Despite SEC probe, Salem firm hopes to fly high again

On April 19, 2004, StockerYale Inc., the once high-flying, then struggling, Salem-based fiberoptics company, announced it landed two orders from defense giant BAE Systems for specialized lasers.

After the news, the company’s stock went “ballistic,” in the words of spokesman Fred Pilon, rocketing from $1.35 to a high of $7.75 the next day — more than a five-fold increase in less than 24 hours.

On April 21, however, the company clarified that the order was part of a two-year existing contract. The second order, Pilon later stated, amounted to a couple of lasers, “nothing to get filthy rich on,” and the stock fizzled, eventually hitting its previous level.

In-between, on April 20, Chief Executive Officer Mark Blodgett sold a quarter-million shares at $6.56 share, a transaction worth more than $1.6 million. It was his only sale in at least two years. Lawrence Blodgett (his father, who sits on the board of the directors) sold nearly 57,000 shares that day, some valued at $7.19 a share, for more than $350,000.

The transactions triggered a Securities and Exchange Commission investigation into whether Blodgett illegally used insider knowledge or manipulated information to make a killing, the company announced last month.

Pilon said that Blodgett checked with his lawyers before selling the stock, that “he knew what he was doing” and doesn’t think the investigation will amount to much. Lately, the SEC is giving out notification letters – known as Wells Notices – “like they are candy,” Pilon said.

Still, the SEC investigation is like a “cloud hanging over the head” of a company that seems to go bright and dim as much as headlights on a two-lane curvy highway on a rainy night. In fact, lately the good news and bad news is coming at the same time,

• Two years after being tossed off the Nasdaq exchange in 1999, StockerYale stock was shining as the exchange’s top-performing company. Then it went dim, along with the rest of the fiberoptics industry.

• In recent months, the company has seen increasing sales and been hiring workers, but it still is losing millions a year.

• StockerYale shares reached their highest price of 2004 at the same time its accounting firm — Deloitte & Touche LLP — quit after expressing doubts about the “company’s ability to continue as a going concern.”

• At the same time it announced the SEC probe, the firm proceeded to acquire a major company that could result in potential growth.

Drexel Burnham alumnus

StockerYale, which began as Stocker & Yale in 1946, historically sold watches and compasses to the military and made machine-tool fluorescent lighting systems. In 1989, the firm was then taken over and taken private by Blodgett, a former vice president of Drexel Burnham Lambert Inc., a leveraged buyout firm then headed by junk bond king Michael Milken. It was about the same time that Milken was charged with and later sentenced for securities fraud and related charges.

Blodgett paid off much of StockerYale’s debt and brought it public again via a reverse merger with a tiny Canadian company. He used the cash to acquire cheap fiberoptics assets, such as another Canadian laser maker.

But it took a while for the market to catch on, and by June 1999 Nasdaq delisted it for failing to meet capital and income requirements. The largest institutional shareholder sold out, and StockerYale stock dipped below 40 cents a share. Blodgett, however, had faith in the company, buying shares at prices as low as 42 cents.

The faith paid off, literally and figuratively. The next year Bloomberg reclassified StockerYale as a fiberoptics company just when the high-speed Internet craze was taking off. StockerYale went along for the ride. Instead of selling for 40 cents a share, it was selling for more than $40 a share. No other company on the Nasdaq went so far so fast. So StockerYale plunked down $12 million to purchase a 900,000-square-foot former Digital Equipment Corp. plant in Salem, brightened by skylights, complete with an employee gym to work off all those stock options.

The fiberoptics balloon burst shortly afterwards, and StockerYale stock staggered, limping along at $1 to $2 a share, except for the aforementioned peak in April 2004. The Salem facility, which once held nearly 100 people, now houses about 30 out of a total workforce of 165.

The good news is the company is growing again, adding 15 employees last year. The bad news (for New Hampshire, at least) is that most of that job growth has been in Montreal, where the company consolidated much of its operations.

‘The right direction’

Spokesman Pilon is optimistic about the company’s future. The latest financials show that sales have steadily increased to $4.85 million in the third quarter. And while the company still lost $2.5 million in the period, that’s nearly half the amount it lost in the last quarter of 2003. That’s because the specialized optical fibers industry — crucial to moving data in high-speed fiberoptics systems – is starting to come to life.

“The trend is in the right direction,” said Pilon. “With a little bump in revenues, we should be a profitable company.”

Meanwhile, the company has announced its intention to purchase Navitar, a Rochester, N.Y., company, for $25.5 million. Navitar specializes in lens systems, which would seem to fit well into an optics company. The new company will have $43 million in sales, which might provide that “little bump” the company needs.

But at this point StockerYale can only afford to buy companies by going deeper into debt.

“The company has been adept at raising money,” Pilon said.

While some investors are still betting on StockerYale, the market remains skeptical about whether the company will be adept at making money. The purchase of Navitar failed to have an impact on its stock price — perhaps because the company is now deeper in debt, perhaps because of the SEC investigation.

Pilon said the company intends to reply to the SEC letter this month, defending Blodgett’s actions, but probes like these could take months, if not years.

“The uncertainty doesn’t help,” he said. “But what choice do we have but to let this thing play out? It will be resolved sooner or later. Hopefully, sooner.”

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