UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 29, 2003, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to .
------ -----
Commission file number 0-31162
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 office)
(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 March 29, 2003.
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OPTICNET, INC.
(a development stage company)
INDEX
PART 1. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets--March 29, 2003 and
September 28, 2002 3
Condensed Statements of Operations-- Quarter and
Six Months ended March 29, 2003 and March 30,
2002 and the period from February 23, 2000
(inception) to March 29, 2003 4
Condensed Statements of Cash Flows-- Quarter and
Six Months ended March 29, 2003 and March 30,
2002 and the period from February 23, 2000
(inception) to March 29, 2003 5
Notes to Condensed Financial Statements--March
29, 2003 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure About Market
Risk 16
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
(a) Exhibits
(b) Reports on Form 8-K
SIGNATURES 19
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (UNAUDITED)
OPTICNET, INC.
(a development stage company)
CONDENSED BALANCE SHEETS
March 29, September 28,
2003 2002
(Unaudited) (See note below)
----------- -----------
ASSETS
Cash and cash equivalents $ 14,205 $ 4,881
Trade receivables, less customer allowance for
doubtful accounts (2003--$0; 2002--$57,080) -- --
Receivable from prototype deliveries 60,508 --
Prepaid expenses 6,380 3,263
Other current assets 14,401 324
----------- -----------
Total current assets 95,494 8,468
Other assets 728 728
----------- -----------
$ 96,222 $ 9,196
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable $ 15,743 $ 13,713
Accrued expenses and other liabilities 23,698 40,394
Other related party liability 234,619 214,078
Note payable to related party 2,656,338 2,656,338
Customer funded research and
development liability 72,500 --
----------- -----------
Total current liabilities 3,002,898 2,924,523
Stockholders' deficit (2,906,676) (2,915,327)
----------- -----------
$ 96,222 $ 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.
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OPTICNET, INC.
(a development stage company)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Quarter Ended Six Months Ended
------------------------- -------------------------
Period from
February 23,
2000 (inception)
March 29, March 30, March 29, March 30, to March 29,
2003 2002 2003 2002 2003
----------- ----------- ----------- ----------- -----------
Revenues $ -- $ -- $ -- $ 87,500 $ 611,500
Cost of revenues -- -- -- 43,752 343,441
----------- ----------- ----------- ----------- -----------
Gross margin -- -- -- 43,748 268,059
Selling, general and administrative expenses 133,158 479,526 192,169 767,868 2,355,177
Research and development expenses 169,165 1,256,733 232,289 1,720,299 4,065,128
----------- ----------- ----------- ----------- -----------
Loss from operations (302,323) (1,736,259) (424,458) (2,444,419) (6,152,246)
Interest expense 38,193 25,787 77,816 44,567 227,131
Other income (expense) -- (5,725) -- 3,275 65,173
----------- ----------- ----------- ----------- -----------
Deficit accumulated in the development stage $ (340,516) $(1,767,771) $ (502,274) $(2,485,711) $(6,314,204)
=========== =========== =========== =========== ===========
Basic and Diluted Net Loss per Share
Basic and diluted net loss per share $ (0.06) $ (0.32) $ (0.08) $ (0.45) $ (1.34)
=========== =========== =========== =========== ===========
Weighted average shares used in computation
of basic and diluted net loss per share 6,044,585 5,539,735 6,047,112 5,486,573 4,699,890
=========== =========== =========== =========== ===========
See notes to condensed financial statements.
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OPTICNET, INC.
(a development stage company)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Quarter Ended Six Months Ended
----------------------------- ----------------------------- Period from
February 23,
2000
(inception)
March 29, March 30, March 29, March 30, to March 29,
2003 2002 2003 2002 2003
----------- ----------- ----------- ----------- -----------
Cash flows from operating activities:
Deficit accumulated in the development stage $ (340,516) $(1,767,771) $ (502,274) $(2,485,711) $(6,314,204)
Adjustments to reconcile deficit
accumulated in the development stage
to net cash used by operating
activities:
Depreciation and amortization 5,091 6,390 10,182 14,269 61,741
Other (53,075) 409,446 673 260,673 265,271
----------- ----------- ----------- ----------- -----------
Net cash used by operating activities (388,500) (1,351,935) (491,419) (2,210,769) (5,987,192)
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 -- 927,334 -- 1,489,730 2,820,331
Principal payments on line of credit
from related party -- -- -- -- (163,993)
Proceeds from equity funding from a
related party 344,760 -- 500,743 -- 2,315,385
Proceeds from issuance of convertible
preferred stock, net -- -- -- -- 1,000,000
Proceeds from issuance of common stock -- 542 -- 542 54,894
----------- ----------- ----------- ----------- -----------
Net cash provided by financing activities 344,760 927,876 500,743 1,490,272 6,026,617
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents (43,740) (424,059) 9,324 (721,655) 14,205
Cash and cash equivalents at beginning of
period 57,945 530,893 4,881 828,489 --
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 14,205 $ 106,834 $ 14,205 $ 106,834 $ 14,205
=========== =========== =========== =========== ===========
Supplemental Disclosure of Non Cash Items:
Grants of restricted stock $ -- $ -- $ -- $ -- $ 95,040
Contribution of treasury stock -- -- -- -- 14,720
Reacquisition of restricted stock -- 3,625 -- 3,625 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.
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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 of the
Company's common stock to BEI Technologies' stockholders (the "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. During November 2002, the Company issued 18,146,420 shares
of Series B nonvoting and nonconvertible preferred stock to BEI Technologies,
increasing its total ownership interest.
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 consists 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 Standard ("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 $6.3 million at March 29, 2003. These conditions raise substantial
doubt about the Company's ability to continue as a going concern.
During fiscal 2002 and the first six months 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
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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 is
recorded as an additional investment in the Company by BEI Technologies because
it is the intention of both parties that equity will be issued. New prototype or
product contracts will not be initiated by the Company if these contracts cannot
generate positive cash flows within 12 months. Management believes that funding
for fiscal 2003 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 approximately $0.5 million in equity funding from BEI
Technologies during the first six months of fiscal 2003, used for general
operating expenses.
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. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." 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 March 29,
2003 was $728.
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") issued FASB Interpretation No.
46 ("FIN 46"), "Consolidation of Variable Interest Entities." The primary
objectives of FIN 46 are to provide guidance on the identification of entities
for which control is achieved through means other than through voting rights
("variable interest entities" or "VIEs") and how to determine when and which
business enterprise should consolidate the VIE (the "primary beneficiary"). This
new model for consolidation applies to an entity in which either (1) the equity
investors (if any) do not have a controlling financial interest or (2) the
equity investment at risk is insufficient to finance that entity's activities
without receiving additional subordinated financial support from other parties.
In addition, FIN 46 requires that both the primary beneficiary and all other
enterprises
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with a significant variable interest in a VIE make additional disclosures. FIN
46 is effective for the Company's quarter ended September 27, 2003 with
transitional disclosure required with these financial statements. The Company
will adopt these provisions in its quarter ended September 27, 2003, however the
Company does not believe it is a primary beneficiary of a VIE or holds any
significant interests or involvement in a VIE and does not expect there to be an
impact on the Company's financial statements.
In December 2002, the FASB issued FAS No. 148, "Accounting for Stock-Based
Compensation: Transition and Disclosure" ("FAS No. 148"). FAS No.148 amends FAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value-based method of
accounting for stock-based employee compensation ("transition provisions"). In
addition, FAS No. 148 amends the disclosure requirements of Accounting
Principals Board ("APB") Opinion No. 28, "Interim Financial Reporting," to
require pro forma disclosure in interim financial statements by companies that
elect to account for stock-based compensation using the intrinsic value method
prescribed in APB Opinion No. 25 ("disclosure provisions"). The transition
methods of FAS No. 148 are effective for the Company's September 27, 2003 Form
10-K. The Company continues to use the intrinsic value method of accounting for
stock-based compensation. As a result, the transition provisions will not have
an effect on the Company's financial statements. The Company has adopted the
interim disclosure requirements as presented below.
Stock-Based Compensation
The Company's 2000 Equity Incentive Plan provides for the granting of stock
options to consultants, employees and directors. The Company accounts for
stock-based compensation using the intrinsic value method prescribed in APB
Opinion No. 25 whereby the options are granted at market price, and therefore no
compensation costs are recognized. The Company has elected to retain its current
method of accounting as described above and has adopted the disclosure
requirements FAS Nos. 123 and 148.
If compensation expense for the Company's stock option plan had been determined
based upon fair values at the grant dates for awards under those plans in
accordance with FAS No. 123, the Company's pro-forma net earnings, basic and
diluted earnings per common share would have been as follows:
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Three Months Ended Six Months Ended
----------------------------- -----------------------------
Period from February
March 29, March 30, March 29, March 30, 23, 2000 (inception)
2003 2002 2003 2002 to March 29, 2003
----------- ----------- ----------- ----------- --------------------
Deficit accumulated during the
development stage, as reported $ (340,516) $(1,767,771) $ (502,274) $(2,485,711) $(6,314,204)
Deduct: Total stock based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects -- (1,297) -- (3,443) (4,445)
----------- ----------- ----------- ----------- -----------
Pro forma deficit accumulated
during the development stage $ (340,516) $(1,769,068) $ (502,274) $(2,489,154) $(6,318,649)
Basic and Diluted Net Loss per Share:
Basic-as reported $ (0.06) $ (0.32) $ (0.08) $ (0.45) $ (1.34)
Basic-pro forma $ (0.06) $ (0.32) $ (0.08) $ (0.45) $ (1.34)
Diluted-as reported $ (0.06) $ (0.32) $ (0.08) $ (0.45) $ (1.34)
Diluted-pro forma $ (0.06) $ (0.32) $ (0.08) $ (0.45) $ (1.34)
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.
-9-
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 March 29, 2003, 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. At March 29, 2003, BEI Technologies has
taken no action to seek repayment and the Company intends to seek a further
extension from BEI Technologies. 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 six months ended March 29, 2003 was approximately $85,000.
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 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 since the quarter ended
June 29, 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 and nonconvertible Series B Preferred Stock to BEI
Technologies, in consideration of the $1.8 million advanced noted above.
The Company received approximately $0.5 million in equity funding from BEI
Technologies during the first six months of fiscal 2003, used for general
operating expenses. These monies were advanced by BEI Technologies to the
Company on the basis that the Company would in the future issue additional
equity securities to BEI Technologies representing this sum.
During the fiscal quarter ended March 29, 2003, the Company received a letter
from BEI Technologies stating that BEI Technologies is interested in acquiring
those shares of the Company's common stock that are not currently owned by that
company. See Schedule 13D as filed by BEI Technologies on March 24, 2003. If
this transaction is approved, the Company expects the aggregate purchase price
for all common stock not already owned by BEI Technologies will not exceed
$250,000 for the stock.
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.
-10-
NOTE 3. NOTE PAYABLE TO RELATED PARTY
During fiscal 2001, the Company entered into a line of credit agreement with BEI
Technologies, an 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 was due in
full on December 31, 2002, however payment has not been made. As of March 29,
2003, BEI Technologies has not taken action to seek repayment from the Company.
The Company intends to seek a further extension of the line of credit from BEI
Technologies. 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:
March 29, 2003 March 30, 2002
-------------- --------------
Unsecured revolving promissory note from
BEI Technologies due 12/31/02, at a rate
of prime plus 1.5%; 5.75% and 6.3% at
March 29, 2003 and March 30, 2002,
respectively $2,656,338 $2,656,338
-------------- --------------
$2,656,338 $2,656,338
============== ===============
No interest was paid during the six months ended March 29, 2003 or in the six
months ended March 30, 2002. Accrued interest expense was approximately $227,000
and $68,000 at March 29, 2003 and March 30, 2002, respectively. The interest
payable of approximately $227,000 at March 29, 2003 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 expense.
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 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 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. No material severance costs were incurred by
the Company as a result of the release of these employees.
NOTE 5. CONTINGENCIES AND LITIGATION
The Company has various pending 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 March 29, 2003, cannot be reasonably
estimated to the future financial impact. The Company believes this claim has no
merit and is defending the allegation.
-11-
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 March 29, 2003 and March 30, 2002
There were no revenues during the second quarter of fiscal 2003 and fiscal 2002.
Payments and receivables recorded from customers for the delivery under
contracts of prototype units of approximately $15,000 and $0 were offset against
research and development expense in the statements of operations for the
quarters ended March 29, 2003 and March 30, 2002, respectively. During the
second quarter of fiscal 2003, the Company made prototype deliveries to one
customer. There were no prototype deliveries during the second quarter of fiscal
2002.
Selling, general and administrative expenses in the second quarter of fiscal
2003 decreased approximately $347,000 from $480,000 in the same quarter of the
prior fiscal year to $133,000. 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 Company's 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 work under agreements with its current customers.
Prior to the second quarter of fiscal 2002, selling, general and administrative
expenses included a quarterly 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 quarter of fiscal 2002, these charges have been
waived in light of the Company's financial position.
Research and development expenses in the second quarter of fiscal 2003 decreased
approximately $1,088,000 from $1,257,000 in the same quarter of the prior fiscal
year to $169,000 for employee compensation and subleased facilities rent. The
decrease was primarily due to the Company's decision to significantly reduce
operations to conserve cash.
Interest expense in the second quarter of fiscal 2003 increased approximately
$12,000 from $26,000 in the same quarter of the prior fiscal year to $38,000 due
to the increased outstanding balance on the Company's line of credit agreement
with BEI Technologies during the quarter.
Six Months ended March 29, 2003 and March 30, 2002
There were no revenues during the first six months of fiscal 2003. Revenues
during the first six months of fiscal 2002 of approximately $88,000 reflected
work performed under engineering agreements with two unaffiliated customers. The
decrease is due to the Company's reduced operations in light of the slow down of
demand for new telecommunications equipment components. In addition, during the
first six months of fiscal 2003, the Company recorded payments or receivables
for deliveries of prototype products to one unaffiliated customer, accounted for
as an offset against research and development expense.
Cost of revenues as a percentage of revenues was 50% in the first six months of
fiscal 2002.
Selling, general and administrative expenses during the first six months of
fiscal 2003 decreased approximately $576,000 from $768,000 in the comparable
period of the prior fiscal year to $192,000. 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.
-12-
The Company agreed with BEI Technologies that this reduction in operations would
lower usage of the Company's 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 work under agreements with its
current customers. Prior to the second quarter of fiscal 2002, selling, general
and administrative expenses included a quarterly 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 quarter of fiscal 2002, these charges have
been waived in light of the Company's financial position.
Research and development expenses during the first six months of fiscal 2003
decreased approximately $1,488,000 from $1,720,000 in the comparable period of
the prior fiscal year to $232,000. The decrease was primarily due to the
Company's decision to significantly reduce operations to support work under
agreements with its current customers.
Interest expense in the first six months of fiscal 2003 increased approximately
$33,000 from $45,000 in the same quarter of the prior fiscal year to $78,000 due
primarily to the increased outstanding balance during the period 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, 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. During October 2002, BEI Technologies extended the
maturity date of the line of credit to December 31, 2002. BEI Technologies has
taken no action to date to seek repayment and the Company intends to seek a
further extension from BEI Technologies. 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 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 and nonconvertible 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
of fiscal 2002.
The Company received approximately $0.5 million in equity funding from BEI
Technologies during the first six months of fiscal 2003, used for general
operating expenses. These monies were advanced by BEI Technologies to the
Company on the basis that the Company would in the future issue additional
equity securities to BEI Technologies representing this sum.
During the fiscal quarter ended March 29, 2003, the Company received a letter
from BEI Technologies stating that BEI Technologies is interested in acquiring
those shares of the Company's common stock that are not currently owned by that
company. See Schedule 13D as filed by BEI Technologies on March 24, 2003. If
this transaction is approved, the Company expects the aggregate purchase price
for all common stock not already owned by BEI Technologies will not exceed
$250,000 for the stock.
Pursuant to the facilities sublease agreement, equipment sublease agreement and
the Services Agreement described above, payments due to BEI Technologies were as
follows:
-13-
Period from
Fiscal Year Quarter Six Months February 23, 2000
Ended Ended Ended (inception) to
September 28, March 29, March 29, March 29,
2002 2003 2003 2003
-------- ------- ------- ----------
Subleases
Facilities sublease $134,585 $ 5,395 $ 9,872 $ 366,512
Equipment sublease 660,449 39,447 85,456 745,905
-------- ------- ------- ----------
Total amounts financed under subleases 795,034 44,842 95,328 1,112,417
Intercompany services charges 50,000 -- -- 125,000
-------- ------- ------- ----------
Total payments due $845,034 $44,842 $95,328 $1,237,417
======== ======= ======= ==========
Liquidity and Capital Resources
During the first six months of fiscal 2003, total cash used by operations was
approximately $491,000. Cash provided by operations included the positive impact
of non-cash charges from depreciation and amortization of $10,000. In addition,
positive impacts to cash resources resulted primarily from an increase in
customer funded research and development liability of approximately $73,000.
These cash inflows were offset primarily by an increase in receivables from
prototype deliveries of approximately $60,000 and a net loss of $502,000. Cash
provided by financing activities consisted of net proceeds from equity funding
from a related party of approximately $501,000. The funding was used to support
daily operations and product development.
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 March 29, 2003, the Company had an accumulated
deficit of $6.3 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
cash amounts advanced 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 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 were recorded
in the first six months of fiscal 2003.
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 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
-14-
individuals 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. No material severance costs were incurred by
the Company as a result of the release of these employees.
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. See Note 5 for a further description of
litigation.
Environmental Matters
The Company reserves for known environmental claims, of which there are none to
date, 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 estimating such costs and potential changes in the status of
government regulations.
-15-
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 consists 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 are offset against
research and development expense in the statements of operations in the
respective period.
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 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.
-16-
Item 4. CONTROLS AND PROCEDURES
The Company's President and Chief Financial Officer have concluded, based on
their evaluation within 90 days of the filing date of this report, that the
Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934) are effective for
gathering, analyzing and disclosing the information the Company is required to
disclose in its reports filed under the Securities Exchange Act. There have been
no significant changes in the Company's internal controls or in other factors
that could significantly affect these controls subsequent to the date of the
previously mentioned evaluation.
-17-
OPTICNET, INC.
(a development stage company)
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Numbers Description Footnote
------- ----------- --------
99.1 President Certification Pursuant to 18 U.S.C.
as adopted Pursuant to Section 906 of the
Sarbanes - Oxley Act of 2002
99.2 CFO Certification Pursuant to 18 U.S.C. as
adopted Pursuant to Section 906 of the
Sarbanes - Oxley Act of 2002
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the
Company during the fiscal quarter ended March
29, 2003
-18-
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 May 8, 2003.
OpticNet, Inc.
By: /s/ Gary D. Wrench
------------------------------
Gary D. Wrench
Chief Financial Officer
-19-
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 any 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 officer 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 May 8, 2003
-------------------
/s/ Gerald D. Brasuell
--------------------------
Gerald D. Brasuell
President
-20-
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 any 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 officer 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 May 8, 2003
--------------------
/s/ Gary D. Wrench
--------------------------
Gary D. Wrench
Chief Financial Officer
-21-
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
99.1 President Certification Pursuant to 18 U.S.C as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 CFO Certification Pursuant to 18 U.S.C as adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
-22-