SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended December 27, 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 December 27, 1997, the Company had outstanding 1,081,765 shares of common
stock, $.10 par value, which is its only class of stock.
PART 1 - FINANCIAL INFORMATION
COMPANY GROUP OF COMPANIES FOR WHICH REPORT IS FILED:
SAGE LABORATORIES, INC. AND SUBSIDIARIES
Item I - Financial Statements
(Unaudited)
A. Statements of Income
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------------
Dec. 27, Dec. 28, Dec. 27, Dec. 28,
-------- -------- -------- --------
1997 1996 1997 1996
---- ---- ---- ----
NET SALES AND CONTRACT REVENUES $ 2,332,115 $ 2,702,379 $ 4,678,136 $ 4,566,469
COST OF SALES AND CONTRACT COSTS 1,260,131 1,360,222 2,648,547 2,452,794
ENGINEERING AND NEW PRODUCT DEVELOPMENT COSTS 120,987 89,446 190,126 107,650
----------- ----------- ----------- -----------
Gross Profit 950,997 1,252,711 1,839,463 2,006,025
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 814,423 721,107 1,484,570 1,256,983
----------- ----------- ----------- -----------
Operating Income 136,574 531,604 354,893 749,042
INTEREST INCOME 50,372 68,024 112,242 140,664
INTEREST EXPENSE (11,670) (14,489) (23,703) (29,278)
INCOME ON RENTAL PROPERTY 21,583 14,474 35,952 26,752
----------- ----------- ----------- -----------
Income before provision for income taxes 196,859 599,613 479,384 887,180
PROVISION FOR INCOME TAXES:
Federal 62,000 185,000 138,000 272,000
State 13,000 56,000 41,000 88,000
=========== =========== =========== ===========
Net Income $ 121,859 $ 358,613 $ 300,384 $ 527,180
=========== =========== =========== ===========
NET INCOME PER SHARE:
Basic $ 0.11 $ 0.31 $ 0.28 $ 0.45
=========== =========== =========== ===========
Diluted $ 0.11 $ 0.30 $ 0.27 $ 0.45
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 1,081,765 1,161,265 1,087,765 1,161,265
=========== =========== =========== ===========
Diluted 1,088,266 1,191,574 1,095,186 1,181,389
=========== =========== =========== ===========
DIVIDENDS PAID $ 0 $ 0 $ 108,176 $ 116,127
=========== =========== =========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
SAGE LABORATORIES, INC. AND SUBSIDIARIES
B. CONSOLIDATED BALANCE SHEETS
DECEMBER 27, 1997 and JUNE 30, 1997
(Unaudited)
ASSETS Dec. 27, 1997 June 30, 1997
------------- -------------
CURRENT ASSETS:
Cash & cash equivalents $ 4,142,767 $ 5,280,584
Accounts receivable, net of reserve of approximately
$68,000 at Dec. 27, 1997 and $62,000 at June 30, 1997 2,008,568 1,749,778
Inventories 2,280,594 1,936,015
Prepaid expenses and other current assets 302,802 661,883
----------- -----------
Total current assets 8,734,731 9,628,260
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land, buildings, and improvements 4,208,565 4,191,088
Machinery & laboratory equipment 2,326,663 2,180,492
Furniture, fixtures, and motor vehicles 722,979 691,192
----------- -----------
7,258,207 7,062,772
Less--Accumulated depreciation and amortization 4,162,527 3,869,877
----------- -----------
3,095,680 3,192,895
----------- -----------
OTHER ASSETS:
Notes receivable from an officer/stockholder 10,870 23,047
Other assets 139,914 151,457
----------- -----------
Total other assets 150,784 174,504
----------- -----------
$11,981,195 $12,995,659
=========== ===========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current maturities of long-term debt $ 166,667 $ 166,667
Accounts payable 485,757 427,022
Accrued expenses
Compensation 556,512 635,297
Commission 149,998 155,701
Other 317,027 256,191
----------- -----------
Total current liabilities 1,675,961 1,640,878
----------- -----------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 416,666 500,000
----------- -----------
DEFERRED INCOME TAXES 144,000 144,000
----------- -----------
STOCKHOLDERS' INVESTMENT
Common stock, .$10 par value--
Authorized--10,000,000 shares
Issued--2,681,980 shares at Dec 27, 1997 and
June 30, 1997 268,198 268,198
Capital in excess of par value 2,038,757 2,038,757
Retained earnings 14,045,021 13,852,814
----------- -----------
16,351,976 16,159,769
Less-
Cost of 1,600,215 shares of treasury stock at
Dec. 27, 1997 and 1,517,215 at June 30, 1997 6,607,408 5,448,988
----------- -----------
Total stockholders' investment 9,744,568 10,710,781
----------- -----------
$11,981,195 $12,995,659
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements
SAGE LABORATORIES, INC. AND SUBSIDIARIES
C. CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
Dec. 27, 1997 Dec. 28, 1996
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 300,384 $ 527,180
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation & Amortization 292,650 311,781
Notes receivable from an officer/stockholder 12,177 12,177
Amortization of deferred compensation -- 27,228
Changes in assets & liabilities-
Accounts receivable (258,790) (139,091)
Inventories (344,579) (236,057)
Prepaid expenses & other current assets 359,081 (12,338)
Accounts payable 58,735 (23,653)
Accrued expenses (23,652) (368,520)
----------- -----------
Net cash provided by operating activities 396,006 98,707
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant, & equipment, net (195,435) (371,794)
(Increase) decrease in other assets 11,543 (67,183)
----------- -----------
Net cash used in investing activities (183,892) (438,977)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (1,158,420) --
Payment of cash dividend (108,177) (116,127)
Payments on long-term debt (83,334) (83,332)
----------- -----------
Net cash used in financing activities (1,349,931) (199,459)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,137,817) (539,729)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,280,584 5,878,691
=========== ===========
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,142,767 $ 5,338,962
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (refunded) during the period for--
Interest $ 24,720 $ 29,273
=========== ===========
Income taxes $ (25,308) $ 583,000
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 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 six month periods ended December 27,
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 expenses 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:
Dec. 27, June 30,
-------- --------
1997 1997
---- ----
Raw materials and parts $ 798,584 $ 813,606
Work-in-process 1,313,364 943,453
Finished goods 168,646 178,956
---------- ----------
$2,280,594 $1,936,015
========== ==========
Work-in-process and finished goods include material, labor and manufacturing
overhead.
(3) Net Income Per Common Share
On March 31, 1997, the Financial Accounting Standards Board issued SFAS
No.128, Earnings Per Share. SFAS No.128 establishes standards for computing and
presenting earnings per share (EPS) and applies to entities with publicly held
common stock or potential common stock. During the second quarter ended December
27, 1997, the Company adopted SFAS No.128 and is now required to report both
basic and diluted earnings per share. Basic EPS is computed by dividing net
income by the weighted average number of common shares outstanding during the
period. Diluted EPS reflects the potential dilution from common stock
equivalents (stock options). The Company has restated earnings per share for the
comparative prior periods for fiscal 1997 as required by SFAS No.128.
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997
D. Management's Discussion and Analysis of Quarterly Income Statement
Three Months Ended December 27, 1997 and December 28, 1996
For the three months ended December 27, 1997, the Company realized net income of
approximately $122,000, or $.11 per diluted share, on sales of $2,332,000. This
compares with net income of approximately $359,000, or $.30 per diluted share,
on sales of $2,702,000 for the same period a year ago.
Total net sales for the three months ended December 27, 1997 decreased by
approximately $370,000, or 14%, compared to the same period a year ago. Sage
Laboratories Active Microwave, Inc. (SLAM) recorded sales of $181,000 for the
quarter, as compared with $158,000 for the same period a year ago. The decrease
total in sales is mostly attributable to difficulties experienced with certain
engineering programs, which are currently being resolved. Also contributing to
the decrease is a decrease of $90,000 in adaptable or reorderable items. Both
these decreases were partially offset by increased catalog sales of
approximately $213,000. Orders received in the second quarter totaled
$2,666,000, including $547,000 from SLAM. This compares with $2,172,000,
including $138,000 from SLAM, for the same period a year ago. The Company's
backlog as of December 27, 1997 was $4,981,000, including $885,000 from SLAM.
This compares to $4,044,000, including $298,000 from SLAM a year ago.
Gross profit as a percentage of sales was approximately 41% for the three months
ended December 27, 1997, as compared to approximately 46% for the same period a
year ago. The decrease in gross margin was primarily attributable to
significantly reduced margins on engineered items and increased research and
development costs of approximately $32,000.
Selling, General and Administrative expenses (S G & A) as a percentage of sales
was 35% for the quarter ended December 27, 1997, compared to 27% for the same
period a year ago. S G & A expenses increased by $93,000. Selling expenses
increased by $26,000 due to additions of personnel. G & A expenses increased by
$67,000 primarily due to increased salaries and related items, including
increased staff in accounting and administration.
Interest income for the three months ended December 27, 1997 decreased by
approximately $18,000 from the same period a year ago. This decrease is
attributable to reductions in cash available for investing.
Interest expense for the period ended December 27, 1997 decreased by
approximately $3,000, due to scheduled principal reductions on outstanding
obligations.
The Company's rental property continues to be fully leased. Profit on rental
property increased by $7,000 to $22,000 for the period ended December 27, 1997,
as compared to the same period a year ago.
The Company's net book value of property held for rent (including renovations)
at December 27, 1997 and December 28, 1996 is as follows:
1997 1996
---- ----
3 Huron Drive (old facility) $388,016 $462,314
11 Huron Drive (rented portion) 242,194 259,822
-------- --------
Total $630,210 $722,136
======== ========
Federal and state income taxes for the three months ended December 27, 1997, and
December 28, 1996 were provided at their respective statutory rates.
SAGE LABORATORIES, INC. AND SUBSIDIARIES
December 27, 1997
Six Months Ended December 27, 1997 and December 28, 1996
For the six months ended December 27, 1997, the Company realized net income of
$300,000, or $.27 per diluted share, on sales of $4,678,000. This compared with
net income of $527,000, or $.45 per diluted share, on sales of $4,566,000 for
the same period a year ago.
Net sales for the six months ended December 27, 1997 increased by $112,000, or
2% compared to the same period a year ago. SLAM recorded sales of $318,000 for
the six months, as compared with $313,000 for the same period a year ago. The
increase in total sales is due to increases in catalog and adaptable or
reorderable sales items, offset by decreased revenues from engineered items.
Total orders received were $4,200,000, including $607,000 from SLAM, for the
first six months of fiscal 1998, as compared to $4,017,000, including $343,000
from SLAM, for the same period a year ago.
Gross profit as a percentage of sales was approximately 39% for the six months
ended December 27, 1997, as compared to approximately 44% for the same period a
year ago. The decrease in gross profit is primarily attributable to reduced
margins earned on certain engineering programs. Also contributing is an increase
in research and development expense of $82,000. For the six months ended
December 27, 1997, gross profit at SLAM was $47,000, as compared to a negative
gross profit of $47,000 for the same period a year ago.
S G & A as a percentage of sales was 32% for the six months ended December 27,
1997, compared to 28% for the same period a year ago. S G & A expense increased
by $228,000. Sales and marketing expenses increased by $69,000 due to increases
in commission expense, marketing efforts and sales staff. Commissions increased
by $34,000, primarily due to higher commission rates paid on lower volumes per
sale. G & A increased by $159,000 primarily due to increased salaries and
related items, including increased staff in accounting and administration.
Interest income for the six months ended December 27, 1997 decreased by
approximately $28,000 from the same period a year ago. This decrease is due to a
lower average cash position.
Interest expense for the six months ended December 27, 1997 decreased by $6,000,
due to scheduled principal reductions in outstanding obligations.
The Company recorded a profit of approximately $36,000 from rental property for
the six months ended December 28, 1997 as compared to a profit of $27,000 for
the same period a year ago.
Federal and State income taxes for the six months ended December 27, 1997 and
December 28, 1996 were provided at their respective statutory rates.
Liquidity and Capital Resources
For the six months ended December 27, 1997 operating activities generated cash
of $396,000, an increase of $297,000 from the six months ended December 28,
1996. Cash used in investing activities amounted to $184,000 and $439,000
respectively, while cash used for financing activities was $1,350,000 and
$199,000, 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 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.
SAGE LABORATORIES, INC. AND SUBSIDIARIES
DECEMBER 27, 1997
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 1998 will be approximately $500,000 and
that no outside funding will be required.
During the six months ended December 27, 1997, the Company purchased 83,000
shares of its stock at a cost of $1,158,420, at an average price of $13.96 per
share. The purchase of 65,000 shares was made pursuant to the put provision of a
put-and-call agreement with a relative of the former chairman of the Company's
Board of Directors, and the remaining balance of 18,000 shares were acquired on
the open market.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings: None
2. Changes in Securities: None
3. Defaults upon Senior Securities: None
4. Submission of Matters to a Vote of Security Holders: At the annual
meeting of stockholders held on November 11, 1997, the following
matter was submitted to votes of the stockholders: To approve the
adoption of the corporation's 1997 Incentive Stock Option Plan
(297,727 shares voted in favor of the adoption and 45,195 shares voted
"against", 121,175 shares abstained, and there were 219,322 broker
non-votes).
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: February 4, 1998 SAGE LABORATORIES, INC. AND SUBSIDIARIES
/S/ Carl A. Marguerite
-----------------------------
(Principal executive officer;
principal financial officer)