Delaware		95-4313013
(State or other jurisdiction of )		(I.R.S. Employer Identification No.)
incorporation or organization)
15550 Lightwave Drive		33760
Clearwater, Florida		(Zip Code)
(Address of principal executive offices)

	INDEX
		Page
	PART I. FINANCIAL INFORMATION
Item 1.	Consolidated Condensed Financial Statements:
	Consolidated Condensed Balance Sheets – September 30, 2003 (Unaudited) and December 31, 2002	1
	Consolidated Condensed Statements of Operations (Unaudited) – Three Months Ended September 30, 2003 and September 30, 2002	2
	Consolidated Condensed Statements of Operations (Unaudited) – Nine Months Ended September 30, 2003 and September 30, 2002	3
	Consolidated Condensed Statements of Cash Flows (Unaudited) -- Nine Months Ended September 30, 2003 and September 30, 2002	4
	Notes to Consolidated Condensed Financial Statements (Unaudited)	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 5.	Other Information	34
Item 6.	Exhibits and Reports on Form 8-K	34
SIGNATURES		35
EXHIBIT INDEX		36

• An unconditional redemption obligation at a specified or determinable date, or upon an event that is certain to occur;
• An obligation to repurchase shares, or indexed to such obligation, which may require physical share or net cash settlement;
• An unconditional, or for new issuances conditional, obligation that may be settled by issuing a variable number of equity shares if either (a) a fixed monetary amount is known at inception, (b) the variability is indexed to something other than the fair value of the issuer’s equity shares, or (c) the variability moves inversely to changes in the fair value of the issuer’s shares.

International sales for the quarter ended September 30, 2003, were approximately $1.0 million, or 38% of total sales as compared to $1.8 million, or 40% of total sales for the quarter ended September 30, 2002.

Net sales for the nine months ended September 30, 2003 decreased $9.2 million, or 61%, to $5.9 million from $15.1 million for the nine months ended September 30, 2002. The sales decrease relates primarily to lower pricing and lower volume due to the increased competition for market share resulting from significant decline in demand for telecommunication equipment. The telecommunications industry, our customer base, continued to experience a dramatic economic downturn that was brought on by a significant decrease in network build-outs and capital spending by the telecommunications carriers and equipment manufactur ers.

International sales for the nine months ended September 30, 2003 represented 25% of sales or $1.5 million, as compared to $5.7 million or 38% of total sales for the nine months ended September 30, 2002.

Cost of Goods Sold

Cost of goods sold for the quarter ended September 30, 2003 decreased by $1.5 million, or 49%, to $1.6 million as compared to $3.2 million for the quarter ended September 30, 2002. The decrease in cost of goods sold for the quarter ended September 30, 2003 was primarily attributable to a reduction in volume of units sold.

Cost of goods sold for the nine months ended September 30, 2003 decreased by $7.5 million, or 50%, to $7.6 million as compared to $15.1 million for the nine months ended September 30, 2002. During the nine months ended September 30, 2003, a provision for excess and obsolete inventory of $3.4 million was recorded by the Company as compared to an excess and obsolete inventory provision of $6.0 million in the nine months ended September 30, 2002. Additionally, a $500,000 charge related to the outsourcing of manufacturing operations was taken in the nine months ending September 30, 2002. The remaining decrease in cost of goods sold for the nine months ended September 30, 2003 was primarily attributable to a reduction in volume of units sold.

	23

 

Gross Profit

Gross profit for the quarter ended September 30, 2003 decreased by $432,000, or 31%, to $952,000 from $1.4 million for the quarter ended September 30, 2002. Gross profit for the nine months ended September 30, 2003 decreased by $1.7 million to a negative $1.7 million from a negative $16,000 for the nine months ended September 30, 2002.

Gross margin for the nine months ended September 30, 2003 was a negative 30% as compared to 0% during the nine months ended September 30, 2002. Without the $3.4 million provision for excess and obsolete inventory, gross margin for the nine months ended September 30, 2003 was 28%. Without the $6.0 million provision for excess and obsolete inventory and the $500,000 charge related to the outsourcing of manufacturing operations, gross margin for the nine months ended September 30, 2002 was 57%.

The decreases in gross profit and gross margin, after exclusion of the provisions discussed above, were primarily due to a reduction in volume of units sold at lower sales prices.

Engineering and Development

Engineering and development expenses principally include salaries for engineering and development personnel, depreciation of production and development assets, outside consulting fees and other development expenses. Engineering and development expenses for the quarter ended September 30, 2003 decreased by approximately $1.6 million to $1.5 million from $3.2 million for the quarter ended September 30, 2002. Engineering and development expenses for the nine months ended September 30, 2003 decreased by approximately $3.5 million to $6.5 million from $10.0 million for the nine months ended September 30, 2002. The decreases for the quarter and the nine months ended September 30, 2003 versus 2002 were primarily due to reductions in force implemented in 2002 and 2003, decreased spending on developm ent efforts on the Company’s product lines, and reduced depreciation expense resulting from the impairment of fixed assets recorded by the Company in the fourth quarter of 2002 and the first quarter of 2003. These reductions were partially offset by costs associated with personnel hired as part of the LightChip, Inc. and Tektronix, Inc. acquisitions as well as a true- up in equipment rental expenses associated with a vendor settlement.

Sales and Marketing

Sales and marketing expenses principally include salaries, commissions, travel, tradeshows, promotional materials and warranty expenses. Sales and marketing expenses for the quarter ended September 30, 2003 were $2.4 million, reflecting a decrease of approximately $1.0 million from the quarter ended September 30, 2002. Sales and marketing expenses for the nine months ended September 30, 2003 were $7.5 million, reflecting a decrease of approximately $700,000 from the nine months ended September 30, 2002. The decreases for the quarter and the nine months ended September 30, 2003 versus 2002 were primarily related to reductions in force implemented in 2002 and 2003 as well as decreased spending on travel and entertainment and marketing programs resulting from the Company’s cost containment efforts. Additionally, there was a reduction in warranty expense as fewer units were under warranty in the third quarter of 2003 than were under warranty in the third quarter of 2002. These decreases were offset in part by an increase in depreciation expense related to additional demonstration units capitalized under a sale-leaseback arrangement more fully disclosed in Note 8 to the Consolidated Condensed Financial Statements – Sale-Leaseback Transactions and Capital Leases.

General and Administrative

General and administrative expenses principally include salaries, professional fees, facility rentals, compensation and information systems related to general management functions. General and administrative expenses for the quarter ended September 30, 2003 decreased by approximately $571,000 to $1.5 million from $2.0 million for the quarter ended September 30, 2002. The decrease is primarily attributable to reductions in force implemented in 2002 and 2003, reduced legal and professional fees, and reduced depreciation expense resulting from the impairment of fixed assets recorded by the Company in the fourth quarter of 2002 and the first quarter of 2003. These decreases were offset in part by the increased costs associated with the Massachusetts facility, fixed assets, and intangible assets that were acquired as part of the LightChip, Inc. and Tektronix, Inc. acquisitions.

General and administrative expenses for the nine months ended September 30, 2003 increased by $1.4 million to $6.5 million from $5.1 million for the nine months ended September 30, 2002. The increase is due primarily to an increase in insurance costs, increased professional fees, and increased costs associated with the Massachusetts facility, fixed assets, and intangible assets that were acquired as part of the LightChip, Inc. and Tektronix, Inc. acquisitions. These increases were offset in part by reductions in force implemented in 2002 and 2003, and decreased depreciation expense resulting from the impairment of fixed assets recorded by the Company in the fourth quarter of 2002 and the first quarter of 2003.

	24

 

Restructuring Charges

In January 2002, the board of directors approved cost reduction initiatives aimed at reducing operating costs. These included a reduction in force of 46 employees and contractors and the outsourcing of manufacturing and production for our product lines. All affected employees were terminated in January 2002 and given severance based upon years of service with the Company. The Company recorded a restructuring charge of approximately $1.3 million in the first quarter of 2002. Approximately $39,000 of severance payments, which were extended through December 2003, and settlement costs from litigation remained unpaid at September 30, 2003.

In January 2003, the board of directors approved a reduction in workforce of 46 positions, or approximately 24% of the Company’s employment base. This included closing the Company’s sales offices in Brazil, Singapore, India and Australia. The Company recorded a restructuring charge of approximately $1.3 million related to the employment reduction. The total costs associated with the restructuring are expected to be paid by July 2003. Approximately $300,000 of previously recorded restructuring charges related to certain executive severance agreements were reversed in the first quarter of 2003 as the timeframe for the reimbursement of these costs expired.

In March 2003, the board of directors approved another reduction in workforce of 12 positions and no restructuring charge. In each of April 2003 and June 2003, the board of directors approved further reductions in workforce of 5 positions. As a result of these reductions, the Company recorded a restructuring charge of $80,000 in the second quarter of 2003. In September 2003, 5 positions were eliminated and in October 2003, an additional 7 positions were eliminated.

Activity associated with the restructuring charges for the nine months ended September 30, 2003 was as follows:

		Balance at									Balance at
		December 31,						Payments/			September 30,
			2002			Additions			Reductions			2003
			(in thousands)
Severance		$	342		$	1,287		$	(1,257	)	$	372
Legal and other expenses			152			48			(155	)	$	45
		$	494		$	1,335		$	(1,412	)	$	417

Impairment of Property and Equipment

For the quarter ended March 31, 2003, the Company recorded a non -cash asset impairment charge of $3.3 million related to certain intangible assets and property and equipment acquired from Tektronix, Inc. in November 2002. The amount of the impairment was determined using estimates of future cash flows expected to be generated from sales of the OTS products. The Company did not record a non-cash asset impairment charge during the nine months ended September 30, 2002, and the quarters ended June 30, 2003 and September 30, 2003.

Other Income (Expense), net

Other expense for the quarter ended September 30, 2003 was $252,000 as compared to other income of $111,000 for the quarter ended September 30, 2002 . The difference is due to an increase in interest expense associated with capital leases, notes payable to a related party, and notes payable to others and a decrease in interest income offset in part by forgiveness of debt associated with certain vendor settlements.

Other expense for the nine months ended September 30, 2003 was $1.4 million as compared to other income of $453,000 for the quarter ended September 30, 2002 . The difference is due to an increase in interest expense associated with capital leases, notes payable to a related party, and notes payable to others, and a decrease in interest income offset in part by forgiveness of debt associated with certain vendor settlements.

	25

 

Provision for Income Taxes

No provision for income taxes was made for the three months ended and the nine months ended September 30, 2003 due to the Company’s net loss of $4.7 million and $28.0 million, respectively. Any tax benefits resulting from the Company’s net loss have not been recognized due to a full valuation allowance for deferred tax assets being recorded as a result of management’s belief it is more likely than not that future tax be nefits will not be realized as a result of current and future income. No provision for income taxes was made for the quarter ended and the nine months ended September 30, 2002 due to the Company’s net loss of $7.1 million and $24.7 million, respectively.

Net Loss

Net loss for the quarter ended September 30, 2003 was $4.7 million or $0.15 per diluted share compared with net loss of $7.1 million or $0.23 per diluted share for the quarter ended September 30, 2002 and net loss for the nine months ended September 30, 2003 was $28.0 million or $.89 per diluted share compared with net loss of $24.7 million or $.79 per diluted share for the nine months ended September 30, 2002, for the reasons discussed above.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2003 , the Company’s unrestricted cash and cash equivalents and short-term investments were approximately $138,000, a decrease of $2.0 million from unrestricted cash and cash equivalents and short-term investments as of December 31, 2002. As of September 30, 2003 the Company's working capital deficit was approximately $23.9 million as compared to $2.3 million at December 31, 2002. For the nine months ended Sep tember 30, 2003, the Company reported net loss of $28.0 million and cash flows used in operations of $13.3 million. The Company had an accumulated deficit of $98.0 million at September 30 , 2003.

The Company expects to continue to incur operating losses through 2003. Management has taken actions to reduce operating expenses and capital expenditures. These actions include restructuring operations to more closely align operating costs with revenues. As further discussed below, our ability to maintain sufficient liquidity in the future is dependent on us securing additional debt financing, resolving outstanding legal actions brought against us, successfully restructuring creditor lia bilities, maintaining tight controls over spending, successfully achieving our product release schedules and attaining our forecasted sales objectives.

The Company has insufficient short-term resources for the payment of its current liabilities. Various creditors have contacted us in order to demand payment for outstanding liabilities owed to them and some creditors have commenced legal proceedings against the Company seeking an aggregate of approximately $26.0 million in damages. We are in discussions with our creditors in order to restructure our outstanding liabilities. As of the date of this report, we have entered into settlement agreements with several of our creditors settling approximately $13.5 million of debt for approximately $10.5 million. As of the date of this report, we have paid approximately $4.0 million due under these settlement agreements, and we are required to continue to make payments for the remaining balance due under the settlement agreements. The Company is now in default under certain of such settlement agreements and may now be forced to forfeit $2.4 million of the savings previously negotiated with such creditors. Although we will continue to attempt to raise additional financing, the Company does not currently have sufficient resources to make the additional required payments under the settlement agreements as they become due.

In order to alleviate the Company’s working capital shortfall, we are attempting to raise additional debt financing. Since February 2003, the Company has raised approximately $11.3 million from Optel, LLC and Optel Capital, LLC, entities controlled by the Company’s majority stockholder and current chairman of the board of directors, Dr. Bryan J. Zwan (collectively "Optel), pursuant to several secured promissory notes (the "Optel Notes") (as further described in Note 9 – Related Party Transactions), of which approximately $10.35 million is currently outstanding. The Optel Notes bear interest at a rate of 10%, mature on July 31, 2004, unless certain specified events occur accelerating their maturity, and are secured by a first priority security interest in substantially all of t he assets of the Company pursuant to a separate security agreement between Optel and the Company. The Company has no commitment from Optel for future financing . As of the date of this report, the Company is unaware of any funding source that would be willing to provide future financing to the Company without the Company restructuring its liabilities. Additionally, as of the date of this report, the Company has been unable to restructure its outstanding liabilities with certain significant creditors .

	26

 

The Company’s ability to meet cash requirements over the next twelve months is dependent on our ability to obtain additional financing, successfully negotiate extended payment terms with certain vendors, restructure outstanding liabilities with certain creditors, and meet our forecasted sales objectives. There can be no assurance, however, that the Company can raise additional financing from any source on terms favorable to it, or at all, that the Company’s creditors will agree to any restructuring of outstanding liabilities. If the Company is unable to secure adequate financing on terms acceptable to the Company, is unable to successfully restructure its outstanding liabilities, then it expects that it will not have sufficient cash to fund settlements previously negotiated with ce rtain creditors, its current working capital and capital expenditure requirements and may have no alternative but to seek bankruptcy protection.

The Company cannot assure you that it will be able to obtain additional financing, that it will achieve profitability or, if it achieves profitability, that the profitability will be sustainable, that we will be able to restructure our outstanding liabilities with all significant creditors, that we will be able to avoid seeking bankruptcy protection, or that we will continue as a going concern. As a result, our independent certified public accountants have included an explanatory paragraph for a going concern in their report for the year ending December 31, 2002 that was included in our Annual Report on Form 10-K filed on April 15, 2003. As of the date of this report, the Company is una ware of any funding source that would be willing to provide any future financing to the Company without the Company restructuring its liabilities. Additionally, to date, the Company has been unable to restructure its outstanding liabilities with its significant creditors and although the Company is continuing to attempt to restructure its obligations, the Company now believes that such voluntary restructuring may be unlikely.

 

Operating Activities

Net cash used by operating activities for the nine months ended September 30, 2003 was $13.3 million. This was primarily the result of the net loss of $28.0 million and increases in prepaid and other assets of $726,000 and a decrease in of $3.3 million in accrued litigation charges primarily as a result of payments made in the Seth Joseph matter (Refer to Note 4 to the Consolidated Financial Statements – Legal Proceedings for further discussion). These uses of cash were partially offset by non-cash expenses consisting primarily of a provision for excess and obsolete inventory of $3.4 million, depreciation an d amortization of $2.8 million, and $3.3 million impairment of long-lived assets along with a decrease in accounts receivable of $2.1 million, a $2.6 million decrease in inventory, and an increase in accounts payable and accrued expenses of $5.0 million.

Investing Activities

Net cash provided by investing activities for the nine months ended September 30, 2003 was $3.1 million. This was primarily the result of the liquidation of approximately $1.6 million of the company’s short-term investments, the $800,000 repayment of a note receivable, and the reduction of $817,000 in restricted cash. The reduction in restricted cash is attributable to the retirement and draw down on certain letters of credit for which the restricted cash was serving as collateral. This provision of cash was offset in part by property, plant and equipment purchases of approximately $158,000.

Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2003 was $9.8 million. This was primarily the result of proceeds of $10.8 million from borrowings from Optel and proceeds of approximately $200,000 from the sale of common stock. This was offset by principal payments of approximately $1.0 million to Optel and approximately $200,000 on capital lease obligations.

Revolving Credit Facility

In April 2002, the Company entered into a Revolving Credit and Security Agreement (the "Agreement") with Wachovia Bank (the "Bank"). The terms of the Agreement provide the Company with a $27.5 million line of credit at LIBOR plus 0.7% collateralized by the Company’s cash and cash equivalents and short-term investments. The advance rate varies between 80% and 95% and is dependent upon the composition and maturity of the available collateral. An availability fee of 0.10% per annum is payable quarterly based on the Average Available Principal Balance (as defined in the Agreement) for such three months. The Agreement has an initial term of three years. The Agreement may be terminated by the Company at any time upon at least fifteen days prior written notice to the Bank, and the Bank may ter minate the Agreement at any time, without notice upon or after the occurrence of an event of default. At September 30, 2003, there were approximately $1.6 million of letters of credit outstanding under this facility secured by approximately $1.6 million of the Company’s cash and cash equivalents which were classified as restricted at September 30, 2003. The Company currently has no additional borrowing capacity under this facility.

	27

 

Legal Proceedings

The Company is subject to ongoing litigation for amounts owed to certain of its creditors and has entered into settlement agreements with certain other creditors. While the Company continues to attempt to resolve its outstanding litigation on terms favorable to the Company, and to make the payments required under its settlement agreements, the Company currently has insufficient resources for the payment of its outstanding liabilities owed to such creditors. The Company has no commitment for future funding from Optel and the Company currently has no other source of financing. There can be no assurance that the Company can raise additional financing or that the Company's creditors will agree to restructure any outstanding liabilities. If the Company is unable to obtain additional financing and the Company is unable to restructure its outstanding liabilities with its creditors, the Company expects that it will not have sufficient cash to satisfy its obligations under its various settlement agreements or to fund its current working capital and capital expenditure requirements and may have no alternative but to seek bankruptcy protection. In addition, while the Company has successfully compromised and restructured its obligations with certain creditors, if the Company is unable to meet such restructured obligations on a timely basis, such compromised and restructured obligations may revert to their original amounts and terms. For a detailed description of the Company's ongoing litigation and settlement agreements with its creditors, see Part II-Item 1, "Legal Proceedings".

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

We are not exposed to material fluctuations in currency exchange rates because the majority of our sales and expenses are denominated in U.S. dollars. We are exposed to the impact of interest rate changes on our short-term cash investments, consisting of U.S. Treasury obligations and other investments in institutions with the highest credit ratings, all of which have maturities of three months or less. These short-term investments carry a degree of interest rate risk. We believe that the impact of a 10% increase or decline in interest rates would not be material to our investment income.

Item 4.    Controls and Procedure

Our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2003. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of September 30, 2003, our disclosure controls and procedures were effective in ensuring that (1) information to be disclosed in reports we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms promulgated under the Exchange Act and (2) information required to be disclosed in reports filed under the Exchange Act is accumulated and communicated to the principal executive officer and pr incipal financial officer as appropriate to allow timely decisions regarding required disclosure. There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting .    

 

PART II

OTHER INFORMATION

Item 1.    Legal Proceedings

Seth P. Joseph

On November 23, 1999, Seth P. Joseph, a former officer and director of the Company, commenced arbitration proceedings against the Company alleging breach of his employment agreement and stock option agreements, violation of the Florida Whistleblower statute, and breach of an indemnification agreement and the Company’s bylaws. As relief, Mr. Joseph sought $500,000, attorneys’ fees, interest and stock options for 656,666 shares of the Company’s common stock exercisable at a price of $5.25 per share. The Company filed an answer denying Mr. Joseph's allegations and alleging multiple affirmative defenses and counterclaims. The Company's counterclaims against Mr. Joseph sought repayment of loans totaling approximately $113,000 plus interest. Mr. Joseph subsequently dismissed wi thout prejudice all of his claims other than his claim under the Whistleblower Statute. The arbitration hearing on Mr. Joseph’s Whistleblower claim and the Company’s counterclaims concluded on October 5, 2001. The parties submitted proposed findings to the arbitrator on October 17, 2001. As part of his proposed findings, Mr. Joseph sought an award of $4.8 million and attorneys’ fees and costs. On November 9, 2001, the Company was notified of the arbitrator's decision which awarded Mr. Joseph the sum of approximately $3.7 million and attorneys’ fees and costs. On December 20, 2001, the arbitrator issued a corrected award and awarded Mr. Joseph the sum of $3.9 million and attorneys’ fees and costs in an amount to be determined. On January 23, 2002, Mr. Joseph filed a motion seeking the award of $1.1 million in attorneys’ fees, costs and interest thereon. On July 18, 2002, the arbitrator issued an award to Mr. Joseph of $575,000 for attorneys’ fees, $1 65,000 for costs, $10,000 for a portion of the arbitrator fees, plus interest from November 1, 2001 until paid.

	28

 

On December 26, 2001, the Company filed a petition to vacate or modify the arbitration award in the Circuit Court of the Sixth Judicial Circuit, Pinellas County, Florida, in an action entitled Digital Lightwave, Inc. v. Seth P. Joseph, Case No. 01-9010C1-21. The Company filed an amended petition on December 26, 2001, following the corrected arbitration award. Subsequently, Mr. Joseph filed a cross-motion to confirm the arbitration award. On March 26, 2002, the Court denied the Company's petition to vacate the arbitration award, granted Mr. Joseph’s cross-motion to confirm the award, and entered a judgment in favor of Mr. Joseph in the amount of $4.0 million including interest (the "Final Judgment"). On April 4, 2002 the Company posted a civil supersedeas bond in the amount of $4.8 milli on, issued by Fidelity and Deposit Company of Maryland, n/k/a Zurich American Insurance Company ("Fidelity") which represents the amount of the judgment plus two times the estimated interest, to secure a stay of enforcement of the Circuit Court judgment pending the Company’s appeal. In January 2003, the Company paid approximately $1.0 million into an escrow account for Mr. Joseph’s legal fees and interest on the balance recorded by the Company in 2002. The Company appealed the decision and judgment of the Circuit Court. On April 23, 2003, the appellate court affirmed the decision and judgment of the Circuit Court. On May 14, 2003, the Company and Mr. Joseph agreed to the release of the $1.0 million deposited into the escrow account, and the Company received $118,000 of the escrowed funds. The balance of the account was disbursed to Mr. Joseph.

 As a result of the appellate court's decision, which was not appealed further by the Company, the Company was required to pay the amount of the Final Judgment on May 9, 2003. The Company was unable to make this payment on May 9, 2003. Upon a motion for disbursement of bond proceeds, the Circuit Court ordered Fidelity to pay the Final Judgment, inclusive of prejudgment interest, totaling approximately $4.5 million, by June 16, 2003, plus interest for each additional day thereafter until paid. Pursuant to a motion to determine amount of appellate attorneys' fees, costs and expenses, on June 10, 2003, the Circuit Court awarded Mr. Joseph appellate attorneys' fees and costs for the subsequently determined amount of $65,415 (the "Attorney’s Fees and Costs Judgment").

In connection with the foregoing, on June 13, 2003, the Company and Fidelity entered into a Compromise and Settlement Agreement (the "Fidelity Settlement Agreement"). Under the terms of the agreement, the Company was required to pay Fidelity 60% of the amount paid by Fidelity under the Final Judgment and the Attorneys' Fees and Costs Judgment as follows: (a) within 10 days of the date Fidelity makes payment on each Judgment, the Company shall pay to Fidelity 35% of the amount paid by Fidelity on such Judgment; (b) thereafter, as to each Judgment, within 30 days of the first payment, the Company shall pay to Fidelity an additional 10% of the amount paid by Fidelity on such Judgment; (c) within 30 days of the second payment, the Company shall pay an additional 10% of the amount paid by Fidelit y on such Judgment; and (d) within 60 days of the third payment, the Company shall pay an additional 5% of the amount paid by Fidelity on such Judgment. On June 18, 2003, Fidelity paid the Final Judgment plus interest in the amount of $4,484,414 and on July 15, 2003, Fidelity paid the Attorneys’ Fees and Cost Judgment. The Company paid the first and second settlement payments with respect to the Final Judgment, and the first and second settlement payments with respect to the Attorneys’ Fees and Costs Judgment in accordance with the terms of the Fidelity Settlement Agreement.

On September 8, 2003, Fidelity agreed to a modification of the payment schedule under the Fidelity Settlement Agreement pursuant to which Fidelity agreed to accept the Company’s payment of 5% of the Final Judgment on August 21, 2003 as its third payment and to allow the Company to pay the remaining 10% of the Final Judgment with a 5% payment in September and a 5% payment in November. The Company was unable to make the payment of 5% of the Final Judgment in September and requested a further modification to the payment schedule. To date, the Company has not received a response to its request for a second modification to the payment schedule from Fidelity. The Company is currently unable to make any further payments under the Fidelity Settlement Agreement with respect to the Final Judgment or the Attorneys’ Fees and Costs Judgment.

Because the Company has not timely performed its obligations under the Fidelity Settlement Agreement, the Final Judgment and the Attorneys' Fees and Costs Judgment, plus interest and attorneys' fees and costs allowed under the agreement, less any payments by the Company under the agreement retained by Fidelity, may be reinstated as the obligation owed to Fidelity by the Company. In addition, in the event that the Company files or is the subject of a petition for relief pursuant to Title 11 of the United States Bankruptcy Code and Fidelity is required or compelled to return any portion of the Company's payments under the Fidelity Settlement Agreement, the Final Judgment and the Attorneys' Fees and Costs Judgment, plus interest and attorneys' fees and costs allowed under the agreement, less an y payments by the Company under the agreement retained by Fidelity, may be reinstated as the obligation owed to Fidelity by the Company.

	29

 

The Company’s financial statements at September 30, 2003 reflect a liability of approximately $2.2 million to Fidelity as an accrued litigation charge. The Company has not recognized the decrease in the liability as a result of the Fidelity Settlement Agreement. This is due to the default provisions in the Fidelity Settlement Agreement and the Company’s current inability to pay this obligation.

CIT Technologies Corporation

On April 7, 2003, CIT Technologies Corporation ("CIT"), the Company’s largest creditor, served the Company with a complaint in connection with a lawsuit commenced in the Circuit Court for Pinellas County, Florida. This complaint was filed in connection with the non-payment of monies due for equipment provided under various lease agreements between CIT and the Company. The complaint seeks, among other things, damages in excess of $16.5 million as well as the return of all leased equipment. The Company disputes certain of the amounts claimed by CIT and is proceeding with the defense of its position in court. The Company recently filed its Amended Answer, Affirmative Defenses, and Counterclaim wherein the Company asserts, among other things, that CIT is violating usury laws in connection w ith the agreements subject of the suit. The Company is attempting to discuss and resolve its disputes with CIT. A mediation was held on November 3, 2003, but the mediation was unsuccessful. There can be no assurances that the Company will be successful in resolving its disputes with CIT. The state court recently issued an order directing the clerk of court to enter a writ of replevin in favor of CIT. The writ of replevin entitles CIT to secure possession of the equipment subject of the agreements pending the outcome of the lawsuit. To date the Company has provided approximately 80% of the units under lease with the remaining approximately 20% yet to be provided to CIT.

Lightwave Drive, LLC

In April 2003, Lightwave Drive, L.L.C. ("Landlord"), the landlord for the headquarters of the Company located at 15550 Lightwave Drive, Clearwater, Florida 33760 (the "Leased Property"), filed a complaint against the Company in the Sixth Judicial Circuit for Pinellas County, Florida, Case No. 0300241CI-15 (the "Lawsuit"), seeking eviction and monetary damages for unpaid rent and real estate taxes under the Lease Agreement between Landlord and the Company dated as of January 14, 1998, as amended (the "Lease"). The Lease is secured by an irrevocable standby letter of credit issued by First Union National Bank, n/k/a Wachovia Bank, N.A. (the "Letter of Credit") in the aggregate total amount of $2.0 million. The Landlord previously drew down the Letter of Credit in the amount of $463,642 for unp aid rent accrued in March and April, 2003 and for the 2002 real estate taxes on the Leased Property, and the Landlord drew down the Letter of Credit in the amount of $53,333 for the amount due under the Lease following the Company's first settlement payment under the Settlement and Lease Modification Agreement discussed below.

In connection with the foregoing, on July 22, 2003, the Company and the Landlord entered into a Settlement and Lease Modification Agreement (the "Lease Modification Agreement"). Under the terms of the Lease Modification Agreement, the Landlord agreed to forebear from pursuing the relief requested in the Lawsuit and the parties agreed to amend the Lease pursuant to the Lease Modification Agreement. Further, under the terms of the Lease Modification Agreement, the Company paid Landlord $421,500 on July 23, 2003, and agreed to pay Landlord as follows: (i) as advance payment of the year 2003 real estate taxes for the Leased Property, the payment of $33,000 per month for the five month period beginning October 1, 2003, and ending on February 29, 2004, to be paid in accordance with the rent paymen t provisions of the Lease and subject to adjustment for any difference between the estimated and the actual 2003 tax liability; (ii) as partial payment of the rent due for the months between and including August, 2003 and December, 2003, the payment of $75,000, to be paid in accordance with the rent payment provisions of the Lease; and (iii) beginning on January 1, 2004, the full amount of the rent due under the Lease, to be paid in accordance with the rent payment provisions of the Lease.

In addition, Landlord was entitled to draw on the Letter of Credit for the months between and including August, 2003 and December, 2003 for the difference between the Company’s rent obligations under the Lease and the Company’s $75,000 payment. Additionally, a default by the Company or Landlord under the Lease Modification Agreement constitutes an Event of Default under the Lease, as such term is defined under the Lease, and except as expressly modified in the Lease Modification Agreement, the Lease shall remain in full force and effect. In connection with the foregoing settlement, Landlord filed a Notice of Voluntary Dismissal Without Prejudice with respect to the Lawsuit.

For August, 2003 and September, 2003, the Landlord drew down the Letter of Credit in the amount of $143,490 for the difference between the Company’s rent obligations under the Lease and the Company’s $75,000 payment pursuant to the Lease Modification Agreement. Because the Company was unable to make the October rent payment the Landlord drew down the Letter of Credit in the amount of $148,904. In addition, the Landlord drew down the Letter of Credit in the amount of $30,841 upon the failure of the Company to make the advance payment of the year 2003 real estate taxes for the Leased Property. The failure of the Company to make the aforementioned payment constituted an Event of Default under the Lease, entitling the Landlord to exercise its rights thereunder not withstanding the fore going, the Company made the November rent payment, and the Landlord has taken no further action under the Lease or the Lease Modification Agreement. The Company is currently unable to make any further payments under the Lease as modified by the Lease Modification Agreement.

	30

 

Pursuant to the Lease Modification Agreement, on or before November 10, 2003, the Company agreed to provide Landlord with a new letter of credit in the amount of $1,350,000 with an effective date on or before November 20, 2003 (the "New Letter of Credit") to replace the Letter of Credit. In the event that the Company fails to deliver the New Letter of Credit to Landlord as set forth above, the Company shall be deemed to be in default of the Lease and Landlord shall immediately, without notice or opportunity to cure, be entitled to draw the entire amount of the Letter of Credit as security for the Company’s obligations under the Lease. The Company was unable to provide Landlord with the New Letter of Credit on or before November 10, 2003; however, pursuant to a verbal agreement with Land lord, the Letter of Credit was not drawn against and the company is in the process of providing the New Letter of Credit. Subject to certain conditions, effective November 20, 2006 and November 20, 2007, the amount of the New Letter of Credit may be reduced to $1,150,000 and $1,000,000, respectively.

 

Jabil Circuit, Inc.

In February 2003, Jabil terminated the manufacturing services agreement with the Company, and in March 2003, Jabil commenced an arbitration proceeding against the Company with the American Arbitration Association. The arbitration was commenced in connection with the non-payment by the Company of amounts due under the manufacturing services agreement. Jabil claimed damages in excess of $6.8 million for unpaid invoices, termination charges and costs and charges relating to the cessation of manufacturing. Jabil also sought recovery of interest, costs and expenses.

On May 21, 2003 (but effective as of May 1, 2003), the Company and Jabil entered into a forbearance agreement (the "Jabil Forbearance Agreement") relating to Jabil’s claims against the Company relating to the manufacturing services agreement. Under the terms of the Jabil Forbearance Agreement, the Company (a) paid Jabil $620,000 in cash, (b) delivered to Jabil a promissory note in the original principal amount of approximately $2.84 million (the "First Note"), and (c) delivered to Jabil a promissory note in the original principal amount of approximately $2.74 million (the "Second Note" and, together with the First Note, the "Notes"). The Company and Jabil agreed that the principal amount of the First Note represents the unpaid outstanding accounts receivable owed by the Company to Jabil for product previously delivered to the Company under the manufacturing services agreement and that the principal amount of the Second Note represents the compromised amount due by the Company to Jabil for component inventory, work-in-process inventory, and finished goods inventory for which the Company has not yet paid Jabil.

Each of the Notes bears interest at six percent (6.0%) per year. Under the First Note, the Company was required to make a payment of approximately $253,000 on September 1, 2003, monthly payments of approximately $210,000 on October 1, 2003 and November 1, 2003, and is required to make monthly payments of approximately $210,000 from December1, 2003, through October 1, 2004. The Second Note does not provide for periodic payments. The Second Note requires the Company to pay all unpaid principal and accrued interest in full on October 1, 2004. As provided for in the Jabil Forbearance Agreement, all payments made by the Company to Jabil for certain existing inventory (as such term is defined in the Jabil Forbearance Agreement) and all proceeds from the sale of such inventory by Jabil to third par ties will be credited as payments on the Second Note. Each of the Notes provides for the accelerated payment of all unpaid principal and accrued interest upon the occurrence of certain events described in the Notes.

Pursuant to the forbearance agreement, Jabil agreed to forbear from taking further actions to collect on Jabil’s claim but only so long as the Company complies with all terms, conditions, obligations, and duties provided in the Jabil Forbearance Agreement, the Notes, and each other document or agreement signed in connection with the Jabil Forbearance Agreement. The Company was unable to make the September 1, 2003 payment under the First Note of approximately $253,000, the October 1, 2003 payment under the First Note of approximately $210,000 and the November 1, 2003 payment under the First Note of approximately $210,000. In addition, the Company is currently unable to make any further payments with respect to the First Note. Because the Company has not timely performed its obligations a nd has defaulted under the Jabil Forbearance Agreement and the Notes, on October 7, 2003, Jabil filed two complaints in the Circuit Court of the Thirteenth Judicial Circuit in and for Hillsborough County, Florida, Civil Division, Case No. 03 9331 DIV 1 and Case No. 03 9332 DIV B with respect to the Notes seeking payment in full of the Notes. The Company did not file a timely response and a default was entered in the above referenced matters. The Company has filed a motion to set aside the default.

 

Under the terms of the forbearance agreement, the Company acknowledged that Jabil rightfully terminated the manufacturing services agreement in February 2003. The Company and Jabil have begun the negotiations for a new manufacturing agreement, but no agreement has been reached and there is no commitment or obligation for either party to enter into a new manufacturing agreement. The parties agreed that if they are able to reach an understanding with respect to any such new manufacturing agreement, the Company will be required to prepay Jabil for any additional inventory or component parts that are to be purchased, and that Jabil will have no obligation to pay or carry the costs or expenses for any additional inventory or component parts to be used in the manufacturing process.

Jabil is currently in possession of $3.3 million of inventory which is considered inventory of the Company and is recorded as an other current asset. The inventory is being held by Jabil as collateral for the Second Note and will be proportionately released as payments are made under the Second Note.

	31

 

Micron Optics, Inc.

In February 2003, Micron Optics, Inc. ("Micron") commenced mediation proceedings against the Company.  The mediation was commenced between Micron and the Company in connection with the alleged breach of contract and amounts owing under a Collaboration & Distribution Agreement between Micron and the Company.  Micron is seeking damages in excess of $500,000. The Company has asserted counterclaims relating to alleged fraudulent activity by Micron. The m ediation was unsuccessful and the dispute has been submitted to binding arbitration pursuant to the agreement between Micron and the Company.  The arbitration is pending in front of a three-arbitrator panel in Atlanta, Georgia. The Company filed its initial arbitration brief on August 27, 2003, and the parties are currently engaged in discovery, including document productions and interrogatories. The Company is in discussion with Micron in an effort to resolve this matter as a part of the Company’s ongoing efforts to restructure its outstanding liabilities.  There can be no assurance that such discussions will be successful or whether a favorable outcome in the arbitration will occur.

JDS Uniphase

Pursuant to a letter agreement between the Company and JDS Uniphase, a creditor of the Company ("JDSU"), dated July 25, 2003, the Company and JDSU entered into a settlement for the cancellation of certain outstanding JDSU accounts receivables set forth in the letter agreement in the aggregate amount of $696,628. Under the terms of the letter agreement, the Company paid JDSU the sum of $174,157 and the Company and JDSU agreed to release each other from certain liabilities relating to the cancelled accounts.

Arrow Electronics, Inc.

On August 11, 2003, Arrow Electronics Inc. ("Arrow") filed a complaint against the Company in the Circuit Court in and for Pinellas County, Florida, Case No. 03-6144-CI-13 alleging a breach of a Mutual Purchase and Sale Agreement and seeking approximately $3.5 million in damages. The Company responded to the complaint on September 2, 2003, and the Company intends to defend the action. Additionally, the Company is attempting to discuss and resolve its disputes with Arrow as it is doing with its other creditors as part of its overall efforts to restructure its outstanding liabilities.

The Company currently has an asset of $1.1 million for credits issued to the Company that is recorded as an other current asset and a $1.9 million payable for past purchases of electronic components. The Company has not recorded any additional liability related to this claim because management believes Arrow’s additional claim is without merit.

Insight Electronics, LLC.

Insight Electronics, LLC ("Insight") filed a complaint against the Company in the Sixth Judicial Circuit for Pinellas County, Florida, Case No. 03-2882-CI-11, alleging non-payment of amounts due and owing for equipment purchases. Insight sought $43,533 in damages. The parties have settled the matter whereby the Company agreed to pay the full amount demanded plus nominal interest by making a payment of $5,000 on or before July 11, 2003, and monthly payments of not less than $5,000 beginning on September 15, 2003 and continuing on the 15th day of each month thereafter until paid in full. The Company made the initial $5,000 payment and the first monthly payment of $5,000 on September 15, 2003, but was unable to make the second monthly payment of $5,000 on October 15, 2003. Because the Company fail ed to make the second monthly payment, Insight is entitled to a final judgment in the amount of $33,533, together with prejudgment interest and court costs pursuant to the terms of the settlement. The Company is currently unable to make any further payments under the settlement with Insight.

Plaut Sigma Solutions, Inc.

On July 15, 2003, the Company entered into letter agreements with Plaut Sigma Solutions, Inc. ("Plaut") with respect to outstanding payments due to Plaut under that certain Plaut Sigma Solutions, Inc. Presents a MYSAP.com Business Solution for Digital Lightwave, Inc. dated May 30, 2002 in the amount of $360,630 (the "Consulting Letter Agreement") and that certain Software End-User License Agreement dated May 30, 2002 in the amount of $83,120. (the "Maintenance Letter Agreement", and together with the Consulting Letter Agreement, the "Letter Agreements"). Under the Consulting Letter Agreement, the Company agreed to pay Plaut the full amount of the debt as follows: (i) upon execution of the Consulting Letter Agreement, a payment of $36,063 and (ii) on the first day of each calendar month beginnin g on October 1, 2003 through November 1, 2004, a payment equal to $23,183. Under the Maintenance Letter Agreement, the Company agreed to pay Plaut the full amount of the debt as follows: (i) upon execution of the Maintenance Letter Agreement, a payment of $8,312 and (ii) on the first day of each calendar month beginning on August 1, 2003 through December 1, 2003, a payment equal to $14,962. The Company was unable to make the October and November payments and is currently in default under the Letter Agreements. On October 9, 2003, the Company received notification of default under the Letter Agreements from Plaut. No further action has been taken by Plaut. The Company is currently unable to make any further payments under the Letter Agreements.

	32

 

Tektronix, Inc.

On November 5, 2003, the Company notified Tektronix, Inc. ("Tektronix") of certain claims for indemnification it believes it has against Tektronix in connection with that certain Asset Purchase Agreement dated October 31, 2002 between the Company and Tektronix (the "Asset Purchase Agreement"). Under the Asset Purchase Agreement, $1,000,000 of the purchase price was placed in an escrow account (the "Escrow Amount") for a period of one year following the closing of the Agreement as an offset for indemnification claims by the Company, subject to the terms of an escrow agreement (the "Escrow Agreement"). The Company notified the escrow agent of its indemnification claims under the Asset Purchase Agreement and instructed the escrow agent to release the Escrow Amount to the Company under the Escrow A greement. In accordance with the Escrow Agreement, on November 6, 2003, Tektronix notified the escrow agent of its objection to the Company's indemnification claims under the Asset Purchase Agreement. The Escrow Agreement provides that disputes regarding the Escrow Amount will be handled by negotiation between the parties, and if such negotiation is not successful, by binding arbitration. In addition, Tektronix may have certain claims against the Company for alleged amounts owed to Tektronix in connection with a lease agreement for a facility in Chelmsford, Massachusetts and a Manufacturing and Services Agreement dated November 5, 2002 between the Company and Tektronix. No further action has been taken by the Company or Tektronix with respect to the foregoing matters.

Other

Numerous creditors have sent demand letters threatening legal proceedings if they are not paid. The Company is seeking to reach accommodations with such creditors.

The Company from time to time is involved in various other lawsuits and actions by third parties arising in the ordinary course of business. The Company is not aware of any additional pending litigation, claims or assessments that could have a material adverse effect on the Company's business, financial condition and results of operations.

Item 5.    Other Information

On September 11, 2003, the Company borrowed $350,000 from Optel Capital, LLC pursuant to a Secured Promissory Note (the "Note"). The Note bears interest at an annual rate of 10% , is secured by a first priority security interest in substantially all of the assets of the Company pursuant to a Second Amended and Restated Security Agreement dated as of September 11, 2003 and may be prepaid at any time. The Company intends to use the proceeds for the settlement of debt with certain trade creditors and for general corporate and working capital purposes. The Note matures on July 31, 2004, unless certain specified events occur accelerating its maturity.

On November13, 2003, the Company borrowed $500,000 from Optel Capital, LLC pursuant to a Secured Promissory Note (the "Note"). The Note bears interest at an annual rate of 10% , is secured by a first priority security interest in substantially all of the assets of the Company pursuant to a Third Amended and Restated Security Agreement dated as of November 13, 2003 and may be prepaid at any time. The Company intends to use the proceeds for general corporate and working capital purposes. The Note matures on July 31, 2004, unless certain specified events occur accelerating its maturity. The Company’s total indebtedness to Optel , LLC and Optel Capital, LLC is now approximately $10.35 million.

	33

 

Item 6.    Exhibits and Reports on Form 8-K

(a)  Exhibits

    A list of exhibits is set forth in the Exhibit Index found on page 30 of the report.

(b) Reports on Form 8-K.

(i) Current Report on Form 8-K dated as of August 21, 20003, filed on September 10, 2003 pursuant to item 5, reporting the Fidelity Compromise and Settlement Agreement matter, the Jabil Forbearance matter, and Loans from Optel matter.

	34

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

	Digital Lightwave, Inc.
	(Registrant)
	By:	/s/JAMES GREEN
		Chief Executive Officer and President
		(Principal Executive Officer)
		Date: November 17, 2003
	By:	/s/PATRICIA HAYES
		Patricia Hayes
		Chief Accounting Officer
		(Principal Financial Officer)
		Date: November 17, 2003

EXHIBIT INDEX

Exhibit Number		Description
10.1+		Secured Promissory Note dated September 11, 2003 between Digital Lightwave, Inc. and Optel Capital, LLC.
10.2+		Second Amended and Restated Security Agreement dated September 11, 2003 between Digital Lightwave, Inc. and Optel Capital, LLC.
10.3+		Secured Promissory Note dated November 13, 2003 between Digital Lightwave, Inc. and Optel Capital, LLC.
10.4+		Third Amended and Restated Security Agreement dated November 13, 2003 between Digital Lightwave, Inc. and Optel Capital, LLC.
31.1+		Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes–Oxley Act of 2002.
31.2+		Certification by the Principal Financial Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002
32.1+		Certification by the Chief Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes–Oxley Act of 2002

____________

+     Indicates such exhibit is filed herewithin.