SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 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 (I.R.S. Employer
of incorporation or organization) Identification No.)
11 Huron Drive, East Natick Industrial Park, Natick, Massachusetts 01760
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 653-0844
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value
(Title of Class)
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 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___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X].
As of September 24, 1996 the aggregate market value of the voting stock
held by non-affiliates (based on the average bid and asked prices as reported
by NASDAQ) was $13,674,564.
On June 30, 1996 the Company had outstanding 1,161,265 shares of common
stock, $.10 par value, which is its only class of stock.
DOCUMENTS INCORPORATED BY REFERENCE
See Exhibit Index at page 12.
1
Item 1. Business.
General Description and History of the Company
Sage Laboratories, Inc. (the "Company") is engaged primarily in the design,
manufacture and sale of specialized microwave components and subsystems. These
products are used in applications such as cellular base stations, point-to-point
radio links, satellite communications, aircraft landing and guidance, medical
diagnostics and treatment, radar and weapons guidance. The types of products
designed and manufactured by Sage are required in each of the basic systems
described herein.
Microwaves have an extremely high frequency and short wave length. A sharp
beam of microwave energy can readily be shaped, focused, concentrated,
reflected, and transmitted in a straight line over infinite distances.
The Company operates exclusively within a single industry (S.I.C. #3829)
for the purposes of Statement of Financial Accounting Standards No. 14 and
Regulation S-K.
The Company has engaged in no transactions or activities outside the
ordinary course of business since June 30, 1995.
The Company's Microwave Products
The amounts of total sales and revenues, operating income and the total
value of assets attributable to the Company's microwave products in the last
three fiscal years are as follows:
(IN THOUSANDS)
Fiscal year ended June 30: 1994 1995 1996
----------------------------
Amount of total sales and revenues $8,167 $9,154 $9,769
Amount of operating income $1,862 $2,158 $2,341
Total assets (year end) $10,359 $11,611 $13,028
The Company's RF/microwave technology is used in components and integrated
assemblies to divide, couple, absorb, attenuate, filter, control, amplify,
detect, process, convert RF/microwave energy. Its products are suitable for all
types of commercial and defense applications, including radar, electronic
warfare, surveillance, and communications systems.
2
The Company's line of passive microwave devices is extensive, ranging from
caseless hybrids which are used in high volume production of commercial cellular
and wireless products to sophisticated integrated assemblies which switch,
divide, filter and control signals in high performance, space-qualified
satellite communications systems. Caseless wireline hybrids, switches rotary
joints, phase shifters, filters, couplers, power dividers and subsystems have
been among the Company's most important passive components in recent years.
The Company's standard passive components can be sold from the shelf
without special engineering, and such components are the Company's most
profitable products. The Company also negotiates fixed price contracts for the
sale of passive components meeting particular specifications and requiring
varying degrees of engineering design and development. The profit margin on
contracts involving heavy engineering content is lower than on standard items,
but such work often results in a product which may be reordered or which can be
adapted to other purposes with little additional engineering and can therefore
be sold at a higher profit margin. Total sales and contract revenue contributed
by the sale of traditional passive components during the last three fiscal years
are as follows:
(IN THOUSANDS)
Fiscal year ended June 30: 1994 1995 1996
--------------------------------
Catalog items $2,044 $2,101 $2,889
Adaptable or reorderable items 4,283 5,281 3,932
Engineered items 1,690 1,542 2,251
Other 150 113 321
---------------------------------
Total $8,167 $9,037 $9,393
=================================
In addition to passive components, semi-conductor based "active" components
are also needed in microwave systems to amplify, detect, control, convert,
modulate, demodulate and otherwise process RF/microwave signals. The Company
developed the capacity to produce active microwave components through the
formation of a wholly-owned subsidiary, Sage Laboratories Active Microwave, Inc.
("SLAM"), a New Hampshire corporation, during the second half of fiscal 1994.
Active components are used in all types of commercial and defense systems,
including radar, electronic warfare, surveillance, and communications. SLAM uses
modern solid-state circuit technology in the design and manufacture of microwave
mixers, detectors, switches, limiters, variable attenuators, amplifiers, and
complex integrated assemblies consisting of active and passive components. SLAM
offers a standard catalog line of solid-state microwave products, as well as the
capability to produce custom products designed to meet particular customer
specifications. SLAM revenue for fiscal year 1996 and 1995 amounted to $375,000
and $117,000 respectively.
Sources and Availability of Raw Materials
The Company obtains raw materials from a wide variety of suppliers with
alternative sources available for all essential materials with reasonable lead
time. There is no dependence on foreign sources and no relationship with
important suppliers.
3
Principal Markets and Distribution
The Company's microwave products are sold principally through a group of 40
independent representatives with 54 offices located throughout the United States
and abroad. Their efforts are directed by the Company's Vice President of Sales
and Sales Manager. Catalogs of standard items, advertising in trade
publications, trade shows and periodic visits to customers by the Company's
officers and engineers supplement the work of the representatives. The microwave
products are principally used in communications and radar applications in the
commercial and defense markets.
Importance, Duration and Effect of Patents, Trademarks, Licenses, Franchises and
Concessions
The Company holds various patents, but does not believe such patents to be
material to the Company's business. There are no material trademarks, licenses,
franchises or concessions.
Competition
Many companies manufacture microwave products similar to those of the
Company, some larger and with greater financial resources than the Company. The
Company's experience to date indicates that competition has related primarily to
delivery, price and performance.
Backlog and Customers
The Company's backlog of orders believed to be firm for microwave products
was $4,602,000 as of June 30, 1996, as compared to $4,683,000 as of June 30,
1995. All of the June 30, 1996 backlog is expected to be filled during the
current fiscal year. There is no seasonality to the backlog or to the business
in general.
The Company has not relied on a single customer or a small group of
customers for a substantial proportion of its sales of microwave products,
though at any given time one or more large orders or contracts may represent a
high percentage of the backlog. During the fiscal year ended June 30, 1996,
components were sold to approximately 408 customers.
Practices Relating to Working Capital
There are no special practices followed by the Company relating to working
capital.
Personnel
As of June 30, 1996, the Company employed 51 people, seven of which are
employed by SLAM. The Company also utilized temporary employees throughout the
year. Twenty three of the Company's employees are engineers or other technically
trained people and the balance are engaged in production, administrative and
sales activities.
Research and Development
The Company conducts various research and development activities under
which expenditures of approximately $272,000, $200,000 and $199,000 (including
overhead) were made in each of fiscal 1996, 1995 and 1994, respectively.
4
Export Sales
Approximately 20% of the Company's revenues for fiscal year 1996 were
attributable to export sales. While competition abroad is generally more
intense, the profitability and attendant risks of sales are not materially
different from those of the balance of the Company's business. Total export
sales for the fiscal years ended June 30, 1996, 1995 and 1994 were $1,954,000,
$2,184,000 and $1,756,000, respectively.
Executive Officers of the Registrant
The following table sets forth information concerning the Company's executive
officers as of the date hereof. Each officer is elected by the Company's Board
of Directors and holds office until the date of the Company's annual meeting of
stockholders and until his successor is elected and qualified.
Offices Held and Business Experience
Name Age During Past Five Years
---- --- ----------------------
Carl A. Marguerite 56 Chairman, Chief Executive Officer
(President until 1996)
and Director of the Company
Louis J. Lanzillo, Jr. 38 President, Chief Operating Officer
and Director of the Company
Anthony J. Cieri 65 Vice President of Sales of the Company.
Janusz J. Majewski 49 Vice President of Engineering of
the Company
(Director of Engineering until 1996)
Item 2. Properties
In 1985 and 1986, the Company constructed a 30,000 square foot facility to
house its offices and principal plant. The facility shares a four acre site in
East Natick, Massachusetts with the 25,000 square foot building which formerly
served as the Company's plant and offices. The Company moved into its current
facility in late August 1986.
The Company occupies approximately 25,000 square feet of its current
facility and leases the balance of 5,000 square feet to others. All of the
Company's rental property is fully occupied.
SLAM leases approximately 6,000 square feet in Hollis, New Hampshire.
The cost of the Company's machinery and equipment owned on June 30, 1996 is
approximately $1,753,000. Such machinery and equipment is in good condition and
is being used to capacity.
Item 3. Legal Proceedings
There are no material pending legal proceedings affecting the Company or
its properties.
5
Item 4. Submission of Matters to a Vote of Security Holders
There was nothing submitted during the fourth quarter of fiscal 1996 to a
vote of the Company's security holders.
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's common stock, $.10 par value (which is the Company's only
class of equity securities), is listed with the NASDAQ system for trading in the
over-the-counter market. The quarterly high and low bid prices for the Company's
common stock for the last two fiscal years as reported on NASDAQ were as
follows:
1996 1995
------------------ ------------------
High Low High Low
---- --- ---- ---
First Quarter 23 11 4/5 10 3/10 7 4/5
Second Quarter 22 18 1/10 10 1/5 8 4/5
Third Quarter 20 1/4 14 3/4 9 3/5 8 9/10
Fourth Quarter 18 3/4 15 1/8 12 9 3/5
These over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions. There were approximately 249 holders of record of
the Company's outstanding common stock on June 30, 1996.
The Company paid cash dividends in October of 1994 and 1995 in the amount
of 10 cents per share. On September 4, 1996, the Company's Board of Directors
declared a cash dividend in the amount of ten cents per share payable on October
11, 1996 to holders of record as of September 27, 1996.
Item 6. Selected Financial Data.
The selected financial data called for under this caption is attached to
this report as Appendix A.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
1996 Compared to 1995
Net Sales:
Net sales for fiscal 1996 increased by $615,000, or 7%, from fiscal 1995.
This increase is due in part to an increase in the Company's core sales of
$357,000 and an increase in the Company's subsidiary, Sage Laboratories Active
Microwave, Inc. (SLAM) sales of $258,000. This overall increase in sales was
primarily the result of an increase in the number and size of orders shipped, as
there have been no material increases in the price of the Company's products
during fiscal 1996. Orders received in fiscal 1996 totaled $9,708,000, as
compared to $10,530,000 for 1995. Total orders included $586,000 from SLAM,
compared to $128,000 for the same period a year ago. SLAM's increase in orders
is due to growing recognition in the industry. The decline in Sage core orders
of approximately $1,280,000 is primarily due to customers' delays in placing
orders, as well as certain orders which were received in fiscal 1995 that were
not renewed in fiscal 1996 due to programs coming to closure. Although the
Company's fourth quarter has historically realized a larger sales volume over
other quarters, there is no seasonality to the Company's business. Sales volume
is strictly predicated on customers' requirements for delivery.
6
Gross Profit:
Gross profit as a percentage of sales decreased to approximately 48% in
fiscal 1996, as compared to 50% for the same period a year ago. The decrease in
gross profit percentage was due to increased research and development expense,
as well as increases in cost overruns on Sage core engineering programs, lower
profit margins on certain programs, and a negative gross profit attributed to
SLAM.
Selling, General and Administrative Expenses:
Selling, General and Administrative Expenses (S G & A) decreased by
approximately $59,000 over the same period a year ago. Selling expense increased
by approximately $32,000. This increase was primarily due to increased
commission expense of approximately $60,000 attributed to increased sales volume
offset by a decrease in marketing expense of approximately $28,000. G & A
expenses decreased by approximately $90,000, due in part to a decrease of
approximately $63,000 in consulting fees associated with the Company's former
Chairman of the Board, as well as a decrease in salaries and related items of
approximately $30,000.
Interest Income:
Interest income for fiscal year 1996 increased by approximately $108,000
over fiscal year 1995. This increase is due to higher average cash balances, as
well as higher interest rates being realized.
Interest Expense:
Interest expense decreased for fiscal year 1996 by $11,000 over the
previous year. This decrease is due to decreases in outstanding principal.
Rental Property:
The Company generated a profit of approximately $48,000 from its rental
property in fiscal 1996 compared to a modest profit of $6,500 in fiscal 1995.
All of the Company's rental property was fully occupied during fiscal 1996. The
Company has taken occupancy of approximately 5,000 square feet of space in its
corporate headquarters that had previously been leased. This space was converted
to a state-of-the-art Clean Room facility and is now occupied by the Company's
Commercial switch and high reliability product lines.
The Company's net book value of property held for rent at June 30, 1996 and
1995 is as follows:
1996 1995
---- ----
3 Huron Drive (old facility) $501,114 $ 579,112
11 Huron Drive (rental portion
of current facility) 283,855* 612,966
------- -------
Total $784,969 $1,192,078
======== ==========
*Change due to Company occupying additional space for its commercial switch and
high reliability product lines.
7
Provisions for Federal and State Income Taxes:
Federal and State income tax provisions for fiscal years 1996 and 1995 have
been reconciled to the U.S. statutory rate. (See Note No. 5 to Consolidated
Financial Statements).
1995 Compared to 1994
Net Sales:
Net sales for fiscal year 1995 increased by approximately $987,000, or 12%,
as compared to fiscal year 1994. The increase occurred in all markets, including
commercial, government, and space. For the year ended June 30, 1995 commercial
business accounted for more than half of total revenues. Sage Laboratories
received orders during fiscal 1995 totaling $10,530,000, an increase of
$2,870,000, or 37%. Sage Laboratories Active Microwave, Inc. (SLAM) received
orders totaling $182,000 during fiscal 1995. Net sales for SLAM totaled
$117,000.
Gross Profit:
Gross profit as a percentage of sales decreased from 53% in fiscal 1994, to
50% in fiscal 1995. This decrease is primarily attributable to write-offs of
costs associated with a number of engineering programs with very difficult
specifications. These program difficulties have been resolved and the programs
were shipped in the first quarter of fiscal 1996. Included in the cost of sales
was approximately $103,000 of cost overruns of SLAM. Engineering and new product
development costs remained consistent with the previous year. Among the new
products in development during fiscal year 1995 were a 60-75 Ghz Waveguide
Switch, a T-Switch, Top-Through Electromechanical Latching Devices for an SMA
Transfer Switch, and cost reduction development of Hybrids, Couplers and Power
Dividers for the commercial market. Also developed was a line of surface-mounted
couplers. SLAM developed five low-cost/high performance open substrate mixers, a
broadband mixer (1-18 Ghz), a matched detector, and a high-power coax limiter.
Many of these products are now standard catalog products for SLAM.
Selling, General and Administrative Expenses:
Selling, General and Administrative Expenses (S G & A) as a percentage of
sales were 26% for fiscal 1995, as compared to 30% for fiscal 1994. The decrease
is mainly attributed to the higher sales volume, as well as a reduction in
general and administrative expenses of approximately $150,000. This decrease is
comprised of a decrease in salaries and related items, professional expenses,
and a reduction in the former Chairman's consulting fees. The decrease in
general and administrative expenses was somewhat offset by SLAM's general and
administrative expenses, which increased by $43,000, due to a full year of
operations.
Sales and Marketing expense increased by $138,000 at SLAM, as 1995 was
SLAM's first full year of operation. This was offset by other sales and
marketing expense decreases primarily due to lower salaries and related expenses
as a result of personnel changes, as well as a reduction in amortization of the
Company's catalog, which was fully amortized in fiscal 1994.
Interest Income:
Interest income for fiscal year 1995 increased by approximately $69,000,
over fiscal year 1994. This increase is due to a higher cash position, as well
as higher interest rates.
8
Interest Expense:
Interest expense increased for fiscal year 1995 by $10,000 over the
previous year. This increase is primarily due to an increase in the prime rate
of interest.
Rental Property:
The Company's rental property reported a small profit in fiscal 1995 of
$6,500, compared to a loss of $41,000 for fiscal 1994. All of the Company's
rental property was leased as of November 1, 1994. As part of its expansion
plans in 1996, the Company remodeled 5,000 square feet of this space for its
Commercial Switch and high reliability product lines. The Company's net book
value of its property held for rent at June 30, 1995 and 1994 is as follows:
1995 1994
---- ----
3 Huron Drive (old facility) $ 579,112 $ 597,110
11 Huron Drive (rental portion of
current facility) 612,966 665,590
------- -------
Total $1,192,078 $1,262,700
========== ==========
Provisions for Federal and State Income Taxes:
Federal and State income tax provisions for fiscal years 1995 and 1994 have
been reconciled to the U.S. statutory rate. (See Note No. 5 to Consolidated
Financial Statements).
Liquidity and Capital Resources:
For the twelve months ended June 30, 1996 operating activities generated
$1,647,000 in cash, an increase of $101,000 over the twelve months ended June
30, 1995. Cash used in investing activities amounted to $808,000 and $330,000
for the twelve months ended June 30, 1996 and 1995, respectively, while cash
used for financing activities was $222,000 and $203,000, 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. The Company's new commercial switch product line
is expected to generate revenues of approximately $750,000 and incur a gross
profit of approximately $138,000 in fiscal 1997. In addition, the Company is
expected to increase capital equipment by $290,000 and spend an additional
$140,000 to complete its state-of-the-art clean room during the first quarter of
fiscal 1997 (occupancy took place in September 1996).
Having only the debt relating 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 $1,000,000 bank line of credit, the Company does
not presently intend to use the line.
The Company anticipates that total capital expenditures for fiscal year
1996 will be approximately $700,000. Accordingly, no outside funding will be
required.
The foregoing analysis 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, including statements about the Company's new
commercial switch product line and the improving performance at SLAM. Inasmuch
as the results of these activities depend on numerous factors, including
acceptance by third parties, actual results could differ materially from those
projected in the forward-looking statements.
9
Item 8. Financial Statements and Supplementary Data.
Financial statements and supplementary financial information required to be
filed hereunder may be located through the Index to Financial Statements.
Item 9. Disagreements on Accounting and Financial Disclosure.
The Company has not filed a Form 8-K under the Securities Exchange Act of
1934 reporting a change of accountants.
Item 10. Directors, Executive Officers, Promoters and Control Persons of the
Registrant.
The information called for under this caption is incorporated by reference
from the material captioned "Election of Directors" in the proxy statement for
the Company's annual meeting of shareholders to be held on November 12, 1996.
Additional information required to be reported under this caption may be found
in the last paragraph of Item 1 to this report.
Item 11. Management Remuneration.
The information called for under this caption is incorporated by reference
from the material captioned "Remuneration of Directors and Executive Officers"
in the proxy statement for the Company's annual meeting of shareholders to be
held on November 12, 1996.
Item 12. Security Ownership of Certain Beneficial Owners and Managers.
The information called for under this caption is incorporated by reference
from the material captioned "Principal Holders of Voting Securities" and
"Election of Directors" in the proxy statement for the Company's annual meeting
of shareholders to be held on November 12, 1996.
Item 13. Certain Relationships and Transactions
The information called for under this caption is incorporated by reference
from the material captioned "Election of Directors" in the proxy statement for
the annual meeting of shareholders to be held on November 12, 1996.
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K
The following documents are filed as a part of this report:
1. Financial Statements
See the Index to Consolidated Financial Statements and Schedules
attached to this report.
2. Exhibits
See the Index to Exhibits attached to this report.
No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
10
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 by the undersigned, "hereunto duly authorized.
SAGE LABORATORIES, INC.
By /s/ Carl A. Marguerite Chairman September 17, 1996
-------------------------
Carl A. Marguerite
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.
By /s/ Carl A. Marguerite Chairman, Chief September 17, 1996
---------------------------- Executive Officer,
Carl A. Marguerite Principal Executive
Officer, Treasurer
and Director
By /s/ Erich P. Ippen Director September 18, 1996
-----------------------------
Erich P. Ippen
By /s/ Louis J. Lanzillo, Jr. Director September 17, 1996
-----------------------------
Louis J. Lanzillo, Jr.
By /s/ John E. Miller Director September 17, 1996
-----------------------------
John E. Miller
By /s/ C. Duncan Soukup Director September 17, 1996
------------------------------
C. Duncan Soukup
11
APPENDIX A
ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEARS ENDED JUNE 30,
-----------------------------------------------
1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ ------------
Net Sales and Contract Revenues $ 6,467,000 $ 6,627,000 $ 8,167,000 $ 9,154,000 $ 9,769,000
Net Income 992,000 956,000 1,198,000 1,389,000 1,609,000
Net Income Per Commom and
Common Equivalent Share 0.69 0.66 1.00 1.20 1.38
Total Assets 10,173,000 10,821,000 10,359,000 11,611,000 13,028,000
Total Current Assets 7,404,000 7,987,000 7,242,000 8,603,000 9,706,000
Total Current Liabilities 1,880,000 1,820,000 2,046,000 2,083,000 2,075,000
Working Capital 5,524,000 6,167,000 5,196,000 6,520,000 7,631,000
Long Term Debt:
5% Note Payable to an
Insurance Company 16,000 - - - -
Industrial Revenue Bond 1,333,000 1,167,000 999,999 833,333 666,665
------------ ------------ ------------ ------------ ------------
Total Long Term Debt 1,349,000 1,167,000 999,999 833,333 666,665
------------ ------------ ------------ ------------ ------------
Stockholder's Equity 6,735,000 7,526,000 7,075,000 8,488,000 10,096,000
Cash Dividends Declared
Per Common Share 0.10 0.10 0.10 0.10 0.10
Weighted Average Number of
Common and Common Equivalent
Shares Outstanding 1,447,645 1,457,065 1,197,035 1,159,390 1,169,491
=========== ========== =========== =========== ==========
D. INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
3.1 Restated Articles of Organization
as amended October 27, 1987 and
November 14, 1995
3.2 Bylaws of the Company as amended by the
directors on September 4, 1996.
3.3 Mortgage and Trust Agreement (incorporated by
references to Exhibit 3.3 to the Company's
report on Form 10-K for the fiscal year ended
June 30, 1991)
3.4 Bond Purchase and Guaranty Agreement
(incorporated by references to Exhibit 3.4 to
the Company's report on Form 10-K for the
fiscal year ended June 30, 1991)
10.1 Executive Bonus Plan - 1/20/89 (incorporated by
reference to Exhibit 10.1 to the Company's
report on Form 10-K for the fiscal year ended
June 30, 1989)
10.2 Stock Option Plan dated September 2, 1989
(incorporated by reference to Exhibit 10.2 to
the Company's report on Form 10-K for the
fiscal year ended June 30, 1989)
10.3 Restricted Stock Plan dated May 4, 1987
(incorporated by reference to Exhibit 10.3 to
the Company's report on Form 10-K for the
fiscal year ended June 30, 1989)
10.4 Employment Agreement with attached exhibits
between Company and Louis J. Lanzillo, Jr.,
dated September 4, 1996.
22 Subsidiaries
24 Consent of Accountants
12
List of Financial Statements and Schedules
Page
Appendix AF-O
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of June 30, 1996 and June 30, 1995 F-2
Consolidated Statements of Income for each
of the three fiscal years in the period ended June 30, 1996 F-3
Consolidated Statements of Stockholders' Investment for each
of the three fiscal years in the period ended June 30, 1996 F-4
Consolidated Statements of Cash Flows for each of the three fiscal years in
the period ended June 30, 1996 F-5
Notes to Consolidated Financial Statements F-6
13
SAGE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1996 AND 1995
TOGETHER WITH AUDITORS' REPORT
SAGE LABORATORIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
PAGE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-1
CONSOLIDATED BALANCE SHEETS--JUNE 30, 1996 AND 1995 F-2
CONSOLIDATED STATEMENTS OF INCOME FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996 F-3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996 F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996 F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Sage Laboratories, Inc.:
We have audited the accompanying consolidated balance sheets of Sage
Laboratories, Inc. (a Massachusetts corporation) and subsidiaries as of June 30,
1996 and 1995, and the related consolidated statements of income, stockholders'
investment and cash flows for each of the three years in the period ended June
30, 1996. 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 Sage Laboratories,
Inc. and subsidiaries as of June 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1996, in conformity with generally accepted accounting principles.
Boston, Massachusetts
August 23, 1996
SAGE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30,
ASSETS 1996 1995
CURRENT ASSETS:
Cash and cash equivalents $ 5,878,691 $ 5,261,978
Accounts receivable, net of reserve of approximately
$50,000 in 1996 and $42,000 in 1995 1,993,452 1,543,964
Inventories 1,348,469 1,296,076
Prepaid expenses and other current assets 485,405 501,147
----------- -----------
Total current assets 9,706,017 8,603,165
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land, buildings and improvements 3,989,760 3,768,658
Machinery and laboratory equipment 1,753,072 1,455,387
Furniture, fixtures and motor vehicles 664,894 471,666
----------- -----------
6,407,726 5,695,711
Less--Accumulated depreciation and amortization 3,302,607 2,840,371
----------- -----------
3,105,119 2,855,340
----------- -----------
OTHER ASSETS:
Notes receivable from an officer/stockholder 55,043 87,039
Other assets 161,536 65,932
----------- -----------
Total other assets 216,579 152,971
----------- -----------
$13,027,715 $11,611,476
=========== ===========
June 30,
LIABILITIES AND STOCKHOLDERS' INVESTMENT 1996 1995
CURRENT LIABILITIES:
Current maturities of long-term debt $ 166,667 $ 166,667
Accounts payable 394,221 300,686
Accrued expenses-
Compensation 762,025 860,626
Commissions 136,364 98,469
Taxes other than federal income taxes 85,259 42,259
Federal income taxes 261,827 292,114
Other 268,191 322,218
----------- -----------
Total current liabilities 2,074,554 2,083,039
----------- -----------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 666,665 833,332
----------- -----------
DEFERRED INCOME TAXES 190,000 207,000
----------- -----------
COMMITMENTS (Notes 6 and 9)
STOCKHOLDERS' INVESTMENT:
Common stock, $.10 par value-
Authorized--10,000,000 shares
Issued--2,678,480 shares in 1996 and
2,650,480 shares in 1995 267,848 265,048
Capital in excess of par value 2,030,182 1,943,802
Retained earnings 13,276,809 11,783,144
----------- -----------
15,574,839 13,991,994
Less--
Cost of 1,517,215 shares of treasury stock in 1996
and 1,515,740 shares of treasury stock in 1995 5,448,988 5,420,078
Deferred compensation 29,355 83,811
----------- -----------
Total stockholders' investment 10,096,496 8,488,105
----------- -----------
$13,027,715 $11,611,476
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
SAGE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
--------------Years Ended June 30,-------------
1996 1995 1994
NET SALES AND CONTRACT REVENUE $ 9,768,809 $ 9,154,059 $ 8,167,307
COST OF SALES AND CONTRACT COSTS 4,812,675 4,394,464 3,629,427
ENGINEERING AND NEW PRODUCT DEVELOPMENT COSTS 272,014 199,918 199,162
----------- ----------- -----------
Gross profit 4,684,120 4,559,677 4,338,718
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,343,222 2,402,174 2,476,657
----------- ----------- -----------
Operating income 2,340,898 2,157,503 1,862,061
INTEREST INCOME 302,901 194,528 125,230
INTEREST EXPENSE (68,922) (79,597) (69,223)
INCOME (LOSS) ON RENTAL PROPERTY 54,614 6,506 (41,104)
----------- ----------- -----------
Income before provision for income taxes 2,629,491 2,278,940 1,876,964
PROVISION FOR INCOME TAXES:
Federal 791,000 680,000 528,000
State 229,000 210,000 151,000
----------- ----------- -----------
Net income $ 1,609,491 $ 1,388,940 $ 1,197,964
=========== =========== ===========
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE $ 1.38 $ 1.20 $ 1.00
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING 1,169,086 1,159,390 1,197,035
=========== =========== ===========
DIVIDENDS PAID $ 115,826 $ 112,725 $ 109,683
=========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
SAGE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
Common Stock Capital in
Number $.10 Excess of Retained
of Shares Par Value Par Value Earnings
BALANCE, JUNE 30, 1993 2,588,480 $ 258,848 $ 1,764,347 $ 9,418,648
Net income -- -- -- 1,197,964
Payment of $.10 per share cash dividend -- -- -- (109,683)
Amortization of deferred compensation -- -- -- --
Exercise of stock options 25,000 2,500 65,290 --
Purchase of treasury stock -- -- -- --
Stock option compensation grants -- -- 3,420 --
------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1994 2,613,480 261,348 1,833,057 10,506,929
Net income -- -- -- 1,388,940
Payment of $.10 per share cash dividend -- -- -- (112,725)
Amortization of deferred compensation -- -- -- --
Exercise of stock options 37,000 3,700 104,685 --
Purchase of treasury stock -- -- -- --
Stock option compensation grants -- -- 6,060 --
------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1995 2,650,480 265,048 1,943,802 11,783,144
Net income -- -- -- 1,609,491
Payment of $.10 per share cash dividend -- -- -- (115,826)
Amortization of deferred compensation -- -- -- --
Exercise of stock options 28,000 2,800 86,380 --
Purchase of treasury stock -- -- -- --
------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1996 2,678,480 $ 267,848 $ 2,030,182 $ 13,276,809
============ ============ ============ ============
Total
Treasury Stock, Deferred Stockholders'
at Cost Compensation Investment
BALANCE, JUNE 30, 1993 $ (3,723,171) $ (192,772) $ 7,525,900
Net income -- -- 1,197,964
Payment of $.10 per share cash dividend -- -- (109,683)
Amortization of deferred compensation -- 54,456 54,456
Exercise of stock options -- -- 67,790
Purchase of treasury stock (1,665,080) -- (1,665,080)
Stock option compensation grants -- -- 3,420
------------ ------------ ------------
BALANCE, JUNE 30, 1994 (5,388,251) (138,316) 7,074,767
Net income -- -- 1,388,940
Payment of $.10 per share cash dividend -- -- (112,725)
Amortization of deferred compensation -- 54,505 54,505
Exercise of stock options -- -- 108,385
Purchase of treasury stock (31,827) -- (31,827)
Stock option compensation grants -- -- 6,060
------------ ------------ ------------
BALANCE, JUNE 30, 1995 (5,420,078) (83,811) 8,488,105
Net income -- -- 1,609,491
Payment of $.10 per share cash dividend -- -- (115,826)
Amortization of deferred compensation -- 54,456 54,456
Exercise of stock options -- -- 89,180
Purchase of treasury stock (28,910) -- (28,910)
------------ ------------ ------------
BALANCE, JUNE 30, 1996 $ (5,448,988) $ (29,355) $ 10,096,496
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
SAGE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30,
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,609,491 $ 1,388,940 $ 1,197,964
Adjustments to reconcile net income to net cash provided by
operating activities-
Stock option compensation -- 6,060 3,420
Depreciation and amortization 462,236 406,876 257,837
Notes receivable from an officer/stockholder 31,996 31,996 46,262
Amortization of deferred compensation 54,456 54,505 54,456
Deferred income taxes (28,000) (124,000) (176,000)
Changes in assets and liabilities-
Accounts receivable (449,488) 210,475 (247,715)
Inventories (52,393) (482,511) (130,877)
Prepaid expenses and other current assets 26,742 15,773 (56,863)
Accounts payable 93,536 20,295 37,685
Accrued expenses (102,021) 17,198 188,016
----------- ----------- -----------
Net cash provided by operating activities 1,646,555 1,545,607 1,174,185
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (712,015) (326,639) (604,961)
(Increase) decrease in other assets (95,604) (3,680) 20,914
----------- ----------- -----------
Net cash used in investing activities (807,619) (330,319) (584,047)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options 89,180 108,385 67,790
Purchase of treasury stock (28,910) (31,827) (1,665,080)
Payment of cash dividend (115,826) (112,725) (109,683)
Payments on long-term debt (166,667) (166,667) (166,667)
----------- ----------- -----------
Net cash used in financing activities (222,223) (202,834) (1,873,640)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 616,713 1,012,454 (1,283,502)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,261,978 4,249,524 5,533,026
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,878,691 $ 5,261,978 $ 4,249,524
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 73,606 $ 77,524 $ 69,131
=========== =========== ===========
Income taxes $ 1,035,000 $ 996,531 $ 830,834
=========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(1) OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company is engaged primarily in the design, manufacture and sale of
specialized components suitable for the transmission, reception,
modification and utilization of microwave energy.
The accompanying consolidated financial statements reflect the application
of the following major accounting policies.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Sage Laboratories, Inc. (the Company) and its wholly owned
subsidiaries, Sage Laboratories Investment Corporation, a
Massachusetts securities corporation; Sage Laboratories Active
Microwave, Inc. (SLAM), a New Hampshire corporation; and Sage
Laboratories Foreign Sales, Inc., a U.S. Virgin Island corporation.
All material intercompany transactions and balances have been
eliminated in consolidation.
(b) Revenue Recognition
With respect to contracts, the Company recognizes revenue on the basis
of shipments by relating the total anticipated costs to total units to
be produced and units actually shipped. Contract losses are recorded
in total as soon as they can be reasonably anticipated. Product sales
are recognized upon shipment.
(c) Research and Development Expenses
Research and development expenses are charged to operations as
incurred. Research and development expenses of approximately $272,000,
$200,000 and 199,000 were incurred in 1996, 1995 and 1994,
respectively. In 1996, 1995 and 1994, $25,000, $62,000 and $119,000,
respectively, of the total research and development costs were related
to new product development by SLAM.
(d) Depreciation and Amortization
The Company provides for depreciation and amortization by charges to
operations to allocate the cost of the assets over their estimated
useful lives as follows:
Method of Depreciation Estimated
Assets Classification and Amortization Useful Life
Buildings and improvements Straight-line 5-25 Years
Machinery and laboratory equipment Straight-line and declining-balance 3-10 Years
Furniture, fixtures and motor vehicles Straight-line and declining-balance 3-10 Years
F-6
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(1) OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(e) Warranty Costs
Warranty costs incurred by the Company during the three years in the
period ended June 30, 1996 were not significant, and future warranty
costs are not expected to be significant.
(f) Inventories
Inventories, priced at the lower of cost (first-in, first-out) or
market, are as follows as of June 30, 1996 and 1995:
1996 1995
Raw materials and parts $ 406,581 $ 335,968
Work-in-process 814,776 863,328
Finished goods 127,112 96,780
---------- ----------
$1,348,469 $1,296,076
========== ==========
Work-in-process and finished goods include material, labor and
manufacturing overhead.
(g) Net Income per Common and Common Equivalent Share
Net income per common and common equivalent share was computed based
on the weighted average number of common shares and common share
equivalents outstanding during the year. Common share equivalents
consist of dilutive outstanding stock options computed under the
treasury stock method. Fully diluted net income per common and common
equivalent share has not been presented since the result would not be
materially different.
(h) Postretirement and Postemployment Benefits
The Company has no obligations for postretirement or postemployment
benefits.
(i) 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 at the
date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ
from those estimates.
F-7
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(1) OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(j) New Accounting Standards
The Company will adopt Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, in fiscal
1997. The standard defines a fair value based method of accounting for
employee stock options and other stock-based compensation. The
compensation expense arising from this method of accounting can be
reflected in the financial statements or, alternatively, the pro forma
net income and earnings per share effect of the fair value based
accounting can be disclosed in the financial footnotes. The Company
expects to adopt the disclosure alternative.
(k) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information About Financial Instruments
with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk, requires disclosure of any significant
off-balance sheet and credit risk concentrations. The Company's
accounts receivable credit risk is not concentrated within any
geographic area and does not represent a significant credit risk to
the Company.
During the years ended June 30, 1996, 1995 and 1994, export sales
accounted for approximately 20%, 24% and 22% of revenue, respectively.
During fiscal 1995, two domestic customers accounted for 22% of
revenue. No customer accounted for more than 10% of revenue in fiscal
1996 and 1994.
(l) Fair Value of Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of an estimate of the fair value of certain
financial instruments. The fair value of financial instruments
pursuant to SFAS No. 107 approximated their carrying values at June
30, 1996 and 1995. Fair values have been determined through
information obtained from market sources and management estimates.
F-8
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(2) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Cash and cash
equivalents, which are recorded at amortized cost, consist of the following
at June 30:
1996 1995
Cash $ 24,208 $ 115,337
Money market mutual fund 4,795,421 3,469,960
Fixed time deposit 1,059,062 1,000,000
Repurchase agreements -- 676,681
---------- ----------
$5,878,691 $5,261,978
========== ==========
(3) LINE OF CREDIT
At June 30, 1996, the Company has available an unsecured revolving line of
credit of $1,000,000 with a bank, expiring on November 30, 1996. Borrowings
under the line bear interest at the borrower's option at either the bank's
prime rate (8.25% at June 30, 1996) or 30-, 60-, 90- or 180-day LIBOR (5.5%
to 5-3/16% at June 30, 1996) plus 1.75%. There were no borrowings under the
line during fiscal 1996.
(4) LONG-TERM DEBT
Long-term debt consists of an Industrial Revenue Bond, payable in quarterly
principal installments of $41,667 through April 2001. The bond bears
interest at 88.6% of the prime rate (8.25% at June 30, 1996), payable
quarterly through April 2001. The bond is collateralized by land and
buildings.
Maturities of long-term debt are as follows:
Fiscal Year
1997 $ 166,667
1998 166,667
1999 166,667
2000 166,667
2001 166,664
---------
Total $ 833,332
=========
F-9
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(5) INCOME TAXES
The Company follows the provisions of SFAS No. 109, Accounting for Income
Taxes. The provision for income taxes for the three years ended June 30,
1996 consists of the following:
1996 1995 1994
Current--
Federal $ 813,000 $ 775,000 $ 705,000
State 235,000 239,000 225,000
---------- ---------- ---------
1,048,000 1,014,000 930,000
---------- ---------- ---------
Deferred (prepaid)--
Federal (22,000) (95,000) (177,000)
State (6,000) (29,000) (74,000)
---------- ---------- ---------
(28,000) (124,000) (251,000)
---------- ---------- ---------
$1,020,000 $ 890,000 $ 679,000
========== ========== =========
The provision for income taxes for each of the three years in the period
ended June 30, 1996 is reconciled to the U.S. statutory rate as follows:
1996 1995 1994
Provision at statutory rate $ 894,000 $775,000 $638,000
Increase (decrease) in income taxes resulting from--
State income taxes, net of federal benefit 151,000 137,000 100,000
Tax benefit of foreign sales corporation (25,000) (22,000) --
Other -- -- (59,000)
---------- -------- --------
Provision for income taxes $1,020,000 $890,000 $679,000
========== ======== ========
Under SFAS No. 109, the Company records a deferred tax asset or liability
based on the enacted tax rates that are expected to be in place when any
differences between the financial statement and tax bases of liabilities or
assets reverse. The approximate income tax effect of each temporary
difference
F-10
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(5) INCOME TAXES (Continued)
constituting the deferred tax asset (included in prepaid expenses and other
current assets) and the deferred tax liability in the accompanying
consolidated balance sheets as of June 30, 1996 and 1995 are as follows:
1996 1995
Deferred tax assets--
Nondeductible accruals $ 210,000 $ 261,000
Receivable reserves 20,000 17,000
Inventory reserves 216,000 157,000
--------- ---------
$ 446,000 $ 435,000
========= =========
Deferred tax liabilities--
Depreciation $(151,000) $(149,000)
Deferred compensation (13,000) (34,000)
Other (26,000) (24,000)
--------- ---------
$(190,000) $(207,000)
========= =========
(6) COMMITMENTS
SLAM conducts its operations in leased facilities under an operating lease
agreement that expires in March 1999.
Future minimum lease commitments under this operating lease are as follows:
Fiscal Year
1997 $23,000
1998 23,000
1999 17,000
-------
Total $63,000
=======
The Company has the option to terminate this lease during 1997 for a
termination fee of $5,000. Rent expense under the operating lease for the
years ended June 30, 1996, 1995 and 1994 was approximately $23,000, $23,000
and $3,000, respectively.
F-11
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(7) STOCKHOLDERS' INVESTMENT
(a) Stock Split
On September 5, 1995, the Board of Directors declared a 5-for-1 stock
split, effective December 1, 1995 to stockholders of record on
November 14, 1995. In addition, the par value of the Company's common
stock was changed from $1.00 to $.10 per share. Stockholders'
investment has been restated to give retroactive recognition to both
the stock split and change in par value.
(b) 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 at 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 form 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 the 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 that 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.
F-12
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(7) STOCKHOLDERS' INVESTMENT (Continued)
(b) Stock Option Plan (Continued)
The following table summarizes incentive stock option activity for the
three years ended June 30, 1996:
Price Range
Shares per Share
Options outstanding, June 30, 1993 111,500 $ 2.55-$ 2.90
Exercised (24,000) 2.55- 2.90
Expired (14,500) 2.65
------- -------------
Options outstanding, June 30, 1994 73,000 2.55- 2.90
Exercised (33,000) 2.55- 2.90
Expired (5,000) 2.90
------- -------------
Options outstanding, June 30, 1995 35,000 2.55- 2.90
Granted 101,500 19.78- 21.75
Exercised (25,000) 2.90
------- -------------
Options outstanding, June 30, 1996 111,500 $ 2.55-$21.75
======= =============
Options exercisable, June 30, 1996 43,835 $ 2.55-$21.75
======= =============
At June 30, 1996, 250,000 shares of common stock were reserved for
issuance under the plan, of which 138,500 were available for
additional grants.
(c) 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 nonemployee
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 exercise price of the options was equal
to 80% of the fair market value of the shares on the date of the
grant. During fiscal 1996, the Plan was amended to provide 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 grant.
F-13
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(7) STOCKHOLDERS' INVESTMENT (Continued)
(c) Director Stock Option Plan (Continued)
The following table summarizes director's stock option activity for
the three years ended June 30, 1996:
Price Range
Shares per Share
Options outstanding, June 30, 1993 3,000 $4.04
Granted 3,000 4.56
Exercised (1,000) 4.04
------ -------------
Options outstanding, June 30, 1994 5,000 4.04- 4.56
Granted 3,000 8.08
Exercised (4,000) 4.04- 8.08
------ -------------
Options outstanding, June 30, 1995 4,000 4.04- 8.08
Granted 10,000 20.00
Exercised (3,000) 4.04- 8.08
------ -------------
Options outstanding, June 30, 1996 11,000 $ 8.08-$20.00
------ =============
Options exercisable, June 30, 1996 11,000 $ 8.08-$20.00
====== =============
At June 30, 1996, 47,000 shares of common stock were reserved for
issuance under the Plan, of which 36,000 shares were available for
additional grants.
(d) Deferred Compensation
During 1992, the Company issued 50,000 shares of its common stock to
an officer as additional compensation. The stock is subject to
forfeiture by the officer under certain conditions. However, the
forfeiture restriction lapses in February 2002. At the discretion of
the Company's Board of Directors, the forfeiture restriction on 10,000
shares may be lapsed each year if the officer achieves certain
predefined goals. The Company recorded deferred compensation equal to
the fair market value of the stock on the date of the grant and has
been amortizing the cost over five years, which is the anticipated
vesting period of the stock. During each of fiscal 1996, 1995 and
1994, the Board of Directors approved the lapse of restrictions on
10,000 shares in accordance with this agreement. During each of 1996,
1995 and 1994, approximately $54,000 was charged to operations as
compensation expense.
F-14
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(7) STOCKHOLDERS' INVESTMENT (Continued)
(d) Deferred Compensation (Continued)
In connection with the stock grant, the Company made certain loans to
the officer. The loans are evidenced by interest-free notes
receivable, payable in five equal annual installments beginning in
December 1993. Interest is imputed on the notes at the appropriate
Internal Revenue Service rate and included in compensation to the
officer.
(e) Put-and-Call Agreement
The Company has a put-and-call agreement with a relative of the former
chairman of the Company's Board of Directors providing that, in the
event of the relative's death prior to August 31, 1998, the relative's
estate could require the Company to acquire all of the relative's
Company common stock (65,000 shares as of June 30, 1996) at the
average market value, as defined, if the Company has achieved certain
defined financial results. The Company also has the option to require
the relative's estate to sell to the Company all of the relative's
stock at the average market value, as defined, in the event of the
relative's death prior to August 31, 1998.
(8) BONUS AND PROFIT-SHARING PLANS
(a) Bonus Plan
The Company maintains a discretionary executive bonus plan that is
based on a formula established by the Board of Directors. Expenses
charged to operations under this plan were approximately $136,000,
$208,000 and $254,000 in 1996, 1995 and 1994, respectively.
(b) Employee Profit-Sharing Plan
The Company has a profit-sharing plan in which each qualified
employee, as defined, becomes eligible to receive benefits to the
extent of his or her vested interests upon retirement or other
termination of employment. Contributions to the plan are determined by
the Board of Directors. The Company provided approximately $173,000,
$199,000 and $220,000 for this plan in 1996, 1995 and 1994,
respectively.
F-15
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(9) CONSULTING AND NONCOMPETE AGREEMENTS
During 1993, the Company entered into a consulting agreement with a former
officer/stockholder of the Company. Under the terms of the agreement, the
former officer/stockholder provided consulting services to the Company for
a three-year period, ending in December 1995. The Company incurred $57,000,
$122,000 and $146,000 in consulting expense under this agreement during the
years ended June 30, 1996, 1995 and 1994, respectively.
During 1994, the Company entered into a noncompete agreement with its
founder and former chairman of the Board of Directors. Under the terms of
the noncompete agreement, the former chairman agreed not to compete with
the Company directly or indirectly through August 1998. The Company
incurred $80,000, $80,000 and $67,000 in expense under this agreement
during the years ended June 30, 1996, 1995 and 1994, respectively. The
Company's future commitment under the noncompete agreement will be as
follows:
Fiscal Year
1997 $ 80,000
1998 80,000
1999 13,000
--------
$173,000
========
(10) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table presents a summary of quarterly results of operations
for the years ended June 30, 1996 and 1995.
1996
First Second Third Fourth
Quarter Quarter Quarter Quarter
Net sales and contract revenues $2,216,056 $2,680,312 $2,089,982 $2,782,459
Gross profit 938,782 1,178,416 1,098,717 1,468,205
Net income 183,090 351,459 415,330 659,612
Net income per common and common
equivalent share $ .16 $ .30 $ .36 $ .56
F-16
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(10) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (Continued)
1995
First Second Third Fourth
Quarter Quarter Quarter Quarter
Net sales and contract revenues $1,493,154 $2,273,759 $2,816,498 $2,570,648
Gross profit 796,139 1,114,277 1,420,517 1,228,744
Net income 114,310 274,181 401,803 598,646
Net income per common and common
equivalent share $ .10 $ .24 $ .35 $ .51
F-17