Item 1. Business.
General Description and History of the Company
Sage Laboratories, Inc. (the "Company") is engaged primarily in the design, manufacture and sale of specialized microwave components and subsystems. These products are used in applications such as cellular base stations, point-to-point radio links, satellite communications, aircraft landing and guidance, medical diagnostics and treatment, radar and weapons guidance. The types of products designed and manufactured by Sage are required in each of the basic systems described herein.
Microwaves have an extremely high frequency and short wave length. A sharp beam of microwave energy can readily be shaped, focused, concentrated, reflected, and transmitted in a straight line over infinite distances.
The Company operates exclusively within a single industry (S.I.C. #3829) for the purposes of Statement of Financial Accounting Standards No. 14 and Regulation S-K.
The Company has engaged in no transactions or activities outside the ordinary course of business since June 30, 1995.
The Company's Microwave Products
The amounts of total sales and revenues, operating income and the total value of assets attributable to the Company's microwave products in the last three fiscal years are as follows:
(IN THOUSANDS) Fiscal year ended June 30: 1994 1995 1996 ----------------------------
Amount of total sales and revenues $8,167 $9,154 $9,769
Amount of operating income $1,862 $2,158 $2,341
Total assets (year end) $10,359 $11,611 $13,028
The Company's RF/microwave technology is used in components and integrated assemblies to divide, couple, absorb, attenuate, filter, control, amplify, detect, process, convert RF/microwave energy. Its products are suitable for all types of commercial and defense applications, including radar, electronic warfare, surveillance, and communications systems.
The Company's line of passive microwave devices is extensive, ranging from caseless hybrids which are used in high volume production of commercial cellular and wireless products to sophisticated integrated assemblies which switch, divide, filter and control signals in high performance, space-qualified satellite communications systems. Caseless wireline hybrids, switches rotary joints, phase shifters, filters, couplers, power dividers and subsystems have been among the Company's most important passive components in recent years.
The Company's standard passive components can be sold from the shelf without special engineering, and such components are the Company's most profitable products. The Company also negotiates fixed price contracts for the sale of passive components meeting particular specifications and requiring varying degrees of engineering design and development. The profit margin on contracts involving heavy engineering content is lower than on standard items, but such work often results in a product which may be reordered or which can be adapted to other purposes with little additional engineering and can therefore be sold at a higher profit margin. Total sales and contract revenue contributed by the sale of traditional passive components during the last three fiscal years are as follows:
(IN THOUSANDS) Fiscal year ended June 30: 1994 1995 1996 -------------------------------- Catalog items $2,044 $2,101 $2,889 Adaptable or reorderable items 4,283 5,281 3,932 Engineered items 1,690 1,542 2,251 Other 150 113 321 --------------------------------- Total $8,167 $9,037 $9,393 =================================
In addition to passive components, semi-conductor based "active" components are also needed in microwave systems to amplify, detect, control, convert, modulate, demodulate and otherwise process RF/microwave signals. The Company developed the capacity to produce active microwave components through the formation of a wholly-owned subsidiary, Sage Laboratories Active Microwave, Inc. ("SLAM"), a New Hampshire corporation, during the second half of fiscal 1994.
Active components are used in all types of commercial and defense systems, including radar, electronic warfare, surveillance, and communications. SLAM uses modern solid-state circuit technology in the design and manufacture of microwave mixers, detectors, switches, limiters, variable attenuators, amplifiers, and complex integrated assemblies consisting of active and passive components. SLAM offers a standard catalog line of solid-state microwave products, as well as the capability to produce custom products designed to meet particular customer specifications. SLAM revenue for fiscal year 1996 and 1995 amounted to $375,000 and $117,000 respectively.
Sources and Availability of Raw Materials
The Company obtains raw materials from a wide variety of suppliers with alternative sources available for all essential materials with reasonable lead time. There is no dependence on foreign sources and no relationship with important suppliers.
Principal Markets and Distribution
The Company's microwave products are sold principally through a group of 40 independent representatives with 54 offices located throughout the United States and abroad. Their efforts are directed by the Company's Vice President of Sales and Sales Manager. Catalogs of standard items, advertising in trade publications, trade shows and periodic visits to customers by the Company's officers and engineers supplement the work of the representatives. The microwave products are principally used in communications and radar applications in the commercial and defense markets.
Importance, Duration and Effect of Patents, Trademarks, Licenses, Franchises and Concessions
The Company holds various patents, but does not believe such patents to be material to the Company's business. There are no material trademarks, licenses, franchises or concessions.
Competition
Many companies manufacture microwave products similar to those of the Company, some larger and with greater financial resources than the Company. The Company's experience to date indicates that competition has related primarily to delivery, price and performance.
Backlog and Customers
The Company's backlog of orders believed to be firm for microwave products was $4,602,000 as of June 30, 1996, as compared to $4,683,000 as of June 30, 1995. All of the June 30, 1996 backlog is expected to be filled during the current fiscal year. There is no seasonality to the backlog or to the business in general.
The Company has not relied on a single customer or a small group of customers for a substantial proportion of its sales of microwave products, though at any given time one or more large orders or contracts may represent a high percentage of the backlog. During the fiscal year ended June 30, 1996, components were sold to approximately 408 customers.
Practices Relating to Working Capital
There are no special practices followed by the Company relating to working capital.
Personnel
As of June 30, 1996, the Company employed 51 people, seven of which are employed by SLAM. The Company also utilized temporary employees throughout the year. Twenty three of the Company's employees are engineers or other technically trained people and the balance are engaged in production, administrative and sales activities.
Research and Development
The Company conducts various research and development activities under which expenditures of approximately $272,000, $200,000 and $199,000 (including overhead) were made in each of fiscal 1996, 1995 and 1994, respectively.
Export Sales
Approximately 20% of the Company's revenues for fiscal year 1996 were attributable to export sales. While competition abroad is generally more intense, the profitability and attendant risks of sales are not materially different from those of the balance of the Company's business. Total export sales for the fiscal years ended June 30, 1996, 1995 and 1994 were $1,954,000, $2,184,000 and $1,756,000, respectively.
Executive Officers of the Registrant
The following table sets forth information concerning the Company's executive officers as of the date hereof. Each officer is elected by the Company's Board of Directors and holds office until the date of the Company's annual meeting of stockholders and until his successor is elected and qualified.
Offices Held and Business Experience Name Age During Past Five Years ---- --- ----------------------
Carl A. Marguerite 56 Chairman, Chief Executive Officer (President until 1996) and Director of the Company
Louis J. Lanzillo, Jr. 38 President, Chief Operating Officer and Director of the Company
Anthony J. Cieri 65 Vice President of Sales of the Company.
Janusz J. Majewski 49 Vice President of Engineering of the Company (Director of Engineering until 1996)
Item 2.
Item 2. Properties
In 1985 and 1986, the Company constructed a 30,000 square foot facility to house its offices and principal plant. The facility shares a four acre site in East Natick, Massachusetts with the 25,000 square foot building which formerly served as the Company's plant and offices. The Company moved into its current facility in late August 1986.
The Company occupies approximately 25,000 square feet of its current facility and leases the balance of 5,000 square feet to others. All of the Company's rental property is fully occupied.
SLAM leases approximately 6,000 square feet in Hollis, New Hampshire.
The cost of the Company's machinery and equipment owned on June 30, 1996 is approximately $1,753,000. Such machinery and equipment is in good condition and is being used to capacity.
Item 3.
Item 3. Legal Proceedings
There are no material pending legal proceedings affecting the Company or its properties.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
There was nothing submitted during the fourth quarter of fiscal 1996 to a vote of the Company's security holders.
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
The Company's common stock, $.10 par value (which is the Company's only class of equity securities), is listed with the NASDAQ system for trading in the over-the-counter market. The quarterly high and low bid prices for the Company's common stock for the last two fiscal years as reported on NASDAQ were as follows:
1996 1995 ------------------ ------------------ High Low High Low ---- --- ---- --- First Quarter 23 11 4/5 10 3/10 7 4/5
Second Quarter 22 18 1/10 10 1/5 8 4/5
Third Quarter 20 1/4 14 3/4 9 3/5 8 9/10
Fourth Quarter 18 3/4 15 1/8 12 9 3/5
These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. There were approximately 249 holders of record of the Company's outstanding common stock on June 30, 1996.
The Company paid cash dividends in October of 1994 and 1995 in the amount of 10 cents per share. On September 4, 1996, the Company's Board of Directors declared a cash dividend in the amount of ten cents per share payable on October 11, 1996 to holders of record as of September 27, 1996.
Item 6.
Item 6. Selected Financial Data.
The selected financial data called for under this caption is attached to this report as Appendix A.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
1996 Compared to 1995
Net Sales:
Net sales for fiscal 1996 increased by $615,000, or 7%, from fiscal 1995. This increase is due in part to an increase in the Company's core sales of $357,000 and an increase in the Company's subsidiary, Sage Laboratories Active Microwave, Inc. (SLAM) sales of $258,000. This overall increase in sales was primarily the result of an increase in the number and size of orders shipped, as there have been no material increases in the price of the Company's products during fiscal 1996. Orders received in fiscal 1996 totaled $9,708,000, as compared to $10,530,000 for 1995. Total orders included $586,000 from SLAM, compared to $128,000 for the same period a year ago. SLAM's increase in orders is due to growing recognition in the industry. The decline in Sage core orders of approximately $1,280,000 is primarily due to customers' delays in placing orders, as well as certain orders which were received in fiscal 1995 that were not renewed in fiscal 1996 due to programs coming to closure. Although the Company's fourth quarter has historically realized a larger sales volume over other quarters, there is no seasonality to the Company's business. Sales volume is strictly predicated on customers' requirements for delivery.
Gross Profit:
Gross profit as a percentage of sales decreased to approximately 48% in fiscal 1996, as compared to 50% for the same period a year ago. The decrease in gross profit percentage was due to increased research and development expense, as well as increases in cost overruns on Sage core engineering programs, lower profit margins on certain programs, and a negative gross profit attributed to SLAM.
Selling, General and Administrative Expenses:
Selling, General and Administrative Expenses (S G & A) decreased by approximately $59,000 over the same period a year ago. Selling expense increased by approximately $32,000. This increase was primarily due to increased commission expense of approximately $60,000 attributed to increased sales volume offset by a decrease in marketing expense of approximately $28,000. G & A expenses decreased by approximately $90,000, due in part to a decrease of approximately $63,000 in consulting fees associated with the Company's former Chairman of the Board, as well as a decrease in salaries and related items of approximately $30,000.
Interest Income:
Interest income for fiscal year 1996 increased by approximately $108,000 over fiscal year 1995. This increase is due to higher average cash balances, as well as higher interest rates being realized.
Interest Expense:
Interest expense decreased for fiscal year 1996 by $11,000 over the previous year. This decrease is due to decreases in outstanding principal.
Rental Property:
The Company generated a profit of approximately $48,000 from its rental property in fiscal 1996 compared to a modest profit of $6,500 in fiscal 1995. All of the Company's rental property was fully occupied during fiscal 1996. The Company has taken occupancy of approximately 5,000 square feet of space in its corporate headquarters that had previously been leased. This space was converted to a state-of-the-art Clean Room facility and is now occupied by the Company's Commercial switch and high reliability product lines.
The Company's net book value of property held for rent at June 30, 1996 and 1995 is as follows:
1996 1995 ---- ---- 3 Huron Drive (old facility) $501,114 $ 579,112 11 Huron Drive (rental portion of current facility) 283,855* 612,966 ------- ------- Total $784,969 $1,192,078 ======== ==========
*Change due to Company occupying additional space for its commercial switch and high reliability product lines.
Provisions for Federal and State Income Taxes:
Federal and State income tax provisions for fiscal years 1996 and 1995 have been reconciled to the U.S. statutory rate. (See Note No. 5 to Consolidated Financial Statements).
1995 Compared to 1994
Net Sales:
Net sales for fiscal year 1995 increased by approximately $987,000, or 12%, as compared to fiscal year 1994. The increase occurred in all markets, including commercial, government, and space. For the year ended June 30, 1995 commercial business accounted for more than half of total revenues. Sage Laboratories received orders during fiscal 1995 totaling $10,530,000, an increase of $2,870,000, or 37%. Sage Laboratories Active Microwave, Inc. (SLAM) received orders totaling $182,000 during fiscal 1995. Net sales for SLAM totaled $117,000.
Gross Profit:
Gross profit as a percentage of sales decreased from 53% in fiscal 1994, to 50% in fiscal 1995. This decrease is primarily attributable to write-offs of costs associated with a number of engineering programs with very difficult specifications. These program difficulties have been resolved and the programs were shipped in the first quarter of fiscal 1996. Included in the cost of sales was approximately $103,000 of cost overruns of SLAM. Engineering and new product development costs remained consistent with the previous year. Among the new products in development during fiscal year 1995 were a 60-75 Ghz Waveguide Switch, a T-Switch, Top-Through Electromechanical Latching Devices for an SMA Transfer Switch, and cost reduction development of Hybrids, Couplers and Power Dividers for the commercial market. Also developed was a line of surface-mounted couplers. SLAM developed five low-cost/high performance open substrate mixers, a broadband mixer (1-18 Ghz), a matched detector, and a high-power coax limiter. Many of these products are now standard catalog products for SLAM.
Selling, General and Administrative Expenses:
Selling, General and Administrative Expenses (S G & A) as a percentage of sales were 26% for fiscal 1995, as compared to 30% for fiscal 1994. The decrease is mainly attributed to the higher sales volume, as well as a reduction in general and administrative expenses of approximately $150,000. This decrease is comprised of a decrease in salaries and related items, professional expenses, and a reduction in the former Chairman's consulting fees. The decrease in general and administrative expenses was somewhat offset by SLAM's general and administrative expenses, which increased by $43,000, due to a full year of operations.
Sales and Marketing expense increased by $138,000 at SLAM, as 1995 was SLAM's first full year of operation. This was offset by other sales and marketing expense decreases primarily due to lower salaries and related expenses as a result of personnel changes, as well as a reduction in amortization of the Company's catalog, which was fully amortized in fiscal 1994.
Interest Income:
Interest income for fiscal year 1995 increased by approximately $69,000, over fiscal year 1994. This increase is due to a higher cash position, as well as higher interest rates.
Interest Expense:
Interest expense increased for fiscal year 1995 by $10,000 over the previous year. This increase is primarily due to an increase in the prime rate of interest.
Rental Property:
The Company's rental property reported a small profit in fiscal 1995 of $6,500, compared to a loss of $41,000 for fiscal 1994. All of the Company's rental property was leased as of November 1, 1994. As part of its expansion plans in 1996, the Company remodeled 5,000 square feet of this space for its Commercial Switch and high reliability product lines. The Company's net book value of its property held for rent at June 30, 1995 and 1994 is as follows:
1995 1994 ---- ---- 3 Huron Drive (old facility) $ 579,112 $ 597,110 11 Huron Drive (rental portion of current facility) 612,966 665,590 ------- ------- Total $1,192,078 $1,262,700 ========== ==========
Provisions for Federal and State Income Taxes:
Federal and State income tax provisions for fiscal years 1995 and 1994 have been reconciled to the U.S. statutory rate. (See Note No. 5 to Consolidated Financial Statements).
Liquidity and Capital Resources:
For the twelve months ended June 30, 1996 operating activities generated $1,647,000 in cash, an increase of $101,000 over the twelve months ended June 30, 1995. Cash used in investing activities amounted to $808,000 and $330,000 for the twelve months ended June 30, 1996 and 1995, respectively, while cash used for financing activities was $222,000 and $203,000, respectively The details of these activities are provided in the consolidated statements of cash flows. The Company invests its excess cash only in short-term, highly liquid instruments with minimal risk. The Company's new commercial switch product line is expected to generate revenues of approximately $750,000 and incur a gross profit of approximately $138,000 in fiscal 1997. In addition, the Company is expected to increase capital equipment by $290,000 and spend an additional $140,000 to complete its state-of-the-art clean room during the first quarter of fiscal 1997 (occupancy took place in September 1996).
Having only the debt relating to the Company's facility, and with surplus cash, Management believes that the Company will be able to finance its operations and necessary capital expenditures for the foreseeable future.
Although the Company has a $1,000,000 bank line of credit, the Company does not presently intend to use the line.
The Company anticipates that total capital expenditures for fiscal year 1996 will be approximately $700,000. Accordingly, no outside funding will be required.
The foregoing analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements about the Company's new commercial switch product line and the improving performance at SLAM. Inasmuch as the results of these activities depend on numerous factors, including acceptance by third parties, actual results could differ materially from those projected in the forward-looking statements.
Item 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.
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.
Item 10. Directors, Executive Officers, Promoters and Control Persons of the Registrant.
The information called for under this caption is incorporated by reference from the material captioned "Election of Directors" in the proxy statement for the Company's annual meeting of shareholders to be held on November 12, 1996. Additional information required to be reported under this caption may be found in the last paragraph of Item 1 to this report.
Item 11.
Item 11. Management Remuneration.
The information called for under this caption is incorporated by reference from the material captioned "Remuneration of Directors and Executive Officers" in the proxy statement for the Company's annual meeting of shareholders to be held on November 12, 1996.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Managers.
The information called for under this caption is incorporated by reference from the material captioned "Principal Holders of Voting Securities" and "Election of Directors" in the proxy statement for the Company's annual meeting of shareholders to be held on November 12, 1996.
Item 13.
Item 13. Certain Relationships and Transactions
The information called for under this caption is incorporated by reference from the material captioned "Election of Directors" in the proxy statement for the annual meeting of shareholders to be held on November 12, 1996.
Item 14.
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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, "hereunto duly authorized.
SAGE LABORATORIES, INC.
By /s/ Carl A. Marguerite Chairman September 17, 1996 ------------------------- Carl A. Marguerite
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
By /s/ Carl A. Marguerite Chairman, Chief September 17, 1996 ---------------------------- Executive Officer, Carl A. Marguerite Principal Executive Officer, Treasurer and Director
By /s/ Erich P. Ippen Director September 18, 1996 ----------------------------- Erich P. Ippen
By /s/ Louis J. Lanzillo, Jr. Director September 17, 1996 ----------------------------- Louis J. Lanzillo, Jr.
By /s/ John E. Miller Director September 17, 1996 ----------------------------- John E. Miller
By /s/ C. Duncan Soukup Director September 17, 1996 ------------------------------ C. Duncan Soukup
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
List of Financial Statements and Schedules Page Appendix AF-O
Report of Independent Public Accountants
Consolidated Balance Sheets as of June 30, 1996 and June 30, 1995
Consolidated Statements of Income for each of the three fiscal years in the period ended June 30, 1996
Consolidated Statements of Stockholders' Investment for each of the three fiscal years in the period ended June 30, 1996
Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended June 30, 1996
Notes to Consolidated Financial Statements
SAGE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 1996 AND 1995 TOGETHER WITH AUDITORS' REPORT
SAGE LABORATORIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996
PAGE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
CONSOLIDATED BALANCE SHEETS--JUNE 30, 1996 AND 1995
CONSOLIDATED STATEMENTS OF INCOME FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Sage Laboratories, Inc.:
We have audited the accompanying consolidated balance sheets of Sage Laboratories, Inc. (a Massachusetts corporation) and subsidiaries as of June 30, 1996 and 1995, and the related consolidated statements of income, stockholders' investment and cash flows for each of the three years in the period ended June 30, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sage Laboratories, Inc. and subsidiaries as of June 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles.
Boston, Massachusetts August 23, 1996
SAGE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
SAGE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes are an integral part of these consolidated financial statements.
SAGE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
The accompanying notes are an integral part of these consolidated financial statements.
SAGE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996
(1) OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company is engaged primarily in the design, manufacture and sale of specialized components suitable for the transmission, reception, modification and utilization of microwave energy.
The accompanying consolidated financial statements reflect the application of the following major accounting policies.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Sage Laboratories, Inc. (the Company) and its wholly owned subsidiaries, Sage Laboratories Investment Corporation, a Massachusetts securities corporation; Sage Laboratories Active Microwave, Inc. (SLAM), a New Hampshire corporation; and Sage Laboratories Foreign Sales, Inc., a U.S. Virgin Island corporation. All material intercompany transactions and balances have been eliminated in consolidation.
(b) Revenue Recognition
With respect to contracts, the Company recognizes revenue on the basis of shipments by relating the total anticipated costs to total units to be produced and units actually shipped. Contract losses are recorded in total as soon as they can be reasonably anticipated. Product sales are recognized upon shipment.
(c) Research and Development Expenses
Research and development expenses are charged to operations as incurred. Research and development expenses of approximately $272,000, $200,000 and 199,000 were incurred in 1996, 1995 and 1994, respectively. In 1996, 1995 and 1994, $25,000, $62,000 and $119,000, respectively, of the total research and development costs were related to new product development by SLAM.
(d) Depreciation and Amortization
The Company provides for depreciation and amortization by charges to operations to allocate the cost of the assets over their estimated useful lives as follows:
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996
(Continued)
(1) OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(e) Warranty Costs
Warranty costs incurred by the Company during the three years in the period ended June 30, 1996 were not significant, and future warranty costs are not expected to be significant.
(f) Inventories
Inventories, priced at the lower of cost (first-in, first-out) or market, are as follows as of June 30, 1996 and 1995:
1996 1995
Raw materials and parts $ 406,581 $ 335,968 Work-in-process 814,776 863,328 Finished goods 127,112 96,780 ---------- ---------- $1,348,469 $1,296,076 ========== ==========
Work-in-process and finished goods include material, labor and manufacturing overhead.
(g) Net Income per Common and Common Equivalent Share
Net income per common and common equivalent share was computed based on the weighted average number of common shares and common share equivalents outstanding during the year. Common share equivalents consist of dilutive outstanding stock options computed under the treasury stock method. Fully diluted net income per common and common equivalent share has not been presented since the result would not be materially different.
(h) Postretirement and Postemployment Benefits
The Company has no obligations for postretirement or postemployment benefits.
(i) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996
(Continued)
(1) OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(j) New Accounting Standards
The Company will adopt Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, in fiscal 1997. The standard defines a fair value based method of accounting for employee stock options and other stock-based compensation. The compensation expense arising from this method of accounting can be reflected in the financial statements or, alternatively, the pro forma net income and earnings per share effect of the fair value based accounting can be disclosed in the financial footnotes. The Company expects to adopt the disclosure alternative.
(k) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information About Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk, requires disclosure of any significant off-balance sheet and credit risk concentrations. The Company's accounts receivable credit risk is not concentrated within any geographic area and does not represent a significant credit risk to the Company.
During the years ended June 30, 1996, 1995 and 1994, export sales accounted for approximately 20%, 24% and 22% of revenue, respectively. During fiscal 1995, two domestic customers accounted for 22% of revenue. No customer accounted for more than 10% of revenue in fiscal 1996 and 1994.
(l) Fair Value of Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosure of an estimate of the fair value of certain financial instruments. The fair value of financial instruments pursuant to SFAS No. 107 approximated their carrying values at June 30, 1996 and 1995. Fair values have been determined through information obtained from market sources and management estimates.
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996
(Continued)
(2) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents, which are recorded at amortized cost, consist of the following at June 30:
1996 1995
Cash $ 24,208 $ 115,337 Money market mutual fund 4,795,421 3,469,960 Fixed time deposit 1,059,062 1,000,000 Repurchase agreements -- 676,681 ---------- ---------- $5,878,691 $5,261,978 ========== ==========
(3) LINE OF CREDIT
At June 30, 1996, the Company has available an unsecured revolving line of credit of $1,000,000 with a bank, expiring on November 30, 1996. Borrowings under the line bear interest at the borrower's option at either the bank's prime rate (8.25% at June 30, 1996) or 30-, 60-, 90- or 180-day LIBOR (5.5% to 5-3/16% at June 30, 1996) plus 1.75%. There were no borrowings under the line during fiscal 1996.
(4) LONG-TERM DEBT
Long-term debt consists of an Industrial Revenue Bond, payable in quarterly principal installments of $41,667 through April 2001. The bond bears interest at 88.6% of the prime rate (8.25% at June 30, 1996), payable quarterly through April 2001. The bond is collateralized by land and buildings.
Maturities of long-term debt are as follows:
Fiscal Year 1997 $ 166,667 1998 166,667 1999 166,667 2000 166,667 2001 166,664 --------- Total $ 833,332 =========
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996
(Continued)
(5) INCOME TAXES
The Company follows the provisions of SFAS No. 109, Accounting for Income Taxes. The provision for income taxes for the three years ended June 30, 1996 consists of the following:
1996 1995 1994 Current-- Federal $ 813,000 $ 775,000 $ 705,000 State 235,000 239,000 225,000 ---------- ---------- --------- 1,048,000 1,014,000 930,000 ---------- ---------- --------- Deferred (prepaid)-- Federal (22,000) (95,000) (177,000) State (6,000) (29,000) (74,000) ---------- ---------- --------- (28,000) (124,000) (251,000) ---------- ---------- --------- $1,020,000 $ 890,000 $ 679,000 ========== ========== =========
The provision for income taxes for each of the three years in the period ended June 30, 1996 is reconciled to the U.S. statutory rate as follows:
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
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996
(Continued)
(5) INCOME TAXES (Continued)
constituting the deferred tax asset (included in prepaid expenses and other current assets) and the deferred tax liability in the accompanying consolidated balance sheets as of June 30, 1996 and 1995 are as follows:
1996 1995 Deferred tax assets-- Nondeductible accruals $ 210,000 $ 261,000 Receivable reserves 20,000 17,000 Inventory reserves 216,000 157,000 --------- --------- $ 446,000 $ 435,000 ========= =========
Deferred tax liabilities-- Depreciation $(151,000) $(149,000) Deferred compensation (13,000) (34,000) Other (26,000) (24,000) --------- --------- $(190,000) $(207,000) ========= =========
(6) COMMITMENTS
SLAM conducts its operations in leased facilities under an operating lease agreement that expires in March 1999.
Future minimum lease commitments under this operating lease are as follows:
Fiscal Year 1997 $23,000 1998 23,000 1999 17,000 ------- Total $63,000 =======
The Company has the option to terminate this lease during 1997 for a termination fee of $5,000. Rent expense under the operating lease for the years ended June 30, 1996, 1995 and 1994 was approximately $23,000, $23,000 and $3,000, respectively.
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996
(Continued)
(7) STOCKHOLDERS' INVESTMENT
(a) Stock Split
On September 5, 1995, the Board of Directors declared a 5-for-1 stock split, effective December 1, 1995 to stockholders of record on November 14, 1995. In addition, the par value of the Company's common stock was changed from $1.00 to $.10 per share. Stockholders' investment has been restated to give retroactive recognition to both the stock split and change in par value.
(b) Stock Option Plan
The Company has an incentive stock option plan under which key employees may be granted options to purchase common stock at not less than fair market value at the date of grant. Options are exercisable as determined by the compensation committee of the Board of Directors and expire no later than 10 years form the date of grant.
No accounting recognition is given to incentive stock options until they are exercised, at which time the par value is credited to the common stock account, and the difference between the proceeds received and the par value is credited to the capital in excess of the par value account. An employee may exercise an outstanding stock option by delivering to the Company shares of common stock previously acquired by the employee rather than paying cash. The number of shares that the employee must surrender to the Company is equal to the aggregate exercise price of the stock options divided by the fair market value of the Company's common stock on the exercise date.
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996
(Continued)
(7) STOCKHOLDERS' INVESTMENT (Continued)
(b) Stock Option Plan (Continued)
The following table summarizes incentive stock option activity for the three years ended June 30, 1996:
Price Range Shares per Share
Options outstanding, June 30, 1993 111,500 $ 2.55-$ 2.90 Exercised (24,000) 2.55- 2.90 Expired (14,500) 2.65 ------- -------------
Options outstanding, June 30, 1994 73,000 2.55- 2.90 Exercised (33,000) 2.55- 2.90 Expired (5,000) 2.90 ------- -------------
Options outstanding, June 30, 1995 35,000 2.55- 2.90 Granted 101,500 19.78- 21.75 Exercised (25,000) 2.90 ------- -------------
Options outstanding, June 30, 1996 111,500 $ 2.55-$21.75 ======= =============
Options exercisable, June 30, 1996 43,835 $ 2.55-$21.75 ======= =============
At June 30, 1996, 250,000 shares of common stock were reserved for issuance under the plan, of which 138,500 were available for additional grants.
(c) Director Stock Option Plan
The Company has a Director Stock Option Plan (the Plan), the purpose of which is to attract and retain highly qualified nonemployee directors and to encourage their ownership of common stock. The Plan automatically provides for the annual grant of options to purchase 1,000 shares of common stock to each director who is serving on the Board at the time of such grant and who is not also an employee of the Company or any subsidiary. The exercise price of the options was equal to 80% of the fair market value of the shares on the date of the grant. During fiscal 1996, the Plan was amended to provide for the annual automatic grant of 2,500 shares of the Company's common stock to each eligible director at an exercise price equal to 100% of the fair market value of the shares on the date of grant.
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996
(Continued)
(7) STOCKHOLDERS' INVESTMENT (Continued)
(c) Director Stock Option Plan (Continued)
The following table summarizes director's stock option activity for the three years ended June 30, 1996:
Price Range Shares per Share
Options outstanding, June 30, 1993 3,000 $4.04 Granted 3,000 4.56 Exercised (1,000) 4.04 ------ -------------
Options outstanding, June 30, 1994 5,000 4.04- 4.56 Granted 3,000 8.08 Exercised (4,000) 4.04- 8.08 ------ -------------
Options outstanding, June 30, 1995 4,000 4.04- 8.08 Granted 10,000 20.00 Exercised (3,000) 4.04- 8.08 ------ -------------
Options outstanding, June 30, 1996 11,000 $ 8.08-$20.00 ------ =============
Options exercisable, June 30, 1996 11,000 $ 8.08-$20.00 ====== =============
At June 30, 1996, 47,000 shares of common stock were reserved for issuance under the Plan, of which 36,000 shares were available for additional grants.
(d) Deferred Compensation
During 1992, the Company issued 50,000 shares of its common stock to an officer as additional compensation. The stock is subject to forfeiture by the officer under certain conditions. However, the forfeiture restriction lapses in February 2002. At the discretion of the Company's Board of Directors, the forfeiture restriction on 10,000 shares may be lapsed each year if the officer achieves certain predefined goals. The Company recorded deferred compensation equal to the fair market value of the stock on the date of the grant and has been amortizing the cost over five years, which is the anticipated vesting period of the stock. During each of fiscal 1996, 1995 and 1994, the Board of Directors approved the lapse of restrictions on 10,000 shares in accordance with this agreement. During each of 1996, 1995 and 1994, approximately $54,000 was charged to operations as compensation expense.
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996
(Continued)
(7) STOCKHOLDERS' INVESTMENT (Continued)
(d) Deferred Compensation (Continued)
In connection with the stock grant, the Company made certain loans to the officer. The loans are evidenced by interest-free notes receivable, payable in five equal annual installments beginning in December 1993. Interest is imputed on the notes at the appropriate Internal Revenue Service rate and included in compensation to the officer.
(e) Put-and-Call Agreement
The Company has a put-and-call agreement with a relative of the former chairman of the Company's Board of Directors providing that, in the event of the relative's death prior to August 31, 1998, the relative's estate could require the Company to acquire all of the relative's Company common stock (65,000 shares as of June 30, 1996) at the average market value, as defined, if the Company has achieved certain defined financial results. The Company also has the option to require the relative's estate to sell to the Company all of the relative's stock at the average market value, as defined, in the event of the relative's death prior to August 31, 1998.
(8) BONUS AND PROFIT-SHARING PLANS
(a) Bonus Plan
The Company maintains a discretionary executive bonus plan that is based on a formula established by the Board of Directors. Expenses charged to operations under this plan were approximately $136,000, $208,000 and $254,000 in 1996, 1995 and 1994, respectively.
(b) Employee Profit-Sharing Plan
The Company has a profit-sharing plan in which each qualified employee, as defined, becomes eligible to receive benefits to the extent of his or her vested interests upon retirement or other termination of employment. Contributions to the plan are determined by the Board of Directors. The Company provided approximately $173,000, $199,000 and $220,000 for this plan in 1996, 1995 and 1994, respectively.
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996
(Continued)
(9) CONSULTING AND NONCOMPETE AGREEMENTS
During 1993, the Company entered into a consulting agreement with a former officer/stockholder of the Company. Under the terms of the agreement, the former officer/stockholder provided consulting services to the Company for a three-year period, ending in December 1995. The Company incurred $57,000, $122,000 and $146,000 in consulting expense under this agreement during the years ended June 30, 1996, 1995 and 1994, respectively.
During 1994, the Company entered into a noncompete agreement with its founder and former chairman of the Board of Directors. Under the terms of the noncompete agreement, the former chairman agreed not to compete with the Company directly or indirectly through August 1998. The Company incurred $80,000, $80,000 and $67,000 in expense under this agreement during the years ended June 30, 1996, 1995 and 1994, respectively. The Company's future commitment under the noncompete agreement will be as follows:
Fiscal Year 1997 $ 80,000 1998 80,000 1999 13,000 -------- $173,000 ========
(10) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table presents a summary of quarterly results of operations for the years ended June 30, 1996 and 1995.
SAGE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996
(Continued)
(10) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (Continued)