ITEM 1 - BUSINESS Background StockerYale
is an independent designer and manufacturer of optical communication
sub-components and specialty optical fiber used in the building of optical
networks, as well as structured light lasers, specialized fiber optic,
fluorescent, and LED illumination products for the machine vision and
industrial inspection industries.
(a) Developments
During Fiscal 2001 In 2001, StockerYale focused its activities on its two
core businesses, Illumination and Optical Components, while divesting itself of
the last of its legacy businesses. StockerYale continued to develop its
previously announced initiative to enter the Optical Components marketplace by
offering specialty optical fibers, in addition to its existing phase mask
products. Key developments during the year centered on hiring scientists and
marketing personnel that would enable the Company to design, manufacture and
sell new and innovative products to OEM customers in the telecommunication
industry.
A summary of the major developments during 2001
include:
As part of the Company’s intent to focus only on
photonics-based businesses, the Company announced in March that it had signed a
letter of intent to sell its Stilson machine tool and accessories division for
a total consideration of $1.1 million. The Company completed the sale of the
Stilson business in September 2001. Simultaneously, the Company announced it
would discontinue its printer and recorder product line.
During the first half of 2001, the Company renovated
its Canadian facility, purchased in December 2000. The renovation included the
construction and installation of new manufacturing and test equipment, design
and construction of a class 100-research and development clean room and
improvements to existing office and conference room facilities.
On June 4, 2001, StockerYale completed an equity private placement of
1.7 million shares of common stock at a price of $10.25 per share with net
proceeds totaling approximately $16 million. These proceeds were used for
general corporate purposes, including funding operating losses, working capital
and the installation of machinery in both its Salem and Montreal operations and
the construction of an addition to its corporate headquarters in Salem, New
Hampshire.
In June 2001, StockerYale announced that it had
completed Phase I of its entry into the specialty optical fiber business when
it installed state-of-the-art modified chemical vapor deposition (MCVD)
equipment in the corporate headquarters facility in Salem, New Hampshire. These
machines, commonly referred to as lathes, are used to manufacture optical
preforms, which are then converted to specialty optical fiber through the use of
a fiber draw tower.
The Company began Phase II in May 2001, with the
construction of a 15,000 sq. ft. addition to its corporate headquarters
designed to house additional MCVD equipment, two high speed draw towers and
iSOFC, a majority-owned subsidiary formed to do research and development on
second-generation optical fibers and all-fiber components. The facility was
completed in September 2001.
During the second quarter of 2001, StockerYale’s Illumination product
line announced the availability of three new specialized illumination products:
sealed fluorescent linear lighting fixtures, white light-emitting diode (LED)
modules, and the Lasiris™ mini laser.
In July 2001, the Company announced the appointment of Ellen Landis as
national sales manager for Optical Components. Landis joined StockerYale from
3M’s Optical Communication Sub-Components organization where she held the
position of national sales manager and was a key contributor to 3M’s specialty
fiber success.
In October 2001, StockerYale, Inc. demonstrated its new class of tunable
optical filters (TOFs), designed by Optune Technologies, a 49% owned joint
venture of StockerYale, at ECOC in Amsterdam. This innovative TOF is based on a
proprietary multiple beam interferometer without resonant cavity, and several
patent applications have been filed with the United States Patent and Trademark
Office.
In November 2001, the Company announced the appointment of Francis J.
O’Brien as Chief Financial Officer. Mr. O’Brien was previously the Director of
Finance and Business Development for Analogic Corporation.
(b) Company
History StockerYale, Inc., (the “Company”) was incorporated on
March 27, 1951 under the laws of the Commonwealth of Massachusetts. In May
1994, the Company became publicly traded on the Vancouver Stock Exchange (the
“VSE”) via a merger with Brower Exploration, Inc., a Wyoming corporation that
was publicly traded in Canada. The
Company’s common stock (the “Common Stock”) was listed and traded on the
Vancouver Stock Exchange from May 14, 1994 until May 10, 1996, when the Company
de-listed its stock from the VSE. In
December 1995, the Company completed the registration of its Common Stock with
the U.S. Securities and Exchange Commission, and in January 1996, the Company
listed its stock on the Nasdaq SmallCap Market under the trading symbol “STKR”.
In June 1999, the Company was de-listed from the Nasdaq SmallCap Market and
began trading on the OTC-Bulletin Board under the same trading symbol “STKR”.
On May 11, 2000, the Company’s application to list its Common Stock on the
Nasdaq National Market was approved and trading began under the same trading
symbol “STKR” on May 16, 2000.
On May 13, 1998, the Company acquired StockerYale
Canada, Inc., formerly known as Lasiris, Inc., a Canadian manufacturer of
industrial lasers and other illumination and photonics products. The
acquisition of StockerYale Canada provided the Company with the capability to
manufacture laser-based illumination products and phase masks, which are used
to manufacture fiber Bragg gratings for telecommunication applications.
The Company acquired StockerYale Canada through
Lasiris Holdings, Inc., a newly formed New Brunswick corporation (“LHI”) and a
wholly owned subsidiary of the Company.
StockerYale Canada is operated as a wholly owned Canadian subsidiary of
LHI. In connection with this transaction, the former stockholders of
StockerYale Canada received shares of capital stock in LHI, which are
exchangeable into shares of the Company’s common stock on a one-for-one basis
at any time at the option of the holder.
In addition to Lasiris
Holdings, Inc., the Company has two active subsidiaries. On June 16, 2000, the
Company acquired StockerYale (IRL) Ltd., formerly known as CorkOpt Ltd, which
is a wholly owned Irish subsidiary and StockerYale Asia PTE Ltd., formerly
known as Radiant Asiatec Pte, Ltd., a Singapore corporation that was formed in
December 1997, is an 80% owned subsidiary of the Company. The acquisition of
StockerYale (IRL) Ltd. provided the Company with the capability to manufacture
and sell light-emitting diodes, or LEDs, for industrial applications.
StockerYale Asia PTE Ltd. is the entity through which the Company sells its
Illumination products in Southeast Asia.
As of February 28, 2002, the authorized capital stock
of the Company was 100,000,000 shares of Common Stock of which 11,736,436
shares were issued and outstanding. Additionally, 2,308,981 shares of Common
Stock were reserved for issuance upon the exercise of outstanding options or
warrants to purchase Common Stock and upon the exchange of 656,365 shares of
Lasiris Holdings, which are exchangeable into Company Common Stock on a
one-for-one basis.
(c) Financial
Information About Industry Segments The Company operated
within a single segment of the electronics industry (Illumination Instruments)
in 2001.
Beginning in 2002, the Company will design and
manufacture products within two industry segments, namely illumination and
optical components. Illumination products include structured light lasers,
specialized fiber optic, fluorescent, and light-emitting diode (LED) products
for the machine vision and industrial inspection industries. The optical components segment includes
communication and sub-component and specialty optical fiber for the
telecommunications, industrial and medical markets.
Illumination
Products StockerYale is a leading developer and manufacturer of
specialized illumination products for the inspection, machine vision, medical,
and military markets and continues to be the only company with design and
manufacturing competencies in four illumination disciplines: fiber optic,
fluorescent, structured light laser, and
light emitting diode (LED) technologies. The Company also differentiates itself
from many of its competitors by delivering custom designed lighting solutions
that can operate as a stand-alone illumination source or as an integral
component of a larger OEM system.
The Company’s fiber optic illumination products provide shadow-free, glare-free, cool
illumination by way of a halogen light source (i.e. fiber optic illuminator)
and the components (i.e. fiber optic light guide) that carry the illumination
output to the intended location. StockerYale manufactures high output, 0.66
numerical aperture (N.A.) glass fiber, in addition to polymer clad fused silica
(quartz) fiber that is used in its fiber optic components, providing customers
with the lighting solution that best fits their application. StockerYale’s
technologically advanced fiber is produced in its state-of-the-art fiber
drawing facility, ensuring that the purest of light demanded by increasingly
sophisticated imaging systems and advanced quality assurance processes is
delivered.
StockerYale has over twenty years experience designing
and manufacturing high-quality fluorescent illumination
products that are primarily used in microscopy and machine vision applications.
The Company’s fluorescent illuminators provide the critical lighting needs for
a diversity of microscopes and cameras that are widely used for inspection in
the semiconductor and disk drive manufacturing industries. StockerYale has the
most comprehensive line of fluorescent products available and believes that its
Model 9 circular fluorescent microscope illuminator (CFMI) is the world’s
leading microscope illuminator. The Company also custom designs fluorescent
illumination systems to meet a customers exact lighting requirements.
For customers looking for a more energy efficient,
long lasting illumination source, StockerYale offers LED lighting systems. The
Company’s patented, state-of-the-art, chip-on-board LED units draw less power,
produce less heat, and are not subject to the influences of oxidation that
other lighting technologies endure, resulting in a life span of over 60,000
hours. Furthermore, because of the intrinsic characteristics of
LEDs, which can be engineered into virtually any geometric
configuration, StockerYale’s LED’s are ideal for specialized illumination
applications within the semiconductor and electronics industries that require
the properties and benefits that only this lighting technology can deliver.
StockerYale’s Lasiris™ brand laser pattern projectors
are used in the industrial inspection and 3-D machine vision industries and
have most recently been introduced into the medical and military industries for
specialized applications. The Company’s patented optical design produces a
non-gaussian (evenly illuminated) distinct laser line or a more complex laser
light pattern that maintains a consistent intensity along the length and height
of the projection. StockerYale’s lasers are electrostatic discharge (ESD)
protected; feature interchangeable head patterns, and most meet Class II eye
safety ratings. By applying nearly 50 years of electro-optic R&D
experience, the Company offers custom design laser pattern projectors that meet
even the most stringent requirements.
Lasers can be useful for
contour mapping of parts, surface defect detection, depth measurements,
guidelines, edges detection, and alignment.
For example, in machine vision applications, structured light lasers may
be used on robots as 3-D guiding systems to place or insert a part on a car,
such as a windshield wiper or a door.
In industrial inspection applications, these products may draw attention
to parts that do not conform to specifications, such as defective parts.
Optical Components StockerYale is an
emerging, independent designer and manufacturer of specialty optical fiber,
optical sub-components, and advanced optical technologies that are primarily
used by telecommunication equipment manufacturers around the world.
As a result of the demand for products that can
deliver high-speed data and voice transmission, the Company is utilizing both
its photonics (light-based) knowledge and manufacturing expertise to
aggressively move into the optical networking components, industrial and
medical markets.
Today, the Company is a leading supplier of phase
masks, a key enabling technology for the production of fiber Bragg gratings
(FBGs) used in dense wavelength-division multiplexing (DWDM) and other
filtering applications. The Company also designs and manufactures specialty
optical fiber (SOF) along with other advanced optical technologies that enable
the optimization and proliferation of fiber optic networks.
StockerYale designs and produces high-quality
specialty optical fiber for both industry standard and custom applications.
StockerYale’s specialty optical fiber development efforts fall into four broad
categories: rare-earth doped fibers, polarization maintaining fibers,
photosensitive fibers and custom design fibers. These specialty optical fibers
support a diverse range of applications, including erbium-doped fiber
amplifiers, (EDFAs), dense wavelength-division multiplexing, (DWDM), fiber
Bragg gratings, (FBGs), high-voltage current sensors, gyroscopes, and
high-data-rate communications systems.
StockerYale has added Polarization Maintaining Fibers
and Cladding Mode Suppression Fibers to its product line. StockerYale’s
Polarization Maintaining Fiber maintains a specific state of polarized light
and is designed for use in telecommunication, gyro and sensor applications.
StockerYale’s Cladding Mode Suppression Fiber is
optimized for the writing of high quality Fiber Bragg Gratings (FBGs). FBGs are
used to preselect and filter signals in DWDM to increase network capacity and
performance. Simply stated, FBGs, through the use of a phase mask, are made by
exposing the core of a single-mode fiber to a periodic pattern of ultraviolet
light, which permanently increases the refractive index of the fiber’s core.
FBGs are used for pump stabilizers, dispersion compensators, GFF and sensor
applications.
The Company’s Lasiris™ brand phase masks are
high-precision phase diffraction gratings with suppressed zeroth orders and
maximized first orders and are primarily used in the production of fiber Bragg
gratings (FBGs). FBGs offer a passive fiber-based means of filtering and stabilizing
wavelengths to improve the performance of optical components. The Company also
has the technical expertise and R&D facilities to optimize or custom design
a phase mask that supports a special wavelength operation or tailor the mask
dimensions to satisfy a customer’s specific application.
StockerYale
recently began designing and manufacturing a broad range of diffractive
gratings. These holographically recorded sinusoidal and binary diffraction
gratings are key components in select telecommunication devices such as optical
spectrum analyzers, multiplexers, demultiplexers, and tunable lasers. A
diffraction grating is basically an array of fine, parallel, equally spaced
grooves (or “rulings”) on a reflecting or transparent substrate. The grooves cause
an interference phenomenon (diffraction), which allows for the angular
redirection of light depending on its wavelength. This optical phenomenon can be exploited to perform
demultiplexing, among other tasks. In
demultiplexing, incoming multi-channel signals traveling on a single fiber are
separated (demultiplexed) into the constituent wavelength channels. Each
individual wavelength can then be launched into its own fiber or processed
separately. The flexibility and repeatability of the Company’s proprietary
holographic recording method provides significant advantages over competing
technologies by allowing us to produce gratings with a wide range of areas,
periods, modulation depths, duty cycles and diffraction efficiencies.
Optical communications is
clearly moving toward tunability, specifically in the areas of lasers,
receivers and routers. Optune Technologies, a 49% owned joint venture, has
developed a new class of tunable optical filters (TOFs) that are designed to
deliver unparalleled performance and reliability, optimizing the optical
network by working internally as a system. The Company’s TOF is a proprietary
multiple beam interferometer without a resonant cavity and is used primarily as
a wavelength selection element. StockerYale’s TOF delivers enhanced tunability
and excellent channel isolation while minimizing signal drift.
StockerYale’s TOFs represent the next generation of critical optical
components that will be required to build re-configurable, all-optical networks
of the future, delivering increased communication bandwidth and improved
quality of service (QoS).
Sales Data Specialized illumination
and optical sub-component products represent 69% and 23% respectively of 2001
revenues compared to 74% and 16%, respectively, in 2000. Printer/recorder
product sales represented 8% and 10%, respectively, of revenues in 2001 and
2000.
Domestic and
Foreign Revenue Sales
to unaffiliated customers in foreign countries represented 38% and 40% of net
revenues in 2001 and 2000, respectively.
Marketing and
Distribution The
Company’s products are sold to over 10,000 customers, primarily in North
America, Europe and the Pacific Rim.
The Company sells directly to, and works with, a group of approximately
125 distributors and machine vision integrators to sell its specialized
illumination products. Optical components are sold directly to OEM customers by
the Company’s marketing and sales organization.
Competition and Competitive Position
The Company competes with a number of firms in the
design and manufacture of its specialized illumination, optical fiber and
sub-component products. Some competitors have greater resources than the
Company, and as a result, may have competitive advantages in the research and
development and sales and distribution.
In
the industrial fluorescent lighting market, the Company has two primary
competitors. MicroLite markets a product similar in appearance to the Company’s
circular fluorescent microscope illuminator. Techni-Quip Corp. offers
industrial fluorescent lighting as part of its product line but as a whole, its
lighting product line is limited and represents a small percentage of that
company’s total business.
The Company has five primary competitors in the fiber
optic illumination market. The most established segment of this market relates
to illumination for microscopes. Within
that market, Volpi Manufacturing USA, Inc. and Dolan-Jenner Industries, Inc.
compete directly with the Company’s products.
Both of these companies have been producing fiber optic products for
more than thirty years and offer a fully developed line of fiber optic
illumination systems for microscopy applications. A third company, Cuda
Products, Inc., also supplies fiber optic lighting for microscopy; however, its
primary market is medical. The value-oriented segment of the microscopy market
is dominated by Chiu Technical Corp, which offers an inexpensive, “no-frills”,
fiber optic lighting system. A newer segment in the fiber optic lighting market
relates to automated imaging and inspection equipment for machine vision.
Fostec, Inc. is the leading provider of fiber optic lighting for the machine
vision industry.
The Company has developed
the in-house capability to draw its own glass fiber in variable dimensions to
suit customer needs. Although some of the above-named competitors also have
this capability, the Company believes that its proprietary manufacturing
techniques result in fiber that has increased reliability. Since mid-1996, the
Company has invested in developing its in-house design and research
capabilities, including the hiring of personnel trained in optical, chemical,
mechanical and electrical engineering and related disciplines, and the purchase
of computers and laboratory equipment necessary to support these
personnel. Further, the Company has
succeeded in designing and developing a complete line of fiber optic lighting
products for both the machine vision and microscopy markets.
Over the last eighteen months, the Company completed a
program to expand its specialty optical fiber capability to include specialty
optical fibers (SOF) for the telecommunications industry. The Company made
substantial capital investments in plant and equipment in connection with its
development of a complete line of Specialty Optical Fibers (SOF). The Company’s
major competitors in this area include OFS, formally Lucent’s optical fiber
solutions division, Corning, and 3M.
With OFS (now owned by Furukawa), Corning and 3M consuming the majority
of their SOF products internally, the Company believes the industry is looking
for additional independent suppliers of SOF.
Backlog
The
Company maintains an inventory of standard materials and components and
generally manufactures standard illumination product configurations within one
to five days after receipt of a customer order. The optical components and specialty optical products are
generally manufactured to specifications of the customer order with a one to two
week turnaround between order and shipment. Although such rapid response is,
and historically has been, a selling advantage for the Company, some orders are
placed for future delivery. At December 31, 2001, the Company had a backlog of
orders for future delivery of approximately $2,858,000, compared to
approximately $4,287,000 as of December 31, 2000.
Raw Materials
The raw materials and
components used in the Company’s products are purchased from a number of
different suppliers and are generally available from several sources.
Dependence on One or a Few Major Customers
The Company’s customer base consists of more than
10,000 customers in various industries worldwide. Sales to the Company’s
largest single customer represented 10% of the Company’s total net sales in
fiscal 2001. The Company’s top ten customers represented approximately 32% of
total net sales in fiscal 2001, 38% in 2000 and 18% in 1999.
Patents and
Trademarks The Company holds patents
in the United States and Ireland and, has filed additional patent applications
in the United States, Canada, Europe and Japan. StockerYale (IRL), Ltd holds a
patent on a method for attaching semiconductor chips and has applied for two
patents in the United States, Canada and Europe on new ring light and line
light technologies. StockerYale Canada
holds exclusive rights in three patents in the United States and one patent in
Canada through licensing agreements. A majority-owned subsidiary of the
Company, Innovative Specialty Optical Fiber Components LLC, has applied for a
patent in the United States on a fiber optic technology for depolarizing light.
A 49% owned joint venture of the Company, Optune Technologies, Inc. has applied
for two patents in the United States on a tunable optical filter for optical
communications.
The Company has
four patents relating to fundamental technological devices and methodologies
used to achieve low-cost fluorescent light dimming; these patents expire on
August 18, 2009, August 24, 2010, September 6, 2011 and September 13,
2011. StockerYale Canada’s material
patents consist of four patents for lenses, which expire on May 2, 2006,
November 27, 2007, June 4, 2013 and December 15, 2015. The Company believes
that patents are an effective way of protecting its competitive technological
advantages, and considers its patents to be a strong deterrent against
unauthorized manufacture, use and sale of its products and key product
attributes. There can be no assurance,
however, that a patent will be issued with respect to the Company’s pending
patent applications or whether the Company’s patents or license rights will
provide meaningful protection for the Company.
The Company also relies upon trade secret protection
for its confidential and proprietary information. There can be no assurance that others will not independently
develop substantially equivalent proprietary information and techniques, or
otherwise gain access to and use or disclose the Company’s trade secrets or
that the Company can meaningfully protect its trade secrets.
The Company holds rights
in certain trademarks to protect its brand name recognition in various markets.
Because of the Company’s long history and reputation for designing and
manufacturing high quality products, trademark protection enhances the
Company’s position in the market.
Although the Company believes that its products and
other proprietary rights do not infringe the proprietary rights of third
parties, there can be no guarantee that infringement claims will not be
asserted against the Company in the future or that any such claims will not
require the Company to enter into royalty arrangements or result in costly
litigation.
Research and
Development The Company intends to continue to invest significant
amounts in research and development for new products and for enhancements to
existing products. Research and development expenditures for the Company were
$5,465,000 or 35% of net sales in 2001 and
$1,333,000 or 7% of net sales in 2000. The increase was primarily a
result of the strategic decision to focus on the development of the Company’s
optical communication sub-component product line.
As of February 28, 2002, the Company employed 85
full-time scientists and engineers compared to 20 as of February 28, 2001.
Outside firms and consultants are selectively engaged to develop or assist with
the development of new products when opportunities exist.
Compliance with Environmental Laws
The
Company is subject to evolving Federal, state and local environmental laws and
regulations. Compliance with such laws
and regulations in the past has had no material effect on the capital
expenditures, earnings or competitive position of the Company. The Company
believes that it complies in all material respects with existing environmental
laws and regulations applicable to it.
However, the Company’s Salem, New Hampshire headquarters are currently
the subject of environmental testing and monitoring relating to soil and
groundwater contamination that occurred under prior ownership. The costs
incurred to date for such testing and for remediation planning have been paid
by third parties. The Company believes that the costs of any required
remediation will be covered by an environmental indemnity obtained from the
seller, John Hancock Mutual Life Insurance Company. In addition, it is management’s understanding that in April 1996,
the Massachusetts Department of Environmental Protection circulated notices to
parties identified as “potentially responsible parties” with respect to the
Company’s Salem, New Hampshire headquarters.
The Company did not receive such notice. Compliance with environmental laws and regulations in the future
may require additional capital expenditures, and the Company expects that in
the foreseeable future such capital expenditures will be financed by cash flow
from operations.
Employees As of February 28, 2002,
the Company employed approximately 255 persons, of which 18 were part-time
employees. None of the Company’s employees are represented by a labor union and
the Company believes that it has good relations with its employees.
ITEM 2
ITEM 2 - PROPERTIES The Company currently
conducts its business at two Company-owned facilities and in two leased
facilities. The Company’s headquarters are located in a 95,000 square foot
facility in Salem, New Hampshire, which also houses research and development,
manufacturing, sales and distribution capacities for the Company’s specialized
lighting and specialty optical fiber products. In December 2000, the Company
purchased a 65,000 square foot building and property located in
Dollard-des-Ormeaux, Quebec for research and development, manufacturing and
sales and distribution by its Canadian subsidiary, StockerYale Canada. StockerYale
Asia Pte, Ltd. operates out of an approximately 2,733 square foot leased office
space in Singapore. StockerYale (IRL), Ltd leases approximately 5,500 square
feet in Cork Ireland.
The Company’s Salem facility is owned by the Company subject to a
mortgage granted to Granite State Bank, which secures obligations of the
Company to such party. The Company’s
Canadian facility in Dollard-des-Ormeaux is owned by the Company subject to a
mortgage granted to Toronto Dominion Bank, which secures obligations of the
Company to such party. See
“MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS-Liquidity and Capital Resources.”
The
Company’s facilities are generally operated on the basis of one shift per day,
five days per week. Management
considers the facilities to be in generally good condition, to be adequately
maintained and insured, and sufficient to satisfy the Company’s needs for the
foreseeable future.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS At
times the Company may be involved in disputes and/or litigation with respect to
its products and operations in its normal course of business. The Company does
not believe that the ultimate impact of the resolution of such matters would
have a material adverse effect on the Company’s financial condition or results
of operations. The Company is not currently involved in any legal proceedings.
ITEM
4
ITEM
4 -
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There
were no matters submitted to a vote of stockholders during the fourth quarter
of fiscal 2001.
PART II
ITEM 5
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS The Company’s Common
Stock is listed on the Nasdaq National Market under the symbol “STKR.” From June 24, 1999 until May 11, 2000, the
Company’s Common Stock was quoted on the OTC-Bulletin Board under the same
symbol. Prior to June 24, 1999, the Company’s Common Stock was listed on the
Nasdaq SmallCap Stock Market since January 29, 1996, also under the symbol
“STKR”. The following table sets forth
the quarterly high and low sales prices for the Common Stock as reported by
Nasdaq for the periods indicated:
Holders
As of
February 28, 2002, there were approximately 2,365 holders of the Company’s
common stock.
Dividends
The Company does not
expect to declare or pay any dividends in the foreseeable future. The payment of any future dividends will be
at the discretion of the Company’s Board of Directors and will depend upon,
among other things, future earnings, operations, capital requirements, the
general financial condition of the Company and general business conditions.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
The
following selected consolidated financial data with respect to the Company’s
statements of operations for the years ended December 31, 2001, 2000 and 1999
and with respect to the Company’s balance sheets as of December 31, 2001 and
2000 are derived from the Company’s consolidated financial statements, which
appear elsewhere in this report and which have been audited by Arthur Andersen
LLP, independent auditors. The following selected consolidated financial data
with respect to the Company’s statements of operations for the years ended
December 31, 1998 and 1997 and with respect to the Company’s balance sheets as
of December 31, 1999, 1998 and 1997 are derived from the Company’s audited
consolidated financial statements, which are not included herein. The data
should be read in conjunction with the consolidated financial statements,
related notes and other financial information included herein.
ITEM 7
ITEM 7 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS The following discussion of the
Company’s financial condition, results of operations and capital resources and
liquidity should be read in conjunction with the Consolidated Financial
Statements and related Notes included elsewhere herein
Background StockerYale
is an independent designer and manufacturer of optical communication
sub-components and specialty optical fiber used in the building of optical
networks, as well as structured light lasers, specialized fiber optic,
fluorescent, and LED illumination products for the machine vision and industrial
inspection industries.
Results of
Operations Year Ended
December 31, 2001 Compared to Year Ended December 31, 2000 Net Sales Net sales were $15.6 million in 2001 compared to $18.4 million in 2000,
a decrease of 15% or $2.8 million.
Net sales from the Company's specialized illumination products were
$10.8 million in 2001 compared to $13.6 million in 2000, a decrease of 21% or
$2.8 million. The decrease was primarily caused by a reduction in demand due to
a general slow down in the semi-conductor, disk drive inspection and electronic
assembly markets. The majority of the Company’s sales of specialized
illumination products are made to companies in industries who use specialized
lighting for industrial inspection and machine vision applications.
Net
sales from the Company's optical sub-component products were $3.6 million in
2001 compared to $3.0 million in 2000, an increase of 21% or $0.6 million.
Net sales from the Company’s other products, largely printers and
recorders, decreased from $1.8 million in 2000 to $1.2 million in 2001. The
Company has discontinued this product line.
Cost of Sales Cost of sales were $11.3 million in 2001 compared to
$11.5 million in 2000, a decrease of 1% or $157,000. The decrease in cost of
sales resulted primarily from the decrease in net sales.
Gross
profit was $4.3 million or 28% in 2001 compared to $6.9 million or 38% in 2000.
Gross margin declined primarily due to unabsorbed fixed overhead costs related
to the decrease in revenue in the illumination business as well as increased
depreciation and incremental management costs related to the implementation of
specialty optical fiber and optical components manufacturing capacity in
anticipation of revenues in 2002. The Company also recorded a charge of
approximately $0.4 million related to inventory obsolescence related to the
discontinuation of its printer and recorder product line.
Operating Expenses Operating
expenses increased $10.3 million from $8.1 million in 2000 to $18.4 million
2001. The increase is directly related to the Company’s new business strategy
to invest in the optical components market.
Research
and development expenses rose $4.2 million from $1.3 million in 2000 to $5.5
million in 2001. Salaries and benefits increased $2.7 million as the scientific
and engineering staff evolved from 24 at December 31, 2000 to 85 at December
31, 2001. The increase in professional staff completed the Company’s
substantial intellectual capital investment in the optical components and
specialty optical fiber markets. Prototype material expenses and higher
depreciation costs accounted for $1.1 million of the higher research and
development expenses.
Selling expenses increased $2.3 million as a result of staff doubling
from 12 to 24 representing a $1.0 million growth in salaries, benefits,
commissions and traveling expenses. In addition, advertising, promotion and
trade show costs increased from $0.4 million to $1.0 million. The majority of
these higher expenses were in support of the Company’s strategic initiative
into the specialty optical fiber market.
General
and administrative expenses more than doubled from $3.6 million in 2000 to $7.8
million in 2001. Salaries and associated costs, including benefit and travel
expenses, rose $0.9 million as headcount grew from 27 to 35. Occupancy and
professional fees rose $1.6 million while Information Technology costs
increased $0.5 million. The full year impact of the June 2001 acquisition of
CorkOpt Ltd. also represented a $0.5 million increase in general and
administrative expenses. The Company believes these incremental costs were
necessary to provide the infrastructure to support the new complexity of the
Company.
The increase in operating expenses in 2001 versus 2000 was based upon a
strategic decision of the Company to invest in the optical component and
specialty optical fiber markets. These expenses are expected to moderate in
2002 and decline significantly as a percentage of revenue.
Interest and Other Income Interest
and other income was $441,000 in 2001 compared to $394,000 in 2000. Interest
and other income were comprised primarily of $425,000 of interest income for
2001.
Interest Expense Interest
expense was $757,000 in 2001 compared to $475,000 in 2000. The increase in interest
expense resulted primarily from an increase in borrowings to fund working
capital.
Provision (Benefit) for Income Taxes The tax benefit recorded in 2001 relates primarily to net operating
losses ($465,000) and research and development tax credits ($236,000) being
benefited in the Canadian tax jurisdiction. In accordance with the provisions
of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, the deferred
tax assets were recognized up to the amount offsetting deferred tax liabilities
in the applicable tax jurisdiction.
Year Ended
December 31, 2000 Compared to Year Ended December 31, 1999 Net Sales Net sales were $18.4 million in 2000 compared to $11.5 million in 1999,
an increase of 60% or $6.9 million. Net
sales from the Company's specialized illumination products were $13.6 million
in 2000 compared to $8.2 million in 1999, an increase of 65.9% or $5.4 million. The increase was largely due to higher sales
of structured light lasers and fluorescent light products, which grew $2.4
million and $1.8 million, respectively.
Net sales from the Company's optical communication sub-component
products doubled to $3.0 million in 2000 compared to $1.5 million in 1999. These increases were a direct result of our
efforts to implement the Company's strategic business plan to focus on optical
sub-component and specialized illumination products.
Net sales from the Company’s other products, largely printer and
recorders, increased slightly from $1.7 million in 1999 to $1.8 million in
2000. The Company plans to discontinue
these product lines by the end of 2001.
Cost of Sales Cost
of sales were $11.0 million in 2000 compared to $7.0 million in 1999, an
increase of 57.1% or $4.0 million. The increase in cost of sales resulted
primarily from an increase in net sales during the same period. The Company also recorded a $494,000
inventory impairment charge in 2000 for the printer and recorder inventory as a
result of the Company's decision to exit these product lines by the end of
2001. The printer and recorder product
line incorporated older technology, some of which was becoming obsolete. In light of the Company's business strategy
to focus on the optical sub-components and specialized illumination lines of
business, the Company determined that exiting these product lines was a more
productive use of corporate resources than investing in the research and
development that would have been necessary to upgrade the printer and recorder
product lines. The inventory impairment
charge relating to this decision was unrelated to the discontinued operations
discussed above and is included in cost of sales in the accompanying statement
of operations.
Gross
profit was $6.9 million in 2000 compared to $4.5 million in 1999, an increase
of 53.3% or $2.4 million. Gross margin decreased from 39.1% in 1999 to 37.5% in
2000. Gross margin declined primarily because of the inventory impairment
charge of $494,000. Excluding this
non-cash, non-recurring charge, gross margin increased to 40.2% in 2000.
Operating Expenses Operating expenses were $8.1 million in 2000 compared to $5.1 million
in 1999, an increase of approximately $3.0 million, and remained at 44% of net
sales.
A significant portion of this increase is attributable to the
Company's efforts to implement its new business strategy, for example, through
increased hiring and facility expansion.
Included in operating expenses were $604,000 and $483,000 of
amortization expense primarily comprised of goodwill and other identifiable
intangible assets associated with acquisitions. Also included in operating
expenses for 2000 was a non-cash, non-recurring charge of $402,000 representing
in-process research and development acquired in the acquisition of CorkOpt,
Ltd.
Selling
expenses were $2.2 million in 2000, or 12% of net sales, compared to $1.7
million in 1999, or 14.8% of net sales.
Selling expenses increased mainly due to the additional staffing and
associated expenses related to the specialty optical fiber sales and marketing
group of approximately $140,000; increases in travel, advertising and
tradeshows make up the balance of the increase. General and administrative expenses were $3.6 million in 2000, or
20.0% of net sales, compared to $2.2 million, or 19.1% of net sales in fiscal
1999. General and administrative
expenses increased primarily due to growth in staffing levels of administrative
personnel of approximately $800,000, which includes information technology
services, finance and administration. Research and development expenses were
$1.3 million in 2000, or 7.1% of net sales compared to $788,000, or 6.9% of net
sales in 1999, reflecting our strategy of making significant investments in
scientists and research personnel for the optical sub-component product lines.
Interest and Other Income Interest
and other income was $394,000 in 2000 compared to $318,000 in 1999. Interest
and other income were comprised primarily of $340,000 of interest income for
2000. In 1999, interest and other
income included a gain of $164,000 from the sale of business assets relating to
the Company’s military compass product line and $91,000 from the sale of
marketable securities.
Interest Expense Interest
expense was $475,000 in 2000 compared to $526,000 in 1999. The decrease in
interest expense resulted primarily from a decrease in borrowings to fund
working capital.
Provision (Benefit) for Income Taxes The
Company recorded a provision for income taxes of $252,000 in 2000 compared to
$78,000 in 1999. The tax provision is a result of taxable income generated in
Canada that could not be used to offset operating losses in the United States.
The Company has recorded a valuation allowance against its net deferred tax
assets in 2000 and 1999 after concluding that it is not likely such deferred
tax asset will be realized.
Liquidity and
Capital Resources Historically, the Company has financed operations through private
equity placements, third-party credit facilities and cash from operations.
During the year ended December 31, 2001, the Company completed a private
placement transaction selling an aggregate of 1,700,00 shares of common stock
resulting in net proceeds of approximately $16 million. The Company has used
the proceeds from the private placement primarily to fund operating losses,
capital expenditures, repayment of debt and for general working capital
purposes. As of December 31, 2001, unrestricted cash and cash equivalents were
$3.6 million.
Cash
Flows
Cash used in operating activities was $9.7 million in 2001, as a result
of a net loss of $13.9 million offset by depreciation and amortization of $2.1
million and an increase in accounts payable of $2.1 million.
Cash used in investing activities was $18.5 million. The principal
expenditures were $4.0 million for a new 15,000 square-foot research and
development facility in Salem, NH; $8.5 million for specialty optical fiber
equipment in Salem, NH, and $4.7 million for a class 100 clean room, test and
measurement equipment and production equipment for optical components in
Montreal, Quebec. The Company incurred approximately $1.5 million upgrading
both its Salem, NH and Montreal, Quebec facilities. In addition, the Company
received net proceeds of $659,000 upon the sale of its discontinued operations
and made a net investment of $220,000 in the Optune joint venture.
Cash provided by financing activities was $17.5 million in 2001
principally as a result of the Company’s sale of common stock through a private
placement transaction.
Borrowing Agreements On May 19, 2001, the Company entered into a credit agreement with
Merrill Lynch Financial Services, Inc. providing total borrowing availability
up to $6,000,000. Initial proceeds were used to pay off the credit agreement
between the Company and Wells Fargo Business Credit, Inc. The new credit
facility with Merrill Lynch consists of a line of credit of up to $2,500,000
and a reducing revolver in the amount of $3,500,000. As of December 31, 2001,
$2,986,000 was outstanding under the reducing revolver. Approximately
$3,014,000 was available for additional borrowings through the reducing
revolver and the line of credit. The outstanding principal balance of all advances
under this credit facility bears interest at 2.5% over the one month LIBOR
rate. As of December 31, 2001 the interest rate was approximately 4.3%. The
Company’s obligations under this credit facility are secured by substantially
all of the Company’s assets excluding real property plus a pledge of restricted
cash in the amount of $2,000,000. In addition, the Company is required to
maintain a $7.8 million Tangible Net Worth. The Company is in compliance with
all provisions of the credit agreement. These restrictions will lapse when we
achieve profitability or at such time as no balance is outstanding. The
reducing revolver is a seven-year loan with monthly principal and interest
payments beginning in 2002. The line of credit is subject to an annual renewal.
On December 5, 2000, StockerYale Canada amended its credit agreement
with Toronto Dominion Bank. The credit
agreement provides for (a) a $3,500,000 CDN operating line of credit of which
$1,000,000 CDN must be offset by credit balances; (b) two mortgage loans of
$2,020,000 CDN and (c) four term notes totaling up to $1,049,000 CDN. The line
of credit bears interest at 1% over Toronto Dominion’s prime rate, requires
monthly payments of interest only, and is payable on demand. As of December 31,
2001, $836,630 CDN ($525,571 US) was outstanding under the line of credit and
approximately $2,663,370 ($1,673,129 US) was available for additional
borrowings. The two mortgages require monthly principal payments of $10,797 CDN
(approximately $7,200 US) and $1,111 CDN (approximately $698 US) plus interest
at prime rate plus 0.875% and mature in December 2015 and July 2016. As of
December 31, 2001, the outstanding balance on the mortgage loans was $2,008,377
CDN ($1,269,244 US). The four term loans require monthly principle payments of
approximately $36,125 CDN ($22,694 US) plus interest ranging from the prime
rate plus 1.25% to 2.0% and mature between May 2002 and October 2006. On
December 31, 2001, the outstanding aggregate balance on the term loans was
$878,375 CDN ($562,502 US).
On October 12,
2000, the Company entered into a joint venture with Dr. Nicolae Miron and
formed Optune Technologies, Inc., a Quebec corporation, to develop a new class
of tunable optical filters. Under the
terms of this joint venture arrangement, the Company owns a 49% equity interest
in Optune and the Company agreed to contribute an aggregate of $4,000,000 to
cover all operating costs of the joint venture including salaries, equipment
and facility costs. The contributions are to be made over a two-year period
pursuant to a fixed milestone schedule.
The Company is
recording 100% of the losses associated with the research and development joint
venture in the accompanying statement of operations as research and development
expense. As of December 31, 2001, the Company has provided approximately
$936,000 CDN ($600,000 USD) of funding to the joint venture and recorded
approximately $400,000 USD of research and development expenses related to the
operating losses for the year ended December 31, 2001.
In April 2001, the
Company entered into a research and development joint venture agreement to form
Innovative Specialty Optical Fiber Components LLC with Dr. Danny Wong, a
scientist employed by the Company, to develop specialty optical fiber products.
In exchange for a 60% ownership interest in Innovative Specialty Optical Fiber
Components LLC, the Company has committed to fund up to $7.0 million over a
two-year period to cover all operating costs of the majority owned subsidiary,
including salaries, equipment and facility costs. Innovative Specialty Optical
Fiber Components LLC has been consolidated by the Company and the Company has
recorded 100% of the losses associated with Innovative Specialty Optical Fiber
Components LLC as research and development expense in the accompanying
statement of operations. For the year ending December 31, 2001, the Company has
funded $324,000 and recorded an operating loss of $94,000, related to the
iSOF joint venture.
The
Company’s headquarters in Salem, New Hampshire is subject to a mortgage and
note issued to Granite Bank on August 26, 1996 (the “Granite Note”). The
Granite Note, in an initial principal amount of $1,500,000 is due August 29,
2011. The Granite Note bears interest at a rate of 7.50% per annum and is
reviewed annually in August. The principal and interest are repayable in 180
equal monthly installments. In accordance with the terms of the Granite Note,
the Company may prepay amounts outstanding there under, in whole or in part, at
any time without premium or penalty. As of December 31, 2001, the outstanding
balance on the Granite Note was $1,195,000.
On
May 20, 1997, the Company entered into an equipment line of credit agreement
with Granite Bank to finance capital equipment related to new product
development. The line of credit provides that equipment purchases will be
converted quarterly into a series of five-year notes, not to exceed $500,000 in
the aggregate, bearing interest at the prime rate plus .75%.
From
time to time, the Company contemplates raising additional capital by the
issuance of equity securities, the proceeds of which may be used, among other
things, to fund working capital needs and capital expenditures. As of March 8,
2002, the Company raised an additional $9.7 million through a private placement
of 1,242,600 shares. The Company believes this additional capital coupled with
its available lines of credit will be sufficient to cover operating losses,
working capital, debt service and capital expenditures through the next twelve
months.
Contractual Obligations The following
table summarizes the Company’s contractual obligations at December 31, 2001,
and the effect such obligations are expected to have on its liquidity and cash
flow in future periods;
(1) Includes approximately
$3.5 million of credit lines, which the Company expects to renew in 2002.
(2) Optune
Technologies, Inc (Optune) is a joint venture between StockerYale, Inc and Dr.
Nicolae Miron. Optune was formed in October 2000 and, in exchange for a 49%
equity interest in Optune, StockerYale has agreed to contribute an aggregate of
$4,000,000 to cover all operating costs of Optune including salaries, equipment
and facility costs. Over the past fifteen months ending December 31, 2001,
StockerYale has contributed $600,000 to Optune’s operating costs. StockerYale
demonstrated a prototype of a new class tunable optical filters (TOFs),
designed by Optune, in October 2001 at the ECOC in Amsterdam. A refined
prototype was demonstrated at the Optical Fiber Conference (OFC) in March of
2002. Both partners are currently evaluating several options regarding the next
steps in product development. At this time, StockerYale expects to fund an
additional $600,000 in 2002, which will result in a cumulative funding of
$1,200,000. The remaining commitment of additional $2,800,000 has not been
included in the table above, since it is dependent upon strategic decisions by
the partners regarding further product development and manufacturing.
(3) Innovative
Specialty Optical Components LLC (iSOFC) is a majority owned subsidiary of
StockerYale. The Company, which owns approximately 60% of the outstanding
equity in iSOFC, has committed to fund up to $7,000,000 over a two-year period
to cover all operating costs of the majority owned subsidiary, including
salaries, equipment and facility costs. As of December 31, 2001, StockerYale
has funded $324,000 for capital equipment and $94,000 of operating losses.
These expenditures were specifically identified as iSOFC.
Separately, StockerYale purchased and installed $4.7 million of capital
equipment for the specialty fiber components business in 2001. In addition,
StockerYale constructed a new $4.0 million research and development facility in
2001. Because both StockerYale and iSOFC will derive financial benefits from
these investments in the future, StockerYale decided it would be appropriate
for StockerYale to own the equipment and facilities and recover these
expenditures by leasing the equipment and facilities to iSOFC thus satisfying
the equipment and facility costs of the contractual obligation. StockerYale
estimates these to be approximately $0.5 million annually beginning in 2002.
StockerYale also plans to incur approximately $2.1 million annually
beginning in 2002 for salaries, benefits and operating expenses directly
associated with iSOFC. In addition, StockerYale expects to charge iSOFC
approximately $0.5 million annually beginning in 2002 for administration
support, including accounting, human resources and information technology
services.
The sum of the leasing equipment and facilities, iSOFC staffing and
operating expenses and administrative support will be approximately $3.1
million annually.
Recent Accounting
Pronouncements In June 2001, the
FASB issued SFAS No. 141, Business
Combinations. SFAS No. 141 requires that all business combinations
be accounted for under the purchase method only and that certain acquired
intangible assets in a business combination be recognized as assets apart from
goodwill. SFAS No. 141 is effective for all business combinations initiated
after June 30, 2001 and for all business combinations accounted for by the
purchase method for which the date of acquisition is after June 30, 2001. The
adoption of SFAS No. 141 did not have a material effect on the Company’s
financial position or results of operations.
In June 2001, the
FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets, which requires that the ratable amortization of
goodwill and indefinite lived intangibles be replaced with periodic impairment
tests and that most intangible assets other than goodwill be amortized over
their useful lives. Certain intangibles will be allowed indefinite lives and
will not be amortized but rather evaluated for impairment annually based on
fair market value. The provisions of SFAS No. 142 will be effective for fiscal
years beginning after December 15, 2001, and will thus be adopted by the
Company, as required on January 1, 2002. Management has reviewed SFAS No. 142 and
will perform the impairment tests during fiscal 2002 to determine if there has
been or will be an impairment of goodwill. In addition, the Company will
continue to amortize intangible assets over their useful lives. The Company
will stop amortizing goodwill effective January 1, 2002. Goodwill amortization
was $326,000 for the year ended December 31, 2001.
In July 2001, the
FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supercedes
SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
SFAS No. 144 applies to all long-lived assets (including discontinued
operations) and consequently amends APB Opinion No. 30, Reporting Results of Operations-Reporting the Effects
of Disposal of a Segment of a Business. SFAS No. 144 is effective
for financial statements issued for fiscal years beginning after December 15,
2001 and thus will be adopted by the Company, as required, on January 1, 2002.
Management is currently determining what effect, if any, SFAS No. 144 will have
on its financial position and results of operations.
Critical
Accounting Policies StockerYale’s
discussion and analysis of its financial condition and results of operations
are based upon the Company’s consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires
StockerYale to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues
and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, StockerYale evaluates its estimates, including, accounts
receivable, inventories and goodwill and intangible assets. StockerYale
develops its estimates based on historical experience as well as assumptions
that are believed to be reasonable under the circumstances. Actual results may
differ from these estimates under different assumptions or conditions.
StockerYale
believes the following critical policies affect its more significant judgments
and estimates used in the preparation of its consolidated financial statements.
Accounts Receivable:
The Company
reviews the financial condition of all new customers prior to granting credit.
After completing the credit review, the Company establishes a credit line for
each customer. Periodically, the Company reviews the credit line for all major
customers and adjusts the credit limit based upon an updated financial
condition of the customer, historical sales and payment information and
expected future sales. The Company has a large number of customers; therefore,
material credit risk is limited to only a small number of customers. The
Company periodically reviews the collectibility of its accounts receivable.
Provisions are established for accounts that are potentially uncollectible.
Determining adequate reserves for accounts receivable requires management’s judgment.
Conditions impacting the collectability of the Company’s receivables could
cause actual asset write-offs to be materially different than the reserved
balances as of December 31, 2001.
Inventory Obsolescence:
The Company values
inventories at the lower of cost or market using the first in, first-out
(“FIFO”) method. The Company specifically evaluates historical and forecasted
demand of the illumination product line to determine if the carrying value of
both finished goods and raw materials is recoverable through future sales. The
Company also estimates the impact of increased revenues for new products versus
the potential obsolescence of older products on a case-by-case basis. The
Company does not anticipate establishing an inventory reserve for the optical
components product line since these products are primarily manufactured based
upon a customer order; actual results could be different.
Goodwill and Intangible Assets:
The
Company reviews the potential impairment of goodwill and intangible assets whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. Factors the Company considers to be important which could trigger
an impairment review include the following:
• significant
underperformance relative to expected historical or projected future operating
results;
• significant changes
in the manner of our use of the acquired assets or the strategy of our overall
business; and
• significant negative
industry or economic trends.
When
the Company determines the carrying value of goodwill and intangible assets may
not be recoverable based upon the existence of one or more of the above
indicators of impairment, the Company will assess any potential impairment based
on undiscounted future cash flows.
Certain Factors
Affecting Future Operating Results Statements,
other than historical facts, made herein may constitute forward-looking
statements. Such forward-looking
statements are subject to risks and uncertainties, which may cause actual
results to differ materially from those, anticipated in such statements. The factors that could cause actual results
to differ materially from anticipated results include, without limitation, the
Company’s ability to, (i) compete with entities that have greater financial,
technical and marketing resources than the Company, (ii) develop and market new
products in its various business lines, (iii) gain sufficient market acceptance
for its optical communications sub-component products (iv) obtain financing on
favorable terms or refinance indebtedness prior to maturity or (v) raise
capital through equity or debt to fund anticipated expenditures and (vi) risks
inherent with international operations. In addition, general economic conditions
in the United States, Europe, Southeast Asia, and elsewhere may affect the
Company’s results.
The Company may
not obtain sufficient capital to fund its needs and additional funding may be
dilutive to current security holders The
Company's future capital requirements will depend on a number of factors,
including its profitability, growth rate, working capital requirements,
expenses associated with protection of the Company's patents and other
intellectual property, and costs of future research and development activities.
Future operating results will depend, in part, on the Company's ability to
obtain and manage capital sufficient to finance its business. To the extent
that funds currently available or expected to be generated from operations are
not sufficient to meet current or planned operating requirements, the Company
will seek to obtain additional funds through bank credit facilities, equity or
debt financing, collaborative or other arrangements with corporate partners and
from other sources. Additional funding
may not be available when needed or on acceptable terms, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. If adequate
funds are not available, the Company may be required to delay or to eliminate
certain expenditures or to license to third parties the rights to commercialize
technologies that the Company would otherwise seek to develop. In addition, in the event that the Company
obtains any additional funding, such financing may have a substantially
dilutive effect on the holders of the Company's securities.
The Company may
not accomplish its new business strategy; its photonics products may not gain
sufficient market acceptance to result in the number of orders for the Company
to achieve profitability The
Company's business strategy is to shift away from its historical lines of
businesses and direct the Company's resources to develop, manufacture and
market the Company's specialty optical fiber and optical sub-component products
for use in industrial inspection applications and in the telecommunications
industry. The Company's specialty optical fiber and optical sub-component
products may not achieve market acceptance with commercial and industrial
purchasers. Without market acceptance,
the Company may not receive a sufficient number of orders for its specialty
optical fiber and optical sub-component products to achieve profitability. In addition, even if the Company's specialty
optical fiber, and optical sub-component products achieve market acceptance,
should these products not prove to be cost-effective and reliable, or offer
advantages over comparable products sold by the Company's competitors, they may
lose that acceptance.
The Company may
face delays, difficulties or unanticipated costs in expanding its sales and
distribution capabilities necessary to gain market acceptance for its products The
Company is working to expand its sales, distribution and marketing capabilities
for the Company's specialty optical fiber, optical subcomponent and
illumination products in the United States and abroad. To market its products
directly, the Company must develop an effective marketing and sales force with
technical expertise and a supporting distribution capability. The Company may
choose or find it necessary to enter into strategic partnerships on uncertain
but potentially unfavorable terms to sell, market and distribute its products.
The Company has
many competitors in its field and its technologies may not remain competitive The Company participates in a rapidly evolving field in which
technological developments are expected to continue at a rapid pace. The Company has many competitors in the
United States and abroad, including various fiber optic component
manufacturers, universities and other private and public research institutions.
The Company's success depends upon its ability to develop and maintain a
competitive position in the product categories and technologies on which the
Company focuses. The introduction of
new products incorporating new technologies of the emergence of new industry
standards could make it more difficult for the Company's existing products to
compete in terms of pricing or functionality. Many of the Company's competitors
have greater capabilities, experience and financial resources than the
Company. Competition is intense and is
expected to increase as new products enter the market and new technologies
become available.
If the Company
fails to maintain acceptable manufacturing yields, the Company may need to
delay product shipments and its gross margins could be impaired The
manufacture of the Company's products involves highly complex and labor
intensive processes. If production facilities or personnel are not adequate for
these demands, the Company's manufacturing yields, which is the percentage of
its products that meet customer specifications, could decline, resulting in
product shipment delays, possible lost revenue opportunities, and impaired gross
margins. In response to changes in product specifications and customer needs,
the Company's manufacturing process may experience changes that could
significantly reduce manufacturing yields. The Company's production yields
could also be lower if the Company receives or inadvertently uses defective
materials from its suppliers. The
Company cannot be sure that its manufacturing facilities will achieve or
maintain acceptable yields in the future.
The Company's
customers are not obligated to buy material amounts of its products and may
cancel or defer purchases on short notice The
Company's customers typically purchase its products under individual purchase
orders and may cancel or defer purchases on short notice without significant
penalty. Accordingly, sales in a
particular period are difficult to predict. Decreases in purchases,
cancellations of purchase orders or deferrals of purchases may have a material
adverse effect on the Company, particularly if the Company does not anticipate
them.
There are
uncertainties associated with the Company's acquisition and joint venture
strategy The
Company intends, from time to time, to evaluate and consider potential
acquisitions of businesses or assets and joint ventures to complement or expand
its product lines or business. No
assurance can be given that suitable acquisition candidates can be acquired on
acceptable terms or that future acquisitions, if completed, will be
successful. Future acquisitions by the
Company could result in the incurrence of debt, the potentially dilutive
issuance of equity securities and the incurrence of contingent liabilities and
amortization expenses related to goodwill and other intangible assets, which
could materially adversely affect the Company's business, operating results,
financial condition and future prospects.
The success of any completed acquisition will depend on the Company's
ability to integrate effectively the acquired business or assets into the
Company's business and operations. The process of integrating any acquired
business or assets may involve numerous risks, including difficulties in the
assimilation of operations and products, the diversion of management’s
attention from other business concerns, risks of entering markets in which the
Company has limited or no direct prior experience and the potential loss of key
employees of the acquired businesses.
The Company faces
risks associated with its international operations The
Company distributes and sells certain of its products internationally. As a result, the Company is subject to risks
associated with operating in a foreign country, including fluctuations in
foreign currency exchange rates, imposition of limitations on conversion of
foreign currencies into dollars or remittance of dividends and other payments
by foreign subsidiaries, imposition or increase of withholding and other taxes
on remittances and other payments on foreign subsidiaries, hyperinflation and
imposition or increase of investment and other restrictions by foreign
governments. Such risks may have a
material adverse effect on the Company's business, results of operations and
financial condition in the future.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS
The information required by Item 8 is presented on pages 29 through 50 of
this Form 10-K.
The index to the Company’s consolidated financial statements is set
forth below:
Report of
Independent Public Accountants
Consolidated Balance Sheets
at December 31, 2001 and 2000
Consolidated
Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999
Consolidated
Statements of Stockholders’ Equity for the Years Ended December 31, 2001,
2000 and 1999
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999
Notes
to Consolidated Financial Statements
REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
To the Directors and Stockholders of
StockerYale, Inc.:
We
have audited the accompanying consolidated balance sheets of StockerYale, Inc.
(a Massachusetts corporation) and subsidiaries as of December 31, 2001 and
2000, and the related consolidated statements of operations, stockholders’
equity and cash flows for each of the three years in the period ended December
31, 2001. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
StockerYale, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States.
Boston, Massachusetts
February 25, 2002
(except with respect to the
matter discussed in Note 18, as
to which the date is March 8, 2002)
STOCKERYALE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001
AND 2000
(IN THOUSANDS,
EXCEPT SHARE AND PER SHARE DATA)
The accompanying notes are an integral part of these
consolidated financial statements.
STOCKERYALE,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
OPERATIONS
YEARS ENDED
DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
The accompanying notes are an
integral part of these consolidated financial statements.
STOCKERYALE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY
(In
thousands)
The accompanying notes are an integral part of these
consolidated financial statements
STOCKERYALE,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED
DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS)
The accompanying notes are an
integral part of these consolidated financial statements.
STOCKERYALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(1) ORGANIZATION AND OPERATIONS
StockerYale, Inc. (the
Company) was incorporated in 1951, and is primarily engaged in the design,
manufacture and distribution of structured light lasers, specialized fiber
optic and fluorescent illumination products for the machine vision and industrial
inspection industries as well as telecommunication optical sub-component
products.
(2) SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
The accompanying
consolidated financial statements reflect the application of certain
significant accounting policies as described in this note and elsewhere in the
accompanying consolidated financial statements and notes.
Principles
of Consolidation
The accompanying
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries, StockerYale (IRL) Ltd and Lasiris Holdings, Inc.,
which holds all of the outstanding shares of StockerYale Canada, and its
majority owned subsidiaries, Innovative Specialty Optical Fiber Components LLC
and StockerYale Asia PTE Ltd. All significant intercompany balances and
transactions have been eliminated.
Cash
and Cash Equivalents
Cash equivalents consist
of highly liquid investments with original maturities of three months or less.
Restricted
Cash
The Company maintains
certain levels of restricted cash required as collateral under the borrowings
agreement with Merrill Lynch. The
agreement requires that $2,000,000 be held in escrow as long as there is an
outstanding balance under the agreement. The Company maintains the restricted
cash in highly liquid investments with original maturities of 3 months or less.
Accounts
Receivable
The Company reviews the
financial condition of all new customers prior to granting credit. After
completing the credit review, the Company establishes a credit line for each
customer. Periodically, the Company reviews the credit line for all major
customers and adjusts the credit limit based upon an updated financial
condition of the customer, historical sales and payment information and
expected future sales. The Company has a large number of customers; therefore,
material credit risk is limited to only a small number of customers. The
Company periodically reviews the collectibility of its accounts receivable.
Provisions are established for accounts that are potentially uncollectible.
Determining adequate reserves for accounts receivable requires management’s
judgment. Conditions impacting the collectability of the Company’s receivables
could cause actual asset write-offs to be materially different than the
reserved balances as of December 31, 2001.
Inventory
Obsolescence
The Company values
inventories at the lower of cost or market using the first in, first-out
(“FIFO”) method. The Company specifically evaluates historical and forecasted
demand of the illumination product line to determine if the carrying value of
both finished goods and raw materials is recoverable through future sales. The
Company also estimates the impact of increased revenues for new products versus
the potential obsolescence of older products on a case-by-case basis. The
Company does not anticipate establishing an inventory reserve for the optical
components product line since these products are primarily manufactured based
upon a customer order; actual results could be different from management’s
estimates and assumptions.
Goodwill
and Intangible Assets
The Company reviews the
potential impairment of goodwill and intangible assets whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Factors the Company considers to be important which could trigger
an impairment review include the following:
• significant underperformance relative to
expected historical or projected future operating results;
• significant changes in the manner of our use of the acquired assets or
the strategy of our overall business; and
• significant negative industry or economic trends.
When the Company
determines the carrying value of goodwill and intangible assets may not be
recoverable based upon the existence of one or more of the above indicators of
impairment, the Company will assess any potential impairment based on future
undiscounted cash flows.
Earnings per Share
In accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings per
Share, basic and diluted net loss per common share is calculated by
dividing the net loss by the weighted average number of common shares
outstanding. For the years ended December 31, 2001, 2000, and 1999, 2,329,231,
1,475,857, 1,292,902 options, respectively, were excluded from the calculation
of diluted shares, as their effects are anti-dilutive.
Stock Split
On July 31, 2000, a stock split
of the Company’s outstanding common stock was effected in the form of a 100%
dividend to holders of record as of the close of business on July 17, 2000. All
shares and per share amounts of the common stock for all periods have been
retroactively adjusted to reflect the stock split.
Revenue
Recognition
The Company recognizes revenue from product sales at the time of
shipment and when persuasive evidence of an arrangement exists, performance of
seller’s obligation is complete, seller’s price to the buyer is fixed or
determinable, and collectibility is reasonably assured. If a loss is anticipated on any contract, a
provision for the entire loss is made immediately. The Securities and Exchange Commission released Staff Accounting
Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements,
on December 3, 1999.
This SAB provides
additional guidance on the accounting for revenue recognition, including both
broad conceptual discussions as well as certain industry-specific guidance, and
the guidance was effective for the first quarter of fiscal 2000. This new guidance did not have a material
effect on the Company’s results of operations or financial position for fiscal
2001.
Depreciation
The Company provides for
depreciation on a straight-line basis by charges to expense in amounts
estimated to amortize the costs of property, plant and equipment over their
estimated useful lives as follows:
Total depreciation
expense of property, plant and equipment was approximately $1.4 million in
2001, $0.4 million in 2000, and $0.4 million in 1999.
Goodwill
and Other Intangible Assets
The Company
provides for amortization on a straight-line basis by charges to expense in
amounts estimated to amortize goodwill and intangible assets over their useful
lives as follows:
Amortization of goodwill
and other intangibles was approximately $0.7 million, $0.6 million and $0.5
million in 2001, 2000, and 1999, respectively.
Long-Lived
Assets
In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, the Company continually
reviews for impairment whenever events or changes in circumstances indicate
that the remaining estimated useful life of goodwill or other intangible assets
might warrant revision or that the balance may not be recoverable. The Company
evaluates possible impairment by comparing estimated future cash flows, before
interest expense and on an undiscounted basis, with the net book value of
long-term assets including goodwill and other intangible assets. If
undiscounted cash flows are insufficient to recover assets, further analysis is
performed in order to determine the amount of impairment. An impairment loss is
then recorded equal to the amount by which the carrying amount of the assets
exceeds their fair market value. Fair market value is usually determined based
on the present value of estimated expected future cash flows using a discount
rate commensurate with the risks involved. In instances where goodwill is
identified with assets that are subject to an impairment loss, the carrying
amount of the identified goodwill is reduced before making any reduction to the
carrying amounts of other long-lived assets. No impairment has been identified
by the Company for the year ended December 31, 2001.
Income
Taxes
The Company accounts for
income taxes under the liability method.
Under this method the Company recognizes deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the financial statements or tax returns. Deferred tax assets and liabilities are
determined based on the difference between the financial reporting and tax
basis of the assets and liabilities using currently enacted tax rates.
Stock-Based Compensation
During 1995, the
Financial Accounting Standards Board (“FASB”) issued SFAS No. 123, Accounting
for Stock-Based Compensation, which defines a fair value based
method of accounting for an employee stock option or similar equity instrument
and encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans.
However, it also allows an entity to continue to measure compensation
costs for those plans using the method of accounting prescribed by Accounting
Principles Board (“APB”) Opinion No. 25. Entities electing to remain with the
accounting in APB Opinion No. 25 must make pro forma disclosures of net income
and, if presented, earnings per share as if the fair value based method of
accounting defined in SFAS No. 123 has been applied (see Note 12).
Translation
of Foreign Currencies
The balance sheet
accounts on non-U.S. operations, exclusive of stockholders’ equity, are
translated at year-end exchange rates, and income statement accounts are
translated at weighted-average rates in effect during the year; any translation
adjustments are made directly to a component of stockholders’ equity. Foreign
currency transaction gains and losses are recorded in the statements of
operations and have not been material.
Comprehensive
Income (Loss)
Comprehensive income
(loss) is defined as the change in net assets of a business enterprise during a
period from transactions generated from non-owner sources. It includes all
changes in equity during a period except those resulting from investments by
owners and distributions to owners. Accumulated other comprehensive income
(loss) included in the accompanying balance sheets consists of foreign currency
translation adjustments.
Fair
Values of Financial Instruments
The Company’s financial
instruments consist mainly of cash and cash equivalents, accounts receivable,
short-term debt, current maturities of long-term debt, accounts payable and
long-term debt. The estimated fair
value of these financial instruments approximates their carrying value as of
December 31, 2001.
Concentration
of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. The risk is limited due to the relatively
large number of customers composing the Company’s customer base and their
dispersion across many industries and geographic areas within the United
States, Europe and Asia. The Company also insures approximately 90% of export
receivables from its Canadian subsidiary and performs ongoing credit
evaluations of existing customers’ financial condition. In 2000, sales to the
Company’s largest single customer accounted for 18% of the Company’s total net
sales. No customer accounted for more than 10% of sales in 2001 or 1999.
Use
of Estimates
The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the date of the financial statements and the
reported amounts of income and expenses during the reporting periods. Actual
results in the future could vary from the amounts derived from management’s
estimates and assumptions.
Recent
Accounting Pronouncements
In June 2001, the FASB
issued SFAS No. 141, Business Combinations.
SFAS No. 141 requires that all business combinations be accounted for under the
purchase method only and that certain acquired intangible assets in a business
combination be recognized as assets apart from goodwill. SFAS No. 141 is
effective for all business combinations initiated after June 30, 2001 and for
all business combinations accounted for by the purchase method for which the
date of acquisition is after June 30, 2001. The adoption of SFAS No. 141 did
not have a material effect on the Company’s financial position or results of
operations.
In June 2001, the FASB
issued SFAS No. 142, Goodwill and Other
Intangible Assets, which requires that the ratable amortization of
goodwill and indefinite lived intangibles be replaced with periodic impairment
tests and that most intangible assets other than goodwill be amortized over
their useful lives. Certain intangibles will be allowed indefinite lives and
will not be amortized but rather evaluated for impairment annually based on
fair market value. The provisions of SFAS No. 142 will be effective for fiscal
years beginning after December 15, 2001, and will thus be adopted by the
Company, as required on January 1, 2002. Management has reviewed SFAS No. 142
and will perform the impairment tests during fiscal 2002 to determine if there
has been or will be an impairment of goodwill. In addition, the Company will
continue to amortize intangible assets over their useful lives. The Company
will stop amortizing goodwill effective January 1, 2002. Goodwill amortization
was $326,000 for the year ended December 31, 2001.
In July 2001, the FASB
issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supercedes
SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS
No. 144 applies to all long-lived assets (including discontinued operations)
and consequently amends APB Opinion No. 30, Reporting
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business. SFAS No. 144 is effective for financial statements issued
for fiscal years beginning after December 15, 2001 and thus will be adopted by
the Company, as required, on January 1, 2002. Management is currently
determining what effect, if any, SFAS No. 144 will have on its financial
position and results of operations.
Reclassification
Certain amounts reported for prior periods have been reclassified to be
consistent with the current period presentation.
(3) INVENTORIES
Inventories are stated at
the lower of cost (first-in, first-out basis) or market and include materials,
labor and overhead. Inventories are as follows:
Management performs
periodic reviews of inventory and disposes of items not required by their
manufacturing plan and reduces the carrying cost of inventory to the lower of
cost or market. The Company recorded a charge of $0.4 million in 2001 and $0.5
million in 2000 related to the discontinuance of the printer and recorder
product line.
(4) NOTE RECEIVABLE
On September 19, 2001,
the Company sold its machine components and accessories division for $850,000
in cash and a note receivable of $250,000 from the buyer. The note demands
payment of interest at a rate of 6.25% only for the first six months with
interest and principal payable over the following twelve months. The balance
due as of December 31, 2001 is $250,000 and is included in other Long-Term
Assets.
(5) PROPERTY, PLANT
AND EQUIPMENT
Property, plant and
equipment are stated at cost and are depreciated over a period of 3 to 40 years
generally under the straight-line method for financial reporting purposes.
During 2001, the Company retired approximately $2.3 million for fully
depreciated equipment related to the discontinued printer and recorder product
line. Property, plant and equipment were as follows:
(6) GOODWILL AND
OTHER INTANGIBLE ASSETS
Intangible assets as of December 31, 2001 and 2000 consisted of the
following:
(7) ACQUISITIONS
On June 16, 2000, the
Company acquired all of the outstanding voting shares of CorkOpt Ltd for
approximately $3.2 million, consisting of approximately $256,000 in cash,
125,382 shares of the Company’s common stock with an approximate fair value of
$2.2 million and assumed liabilities of approximately $735,000. The Company
accounted for the acquisition under the purchase method of accounting and
accordingly, the operating results of CorkOpt Ltd. from the date of acquisition
have been included in the accompanying consolidated statement of operations.
The Company has allocated the purchase price based on estimates of the fair
market value of the assets acquired, which consist of approximately $830,000 of
identifiable tangible assets including approximately $270,000 of cash, identified
intangible assets of approximately $424,000, goodwill of approximately $1.5
million and approximately $402,000 of in-process research and development,
which was charged to operations in the second quarter of fiscal 2000. The
purchase price allocations represent the fair values determined in part by an
independent appraisal. In-process research and development was comprised of two
projects, which we estimated to be 70% complete and 40% complete, respectively,
at the time of the acquisition. The
in-process R&D was valued under the income approach, which represents the
estimated fair value based on the risk adjusted cash flows related to the
in-process R&D projects. Financial
projections utilized in the valuation were based on historical results and comparable
technologies and the risk-adjusted discount rates were 35% and 50% based on
specific projects. At the date of the
acquisition, the development of these projects had not yet reached
technological feasibility and the R&D in process had no alternative future
uses. Accordingly, these costs were
expensed in the second quarter of fiscal 2000. The acquisition was not material
to the Company’s consolidated financial statements and therefore pro forma
financial information has not been presented.
(8) DISCONTINUED OPERATIONS
During 2000, the Company decided to discontinue its machine components
and accessories division (“Stilson Die-Draulic”). On March 6, 2001, the Company signed a letter of intent to sell
the net assets of the division for $1.1 million. Accordingly, the Company
reported the results of the operations of the machine tool and accessories
division and the associated impairment charges as discontinued operations. As
of December 31, 2000, the assets and liabilities of the division remaining on the
balance sheet consisted of receivables, inventory, property, plant and
equipment, accounts payable, accrued liabilities and lease obligations. The net
loss from discontinued operations was $1.9 million in fiscal 2000 that includes
a $1.2 million charge for impairment, principally due to goodwill and net
assets of $0.7 million of
$0.4 million,
respectively. The Company has provided a full valuation allowance on the loss
from discontinued operations. In September 2001, the Company completed the sale
of Stilson Die-Draulic for $1.1 million, which resulted in an additional loss
of $191,000, which has been recorded in the accompanying statement of
operations
Certain information with
respect to discontinued operations is summarized as follows:
(9) INCOME TAXES
The components of
the provision (benefit) for income taxes are as follows:
The following is a
reconciliation of the federal income tax (benefit) provision calculated at the
statutory rate of 34% to the recorded amount:
The significant items
comprising the deferred tax asset and liability at December 31, 2001 and 2000
are as follows:
As of December 31, 2001,
the Company had net operating loss carry forwards (NOLs) of approximately $14.0
million available to offset future taxable income, if any. These carry forwards
expire through 2021 and are subject to review and possible adjustment by the
Internal Revenue Service. The Company’s
historical operating losses raise doubt as to the realizability of the deferred
tax assets. As a result, management has
provided a valuation allowance for a portion of deferred tax assets that may
not be realized. In addition, the Company has research and development tax
credits of $465,000 related to equipment purchased and salaries paid for
research and development projects in Canada. These tax credits expire at
various times through 2008 and 2010.
The tax benefit recorded
in 2001 relates primarily to net operating losses and research and development
tax credits being benefited in the Canadian tax jurisdiction. SFAS No. 109, Accounting for Income Taxes, the deferred
tax assets were recognized up to the amount offsetting deferred tax liabilities
in the applicable tax jurisdiction.
(10) DEBT AND
CAPITAL LEASE OBLIGATIONS
As of December 31, 2001
and 2000, debt and capital lease obligations consisted of the following:
Borrowings
under Credit Agreement with Merrill Lynch
On May 19, 2001, the Company entered into a credit agreement with
Merrill Lynch Financial Services, Inc. providing total borrowing availability
up to $6,000,000. Initial proceeds were used to pay off the credit agreement
between the Company and Wells Fargo Business Credit, Inc. The new credit facility
with Merrill Lynch consists of a line of credit of up to $2,500,000 and a
reducing revolver in the amount of $3,500,000. As of December 31, 2001,
$2,986,000 was outstanding under the reducing revolver. Approximately
$3,014,000 was available for additional borrowings through the reducing
revolver and the line of credit.
The outstanding principal
balance of all advances under this credit facility bears interest at 2.5% over
the one month LIBOR rate. As of December 31, the interest rate was
approximately 4.3%. The Company’s obligations under this credit facility are
secured by substantially all the Company’s assets, excluding real property,
plus a pledge of restricted cash in the amount of $2,000,000. In addition, the
Company is required to maintain a $7.8 million Tangible Net Worth. The Company
is in compliance with all provisions of the credit agreement. These
restrictions will lapse when the Company achieves profitability or at such time
as no balance is outstanding. The reducing revolver is a seven-year loan with
monthly principal and interest payments beginning in 2002. The line of credit
is subject to an annual renewal.
Borrowings
under Credit Agreement with Toronto Dominion Bank
On December 5, 2000,
StockerYale Canada amended its credit agreement with Toronto Dominion
Bank. The credit agreement provides for
(a) a $3,500,000 CDN operating line of credit of which $1,000,000 CDN must be
offset by credit balances; (b) two mortgage loans for $2,020,000 CDN and (c)
four term notes totaling up to $1,049,000 CDN. The line of credit bears
interest at 1% over Toronto Dominion’s prime rate, requires monthly payments of
interest only, and is payable on demand.
As of December 31, 2001, $836,630 CDN ($525,571 US) was outstanding
under the line of credit and approximately $2,663,370 ($1,673,129 US) was
available for additional borrowings. The mortgage requires monthly principal
payments of $10,797 CDN (approximately $7,200 US) and $1,111 CDN (approximately
$698 US) plus interest at prime rate plus 0.875% and mature in December 2015
and July 2016. As of December 31, 2001, the outstanding balance on the mortgage
loans was $2,008,377 CDN ($1,269,244 US). The four term loans require monthly
principle payments of approximately $36,125 CDN ($22,694 US) plus interest
ranging from the prime rate plus 1.25% to 2.0% and mature between May 2002 and
October 2006. On December 31, 2001, the outstanding aggregate balance on the
term loans was $878,375 CDN ($562,502 US).
Borrowings
under Equipment Line of Credit with Granite Bank
The Company’s
headquarters in Salem, New Hampshire is subject to a mortgage and note issued
to Granite Bank on August 26, 1996 (the “Granite Note”). The Granite Note, in
an initial principal amount of $1,500,000 is due August 29, 2011. The Granite
Note bears interest at a rate of 7.50% per annum and is reviewed annually in
August. The principal and interest are repayable in 180 equal monthly
installments. In accordance with the terms of the Granite Note, the Company may
prepay amounts outstanding there under, in whole or in part, at any time
without premium or penalty. As of December 31, 2001, the outstanding balance on
the Granite Note was $1,195,000.
On May 20, 1997
the Company entered into an equipment line of credit agreement with Granite
Bank to finance capital equipment related to new product development. The line
of credit provides that equipment purchases will be converted quarterly into a
series of five-year notes, not to exceed $500,000 in the aggregate, bearing
interest at the prime rate plus .75%.
Scheduled future
maturities of debt and capital lease obligations for the next five years are as
follows:
(11) STOCKHOLDERS’
EQUITY
On February 18, 2000, the
Company announced that all of the holders of its $1.35 million 7-¼% Convertible
Subordinated Notes due May 1, 2001 had elected to convert their Notes. The Notes were converted into 366,092 shares
of common stock based on a conversion price of $3.6875 per share.
On March 3, 2000, the
Company completed a private placement of 710,000 common shares at a price of
$13.00 per share, which resulted in net proceeds of approximately $8.8 million.
On June 16, 2000, the
Company acquired all of the outstanding voting shares of CorkOpt Ltd for
approximately $3.2 million, consisting of approximately $256,000 in cash,
125,382 shares of the Company’s common stock with a fair value of $2.2 million
and the assumption of approximately $735,000 of liabilities.
On October 5, 2000, the
Company completed a private placement of 409,132 common shares at a price of
$30.00 per share, which resulted in net proceeds to the Company of
approximately $11.7 million.
On November 2, 2000, the
Company completed another private placement of 150,000 common shares at a price
of $24.4375 per share, which resulted in net proceeds to the Company of
approximately $3.6 million.
In connection with the
private placements, the Company issued 19,957 warrants to purchase shares of
the Company’s common stock at $45.00 per share expiring on October 4, 2004. The
Company has determined the fair value of these options to be $723,000 which is
netted against the proceeds in additional paid in capital.
On May 31, 2001, the Company completed a private placement of 1,700,000
shares of its common stock, par value $.001 per share. The Company offered these
shares to eighteen purchasers at $10.25 per share. The Company did not engage
any underwriters in connection with the private placement, but the Company did
enter into an agreement with William Blair & Company to act as exclusive
placement agent for the shares. The
Company paid a commission of $1,219,750 to William Blair & Company. The
private placement resulted in net proceeds to the Company of approximately $16
million. Proceeds were used for facility expansion, capital expenditures and
working capital.
(12) STOCK OPTIONS
Stock
Option Plans
In March 1996, the
Company adopted the 1996 Stock Option and Incentive Plan (the 1996 Option Plan)
for the purpose of issuing both Incentive Options and Nonqualified Options to
officers, employees and directors of the Company. A total of 300,000 shares of common stock were reserved for
issuance under this plan.
In May 1998, the Company
increased the total shares reserved for issuance under this plan by 300,000
shares for a total of 600,000 shares.
In May 1999, the Company increased the total shares reserved for
issuance under this plan by 600,000 shares for a total of 1,200,000 shares
available for issuance.
Options may be granted
under the Option Plan on such terms and at such prices as determined by the
Board of Directors, except that the options cannot be granted at less than
100%, or in certain circumstances not less than 110%, of the fair market value
of the common stock on the date of the grant.
Each option will be exercisable after the period or periods specified in
the option agreement, but no option may be exercised after the expiration of 10
years from the date of grant.
In May 2000, the Company
adopted the 2000 Stock Option and Incentive Plan (the 2000 Option Plan) for the
purpose of issuing both Incentive Options and Nonqualified Options to officers,
employees and directors of the Company. A total of 800,000 shares of common
stock were reserved for issuance under this plan. Options may be granted under
the Option Plan on such terms and at such prices as determined by the Board of
Directors, except that the options cannot be granted at less than 100%, or in
certain circumstances not less than 110%, of the fair market value of the
common stock on the date of the grant. Each option will be exercisable after
the period or periods specified in the option agreement, but no option may be
exercised after the expiration of 10 years from the date of grant.
The following is a
summary of the activity for the Company’s stock options:
The Company had 1,399,540
and 604,100 shares available for grant as of December 31, 2001 and 2000,
respectively.
During 2001 and 2000, the
weighted average fair value of options granted was $8.91 and $9.76
respectively.
In 2000, the Company
granted options to purchase 8,000 shares of common stock with a weighted
average exercise price of $24.94 per share to non-employees. The Company
determined that the fair value of these options totaled $68,000 using the
Black-Scholes option model. The fair value of these options will be recorded as
a charge to operations as the options vest.
Stock-Based
Compensation
The Company elected to
account for its stock-based compensation plan under APB 25. However, the Company has computed, for pro
forma disclosure purposes, the value of all options granted during 2001 and
2000 using the Black-Scholes option pricing model as prescribed by SFAS No.
123, using the following weighted-average assumptions for grants in 2001, 2000
and 1999:
The total value of options granted during 2001, 2000, and 1999 would be
amortized on a pro forma basis over the vesting period of the options. Options generally vest equally over two or
four years.
If the Company had
accounted for these plans in accordance with SFAS No. 123, the Company’s net
loss and net loss per share would have increased as reflected in the following
pro forma amounts:
(13) EMPLOYEE STOCK
PURCHASE PLAN
In May 2000, the Company
adopted the 2000 Employee Stock Purchase Plan (the “Stock Purchase Plan”),
which permits the eligible employees of the Company and its subsidiaries to
purchase shares of the Company’s common stock, at a discount, through regular
monthly payroll deductions of up to 10% of their pre-tax gross salary. Subject to adjustment for stock splits,
stock dividends and similar events, a maximum of 100,000 shares of common stock
may be issued under the Stock Purchase Plan.
For the year ended December 31, 2001, there were 9,380 shares issued
under the Stock Purchase Plan.
(14) EMPLOYEE BENEFIT
PLANS
On January 17, 1994, the
Company established the StockerYale 401(k) Plan (the Plan). Under the Plan, employees are allowed to
make pretax retirement contributions.
In addition, the Company may make matching contributions, not to exceed
100% of the employee contributions, and profit sharing contributions at its
discretion. The Company made matching contributions of $57,000, $38,000, and
$36,000 in fiscal years 2001, 2000, and 1999, respectively. The Company
incurred costs of approximately $12,000, $5,000, and $5,000 in 2001, 2000, and
1999, respectively, to administer the Plan.
(15) COMMITMENTS
AND CONTINGENCIES
The Company leases
facilities and equipment under operating leases. The future minimum lease
payments as of December 31, 2001 are as follows (in thousands):
Total rent expense for
operating leases charged to operations was $207,000, $164,000 and $52,000 in
2001, 2000 and 1999, respectively.
The Company is party to various legal proceedings generally incidental
to its business. Although the disposition of such legal proceedings cannot be
determined with certainty it is the Company’s opinion that any pending or
threatened litigation will not have a material adverse effect on the Company’s
financial condition.
(16) JOINT VENTURES
AND OTHER INVESTMENTS
In
June 2000, the Company purchased 75,075 shares for $250,000 to obtain a less
than 1% interest in the Giant Loop Corporation. The investment is accounted for
on the cost basis and is adjusted for any other than temporary impairment in
value. No impairment was recorded in 2001.
On October 12, 2000, the
Company entered into a joint venture with Dr. Nicolae Miron and formed Optune
Technologies, Inc., a Quebec corporation, to develop a new class of tunable
optical filters. Under the terms of
this joint venture arrangement, the Company owns a 49% equity interest in
Optune and the Company agreed to contribute an aggregate of $4,000,000 to cover
all operating costs of the joint venture including salaries, equipment and
facility costs. The contributions are to be made over a two-year period
pursuant to a fixed milestone schedule. The Company is recording 100% of the
losses associated with the research and development joint venture in the
accompanying statement of operations as research and development expense. As of
December 31, 2001, the Company has provided approximately $936,000 CDN
($600,000 USD) of funding to the joint venture and recorded approximately
$400,000 USD of research and development expenses related to the operating
losses for the year ended December 31, 2001.
In April 2001, the
Company entered into a research and development joint venture agreement to form
Innovative Specialty Optical Fiber Components LLC with Dr. Danny Wong, a
scientist employed by the Company, to develop specialty optical fiber products.
In exchange for a 60% ownership interest in Innovative Specialty Optical Fiber
Components LLC, the Company has committed to fund up to $7.0 million over a
two-year period to cover all operating costs of the majority owned subsidiary,
including salaries, equipment and facility costs. Innovative Specialty Optical
Fiber Components LLC has been consolidated by the Company and the Company has
recorded 100% of the losses associated with Innovative Specialty Optical Fiber
Components LLC as research and development expense in the accompanying
statement of operations. For the year ending December 31, 2001, the Company has
funded $324,000 and recorded an operating loss of $94,000, related to the
iSOF joint venture.
(17) SEGMENT INFORMATION
The Company has adopted
the SFAS No. 131, Disclosures About Segments of an Enterprise and Related information. SFAS No. 131 requires financial and
supplementary information to be disclosed on an annual and interim basis of
each reportable segment of an enterprise.
SFAS No. 131 also establishes standards for related disclosures about
product and services, geographic areas and major customers. Operating segments are identified as
components of an enterprise about which separate discrete financial information
is available for evaluation by the chief decision-making group, in making
decisions how to allocate resources and assess performance. The Company’s chief decision-maker is the
chief executive officer.
The Company operated within a single segment of the electronics
industry (Illumination Instruments) in 2001. The Company will operate in two
segments in 2002-Illumination and Optical Components. The Company made
significant investments in research and development and sales and marketing
expenses as well as capital equipment and facilities during 2001 in support of
its new optical components and specialty optical fiber business. However, revenues
and gross profits and associated expenses from these businesses are not
expected to be material to overall results until 2002. Therefore, the Company
will segregate revenues, profits, expenses, and assets of the illumination and
optical segments beginning in fiscal 2002.
The Company’s export
sales are denominated in U.S. dollars. These sales are as follows:
The Company’s
long-term assets consist of property, plant and equipment located in the
following geographic locations:
(18) SUBSEQUENT EVENTS
On March 8, 2002, the
Company completed a private placement of 1,242,600 shares at $7.76 per share,
which resulted in net proceeds to the Company of approximately $9.7 million.
The Company did not engage either an underwriter or agent in this transaction.
In connection with the private placement, the Company granted registration
rights to investors. The registration rights granted to certain investors
provide for liquidated damages, in the form of additional shares of the
Company’s common stock in an amount equal to 15% of the total number of shares
purchased by such investor, in the event that the registration statement filed
with respect to such investor’s shares is not effective within 90 days after
the closing of the purchase of such investor’s shares.
ITEM
9.
ITEM
9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III. ITEM
10.
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Information
pertaining to directors and executive officers of the Company is set forth
under “Election of Directors” in the Company’s Proxy Statement for the Special
Meeting in Lieu of an Annual Meeting of Stockholders to be held on May 15, 2002
(the “Proxy Statement”), and is incorporated herein by reference.
The information
regarding compliance with Section 16(a) of the Securities Exchange Act of 1934
by the directors, executive officers and beneficial owners of more than 5% of
the Company’s Common Stock required by this item is set forth under “Compliance
with Section 16(a) of the Exchange Act” in the Company’s Proxy Statement and is
incorporated herein by reference.
ITEM
11.
ITEM
11. EXECUTIVE COMPENSATION Information
pertaining to executive compensation is set forth under “Compensation of
Executive Officers and Directors” in the Company’s Proxy Statement and is
incorporated herein by reference.
ITEM
12.
ITEM
12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information pertaining
to security ownership of management and certain beneficial owners of Company
Common Stock is set forth under “Voting Securities and Principal Holders
Thereof” in the Company’s Proxy Statement and is incorporated herein by
reference.
ITEM
13.
ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS Information pertaining to certain relationships and
related transactions is set forth under “Certain Relationships and Related
Transactions” in the Company’s Proxy Statement and is incorporated herein by
reference.
REPORT
OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
To
StockerYale, Inc.
We have audited in accordance with accounting
standards generally accepted in the United States, the consolidated financial
statements included in StockerYale, Inc.’s Form 10-K and have issued our report
thereon dated February 25, 2002 (except with respect to the matter discussed in
Note 18, as to which the date is March 8, 2002). Our audit was made for the
purpose of forming an opinion on those statements taken as a whole. Schedule II
is the responsibility of the Company’s management and is presented for purposes
of complying with the Securities and Exchange Commission’s rules and is not
part of the basic financial statements. The schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
STOCKERYALE,
INC SCHEDULE
II VALUATION
AND QUALIFYING ACCOUNTS
Years
ended December 31, 2001, 2000 and 1999
(in
thousands)
(1)
Reflects uncollectible accounts written off.
ITEM
14.
ITEM
14. EXHIBITS,
LISTS, AND REPORTS ON FORM 8-K (a) The following is a complete list of
Exhibits filed as part of this Form 10-K.
10.3(d)
Amended Form of Nonqualified Stock Option Agreement
for employees under the 2000 Stock Option and Incentive Plan, incorporated by
reference to Exhibit 10.3(g) of StockerYale, Inc.’s Form 10-QSB
for the fiscal quarter ended June 30, 2001.
10.3(e)
Amended Form of Nonqualified Stock Option Agreement
for Outside Directors under the 2000 Stock Option and Incentive Plan,
incorporated by reference to Exhibit 10.3(h) of StockerYale, Inc.’s
Form 10-QSB for the fiscal quarter ended June 30, 2001.
10.4(a)
2000 Employee Stock Purchase Plan, incorporated by
reference to Exhibit 99.1 to the Form S-8 filed by StockerYale, Inc. on June
9, 2000 (No. 333-39082).
*
10.4(b)
Amendment No. 1 to 2000 Employee Stock Purchase
Plan, dated June 26, 2001.
10.5
Voting, Support and Exchange Agreement between
Lasiris Holding, Inc., StockerYale, Inc. and the stockholders’ of Lasiris,
Inc. and certain other parties named therein, dated May 13, 1998,
incorporated by reference to Exhibit 10.16(a) of StockerYale, Inc.’s Form
10-QSB, as amended, for the fiscal quarter ended June 30, 1998.
10.6
Employment Agreement by and among Lasiris, Inc.,
StockerYale, Inc. and Alain Beauregard, dated as of May 13, 1998,
incorporated by reference to Exhibit 10.16(b) of StockerYale, Inc.’s Form
10-QSB, as amended, for the fiscal quarter ended June 30, 1998.
10.7
Lasiris, Inc. Executive Incentive Compensation Plan,
incorporated by reference to Exhibit 10.16(d) of StockerYale, Inc.’s Form
10-QSB, as amended, for the fiscal quarter ended June 30, 1998.
10.8(a)
Stock Purchase Agreement by and among StockerYale,
Inc., CorkOpt Ltd., W.M.Kelly, Gary Duffy and Thomas Meade, incorporated by
reference to Exhibit 2.1 of
StockerYale, Inc.’s Form 8-K, filed on June 30, 2000.
10.8(b)
Stock Purchase Agreement between University College
Cork - National University of Ireland, Cork and StockerYale, Inc.,
incorporated by reference to Exhibit 2.2 of StockerYale, Inc.’s Form
8-K, filed on June 30, 2000.
10.8(c)
Stock Purchase Agreement between Anne Kelly and
StockerYale, Inc., incorporated by reference to Exhibit 2.3 of StockerYale,
Inc.’s Form 8-K, filed on June 30, 2000.
10.8(d)
Stock Purchase Agreement between Gerard Conlon and
StockerYale, Inc., incorporated by reference to Exhibit 2.4 of StockerYale,
Inc.’s Form 8-K, filed on June 30, 2000.
10.8(e)
Stock Purchase Agreement between Enterprise Ireland
and StockerYale, Inc., incorporated by reference to Exhibit 2.5 of
StockerYale, Inc.’s Form 8-K, filed on June 30, 2000.
SIGNATURES Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf, thereunto
duly authorized.
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been duly
signed below by the following persons on behalf of the Registrant and in the
capacities and on the date set forth above.
Signature
Title
Date
/s/ Mark W. Blodgett
Chairman of the Board
April 1, 2002
Mark W. Blodgett
of Directors and Chief
Executive Officer
/s/ Alain Beauregard
President, Chief
Technology
April 1, 2002
Alain Beauregard
Officer and Director
/s/ Lawrence Blodgett
Director
April 1, 2002
Lawrence Blodgett
/s/ Clifford Abbey
Director
April 1, 2002
Clifford Abbey
/s/ Steven E. Karol
Director
April 1, 2002
Steven E. Karol
/s/ Raymond J.
Oglethorpe
Director
April 1, 2002
Raymond J. Oglethorpe
/s/ Dr. Herbert Cordt
Director
April 1, 2002
Dr. Herbert Cordt
/s/ Francis J. O’Brien
Executive Vice
President, Chief
April 1, 2002
Francis J. O’Brien
Financial Officer and
Treasurer