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, 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 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 23, 1997 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 $10,852,499.
On June 30, 1997 the Company had outstanding 1,164,765 shares of common
stock, $.10 par value, which is its only class of stock.
DOCUMENTS INCORPORATED BY REFERENCE
See Exhibit Index at page 12.
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, 1996.
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:
Fiscal year ended June 30: 1995 1996 1997
---- ---- ----
(in thousands)
Amount of total sales and revenues $9,154 $9,769 $8,934
Amount of operating income $2,158 $2,341 $780
Total assets (year end) $11,611 $13,028 $12,996
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.
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 in the future. Total sales and contract
revenue derived from the sale of traditional passive components during the last
three fiscal years are as follows:
2
Fiscal year ended June 30: 1995 1996 1997
---- ---- ----
(in thousands)
Catalog items $2,101 $2,889 $2,748
Adaptable or reorderable items 5,281 3,932 2,853
Engineered items 1,542 2,251 2,659
Other 113 321 63
-------------------------------------------
Total $9,037 $9,393 $8,323
===========================================
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 revenues for fiscal years 1995, 1996 and 1997 amounted to
$117,000, $375,000 and $611,000 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.
Principal Markets and Distribution
The Company's microwave products are sold principally through a group of 37
independent representatives with 51 offices located throughout the United States
and abroad. Their efforts are directed by the Company's Vice President of Sales
and Sales Managers. 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 $5,258,000 as of June 30, 1997, as compared to $4,602,000 as of June 30,
1996. All of the June 30, 1997 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 significant amount of its sales of microwave products, though at
any given time one or more large orders or contracts may
3
represent a high percentage of the backlog. During the fiscal year ended June
30, 1997, 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, 1997, the Company employed 66 people, ten of which are
employed by SLAM. The Company also utilized temporary employees throughout the
year. Thirty 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 $318,000, $272,000, and $200,000 (including
overhead) were made in each of fiscal 1997, 1996 and 1995, respectively.
Export Sales
Approximately 16% of the Company's revenues for fiscal year 1997 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, 1995, 1996 and 1997 were $2,184,000,
$1,954,000 and $1,396,000, 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 57 Chairman, Chief Executive Officer
(President until 1996)
and Director of the Company
Louis J. Lanzillo, Jr. 39 President, Chief Operating Officer
and Director of the Company
(President of New England Division
Unicco Service Co. until 1996)
Anthony J. Cieri 66 Vice President of Customer Service
and Special Projects of the Company
(Vice President of Sales until 1997)
Janusz J. Majewski 50 Vice President of Research & Development
of the Company
(Vice President of Engineering until
1996
(Director of Engineering until 1995)
John J. Leary 51 Vice President of Passive Products and
Manufacturing of the Company
(Vice President and General Manager
of U.S. Operations, Filtronic Comtek
until 1997)
4
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, 1997 is
approximately $2,180,000. 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.
Item 4. Submission of Matters to a Vote of Security Holders
There was nothing submitted during the fourth quarter of fiscal 1997 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:
1997 1996
---- ----
High Low High Low
---- --- ---- ---
First Quarter 17 14 23 11 4/5
Second Quarter 16 5/8 12 1/4 22 18 1/10
Third Quarter 15 1/4 13 20 1/4 14 3/4
Fourth Quarter 14 3/4 12 3/4 18 3/4 15 1/8
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 236 holders of record of
the Company's outstanding common stock on June 30, 1997.
The Company paid cash dividends in October of 1995 and 1996 in the amount
of 10 cents per share. On September 4, 1997, the Company's Board of Directors
declared a cash dividend in the amount of ten cents per share payable on October
10, 1997 to holders of record as of September 26, 1997.
Item 6. Selected Financial Data.
The selected financial data called for under this caption is attached to
this report as Appendix A.
5
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
1997 Compared to 1996
Net Sales:
Net sales on a consolidated basis for fiscal 1997 decreased by $835,000, or 9%,
from fiscal 1996. This decrease is due primarily to lower sales from certain
catalog products and delays experienced in certain space related programs. This
overall decrease in sales was primarily the result of a decrease in the number
and size of orders shipped, as there have been no material changes in the price
of the Company's products during fiscal 1997. The Company's core sales decrease
of $1,071,000 was partially offset by an increase in the Company's subsidiary,
Sage Laboratories Active Microwave, Inc. (SLAM) sales of $236,000.
Orders received in fiscal 1997 totaled $9,851,000, as compared to $9,708,000 for
1996. Total orders included $941,000 from SLAM, compared to $586,000 for the
same period a year ago. SLAM's increase in orders is due to growing recognition
in the industry. The decrease in Sage core orders of approximately $212,000 is
primarily due to customers' delays in placing orders, as well as certain orders
which were received in fiscal 1996 that were not renewed in fiscal 1997 due to
programs coming to closure. There is no seasonality to the Company's business.
Sales volume is strictly predicated on customers' requirements for delivery.
Gross Profit:
Gross profit as a percentage of sales decreased to approximately 38% in
fiscal 1997, as compared to 48% for the same period a year ago. The decrease in
gross profit percentage was due in part to a shift in mix of sales to lower
margin products, increased research and development expenses, increases in cost
overruns on Sage core engineering programs, and a negative gross profit
attributed to SLAM and the commercial switch division.
Selling, General and Administrative Expenses:
Selling, General and Administrative Expenses (S G & A) increased by
approximately $256,000, or 11%, over the same period a year ago. Selling
expenses increased by approximately $140,000. The increase in selling expenses
was primarily due to increased salary and related items of approximately $21,000
and the addition of sales and marketing personnel, increased advertising and
other sales expenses of $119,000. Commission expense increased by approximately
$34,000 as a result of the change in the mix from non commissioned to
commissioned sales, as well as a larger number of smaller orders which bear
higher commission rates. General and Administrative expenses increased by
approximately $82,000, due in part to increased salary expenses for additional
administrative personnel partially offset by a decrease in bonuses resulting
from lower corporate profitability and decreased consulting expenses attributed
to the Company's former Chairman of the Board.
Interest Income:
Interest income for fiscal year 1997 decreased by approximately $24,000 as
compared to fiscal year 1996. This decrease is due to lower average cash
balances, as well as lower interest rates being realized.
Interest Expense:
Interest expense decreased in fiscal year 1997 by $13,000 over the previous
year. This decrease is due to decreases in the outstanding principal balances.
Rental Property:
The Company generated a profit of approximately $69,000 from its rental
property in fiscal 1997 compared to a profit of $55,000 in fiscal 1996. All of
the Company's rental property was fully occupied during fiscal 1997.
The Company's net book value of property held for rent at June 30, 1997 and
1996 is as follows:
6
1997 1996
-------- --------
3 Huron Drive (old facility) $423,116 $501,114
11 Huron Drive (rental portion
of current facility) 250,171 283,855
-------- --------
Total $673,286 $784,969
======== ========
Provisions for Federal and State Income Taxes:
Federal and State income tax provisions for fiscal years 1997 and 1996 have
been reconciled to the U.S. statutory rate. (See Note 5 to Consolidated
Financial Statements).
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.
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.
7
Rental Property:
The Company generated a profit of approximately $55,000 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.
During fiscal 1996, the Company took 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.
Provisions for Federal and State Income Taxes:
Federal and State income tax provisions for fiscal years 1997 and 1996 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, 1997 operating activities generated
$321,000 in cash, a decrease of $1,326,000 from the twelve months ended June 30,
1996. Cash used in investing activities amounted to $645,000 and $808,000 for
the twelve months ended June 30, 1997 and 1996, respectively, while cash used
for financing activities was $274,000 and $222,000, 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 anticipates that total capital expenditures for fiscal year
1998 will be approximately $500,000. The Company repurchased 65,000 shares of
stock from the estate of a shareholder at a total cost of approximately $902,000
on July 3, 1997, as described in more detail in Note 7 to Consolidated Financial
Statements. No outside funding will be required.
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 $2,000,000 bank line of credit, the Company does
not presently intend to utilize the line.
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
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.
8
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 11, 1997.
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 11, 1997.
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 11, 1997.
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 11, 1997.
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.
9
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 15, 1997
-----------------------------
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 15, 1997
----------------------------- Executive Officer,
Carl A. Marguerite Principal Executive
Officer, Treasurer
and Director
By /s/ Louis J. Lanzillo, Jr. President, Chief September 15, 1997
----------------------------- Operating Officer
Louis J. Lanzillo, Jr. and Director
By /s/ John E. Miller Director September 15, 1997
-----------------------------
John E. Miller
By /s/ David M. Pozar Director September 15, 1997
-----------------------------
David M. Pozar
By /s/ C. Duncan Soukup Director September 15, 1997
-----------------------------
C. Duncan Soukup
10
APPENDIX A
ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEARS ENDED JUNE 30,
----------------------------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- --------------
Net Sales and Contract Revenues $ 6,627,000 $ 8,167,000 $ 9,154,000 $ 9,769,000 $ 8,934,000.00
Net Income 956,000 1,198,000 1,389,000 1,609,000 692,000
Net Income Per Common and
Common Equivalent Share 0.66 1.00 1.20 1.38 0.59
Total Assets 10,821,000 10,359,000 11,611,000 13,028,000 12,996,000
Total Current Assets 7,987,000 7,242,000 8,603,000 9,706,000 9,628,000
Total Current Liabilities 1,820,000 2,046,000 2,083,000 2,075,000 1,641,000
Working Capital 6,167,000 5,196,000 6,520,000 7,631,000 7,987,000
Long Term Debt:
Industrial Revenue Bond 1,167,000 999,999 833,333 666,665 500,000
----------- ----------- ----------- ----------- --------------
Total Long Term Debt 1,167,000 999,999 833,333 666,665 500,000
----------- ----------- ----------- ----------- --------------
Stockholders' Equity 7,526,000 7,075,000 8,488,000 10,096,000 10,711,000
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 1,457,065 1,197,035 1,159,390 1,169,086 1,169,616
=========== =========== =========== =========== ==============
11
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, 1997 and June 30, 1996 F-2
Consolidated Statements of Income for each
of the three fiscal years in the period ended June 30, 1997 F-3
Consolidated Statements of Stockholders' Investment for each
of the three fiscal years in the period ended June 30, 1997 F-4
Consolidated Statements of Cash Flows for each of the three fiscal years in
the period ended June 30, 1997 F-5
Notes to Consolidated Financial Statements F-6
13
ARTHUR ANDERSEN LLP
SAGE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1997 AND 1996
TOGETHER WITH AUDITORS' REPORT
SAGE LABORATORIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
PAGE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-1
CONSOLIDATED BALANCE SHEETS--JUNE 30, 1997 AND 1996 F-2
CONSOLIDATED STATEMENTS OF INCOME FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 F-3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6
ARTHUR ANDERSEN LLP
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,
1997 and 1996, and the related consolidated statements of income, stockholders'
investment and cash flows for each of the three years in the period ended June
30, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
August 22, 1997
F-1
SAGE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30,
ASSETS 1997 1996
CURRENT ASSETS:
Cash and cash equivalents $ 5,280,584 $ 5,878,691
Accounts receivable, net of reserve of $62,000 in
1997 and $50,000 in 1996 1,749,778 1,993,452
Inventories 1,936,015 1,348,469
Prepaid expenses and other current assets 661,883 485,405
----------- -----------
Total current assets 9,628,260 9,706,017
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land, buildings and improvements 4,191,088 3,989,760
Machinery and laboratory equipment 2,180,492 1,753,072
Furniture, fixtures and motor vehicles 691,192 664,894
----------- -----------
7,062,772 6,407,726
Less--Accumulated depreciation and amortization 3,869,877 3,302,607
----------- -----------
3,192,895 3,105,119
----------- -----------
OTHER ASSETS:
Notes receivable from an officer/stockholder 23,047 55,043
Other assets 151,457 161,536
----------- -----------
Total other assets 174,504 216,579
----------- -----------
$12,995,659 $13,027,715
=========== ===========
June 30,
LIABILITIES AND STOCKHOLDERS' INVESTMENT 1997 1996
CURRENT LIABILITIES:
Current maturities of long-term debt $ 166,667 $ 166,667
Accounts payable 427,022 394,221
Accrued expenses-
Compensation 635,297 762,025
Commissions 155,701 136,364
Taxes other than federal income taxes -- 85,259
Federal income taxes -- 261,827
Other 256,191 268,191
----------- -----------
Total current liabilities 1,640,878 2,074,554
----------- -----------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 500,000 666,665
----------- -----------
DEFERRED INCOME TAXES 144,000 190,000
----------- -----------
COMMITMENTS (Notes 6 and 9)
STOCKHOLDERS' INVESTMENT:
Common stock, $.10 par value-
Authorized--10,000,000 shares
Issued--2,681,980 shares in 1997 and
2,678,480 shares in 1996 268,198 267,848
Capital in excess of par value 2,038,757 2,030,182
Retained earnings 13,852,814 13,276,809
----------- -----------
16,159,769 15,574,839
Less-
Cost of 1,517,215 shares of treasury stock 5,448,988 5,448,988
Deferred compensation -- 29,355
----------- -----------
Total stockholders' investment 10,710,781 10,096,496
----------- -----------
$12,995,659 $13,027,715
=========== ===========
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,----------
1997 1996 1995
NET SALES AND CONTRACT REVENUE $ 8,933,629 $ 9,768,809 $ 9,154,059
COST OF SALES AND CONTRACT COSTS 5,236,758 4,812,675 4,394,464
ENGINEERING AND NEW PRODUCT DEVELOPMENT COSTS 317,734 272,014 199,918
----------- ----------- -----------
Gross profit 3,379,137 4,684,120 4,559,677
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,599,411 2,343,222 2,402,174
----------- ----------- -----------
Operating income 779,726 2,340,898 2,157,503
INTEREST INCOME 278,508 302,901 194,528
INTEREST EXPENSE (55,772) (68,922) (79,597)
INCOME FROM RENTAL PROPERTY 68,670 54,614 6,506
----------- ----------- -----------
Income before provision for income taxes 1,071,132 2,629,491 2,278,940
PROVISION FOR INCOME TAXES:
Federal 309,000 791,000 680,000
State 70,000 229,000 210,000
----------- ----------- -----------
Net income $ 692,132 $ 1,609,491 $ 1,388,940
=========== =========== ===========
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE $ .59 $ 1.38 $ 1.20
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 1,169,616 1,169,086 1,159,390
=========== =========== ===========
DIVIDENDS PAID $ 116,127 $ 115,826 $ 112,725
=========== =========== ===========
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 Total
Number $.10 Excess of Retained Treasury Deferred Stockholders'
of Shares Par Value Par Value Earnings Stock, at Cost Compensation Investment
BALANCE, JUNE 30, 1994 2,613,480 $261,348 $1,833,057 $10,506,929 $(5,388,251) $(138,316) $ 7,074,767
Net income -- -- -- 1,388,940 -- -- 1,388,940
Payment of $.10 per share cash dividend -- -- -- (112,725) -- -- (112,725)
Amortization of deferred compensation -- -- -- -- -- 54,505 54,505
Exercise of stock options 37,000 3,700 104,685 -- -- -- 108,385
Purchase of treasury stock -- -- -- -- (31,827) -- (31,827)
Stock option compensation grants -- -- 6,060 -- -- -- 6,060
---------- -------- ---------- ----------- ----------- --------- -----------
BALANCE, JUNE 30, 1995 2,650,480 265,048 1,943,802 11,783,144 (5,420,078) (83,811) 8,488,105
Net income -- -- -- 1,609,491 -- -- 1,609,491
Payment of $.10 per share cash dividend -- -- -- (115,826) -- -- (115,826)
Amortization of deferred compensation -- -- -- -- -- 54,456 54,456
Exercise of stock options 28,000 2,800 86,380 -- -- -- 89,180
Purchase of treasury stock -- -- -- -- (28,910) -- (28,910)
---------- -------- ---------- ----------- ----------- --------- -----------
BALANCE, JUNE 30, 1996 2,678,480 267,848 2,030,182 13,276,809 (5,448,988) (29,355) 10,096,496
Net income -- -- -- 692,132 -- -- 692,132
Payment of $.10 per share cash dividend -- -- -- (116,127) -- -- (116,127)
Amortization of deferred compensation -- -- -- -- -- 29,355 29,355
Exercise of stock options 3,500 350 8,575 -- -- -- 8,925
---------- -------- ---------- ----------- ----------- --------- -----------
BALANCE, JUNE 30, 1997 2,681,980 $268,198 $2,038,757 $13,852,814 $(5,448,988) $ -- $10,710,781
========== ======== ========== =========== =========== ========= ===========
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,-----------
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 692,132 $ 1,609,491 $ 1,388,940
Adjustments to reconcile net income to net cash provided by
operating activities-
Stock option compensation -- -- 6,060
Depreciation and amortization 567,271 462,236 406,876
Notes receivable from an officer/stockholder 31,996 31,996 31,996
Amortization of deferred compensation 29,355 54,456 54,505
Deferred income taxes 24,000 (28,000) (124,000)
Changes in assets and liabilities-
Accounts receivable 243,674 (449,488) 210,475
Inventories (587,546) (52,393) (482,511)
Prepaid expenses and other current assets (176,478) 26,742 15,773
Accounts payable 32,802 93,536 20,295
Accrued expenses (536,477) (102,021) 17,198
----------- ----------- -----------
Net cash provided by operating activities 320,729 1,646,555 1,545,607
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (655,045) (712,015) (326,639)
Decrease (increase) in other assets 10,078 (95,604) (3,680)
----------- ----------- -----------
Net cash used in investing activities (644,967) (807,619) (330,319)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options 8,925 89,180 108,385
Purchase of treasury stock -- (28,910) (31,827)
Payment of cash dividend (116,127) (115,826) (112,725)
Payments on long-term debt (166,667) (166,667) (166,667)
----------- ----------- -----------
Net cash used in financing activities (273,869) (222,223) (202,834)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (598,107) 616,713 1,012,454
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,878,691 5,261,978 4,249,524
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,280,584 $ 5,878,691 $ 5,261,978
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 58,422 $ 73,606 $ 77,524
=========== =========== ===========
Income taxes $ 946,569 $ 1,035,000 $ 996,531
=========== =========== ===========
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, 1997
(1) OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Sage Laboratories Inc. (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 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) Engineering and New Product Development Expenses
Research and development expenses are charged to operations as
incurred. Research and development expenses of approximately $318,000,
$272,000 and $200,000 were incurred in 1997, 1996 and 1995,
respectively. In 1997, 1996 and 1995, $0, $25,000 and $62,000,
respectively, of the total research and development costs were related
to new product development by SLAM.
F-6
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Continued)
(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 3-10 years
Furniture, fixtures and motor vehicles Straight-line 3-10 years
(e) Warranty Costs
Warranty costs incurred by the Company during each of the three years
in the period ended June 30, 1997 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, 1997 and 1996:
1997 1996
Raw materials and parts $ 813,606 $ 406,581
Work-in-process 943,453 814,776
Finished goods 178,956 127,112
--------------- ---------------
$ 1,936,015 $ 1,348,469
=============== ===============
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.
F-7
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Continued)
(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.
(j) New Accounting Standards
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings
per Share. SFAS No. 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly
held common stock. This statement is effective for fiscal years ending
after December 15, 1997, and early adoption is not permitted. When
adopted, SFAS No. 128 will require restatement of prior years'
earnings per share. The Company will adopt this statement for its
fiscal year ended June 30, 1998. The Company believes that the
adoption of SFAS No. 128, including the effect on prior periods, will
not have a material effect on its financial statements.
(k) Concentration of Credit Risk and Significant Customers
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. Financial
instruments that subject the Company to credit risk consist primarily
of cash and cash equivalents and trade accounts receivable. The
Company places its investments in highly rated financial institutions.
The Company has not experienced any losses on these investments to
date. Accounts receivable of $321,000 or 18% of trade accounts
receivable as of June 30, 1997 were due from one customer, who
accounted for 15% of revenue during fiscal 1997.
No customer accounted for more than 10% of net sales and contract
revenue in fiscal 1996, and two domestic customers accounted for 22%
of revenue in fiscal 1995.
During the years ended June 30, 1997, 1996 and 1995, export sales
accounted for approximately 16%, 20% and 24% of net sales and contract
revenue, respectively.
F-8
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Continued)
(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, 1997 and 1996. Fair values have been determined through
information obtained from market sources and management estimates.
(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 (which approximates fair
market value), consist of the following at June 30:
1997 1996
Cash $ 336,336 $ 24,208
Money market mutual fund 3,828,612 4,795,421
Fixed time deposit 1,115,636 1,059,062
--------------- ---------------
$ 5,280,584 $ 5,878,691
=============== ===============
(3) LINE OF CREDIT
At June 30, 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 Company's option at either the bank's
prime rate (8.5% at June 30, 1997) or 30-, 60-, 90- or 180-day LIBOR (5.72%
to 5.94% at June 30, 1997) plus 1.75%. There were no borrowings under the
line during fiscal 1997.
F-9
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Continued)
(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 (8.5% at June 30, 1997), payable
quarterly through April 2001. The bond is collateralized by land and
buildings.
Maturities of long-term debt are as follows:
Fiscal Year
1998 $ 166,667
1999 166,667
2000 166,667
2001 166,666
-------------
Total $ 666,667
============
(5) INCOME TAXES
The Company follows the provisions of SFAS No. 109, Accounting for Income
Taxes. The provision for income taxes for each of the three years in the
period ended June 30, 1997 consists of the following:
1997 1996 1995
Current-
Federal $ 290,000 $ 813,000 $ 775,000
State 65,000 235,000 239,000
-------------- -------------- -------------
355,000 1,048,000 1,014,000
-------------- -------------- -------------
Deferred (Prepaid)-
Federal 19,000 (22,000) (95,000)
State 5,000 (6,000) (29,000)
-------------- -------------- -------------
24,000 (28,000) (124,000)
-------------- -------------- -------------
$ 379,000 $ 1,020,000 $ 890,000
============== ============== ============
F-10
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Continued)
The provision for income taxes for each of the three years in the period
ended June 30, 1997 is reconciled to the U.S. statutory rate as follows:
1997 1996 1995
Provision at statutory rate $ 364,000 $ 894,000 $ 775,000
Increase (decrease) in income taxes resulting from-
State income taxes, net of federal benefit 46,000 151,000 137,000
Tax benefit of foreign sales corporation (31,000) (25,000) (22,000)
-------------- -------------- -------------
Provision for income taxes $ 379,000 $ 1,020,000 $ 890,000
============== ============== =============
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 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, 1997 and 1996 are
as follows:
1997 1996
Deferred tax assets-
Accruals currently not deductible $ 189,000 $ 210,000
Receivable reserves 25,000 20,000
Inventory reserves 162,000 216,000
-------------- --------------
$ 376,000 $ 446,000
============== ==============
Deferred tax liabilities-
Depreciation $ (115,000) $ (151,000)
Deferred compensation - (13,000)
Other (29,000) (26,000)
-------------- --------------
$ (144,000) $ (190,000)
============== ==============
F-11
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Continued)
(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
1998 $ 23,000
1999 17,000
-----------
Total $ 40,000
===========
Rent expense under the operating lease for the years ended June 30, 1997,
1996 and 1995 was approximately $32,000 , $23,000 and $23,000,
respectively.
(7) 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 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 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, 1997
(Continued)
The following table summarizes incentive stock option activity for the
three years ended June 30, 1997:
Weighted
Average Price
Shares Per Share
Options outstanding, June 30, 1994 73,000 $ 2.81
Exercised (33,000) 2.81
Expired (5,000) 2.90
-------- ------
Options outstanding, June 30, 1995 35,000 2.80
Granted 101,500 20.51
Exercised (25,000) 2.90
-------- ------
Options outstanding, June 30, 1996 111,500 18.89
Granted 171,100 14.17
Exercised (3,500) 2.55
Expired (11,500) 19.78
-------- ------
Options outstanding, June 30, 1997 267,600 $12.95
======== ======
Options exercisable, June 30, 1997 131,868 $12.83
======== ======
The range of actual exercise prices for options outstanding and
options exercisable as of June 30, 1997 was $2.55 to $21.75.
At June 30, 1997, 500,000 shares of common stock were reserved for
issuance under the plan, of which 232,400 were available for
additional grants.
(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 nonemployee
directors and to encourage their ownership of common stock. The Plan
automatically provides for the annual grant of options to purchase
2,500 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 1997, 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, 1997
(Continued)
The following table summarizes directors' stock option activity for
the three years ended June 30, 1997:
Weighted
Average Price
Shares Per Share
Options outstanding, June 30, 1994 5,000 $ 4.35
Granted 3,000 8.08
Exercised (4,000) 4.43
------- ------
Options outstanding, June 30, 1995 4,000 7.07
Granted 10,000 20.00
Exercised (3,000) 6.73
------- ------
Options outstanding, June 30, 1996 11,000 18.92
Granted 7,500 13.25
------- ------
Options outstanding, June 30, 1997 18,500 $16.62
======= ======
Options exercisable, June 30, 1997 18,500 $16.62
======= ======
The range of actual exercise prices for options outstanding and
options exercisable as of June 30, 1997 was $8.08 to $20.00
At June 30, 1997, 47,000 shares of common stock were reserved for
issuance under the Plan, of which 28,500 shares were available for
additional grants.
(c) Stock-Based Compensation
The Company accounts for its stock-based compensation under Accounting
Principals Board Opinion No. 25, Accounting for Stock Issued to
Employees. In October 1995, the Financial Accounting Standards Board
issued SFAS No. 123, Accounting for Stock-Based Compensation, which is
effective for fiscal years beginning after December 15, 1995. SFAS No.
123 establishes a fair-value-based method of accounting for
stock-based compensation plans. The Company has adopted the
disclosure-only alternative under SFAS No. 123, which requires the
disclosure of the pro forma effects on earnings and earnings per share
as if the accounting prescribed by SFAS No. 123 had been adopted, as
well as certain other information.
F-14
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Continued)
The Company has computed the pro forma disclosures required under SFAS
No. 123 for all stock options granted during fiscal 1996 and 1997
using the Black-Scholes option pricing model prescribed by SFAS No.
123.
The assumptions used and the weighted average information for the
years ended June 30, 1997 and 1996 are as follows:
Years Ended
June 30,
1997 1996
Risk-free interest rates 6.73% 5.83%
Expected dividend yield .80% .80%
Expected lives 7 years 7 years
Expected volatility 14% 14%
Weighted-average remaining contractual life of
options outstanding 5.30 years 4.65 years
The effect of applying SFAS No. 123 would be as follows:
1997 1997 1996 1996
As Reported Pro Forma As Reported Pro Forma
Net income $ 692,132 $ 252,377 $ 1,609,491 $ 1,342,464
Net income per share $.59 $.22 $1.38 $1.15
(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 1997, 1996 and
1995, the Board of Directors approved the lapse of restrictions on
10,000 shares in accordance with this agreement. During 1997,
approximately $29,000 was charged to operations as compensation
expense. As of June 30, 1997, the restriction on the final 10,000
shares has lapsed.
F-15
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(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, 1997) 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. On July 3, 1997, the
Company repurchased all 65,000 shares from the relatives estate for
$13.95 per share or a total of $906,420 pursuant to the put provision
of this agreement.
(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 $56,500,
$136,000 and $208,000 in 1997, 1996 and 1995, 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 interest upon retirement or other
termination of employment. Contributions to the plan are determined by
the Board of Directors. The Company contributed approximately
$200,000, $173,000 and $199,000 to this plan in 1997, 1996 and 1995,
respectively.
(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
and $122,000 in consulting expense under this agreement during the years
ended June 30, 1996 and 1995, respectively.
F-16
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Continued)
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 in expense under this agreement during the years ended
June 30, 1997, 1996 and 1995. The Company's future commitment under the
noncompete agreement is as follows:
Fiscal Year
1998 $ 80,000
1999 13,000
-------------
$ 93,000
=============
(10) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table presents a summary of quarterly results of operations
for the years ended June 30, 1997 and 1996.
1997
First Quarter Second Quarter Third Quarter Fourth Quarter
Net sales and contract revenues $ 1,864,089 $ 2,702,379 $ 2,177,710 $ 2,189,451
Gross profit 753,314 1,252,711 708,901 664,211
Net income 168,567 358,613 87,614 77,338
Net income per common and common $ .14 $ .30 $ .08 $ .07
equivalent share
1996
First Quarter Second Quarter Third Quarter Fourth 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 $ .16 $ .30 $ .36 $ .56
equivalent share
F-17