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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB/A-2
(AMENDMENT NO. 2)
ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
Commission file number 0-5460
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Stocker & Yale, Inc.
(Name of small business issuer in its charter)
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<S> <C>
Massachusetts 04-2114473
State or other jurisdiction of (I.R.S. employer
incorporation or organization identification no.)
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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)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for 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. [ ]
The registrant's revenues for the fiscal year ended December 31, 1997 were
$11,062,026.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 27, 1998 was $9,888,790 based on the price per share of
such stock reported at closing on the Nasdaq SmallCap Market on that date.
As of October 7, 1998 there were 3,364,340 shares of the issuer's common stock
outstanding.
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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. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled "Certain Factors
Affecting Future Operating Results" on page 9 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 which was publicly traded
in Canada. The Company's common stock (the "Common Stock") was listed and traded
in 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".
As of December 31, 1997, the authorized capital stock of the Company was
10,000,000 shares of Common Stock of which 2,567,894.6 shares were issued and
outstanding. An additional 490,091 shares of Common Stock have been reserved for
issuance upon the exercise of outstanding options to purchase Common Stock and
upon conversion of certain convertible indebtedness of the Company.
The Company has two active subsidiaries: Stocker & Yale Foreign Sales
Corporation, a U.S. Virgin Islands corporation which is a wholly-owned
subsidiary of the Company and qualifies as a "foreign sales corporation" under
the Internal Revenue Code, and Radiant Asiatec Pte, Ltd., a Singapore
corporation formed in December, 1997, which is an 80% owned subsidiary of the
Company. A third subsidiary, Stocker & Yale Hong Kong Ltd., a Hong Kong
corporation formed in March,1995, ceased operations in December, 1997.
Business Description
The Company is a diversified manufacturing company engaged predominantly
in the production of lighting systems for measuring and inspection equipment in
the microscopy and machine vision markets. In addition, the Company manufactures
machine tool components and accessories for the automotive and related
industries. The Company operates in two company-owned facilities in Salem, New
Hampshire and Fraser, Michigan, and in leased space in Singapore. Sales to
unaffiliated customers in foreign countries represented 17% and 11% of net sales
in 1997 and 1996, respectively.
Salem Division/Lighting and accessories for measuring and inspection
instruments. The Company's Salem Division, located in Salem, New Hampshire,
produces a broad array of inspection and measurement instruments and
accessories. The Division's core business is the development, manufacture and
distribution of lighting products for the microscopy and machine vision markets
("Industrial Lighting Products"). The Salem Division also supports two ancillary
product lines: Military Products and Recorder/Printer Products.
Sales Data.
Sales generated by the Salem Division represented approximately 65% of
total Company sales in 1997, and approximately 62% in 1996. Industrial Lighting
Products represent the Company's fastest growing product segment in terms of
sales volume and represent approximately 37% of total Company sales in 1997 from
approximately 24% in 1996 and approximately 18% in 1995. Measuring and
Inspection Instruments represented approximately 27% of total Company sales
in1997 and approximately 35% in 1996.
Industrial Lighting Products.
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Stocker & Yale has been designing, manufacturing and selling industrial
fluorescent lighting products since the establishment of the Company over fifty
years ago by two engineers who recognized the need for reliable specialized
lighting in industrial applications. The Company is a manufacturer of
fluorescent illumination systems for microscopy and machine vision applications.
In 1997, the Company began to manufacture fiber optic illumination systems for
the same industries.
The Company's fluorescent illuminators are used primarily to provide
lighting for microscopes and cameras, and are widely utilized for inspection
operations in the semiconductor and hard disk manufacturing industries.
Representatives of these industries are IBM, Seagate and Read-Rite, which are
among the Company's largest customers, although none of these accounts for more
than 2.5% of the Company's total sales.
In 1997, the Company developed a line of fiber optic illumination
products for use with high power microscopes. These products utilize glass fiber
which is produced in-house, enabling the Company to ensure high quality. As new
fiber optic lighting products were developed and refined, initial orders were
primarily for fiber bundles and came primarily from lighting distributors. In
February 1998, the Company received its first significant fiber optic order,
totaling approximately $560,000 from an original equipment manufacturer
("OEM")for a fiber optic illuminator, the Model 2000.
Measuring and Inspection Instruments.
In addition to Industrial Lighting Products, the Salem Division also
supports other product lines, which are broadly characterized as Measuring and
Inspection Instruments, specifically known as Military Products and
Recorder/Printer Products. The Company manufactures compasses and sources and
distributes watches to military specifications. These watches and compasses
("Military Products") are sold to the U.S. government and to the civilian
market. Since 1979, the Company has manufactured over one million compasses for
the U.S. Army. Although the Company competes against foreign companies in the
bidding process, as of December 31, 1997, Stocker & Yale is the only U.S.
company qualified as a supplier of watches to the U.S. armed forces. The Company
bid for and won a contract to be the sole supplier of Model 490, Type I watches
to the U.S. armed forces. The contract expires in November, 1999. Under the MFE
brand name, the Salem Division also manufactures and distributes a variety of
oscillographic and thermal recorders and printers ("Recorder/Printer Products")
for diverse field, industrial and laboratory uses.
Distribution.
Salem Division products are sold to over 8,000 customers, primarily in
North America, Europe and the Pacific Rim. The Salem Division sells directly and
also works with a group of approximately 125 microscope dealers and machine
vision integrators in selling industrial lighting products and with
approximately five manufacturer's representatives in selling MFE brand products.
No single customer represents more than 10% of division revenues.
Competition and Competitive Position.
The Company competes with a number of large and small firms in the
design and manufacture of its Industrial Lighting Products and Measurement and
Inspection Instruments. 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.
Industrial Lighting Products.
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 its lighting
product line is limited and represents a small percentage of that company's
total business.
The Company has five primary competitors in the fiber optic lighting
market. The most mature segment of this market relates to lighting for
microscopes. Within that segment, Volpi Manufacturing USA, Inc. and Dolan-Jenner
Industries, Inc. have highest market share. Both of these companies have been
producing fiber optic products for more than thirty years and offer a fully
developed line of microscopy products. A third company, Cuda Products, Inc.,
also supplies fiber optic lighting for microscopy, however, its primary market
is medical products. The value-oriented segment of the microscopy market is
dominated
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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
lighting for machine vision, which is automated imaging and inspection
equipment. Fostec, Inc., is the leading provider of fiber optic lighting for
machine vision, with ten years of experience in the machine vision industry and
advanced glass technology its primary advantages.
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 which may make the Company's fiber long-lived and
reliable. Further, the Company's spectrographic analysis has established 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 microscopy
applications in less than two years.
The Company competes primarily on the basis of service and product
performance. The Company believes that its primary market advantages going
forward are its long history of providing specialized products to meet
customers' illumination needs, its broad line of industrial fluorescent lighting
products, its ability to produce high quality glass fiber, and its design and
development capabilities.
MEASURING AND INSPECTION INSTRUMENTS. The chart recorder and thermal
printer market is dominated by companies that are larger and offer more advanced
technology than the Salem Division. Recognizing that it lacks the resources to
compete directly against larger companies, such as Gould, Inc., and General
Scanning, Inc., the Company focuses on the value-oriented segment of the market
and customers with low volume specialized applications.
In bidding for contracts to supply compasses and watches for the U.S.
Army, the Company competes against only a limited number of firms. However, as a
result of reduced spending by the United States government, the Company expects
to obtain fewer contracts from the United States armed forces in the future.
Machine tool components and accessories product lines
For over 50 years, the Company's Stilson/Die-Draulics Division("SDD
Division"), located in Fraser, 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.
Sales Data.
Machine tools and accessories represented approximately 35% of the total
Company sales in 1997, compared to approximately 39% in 1996. Material handling
products, such as conveyor rolls and bumpers, were approximately 17% of total
Company sales in 1997 and 1996. 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
1997. 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 54% of Stilson Division sales in 1997 and 53% in both
1996 and 1995. The Division works with approximately 60 distributors and
manufactures' representatives in the marketing of the Stilson and Die-Draulics
product lines.
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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 and
technical applications assistance 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, 1997, the Company had a backlog of
orders for future delivery of approximately $920,000 compared to approximately
$700,000 of such orders at December 31, 1996. At March 15, 1998, the backlog was
approximately $1,899,000.
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 is the
United States government to which the Company has been a contract supplier of
watches and compasses for many years. Sales to various agencies of the United
States Government were less than 3% of the Company's total sales in 1997.
Patents and Trademarks
The Company holds patents in the United States and has filed additional
patent applications in the United States, Europe and Japan. The Company's
material patents consists 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 and
September 13, 2011. The Company believes that patents are an effective way of
protecting its competitive technological advantages, and considers its patents
to be a 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 will provide meaningful protection for the Company.
The Company also relies upon trade secret protection for its
confidential and proprietary information. There can be no assurance that others
will not independently develop substantially equivalent proprietary information
and techniques or otherwise gain access to and use or disclose the Company's
trade secrets or that the Company can meaningfully protect its trade secrets.
The Company holds rights in certain trademarks to protect its brand name
recognition in various markets. Because of the Company's long history and
reputation for designing and manufacturing high quality products, trademark
protection enhances the Company's position in the market.
Although the Company believes that its products and other proprietary
rights do not infringe the proprietary rights of third parties, there can be no
assurance 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.
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Research and Development
Research and development expenditures for the Company were $725,539 in
1997, $424,637 in 1996 and $220,290 in 1995. The increases in 1997 and 1996
reflect a stepped up development effort, which is focused on introducing a line
of fiber optic illumination products to complement the Company's line of
industrial fluorescent lighting products. Specifically, the Company has
strengthened its capability to design and develop fiber optic illuminators, ring
lights and standard and custom lengths of glass fiber for existing and new
customers within the machine vision and microscopy industries.
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 "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, 1997, the Company employed approximately 106 persons,
100 of whom were full-time employees. No employees of the Company are unionized
and relations with employees are satisfactory.
ITEM 3. LEGAL PROCEEDINGS
The Company is a named defendant in a civil action filed on or about
February 17, 1998, in the Superior Court of Massachusetts, Essex County. The
plaintiff, Dolan-Jenner Industries, Inc., alleges that the Company and one of
its employees (a former employee of the plaintiff), have breached and/or
interfered with a non-competition and non-disclosure agreement and have
misappropriated plaintiff's proprietary information. The plaintiff has sought
both injunctive relief and monetary damages. At the time the plaintiff filed its
action, the plaintiff also submitted a statement alleging damages of at least
$500,000. The Court has denied plaintiff's request for preliminary injunctive
relief, finding, among other things, that the plaintiff has not established a
likelihood of success on the merits of its claims. The Company believes that it
has meritorious defenses to all remaining claims made by the plaintiff. The
Company does not expect this litigation to have a material adverse effect on the
financial condition or operations of the Company and its subsidiaries taken as a
whole; however, if the matter is decided adversely to the Company, there can be
no assurance that the decision would not have a material adverse effect.
PART II
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.
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Results of Operations
Fiscal Year Ended December 31, 1997 Compared
to Fiscal Year Ended December 31, 1996.
As previously reported, in 1996 management formulated a strategy to
de-emphasize less profitable product lines and to focus on and expand its
Industrial Lighting Products, which included a plan to develop, manufacture and
sell fiber optic illumination products. In 1997, the Company implemented its
plan to establish a line of fiber optic products, investing over $2 million in
inventories and capital equipment and nearly doubling research and development
expenditures to expand development capabilities. The Company ended the year
having successfully completed the first phase of this initiative, with the
installation of its glass fiber drawing tower, the quantity production of high
quality glass fiber, and the design and development of a complete fiber optic
product line for use in microscopy. The Company reported a net loss of $726,860
for fiscal year 1997 as compared to a net loss of $643,296 in 1996. The 1997
loss is primarily attributable to expenses associated with the startup of the
new fiber optic product including an increase of approximately $300,000 in
Research and Development.
Total Company revenues increased 3.5% from $10,782,078 in 1996 to
$11,162,026 in 1997. Industrial Lighting Product sales grew more than 61%,
increasing from $2,586,973 in 1996 to $4,169,795 in 1997. This revenue growth
resulted from increased selling activity, especially in southeast Asia, and the
introduction of thirty-seven new products, including the Company's fiber optic
lighting products. Fiber optic lighting sales increased to $323,506 as compared
to only $3,604 in 1996. Sales of machine tool components and accessories through
the SDD Division decreased by 3% from $4,087,218 to $3,948,151, due primarily to
delays in the Division's fulfillment cycle resulting from changes in the
division's personnel. Less profitable lines, which had been strategically
de-emphasized, experienced expected decreases in revenue. Sales of Military
Products decreased from $1,775,798 in 1996 to $1,329,362 in 1997, largely due to
decreased U.S. government sales, which in 1996 had benefited from deliveries
totalling $6,000 under a large contract for navigation watches. Recorder/Printer
Product sales declined from $2,034,146 in 1996 to $1,676,949 in 1997, as
customers continue to turn from generic printers and recorders to develop their
own application-specific products.
Gross profit increased $390,244 from $3,872,812 in 1996 to $4,263,056 in
1997, and improved as a percentage of revenues from 35.9% to 38.2%. Management
credits this improvement to the increased sales of Industrial Lighting Products
which generally produce higher margins than other product lines. Research and
development expenses increased by approximately $300,000 as the Company hired
additional engineering staff and updated its equipment. Selling expenses
increased by approximately $291,000 as a result of hiring and training new sales
people and the purchase of new product advertising and literature. Such planned
expenditures established the Company's capability to produce glass fiber and
manufacture fiber optic light sources, and positioned the Company to enter the
fiber optic lighting marketplace. General and Administrative expense increased
modestly but remained at 19% of Company revenue. Total operating costs increased
from $4,247,422 in 1996 to $4,906,583 in 1997, as a result of the increased
selling and research and development costs associated with the startup of the
fiber optic product line. The Company reported a net loss for 1997 of $726,864
as compared with a net loss in 1996 of $643,296.
Included in 1997 operating expenses are approximately $329,000 of
non-recurring charges. These charges consist primarily of approximately $260,000
in costs associated with personnel changes, such as severance pay and hiring of
interim help, as well as costs related to the closing of the Company's Hong Kong
subsidiary in December, 1997.
Fiscal Year Ended December 31, 1996 Compared
to Fiscal Year Ended December 31, 1995.
Fiscal year 1996 was characterized by a stronger balance sheet and
weaker operating results. Management formulated a plan to focus on and expand
its industrial lighting and machine tool product lines through the acquisition
of complementary business and/or product lines and the development and marketing
of a line of fiber optic illumination products. In order to provide additional
working capital for growth as well as to finance possible acquisitions and new
product development, the Company completed a public
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offering on October 25, 1996 which generated net proceeds of approximately
$3,950,000. As a consequence of the Company's public offering, the Company
increased stockholder's equity approximately 38% from $8,624,495 at December 31,
1995 to $11,908,952 at December 31, 1996, and reduced debt approximately 32%
from $9,256,713 to $6,256,713. In addition, in separate transactions which
occurred in May and August of 1996, the Company refinanced $2,500,000 of debt,
all of which was classified as current debt in 1995 to $2,784,346 of long term
debt and $50,151 of current debt in 1996. The Company reported a net loss of
$643,421 for the year ended December 31, 1996 as compared to a net loss of
$309,939 for year ended December 31, 1995. The loss is largely attributable to
(i) decreased revenues of approximately 17% from 1995 to 1996 and related lower
absorption of costs, (ii) decreased gross margin at the Company's SDD Division
and (iii) increased Research and Development expenses.
Revenues decreased from $13,004,675 to $10,782,078. Approximately 44% of
the revenue decrease was due to reduced sales to the U.S. government, which
declined from $1,534,165 in 1995 to $558,171 in 1996. Sales to the U.S.
government in 1995 benefitted from a $538,000 contract for borescopes, which was
delivered in 1995, and from a contract for navigator watches of which $388,000
was delivered in the fourth quarter of 1995. An additional $156,000 of navigator
watches.was delivered under the contract in the first quarter of 1996. Sales of
electronic ballasts declined from $1,103,401 in 1995 to $297,943 in 1996,
accounting for approximately 36% of the revenue decrease. The reduction in sales
of electronic ballasts resulted from the Company's decision to withdraw from
this market, which has become increasingly commodity price-driven, to focus on
sales of higher margin products. Recorder and printer product sales declined
from $2,786,600 in 1995 to $2,034,146 in 1996, representing approximately 34% of
the total revenue decrease. Recorder and printer product sales declined
primarily due to customer decisions to develop their own printers and recorders
and, especially, their own application-specific electronic controllers rather
than adapt generic product for re-sale. Sales of the Company's lighting products
increased approximately 9% from $2,370,756 in 1995 to $2,583,369 in 1996. Sales
of military watches and compasses to the civilian market increased approximately
37% from $889,489 in 1995 to $1,217,627, primarily as a result of a contract
with a mail order marketing firm and increased sales in Asia through the
Company's Hong Kong subsidiary. Hong Kong sales increased from $92,309 in 1995
to $272,455 in 1996.
Consolidated gross profit expressed as a percentage of total yearly
sales remained flat at 35.9% of total sales in 1996 compared to 35.5% of sales
in 1995. However, due primarily to reduced absorption of overhead costs
resulting from lower revenues, gross profit decreased $846,246 from $4,719,058
in 1995 to $3,872,812 in 1996. In addition, the SDD Division experienced a
decline in gross profit from 48% of net sales in 1995 to 42% of net sales in
1996. The decrease in the gross profit at SDD Division was due primarily to
increased material costs incurred as a result of temporary outsourcing of
components previously produced in-house.
Research and development expenditures increased to $424,637 in 1996 from
$220,290 in 1995. The increase in 1996 reflects increased personnel costs for
new product development in the Salem Division, which is focused on introducing a
line of fiber optic illumination products to complement the Company's line of
industrial fluorescent lighting products.
Selling and General and Administrative Expenses remained flat at
$3,822,595 in 1996 as compared to $3,869,952 in 1995. Interest expense decreased
approximately 17% from $661,905 in 1995 to $546,770 in 1996, due primarily to
the paydown of the Company's Revolving Loan subsequent to the public offering in
October, 1996. In addition, 1995 results included a loss on the sale of real
estate relating to the sale of the Company's former headquarters. This
transaction is discussed in greater detail in the comparison of 1995 and 1994
below, and had no equivalent in 1996.
The Company recorded an income tax benefit of $277,892 in 1996 as
compared with a tax benefit of $52,270 in 1995. Varying effective tax rates are
due primarily to non-deductible goodwill amortization.
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
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materially from anticipated results include, without limitation, the Company's
ability to (i) compete with entities that have greater financial, technical and
marketing resources than the Company, (ii) develop and market new products in
its various business lines, (iii) compete for and obtain certain U.S. government
contracts, or (iv) obtain financing on favorable terms. In addition, the Company
sells certain products to customers located in Southeast Asia, and in 1997, the
Company experienced a slowdown in orders and payments from its customers in that
region, as the currencies of certain countries in that region have been devalued
and destabilized. Although the Company has taken reasonable precautions to limit
its credit risk in southeast Asia, there can be no assurance that the Company
will be able to secure future orders from its customers in that region. General
economic conditions in the United States, southeast Asia, and elsewhere may
affect the Company's results.
Liquidity and Capital Resources
The Company historically has financed its operations primarily through
third party credit facilities and cash from operations. Anticipating the need
for capital to finance the startup of the fiber optic lighting business, the
Company completed a public offering of the Company's Common Stock in October,
1996, which generated $4,250,000 in gross proceeds. During 1997,the Company's
operations used $1,646,613 of cash as compared with $115,008 of cash provided by
operations in 1996. Cash used for operations was primarily for the purchase of
inventories relating to its new fiber optic lighting products. Cash investments
increased as well from $196,302 in 1996 to $882,540 in 1997, as the Company
purchased equipment for increased research and development and for setting up a
manufacturing facility for fiber optic lighting production. Such expenditures in
1997 were planned costs associated with startup of the new fiber optic lighting
product line and, as such, should not be of a recurring nature.
The Company's primary third party financing relationship is with Fleet
National Bank (the "Bank"). The initial Credit Agreement (the"Initial Credit
Agreement") included provisions for revolving loans due March 31, 1998 (the
"Revolving Loans"), a long-term loan due March 31, 1998 (the "Term Loan"), and a
short-term loan due August 1, 1995 (the "Short-Term Loan"), in an aggregate
principal amount of $6,967,000. The Short Term Loan was paid as agreed in
August, 1995. In September, 1995, the Company made a partial prepayment of the
Term Loan in an amount of $1,100,000. As of December 31, 1997, there was a total
of $1,175,945 outstanding under the Term Loan, as compared to $1,336,986
outstanding on December 31, 1996. Borrowings under the Revolving Loans totaled
$1,307,053 as of December 31, 1997, as compared to no borrowings as of December
31, 1996 when the Revolving loans were temporarily paid down after the
completion of the Company's stock offering in October, 1996. Both the Revolving
Loan and the Term Loan bear interest at a rate equal to the Bank's base rate
plus 1/2%. As of December 31, 1997, the interest rate on both the Revolving
Loans and the Term Loan was 9.00%.
Under the terms of the Credit Agreement, the Company is required to
comply with a number of covenants including minimum equity, debt to equity
ratios, and minimum net income tests. At September 30, 1997, and December 31,
1997, the Company was not in compliance with the minimum net income and debt
service coverage covenants. The bank granted waivers to these covenants on
November 12, 1997 for the period ended September 30, 1997, and granted waivers
on March 5, 1998 for the period ended December 31, 1997. In addition, on
November 12, 1997, the Credit Agreement was amended to increase the maximum
annual limit on capital expenditures from $500,000 to $1,500,000 for the year
ending December 31, 1997.
The Company had planned to refinance the Fleet National Bank credit
facility with another bank prior to such credit facility's March 31, 1998
maturity dates. On March 17, 1998, the other bank altered the terms of its
proposal and the Company terminated those negotiations. On March 30, 1998, the
Company and the Bank entered into a commitment letter (the "Commitment Letter")
to amend the Credit Agreement in order to extend the maturity dates for the Term
Loan and the Revolving Loan until January 2, 1999. Under the terms of the
extension, both the Term Loan and the Revolving Loan will bear interest at a
rate equal to the Bank's base rate plus 1% through June 30, 1998, after which
the rate will increase to the Bank's base rate plus 2%. The Company will pay
quarterly extension fees of $10,000 on March 31, 1998 and $20,000 on June 30,
1998, and monthly extension fees of $7,000 payable on the last days of July,
August and September, and $10,000 payable on the last day of October, November
and December. The Amended Credit Agreement deletes the minimum debt service
covenant and requires the Company to report a pretax profit in the month of
March, 1998 and for each of the subsequent quarters in fiscal year 1998. The
9
<PAGE>
Company intends to refinance the Credit Agreement with another lender before its
January 2, 1999 maturity date. At this time, the terms of such refinancing can
not be determined by the Company.
In May 1996, the Company issued Subordinated Notes in an original
principal amount of $1,350,000 in a private placement. These notes mature on May
1, 2001, bear interest at 7.25%, and are convertible into shares of Common Stock
at a conversion price of $7.375 per share subject to certain adjustments
pursuant to the Convertible Subordinated Note Purchase Agreement (the "Purchase
Agreement"). Payments of principal and interest on the Convertible Subordinated
Notes are subordinated to all existing and future indebtedness of the Company to
banks and financial institutions. The Notes are unsecured and are redeemable at
the option of the Company at any time after May 1, 1998 under a formula
specified in the purchase agreement.
The Company's headquarters facility in Salem, New Hampshire, is subject
to a mortgage and note issued to Primary Bank on August 29, 1996 (the "Primary
Note"). The Primary Note, in an initial principal amount of $1,500,000, is due
August 29, 2011. The Primary Note bears interest at an annual rate of 9.25% per
annum until August 29, 1999; and thereafter, adjusted annually to the Prime Rate
plus one percent. The principal and interest are repayable in 180 equal monthly
installments. In accordance with the terms of the Primary Note, the Company may
prepay amounts outstanding thereunder, in whole or in part, at any time without
premium or penalty.
On May 20, 1997, the Company entered into an equipment line of credit
agreement with Primary Bank to finance capital equipment related to new product
development. The facility 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,
1997, the Company had borrowed $209,759 against this line of credit.
The Company contemplates that it may seek to raise additional capital by
the issuance of equity, the proceeds of which may be used, among other things,
in connection with refinancing its senior credit facility. The Company's
existing Credit Agreement with the Bank will expire on January 1, 1999 by its
terms. While the Company is currently exploring establishing a replacement
credit facility with various commercial lenders, the Company can give no
assurance as to whether such a replacement credit facility will be established
or as to the terms of such credit facility. Assuming the continued availability
of the Company's Credit Agreement with the Bank or a replacement credit
facility, the Company believes that its available financial resources are
adequate to meet its foreseeable working capital, debt service and capital
expenditure requirements through the next twelve months. If the Company is
unable to refinance or extend its Credit Agreement with the Bank prior to
maturity, then it will be unable to repay such indebtedness when due and the
Bank may declare a default. Were a default to be declared, the Company would not
be able to continue absent alternative financing.
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 fiber optic lighting products and fluorescent light
dimming systems and electronic ballasts which was a new product line in 1993,
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.
Foreign Currency Fluctuations
Historically, foreign currency fluctuations have had only a minor impact
on the Company's results of operations. In 1997 and 1996, such foreign currency
fluctuations were favorable and totaled $30,709 in 1997 and $13,103 in 1996. The
Company's direct exposure to foreign currency exchange fluctuations is limited
to contracts denominated in the Swiss Franc. The Company has Swiss Franc
contracts to purchase watches at an agreed fixed cost and corresponding
contracts with the General Services Administration to sell
10
<PAGE>
those watches at a fixed price. For 1997, the Company recorded favorable Swiss
Franc currency exchange rate fluctuations totaling $30,709 on $413,912 of Swiss
Franc transactions. In 1996, the Company recorded favorable Swiss Franc currency
exchange rate fluctuations of $13,103. At December 31, 1997, the Company had a
total foreign currency liability of $273,148 Swiss Francs.
With the exception of these Swiss Franc contracts, the financial
operations of the Salem and SDD Divisions are conducted in U.S. dollars. All
sales originated by United States operations, including those sales to foreign
customers, are denominated in U.S. dollars. Similarly, the financial operations
of each of the Company's subsidiaries are conducted in the local currency (i.e.,
sales by Stocker & Yale HK, Ltd. were denominated in Hong Kong dollars, and
sales by Radiant Asiatec are denominated in Singapore dollars.)
In addition, in 1997 the Company experienced a small adverse effect from
indirect exposure to the devaluation of the Thai Baht. Although the Company
conducts its sales to Thai distributors in U.S. dollars, those Thai distributors
are paid by their customers in local currency. As a result, the Company recorded
in 1997 a $25,000 allowance for the return of inventory from a distributor who
was unable to pay for his merchandise.
Year 2000 Issues
In the conduct of its own operations, the Company relies upon commercial
computer software primarily provided by independent software vendors. After an
analysis of the Company's exposure of the impact of "year 2000 issues" (i.e.,
issues that may arise resulting from computer programs that use only the last
two, rather than all four, digits of the year), the Company believes that such
commercial software is substantially year 2000 compliant and that such
independent vendors will be able to complete such year 2000 compliance in a
timely manner and without any material impact on the Company business,
operations or financial condition. In addition, the Company has completed an
upgrade to the Company's integrated manufacturing software which has brought
such software into year 2000 compliance. However, the Company is subject to year
2000 issues that may affect the economy generally or any customers, suppliers or
others with whom the Company does business and over whose year 2000 compliance
the Company has no control.
ITEM 7. FINANCIAL STATEMENTS
The information required by Item 7 Is presented on pages 12 through 33
of this Form 10-KSB. The index to the Company's Financial Statements is set
forth below:
Page(s)
<TABLE>
<S> <C>
Report of Independent Public Auditors .................................. 12
Consolidated Balance Sheets at December 31, 1997 ....................... 13-14
Consolidated Statements of Operations for the
Years Ended December 31, 1997 and 1996 .......................... 15
Consolidated Statements of Stockholder's Investment
for the Years Ended December 31, 1997 and 1996 .................. 16
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997 and 1996 .......................... 17-18
Notes to Consolidated Financial Statements ............................. 19-35
</TABLE>
11
<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,
1997 and 1996, and the related consolidated statements of operations,
stockholders' investment and cash flows for each of the two years ended December
31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 6, 1998
(except for the matters discussed in Notes
6 and 11, for which the date is March 27, 1998)
12
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
<S> <C> <C>
Current Assets:
Cash and cash equivalents .................................................... $ 73,520 $ 1,244,418
Trade receivable, less reserves of approx
$187,000 in 1997 and $166,000 in 1996 ................................... 1,860,624 1,410,774
Prepaid income taxes ......................................................... 579,332 353,668
Inventories .................................................................. 4,957,095 3,701,019
Prepaid Expenses ............................................................. 117,354 131,478
----------- -----------
Total current assets .................................................... 7,587,925 6,841,357
Property, Plant and Equipment, Net ........................................... 3,857,504 3,134,717
----------- -----------
Note Receivable .............................................................. 1,000,000 1,000,000
----------- -----------
Goodwill, Net of Accumulated Amortization .................................... 8,453,000 8,721,800
----------- -----------
Debt Issuance Costs, Net of Accumulated
Amortization ............................................................ 39,776 138,490
----------- -----------
Cash Value Life Insurance .................................................... 52,546 --
----------- -----------
$20,990,751 $19,836,364
</TABLE>
13
<PAGE>
LIABILITIES AND STOCKHOLDER'S INVESTMENT
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
<S> <C> <C>
Current Liabilities:
Current Portion of long-term debt .............................................. $ 443,334 $ 357,569
Accounts Payable ............................................................... 1,858,936 1,373,121
Accrued Expenses ............................................................... 541,668 547,654
Short Term Lease Obligation .................................................... 89,771 --
----------- -----------
Total current liabilities ................................................. 2,933,709 2,278,344
----------- -----------
Long Term Debt and Capital Lease Obligations ................................... 5,383,233 4,021,570
----------- -----------
Other Long Term Liabilities .................................................... 564,688 564,688
----------- -----------
Deferred Income Taxes .......................................................... 876,904 1,012,685
----------- -----------
Commitments and Contingencies
Stockholder's Investment: Common stock, par value
$0.001 Authorized -- 10,000,000 shares at
December 31, 1997 and 1996
Issued and outstanding -- 2,567,894 shares
at December 31, 1997 and 1996 ............................................. 2,568 2,568
Paid-in capital ................................................................ 10,822,705 10,822,705
Retained earnings .............................................................. 406,944 1,133,804
----------- -----------
Total stockholder's investment ............................................ 11,232,217 11,959,077
----------- -----------
$20,990,751 $19,836,364
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
14
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1997 1996
--------- --------
<S> <C> <C>
Net Sales .............................................................. $ 11,162,026 $ 10,782,078
Cost of Sales .......................................................... 6,898,970 6,909,266
------------ ------------
Gross Profit ...................................................... 4,263,056 3,872,812
Selling Expenses ....................................................... 2,040,637 1,749,492
General and Administrative Expenses .................................... 2,140,403 2,073,101
Research and Development ............................................... 725,539 424,637
------------ ------------
Operating Loss .................................................... (643,523) (374,418)
Interest Expense ....................................................... (388,337) (546,770)
------------ ------------
Loss before income tax benefit .................................... (1,031,860) (921,188)
Income Tax Benefit ..................................................... (305,000) (277,892)
------------ ------------
Net Loss .......................................................... $ (726,860) $ (643,296)
============ ============
Loss Per Share ......................................................... $ (0.28) $ (0.34)
============ ============
Weighted-Average Common Shares ......................................... 2,567,894 1,891,116
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
15
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
Common Stock Paid-in Retained Total
Shares Amount Capital Earnings Stockholders
<S> <C> <C> <C> <C> <C>
Balance,
December 31, 1995 ................. 1,712,914 $ 1,713 $ 6,845,685 $ 1,777,100 $ 8,624,498
Sale of Common Stock,
net of issuance ................... 850,000 850 3,950,885 -- 3,951,735
Issuance of Common
Stock to employees ................ 4,980 5 26,135 -- 26,140
Net loss .......................... -- -- -- (643,296) (643,296)
------------ ------------ ------------ ------------ ------------
BALANCE,
DECEMBER 31, 1996 ................. 2,567,894 2,568 10,822,705 1,133,804 11,959,077
Net loss .......................... -- -- -- (726,860) (726,860)
------------ ------------ ------------ ------------ ------------
BALANCE,
DECEMBER 31, 1997 ................. 2,567,894 2,568 10,822,705 406,944 11,232,217
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
16
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1997 1996
----------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss .................................................................... $ (726,860) $ (643,296)
Adjustments to reconcile net loss to
net cash provided by operating activities
Depreciation and amortization ............................................... 676,258 781,664
Deferred income taxes ....................................................... (305,000) (232,300)
Other changes in assets and liabilities
Accounts receivable, net ................................................ (449,850) 487,169
Inventories ............................................................. (1,256,076) 135,634
Prepaid expenses ........................................................ 14,124 27,535
Accounts payable ........................................................ 485,815 (154,347)
Accrued expenses ........................................................ (5,986) 72,518
Cash value of life insurance ............................................ (52,546) 0
Accrued and refundable taxes ............................................ 0 (265,918)
Issuance of common stock to employees ................................... 0 26,140
Other long-term liabilities ............................................. (26,492) (119,791)
----------- -----------
Net cash (used in)/provided by operating activities ......................... (1,646,613) 115,008
----------- -----------
Cash Flows Used for Investing Activities:
Purchases of property, plant and equipment .................................. (882,540) (196,302)
----------- -----------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1997 1996
----------- ---------
<S> <C> <C>
Cash Flows from Financing Activities:
Net proceeds from sale of common stock ....................................... 0 3,951,735
Payments of bank debt ........................................................ (227,466) (1,188,587)
Proceeds from bank debt and equipment loans .................................. 1,611,678 41,108
Proceeds from subordinated notes ............................................. 0 1,350,000
Repayments of term loans and subordinated notes .............................. 0 (2,753,017)
Payments on capital lease .................................................... (25,957) (58,560)
Deferred financing costs ..................................................... 0 (39,000)
----------- -----------
Net cash provided by financing activities ............................... 1,358,255 1,303,679
----------- -----------
Net Increase/(Decrease) in Cash and Cash Equivalents ......................... (1,170,898) 1,222,385
Cash and Cash Equivalents, Beginning of Year ................................. 1,244,418 22,033
----------- -----------
Cash and Cash Equivalents, End of Year ....................................... $ 73,520 $ 1,244,418
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid ........................................................... $ 426,409 $ 601,776
----------- -----------
Taxes paid .............................................................. $ 67,492 $ 241,691
----------- -----------
SUPPLEMENTAL DISCLOSURE OF NONCASH
FINANCING ACTIVITIES:
Capital lease obligations incurred for new equipment ......................... $ 153,008 $ 0
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
18
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) ORGANIZATION AND OPERATIONS
On June 14, 1989, Stocker & Yale, Inc. (the Company) was acquired by S&Y
Acquisition Corp., a privately held corporation. The Company was merged with and
into S&Y Acquisition Corp., with the Company being the surviving corporation.
S&Y Acquisition Corp. financed the acquisition through the issuance of its
common stock, borrowings under a revolving line of credit, issuance of
subordinated notes payable and cash of the Company.
The Company, incorporated in 1951, designs, manufactures, assembles and
markets a diversified line of products. In its Salem, New Hampshire, facility,
the Company manufactures a variety of optical and measuring instruments,
including microscope illuminators, magnifiers and machine vision lighting
systems, machine tool projectors and tool analyzers, land navigation compasses
and military-type mechanical watches. The Company sells its compasses and
watches to a wide variety of customers including the U.S. Government. Under the
MFE brand name, the Company manufactures a broad range of oscillographic
recorders and thermal printers. These products are produced for both the
original equipment manufacturer and end-user markets and are used in diverse
applications including medical, laboratory, general industrial and commercial
applications. In 1996, the Company expanded its product line by developing and
marketing fiber-optic lighting products.
The Company's Stilson and Die-Draulics Division manufactures a wide
range of machine tool components, material handling accessories and pressure
control systems at its facility in Fraser, Michigan. These products are sold to
the automotive, electronic, food, pharmaceutical and appliance industries.
Stocker & Yale Hong Kong Limited was formed in March 1995 as a 95%-owned
subsidiary of the Company. This entity was formed to facilitate distribution of
watches and compasses in Southeast Asia. The Company is presently in the process
of ceasing the operations of this subsidiary. The operations of this entity are
consolidated into the accompanying consolidated financial statements.
Radiant Asiatec Pte. Ltd. (Radiant) was established in December 1997 as
an 80% owned Singapore-based distribution company. When fully operational,
Radiant will sell industrial microscopes, imaging application software,
production accessories and lighting systems manufactured by the Company. The
operations of this entity are consolidated into the accompanying consolidated
financial statements.
19
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of income and expenses during the reporting
periods. Operating results in the future could vary from the amounts derived
from management's estimates and assumptions.
Accounting for Long-Lived Assets
The Company periodically assesses the realizability of its long-lived
assets in accordance with Statement of Financial Accounting Standards No. 121
(SFAS No. 121), Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of. Based on its review, the Company does not
believe that any material impairment of its long-lived assets has occurred.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries, Stocker & Yale Foreign Sales Corp., Stocker
& Yale Hong Kong Limited and Radiant Asiatech Pte. Ltd. All significant
intercompany balances and transactions have been eliminated.
Revenue Recognition
The Company recognizes revenue as products are shipped.
Property, Plant and Equipment
The Company provides for depreciation on a straight-line basis by
charges to expense in amounts estimated to amortize the costs of property, plant
and equipment over their estimated useful lives. Rates used to compute
depreciation are based on the following estimated useful lives:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
<S> <C>
Building and building improvements .................. 10 to 40 years
Machinery and equipment ............................. 5 to 10 years
Furniture and fixtures ............................. 3 to 10 years
</TABLE>
20
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
Property, plant and equipment, net, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------------
Accumulated Net Book
Cost Depreciation Value
<S> <C> <C> <C>
Land .............................................. $ 446,300 $ -- $ 446,300
Building and building improvements ................ 2,670,191 379,879 2,290,312
Machinery and equipment ........................... 4,676,554 4,031,048 645,506
Furniture and fixtures ........................... 974,283 498,897 475,386
------------- ------------- ------------
$ 8,767,328 $ 4,909,824 $ 3,857,504
============= ============= ============
DECEMBER 31, 1996
----------------------------------------------------------
Accumulated Net Book
Cost Depreciation Value
Land .............................................. $ 446,300 $ -- $ 446,300
Building and building improvements ................ 2,469,609 371,203 2,098,406
Machinery and equipment ........................... 4,140,402 3,835,242 305,160
Furniture and fixtures ............................ 828,477 543,626 284,851
------------- ------------- -------------
$ 7,884,788 $ 4,750,071 $ 3,134,717
============= ============= =============
</TABLE>
Total depreciation of property, plant and equipment amounted to
approximately $312,000 and $424,000 for the periods ended December 31, 1997 and
1996, respectively.
Goodwill and Debt Issuance Costs
The 1989 acquisition of Stocker & Yale, Inc. by S & Y Acquisition Corp.
resulted in $10,749,000 of goodwill, which is being amortized over 40 years.
Intangibles consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------------
Accumulated Net Book
Cost Depreciation Value
<S> <C> <C> <C>
Goodwill .......................................... $ 10,749,000 $ 2,296,000 $ 8,453,000
Debt issuance costs ............................... 316,053 276,277 39,776
DECEMBER 31, 1997
-----------------------------------------------------------
Accumulated Net Book
Cost Depreciation Value
Goodwill .......................................... $ 10,749,000 $ 2,027,200 $ 8,721,800
Debt issuance costs ............................... 316,053 177,563 138,490
</TABLE>
21
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
Amortization of goodwill was approximately $268,800 for the year ended
December 31, 1997 and approximately $284,000 for the year ended December 31,
1996.
The Company evaluates the net realizable value of intangible assets on
an on-going basis relying on a number of factors including operating results,
business plans, budgets and economic projections. In addition, the Company's
evaluation considers nonfinancial data such as market trends, product
development cycles and changes in management's market emphasis. When an
impairment in the carrying value has occurred, it is the Company's policy to
reduce the carrying amount of the impaired asset to its fair market value.
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 $98,714 and $70,000 for the years ended
December 31, 1997 and 1996, respectively.
Income Taxes
The Company accounts for income taxes under the asset and liability
method. Under this method the Company recognizes deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the financial statements or tax returns. Deferred tax assets and
liabilities are determined based on the difference between the financial
reporting and tax basis of the assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis)
or market and include materials, labor and overhead.
Earnings Per Share
In 1997, the Company adopted the provisions of SFAS No. 128, Earnings
Per Share. This statement was issued by the FASB in March 1997 and establishes
the standards for computing and presenting earnings per share (EPS) and applies
to entities with publicly held common stock or potential common stock. This
statement replaces the presentation of primary EPS with a presentation of basis
EPS. It also requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures and
requires a reconciliation of the numerators and denominators for the basic and
diluted EPS computations for all prior-period EPS data presented. The Company
has reported a net loss for the years ended December 31, 1997 and 1996.
Accordingly, all options and warrants have been excluded from diluted earnings
per share as they would be antidilutive.
All share amounts and per share amounts in the accompanying consolidated
financial statements have been adjusted to reflect the 1-to-5 reverse stock
split, which occurred on December 28, 1995.
22
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
Cash and Cash Equivalents and Financial Instruments
For purposes of the consolidated statements of cash flows, cash and cash
equivalents consist of highly liquid investments with original maturities of
three months or less.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. The risk
is limited due to the relatively large number of customers composing the
Company's customer base and their dispersion across many industries and
geographic areas within the United States, Europe and Asia.
Fair Values of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, accounts receivable, current maturities of long-term debt, accounts
payable and long-term debt. The estimated fair value of these financial
instruments approximates their carrying value as of December 31, 1997.
Reclassification
Certain amounts reported for prior periods have been reclassified to be
consistent with the current period presentation.
Advertising Expenses
The Company expenses the cost of advertising as incurred. Total
advertising expenses amount to approximately $255,000 and $192,000 for the
periods ended December 31, 1997 and 1996.
23
<PAGE>
(3) INCOME TAXES
The components of the income tax (benefit) are as follows:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1997 1996
------------ ---------
<S> <C> <C>
Current-
Federal ............................ $ -- $ --
State .............................. -- --
--------- ---------
Deferred-
Federal ............................ (234,850) (216,345)
State .............................. (70,150) (61,547)
--------- ---------
(305,000) (277,892)
--------- ---------
$(305,000) $(277,892)
========= =========
</TABLE>
24
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
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,
1997 1996
------------ -----------
<S> <C> <C>
Applicable statutory federal income tax benefit ................... $(350,834) $(313,204)
State income taxes, net of federal income tax benefit ............. (64,698) (55,271)
Goodwill amortization ............................................. 91,392 96,560
Other, net ........................................................ 19,140 (5,977)
--------- ---------
$(305,000) $(277,892)
========= =========
</TABLE>
The significant items composing the deferred tax asset and liability at December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
Current Long-Term Current Long-Term
Assets
<S> <C> <C> <C> <C>
Reserves not currently deductible ............... $ 240,772 $ -- $ 252,548 $ --
Other ........................................... 338,560 -- 101,120 --
----------- ----------- ----------- -----------
Total assets ......................................... 579,332 -- 353,668 --
----------- ----------- ----------- -----------
Liabilities-
Accelerated depreciation and
property-basis differences ...................... -- (672,602) -- (746,217)
Note receivable ................................. -- (402,700) -- (402,700)
Other ........................................... -- 198,398 -- 136,232
----------- ----------- ----------- -----------
Total liabilities ............................... -- (876,904) -- (1,012,685)
----------- ----------- ----------- -----------
Net assets (liabilities) ........................ $ 579,332 $ (876,904) $ 353,668 $(1,012,685)
=========== =========== =========== ===========
</TABLE>
25
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(4) Inventories
Inventories are as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
---------- ----------
<S> <C> <C>
Finished goods ............................ $ 435,201 $ 895,672
Work-in-process ........................... 431,142 398,433
Raw materials ............................. 4,090,752 2,406,914
---------- ----------
$4,957,095 $3,701,019
========== ==========
</TABLE>
(5) NOTE RECEIVABLE
On September 5, 1995, the Company sold its manufacturing facility in
Beverly, Massachusetts, for $1.2 million in cash and a note receivable of $1
million from the buyer. The note bears interest at 6.32%, payable monthly in
arrears. The terms of the note require interest-only payments for the first five
years, with monthly principal and interest payments of $19,482 commencing
October 1, 2000 through maturity on September 1, 2005. The note is secured by a
letter of credit with a bank.
(6) LONG-TERM DEBT
As of December 31, 1997 and 1996, debt consisted of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
---------- ----------
<S> <C> <C>
Revolving line of credit, maturing March 31, 1998, payable to a bank, with an
interest rate at the bank's prime lending rate plus 1/2% at
December 31, 1997 (9.00%) ...................................................................... $1,307,053 $ --
Revolving line of credit, maturing April 1998, payable to a Hong Kong bank, with
an interest rate at the bank's prime lending rate as defined
(8.50%) at December 31, 1997 ................................................................... 202,121 124,799
Mortgage note payable, maturing August 29, 2011, payable to a bank, with an
interest rate of 9.25%
as of December 31, 1997 ........................................................................ 1,434,395 1,484,446
Term loan, maturing on March 1, 2000, payable to a bank, with an interest rate
of prime plus 1/2%
(9.00%) at December 31, 1997 ................................................................... 1,175,945 1,336,986
</TABLE>
26
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
<TABLE>
<S> <C> <C>
Convertible subordinated notes payable, maturing
on May 1, 2001, interest payable quarterly in
arrears at 7.25% ............................................. 1,350,000 1,350,000
Equipment loan, maturing October 17, 2000,
payable to a bank, with an interest rate at 8.80% ............ 66,534 82,908
Auto loan, maturing February 2002, payable to a
bank, with an interest rate at 8.50% ......................... 17,524 --
Equipment capital lease obligation, maturing
August 31, 2000, with an interest rate at 7.81% .............. 153,008 --
Equipment lease line of credit, maturing on
October 31, 2002 payable to a bank,
with an interest rate of prime plus 3/4% (9.25%) at
December 31, 1997 ............................................ 209,759 --
-------------- --------------
Less--Current portion of long term debt ...................... 533,106 357,569
-------------- --------------
$ 5,383,233 $ 4,021,570
============== ==============
</TABLE>
The revolving line of credit has a maximum credit limit of the lessor of
$4,000,000 or a borrowing base as defined in the Credit Agreement, which is
composed of the Company's eligible accounts receivable and inventory. The line
has a floating interest rate of 1/2% above the bank's prime lending rate.
The Company has a five-year term loan with the same bank, with an
original principal amount of $2,767,000. The monthly principal payments on this
note are $13,420. The loan has a floating interest rate of 1/2% above the bank's
prime lending rate. The loan matures on March 1,2000, at which time all unpaid
interest and principal amounts are due in full.
The revolving line of credit and the term loan discussed above require
the Company to comply with several affirmative and negative covenants, including
certain financial tests and ratios such as debt service coverage, net income
requirements and other items. The loans are collateralized by substantially all
of the Company's assets and a personal guaranty, to the extent of $1,000,000 by
the Chairman of the Board.
In exchange for the personal guarantees discussed above, the Chairman of
the Board received 5% of the face amount of the guarantees in common stock of
the Company, which amounted to $112,500. This amount is included in debt
acquisition costs and is being amortized over the lives of the respective loan
and note agreements.
27
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
On September 5, 1995, the Company sold its manufacturing facility in
Beverly, Massachusetts, and purchased a manufacturing facility in Salem, New
Hampshire. In conjunction with this purchase, the Company issued a one-year
$1,500,000 mortgage note payable to the buyer of its Beverly, Massachusetts
facility in exchange for $1,500,000 in cash, which was utilized to purchase the
Salem facility. This mortgage note payable was paid in full in August 1996 with
proceeds from a new 15 year mortgage note payable to a bank for $1,500,000. The
interest rate on the note is fixed at 9.25% until August 29, 1999. Thereafter,
the interest rate shall be calculated by the bank on an annual basis, at the
Bank's prime rate, as defined, plus one percent (1.00%). The note is secured by
the property.
In May 1996, the Company paid in full the holders of $1,000,000 in
subordinated notes payable with proceeds from the issuance of $1,350,000 in
convertible subordinated notes payable. These new notes pay interest quarterly
in arrears at 7.25% and mature on May 1, 2001. At the option of the holders, the
principal portion of the notes is convertible into shares of the Company's
common stock at a conversion rate of $7.38 per share. These notes are
subordinated to the Company's revolving line of credit and five-year term loan.
As of December 31, 1997, the Company was not in compliance with certain
financial covenants set forth in the Credit Agreement of it's revolving line of
credit and five-year term loan, as amended. On March 5, 1998, the Company
obtained a waiver for these events of noncompliance. This waiver is effective
for the period ended December 31, 1997.
On March 27, 1998, the Company entered into an agreement to extend the
maturity dates of its revolving line of credit and term loan to January 2, 1999.
Under the terms of the extension, the revolving line of credit's maximum credit
limit decreased from $4.0 million to the lesser of $2.5 million or a borrowing
base as defined in the Amended Credit Agreement. Also, both the term loan and
the revolving line of credit will bear interest at a rate equal to the Bank's
base rate plus 1% through June 30, 1998, after which the rate will increase to
the Bank's base rate plus 2%. The Company will pay quarterly extension fees of
$10,000 on March 31, 1998 and $20,000 on June 30, 1998, and monthly extension
fees of $7,000 payable on the last day of July, August and September, and
$10,000 payable on the last day of October, November and December. The Amended
Credit Agreement deletes the minimum debt service covenant and requires the
Company to report a pretax profit in the month of March 1998, and for each of
the subsequent quarters in fiscal year 1998.
(7) STOCKHOLDERS' INVESTMENT
On September 17, 1996, the Company amended and restated their articles
of incorporation, whereby common stock authorized for issuance increased from
2,400,000 shares to 10,000,000 shares.
In October 1996, the Company completed a secondary public offering. A
total of 850,000 shares of the Company's common stock was sold for $3,951,735,
net of issuance costs.
(8) EMPLOYEE BENEFITS AND STOCK OPTIONS
The Company has two noncontributory defined benefit pension plans that
cover a majority of Company employees. The accrued benefit is determined based
on credited service as of the employee's retirement date. Employees become fully
vested after five years.
28
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
The Company froze the benefits of the defined benefit pension plan
during August 1993. The Company will report a curtailment gain in accordance
with SFAS No. 88, Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits, after all benefit
payments are made; the Company does not believe that the curtailment gain will
have a material impact on the financial position or operations of the Company.
The following table sets forth the plans' funded status and amounts
recognized in the Company's consolidated balance sheets:
<TABLE>
<CAPTION>
December 31,
1997 1996
------------- --------------
<S> <C> <C>
Actuarial present value of benefit obligations Accumulated
benefit obligation, including vesting benefits of
$440,931 in 1997 and $407,825 in 1996 ................. $ (456,444) $ (425,760)
============= =============
Projected benefit obligation for service
rendered to date ...................................... $ (456,444) $ (425,760)
Plan assets at fair value, guaranteed
investment contract with an insurance
company ............................................... 775,505 678,377
Unrecognized net gain ...................................... (297,597) (217,733)
Unrecognized net (assets) liabilities ...................... 13,365 (45,727)
-------------- --------------
Prepaid (accrued) pension cost ........................ $ 34,829 $ (10,843)
============== ==============
Net periodic pension cost (income) includes the following components:
For the Years Ended
December 31,
1997 1996
-------------- ---------------
Service cost-income earned during the period ............... $ -- $ --
Interest cost on projected benefit obligation .............. 29,861 27,853
Return on plan assets ...................................... (57,445) (50,250)
Amortization ............................................... (18,087) (13,224)
-------------- --------------
Net periodic pension income ........................... $ (45,671) $ (35,621)
============== ==============
</TABLE>
The weighted average discount rate and rate of increase in future
compensation used in determining the actuarial present value of the projected
benefit obligation was 7% in 1997 and 1996. The expected long-term rate of
return on assets was 8% in 1997 and 1996.
29
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
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. The Company made no such contributions for the plan years ended
December 31, 1997 and 1996. The Company incurred costs of $5,169 and $3,661 in
1997 and 1996, respectively, to administer the Plan.
During 1994, the Company adopted a stock option plan (the Option Plan)
for the purpose of issuing both Incentive Options and Nonqualified Options to
officers, employees and directors of the Company. Options may be granted under
the Option Plan on such terms and at such prices as determined by the Board of
Directors, except that the options cannot be granted at less than 100%, or in
certain circumstances not less than 110%, of the fair market value of the common
stock on the date of the grant. Each option will be exercisable after the period
or periods specified in the option agreement, but no option may be exercised
after the expiration of 10 years from the date of grant.
In March 1996, the Company adopted the 1996 Stock Option and Incentive
Plan (the Option Plan) for the purpose of issuing both Incentive Options and
Nonqualified Options to officers, employees and directors of the Company. A
total of 150,000 shares of common stock were reserved for issuance under this
plan. In December 1996, the Company awarded 4,980 shares of common stock to
employees through the 1996 Stock Option Plan. Accordingly, the Company has
recognized approximately $26,000 in compensation expense in the accompanying
financial statements. Options may be granted under the Option Plan on such terms
and at such prices as determined by the Board of Directors, except that the
options cannot be granted at less than 100%, or in certain circumstances not
less than 110%, of the fair market value of the common stock on the date of the
grant. Each option will be exercisable after the period or periods specified in
the option agreement, but no option may be exercised after the expiration of 10
years from the date of the grant.
30
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
The following is a summary of the activity for the 1996 and 1994 Stock
Option Plans:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
SHARES PRICE RANGE AVERAGE PRICE
<S> <C> <C> <C>
Outstanding at December 31, 1995 .............. 134,440 $ 3.70-$ 7.25 $ 6.23
Granted .................................. 70,000 $ 5.25-$ 6.00 $ 5.99
Lapsed ................................... (1,000) $ 4.55 $ 4.55
---------- ----------------- ----------
Outstanding at December 31, 1996 .............. 203,440 $ 3.70-$ 7.25 $ 6.14
=========== ================= ==========
Exercisable at December 31, 1996 .............. 84,440 $ 7.25 $ 7.25
=========== ================= ==========
Granted .................................. 61,600 $ 4.50-$ 5.38 $ 5.27
----------- ----------------- ----------
Outstanding at December 31, 1997 .............. 265,040 $ 3.70-$ 7.25 $ 5.97
=========== ================= ==========
Exercisable at December 31, 1997 .............. 123,040 $ 3.70-$ 7.25 $ 6.36
=========== ================= ==========
Weighted average option price for all options $ 5.88
==========
</TABLE>
In addition to the options listed above, as of December 31, 1997, there
are 44,000 options outstanding to non-employees to purchase shares of the
Company's common stock at prices ranging from $4.30-$7.25 per share. These
options were issued in 1994 and 1995 and expire beginning on August 26, 1998.
During 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation, which defines a fair value based
method of accounting for an employee stock option or similar equity instrument
and encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to continue
to measure compensation costs for those plans using the method of accounting
prescribed by APB Opinion 25. Entities electing to remain with the accounting in
APB Opinion 25 must make pro forma disclosures of net income and, if presented,
earnings per share as if the fair value based method of accounting defined in
SFAS No. 123 has been applied.
31
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
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 1996 and 1997 using the
Black-Scholes option pricing model as prescribed by SFAS No. 123, using the
following weighted-average assumptions for grants in 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Risk-free interest rate .......... 5.87%-6.9% 6.08%-7.91%
Expected dividend yield .......... -- --
Expected life .................... 10 years 10 years
Expected volatility .............. 32.29% 50.10%
</TABLE>
The total value of options granted during 1996 and 1997 would be
amortized on a pro forma basis over the vesting period of the options. Options
generally vest equally over two years. Because the SFAS No. 123 method of
accounting has not been applied to options granted prior to January 1, 1995, the
resulting pro forma compensation costs may not be representative of that to be
expected in future years. If the Company had accounted for these plans in
accordance with SFAS No. 123, the Company's net loss and net loss per share,
would have increased as reflected in the following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
Net loss-
As reported ............. $ (726,860) $ (643,296)
Pro forma ............... (1,057,884) (808,071)
Net loss per share-
As reported ............. (.28) (.34)
Pro forma ............... (.41) (.43)
</TABLE>
Set forth below is a summary of options granted in 1997 and 1996:
<TABLE>
<CAPTION>
______________ Options Outstanding ______________ _____ Options Exercisable _____
Exercise Price Outstanding Weighted Weighted Per Exercisable Weighted
Range Shares at Average Average Share Options Average
December 31, Remaining Exercise Fair Exercise
1997 Contractual Price Value Price
Life (Years)
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $5.25-$6.00 $79,000 9 years 5.89 4.16 -- --
1997 $4.50-$5.38 $72,000 10 years 5.28 3.96 -- --
</TABLE>
32
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(9) COMMITMENTS AND CONTINGENCIES
Total rent expense for operating leases charged to operations for the
periods ended December 31, 1997 and 1996 was $17,862 and $20,100, respectively.
Minimum commitments under leases in effect at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
OPERATING
YEAR LEASES
<S> <C>
1998 ............................................. $ 17,888
1999 ............................................. 15,903
2000 ............................................. 3,981
Thereafter ....................................... -
-------------
Total minimum lease payments ..................... 37,772
=============
</TABLE>
The Company is a named defendant in a civil action filed on or about
February 17, 1998, in the Superior Court of Massachusetts, Essex County. The
plaintiff, Dolan-Jenner Industries, Inc., alleges that the Company and one of
its employees ( a former employee of the plaintiff), have breached and/or
interfered with a non-competition and non-disclosure agreement and have
misappropriated plaintiff's proprietary information. The plaintiff has sought
both injunctive relief and monetary damages. At the time the plaintiff filed its
action, the plaintiff also submitted a statement alleging damages of at least
$500,000. The Court has denied plaintiff's request for preliminary injunctive
relief, finding, among other things, that the plaintiff has not established a
likelihood of success on the merits of its claims. The Company believes that it
has meritorious defenses to all remaining claims made by the plaintiff. The
Company does not expect this litigation to have a material adverse effect on the
financial condition or operations of the Company and its subsidiaries taken as a
whole; however, if the matter is decided adversely to the Company, there can be
no assurance that the decision would not have such a material adverse effect.
(10) SEGMENTED INFORMATION
The Company's operations were conducted primarily within the following
industry segments for the fiscal years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------------
MEASURING MACHINE
AND COMPONENTS
INSPECTION AND
INSTRUMENTS ACCESSORIES TOTAL
<S> <C> <C> <C>
Net sales ........................... $ 7,213,876 $ 3,948,150 $ 11,162,026
Operating income (loss) ............. (325,314) (318,209) (643,523)
Capital expenditures ................ 751,293 282,763 1,034,056
Depreciation expense ................ 133,013 179,436 312,449
Amortization expense ................ 147,006 220,508 367,514
=============== ===============
Fixed assets, net 2,707,700 1,149,804 3,857,504
Total identifiable assets 14,594,836 1,324,115 20,990,751
=============== ===============
</TABLE>
33
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------
MEASURING MACHINE
AND COMPONENTS
INSPECTION AND
INSTRUMENTS ACCESSORIES TOTAL
<S> <C> <C> <C>
Net sales ........................... $ 6,694,860 $ 4,087,218 $ 10,782,078
Operating income (loss) ............. (383,751) 9,333 (374,418)
Capital expenditures ................ 172,876 8,249 181,125
Depreciation expense ................ 224,871 204,514 429,385
Amortization expense ................ 155,081 197,197 352,278
=============== ===============
Fixed assets, net 2,188,748 945,969 3,134,717
Total identifiable assets 13,050,971 6,785,393 19,836,364
=============== ===============
</TABLE>
Sales to unaffiliated customers in foreign countries represented
approximately 17% and 11% of net sales for fiscal 1997 and 1996, respectively.
The Company's export sales are denominated in U.S. dollars.
34
<PAGE>
STOCKER & YALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(11) SUBSEQUENT EVENT
On March 16, 1998, the Company entered into an agreement to acquire
Lasiris, a Canadian company that manufactures and distributes lasers and related
products for the machine vision industry. The purchase price is approximately
$5.3 million and will be paid in cash and common stock of the Company.
35
<PAGE>
PART III
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows for the fiscal years ended December 31, 1995,
1996, and 1997 compensation paid by the Company to the Named Executives.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------------------ ----------------------------------------
OTHER RESTRICTED SECURITIES ALL
NAME AND ANNUAL STOCK UNDERLYING OTHER
PRINCIPAL POSITION YEAR SALARY(1) BONUS COMPENSATION AWARDS OPTIONS COMPENSATION
- ------------------ ---- --------- ----- ------------ ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mark W. Blodgett 1997 $ 297,862 -- -- -- 20,000 --
Chairman and Chief 1996 $ 227,611 -- -- -- 20,000 --
Executive Officer 1995 $ 255,954 -- -- -- -- --
Susan A. Hojer Sundell
Senior Vice 1997 $ 110,296 -- -- -- 10,000 --
President - Finance 1996 $ 100,303 -- -- -- 6,000 --
and Treasurer 1995 $ 96,684 7,000 --
Kenneth A. Ribeiro 1997 $ 109,972 -- -- -- 7,000 --
Vice President 1996 $ 56,853 -- -- -- 6,000 --
Engineering, Salem(2) 1995 $ -- -- -- -- -- --
William J. Michaud
Vice President 1997 $ 130,315 -- -- -- 5,000 --
Sales and Marketing, 1996 $ 47,146 -- -- -- 7,000 --
Salem(3) 1995 $ -- -- -- -- -- --
</TABLE>
(1) Salary includes amounts, if any, deferred pursuant to the Company's
401(k) Plan.
(2) Kenneth A. Ribeiro became an employee of the Company on June 10, 1996.
(3) William J. Michaud was employed by the Company from August 15, 1995 through
December 12, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
The table below sets forth grants of options to purchase shares of
Common Stock pursuant to the 1996 Stock Option Plan made during the last
completed fiscal year to the named executive officers:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES PERCENT OF TOTAL OPTIONS EXERCISE EXPIRATION
NAME UNDERLYING OPTIONS GRANTED TO EMPLOYEES PRICE DATE
- ---- -------------------- ------------------------ -------- ----------
<S> <C> <C> <C> <C>
Mark W. Blodgett ........ 20,000 27.2% $ 5.38 4/1/2007
(non-qualified)
Susan A. Sundell ........ 10,000 13.6% $ 5.38 4/1/2007
William J. Michaud* ..... 10,000 13.6% $ 5.38 4/1/2007
Kenneth A. Ribeiro ...... 7,000 9.5% $ 5.38 4/1/2007
</TABLE>
* William J. Michaud terminated employment with the Company on December 12,
1997. On January 27 and February 3, 1998, Mr. Michaud exercised previously
granted options to purchase 2,300 shares of Common Stock at a price of $4.40
per share. All other options granted to Mr. Michaud, including 10,000 granted
in 1997, were forfeited by Mr. Michaud.
36
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END AT FISCAL YEAR-END
(#) ($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------------------------ -------------------------
<S> <C> <C>
Mark W. Blodgett ....................... 42,534/ 40,000 0/ 11,200
Susan A. Sundell ....................... 13,000/ 16,000 9,730/ 5,600
William J. Michaud ..................... 7,000/ 0 9,730/ 0
Kenneth A. Ribeiro ..................... 0/ 12,000 0/ 3,920
</TABLE>
TERMINATION OF EMPLOYMENT CHANGE IN RESPONSIBILITIES AND EMPLOYMENT CONTRACTS
The Company has no plan or arrangement with respect to the compensation
of its executive officers which would be payable upon the resignation,
retirement or any other termination of any executive officer's employment with
the Company or its subsidiaries or in connection with a change of control of the
Company or any subsidiary of the Company or a change in the executive officer's
responsibilities following a change in control. However, options to purchase
shares of Common Stock granted pursuant to the 1994 Stock Option Plan (the "1994
Plan") become fully vested upon a change of control as defined in the 1994 Plan.
Under the 1996 Stock Option Plan, in the event of a change of control, as
defined in the 1996 Stock Option Plan, the Board of Directors, in its
discretion, may provide for substitution or adjustments of outstanding options
granted under the 1996 Stock Option Plan, or may terminate all unexercised
options granted under the 1996 Stock Option Plan with or without payment of cash
consideration. In addition, certain options granted to outside Directors of the
Company vest upon such a change of control. There are no employment contracts
between the Company and any of the named executive officers.
37
<PAGE>
ITEM 13. EXHIBITS, LISTS, AND REPORTS ON FORM 8-K
(a) The following is a complete list of Exhibits filed as part of this Form
10-KSB.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
3.1 Amended and Restated Articles of Organization of the
Registrant, incorporated by reference to Exhibit 3.1 of
Stocker & Yale's Form SB-2, Amendment No. 1, filed October
11, 1996.
3.2 Amended and Restated Bylaws of the Registrant,
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 the Registrant 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 Agreement, dated as of March 6, 1995, by and
between the Company and Shawmut Bank, N.A., incorporated
by reference to Exhibit 10.1(a) of Stocker & Yale's Form
10-SB, as amended, filed on November 2, 1995.
10.1(b) Waiver and Amendment No. 1 to the Credit Agreement, dated
as of August 16, 1995, incorporated by reference to
Exhibit 10.1(b) of Stocker & Yale's Form 10-SB, as
amended, filed on November 2, 1995.
10.1(c) Consent under, and Second Amendment, to the Credit
Agreement and Amendment to Term Note, dated as of August
25, 1995, incorporated by reference to Exhibit 10.1(c) of
Stocker & Yale's Form 10-SB, as amended, filed on November
2, 1995.
10.1(d) Waiver and Amendment No. 3 to the Credit Agreement, dated
as of March 15, 1996, incorporated by reference to Exhibit
10.14 of Stocker & Yale's Form 10-KSB for the fiscal year
ended December 31, 1995.
10.1(e) Waiver of certain provisions of the Credit Agreement dated
May 24, 1996, incorporated by reference to Exhibit 10.1 of
Stocker & Yale's Form 10-QSB for the period ended June 30,
1996.
10.1(f) Waiver of certain provisions of the Credit Agreement dated
July 31, 1996, incorporated by reference to Exhibit 10.2
of Stocker & Yale's Form 10-QSB for the period ended June
30, 1996.
10.1(g) Amendment No. 4 to the Credit Agreement, dated August 13,
1996, for the fiscal year ending December 31, 1996,
incorporated by reference to Exhibit 10.3 of Stocker &
Yale's Form 10-QSB for the period ending June 30, 1996.
10.1(h) Waiver and Amendment No. 5 to the Credit Agreement, dated
March 14, 1997, for the year ending December 31, 1996,
incorporated by reference to Exhibit 10.1(h) of Stocker &
Yale's Form 10-KSB for the fiscal year ended December 31,
1996.
10.1(i) Waiver and Amendment of the Credit Agreement, dated
November 12, 1997, for the period ending September 30,
1997, incorporated by reference to Exhibit 27.2 of Stocker
& Yale's Form 10-QSB for the period ending September 30,
1997.
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**10.1(j) Commitment Letter, dated March 30, 1998, by and between
Stocker & Yale and Fleet National Bank, relating to
amending certain terms of the Credit Agreement.
10.2 Security Agreement, dated March 6, 1995, by and between
the Company and Shawmut Bank, N.A., incorporated by
reference to Exhibit 10.2 of Stocker & Yale's Form 10-SB,
as amended, filed on November 2, 1995.
10.3 Mortgage (Michigan), incorporated by reference to Exhibit
10.3 of Stocker & Yale's Form 10-SB, as amended, filed on
November 2, 1995.
10.4 Promissory Note, due September 1, 1996, issued by the
Company to Beverly Hospital Corporation, incorporated by
reference to Exhibit 10.4 of Stocker & Yale's Form 10-SB,
as amended, filed on November 2, 1995.
10.5 Mortgage (New Hampshire), incorporated by reference to
Exhibit 10.5 of Stocker & Yale's Form 10-SB, as amended,
filed on November 2, 1995.
10.6 Purchase and Sale Agreement, dated as of August 28, 1995,
by and between the Company and John Hancock Mutual Life
Insurance Company, incorporated by reference to Exhibit
10.6 of Stocker & Yale's Form 10-SB, as amended, filed on
November 2, 1995.
10.7 Form of Convertible Subordinated Note Purchase Agreement
by and between the Company and the Purchasers named
therein, incorporated by reference to Exhibit 4.1 of
Stocker & Yale's Form 10-QSB for the period ended March
31, 1996.
10.8(a) Amended and Restated 1994 Stock Option Plan, incorporated
by reference to Exhibit 10.8(a) of Stocker & Yale's Form
10-SB, as amended, filed on November 2, 1995.
10.8(b) Form of Incentive Option Agreement for employees under the
Amended and Restated 1994 Stock Option Plan, incorporated
by reference to Exhibit 10.8(b) of Stocker & Yale's Form
10-SB, as amended, filed on November 2, 1995.
10.8(c) Form of Nonqualified Option Agreement for employees under
the Amended and Restated 1994 Stock Option Plan,
incorporated by reference to Exhibit 10.8(c) of Stocker &
Yale's Form 10-SB, as amended, filed on November 2, 1995.
10.8(d) Form of Nonqualified Option Agreement for Outside
Directors under the Amended and Restated 1994 Stock Option
Plan, incorporated by reference to Exhibit 10.8(d) of
Stocker & Yale's Form 10-SB, as amended, filed on November
2, 1995.
10.9 Form of Option Agreement for Outside Directors outside the
Amended and Restated 1994 Stock Option Plan, incorporated
by reference to Exhibit 10.9 of Stocker & Yale's Form
10-SB, as amended, filed on November 2, 1995.
10.10 1995 Senior Management Profit Sharing Plan, incorporated
by reference to Exhibit 10.10 of Stocker & Yale's Form
10-SB, as amended, filed on November 2, 1995.
10.11 1994 Employee Stock Bonus Plan, incorporated by reference
to Exhibit 10.11 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.
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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-FSB, for the fiscal year ended December 31, 1995.
10.14(a) Promissory Note, due August 29, 2011, issued by the
Company to Primary Bank.
10.14(b) Mortgage Deed and Security Agreement, dated August 29,
1996, granted by the Company to Primary Bank.
10.14(c) Collateral Assignment of Leases and Rents, dated August
29, 1996, granted by the Company to Primary Bank.
21.1 Subsidiaries of the Company, incorporated by reference to
Exhibit 21.1 of Stocker & Yale's Form 10-SB, as amended,
filed on November 2, 1995.
*23.1 Consent of Arthur Andersen, LLP, Independent Accountants
</TABLE>
- ----------------------------
* Filed herewith
** Previously filed on Form 10-KSB, filed on April 1, 1998
(b) Reports on Form 8-K
There were no reports filed on Form 8-K.
40
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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, thereto duly authorized.
STOCKER & YALE, INC.
Date: February 28, 2000 By: /s/Mark W. Blodgett
-------------------------------------
Mark W. Blodgett, Chairman and Chief
Executive Officer
Date: February 28, 2000 By: /s/Gary B. Godin
-------------------------------------
Gary B. Godin, Senior Vice President,
Finance and Treasurer
41
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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.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 28, 2000
