Activities
The most significant event of the quarter was the signing on 22 January of a productization and licensing agreement for process and product development with Intel. This agreement replaced the former agreements with Intel, from 1999 and 2001. Basic terms and conditions remained unchanged. The work under the agreement is scheduled to last into 2003, and includes process development in order to establish a production process that can be employed in industrial scale volume production, and the design of a commercially viable product.
In order to fund its expanded obligations as agreed with Intel, Opticom completed a private placement of shares on 23 January, raising NOK 312 million before expenses. In light of capital market conditions and other companies' difficulties in raising funds over the last year, we consider this a strong achievement and are thankful to the investors for their confidence in our company.
Opticom group financial statements
TFE reported NOK 4.2 million revenue in the quarter, compared to NOK 5.4 million the prior quarter. The revenue originated from Intel for project deliveries according to the productization and licensing agreement for process- and product development. Deliveries are on schedule.
Operating costs were NOK 24.4 million in the quarter, in line with the preceding quarter. The costs are NOK 10.0 million higher than Q1 last year, mainly because the manning in research and development activities grew substantially during 2001. Depreciation and write-down increased to NOK 14.6 million for the quarter, compared to NOK 12.6 million in the preceding quarter and NOK 7.6 million in Q1 2001. This increase reflects the growth in TFE's fixed assets over the period and that depreciation of the Linköping facility and equipment commence when put in use.
The company capitalises direct external and internal research and development expenses that are directed at creating new knowledge to become part of the company's intellectual property, while the cost of the deliverables for which revenue is recognised, is expensed.
Capitalisation of the internal research and development effort is shown as a cost reduction, and amounted to NOK 10.2 million in the quarter, which is lower than average for 2001. This decrease reflects that a sizable share of the research and development organisation is now working on the deliverables being paid for by Intel. On average, about 25% of TFE's resources will work on the Intel deliverables in 2002. Research and development purchased externally is added directly to the balance sheet, and does not flow through the profit and loss statement.
The external purchases of research and development were lower in Q1 2002 than in previous periods, because TFE is now itself capable of performing most of the tasks at hand in-house. This may vary over time, depending on volume and type of issues being pursued.
The results from Opticom's Internet technology associate Fast Search & Transfer (FAST) are published by FAST. The result in FAST has no cash effect for Opticom. It is notable, impressing and very encouraging that FAST reported a net profit for Q1 2002 amounting to USD 650 thousand (under Norwegian accounting). The net gain to Opticom from the investment in FAST was NOK 83.6 million in Q1 2002. Of this, NOK 1.8 million is Opticom's share of FAST's net profit in the quarter, while the rest is largely Opticom's gain on dilution from the private placement completed by FAST in February. Opticom did not take part in the placement, and was diluted from 33.8% to 30.7% ownership. The new shares in FAST were issued at a higher price than Opticom's cost of its shares in FAST, causing the non-cash accounting gain and 28% deferred tax liability.
All but a tiny portion of the tax cost in the quarter (as well as in 2001) is deferred tax from the gain on dilution in FAST. This tax will only become payable in the event that Opticom sells FAST shares, for which there is no prospect.
The investment in tangible assets in Q1 2002 was NOK 6.4 million, which is relatively low compared to the 2001 average exceeding NOK 20 million per quarter. Most of the equipment included in the first stage of the Linköping facility was put into use by the end of 2001, and the remaining units were put in place during Q1 2002. The total investment has amounted to about NOK 100 million. Certain additional investments are currently under consideration, to handle tasks related to the Intel project and to pursue other assignments.
Cash flow was NOK 245.0 million positive in the quarter, because the private placement completed in January provided NOK 300.1 million net after expenses. The cash position is very healthy, and adequate for the planned investments and operations. The group has no financial debt, and does not need or intend to raise such debt.
At the end of the quarter, the group had 75 employees - unchanged since year-end 2001. The number is expected to remain stable at this level.
8 May 2002
Thomas Fussell
Chairman
