SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended December 28, 1996 Commission File Number 1-7054
SAGE LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2179082
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
11 Huron Drive, Natick Massachusetts 01760
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508)653-0844
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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.
Yes_X_ No___
On December 28, 1996, the Company had outstanding 1,161,265 shares of common
stock, $.10 par value, which is its only class of stock.
<PAGE>
PART 1 - FINANCIAL INFORMATION
COMPANY OR GROUP OF COMPANIES FOR WHICH REPORT IS FILED:
SAGE LABORATORIES, INC. AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
Item 1 - Financial Statements
A. Income Information:
For the Three Months Ended For the Six Months Ended
Dec. 28, Dec. 30, Dec. 28, Dec. 3O,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES AND CONTRACT REVENUES $ 2,702,379 $ 2,680,312 $ 4,566,469 $ 4,896,368
COST OF SALES AND CONTRACT COSTS 1,360,222 1,441,878 2,452,794 2,650,103
ENGINEERING AND NEW PRODUCT DEVELOPMENT COSTS 89,446 60,018 107,650 129,067
----------- ----------- ----------- -----------
1,449,668 1,501,896 2,560,444 2,779,170
----------- ----------- ----------- -----------
Gross profit 1,252,711 1,178,416 2,006,025 2,117,198
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 721,107 645,111 1,256,983 1,331,414
----------- ----------- ----------- -----------
Operating income 531,604 533,305 749,042 785,784
INTEREST INCOME 68,024 72,492 140,664 150,915
INTEREST EXPENSE (14,489) (18,129) (29,278) (37,115)
INCOME ON RENTAL PROPERTY 14,474 8,791 26,572 15,965
----------- ----------- ----------- -----------
Income before provision for income taxes 599,613 596,459 887,180 915,549
PROVISION FOR INCOME TAXES:
Federal 185,000 185,000 272,000 285,000
State 56,000 60,000 88,000 96,000
----------- ----------- ----------- -----------
Net income $ 358,613 $ 351,459 $ 527,180 $ 534,549
=========== =========== =========== ===========
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE $ .30 $ .30 $ .45 $ .46
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 1,191,674 1,168,481 1,181,389 1,167,565
=========== =========== =========== ===========
DIVIDENDS PAID $ -- $ -- $ 116,127 $ 115,827
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
SAGE LABORATORIES, INC. AND SUBSIDIARIES
B. CONSOLIDATED BALANCE SHEETS
DECEMBER 28, 1996 AND JUNE 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
December 28, June 30,
ASSETS 1996 1996
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,338,962 $ 5,878,691
Accounts receivable, net of reserves of
approximately
$56,000 at Dec. 28, 1996 and $45,000 at June 30, 1996 2,132,543 1,993,452
Inventories 1,584,527 1,348,469
Prepaid expenses and other current assets 497,743 485,405
Total current assets ----------- -----------
9,553,775 9,706,017
PROPERTY, PLANT AND EQUIPMENT, AT COST: ----------- -----------
Land, buildings and improvements 4,191,082 3,989,760
Machinery and laboratory equipment 1,789,002 1,753,072
Furniture, fixtures and motor vehicles 799,436 664,894
----------- -----------
6,779,520 6,407,726
Less--Accumulated depreciation and amortization 3,599,389 3,302,607
----------- -----------
3,180,131 3,105,119
----------- -----------
OTHER ASSETS:
Notes receivable from an officer/stockholder 42,866 55,043
Other assets 213,719 161,536
----------- -----------
Total other assets 256,585 216,579
----------- -----------
$12,990,491 $13,027,715
=========== ===========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current maturities of long-term debt $ 166,667 $ 166,667
Accounts payable 370,568 394,221
Accrued expenses--
Compensation 563,305 762,025
Commissions 141,606 136,364
Taxes other than federal income taxes 19,570 85,259
Federal income taxes 116,827 261,827
Other 303,839 268,191
----------- -----------
Total current liabilities 1,682,382 2,074,554
----------- -----------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 583,333 666,665
=========== ===========
DEFERRED INCOME TAXES 190,000 190,000
----------- -----------
STOCKHOLDERS' INVESTMENT:
Common stock, $.01 par value--
Authorized--10,000,000 shares
Issued--2,678,480 shares at Dec 28, 1996 and
at June 30, 1996 267,848 267,848
Capital in excess of par value 2,030,182 2,030,182
Retained earnings 13,687,861 13,276,809
----------- -----------
15,985,891 15,574,839
Less--
Cost of 1,517,215 shares of treasury stock
at Dec. 28, 1996 and at June 30, 1996 5,448,988 5,448,988
Deferred compensation 2,127 29,355
----------- -----------
Total stockholders' investment 10,534,776 10,096,496
----------- -----------
$12,990,491 $13,027,715
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
SAGE LABORATORIES, INC. AND SUBSIDIARIES
C. CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
December 28, December 30
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 527,180 $ 534,549
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization 311,781 297,180
Notes receivable from an officer/stockholder 12,177 12,177
Amortization of deferred compensation 27,228 27,228
Changes in assets and liabilities--
Accounts receivable (139,091) (412,446)
Inventories (236,057) 237,972
Prepaid expenses and other current assets (12,338) 56,865
Accounts payable (23,653) 48,590
Accrued expenses (368,519) (289,825)
----------- -----------
Net cash provided by operating activities 98,707 512,290
=========== ===========
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (371,794) (221,334)
Increase in other assets (67,183) (20,853)
----------- -----------
Net cash used in investing activities (438,977) (242,187)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options -- 72,500
Purchase of treasury stock -- (28,910)
Payment of cash dividend (116,127) (115,827)
Payments on long-term debt (83,332) (83,332)
----------- -----------
Net cash used in financing activities (199,459) (155,569)
=========== ===========
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (539,729) 114,534
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,878,691 5,261,978
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,338,962 $ 5,376,512
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 29,273 $ 37,115
Income taxes 583,000 555,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1996
(1) Basis of Presentation
The unaudited consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission and include, in the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of interim period results. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The Company believes, however,
that its disclosures are adequate to make the information presented not
misleading. The results for the three and six month periods ended December 28,
1996, are not necessarily indicative of results to be expected for the full
fiscal year.
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 at the date of the financial
statements and reported amounts of revenue and expense during the reporting
period. Actual results could differ from those estimates.
(2) Inventories
Inventories, priced at the lower of cost (first-in, first-out) or market,
are as follows:
December 28, June 30,
1996 1996
---- ----
Raw materials and parts $ 544,121 $ 406,581
Work-in-process 939,771 814,776
Finished goods 100,635 127,112
---------- ----------
$1,584,527 $1,348,469
========== ==========
Work-in-process and finished goods include material, labor and
manufacturing overhead.
(3) Line of Credit
At December 28, 1996, the Company has available an unsecured revolving line
of credit of $2,000,000 with a bank, expiring on November 30, 1997. Borrowings
under the line bear interest at the borrower's option at either the bank's prime
rate (8.25% at December 28, 1996), or 30-, 60-, 90-, or 180-day LIBOR (5.6% to
5.7% at December 28, 1996), plus 1.75%. There were no borrowings under the line
as of December 28, 1996.
<PAGE>
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1996
(Continued)
(4) Stockholders' Investment
(a) Stock Option Plan
The Company has an incentive stock option plan under which key employees
may be granted options to purchase common stock at not less than fair market
value of the common stock on the date of grant. Options are exercisable as
determined by the compensation committee of the Board of Directors and expire no
later than 10 years from the date of grant.
No accounting recognition is given to incentive stock options until they
are exercised, at which time the par value is credited to the common stock
account and the difference between the proceeds received and the par value is
credited to the capital in excess of par value account. An employee may exercise
an outstanding stock option by delivering to the Company shares of common stock
previously acquired by the employee, rather than paying cash. The number of
shares the employee must surrender to the Company is equal to the aggregate
exercise price of the stock options divided by the fair market value of the
Company's common stock on the exercise date.
At the November 12, 1996 annual meeting, it was voted to add 250,000 shares
to the Company's Stock Option Plan, so that a total of 288,500 shares would be
reserved for the grant of options under the plan.
The following table summarizes stock option activity for the six months
ended December 28, 1996:
Shares Price Range
------ -----------
Per Share
---------
Options outstanding June 30, 1996 111,500 $ 2.55-$21.75
Options granted 168,100 $12.75-$15.00
------- -------------
Options outstanding December 28, 1996 279,600 $ 2.55-$21.75
------- -------------
Options exercisable December 28 1996 116,593 $ 2.55-$21.75
------- -------------
At December 28, 1996, 500,000 shares of common stock were reserved for
issuance under the plan, of which 220,400 were available for additional grants.
<PAGE>
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1996
(Continued)
(4) Stockholders' Investment (Continued)
(b) Director Stock Option Plan
The Company has a Director Stock Option Plan (the "Plan"), the purpose of
which is to attract and retain highly qualified non-employee directors and to
encourage their ownership of common stock. The plan automatically provides for
the annual grant of options to purchase 1,000 shares of common stock to each
director who is serving on the board at the time of such grant and who is not
also an employee of the Company or any subsidiary. The Plan provides for the
annual automatic grant of 2,500 shares of the Company's common stock to each
eligible director at an exercise price equal to 100% of the fair market value of
the shares on the date of the grant.
The following table summarizes directors' stock option activity for the six
months ended December 28, 1996:
Shares Price Range
------ -----------
Per Share
---------
Options outstanding June 30, 1996 11,000 $8.08-$20.00
Options granted 7,500 $ 13.25
Options outstanding December 28, 1996 18,500 $8.08-$20.00
------ ------------
Options exercisable December 28, 1996 18,500 $8.08-$20.00
------ ------------
At December 28, 1996, 47,000 shares of common stock were reserved for
issuance under the Plan, of which 28,500 shares were available for additional
grants.
<PAGE>
D. Management's Discussion and Analysis of Quarterly Income Statements
For the three months ended December 28,1996, the Company realized net income of
approximately $359,000, or $.30 per share, on sales of $2,702,000. This compares
with net income of approximately $351,000, or $.30 per share, on sales of
$2,680,000 for the same period a year ago.
Net income was negatively impacted in the second quarter of fiscal 1997 by an
operating loss of approximately $53,000, or $.05 per share, from the Company's
wholly-owned subsidiary, Sage Laboratories Active Microwave, Inc. (SLAM). This
compares with a negative impact of approximately $59,000, or $.05 per share, for
the same period a year ago.
Net sales for the three months ended December 28, 1996, increased by
approximately $22,000, or 1% over the previous year. SLAM recorded sales of
approximately $158,000 for the quarter, as compared with $84,000 for the same
period a year ago. The increase in sales is attributable to increased sales at
SLAM. Sage Laboratories, Inc. sales declined by $52,000, or 2%, as compared with
the same period a year ago. The sales decrease is primarily attributable to
sales volume changes among certain customers. Orders received in the second
quarter totaled approximately $2,172,000, including $138,000 from SLAM. This
compares to $2,642,000, including $64,000 from SLAM for the same period a year
ago. The decline in orders of approximately $470,000 for the quarter is
primarily attributable to order delays received from customers as well as
programs no longer in production. The Company's backlog at the end of the
quarter was $4,044,000, including $298,000 from SLAM. This compares to
$4,988,000, including $357,000 from SLAM for the previous year.
Gross profit as a percentage of sales was 46% for the quarter ended December 28,
1996, as compared to 44% for the same period a year ago. The increase in gross
profit is primarily attributable to improved cost performance on certain
engineering programs.
Selling, General and Administrative expense (S G & A) increased by approximately
$76,000. As a percentage of sales, S G & A increased to approximately 27% for
the second quarter, as compared to 24% for the same period a year ago. The
increase is primarily attributable to increased salaries and related items of
$55,000, commission expense of $21,000, supplies & services expense of $21,000
and marketing expense of $7,000. These increases were partially offset by a
reduction in fees associated with the consulting agreement with the Company's
former chairman of $28,000.
Interest income for the three months ended December 28, 1996 decreased by
approximately $4,000 from the same period a year ago. This decrease is due to a
lower average cash position and to lower interest rates being paid.
Interest expense for the three months ended December 28, 1996 decreased by
approximately $4,000 due to a decrease in outstanding principal.
The Company generated a profit of approximately $14,000 from its rental
property, as compared to $9,000 for the same period a year ago. The Company's
rental property is fully occupied.
<PAGE>
The Company's net book value of property held for rent (including renovations)
at December 28, 1996, and December 30, 1995, is as follows:
1996 1995
---- ----
3 Huron Drive (old facility) $462,314 $540,112
11 Huron Drive (rented portion) $259,822 $289,239
-------- --------
Total $722,136 $829,351
======== ========
Federal and State income taxes for the three months ended December 28, 1996 and
December 30, 1995, were provided for at their respective statutory rates.
Six Months Ended December 28, 1996 and December 30, 1995
- --------------------------------------------------------
For the six months ended December 28, 1996, the Company realized net income of
$527,000, or $.45 per share, on sales of $4,566,000. This compared with net
income of $535,000, or $.46 per share, on sales of $4,896,000 for the same
period a year ago.
Net income for the six months ended December 28, 1996, was negatively impacted
by a loss of approximately $93,000, or $.07 per share, from SLAM. This compares
with a negative impact of approximately $139,000, or $.12 per share, for the
same period a year ago.
Net sales for the six months ended December 28, 1996, decreased by $330,000 from
the previous year. SLAM recorded sales of $313,000 for the six months ended
December 28, 1996, compared to $118,000 for the same period a year ago. The
decrease in total sales is due to changes in product requirements for certain
large customers. Total orders received were $4,017,000 (including $343,000 from
SLAM) for the first six months of fiscal 1997, as compared to $5,200,000
(including $412,000) from SLAM) for the same period a year ago.
Gross profit as a percentage of sales was approximately 44% for the six months
ended December 28, 1996 as compared to approximately 43% for the same period a
year ago. The increase in gross profit is primarily attributable to higher
margins earned on certain engineering programs and a reduced negative gross
profit attributable to SLAM. For the six months ended December 28, 1996,
negative gross profit at SLAM was $93,000 as compared to $139,000 for the same
period a year ago.
S G & A expenses decreased by approximately $74,000 from the same period a year
ago. The decrease is primarily due to a reduction in fees associated with the
consulting agreement with the Company's former chairman of $55,000, reduced
salary and related items of $31,000, reduced consulting expense of $20,000, and
lower sales and marketing expense of $7,000. These decreases were partially
offset by increases in commission expense of $26,000 and higher supplies and
services expense of $13,000.
<PAGE>
Interest income for the six months ended December 28, 1996 decreased by
approximately $10,000 from the same period a year ago. This decrease is due to a
lower average cash position.
The Company recorded a profit of approximately $27,000 from rental property for
the six months ended December 28, 1996 as compared to a profit of $16,000 for
the same period a year ago.
Federal and State income taxes for the six months ended December 28, 1996 and
December 30, 1995, were provided for at their respective statutory rates.
Liquidity and Capital Resources
For the six months ended December 28, 1996, operating activities generated cash
of $99,000, a decrease of $413,000 from the six months ended December 30, 1995.
Cash used in investing activities amounted to $439,000 and $242,000,
respectively, while cash used for financing activities was $199,000 and
$156,000, respectively. The details of these activities are provided in the
consolidated statements of cash flows. The Company invests its excess cash only
in short-term, highly liquid instruments with minimal risk. Having only the debt
related to the Company's facility, and with surplus cash, management believes
that the Company will be able to finance its operations and necessary capital
expenditures for the foreseeable future.
Although the Company has a $2,000,000 bank line of credit, the Company does not
presently anticipate a need to use the line.
The Company anticipates that capital expenditures for fiscal year 1997 will be
approximately $700,000. Accordingly, no outside funding will be required.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings: None
2. Changes in Securities: None
3. Defaults upon Senior Securities: None
4. Submission of Matters to a Vote of Security Holders:
At the Annual Meeting of Stockholders held on November 12, 1996,
the following matter was submitted to votes of the stockholders:
Amendment to the Corporation's 1987 Employee Stock Option Plan
so as to increase the pool of shares allocated to the plan by
adding 250,000 shares (683,476 shares voted in favor of the
amendment and 28,695 against).
5. Other Information: None
6. Exhibits and Reports on Form 8-K: None
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 7, 1997
SAGE LABORATORIES, INC. AND SUBSIDIARIES
/s/ Carl A. Marguerite
----------------------------------
(Principal executive officer;
principal financial officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-28-1996
<CASH> 5,338,962
<SECURITIES> 0
<RECEIVABLES> 2,188,543
<ALLOWANCES> 56,000
<INVENTORY> 1,548,527
<CURRENT-ASSETS> 9,553,775
<PP&E> 6,779,520
<DEPRECIATION> 3,599,389
<TOTAL-ASSETS> 12,990,491
<CURRENT-LIABILITIES> 1,682,382
<BONDS> 583,333
0
0
<COMMON> 267,848
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,990,491
<SALES> 4,566,469
<TOTAL-REVENUES> 4,566,469
<CGS> 2,560,444
<TOTAL-COSTS> 2,560,444
<OTHER-EXPENSES> 1,256,983
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,278
<INCOME-PRETAX> 887,180
<INCOME-TAX> 360,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 527,180
<EPS-PRIMARY> .45
<EPS-DILUTED> .45
</TABLE>
