UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 29, 2002 or
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to ________.
Commission file number 0-31162
O P T I C N E T, I N C.
(Exact name of Registrant as specified in its charter)
Delaware 94-3368561
------------------------ ------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
One Post Street, Suite 2500
San Francisco, California 94104
----------------------------------------
(Address of principal executive offices)
(415) 956-4477
-------------------------------
(Registrant's telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock: $.0001 Par Value; 3,632,603 shares of Voting Common Stock and
2,591,857 shares of Nonvoting Common Stock outstanding as of June 29, 2002.
Page 1 of 18
OPTICNET, INC. (a development stage company)
INDEX
PART 1. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Balance Sheets-- June 29, 2002 and
September 29, 2001 3
Condensed Statements of Operations--Quarter and
Nine Months ended June 29, 2002 and June 30, 2001
and the period from February 23, 2000 (inception)
to June 29, 2002 4
Condensed Statements of Cash Flows-- Quarter and
Nine Months ended June 29, 2002 and June 30, 2001
and the period from February 23, 2000 (inception)
to June 29, 2002 5
Notes to Condensed Financial Statements-- June 29, 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 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
June 29, September 29,
2002 2001
(Unaudited) (See note below)
- --------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 21,655 $ 828,489
Trade receivables, net -- 99,720
Inventories 26,286 --
Other current assets 14,201 80,631
----------- -----------
62,142 1,008,840
Total current assets
Property and equipment, net 11,879 17,984
Other assets 728 22,025
----------- -----------
$ 74,749 $ 1,048,849
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable $ 138,507 $ 132,574
Accrued expenses and other liabilities 360,280 349,174
Note payable to related party 2,656,338 1,166,608
----------- -----------
3,155,125 1,648,356
Total current liabilities
Other liabilities -- 14,670
Stockholders' deficit (3,080,376) (614,177)
----------- -----------
$ 74,749 $ 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 Nine Months Ended
-------------------------- --------------------------
Period from
February 23,
2000
June 29, June 30, June 29, June 30, (inception) to
2002 2001 2002 2001 June 29, 2002
-------------------------- -------------------------- -------------
Revenues $ 25,000 $ 174,000 $ 112,500 $ 499,000 $ 611,500
Cost of revenues 12,500 64,640 56,252 259,640 315,892
----------- ----------- ----------- ----------- -----------
Gross margin 12,500 109,360 56,248 239,360 295,608
Selling, general and administrative expenses 431,702 291,687 1,199,570 498,603 2,083,339
Research and development expenses 688,746 55,039 2,409,045 341,052 3,482,561
----------- ----------- ----------- ----------- -----------
Loss from operations (1,107,948) (237,366) (3,552,367) (600,295) (5,270,292)
Interest expense 42,175 10,998 86,742 10,998 110,594
Other income 622 9,000 3,897 37,909 65,173
----------- ----------- ----------- ----------- -----------
Deficit accumulated in the development stage $(1,149,501) $ (239,364) $(3,635,212) $ (573,384) $(5,315,713)
=========== =========== =========== =========== ===========
Basic and Diluted Net Loss per Share
Basic and diluted net loss per share $ (0.20) $ (0.05) $ (0.66) $ (0.12) $ (1.31)
=========== =========== =========== =========== ===========
Weighted average shares used in computation of
basic and diluted loss per share 5,622,237 5,015,565 5,519,293 4,861,015 4,051,406
=========== =========== =========== =========== ===========
See notes to condensed financial statements.
Page 4 of 18
OPTICNET, INC. (a development stage company)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Quarter Ended Nine Months Ended
-------------------------- --------------------------
Period from
February 23,
2000
(inception)
June 29, June 30, June 29, June 30, to June 29,
2002 2001 2002 2001 2002
-------------------------- -------------------------- -----------
Cash flows from operating activities:
Deficit accumulated in the development stage $(1,149,501) $ (239,364) $(3,635,212) $ (573,384) $(5,315,713)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 3,775 2,664 18,044 9,105 34,633
Other (118,440) (404,870) 142,233 (1,647) 458,300
----------- ----------- ----------- ----------- -----------
Net cash used by operating activities (1,264,166) (641,570) (3,474,935) (565,926) (4,822,780)
Cash flows from investing activities:
Purchase of property and equipment -- (4,434) (1,158) (17,920) (22,406)
Other 21,297 (1,060) 21,297 (21,297) (728)
----------- ----------- ----------- ----------- -----------
Net cash provided (used) by investing activities 21,297 (5,494) 20,139 (39,217) (23,134)
Cash flows from financing activities:
Proceeds from borrowing on line of credit from
related party -- 819,737 1,489,730 819,737 2,820,331
Principal payments on line of credit from related party -- (163,993) -- (163,993) (163,993)
Proceeds from investment by related party 1,156,903 -- 1,156,903 -- 1,156,903
Proceeds from issuance of convertible preferred stock -- -- -- -- 1,000,000
Proceeds from issuance of common stock 787 -- 1,329 8,000 54,328
----------- ----------- ----------- ----------- -----------
Net cash provided by financing activities 1,157,690 655,744 2,647,962 663,744 4,867,569
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (85,179) 8,680 (806,834) 58,601 21,655
Cash and cash equivalents at beginning of period 106,834 1,062,724 828,489 1,012,803 --
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 21,655 $ 1,071,404 $ 21,655 $ 1,071,404 $ 21,655
=========== =========== =========== =========== ===========
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 30 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 30 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. During the fiscal
quarter ended June 29, 2002, the Company continued negotiations with BEI
Technologies regarding a further equity investment in the Company by BEI
Technologies, contemplated to be in the form of nonvoting preferred stock, when,
and if authorized by the Company for issuance to BEI Technologies.
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."
Page 6 of 18
OpticNet's operations are subject to significant risks and uncertainties,
including competitive, financial, developmental, operational, growth and
expansion, technological, regulatory and other risks associated with an emerging
business.
These financial statements have been prepared assuming that the Company will
continue as a going concern. Since its inception, the Company has incurred
recurring operating losses and negative cash flows from operations and has an
accumulated deficit of $5.3 million at June 29, 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 decided in March 2002 to reduce
the level of incremental spending for research and development and to reduce
operations to a level that will solely support the current customer base. During
the third quarter of fiscal 2002, the Company remained unsuccessful at
attracting outside financing despite management's efforts, and continued
operations on a reduced basis.
The Company received approximately $1.2 million in cash from BEI Technologies
during the third quarter, used for general operating expenses. The parties have
been discussing the authorization by the Company of a nonvoting series of
preferred stock for issuance to BEI Technologies representing this sum. The
final terms of such an equity investment would be determined when, and if, such
an equity investment is consummated.
Use of Estimates
The preparation of 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 assured, which is generally upon receipt of
payment.
Page 7 of 18
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
quarter ended June 29, 2002. Prototype units were delivered during the quarter
ended June 30, 2001, thus payments or receivables for prototype deliveries were
offset against research and development expense in the statements of operations
for the quarter ended June 30, 2001.
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 quarter ended June
29, 2002. In the current quarter, BEI Technologies agreed to suspend these and
future quarters' service charges, due to the Company's inability to obtain
significant strategic partners or third party financing.
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
Page 8 of 18
June 29, 2002, the Company had outstanding borrowings totaling approximately
$2.7 million on this line of credit. During the fiscal quarter ended June 29,
2002, the Company was informed by BEI Technologies that no further advances
would be made to the Company under this line of credit beyond the approximately
$2.7 million funded as of March 30, 2002. 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 a general equipment sublease
agreement with BEI Technologies as the lessor, which is subordinate to a master
lease agreement entered into by BEI Technologies as the lessee. On September 28,
2001, December 20, 2001 and March 28, 2002, the Company executed equipment lease
schedules under the general equipment sublease with BEI Technologies. The total
value of the scheduled equipment under the sublease agreement was approximately
$7.0 million, with an initial lease term of 36 months. Rental payments are due
on a quarterly basis and the amount determined by the Company's level of usage
of the equipment, the cost of the equipment and applicable interest. Payments
due for the quarter ended June 29, 2002 are approximately $10,000.
The Company originally entered into a lease agreement in October 2001 with BEI
Technologies for a 15,571 square feet facility for administration, research and
development and manufacturing activities in Hayward, California, expiring
December 2005. As of March 30, 2002, the Company, in recognition of its
inability to obtain significant strategic partners or third party financing,
concluded it was necessary to reduce operating costs. The Company agreed with
BEI Technologies that this reduction in operations would lower usage of the
equipment and the subleased facilities described above. Accordingly, the annual
lease payments to BEI Technologies have been prorated beginning March 31, 2002,
based on the portion of the facilities the Company requires to support its
current customers.
In the fiscal quarter ended June 29, 2002, BEI Technologies advanced an
additional $1.2 million to the Company. The parties have been discussing the
authorization by the Company of a nonvoting series of preferred stock for
issuance to BEI Technologies representing this investment. The final terms of
such an equity investment remain under discussion by the parties and have yet to
be determined.
All of the arrangements outlined above were negotiated by related parties and
may not represent transactions at arms length and the Company may not be able to
obtain terms as favorable with third parties if and when the arrangements with
BEI Technologies come to an end.
NOTE 3. NOTE PAYABLE TO RELATED PARTY
During fiscal 2001, the Company entered into a line of credit agreement with BEI
Technologies, a minority investor. Borrowings outstanding on the line of credit
were as follows:
June 29, 2002 June 30, 2001
------------- -------------
Unsecured revolving promissory note from BEI
Technologies due 9/28/02, at a rate of prime
plus 1.5%; 6.3% and 8.3% at June 29, 2002 and
June 30, 2001, respectively $2,656,338 $655,744
---------- --------
$2,656,338 $655,744
========== ========
Page 9 of 18
No interest was paid during the quarter ended June 29, 2002 or in the quarter
ended June 30, 2001. Accrued interest expense was approximately $111,000 and
$11,000 at June 29, 2002 and June 30, 2001, respectively.
NOTE 4. REDUCTION IN FORCE
In April 2002, the Company underwent a reduction in force resulting in eight
individuals departing employment with the Company, including engineering,
manufacturing and marketing personnel. Severance pay for affected persons was
per Company policy, including cash payment and the acceleration of the vesting
of options for certain affected individuals. Total cash costs related to the
reduction in force of approximately $86,000 were recorded in the fiscal quarter
ending June 29, 2002.
NOTE 5. SUBSEQUENT EVENTS
During July 2002, a significant stockholder of the Company contributed a total
of 420,572 shares of nonvoting common stock and a total of 546,484 shares of
voting common stock to the capital of the Company.
NOTE 6. CONTINGENCIES AND LITIGATION
The Company has pending various legal actions arising in the normal course of
business.
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.
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,
Page 10 of 18
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 June 29, 2002 and June 30, 2001
Revenues during the third quarter of fiscal 2002 and 2001 were $25,000 and
$174,000, respectively, reflecting work performed under engineering agreements
with unaffiliated customers. The decrease during the current quarter is due to
the slow down of demand for new telecommunications equipment components compared
to prior periods. In addition, during the third quarter of fiscal 2001 the
Company recorded payments or receivables for deliveries of prototype products to
five unaffiliated customers, accounted for as an offset against research and
development expense.
In the third quarter of fiscal 2002 and 2001, cost of revenues as a percentage
of revenues was 50% and 37%, resulting in gross profit of approximately $13,000
and $109,000, respectively. The increase as a percentage of revenues is due to
higher direct costs on engineering agreements in the period just ended. Cost of
revenues includes employee compensation, materials and production overhead.
Page 11 of 18
Selling, general and administrative expenses in the third quarter of fiscal 2002
increased approximately $140,000 from $292,000 in the same quarter of the prior
fiscal year to $432,000. The increase was primarily due to increased facility
rent and related costs of approximately $10,000, as well as increased travel
expenses of approximately $9,000. The remaining increase was due to
professional, consulting and legal fees, and other costs. In the third quarter
of fiscal 2001, selling, general and administrative expenses included a payment
of $25,000 made to BEI Technologies for accounting, human resources and other
administrative services provided by BEI Technologies pursuant to the Services
Agreement between the two companies. 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. In the period just ended,
BEI Technologies agreed to suspend these charges due to the Company's inability
to obtain significant strategic partners or third party financing.
Research and development expenses in the third quarter of fiscal 2002 increased
approximately $634,000 from $55,000 in the same quarter of the prior fiscal year
to $689,000. The increase was primarily due to increased gross costs for direct
employee compensation expense and related benefits of approximately $201,000,
and increased gross costs for materials and supplies of approximately $85,000.
In addition, during the third quarter of fiscal 2001 the Company recorded
approximately $139,000 for deliveries of prototype products as an offset against
research and development expense. The remaining increase was due to gross costs
for professional fees, facility rent and operations, and other expenses.
Interest expense in the third quarter of fiscal 2002 increased approximately
$31,000 from $11,000 in the same quarter of the prior fiscal year to $42,000 due
to the outstanding balance and additional borrowings during the period ended
March 30, 2002, on the Company's line of credit agreement with BEI Technologies.
Nine Months ended June 29, 2002 and June 30, 2001
Revenues during the first nine months of fiscal 2002 reflected work performed
under engineering agreements with two unaffiliated customers and decreased
approximately $386,000 to $113,000 from $499,000 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 nine 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 nine months of fiscal
2002 decreased 2.0 percentage points to 50% from 52% 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 nine months of
fiscal 2002 increased approximately $701,000 from $499,000 in the comparable
period of the prior fiscal year to $1,200,000. The increase was primarily due to
increased professional, consulting and legal fees of approximately $359,000, as
well as increased direct employee compensation expense and related benefits of
approximately $139,000. 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 nine months
of both fiscal 2002 and 2001 were $50,000. The cost of these services was
established at $25,000 per fiscal quarter at the time of entrance into the
Services Agreement based upon square footage, headcount, usage and other methods
management believes to be reasonable. In the current quarter, BEI Technologies
agreed to suspend these charges due to the Company's inability to obtain
significant strategic partners or third party financing.
Page 12 of 18
Research and development expenses during the first nine months of fiscal 2002
increased approximately $2,068,000 from $341,000 in the comparable period of the
prior fiscal year to $2,409,000. The increase was primarily due to increased
gross costs for direct employee compensation expense and related benefits of
approximately $806,000, as well as increased gross costs for facility rent and
operations of approximately $583,000, and increased gross costs for materials
and supplies of approximately $338,000. The remaining increase was due to gross
costs for professional fees, travel and other costs.
Interest expense during the first nine months of fiscal 2002 increased
approximately $76,000 from $11,000 in the same period of the prior fiscal year
to $87,000 due to the outstanding balance and additional borrowings during the
period ended March 30, 2002, on the Company's line of credit agreement with BEI
Technologies.
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
February 23, February 23,
2000 Quarter Ended 2000
(inception) to ------------------------------------------- (inception) to
September 29, December 29, March 30, June 29, June 29,
2001 2001 2002 2002 2002
-------------- ----------- -------- -------- --------------
(unaudited) (unaudited)
Subleases
Facilities sublease $222,055 $ 56,553 $ 56,753 $ 10,132 $345,493
Equipment sublease -- 59,230 340,435 104,172 503,837
-------- -------- -------- -------- --------
Total amounts financed under subleases 222,055 115,783 397,188 114,304 849,330
Intercompany services charges 75,000 25,000 25,000 -- 125,000
-------- -------- -------- -------- --------
Total payments due $297,055 $140,783 $422,188 $114,304 $974,330
======== ======== ======== ======== ========
Liquidity and Capital Resources
During the first nine months of fiscal 2002, total cash used by operations was
approximately $3,475,000. Cash provided by operations included the positive
impact of non-cash charges from bad debt expense, and depreciation and
amortization of $57,000 and $18,000, respectively. In addition, positive impacts
to cash resources resulted from decreases in other current assets and trade
receivables of $55,000 and $43,000, respectively, as well as increases in
accrued expenses and other liabilities of $36,000, and other net impacts of
$2,000. These cash inflows were offset by a net loss of $3,635,000, as well as
increases in inventory of $26,000 and decreases in customer advances of $25,000.
Cash used by investing activities during the first nine months of fiscal 2002
consisted of a purchase of $1,000 in capital equipment, offset by a decrease in
other assets of $21,000. In addition, during the first nine 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 reduced operations due to its
inability to obtain additional financing from unaffiliated investors to this
date. 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
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necessarily on an arms-length basis and the Company may receive more favorable
terms under these arrangements than it would from an unrelated third party.
Cash provided by financing activities consisted of net proceeds since inception
of $2,656,000 from borrowings on the Company's note payable to BEI Technologies
under its related party line of credit arrangement, of which $1,490,000 was
provided during the first nine months of fiscal 2002. The borrowings were used
to fund daily operations, capital investments and product development. In March
2002, BEI Technologies increased this line of credit by $1.0 million. Also
during the first nine months of fiscal 2002, cash from financing activities
included an investment of $1,157,000 by BEI Technologies, and option exercises
for common stock of $1,000.
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 June 29, 2002,
the Company had an accumulated deficit of $5.3 million. After extensive
discussions with prospective outside investors throughout the Company's second
fiscal quarter, during March 2002 the Company 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 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. The Company has been in recent discussions with other prospective
investors to obtain additional equity financing, however it can offer no
assurances an investment by outside investors will be accomplished in the near
future, if at all. During the fiscal quarter ended June 29, 2002, the Company
continued negotiations with BEI Technologies regarding a further equity
investment in the Company by BEI Technologies, contemplated to be in the form of
nonvoting preferred stock, when, and if authorized by the Company for issuance
to BEI Technologies. As of the end of the Company's March 30, 2002 fiscal
quarter, management determined that the Company would not have sufficient
financing for the remainder of its 2002 fiscal year without modifying the
Company's business plan, implementing strict cost-cutting measures and unless
additional financing was obtained. 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 to reduce
operations to a level that will solely support the current customer base. The
Company intends to continue to operate in such a scaled back manner until
additional outside financing is available or other prospects are realized by the
Company.
In April 2002, the Company underwent a reduction in force resulting in eight
individuals 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 were recorded in the fiscal quarter
ending June 29, 2002.
In the fiscal quarter ended June 29, 2002, BEI Technologies advanced an
additional $1.2 million to the Company. The parties have been discussing the
authorization by the Company of a nonvoting series of preferred stock for
issuance to BEI Technologies representing this investment. The final terms of
such an equity investment remain under discussion by the parties.
Recent Developments
To further reduce costs for the Company in the near term, during July 2002, a
total of 15 Company employees terminated their employment and accepted
employment with a subsidiary of BEI Technologies, as previously had been agreed
to by both companies. The Company's Chief Executive Officer and Chief Technical
Officer have also become employees of this same subsidiary of BEI Technologies,
but continue to serve as executive officers
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of the Company. The services of certain key individuals, including the Company's
Chief Executive Officer and Chief Technical Officer, are expected to continue to
be available to the Company on an as needed basis, with reimbursement by the
Company to their present employer for the time value of their services.
Effects of Inflation
Management believes that, for the periods presented, inflation has not had a
material effect on the Company's operations.
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.
Page 15 of 18
OPTICNET, INC. (a development stage company)
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Listing of Exhibits
Exhibit Numbers Description Footnote
--------------- ----------- --------
2.1 Technology Transfer and Distribution Agreement between BEI
Technologies, Inc. and the registrant i
3.1 Amended and Restated Certificate of Incorporation ii
3.2 Bylaws i
4.1 Specimen Voting Common Stock certificate i
4.2 Bylaws (see Exhibit 3.2) i
4.3 Amendment to Preferred Stock Purchase Agreement between BEI
Technologies, Inc. and the registrant i
10.1 InterCompany Agreement between BEI Technologies, Inc. and
the registrant i
10.2 License and Technical Assistance Agreement between BEI
Technologies, Inc. and the registrant i
10.3 Sublease Agreement between BEI Technologies, Inc. and the
registrant ii
10.4 Equipment Sublease Agreement between BEI Technologies, Inc.
and the registrant i
10.5 Amended and Restated 2000 Equity Incentive Plan of the
registrant i
10.6 Form of option agreement under 2000 Equity Incentive Plan
i
10.7 Form of Leave of Absence Agreements between BEI
Technologies, Inc. and Certain Named Executive Officers of
the registrant i
Page 16 of 18
10.8 Revolving Line of Credit Note executed by the registrant in
favor of BEI Technologies, Inc. i
10.9 Form of Indemnity Agreement to be entered into by the
registrant with each of its directors and executive officers ii
10.10 Consulting Agreement between Danforth Joslyn and the
registrant ii
10.11 Consulting Agreement between Gary D. Wrench and BEI
Technologies, Inc. iii
10.12 Amendment No. 1 to License and Technical Assistance
Agreement between the registrant and SiTek, Inc. iii
99.1 Preliminary Information Statement of BEI Technologies, Inc.
dated September 30, 2000 i
99.2 Final Information Statement of BEI Technologies, Inc. dated
November 17, 2000 i
99.3 Certification pursuant to section 906 of the Corporate Fraud
Accountability Act of 2002
(i) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Information Statement on Form 10 (file no. 0-31162) as filed
on January 25, 2002.
(ii) Incorporated by reference. Previously filed as an exhibit to Amendment No.
1 to the Registrant's Information Statement on Form 10 (file no. 0-31162)
as filed on March 22, 2002.
(iii) Incorporated by reference. Previously filed as an exhibit to Amendment No.
2 to the Registrant's Information Statement on Form 10 (file no. 0-31162)
as filed on April 25, 2002.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended June 29, 2002.
Page 17 of 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized on August 8, 2002.
OpticNet, Inc.
By: /s/ Gary D. Wrench
--------------------------
Gary D. Wrench
Chief Financial Officer
(Chief Accounting Officer)
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