------------
/s/ Gerald D. Brasuell
-------------------------
Gerald D. Brasuell
President
Page 19 of 23
CERTIFICATION OF
CHIEF FINANCIAL OFFICER
I, Gary D. Wrench, certify that:
1. I have reviewed this quarterly report on Form 10-Q of OpticNet, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors and material weakness in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated February 10, 2003
-------------------
/s/ Gary D. Wrench
-------------------------
Gary D. Wrench
Chief Financial Officer
Page 20 of 23
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
99.3 President Certification Pursuant to 18 U.S.C as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.4 CFO Certification Pursuant to 18 U.S.C as adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Page 21 of 23