SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 27, 1999
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-12991
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THE LANGER BIOMECHANICS GROUP, INC.
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(Exact name of registrant as specified in its charter.)
NEW YORK 11-2239561
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization.) Identification No.)
450 COMMACK ROAD, DEER PARK, NY 11729
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(516) 667-1200
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 / /
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Common Stock, $.02 Par Value - 2,564,181 shares as of December 30, 1999.
INDEX
THE LANGER BIOMECHANICS GROUP, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -- November 27, 1999
and February 28, 1999 3
Condensed Consolidated Statements of Operations -- Three and
Nine Months ended November 27, 1999 and November 28, 1998 4
Condensed Consolidated Statements of Cash Flows --
Nine Months ended November 27, 1999 and November 28, 1998 5
Notes to Condensed Consolidated Financial Statements --
Nine Months ended November 27, 1999 6 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 13
2
THE LANGER BIOMECHANICS GROUP, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
NOVEMBER 27,1999 FEBRUARY 28,1999
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 852,995 $ 1,700,156
Accounts receivable, net of allowance for
doubtful accounts of $44,430 and $36,155, respectively 1,617,012 1,396,878
Inventories, net 1,310,599 1,034,001
Prepaid expenses and other current assets 289,579 160,723
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Total current assets 4,070,185 4,291,758
Property and equipment, net 1,016,879 673,152
Other assets 161,105 159,670
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Total Assets $ 5,248,169 $ 5,124,580
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 549,299 $ 700,590
Accrued liabilities:
Accrued payroll and related payroll taxes 273,692 285,540
Other current liabilities 849,292 542,250
Unearned revenue-current 309,514 356,887
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Total current liabilities 1,981,797 1,885,267
Accrued pension expense 119,361 195,254
Unearned revenue-long-term 212,877 104,420
Deferred income taxes 5,304 5,288
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Total liabilities 2,319,339 2,190,229
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Stockholders' equity:
Common stock, $.02 par value. Authorized
10,000,000 shares; Issued 2,615,281 and
2,598,281shares, respectively 52,307 51,966
Additional paid-in capital 6,304,505 6,291,564
Accumulated deficit (3,045,299) (3,070,630)
Accumulated other comprehensive loss (298,756) (299,199)
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3,012,757 2,973,701
Less treasury stock at cost, 51,100 and 25,000 shares, respectively (83,927) (39,350)
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Total stockholders' equity 2,928,830 2,934,351
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Total Liabilities and Stockholders' Equity $ 5,248,169 $ 5,124,580
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See notes to condensed consolidated financial statements.
3
THE LANGER BIOMECHANICS GROUP, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 27,1999 NOVEMBER 28,1998 NOVEMBER 27,1999 NOVEMBER 28,1998
---------------- ---------------- ---------------- ----------------
Net sales $ 2,802,752 $ 2,668,380 $ 8,460,249 $ 7,882,098
Cost of sales 1,767,469 1,642,158 5,325,608 4,892,296
----------- ----------- ----------- -----------
Gross profit 1,035,283 1,026,222 3,134,641 2,989,802
Selling expenses 445,764 343,695 1,210,294 1,002,867
Research and development expenses 29,393 -- 83,112 --
General and administrative expenses 632,404 605,160 1,832,416 1,648,185
----------- ----------- ----------- -----------
Income (loss) from operations (72,278) 77,367 8,819 338,750
----------- ----------- ----------- -----------
Other income (expense):
Other income, principally interest income 14,614 14,181 51,110 65,025
Gain on legal settlement -- -- -- 149,498
Interest expense (808) -- (4,265) --
Minority interest (1,479) (28,772) (14,343) (28,772)
----------- ----------- ----------- -----------
Other income (expense), net 12,327 (14,591) 32,502 185,751
----------- ----------- ----------- -----------
Income (loss) before income taxes (59,951) 62,776 41,321 524,501
(Benefit from) provision for income taxes (189) 6,152 15,990 34,463
----------- ----------- ----------- -----------
Net income (loss) ($ 59,762) $ 56,624 $ 25,331 $ 490,038
=========== =========== =========== ===========
Weighted average number of common
shares used in computation of net
income per share:
Basic 2,559,738 2,586,281 2,567,706 2,586,170
Diluted 2,559,738 2,604,020 2,664,999 2,612,452
Net income per common share:
Basic $ (0.02) $ 0.02 $ 0.01 $ 0.19
=========== =========== =========== ===========
Diluted $ (0.02) $ 0.02 $ 0.01 $ 0.19
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
4
THE LANGER BIOMECHANICS GROUP, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
NOVEMBER 27, 1999 NOVEMBER 28, 1998
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Cash Flows From Operating Activities:
Net income $ 25,331 $ 490,038
Adjustments to reconcile net income to net cash
(used in) provided by operating
activities:
Deferred foreign taxes (65) 33
Depreciation and amortization 216,778 196,955
Provision for doubtful accounts receivable 14,360 --
Changes in operating assets and liabilities:
Accounts receivable (230,625) (206,597)
Inventories (273,668) (15,612)
Prepaid expenses and other assets (129,927) 86,640
Accounts payable and accrued liabilities 136,981 183,662
Net pension liability (75,893) 24,759
Unearned revenue 57,840 (23,254)
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Net cash (used in) provided by operating activities (258,888) 736,624
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Cash Flows From Investing Activities:
Capital expenditures (556,977) (218,907)
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Net cash used in investing activities (556,977) (218,907)
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Cash Flows From Financing Activities:
Common stock options exercised 13,281 781
Treasury stock acquired (44,577)
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Net cash (used in) provided by financing activities (31,296) 781
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Net (decrease) increase in cash and cash equivalents (847,161) 518,498
Cash and cash equivalents at beginning of period 1,700,156 1,189,046
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Cash and cash equivalents at end of period $ 852,995 $ 1,707,544
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Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest expense $ 4,266 $ 7,603
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Income taxes $ -- $ 8,673
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See notes to condensed consolidated financial statements.
5
THE LANGER BIOMECHANICS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended November 27, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
A) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. For further information, refer to the consolidated financial
statements and footnotes thereto for the fiscal year ended February 28, 1999.
Operating results for the periods ended November 27, 1999 are not necessarily
indicative of the results that may be expected for the year ending February 29,
2000.
B) Income per Share
Basic earnings per share are based on the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per share are based
on the weighted average number of shares of common stock and common stock
equivalents (options and warrants) outstanding during the period, except where
the effect would be antidilutive, computed in accordance with the treasury stock
method.
C) Provision for Income Taxes
The provision for income taxes on domestic operations, for periods ended
November 27, 1999 and November 28, 1998 , reflect the utilization of available
net operating loss carryforwards and also take into account the "Alternative
Minimum Tax". The provision for income taxes on foreign operations was estimated
at 21%.
6
THE LANGER BIOMECHANICS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2
The Company did not perform a physical inventory as of November 27, 1999.
Inventories and cost of sales for the interim period were based on the Company's
perpetual inventory records.
NOVEMBER 27, 1999 FEBRUARY 28, 1999
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(unaudited)
Inventories consist of:
Raw materials $1,272,891 $1,017,080
Work-in-process 105,235 84,448
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Total inventories 1,378,126 1,101,528
Less: allowance for obsolescence 67,527 67,527
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Inventories, net $1,310,599 $1,034,001
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NOTE 3 - SEASONALITY
Revenues derived from the Company's sale of orthotic devices, a substantial
portion of the Company's operations, have historically been significantly higher
in the warmer months of the year.
NOTE 4 - COMPREHENSIVE INCOME
The Company's comprehensive earnings were as follows:
Three Months Ended Nine Months Ended
November 27, November 28, November 27, November 28,
1999 1998 1999 1998
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Net income (loss) $(59,762) $ 56,624 $ 25,331 $490,038
Other comprehensive income (loss) , net of tax:
Change in equity resulting from translation of
financial statements into U.S. dollars 6,255 228 443 528
-------- -------- -------- --------
Comprehensive income $(53,507) $ 56,852 $ 25,774 $490,566
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7
THE LANGER BIOMECHANICS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5 - SEGMENT INFORMATION
The Company operates in two geographic segments (North America and United
Kingdom) principally in the design, development, manufacture and sale of foot
and gait-related products. Intersegment net sales are recorded at cost. Segment
information was as follows:
Three Months Ended November 27, 1999 North America United Kingdom Total
- ------------------------------------ ------------- -------------- -----
Net sales from external customers $ 2,443,599 $ 359,153 $ 2,802,752
Intersegment net sales 55,228 -- 55,228
Gross margins 901,907 133,376 1,035,283
Operating (loss) profit (87,109) 14,831 (72,278)
THREE MONTHS ENDED NOVMEBER 28,1998
Net sales from external customers $ 2,309,287 $ 359,093 $ 2,668,380
Intersegment net sales 52,813 _ 52,813
Gross margins 877,227 148,995 1,026,222
Operating profit 10,056 67,311 77,367
NINE MONTHS ENDED NOVEMBER 27,1999
Net sales from external customers $ 7,368,526 $ 1,091,723 $ 8,460,249
Intersegment net sales 161,643 -- 161,643
Gross margins 2,699,052 435,589 3,134,641
Operating (loss) profit (99,055) 107,874 8,819
NINE MONTHS ENDED NOVEMBER 28,1998
Net sales from external customers $ 6,900,232 $ 981,866 $ 7,882,098
Intersegment net sales 128,270 -- 128,270
Gross margins 2,601,073 388,729 2,989,802
Operating profits 195,260 143,490 338,750
8
THE LANGER BIOMECHANICS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 - EARNINGS PER SHARE
Basic earnings per common share ("EPS") are computed based on the weighted
average number of common shares outstanding during each period. Diluted earnings
per common share are computed based on the weighted average number of common
shares, after giving effect to dilutive common stock equivalents outstanding
during each period. The following table provides a reconciliation between basic
and diluted earnings per share:
Three Months Ended Nine Months Ended
November 27,1999 November 28,1998 November 27, 1999 November 28,1998
------------------------------------ ------------------------------------
Numerator:
Income available to common stockholders $ (59,762) $ 56,624 $ 25,331 $ 490,038
----------- ----------- ----------- -----------
Denominators:
Denominator for basic earnings per share-
weighted average shares 2,559,738 2,586,281 2,567,706 2,586,170
outstanding
Effect of dilutive securities:
Stock options 17,739 96,749 26,282
----------- ----------- -----------
Denominator for diluted earnings per share 2,559,738 2,604,020 2,664,455 2,612,452
=========== =========== =========== ===========
Basic earnings per share $ (0.02) $ 0.02 $ 0.01 $ 0.19
=========== =========== =========== ===========
Diluted earnings per share $ (0.02) $ 0.02 $ 0.01 $ 0.19
=========== =========== =========== ===========
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Three and nine months ended November 27, 1999 as compared with three and nine
months ended November 28, 1998.
REVENUES
Sales of $2,802,752 for the third quarter ended November 27, 1999 were 5.0%
higher than the sales of $2,668,380 in the comparable prior-year quarter. Sales
of $8,460,249 for the nine months ended November 27, 1999 were 7.3% higher than
prior-period's sales of $7,882,098. The increased sales for both the three month
and nine month periods when compared to the comparable prior year periods are
principally due to increased unit volume in the Company's domestic orthotic
business and increased unit volume in the Company's subsidiary in the United
Kingdom.
GROSS PROFIT
Gross profit as a percentage of sales for both the three month and nine month
periods ended November 27,1999 was consistent with but slightly lower than the
comparable periods in the prior year. For the three months ended November
27,1999 gross profit as a percentage of sales decreased to 36.9% of sales from
38.5% in the comparable prior period, while for the nine month period ended
November 27,1999, gross margin as a percentage of sales decreased to 37.1% from
37.9% in the comparable period in the prior year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the recently ended quarter were
$1,078,168 compared to $948,855 in the comparable prior-year period, a 13.6%
increase. Selling expenses increased $102,069 principally due to increased
commissions associated with increased sales and increased salary and travel
expenses, while general and administrative expenses increased $27,244 due to
increased professional fees and salary and salary related expenses. Selling,
general and administrative expenses for the nine months ended November 27,1999
were $3,042,710 compared with $2,651,052 in the prior comparable period, a 14.8%
increase. Selling expenses increased $207,427 over the prior year period
principally due to increased advertising and promotional expenses focused on
increasing market share and future sales and increased commissions associated
with the increased sales. General and administrative expenses increased $184,231
primarily due to increased professional fees and salary and salary related
expenses.
RESEARCH AND DEVELOPMENT EXPENSE
As of March 1, 1999, the Company established a Product Development department to
explore new applications for existing products and to ensure that the Company
remains on the cutting edge of orthotic therapy. Costs incurred during the three
month and nine month periods ended November 27,1999 of $29,393 and $83,112,
respectively, were principally salary and salary related expenses.
OTHER INCOME AND EXPENSES
Other income consists primarily of income generated from investments, service
charge income generated from the Company's accounts receivable, seminar fees and
in the nine-month prior-year period, a gain on legal settlement of $149,498. Net
other income was $12,327 for the third quarter of the current fiscal year as
compared with other expense of ($14,591) in the comparable prior-year quarter.
This difference is due to the decrease in minority interest expense of $27,293.
For the nine month periods, net other income was $32,502 this year versus
$36,253, exclusive of the gain on legal settlement.
10
LIQUIDITY
At November 27, 1999 , the Company had cash and cash equivalents of $ 852,995
and working capital of $2,088,388. Cash balances decreased $847,161 from
February 28,1999 primarily due to the Company's investment in capital equipment
of $556,977. These capital expenditures were made to position the Company for
future growth. In December 1999, the Company renewed its $1.5 million revolving
credit facility with a bank, which facility had expired on July 31, 1999. The
revolving credit facility provides for borrowings at an interest rate of prime
plus 1/2 percent. The agreement contains, among other things, restrictions
relating to the incurrence of additional indebtedness and the payment of
dividends. The Company has never borrowed on the revolving credit facility and
management believes that its existing cash balances , funds generated from
operations and the renewed revolver will be adequate to meet cash needs. The
Company also has a $500,000 equipment credit line with a bank to finance the
long-term capital needed to grow the Company's business. In December 1999, the
Company borrowed $115,000 on this line at an interest rate of 9.5% to finance a
new telecommunications system and certain production equipment , which were
acquired prior to November 27, 1999.
Repurchases of the Company's common stock will be made from time to time in the
open market at prevailing market prices and may be made in privately negotiated
transactions, subject to available resources. The Company may also finance
acquisitions of other companies or product lines in the future from existing
cash balances and its revolving credit facility, from borrowings from
institutional lenders, and/or the public or private offerings of debt or equity
securities.
RECENT PRONOUCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"), which requires that
derivative instruments be measured at fair value and recognized as assets or
liabilities in the Company's balance sheet. SFAS No. 133 is effective for all
quarters of all fiscal years beginning after June 15, 2000. The Company is
currently evaluating the effect that SFAS No. 133 will have on the Company's
consolidated financial statements.
YEAR 2000 COMPLIANCE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a 2
digit year is commonly referred to as the "Year 2000 Compliance" issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information. The Company commenced a program in fiscal 1998 to
identify, remediate, test and develop contingency plans for Year 2000
Compliance. Currently, the Company is complete with its Year 2000 Compliance
Program, the results of which are summarized as follows:
COMPUTER INFORMATION SYSTEMS ("CIS")
Beginning in fiscal 1998 (March 1997 - February 1998), the Company began
implementing a new enterprise-wide CIS. The CIS is customized software running
on a Windows NT Server. The server, customer software and all networked personal
computers are fully Year 2000 compliant. The Company has been operating the new
CIS since February 1998 and it is now considered fully implemented. The Company
anticipates that the CIS, as it relates to the Year 2000 Compliance issue, will
have no effect on business operations.
PRODUCTS
The Year 2000 Compliance issue affects none of the Company's current products.
Due to the nature of the Company's business, custom orthotics and related
materials and services, no software or microprocessors are used in the products.
THIRD PARTIES
11
The Company solicited statements of compliance from its key outside vendors,
manufacturers and suppliers with respect to their CIS and overall business
operations. Approximately 70% of these parties responded and informed the
Company that they are currently compliant or plan to be compliant by December
31, 1999. To the extent that any of these parties have been unable to certify
that they will be substantially Year 2000 compliant by early 1999, the Company
is reviewing its alternatives with respect to other vendors, manufacturers or
suppliers (as applicable). Currently, the Company has received responses from
its critical suppliers and its CIS vendor certifying full Year 2000 compliance.
COSTS
The Company's most significant Year 2000 Compliance costs related to the
implementation of the new CIS and were incurred in prior years as part of the
implementation of the new enterprise-wide CIS. Costs incurred in the current
year were not significant and the Company does not currently anticipate that
future costs associated with its ongoing Year 2000 Compliance program will be
material to its financial condition or results of operations.
The Year 2000 issue presents far-reaching implications, some of which cannot be
anticipated with any degree of certainty. Satisfactorily addressing the Year
2000 Compliance issue is dependent on many factors, some of which are not
completely in the Company's control, such as availability of certain resources,
third party remediation plans and other market-wide factors. Based on the
assessment that has been made under the Year 2000 Compliance program, and other
than stated above, the Company has no other contingency plans in the event of
Year 2000 noncompliance and does not currently believe that any other
contingency plans are necessary. In addition, management is not able to
determine the effect of any Year 2000 noncompliance (including with respect to a
"worst-case scenario") on the Company, and there can be no guarantee that any
such noncompliance would not have an adverse effect on the Company's CIS,
results of operations and financial condition.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Form 10-Q contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 which can be identified by the
use of forward-looking terminology such as "believes," "expects," "may," "will,"
"should," or "anticipates" or the negative thereof, other variations thereon or
comparable terminology, or by discussions of strategy. No assurance can be given
that future results covered by the forward-looking statements will be achieved,
and other factors could also cause actual results to vary materially from the
future results covered in such forward-looking statements. Factors which might
cause such a difference include, but are not limited to, product demand, the
impact of competitive products and pricing and general business and economic
conditions.
12
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) 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.
THE LANGER BIOMECHANICS GROUP, INC.
-----------------------
(REGISTRANT)
DATE: JANUARY 7, 1999
By: /s/ DANIEL J. GORNEY
------------------------------
DANIEL J. GORNEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
By: /s/ THOMAS G. ARCHBOLD
------------------------------
THOMAS G. ARCHBOLD
CHIEF FINANCIAL OFFICER
13