U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
Commission file number 0-5460
____________________________________________
STOCKER & YALE, INC.
(Name of small business issuer in its charter)
Massachusetts
(State or other jurisdiction of incorporation or organization)
04-2114473
(I.R.S. employer identification no.)
32 Hampshire Road
Salem, New Hampshire 03079
(Address of principal executive offices) (Zip Code)
(603) 893-8778
(Issuer's telephone number)
____________________________________________
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
uch shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
___X___Yes ________No
As of November 13, 1998 there were 3,364,340 shares of the issuer's common
stock outstanding.
Transitional Small Business Disclosure Format (check one):
_______Yes ____X___No
Page 1 of 13
<PAGE>
PART I FINANCIAL STATEMENTS
Item 1.1 CONSOLIDATED BALANCE SHEETS
STOCKER & YALE, INC.
ASSETS
<TABLE>
<CAPTION>
September 30,1998 December31,1997
(unaudited) (audited)
<S>
CURRENT ASSETS:
<C> <C>
Cash $ 133,713 $ 73,520
Accounts Receivable 2,085,692 1,860,624
Prepaid Taxes 503,022 579,332
Inventory 5,961,724 4,957,095
Prepaid expenses 332,894 117,354
Total current assets 9,017,045 7,587,925
PROPERTY, PLANT AND EQUIPMENT, NET 4,242,537 3,857,504
NOTE RECEIVABLE - 1,000,000
GOODWILL, NET OF ACCUMULATED 2,560,534 8,453,000
AMORTIZATION
IDENTIFIED INTANGIBLE ASSETS 2,961,361 -
OTHER ASSETS 76,457 92,322
$ 18,857,934 $ 20,990,751
LIABILITIES AND STOCKHOLDERS' INVESTMENT
<S>
CURRENT LIABILITIES:
<C> <C>
Current portion of long-term debt $ 215,912 $ 443,334
Short Term Debt 746,796 -
Accounts payable 2,975,221 1,858,936
Accrued expenses 810,570 541,668
Accrued Taxes 129,038 -
Current Lease Obligations 197,062 89,771
Total current liabilities 5,074,599 2,933,709
LONG-TERM DEBT 5,357,436 3,809,658
LONG TERM LEASE OBLIGATIONS 634,246 223,575
OTHER LONG-TERM LIABILITIES 564,688 564,688
SUBORDINATED NOTES 1,350,000 1,350,000
DEFERRED INCOME TAXES 1,870,567 876,904
STOCKHOLDERS' INVESTMENT:
Common stock, par value $0.001 3,364 2,568
Authorized-10,000,000
Issued and outstanding-3,364,340
shares at September 30, 1998 and
2,567,894 shares at December 31, 1997
Cumulative Translation AdjustmenT (30,537) -
Paid-in capital 13,688,913 10,822,705
Retained earnings (9,655,342) 406,944
Total stockholders' investment 4,006,398 11,232,217
$ 18,857,934 $ 20,990,751
</TABLE>
<PAGE>
PART I FINANCIAL STATEMENTS
Item 1.2 CONSOLIDATED STATEMENTS OF OPERATIONS
STOCKER & YALE, INC.
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
NET SALES $ 3,563,158 $ 2,689,583 $ 9,058,439 $ 8,227,525
COST OF SALES 2,240,701 1,882,681 5,791,668 5,139,564
Gross profit 1,322,457 806,902 3,266,771 3,087,961
SELLING EXPENSES 553,126 594,870 1,318,652 1,434,227
GENERAL AND 850,266 635,895 2,362,233 1,488,138
ADMINISTRATIVE EXPENSES
ACQUIRED IN - - 1,087,914 -
PROCESS R&D
Goodwill Impairment - - 7,365,662 -
RESEARCH AND 256,697 222,415 643,397 553,940
DEVELOPMENT
Operating loss (337,632) (646,278) (9,511,087) (388,344)
INTEREST EXPENSE (177,000) (107,913) (427,806) (272,217)
Loss before (514,632) (754,191) (9,938,893) (660,561)
income taxes
INCOME TAX 101,921 (277,000) 123,391 (185,000)
EXPENSE/BENEFIT
Net loss $ (616,553) $(477,191) $ (10,062,284) $(475,561)
PER SHARE INFORMATION
(1):Basic net $ (0.18) $ ( 0.19) $ ( 3.38) $(0 .19)
loss per
common share
Weighted average
number of common shares
outstanding 3,364,340 2,567,894 2,980,096 2,567,894
(2):Diluted net
loss per common and
dilutive potential
common shares outstanding
$ (0.18) $( 0.19) $( 3.38) $(0 .19)
Weighted Average
Number of Common
and dilutive potential
common shares outstanding
3,364,340 2,567,894 2,980,096 2,567,894
</TABLE>
<PAGE>
PART I FINANCIAL STATEMENTS
Item 1.3 CONSOLIDATED STATEMENTS OF CASH FLOWS
STOCKER & YALE, INC.
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1998 1997
<S>
CASH FLOWS FROM OPERATING ACTIVITIES:
<C> <C>
Net loss $ (10,062,284) $ (475,561)
Adjustments to reconcile net loss to net
cash used in/provided by operating
activities-
Acquired in Process Research and Development 1,087,914 -
Goodwill Impairment 7,365,662 -
Depreciation and amortization 573,725 429,750
Deferred income taxes (260,369) (40,000)
Other changes in assets and liabilities-
Accounts receivable, net 449,176 (411,356)
Inventories (201,017) (1,109,190)
Prepaid expenses (207,160) (295,372)
Prepaid taxes 201,215 -
Accounts payable 583,173 (23,236)
Accrued expenses 146,041 419
Other assets - (52,166)
Accrued and refundable taxes 129,034 -
Net cash used in operating activities (194,890) (1,976,712)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (435,650) (791,196)
Acquisition of Lasiris (3,815,234) -
Net cash used in investing activities (4,250,884) (791,196)
CASH FLOWS FROM FINANCING ACTIVITIES:
Danvers Savings Bank Financing 750,000 -
Toronto Dominion Financing 798,675 -
Proceeds - Equipment Lease Financing 503,365 387,027
Advances/(Payments) of bank debt 349,627 1,311,593
Issuance of Common Stock 10,121 -
Private Placement of Common Stock 1,124,716 -
Receipt of Beverly Hospital note receivable 1,000,000 -
Net cash provided by financing activities 4,536,504 1,698,620
EFFECT OF EXCHANGE RATE ON CHANGES IN CASH (30,537) -
NET INCREASE/(DECREASE) IN CASH AND CASH 60,193 (1,069,288)
EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 73,520 1,244,418
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 133,713 $ 175,130
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
Cash paid for interest 308,924 299,229
Cash paid for taxes 7,961 26,592
</TABLE>
<PAGE>
PART 1. FINANCIAL STATEMENTS
Notes to Financial Statements
Note 1. General
The interim consolidated financial statements presented have been prepared
by Stocker & Yale, Inc. (the "Company") without audit and, in the opinion
of the management, reflect all adjustments of a normal recurring nature
necessary for a fair statement of (a) the results of operations for the
three month and nine month periods ended September 30,1998 and September
30,1997 (b) the financial position at September 30,1998 and (c ) the cash
flows for the nine month periods ended September 30,1998 and September
30,1997. Interim results are not necessarily indicative of results for a
full year.
The consolidated balance sheet presented as of December 31,1997 has been
derived from the consolidated financial statements that have been audited
by the Company's independent public accountants. The consolidated financial
statements and notes are condensed as permitted by Form 10-QSB and do not
contain certain information included in the annual financial statements
and notes of the Company. The consolidated financial statements and notes
included herein should be read in conjunction with the financial
statements and notes included in the Company's Annual Report on Form 10-KSB.
Note 2. Acquisition of Lasiris and Purchase Price Allocation
Overview
On May 13, 1998, the Company acquired Lasiris, Inc. ("Lasiris"), a Canadian
manufacturer of industrial lasers for the machine vision and industrial
inspection industries. The Company acquired Lasiris through Lasiris
Holdings, Inc., a newly formed New Brunswick corporation ("LHI") and a
subsidiary of the Company. Lasiris will be operated as a wholly-owned
Canadian subsidiary of LHI.
In connection with the acquisition, the stockholders of Lasiris received an
aggregate of approximately $3.2 million in cash and 444,146 shares of LHI's
capital stock which are exchangeable for shares of the Company's common
stock on a one for one basis. The Company financed the cash portion of the
consideration through (i) a private placement of 350,000 shares of the
Company's common stock at a price of $3.50 per share; (ii) a loan in the
amount of $750,000 from a bank which is secured by a second mortgage
interest in the Company's headquarters; (iii) a loan of approximately
$800,000 pursuant to a credit agreement between the Toronto Dominion Bank
and Lasiris; and (iv) cash in the amount of $950,000 received pursuant to
the prepayment of a note receivable due to the Company.
Allocation of Purchase Price
The acquisition was accounted for as a purchase, and accordingly, the
initial purchase price and acquisition costs aggregating approximately
$5.5 million have preliminarily been allocated to the assets acquired,
which consist of approximately $4.0 million in identifiable assets,
approximately $0.4 million in goodwill, and approximately $1.1 million of
in-process research and development which was charged to operations in the
second quarter of 1998. The purchase price allocations represent the fair
values determined by an independent appraisal.
The following outlines the allocation of purchase price for the acquisition
of Lasiris.
<TABLE>
<S> <C>
Purchased in-process research and
development $ 1,087,914
Developed Patented Technology 2,364,122
Trademarks/Tradenames 470,732
Assembled workforce 240,596
Goodwill and Deferred Taxes 1,669,530
---------
5,832,894
Net book value of assets acquired 944,686
---------
6,777,580
Less deferred taxes (1,230,180)
----------
5,547,400
</TABLE>
<PAGE>
In connection with the acquisition of Lasiris, the Company allocated $1.088
million of the purchase price to incomplete research and development
projects. This allocation represents the estimated fair value based on
risk-adjusted cash flows related to the incomplete products. At the date
of acquisition, the development of these projects had not reached
technological feasibility and the research and development in progress had
no alternative future uses. Accordingly, these costs were expensed as of
the acquisition date.
Lasiris' acquired research and development value is comprised of research
and development programs designed to significantly enhance the Company's
current product line, as well as to develop new laser products and
technologies. Management expects that the projects will be completed during
the period from the fourth quarter of 1998 through the end of the calendar
year 2000. At the acquisition date, programs ranged in completion from 10%
to 80%, and aggregate continuing research and development commitments to
complete the projects are expected to be approximately $1.5 million.
The acquired research and development represents developmental efforts
associated with the introduction of new and enhanced laser systems.
Remaining development activities for these programs included the research,
development and testing of advanced electronic, optical, and thermal
technologies. Expenditures to complete these projects are expected to
total approximately $400,000 in 1998, $500,000 in 1999, and $500,000 in
2000. These estimates are subject to change, given the uncertainties of
the development process, and no assurance can be given that deviations from
these estimates will not occur.
As evidenced by the continuation of these projects, management believes the
Company has a reasonable chance of successfully completing each of the major
research and development programs. However, there is substantial risk
associated with the completion of the projects and there is no assurance
that any will achieve either technological or commercial success. If none
of the research and development projects is successfully completed, the
sales and profitability of the combined company would be adversely affected
and the value of the research and development projects will not be realized.
Further information about the acquisition of Lasiris may be found in the
Company's Form 8-K, which was filed with the Securities and Exchange
Commission (the "SEC") on May 27, 1998, and amended on Form 8-K/A, filed
with the SEC on July 27, 1998.
Note 3. Proforma Financial Information
The following proforma financial information assumes that the acquisition
of Lasiris took place at the beginning of each respective period, including
the related expense adjustments.
<TABLE>
<S> <C> <C>
Nine month periods ended September 30,
1998 1997
Net Revenues $ 10,628,707 $ 11,183,754
Net Income (10,270,309) (682,115)
Earnings per Share $ (3.22) $ (0.23)
Average shares
outstanding 3,194,225 3,012,041
</TABLE>
Note 4. Write Down of Goodwill
In accordance with the provisions of Statement of Financial Standards
(SFAS) No. 121 - "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of", the Company periodically assesses
the realizability of its long-lived assets. In addition to this periodic
review, the Company is obliged to initiate such an assessment in the event
of a change in the Company's assets or in the valuation of its assets.
Based on its most recent assessment, the Company has recorded a non-recurring,
non-cash charge of $7.4 million during the three months ended June 30, 1998,
to write down the carrying value of its goodwill to its estimated fair value.
<PAGE>
On July 14, 1998, the Company announced that it had signed a non-binding
letter of intent to sell its Stilson Division ("Stilson"). As of June 30,
1998 the carrying value of the Stilson's net assets was $2.0 million plus a
portion of the goodwill recorded in 1989 when the Company, including Stilson,
was acquired. The proposed sale of Stilson required the Company to assess
the realizability of goodwill. There was no allocation of goodwill to the
individual divisions of the Company at the time of the acquisition in 1989.
Accordingly, management of the Company has evaluated the cash flow generated
by Stilson for the five years preceding and the five years following the
acquisition relative to the cash flow of the entire Company. Management has
also reviewed their expectations, at the time of the 1989 acquisition, of
the future cash flow of Stilson. Based on this assessment, management
allocated approximately 60% of the goodwill resulting from the 1989
acquisition to Stilson, $4.9 million net of amortization at June 30, 1998.
Therefore the net assets of Stilson at June 30, 1998 inclusive of goodwill
were approximately $6.9 million. The purchase price for the net assets of
Stilson set forth in the letter of intent was $3.0 million. Accordingly,
at June 30, 1998 the Company wrote down the carrying value of the net assets
of Stilson to $3.0 million and recorded a charge of $3.9 million which was
included in the goodwill impairment in the three-month period ended June 30,
1998. On November 9, 1998, the Company announced that the agreement, dated
July 14, 1998, for the proposed sale of the assets of its Stilson Division
to De-Sta-Co Industries had been terminated.
After allocating the portion of the goodwill associated with Stilson, the
Company assessed the realizability of the remaining goodwill from the 1989
acquisition, $3.5 million, net of amortization as of June 30, 1998. Based
upon the changes in the Company since 1989 and the recent history of losses,
the Company has concluded that the realizability of the remaining goodwill
is uncertain and that the carrying value should be written down to zero.
As a result of this assessment the Company recorded a charge of $3.5 million
which was included in the goodwill impairment in the three months ended
June 30, 1998 to write down the remaining goodwill from the 1989 acquisition
not allocated to Stilson.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND OPERATING RESULTS
This Quarterly Report on Form 10-QSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. The Company's actual results
could differ materially from those set forth in the forward-looking
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) compete for and obtain certain U.S.
Government contracts, (iv) address risks associated with the year 2000
problem or (v) obtain financing on favorable terms. In addition, general
economic conditions in the United States, Southeast Asia, and elsewhere may
affect the Company's results.
Results of Operations
The following discussion should be read in conjunction with the attached
consolidated financial statements and notes thereto and with the Company's
audited financial statements and notes thereto for the fiscal year ended
December 31, 1997.
Three-month periods ended September 30, 1998 and 1997
Consolidated net revenues increased 32% from $2,689,583 in the third quarter
of 1997 to $3,563,158 in the third quarter of 1998. Despite significantly
reduced sales to Southeast Asia, Lighting Products revenues increased 117%
from $1,041,169 to $2,257,888 due to the addition of $1,413,966 in laser
lighting revenues contributed by Lasiris and $66,354 in microscope lighting
revenues contributed by the Company's Singapore subsidiary. Government and
civilian sales of Military Products decreased $201,901 from $316,474 to
$114,573 reflecting the absence in 1998 of a large contract with a direct
mail marketing firm which favorably impacted 1997, the diminished peacetime
demand for military supplies, and the closing in December, 1997 of the
Company's Hong Kong subsidiary which sold Military Products to the civilian
market. Sales of Machine Tool Accessories decreased from $948,223 in the
third quarter of 1997, to $749,891 in the third quarter of 1998, due to a
slowdown in orders from distributors. Sales of Printer and Recorder Products
increased from $383,717 in the third quarter of 1997, to $440,806 in the
third quarter of 1998. Of the total net revenues reported for the three
month period ended September 30, 1998, Salem Division contributed 37%,
Stilson contributed 21%, Lasiris contributed 40%, and Radiant Asiatec Pte.,
Ltd. contributed 2%.
<PAGE>
Gross profit increased $515,555 from $806,902 in the third quarter of 1997 to
$1,322,457 in the third quarter of 1998, as the Company experienced the
positive effects of the acquisition of Lasiris, through increased revenues
and higher gross profit margins. Selling expenses decreased $41,744,
reflecting reduced commission expense on lower sales at the Stilson Division
and reduced costs of sales personnel in the Salem division. Research and
Development Expenses increased by $34,282 in 1998, which includes $83,042
in research and development expenses from Lasiris. General and
Administrative costs increased $214,371 from $635,895 in the third quarter
of 1997 to $850,266 in the third quarter of 1998. Of this increase,
$338,692 is attributable to expenses reported by the Company's new Singapore
subsidiary and Lasiris and associated corporate expenses, with the balance
due largely to increased personnel costs, legal expenses and bank charges.
Interest expense increased by $69,087 in the third quarter of 1998 as
compared to the third quarter of 1997, primarily as a result of the
Company's increased indebtedness.
Nine-month periods ending September 30, 1998 and 1997
Consolidated net revenues increased 10% from $8,227,525 in the third quarter
of 1997 to $9,058,439 in the third quarter of 1998. Despite significantly
reduced sales to Southeast Asia, Lighting Products revenues increased 65%
from $3,007,329 to $4,974,879 due to the addition of $2,093,461 in laser
lighting revenues contributed by Lasiris and $189,568 in microscope lighting
revenues contributed by the Company's Singapore subsidiary. Government and
civilian sales of Military Products decreased $827,784 from $1,149,038 to
$321,254 reflecting the absence in 1998 of a large contract with a direct
mail marketing firm which favorably impacted 1997, the diminished peacetime
demand for military supplies, and the closing in December, 1997 of the
Company's Hong Kong subsidiary which sold Military Products to the civilian
market. Sales of Machine Tool Accessories decreased from $2,944,940
in the third quarter of 1997, to $2,572,198 in the third quarter of 1998,
due to a slowdown in orders from distributors. Sales of Printer and Recorder
Products increased from $1,126,308 in the third quarter of 1997, to
$1,190,110 in the third quarter of 1998. Of the total net revenues reported
for the three month period ended September 30, 1998, Salem Division
contributed 47%, Stilson contributed 28%, Lasiris contributed 23%, and
Radiant Asiatec Pte., Ltd. contributed 2%.
Gross profit increased $178,810 from $3,087,961 in the first nine months of
1997 to $3,266,771 in the first nine months of 1998, as the Company
experienced the positive effects of the acquisition of Lasiris, through
increased revenues and higher gross profit margins. Selling expenses
decreased $115,575, reflecting reduced commission expense on lower sales at
the Stilson division and reduced costs of sales personnel in the Salem
division. Research and Development Expenses increased by $89,457 in 1998,
which includes of $120,468 of expenses from Lasiris. General and
Administrative costs increased $874,095 from $1,488,138 in the first nine
months of 1997 to $2,362,233 in the first nine months of 1998. Of this
increase, $703,812 is attributable to expenses reported by the Company's
new Singapore subsidiary and Lasiris and associated corporate expenses,
with the balance due largely to increased personnel costs, legal expenses
and bank charges. Interest expense increased $155,589 in 1998 as a result
of the Company's increased indebtedness.
In accordance with the provisions of Statement of Financial Standards (SFAS)
No. 121 - "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", the Company periodically assesses
the realizability of its long-lived assets. In addition to this periodic
review, the Company is obliged to initiate such an assessment in the event
of a change in the Company's assets or in the valuation of its assets.
On July 14, 1998, the Company announced that it had signed a non-binding
letter of intent to sell Stilson. As of June 30, 1998 the carrying value
of the Stilson's net assets was $2.0 million plus a portion of the goodwill
recorded in 1989 when the Company, including Stilson, was acquired. This
proposed sale of Stilson required the Company to assess the realizability of
goodwill. There was no allocation of goodwill to the individual divisions
of the Company at the time of the acquisition in 1989. Accordingly,
management of the Company has evaluated the cash flow generated by Stilson
for the five years preceding and the five years following the acquisition
relative to the cash flow of the entire Company. Management also reviewed
their expectations, at the time of the 1989 acquisition, of the future
cash flow of Stilson. Based on this assessment, management has allocated
approximately 60% of the goodwill resulting from the 1989 acquisition to
Stilson, $4.9 million net of amortization at June 30, 1998. Therefore the
net assets of Stilson at June 30, 1998 inclusive of goodwill was
approximately $6.9 million. The purchase price for the net assets of
Stilson set forth in the letter of intent was $3.0 million. Accordingly,
at June 30, 1998 the Company wrote down the carrying value of the net assets
of Stilson to $3.0 million and recorded a charge of $3.9 million which is
included in the goodwill impairment in the three-month period ended June 30,
1998. On November 9, 1998, the Company announced that the agreement, dated
July 14, 1998, for the proposed sale of the assets of its Stilson Division
to De-Sta-Co Industries had been terminated.
<PAGE>
After allocating the portion of the goodwill associated with Stilson, the
Company assessed the realizability of the remaining goodwill from the 1989
acquisition, $3.5 million, net of amortization as of June 30, 1998. Based
upon the changes in the Company since 1989 and the recent history of losses,
the Company concluded that the realizability of the remaining goodwill is
uncertain and that the carrying value should be written down to zero. As
a result of this assessment the Company recorded a charge of $3.5 million
which was included in the goodwill impairment in the three months ended
June 30, 1998 to write down the remaining goodwill from the 1989 acquisition
not allocated to Stilson.
Liquidity and Capital Resources
The Company finances its operations primarily through third party credit
facilities and cash from operations. Net cash used in operations was
$194,890 for the nine months ended September 30, 1998 and $ 1,976,712 for
the nine months ended September 30, 1997.
The Company's primary third party financing relationship is with Fleet
National Bank of Massachusetts, N.A. (the "Bank"). The initial Credit
Agreement between the Company and the Bank, dated March 6, 1995 (the "Credit
Agreement"), provided for a Revolving Line of Credit Loan (the "Revolving
Loan") and a Long Term Loan (the "Term Loan") both due March 31, 1998. As of
April 1, 1998, the Company and the Bank entered into an agreement to extend
the maturity dates of its Revolving Loan and Term, Loan to January 2, 1999.
The Revolving Loan and the Term Loan bear interest at the Bank's base rate
plus 2% from July 1, 1998 through the maturity date. The Company is
obligated to pay monthly extension fees of $10,000 payable on the last day
of each of October, November and December. At September 30, 1998 there was
a total of $2,959,031 borrowed under the Credit Agreement and availability
to borrow of $149,090 under the Revolving Loan. The Company is exploring
financing alternatives and intends to refinance before maturity.
Under the terms of the Credit Agreement, as amended, the Company is required
to comply with a quarterly minimum net income covenant. As of June 30, 1998,
the Company was not in compliance with this covenant, and on July 21, 1998,
the Bank granted a waiver of the net income covenant for the quarter ended
June 30, 1998. As of September 30, 1998 the Company was not in compliance
with this covenant, and on November 5, 1998 the Bank granted a waiver of
the net income covenant for the quarter ended September 30, 1998.
The Company has issued and outstanding Subordinated Notes in an original
principal amount of $1,350,000. These notes mature on May 1, 2001. They
bear interest at 7.25% and are convertible into shares of the Company's
common stock at a price of $7.375 per share.
In connection with the Lasiris acquisition, the stockholders of Lasiris
received cash in an aggregate amount of approximately $3.3 million and
444,146 shares of capital stock of LHI, which are exchangeable for shares of
the Company's common stock on a one for one basis. The aggregate value of
the shares was deemed to be $1,732,167 as of May 13, 1998. The Company
financed a portion of the cash consideration paid for Lasiris through a
private placement of 350,000 shares of the Company's common stock at a price
of $3.50 per share, which generated net proceeds to the Company of
$1,124,716, after offering expenses of $100,284.
On May 13, 1998, the Company entered into a $750,000 second mortgage loan
with Danvers Savings Bank (the "Danvers Loan"). This loan bears interest at
a rate of 11%, requires monthly payments of interest only, and matures on
May 13, 1999. The Danvers Loan generated net proceeds after expenses of
$731,196, which were used to finance a portion of the Lasiris acquisition.
The balance at September 30, 1998 is $746,796. The Company intends to
refinance this indebtedness prior to its maturity but can give no assurance
as to whether such indebtedness will be refinanced or as to the terms of such
refinancing.
<PAGE>
Also on May 13, 1998, Lasiris entered into a credit agreement with Toronto
Dominion Bank ("TD Bank"). The credit agreement provides for (i) a
$1,000,000 CDN Operating Line of Credit (the "TD Line of Credit"); (ii) a
$1,000,000 CDN Term Loan (the "TD Four Year Term Loan"); (iii) an $83,333
CDN Term Loan (the "TD Two Year Term Loan"); and (iv) a $4,461 CDN Letter of
Guarantee of (the "Letter of Guarantee"). The TD Line of Credit bears
interest at 1% over the TD Bank prime rate, requires monthly payments of
interest only, and is payable on demand. As of September 30, 1998,
borrowings on the TD Line of Credit were $515,000CDN ($345,050US). The TD
Four Year Term Loan bears interest at 2% over the TD Bank prime rate,
matures on May 13, 2002, and requires monthly principal payments of
$20,833CDN (approximately $14,500US) plus interest. As of September 30,
1998, the outstanding balance on the TD Four-Year Term Loan was $916,667CDN
($641,667 US). The TD Two Year Term Loan bears interest at 2% over the TD
Bank prime rate, matures on May 13, 2000, and requires monthly principal
payments of $4,167 CDN (approximately $2,900US) plus interest. As of
September 30, 1998, the outstanding balance on the TD Two-Year Term Loan
was $66,667CDN ($46,667 US).
On May 7, 1998, Beverly Hospital Corporation prepaid its $1,000,000 Note
Receivable due to the Company, less a $50,000 discount for early payment.
The proceeds were used to finance a portion of the Lasiris acquisition.
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%.
As of September 30, 1998, the Company had borrowed $331,656 against such line
of credit.
Accounts payable increased $1,116,285 from December 31, 1997 to September
30, 1998. Of this increase $698,902 resulted from the Lasiris acquisition
and the balance is attributable to increased payment cycles. Company
expenditures for capital equipment were $435,650 in the first nine months of
1998 as compared to $791,196 in the same period of 1997. The majority of
the 1997 expenditures related to the Company's new fiber optic product line.
The majority of the 1998 expenditures related to the purchase of new CNC
machinery at Stilson.
On July 14, 1998, the Company announced that it had signed a non-binding
letter of intent to sell Stilson to De-Sta-Co Industries. On November
9, 1998, the Company announced that the agreement, dated July 14, 1998, for
the proposed sale of the assets of its Stilson Division to De-Sta-Co
Industries had been terminated. As a result, the Company will have
increased general and administrative expenses incurred in the negotiation
and due diligence process and increased accounts payable attributable to
payment cycles which the Company lengthened in anticipation of the sale.
The Company contemplates that it may seek to raise additional capital by the
issuance of equity the proceeds of which may be used among other things in
connection with refinancing its senior credit facility. The Company's
existing Credit Agreement with the Bank will expire on January 1, 1999 by
its terms. While the Company is currently exploring establishing a
replacement credit facility with various commercial lenders, the Company can
give no assurance as to whether such a replacement credit facility will be
established or as to the terms of such credit facility. Assuming the
continued availability of the Company's Credit Agreement with the Bank or a
replacement credit facility, the Company believes that its available
financial resources are adequate to meet its foreseeable working capital,
debt service and capital expenditure requirements through the next twelve
months. If the Company is unable to refinance or extend its Credit Agreement
with the Bank prior to maturity, then it will be unable to repay such
indebtedness when due and the Bank may declare a default. Were a default to
be declared, the Company would not be able to continue to operate absent
alternative financing sources. The Company has been advised by its
independent public accountants that, if this contingency has not been
resolved prior to the completion of their audit of the Company's financial
statements for the year ending December 31, 1998, their auditors' report on
those financial statements will be modified for that contingency.
Foreign Currency Fluctuations
Historically, foreign currency fluctuations have had only a minor impact on
the Company's results of operations. In 1997 and 1996, such foreign currency
fluctuations were favorable and totaled $30,709 in 1997 and $13,103 in 1996.
The Company's direct exposure to foreign currency exchange fluctuations is
limited to contracts denominated in Swiss Franc. The Company has Swiss
Franc contracts to purchase watches at an agreed fixed cost and corresponding
contracts with the General Services Administration to sell those watches at
a fixed price. For 1997, the Company recorded favorable Swiss Franc currency
exchange rate fluctuations of $13,303. At December 31, 1997, the Company
had a total foreign currency liability of $273,148 Swiss Francs.
With the exception of these Swiss Franc contracts, the financial operations
of the Salem and Stilson Divisions are conducted in U.S. dollars. All sales
originated by United States operations, including those sales to foreign
customers, are denominated in U.S. dollars. Similarly, the financial
operations of each of the Company's subsidiaries are conducted in the local
currency (i.e., sales by Stocker & Yale Hong Kong, Ltd, were denominated in
Hong Kong dollars, and sales by Radiant Asiatec Pte Ltd. are denominated in
Singapore dollars.)
<PAGE>
Year 2000 Readiness
The statements in the following section include "Year 2000 readiness
disclosure" within the meaning of the Year 2000 Information and Readiness Act.
The Company has undertaken a plan to address the potential impact to its
business of "Year 2000 issues" (i.e., issues that may arise as a result of
computer programs that use only the last two, rather than all four, digits of
the year). The plan addresses Internal Matters, which are under the
Company's operation and over which the Company exercises some control, and
External Matters, which are outside the Company's control and influence. The
Company has elected first to address Internal Matters, in the belief that
most other companies and institutions are similarly working to resolve their
own mission-critical issues and that as a result an early assessment of
External Matters would be premature.
Internal Matters
Review of Internal Matters is the first phase of the Company's Year 2000
Compliance Program and is broken down into five categories; each are
identified and addressed separately below.
1) Mission Critical Hardware, Operating System, and associated Equipment
such as Terminals and Printers.
The Company utilizes an IBM AS/400 hardware platform to support its mission
critical software. The hardware, operating system, and related software
components were upgraded to a RISC-based architecture with operating system
version 3.7 in 1997. All hardware and software listed above have been
represented to be Year 2000 Compliant by IBM.
All associated peripherals including terminals, printers, and modems have
been confirmed compliant by suppliers with the exception of 5 terminals which
will be eliminated or replaced at an approximate cost of $2,000 or less.
2) Mission Critical Software
The Company's primary information systems software have been reviewed and
have been, or will be, upgraded as follows:
a) Integrated Manufacturing Software, MACPAC written by Andersen Consulting
and supported by The Development Center,
Inc.
MACPAC was upgraded in 1997 so that it would function with the Company's
upgraded computer system hardware. The cost for the new software was
approximately $80,000. The company completed installation of MACPAC Year
2000 compliant Version 10.2 in March of 1998. This software is represented
by Andersen Consulting to be Year 2000 compliant.
b) Payroll Software, MAPICS supported by MARCAM
The MAPICS Payroll software was upgraded to the Year 2000 Compliant Version
DB Mod 4, PTF 4000 in November, 1997. This software is represented by
Marcam to be Year 2000 compliant.
c) Marketing Sales Management (MSM) Software supported by IMA
The Year 2000 compliant version of MSM became available in November, 1998.
The Company plans to install this Year 2000 Compliant Version 6.5A prior to
March, 1999. This software is represented by IMA to be Year 2000 compliant.
3. Personal Computer Hardware and Software
The Company also utilizes a number of personal computers which are operated
independently (i.e., not linked by a network). These computers use a wide
variety of different software packages and are of various ages. The Company
has compiled an inventory of these personal computers, their hardware, as
well as their operating systems and installed application software packages.
This information will be assessed initially to determine if suppliers
represent that they are Year 2000 compliant. The Company estimates that it
has completed approximately 85% of this assessment (preliminary results
indicate compliance for the majority, with minor issues relating to Windows
95). Following the assessment phase, the Company will undertake to upgrade
and replace software and, if necessary, replace personal computers so that
all equipment and software is represented compliant by the providers. The
Company estimates that the cost for such upgrades and replacements will not
exceed $30,000.
Subsequent phases will include obtaining written certification of Year 2000
testing by providers followed by our own in-house Year 2000 tests.
The Company intends to fund Year 2000 upgrades and changes through operating
cash flow and indebtedness. Software upgrades related to Year 2000 are
captured as part of the individual software's annual upgrade charge; hardware
upgrades are budgeted at $30,000.
<PAGE>
4. The Products and Product Components manufactured by the Company
Comprehensive review and testing has been completed for all of the Company's
products. As a part of this process, our engineers have compiled a Product
Compliance Listing (List) to inform customers regarding "year 2000 compliance
readiness" of products manufactured by the Company. A copy of the List is
available from the Company upon request and will be listed on the Company
Web Site at www.stkr.com. The listing denotes those products that are "Year
2000 Compliant", those that are not affected by "Year 2000 Compliance", and
those that do not meet the definition "Year 2000 Compliant" set forth below.
Year 2000 Compliant: The Company's products identified on the List as
"Compliant" will be able to accurately process date (including leap year);
provided that, at the commencement of the Year 2000; (1) the products were
functioning normally as specified in their operator's manuals; (2) the
products have been used and will continue to be used in accordance with the
terms of the limited warranty and operator's manual given with the products
at the time of original purchase, regardless of whether this warranty has
expired; and (3) any products which are connected or integrated to the
products listed on the List are also Year 2000 Compliant.
Not Applicable: Certain of the Company's products indicated on the List do
not have a date function and, therefore, do not present any Year 2000
readiness issues. These products are identified by the phrase "Not
Applicable" on the List.
Non-Compliant: Company products which have a date function and which do not
meet the definition of Year 2000 Compliant set forth above are identified as
"Non-Compliant" on the List.
A letter will soon be provided along with the List as a convenience for our
customers. The information in this letter will be subject to, and will not
supplement, extend or modify any agreement between Stocker & Yale and the
customer relating to the applicable product, including the period, terms,
conditions or scope of any warranty given with respect to the Products at
the time of original purchase. Stocker & Yale makes no representation or
warranty as to, and will not address, the Year 2000 readiness of any
hardware, firmware, software (such as any BIOS or operating system), services
protocols, data, interfaces to third party systems, or user customized
functions or features that may be used with Stocker & Yale software other
than those Company products listed on the List. The Company has
manufactured, distributed and sold products which are not listed on the
List, and such products have not been tested by the Company for Year 2000
compliance. The Company does not plan to test any products other than those
listed on the List and will not provide Year 2000 support for any products
other than those identified on the list. The information contained on the
List is based on data available to Stocker & Yale at the time of its
preparation.
From time to time, the information in the List may be changed by Stocker &
Yale without notice to the customer. Therefore, please contact the Company
for further updates and confirm Year 2000 readiness of the products in your
own environment. The information contained in the List is provided "as is",
without warranties or guarantees of any kind.
As a result of the product review and testing process, it has been
determined that Year 2000 compliance exposure is limited to certain older
model Printer products that incorporate date functionality which does not
interfere with normal operation of the printers. Those printers will not
be made Year 2000 Compliant. However, this will not preclude the customer(s)
from utilizing the product. Surveys of the primary customers indicated that
they are not using the date functionality. Therefore, management believes
the risk of potential impact to revenue to be less than $25,000 per year,
and that the current customer base will probably continue to purchase the
product(s) regardless of the Non-Compliant designation.
<PAGE>
5. Ancillary systems such as test equipment, communications equipment and
security systems
The Company's ancillary systems are largely provided by third parties, most
of which have not yet completed their own assessments of Year 2000 exposure.
The Company will continue to solicit such information from these third
parties. Due to the incompleteness of this information, contingency plans
have not yet been finalized. The following is a list of known Year 2000
issues:
Stilson Division Telephone System $3,000 to Upgrade for Year 2000
Compliance
Stocker & Yale Telephone System Manual Clock Date Set Required
The Company estimates that it has completed approximately 60% of its year
2000 Plan regarding Internal Matters. The Internal Matter review process
is planned for completion by the end of the first quarter 1999.
External Matters
The Company is about to commence review of External Matters which are outside
the Company's control and influence. This process will be comprised of a
review and assessment of the customer and supplier relationships that could
have a potential material impact upon the Company and its ongoing operations
by means of analysis of response to questionnaires sent to these parties.
As a result of the preliminary nature of the Company's review of External
Matters, a contingency plan has not yet been developed and there can be no
assurance that Year 2000 problems resulting from customer or supplier
relationships will not have a material adverse impact on the Company. The
Company anticipates completion of this process by the first half of 1999.
The Company estimates that it has completed approximately 27% of its overall
Year 2000 plan. Although the Company believes that it has an effective plan
in place that will resolve any Year 2000 issues in a timely manner, the
Company may be adversely impacted by Year 2000 issues if its proposed
updates, modifications or replacements are not completed on schedule. In
the event that third parties do not complete the necessary remediation, the
Company could be subject to interruption of its normal business activities,
including its ability to take customer orders, manufacture and ship products,
invoice customers, collect payments or engage in similar business activities.
Such an event could result in a material adverse effect on the Company's
revenues or in litigation surrounding such business interruptions. In
addition, disruptions in the economy generally resulting from the Year 2000
issue could materially adversely affect the Company. The amount of potential
liability and revenues cannot reasonably be estimated at this time.
<PAGE>
PART II
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
10.1 (p) Waiver of Certain Provisions of the Credit Agreement
dated November 5, 1998. *
27.1 Financial Data Schedule
(b) The Company's Form 8-K (as amended by 8-K/A) relating to the acquisition
of Lasiris, Inc. was filed with the Securities and Exchange Commission on May
27, 1998.
* Filed Herewith
<PAGE>
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.
Stocker & Yale, Inc.
November 16, 1998 /s/ Mark W. Blodgett
Mark W. Blodgett, Chairman and Chief Executive Officer
November 16, 1998 /s/ Susan A.H. Sundell
Susan A.H. Sundell, Senior Vice President-Finance and
Treasurer
<PAGE>
10.1(p)
Fleet Bank
Andrew J. Maidman
Vice President
Managed Assets Division
Fleet Corporate Administration
Mail Stop: CT MO IT21A
777 Main Street
Hartford, CT 06115
Tel: (860) 986-4572
Fax: (860) 986-2435
November 5, 1998
Stocker & Yale, Inc. (the "Company")
32 Hampshire Road
Salem, NH 03079
Attn: Mark W. Blodgett
RE: Credit Arrangement with Fleet Bank
Dear Mr. Blodgett:
Reference is hereby made to that certain Credit Agreement, dated as of
March 6, 1995 (the "Credit Agreement") by the Company in favor of Fleet
National Bank, as successor to Shawmut Bank, N.A. (collectively, the "Bank"),
as amended by that certain Modification and Extension Agreement, dated as of
April 1, 1998 (the "Modification Agreement"), between the Company and the
Bank.
1. The Company has requested that the Bank agree to waive compliance with
Sections 10(A) and 10(B) of the Modification Agreement for the quarter
ending September 30, 1998. Subject to terms of this letter and the Company's
acknowledgment below indicating the Company's agreement with such terms, and
the satisfaction of the following conditions, the Bank agrees to waive
compliance with Section 10(A) and 10(B) of the Modification Agreement but
only for the quarter ending September 30, 1998, and only to the extent the
Company's aggregate pre-tax losses for such quarter do not exceed $600,000:
A) payment of $25,000 to the Bank upon execution and delivery of this letter
agreement as a waiver fee which shall be in addition to all amounts due,
owing and payable pursuant to the Credit Agreement and shall not be applied
to any amounts currently outstanding.
B) reimbursement to the Bank for the Bank's legal expenses in connection
with the preparation of this letter agreement and other documents
contemplated herein.
By execution of this letter agreement the Company and the undersigned
Guarantor hereby acknowledge and confirm that they do not have any offsets,
defenses or claims against the Bank, its parents, subsidiaries, affiliates,
or any officers, agents, directors or employees whether asserted or
unasserted. To the extent that they may have such offsets, defenses, or
claims, the Company, the Undersigned Guarantor and their respective
successors, assigns, predecessors, employees, agents, heirs, executors, as
applicable release and forever discharge Bank, its parents, subsidiaries,
affiliates, and officers, directors, employees, agents, attorneys, successors
and assigns, both present and former (collectively the "Bank Affiliates")
of and from any and all manner of action and actions, cause and causes of
action, suits, debts, controversies, damages, judgments, executions, claims
and demands whatsoever, asserted or unasserted, in law or in equity which
against Bank and/or Bank Affiliates they ever had, now have or which any of
Company's or such Guarantor's successors, assigns, parents, subsidiaries,
affiliates, predecessors, employees, agents, heirs, executors, as applicable
both present and former ever had or now have, upon or by reason of any
manner, cause, causes or thing whatsoever, including, without limitation,
any presently existing claim or defense whether or not presently suspected,
contemplated or anticipated.
By execution of this letter agreement and except as otherwise modified or
agreed herein, the Company and the undersigned Guarantor (i) hereby affirm
and ratify all of these terms, covenants, provisions, conditions, agreements,
warranties and representations contained in the Credit Agreement and
Modification Agreement and all loan documents executed in connection
therewith; (ii) hereby agree to make all payments due and payable and to
perform all of their respective obligations pursuant to the Credit Agreement
and Modification Agreement and the related loan documents and this letter
agreement; (iii) hereby agree to indemnify and hold the Bank harmless from
any costs, expenses, claims, losses as a result of the agreements contained
herein; (iv) hereby agree that in addition to the events of default specified
in the Credit Agreement and Modification Agreement, the Company's failure to
comply with its obligations respecting this letter agreement shall constitute
an event of default under the Credit Agreement and Modification Agreement;
(v) hereby agree that the Credit Agreement and Modification Agreement and
this letter agreement are fully enforceable against them and, except as
modified hereby, the Credit Agreement and Modification Agreement and all
loan documents delivered in connection with either the Credit Agreement or
Modification Agreement remain in full force and effect. (vi) hereby confirm
that all collateral granted to or assigned to the Bank with respect to the
loans covered by the Credit Agreement and Modification Agreement continues
to secure the payment, performance and observance of all liabilities,
obligations and covenants on the Company's part and/or the Guarantor's part
to be performed or observed pursuant to the Credit Agreement and Modification
Agreement and this letter agreement; (vii) hereby represent and warrant that
no event has occurred which is, or with the passage of time or with the
giving of notice or both would be an event of default under the Credit
Agreement and Modification Agreement except as expressly contemplated as the
subject of a consent and waiver, and as affected by, this letter agreement;
and (viii) hereby agree that the Bank has no obligation to extend further
credit to the Company under the Credit Agreement and Modification Agreement
of this letter agreement.
Please contact the undersigned for final payoff information for the term
loan as well as wiring instructions. In addition please provide the
undersigned with a detailed schedule of firms assets of the Stilson division
which are being sold, so that we can prepare necessary releases and
discharges.
If the foregoing is acceptable to you, please acknowledge your acceptance by
signing the space provided below.
Very Truly Yours,
Fleet National Bank
/s/ Andrew J. Maidman
Andrew J. Maidman, Vice President
Agreed and Accepted:
Stocker & Yale, Inc.
/s/ Mark W. Blodgett
Mark W. Blodgett, Chairman and Chief Executive Officer
Acknowledgment by Guarantor
/s/ Mark W. Blodgett
Mark W. Blodgett, individually
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<PERIOD-END> SEP-30-1998
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<RECEIVABLES> 2,331,401
<ALLOWANCES> (245,709)
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<TOTAL-LIABILITY-AND-EQUITY> 18,857,934
<SALES> 9,058,439
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<CGS> 5,791,668
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