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 March 28, 1998 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__[GRAPHIC OMITTED] No_________ On March 28, 1998, the Company had outstanding 1,085,265 shares of common stock, $.10 par value, which is its only class of stock. PART 1 - FINANCIAL INFORMATION SAGE LABORATORIES, INC. AND SUBSIDIARIES Item I - Financial Statements A. Statements of Income For the Three Months Ended For the Nine Months Ended Mar. 28, Mar. 29, Mar. 28, Mar. 29, 1998 1997 1998 1997 ---- ---- ---- ---- NET SALES AND CONTRACT REVENUES $ 2,660,485 $ 2,177,710 $ 7,338,621 $ 6,744,179 COST OF SALES AND CONTRACT COSTS 1,631,549 1,377,219 4,280,096 3,830,015 ENGINEERING AND NEW PRODUCT DEVELOPMENT COSTS 149,462 91,590 339,588 199,241 ----------- ----------- ----------- ----------- Gross Profit 879,474 708,901 2,718,937 2,714,923 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 846,359 682,410 2,330,929 1,939,396 ----------- ----------- ----------- ----------- Operating Income 33,115 26,491 388,008 775,527 INTEREST INCOME 49,497 64,664 161,739 205,327 INTEREST EXPENSE (13,300) (13,759) (37,003) (43,037) INCOME ON RENTAL PROPERTY 25,215 16,218 61,167 42,970 ----------- ----------- ----------- ----------- Income before provision for income taxes 94,527 93,614 573,911 980,787 PROVISION FOR INCOME TAXES: Federal 24,000 (5,000) 162,000 267,000 State 3,000 11,000 44,000 99,000 ----------- ----------- ----------- ----------- Net Income $ 67,527 $ 87,614 $ 367,911 $ 614,787 =========== =========== =========== =========== NET INCOME PER SHARE: Basic $ 0.06 $ 0.08 $ 0.34 $ 0.53 =========== =========== =========== =========== Diluted $ 0.06 $ 0.07 $ 0.34 $ 0.52 =========== =========== =========== =========== WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: Basic 1,082,932 1,161,265 1,086,154 1,161,265 =========== =========== =========== =========== Diluted 1,089,217 1,176,788 1,092,965 1,172,927 =========== =========== =========== =========== DIVIDENDS PAID $ -- $ -- $ 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 MARCH 28, 1998 and JUNE 30, 1997 ASSETS March 28, 1998 June 30, 1997 -------------- ------------- CURRENT ASSETS: Cash & cash equivalents $ 4,454,121 $ 5,280,584 Accounts receivable, net of reserve of approximately $68,000 in 1998 and $62,000 in 1997 1,801,409 1,749,778 Inventories 2,247,706 1,936,015 Prepaid expenses and other current assets 491,696 661,883 ----------- ----------- Total current assets 8,994,932 9,628,260 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT, AT COST: Land, buildings, and improvements 4,213,450 4,191,088 Machinery & laboratory equipment 2,508,146 2,180,492 Furniture, fixtures, and motor vehicles 739,279 691,192 ----------- ----------- 7,460,875 7,062,772 Less--Accumulated depreciation and amortization 4,308,837 3,869,877 ----------- ----------- 3,152,038 3,192,895 ----------- ----------- OTHER ASSETS: Notes receivable from an officer/stockholder -- 23,047 Other assets 130,614 151,457 ----------- ----------- Total other assets 130,614 174,504 ----------- ----------- $12,277,584 $12,995,659 =========== =========== LIABILITIES AND STOCKHOLDERS' INVESTMENT CURRENT LIABILITIES: Current maturities of long-term debt $ 166,667 $ 166,667 Accounts payable 375,644 427,022 Accrued expenses Taxes other than federal income taxes 59,677 -- Federal Income Taxes 161,847 -- Compensation 793,154 635,297 Commission 138,720 155,701 Other 283,522 256,191 ----------- ----------- Total current liabilities 1,979,231 1,640,878 ----------- ----------- LONG-TERM DEBT, NET OF CURRENT MATURITIES 333,333 500,000 ----------- ----------- DEFERRED INCOME TAXES 144,000 144,000 ----------- ----------- STOCKHOLDERS' INVESTMENT Common stock, .$10 par value-- Authorized--10,000,000 shares Issued--2,685,480 shares in 1998 and 2,681,980 in 1997 268,548 268,198 Capital in excess of par value 2,047,332 2,038,757 Retained earnings 14,112,548 13,852,814 ----------- ----------- 16,428,428 16,159,769 Less- Cost of 1,600,215 shares of treasury stock in 1998 and 1,517,215 in 1997 6,607,408 5,448,988 ----------- ----------- Total stockholders' investment 9,821,020 10,710,781 ----------- ----------- $12,277,584 $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 For the Nine Months Ended Mar. 28, 1998 Mar. 29, 1997 ------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 367,911 $ 614,787 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation & amortization 438,960 467,573 Amortization of deferred compensation -- 29,355 Changes in assets & liabilities- Accounts receivable (51,631) 278,035 Inventories (311,691) (302,665) Prepaid expenses & other current assets 170,187 (200,314) Accounts payable (51,378) 2,863 Accrued expenses 389,731 (496,351) ----------- ----------- Net cash provided by operating activities 952,089 393,283 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant, & equipment, net (398,103) (655,621) Decrease (increase) in other assets 20,843 (18,112) ----------- ----------- Net cash used in investing activities (377,260) (673,733) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes receivable from an officer/stockholder 23,047 31,966 Exercise of stock options 8,925 -- Purchase of treasury stock (1,158,420) -- Payment of cash dividend (108,177) (116,127) Payments on long-term debt (166,667) (124,999) ----------- ----------- Net cash used in financing activities (1,401,292) (209,130) ----------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (826,463) (489,580) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,280,584 5,878,691 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,454,121 $ 5,389,111 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for-- Interest $ 46,145 $ 44,195 =========== =========== Income taxes $ 6,758 $ 593,542 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. SAGE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 28, 1998 (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 periods ended March 28, 1998 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: March 28, June 30, 1998 1997 ---------- ---------- Raw materials and parts $ 601,602 $ 813,606 Work-in-process 1,219,453 943,453 Finished goods 426,651 178,956 ---------- ---------- $2,247,706 $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 third quarter ended March 28, 1998, 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 MARCH 28, 1998 For the For the Three Months Ended Nine Months Ended ------------------------------ ------------------------------ March 28 March 29 March 28 March 29 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Net Income $ 67,527 $ 87,614 $ 367,911 $ 614,787 Weighted Average Common Shares Outstanding 1,082,932 1,161,865 1,086,154 1,161,265 Dilutive Effect of Stock Options Outstanding 6,285 15,523 6,811 11,662 ---------- ---------- ---------- ---------- Weighted Average Common and Common Equivalent Shares Outstanding 1,089,217 1,176,788 1,092,965 1,172,927 ========== ========== ========== ========== Diluted Earnings Per Share $ 0.06 $ 0.07 $ 0.34 $ 0.52 ========== ========== ========== ========== Not included in the calculation of diluted earnings per share are 187,666 options for the quarter and 177,666 options for the nine months, because they are antidiluted. D. Management's Discussion and Analysis of Quarterly Income Statement Three Months Ended March 28, 1998 and March 29, 1997 For the three months ended March 28, 1998, the Company realized net income of $67,527, or $.06 per diluted share, on net sales of approximately $2,660,000. This compares with net income of $87,614, or $.07 per diluted share, on net sales of approximately $2,178,000 for the same period a year ago. Total net sales for the three months ended March 28, 1998 increased by $482,000, or 22%, compared to the same period a year ago. Sage Laboratories Active Microwave, Inc. (SLAM) recorded sales of $288,000 for the quarter, as compared with $144,000 for the same period a year ago. The increase in sales is mostly attributable to increased engineered product sales of $517,000, offset by decreases in catalog and adaptable or reorderable items of $35,000. Orders received in the third quarter totaled $3,429,000, including $49,000 from SLAM. This compares with $3,343,000, including $352,000 from SLAM, for the same period a year ago. The Company's backlog as of March 28, 1998 was $5,751,000, including $652,000 from SLAM. This compares to $5,202,000, including $504,000 from SLAM a year ago. Gross profit as a percentage of sales was approximately 33% for both the three months ended March 28, 1998, and the same period a year ago. Selling, General and Administrative expenses (S G & A) as a percentage of sales was 32% for the quarter ended March 28, 1998, compared to 31% for the same period a year ago. S G & A expenses increased by approximately $164,000. Selling expense decreased by approximately $28,000. This decrease was due to a decrease in commission expense of approximately $9,000 and decreases in sales salaries and related items for the quarter. G & A expense increased by approximately $192,000, primarily due to a one time charge of $258,000 associated with the termination of the Company's former president, offset by other decreases in salaries and related items. SAGE LABORATORIES, INC. AND SUBSIDIARIES MARCH 28, 1998 Interest income for the three months ended March 28, 1998 decreased by approximately $15,000 from the same period a year ago. This decrease is attributable to reductions in cash available for investing. Interest expense for the period ended March 28, 1998 was approximately the same as the same period a year ago. The Company's rental property continues to be fully leased. Profit on rental property increased by $8,997 to approximately $25,000 for the period ended March 28, 1998, as compared to the same period a year ago. The Company's net book value of property held for rent (including renovations) at March 28, 1998 and March 29, 1997 is as follows: 1998 1997 ---- ---- 3 Huron Drive (old facility) $373,966 $442,814 11 Huron Drive (rented portion) 237,118 250,171 -------- -------- Total $611,084 $692,985 ======== ======== Nine Months Ended March 28, 1998 and March 29, 1997 For the nine months ended March 28, 1998, the Company realized net income of $367,911, or $.34 per diluted share, on sales of approximately $7,339,000. This compared with net income of $614,787, or $.52 per diluted share, on sales of approximately $6,744,000 for the same period a year ago. Net sales for the nine months ended March 28, 1998 increased by approximately $595,000, or 9%, compared to the same period a year ago. SLAM recorded sales of $605,000 for the nine months, as compared with $457,000 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 $7,629,000, including $656,000 from SLAM, for the first nine months of fiscal 1998, as compared to $7,351,000, including $695,000 from SLAM, for the same period a year ago. Gross profit as a percentage of sales was approximately 37% for the nine months ended March 28, 1998, as compared to approximately 40% for the same period a year ago. The decrease in gross profit percentage is primarily attributable to reduced margins earned on certain engineering programs, and to an increase in research and development expense of $140,000. For the nine months ended March 28, 1998, gross profit at SLAM was $116,000, as compared to a negative gross profit of $57,000 for the same period a year ago. S G & A as a percentage of sales was 32% for the nine months ended March 28, 1998, compared to 29% for the same period a year ago. S G & A expense increased by $392,000. Selling expense increased by approximately $40,000. This increase is primarily due to increased commission expense of $25,000 attributed to increased sales, and marketing expense of $15,000. G & A expense increased by approximately $351,000, mainly due to a one time charge of $258,000 associated with the termination of the Company's former president and increases in salaries and related items, including increased accounting and administrative staff. Interest income for the nine months ended March 28, 1998 decreased by approximately $44,000 from the same period a year ago. This decrease is due to a lower average cash position. Interest expense for the nine months ended March 28, 1998 decreased by $6,000, due to scheduled principal reductions in outstanding obligations, offset by interest assessed on prior year tax returns. The Company recorded a profit of approximately $61,000 from rental property for the nine months ended March 28, 1998 as compared to a profit of $43,000 for the same period a year ago. SAGE LABORATORIES, INC. AND SUBSIDIARIES MARCH 28, 1998 Federal and State income taxes for the nine months ended March 28, 1998 and March 29, 1997 were provided at their respective statutory rates. Liquidity and Capital Resources For the nine months ended March 28, 1998 operating activities generated cash of $952,000, an increase of $559,000 from the nine months ended March 29, 1997. Cash used in investing activities for the nine months ended March 28, 1998 and March 29, 1997, amounted to $377,000 and $674,000 respectively, while cash used for financing activities was $1,401,000 and $209,000, 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. 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 nine months ended March 28, 1998, 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: 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 11, 1998 SAGE LABORATORIES, INC. AND SUBSIDIARIES /S/ Carl A. Marguerite --------------------------------------- (Principal executive officer; principal financial officer)