The following discussion should be read in conjunction with the attached consolidated financial statements and notes thereto and with our audited financial statements and notes thereto included in our Annual Report on Form 10-KSB for the year ended December 31, 2000.
Net sales were $3.6 million in the three months ended June 30, 2001 compared to $5.0 million in the second fiscal quarter of 2000, a decrease of 28% or $1.4 million.
Net sales from our specialized illumination products were $2.7 million in the second quarter of 2001 compared to $3.7 million in the comparable quarter in 2000, a decrease of 27.0% or $1.0 million. The decrease was primarily caused by a reduction in demand due to a cyclical downturn in the semi-conductor and related industries.
Net sales from our optical sub-component products were $715,000 in the second quarter of 2001 compared to $736,000 in the comparable quarter in 2000, a decrease of 2.9% or $21,000. The decrease was largely due to the shut down of phase mask production in order to complete construction of a state of the art clean room, which will provide improved quality and efficiency in the phase mask manufacturing process. Accordingly, our backlog for phase masks grew to approximately $2.5 million.
Net sales from printer and recorder products decreased from $535,000 in the second quarter of fiscal 2000 to $225,000 in the comparable quarter of fiscal 2001, a 58.0% decrease. As previously disclosed, we plan to discontinue these product lines by the end of 2001.
Cost of sales were $2.4 million in the second quarter of fiscal 2001 compared to $3.1 million in the comparable quarter of fiscal 2000, a decrease of 23.7% or $734,000. The decrease in cost of sales resulted from the decrease in net sales during the same period.
Gross profit was $1.2 million in the second quarter of fiscal 2001 compared to $1.9 million in the comparable quarter of 2000 as a result of decreased net sales. Gross margin decreased from 38.3% in 2000 to 34.6% in 2001. The decrease in gross margin resulted primarily from increased unabsorbed manufacturing costs due to the shortfall of shipments during the quarter combined with the expansion of our manufacturing capacity.
Selling expenses were $1.0 million in the three months ended June 30, 2001, or 27.9% of net sales, compared to $433,000 in the comparable quarter in 2000, or 8.6% of net sales. General and administrative expenses were $2.5 million in the second quarter of fiscal 2001, or 70.4% of net sales, compared to $822,000, or 16.4% of net sales in the comparable quarter of fiscal 2000. Selling, general and administrative expenses increased primarily due to growth in staffing levels in sales and administrative personnel as well as due to non-recurring charges relating to legal and professional fees associated with our joint ventures and moving costs associated with our new Montreal facility. Research and development expenses were $1.1 million in the second quarter of fiscal 2001 compared to $275,000 in the comparable quarter of 2000; reflecting our strategy of making significant investments in research and development for our specialty optical fiber and optical sub-component products.
Interest expense was $178,000 in the second quarter of fiscal 2001 compared to $121,000 in 2000. The increase in interest expense resulted primarily from borrowings to fund operating losses and working capital.
Net Income
Net loss for the three months ended June 30, 2001 was $3.6 million compared to a net loss of $395,000 for the same period in 2000. Net loss from continuing operations for the second quarter of 2001 was $3.6 million compared to a net loss from continuing operations of $250,000 in the comparable quarter of 2000. Net loss from discontinued operations for the second quarter of 2000 was $145,000. These operations were discontinued as of December 31, 2000.
Provision for Income Taxes
We recorded a benefit for income taxes of $158,000 in the fiscal quarter ended June 30, 2001 compared to a tax provision of $113,000 in the comparable quarter in 2000. The tax benefit for the current quarter is a result of operating losses generated in Canada which offset a previously recorded tax provision. The tax provision in the comparable quarter is a result of taxable income generated in Canada that could not be used to offset operating losses in the United States.
First Six Months of Fiscal 2001 and 2000
Net Sales
Net sales were $8.5 million in the six months ended June 30, 2001 compared to $8.9 million in the comparable period of fiscal quarter of 2000, a decrease of 4.6% or $414,000.
Net sales from our specialized illumination products were $6.3 million in the first six months of 2001 compared to $6.8 million in the comparable period of the prior year, a decrease of 7.7% or $530,000. The decrease was primarily caused by a reduction in demand due to a cyclical downturn in the semi-conductor and related industries.
Net sales from our optical communication sub-component products were $1.7 million in the first six months of 2001 compared to $1.2 million in the comparable period of the prior year, an increase of 43.2% or $508,000. The increase was primarily due to strong demand for our phase mask products. In order to meet current demand, we have completed construction on a state of the art clean room that will increase production capacity and improve quality.
Net sales from printer and recorder products decreased from $923,000 in the first six months of 2000 to $531,000 in the first six months of fiscal 2001, a 42.5% decrease. As previously disclosed, we plan to discontinue these product lines by the end of 2001.
Cost of Sales
Cost of sales was $5.1 million in the first six months of fiscal 2001 compared to $5.4 million in the comparable period of fiscal 2000, a decrease of 6.7% or $363,000. The decrease in cost of sales resulted from a decrease in net sales during the same period.
Gross profit was $3.5 million in the first six months of fiscal 2001 compared to $3.5 million in the comparable period of fiscal 2000. Gross margin increased from 39.4% in fiscal 2000 to 40.7% in fiscal 2001 resulting from a favorable product mix, which was partially offset by higher manufacturing costs.
Operating Expenses
Selling expenses were $1.8 million in the six months ended June 30, 2001, or 21.6% of net sales, compared to $858,000 in the comparable period in fiscal 2000, or 9.6% of net sales. General and administrative expenses were $3.9 million in the first six months of fiscal 2001, or 45.4% of net sales, compared to $1.4 million, or 15.8% of net sales in the comparable period of fiscal 2000. Selling, general and administrative expenses increased primarily due to growth in staffing levels in sales and administrative personnel as well as due to non-recurring charges relating to legal and professional fees associated with our joint ventures and moving costs associated with our new Montreal facility. Research and development expenses were $1.7 million in the first six months of fiscal 2001 compared to $504,000 in the comparable period of fiscal 2000, reflecting our strategy of making significant investments in research and development for our specialty optical fiber and optical sub-component products.
Interest Expense
Interest expense was $289,000 in the first six months of fiscal 2001 compared to $249,000 in 2000. The increase in interest expense resulted primarily from borrowings to fund operating losses and working capital.
Net Income
Net loss for the six months ended June 30, 2001 was $4.3 million compared to a net loss of $421,000 for the same period in 2000. Net loss from continuing operations for the six months ended June 30, 2001 was $4.3 million compared to a net loss from continuing operations of $114,000 in the comparable period in 2000. Net loss from discontinued operations for the six months ended June 30, 2000 was $307,000. These operations were discontinued as of December 31, 2000.
Provision for Income Taxes
We recorded a benefit for income taxes of $64,000 in the six months ended June 30, 2001 compared to a tax provision of $132,000 in the comparable quarter in 2000. The tax benefit is a result of certain research and development tax credits from our Canadian operations. The tax provision in the comparable quarter is a result of taxable income generated in Canada that could not be used to offset operating losses in the United States.
Liquidity and Capital Resources
On May 31, 2001, the Company completed a private placement of 1,700,000 shares of common stock at a price of $10.25 per share with net proceeds of approximately $16.1 million. For the six months ended June 30, 2001, cash and cash equivalents increased $5.3 million over the corresponding period in 2000. Cash used in operating activities was $5.8 million in the first six months of fiscal 2001, which primarily resulted from an operating loss of $4.3 million and an increase in inventories of $1.1 million, which was partially offset by depreciation and amortization and changes in working capital to fund our continued strategic investment in specialty optical fiber and optical sub-components.
Cash of $18.3 million was provided by financing activities, primarily due to the receipt of $16.1 million from the sale of common stock in the above private placement and net proceeds from bank debt of $2.1 million. Cash used in investing activities was $7.2 million in the six months ended June 30, 2001; primarily resulting from the purchase of production and development equipment and facility expansion.
As part of our strategic plan to expand our specialty optical fiber production capabilities, we have continued the construction of a 14,000 square foot addition to our existing Salem facility. This building will be used for research and development of specialty optical fiber and optical sub-components, including MCVD systems, drawing towers and other optical measuring equipment. We believe that we will be able to finance a significant portion of this project, which is expected to cost approximately $7 million, although we can have no assurance at this time as to the availability and terms of any such financing.
On May 19, 2001, we 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 June 30, 2001, $1,440,000 was outstanding under the reducing revolver and approximately $4,560,000 was available for additional borrowings. The outstanding principal balance of all advances under this credit facility bears interest at 2.5% over the one month LIBOR rate. Our obligations under this credit facility are secured by substantially all of our assets other than real property along with a pledge of restricted cash in the amount of $2,000,000.
On December 5, 2000, StockerYale Canada amended its credit agreement with Toronto Dominion Bank. The credit agreement provides for (a) a $2,000,000 CDN operating line of credit; (b) a mortgage loan and (c) various 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 June 30, 2001, $2,869,000 CDN ($1,894,000 US) had been borrowed on the line of credit. The mortgage requires monthly principal payments of $10,797 CDN (approximately $7,200 US) plus interest at prime rate plus 0.870% and matures in December 2005. As of June 30, 2001, the outstanding balance on the mortgage was $1,878,717 CDN ($1,240,000 US).
The term loans require aggregate monthly principal payments of approximately $25,000 CDN ($16,750 US) plus interest ranging from the prime rate plus 1.20% to 2.0% and mature between May 2002 and December 2005. On June 30, 2001, the outstanding aggregate balance on the term loans was $383,124 CDN ($252,939 US).
Our 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 10% 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, we may prepay amounts outstanding thereunder, in whole or in part, at any time without premium or penalty. As of June 30, 2001, the outstanding balance on the Granite Note was $1,232,000.
On May 20, 1997 we 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 bank’s prime rate plus .75%. As of June 30, 2001, we had borrowed $136,000 pursuant to such line of credit.
From time to time, we explore possible acquisitions of companies or product lines and investments in joint ventures with third parties that we believe will fit with our strategic plan and complement our existing product lines. On October 12, 2000, we 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, we acquired a 49% equity interest in Optune and we agreed to contribute an aggregate of $4,000,000 to be made over a two year period pursuant to a fixed schedule. On April 25, 2001, we formed a limited liability company with Dr. Danny Wong called Innovative Specialty Optical Fiber Components LLC, which will pursue the research and development of new products and technologies involving specialty optical fiber for telecommunication applications. Under the terms of our agreement, we acquired a 60% equity interest in the entity and agreed to contribute up to $7,000,000 in financing. These arrangements will require us to fund a significant amount of research and development costs at both joint ventures, which may require us to obtain additional financing through the future issuance of equity or debt securities or future borrowings.
Periodically, we contemplate raising additional capital by the issuance of equity securities, the proceeds of which may be used, among other things, to fund working capital need or future acquisitions and joint ventures. Assuming our borrowing base remains at its current level or higher and our ability to raise necessary capital, we believe that our available financial resources are adequate to meet foreseeable working capital, debt service and capital expenditure requirements through the next twelve months.
PART II
ITEM 1. 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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 $16.1 million. Proceeds will be used for working capital purposes. In light of information received by the Company in connection with the private placement, management believes that the private placement was exempt from registration under Section 4(2) of the Securities Act of 1933.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) A special meeting of stockholders of the Company in lieu of the annual meeting was held on May 24, 2001.
b) The following matters were presented and voting results were as follows:
| PROPOSAL I – Election of Directors | Number of Shares/Votes |
| |
|
| | For | Authority Withheld |
| |
|
|
| Mark W. Blodgett | 6,610,825 | 1,739 |
| Alain Beauregard | 6,601,836 | 10,728 |
| Clifford L. Abbey | 6,610,836 | 1,728 |
| Lawrence W. Blodgett | 6,599,845 | 12,719 |
| Steven E. Karol | 6,611,116 | 1,448 |
| Dr. Herbert Cordt | 6,611,136 | 1,428 |
| Raymond J. Oglethorpe | 6,611,036 | 1,528 |
| PROPOSAL II – Amending the Articles of Organization to increase the authorized shares. | |
| | |
| | FOR: | 6,445,747 | | |
| | AGAINST | 165,544 | | |
| | ABSTAIN | 1,273 | | |
| | | | |
| PROPOSAL III – Amending the Company’s 2000 Stock Option and Incentive Plan. | |
| | |
| | FOR: | 4,807,640 | |
| | AGAINST | 166,056 | |
| | ABSTAIN | 1,514 | |
| | NON VOTES | 1,637,354 | |
| | | | |
| PROPOSAL IV – | Ratifying the appointment of Arthur Andersen LLP as the Company’s independent public accountants. |
| | |
| | FOR: | 6,600,366 | |
| | AGAINST | 4,688 | |
| | ABSTAIN | 7,510 | |
| | | | | | | |
ITEM. 6 EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) The following is a complete list of Exhibits filed as part of this Form 10-QSB:
| Exhibit | |
| Number | Description |
| | |
| 3.1 | Amendment to the Amended and Restated Articles of Organization of StockerYale, Inc. The Amended and Restated Articles of Organization of StockerYale, Inc., together with all previous amendments, are incorporated by reference to Exhibit 3.1 of StockerYale, Inc.’s Form 10-KSB for the fiscal year ended December 31, 2000. |
| | |
| 10.3(e) | Amendment No. 1 to the 2000 Stock Option and Incentive Plan. |
| | |
| 10.3(f) | Amended Form of Incentive Stock Option Agreement for employees under the 2000 Stock Option and Incentive Plan. |
| | |
| 10.3(g) | Amended Form of Nonqualified Stock Option Agreement for employees under the 2000 Stock Option and Incentive Plan. |
| | |
| 10.3(h) | Amended Form of Nonqualified Stock Option Agreement for Outside Directors under the 2000 Stock Option and Incentive Plan. |
| | |
| 10.4(b) | Amendment No. 1 to the 2000 Employee Stock Purchase Plan. |
| | |
| 10.8 (a) | Credit Agreement, dated as of May 3, 2001, by and between Merrill Lynch Financial Services Inc. and StockerYale, Inc. as amended by letter dated May 16, 2001. |
| | |
| 10.8 (b) | Credit Agreement, dated as of May 3, 2001, by and between Merrill Lynch Financial Services Inc. and StockerYale, Inc. as amended by letter dated May 16, 2001. |
| | |
| 10.8 (c) | Financial Securities Agreement, dated as of May 1, 2001, by and between Merrill Lynch Financial Services Inc. and StockerYale, Inc. |
| | |
(b) Reports on Form 8-K
| | The Company filed a report of Form 8-K on June 4, 2001 to report the completion of a private placement of 1,700,000 shares of its common stock. |
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
StockerYale, Inc.
| August 13, 2001 | | /s/ Mark W. Blodgett |
| | |
|
| | | Mark W. Blodgett, |
| | | Chairman and Chief Executive Officer |
| | | |
| August 13, 2001 | | /s/ Gary B. Godin |
| | |
|
| | | Gary B. Godin, |
| | | Executive Vice President-Finance and |
| | | Treasurer |
