U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
Commission file number: 0 - 5460
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STOCKER & YALE, INC.
(Name of small business issuer in its charter)
Massachusetts 04-2114473
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
32 Hampshire Road
Salem, New Hampshire 03079
(Address of principal executive offices) (Zip Code)
(603) 893-8778
(Issuer's telephone number)
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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)
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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. |X| Yes |_| 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 or any amendment
to this Form 10-KSB.|_|
The registrant's revenues for the fiscal year ended December 31, 1999 were
$14,343,761.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 24, 2000 was approximately $66,883,000 based on the price
per share of such stock reported at closing on the OTC-Bulletin Board on that
date.
As of March 24, 2000 there were 3,944,627.6 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 Stockholders to be held on May
30, 2000, 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, 1999, are
incorporated by reference into Items, 9, 10, 11 and 12 of Part III.
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TABLE OF CONTENTS
PART I
Page
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Item 1. Description of Business........................................... 1
Item 2. Description of Properties......................................... 7
Item 3. Legal Proceedings................................................. 7
Item 4. Submission of Matters to a Vote of Security Holders............... 7
PART II
Item 5. Market for Common Equity and Other Stockholder Matters............ 8
Item 6. Management Discussion and Analysis of Financial Condition and
Results of Operations.................................... 11
Item 7. Financial Statements.............................................. 17
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.................................... 35
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act........ 36
Item 10. Executive Compensation............................................ 36
Item 11. Security Ownership of Certain Beneficial Owners and Management.... 36
Item 12. Certain Relationships and Related Transactions.................... 36
Item 13. Exhibits, List and Reports on Form 8-K............................ 37
Signatures........................................................ 40
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This Form 10-KSB 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. You can identify forward looking statements by the use of
the words "believe," "expect," "anticipate," "intend," "estimate," "assume," and
other similar expression which predict or indicate future events and trends and
which do not relate to historical matters. The Company's actual results,
performance or achievements could differ materially from our expectations
expressed or implied by the forward-looking statements sometimes for reasons
that are beyond our control. Certain factors that might cause such a difference
are discussed in the section entitled "Certain Factors Affecting Future
Operating Results" on page 16 of this Form 10-KSB.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Business Development
Stocker & Yale, Inc., (the "Company") was incorporated on March 27, 1951 under
the laws of the Commonwealth of Massachusetts. In May 1994, the Company became
publicly traded on the Vancouver Stock Exchange (the "VSE") via a merger with
Brower Exploration, Inc., a Wyoming corporation that was publicly traded in
Canada. The Company's common stock (the "Common Stock") was listed and traded on
the Vancouver Stock Exchange from May 14, 1994 until May 10, 1996, when the
Company de-listed its stock from the VSE. In December 1995, the Company
completed the registration of its Common Stock with the U.S. Securities and
Exchange Commission, and in January 1996, the Company listed its stock on the
Nasdaq SmallCap Market under the trading symbol "STKR". In June 1999, the
Company was de-listed from the Nasdaq SmallCap Market and began trading on the
OTC-Bulletin Board under the same trading symbol "STKR".
On May 13, 1998, the Company acquired Lasiris, Inc. ("Lasiris"), a Canadian
manufacturer of industrial lasers and other illumination and photonics products.
The Company acquired Lasiris through Lasiris Holdings, Inc., a newly formed New
Brunswick corporation ("LHI") and a wholly owned subsidiary of the Company.
Lasiris is operated as a wholly owned Canadian subsidiary of LHI.
As of December 31, 1999, the authorized capital stock of the Company was
10,000,000 shares of Common Stock of which 3,406,581.6 shares were issued and
outstanding. Additionally 1,042,395 shares of Common Stock were reserved for
issuance upon the exercise of outstanding options to purchase Common Stock
including 395,944 shares of Lasiris Holdings, warrants and, the conversion of
certain convertible indebtedness of the Company.
In addition to Lasiris Holding, Inc., the Company has one active subsidiary.
Radiant Asiatec Pte, Ltd., a Singapore corporation which was formed in December
1997, is an 80% owned subsidiary of the Company.
Business Description
The Company is a diversified manufacturing company engaged primarily in the
production of specialized illumination and photonics products for measuring and
inspection equipment in the microscopy, machine vision and telecommunications
component manufacturing markets. In addition, the Company manufactures machine
tool components and accessories for the automotive and related industries. The
Company operates in a company-owned facility in Salem, New Hampshire and in
three leased spaces, one in Roseville, Michigan, one in Singapore and, the
third, in Saint-Laurent,
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Quebec. Sales to unaffiliated customers in foreign countries represented 22% and
9% of net sales in 1999 and 1998, respectively.
Measuring and Inspection Instruments
Products. The Company has been designing and manufacturing industrial
fluorescent lighting products for metrology instruments for over twenty years.
In 1994, the Company recognized the need for reliable specialized illumination
products for industrial applications. Consequently, the Company made a strategic
decision to shift corporate resources into a fluorescent illumination product
line, with a focus toward microscopy and machine vision applications. In
addition, the Company developed a line of fiber optic illumination products for
use with high power microscopes and began to manufacture fiber optic
illumination systems in 1997. Since 1997, the Company has continued to invest in
developing its fiber optic production capability, including state of the art
fiber optic drawing facilities.
Lasiris, located in Saint-Laurent, Quebec, develops, manufactures and
distributes industrial structured light lasers and other illumination and
telecommunication component products. Lasiris was founded in 1985 to offer
technical and scientific expertise in lasers, optics and holography. In 1990,
through a number of research and development contracts, Lasiris began to design
a wide range of laser pattern projectors for industrial inspection and machine
vision applications. Since 1991, Lasiris has been a leading manufacturer of
phase masks used in the production of fiber bragg gratings, an essential
component of dense wavelength division multiplexer (DWDM) devices used in
high-capacity fiber optic networks.
In addition to specialized illumination and photonics products, the Company's
Salem facility also supports two ancillary product lines: military products,
comprised of military watches, and recorder/printer products. In September 1999,
the Company sold its military compass product line to an unrelated third party.
Sales Data. Specialized illumination and telecommunication component products
represent the Company's fastest growing product segment in terms of sales
volume. These products represent approximately 68% of total Company sales in
1999, up 34% from 58% of total Company sales in fiscal 1998. Military and
printer/recorder product sales represented approximately 12% of total Company
sales in 1999, down from approximately 16% in fiscal 1998.
Distribution. The Company's products are sold to over 10,000 customers,
primarily in North America, Europe and the Pacific Rim. This segment sells
directly to and works with, a group of approximately 125 distributors and
machine vision integrators to sell its specialized illumination products. Five
manufacturer's representatives sell the Company's printer/recorder products. No
single customer represents more than 5% of total Company sales.
Competition and Competitive Position. The Company competes with a number of
large and small firms in the design and manufacture of its specialized
illumination and telecommunications component products and printer/recorder
products. Some competitors have greater resources than the Company, and as a
result, may have a competitive advantage in the research and development of new
products, sales and distribution and in other business areas.
In the industrial fluorescent lighting market, the Company has two primary
competitors. MicroLite markets a product similar in appearance to the Company's
circular fluorescent microscope illuminator. Techni-Quip Corp. offers industrial
fluorescent lighting as part of its product line but as a whole, its lighting
product line is limited and represents a small percentage of that company's
total business.
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The Company has five primary competitors in the fiber optic illumination market.
The maturest segment of this market relates to illumination for microscopes.
Within that market, Volpi Manufacturing USA, Inc. and Dolan-Jenner Industries,
Inc. have a competing market share. Both of these companies have been producing
fiber optic products for more than thirty years and offer a fully developed line
of fiber optic illumination systems for microscopy applications. A third
company, Cuda Products, Inc., also supplies fiber optic lighting for microscopy;
however, its primary market is medical. The value-oriented segment of the
microscopy market is dominated by Chiu Technical Corp, which offers an
inexpensive "no-frills", fiber optic lighting system. A newer segment in the
fiber optic lighting market relates to machine vision, which is automated
imaging and inspection equipment. Fostec, Inc. is the leading provider of fiber
optic lighting for the machine vision industry. With ten years of experience in
addition to the use of advanced glass technology, Fostec maintains its
leadership position.
The Company has developed the in-house capability to draw its own glass fiber in
variable dimensions to suit customer needs. Although some of the above named
competitors also have this capability, the Company believes that its fiber has
certain qualities that deliver higher performance and is more reliable. The
Company's spectrographic analysis has determined that the fiber drawn by the
Company demonstrates higher light transmission qualities than its competitors'
fiber.
Since mid-1996, the Company has invested in building up its in-house design,
development and research capabilities, including the hiring of personnel trained
in optical, chemical, mechanical and electrical engineering and related
disciplines, and the purchase of computers and laboratory equipment necessary to
support these personnel. Further, the Company has succeeded in designing and
developing a complete line of fiber optic lighting products for both the machine
vision and microscopy markets.
The market for machine vision lasers is highly fragmented, with a large number
of suppliers providing different types of products for different markets. This
emerging laser segment is characterized by continuous pressure to incorporate
new features, improve functionality, and reduce prices. The principal
competitive factors in the industry are product features and accuracy, delivery
time, technical support, manufacturer reputation, and price.
With regards to the chart recorder and thermal printer products, companies that
are larger and offer more advanced technology than the Company dominate the
market. Recognizing that it lacks the resources to compete directly against
larger companies, such as Gould, Inc., and General Scanning, Inc., the Company
focuses its resources on specialized illumination and telecommunication
component products.
The Company competes primarily on the basis of service and product performance.
The Company believes that its primary market advantages going forward are its
history of providing specialized products to meet customers' illumination needs,
its broad line of specialized illumination and telecommunication component
products, its ability to produce high quality glass fiber, and its design and
development capabilities.
Machine Tool Components and Accessories
For over 50 years, the Company's Stilson/Die-Draulics Division ("SDD Division"),
located in Roseville, Michigan, has manufactured a wide range of machine tool
components and material handling accessories which are used extensively in the
construction and maintenance of assembly and conveying machinery. SDD Division
recently completed a capital equipment upgrade program that the Company believes
will lower production costs and improve product quality.
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Sales Data. Machine tools and accessories represented approximately 20% of the
total Company sales in 1999, compared to approximately 26% in 1998. Material
handling products, such as conveyor rolls and bumpers, were approximately 9% of
total Company sales in 1999 and approximately 12% in 1998. Other products
include vacuum handling systems, machine tool components for clamping, indexing,
holding, handling, locating, positioning and actuating, and nitrogen die control
systems. The products are sold to participants in the automotive, packaging and
other industries.
Distribution. The SDD Division's products are sold to over 5,000 customers, and
no one customer or group of customers represented more than 5% of total revenue
in 1999. Although SDD Division products are sold throughout the world, sales to
customers in the U.S. industrial Midwest (Ohio, Michigan, Illinois, and Indiana)
represented approximately 49% of Stilson Division sales in 1999 and 54% in 1998
and 54% in 1997. The Division works with approximately 60 distributors and
manufacturers' representatives in the marketing of the Stilson and Die-Draulics
product lines.
Competition and Competitive Position. The market for machine components and
accessories is mature, with a number of small companies competing within the
industry. The SDD Division competes with a variety of companies (many of which
are larger and have greater resources than the Company) in designing and
distributing its products. These products are sold primarily to participants in
the automotive industry and secondarily to participants in the home appliance,
leisure-time products, building materials and packaging equipment industries.
The SDD Division competes primarily on the basis of service, by offering a
complete product line, technical applications assistance and quality service, at
a competitive price. Further, the Company has been able to adapt its products to
the specific requirements of its customers
Backlog
The Company maintains an inventory of standard materials and components and
generally manufactures standard product configurations within one to five days
after receipt of a customer order. Although such rapid response is, and
historically has been, a selling advantage for the Company, some orders are
placed for future delivery. At December 31, 1999, the Company had a backlog of
orders for future delivery of approximately $2,666,000. This is compared to
approximately $2,312,000 as of December 31, 1998.
Raw Materials
The raw materials and components used in the Company's products are purchased
from a number of different suppliers and are generally available from several
sources.
Dependence on One or a Few Major Customers
The Company's customer base consists of more than 10,000 customers in various
industries worldwide. The Company's largest single customer was less than 4% in
fiscal 1999. The Company's top ten customers represented approximately 18% of
total sales in fiscal 1999.
Patents and Trademarks
The Company holds patents in the United States and has filed additional patent
applications in the United States, Europe and Japan. Lasiris holds rights in
three patents in the United States and one patent in Canada through licensing
agreements. The Company's material patents consist of four patents relating to
fundamental technological devices and methodologies used to achieve low-cost
fluorescent light dimming, which expire on August 18, 2009, August 24, 2010,
September 6, 2011
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and September 13, 2011. Lasiris' material patents consist of four patents for
lenses, which expire on May 2, 2006, November 27, 2007, June 4, 2013 and
December 15, 2015. The Company believes that patents are an effective way of
protecting its competitive technological advantages, and considers its patents
to be a strong deterrent against unauthorized manufacture, use and sale of its
products and key product attributes. There can be no assurance, however, that a
patent will be issued with respect to the patent applications or whether the
Company's patents or license rights will provide meaningful protection for the
Company.
The Company also relies upon trade secret protection for its confidential and
proprietary information. There can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques, or otherwise gain access to and use or disclose the Company's trade
secrets or that the Company can meaningfully protect their trade secrets.
The Company holds rights in certain trademarks to protect its brand name
recognition in various markets. Because of the Company's long history and
reputation for designing and manufacturing high quality products, trademark
protection enhances the Company's position in the market.
Although the Company believes that its products and other proprietary rights do
not infringe the proprietary rights of third parties, there can be no guarantee
that infringement claims will not be asserted against the Company in the future
or that any such claims will not require the Company to enter into royalty
arrangements or result in costly litigation.
Research and Development
The Company intends to continue to invest in research and development for new
products and for enhancements to existing products. Research and development
expenditures for the Company were $787,633 or 5.5% of net sales in 1999 and
$971,378 or 7.7% of net sales in 1998. The decrease was primarily a result of
actions taken to eliminate redundancy in research expense between the Quebec and
Salem facilities.
The Company employed, as of February 29, 2000, 12 full-time engineers whose
primary duties relate to product development. Outside firms and consultants are
selectively engaged to develop or assist with the development of new products
when opportunities exist.
In the illumination and photonics products area, the Company's focus is on
developing specialty optical fiber and related components which include the
recently announced 150 mm Ultra-LongTM phase mask product and photosensitive
optical fiber utilizing Radiation Mode Suppression (RMS) fiber. These products
are expected to begin shipping at the end to the second quarter of fiscal 2000.
Compliance with Environmental Laws
The Company is subject to evolving Federal, state and local environmental laws
and regulations. Compliance with such laws and regulations in the past had no
material effect on the capital expenditures, earnings or competitive position of
the Company. The Company believes that it complies in all material respects with
existing environmental laws and regulations applicable to it. However, the
Company's Salem, New Hampshire headquarters are currently the subject of
environmental testing and monitoring relating to soil and groundwater
contamination which occurred under prior ownership. The costs incurred to date
for such testing and for remediation planning have been paid by third parties.
The Company believes that the costs of any required remediation will be covered
by an environmental indemnity obtained from the seller, John Hancock Mutual Life
Insurance Company. In addition, it is management's understanding that in April
1996, the Massachusetts Department of Environmental Protection circulated
notices to parties identified as
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"potentially responsible parties" with respect to the Company's Salem, New
Hampshire headquarters. The Company did not receive such notice. Compliance with
environmental laws and regulations in the future may require additional capital
expenditures, and the Company expects that in the foreseeable future such
capital expenditures will be financed by cash flow from operations.
Employees
As of December 31, 1999, the Company employed approximately 152 persons, of
which 139 were full-time employees. None of the employees are represented by a
union and the Company believes it has good relations with its employees.
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ITEM 2. DESCRIPTION OF PROPERTIES
The Company currently conducts its business at one Company-owned facility
and in three leased spaces, one in Roseville, Michigan, one in Singapore and the
other in Saint-Laurent, Quebec. The Company's headquarters and manufacturing and
distribution center for the Salem Division is located at a 79,120 square foot
facility in Salem, New Hampshire. The machine tool components and materials
handling accessories product lines are manufactured and sold from a 16,275
square foot leased facility in Roseville, Michigan. The lease for the Roseville,
Michigan facility expires on September 1, 2002. Lasiris operates out of an
approximately 40,000 square foot leased facility in Saint-Laurent, Quebec. The
lease for Lasiris' facility expires on July 2004. Radiant Asiatec Pte., Ltd.
operates out of an approximately 2,733 square foot leased office space in
Singapore. The lease for Radiant Asiatec's facility expires in March 2001.
The Company's Salem facility is owned by the Company subject to a mortgage
granted to Granite State Bank and a second mortgage granted to Danvers Savings
Bank, which secure obligations of the Company to such parties. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS--Liquidity and Capital Resources."
The Company's facilities are generally operated on the basis of one shift per
day, five days per week. Management considers the facilities to be in generally
good condition, to be adequately maintained and insured, and sufficient to
satisfy the Company's needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
At times the Company may be involved in disputes and/or litigation with respect
to its products and operations in its normal course of business. The Company
does not believe that the ultimate impact of the resolution of such matters
would have a material adverse effect on the Company's financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders during the fourth
quarter of fiscal 1999.
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PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Market Information
The Company's Common Stock has been quoted on the OTC-Bulletin Board under the
symbol "STKR" since June 24, 1999. Prior to that, the Company's Common Stock was
listed on the Nasdaq SmallCap Stock Market since January 29, 1996 under the
symbol "STKR".
The following table sets forth the high and low sales prices for the last 8
quarters:
High Low
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Quarter ended March 31, 1998 $6.4380 $3.7500
Quarter ended June 30, 1998 $5.8750 $3.1250
Quarter ended September 30, 1998 $3.6250 $1.7500
Quarter ended December 31, 1998 $2.3130 $0.9060
Quarter ended March 31, 1999 $2.1250 $1.3125
Quarter ended June 30, 1999 $2.0312 $1.3750
Quarter ended September 30, 1999 $2.0000 $1.3750
Quarter ended December 31, 1999 $1.6562 $0.9688
Holders
As of March 15, 2000, there were approximately 550 shareholders of the Company's
Common Stock.
Dividends
The Company presently is restricted from payment of dividends under the terms of
its credit facility with Wells Fargo Business Credit, Inc., and therefore, the
Company does not expect to declare or pay any dividends in the foreseeable
future. The payment of any future dividends will be at the discretion of the
Company's Board of Directors and will depend upon, among other things, future
earnings, operations, capital requirements, the general financial condition of
the Company and general business conditions.
Recent Sales of Unregistered Securities
On March 3, 2000, the Company completed a private placement (the "Private
Placement") of 355,000 shares of Common Stock, par value $.001 per share, of the
Company. The Company offered the shares to fifteen purchasers in the Private
Placement at a price of $26.00 per share. The Company did not engage any
underwriters in connection with the Private Placement, but the Company did enter
into an agreement with K.S. Securities GmbH to act as placement agent for the
shares. The Company paid K.S. Securities a commission of $369,200 in connection
with the Private Placement. The Private Placement resulted in net proceeds to
the Company of approximately $8.9 million. Proceeds will be used for working
capital purposes. The Private Placement was exempt from registration under
Section 4(2) of the Securities Act, based upon the following facts: (i) the
Company did not engage in any general solicitation or advertising in connection
with the Private Placement; (ii) the shares of Common Stock were sold to a total
of fifteen purchasers, fourteen of whom represented to the Company that they
were each an "accredited investor" as defined under Regulation D under the
Securities Act; (iii) the Company took reasonable precautions to assure that all
of the purchasers (together with any financial advisors) were financially
sophisticated and able to bear the risks of the
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investment as well as to assure that the Common Stock was being purchased for
investment purposes and would not be resold in a public offering; (iv) pertinent
information regarding the Company and the Private Placement was provided to the
purchasers, and they or their representatives had access to officers of the
Company to inquire as to any further information they believed relevant; (v) the
Company provided the non-accredited investor with additional information about
the Company as required by Regulation D under the Securities Act; and (vi) the
Company advised the investors of the limitations on resale of the shares.
On March 31, 1999, the Company issued 123,077 shares of its Common Stock to Mark
W. Blodgett, Chief Executive Officer and a director of the Company, in exchange
for the cancellation of $200,000 in indebtedness owed by the Company to Mr.
Blodgett. The stock issued to Mr. Blodgett has not been registered under the
Securities Act of 1933, as amended (the "Securities Act") and may not be sold
without an exemption from the registration requirements of the Securities Act.
The issuance qualified for the exemption from registration provided by Section
4(2) of the Securities Act, based upon: (i) the Company did not engage in any
general solicitation or advertising in connection with the issuance; (ii) the
shares of stock were only issued to the Chief Financial Officer of the Company;
and (iii) the Company took reasonable precautions to assure that the Common
Stock was being purchased for investment purposes and would not be resold in an
offering.
In December 1998, the Company issued shares of its Common Stock to certain of
its officers and directors. No underwriter or agent was engaged in connection
with such issuances. A total of 288,400 shares of Common Stock were issued to
Mark W. Blodgett, the Company's Chairman and Chief Executive Officer. Of such
shares, 187,500 shares of Common Stock were sold to Mr. Blodgett at a price of
$2.00 per share, and 100,908 shares of Common Stock were issued to Mr. Blodgett
as compensation for his guarantee of certain Company indebtedness. In addition,
one other director and one officer of the Company purchased an aggregate of
26,700 shares of Common Stock at a price of $2.00 per share. All of such
issuances qualified for the exemption from registration provided by Section 4(2)
of the Securities Act, based upon: (i) the Company did not engage in any general
solicitation or advertising in connection with such issuances; (ii) the shares
of Common Stock were issued to only directors and officers of the Company; and
(iii) the Company took reasonable precautions to assure that the Common Stock
was being purchased for investment purposes and would not be resold in a public
offering.
As of May 13, 1998, the Company offered and sold in a private transaction
350,000 shares of Common Stock for a price of $3.50 per share. 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. The
net cash proceeds to the Company from the offering were $1,124,716. The offering
qualified for the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"), based upon: (i) the
Company did not engage in any general solicitation or advertising in connection
with the offering; (ii) the shares of Common Stock were sold to a total of
fourteen purchasers, each of whom represented to the Company that it was an
"accredited investor" as defined under Regulation D under the Securities Act;
(iii) the Company took reasonable precautions to assure that the purchasers were
financially sophisticated and able to bear the risks of the investment as well
as to assure that the Common Stock was being purchased for investment purposes
and would not be resold in a public offering; and (iv) pertinent information
regarding the Company and the offering was provided to the
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purchasers, and they or their representatives had access to officers of the
Company to inquire as to any further information they believed relevant.
Also as of May 13, 1998, in connection with the acquisition of Lasiris, sixteen
direct and indirect stockholders of Lasiris were issued 444,146 shares of
capital stock of LHI. Such shares of LHI stock are exchangeable for shares of
the Company's Common Stock on a one for one basis at any time. The Company did
not engage any underwriters in connection with such issuance of LHI stock. In
consideration of such shares of LHI stock, as well as other consideration, LHI
received, directly or indirectly, all of the issued and outstanding stock of
Lasiris. The issuance of LHI stock qualified for the exemption from registration
provided by Section 4(2) of the Securities Act based upon the facts above as
well as: (i) the Company did not engage in any general solicitation or
advertising in connection with such issuance; (ii) the Company took reasonable
precautions to assure that the recipients of the LHI stock would hold such stock
for investment purposes and not transfer such shares of LHI or shares of the
Company's Common Stock in a public offering; and (iii) pertinent information
regarding the Company was provided to the recipients and they or their
representatives had access to officers of the Company to inquire as to any
further information they believed relevant.
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ITEM 6. MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's financial condition, results of
operations and capital resources and liquidity should be read in conjunction
with the Consolidated Financial Statements and related Notes included elsewhere
herein.
Background
The Company is a diversified manufacturing company engaged primarily in the
production of specialized illumination and telecommunication component products.
In addition, we manufacture machine tool components and accessories for the
automotive and related industries.
We have been designing and manufacturing industrial fluorescent lighting
products for metrology instruments for over twenty years. In 1994, we recognized
the need for reliable specialized lighting for industrial applications and made
a strategic decision to shift corporate resources into our illumination product
line, which at the time concentrated on fluorescent illumination systems for
microscopy and machine vision applications. In pursuit of that strategy, we
developed a line of fiber optic illumination products for use with high power
microscopes and began to manufacture fiber optic illumination systems in 1997.
Since 1997, we have continued to invest in acquiring and developing fiber optic
production capability, including state of the art fiber optic drawing
facilities.
On May 13, 1998, we completed our purchase of all of the outstanding stock of
Lasiris, Inc., a Canadian manufacturer of industrial lasers and other
illumination and telecom component products. Since 1991, Lasiris has been a
leading manufacturer of phase masks used in the production of fiber bragg
grating, which is an essential component of dense wavelength division
multiplexer (DWDM) devices for high-capacity fiber optic networks used in the
telecommunications industry. Because the acquisition was accounted for as a
purchase, the 1998 results include the effects of increased goodwill
amortization, increased depreciation of acquired assets, and the results of
Lasiris' operations for the period since the acquisition date. In addition, the
Company recorded a $1.1 million charge for in-process research and development
projects of Lasiris in 1998. See "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
Acquisition of Lasiris."
In December 1999, the Company purchased additional assets that will allow it to
increase production of bulk optical glass fiber. This fiber is marketed to OEM
customers contracted in the production of fiber optic products and solutions. In
the first quarter of fiscal 2000, the Company introduced the Ultra-Long(TM)
Phase Mask allowing telecom companies to use longer fiber bragg gratings to pack
more data in the optical fiber, significantly increasing available bandwidth. At
the OFC 2000 conference in Baltimore, MD the Company announced an exclusive
agreement with a strategic partner for the right to manufacture and sell
photosensitive optical fibers, which include Radiation Mode Suppression (RMS)
fiber. To advance the time to market for these products, the Company most
recently announced the purchase of a fiber drawing tower capable of producing
telecom grade, specialty optical fiber.
Results of Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net Sales
Net sales were $14.3 million in 1999 compared to $12. 6 million in 1998, an
increase of 14.0% or $1.7 million.
11
<PAGE>
Net sales from the Company's illumination and telecommunication component
products were $9.7 million in 1999 compared to $7.3 million in 1998, an increase
of or 33.6% or $2.5 million. This increase was largely due to the addition of
sales contributed by Lasiris, which included laser and telecom component
products, combined with increased sales of fiber optic illumination products
from the Company's Salem facility. The increases in net sales resulted from the
Company's strategic business decision to shift its focus toward illumination and
photonics products.
Net sales from the Company's military products, largely compasses and watches,
were $517,000 in 1999 compared to $458,000 in 1998, representing a 12.9%
increase. The increase resulted from last-time sales on many of its compass
products prior to the sale of the business assets associated with this product
line in September 1999.
Net sales from printer and recorder products decreased from $1.5 million in 1998
to $1.2 million in 1999, or 19.7%, due to lower unit sales of older, mature
products.
Net sales from machine components and accessories decreased from $3.3 million in
1998 to $2.9 million in 1999, a decrease of 13.6%. The primary reason for the
decline was decreased unit shipments of material handling and DieDraulic
products.
Cost of Sales
Cost of sales were $9.3 million in 1999 compared to $7.4 million in 1998, an
increase of 24.8% or 1.9 million. The increase in cost of sales resulted from an
increase in net sales during the same period.
Gross profit was $5.1 million in 1999 and 1998; however, gross margin decreased
from 40.9% in 1998 to 35.2% in 1999. Gross margin declined primarily because of
increased unabsorbed manufacturing costs resulting from the expansion of
manufacturing capacity faster than increases in net sales volume.
Operating Expenses
Selling expenses were $1.9 million in 1999, or 13.2% of net sales, compared to
$1.9 million in 1998, or 15.3% of net sales.
General and administrative expenses were $3.5 million in 1999, or 24.1% of net
sales, compared to $3.3 million, or 26.5% of net sales in fiscal 1998. The
increase in general and administrative expenses was primarily due to an increase
from $326,000 in 1998 to $578,000 in 1999 of amortization expense primarily for
goodwill and other identifiable intangible assets associated with the
acquisition of Lasiris in May 1998.
Research and development expenses were $788,000 in 1999, or 5.5% of net sales
compared to $971,000, or 7.7% of net sales in 1998. The decrease in research and
development expenses resulted from actions taken to eliminate redundant research
expense between Lasiris and the Salem division.
Acquired In-Process Research and Development
In 1998, the Company recorded a nonrecurring charge of $1.1 million with respect
to the costs of research and development projects of Lasiris that were in
process at the time of the acquisition of Lasiris. This portion of the assets
acquired were identified as projects that had not yet reached technological
feasibility and that, until the completion of the development, had no
alternative future use.
12
<PAGE>
Charge for Goodwill Impairment
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.
In July 1998, the Company signed a non-binding letter of intent to sell its
Stilson division. As of June 30, 1998 the carrying value of the net assets for
the Stilson division was approximately $6.9 million, which included $4.9 million
in allocated goodwill recorded when the Company, including Stilson, was acquired
in 1989. The proposed sale of Stilson required the Company to assess the
realizable value of its goodwill. The proposed purchase price for the net assets
of Stilson set forth in the letter of intent was $3.0 million. Accordingly, on
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 for goodwill
impairment.
On November 9, 1998, the Company announced that the letter of intent for the
proposed sale of the assets of Stilson had been terminated. After allocating the
portion of goodwill associated with Stilson, the Company assessed the realizable
value of its remaining goodwill from the 1989 acquisition, which was $3.5
million, net of amortization, as of June 30, 1998. Based on changes in the
Company since 1989, including management's strategic decision to shift the
business focus toward the industrial lighting industries and the recent history
of losses, the Company concluded that the realizable value of the remaining
goodwill was uncertain and that the carrying value of the Stilson goodwill
should be written down to zero. As a result of this assessment, the Company
recorded an additional charge for goodwill impairment of the remaining Stilson
goodwill of approximately $3.5 million in 1998.
Gain on Sale of Real Estate
In August 1999, the Company sold its Fraser, Michigan manufacturing facility for
$1,362,000 and recorded a gain of $511,000 in 1999.
Other Income
Other income was $313,000 in 1999 compared to none in 1998. Other income
includes a gain of $164,000 from the sale of business assets during 1999
relating to the Company's military compass product line and $91,000 from the
sale of marketable securities.
Interest Expense
Interest expense was $717,000 in 1999 compared to $601,000 in 1998. The increase
in interest expense resulted primarily from additional borrowings to fund
working capital.
Provision (Benefit) for Income Taxes
The Company recorded a provision for income taxes of $78,000 in 1999 as a result
of taxable income generated in Canada that could not be used to offset operating
losses in the United States. The Company recorded a benefit for income taxes of
$131,000 in 1998. The Company has recorded a valuation allowance against its net
deferred tax assets in 1999 and 1998 as the Company has concluded that it is not
likely such deferred tax asset would be realized.
13
<PAGE>
Liquidity and Capital Resources
The Company historically has financed its operations primarily through
third-party credit facilities and cash from operations. For the year ended
December 31, 1999, cash and cash equivalents increased $35,000.
Cash used in operating activities was $294,000 in 1999 and resulted from the net
loss offset by gains from the sale of business assets of $533,000 and
depreciation and amortization charges of $1.0 million.
Cash of $736,000 was provided by investing activities, primarily due to the
receipt of $1,317,000 from the sale of business assets in 1999, offset by
$581,000 used for purchases of equipment.
Cash used in financing activities was $413,000 in 1999 and resulted from the
payment of debt totaling $513,000.
On March 3, 2000, the Company completed a private placement of 355,000 common
shares at a price of $26.00 per share totaling net proceeds of approximately
$8.9 million.
On February 18, 2000, the Company announced that all of the holders of its $1.35
million 7 1/4% Convertible Subordinated Notes due May 1, 2001 had elected to
convert their Notes. The Notes were converted into 183,046 shares of common
stock based on a conversion price of $7.375 per share.
On February 11, 1999 the Company entered in a new credit agreement with Wells
Fargo Business Credit, Inc., formerly Norwest Business Credit, Inc., with total
borrowing availability up to $3,500,000. Initial proceeds were used to payoff
the amounts outstanding under the credit agreement between the Company and Fleet
National Bank of Massachusetts, N.A. The new credit facility with Wells Fargo
consists of a $500,000 term loan that requires 60 monthly principal payments of
$8,333, beginning April 1, 1999. The credit facility also provides for a
revolving line of credit of up to $3.5 million less the amount of the term loan.
The amount available for borrowing under this facility is also subject to a
defined borrowing base consisting of eligible accounts receivable and inventory.
As of December 31, 1999, $2,452,000 was outstanding under the term loan and
revolving credit line and approximately $133,000 was available for additional
borrowings. The outstanding principal balance of all advances under this credit
facility bears interest at a floating rate of the bank's base rate plus 2.5%.
The Company's obligation under the Wells Fargo credit agreement is evidenced by
a demand note and may be terminated at any time by Wells Fargo in its sole
discretion, prior to the stated maturity date of March 1, 2002. The Company's
obligations under this credit facility are secured by substantially all of the
Company's assets other than real property. In addition, Mark W. Blodgett, the
Company's Chief Executive Officer, has unconditionally guaranteed all amounts
outstanding. The Credit and Security Agreement between the Company and Wells
Fargo requires the Company to comply with certain affirmative and negative
covenants. As of December 31, 1999 the Company was in technical default of its
covenant regarding minimum earnings. Wells Fargo has waived such default.
On January 21, 1999, the Company entered into an $824,000 mortgage loan with
Comerica Bank, which was scheduled to mature on January 1, 2004 and was secured
by a first mortgage on the Fraser, Michigan property. The loan bore interest at
Comerica's prime rate. Payments were amortized over a 15-year period assuming a
7.75% rate of interest. The Company used a portion of the proceeds of the sale
of the Fraser, Michigan property to repay in full this indebtedness in August
1999.
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
14
<PAGE>
interest only, and its original maturity date of May 13, 1999 has been extended
to February 28, 2001. Under the terms of the extension, Danvers Savings Bank
lowered the interest rate to 10% and requires monthly payments of principal and
interest on a ten-year amortization schedule with $25,000 of additional
principal due each quarter until maturity. As of December 31, 1999, the balance
due under the Danvers Loan was $750,000.
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 December 31,
1999, borrowings on the TD Line of Credit were $1.0 million CDN ($702,000 US).
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 $21,000 CDN
(approximately $15,000 US) plus interest. As of December 31, 1999, the
outstanding balance on the TD Four-Year Term Loan was $604,000 CDN ($418,000
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 $4,000 CDN
(approximately $3,000 US) plus interest. As of December 31, 1999, the
outstanding balance on the TD Two-Year Term Loan was $4,000 CDN ($3,000 US).
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 December 31,
1999, the Company had borrowed $248,000 pursuant to such line of credit.
From time to time, the Company contemplates raising additional capital by the
issuance of equity securities, the proceeds of which may be used, among other
things, in connection with refinancing existing indebtedness. Although the
Company has no reason to believe that Wells Fargo will do so, the structure of
the Company's credit facility with Wells Fargo allows the lender to terminate
the facility and demand payment of the Company's obligations at any time. In
addition, the availability for borrowing under the Wells Fargo credit facility
is limited by a defined borrowing base of eligible accounts receivable and
inventory, which fluctuates from time to time. Assuming Wells Fargo does not
terminate the credit facility and demand repayment and the Company's borrowing
base remains at its current level or higher, the Company believes that its
available financial resources are adequate to meet foreseeable working capital,
debt service and capital expenditure requirements through the next twelve
months.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. SFAS No. 133 is not expected to
have a material impact on the Company's consolidated financial statements.
15
<PAGE>
Certain Factors Affecting Future Operating Results
Statements, other than historical facts, made herein may constitute
forward-looking statements. Such forward-looking statements are subject to risks
and uncertainties, which may cause actual results to differ materially from
those anticipated in such statements. The factors that could cause actual
results to differ materially from anticipated results include, without
limitation, the Company's ability to, (i) compete with entities that have
greater financial, technical and marketing resources than the Company, (ii)
develop and market new products in its various business lines, (iii) gain
sufficient market acceptance for its telecommunications component products (iv)
obtain financing on favorable terms or refinance indebtedness prior to maturity
or (v) maintain availability of funds for borrowing under the Company's credit
arrangement and risks inherent with international operations. In addition,
general economic conditions in the United States, Southeast Asia, and elsewhere
may affect the Company's results.
Inventory Obsolescence
The potential for inventory obsolescence of older products as the Company
develops new products is not significant. With the exception of the Company's
new line of specialized illumination and telecom component products, the
Company's product offerings have remained substantially the same for twenty
years, with new enhancements introduced periodically. Enhanced versions of old
products are not introduced to the market until the old components being
replaced in the new configurations are appropriately reduced. New product
additions to existing lines are generally designed to accommodate new and
different applications, have features that are quite different from existing
products, and do not impact the demand for other, older products.
Year 2000 Compliance
The year 2000 computer problem refers to the potential for system and processing
failures of date-related data as a result of computer-controlled systems using
two digits rather than four to define the applicable year. For example, computer
programs that have time-sensitive software may recognize a date represented as
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
To date, the Company has not experienced any year 2000 issues with any of its
internal systems or products and does not expect to experience any in the
future. To date, the Company has not experienced any year 2000 issues related to
any key third party suppliers and customers and does not expect to experience
any in the future. Costs associated with remediation of its internal systems
were not material.
16
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The information required by Item 7 is presented on pages 19 through 36
of this Form 10-KSB. The index to the Company's consolidated financial
statements is set forth below:
Page
Report of Independent Public Accountants 18
Consolidated Balance Sheet at December 31, 1999 and 1998 19
Consolidated Statements of Operations for the Years Ended
December 31, 1999 and 1998 20
Consolidated Statements of Stockholders' Investment for the Years
Ended December 31, 1999 and 1998 21
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998 22
Notes to Consolidated Financial Statements 23
17
<PAGE>
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, 1999 and
1998, 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, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Boston, Massachusetts
March 9, 2000
18
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
Assets 1999 1998
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 120,737 $ 85,854
Marketable Securities -- 86,407
Trade receivables, less reserves of approximately $84,000 in 1999 and $209,000
in 1998 2,420,039 2,131,472
Prepaid income taxes 223,987 162,039
Inventories 5,966,691 6,260,779
Prepaid expenses 171,228 276,565
------------ ------------
Total current assets 8,902,682 9,003,116
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET 3,687,153 4,340,654
------------ ------------
NOTE RECEIVABLE 100,000 --
------------ ------------
GOODWILL, NET OF ACCUMULATED AMORTIZATION 2,208,549 2,470,796
------------ ------------
IDENTIFIED INTANGIBLE ASSETS 2,587,329 2,902,675
------------ ------------
CASH VALUE LIFE INSURANCE 66,098 52,546
------------ ------------
$ 17,551,811 $ 18,769,787
============ ============
Liabilities and Stockholders' Investment
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,798,367 $ 4,420,085
Accounts payable 3,432,765 3,134,933
Accrued expenses 940,445 893,970
Short-term lease obligation 212,586 224,046
------------ ------------
Total current liabilities 8,384,163 8,673,034
------------ ------------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 3,810,913 3,691,140
------------ ------------
OTHER LONG-TERM LIABILITIES 564,688 564,688
------------ ------------
DEFERRED INCOME TAXES 1,037,688 1,153,925
------------ ------------
COMMITMENTS (NOTE 11)
STOCKHOLDERS' INVESTMENT:
Common stock, par value $0.001-
Authorized--10,000,000 shares at December 31, 1999 and 1998
Issued and outstanding--3,802,525 and 3,679,448 shares at
December 31, 1999 and 1998, respectively 3,803 3,679
Paid-in capital 14,424,720 14,224,841
Accumulated other comprehensive income (loss) (17,585) 57,432
Accumulated deficit (10,656,579) (9,598,952)
------------ ------------
Total stockholders' investment 3,754,359 4,687,000
------------ ------------
$ 17,551,811 $ 18,769,787
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
19
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1999 1998
<S> <C> <C>
NET SALES $ 14,343,761 $ 12,585,322
COST OF SALES 9,289,237 7,440,743
------------ ------------
Gross profit 5,054,524 5,144,579
OPERATING EXPENSES:
Selling expenses 1,890,089 1,925,361
General and administrative expenses 3,462,279 3,329,995
Research and Development 787,633 971,378
Charge for goodwill impairment -- 7,365,662
Charge for acquired in-process research and development -- 1,087,914
------------ ------------
Total operating expenses 6,140,001 14,680,310
Operating loss (1,085,477) (9,535,731)
OTHER INCOME 823,479 --
INTEREST EXPENSE (717,262) (601,031)
------------ ------------
Loss before income tax provision (benefit) (979,260) (10,136,762)
INCOME TAX PROVISION (BENEFIT) 78,367 (130,866)
------------ ------------
Net loss $ (1,057,627) $(10,005,896)
============ ============
LOSS PER SHARE - BASIC AND DILUTED $ (0.28) $ (3.25)
============ ============
WEIGHTED AVERAGE COMMON SHARES - BASIC AND DILUTED 3,772,514 3,078,674
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
20
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
Cumulative
Common Stock Items of
-------------------- Retained Other Total
$0.001 Paid-in Earnings Comprehensive Stockholders' Comprehensive
Shares Par Value Capital (Deficit) Income Investment Income (Loss)
<S> <C> <C> <C> <C> <C> <C> <C>
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
Unrealized gain on investment -- -- -- -- 86,407 86,407 $ 86,407
Cumulative translation adjustment -- -- -- -- (28,975) (28,975) (28,975)
Net loss -- -- -- (10,005,896) -- (10,005,896) (10,005,896)
------------
Comprehensive net loss for the year ended
December 31, 1998 $ (9,948,464)
--------- ------ ----------- ------------ -------- ------------ ============
BALANCE, DECEMBER 31, 1998 3,679,448 3,679 14,224,841 (9,598,952) 57,432 4,687,000
Issuance of common stock to employee 123,077 124 199,879 -- -- 200,003
Unrealized gain on investment -- -- -- -- (86,407) (86,407) $ (86,407)
Cumulative translation adjustment -- -- -- -- 11,390 11,390 11,390
Net loss -- -- -- (1,057,627) -- (1,057,627) (1,057,627)
------------
Comprehensive net loss for the year ended
December 31, 1999 $ (1,132,644)
--------- ------ ----------- ------------ -------- ------------ ============
BALANCE, DECEMBER 31, 1999 3,802,525 $3,803 $14,424,720 $(10,656,579) $(17,585) $ 3,754,359
========= ====== =========== ============ ======== ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
21
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,057,627) $(10,005,896)
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
Gain on sale of fixed assets (533,412) --
Depreciation and amortization 1,033,131 848,463
Deferred income taxes (116,237) (629,011)
Other changes in assets and liabilities-
Accounts receivable, net (288,567) 403,396
Inventories 294,088 (500,072)
Prepaid expenses 105,337 (150,832)
Prepaid taxes (61,948) 331,198
Accounts payable 297,832 742,884
Accrued expenses 46,475 92,441
Cash value of life insurance (13,553) --
------------ ------------
Net cash used in operating activities (294,481) (306,008)
------------ ------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchases of property, plant and equipment (581,373) (636,170)
Net proceeds from sale of fixed assets 1,317,421 --
Acquisition of Lasiris -- (3,815,234)
------------ ------------
Net cash provide by (used in) investing activities 736,048 (4,451,404)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, including options exercised 200,003 1,563,235
Proceeds (payments) of bank debt (513,405) 2,235,486
Note receivable (issued) settled (100,000) 1,000,000
------------ ------------
Net cash provided by(used in) financing activities (413,402) 4,798,721
------------ ------------
EFFECT OF EXCHANGE RATE ON CHANGES IN CASH 6,718 (28,975)
NET INCREASE IN CASH AND CASH EQUIVALENTS 34,883 12,334
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 85,854 73,520
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 120,737 $ 85,854
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 717,128 $ 597,343
============ ============
Taxes paid $ 49,804 $ --
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
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.
22
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) ORGANIZATION AND OPERATIONS
Stocker & Yale, Inc. (the Company) was incorporated in 1951, and is
primarily engaged in the design, manufacture and distribution of
structured light lasers, specialized fiber optic and fluorescent
illumination products for the machine vision and industrial inspection
industries as well as telecommunication component products. Under the MFE
brand name, the Company manufactures a broad range of oscillographic
recorders and thermal printers which are used in medical, laboratory and,
general industrial and commercial applications
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 Roseville, Michigan. These products
are sold to the automotive, electronic, food, pharmaceutical and
appliance industries.
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.
On March 3, 2000, the Company completed a private placement of 355,000
common shares at a price of $26.00 per share totaling net proceeds of
approximately $8.9 million.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the
application of certain significant accounting policies as described in
this note and elsewhere in the accompanying consolidated financial
statements and notes.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its majority owned subsidiaries, Radiant Asiatec Pte.
Ltd, and Lasiris Holdings, Inc. All significant intercompany balances and
transactions have been eliminated.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with original
maturities of three months or less.
Earnings per Share
In accordance with SFAS No. 128, Earnings Per Share, basic and diluted
net loss per common share is calculated by dividing the net loss by the
weighted average number of common shares outstanding. Diluted net loss
per share exclude the effect of 646,451 shares in 1999 and 612,086 shares
in 1998 of potential common shares from stock options and warrants,
because to include such shares would have been antidilutive.
23
<PAGE>
Revenue Recognition
The Company recognizes revenue as products are shipped.
Property, Plant and Equipment
Property, plant and equipment, as of December 31, 1999 and 1998 consisted
of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Land $ 306,300 $ 483,989
Building and building improvements 1,845,138 2,693,176
Machinery and equipment 5,752,965 5,235,700
Furniture and fixtures 1,286,006 1,181,458
------------- -------------
9,190,409 9,594,323
Less -- accumulated depreciation and amortization 5,503,247 5,253,669
------------- -------------
$ 3,687,162 $ 4,340,654
============= =============
</TABLE>
Depreciation
The Company provides for depreciation on a straight-line basis by charges
to expense in amounts estimated to amortize the costs of property, plant
and equipment over their estimated useful lives as follows:
Asset Classification Estimated Useful Life
Building and building improvements 10 to 40 years
Machinery and equipment 5 to 10 years
Furniture and fixtures 3 to 10 years
Total depreciation and amortization of property, plant and equipment was
approximately $456,000 and $500,000 in 1999 and 1998, respectively.
Goodwill and Other Intangible Assets
Intangible assets as of December 31, 1999 and 1998 consisted of the
following:
1999 1998
Goodwill $ 12,418,530 $ 12,418,530
Debt issuance costs 334,857 334,857
Other identified intangible assets 3,075,450 3,075,450
-------------- --------------
15,828,837 15,828,837
Less - accumulated amortization 11,032,960 10,455,366
-------------- --------------
$ 4,795,877 $ 5,373,471
============== ==============
24
<PAGE>
The rates used to compute amortization are based on the following
estimated useful lives:
Asset Classification Estimated Useful Life
Goodwill 10 years
Identifiable intangibles 10 years
Debt issuance costs Life of loan
Amortization of goodwill and other intangibles was approximately $578,000
for the year ended December 31, 1999 and, exclusive of the write-off of
approximately $7,366,000, was approximately $477,000 for the year ended
December 31, 1998.
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 $8,000 and $40,000 for the
years ended December 31, 1999 and 1998, respectively.
Long-Lived 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. In June 1998, the Company determined that an impairment of the
carrying value of the goodwill attributable to its Stilson division had
occurred. Accordingly, the Company recorded a charge for the impairment
of Stilson goodwill of approximately $3.9 million in 1998.
After allocating the portion of the goodwill associated with Stilson, the
Company performed an assessment of the realizability of its remaining
$3.5 million of goodwill from the 1989 acquisition. 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 was
uncertain and that the carrying value should be written down to zero. As
a result of this assessment the Company recorded an additional charge for
the impairment of the remaining goodwill of $3.5 million in the second
half of 1998.
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.
Stock-Based Compensation
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
25
<PAGE>
share as if the fair value based method of accounting defined in SFAS No.
123 has been applied.
Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes new standards for the
reporting and display of comprehensive income and its components. The
accompanying consolidated statements of stockholders' investment presents
the Company's comprehensive income, which includes foreign currency
translation adjustments and unrealized net of tax gains and losses from
available-for-sale investments.
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, 1999.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
The risk is limited due to the relatively large number of customers
composing the Company's customer base and their dispersion across many
industries and geographic areas within the United States, Europe and
Asia.
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.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 133, Accounting
for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133, as amended by SFAS
No. 137, is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. SFAS No. 133 is not expected to have a material
impact on the Company's consolidated financial statements.
Reclassification
Certain amounts reported for prior periods have been reclassified to be
consistent with the current period presentation.
26
<PAGE>
(3) 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 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. 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 $1.1 million of purchase price allocated to in-process research and
development represented incomplete research and development projects at
the date of acquisition. 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 charged to operations as of the acquisition date.
In connection with the acquisition, the stockholders of Lasiris received
an aggregate of approximately $3.2 million in cash and 444,146 shares of
Lasiris Holding Inc.'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.
The following unaudited, pro forma financial information assumes that the
acquisition of Lasiris took place at the beginning of 1998:
1998
(Unaudited)
Net revenues $ 14,155,590
Net loss $(10,213,921)
Net loss per share $ (3.15)
Weighted average shares outstanding 3,239,296
27
<PAGE>
(4) INCOME TAXES
The components of the provision (benefit) for income taxes are as
follows:
For the Years Ended
December 31,
1999 1998
Current-
Federal $ (98,000) $(283,000)
State (18,000) (88,000)
Foreign 78,000 68,000
--------- ---------
(38,000) (303,000)
--------- ---------
Deferred-
Federal 98,000 146,000
State 18,000 26,000
Foreign -- --
--------- ---------
116,000 172,000
--------- ---------
$ 78,000 $(131,000)
========= =========
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
Ended December 31,
1999 1998
<S> <C> <C>
Applicable statutory federal income tax benefit $ (333,000) $(3,447,000)
State income taxes, net of federal income tax benefit (59,000) (608,000)
Non-deductible amortization and impairment charge 228,000 3,137,000
Acquired in process research and development -- 435,000
Other, net (41,000) 142,000
Valuation allowance 283,000 210,000
----------- -----------
$ 78,000 $ (131,000)
=========== ===========
</TABLE>
The significant items composing the deferred tax asset and liability at
December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
----------- -----------
<S> <C> <C>
Net operating loss carryforwards $ 789,000 $ 758,000
Financial reserves not yet deductible 470,000 208,000
Accelerated depreciation and property-basis differences (772,000) (841,000)
Identified intangible assets (1,038,000) (1,154,000)
Other 6,000 85,000
Valuation allowance (493,000) (210,000)
----------- -----------
$(1,038,000) $(1,154,000)
=========== ===========
</TABLE>
28
<PAGE>
The Company has provided a valuation allowance for a portion of deferred
tax assets that may not be realized. As of December 31, 1999, the
Company's federal net operating loss carryforward totaled approximately
$2.0 million.
As of December 31, 1999, the Company had net operating loss carryforwards
(NOLs) of approximately $2.0 million available to offset future taxable
income, if any. These carryforwards expire through 2019 and are subject
to review and possible adjustment by the Internal Revenue Service. The
Company's historical operating losses raise doubt as to the realizability
of the deferred tax assets. As a result, management believes that it is
more likely than not that the net deferred tax asset will not be
realized.
(5) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis)
or market and include materials, labor and overhead. Inventories are as
follows:
December 31,
1999 1998
Finished goods $ 825,821 $ 603,435
Work-in-process 419,472 201,695
Raw materials 4,721,398 5,455,649
---------- ----------
$5,966,691 $6,260,779
========== ==========
(6) NOTE RECEIVABLE
On September 24, 1999, the Company sold its military compass product line
for $200,000 in cash and a note receivable of $100,000 from the buyer.
The note demands payment of interest only for the first six months with
interest and principal payable over the following twelve months.
(7) LONG-TERM DEBT
As of December 31, 1999 and 1998, debt consisted of the following:
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
Borrowings under Credit Agreement with Wells Fargo 2,451,552 --
Revolving line of credit, maturing March 31, 1999, payable to Fleet
Bank, NA, with an interest rate at the bank's prime lending rate plus
1/2% at December 31, 1998 -- 1,775,881
Convertible subordinated notes payable 1,350,000 1,350,000
Mortgage note payable to a bank (Salem facility), maturing August 29,
2011, with an interest rate of 9.25% as of December 31, 1998; effective
August 29, 1999 the rate was at the bank's prime rate plus 1% 1,319,360 1,379,489
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
Term loan with a bank, maturing on March 31, 1999, with an interest
rate of prime plus 1/2% at December 31, 1998 -- 1,014,905
Mortgage Note with Danvers Savings Bank 750,000 750,000
Borrowings under equipment line of credit 248,465 315,868
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
Borrowings under Credit Agreement with Toronto Dominion Bank 1,123,945 1,066,546
Revolving line of credit, maturing on demand, payable to a Singapore
bank, with an interest rate of prime plus 2% 53,413 --
Equipment loans payable to banks, with maturities through February
2002, at interest rates ranging from 8.5% to 8.8% 31,152 58,755
Machinery and equipment capital lease obligation, maturing at various
dates through November 2002, with interest rates ranging from of 7.8%
to 8.0% 291,858 421,706
---------- ----------
7,821,866 8,335,271
Less - Current portion of long-term debt 4,010,953 4,644,131
---------- ----------
$3,810,913 $3,691,140
========== ==========
</TABLE>
Borrowings under Credit Agreement with Wells Fargo
On February 11, 1999 the Company entered in a credit agreement with Wells
Fargo Business Credit, Inc., formerly Norwest Business Credit, Inc., with
total borrowing availability up to $3,500,000. Initial proceeds were used
to payoff the amounts outstanding under the credit agreement between the
Company and Fleet National Bank of Massachusetts, N.A. The new credit
facility with Wells Fargo consists of a $500,000 term loan that requires
60 monthly principal payments of $8,333, beginning April 1, 1999. The
credit facility also provides for a revolving line of credit of up to
$3.5 million less the amount of the term loan. The amount available for
borrowing under this facility is also subject to a defined borrowing base
consisting of eligible accounts receivable and inventory. The outstanding
principal balance of all advances under this credit facility bears
interest at a floating rate of the bank's base rate plus 2.5%. The
Company's obligation under the Wells Fargo credit agreement is evidenced
by a demand note and may be terminated at any time by Wells Fargo in its
sole discretion, prior to the stated maturity date of March 1, 2002. The
Company's obligations under this credit facility are secured by
substantially all of the Company's assets other than real property. In
addition, Mark W. Blodgett, the Company's Chief Executive Officer, has
unconditionally guaranteed all amounts outstanding. The Credit and
Security Agreement between the Company and Wells Fargo requires the
Company to comply with certain affirmative and negative covenants. As of
December 31, 1999 the Company has obtained a waiver for its events of
default of its covenant regarding minimum earnings. As of December 31,
1999, $2,035,000 and $417,000 were
30
<PAGE>
outstanding under the revolving credit line and term loan, respectively.
Approximately $133,000 was available for additional borrowings under the
revolving credit line.
Convertible Subordinated Notes Payable
On February 18, 2000, all of the holders of the outstanding convertible
subordinated notes payable elected to convert their notes. Notes totaling
$1,350,000 were converted into 183,046 shares of common stock based on a
conversion price of $7.375 per share.
Mortgage Note Payable with Comerica Bank (Michigan)
On January 21, 1999, the Company entered into an $824,000 mortgage loan
with Comerica Bank, secured by a first mortgage on the Fraser, Michigan
property. The loan bore interest at Comerica's prime rate. Payments were
amortized over a 15-year period assuming a 7.75% rate of interest. The
Company repaid this mortgage note payable in full using the proceeds from
the sale of the Fraser, Michigan property in August 1999.
Mortgage Note Payable with Danvers Savings Bank (New Hampshire)
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 its
original maturity date of May 13, 1999 was extended to February 28, 2001.
Under the terms of the extension, Danvers Savings Bank lowered the
interest rate to 10% and requires monthly payments of principal and
interest on a 10-year amortization schedule with $25,000 of additional
principal due each quarter until maturity. As of December 31, 1999, the
balance due under the Danvers Loan was $750,000.
Borrowings under Credit Agreement with Toronto Dominion Bank
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 December 31, 1999, borrowings on the TD Line of Credit were $1.0
million CDN ($702,000 US). 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 $21,000 CDN (approximately $15,000 US) plus
interest. As of December 31, 1999, the outstanding balance on the TD
Four-Year Term Loan was $604,000 CDN ($418,000 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 $4,000 CDN
(approximately $3,000 US) plus interest. As of December 31, 1999, the
outstanding balance on the TD Two-Year Term Loan was $4,000 CDN ($3,000
US).
Borrowings under Equipment Line of Credit with Granite Bank
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 December 31, 1999, the Company had borrowed $248,000 pursuant
to such line of credit.
31
<PAGE>
(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.
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.
In December 1998, the Company also issued 100,908 shares to the Company's
chief executive officer in exchange for his guarantee of certain
indebtedness to the Company. The value of the shares, totaling $108,000,
was recorded as a charge to operations in the accompanying statement of
operations in 1998.
(9) STOCK OPTIONS
Stock Option Plans
During 1994, the Company adopted a stock option plan (the 1994 Option
Plan) for the purpose of issuing both Incentive Options and Nonqualified
Options to officers, employees and directors of the Company. No options
may be granted under this plan and as of December 31, 1999, there were no
options outstanding under the 1994 Option Plan.
In March 1996, the Company adopted the 1996 Stock Option and Incentive
Plan (the 1996 Option Plan) for the purpose of issuing both Incentive
Options and Nonqualified Options to officers, employees and directors of
the Company. A total of 150,000 shares of common stock were reserved for
issuance under this plan. In May 1998, the Company increased the total
shares reserved for issuance under this plan by 150,000 shares for a
total of 300,000 shares. In May 1999, the Company increased the total
shares reserved for issuance under this plan by 300,000 shares for a
total of 600,000 shares available for issuance. Options may be granted
under the Option Plan on such terms and at such prices as determined by
the Board of Directors, except that the options cannot be granted at less
than 100%, or in certain circumstances not less than 110%, of the fair
market value of the common stock on the date of the grant. Each option
will be exercisable after the period or periods specified in the option
agreement, but no option may be exercised after the expiration of 10
years from the date of grant.
The following is a summary of the activity for the Company's stock
options:
<TABLE>
<CAPTION>
Number of Weighted
Shares Price Range Average Price
<S> <C> <C> <C>
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
</TABLE>
32
<PAGE>
<TABLE>
<S> <C> <C> <C>
Exercised (2,300) $ 4.40 $ 4.40
-------- ------------- -------
Outstanding at December 31, 1998 377,040 $1.75 - $7.25 $ 5.13
Granted 410,405 $1.31 - $1.94 $ 1.61
Forfeited/Cancelled (364,040) $1.75 - $7.25 $ 5.12
-------- ------------- -------
Outstanding at December 31, 1999 423,405 $1.31 - $1.94 $ 1.61
======== ============= =======
Exercisable at December 31, 1999 -- $ -- --
======== ============= =======
</TABLE>
In 1999, the Company granted options to purchase 20,000 shares of options
to common stock with a weighted average exercise price of $ 1.69 per
share to nonemployees. The Company determined that the fair value of
these options totaled $26,000 using the Black-Scholes option valuation
model. The fair value of these options will be recorded as a charge to
operations as the options vest. In 1999, the Company recorded
compensation expense totaling $13,000 relating to these options.
Stock-Based Compensation
The Company elected to account for its stock-based compensation plan
under APB 25. However, the Company has computed, for pro forma disclosure
purposes, the value of all options granted during 1999 and 1998 using the
Black-Scholes option pricing model as prescribed by SFAS No. 123, using
the following weighted-average assumptions for grants in 1999 and 1998:
1999 1998
Risk-free interest rate 5.08%-6.41% 4.70%-5.97%
Expected dividend yield - -
Expected life 10 years 10 years
Expected volatility 67% 62%
The total value of options granted during 1998 and 1999 would be
amortized on a pro forma basis over the vesting period of the options.
Options generally vest equally over two years. If the Company had
accounted for these plans in accordance with SFAS No. 123, the Company's
net loss and net loss per share would have increased as reflected in the
following pro forma amounts:
Year Ended December 31,
1999 1998
Net loss-
As reported $(1,057,627) $(10,005,896)
Pro forma $(1,556,581) $(10,331,756)
Net loss per share-
As reported $(0.28) $(3.25)
Pro forma $(0.41) $(3.36)
33
<PAGE>
(10) EMPLOYEE BENEFIT PLANS
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.
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 and contributed $36,000 in
fiscal 1999. The Company incurred costs of approximately $5,000 in both
1999 and 1998 to administer the Plan.
(11) COMMITMENTS
The Company leases facilities and equipment under operating leases. The
future minimum lease payments as of December 31, 1999 are as follows:
For the Year Ending December 31, Amount
2000 $ 205,000
2001 202,000
2002 162,000
Thereafter 148,000
--------------
Total minimum lease payments $ 717,000
==============
Total rent expense for operating leases charged to operations was $52,000
in 1999 and $48,000 in 1998.
(12) SEGMENT INFORMATION
The Company has adopted the SFAS No. 131, Disclosures About Segments of
an Enterprise and Related information. SFAS No. 131 requires financial
and supplementary information to be disclosed on an annual and interim
basis of each reportable segment of an enterprise. SFAS No. 131 also
establishes standards for related disclosures about product and services,
geographic areas and major customers. Operating segments are identified
as components of an enterprise about which separate discrete financial
information is available for evaluation by the chief decision making
group, in making decisions how to allocate resources and assess
performance. The Company's chief decision-maker is the chief executive
officer.
The Company evaluates its operations in two product segments: Measuring
and Inspection Instruments and Machine Components and Accessories.
34
<PAGE>
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates
performance of its segments based on revenues and segment profitability.
Segment profitability is defined by the Company as the loss from
operations. Noncash expenses included in the segment profitability
measure have been detailed separately in the table below.
Year Ended December 31,
1999 1998
Net sales:
Measuring and Inspection Instruments $ 11,482,666 $ 9,273,434
Machine Components and Accessories 2,861,096 3,311,888
------------ ------------
$ 14,343,761 $ 12,585,322
============ ============
Operating loss:
Measuring and Inspection Instruments $ (698,681) $ (5,355,750)
Machine Components and Accessories (386,796) (4,179,981)
------------ ------------
$ (1,085,477) $ (9,535,731)
============ ============
Identifiable assets:
Measuring and Inspection Instruments $ 16,891,882 $ 17,867,643
Machine Components and Accessories 870,929 1,113,144
------------ ------------
$ 17,762,811 $ 18,980,787
============ ============
Noncash expenses:
Measuring and Inspection Instruments $ 706,072 $ 609,640
Machine Components and Accessories 327,059 216,643
------------ ------------
$ 1,033,131 $ 826,283
============ ============
Sales to unaffiliated customers in foreign countries outside of the
United States represented approximately 22% and 9% of net sales for
fiscal 1999 and 1998, respectively. The Company's export sales are
denominated in U.S. dollars.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
35
<PAGE>
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Information pertaining to directors and executive officers of the Company
is set forth under "Election of Directors" in the Company's Proxy Statement for
the Special Meeting in Lieu of an Annual Meeting of Stockholders to be held on
May 30, 2000 (the "Proxy Statement"), and is incorporated herein by reference.
The information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934 by the directors, executive officers and beneficial owners
of more than 10% of the Company's Common Stock required by this item is set
forth under "Compliance with Section 16(a) of the Exchange Act" in the Company's
Proxy Statement and is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
Information pertaining to executive compensation is set forth under
"Compensation of Executive Officers and Directors" in the Company's Proxy
Statement and is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Information pertaining to security ownership of management and certain
beneficial owners of Company Common Stock is set forth under "Voting Securities
and Principal Holders Thereof" in the Company's Proxy Statement and is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information pertaining to certain relationships and related transactions
is set forth under "Certain Relationships and Related Transactions" in the
Company's Proxy Statement and is incorporated herein by reference.
36
<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.
Exhibit
Number Description
------ -----------
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.
10.8(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.
37
<PAGE>
Exhibit
Number Description
------ -----------
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-KSB, 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.
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.
38
<PAGE>
Exhibit
Number Description
------ -----------
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.
10.17(a) Credit Agreement, dated as of May 13, 1998, by and between
Toronto-Dominion Bank and Lasiris, Inc.
10.17(b) Guarantee and Postponement of Claim, dated as of May 13, 1998,
by Stocker & Yale.
*21.1 Subsidiaries of the Company
*23.1 Consent of Arthur Andersen LLP
*27.1 Financial Data Schedule
- -----------------------
* Filed herewith
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the fourth quarter of 1999.
39
<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.
STOCKER & YALE, INC.
Date: March 30, 2000 By : /s/ Mark W. Blodgett
--------------------- ----------------------
Mark W. Blodgett, Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been duly signed below by the following persons on behalf of the
Registrant and in the capacities and on the date set forth above.
Signature Title Date
--------- ----- ----
/s/ Mark W. Blodgett Chairman of the Board March 30, 2000
- ----------------------- of Directors and Chief
Mark W. Blodgett Executive Officer
/s/ Alain Beauregard President, Chief Technology March 30, 2000
- ----------------------- Officer and Director
Alain Beauregard
/s/ Lawrence Blodgett Director March 30, 2000
- -----------------------
Lawrence Blodgett
/s/ Clifford Abbey Director March 30, 2000
- -----------------------
Clifford Abbey
/s/ Steven E. Karol Director March 30, 2000
- -----------------------
Steven E. Karol
/s/ John M. Nelson Director March 30, 2000
- -----------------------
John M. Nelson
/s/ Dr. Herbert Cordt Director March 30, 2000
- -----------------------
Dr. Herbert Cordt
/s/ Gary B. Godin Senior Vice President-Finance March 30, 2000
- ----------------------- and Treasurer
Gary B. Godin
40
EXHIBIT 21.1
SUBSIDIARIES
Lasiris Holdings, Inc.
Radiant Asiatec Pte. Ltd
Stocker & Yale Hong Kong, Ltd.
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-KSB, into the Company's previously filed
Registration Statement File Nos. 333-14757 and 333-60717.
Boston, Massachusetts
March 30, 2000
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