<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM 10-KSB/A
ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER: 0-5460
------------------------
STOCKER & YALE, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C>
MASSACHUSETTS 04-2114473
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
<TABLE>
<S> <C>
32 HAMPSHIRE ROAD 03079
SALEM, NEW HAMPSHIRE (Zip Code)
(Address of principal
executive offices)
</TABLE>
(603) 893-8778
(Issuer's telephone number)
------------------------
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT: COMMON STOCK, $0.001 PAR
VALUE
(Title of class)
------------------------
Check whether 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 such shorter
period that the registrant was required to file such reports), and (2) has been
subject to filing such requirements for the past 90 days. Yes _X_ No ____
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of Form 10-KSB. / /
The registrant's revenues for the fiscal year ended December 31, 1998 were
$12,585,322.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 31, 1999 was $2,561,857 based on the price per share of
such stock reported at closing on the Nasdaq SmallCap Market on that date.
As of March 31, 1999 there were 3,679,448.6 shares of the issuer's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement (the "Proxy Statement") for the
Special Meeting in Lieu of an Annual Meeting of Shareholders to be held on May
20, 1999, to be filed with Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended, which is anticipated to be filed
within 120 days after the Registrant's fiscal year ended December 31, 1998, are
incorporated by reference into Items, 9, 10, 11 and 12 of Part III.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The information required by Item 7 is presented on pages 18 through 39 of this
Form 10-KSB. The index to the Company's Financial Statements is set forth below:
<TABLE>
<CAPTION>
PAGE(S)
-----------
<S> <C>
Report of Independent Public Accountants................................................................. 2
Consolidated Balance Sheets as of December 31, 1998 and 1997............................................. 3
Consolidated Statements of Operations for the Years Ended December 31, 1998 and 1997..................... 4
Consolidated Statements of Stockholder's Investment for the Years Ended December 31, 1998 and 1997....... 5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 and 1997..................... 6
Notes to Consolidated Financial Statements............................................................... 7-22
</TABLE>
1
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997
TOGETHER WITH AUDITORS' REPORT
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Directors and Stockholders of
Stocker & Yale, Inc.:
We have audited the accompanying consolidated balance sheets of Stocker &
Yale, Inc. (a Massachusetts corporation) and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' investment and cash flows for the years then ended. 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 generally accepted auditing
standards. 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 Stocker &
Yale, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
April 7, 1999
2
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
<S> <C> <C>
1998 1997
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents........................................................ $ 85,854 $ 73,520
Marketable Securities............................................................ 86,407 --
Trade receivables, less reserves of approximately $209,000 in 1998 and $187,000
in 1997........................................................................ 2,131,472 1,860,624
Prepaid income taxes............................................................. 373,039 579,332
Inventories...................................................................... 6,260,779 4,957,095
Prepaid expenses................................................................. 276,565 117,354
------------- -------------
Total current assets......................................................... 9,214,116 7,587,925
------------- -------------
Property, Plant and Equipment, net................................................. 4,340,654 3,857,504
------------- -------------
Note Receivable.................................................................... -- 1,000,000
------------- -------------
Goodwill, net of accumulated amortization.......................................... 2,470,796 8,453,000
------------- -------------
Identified intangible assets....................................................... 2,902,675 39,776
------------- -------------
Cash Value Life Insurance.......................................................... 52,546 52,546
------------- -------------
$ 18,980,787 $ 20,990,751
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current portion of long-term debt................................................ $ 4,420,085 $ 443,334
Accounts payable................................................................. 3,134,933 1,858,936
Accrued expenses................................................................. 756,970 541,668
Short-term lease obligation...................................................... 224,046 89,771
------------- -------------
Total current liabilities.................................................... 8,536,034 2,933,709
------------- -------------
Long-Term Debt and Capital Lease Obligations....................................... 3,691,140 5,383,233
------------- -------------
Other Long-Term Liabilities........................................................ 564,688 564,688
------------- -------------
Deferred Income Taxes.............................................................. 1,501,925 876,904
------------- -------------
Commitments and Contingencies
Stockholders' Investment:
Common stock, par value $0.001--
Authorized--10,000,000 shares at December 31, 1998 and 1997
Issued and outstanding--3,679,448 and 2,567,894 shares at December 31, 1998 and
1997, respectively........................................................... 3,679 2,568
Paid-in capital.................................................................... 14,224,841 10,822,705
Accumulated Other Comprehensive Income............................................. 57,432 --
Retained earnings.................................................................. (9,598,952) 406,944
------------- -------------
Total stockholders' investment............................................... 4,687,000 11,232,217
------------- -------------
$ 18,980,787 $ 20,990,751
------------- -------------
------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
<S> <C> <C>
1998 1997
-------------- -------------
Net Sales.......................................................................... $ 12,585,322 $ 11,162,026
Cost of Sales...................................................................... 7,440,743 6,898,970
-------------- -------------
Gross profit..................................................................... 5,144,579 4,263,056
Selling Expenses................................................................... 1,925,361 2,040,637
General and Administrative Expenses................................................ 3,329,995 2,140,403
Acquired in Process R&D............................................................ 1,087,914 --
Goodwill Impairment................................................................ 7,365,662 --
Research and Development........................................................... 971,378 725,539
-------------- -------------
Operating loss................................................................... (9,535,731) (643,523)
Interest Expense................................................................... 601,031 388,337
-------------- -------------
Loss before income tax benefit................................................... (10,136,762) (1,031,860)
Income Tax Benefit................................................................. (130,866) (305,000)
-------------- -------------
Net loss......................................................................... $ (10,005,896) $ (726,860)
-------------- -------------
-------------- -------------
Loss per Share--Basic and diluted.................................................. $ (3.25) $ (0.28)
-------------- -------------
-------------- -------------
Weighted Average Common Shares--Basic and diluted.................................. 3,078,674 2,567,894
-------------- -------------
-------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------------- PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL INCOME/(LOSS) EARNINGS INVESTMENT
---------- --------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996............ 2,567,894 $ 2,568 $ 10,822,705 $ -- $ 1,133,804 $ 11,959,077
Net loss.......................... -- -- -- -- (726,860) (726,860)
---------- --------- ------------- -------------- ------------- -------------
Balance, December 31, 1997............ 2,567,894 $ 2,568 $ 10,822,705 $ -- $ 406,944 $ 11,232,217
Issuance of common stock to
employee........................ 100,908 101 107,744 107,845
Issuance of common stock for
acquisition of Lasiris.......... 444,146 444 1,731,723 1,732,167
Sale of common stock, including
options exercised, net of
issuance cost................... 566,500 566 1,562,669 1,563,235
Comprehensive income:
Net loss.......................... -- -- -- (10,005,896) (10,005,896)
Unrealized gain on investment..... 86,407 86,407
Cumulative translation
adjustment...................... -- -- -- (28,975) -- (28,975)
---------- --------- ------------- -------------- ------------- -------------
Balance, December 31, 1998............ 3,679,448 $ 3,679 $ 14,224,841 $ 57,432 $ (9,598,952) $ 4,687,000
---------- --------- ------------- -------------- ------------- -------------
---------- --------- ------------- -------------- ------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
5
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
<S> <C> <C>
1998 1997
------------ ---------
Cash Flows from Operating Activities:
Net loss.............................................................................. ($10,005,896) $(726,860)
Adjustments to reconcile net loss to net cash used in operating activities--
Acquired in Process Research and Development........................................ 1,087,914 --
Goodwill Impairment................................................................. 7,365,662 --
Issuance of common stock to employee................................................ 107,845 --
Depreciation and amortization....................................................... 848,463 676,258
Deferred income taxes............................................................... (629,011) (305,000)
Other changes in assets and liabilities--
Accounts receivable, net.......................................................... 403,396 (449,850)
Inventories....................................................................... (500,072) (1,256,076)
Prepaid expenses.................................................................. (150,832) 14,124
Prepaid taxes..................................................................... 331,198 --
Accounts payable.................................................................. 742,884 485,815
Accrued expenses.................................................................. 92,441 (5,986)
Cash value of life insurance...................................................... -- (52,546)
Other............................................................................. -- (26,492)
------------ ---------
Net cash used in operating activities......................................... (306,008) (1,646,613)
------------ ---------
Cash Flows Used for Investing Activities:
Purchases of property, plant and equipment............................................ (636,170) (882,540)
Acquisition of Lasiris................................................................ (3,815,234) --
------------ ---------
Net cash used in investing activities......................................... (4,451,404) (882,540)
------------ ---------
Cash Flows from Financing Activities:
Danvers Savings Bank financing........................................................ 750,000 --
Toronto Dominion financing............................................................ 798,675 --
Equipment lease financing............................................................. 377,573
Proceeds from bank debt............................................................... 309,238
Payments of bank debt................................................................. (227,466)
Proceeds from bank debt and equipment loans........................................... 1,611,678
Payments on capital lease............................................................. (25,957)
Issuance of common stock, including options exercised................................. 1,563,235 --
Receipt of Beverly Hospital note receivable........................................... 1,000,000 --
------------ ---------
Net cash provided by financing activities..................................... 4,798,721 1,358,255
------------ ---------
Effect of Exchange Rate on Changes in Cash.............................................. (28,975) --
Net (Decrease) Increase in Cash and Cash Equivalents.................................... 12,334 (1,170,898)
Cash and Cash Equivalents, beginning of year............................................ 73,520 1,244,418
------------ ---------
Cash and Cash Equivalents, end of year.................................................. $ 85,854 $ 73,520
------------ ---------
------------ ---------
Supplemental Disclosure of Cash Flow Information:
Interest paid......................................................................... $ 597,343 $ 426,409
------------ ---------
------------ ---------
Taxes paid............................................................................ $ -- $ 67,492
------------ ---------
------------ ---------
Supplemental Disclosure of Noncash Financing Activities:
Capital lease obligations incurred for new equipment.................................. $ -- $ 153,008
------------ ---------
------------ ---------
Shares of common stock issued in connection with Lasiris acquisition.................. 444,146 --
------------ ---------
------------ ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
6
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(1) ORGANIZATION AND OPERATIONS
On June 14, 1989, Stocker & Yale, Inc. (the Company) was acquired by S&Y
Acquisition Corp., a privately held corporation. The Company was merged with and
into S&Y Acquisition Corp., with the Company being the surviving corporation.
S&Y Acquisition Corp. financed the acquisition through the issuance of its
common stock, borrowings under a revolving line of credit, issuance of
subordinated notes payable and cash of the Company.
The Company, incorporated in 1951, designs, manufactures, assembles and
markets a diversified line of products. In its Salem, New Hampshire, facility,
the Company manufactures a variety of optical and measuring instruments,
including microscope illuminators, magnifiers and machine vision lighting
systems, machine tool projectors and tool analyzers, land navigation compasses
and military-type mechanical watches. The Company sells its compasses and
watches to a wide variety of customers including the U.S. Government. Under the
MFE brand name, the Company manufactures a broad range of oscillographic
recorders and thermal printers. These products are produced for both the
original equipment manufacturer and end-user markets, and are used in diverse
applications including medical, laboratory, general industrial and commercial
applications. In 1996, the Company expanded its product line by developing and
marketing fiber-optic lighting products.
The Company's Stilson and Die-Draulics Division manufactures a wide range of
machine tool components, material handling accessories and pressure control
systems at its facility in Fraser, Michigan. These products are sold to the
automotive, electronic, food, pharmaceutical and appliance industries.
Stocker & Yale Hong Kong Limited was formed in March 1995 as a 95%-owned
subsidiary of the Company. This entity was formed to facilitate distribution of
watches and compasses in Southeast Asia. The Company is presently in the process
of ceasing the operations of this subsidiary. The operations of this entity are
consolidated into the accompanying consolidated financial statements.
Radiant Asiatec Pte. Ltd. (Radiant) was established in December 1997 as an
80% owned Singapore-based distribution company. Radiant sells industrial
microscopes, imaging application software, production accessories and lighting
systems manufactured by the Company. The operations of this entity are
consolidated into the accompanying consolidated financial statements.
(2) ACQUISITION OF LASIRIS
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 is 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.
7
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(2) ACQUISITION OF LASIRIS (Continued)
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 been allocated to the assets acquired, which consist of
approximately $4.0 million in identifiable assets, approximately $1.7 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 Company has assigned a ten year life for the identified
intangible assets and the goodwill.
The following outlines the allocation of purchase price for the acquisition
of Lasiris.
<TABLE>
<S> <C>
Purchased in-process research and development................................... $1,088,000
Developed Patented Technology................................................... 2,364,000
Trademarks/Tradenames........................................................... 471,000
Assembled workforce............................................................. 241,000
Goodwill........................................................................ 1,669,000
----------
5,833,000
Net book value of assets acquired............................................... 944,000
----------
6,777,000
Less deferred taxes............................................................. (1,230,000)
----------
5,547,000
</TABLE>
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 projects. 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 at the date of acquisition. 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 $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.
8
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(2) ACQUISITION OF LASIRIS (Continued)
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
completed successfully, 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.
The following unaudited, proforma financial information assumes that the
acquisition of Lasiris took place at the beginning of each respective period.
<TABLE>
<CAPTION>
UNAUDITED
YEAR ENDED DECEMBER 31,
----------------------------
<S> <C> <C>
1998 1997
------------- -------------
Net Revenues....................................................................... $ 14,155,590 $ 15,309,392
Net Income......................................................................... (10,213,921) (721,117)
Earnings per Share................................................................. $ (3.15) $ (0.24)
Average shares outstanding......................................................... 3,239,296 3,012,041
</TABLE>
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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. Operating results in the future could vary from the amounts derived
from management's estimates and assumptions.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries, Stocker & Yale Foreign Sales Corp., Stocker &
Yale Hong Kong Limited, Radiant Asiatec Pte. Ltd., and Lasiris Holdings, Inc.
All significant intercompany balances and transactions have been eliminated.
REVENUE RECOGNITION
The Company recognizes revenue as products are shipped.
PROPERTY, PLANT AND EQUIPMENT
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. Rates used to compute depreciation
are based on the following estimated useful lives:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
ASSET CLASSIFICATION LIFE
- -------------------------------------------------------------------------------------------- --------------------
<S> <C>
Building and building improvements.......................................................... 10 to 40 years
Machinery and equipment..................................................................... 5 to 10 years
Furniture and fixtures...................................................................... 3 to 10 years
</TABLE>
9
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property, plant and equipment, net, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------
<S> <C> <C> <C>
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
------------ ------------ ------------
Land................................................ $ 483,989 $ -- $ 483,989
Building and building improvements.................. 2,693,176 443,318 2,249,858
Machinery and equipment............................. 5,235,700 4,174,502 1,061,198
Furniture and fixtures.............................. 1,181,458 635,849 545,609
------------ ------------ ------------
$ 9,594,323 $ 5,253,669 $ 4,340,654
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------
<S> <C> <C> <C>
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
------------ ------------ ------------
Land................................................ $ 446,300 $ -- $ 446,300
Building and building improvements.................. 2,670,191 379,879 2,290,312
Machinery and equipment............................. 4,676,554 4,031,048 645,506
Furniture and fixtures.............................. 974,283 498,897 475,386
------------ ------------ ------------
$ 8,767,328 $ 4,909,824 $ 3,857,504
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Total depreciation of property, plant and equipment amounted to
approximately $500,000 and $312,000 for the periods ended December 31, 1998 and
1997, respectively.
GOODWILL AND OTHER INTANGIBLE ASSETS
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 year ended December 31, 1998, to write down the carrying value of its
goodwill to its estimated fair value.
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 excluding 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
10
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
$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 that is included in the goodwill impairment
for the year ended December 31, 1998. In addition, the Company has reduced the
amortization of the remaining goodwill allocated from Stilson from forty years
to ten years. 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. Despite the termination of the
agreement to sell Stilson to De-Sta-Co, the Company believes that the letter of
intent is the most reliable evidence of the fair market value of Stilson and
that no further adjustment to the carrying value of the Stilson goodwill is
appropriate at this time.
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. 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 an additional charge of $3.5 million which was included in
the goodwill impairment in the year ended December 31, 1998.
Rates used to compute amortization are based on the following estimated
useful lives:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
- ---------------------------------------------- ----------------------------------------------
<S> <C>
Goodwill...................................... 10 years
Identifiable intangibles...................... 10 years
Debt issuance costs........................... Life of loan
</TABLE>
Intangibles consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------
<S> <C> <C> <C>
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
------------- ------------ ------------
Goodwill.......................................... $ 12,418,530 $9,947,734 $ 2,470,796
Debt issuance costs............................... 334,857 316,657 18,200
Other identified intangibles...................... 3,075,450 190,975 2,884,475
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------
<S> <C> <C> <C>
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
------------- ------------ ------------
Goodwill.......................................... $ 10,749,000 $2,296,000 $ 8,453,000
Debt issuance costs............................... 316,053 276,277 39,776
</TABLE>
Amortization of goodwill and other intangibles, exclusive of the writeoff of
approximately $7,366,000, was approximately $477,000 for the year ended December
31, 1998 and approximately $268,800 for the year ended December 31, 1997.
11
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Financing costs related to certain loans have been capitalized and are being
amortized over the life of the related loans. Amortization expense related to
financing cost was approximately $40,380 and $98,714 for the years ended
December 31, 1998 and 1997, respectively.
INCOME TAXES
The Company accounts for income taxes under the asset and 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 enacted tax rates in effect for the year in
which the differences are expected to reverse.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market and include materials, labor and overhead.
EARNINGS PER SHARE
In 1997, the Company adopted the provisions of SFAS No. 128, EARNINGS PER
SHARE. This statement was issued by the FASB in March 1997 and establishes the
standards for computing and presenting earnings per share (EPS) and applies to
entities with publicly held common stock or potential common stock. This
statement replaces the presentation of primary EPS with a presentation of basic
EPS. It also requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures and
requires a reconciliation of the numerators and denominators for the basic and
diluted EPS computations for all prior-period EPS data presented. The Company
has reported a net loss for the years ended December 31, 1998 and 1997.
Accordingly, all options and warrants have been excluded from diluted earnings
per share as they would be antidilutive.
CASH AND CASH EQUIVALENTS AND FINANCIAL INSTRUMENTS
For purposes of the consolidated statements of cash flows, cash and cash
equivalents consist of highly liquid investments with original maturities of
three months or less.
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.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist mainly of cash and cash
equivalents, accounts receivable, 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, 1998.
12
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECLASSIFICATION
Certain amounts reported for prior periods have been reclassified to be
consistent with the current period presentation.
(4) INCOME TAXES
The components of the income tax (benefit) are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
<S> <C> <C>
1998 1997
----------- -----------
Current--
Federal............................................................. $ (283,000) $ --
State............................................................... (88,000) --
Foreign............................................................. 68,000 --
----------- -----------
(303,000) --
----------- -----------
Deferred--
Federal............................................................. 146,000 (234,850)
State............................................................... 26,000 (70,150)
Foreign............................................................. -- --
----------- -----------
172,000 (305,000)
----------- -----------
$ (131,000) $ (305,000)
----------- -----------
----------- -----------
</TABLE>
The following is a reconciliation of the federal income tax (benefit)
calculated at the statutory rate of 34% to the recorded amount:
<TABLE>
<CAPTION>
FOR THE YEARS
--------------------------
<S> <C> <C>
ENDED DECEMBER 31,
--------------------------
<CAPTION>
1998 1997
------------- -----------
<S> <C> <C>
Applicable statutory federal income tax benefit....................................... $ (3,447,000) $ (350,834)
State income taxes, net of federal income tax benefit................................. (608,000) (64,698)
Non-deductible amortization and impairment charge..................................... 3,136,000 91,392
Acquired in process research and development.......................................... 435,000 --
Valuation allowance................................................................... 210,000 --
Other, net............................................................................ 143,000 19,140
------------- -----------
$ (131,000) $ (305,000)
------------- -----------
------------- -----------
</TABLE>
13
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(4) INCOME TAXES (CONTINUED)
The significant items composing the domestic deferred tax asset and
liability at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------- -----------------------
<S> <C> <C> <C> <C>
CURRENT LONG-TERM CURRENT LONG-TERM
---------- ------------- ---------- -----------
Assets--
Net operating loss carryforwards............................. $ -- $ 758,000 $ -- $ --
Reserves not currently deductible............................ 240,000 -- 240,772 --
Other........................................................ (30,000) 65,000 338,560 --
---------- ------------- ---------- -----------
Total assets............................................. 210,000 823,000 579,332 --
---------- ------------- ---------- -----------
Liabilities--
Accelerated depreciation and property-basis differences...... -- (819,000) -- (672,602)
Note receivable.............................................. -- -- -- (402,700)
Identified intangibles....................................... -- (1,154,000) -- --
Other........................................................ -- (100,000) -- 198,398
---------- ------------- ---------- -----------
Total liabilities...................................... -- (2,073,000) -- (876,904)
---------- ------------- ---------- -----------
Valuation allowance.................................... -- (210,000) -- --
---------- ------------- ---------- -----------
Net assets (liabilities)............................... $ 210,000 $ (1,460,000) $ 579,332 $ (876,904)
---------- ------------- ---------- -----------
---------- ------------- ---------- -----------
</TABLE>
The Company has provided a valuation allowance for a portion of deferred tax
assets that may not be realized. The Company's federal net operating loss
carryforwards, approximately $1.8 million as of December 31, 1998, expiring
beginning in 2011.
(5) INVENTORIES
Inventories are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
<S> <C> <C>
1998 1997
------------ ------------
Finished goods.................................................... $ 603,435 $ 435,201
Work-in-process................................................... 201,695 431,142
Raw materials..................................................... 5,455,649 4,090,752
------------ ------------
$ 6,260,779 $ 4,957,095
------------ ------------
------------ ------------
</TABLE>
(6) NOTE RECEIVABLE
On September 5, 1995, the Company sold its manufacturing facility in
Beverly, Massachusetts, for $1.2 million in cash and a note receivable of $1
million from the buyer. On May 7, 1998, Beverly Hospital Corporation prepaid its
$1,000,000 Note Receivable due the Company, less a $50,000 discount for early
payment. The proceeds were used to finance a portion of the Lasiris acquisition
(Note 2).
14
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(7) LONG-TERM DEBT
As of December 31, 1998 and 1997, debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
<S> <C> <C>
1998 1997
------------ ------------
Revolving line of credit, maturing March 31, 1999, payable to a bank, with an interest
rate at the bank's prime lending rate plus 1/2 % at December 31, 1998 (9.75%)......... $ 1,775,881 $ 1,307,053
Revolving line of credit, maturing April 1998, payable to a Hong Kong bank, with an
interest rate at the bank's prime lending rate as defined (8.50%) at December 31,
1998.................................................................................. 202,121 202,121
Mortgage note payable (Salem facility), maturing August 29, 2011, payable to a bank,
with an interest rate of 9.25% as of December 31, 1998, effective August 29, 1999 the
rate is at the bank's prime rate plus 1%.............................................. 1,379,489 1,434,395
Term loan, maturing on March 31, 1999, payable to a bank, with an interest rate of
prime plus 1/2% (9.75%) at December 31, 1998.......................................... 1,014,905 1,175,945
Convertible subordinated notes payable, maturing on May 1, 2001, interest payable
quarterly in arrears at 7.25%......................................................... 1,350,000 1,350,000
Equipment loan, maturing October 17, 2000, payable to a bank, with an interest rate at
8.80%................................................................................. 44,913 66,534
Auto loan, maturing February 2002, payable to a bank, with an interest rate at
8.50%................................................................................. 13,842 17,524
Term Loan, maturing May 13, 2002, payable to a bank, with an interest rate of bank's
prime plus 2.0%....................................................................... 612,908 --
Term Loan, maturing May 13, 2000, payable to a bank, with an interest rate of bank's
prime plus 2.0%....................................................................... 35,398 --
Term Loan, maturing May 13, 1999, payable to a bank, with an interest rate of 11.0%... 750,000 --
Equipment capital lease obligation, maturing August 31, 2000, with an interest rate of
7.81%................................................................................. 99,322 153,008
Equipment lease line of credit, maturing July 22, 2003, payable to a bank, with an
interest rate of prime plus 3/4% (9.25%) at December 31, 1998......................... 315,868 209,759
Machinery equipment lease obligation, maturing November 1, 2002, with an interest rate
of 8.00%.............................................................................. 210,459 --
Machinery equipment lease obligation, maturing October 18, 2002, with an interest rate
of 8.00%.............................................................................. 111,925 --
Revolving line of credit, maturing on demand, payable to a bank, with an interest rate
of bank's prime plus 1%............................................................... 418,240 --
------------ ------------
8,335,271 5,916,339
Less--Current portion of long-term debt............................................... 4,644,131 533,106
------------ ------------
$ 3,691,140 $ 5,383,233
------------ ------------
</TABLE>
15
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(7) LONG-TERM DEBT (CONTINUED)
The revolving line of credit has a maximum credit limit of the lesser of
$4,000,000 or a borrowing base as defined in the Credit Agreement, which is
composed of the Company's eligible accounts receivable and inventory. The line
has a floating interest rate of 1/2% above the bank's prime lending rate.
The Company has a five-year term loan with the same bank, with an original
principal amount of $2,767,000. The monthly principal payments on this note are
$13,420. The loan has a floating interest rate of 1/2% above the bank's prime
lending rate. The loan matures on March 1, 2000, at which time all unpaid
interest and principal amounts are due in full.
The revolving line of credit and the term loan discussed above require the
Company to comply with several affirmative and negative covenants, including
certain financial tests and ratios such as debt service coverage, net income
requirements and other items. The loans are collateralized by substantially all
of the Company's assets and a personal guaranty, by the Chairman of the Board.
As of December 31, 1997, the Company was not in compliance with certain
financial covenants set forth in the Credit Agreement of it's revolving line of
credit and five-year term loan, as amended. On March 5, 1998, the Company
obtained a waiver for these events of noncompliance. This waiver was effective
for the period ended December 31, 1997.
On March 27, 1998, the Company entered into an agreement to extend the
maturity dates of its revolving line of credit and term loan to January 2, 1999.
Under the terms of the extension, the revolving line of credit's maximum credit
limit decreased from $4.0 million to the lesser of $2.5 million or a borrowing
base as defined in the Amended Credit Agreement. Also, both the term loan and
the revolving line of credit will bear interest at a rate equal to the Bank's
base rate plus 1% through June 30, 1998, after which the rate will increase to
the Bank's base rate plus 2%. The Company paid quarterly extension fees of
$10,000 on March 31, 1998 and $20,000 on June 30, 1998, and monthly extension
fees of $7,000 payable on the last day of July, August and September, and
$10,000 payable on the last day of October, November and December. The Amended
Credit Agreement deletes the minimum debt service covenant and requires the
Company to report a pretax profit in the month of March 1998, and for each of
the subsequent quarters in fiscal year 1998.
Under the terms of the Credit Agreement, as amended, the Company was
required to comply with a quarterly minimum net income covenants. 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.
On January 15, 1999, the Company entered into an agreement to extend the
maturity dates of its revolving line of credit from February 1, 1999 to March
31, 1999, after which date no further advances would be made with respect to the
Amended Revolving Note. As part of the agreement, the Company agreed to pay the
bank all payments due prior to March 31, 1999 and that failure to make such
payments would result in the Company being in default under this agreement. As
part of the agreement, the maturity date of the term note with the same bank was
also extended to March 31, 1999. The Company agreed to pay the bank the entire
principal balance outstanding on the term note, plus all unpaid accrued
interest. Also, both the revolving line of credit and the term loan will bear
interest at a rate equal to the bank's base rate plus 4%. The Company agreed to
pay up to $35,000 in consideration for the agreement, with $20,000
16
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(7) LONG-TERM DEBT (CONTINUED)
due upon execution of the agreement. In the event that the Company pays off it
obligation in full on or before February 15, 1999, the bank agreed to waive the
remaining $15,000 balance.
On February 11, 1999 the Company entered in a new credit agreement with
Norwest Business Credit, Inc. with total borrowing availability up to
$3,500,000. Initial proceeds were used to payoff the Credit Agreement between
the Company and Fleet National Bank of Massachusetts, N.A. This new credit
facility with Norwest consists of a $500,000 term loan that requires 60 monthly
principal payments of $8,334 beginning April 1, 1999. The credit facility also
provides for a revolving line of credit of up to $3.0 million subject to a
defined borrowing base consisting of eligible accounts receivable and inventory.
As of March 31, 1999, $2,218,959 was outstanding under the term loan and
revolving credit line and $126,840 was available for additional borrowings. The
outstanding principal balance of all advances under the Norwest facility bear
interest at a floating rate of the bank's base rate plus 2.5%. The Norwest
credit agreement is a demand note and maybe terminated by the lender at any time
at the discretion of the lender, prior to the stated maturity date of March 1,
2002. The credit agreement is secured by essentially all of the Company's
assets. Mark W. Blodgett, the Company's Chief Executive Officer has,
unconditionally guaranteed all amounts outstanding under the credit agreement.
The Credit and Security Agreement require the Company to comply with certain
affirmative and negative covenants.
On January 21, 1999, the Company entered into mortgage loan with a bank in
the amount of $824,000. The mortgage matures on January 1, 2004, and is secured
by a first mortgage on the Company's Fraser, Michigan property.
In May 1996, the Company paid in full the holders of $1,000,000 in
subordinated notes payable with proceeds from the issuance of $1,350,000 in
convertible subordinated notes payable. These new notes pay interest quarterly
in arrears at 7.25% and mature on May 1, 2001. At the option of the holders, the
principal portion of the notes is convertible into shares of the Company's
common stock at a conversion rate of $7.38 per share. These notes are
subordinated to the Company's revolving line of credit and five-year term loan.
(8) STOCKHOLDERS' INVESTMENT
On May 13, 1998, in connection with the Lasiris acquisition, the
stockholders of Lasiris received 444,146 shares of capital stock of Lasiris
Holdings, Inc., a newly formed New Brunswick corporation and a subsidiary of the
Company. These newly issued shares were exchangeable for shares of the Company's
common stock on a one for one basis with aggregate value of $1,732,167 on the
acquisition date. The Company financed a portion of the cash consideration paid
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
$1,124,714 after offering expenses of $100,284. The Company did not engage any
underwriters in connection with such offering, but the Company did enter into an
arrangement with J.E. Sheehan & Co. ("Sheehan") to act as placement agent for
all or a portion of the shares offered thereby. In connection with the offering,
Sheehan was paid a commission of $73,500 and was issued a warrant entitling
Sheehan to purchase an aggregate of 10,000 shares of Common Stock at a price of
$4.00 per share (the "Sheehan Warrant"). The Sheehan Warrant is exercisable for
a period of three years and contains customary weighted-average anti-dilution
provisions providing for appropriate adjustment of the exercise price and the
number of shares issuable upon exercise thereof upon the occurrence of certain
events regarding the Common Stock as a whole.
17
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(8) STOCKHOLDERS' INVESTMENT (Continued)
In December 1998, the Company issued and sold 214,200 shares of common
stock, at a price of $2.00 per share in a private placement to officers and
directors of the Company generating proceeds of $428,400.
Also in December 1998, the Company issued 100,908 shares to the Company's
CEO in exchange for his guarantee of certain indebtedness to the Company. As a
result, the Company recorded a charge of $107,845 in the accompanying statement
of operations for the year ended December 31, 1998.
(9) EMPLOYEE BENEFITS AND STOCK OPTIONS
The Company had two noncontributory defined benefit pension plans that
covered a majority of Company employees. The accrued benefit is determined based
on credited service as of the employee's retirement date. Employees became fully
vested after five years.
The Company froze the benefits of the defined benefit pension plans during
August 1993. During 1998, the Company distributed the plan assets to the plan
participants, based upon actuarial calculations of benefit amounts due each
participant. After all liabilities to participants had been paid, the Pension
Plans were effectively terminated. Upon termination, there existed approximately
$389,000 in excess funds. The Company subsequently distributed approximately
$98,000 to the 401(k) plan established for Company employees. At December 31,
1998, the Company recorded net curtailment gain of approximately $233,000 in
accordance with SFAS No. 88, EMPLOYERS' ACCOUNTING FOR SETTLEMENTS AND
CURTAILMENTS OF DEFINED BENEFIT PENSION PLANS AND FOR TERMINATION BENEFITS.
The following table sets forth the plans' funded status and amounts
recognized in the Company's consolidated balance sheets:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C> <C>
Actuarial present value of benefit obligations--
Accumulated benefit obligation, including vested benefits of $440,931 in 1997................ $ (456,444)
-----------------
-----------------
Projected benefit obligation for service rendered to date...................................... $ (456,444)
Plan assets at fair value, guaranteed investment contract with an insurance company............ 775,505
Unrecognized net gain.......................................................................... (297,597)
Unrecognized net (assets) liabilities.......................................................... 13,365
-----------------
Prepaid (accrued) pension cost............................................................. $ 34,829
-----------------
-----------------
</TABLE>
Net periodic pension cost (income) includes the following components:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1997
------------------
<S> <C>
Service cost--income earned during the period................................................. $ --
Interest cost on projected benefit obligation................................................. 29,861
Return on plan assets......................................................................... (57,445)
Amortization.................................................................................. (18,087)
--------
Net periodic pension income............................................................... $ (45,671)
--------
--------
</TABLE>
18
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(9) EMPLOYEE BENEFITS AND STOCK OPTIONS (Continued)
The weighted average discount rate and rate of increase in future
compensation used in determining the actuarial present value of the projected
benefit obligation was 7% in 1997. The expected long-term rate of return on
assets was 8% in 1997.
On January 17, 1994, the Company established the Stocker & Yale 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. Upon termination of the Company's defined benefit pension plans
in December 1998, the Company made a $98,000 contribution to the 401(k) Plan.
The Company made no such contributions for the plan year ended December 31,
1997. The Company incurred costs of $4,929 and $5,169 in 1998 and 1997,
respectively, to administer the Plan.
During 1994, the Company adopted a stock option plan (the Option Plan) for
the purpose of issuing both Incentive Options and Nonqualified Options to
officers, employees and directors of the Company. 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 March 1996, the Company adopted the 1996 Stock Option and Incentive Plan
(the Option Plan) for the purpose of issuing both Incentive Options and
Nonqualified Options to officers, employees and directors of the Company. A
total of 150,000 shares of common stock were reserved for issuance under this
plan. In December 1996, the Company awarded 4,980 shares of common stock to
employees through the 1996 Stock Option Plan. Accordingly, the Company has
recognized approximately $26,000 in compensation expense in the accompanying
financial statements. 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.
19
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(9) EMPLOYEE BENEFITS AND STOCK OPTIONS (Continued)
The following is a summary of the activity for the 1996 and 1994 Stock
Option Plans:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES PRICE RANGE PRICE
----------- -------------- -----------------
<S> <C> <C> <C>
Outstanding at December 31, 1996............... 203,440 $ 3.70--$7.25 $ 6.14
Granted.................................... 61,600 $ 4.50--$5.38 $ 5.27
----------- -------------- -----
Outstanding at December 31, 1997............... 265,040 $ 3.70--$7.25 $ 5.97
Granted.................................... 128,000 $ 1.75--$5.16 $ 3.37
Forfeited.................................. (13,700) $ 4.40--$6.00 $ 4.94
Exercised.................................. (2,300) $ 4.40 $ 4.40
----------- -------------- -----
Outstanding at December 31, 1998............... 377,040 $ 1.75--$7.25 $ 5.13
----------- -------------- -----
----------- -------------- -----
Exercisable at December 31, 1998............... 184,540 $ 3.70--$7.25 $ 6.30
----------- -------------- -----
----------- -------------- -----
Weighted average option price for all
options...................................... $ 5.14
-----
-----
</TABLE>
Included in the options listed above, as of December 31, 1998, there are
50,000 options outstanding to nonemployees to purchase shares of the Company's
common stock at prices ranging from $4.30--$7.25 per share. These options were
issued in 1994 through 1998.
During 1995, the Financial Accounting Standards Board 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 APB Opinion 25. Entities electing to remain with the accounting in
APB Opinion 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.
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 1997 and 1998 using the Black-Scholes
option pricing model as prescribed by SFAS No. 123, using the following
weighted-average assumptions for grants in 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------------- ---------------
<S> <C> <C>
Risk-free interest rate....................................................... 4.70%--5.97% 5.87%--6.9%
Expected dividend yield....................................................... -- --
Expected life................................................................. 10 years 10 years
Expected volatility........................................................... 61.83% 32.29%
</TABLE>
The total value of options granted during 1997 and 1998 would be amortized
on a pro forma basis over the vesting period of the options. Options generally
vest equally over two years. Because the SFAS No. 123 method of accounting has
not been applied to options granted prior to January 1, 1995, the resulting pro
forma compensation costs may not be representative of that to be expected in
future years. If
20
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(9) EMPLOYEE BENEFITS AND STOCK OPTIONS (Continued)
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
<S> <C> <C>
1998 1997
-------------- -----------
Net loss--
As reported..................................................................... $ (10,005,896) $ (726,860)
Pro forma....................................................................... (10,331,756) (1,057,884)
Net loss per share--
As reported..................................................................... (3.25) (0.28)
Pro forma....................................................................... (3.36) (0.41)
</TABLE>
Set forth below is a summary of options granted in 1998 and 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------------- --------------------------
<C> <C> <C> <S> <C> <C> <C> <C>
WEIGHTED AVERAGE WEIGHTED
OUTSTANDING REMAINING WEIGHTED AVERAGE
EXERCISE PRICE SHARES AT CONTRACTUAL LIFE AVERAGE PER SHARE EXERCISABLE EXERCISE
RANGE DECEMBER 31, 1998 (YEARS) EXERCISE PRICE FAIR VALUE OPTIONS PRICE
-------------- ----------------- ---------------- ----------------- ------------- ----------- -------------
1997 $ 4.50--$5.38 72,000 9 years 5.28 3.96 -- --
1998 $ 1.75--$5.16 128,000 10 years 3.37 2.55 -- --
</TABLE>
(10) COMMITMENTS AND CONTINGENCIES
Total rent expense for operating leases charged to operations for the
periods ended December 31, 1998 and 1997 was $47,873 and $17,862, respectively.
Minimum commitments under leases in effect at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
OPERATING
YEAR LEASES
- ---------------------------------------------------------------------------------- ----------
<S> <C>
1999.............................................................................. $ 104,083
2000.............................................................................. 69,116
2001.............................................................................. 42,201
Thereafter........................................................................ 5,493
----------
Total minimum lease payments...................................................... $ 220,893
----------
----------
</TABLE>
(11) SEGMENTED INFORMATION
Statement of Financial Accounting Standards (SFAS) No. 131, DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, issued June 1997.
SFAS No. 131 introduces a new model for segment reporting called the
"management approach." The management approach is based on the way the chief
operating decision maker organizes segments based on products and services,
geography, legal structure, management structure--any manner in which management
disaggregates the company. This statement replaces SFAS No. 14, FINANCIAL
REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE. SFAS requires disclosures for
each segment that are similar to those
21
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(11) SEGMENTED INFORMATION (Continued)
required under current standards with the addition of quarterly disclosure
requirements and a finer partitioning of geographic disclosures. It requires
limited segment data on a quarterly basis. It also requires geographic data by
country, as opposed to broader geographic regions permitted under current
standards. This statement applies to public business enterprises.
The Company has assessed the new statement and has classified the operating
results of Lasiris with the Measuring and Inspection Instruments Segment.
The Company's operations were conducted primarily within the following
industry segments for the fiscal years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------
<S> <C> <C> <C>
MEASURING AND
INSPECTION MACHINE COMPONENTS
INSTRUMENTS AND ACCESSORIES TOTAL
-------------- -------------------- -------------
Net sales.................................................... $ 9,273,434 $ 3,311,888 $ 12,585,322
Operating income (loss)...................................... (5,355,750) (4,179,981) (9,535,731)
Capital expenditures......................................... 311,106 325,064 636,170
Depreciation expense......................................... 413,769 86,062 499,831
Amortization expense......................................... 195,871 130,581 326,452
Fixed assets, net............................................ 2,944,313 1,396,341 4,340,654
Total identifiable assets.................................... 17,867,643 1,113,144 18,980,787
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------
<S> <C> <C> <C>
MEASURING AND
INSPECTION MACHINE COMPONENTS
INSTRUMENTS AND ACCESSORIES TOTAL
-------------- -------------------- -------------
Net sales.................................................... $ 7,213,876 $ 3,948,150 $ 11,162,026
Operating income (loss)...................................... (325,314) (318,209) (643,523)
Capital expenditures......................................... 751,293 282,763 1,034,056
Depreciation expense......................................... 133,013 179,436 312,449
Amortization expense......................................... 220,508 147,006 367,514
Fixed assets, net............................................ 2,707,700 1,149,804 3,857,504
Total identifiable assets.................................... 19,666,636 1,324,115 20,990,751
</TABLE>
Sales to unaffiliated customers in foreign countries outside of the United
States represented approximately 9% and 17% of net sales for fiscal 1998 and
1997, respectively. The Company's export sales are denominated in U.S. dollars.
(12) COMPREHENSIVE INCOME/(LOSS)
For the year ended December 31, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This pronouncement sets forth requirements for
disclosure of the Company's comprehensive income and accumulated other
comprehensive items. In general, comprehensive income combines net income and
"Other comprehensive items, net" which represents certain amounts that are
reported as components of shareholders' investment in the accompanying balance
sheet, including foreign currency translation adjustments and unrealized net of
tax gains and losses from available-for-sale investments.
22
<PAGE>
ITEM 13. EXHIBITS, LISTS, AND REPORTS ON FORM 8-K
(a) The following is a complete list of Exhibits filed as part of this Form
10-KSB.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ ----------------------------------------------------------------------------------------------------
<C> <S>
3.1 Amended and Restated Articles of Organization of Stocker & Yale, incorporated by reference to
Exhibit 3.1 of Stocker & Yale's Form SB-2, Amendment No.1, filed on October 11, 1996.
3.2 Amended and Restated Bylaws of Stocker & Yale, incorporated by reference to Exhibit 3.2 of Stocker &
Yale's Form 10-SB, as amended, filed on November 2, 1995.
4.1 Escrow Agreement by and among Stocker & Yale and the parties named therein, incorporated by
reference to Exhibit 4.1 of Stocker & Yale's Form 10-SB, as amended, filed on November 2, 1995.
4.2 Subordinated Note & Warrant Purchase Agreements, incorporated by reference to Exhibit 10.7 of
Stocker & Yale's Form 10-SB, as amended, filed on November 2, 1995.
**10.1(a) Credit and Security Agreement dated February 11, 1999 by and between Stocker & Yale and Norwest
Business Credit, Inc.
**10.1(b) Demand Note dated February 11, 1999 issued to Norwest Business Credit, Inc. by Stocker & Yale.
**10.1(c) Guaranty dated February 11, 1999 by and between Mark W. Blodgett and Norwest Business Credit, Inc.
**10.2(a) Mortgage Note dated January 11, 1999 issued to Comerica Bank by Stocker & Yale.
**10.2(b) Continuing Collateral Mortgages dated January 21, 1999 by Stocker & Yale to Comerica Bank.
10.6 Purchase and Sale Agreement, dated as of August 28, 1995, by and between the Company and John
Hancock Mutual Life Insurance Company, incorporated by reference to Exhibit 10.6 of Stocker & Yale's
Form 10-SB, as amended, filed on November 2, 1995.
10.7 Form of Convertible Subordinated Note Purchase Agreement by and between the Company and the
Purchasers named therein, incorporated by reference to Exhibit 4.1 of Stocker & Yale's Form 10-QSB
for the period ended March 31, 1996.
10.8(a) Amended and Restated 1994 Stock Option Plan, incorporated by reference to Exhibit 10.8(a) of Stocker
& Yale's Form 10-SB, as amended, filed on November 2, 1995.
10.8(b) Form of Incentive Option Agreement for employees under the Amended and Restated 1994 Stock Option
Plan, incorporated by reference to Exhibit 10.8(b) of Stocker & Yale's Form 10-SB, as amended, filed
on November 2, 1995.
10.8(c) Form of Nonqualified Option Agreement for employees under the Amended and Restated 1994 Stock Option
Plan, incorporated by reference to Exhibit 10.8(c) of Stocker & Yale's Form 10-SB, as amended, filed
on November 2, 1995.
10.8(d) Form of Nonqualified Option Agreement for Outside Directors under the Amended and Restated 1994
Stock Option Plan, incorporated by reference to Exhibit 10.8(d) of Stocker & Yale's Form 10-SB, as
amended, filed on November 2, 1995.
10.9 Form of Option Agreement for Outside Directors outside the Amended and Restated 1994 Stock Option
Plan, incorporated by reference to Exhibit 10.9 of Stocker & Yale's Form 10-SB, as amended, filed on
November 2, 1995.
10.10 1995 Senior Management Profit Sharing Plan, incorporated by reference to Exhibit 10.10 of Stocker &
Yale's Form 10-SB, as amended, filed on November 2, 1995.
10.12 1995 Employee Stock Bonus Plan, incorporated by reference to Exhibit 10.12 of Stocker & Yale's Form
10-SB, as amended, filed on November 2, 1995.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ ----------------------------------------------------------------------------------------------------
<C> <S>
10.13(a) 1996 Stock Option and Incentive Plan, incorporated by reference to Exhibit A of Stocker & Yale's
Proxy Statement for the 1996 Annual Meeting of Stockholders, filed on April 3, 1996.
10.13(b) Form of Incentive Option Agreement for employees under the 1996 Stock Option and Incentive Plan,
incorporated by reference to Exhibit 10.13(b) of Stocker & Yale's Form 10-KSB, for the fiscal year
ended December 31, 1995.
10.13(c) Form of Nonqualified Option Agreement for employees under the Restated 1995 Stock Option Plan,
incorporated by reference to Exhibit 10.13(d) of Stocker & Yale's Form 10-KSB, for the fiscal year
ended December 31, 1995.
10.14(a) Promissory Note, due August 29, 2011, issued by the Company to Granite Bank.
10.14(b) Mortgage Deed and Security Agreement, dated August 29, 1996, granted by the Company to Granite Bank.
10.14(c) Collateral Assignment of Leases and Rents, dated August 29, 1996, granted by the Company to Granite
Bank.
10.15(a) Promissory Note, due May 13, 1999, issued by the Company to Danvers Savings Bank, incorporated by
reference to Exhibit 10.15(a) of Stocker & Yale's Form 10-QSB filed on August 19, 1998.
10.16(a) Voting, Support and Exchange Agreement between Lasiris Holding, Inc., Stocker & Yale, 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 Stocker & Yale's Form 10-QSB filed on August 19,
1998.
10.16(b) Employment Agreement by and among Lasiris, Inc., Stocker & Yale, Inc. and Alain Beauregard, dated as
of May 13, 1998, incorporated by reference to Exhibit 10.16(b) of Stocker & Yale's Form 10-QSB filed
on August 19, 1998.
10.16(c) Employment Agreement by and among Lasiris, Inc., Stocker & Yale, Inc. and Luc Many, dated as of May
13, 1998, incorporated by reference to Exhibit 10.16(c) of Stocker & Yale's Form 10-QSB filed on
August 19, 1998.
10.16(d) Lasiris, Inc. Executive Incentive Compensation Plan, incorporated by reference to Exhibit 10.16(d)
of Stocker & Yale's Form 10-QSB filed on August 19, 1998.
**21.1 Subsidiaries of the Company.
*23.1 Consent of Arthur Andersen LLP
*27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Filed herewith
** Previously Filed
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the fourth quarter of 1998.
24
<PAGE>
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.
<TABLE>
<S> <C> <C>
STOCKER & YALE, INC.
By: /s/ MARK W. BLODGETT
-----------------------------------------
Mark W. Blodgett, Chairman
Date: April 8, 1999 and Chief Executive Officer
</TABLE>
25
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in the Registration Statement pertaining to the Stocker & Yale,
Inc. 1996 Stock Option and Incentive Plan (Form S-8 No. 333-60717) of our
report dated April 7, 1999, with respect to the consolidated financial
statements of Stocker & Yale, Inc. and subsidiaries included in the Annual
Report (Form 10-KSB) for the year ended December 31, 1998.
/s/Arthur Andersen LLP
Boston, Massachusetts
April 7, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 85,854
<SECURITIES> 86,407
<RECEIVABLES> 2,131,472
<ALLOWANCES> 209,000
<INVENTORY> 6,260,779
<CURRENT-ASSETS> 9,214,116
<PP&E> 9,594,323
<DEPRECIATION> 5,253,669
<TOTAL-ASSETS> 18,980,787
<CURRENT-LIABILITIES> 8,536,034
<BONDS> 3,691,140
0
0
<COMMON> 3,679
<OTHER-SE> 4,683,321
<TOTAL-LIABILITY-AND-EQUITY> 18,980,787
<SALES> 12,585,322
<TOTAL-REVENUES> 12,585,322
<CGS> 7,440,743
<TOTAL-COSTS> 7,440,743
<OTHER-EXPENSES> 14,680,310
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 601,031
<INCOME-PRETAX> (10,136,762)
<INCOME-TAX> (130,866)
<INCOME-CONTINUING> (10,005,896)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,005,896)
<EPS-PRIMARY> (3.25)
<EPS-DILUTED> (3.25)
</TABLE>
