UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT TO
FORM 10-Q
[X] Amendment to quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended March
30, 2002 or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________________
to __________________.
Commission file number 0-31162
O P T I C N E T, I N C.
(Exact name of Registrant as specified in its charter)
Delaware 94-3368561
- ------------------------ ------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
One Post Street, Suite 2500
San Francisco, California 94104
----------------------------------------
(Address of principal executive offices)
(415) 956-4477
-------------------------------
(Registrant's telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __ No X
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock: $.0001 Par Value; 3,622,770 shares of Voting Common Stock and
2,591,857 shares of Nonvoting Common Stock outstanding as of May 1, 2002.
Explanatory Note to Amendment
Revised information in this amended report on Form 10-Q for the Registrant's
fiscal quarter ended March 30, 2002 is contained solely in the notes to the
Company's condensed financial statements under the headings "Note 1. Basis of
Presentation" and within Management's Discussion and Analysis of Financial
Condition and Results of Operations under the inserted heading "Financing from
Related Party" and the headings "Liquidity and Capital Resources" and "Recent
Developments." The Company has not undertaken to update any other information in
this amended filing from that contained in the Company's report on Form 10-Q for
the fiscal quarter ended March 30, 2002 filed May 14, 2002.
Page 1 of 18
OPTICNET, INC. (a development stage company)
INDEX
PART 1. FINANCIAL INFORMATION PAGE
--------------------- ----
Item 1. Financial Statements
Condensed Balance Sheets--March 30, 2002 and
September 29, 2001 3
Condensed Statements of Operations--Quarter and
Six Months ended March 30, 2002 and March 31,
2001 and the period from February 23, 2000
(inception) to March 30, 2002 4
Condensed Statements of Cash Flows-- Quarter
and Six Months ended March 30, 2002 and March
31, 2001 and the period from February 23, 2000
(inception) to March 30, 2002 5
Notes to Condensed Financial Statements--
March 30, 2002 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk 15
PART II. OTHER INFORMATION
-----------------
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
(a) Exhibits
(b) Reports on Form 8-K
SIGNATURES 18
----------
Page 2 of 18
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
OPTICNET, INC. (a development stage company)
CONDENSED BALANCE SHEETS
March 30, September 29,
2002 2001
(Unaudited) (See note below)
- --------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 106,834 $ 828,489
Trade receivables, net -- 99,720
Inventories 108,851 --
Other current assets 57,535 80,631
----------- -----------
Total current assets 273,220 1,008,840
Property and equipment, net 13,293 17,984
Other assets 22,025 22,025
----------- -----------
$ 308,538 $ 1,048,849
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable $ 282,399 $ 132,574
Accrued expenses and other liabilities 439,127 349,174
Note payable to related party 2,656,338 1,166,608
----------- -----------
Total current liabilities 3,377,864 1,648,356
Other liabilities 21,600 14,670
Stockholders' deficit (3,090,926) (614,177)
----------- -----------
$ 308,538 $ 1,048,849
=========== ===========
Note: The balance sheet at September 29, 2001 has been derived from the audited
balance sheet at that date.
See notes to condensed financial statements.
Page 3 of 18
OPTICNET, INC. (a development stage company)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited) Quarter Ended Six Months Ended
--------------------------- ---------------------------
Period from
February 23,
2000
(inception) to
March 30, March 31, March 30, March 31, March 30,
2002 2001 2002 2001 2002
----------- ----------- ----------- ----------- -----------
Revenues $ -- $ 325,000 $ 87,500 $ 325,000 $ 586,500
Cost of revenues -- 195,000 43,752 195,000 303,392
----------- ----------- ----------- ----------- -----------
Gross margin -- 130,000 43,748 130,000 283,108
Selling, general and administrative expenses 479,526 188,494 767,868 206,916 1,651,637
Research and development expenses 1,256,733 111,686 1,720,299 286,013 2,793,815
----------- ----------- ----------- ----------- -----------
Loss from operations (1,736,259) (170,180) (2,444,419) (362,929) (4,162,344)
Interest expense 25,787 -- 44,567 -- 68,419
Other income (expense) (5,725) 12,188 3,275 28,909 64,551
----------- ----------- ----------- ----------- -----------
Net loss accumulated in the development stage $(1,767,771) $ (157,992) $(2,485,711) $ (334,020) $(4,166,212)
=========== =========== =========== =========== ===========
Basic and Diluted Net Loss per Share
Basic and diluted net loss per share $ (0.32) $ (0.03) $ (0.45) $ (0.07) $ (1.08)
=========== =========== =========== =========== ===========
Weighted average shares used in computation
of basic and diluted loss per share 5,539,735 4,904,184 5,486,573 4,783,739 3,865,398
=========== =========== =========== =========== ===========
See notes to condensed financial statements.
Page 4 of 18
OPTICNET, INC. (a development stage company)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Quarter Ended Six Months Ended
-------------------------- --------------------------
Period from
February 23,
2000
(inception) to
March 30, March 31, March 30, March 31, March 30,
2002 2001 2002 2001 2002
----------- ----------- ----------- ----------- -----------
Cash flows from operating activities:
Net loss $(1,767,771) $ (157,992) $(2,485,711) $ (334,020) $(4,166,212)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Depreciation and amortization 6,390 21 14,269 4,811 30,858
Other 409,446 (76,773) 260,673 404,853 576,740
----------- ----------- ----------- ----------- -----------
Net cash provided (used) by operating activities (1,351,935) (234,744) (2,210,769) 75,644 (3,558,614)
Cash flows from investing activities:
Purchase of property and equipment -- (6,339) (1,158) (13,486) (22,406)
Other -- 16,972 -- (20,237) (22,025)
----------- ----------- ----------- ----------- -----------
Net cash provided (used) by investing activities -- 10,633 (1,158) (33,723) (44,431)
Cash flows from financing activities:
Proceeds from borrowing on line of credit from
related party 927,334 -- 1,489,730 -- 2,820,331
Principal payments on line of credit from related party -- -- -- -- (163,993)
Proceeds from issuance of convertible preferred stock -- -- -- -- 1,000,000
Proceeds from issuance of common stock 542 8,000 542 8,000 53,541
----------- ----------- ----------- ----------- -----------
Net cash provided by financing activities 927,876 8,000 1,490,272 8,000 3,709,879
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (424,059) (216,111) (721,655) 49,921 106,834
Cash and cash equivalents at beginning of period 530,893 1,278,835 828,489 1,012,803 --
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 106,834 $ 1,062,724 $ 106,834 $ 1,062,724 $ 106,834
=========== =========== =========== =========== ===========
See notes to condensed financial statements.
Page 5 of 18
OPTICNET, INC. (a development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
interim periods presented are not necessarily indicative of the results that may
be expected for the year ending September 28, 2002. For further information,
refer to the financial statements and footnotes thereto in the Company's
registration statement on Form 10, as amended April 25, 2002.
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 in
OpticNet to BEI Technologies' stockholders (the "Distribution"), substantially
all of the Company's voting common stock held by BEI Technologies. In the
Distribution, each holder of record of BEI Technologies common stock as of
October 30, 2000 received one share of OpticNet voting 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 voting common stock, representing an aggregate direct
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
relates to engineering agreements funded by unaffiliated customers. 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,
Page 6 of 18
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 incurred
recurring operating losses and negative cash flows from operations and has an
accumulated deficit of $4.2 million at March 30, 2002. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
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.
Management and the Company's board of directors made a decision in March 2002 to
reduce the level of spending for research and development and equipment and
facilities expenditures and to reduce operations to a level that will solely
support the current customer base. The decision by the Company to reduce
operations was made based on the inability to obtain additional funding from
unaffiliated investors at this time. During March 2002, the Company escalated
discussions with BEI Technologies regarding an additional investment in the
Company by BEI Technologies, which, if consummated, would be expected to provide
sufficient funding for scaled back operations for the remainder of the Company's
fiscal year 2002. As of the end of the second fiscal quarter, this investment
had not been consummated.
Based on cost reduction measures implemented by the Company during the fiscal
quarter ended March 30, 2002, additional cost reductions under consideration and
discussions with BEI Technologies regarding an additional investment in the
Company, management believed the Company would have, provided such steps were
taken and negotiations as to an additional investment by BEI Technologies
concluded successfully, sufficient financing to maintain reduced operations for
the remainder of the current fiscal year. Accordingly, management did not, as of
the end of the second 2002 fiscal quarter, determine it necessary to present the
Company's financial statements on a liquidation basis.
Use of Estimates
The preparation of these financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent assets and
liabilities. The estimates are based on historical experience and on various
other assumptions that management believes to be reasonable under the
circumstances. On an ongoing basis, the Company evaluates its estimates. Results
may differ from these estimates due to actual outcomes being different from
those on which the Company based its assumptions.
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
Page 7 of 18
assured, which is generally upon receipt of payment.
Revenue Recognition
The Company has not recognized revenue from commercial product sales to date.
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. Payments, if any, for prototype
deliveries to customers by the Company are accounted for as an offset against
research and development expense as described below.
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." No prototype units were delivered during the
quarters ended March 30, 2002 and March 31, 2001, thus no payments or
receivables for prototype deliveries were offset against research and
development expense in the statements of operations for the periods indicated.
NOTE 2. TRANSACTIONS WITH RELATED PARTIES
On October 6, 2000, the Company and BEI Technologies entered into a Technology
Transfer and Distribution Agreement (the "Distribution Agreement") whereby BEI
Technologies contributed to the Company certain assets and intellectual property
related to the fiber optic components technology developed by BEI Technologies
and BEI Technologies' majority-owned subsidiary, SiTek, Inc. ("SiTek") in
exchange for 3,616,000 shares of the Company's common stock. BEI Technologies
later distributed 3,578,387 of these shares to its stockholders on November 21,
2000 in connection with the Company's separation from BEI Technologies.
In connection with the Distribution Agreement, on October 6, 2000, the Company
and SiTek entered into a License and Technical Assistance Agreement whereby
Sitek agreed to license certain technology to the Company, assist the Company in
certain research and development efforts following the Distribution and also
fabricate and supply certain components utilized in the Company's products.
Further, Sitek granted to the Company a perpetual, royalty free, worldwide,
exclusive license to develop, make, use and sell products within the field of
telecommunications data transmission utilizing technology now possessed or later
developed by SiTek, and the Company has granted to SiTek a corresponding
perpetual, royalty free, worldwide, exclusive license to develop, make, use and
sell products outside of the Company's defined market utilizing technology now
possessed or later developed by the Company. This agreement shall continue in
effect for five years and automatically renew thereafter for consecutive
one-year terms unless either party gives written notice of termination.
On October 27, 2000, the Company and BEI Technologies entered into an
InterCompany Services Agreement (the "Services Agreement") whereby BEI
Technologies agreed to make available to the Company certain office and facility
space, personnel support and supervision, financial and administrative services,
record-keeping functions and other assistance, with BEI Technologies being
reimbursed for the costs and expenses incurred in connection with the provision
of these services to OpticNet. Charges for these services were allocated to the
Company based upon usage, headcount and other methods that management believes
to be reasonable. These allocations totaled $25,000 for the each of the quarters
ended March 30, 2002 and March 31, 2001.
Page 8 of 18
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. In March 2002, BEI Technologies increased this line of credit by $1.0
million. As of March 30, 2002, the Company had outstanding borrowings totaling
approximately $2.7 million on this line of credit. To maintain sufficient
liquidity in the future and to fund operations, the Company may need to enter
into a new credit agreement in the future with a commercial lender. A new credit
line, if available, could include less favorable terms than the existing line of
credit agreement with BEI Technologies.
On September 28, 2001 the Company entered into an equipment sublease agreement
with BEI Technologies, as lessor, which is subordinate to a master lease
agreement entered into by BEI Technologies, as lessee. This equipment under the
equipment sublease agreement was valued at approximately $708,000, with an
initial lease term of 36 months. Rental payments are on a quarterly basis and
are equal to a monthly equivalent rent determined by the Company's level of
usage of the equipment, the cost of the equipment and applicable interest.
On December 20, 2001 the Company executed two additional equipment lease
schedules under the Company's equipment sublease arrangement with BEI
Technologies. This additional equipment under the equipment sublease agreement
was valued at approximately $3.5 million, with an initial lease term of 36
months. Rental payments are on a quarterly basis and are equal to a monthly
equivalent rent determined by the Company's level of usage of the equipment, the
cost of the equipment and applicable interest.
On March 28, 2002 the Company executed an additional equipment lease schedule
under the Company's equipment sublease arrangement with BEI Technologies. This
additional equipment under the equipment sublease agreement was valued at
approximately $2.8 million, with an initial lease term of 36 months. Rental
payments are on a quarterly basis and are equal to a monthly equivalent rent
determined by the Company's level of usage of the equipment, the cost of the
equipment and applicable interest.
The Company leases 15,571 square feet of office and manufacturing facilities
used for research and development and manufacturing activities in Hayward,
California from BEI Technologies under a sublease agreement entered into in
October 2001, for an initial term expiring December 2005. The average annual
rental payment under the sublease agreement is approximately $220,000.
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 includes lower usage of the subleased
facilities and equipment described above.
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.
Page 9 of 18
NOTE 3. NOTE PAYABLE TO RELATED PARTY
During fiscal 2001, the Company entered into a line of credit agreement with BEI
Technologies, a minority investor. Borrowings outstanding on the line of credit
were as follows:
March 30, March 31,
2002 2001
---------- ----------
Unsecured revolving promissory note from BEI
Technologies due 9/28/02, at a rate of prime plus
1.5%; 6.3% and 9.5% at March 30, 2002 and March 31,
2001, respectively) $2,656,338 $ --
---------- ----------
$2,656,338 $ --
========== ==========
No interest was paid during the quarter ended March 30, 2002 or in the quarter
ended March 31, 2001. Accrued interest expense was approximately $68,000 at
March 30, 2002. No interest expense was accrued at March 31, 2001.
NOTE 4. CONTINGENCIES AND LITIGATION
The Company may be subject to various legal actions arising in the normal course
of business from time to time. As of March 30, 2002, the Company had no legal
actions pending.
NOTE 5. SUBSEQUENT EVENT
In April 2002, the Company underwent a reduction in force resulting in eight
individuals departing employment with the Company, including engineering,
manufacturing and marketing personnel. Severance pay for affected persons was
per Company policy, including cash payment and the acceleration of the vesting
of options for certain affected individuals. Total cash costs related to the
reduction in force of approximately $86,000 are expected to be recorded in the
fiscal quarter ending June 29, 2002.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those expressed in, or
implied by, such forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in this section, and those discussed in the Company's Form 10, as amended April
25, 2002, in particular, within the "Risk Factors" section thereof.
Critical Accounting Policy and the Use of Estimates
Management's discussion and analysis of financial condition and results of
operations is based upon the Company's financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The Company reviews the accounting policies used in
reporting its financial results on a regular basis. The preparation of these
financial statements requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosure of contingent assets and liabilities. The estimates are based
on historical experience and on various other assumptions that management
believes to be reasonable under the circumstances. On an ongoing basis, the
Company evaluates its estimates. Results may differ from these estimates due to
actual outcomes being different from those on which the Company based its
assumptions. The Company believes the following critical accounting policy
affects its more significant judgments and estimates used in the preparation of
its financial statements.
Page 10 of 18
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.
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.
Quarters ended March 30, 2002 and March 31, 2001
There were no revenues or prototype product deliveries during the second quarter
of fiscal 2002. Revenues during the second quarter of fiscal 2001 were $325,000,
reflecting work performed under an engineering agreement with one unaffiliated
customer. In addition, during the second quarter of fiscal 2001 the Company
recorded payments or receivables for deliveries of prototype products to one
unaffiliated customer, accounted for as an offset against research and
development expense.
There was no cost of revenues in the second quarter of fiscal 2002. In the
second quarter of fiscal 2001, cost of revenues as a percentage of revenues was
60%, resulting in gross profit of $130,000. Cost of revenues includes salaries,
materials and production overhead.
Page 11 of 18
Selling, general and administrative expenses in the second quarter of fiscal
2002 increased approximately $291,000 from $189,000 in the same quarter of the
prior fiscal year to $480,000. The increase was primarily due to increased
professional, consulting and legal fees of approximately $158,000, as well as
increased direct employee compensation expense and related benefits of
approximately $100,000. The remaining increase was due to travel, facility rent
and other costs. Selling, general and administrative expenses included payments
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 the second quarter of
both fiscal 2002 and 2001 totaled $25,000. The cost of these services was
established at $25,000 per fiscal quarter based upon square footage, headcount,
usage and other methods management believes to be reasonable.
Research and development expenses in the second quarter of fiscal 2002 increased
approximately $1,145,000 from $112,000 in the same quarter of the prior fiscal
year to $1,257,000. The increase was primarily due to increased gross costs for
facility rent and operations of approximately $419,000, as well as increased
gross costs for direct employee compensation expense and related benefits of
approximately $334,000, and increased gross costs for materials and supplies of
approximately $197,000. The remaining increase was due to gross costs for
professional fees, travel and other expenses.
Interest expense was approximately $26,000 in the second quarter of fiscal 2002
due to the outstanding balance and additional borrowings during the quarter on
the Company's line of credit agreement with BEI Technologies. No interest
expense was incurred during the second quarter of fiscal 2001 because the
Company did not borrow any amounts on the line of credit with BEI Technologies
during that time.
Six Months ended March 30, 2002 and March 31, 2001
Revenues during the first six months of fiscal 2002 reflected work performed
under engineering agreements with two unaffiliated customers and decreased
approximately $237,000 to $88,000 from $325,000 during the same period in fiscal
2001. The decrease is due to the slow down of demand for new telecommunications
equipment components compared to prior periods. In addition, during the first
six months of fiscal 2002, the Company recorded payments or receivables for
deliveries of prototype products to two unaffiliated customers, accounted for as
an offset against research and development expense.
Cost of revenues as a percentage of revenues in the first six months of fiscal
2002 decreased 10 percentage points to 50% from 60% in the comparable period of
fiscal 2001. The decrease is due to slightly lower direct costs on engineering
agreements in the current period.
Selling, general and administrative expenses during the first six months of
fiscal 2002 increased approximately $561,000 from $207,000 in the comparable
period of the prior fiscal year to $768,000. The increase was primarily due to
increased professional, consulting and legal fees of approximately $354,000, as
well as increased direct employee compensation expense and related benefits of
approximately $140,000. The remaining increase was due to facility rent, travel
and other costs. Selling, general and administrative expenses included payments
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 the first six months
of fiscal 2002 and 2001 were $50,000 and $25,000, respectively. The cost of
these services was established at $25,000 per fiscal quarter at the time of
entrance into the Services Agreement based upon square footage, headcount, usage
and other methods management believes to be reasonable.
Research and development expenses during the first six months of fiscal 2002
increased approximately $1,434,000 from $286,000 in the comparable period of the
prior fiscal year to $1,720,000. The increase was primarily due to increased
gross costs for direct employee compensation expense and related benefits of
approximately $605,000, as well as increased gross costs for facility rent and
operations of approximately
Page 12 of 18
$560,000, and increased gross costs for materials and supplies of approximately
$254,000. The remaining increase was due to gross costs for professional fees,
travel and other costs.
Interest expense was approximately $45,000 in the first six months of fiscal
2002 due to the outstanding balance and additional borrowings during the period
on the Company's line of credit agreement with BEI Technologies. No interest
expense was incurred during the comparable period of fiscal 2001 because the
Company did not borrow any amounts on the line of credit with BEI Technologies
during that time.
Financing from Related Party
Pursuant to the facilities sublease agreement, equipment sublease agreement and
the Services Agreement described above, payments due to BEI Technologies were as
follows:
Period from Period from Period from
February 23, February 23, February 23,
2000 2000 Quarter Ended 2000
(inception) to Year ended (inception) to ------------------------- (inception) to
September 30, September 29, September 29, December 29, March 30, March 30,
2000 2001 2001 2001 2002 2002
-------- -------- -------- -------- -------- --------
(unaudited) (unaudited)
Subleases
Facilities sublease $ 8,486 $213,569 $222,055 $ 56,553 $ 56,753 $335,361
Equipment sublease -- -- -- 59,230 340,435 399,665
-------- -------- -------- -------- -------- --------
Total amounts
financed under
subleases 8,486 213,569 222,055 115,783 397,188 735,026
Intercompany
services charges -- 75,000 75,000 25,000 25,000 125,000
-------- -------- -------- -------- -------- --------
Total payments due $ 8,486 $288,569 $297,055 $140,783 $422,188 $860,026
======== ======== ======== ======== ======== ========
Liquidity and Capital Resources
During the first six months of fiscal 2002, total cash used by operations was
approximately $2,211,000. Cash provided by operations included the positive
impact of non-cash charges from bad debt expense, and depreciation and
amortization of $57,000 and $14,000, respectively. In addition, positive impacts
to cash resources resulted from decreases in other current assets and trade
receivables of $44,000 and $43,000, respectively, as well as increases in trade
accounts payable, accrued expenses and other liabilities and deferred rent of
$150,000, $90,000 and $7,000, respectively. These cash inflows were offset by a
net loss of $2,486,000, as well as increases in inventory and prepaid expenses
of $109,000 and $21,000, respectively.
Cash used by investing activities during the first six months of fiscal 2002
consisted of a purchase of $1,000 in capital equipment. In addition, during the
first six months of fiscal 2002 the Company financed equipment with a value of
approximately $6.3 million and an initial lease term of three years under the
equipment sublease arrangement with BEI Technologies. The subleased equipment is
in addition to the approximately $708,000 of equipment subleased as of fiscal
2001 year end. Rent expense related to this equipment totaled approximately
$340,000 and $59,000 during the second and first quarters, respectively, of
fiscal 2002. Beginning in the third quarter of fiscal 2002, the Company intends
to reduce operations due to its inability to obtain additional financing from
unaffiliated investors at this time. Thus, due to reduced usage now expected on
the subleased equipment, past rent expense on the subleases is not necessarily
indicative of future results. 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
Page 13 of 18
from an unrelated third party.
Cash provided by financing activities during the first six months of fiscal 2002
consisted of proceeds of $1,490,000 from borrowings on the Company's note
payable to BEI Technologies under its related party line of credit arrangement.
The borrowings were used to fund daily operations, capital investments and
product development. In March 2002, BEI Technologies increased this line of
credit by $1.0 million.
The Company anticipates incurring substantial additional losses over at least
the next several years. Since inception, the Company has incurred recurring
operating losses and negative cash flows from operations. As of March 30, 2002,
the Company had an accumulated deficit of $4.2 million. As of that date, after
extensive discussions with prospective outside investors throughout the
Company's second fiscal quarter, management became aware that none of these
discussions would result in a 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 such 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. As of the end of the Company's March 30, 2002 fiscal quarter,
management determined that unless additional financing was obtained, the Company
would not have sufficient financing to continue as a going concern for the
remainder of its 2002 fiscal year without modifying the Company's business plan
and implementing strict cost-cutting measures. In March 2002, management and the
Company's board of directors decided to reduce the level of spending by the
Company for research and development and facility and equipment expenditures and
reduce operations to a level that will solely support the current customer base.
Further, during March 2002, the Company escalated discussions with BEI
Technologies regarding an additional investment in the Company by BEI
Technologies, which, if consummated, would be expected to provide sufficient
funding for scaled back operations for the remainder of the Company's fiscal
year 2002. As of the end of the second fiscal quarter, this investment had not
been consummated. The Company intends to continue to operate in a scaled back
manner until outside financing is available or other prospects are realized by
the Company.
Based on cost reduction measures implemented by the Company during the fiscal
quarter ended March 30, 2002, additional cost reductions under consideration and
discussions with BEI Technologies regarding an additional investment in the
Company, management believed the Company would have, provided such steps were
taken and negotiations as to an additional investment by BEI Technologies
concluded successfully, sufficient financing to maintain reduced operations for
the remainder of the current fiscal year. Accordingly, management did not, as of
the end of the second 2002 fiscal quarter, determine it necessary to present the
Company's financial statements on a liquidation basis.
The Company had no material capital commitments at March 30, 2002.
Recent developments
In April 2002, the Company underwent a reduction in force resulting in eight
individuals departing employment with the Company, including engineering,
manufacturing and marketing personnel. Severance pay for affected persons was
per Company policy, including cash payment and the acceleration of the vesting
of options for certain affected individuals. Total cash costs related to the
reduction in force of approximately $86,000 are expected to be recorded in the
fiscal quarter ending June 29, 2002.
In addition, since the end of the Company's March 30, 2002 fiscal quarter,
management and the Company's board of directors have been considering other cost
reduction measures. Such cost reduction measures could include engagement on a
project or temporary basis of Company engineers and technicians and other
skilled personnel by a subsidiary of BEI Technologies. Such persons would work
on projects non-competitive with the Company. A temporary redeployment of
personnel would be intended to preserve essential know-how and access to key
personnel for the Company while alleviating operating costs. Further, since the
end of the
Page 14 of 18
Company's March 30, 2002 fiscal quarter, the Company has continued to engage in
extensive discussions with BEI Technologies regarding a further investment in
the Company by BEI Technologies. An additional investment, combined with
measures to reduce payroll costs and the continued emphasis on reduction of
operating costs, would be expected to provide sufficient funding for the Company
for the remainder of the Company's fiscal 2002. The Company is still in
discussions with BEI Technologies regarding the terms and the structure of such
an investment.
Effects of Inflation
Management believes that, for the periods presented, inflation has not had a
material effect on the Company's operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company was incorporated in February 2000 and commenced independent
operations in November 2000. The Company has not yet generated revenues from
sales of its products but only from engineering work performed for three
customers to date. The Company expects to incur net losses for the foreseeable
future. The Company may never achieve profitability and may not succeed as a
going concern and its independent auditor has included a statement to this
effect in their most recently issued audit report.
The Company believes that there have been no material changes in the reported
market risks faced by the Company since those discussed in the Company's Form
10, as amended April 25, 2002, under the heading corresponding to that set forth
above. The Company's exposure to market risk is limited to interest income
sensitivity, which is affected by changes in the general level of U.S. interest
rates, as a portion of the Company's cash equivalents are in short-term debt
securities issued by corporations. The Company's cash equivalents are placed
with high-quality issuers and the Company attempts to limit the amount of credit
exposure to any one issuer. Due to the nature of the Company's short-term
investments, the Company believes that it is not subject to any material market
risk exposure. The Company does not have any foreign currency or other
derivative financial instruments.
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fiscal quarter ended March 30, 2002, the stockholders of the Company
approved by an action by written consent an amendment to the Company's
certificate of incorporation to (i) increase the aggregate authorized shares of
the Company's capital stock to 50 million shares from the previously authorized
aggregate of 40 million; (ii) increase the number of shares designated as
preferred stock to an aggregate of 22 million shares from the previously
designated aggregate of 7 million shares; and (iii) increase the number of
shares designated as voting common stock to an aggregate of 45 million shares
from the previously designated aggregate of 35 million shares. The amendment to
the Company's certificate of incorporation was approved by a simple majority of
the stockholders of the Company entitled to vote on the amendment. None of the
newly authorized shares were issued.
Page 15 of 18
Item 6. Exhibits and Reports on Form 8-K
(a) Listing of Exhibits
Exhibit Numbers Description Footnote
--------------- ----------- --------
2.1 Technology Transfer and Distribution Agreement between BEI
Technologies, Inc. and the registrant i
3.1 Amended and Restated Certificate of Incorporation ii
3.2 Bylaws i
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 Restate 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
Page 16 of 18
10.9 Form of Indemnity Agreement to be entered into by the
registrant with each of its directors and executive officers ii
10.10 Consulting Agreement between Danforth Joslyn and the
registrant ii
10.11 Consulting Agreement between Gary D. Wrench and BEI
Technologies, Inc. iii
10.12 Amendment No. 1 to License and Technical Assistance
Agreement between the registrant and SiTek, Inc. iii
99.1 Preliminary Information Statement of BEI Technologies, Inc.
dated September 65, 2000 i
99.2 Final Information Statement of BEI Technologies, Inc. dated
November 17, 2000 i
(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 the quarter
ended March 30, 2002.
Page 17 of 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amended Report on Form 10-Q to be signed on its
behalf by the undersigned, thereunto duly authorized on June 19, 2002.
OpticNet, Inc.
By: /s/ Gary D. Wrench
---------------------------
Gary D. Wrench
Chief Financial Officer
(Chief Accounting Officer)
Page 18 of 18