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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended September 28, 2002 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
OPTICNET, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
94-3368561
(I.R.S. Employer Identification No.)
One Post Street, Suite 2500
San Francisco, California 94104
(Address of principal executive officers) (Zip code)
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(415) 956-4477
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
None
----
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $.0001 par value
----------------------------------
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock: $0.0001 Par Value; 3,093,202 shares of Voting Common Stock and
2,998,902 shares of Nonvoting Common Stock outstanding as of December 11, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Proxy Statement with respect to its 2003 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission is
incorporated by reference into Part III, Items 10, 11, 12 and 13 of this report.
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TABLE OF CONTENTS
Page
PART I
Item 1. Business....................................................................... 3
Item 2. Properties..................................................................... 21
Item 3. Legal Proceedings.............................................................. 21
Item 4. Submission of Matters to a Vote of Security Holders............................ 21
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters.................................................... 22
Item 6. Selected Financial Data........................................................ 24
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................. 25
Item 7a. Quantitative and Qualitative Disclosures About Market Risk..................... 32
Item 8. Financial Statements and Supplementary Data.................................... 33
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure......................................... 55
PART III
Item 10. Directors and Executive Officers
of the Registrant.............................................................. 55
Item 11. Executive Compensation......................................................... 55
Item 12. Security Ownership of Certain Beneficial
Owners and Management.......................................................... 55
Item 13. Certain Relationships and Related Transactions................................. 55
PART IV
Item 14. Controls and Procedures........................................................... 55
Item 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K........................................................ 56
Signatures ............................................................................... 59
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Except for historical information contained herein, the following discussion
contains certain forward-looking statements that are based on the beliefs of our
management, as well as assumptions made by, and information currently available
to, our management. We have based these forward-looking statements on our
current expectations and projections about future events and trends affecting
the financial condition of our business. These forward-looking statements are
subject to risks, uncertainties and assumptions about us, several of which are
identified below and discussed in Item 1. "Business--Risk Factors" and Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." In particular, the words and phrases such as "expects,"
"estimates," "intends," "plans," "believes," "projection," "will continue" and
"is anticipated" are intended to identify forward-looking statements.
These forward-looking statements may differ materially from actual results
because they involve estimates, assumptions and uncertainties. We undertake no
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
PART I
ITEM 1. BUSINESS
Introduction
We are a development stage company that aspires to design and manufacture
optical components used to interconnect, switch, attenuate and otherwise manage
optical signals in fiber optic circuits. Our products are being developed for
use in broadband telecommunications networks. Virtually all of our products
developed to date are based on micro electromechanical structures (MEMS) made
from monocrystalline silicon, a material similar to that used to manufacture
electronic microcircuits.
We use specialized equipment and proprietary fabrication processes which enable
us to produce small scale devices with advantageous optical and environmental
characteristics and unique multi-function capabilities that can be conveniently
applied in a wide variety of fiber optic applications.
Our prospective customers are makers and users of many types of
telecommunications equipment. Our existing and prospective products are intended
for use throughout fiber optic systems including those for long-haul
transmission, metro-area distribution networks and enterprise or local area
networks. The demanding technical requirements for our products typically
require that our engineering staff consult closely with our customers'
engineering staff. We endeavor to cultivate long-term relationships with
prospective customers in order to facilitate the required communication.
Our Background
We were incorporated in February 2000 in Delaware as a majority-owned subsidiary
of BEI Technologies, Inc. ("BEI Technologies"), a publicly held Delaware
Company, to extend proprietary MEMS production processes developed by BEI
Technologies to the field of optical networks. BEI Technologies, a global
provider of highly engineered motion sensing and motion control components used
in automotive, aerospace and factory automation systems, has engaged in research
and development in the field of silicon MEMS technology since 1993. The silicon
MEMS technology research initiative undertaken by BEI Technologies led to new
MEMS fabrication techniques relevant not only to motion sensing and motion
control, but also to optical and potentially biomedical applications.
In November 2000, we were separated from BEI Technologies in order to focus
exclusively on the commercialization of MEMS technology for optical
telecommunications applications. We were established as a separate company by
BEI Technologies' distribution to its stockholders of approximately 42% of our
outstanding securities at the time of the distribution, with BEI Technologies
retaining approximately 24% of our outstanding securities and the remainder of
our securities continuing to be held by contributing founders. At the time of
our separation from BEI Technologies certain MEMS-based proprietary product
designs were transferred to us and we were granted exclusive, worldwide,
royalty-free and perpetual rights to utilize BEI Technologies' proprietary
MEMS-based processing technologies in the manufacture of our products for the
telecommunications market. In recognition of our early stage of development,
immediately prior to our separation from BEI Technologies we
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imposed transfer restrictions on our common stock and accordingly there is
presently no authorized public trading market for our securities. We continue to
have significant intercompany arrangements with BEI Technologies.
In June 2000, we received our first customer order and in November 2000 made our
first prototype deliveries. Our total revenue for fiscal 2001 was $499,000, for
engineering work performed for one customer. During fiscal 2001 we also recorded
payments or receivables from a total of five customers for deliveries of
prototype products, accounted for as an offset to research and development
expense. During fiscal 2002, we recorded revenue of $112,500 for engineering
work performed for two unaffiliated customers and recorded payments or
receivables for prototype deliveries from two other customers. Proceeds from the
development of prototypes delivered under customer agreements were approximately
$210,000 and $187,000 for fiscal 2001 and fiscal 2002, respectively.
Importance of Optical Components in Telecommunications Networks
Analogous to pipes for water or copper wire for electrical systems, optical
fibers transport coded pulses of light to the users of optical
telecommunications systems. Accordingly, the optical components in fiber optic
systems perform functions that are analogous to those provided by the diverse
parts found in water distribution or electrical systems. For example, different
types of optical components exist to adjust the intensity of an optical data
stream. Other components switch the optical data stream into alternative carrier
circuits. Still others combine multiple data streams together or separate data
from a larger stream into a smaller stream. Widely varying approaches to optical
system design and performance are common and the components used for a given
system must, accordingly, be designed to optimize the system's functionality,
efficiency and cost.
The myriad designs of valves and regulators that have evolved for plumbing and
the variety of switches and relays to control electrical currents are indicative
of the diversity of components needed to accommodate optical system
requirements. Those familiar with the offerings in the electrical or plumbing
aisles of any home repair store will appreciate this analogous diversity of
functions and implementations that evolve for such systems.
The optical telecommunications industry is still a relatively young field with
much ongoing innovation and variation in system designs. The optical components
that are needed to support optical telecommunication systems are similarly
diverse and dynamically evolving. Due to the technical complexity of optical
telecom systems, optical components are used at multiple locations within the
system, sometimes with dozens or even hundreds or thousands of component sites
occurring in a given system at junctions or nodes between data streams or near
the end points of optical circuits.
Our Business Objective and Strategy
Our long-term business objective is to be recognized as the preeminent and
preferred independent supplier of highly engineered proprietary or custom
designed MEMS-based optical components. We aspire to cultivate close and ongoing
relationships with significant customers.
Our strategy is to use a combination of design experience, sophisticated
processing know-how, including deep reactive ion etching (DRIE) and
monocrystalline silicon wafer bonding, and the creative capabilities of our
engineers to devise unique solutions for our customers. We expect this strategy
to require close liaison between our engineering personnel and the engineering
staff of our prospective customers. Our goal is to enhance the value of our
products for our customers by creating designs that have performance, packaging
or multi-function capabilities that exceed those which are otherwise available.
We possess certain immediately available proprietary product designs that we
intend to modify or adapt as building blocks to accommodate specific customer
requirements, thereby reducing product development time. We also carry out an
ongoing program of proprietary-product development, continually updating our
portfolio of product designs. By means of this expansion of our standard
products, we expect to continually expand our custom-design capabilities. Our
management possesses broad experience in implementing these business strategies
and we believe that our heritage of engineer-to-engineer problem solving is a
competitive advantage.
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In summary, our strategy focuses on providing value to our customers and
emphasizing the following attributes:
* Superior technology involving striving for the highest industry
achievement in optical properties, production yields and environmental
robustness;
* Creative and responsive custom designs that will enhance the
performance of our customers' systems; and
* Rapid design and design validation cycles.
Because of very depressed conditions in the telecommunications equipment market
during 2002 and 2001, the Company has not realized revenue growth as originally
planned. Due to the shortage of funding, the scope of the Company's business
development activity was substantially reduced during fiscal 2002. Our business
strategy has, accordingly, been adjusted to preserve essential capabilities
while anticipating the additional time required to develop a base of products
and customers and uncertainty of future prospects.
Technology
The technological foundation of our business is based on a thorough
understanding of and expertise in the processes for microfabrication of optical
and electromechanical devices using silicon as the structural material.
In the past, the most commonly used microfabrication processes for silicon
included bulk micromachining by wet chemical etch and surface micromachining.
Bulk micromachining, sometimes referred to as chemical micromilling, is
essentially a subtractive process in which chemical etchants are used in a
controlled fashion to alter the shape of a bulk material.
Surface micromachining is typically an additive process that adopts the
technique of microcircuit manufacturing to deposit thin layers of
polycrystalline silicon or other materials on the surface of a substrate
material. Bulk and surface micromachining are both useful processes that have a
certain utility for producing optical components. They also have certain
disadvantages. Chief among these are the lack of mechanical precision, low
yields, poor surface finish, slow processing (all seen in bulk micromachining)
and an inability to create strong, rigid and thermally stable structures (a
disadvantage of surface micromachining).
We possess exclusive, worldwide, royalty-free and perpetual rights to utilize
BEI Technologies' proprietary MEMS-based processing technologies in the
manufacture of our products. We believe these licensed processes overcome the
most significant shortcomings of bulk micromachining and surface micromachining
and we continue to work strategically with BEI Technologies to further enhance
and improve upon these processes. We believe our exclusive license to these
processing technologies represents a substantial competitive advantage.
Our licensed Deep Reactive Ion Etching ("DRIE") and Direct Fusion Bonding
processes have the following characteristics and advantages:
Deep Reactive Ion Etching
Our licensed DRIE process enables the creation of fine mechanical details. This
process has virtually unlimited form factor relative to bulk micromachining and
helps assure reliable, high yield fabrication of complex structures. For
example, very narrow, straight-sided channels or structural webs can be
produced, and structures that flex in one dimension while retaining rigidity in
another are therefore possible. The process also enables small-mouthed but
smooth-sided plunge cuts which, together with proprietary deep lithographic
techniques developed by us, are useful for creating electrical "via" pathways to
electrically interconnect control elements on the top and bottom of our devices.
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Direct Fusion Bonding
Direct fusion bonding is a process used by us for combining monocrystalline
silicon wafers. These bonds do not rely on any glue-like material and when used
in conjunction with our licensed DRIE processing technique, enable our engineers
to create unique multi-functional devices having superior optical, thermal,
structural, electrical and packaging advantages.
Packaging
Due to financial constraints and personnel reduction, our present ability to
perform packaging services was discontinued during fiscal 2002.
Optical Engineering and Assembly
In addition to using our MEMS-based technology for making components as noted
above, we seek to enhance our capabilities with applied engineering, fabrication
and assembly skills. Our engineering and assembly capabilities for micro optical
electromechanical systems include mirror metallization and coatings;
MEMS-assisted fiber management (including alignment, strain relief and
protection); thermal and electrostatic actuation; latching; fiber lenses; and
metrology.
Our Products and Markets
Products and Services
Our product offerings include mirrors and mirror arrays; optical switches and
switch arrays; variable optical attenuators ("VOA") and VOA arrays. To date, we
have made only prototype deliveries of our products. Revenue recorded by us
during fiscal 2001 was derived from one unaffiliated customer for engineering
work performed by us to design and develop large actuated mirror arrays for a
maker of large, multi-port 3D optical switching systems. We also recorded
payments or receivables during fiscal 2001 from five customers for deliveries of
prototypes of mirror arrays, fiber alignment devices and optical benches. These
payments or receivables for prototypes have been accounted for as an offset to
our research and development expense. During fiscal 2002, we recorded revenue of
$112,500 from two unaffiliated customers for the design and development of 2D
optical switches and actuated mirrors. We also recorded payments or receivables
of $187,000, accounted for as an offset to research and development expense,
during fiscal 2002 from two unaffiliated customers for delivery of prototypes of
actuated mirrors.
Mirrors and Mirror Arrays.
When used in fiber optic telecommunications applications, mirrors must be
optimized for one or more of the following characteristics: size, shape,
environmental temperature tolerance, gimballing, actuation, integration with
electronics, environmental packaging, reflectivity and mounting means. Mirror
arrays require mounting means to hold two or more mirrors in rigid or variable
juxtaposition as may be required in our customers' systems or subsystems. We
manufacture our mirrors and mirror arrays in various existing configurations,
and alternative versions can be customized to meet a customer's requirements.
Optical switches.
These enable an optical signal to be moved between two or more signal-carrying
or control fibers without the need for the signal to be converted to another
energy state. All-optical switches avoid optical to electronic to optical
conversion, which can compromise bandwidth, system size, power consumption,
switching speed and cost. Optical switches must generally provide two
dimensional (2D) or three dimensional (3D) flexure means and a means of
actuating and precisely positioning the switch elements. We presently design and
have the capability to manufacture 2D optical switches to accommodate a
customer's unique requirements. We presently offer 2D optical switches in a
variety of standard and customized configurations. We do not expect to devote
resources to developing complete 3D optical switching systems, but we have
developed, tested and delivered pre-production units of large (>1000 mirror)
arrays that are designed to be components of 1000 port (or larger) 3D optical
switches. Large, multi-port mirror arrays for such switches have comprised a
significant part of our business to date. In the future, however, our
expectation is that other components, including 2D optical switches and optical
switch arrays and variable optical attenuators will become a more dominant
portion of our business.
Optical Switch Arrays.
Arrays must be provided for a very wide range of 2D or 3D configurations. Two
dimensional arrays meeting in a wide variety of characteristics are needed for
switching between 1 or more fibers aligned in a common plane, for example, 1x2,
1x4, 1xn, 2x2, 2x4, 2xn. Three dimensional switches must route
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signals among fiber circuits aligned in different planes. One challenging
configuration can require an ability to receive optical signals from a 1000 port
fiber bundle and switch the signal(s) across free space into any channel of
another 1000 port fiber bundle. Our arrays are presently available in 2D and 3D
configurations and are adapted and customized as necessary.
Variable Optical Attenuators.
VOA's are used to adjust or to equalize the intensity of optical signals among
cooperating fiber optic circuits. VOA arrays accommodate the need to have
multiple attenuators in close proximity for widely varying fiber optic circuit
configurations. Our VOA's are offered with different actuation means and can be
either dynamically variable or lockable and unlockable. "Variable" attenuators
are adjusted upon setup after installation and remain at the selected set point
as long as control power is available. "Lockable" means that the amount of
attenuation is fixed at a particular setting upon initial setup and will remain
at this setting even if control power is lost. "Unlockable" means that the
amount of attenuation that has been previously fixed at a desired set point can
be changed later to a different setting. "Dynamically variable" means that the
attenuator can be continuously modulated by an external feedback control while
the circuit is in use. The ability to choose among these different performance
characteristics allows additional flexibility to system design engineers.
Product Development Efforts
Our goals for future products include MEMS-based tunable filters, optical
add-drop multiplexers and integrated subsystems with controlling electronics. We
strive to design our components and subsystems in a manner that allows our
customers to cascade our products to build very dense, scalable systems. We
intend to expand the functionality of our switching products by incorporating
combinations of new features and functionalities into a single package. In
metropolitan area and enterprise level markets in particular, the manifold
branching of circuits to reach individual users creates the need for a
proliferation of individual component functions near each end point. Each of
these installations requires individual access switches, separate protection
switches and means for balancing circuit strength by use of attenuators. Also,
fibers must be aligned with lenses and all of these must be durably packaged for
installation by technicians working in crowded equipment racks or closets. We
believe our future integration of the various individual component functions
into compact, easily installed unitary packages would save installation and
maintenance labor costs for customers and reduce the space required for mounting
the individual components. Our ability to offer this level of product
integration would be expected to translate to reduced cost of ownership for our
customers and their end customers.
Markets for Optical Components
The demand for broadband telecommunications components is being fueled by
expanded use of the Internet and rising expectations that
high-information-content data (photos, music and video in addition to voice and
text) can be rapidly transmitted. The worldwide need to support these
expectations with telecom and Information Technology (IT) infrastructure
including those for long haul, metro area and local or enterprise LANs is
expected to create an associated need for new types of broadband components such
as the MEMS-based components we produce. We believe the engineering challenges
presently facing telecommunications equipment suppliers, subsystems and
components manufacturers create an opportunity throughout the broadband telecom
marketplace that can be addressed by our MEMS-based products.
Prospective users of MEMS-based optical components include large, worldwide
suppliers of optical telecommunications systems. Companies that supply optical
telecommunication equipment and buy components include: Alcatel and its
affiliates, Cisco Systems, Inc., Ciena Corporation, Lucent Technologies, Inc.,
Marconi plc, NEC Corporation, and Toshiba. Other existing or prospective
customers for MEMS-based optical components include suppliers of subsystems
purchased by the equipment companies. Manufacturers of such subsystems include
(in addition to the equipment companies themselves) companies such as Calient,
Corning, JDS Uniphase, Finisar Corporation, OpLink Communications, Inc.,
Sycamore Networks, Inc., Movaz, Northrop Grumman PolyScientific, and
Glimmerglass Networks. Our business focus is primarily on the manufacture and
sale of components used in multiple types of optical networking systems and
subsystems, rather than a focus on development and sale of entire optical
switching systems.
Customers and Strategic Relationships
We aspire to develop relationships with manufacturers of optical network
equipment to define, develop and manufacture several different types of optical
components to accommodate their specific requirements. Some of
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these products are adaptations of existing designs and processes while others
involve custom designs or development for use together with our existing designs
and processes. In some cases we may assess special charges for non-recurring
engineering work whereas in others we may charge only for special setups or
tooling.
Our revenue for fiscal 2001 was $499,000, which was entirely attributable to
engineering work performed for Glimmerglass Networks, Inc. on actuated mirror
arrays for use in a 3D optical switching system being developed by that company.
We also recorded payments or receivables, accounted for as an offset to research
and development expense, from Glimmerglass Networks and four other customers
during fiscal 2001 for deliveries of prototype products. Our revenue for fiscal
2002 was $112,500, which was attributable to engineering work performed for two
customers on 2D switches and actuated mirrors. We also recorded payments or
receivables during fiscal 2002 from two other customers for delivery of
prototypes of actuated mirrors as an offset to research and development expense.
Research and Development
We have invested substantial resources in research and development activities.
We possess expertise in fiber optics systems processing and packaging, the
microfabrication of electromechanical devices, system architecture and silicon
wafer bonding techniques. 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 will solely support the
current customer base. Our current research and development is directed to
enhancements and improvements to existing products. Our research and development
expenses were approximately $2.8 million, $972,000, and $3.8 million for fiscal
years ended September 28, 2002 and September 29, 2001, and the period from
inception to September 28, 2002, respectively, net of proceeds from development
of prototypes delivered under customer agreements totaling $187,000 and
$210,000, respectively, and have totaled approximately $397,000.
Manufacturing and Operations
We consider our manufacturing expertise to be one of our core competencies and
strengths, and our manufacturing processes to be significant competitive
advantages. To this end management has invested time in designing and
implementing our manufacturing processes. We consider our manufacturing process
a core component of our ability to achieve the production volumes required for
our current customer commitments. We have not manufactured any of our products
in production quantity.
Our manufacturing operations will, in the future, produce products in response
to customer orders and we do not carry a ready product inventory. Product
designs that have been previously produced are sometimes used for production in
response to a customer order or modified or combined with new designs to
accommodate customer requirements. Processes we internally perform include mask
design and layout, photolithography, precision metrology, wafer cleaning and
polishing, wafer bonding, wafer machining, material deposition or plating,
annealing, parametric testing, wafer dicing, fiber cleaving, fiber polishing,
and fiber fusion. We rely on subcontractors for implanting application-specific
integrated circuits if required. We require specialized equipment to engineer
the majority of our products, and processing must often be carried out within
contamination-free clean room conditions, such as those available at our
Hayward, California facility.
Competition
We compete with both large, diversified and also small, focused companies that
also supply optical components intended for the telecommunications market. We
believe that the principal bases of competition in our market include the
overall performance of the components and subsystems and the total cost,
flexibility and scalability of products. Large, diversified companies we may
compete with include Analog Devices, Inc., Avanex Corporation, Corning
Corporation and its affiliates, JDS Uniphase, Finisar Corporation and Oplink
Communications, Inc. Historically, the majority of optical components used have
been assembled from discrete parts manufactured from traditional materials such
as metal, plastic or glass. Some of the larger companies we may compete with
have acquired or developed their own business units that utilize MEMS technology
for certain types of broadband components. These include acquisitions by Analog
Devices, Corning Corporation and JDS Uniphase. In addition, we compete with
smaller similarly focused companies also developing products utilizing MEMS
fabrication processes. These include Applied MEMS, Inc., Integrated
MicroMachines, Inc., OMM, Inc., MegaSense, Inc., MEMSCAP, S.A., and Standard
MEMS, Inc.
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We believe the MEMS processes used and components manufactured by our
prospective competitors have distinguishing characteristics from the processes
and products we employ. We also believe that our processes, including our
licensed processes, enable the creation of products that will differentiate
themselves from those made by other companies. In particular, we believe our
DRIE and direct fusion bonding processes enable thicker mirrors of a single
material that help assure constant flatness over extremes of temperature. The
process also preserves the inherently smooth fine surface finish of the polished
wafers and assures optimum reflectivity. Also, our bonding is accomplished
without the addition of other materials such as organic adhesives or glass frit
that can compromise temperature stability, dimensional control and flatness. We
believe our licensed processes together with our engineers' know-how enables our
flexures to be free of undesirable cross-axis effects, bending only in the
intended direction without simultaneously bending in an undesired way. Our
flexures, if designed to flex left or right, are intended to do so without also
having any undesirable components of up or down movement at the same time. We
also believe the expertise possessed by our management team and engineers in
large volume component production with favorable process yields gives us a
competitive advantage when compared to similarly situated companies.
No assurance can be given however, that our competitors will not independently
develop processes that are capable of supplying components competitive with ours
or in time acquire the equipment and experience necessary to compete with us.
Patents and Intellectual Property
We rely on a combination of intellectual property and trade secret laws and
nondisclosure and confidentiality agreements to establish and protect our
intellectual property.
We have 4 issued U.S. patents expiring in 2016 through 2019, 8 pending patent
applications in the United States, 2 pending application with the European
Patent Office, and 1 pending application in Canada. In addition, at the time of
our separation from BEI Technologies we were granted exclusive, worldwide,
royalty-free and perpetual rights to utilize BEI Technologies' proprietary DRIE
and direct fusion bonding MEMS-based processing technologies in the manufacture
of our products. These licenses are restricted to our use of the technology in
the telecommunications data transmission market.
The possession of patent rights may in the future be helpful in enabling us to
assert claims to exclusive rights to a product or process. We expect to continue
to file for patent protection for products and processes we develop as we deem
appropriate. Such patent rights may not be sufficient protection by themselves,
however, and for this reason, we seek to preserve certain know-how and processes
as trade secrets. This affords some additional protection against copying, as
the means by which certain physical product features are achieved are not
readily discernable merely by inspection. However, if our current processes
should become common knowledge and widely taught and practiced, our competitive
advantage could be diminished unless we continue to enhance our process
know-how.
Policing any unauthorized use of our technology and other intellectual property
is difficult, and we cannot assure you that the measures we take to protect our
intellectual property will be adequate or successful. While our competitive
position may be affected by our ability to protect our proprietary information,
we believe that other factors including the expertise of our engineering
personnel and specialized processing techniques will be significant in helping
us to achieve a competitive position in our principal markets.
Employees
In April 2002, the Company underwent a reduction in force resulting in 8
individuals departing employment with the Company, including engineering,
manufacturing and marketing personnel. Severance pay for the 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 were recorded in the fiscal
quarter ending June 29, 2002.
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 employment by the
Company and accepted employment with a subsidiary of BEI
9
Technologies, as agreed to by both companies. The Company's newly appointed
President and Chief Technical Officer, respectively, 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.
Facilities
Our administrative headquarters are located in San Francisco, California, where
we occupy office space subleased to us by BEI Technologies as part of the
administrative support received from BEI Technologies under our intercompany
services agreement. Our engineering and manufacturing operations are carried out
in a 15,571 square foot facility located in Hayward, California. This facility
is subleased from BEI Technologies, which also conducts research and development
at this location. 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 beginning March 31, 2002,
based on the portion of the facilities the Company requires to support its
current customers. We believe our facility is adequate to meet our current
needs.
RISK FACTORS
Described below are some of the risks we face, although these are not the only
risks and uncertainties we may encounter. If any of the conditions giving rise
to the following risks occur, our business, financial condition or results of
operations could be materially adversely affected. Our actual results could
differ materially from those anticipated in the forward-looking statements
included in this registration statement as a result of many factors, including
the occurrence of any of the conditions described below.
RISKS RELATED TO OUR BUSINESS
We may be unable to continue as a going concern
Given our history of net losses, combined with our inability to date to obtain
third party financing or interest from strategic investors, we may be unable to
continue as a going concern. During fiscal 2002, we reduced operations and
expenditures in an effort to control costs in light of the continued severe
downturn in the telecommunications industry. We are currently unable to
significantly grow or expand our business in light of recent personnel
reductions and other cost-cutting measures. Unless we obtain additional
financing, either as debt or equity funding, we will not have the necessary
resources to take advantage of any upturn in the telecommunications industry and
grow our business. Our ability to continue operations will be contingent on
obtaining additional financing during fiscal 2003.
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. The
majority of operating costs are paid by a related party which 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 the related party. 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
the related party, if required. Management continues to seek additional equity
financing from new and 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. Although management is
confident in its ability to execute its plan to enable the Company to continue
as a going concern there is no assurance that the Company will be able to reduce
expenditures sufficiently, estimate future contract cost accurately, or secure
the necessary financing, in order to continue operations.
We are a company with a very limited operating history, which may make it
difficult to evaluate our business prospects.
We were incorporated in February 2000 and commenced independent operations in
November 2000. We have not generated revenues from sales of our products but
only from engineering work performed for three customers to date. Since
inception, a total of six customers have engaged us to supply prototype models
of our MEMS-based products and we have yet to sell our products in volume
quantities. As a result of our limited operating history, we have only limited
data from operations on which to rely in estimating future revenues and as a
basis for evaluating our future prospects. If we fail to accurately estimate our
future revenue and future operating expenses, we may incur substantially greater
losses or use substantially greater resources than we currently anticipate which
would cause harm to our financial condition and results of operations.
We expect to incur net losses for the foreseeable future. We may never achieve
profitability and we may not succeed as a going concern and our independent
auditor has included a statement to this effect in their most recently issued
audit report.
10
We expect to continue to invest considerable resources in developing our
technology, marketing our products and establishing customer relationships. We
incurred a net loss of approximately $4.1 million for fiscal 2002 and have
incurred a net loss of approximately $5.8 million since inception through fiscal
2002 and we expect to continue to incur net losses for the foreseeable future.
In order to achieve profitability, we will need to generate significantly higher
revenue while containing manufacturing costs and operating expenses. Even if we
achieve profitability in the future, we may not be able to sustain or increase
profitability on a quarterly or annual basis. Prior to realizing sufficient
revenue levels to achieve profitability, we will require additional private or
public financing, which may not be available on acceptable terms and conditions.
If we are unable to obtain necessary financing in order to allow us time to
achieve profitability, our business may fail. Even if we achieve profitability,
we must sustain profitability in the future for our business to succeed.
We may not obtain sufficient affordable capital in the future to fund our
continued need to invest in our manufacturing operations and research and
development.
We will need to continue to make significant capital expenditures to expand our
operations to enhance our manufacturing capability and for research and
development activities to keep pace with rapidly changing technologies. Based on
our current operating plans, we will require additional external financing to
fund our capital expenditures, facilitate our research and development efforts
and for operating expenses. During the past few years, the markets for equity
and debt securities have fluctuated significantly, especially with respect to
technology-related companies, and during some periods public offerings and
private placements of those securities have been extremely difficult to
complete. As a result, in the future, we may not be able to obtain the
additional capital required to fund our operations on reasonable terms, or at
all, and this lack of capital may have a material adverse effect on our business
and results of operations.
Our original line of credit from BEI Technologies was 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. In March 2002, BEI Technologies
increased this line of credit by $1.0 million. As of June 29, 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 June 29,
2002. This determination was the result of the Company's inability to attract
significant strategic partners or third party financing to sustain operations.
In October 2002, BEI Technologies extended the due date of the line of credit to
December 31, 2002. To maintain sufficient liquidity in the future and to fund
operations, we may need to enter into a new credit agreement in the future with
a commercial lender or issue additional equity to a new or existing investors. A
new credit line, if available to us, could have less favorable terms for us than
our existing line of credit agreement with BEI Technologies, including a higher
borrowing rate, more restrictive terms and possibly requiring liens on some or
all of our assets. New equity financing, if available to us, could have less
favorable provisions for us than our existing equity instruments.
A significant portion of our business comes from a few customers, and our
revenues may decline significantly if any of these customers discontinue doing
business with us, or cancel, reduce or delay purchases of our products.
Our success will depend on our continued ability to develop and manage
relationships with significant customers. For the fiscal year ended September
29, 2001, one customer accounted for 100% of our revenues, all of which were
attributable to an engineering agreement with that one customer. During fiscal
2002, we recorded revenue for engineering work from two customers and payments
or receivables for deliveries of prototype products accounted for as an offset
to research and development expense from two other customers. We expect our
dependence on revenues generated from one or a small number of customers to
continue in the near future.
The markets into which we plan to sell our products are dominated by a
relatively small number of optical networking systems and subsystems
manufacturers thereby limiting the number of our potential customers. As a
result, our relationships with significant customers are critically important to
our business. We cannot assure you that we will be able to retain any
significant customers, that we will be able to attract additional customers or
that
11
our customers will be successful in selling their products that incorporate our
components. The loss of, or a significant reduction in orders from one or more
of our largest customers, or an inability to successfully develop relationships
with additional or replacement customers could adversely affect our financial
position and results of operations.
We must manufacture products that meet industry quality standards, or our
customers may choose not to purchase our products, which would harm our
operating results and ultimately our business.
The manufacturing process for our MEMS-based products, as well as each new
manufacturing process we might in the future develop, must pass through varying
levels of qualification by our customers. Customers may require that our
products be certified under international quality standards, such as the
Telecordia and Belcore specifications, or other industry standards. The
Telecordia and Belcore standards help insure that components or subsystems used
by carrier companies meet certain minimum requirements for technical performance
and physical and environmental durability. In some cases our customers will be
responsible for verifying that our components comply with these standards, while
in other cases the responsibility will be ours. We have not yet applied for any
such certifications, nor subjected our products to the complete testing that
such certification might require. Our products may also have to meet other
customer specific requirements. If we experience delays in receiving industry
standard certification or in meeting customer qualifications, our customers may
choose not to purchase our products, which would result in significant lost
revenue opportunities that could harm our business.
Failure to effectively manage our manufacturing facility could adversely affect
our business, financial condition or results of operations.
The operation and management of our high volume facility is a recent activity
for us, and, therefore we cannot guarantee that we will be able to meet future
customer development deadlines, minimize development costs or effectively manage
these operations. It is critical to our growth that we achieve and maintain
acceptable yields in the manufacturing of our products and that we maintain
these yields and quality requirements for each new product or product
enhancement that we introduce. If we fail to achieve and maintain these yields,
our ability to deliver products to customers in a timely and cost-effective
manner and in the quantities that our customers may require could be
significantly impaired.
We must continue to develop, expand and protect our intellectual property and
proprietary rights.
We regard our patents, trade secrets and other proprietary rights as important
to our success, and rely primarily on a combination of intellectual property and
trade secret laws and contractual restrictions to protect our proprietary
rights. We have 4 issued U.S. patents expiring in 2016 through 2019, 8 pending
patent applications in the United States, 2 pending application with the
European Patent Office, and 1 pending application in Canada. There can be no
assurance that any of our pending patent applications or any future patent
applications will be granted or will not be challenged successfully by third
parties, that any patents that may be issued will adequately protect our
technology or intellectual property or will not be challenged by third parties,
or that the patents of others will not have an adverse effect on our ability to
do business.
We also use employee and third party nondisclosure agreements to limit access
to, and distribution of, our proprietary information. There can be no assurance
that the steps we have taken to protect our intellectual property rights will be
adequate to protect our rights, to deter misappropriation of such rights or that
we will be able to detect unauthorized uses and take immediate or effective
steps to enforce our rights. A substantial amount of our intellectual property
was contributed to us by BEI Technologies, and there can also be no assurance
that the steps we have taken to obtain ownership of this intellectual property
will be sufficient to assure our continued ownership of all proprietary rights.
Our license and technical assistance agreement with SiTek, Inc., a
majority-owned subsidiary of BEI Technologies, governs our rights to our
licensed DRIE and direct fusion bonding processes, which are exclusive to us in
the telecommunications field. Our license to these processes is perpetual and
royalty-free, except with respect to certain permitted third-party sublicenses.
Although the grant of these licensed processes is perpetual by its terms, in the
event we should breach the terms or conditions of the license, SiTek could
potentially seek to revoke the license. We consider our rights to these licensed
processes important to our future success.
12
Although we rely on trade secrets to protect our proprietary technology, no
assurance can be given that others will not independently develop or otherwise
acquire the same or substantially equivalent technologies or otherwise gain
unauthorized access to our proprietary technology. In addition, no assurance can
be given that third parties will not obtain patent rights to our trade secrets,
which patent rights could be used to assert infringement claims against us. When
deemed appropriate or necessary, we intend to vigorously protect our
intellectual property rights. However, there can be no assurance that we will be
able to enforce our rights or prevent other parties from designing and marketing
unauthorized products that are based on our technology. Our ability to compete
may be affected by our ability to protect and enforce our proprietary rights,
and any failure to do so for any reason could have a material adverse effect on
our business, results of operations and financial condition.
We may be unable to obtain licenses for the use of third party technology on
acceptable terms.
From time to time, we may be required to license technology from third parties
to develop new products or product enhancements. We cannot assure you that
third-party licenses will be available to us on commercially reasonable terms,
if at all. Our inability to obtain any necessary or desired third-party license
could require us to obtain substitute technology of lower quality or performance
standards or at greater cost, any of which could result in reduced margins and
loss of market share and could seriously harm our business, financial condition
and results of operations.
We have no present intention of listing our common stock with any recognized
national securities exchange or quotation system.
We do not intend to apply for the listing of any class of our equity securities
on any securities exchange or for the inclusion of our equity securities in any
automated quotation system in the near future. Further, our common stock is
subject to transfer restrictions, and beneficial ownership in our common stock
may not be sold, transferred or hypothecated in any manner. Accordingly, our
stock is illiquid, and our stockholders will be required to wait for an unknown
time to sell shares of our stock they currently hold.
Future acquisitions we undertake could harm our business by diverting our
resources and increasing our operating costs.
We may pursue opportunities to buy other technologies or businesses that would
complement our current products and offerings, expand our industry focus,
enhance our technical capabilities, or that may otherwise offer growth
opportunities. Any future acquisitions could result in the use of significant
amounts of cash or equity, the incurrence of debt, and amortization expenses
related to certain intangible assets. Our experience in acquiring other
technologies and businesses is limited. Acquisitions involve numerous risks,
including:
* difficulties in integrating operations, products, technologies and
personnel;
* unanticipated costs or write-offs associated with the acquisition;
* diversion of management's attention from other business concerns;
* diversion of capital and other resources from our existing businesses;
and
* the potential loss of key employees of purchased organizations.
Our products, following our commencement of commercial product sales, may
contain defects that are not detected until after these products have been
integrated into our customers' systems or products. These defects may cause us
to incur additional costs and suffer damage to our reputation.
13
Some of our MEMS-based optical components and subsystems may originally be
designed to be, or eventually be, deployed in large and complex optical network
systems or products used in conjunction with optical networking systems. Our
products must be compatible with other components and subsystems incorporated
into the optical networking system or product. The reliability of our products
and their compatibility with other system or product components will only be
fully tested when deployed in the final application. If we are unable to fix
defects or other problems that may be identified in full deployment or
utilization, we could experience:
* a loss of, or delay in, revenue;
* a loss of existing customers;
* increased repair and warranty costs;
* increased product development expenses;
* damage to our reputation; and
* legal actions by our customers.
Our facility could experience catastrophic loss, which would seriously harm our
operations.
Our subleased research and development and manufacturing facility could be
subject to a catastrophic loss. Any loss of functions at our facility could
disrupt our operations, delay production, shipments and revenue, and result in
large expense to repair and replace such losses, assuming repair or replacement
is even economically feasible or practical for us.
RISKS RELATED TO OUR INDUSTRY
We depend on the continued growth of the optical communications market. If this
market does not develop as rapidly as we expect, our growth could be constrained
and our business could fail.
Our products are targeted towards optical communications systems and subsystems
manufacturers and suppliers and depend on the continued development and growth
of the optical communications market. If optical communications networks are not
expanded significantly by communications service providers, a significant
commercial market for our products will fail to develop. Acceptance of optical
communications networks technology depends on many factors, including:
* its capacity to handle growing demands for transmission of increasing
amounts of video, voice and data;
* its cost effectiveness, performance, reliability and security compared
to other forms of communications technology;
* ability to manufacture products in sufficient volume;
* scalability of products; and
* flexibility of products.
We expect substantially all of our revenues to be derived from MEMS-based
devices, and if the use of MEMS-based products in optical communications
networks fails to achieve commercial success, our business may fail.
We expect MEMS-based devices to account for a substantial portion, if not all,
of our total revenues for the foreseeable future. Market acceptance of
MEMS-based products by optical network systems and subsystems
14
manufacturers and suppliers will be critical to our future success and growth.
To date, we have developed prototype models of custom-designed devices, but our
products have yet to be deployed in any commercial communications systems. If
our customers do not integrate our products into their systems, subsystems or
products, or if these systems, subsystems and products do not in turn gain
acceptance among communication networks service providers, manufacturers and
integrators our revenues will not grow and our business, financial condition and
results of operations will be seriously harmed.
We must develop new products and technology as well as enhancements to our
existing products and technology in order to remain competitive. If we fail to
do so, our products will be unable to compete in the marketplace and we will not
achieve sales growth.
The market for optical communications systems products and technology is
characterized by rapid technological change, new and improved product
introductions, changes in customer requirements and evolving industry standards.
Our future success will depend to a substantial extent on our ability to
develop, introduce and support new products, enhance our existing MEMS-based
technology or develop new technologies on a successful and timely basis. If we
fail to develop and deploy new products or enhancements of existing products on
a successful and timely basis or if we experience delays in the development,
introduction or enhancement of our products, our products will not be
competitive and we will not be able to generate sufficient sales to support our
business.
The development of products utilizing our MEMS-based technology is a complex
process requiring high levels of innovation and highly skilled engineering and
development personnel, as well as the accurate anticipation of technological and
market trends. We cannot assure you that we will be able to identify, develop,
manufacture, market or support new or enhanced products successfully, if at all,
or on a timely basis. Further, we cannot assure you that our new products will
gain market acceptance or that we will be able to respond effectively to product
announcements by competitors, technological changes or emerging industry
standards. Any failure to respond to technological change could significantly
harm our business.
Our ability to reduce costs is limited by our ongoing need to invest in research
and development.
Our industry is characterized by the need for continued investment in research
and development. If we fail to invest sufficiently in research and development,
our products could become less attractive to potential customers, and our
business and financial condition could be materially adversely affected. As a
result of our need to maintain our spending levels in this area, our operating
results could be materially harmed if our net sales do not meet our
expectations. In addition, as a result of our emphasis on research and
development and technological innovation, our operating costs may increase
further in the future.
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 will solely support the current customer base.
We face competition from other providers of optical network systems components
and subsystems that could harm our business and results of operations.
The market for optical components and technology solutions is highly
competitive, highly fragmented and characterized by rapidly changing
technological needs and capabilities. Existing or future competitors may
presently offer or develop optical components that provide design, performance
or other types of advantages over the products that we provide. We expect
competition to persist and intensify in the future. We believe that the
principal bases of competition in our market are:
* overall performance of the product;
* total cost of a particular supplier's product;
* the scalability of the product;
15
* length of the design and production cycles;
* timeliness of the introduction of new products;
* scope and responsiveness of technical support;
* environmental tolerance; and
* versatility of applications.
Our current and potential competitors include large, diversified companies who
have developed or acquired competitive product lines, including Analog Devices,
Inc., Avanex Corporation, Corning Corporation and its affiliates, JDS Uniphase,
Finisar Corporation, and Oplink Communications, Inc. We also compete with
smaller companies similarly strategically focused on developing MEMS-based
products, including Applied MEMS, Inc., Integrated Micro Machines, Inc.,
MegaSense, Inc., MEMSCAP S.A., OMM, Inc., and Standard MEMS, Inc.
Many of our current and potential competitors have longer operating histories
and significantly greater financial, technical, marketing and other resources
than us. As a result, these competitors are able to devote greater resources
than we can to the development, promotion, sale and support of their products.
Some of our competitors have larger market capitalizations or cash reserves than
we do and may be much better positioned than we are to acquire other companies
in order to gain access to new technologies or products that may displace our
products. In addition, some of our competitors have more extensive customer
bases, better-developed distribution channels and broader product offerings than
we have. These companies can leverage their customer bases and broader product
offerings and could adopt aggressive pricing policies to gain market share, all
of which could harm our business. In addition, some of our existing customers
are also potential competitors. These companies may attempt to integrate their
operations by producing their own optical components or subsystems or by
acquiring one of our competitors, thereby eliminating the need to purchase our
products. Further, our current and future competitors may develop products
comparable or superior to those developed by us or adapt more quickly than us to
new technologies, evolving industry standards or customer requirements.
We may be subject to claims of intellectual property infringement.
In the future, we may face litigation regarding patent and other intellectual
property rights. Litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement, invalidity or breaches of indemnities, and there can be
no assurance that adverse parties in any such litigation would not be able to
devote substantially greater financial resources to any litigation proceedings
or that we could prevail in any future litigation. Any such litigation, whether
or not determined in our favor or settled by us, could be costly and would
divert the efforts and attention of our management and technical personnel from
normal business operations, which could have a material adverse effect on our
business, financial condition and results of operations.
Any potential intellectual property litigation also could force us to do one or
more of the following:
* stop selling or incorporating into our products the challenged
intellectual property;
* obtain from the owner of the infringed intellectual property
right a license to sell or use the relevant technology, which
license may not be available on reasonable terms, or at all;
* oblige us to pay indemnities; or
* redesign the products that use the technology.
16
Additionally, we may in the future initiate claims or litigation against third
parties for infringement of our proprietary rights to protect these rights or to
determine the scope and validity of our proprietary rights or the proprietary
rights of competitors. These claims could result in costly litigation and the
diversion of our technical and management personnel.
We are subject to environmental laws and other legal requirements that have the
potential to subject us to substantial liability and increase our costs of doing
business.
Our properties and business operations are subject to a wide variety of federal,
state, and local environmental, health and safety laws and other legal
requirements, including those relating to the storage, use, discharge and
disposal of toxic, volatile or otherwise hazardous substances used in our
manufacturing processes. We cannot assure you that these legal requirements will
not impose on us the need for additional capital expenditures or other
requirements in order to comply with future laws and regulations. If we fail to
obtain required permits or otherwise fail to operate within these or future
legal requirements, we may be required to pay substantial penalties, suspend our
operations or make costly changes to our manufacturing processes or facilities.
RISKS RELATED TO OUR RECENT SEPARATION FROM BEI TECHNOLOGIES AND OUR CONTINUING
RELATIONSHIP
Our future success will depend on our ability to implement the systems and
controls necessary to support our business.
The technology comprising the core of our business was contributed and
transferred to us by BEI Technologies in October 2000. Prior to that time, BEI
Technologies conducted activities related to our present business through
various divisions and subsidiaries and has historically provided us with
operational, financial and other support. Since our separation, effective
November 2000, we have operated as an independent company, but have yet to fully
develop and implement all of the financial, management, information and
reporting systems and controls necessary to support our business. Furthermore,
we will need to continually improve our systems and controls as the size of our
company increases. BEI Technologies initially agreed to provide us with various
interim services through September 2001, however these arrangements have been
extended and may now be terminated by either party upon reasonable notice to the
other party. After the termination of these arrangements, we may not be able to
replace these interim services on terms, including cost, as favorable as those
we will receive from BEI Technologies. We cannot give any assurance that we will
be able to develop the necessary systems resources and controls to support our
business.
BEI Technologies and our directors and management collectively have substantial
control over us, which could delay or prevent a change in our corporate control.
As of December 11, 2002, BEI Technologies and our directors and management
beneficially owned in the aggregate approximately 50% of our outstanding shares
on a fully diluted basis, assuming the conversion of all Series A Preferred
Stock to common stock and exercise of outstanding options. BEI Technologies
alone owns approximately 25% of our total outstanding securities on a fully
diluted basis and 40% of our voting securities on a fully diluted basis, and, as
the holder of our Series A preferred stock, has the right to approve significant
corporate actions, including the issuance of additional shares of preferred
stock, certain acquisitions or asset transfers of the corporation, and
dissolution or liquidation proceedings. BEI Technologies and our directors and
management are in the aggregate able to exercise substantial control over all
matters requiring shareholder approval, including the election of directors and
approval of mergers or other significant corporate transactions, future
issuances of common stock, or other securities, including debt securities, and
may have the ability to delay or prevent an outside party from acquiring or
merging with us.
Two of our directors and certain of our executive officers may have conflicts of
interest because they are also directors of BEI Technologies, formerly or
presently provided services to or were employed by BEI Technologies or own
significant amounts of BEI Technologies' stock.
17
Two members of our board of directors are also directors of BEI Technologies,
one of whom is also our Chief Financial Officer. These directors have
obligations to both companies and may have conflicts of interest with respect to
matters potentially or actually involving or affecting us, such as acquisitions
and other corporate opportunities that may be suitable for both BEI Technologies
or its affiliates and us. These directors collectively own and may in the future
own or have options to purchase significant amounts of BEI Technologies' stock,
as well as collectively own significant amounts of our stock. This ownership
could create, or appear to create, potential conflicts of interest when these
directors are faced with decisions that could have different implications for
BEI Technologies and us.
Out of an average of 12 business days spent each month on professional
management activities, our Chief Financial Officer devotes approximately
three-quarters of his time to us and the remainder to BEI Technologies. During
fiscal 2001, our then incumbent President split his time equally between
providing services to us and BEI Technologies, with a total average of 16
business days spent each month on professional management activities. As of the
commencement of our fiscal year 2002, he began providing services exclusively to
us. As of June 2002, the Company's current President/General Manager was
appointed by the Board of Directors. The Company's new President also serves as
President of a subsidiary of BEI Technologies.
To date, we have not instituted formal procedures for our directors and officers
to follow to safeguard against conflict of interest disputes. We presently rely
on our directors' awareness of their fiduciary duties and our executive
officers' understanding of their responsibilities to us and to each other
company for whom they may serve as a director or in an executive capacity. This
informal policy may not adequately protect us from all conflict of interest
situations. Additionally, when proposed rules requiring adoption of a formal
code of ethics issued by the Securities and Exchange Commission are effective,
we will adopt such a formal policy.
We may have potential business conflicts of interest with BEI Technologies with
respect to our past and ongoing relationships, the resolution of which may not
be as favorable to us as if we were dealing with an unaffiliated party.
We currently have various interim and ongoing agreements with BEI Technologies.
However, disputes could arise between BEI Technologies and us in a number of
areas relating to our past and ongoing relationships, including:
* the nature, extent of, and pricing of the interim services BEI
Technologies has agreed to provide to us;
* intellectual property rights, employee benefits and other matters
arising from our separation from BEI Technologies; and
* major business combinations involving us.
We cannot assure you that we will be able to resolve any conflicts we may have
with BEI Technologies or, if we are able to do so, that the resolution will be
as favorable as if we were dealing with an unaffiliated party. The agreements we
have entered into with BEI Technologies may be amended by mutual agreement of
the parties. It is possible future amendments to these agreements could contain
provisions less favorable to us than the current terms of these agreements.
18
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Name Age Position
- ------------------------------ ---- ----------------------------------------
Dr. Lawrence A. Wan .......... 64 Chairman of the Board
Gerald D. Brasuell............ 54 President
Gary D. Wrench. .............. 69 Chief Financial Officer and Director
Martin Lim. .................. 38 Chief Technical Officer
Danforth Joslyn .............. 72 Director
Charles Crocker .............. 63 Director
Dr. James W. Seeser........... 59 Director
Dr. Lawrence Wan has served as our Chairman of the board and as a director since
our inception. From September 1997 to September 2002, Dr. Wan served as Senior
Vice President and Chief Technical Officer of BEI Technologies and President of
SiTek, Inc., a subsidiary of BEI Technologies. Prior to that, from July 1990 to
September 1997, Dr. Wan served as Vice President and Chief Technical Officer of
BEI Electronics, Inc., renamed BEI Medical Systems Company, Inc. From 1984 until
1990, Dr. Wan served as Vice President, engineering, of Systron Donner
Corporation, and held various technical and general management positions with
that company between 1979 and 1984. From 1968 through 1979, he served as Chief
Executive Officer of Sycom, Inc., a commercial electronics company, of which he
was also a founding member. Dr. Wan holds B.S., M.S. and Ph.D. degrees in
Engineering and Applied Sciences from Yale University. Dr. Wan served as a
director of BEI Medical Systems Company, Inc. until the sale of that company to
Boston Scientific Corporation in July 2002.
Mr. Gerald D. Brasuell has been our President since June 2002. Mr. Brasuell is
also Vice President and General Manager of the Systron Donner Inertial Division
of BEI Technologies and President of SiTek, Inc. Mr. Brasuell has served in the
Systron Donner Inertial Division position since December 6, 2002. Mr. Brasuell
previously served as Vice President and General Manager of Systron Donner
Inertial Division from October 1995 through February 2002. From 1985 until 1995,
Mr. Brasuell held executive staff level positions at Systron Donner Inertial
Division in Program and Contracts Management, Advanced Product Development and
Manufacturing. Between 1976 and 1985 Mr. Brasuell held various technical and
management positions at Systron Donner Inertial Division.
Mr. Gary Wrench has served as our Chief Financial Officer and as a director
since inception. Mr. Wrench's present time commitment to us as our Chief
Financial Officer is part-time. Mr. Wrench served as Senior Vice President and
Chief Financial Officer of BEI Technologies from September 1997 until his
retirement from BEI Technologies in May 2000. Following Mr. Wrench's retirement
from full-time service to BEI Technologies, Mr. Wrench has continued to provide
professional services to BEI Technologies as an independent consultant. From
July 1993 until September 1997, he served as Senior Vice President and Chief
Financial Officer of BEI Electronics, Inc., renamed BEI Medical Systems Company,
Inc. From April 1985 to July 1993, he served as vice president of BEI
Electronics, Inc. and President and Chief Executive Officer of BEI Motion
Systems Company, Inc., then a wholly owned subsidiary of BEI Electronics, Inc.,
now a part of BEI Technologies. Mr. Wrench holds a B.A. from Pomona College and
an M.B.A. from the University of California, Los Angeles. Mr. Wrench serves as a
member of the board of directors of BEI Technologies, Inc. He also served as a
director of BEI Medical Systems Company, Inc. until the sale of that company to
Boston Scientific Corporation in July 2002.
Mr. Martin Lim has served as our Chief Technical Officer since May 2000. From
May 1997 to January 2001, Mr. Lim served as the director of technology for
SiTek, Inc., a subsidiary of BEI Technologies, where he initiated programs in
microfluidics, biomedical implants and photonic devices. From March 1995 until
May 1997, Mr. Lim served as Senior Technologist for BEI Technologies,
specializing in developing advanced silicon-based sensors and microfabrication
initiatives. From December 1989 to January 1995, Mr. Lim was a member of the
research staff at Xerox's Palo Alto research center focusing on MEMS technology
research as applied to microfluidic ink jet printing. Mr. Lim has been awarded 9
U.S. patents in both device and processes technologies. Mr. Lim holds B.S. and
M.S. degrees in Mechanical Engineering from the University of California at
Berkeley.
Mr. Danforth Joslyn has served as a director since inception. From inception to
June 2002, Mr. Joslyn served on a part-time basis as the Company's President.
From 1998 to the present, Mr. Joslyn has served on a less than full time basis
as an executive officer of Neovasys, Inc., a development stage medical device
company of which he
19
was a founder. From 1998 to the commencement of our 2002 fiscal year, Mr. Joslyn
provided services to BEI Technologies as an independent consultant. From 1993 to
1998, Mr. Joslyn served in an executive capacity with similarly focused
predecessor companies to Neovasys. Mr. Joslyn was a founder of Optical Coating
Laboratory, Inc. (OCLI), a company specializing in vacuum deposited thin film
products serving the optical networking, medical and defense markets. From 1988
to 1993, Mr. Joslyn served as President and Chief Executive Officer of a joint
venture established to develop color-shifting pigments for the security market
by OCLI and Imperial Chemical Industries. From 1959 to 1993, Mr. Joslyn served
as a member of OCLI's board of directors and in various executive positions with
OCLI, including as its President and chief operating officer. Mr. Joslyn holds a
B.S. and a J.D. from George Washington University
Mr. Charles Crocker has served as a member of our board of directors since
inception. Mr. Crocker was a founder of BEI Technologies, and has served as
Chairman of the board of directors and Chief Executive Officer of BEI
Technologies since September 1997. Mr. Crocker also served as President of BEI
Technologies until May 2000. Mr. Crocker served as President of Crocker Capital
Corporation from 1970 to 1985, and as general partner of Crocker Associates, a
venture capital investment partnership, from 1970 to 1990. Mr. Crocker holds a
B.S. from Stanford University and an M.B.A. from the University of California,
Berkeley. Mr. Crocker serves as a member of the board of directors of Fiduciary
Trust Company International, Pope & Talbot, Inc., BEI Technologies, Inc. and
Teledyne Technologies, Inc.
Dr. James W. Seeser was elected as a Director of OpticNet in August 2002. He has
advised several companies in technical management after completing a 18 year
career in 2001 with Optical Coating Laboratories, Inc. ("OCLI"), a division of
JDS Uniphase ("JDSU"). He was most recently a vice president at OCLI after
serving for 7 years as Chief Technical Officer for OCLI in charge of U.S. and
foreign technology integration. Prior to that, he was in charge of various
operating units of OCLI. Dr. Seeser received his Ph.D. and M.S. from the
University of Missouri and his B.A. from Drury College. Dr. Seeser has received
several patents for his inventions and has published numerous technical
articles.
Board of Directors and Officers
The members of our board of directors are currently elected annually for a term
of one year. Upon election, all directors hold office until the next annual
meeting of stockholders at which their terms expire and until their successors
have been duly elected and qualified. In the event we should no longer be
subject to certain provisions of the California Corporations Code with which we
must presently comply, we intend to provide for a classified board of directors,
which could have the effect of deterring hostile takeovers or delaying changes
in control of management. Our executive officers serve at the discretion of the
board of directors. There are no family relationships among any of our officers
and directors. Directors who are not officers of OpticNet do not presently
receive any compensation for their services as board members, though they may be
reimbursed for expenses in connection with attendance at board meetings.
Committees of the Board of Directors
We do not presently have any standing committees of the board. We will establish
an audit and compensation committees prior to listing our shares for trading
with any nationally recognized securities exchange or quotation system.
Services Provided by our President and Chief Financial Officer
Mr. Joslyn, our former President (until June 2002), was party to a consulting
Agreement with us, and Mr. Wrench, our Chief Financial Officer, is party to a
consulting agreement with BEI Technologies. During fiscal 2002, each of Mr.
Joslyn and Mr., Wrench divided their time spent on professional management
activities between service to us and service to BEI Technologies. Mr. Joslyn's
agreement with us covered Mr. Joslyn's continuing monthly services to us. During
fiscal 2001, Mr. Joslyn split his time equally between service to us and BEI
Technologies, based on an average of 16 business days combined service per
month, and payments to Mr. Joslyn under this agreement were allocated to our
account and that of BEI Technologies on an equal basis. During fiscal 2001,
payments to Mr. Joslyn allocated to our account under this agreement totaled
$32,000 and $32,000 was allocated to the account of BEI Technologies. As of the
commencement of our 2002 fiscal year, Mr. Joslyn began providing services
exclusively to us under this agreement. As of June 2002, we recognized
20
payments to Mr. Joslyn of approximately $53,000. Mr. Wrench's agreement with BEI
Technologies includes coverage of services performed on our behalf and payments
to Mr. Wrench under this agreement are allocated to our account and that of BEI
Technologies on the basis of time spent by Mr. Wrench each month on behalf of
each company. Mr. Wrench's agreement provides Mr. Wrench is to be compensated at
a rate of $6,000 per month, plus payment of $1,200 per day for service to us or
to BEI Technologies that exceeds five days per month. Service to us averages
approximately three quarters of Mr. Wrench's professional time each month, out
of an average of twelve business days of combined service to us and BEI
Technologies each month. During fiscal 2002, payments to Mr. Wrench allocated to
us under this agreement totaled $94,000. The agreement between BEI Technologies
and Mr. Wrench provides for a one-year term, renewable annually in June of each
year upon mutual agreement of the parties and is cancelable by either party upon
thirty days written notice.
ITEM 2. PROPERTIES
Our properties consist of leased facility space and leased equipment. We lease
facility space used for administrative purposes in San Francisco, California,
and we lease a facility for sales, manufacturing and research and development
purposes in Hayward, California. We lease certain core equipment used in
operations that we have installed at our Hayward, California facility.
Additionally, we may use facilities located in Concord, California from time to
time as permitted under our intercompany agreement with BEI Technologies. We
believe that our existing properties and equipment are adequate for present
operations. The Company's principal facilities are as follows:
Location Description of Facility
- --------------------------------------------------------------------------------
Hayward, California Leases approximately 15,571 square foot manufacturing,
research and development facility.
ITEM 3. LEGAL PROCEEDINGS
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 September 28, 2002, cannot be
reasonably estimated as to the future financial impact. The Company believes
this claim has no merit and is rigorously defending the allegation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for our voting common stock or
nonvoting common stock. As of December 11, 2002, shares of our voting common
stock were held by approximately 3,000 record holders, shares of our nonvoting
common stock were held by 22 individuals and approximately 146,000 shares of our
voting common stock were subject to outstanding options. Our common stock is
currently subject to significant restrictions on transfer as set forth in our
bylaws. We have paid no dividends during the past three fiscal years. The
payment and amount of cash dividends on our common stock is at the discretion of
our board of directors. We anticipate that for the foreseeable future we will
retain earnings, if any, for use in our business.
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 Series B Preferred Stock to BEI Technologies, in exchange
for financing provided during the third and fourth quarters of fiscal 2002 in
the amount of $1,814,642. The sale was exempt under Regulation D of the
Securities Act of 1933.
22
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
- -----------------------------------------------------------------------------------------------------------------------------
Plan Category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding options, remaining available for
outstanding options, warrants and rights future issuance under equity
warrants and rights (a) compensation plans
(excluding securities
reflected in column (a))
- -----------------------------------------------------------------------------------------------------------------------------
Equity Compensation plans
approved by security holders:
2000 Equity Incentive Plan 145,833 $0.09 830,481
Equity Compensation plans
not approved by security
holders: -- -- --
Total 145,833 $0.09 830,481
- -----------------------------------------------------------------------------------------------------------------------------
23
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data
The following table sets forth our selected historical financial data, which
includes research and development expenses borne by BEI Technologies since our
inception through fiscal 2002. We derived the data as of and for the fiscal
years ended September 28, 2002 and September 29, 2001, and from February 23,
2000 (inception) to September 30, 2000 and from February 23, 2000 (inception) to
September 28, 2002 from our audited financial statements and related notes. This
data should be read in conjunction with our audited financial statements and
related notes for the fiscal years ended September 28, 2002 and September 29,
2001, and from February 23, 2000 (inception) to September 30, 2000 and from
February 23, 2000 (inception) to September 28, 2002 included at Item 7 of this
Form 10-K, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Period From Period From
Year Ended Year Ended February 23, 2000 February 23,
September 28, September 29, (Inception) to 2000 (Inception) to
2002 2001 September 30, 2000 September 28, 2002
-------------------------------------------------------------------------------------------------------
Statement of
Operations Data:
Revenues $ 112,500 $ 499,000 $ -- $ 611,500
Gross Profit 28,699 239,360 -- 268,059
Net Loss (4,131,429) (1,574,755) (105,746) (5,811,930)
Balance Sheet Data:
Cash and Cash
Equivalent $ 4,881 $ 828,489 $ 1,012,803 $ 4,881
Total Assets 9,196 1,048,849 1,012,803 9,196
Stockholders' Deficit (2,915,327) (614,177) 944,073 (2,915,327)
The information for the 2002, 2001 and 2000 fiscal years' quarters presented
below is unaudited but has been prepared on the same basis as the audited
financial statements appearing elsewhere in this form 10-K. In the opinion of
management, all necessary adjustments consisting only of normal recurring
adjustments, have been included to present fairly the unaudited quarterly
results when read in conjunction with our audited financial statements and the
related notes. These operating results are not necessarily indicative of the
results of any future period. All expense categories below include stock-based
compensation.
September June 29, March 30, December September June 30,
28, 2002 2002 2002 29, 2002 29, 2001 2001
----------- ----------- ----------- ----------- ----------- -----------
Statement of
Operations Data:
Revenues $ -- $ 25,000 $ -- $ 87,500 $ -- $ 174,000
Gross Profit (loss) (27,549) 12,500 -- 43,748 -- 109,360
Net Loss (496,217) (1,149,501) (1,767,771) (717,940) (1,001,371) (239,364)
Loss Per Share (0.09) (0.20) (0.32) (0.13) (0.19) (0.05)
Balance Sheet Data
(as of the dates
noted above):
Cash and Cash
Equivalents $ 4,881 $ 21,655 $ 106,834 $ 530,893 $ 828,489 $ 1,071,404
Total Assets 9,196 74,749 308,538 852,919 1,048,849 1,247,258
Stockholders'
Deficit (2,915,327) (3,080,376) (3,090,926) (1,328,502) (614,177) 430,529
----------- ----------- ----------- ----------- ----------- -----------
February 23,
2000
(inception)
March 31, December September July 2, to April 1,
2001 30, 2000 30, 2000 2000 2000
----------- ----------- ----------- -------- ---------
Statement of
Operations Data:
Revenues $ 325,000 $ -- $ -- $ -- $ --
Gross Profit (loss) 130,000 -- -- -- --
Net Loss (157,992) (176,028) (105,746) -- --
Loss Per Share (0.03) (0.04) (0.08) -- --
Balance Sheet Data
(as of the dates
noted above):
Cash and Cash
Equivalents $ 1,062,724 $ 1,278,834 $ 1,012,803 -- --
Total Assets 1,164,580 1,381,318 1,012,803 -- --
Stockholders'
Deficit 669,893 868,971 944,073 -- --
----------- ----------- ----------- -------- ---------
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our
historical financial statements and the notes to those financial statements,
which are included in this Form 10-K. Except for the historical information
contained herein, the following discussion contains forward-looking statements
that involve risks and uncertainties. Our actual results could differ materially
from those discussed in, or implied by, these forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to; those discussed in this section and in the "Business--Risk
Factors"--section of this Form 10-K.
See "Critical accounting policies and the use of estimates" for a description of
the Company's critical accounting policies.
The following table sets forth, for the fiscal years ended September 28, 2002
and September 29, 2001 and the period from February 23, 2000 (inception) to
September 30, 2000, the percentage of net sales represented by certain items in
the Company's Statements of Operations.
Fiscal Period Ended
2002 2001 2000
----- ----- -----
Net sales ......................................... 100% 100% -- %
Cost of sales ..................................... 74 52 --
----- ---- ----
Gross profit ...................................... 26 48 --
Operating expenses:
Selling, general and administrative expenses ...... 1137 174 --
Research, development and related expenses ........ 2453 195 --
----- ---- -----
Loss before interest and taxation (EBIT) .......... (3564) (321) --
Other income ...................................... 3 10 --
Interest expense .................................. (112) (5) --
----- ---- -----
Net loss .......................................... (3673%) (316%) -- %
===== ==== =====
Results of Operations
Years ended September 28, 2002 and September 29, 2001
Revenues
Revenues during fiscal 2002 reflected work performed under engineering
agreements with two unaffiliated customers and decreased approximately $387,000
to $112,500 from a similar period in fiscal 2001. The decrease is due to the
slow down of demand for new telecommunications equipment components as compared
to prior periods. During fiscal 2001, revenues were $499,000, which reflected
work performed under an engineering agreement with one customer, Glimmerglass
Networks.
Cost of Revenues and Gross Profit
Cost of revenues as a percentage of revenues in fiscal 2002 increased by 22
percentage points to 74%. The increase is due to higher direct costs on
engineering agreements in the current year. In fiscal 2001, cost of revenues as
a percentage of net revenues was 52%, resulting in gross profit of approximately
$239,000. Cost of revenues includes salaries, materials and production overhead.
Selling, General and Administrative Expenses
Selling, general and administrative expenses during fiscal 2002 increased
approximately $410,000 over fiscal 2001 to $1.3 million. The increase was
primarily due to increased professional, consulting and legal fees of
approximately $567,000. The remaining increase was due to facility rent, which
in fiscal 2002 was the first full year of rent expense, travel and other costs.
Selling, general and administrative expenses included payments
25
made to BEI Technologies for various accounting, human resources and other
administrative services provided by BEI Technologies pursuant to the Services
Agreement between the two companies. These payments during fiscal 2002 were
$50,000. The cost of these services was established at $25,000 per fiscal
quarter at the time of entrance into the Services Agreement based upon the
square footage, headcount, usage and other methods management believes to be
reasonable. In the fiscal quarter ended June 29, 2002, BEI Technologies agreed
to suspend charges for the third and fourth fiscal quarters and reduce the level
of administrative support to a minimal level reflecting the reduced operations
of the Company in the six months ended September 28, 2002 due to the Company's
inability to obtain significant strategic partners or third party financing. As
a percentage of net revenues, selling, general and administrative expense was
1137% in fiscal 2002 compared to 174% in fiscal 2001.
Research and Development Expenses
Research and development expenses during fiscal 2002 increased approximately
$1.8 million over fiscal 2001 to $2.8 million. The increase was primarily due to
increased gross costs for direct employee compensation expense and related
benefits of approximately $1.3 million resulting from a significant staffing up
of research and development headcount in expectation of increased market demand,
increased gross costs for facility rent and operations of approximately $95,000,
as well as increased gross costs for materials and supplies of approximately
$470,000. Many of these costs had a full year effect for the first time in
fiscal 2002. The remaining increase was due to gross costs for professional
fees, travel and other costs. During fiscal 2002, the Company recorded payments
or receivables of $187,000 for deliveries of prototype products to two
unaffiliated customers as a net against research and development expense. In
addition, the Company recorded payments or receivables for deliveries of
prototype products during fiscal 2001 of $210,000 from a total of five
customers, including Glimmerglass Networks. Payments or receivables for
deliveries of prototype products were accounted for as an offset to research and
development expense. As a percentage of net revenues, research and development
expense was 2453% in fiscal 2002 compared to 195% in fiscal 2001.
Related Party Financing
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. 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. See Note 2 for a further
description of the relationship with BEI Technologies.
Interest Expense and Interest Income
Interest expense during fiscal 2002 increased approximately $102,000 to $125,000
as compared to fiscal 2001 due to the increased average outstanding balance and
additional borrowings on the Company's line of credit agreement with BEI
Technologies.
Interest income was $4,000 in fiscal 2002, and $50,000 in fiscal 2001 due to the
decrease in income earned on highly liquid investments.
26
Liquidity and Capital Resources
During fiscal 2002 total cash used in operations was approximately $4.1 million.
Cash provided by operations included the positive impact of non-cash charges
from depreciation and amortization of $21,000 and $14,000, respectively. In
addition, positive impacts to cash resources resulted from decreases in trade
receivables, prepaid expenses, and other current assets, of $100,000, $15,000,
and $62,000, respectively and an increase in other related party liabilities of
$214,000. These cash inflows were offset by a net loss of $4.1 million, as well
as decreases in trade accounts payable, accrued and other liabilities, customer
advances, and deferred rent of $119,000, $284,000, $25,000 and $15,000,
respectively.
Cash provided by investing activities during fiscal 2002 consisted of a purchase
of approximately $3,000 in capital equipment, offset by a decrease in other
assets of $21,000. Rent expense related to this equipment totaled approximately
$399,000 during the first six months of fiscal 2002. Beginning in the third
quarter of fiscal 2002, the Company reduced operations due to its inability to
obtain additional financing from unaffiliated investors to date. Thus, due to
reduced usage now expected on the subleased equipment, past rent expenses on the
subleases is not necessarily indicative of future results. Rent expense for
fiscal 2002 was approximately $0.7 million. Transactions with BEI Technologies,
a minority investor and the Company's former parent company, are not necessarily
on an arms-length basis and the Company may receive more favorable terms under
these arrangements than it would from an unrelated party.
Cash provided by financing activities during fiscal 2002 consisted of net
proceeds of $1.5 million 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.
Also during fiscal 2002, cash from financing activities included the provision
of financing, subsequently converted into Series B preferred stock of the
Company following year-end and option exercises for common stock of
approximately $2,000.
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 September 28, 2002, the Company had an accumulated
deficit of $5.8 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. During fiscal 2002, the Company
completed an equity investment in the Company by BEI Technologies, in the form
of nonvoting preferred stock, 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 8
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.
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
27
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.
Management has developed a plan to enable the Company to continue as a going
concern, see "Item 1. Business - Risk Factors" and Note 1.
Year ended September 29, 2001 and Period from Inception to September 30, 2000
Revenues
During fiscal 2001, revenues were $499,000, reflecting work performed under an
engineering agreement with one customer, Glimmerglass Networks. There were no
revenues generated in the period from inception to the end of fiscal 2000.
Cost of Revenues and Gross Profit
In fiscal 2001, cost of revenues as a percentage of net revenues was 52%,
resulting in gross profit of approximately $239,000. Cost of revenues includes
salaries, materials and production overhead. There was no cost of revenues in
the period from inception to the end of fiscal 2000.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in fiscal 2001 increased $854,000
from $15,000 in the period of inception to the end of fiscal 2000 to $869,000.
These expenses consisted primarily of direct employee compensation expense and
related benefits of approximately $396,000, as well as professional, consulting
and legal fees of approximately $273,000. As a percentage of net revenues,
selling, general and administrative expense was 174% in fiscal 2001.
Selling, general and administrative expenses paid to BEI Technologies by us
during fiscal 2001 totaled $75,000, which covered services received from BEI
Technologies under our InterCompany Services Agreement for three fiscal quarters
during fiscal 2001 at a cost of $25,000 per fiscal quarter. The per fiscal
quarter cost of $25,000 for services covered under our InterCompany Agreement
was established based upon square footage, headcount, usage and other methods
that management believes to be reasonable.
Research and Development Expenses
Research and development expenses in fiscal 2001 increased $870,000 from
$102,000 in the period of inception to the end of fiscal 2000 to $972,000. The
increase was due to a full year operating period in fiscal 2001 as an
independent company dedicated to expanding operations, compared with seven
months in fiscal 2000 during which we were still in an organizational stage.
Research and development expenses in fiscal 2001 consisted primarily of gross
costs for direct employee compensation expense and related benefits of
approximately $614,000 and gross costs related to facility rent and operations
of approximately $219,000. In addition, we recorded payments or receivables for
deliveries of prototype products during fiscal 2001, accounted for as an offset
to research and development expense, from a total of five customers, including
Glimmerglass Networks. As a percentage of net revenues, research and development
expense was 195% in fiscal 2001.
Interest Expense and Interest Income
Interest expense was $24,000 in fiscal 2001 due to borrowings during the year
under our line of credit agreement with BEI Technologies.
Interest income was $50,000 in fiscal 2001, and $11,000 in the period from
inception to the end of fiscal 2000 due to income earned on highly liquid
investments.
Liquidity and Capital Resources
During fiscal 2001, we used $1,316,000 of cash and cash equivalents in
operations. Increases in accrued expenses and other liabilities and accounts
payable of $319,000 and $131,000, respectively, together with a non-cash charge
for depreciation and amortization of $12,000, and other cash inflows of $3,000
provided $465,000 in cash. These cash inflows were offset by a net loss of
$1,575,000, as well as increases in trade receivables, other current assets and
prepaid expenses of $100,000, $62,000 and $19,000, respectively, and a decrease
in customer advances of $25,000.
28
Investing activities in fiscal 2001 consisted of our purchase of $21,000 in
capital equipment to support increased research, development and production and
our entrance into an equipment sublease arrangement with BEI Technologies.
During fiscal 2001, we financed equipment with a value of $708,000 under this
arrangement, with an initial lease term of three years. Our transactions with
BEI Technologies, a minority investor and our former parent company, are not
necessarily on an arms-length basis and we may receive more favorable terms
under these arrangements than we would from an unrelated third-party. In
addition, an increase in deposits resulted in cash outflows of $22,000.
Financing activities for us in fiscal 2001 generated $1,175,000 of cash inflows.
Borrowings were $1,331,000 during the year on our note payable to BEI
Technologies under our line of credit. The borrowings were used to fund daily
operations, capital investments and product development. Additionally, the
issuance of common stock generated $8,000 in cash. These cash inflows were
partially offset by $164,000 of principal repayments on the note payable.
Effects of Inflation
Management believes that, for the periods presented, inflation has not had a
material effect on our operations.
Financing from Related Party
Pursuant to the facilities sublease agreement, equipment sublease agreement and
the Services Agreement, payments due to BEI Technologies were as follows:
Fiscal Years Ended:
Period from February 23, September 29, September 28, Period from February 23,
2000 (inception) to 2001 2002 2000 (inception) to
September 30, 2000 September 28, 2002
----------------------------------------------------------------------------------------
Subleases
Facilities sublease ....... $8,486 $213,569 $134,585 $356,640
Equipment sublease ........ -- -- 660,449 660,449
Total amounts financed under
subleases....................... 8,486 213,569 795,034 1,017,089
Intercompany service
charges......................... -- 75,000 50,000 125,000
Total payments due.............. $8,486 $288,569 $845,034 $1,142,089
Recent Developments
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 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.
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
29
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 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
fiscal 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 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 are offset against
research and development expense in the statements of operations.
30
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.
31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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
effort in their most recently issued audit report.
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.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
OpticNet, Inc.
(a development stage company)
Balance Sheets
September 28, September 29,
2002 2001
---------- ----------
Assets
Current assets:
Cash and cash equivalents ............................. $ 4,881 $ 828,489
Trade receivables, less customer allowance for
doubtful accounts (2002--$57,080; 2001--$0) .......... -- 99,720
Prepaid expenses ...................................... 3,263 18,528
Other current assets .................................. 324 62,103
---------- ----------
Total current assets ..................................... 8,468 1,008,840
Property and equipment, net ........................... -- 17,984
Deposits .............................................. 728 22,025
---------- ----------
$ 9,196 $1,048,849
========== ==========
See accompanying notes.
33
OpticNet, Inc.
(a development stage company)
Balance Sheets (cont.)
September 28, September 29,
2002 2001
----------- -----------
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable ................................................................... $ 13,713 $ 132,574
Accrued expenses and other liabilities ............................................. 40,394 324,174
Other related party liabilities .................................................... 214,078 --
Note payable to related party ...................................................... 2,656,338 1,166,608
Customer advances .................................................................. -- 25,000
----------- -----------
Total current liabilities ............................................................. 2,924,523 1,648,356
Deferred rent ...................................................................... -- 14,670
Stockholders' deficit:
Preferred stock (authorized 22,000,000 shares):
Series A convertible preferred stock:
($0.0001 par value; 2,000,000 issued and
outstanding and liquidation preference of
$1,000,000 at September 28, 2002,
and September 29, 2001) .......................................................... 200 200
Common stock:
($0.0001 par value; authorized 50,000,000 shares;
issued and outstanding;
September 28, 2002--6,092,104;
September 29, 2001--6,311,428) ................................................... 235 139
Equity funding from a related party,
see Note 13 ...................................................................... 1,815 --
Additional paid-in capital .......................................................... 2,943,118 1,098,500
Deferred stock-based compensation ................................................... (48,765) (32,515)
Deficit accumulated during the development stage .................................... (5,811,930) (1,680,501)
----------- -----------
Total stockholders' deficit ........................................................... (2,915,327) (614,177)
----------- -----------
$ 9,196 $ 1,048,849
=========== ===========
See accompanying notes.
34
OpticNet, Inc.
(a development stage company)
Statements of Operations
Period from Period from
February 23, 2000 February 23, 2000
Year Ended Year Ended (inception) to (inception) to
September 28, September 29, September 30, September 28,
2002 2001 2000 2002
----------- ----------- --------- -----------
Revenues ................................. $ 112,500 $ 499,000 $ -- $ 611,500
Cost of revenues ......................... 83,801 259,640 -- 343,441
----------- ----------- --------- -----------
Gross profit ............................. 28,699 239,360 -- 268,059
Operating expenses:
Selling, general
and administrative ..................... 1,279,239 868,769 15,000 2,163,008
Research and
development ............................ 2,759,323 971,952 101,564 3,832,839
----------- ----------- --------- -----------
Total operating
expenses .............................. 4,038,562 1,840,721 116,564 5,995,847
----------- ----------- --------- -----------
Loss from operations ..................... (4,009,863) (1,601,361) (116,564) (5,727,788)
Other income (expense):
Other income ............................. 3,897 50,458 10,818 65,173
Interest expense ......................... (125,463) (23,852) -- (149,315)
----------- ----------- --------- -----------
Other income
(expense), net ........................ (121,566) 26,606 10,818 (84,142)
----------- ----------- --------- -----------
Net loss accumulated
in the development
stage ................................. $(4,131,429) $(1,574,755) $(105,746) $(5,811,930)
=========== =========== ========= ===========
Basic and diluted net
loss per share ........................... $ (0.74) $ (0.32) $ (0.15) $ (1.36)
=========== =========== ========= ===========
Weighted average shares
used in computation of
basic and diluted loss
per share ............................. 5,586,971 4,989,132 683,765 4,266,774
=========== =========== ========= ===========
See accompanying notes.
35
OpticNet, Inc.
(a development stage company)
Statements of Stockholders' Deficit
Equity
Funding
from a
Preferred Treasury Related
Stock Common Stock Stock Party
--------------------------------------------------------------------------
Shares Amount Shares Amount Shares
--------------------------------------------------------------------------
Balance at February 23, 2000 (inception) .. -- $ -- -- $ -- -- $ --
Net loss for the period
ending September 30,
2000 ....................................
Issuance of restricted
Nonvoting common
Stock in exchange for
cash in June 2000 at
$0.035 per share ........................ 1,285,712 129
Issuance of restricted
Nonvoting common
Stock in June 2000 at
$0.035 per share
(subject to repurchase
right by the company,
lapsing in exchange
for continued service) .................. 1,652,572
Issuance of convertible
preferred stock for
cash to BEI
Technologies in
July 2000 at $0.50 per
Share ................................... 2,000,000 200
Amortization of
Deferred stock
Compensation ............................
--------- ---- ---------- ---- ------- ------
Balance at September
30, 2000 ................................ 2,000,000 200 2,938,284 129 -- --
Net loss .................................
Issuance of voting
Common stock to BEI
Technologies in Nov-
ember 2000 for intel-
lectual property rights
and technology .......................... 3,616,000
Repurchase of restric-
ted common stock in
January 2001 ............................. (342,856)
Issuance of restricted
nonvoting common
stock in exchange for
cash in February 2001
at $0.08 per share ...................... 100,000 10
Amortization of defer-
red stock compensa-
tion ....................................
--------- ---- ---------- ---- ------- ------
Balance at September
29, 2001 ................................ 2,000,000 200 6,311,428 139 -- --
Net loss .................................
Equity funding from a
related party, see Note 13 .............. 1,815
Treasury stock ........................... (967,056) 967,056
Issuance of restricted
nonvoting common stock in
August/September 2002 at
$0.04 per share ......................... 930,000 93
Repurchase of restrict-
ed common stock ......................... (205,954)
Stock options exercised .................. 23,686 3
Amortization of defer-
red stock compensation ..................
--------- ---- ---------- ---- ------- ------
Balance at September
28, 2002 ................................ 2,000,000 $200 6,092,104 $235 967,056 $1,815
========= ==== ========= ==== ======= ======
See accompanying notes
36
OpticNet, Inc.
(a development stage company)
Statements of Stockholders' Deficit (Cont.)
Deficit
Accumulated
Additional Deferred During the Total
Paid-In Stock-Based Development Stockholders'
Capital Compensation Stage Deficit
---------------------------------------------------------------------
---------------------------------------------------------------------
Balance at February 23, 2000 (inception) .. $ -- $ -- $ -- $ --
Net loss for the period
ending September 30,
2000 .................................... (105,746) (105,746)
Issuance of restricted
Nonvoting common
Stock in exchange for
cash in June 2000 at
$0.035 per share ........................ 44,870 44,999
Issuance of restricted
Nonvoting common
Stock in June 2000 at
$0.035 per share
(subject to repurchase
right by the company,
lapsing in exchange
for continued service) .................. 57,840 (57,840)
Issuance of convertible
preferred stock for
cash to BEI
Technologies in
July 2000 at $0.50 per
Share ................................... 999,800 1,000,000
Amortization of
Deferred stock
Compensation ............................ 4,820 4,820
----------- -------- ----------- -----------
Balance at September
30, 2000 ................................ 1,102,510 (53,020) (105,746) 44,073
Net loss ................................. (1,574,755) (1,574,755)
Issuance of voting
Common stock to BEI
Technologies in Nov-
ember 2000 for intel-
lectual property rights
and technology ..........................
Repurchase of restric-
ted common stock in
January 2001 ............................. (12,000) 12,000
Issuance of restricted
nonvoting common
stock in exchange for
cash in February 2001
at $0.08 per share ...................... 7,990 8,000
Amortization of defer-
red stock compensa-
tion .................................... 8,505 8,505
----------- -------- ----------- -----------
Balance at September
29, 2001 ................................ 1,098,500 (32,515) (1,680,501) (614,177)
Net loss ................................. (4,131,429) (4,131,429)
Equity funding from a
related party, see Note 13 .............. 1,812,827 1,814,642
Treasury stock ...........................
Issuance of restricted
nonvoting common stock in
August/September 2002 at
$0.04 per share ......................... 37,107 (37,200)
Repurchase of restricted
common stock ............................ (7,208) 7,208
Stock options exercised .................. 1,892 1,895
Amortization of deferred
stock compensation ...................... 13,742 13,742
----------- -------- ----------- -----------
Balance at September
28, 2002 ................................ $ 2,943,118 $(48,765) $(5,811,930) $(2,915,327)
=========== ======== =========== ===========
See accompanying notes.
37
OpticNet, Inc.
(a development stage company)
Statements of Cash Flows
Period from Period from
February 23, 2000 February 23, 2000
Year Ended Year Ended (inception) to (inception) to
September 28, September 29, September 30, September 28,
2002 2001 2000 2002
----------- ------------ ---------- ------------
Operating activities:
Net loss ................. $(4,131,429) $(1,574,755) $(105,746) $(5,811,930)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation ........... 21,228 3,264 -- 24,492
Amortization ........... 13,742 8,505 4,820 27,067
Net changes in operating
assets and liabilities:
Trade receivables ..... 99,720 (99,720) -- --
Prepaid expenses ...... 15,265 (18,528) -- (3,263)
Other current assets .. 61,779 (62,103) -- (324)
Accounts payable ...... (118,861) 131,492 1,082 13,713
Accrued and other
liabilities ...... (283,780) 319,432 4,742 40,394
Customer advances ..... (25,000) (25,000) 50,000 --
Deferred rent ......... (14,670) 14,670 -- --
Other related party
liabilities ....... 214,078 -- -- 214,078
Note payable to related
party ............ -- (12,906) 12,906 --
----------- ----------- --------- -----------
Net cash used in
operating activities ..... (4,147,928) (1,315,649) (32,196) (5,495,773)
Investing activities:
Purchases of property
and equipment ......... (3,244) (21,248) -- (24,492)
Deposits ............... 21,297 (22,025) -- (728)
----------- ----------- --------- -----------
Net cash provided by
(used in) investing
activities ............... 18,053 (43,273) -- (25,220)
See accompanying notes.
38
OpticNet, Inc.
(a development stage company)
Statements of Cash Flows (cont.)
Period from Period from
February 23, 2000 February 23, 2000
Year Ended Year Ended (inception) to (inception) to
September 28, September 29, September 30, September 28,
2002 2001 2000 2002
----------- ----------- ---------- -----------
Financing activities:
Proceeds from
borrowing on line of
credit from related
party .................. $ 1,489,730 $ 1,330,601 $ -- $ 2,820,331
Principal payments
on line of credit
from related party .... -- (163,993) -- (163,993)
Proceeds from issuance
of preferred
stock, net ............ -- -- 1,000,000 1,000,000
Proceeds from equity
funding from a
related party ......... 1,814,642 -- -- 1,814,642
Issuance of common
stock ................. 1,895 8,000 44,999 54,894
----------- ----------- ---------- -----------
Net cash provided by
financing activities ... 3,306,267 1,174,608 1,044,999 5,525,874
----------- ----------- ---------- -----------
Net increase (decrease)
in cash and cash
equivalents ........... (823,608) (184,314) 1,012,803 4,881
Cash and cash
equivalents at
beginning of period ..... 828,489 1,012,803 -- --
----------- ----------- ---------- -----------
Cash and cash
equivalents at end
of period ............. $ 4,881 $ 828,489 $1,012,803 $ 4,881
=========== =========== ========== ===========
Supplemental Disclosure
of Non Cash Items:
Grants of restricted stock $ 37,200 $ -- $ 57,840 $ 95,040
Contribution of treasury
stock .................... 14,720 -- -- 14,720
Repurchase of restricted
stock .................... $ 7,208 $ 12,000 $ -- $ 19,208
See accompanying notes.
39
OpticNet, Inc.
(a development stage company)
Notes to Financial Statements
September 28, 2002
1. Organization and Summary of Significant Accounting Policies
Organization and Basis of Presentation
OpticNet, Inc. ("OpticNet" or the "Company") was incorporated on February 23,
2000 in the State of Delaware, as a majority owned subsidiary of BEI
Technologies, Inc. ("BEI Technologies"). From its inception (February 23, 2000)
through December 31, 2000, OpticNet operated as a controlled subsidiary of BEI
Technologies. BEI Technologies accumulated the costs associated with OpticNet's
operation 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 facilities, salaries and employee benefits 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.
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 raising 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 Statement ("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 $5.8 million at September 28, 2002. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
During fiscal 2002, 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 will 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. The majority of operating costs are paid by a related party which
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 the related
party. 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 then $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 the related party, if required. Management
continues to seek additional equity financing from new and 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. Although management is confident in its ability to execute its plan
to enable the Company to continue as a going concern there is no assurance that
the Company will be able to reduce expenditures sufficiently, estimate future
contract costs accurately, or secure the necessary financing, in order to
continue operations.
40
OpticNet, Inc.
(a development stage company)
Notes to Financial Statements --(Continued)
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 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 advanced.
Fiscal Year
The Company's fiscal year ends on the Saturday nearest September 30. Fiscal
years 2002 and 2001 each contained 52 weeks. The period from February 23, 2000
(inception) to September 30, 2000 contained 32 weeks.
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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity period of
three months or less when purchased to be cash equivalents.
Concentrations of Credit Risk
The Company's engineering agreements have been with three customers located in
the United States. Historically, there have been no credit losses with these
customers. In addition, as the Company primarily deals with start-up companies
in relation to delivery of prototype units, there may be disputes regarding the
performance of the prototypes and payment not received.
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents. Cash and cash
equivalents are held by various domestic financial institutions with a high
credit standing. The Company has not experienced any losses on its cash or cash
equivalents.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided in amounts sufficient
to amortize the cost of such assets over their estimated useful lives, which
range from three to five years, using the straight-line method for structures
and accelerated or straight-line methods for equipment. Leasehold improvements
are amortized over the shorter of the lease term or their estimated useful
lives.
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
41
OpticNet, Inc.
(a development stage company)
Notes to Financial Statements --(Continued)
long-lived assets at September 28, 2002 was $728.
Revenue Recognition
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
such engineering work is recognized based on customer acceptance 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 $187,000,
$210,000, and $397,000 were offset against research and development expense in
the statements of operations for fiscal years 2002 and 2001 and from inception
through fiscal 2002, respectively.
Net Loss Per Share
Basic and diluted loss per share is computed using the weighted average number
of shares outstanding. The effect of convertible preferred stock, unvested stock
and outstanding stock options is antidilutive and, accordingly, is excluded from
diluted loss per share.
Recent Accounting Pronouncements
In July 2001, the FASB issued FAS No. 142 ("FAS 142"), "Goodwill and Other
Intangible Assets." FAS 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Thus amortization of
goodwill, including goodwill recorded in past transactions, will cease upon
adoption of this statement. FAS 142 is effective for fiscal years beginning
after December 15, 2001, with early adoption permitted for entities with fiscal
years beginning after March 15, 2001. The Company chose to adopt FAS 142 for its
fiscal year beginning September 30, 2001. The adoption of this standard did not
have a significant impact on the Company as it has no goodwill.
In October 2001, the FASB issued FAS No. 144 ("FAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets", which is effective for fiscal
periods beginning after December 15, 2001. FAS 144 provides a single accounting
model for, and supersedes previous guidance on, accounting and reporting for the
impairment/disposal of long-lived assets. FAS 144 sets new criteria for the
classification of assets held-for-sale and changes the reporting of discontinued
operations. The Company does not believe that the adoption of FAS 144 will have
a significant impact on its financial statements.
In June 2002, the FASB issued FAS No. 146 ("FAS 146") "Accounting for Costs
Associated with Exit or Disposal Activities." FAS 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. This standard
addresses financial accounting and reporting for costs associated with exit or
disposal activities and replaces EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." FAS 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. FAS 146 also requires that liabilities recorded
in connection with exit plans be initially measured at fair value. The Company
does not believe the adoption of FAS No. 146 will have a material impact on its
financial statements.
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
42
OpticNet, Inc.
(a development stage company)
Notes to Financial Statements --(Continued)
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. These allocations totaled $50,000 for fiscal 2002. 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 June 29, 2002 and September 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. 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. Payments
due for fiscal 2002 were approximately $660,000. Due to reduced usage of the
equipment during the last 6 months of fiscal 2002, and expected reduced usage in
the future, past payments may not be indicative of expected future payments.
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
43
OpticNet, Inc.
(a development stage company)
Notes to Financial Statements --(Continued)
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 advanced noted above. See Note 13.
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.
3. Property and Equipment
Property and equipment consists of the following:
September 28, September 29,
2002 2001
------- -------
Machinery and equipment ........................... $14,561 $13,403
Leasehold improvements ............................ 9,931 7,845
------- -------
24,492 21,248
Less accumulated depreciation and amortization .... 24,492 3,264
------- -------
Property and equipment, net ....................... $ -- $17,984
======= =======
No equipment was capitalized under capital leases at September 28, 2002 and
September 29, 2001.
4. Accrued Expenses and Other Liabilities
September 28, September 29,
2002 2001
------------ -------------
Employee compensation ........................... $ -- $140,815
Vacation ........................................ -- 56,542
Accrued professional fees ....................... 40,394 103,861
Interest ........................................ -- 21,852
Other ........................................... -- 1,104
------- --------
Total accrued expenses and other liabilities .... $40,394 $324,174
======= ========
5. Leasing Arrangements
The Company leases its facility and certain property and equipment under related
party leasing arrangements, see Note 2, that have been accounted for as
operating leases in the accompanying financial statements, according to the
terms of such arrangements. 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
44
OpticNet, Inc.
(a development stage company)
Notes to Financial Statements --(Continued)
Company agreed with its lessor that this reduction in operations would lower
usage of the equipment and the subleased facilities described above.
Accordingly, the annual lease payments have been prorated beginning March 31,
2002, based on the portion of the facilities the Company requires to support its
current customers.
The Company recognized rent expense under operating leases of approximately
$129,000 and $328,000 for the year ended September 28, 2002 and the period from
February 23, 2000 (inception) to September 28, 2002, respectively. Additionally,
the Company recognized rent expense under operating leases of approximately
$199,000 for the year ended September 29, 2001.
On September 28, 2001, December 20, 2001 and March 28, 2002 the Company
entered into equipment sublease agreements with BEI Technologies, as described
in Note 2.
The Company rents office space used for administrative purposes in San
Francisco, California from BEI Technologies under the Company's Services
Agreement described in Note 2. The monthly rental payments associated with these
facility rental arrangements are subsumed into the Company's total monthly
payment under the Services Agreement. The Company also leases space used for
research and development and manufacturing activities in Hayward, California
from BEI Technologies under a sublease agreement described in Note 2. The
average annual rental payment under the sublease agreement is approximately
$11,000.
6. 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. 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:
September 28, September 29,
2002 2002
---------- -----------
Unsecured revolving promissory note from
BEI Technologies due 12/31/02, at a
rate of prime plus 1.5% (6.25% and 7.5% in
fiscal 2002 and 2001, respectively) ........... $2,656,338 $1,166,608
---------- -----------
$2,656,338 $1,166,608
========== ===========
No interest was paid during fiscal year 2002, fiscal year 2001 or in the period
from February 23, 2000 (inception) to September 30, 2000. Accrued interest
expense was approximately $149,000 and $24,000 at September 28, 2002 and
September 29, 2001, respectively. The interest payable of approximately $149,000
at September 28, 2002 was recorded as an other related party liability.
7. Contingencies
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
45
OpticNet, Inc.
(a development stage company)
Notes to Financial Statements --(Continued)
business, financial condition or operating results. The Company is a codefendant
in a dispute with a former employee, which at September 28, 2002, cannot be
reasonably estimated to the future financial impact. The Company believes this
claim has no merit and is rigorously defending the allegation.
8. Stockholders' Equity Deficit
Series A Convertible Preferred Stock
As of September 28, 2002 and September 29, 2001, the Company had 2,000,000
shares of Series A convertible preferred stock ("Series A"), issued and
outstanding, all of which shares are held by BEI Technologies.
Voting
Holders of the Company's Series A preferred stock vote on an as-if-converted
basis together with the voting common stock on all matters except as otherwise
provided by law or in the Company's Certificate of Incorporation.
Liquidation Rights
In the event of any liquidation or winding up of the Company, including a
merger, consolidation or reorganization in which the Company is not the
surviving entity or a sale of substantially all of the Company's assets, the
holders of Series A are entitled to liquidation preferences of $0.50 per share
plus any declared and unpaid dividends. Upon satisfaction of the preferred
liquidation preference, any remaining assets will be distributed to the holders
of common stock on a pro rata basis.
Dividends
The holders of the Series A preferred are entitled to receive dividends when and
if declared by the Board of Directors. The dividends are payable in preference
and priority to any payment of any dividend on the common stock of the Company.
Such dividends are not cumulative, and no right accrues to the holders of Series
A. No dividends have been declared through September 28, 2002.
Conversion
The Series A preferred stock is convertible at any time at the option of the
holder into shares of the Company's voting common stock on a one for one basis.
Each share of Series A shall automatically be converted into shares of voting
common stock at any time upon the affirmative vote of the holders of at least
seventy-five percent of the Series A preferred shares then outstanding.
Series B Nonconvertible Preferred Stock
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 Series B Preferred Stock ("Series B") to BEI Technologies in
consideration of $1.8 million advanced to the Company during the third and
fourth quarters of fiscal 2002. See Note 13 for a further description of the
Series B preferred stock.
Common Stock
As of September 28, 2002 and September 29, 2001, the Company had 3,093,202 and
3,616,000 shares of voting common stock issued and outstanding and 2,998,902 and
2,695,428 shares of nonvoting common stock issued and outstanding, respectively.
Shares of the Company's nonvoting common stock are convertible into shares of
the Company's voting common stock on a one-for-one basis only by action of the
Company's Board of Directors.
Voting and nonvoting
The preferences, privileges, restrictions and other matters relating to the
Company's voting common stock and nonvoting common stock are in all respects
identical, except as otherwise required by law, as expressly provided
46
OpticNet, Inc.
(a development stage company)
Notes to Financial Statements --(Continued)
in the Company's certificate of incorporation and, specifically, with respect to
voting rights. Shares of the Company's voting common stock entitle the holder to
vote on all matters that holders of common stock are generally entitled to vote
by applicable law and as provided in the Company's certificate of incorporation
and bylaws. Except as provided by the Delaware General Corporation Law, the
holders of the Company's nonvoting common stock are not entitled to vote their
shares on any matter on which the holders of the Company's voting common stock
are generally entitled to vote their shares.
The holders of the Company's voting common stock are entitled to one vote for
each share on all matters voted on by stockholders, including elections of
directors, and, except as otherwise required by law or provided in any
resolution adopted by the board with respect to any series of the Company's
preferred stock, the holders of such shares exclusively possess all voting power
(provided that the holders of the Company's preferred stock vote together with
the Company's voting common stock on an as if converted basis). Subject to the
preferential rights of the Company's preferred stock as described above and in
the Company's certificate of incorporation, the holders of the Company's common
stock are entitled to such dividends as may be declared from time to time by the
board from available funds, and upon liquidation will be entitled to receive pro
rata all assets of the company available for distribution to such holders.
Transfer Restrictions
There is not currently a public market for any class of the Company's
securities, nor does the Company intend to create a public market any time in
the near future. Until and unless the Company decides to list shares of its
common stock for trading with a nationally recognized securities exchange or
automated quotation system, the Company's common stock will be subject to
significant restrictions on transfer as set forth in the Company's bylaws. In
particular, apart from limitations on transfer created by applicable securities
laws, the bylaws expressly forbid holders of the Company's common stock from
assigning, hypothecating, donating, encumbering or otherwise disposing of any
beneficial interest in their shares until the Company's common stock has been
listed for trading with a nationally recognized securities exchange or automated
quotation system. Accordingly, the Company's transfer agent has been instructed
to stop any attempted transfer of beneficial ownership by a holder of the
Company's common stock prior to the listing of the Company's common stock.
Shares subject to Right of Reacquisition
As of September 28, 2002 and September 29, 2001, a total of 1,240,496 and
942,096, respectively, shares of the Company's nonvoting common stock held by 17
individuals and 10 individuals, respectively, are subject to a repurchase right
by the Company if the individual's employment with the Company, or employment
with a related party, should terminate prior to full lapsing of such repurchase
right. At September 28, 2002, shares of the Company's nonvoting common stock not
yet vested to the holder and subject to a right of reacquisition by the Company
provided for continued monthly pro-rata lapsing of the Company's reacquisition
right so long as the individual remains in the Company's employ or that of an
affiliate until the right of reacquisition lapses in full in September 2007.
Effective upon termination of all of the Company's employees in July 2002, and
change in status to consultants, all remaining shares subject to reacquisition
are accounted for under EITF 96-18, "Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjuction with Selling,
Goods or Services". Pursuant to the applicable guidance, compensation cost is
determined as the shares vest on the basis of fair value. During August and
September 2002 the Company granted 930,000 restricted shares to non-employees
for ongoing services provided to the Company. The Company recorded compensation
expense of $5,574 related to non-employee restricted stock awards during the
year ended September 28, 2002.
Stock Split
On October 20, 2000, the Company's Board of Directors approved a four-for-one
stock split in respect of the Company's common and preferred stock. All amounts
reported in the Company's financial statements have been adjusted to reflect the
split as of the beginning of the period reported on.
Equity Incentive Plan
The Company's 2000 Equity Incentive Plan ("Incentive Plan") was adopted by the
Board of Directors in September 2000. The Incentive Plan provides for the
granting of incentive stock options to employees and nonstatutory stock options,
restricted stock purchase awards, and stock bonuses to consultants, employees
and directors (collectively, "Stock Awards"). The Company reserved 1,000,000
shares of common stock for Stock
47
OpticNet, Inc.
(a development stage company)
Notes to Financial Statements --(Continued)
Awards under the Incentive Plan and shares totaling 830,481 and 657,000 remain
available for grant thereunder at September 28, 2002 and September 29, 2001,
respectively. Incentive stock options granted under the Incentive Plan are
intended to qualify as "incentive stock options" within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended, and may be granted solely
to employees.
Stock options are granted pursuant to stock option agreements between the
Company and the recipient of the award. The exercise price for an incentive
stock option cannot be less than 100% of the fair market value of the common
stock on the date of grant. The exercise price for a nonstatutory stock option
cannot be less than 85% of the fair market value of the common stock on the date
of grant. Options granted under the Incentive Plan vest at the rate specified in
a grantee's option grant notice and option agreement.
Shares subject to stock options granted under the Incentive Plan that have
expired or otherwise terminated without having been exercised in full once again
become available for the grant of awards under the Incentive Plan. Likewise,
shares of restricted stock awarded under this plan that have not become fully
vested will again become available for the grant of awards. Shares issued under
the Incentive Plan may be previously unissued shares or reacquired shares bought
on the market or otherwise.
The term of incentive stock options granted under the Incentive Plan may not
exceed 10 years. Unless the terms of an optionee's stock option agreement
provide for earlier termination, in the event an optionee's service relationship
with the Company, or any affiliate of the Company's, ceases due to disability,
the optionee may exercise any vested options up to 12 months after the date such
service relationship ends. In the case of the optionee's death, absent a
provision stating otherwise in the stock option agreement, a beneficiary of the
optionee may exercise any vested options up to 18 months after the date the
service relationship ends. An optionee may not transfer a stock option other
than by will or intestate law of descent and distribution upon death. However,
an optionee may designate a beneficiary who may exercise the option following
the optionee's death. If an optionee's relationship with the Company, or any
affiliate of the Company's, ceases for any reason other than disability or
death, absent a provision for earlier termination in the stock option agreement,
the optionee may exercise any vested options up to three months from cessation
of service. However, in no circumstances may an option be exercised after the
expiration of its term. Acceptable consideration for the purchase of common
stock issued under the Incentive Plan is determined by the board of directors
and may include cash, common stock previously owned by the optionee, a deferred
payment arrangement and other legal consideration approved by the board of
directors.
The Company has adopted the disclosure only alternative for its equity incentive
plan as described in FAS No. 123, "Accounting for Stock Based Compensation" (FAS
123). The Company accounts for employee stock awards using the intrinsic value
method in accordance with Accounting Principals Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25).
Effective upon the termination of all the Company's employees in July 2002, and
change in status to consultants, all outstanding options are accounted for under
EITF 96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services".
Pursuant to the applicable guidance, compensation cost is determined as the
options vest on the basis of fair value. In August 2002, the Company granted
16,000 shares to an employee of an affiliate for ongoing services provided to
the Company. The value on non-employee options vesting during the year ended
September 28, 2002 was deemed to be immaterial.
48
OpticNet, Inc.
(a development stage company)
Notes to Financial Statements --(Continued)
A summary of the stock option activity under the Incentive Plan is as follows:
Weighted
Number of average exercise
common shares price per share
------------- ---------------
Options outstanding at February 23,
2000 (inception) ............... -- $ --
Granted ............................ -- --
Exercised .......................... -- --
Terminated ......................... -- --
-------- -----
Options outstanding at September 30,
2000 .......................... -- --
Granted ............................ 343,000 0.08
Exercised .......................... -- --
Terminated ......................... -- --
-------- -----
Options outstanding at September 29,
2001 .......................... 343,000 0.08
Granted ............................ 182,000 0.09
Exercised .......................... (23,686) 0.08
Terminated ......................... (355,481) 0.08
-------- -----
Options outstanding at September 28,
2002 ............................... 145,833 $0.09
======== =====
As of September 28, 2002, options for 8,333 shares were vested and exercisable
at a weighted average exercise price of $0.08. Additionally, options for 145,833
shares were outstanding with a weighted average remaining contractual life of
9.1 years and a weighted average exercise price of $0.09 per share at September
28, 2002.
As of September 29, 2001, no options were vested and exercisable and options for
343,000 shares were outstanding with a weighted average remaining contractual
life of 9.54 years and a weighted average exercise price of $0.08 per share.
Compensation expense of approximately $14,000, $8,000, $5,000, and $26,000 for
the amortization of stock subject to a repurchase right by the Company was
recorded during the years ended September 28, 2002 and September 29, 2001, and
the periods from February 23, 2000 (inception) to September 30, 2000, and
February 23, 2000 (inception) to September 28, 2002, respectively.
The Company computed the pro forma disclosures required under FAS No. 123 for
options granted during the years ended September 28, 2002 and September 29, 2001
using the Black-Scholes option pricing model and the following assumptions: a
risk-free interest rate of 4.13% and 6.0%, respectively; and a weighted average
expected life of 10 years; a volatility rate of 100%; and no dividend yield for
both fiscal 2002 and fiscal 2001. There were no options granted during the
period from February 23, 2000 (inception) to September 30, 2000. The impact on
the calculation of pro forma results of operations and earnings per share
required by FAS 123 was determined to be immaterial for fiscal years 2002 and
2001, and the period from inception to September 28, 2002.
49
OpticNet, Inc.
(a development stage company)
Notes to Financial Statements --(Continued)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. The effects of applying
FAS 123 in the pro forma disclosures may not be indicative of future amounts as
additional awards in future years are anticipated and because the Black-Scholes
option pricing model involves subjective assumptions which may be materially
different than actual amounts.
9. Income Taxes
The Company accounts for income taxes under FAS No. 109, "Accounting for Income
Taxes." Under this method, deferred tax assets and liabilities are recognized
for the expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities. Deferred tax
assets and liabilities are determined based on the differences between financial
reporting and the tax basis of assets and liabilities and are measured using the
enacted tax rates and laws known at this time and that will be in effect when
the differences are expected to reverse.
The reconciliation of income tax attributable to continuing operations computed
at the U.S. federal statutory tax rates to income tax expense is:
September 28, September 29,
2002 2001
----------- ---------
Tax at U.S. statutory rate .................... $(1,408,747) $(535,417)
State income taxes, net of federal benefit .... (248,230) (94,485)
Change in valuation allowance ................. 1,591,972 598,113
Unrealizable net operating losses ............. -- 31,789
Other ......................................... 65,005 --
----------- ---------
Total income taxes ............................ $ -- $ --
=========== =========
50
OpticNet, Inc.
(a development stage company)
Notes to Financial Statements --(Continued)
Significant components of the Company's net deferred tax assets and liabilities
are as follows:
September 28, September 29,
2002 2001
----------- ---------
Deferred tax assets:
Accruals and reserves ...................... $ 11,569 $ --
Net operating loss carryforwards ........... 1,998,671 556,113
Fixed asset and intangibles ................ 67,724 42,000
Credits .................................... 34,338 --
Other ...................................... 98,787 --
----------- ---------
$ 2,211,089 $ 598,113
Valuation allowance ........................ (2,190,085) (598,113)
----------- ---------
$ 21,004 $ --
=========== =========
Deferred tax liabilities:
Fixed asset and intangibles ................ $ (21,004) $ --
----------- ---------
Net deferred tax asset (liability) ......... $ -- $ --
=========== =========
FAS 109 requires the establishment of a valuation allowance against a deferred
tax asset if, based on the weight of available evidence, it is more likely than
not that some portion or all of the deferred tax asset will not be realized. The
deferred tax assets have been fully reserved due to the Company's (i) net
operating losses since inception and (ii) present inability to recognize the
potential benefits of its net operating loss carryforwards. Accordingly, the
valuation allowance increased by $1,591,972 and $598,113 during the years ended
September 28, 2002 and September 29, 2001, respectively.
As of September 28, 2002, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $5,266,500 which expire beginning
in the year 2021. The Company also has net operating loss carryforwards for
state income tax purposes of approximately $2,895,100 which expire beginning in
the year 2013. Total tax credits are approximately $34,338, which begin to
expire in the year 2021.
Utilization of the Company's net operating loss carryforwards and credits may be
subject to a substantial annual limitation due to the ownership change
limitations included in the Internal Revenue Code of 1986, as amended, and
similar state provisions. This annual limitation may result in the expiration of
net operating losses and credits before utilization.
10. Employee Benefit Plan
The Company currently participates in the defined contribution retirement plan
of BEI Technologies, which is a multi-employer 401(k) plan. The multi-employer
plan permits matching contributions by the Company on behalf of its employees
who participate in the plan. Matching non-discretionary contributions are based
on a percentage of employee contributions. Contributions to the plan by the
Company for the benefit of its employees were approximately $35,000 and $27,000
during the years ended September 28, 2002 and September 29, 2001, respectively.
From February 23, 2000 (inception) to September 30, 2000, the Company had no
employees, thus the Company made no contributions to the plan during that time
period.
51
OpticNet, Inc.
(a development stage company)
Notes to Financial Statements --(Continued)
11. Reduction in Force
In April 2002, the Company underwent a reduction in force resulting in 8
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.
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.
12. Loss Per Share
The following table sets forth the computation of basic and diluted loss per
common share from operations:
Period from Period from
Year ended Year ended February 23, 2000 February 23, 2000
September 28, September 29, (inception) to (inception) to
2002 2001 September 30, 2000 September 28, 2002
---------------------------------------------------------------------------
Numerator
---------
Loss from $(4,131,429) $(1,574,755) $(105,746) $(5,811,930)
operations
Denominator
-----------
Weighted average
shares
5,586,971 4,989,132 683,765 4,266,774
If the Company had reported net income, the calculation of diluted loss per
share would have included the shares used in the computation of historical net
loss per share as well as an additional 2,939,840 common equivalent shares
related to outstanding stock options and nonvested restricted stock (determined
using the treasury stock method) for the year ended September 28, 2002.
13. Subsequent Event
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 Series B Preferred Stock ("Series B") to BEI Technologies in
consideration of $1.8 million advanced to the Company during the third and
fourth quarters of fiscal 2002.
Voting
Holders of the Company's Series B preferred stock are not entitled to vote on
any matter that the holders of OpticNet's preferred stock or common stock
generally are entitled to vote.
52
OpticNet, Inc.
(a development stage company)
Notes to Financial Statements --(Continued)
Liquidation Rights
In the event of any liquidation, dissolution or winding up of the Company,
including a merger, consolidation or reorganization resulting in a change in
control of the Company or a sale, lease or other disposal of substantially all
of the Company's assets, the holders of Series B are entitled to receive an
amount equal to the original issuance price plus all accrued and unpaid Series B
dividends as of such date, which shall be paid prior to and in preference to any
payment made or any assets distributed to the holders of any class or series of
the common stock or other series of preferred stock of the Company.
Dividends
The holders of the Series B preferred are entitled to receive dividends on each
share at the rate of 6% per year, calculated on the original issuance price,
payable annually and cumulative to the extent not paid, with additional
dividends payable thereon. The dividends are payable in preference and priority
to any payment of any dividend on the common stock or any other series of
preferred stock of the Company.
Conversion
The Series B preferred stock is not convertible into any other form of equity of
the Company.
53
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors
OpticNet, Inc. (a development stage company)
We have audited the accompanying balance sheets of OpticNet, Inc. (a development
stage company) as of September 28, 2002 and September 29, 2001, and the related
statements of operations, stockholders' deficit and cash flows for the years
ended September 28, 2002 and September 29, 2001 and the periods from February
23, 2000 (inception) to September 30, 2000 and from February 23, 2000
(inception) to September 28, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of OpticNet, Inc. (a development
stage company) at September 28, 2002 and September 29, 2001, and the results of
its operations and its cash flows for the years ended September 28, 2002 and
September 29, 2001 and the periods from February 23, 2000 (inception) to
September 30, 2000 and from February 23, 2000 (inception) to September 28, 2002
in conformity with accounting principles generally accepted in the United
States.
The accompanying financial statements have been prepared assuming that OpticNet,
Inc. will continue as a going concern. As more fully described in Note 1, the
Company has incurred recurring operating losses and negative cash flows from
operations since its inception, which resulted in an accumulated deficit of
approximately $5.8 million as of September 28, 2002. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
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.
San Francisco, CA
November 20, 2002
54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information with respect to directors and executive officers is
set forth in Part I of this Report. Additional information required by
this Item is incorporated herein by reference to the section entitled
"Compliance with Section 16(a) of the Securities and Exchange Act of
1934" of the Proxy Statement related to the Company's 2003 Annual
Meeting of Stockholders to be filed by the Company with the Securities
and Exchange Commission (the "Definitive Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference to the sections entitled "Executive Compensation" and
"Certain Transactions" of the Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Certain information with respect to securities authorized for issuance
under equity compensation plans is set forth in Part II, Item 5 of this
Report. Additional information required by this Item is incorporated
herein by reference to the section entitled "Security Ownership of
Certain Beneficial Owners and Management" of the Definitive Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by
reference to the sections entitled "Certain Transactions" and
"Compensation Committee Interlocks and Insider Participation" of the
Definitive Proxy Statement.
PART IV
ITEM 14. CONTROLS AND PROCEDURES
The Company's management, including the President and Chief Financial
Officer, has conducted an evaluation of the effectiveness of disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15 within 90
days of the filing of this report. Based on that evaluation, the
President and Chief Financial Officer concluded that the disclosure
controls and procedures are effective in ensuring that all material
information required to be filed in this annual report has been made
known to them in a timely fashion. There have been no significant
changes in internal controls, or in factors that could significantly
affect internal controls, subsequent to the date the President and
Chief Financial Officer completed their evaluation.
55
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this Form 10-K.
Form 10-K Page
Number
(a)(1) Index to Financial Statements
The following Financial Statements of OpticNet, Inc. are filed as part
of this Form 10-K:
Report of Ernst & Young LLP, Independent Auditors 54
Balance Sheets -
September 28, 2002 and September 29, 2001 33
Statements of Operations -
Years ended September 28, 2002 and September 29, 2001 and the period
from February 23, 2000 (inception) to September 30, 2000 and the
period from February 23, 2000 (inception) to September 28, 2002 35
Statement of Stockholders' Deficit -
Years ended September 28, 2002, September 29, 2001 and the period from
February 23, 2000 (inception) to September 30, 2000 36
Statements of Cash Flows -
Years ended September 28, 2002, September 29, 2001 and the period from
February 23, 2000 (inception) to September 30, 2000 and the period
from February 23, 2000 (inception) to September 28, 2002 38
Notes to Financial Statements -
September 28, 2002 40
(a)(2) Index to Financial Statement Schedule
The following Financial Statement Schedule of OpticNet, Inc. for each
of the years in the period ended September 28, 2002 and the period
from February 23, 2000 (inception) to September 30, 2000 and the
period from February 23, 2000 (inception) to September 28, 2002 is
filed as part of this Form 10-K:
Schedule II
Valuation and Qualifying Account S-1
Report of Ernst & Young LLP, Independent Auditors as to
Schedule S-2
Schedules not listed above have been omitted because they are not applicable or
are not required or the information required to be set forth therein is included
in the Financial Statements or Notes thereto.
56
(a)(3) Listing of Exhibits
Exhibit Description Footnote
------- ----------- --------
Numbers
-------
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
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
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
57
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.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company
during fiscal 2002
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this periodic report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OpticNet, Inc.
Signature Title Date
- --------- ----- ----
/s/ Charles Crocker Director January 7, 2003
- --------------------------------------- ------------------------------
Charles Crocker
/s/ Danforth Joslyn Director January 7, 2003
- --------------------------------------- ------------------------------
Danforth Joslyn
/s/ Dr. James W. Seeser Director January 7, 2003
- --------------------------------------- ------------------------------
Dr. James W. Seeser
/s/ Dr. Lawrence A. Wan Chairman of the Board of Directors January 7, 2003
- --------------------------------------- ------------------------------
Dr. Lawrence A. Wan
/s/ Gary D. Wrench Director and Chief Financial Officer January 7, 2003
- --------------------------------------- ------------------------------
Gary D. Wrench
/s/ Robert R. Corr Secretary and Treasurer (Chief January 7, 2003
- --------------------------------------- Accounting Officer) ------------------------------
Robert R. Corr
59
CERTIFICATION OF
PRESIDENT
I, Gerald D. Brasuell, certify that:
1. I have reviewed this annual report on Form 10-K of OpticNet, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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
annual 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 annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date with 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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 January 7, 2003
-----------------------------
/s/ Gerald D. Brasuell
- --------------------------------
Gerald D. Brasuell
President
60
CERTIFICATION OF
CHIEF FINANCIAL OFFICER
I, Gary D. Wrench, certify that:
1. I have reviewed this annual report on Form 10-K of OpticNet, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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
annual 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 annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date with 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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 January 7, 2003
----------------------------
/s/ Gary D. Wrench
- ---------------------------------
Gary D. Wrench
Chief Financial Officer
61
SCHEDULE II
OPTICNET, INC.
VALUATION AND QUALIFYING ACCOUNT
Additions
---------
Balance at Charged to Balance at
Beginning Costs and Charged to End of
Description of Period Expenses Other Accounts Deductions Period
----------- --------- -------- -------------- ---------- ------
(in thousands)
Year ended September 28, 2002:
Deducted from asset accounts:
Allowance for doubtful accounts ....... $-- $57,080 $-- $-- $57,080
Year ended September 29, 2001:
Deducted from asset accounts:
Allowance for doubtful accounts ....... $-- $ -- $-- $-- $ --
Period from February 23, 2000 (inception) to
September 30, 2000:
Deducted from asset accounts:
Allowance for doubtful accounts ....... $-- $ -- $-- $-- $ --
62
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS, AS TO SCHEDULE II
The Board of Directors and Shareholders
OpticNet, Inc.
We have audited the financial statements of OpticNet, Inc. as of September 28,
2002 and September 29, 2001, and for the years ended September 28, 2002 and
September 29, 2001, and the period from February 23, 2000 (inception) to
September 30, 2000 and from February 23, 2000 (inception) to September 28, 2002,
and have issued our report thereon dated November 20, 2002. Our audits also
included the financial statement schedule listed in Item 15(a) of this Form
10-K. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.
Ernst & Young LLP
San Francisco, California
Date November 20, 2002
---------------------
63
INDEX TO EXHIBITS
- -----------------
Exhibit
Number Description
- ------ -----------
3.3 Certificate of Designation of Powers, Preferences and Rights of
Series B Preferred Stock
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