U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A-1
(AMENDMENT NO. 1)
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
COMMISSION FILE NUMBER 0-5460
------------------------------------
STOCKER & YALE, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
MASSACHUSETTS 04-2114473
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
(I.R.S. EMPLOYER IDENTIFICATION NO.)
32 HAMPSHIRE ROAD
SALEM, NEW HAMPSHIRE 03079
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(603) 893-8778
(ISSUER'S TELEPHONE NUMBER)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
X Yes No
--- ---
As of October 7, 1998 there were 3,364,340 shares of the issuer's common stock
outstanding.
Transitional Small Business Disclosure Format (check one): Yes X No
--- ---
PART I. FINANCIAL STATEMENTS
ITEM 1.1 CONSOLIDATED BALANCE SHEETS
STOCKER & YALE, INC.
Assets June 30, 1998 December 31,1997
(unaudited) (audited)
Current assets:
Cash ....................................................................... $ 176,021 $ 73,520
Accounts receivable ........................................................ 2,262,624 1,860,624
Prepaid taxes .............................................................. 491,479 579,332
Inventory .................................................................. 6,134,765 4,957,095
Prepaid expenses ........................................................... 321,289 117,354
------------ ------------
Total current assets ....................................................... 9,386,178 7,587,925
------------ ------------
Property, plant and equipment, net ......................................... 4,258,868 3,857,504
------------ ------------
Note receivable ............................................................ -- 1,000,000
Goodwill, net of accumulated amortization .................................. 2,602,272 8,453,000
------------ ------------
Other intangible assets .................................................... 3,038,248 --
Other assets ............................................................... 95,175 92,322
------------ ------------
Total assets ............................................................... $ 19,380,741 $ 20,990,751
Liabilities and Stockholders' Investment
Current liabilities:
Current portion of long-term debt .......................................... $ 215,912 $ 443,334
Short term debt ............................................................ 750,000 --
Accounts payable ........................................................... 2,986,313 1,858,936
Accrued expenses ........................................................... 872,430 541,668
Withheld taxes ............................................................. 36,248 --
Accrued taxes .............................................................. 10,573 --
Current lease obligations .................................................. 197,061 89,771
------------ ------------
Total current liabilities .................................................. 5,068,537 2,933,709
------------ ------------
Long-term debt ............................................................. 5,222,253 3,809,658
------------ ------------
Long-term lease obligations ................................................ 691,106 223,575
------------ ------------
Other long-term liabilities ................................................ 564,688 564,688
------------ ------------
Subordinated note .......................................................... 1,350,000 1,350,000
------------ ------------
Deferred income taxes ...................................................... 1,858,270 876,904
------------ ------------
Stockholders' investment
Common stock, par value $0.001 Authorized--10,000,000
Issued and outstanding -- 3,364,430 shares
at June 30, 1998 and 2,567,894 shares at
December 31, 1997 .......................................................... 3,364 2,568
Cumulative translation adjustment .......................................... (26,028) --
Paid in capital ............................................................ 13,688,913 10,822,705
Retained earnings/(accumulated deficit) .................................... (9,040,362) 406,944
Total stockholders' investment ............................................. 4,625,887 11,232,217
------------ ------------
Total liabilities and stockholders' investment ............................. $ 19,380,741 $ 20,990,751
PART I. FINANCIAL STATEMENTS
ITEM 1.2 CONSOLIDATED STATEMENTS OF OPERATIONS
STOCKER & YALE, INC.
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
Net sales .................................. $ 3,057,442 $ 2,804,280 $ 5,492,783 $ 5,537,942
Cost of sales .............................. 1,899,813 1,614,438 3,549,839 3,256,883
Gross profit ............................... 1,157,629 1,189,842 1,942,944 2,281,059
----------- ----------- ----------- -----------
Selling expenses ........................... 419,297 410,447 765,809 839,357
General and administrative
expenses ................................. 959,304 467,458 1,513,031 852,243
Research and development ................... 196,746 157,241 386,491 331,525
Goodwill Impairment ........................ 7,365,662 -- 7,365,662 --
Acquired in process
research and development ................... 1,087,914 -- 1,087,914 --
----------- ----------- ----------- -----------
Operating income ........................... (8,871,294) 154,696 (9,175,963) 257,934
----------- ----------- ----------- -----------
/(loss)
Interest expense ........................... (136,080) (86,871) (250,752) (164,304)
Income/(loss) before
income taxes ............................... (9,007,374) 67,825 (9,426,715) 93,630
----------- ----------- ----------- -----------
Income tax expense ......................... 160,591 54,500 20,591 92,000
Net income/(loss) .......................... (9,167,965) 13,325 (9,447,306) 1,630
----------- ----------- ----------- -----------
Per share information
(1): Basic net income
/(loss) per common share ................... $ (3.06) $ 0.01 $ (3.39) $ 0.00
Weighted-average
number of common shares
outstanding ................................ 2,997,812 2,567,894 2,784,790 2,567,894
(2): Diluted net income
/(loss) per common and
dilutive potential common
shares outstanding ......................... $ (3.06) $ 0.01 $ (3.39) $ 0.00
Weighted-average number
of common and dilutive
potential common shares
outstanding ................................ 2,997,812 2,567,894 2,784,790 2,567,894
2
PART I. FINANCIAL STATEMENTS
ITEM 1.3 CONSOLIDATED STATEMENTS OF CASH FLOWS
STOCKER & YALE, INC.
SIX MONTHS ENDED
JUNE 30
1998 1997
---- ----
Cash flows from operating activities:
Net income/(loss) ................................................................ (9,447,306) 1,630
Adjustments to reconcile net cash
used in operating activities
Acquired in process research and
development ...................................................................... 1,087,914 --
Goodwill impairment .............................................................. 7,365,662 --
Depreciation and amortization .................................................... 372,499 278,151
Deferred income taxes ............................................................ (272,666) (100,000)
Other changes in assets and liabilities
Accounts receivable, net ......................................................... 272,244 (462,899)
Inventories ...................................................................... (374,058) (907,371)
Prepaid expenses ................................................................. (195,555) (133,459)
Prepaid taxes .................................................................... 212,758 --
Accounts payable ................................................................. 630,510 40,675
Accrued expenses ................................................................. 207,901 (66,060)
Other assets ..................................................................... -- (52,166)
Accrued and refundable taxes ..................................................... 10,573 --
Net cash used in operating activities ............................................ (129,524) (1,401,499)
---------- ----------
Cash flows from investing activities:
Purchases of property, plant and Equipment ....................................... (388,099) (323,602)
Acquisition of Lasiris ........................................................... (3,815,234) --
----------
Net cash used in investing activities ............................................ (4,203,333) (323,602)
---------- ----------
Cash flows from financing activities:
Line of credit advances .......................................................... 522,000 1,307,053
Danvers Savings Bank financing ................................................... 750,000 --
Toronto Dominion financing ....................................................... 798,675 --
Proceeds equipment lease financing ............................................... 503,365 215,450
Payments of bank debt ............................................................ (247,491) (855,457)
Issuance of common stock ......................................................... 10,121 --
Private placement of common stock ................................................ 1,124,716 --
Receipt of Beverly Hospital note receivable ...................................... 1,000,000 --
Net cash provided by financing activities ........................................ 4,461,386 667,046
---------- ----------
Effect of exchange rate on changes in cash ....................................... (26,028) --
---------- ----------
Net increase/(decrease) in cash and cash equivalents ............................. 102,501 (1,058,055)
---------- ----------
Cash and cash equivalents, beginning of period ................................... 73,520 1,244,418
---------- ----------
Cash and cash equivalents, end of period ......................................... 176,021 186,363
Supplemental disclosure of non-cash activities
Cash paid for Interest ........................................................... 254,144 184,749
Cash paid for Taxes .............................................................. 5,335 84,200
In connection with the acquisition of Lasiris, the Company issued 444,146 shares
of common stock to the selling shareholders of Lasiris.
3
PART 1. FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS
NOTE 1. GENERAL
The interim consolidated financial statements presented have been
prepared by Stocker & Yale, Inc. (the "Company") without audit and, in the
opinion of the management, reflect all adjustments of a normal recurring nature
necessary for a fair statement of (a) the results of operations for the three
month and six month periods ended June 30,1998 and June 30,1997 (b) the
financial position at June 30,1998 and (c) the cash flows for the six month
periods ended June 30,1998 and June 30,1997. Interim results are not necessarily
indicative of results for a full year.
The consolidated balance sheet presented as of December 31,1997 has
been derived from the consolidated financial statements that have been audited
by the Company's independent public accountants. The consolidated financial
statements and notes are condensed as permitted by Form 10-QSB and do not
contain certain information included in the annual financial statements and
notes of the Company. The consolidated financial statements and notes included
herein should be read in conjunction with the financial statements and notes
included in the Company's Annual Report on Form 10-KSB.
NOTE 2. ACQUISITION OF LASIRIS AND PURCHASE PRICE ALLOCATION
Overview
On May 13, 1998, Stocker & Yale, Inc. (the "Company") acquired Lasiris,
Inc. ("Lasiris"), a Canadian manufacturer of industrial lasers for the machine
vision and industrial inspection industries. The Company acquired Lasiris
through Lasiris Holdings, Inc., a newly formed New Brunswick corporation and a
subsidiary of the Company ("LHI"). Lasiris will be operated as a wholly-owned
Canadian subsidiary.
In connection with the acquisition, the stockholders of Lasiris
received an aggregate of approximately $3.2 million in cash and 444,146 shares
of LHI's capital stock which are exchangeable for shares of the Company's common
stock on a one for one basis. The Company financed the cash portion of the
consideration through (i) a private placement of 350,000 shares of the Company's
common stock at a price of $3.50 per share; (ii) a loan in the amount of
$750,000 from a bank which is secured by a second mortgage interest in the
Company's headquarters; (iii) a loan of approximately $800,000 pursuant to a
credit agreement between the Toronto Dominion Bank and Lasiris; and (iv) cash in
the amount of $950,000 received pursuant to the prepayment of a note receivable
due to the Company.
ALLOCATION OF PURCHASE PRICE
The acquisition was accounted for as a purchase, and accordingly, the
initial purchase price and acquisition costs aggregating approximately $5.5
million have preliminarily been allocated to the assets acquired, which consist
of approximately $4.0 million in identifiable assets, approximately $0.4 million
in goodwill, and approximately $1.1 million of in-process research and
development which was charged to operations in the second quarter of 1998.
The purchase price allocations represent the fair values determined by an
independent appraisal.
The following outlines the allocation of purchase price for the
acquisition of Lasiris.
Purchased in-process research and development $ 1,087,914
Developed Patented Technology 2,364,122
Trademarks/Tradenames 470,732
Assembled workforce 240,596
Goodwill and Deferred Taxes 1,669,530
---------------
5,832,894
4
Net book value of assets acquired 944,686
Less deferred taxes 6,777,580
(1,230,180)
---------------
5,547,400
In connection with the acquisition of Lasiris, the Company allocated $1.088
million of the purchase price to incomplete research and development projects.
This allocation represents the estimated fair value based on risk-adjusted cash
flows related to the incomplete products. At the date of acquisition, the
development of these projects had not yet reached technological feasibility and
the R&D in progress had no alternative future uses. Accordingly, these costs
were expensed as of the acquisition date.
Lasiris' acquired research and development value is comprised of R&D
programs designed to significantly enhance the Company's current product line,
as well as develop new laser products and technologies. Management expects that
the projects will be completed from the fourth quarter of 1998 through 2000. At
the acquisition date, programs ranged in completion from 10% to 80%, and
aggregate continuing R&D commitments to complete the projects are expected to be
approximately $1.5 million. The acquired R&D represents developmental efforts
associated with the introduction of new and enhanced laser systems. Remaining
development activities for these programs include the research, development and
testing of advanced electronic, optical, and thermal technologies. Expenditures
to complete these projects are expected to total approximately $400,000 in 1998,
$500,000 in 1999, and $500,000 in 2000. These estimates are subject to change,
given the uncertainties of the development process, and no assurance can be
given that deviations from these estimates will not occur.
As evidenced by their continued support for these projects, management
believes the Company has a reasonable chance of successfully completing each of
the major R&D programs. However, there is a substantial risk associated with the
completion of the projects and there is no assurance that any will meet with
either technological or commercial success. If none of the R&D projects is
successfully completed, the sales and profitability of the combined company
would be adversely affected and the value of the R&D projects will not be
realized.
Further information about the acquisition of Lasiris may be found in
the Company's Form 8-K, which was filed with the Securities and Exchange
Commission (the "SEC") on May 27, 1998, and amended on Form 8-K/A, filed with
the SEC on July 27, 1998.
NOTE 3. PROFORMA FINANCIAL INFORMATION
The following proforma financial information assumes that the
acquisition of Lasiris took place at the beginning of each respective period,
including the related expense adjustments.
Six month periods ended June 30,
1998 1997
---- ----
Net Revenues $ 7,063,051 $ 7,351,748
Net Income (9,571,952) (156,674)
Earnings per Share $ (3.08) $ (0.05)
Average shares outstanding 3,108,697 3,012,041
NOTE 4. WRITE DOWN OF GOODWILL
In accordance with the provisions of Statement of Financial Standards
(SFAS) No. 121 - "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", the Company periodically assesses the
realizability of its long-lived assets. In addition to this periodic review, the
Company is obliged to initiate such an assessment in the event of a change in
the Company's assets or in the valuation of its assets. Based on its most recent
assessment, the Company has recorded a non-recurring, non-cash charge of $7.4
5
million during the three months ended June 30, 1998, to write down the carrying
value of its goodwill to its estimated fair value.
On July 14, 1998, the Company announced that it had signed a
non-binding letter of intent to sell its Stilson Division ("Stilson"). As of
June 30, 1998 the carrying value of Stilson's net assets was $2.0 million plus a
portion of the goodwill recorded in 1989 when Stocker & Yale (the "Company"),
including Stilson, was acquired. This proposed sale of Stilson required the
Company to assess the realizability of goodwill. There was no allocation of
goodwill to the individual divisions of the Company at the time of the
acquisition in 1989. Accordingly, management of the Company has evaluated the
cash flow generated by Stilson for the five years preceding and the five years
following the acquisition relative to the cash flow of the entire Company.
Management has also reviewed their expectations, at the time of the 1989
acquisition, of the future cash flow of Stilson. Based on this assessment
management has allocated approximately 60% of the goodwill resulting from the
1989 acquisition to Stilson, $4.9 million net of amortization at June 30, 1998.
Therefore the net assets of Stilson at June 30, 1998 inclusive of goodwill were
approximately $6.9 million. The purchase price for the net assets of Stilson set
forth in the letter of intent is $3.0 million. Accordingly, at June 30, 1998 the
Company has written down the carrying value of the net assets of Stilson to $3.0
million and recorded a charge of $3.9 million which is included in the goodwill
impairment in the three-month period ended June 30, 1998.
Subsequent to the allocation of goodwill to Stilson, management
assessed the realizability of the remaining $3.5 million balance of its 1989
goodwill. Based upon the changes in the Company since 1989 and the recent
history of losses, management concluded that the realizability of the remaining
goodwi1l is uncertain and that the carrying value should be written down to
zero. The Company has incurred consolidated operating losses of approximately
$644,000 and $374,000 for fiscal years ended December 31, 1997 and 1996. During
both periods as indicated in footnote (10) of the consolidated financial
statements, the Measuring and Inspection Instruments segment (the "Stocker"
segment) incurred operating losses of approximately $325,000 and $384,000 in
fiscal 1997 and 1996 respectively, whereas the Stocker segment recorded
operating profits of approximately $64,000 in 1995. In spite of the Company's
concerted efforts to turnaround these negative operating results, it has not
been successful. Since the 1989 acquisition, the Company has experienced a shift
from U.S. government purchases under long-term government contracts to a
civilian customer-base that has not been sufficient to cover the loss of its
governmental business. Furthermore, in spite of management's efforts, the
operating profits of its other measuring and inspection products have also
declined. Management believes that the Company's future growth lies in product
lines, such as fiber optic lighting and laser lighting which were not part of
the 1989 goodwill. Due to the uncertainty of this business, management is unable
to predict when or if Stocker will generate operating profits. As a result of
this assessment the Company adjusted the value of its Stocker goodwill to zero.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND OPERATING RESULTS
This Quarterly Report on Form 10-QSB contains forward looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. The Company's actual results
could differ materially from those set forth in the forward-looking statements.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
attached consolidated financial statements and notes thereto and with the
Company's audited financial statements and notes thereto for the fiscal year
ended December 31, 1997.
THREE-MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
On May 13, 1998, the Company completed its purchase of all of the
outstanding stock of Lasiris, Inc., a Canadian manufacturer of industrial lasers
for the machine vision and industrial inspection industries. The Company
acquired Lasiris through Lasiris Holdings, Inc., a newly formed New Brunswick
corporation and a subsidiary of the Company ("LHI"). The acquisition was
accounted for as a purchase, and the purchase price
6
was allocated pursuant to an independent appraisal. The three month results
include the effects of increased goodwill amortization totaling $20,196,
increased depreciation of acquired assets totaling $37,202, as well as the
results of Lasiris operations for the period since the acquisition date. In
addition, $1,087,914 of in-process research & development projects of Lasiris
was charged against income. This portion of the assets acquired was identified
as projects that had not yet reached technological feasibility and that, until
completion of the development, have no alternative future use.
In connection with the acquisition, the stockholders of Lasiris received an
aggregate of approximately $3.2 million in cash and 444,146 shares of LHI's
capital stock which are exchangeable for shares of the Company's common stock on
a one for one basis. The Company financed the cash portion of the consideration
through (i) a private placement of 350,000 shares of the company's common stock
at a price of $3.50 per share; (ii) a loan in the amount of $750,000 from a bank
which is secured by a second mortgage interest in the Company's headquarters;
(iii) a loan of approximately $800,000 pursuant to a credit agreement with the
Toronto Dominion Bank and Lasiris; and (iv) cash received of $950,000 pursuant
to the prepayment of a note receivable due to the Company. The acquisition was
accounted for as a purchase, and accordingly, the initial purchase price and
acquisition costs aggregating approximately $5.5 million have preliminarily been
allocated to the assets acquired, which consist of approximately $4.0 million in
identifiable assets, approximately $0.4 million in goodwill, and approximately
$1.1 million of in-process research and development which was charged to
operations in the second quarter of 1998. The purchase price allocations
represent the fair values determined by an independent appraisal.
The following outlines the allocation of purchase price for the acquisition of
Lasiris.
Purchased in-process research and development $ 1,087,914
Developed Patented Technology 2,364,122
Trademarks/Tradenames 470,732
Assembled workforce 240,596
Goodwill and Deferred Taxes 1,669,530
----------------
5,832,894
Net book value of assets acquired 944,686
----------------
6,777,580
Less deferred taxes (1,230,180)
----------------
5,547,400
In connection with the acquisition of Lasiris, the Company allocated $1.088
million of the purchase price to incomplete research and development projects.
This allocation represents the estimated fair value based on risk-adjusted cash
flows related to the incomplete products. At the date of acquisition, the
development of these projects had not yet reached technological feasibility and
the R&D in progress had no alternative future uses. Accordingly, these costs
were expensed as of the acquisition date.
Lasiris' acquired research and development value is comprised of R&D
programs designed to significantly enhance the Company's current product line,
as well as develop new laser products and technologies. Management expects that
the projects will be completed from the fourth quarter of 1998 through 2000. At
the acquisition date, programs ranged in completion from 10% to 80%, and
aggregate continuing R&D commitments to complete the projects are expected to be
approximately $1.5 million. The acquired R&D represents developmental efforts
associated with the introduction of new and enhanced laser systems. Remaining
development activities for these programs include the research, development and
testing of advanced electronic, optical, and thermal technologies. Expenditures
to complete these projects are expected to total approximately $400,000 in 1998,
$500,000 in 1999, and $500,000 in 2000. These estimates are subject to change,
given the uncertainties of the development process, and no assurance can be
given that deviations from these estimates will not occur.
As evidenced by their continued support for these projects, management
believes the Company has a reasonable chance of successfully completing each of
the major R&D programs. However, there is a substantial risk associated with the
completion of the projects and there is no assurance that any will meet with
either technological or commercial success. If none of the R&D projects is
successfully completed, the sales and
7
profitability of the combined company would be adversely affected and the value
of the R&D projects will not be realized.
Consolidated net revenues increased 9% from $2,804,280 in the second
quarter of 1997 to $3,057,442 in the second quarter of 1998. Of the total net
revenues reported for the three-month period ended June 30, 1998, the Company's
Salem Division, located in Salem, New Hampshire, contributed 52%, the Company's
Stilson/Die-Draulics Division, located in Fraser, Michigan, contributed 33%,
Lasiris contributed 12% and Radiant Asiatec Pte, Ltd. contributed 2%. Despite
significantly reduced sales to Southeast Asia, Lighting Products revenues
increased 72% from $1,003,846 to $1,726,119 due to the addition of $676,995 in
laser lighting revenues contributed by Lasiris and $123,214 in microscope
lighting revenues contributed by the Singapore subsidiary. Lighting Products
revenue further benefited from fiber optic lighting sales which increased from
$81,762 to $187,240. Sales of the Company's Military Products decreased overall
from $460,923 in the second quarter of 1997 to $109,111 in the second quarter of
1998. Civilian sales of Military Products decreased $148,987 from $236,693 to
$87,706 reflecting the absence in the current year of a large contract with a
direct mail marketing firm which favorably impacted 1997, and also reflecting
the closing in December, 1997 of the Company's Hong Kong subsidiary which sold
such products. Sales of Military Products to the U.S. Government decreased
$112,531 from $133,936 in the second quarter 1997 to $21,405 in the second
quarter 1998, as peacetime demand for military supplies continues to diminish.
Sales of Machine Tool and Accessories decreased from $1,000,193 in the second
quarter of 1997, to $833,739 in the second quarter of 1998, due to a slowdown in
distributor orders. Sales of Printer and Recorder Products increased from
$339,318 in the second quarter of 1997, to $388,473 in the second quarter of
1998.
Gross profit decreased $32,213 from $1,189,842 in the second quarter of
1997 to $1,157,629 in the second quarter of 1998, as personnel costs increased
and the Company experienced reduced revenues at the Company's Stilson and Salem
Divisions. Selling Expenses increased $28,850, with Lasiris selling expenses of
$101,252 offsetting $72,402 in reduced costs of sales personnel in other
divisions.
Research and Development Expenses increased by $39,505 primarily
reflecting the amount of such expenses at Lasiris. General and Administrative
costs increased $491,844 from $467,458 in the second quarter of 1997 to $959,304
in the second quarter of 1998. $321,335 of this increase is attributable to
expenses reported by the Company's new Singapore and Lasiris subsidiaries and
associated corporate expenses, with the balance due largely to increased
personnel costs, legal expenses and bank charges. Interest expense increased
$49,209 as a result of the Company's increased indebtedness.
In accordance with the provisions of Statement of Financial Standards
(SFAS) No. 121 - "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", the Company periodically assesses the
realizability of its long-lived assets. In addition to this periodic review, the
Company is obliged to initiate such an assessment in the event of a change in
the Company's assets or in the valuation of its assets. Based on its most recent
assessment, the Company has recorded a non-recurring, non-cash charge of $7.4
million during the three months ended June 30, 1998, to write down the carrying
value of its goodwill to its estimated fair value.
On July 14, 1998, the Company announced that it had signed a
non-binding letter of intent to sell its Stilson Division ("Stilson"). As of
June 30, 1998 the carrying value of Stilson's net assets was $2.0 million plus a
portion of the goodwill recorded in 1989 when Stocker & Yale (the "Company"),
including Stilson, was acquired. This proposed sale of Stilson required the
Company to assess the realizability of goodwill. There was no allocation of
goodwill to the individual divisions of the Company at the time of the
acquisition in 1989. Accordingly, management of the Company has evaluated the
cash flow generated by Stilson for the five years preceding and the five years
following the acquisition relative to the cash flow of the entire Company.
Management has also reviewed their expectations, at the time of the 1989
acquisition, of the future cash flow of Stilson. Based on this assessment
management has allocated approximately 60% of the goodwill resulting from the
1989 acquisition to Stilson, $4.9 million net of amortization at June 30, 1998.
Therefore the net assets of Stilson at June 30, 1998 inclusive of goodwill was
approximately $6.9 million. The purchase price for the net assets of Stilson set
forth in the letter of intent is $3.0 million. Accordingly, at June 30, 1998,
the Company has written down the carrying value of the net assets of Stilson to
$3.0 million and recorded a charge of $3.9 million which is included in the
goodwill impairment in the three-month period ended June 30, 1998.
8
Subsequent to the allocation of goodwill to Stilson, management
assessed the realizability of the remaining $3.5 million balance of its 1989
goodwill. Based upon the changes in the Company since 1989 and the recent
history of losses, management concluded that the realizability of the remaining
goodwill is uncertain and that the carrying value should be written down to
zero. The Company has incurred consolidated operating losses of approximately
$644,000 and $374,000 for the fiscal years ended December 31, 1997 and 1996.
During both periods as indicated in footnote (10) of the consolidated financial
statements, the Measuring and Inspection Instruments segment (the "Stocker"
segment) incurred operating losses of approximately $325,000 and $384,000 in
fiscal 1997 and 1996 respectively, whereas the Stocker segment recorded
operating profits of approximately $64,000 in 1995. In spite of the Company's
concerted efforts to turnaround these negative operating results, it has not
been successful. Since the 1989 acquisition, the Company has experienced a shift
from U.S. government purchases under long-term government contracts to a
civilian customer-base that has not been sufficient to cover the loss of its
governmental business. Furthermore, in spite of management's efforts, the
operating profits of its other measuring and inspection products have also
declined. Management believes that the Company's future growth lies in product
lines, such as fiber optic lighting and laser lighting which were not part of
the 1989 goodwill. Due to the uncertainty of this business management is unable
to predict when or if Stocker will generate operating profits. As a result of
this assessment the Company adjusted the value of its Stocker goodwill to zero.
SIX-MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
On May 13, 1998, the Company completed its purchase of all of the
outstanding stock of Lasiris, Inc., a Canadian manufacturer of industrial lasers
for the machine vision and industrial inspection industries. The Company
acquired Lasiris through Lasiris Holdings, Inc., a newly formed New Brunswick
corporation and a subsidiary of the Company ("LHI"). The acquisition was
accounted for as a purchase, and the purchase price was allocated pursuant to an
independent appraisal. The six month results include the effects of increased
goodwill amortization totaling $20,196, increased depreciation of acquired
assets totaling $37,202, as well as the results of Lasiris' operations for the
period since the acquisition date. In addition, $1,087,914 of in-process
research & development projects of Lasiris was charged against income. This
portion of the assets acquired were identified as projects that had not yet
reached technological feasibility and that, until completion of the development,
have no alternative future use.
Consolidated net revenues decreased from $5,537,942 in the second
quarter of 1997 to $5,492,783 in the second quarter of 1998. Despite
significantly reduced sales to Southeast Asia, Lighting Products revenues
increased 38% from $1,966,070 to $2,714,491 due to the addition of $676,995 in
laser lighting revenues contributed by Lasiris and $123,214 in microscope
lighting revenues contributed by the Singapore subsidiary. Lighting Products
revenue further benefited from fiber optic lighting sales which increased from
$129,995 to 371,950. Sales of the Company's Military Products decreased overall
from $832,564 in 1997 to $206,681 in 1998. Civilian sales of Military Products
decreased $511,627 from $676,067 in second quarter 1997 to $164,440 in the
second quarter 1998, reflecting the absence in the current year of a large
contract with a direct mail marketing firm which favorably impacted 1997, and
also reflecting the closing in December, 1997 of the Company's Hong Kong
subsidiary which sold such products. Sales of Military Products to the U.S.
government decreased $114,256 from $156,497 in the second quarter 1997 to
$42,241 in the second quarter 1998, as peacetime demand for military supplies
continues to diminish. Sales of Machine Tool and Accessories decreased from
$1,996,717 in the second quarter of 1997 to $1,822,307 in the second quarter of
1998 due to a slowdown in distributor orders. Sales of Printer and Recorder
Products increased from $742,591 in the second quarter of 1997 to $749,304 in
the second quarter of 1998.
Gross profit decreased $338,115 from $2,281,059 in the second quarter
of 1997 to $1,942,944 in the second quarter of 1998, as personnel costs
increased against reduced revenues at the Company's Stilson and Salem Divisions.
Selling Expenses decreased $73,548, as a result of reduced selling costs at the
Salem and Stilson Divisions, a portion of which reduction was offset by the
addition of Lasiris selling expenses totaling $101,252. Research and Development
Expenses increased $54,966 of which $37,216 resulted from the addition of such
expenses at Lasiris. General and Administrative costs increased $660,788 from
$852,243 in the second quarter of 1997 to $1,513,031 in the second quarter of
1998. $321,335 of this increase is attributable to expenses reported by the
Company's new Singapore and Lasiris subsidiaries and associated corporate
expenses, with the balance due largely to increased personnel costs of $199,194,
increased legal and audit expenses of $143,128, a
9
$50,000 discount granted for the prepayment of a note due to the Company, and
increased bank charges of $42,495. Interest expense increased $86,448 as a
result of the Company's increased indebtedness.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations primarily through third party
credit facilities and cash from operations. Net cash used in operations was
($129,524) for the six months ended June 30, 1998 and ($1,401,499) for the six
months ended June 30, 1997.
The Company's primary third party financing relationship is with Fleet
National Bank of Massachusetts, N.A. (the "Bank"). The initial Credit Agreement
between the Company and the Bank, dated March 6, 1995 (the "Credit Agreement"),
provided for a Revolving Line of Credit Loan (the "Revolving Loan") and a Long
Term Loan (the "Term Loan") both due March 31, 1998. The Short Term Loan was
paid as agreed in August 1995. As of April 1, 1998, the Company and the Bank
entered into an agreement to extend the maturity dates of its Revolving Loan and
Term Loan to January 2, 1999. The Revolving Loan and the Term Loan bear interest
at the Bank's base rate plus 1% through June 30, 1998 and at the Bank's base
rate plus 2% from July 1, 1998 through the maturity date. At June 30, 1998 there
was a total of $2,884,454 borrowed under the Credit Agreement, of which
$1,789,029 pertained to the Revolving Loan. The available credit on the
Revolving Loan as of June 30, 1998 was $292,156.65. The Company is exploring
financing alternatives and intends to refinance before maturity.
Under the terms of the Credit Agreement, the Company is required to
comply with a quarterly minimum net income covenant. As of June 30, 1998 the
Company was not in compliance with this covenant, and on July 21, 1998 the Bank
granted a waiver of the net income covenant for the quarter ended June 30, 1998.
In connection with the Lasiris acquisition, the stockholders of Lasiris
received 444,146 shares of capital stock of Lasiris Holdings, Inc., a newly
formed New Brunswick corporation and a subsidiary of the Company, which are
exchangeable for shares of the Company's common stock on a one for one basis and
cash in an aggregate amount of approximately $3.3 million. The aggregate value
of the shares was deemed to be $1,732,167 as of May 13, 1998. The Company
financed a portion of the cash consideration paid for Lasiris through a private
placement of 350,000 shares of the Company's common stock at a price of $3.50
per share, which generated net proceeds to the Company of $1,124,716 after
offering expenses of $100,284.
On May 13, 1998, the Company entered into a $750,000 second mortgage
loan with Danvers Savings Bank (the "Danvers Loan"). This loan bears interest at
a rate of 11%, requires monthly payments of interest only and matures on May 13,
1999. The Danvers Loan generated net proceeds after expenses of $731,196, which
were used to finance a portion of the Lasiris acquisition.
Also on May 13, 1998, Lasiris entered into a credit agreement with
Toronto Dominion Bank ("TD Bank"). The credit agreement provides for (i) a
$1,000,000 CDN Operating Line of Credit (the "TD Line of Credit"); (ii) a
$1,000,000 CDN Term Loan (the "TD 4 Year Term Loan"); (iii) a $83,333 CDN Term
Loan (the "TD Two Year Term Loan"); and (iv) a $4,461 CDN Letter of Guarantee
(the "Letter of Guarantee"). The TD Line of Credit bears interest at 1% over the
TD Bank prime rate, requires monthly payments of interest only, and is payable
on demand. As of June 30, 1998, there were no borrowings on the TD Line of
Credit. The TD 4 Year Term Loan bears interest at 2% over the TD Bank prime
rate, matures on May 13, 2002, and requires monthly principal payments of
$20,833CDN (approximately $14,500US) plus interest. As of June 30, 1998, the
outstanding balance on the TD 4-Year Term Loan was $979,966CDN ($667,650 US).
The TD Two Year Term Loan bears interest at 2% over the TD Bank prime rate,
matures on May 13, 2000, and requires monthly principal payments of $4,167 CDN
(approximately $2,900US) plus interest. As of June 30, 1998, the outstanding
balance on the TD 2-Year Term Loan was $79,167CDN ($53,936 US).
On May 7, 1998, Beverly Hospital Corporation prepaid its $1,000,000
Note Receivable due to the Company, less a $50,000 discount for early payment.
The proceeds were used to finance a portion of the Lasiris acquisition.
10
On May 20, 1997, the Company entered into a one-year equipment line of
credit agreement with Granite State Bank to finance capital equipment related to
new product development. Under the terms of this agreement, advances under the
line will be converted quarterly into a series of five year notes, not to exceed
$500,000 in the aggregate, which will bear interest at the prime rate plus
0.75%. As of June 30, 1998, the Company had outstanding debt of $346,929 under
this line of credit.
Accounts payable increased $1,110,010 from December 31, 1997 to June
30, 1998 of which $698,902 results from the Lasiris acquisition and the balance
is attributable to increased payment cycles. Company expenditures for capital
equipment were $388,099 in the first six months of 1998 as compared to $323,602
in the first six months of 1997. The majority of the 1998 expenditures related
to the purchase of new CNC machinery at the Company's Stilson Division.
On July 14, 1998, the Company announced that it had signed a
non-binding letter of intent to sell its Stilson Division to De-Sta-Co
Industries. Subject to the execution of a definitive purchase and sale agreement
and a due diligence review of the Stilson Division, De-Sta-Co will acquire the
assets of Stilson for $3 million cash, assumption of approximately $1 million of
operating liabilities and semiannual payments of 2% of future Stilson product
line revenues for three years. Although the parties anticipate consummating the
sale on or before September 30, 1998, there can be no assurance as to when such
a transaction would close, if at all, or as to the definitive terms of such a
transaction.
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.
YEAR 2000 ISSUES
The Company has undertaken a plan to address the potential impact to
its business of "year 2000 issues" (i.e., issues that may arise as a result of
computer programs that use only the last two, rather than all four, digits of
the year). The plan addresses Internal Matters, which are under the Company's
operation and over which the Company exercises some control, and External
Matters, which are outside the Company's control and influence. The Company has
elected first to address Internal Matters, in the belief that most other
companies and institutions are similarly working to resolve their own
mission-critical issues and that as a result an early assessment of External
Matters would be premature.
The Company has completed a review of its products and product
components, its information systems, and its ancillary systems (such as test
equipment, communication equipment, and security systems) in order to identify
areas of exposure to year 2000 issues. The review concluded that the Company's
products and product components are substantially free from year 2000 risks. The
Company's Engineering department is working with the suppliers of several
product components to ascertain whether identified potential risks have been
addressed and when they will be compliant.
The Company's information systems rely upon commercial computer
software provided by independent software vendors. The Company's primary
information system software, which consists of computer operating system, an
integrated manufacturing system and a payroll package, was upgraded in 1997 so
that it would function with the Company's upgraded computer system hardware. The
cost for the new software was approximately $80,000. The providers of these
primary information system software packages have represented that these systems
are fully Year 2000 compliant. The Company also utilizes a number of personal
computers which are operated independently (i.e., not linked by a network).
These computers use a wide variety of
11
different software packages and are of various ages. The Company has compiled an
inventory of these personal computers, their hardware, as well as their
operating systems and installed application software packages. This information
will be assessed initially to determine if suppliers represent that they are
year 2000 compliant. The Company estimates that it has completed approximately
75% of this assessment. Following the assessment phase, the Company will
undertake to upgrade or replace software and, if necessary, will replace
personal computers so that all equipment and software is represented compliant
by the providers. The Company estimates that the cost for such upgrades and
replacements will not exceed $30,000. Subsequent phases will include obtaining
written certification of year 2000 testing by providers followed by our own
in-house year 2000 tests.
The Company's ancillary systems are largely provided by third parties,
most of which have not yet completed their own assessments of year 2000
exposure. The Company will continue to solicit such information from these third
parties. Due to the incompleteness of this information, contingency plans have
not yet been finalized.
The Company estimates that it has completed approximately 45% of its
year 2000 Plan regarding Internal Matters and estimates that it has completed
approximately 20% of its overall year 2000 plan.
PART II.
ITEM. 6 EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) The following is a complete list of Exhibits filed as part of this
Form 10-QSB:
Exhibit Number Description
*2.1 Offer of Purchase and Sale by and among Stocker &
Yale, Inc., Lasiris, Inc., the stockholders of Lasiris,
Inc. and certain other parties named therein, dated March
14, 1998.
**10.1(k) Amended and Restated Revolving Loan Agreement, dated
April 1, 1998, by and between Stocker & Yale, Inc. and
Fleet National Bank.
**10.1(1) Modification and Extension Agreement, dated April 1, 1998
by and between Stocker & Yale, Inc. and Fleet National
Bank.
**10.1(m) Third Party Pledge Agreement, dated April 1, 1998, by
and between Stocker & Yale and Fleet National Bank.
**10.1(n) Waiver of Certain Provisions of the Credit Agreement
dated July 21, 1998.
**10.1(o) Consent Letter dated May 11, 1998 relating to Lasiris
Transaction.
**10.15(a) Promissory Note, due May 13, 1999, issued by the Company
to Danvers Savings Bank.
**10.15(b) Mortgage Assignment of Leases and Rents & Security
Agreement, dated May 13, 1998 granted by the Company to
Danvers Savings Bank.
12
* 10.16(a) Voting, Support and Exchange Agreement between Lasiris
Holding, Inc., Stocker & Yale, Inc. and the stockholders
of Lasiris, Inc. and certain other parties named
therein, dated as of May 13, 1998.
* 10.16(b) Employment Agreement by and among Lasiris, Inc., Stocker
& Yale, Inc. and Alain Beauregard, dated as of
May 13, 1998.
*10.16(c) Employment Agreement by and among Lasiris, Inc., Stocker
& Yale, Inc. and Luc Many, dated as of May 13, 1998.
*10.16(d) Lasiris, Inc. Executive Incentive Compensation Plan.
***10.17(a) Credit Agreement, dated as of May 13, 1998, by and
between The Toronto-Dominion Bank and Lasiris, Inc.
***10.17(b) Guarantee and Postponement of Claim, dated as of
May 13, 1998, by Stocker & Yale, Inc.
*Incorporated by reference to the Company's Form 8-K filed May 27, 1998.
**Previously filed as part of Form 10-QSB, for the quarterly period ended
June 30, 1998, filed on August 19, 1998.
***Filed herewith.
27.1 Financial Data Schedule
(b) The Company's Form 8-K relating to the acquisition of Lasiris, Inc. was
filed with the Securities and Exchange Commission on May 27, 1998.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereto duly
authorized.
Stocker & Yale, Inc.
Date: February 28, 2000 By: /s/ Mark W. Blodgett
--------------------------
Chairman and Chief Executive Officer
Date: February 28, 2000 By: /s/ Gary B. Godin
----------------------------
Senior Vice President- Finance and Treasurer