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 March 29, 1997 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 March 29, 1997, the Company had outstanding 1,161,265 shares of common stock, $.10 par value, which is its only class of stock. PART 1 - FINANCIAL INFORMATION COMPANY OR GROUP OF COMPANIES FOR WHICH REPORT IS FILED: SAGE LABORATORIES, INC. AND SUBSIDIARIES (UNAUDITED) Item 1 - Financial Statements A. Income Information: For the Three Months Ended For the Nine Months Ended Mar. 29, Mar. 30, Mar. 29, Mar. 30, 1997 1996 1997 1996 ---- ---- ---- ---- NET SALES AND CONTRACT REVENUES $ 2,177,710 $ 2,089,982 $ 6,744,179 $ 6,986,350 COST OF SALES AND CONTRACT COSTS 1,377,219 924,401 3,830,015 3,574,504 ENGINEERING AND NEW PRODUCT DEVELOPMENT COSTS 91,590 66,864 199,241 195,931 ----------- ----------- ----------- ----------- 1,468,809 991,265 4,029,256 3,770,435 ----------- ----------- ----------- ----------- Gross profit 708,901 1,098,717 2,714,923 3,215,915 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 682,410 569,286 1,939,396 1,900,700 ----------- ----------- ----------- ----------- Operating income 26,491 529,431 775,527 1,315,215 INTEREST INCOME 64,664 76,694 205,327 227,609 INTEREST EXPENSE (13,759) (16,334) (43,037) (53,449) INCOME ON RENTAL PROPERTY 16,218 11,539 42,970 27,504 ----------- ----------- ----------- ----------- Income before provision for income taxes 93,614 601,330 980,787 1,516,879 PROVISION/(BENEFIT) FOR INCOME TAXES: Federal (5,000) 135,000 267,000 420,000 State 11,000 51,000 99,000 147,000 ----------- ----------- ----------- ----------- Net income $ 87,614 $ 415,330 $ 614,787 $ 949,879 =========== =========== =========== =========== NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE $ .07 $ .36 $ .52 $ .81 =========== =========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 1,176,788 1,169,482 1,172,927 1,168,802 =========== =========== =========== =========== DIVIDENDS PAID $ -- $ -- $ 116,127 $ 115,827 =========== =========== =========== =========== The accompanying notes are an integral part of these consolidated financial statements. SAGE LABORATORIES, INC. AND SUBSIDIARIES B. CONSOLIDATED BALANCE SHEETS MARCH 29, 1997 AND JUNE 30, 1996 (Unaudited) Mar. 29, June 30, ASSETS 1997 1996 ----------- ----------- CURRENT ASSETS: Cash and cash equivalents $ 5,389,111 $ 5,878,691 Accounts receivable, net of reserve of approximately $59,300 at Mar. 29, 1997 and $50,000 at June 30, 1996 1,715,417 1,993,452 Inventories 1,651,134 1,348,469 Prepaid expenses and other current assets 685,719 485,405 ----------- ----------- Total current assets 9,441,381 9,706,017 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT, AT COST: Land, buildings and improvements 4,191,088 3,989,760 Machinery and laboratory equipment 2,051,766 1,753,072 Furniture, fixtures and motor vehicles 820,493 664,894 ----------- ----------- 7,063,347 6,407,726 Less--Accumulated depreciation and amortization 3,747,678 3,302,607 ----------- ----------- 3,315,669 3,105,119 ----------- ----------- OTHER ASSETS: Notes receivable from an officer/stockholder 23,047 55,043 Other assets 157,148 161,536 ----------- ----------- Total other assets 180,195 216,579 ----------- ----------- $12,937,245 $13,027,715 =========== =========== LIABILITIES AND STOCKHOLDERS' INVESTMENT CURRENT LIABILITIES: Current maturities of long-term debt $ 166,667 $ 166,667 Accounts payable 397,084 394,221 Accrued expenses- Compensation 600,167 762,025 Commissions 143,772 136,364 Taxes other than federal income taxes 18,603 85,259 Federal income taxes -- 261,827 Other 254,773 268,191 ----------- ----------- Total current liabilities 1,581,066 2,074,554 ----------- ----------- LONG-TERM DEBT, NET OF CURRENT MATURITIES 541,666 666,665 ----------- ----------- DEFERRED INCOME TAXES 190,000 190,000 ----------- ----------- STOCKHOLDERS' INVESTMENT: Common Stock, $.10 par value -- Authorized--10,000,000 shares Issued--2,678,480 shares in 1997 and 1996 267,848 267,848 Capital in excess of par value 2,030,182 2,030,182 Retained earnings 13,775,471 13,276,809 ----------- ----------- 16,073,501 15,574,839 Less-- Cost of 1,517,215 shares of treasury stock in 1997 and 1996 5,448,988 5,448,988 Deferred compensation -- 29,355 ----------- ----------- Total stockholders' investment 10,624,513 10,096,496 ----------- ----------- $12,937,245 $13,027,715 =========== =========== The accompanying notes are an integral part of these consolidated financial statements SAGE LABORATORIES, INC. AND SUBSIDIARIES C. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Mar 29, Mar 30, 1997 1996 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 614,787 $ 949,879 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 467,573 445,770 Amortization of deferred compensation 29,355 40,842 Changes in assets and liabilities- Accounts receivable 278,035 143,064 Inventories (302,665) (157,230) Prepaid expenses and other current assets (200,314) (3,795) Accounts payable 2,863 79,494 Accrued expenses (496,351) (249,389) ----------- ---------- Net cash provided by operating activities 393,283 1,248,635 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment, net (655,621) (319,566) Increase in other assets (18,112) (53,304) ----------- ----------- Net cash used in investing activities (673,733) (372,870) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Notes receivable from an officer/stockholder 31,996 31,996 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 (124,999) (124,999) ----------- ----------- Net cash used in financing activities (209,130) (165,240) ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (489,580) 710,525 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,878,691 5,261,978 ---------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,389,111 $ 5,972,503 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for- Interest $ 44,195 $ 53,449 =========== =========== Income taxes $ 593,542 $ 810,500 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. SAGE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 29, 1997 (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 nine month period ended March 29, 1997, 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: Mar. 29, 1997 June 30, 1996 ------------- ------------- Raw materials and parts $ 553,192 $ 406,581 Work-in-process 907,477 814,776 Finished goods 190,465 127,112 ------------ ------------- $ 1,651,134 $ 1,348,469 ============= ============= Work-in-process and finished goods include material, labor and manufacturing overhead. (3) Line of Credit At March 29, 1997, 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 (8.5% at March 29, 1997), or 30-, 60-, 90-, or 180-day LIBOR (5 .66% to 5.93% at March 29, 1997), plus 1.75%. There were no borrowings under the line at March 29, 1997. SAGE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 29, 1997 (Continued) (4) 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 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 mature 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 nine months ended March 29,1997: SHARES PRICE RANGE ------ ----------- Options outstanding June 30, 1996 111,500 $ 2.55-$21.75 Options granted 168,100 $12.75-$15.00 Options canceled (11,500) 19.775 ------- ------------- Options outstanding March 29, 1997 268,100 $ 2.55-$21.75 ======= ============= Options exercisable at March 29, 1997 103,033 $ 2.55-$21.75 ======= ============== At March 29, 1997, 500,000 shares of common stock were reserved for issuance under the plan, of which 231,900 were available for additional grants. SAGE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 29, 1997 (Continued) (5) New Accounting Standard In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 128 (SFAS No. 128), Earnings Per Share. SFAS No. 128 established standards for computing and presenting earnings per share and applies to entities with publicly held common stock. This statement is effective for fiscal years ended after December 15, 1997 and early adoption is not permitted. When adopted, the statement will require restatement of prior years earnings per share. The Company will adopt this statement during its fiscal year ending June 30, 1998. In addition, the Company believes that the adoption of SFAS No. 128 will not have a material effect on its financial statements. D. Management's Discussion and Analysis of Quarterly Income Statements For the three months ended March 29,1997, the Company realized net income of approximately $88,000, or $.07 per share, on sales of $2,178,000. This compares with net income of approximately $415,000, or $.36 per share, on sales of $2,090,000 for the same period a year ago. Net income was negatively impacted in the third quarter of fiscal 1997 by a net loss of approximately $45,000, or $.04 per share, from the Company's wholly-owned subsidiary, Sage Laboratories Active Microwave, Inc. (SLAM). SLAM's net loss was approximately $14,000, or $.01 per share, for the same period a year ago. Net sales for the three months ended March 29, 1997, increased approximately $88,000, or 4% over the previous year. SLAM recorded sales of approximately $144,000 for the quarter, as compared with $141,000 for the same period a year ago. Sage Laboratories, Inc. sales increased by $85,000, or 4%, as compared with the same period a year ago. The sales increase is primarily attributable to sales volume changes among certain customers. Orders received in the third quarter totaled approximately $3,343,000, including $352,000 from SLAM and $708,000 in new commercial switch orders. This compares to $2,529,000, including $33,000 from SLAM for the same period a year ago. The increase in orders of approximately $804,000 for the quarter is attributable to receipt of orders previously delayed from certain customers as well as orders for new product offerings. The Company's backlog at the end of the quarter was $5,202,000, including $504,000 from SLAM. This compares to $5,425,000, including $306,000 from SLAM for the previous year. SAGE LABORATORIES, INC. AND SUBSIDIARIES MARCH 29, 1997 D. Management's Discussion and Analysis of Quarterly Income Statements - (Continued) Gross profit as a percentage of sales was 33% for the quarter ended March 29, 1997, as compared to 53% for the same period a year ago. The decrease in gross profit is attributable to a shift in product mix towards lower margin products in the current quarter, additional costs incurred related to jobs experiencing difficulties, and start up expenses from the new commercial switch product line. Selling, General and Administrative expense (S G & A) increased by approximately $113,000. As a percentage of sales, S G & A increased to approximately 31% for the third quarter, as compared to 27% for the same period a year ago. The increase is attributable to increased marketing expense of $60,000, supplies & services expense of $52,000, and commission expense of $17,000. These increases were partially offset by reductions in salaries and related items of $16,000. Interest income for the three months ended March 29, 1997 decreased by approximately $12,000 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 March 29, 1997 decreased by approximately $3,000 due to a decrease in the outstanding principal balance. The Company generated a profit of approximately $16,000 from its rental property, as compared to $12,000 for the same period a year ago. The Company's rental property is fully occupied. The Company's net book value of property held for rent (including renovations) at March 29, 1997, and March 30, 1996, is as follows: 1997 1996 ---- ---- 3 Huron Drive (old facility) $442,814 $520,612 11 Huron Drive (rented portion) 250,171 280,684 ------- ------- Total $692,985 $801,296 The Company's combined effective federal and state income tax rate for the three months ended March 29, 1997 and March 30, 1996 was 6.4% and 31%, respectively. Benefit for federal income taxes in the quarter ended March 29, 1997 was recorded as a result of a reduction in the Company's estimated annual effective tax rate. SAGE LABORATORIES, INC. AND SUBSIDIARIES MARCH 29, 1997 D. Management's Discussion and Analysis of Quarterly Income Statements - (Continued) Nine Months Ended March 29, 1997 and March 30, 1996 For the nine months ended March 29, 1997, the Company realized net income of $615,000, or $.52 per share, on sales of $6,744,000. This compared with net income of $950,000, or $.81 per share, on sales of $6,986,000 for the same period a year ago. Net income for the nine months ended March 29, 1997, was negatively impacted by a net loss of approximately $138,000, or $.12 per share, from SLAM. This compares to a net loss of approximately $146,000, or $.13 per share, for the same period a year ago. Net sales for the nine months March 29, 1997, decreased by $242,000 or 3%, from the previous year. SLAM recorded sales of $457,000 for the nine months ended March 29, 1997, compared to $259,000 for the same period a year ago. The decrease in total sales is due to reductions in product requirements for certain large customers. Total orders received were $7,351,000 (including $695,000 from SLAM) for the first nine months of fiscal 1997. Included in this amount is approximately $778,000 in new commercial switch orders. This compares to $7,729,000, including $503,000 from SLAM, for the same period a year ago. Gross profit as a percentage of sales was approximately 40% for the nine months ended March 29, 1997 as compared to approximately 46% for the same period a year ago. The decrease in gross profit is primarily attributable to a shift in product mix towards lower margin products, additional costs incurred related to jobs experiencing difficulties, and start up expenses from the new commercial switch product line, partially offset by higher margins earned on certain engineering programs. Selling, General and Administrative Expense (S G & A) increased by approximately $39,000 from the same period a year ago. The increase is due to higher sales and marketing expense of $45,000, supplies and services expense of $46,000, and commission expense of $42,000. These increases were partially offset by a reduction in fees associated with the consulting agreement with the Company's former chairman of $55,000 and reduced salary and benefit costs of $39,000. Interest income for the nine months ended March 29, 1997 decreased by approximately $22,000 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 nine months ended March 29, 1997 decreased by approximately $10,000 from the same period a year ago. This decrease is due to lower outstanding principal balance on the Company's debt. SAGE LABORATORIES, INC. AND SUBSIDIARIES MARCH 29, 1997 D. Management's Discussion and Analysis of Quarterly Income Statements - (Continued) The Company recorded a profit of approximately $43,000 from rental property for the nine months ended March 29, 1997, as compared to a profit of $28,000 for the same period a year ago. The Company's combined effective Federal and state income tax rate for the nine months ended March 29, 1997 and March 30, 1996, was 37.3% and 37.4%, respectively. This is lower than the combined statutory rate, due to benefits from the Company's Foreign Sales Corporation, tax credits and favorable treatment afforded the Company's Massachusetts Security Corporation. Liquidity and Capital Resources For the nine months ended March 29, 1997, operating activities generated cash of $393,000 a decrease of $855,000 from the nine months ended March 30, 1996. Cash used in investing activities amounted to $674,000 and $373,000, respectively, while cash used for financing activities was $209,000 and $165,000, 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: None 5. Other Information: None 6. Exhibits and Reports on Form 8-K: None 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: May 9, 1997 SAGE LABORATORIES, INC. AND SUBSIDIARIES ------------------- /S/ Carl A. Marguerite ----------------------- (Principal executive officer; principal financial officer)