1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 September 30, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the transitional period from to
Commission File Number: 0-22077
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ERGOBILT, INC.
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(Exact name of registrant as specified in its charter)
Texas 75-2600529
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification number)
9244 Markville Drive, Dallas, Texas 75243-4404
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(972) 889-3742
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Registrant's telephone number including area code
5000 Quorum Drive, Suite 147, Dallas, Texas 75240
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(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) 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 practicable date: $.0001 par value, 6,156,000
shares as of November 14, 1997
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ERGOBILT, INC.
TABLE OF CONTENTS
FORM 10-Q
September 30, 1997
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Index to Financial Statements 2
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Index to exhibits 21
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PART I - FINANCIAL INFORMATION
INDEX TO FINANCIAL STATEMENTS
Page
----
Consolidated Balance Sheets as of December 31, 1996 and
September 30, 1997 (unaudited) 3
Consolidated Statements of Income for the nine month periods ended
September 30, 1996 (unaudited) and 1997 (unaudited) and
for the quarter ended September 30, 1996 (unaudited)
and 1997 (unaudited) 5
Consolidated Statements of Cash Flows for the nine month periods ended
September 30, 1996 (unaudited) and
1997 (unaudited) 6
Notes to consolidated financial statements 8
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ERGOBILT, INC.
Consolidated Balance Sheets
December 31, 1996 and September 30, 1997
(unaudited)
December 31, September 30,
Assets 1996 1997
----------- -----------
Current assets:
Cash and cash equivalents $ 32,150 $ 994,390
Accounts receivable 28,198 6,944,416
Inventory -- 3,420,223
Prepaid expenses -- 580,334
Other current assets 90,328 132,174
----------- -----------
Total current assets 150,676 12,071,537
----------- -----------
Property and equipment:
Land -- 527,450
Building and improvements -- 2,377,319
Furniture and fixtures 12,513 250,677
Equipment 9,455 642,456
Vehicles -- 415,897
Computer equipment 32,623 851,732
----------- -----------
54,591 5,065,531
Less accumulated depreciation 10,387 214,826
----------- -----------
Property and equipment, net 44,204 4,850,705
Other assets:
Note receivable -- 1,617,592
Shareholder receivable 48,325 --
Offering and merger costs 661,453 90,617
Goodwill, net -- 9,970,091
Deferred tax assets 85,543 85,543
Other assets 212 483,193
----------- -----------
Total other assets 795,533 12,247,036
----------- -----------
=========== ===========
$ 990,413 $29,169,278
=========== ===========
(Continued)
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ERGOBILT, INC.
Consolidated Balance Sheets, Continued
(unaudited)
Liabilities and Shareholders Equity December 31, September 30,
------------------------------------ 1996 1997
------------ ------------
Current liabilities:
Line of credit $ -- $ 3,481,208
Current portion of long-term debt -- 142,527
Accounts payable 692,490 1,911,613
Accrued expenses 65,174 1,266,355
Income taxes -- 1,041,857
Commissions payable -- 412,118
Notes payable 500,000 --
------------ ------------
Total current liabilities 1,257,664 8,255,678
------------ ------------
Long-term debt:
Notes payable, less current portion -- 1,207,473
Notes payable to shareholder, net -- 239,415
Shareholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized -- --
Common stock, $.0001 par value; 20,000,000 shares authorized;
2,770,285 and 6,056,000 shares issued and outstanding
at December 31, 1996 and September 30, 1997, respectively 277 606
Additional paid-in capital 823 17,257,051
Retained earnings (deficit) (268,351) 2,209,055
------------ ------------
Total shareholders' equity (267,251) 19,466,712
------------ ------------
$ 990,413 $ 29,169,278
============ ============
See accompanying notes to consolidated financial statements.
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ERGOBILT, INC.
Consolidated Statements of Income
(Unaudited)
Nine Months Ended Three Months Ended
----------------------------------- ---------------------------------
September 30, September 30,
----------------------------------- ---------------------------------
1996 1997 1996 1997
--------------- ---------------- -------------- ---------------
Sales $ 301,610 $ 17,835,161 $ 113,839 $ 8,139,803
Cost of sales 138,942 9,396,923 42,369 4,171,859
--------------- ---------------- -------------- --------------
Gross profit 162,668 8,438,238 71,470 3,967,944
Selling, general and administrative expenses 474,694 4,647,119 360,877 1,898,328
--------------- ---------------- -------------- --------------
Operating income (312,026) 3,791,119 (289,407) 2,069,616
Interest expense and other, net 3,333 (74,518) 13,458 (50,614)
--------------- ---------------- -------------- --------------
Income before income taxes (315,359) 3,865,637 (302,865) 2,120,230
Income tax expense (benefit) (41,595) 1,388,231 (41,595) 747,319
--------------- ---------------- -------------- --------------
Net income $ (273,764) $ 2,477,406 $ (261,270) $ 1,372,911
=============== ================ ============== ==============
Net income per share $ (0.10) $ 0.44 $ (0.09) $ 0.23
=============== ================ ============== ==============
Weighted average common and common
equivalent shares outstanding 2,770,285 5,625,328 2,770,285 6,076,346
=============== ================ ============== ==============
See accompanying notes to consolidated financial statements.
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ERGOBILT, INC.
Consolidated Statements of Cash Flows
For the nine month periods ended
September 30, 1996 and 1997
(Unaudited)
1996 1997
--------- ------------
Cash flows from operating activities:
Net income (loss) $(273,764) $ 2,477,406
Adjustment to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 6,366 373,465
Changes in assets and liabilities:
Accounts receivable 26,346 (4,822,280)
Inventory -- (1,626,974)
Prepaid expenses (18,480) (381,225)
Deferred tax asset (42,749) --
Employee receivables -- (30,661)
Other current assets -- (9,235)
Other noncurrent assets -- (446,197)
Accounts payable 33,034 899,373
Accrued expenses -- 1,102,660
Taxes payable -- 977,736
Commissions payable -- 244,123
Payable to related party 188,250 --
Deferred tax liability 1,154 --
Other 37,444 --
--------- ------------
Net cash used in operating activities (42,399) (1,241,809)
--------- ------------
Cash flows from investing activities
Purchase of property and equipment (20,279) (2,541,818)
Payments received on shareholder loans -- 616,880
Loan to shareholder (8,362) (129,140)
Net advances on note receivable -- (1,617,592)
Acquisition of BodyBilt, net of cash acquired -- (5,128,419)
--------- ------------
Net cash used in investing activities (28,641) (8,800,089)
--------- ------------
Cash flows from financing activities:
Issuance of common stock, net of costs -- 9,976,553
Net advances on line of credit -- 1,481,208
Purchase of treasury stock -- (225,000)
Proceeds from borrowings 500,000 5,429,523
Repayment of borrowings -- (6,163,117)
Offering and merger costs (182,809) 504,971
--------- ------------
Net cash provided by financing activities 317,191 11,004,138
--------- ------------
Net increase in cash 246,151 962,240
Cash and cash equivalents at beginning of period 14,150 32,150
========= ============
Cash and cash equivalents at end of period $ 260,301 $ 994,390
========= ============
(Continued)
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ERGOBILT, INC.
Statements of Cash Flows, Continued
1996 1997
========== ==========
Supplemental disclosure of noncash financing activities:
Common stock issued in acquisition of BodyBilt $ -- $7,280,004
========== ==========
Common stock issued to repay note payable $ -- $ 250,000
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ -- $ 68,369
========== ==========
Income taxes $ -- $ 503,020
========== ==========
See accompanying notes to consolidated financial statements.
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ERGOBILT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Financial Statements
The accompanying unaudited Consolidated Financial Statements include
the accounts of ErgoBilt, Inc. ("ErgoBilt"), its wholly owned
subsidiaries which include BodyBilt, Inc. and Ergofon'iks, Inc.,
("Ergofon'iks") and Markville Partners, LP, a limited partnership
wholly owned by ErgoBilt subsidiaries.
The statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and 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 adjustments) considered necessary for a fair presentation
have been included. Operating results for the nine months ended
September 30, 1997 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1997. For further
information, refer to the consolidated financial statements and
footnotes included in the Company's annual report on Form 10-K for the
year ended December 31, 1996.
Note 2 - Cash and Cash Equivalents
The carrying amount for cash and cash equivalents in not materially
different than fair market value due to the short maturities of the
instruments and/or their respective interest rates.
Note 3 - Stock Split
The Company affected a 2,770-for-1 stock split in January 1997. The
effects of the stock split have been retroactively applied to the
financial statements.
Note 4 - Issuance of Common Stock and Warrants
On February 5, 1997 the Company closed its initial public offering for
the sale of 1,700,000 shares of common stock at a price of $7 per
share. On March 18, 1997, the underwriters exercised their
overallotment option and the Company issued an additional 100,000
shares of the Company's common stock at a price of $7 per share. The
Company received approximately $9,900,000 in net proceeds as a result
of this offering and the underwriters exercise of their over-allotment.
On February 5, 1997 the Company issued to the underwriters warrants to
purchase 170,000 shares of common stock at a price of 120% of the price
to the public exercisable over a period of four years commencing one
year from February 3, 1997.
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ERGOBILT, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 - Business Acquisition
BodyBilt Seating, Inc. ("BodyBilt") was merged into a wholly owned
subsidiary of the Company on February 5, 1997. As consideration for the
merger, the shareholders of BodyBilt received $17.6 million payable in
a combination of cash ($7.2 million), 780,630 shares of common stock of
the Company valued at $3.8 million ($4.90 per share) and 705,085 shares
of Series A Preferred Stock of the Company valued at $3.5 million
($4.90 per share), which was immediately converted into 705,085 shares
of common stock. The valuation of the Company's stock stated above is
based upon an independent valuation obtained by the Company which
includes, the trading restrictions associated with these shares of
common stock pursuant to Rule 144, as promulgated by the Securities and
Exchange Commission. These shares were originally valued at the initial
public offering price of $7 per share. As a result of this change, the
amount of the purchase price attributable to goodwill has been adjusted
from its original amount of $13.3 million to $10.1 million. The Company
has recorded the related adjustments in the second quarter of 1997.
BodyBilt is a developer, manufacturer and marketer of customized,
high-end ergonomic products. The acquisition has been accounted for by
the purchase method of accounting and, accordingly, the results of
operations of BodyBilt have been included in the Company's consolidated
financial statements from February 1, 1997. The excess of the purchase
price over the fair value of the net identifiable assets acquired of
$10.1 million has been recorded as goodwill and is being amortized on a
straight-line basis over 40 years.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and BodyBilt as if the
acquisition had occurred as of the beginning of 1996 and 1997, after
giving effect to certain adjustments. The pro forma financial
information does not necessarily reflect the results of operations that
would have occurred had the acquisition occurred at the beginning of
the periods presented.
(unaudited)
Nine Months Ended
September 30,
----------------------------
1996 1997
----------- -----------
Net sales $12,563,875 $18,775,413
Net income 698,257 2,444,653
Net income per share 0.12 0.40
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ERGOBILT, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 - Notes Payable
During the third quarter, the Company established a new credit facility
with Comerica Bank Texas. This $ 7.8 million facility replaced the
previous $2.0 million credit facility established through BodyBilt and
is comprised of the following:
- $5.0 million revolving line of credit at LIBOR plus 2.85% secured
by a borrowing base of the company's receivables and inventory;
- $2.3 million for a mortgage loan on the manufacturing and
headquarters facility at prime plus 1.5%;
- term loan at prime plus 1.5% secured by the company's machinery
and equipment
On September 12, 1997, the Company entered into a bank promissory note
of approximately $375,000, payable in thirty-six equal monthly
installments of principal and interest, bearing interest at a variable
interest rate of prime plus .5% (9% at September 30, 1997), and
maturing on October 1, 2000. The note is secured by certain machinery
and equipment of the Company.
On September 24, 1997, the Company entered into a bank promissory note
of $975,000, bearing interest at 9.2%, payable in fifty-nine equal
monthly installments of principal and interest of $10,005 with one
final payment of approximately $790,000 at maturity on October 1, 2002.
The note is secured by a certain building and real property.
Note 7 - Stock Option Plan
The board of directors and shareholders of the Company have approved
the ErgoBilt 1996 Stock Option Plan (the Stock Option Plan). The Stock
Option Plan authorizes the Company to award 400,000 shares of common
stock to be used for incentive stock options and nonqualified stock
options or restricted stock grants. The board of directors has
authorized an increase in the options that may be granted to 1,000,000,
subject to shareholder approval in the upcoming shareholder meeting.
During the second quarter of 1997 the Company began granting options
pursuant to the Stock Option Plan. The Company has granted 538,550
options with exercise prices ranging from $5.25 to $12.50 under the
Stock Option Plan during 1997.
Note 8 - Adoption of New Accounting Standards
The Company intends to adopt SFAS No. 128, "Earnings Per Share" ("SFAS
128") effective December 15, 1997. This statement requires the
replacement of primary earnings per share with basic earnings per share
and fully diluted earnings per share with diluted earnings per share.
Management of the Company has not assessed whether the adoption of this
statement will have a material impact on the earnings per share
computation.
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ERGOBILT, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9 - Subsequent Events
Effective October 15, 1997, Ergofon'iks, Inc., a wholly owned
subsidiary of Ergobilt, Inc., acquired certain assets of Computer
Translations Systems & Support, Inc. ("CTSS"), a Texas corporation.
The purchase price includes a "fixed portion payment" of 100,000
shares of Ergobilt, Inc. common stock and a "contingent portion
payment" of $5 million less the value of the 100,000 shares as of a
date in the future when ErgoFon'iks achieves certain performance
benchmarks. The purchase price will be reduced by loans made to CTSS
during 1997 of approximately $1.76 million for working capital for
product development and improvement. The loans made through September
30, 1997 of approximately $1.6 million are classified as notes
receivable on the accompanying financial statements. The assets
acquired include assets used in the manufacture and assembly of the
Fon'iksWriter, a license to the "Digitext Theory" from Digitext, Inc.,
and a portion of the proceeds recovered by CTSS in any lawsuit against
EDS, if any.
The Company also obtained a $750,000 mortgage loan subsequent to
September 30, 1997 to fund capital expenditures at the Dallas
headquarters.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Except for historical data contained herein, some of the information
set forth in this report contains forward-looking statements that are dependent
upon certain risks and uncertainties including, but not limited to, such factors
as the number of new orders received and shipped, continued consumer acceptance
of the Company's products, the availability of the product components,
appropriate labor activity, the timely roll-out of new products, the Company's
ability to identify and acquire commericially viable ergonomic products and the
continued availability of credit or equity to the Company on reasonable terms.
Investors should also consider other risks and uncertainties set forth in
documents filed by the Company with the Securities and Exchange Commission.
On February 5, 1997 BodyBilt, Inc. ("BodyBilt") was merged into a
wholly owned subsidiary of the Company (the "Merger"). BodyBilt is a developer,
manufacturer and marketer of customized, high-end ergonomic products.
The financial statements for 1997 included in this Form 10-Q comprise
the operations of BodyBilt from February 1, 1997 through September 30, 1997 and
the operations of ErgoBilt, Inc. from January 1, 1997 to September 30, 1997.
BodyBilt's operations for 1996 are not included in the financial statements, as
that predates the acquisition. For selected financial data presented on a pro
forma basis as if the acquisition took place at the beginning of the periods
presented see financial statement footnote number 5.
The operations of ErgoBilt are discussed under the heading "ErgoBilt"
below. The remainder of Management's Discussion and Analysis of Financial
Condition and Results of Operations relates to the operations of BodyBilt.
Following the Merger, BodyBilt became the operating company, and ErgoBilt became
the parent company. The following discussion and analysis should be read in
conjunction with the consolidated financial statements of the Company and the
accompanying notes thereto included elsewhere in this Form 10-Q.
ERGOBILT
Since its incorporation in 1995 until February 1997, ErgoBilt's
operations have consisted primarily of providing advertising and marketing
services to BodyBilt, conducting activities necessary to complete the Merger and
the Company's initial public offering (the "Offering") and other activities
necessary to plan for the operations of ErgoBilt and BodyBilt. ErgoBilt's
consolidated operating income (loss) for the nine months ended September 30,
1996 and 1997 was ($312,026) and $3,791,119, respectively. For the quarters
ended September 30, 1996 and 1997, ErgoBilt had operating income (loss) of
($289,407) and $2,069,616, respectively. These increases in operating income
were due primarily to the inclusion of BodyBilt's operations and the licensing
revenue associated with Computer Translation Systems and Support, Inc. (CTSS).
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BODYBILT
The following table sets forth certain unaudited financial information
for BodyBilt for the periods indicated. The table does not include the
amortization of goodwill subsequent to the acquisition. This comparative
information will be used for the accompanying "Management Discussion and
Analysis" as management believes this is the most relevant information for
comparing the ongoing operations of the Company.
Nine Months Ended Three Months Ended
-------------------- --------------------
September 30, September 30,
-------------------- --------------------
1996 1997 1996 1997
------- ------- ------- -------
(in thousands)
Sales $12,553 $16,789 $ 5,121 $ 6,153
Cost of sales 6,618 8,518 2,633 2.687
------- ------- ------- -------
Gross profit 5,935 8,271 2,488 3,466
Selling, general and administrative expenses 4,081 4,098 1,326 1,596
------- ------- ------- -------
Operating income 1,854 4,173 1,162 1,870
Interest expense and other, net 108 51 32 12
------- ------- ------- -------
Income before income taxes $ 1,746 $ 4,122 $ 1,130 $ 1,858
======= ======= ======= =======
GENERAL. BodyBilt generates revenue through sales of its products to
corporate customers, dealers and retailers. The majority of BodyBilt's sales are
generated by either BodyBilt's direct sales force or by independent sales
representatives who are paid a commission for each unit sold. Typically,
BodyBilt's sales are directed through a network of over 550 dealers who acquire
the products at a discount from retail and then resell the products to the
ultimate customer. BodyBilt believes that its growth has been driven by
increasing market acceptance of ergonomics and its success in (i) providing
superior quality products and service; (ii) expanding its direct sales force;
(iii) upgrading the quality of its independent sales representative firms; and
(iv) educating consumers about the benefits of ergonomics and the solutions
provided by BodyBilt's products. BodyBilt did not increase the suggested retail
prices of its chairs during this period.
During the third quarter of 1997, BodyBilt continued to build on its
National Accounts marketing strategy, focusing on larger individual orders by
aggressively opening new corporate account relationships. As a result, the
Company continues to experience an increase in the number of large orders (50
plus chairs) which represented approximately one third of the third quarter
sales. With an increasing focus on larger corporate customers, the average price
per chair shipped during the third quarter was approximately $470 vs. $500 plus
in previous quarters. The reduction in average selling price is due primarily to
the higher percentage of task chairs shipped which carry a lower average selling
price than the Company's other series of chairs. Management feels that the trend
towards greater percentages of task chairs is likely to continue as it
aggressively pursues its National Accounts marketing strategy and as the average
order size increases. Although the average price per chair was lower for the
third quarter, the operating margins were significantly improved over previous
quarters due to greater capacity utilization at the Company's manufacturing
facility and more aggressive purchasing of parts and materials.
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BodyBilt also entered into a license agreement with Computer
Translation Systems and Support, Inc., "C.T.S.S." during the first quarter of
1997. This license agreement contributed significant sales, gross profit and
operating profit to BodyBilt's first and second quarter results. The C.T.S.S.
product, called the Fon'iksWriter, is a state-of-the-art proprietary computer
and keyboard system, designed to facilitate voice-to-text transcription and data
capture services by substantially reducing the number of keystrokes necessary
for operation.
In July, 1997, the CTSS license was assigned to ErgoFon'iks, Inc.
("ErgoFon'iks"), a wholly owned subsidiary of the Company located in Dallas.
Sales of the Fon'iksWriter in the third quarter, as reported by ErgoFon'iks were
approximately $1.99 million, an increase of 195 percent over sales of
Fon'iksWriters reported by BodyBilt in the second quarter.
Sales of BodyBilt increased $4.2 million, or 33.7%, from $12.6 million
for the nine month period ended September 30, 1996, to $16.8 million for the
nine month period ended September 30, 1997. Units sold increased by 8,339, or
37.5%, from 22,248 for the nine month period ended September 30, 1996, to 30,587
for nine month period ended September 30, 1997. Sales increased $1.1 million, or
20.1%, from $5.1 million for the quarter ended September 30, 1996, to $6.2
million for the quarter ended September 30, 1997. Units sold increased by 4,022,
or 44.4 %, from 9,050 for the quarter ended September 30, 1996, to 13,072 for
quarter ended September 30, 1997. This sales increase was attributable to a more
fully focused direct sales organization comprised of 27 individuals selling to
large national accounts, increased acceptance of the Company's ergonomic
products and solutions by companies who are considering ergonomics as a standard
as opposed to a purchase primarily to employers requiring special needs, an
increase in the number of Company sales and sales support personnel, and the
contribution of the Company's new national sales manager.
Gross profit increased $2.4 million or 39.4%, from $5.9 million in the
nine month period ended September 30, 1996, to $8.3 million in the nine month
period ended September 30, 1997. As a percentage of sales, gross profit
increased from 47.3% in the nine month period ended September 30, 1996 to 49.3%
for the nine month period ended September 30, 1997. Gross profit increased
$978,000 or 39.3%, from $2.5 million in the quarter ended September 30, 1996, to
$3.5 million in the quarter ended September 30, 1997. As a percentage of sales,
gross profit increased from 48.6% in the quarter ended September 30, 1996 to
56.3% for quarter ended September 30, 1997. This improvement in the margin is a
result of increased operating leverage associated with higher capacity
utilization and aggressive parts and materials purchasing.
Selling, general and administrative expenses (SG&A) increased by a
nominal amount as compared to the previous year. However, as a percentage of
sales, SG&A expense decreased from 32.5% in the nine month period ended
September 30, 1996, to 24.4% for the nine month period ended September 30, 1997.
For the quarter ended September 30, 1997, SG&A expenses increased $270,000
(20.4%) over the previous year. As a percentage of sales, SG&A expense was
unchanged. The percentage decrease in the selling, general and administrative
expense was a result of the increase in the Company's total sales.
Operating income for the nine months ended September 30, 1997 was $4.2
million, a 125% increase over the previous year. Operating income for the
quarter increased by $708,000, (61%) over the quarter ended September 30, 1996.
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ERGOFON'IKS
In July, 1997, the CTSS license was assigned to ErgoFon'iks, Inc.
("ErgoFon'iks"), a wholly owned subsidiary of the Company located in Dallas.
Sales of the Fon'iksWriter in the third quarter, as reported by ErgoFon'iks were
approximately $1.99 million, an increase of 195 percent over sales of
Fon'iksWriters reported by BodyBilt in the second quarter. The Fon'iksWriter is
a phonetic computerized keyboard system that allows trained operators to input
data in excess of 200 words per minute - significantly faster than a typist is
capable of achieving with traditional (QWERTY) keyboard. During the quarter, the
Company focused on increasing the pool of trained operators by concentrating on
selling the Fon'iksWriter to vocational and occupational schools. Management is
pleased with the progress made during the quarter in licensing schools to teach
the Fon'iks system to both students and schools. With a growing pool of trained
operators, the commercial applications for the Fon'iksWriter extend to any
business that requires high speed, high volume documentation, such as health
care and insurance industries, as well as legal support services.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow. At September 30, 1997 the Company had on hand cash and
equivalents of approximately $1,000,000. Since inception the Company has
financed its operations primarily through the issuance of debt and equity, and
through cash generated by the operating divisions.
During the third quarter, the Company established a new credit facility with
Comerica Bank Texas. This $ 7.8 million facility replaced the previous $2.0
million credit facility established through BodyBilt and is comprised of the
following:
- - $5.0 million revolving line of credit at LIBOR plus 2.85% secured by a
borrowing base of the company's receivables and inventory;
- - $2.3 million for a mortgage loan on the manufacturing and headquarters
facility at prime plus 1.5%;
- - $500,000 term loan at prime plus 1.5% secured by the company's machinery
and equipment
During the third quarter, the Company converted approximately $975,000 of
the $2.3 million facility to a fixed rate mortgage on its Navasota facility. In
addition, approximately $375,000 of the $500,000 term loan commitment was
converted to a machinery and equipment term loan. At September 30, 1997 the
Company had used approximately $3.5 million of its available revolving credit
facility.
The Company's future cash requirements for the remainder of 1997, and
beyond, will depend primarily upon its level of sales, timing of inventory
purchases, conversion of receivables to cash, expenditures on new product
development, implementation of marketing programs, capital expenditures and
possible strategic acquisitions.
Operating activities used cash totaling $42,399 and $1,241,809 for the
nine month periods ended September 30, 1996 and 1997, respectively. The primary
use of cash in operating activities has been to fund increases in accounts
receivable and inventories resulting from BodyBilt's and ErgoFon'iks rapid
growth.
Investing activities used cash totaling $28,641 and $8,800,089 for the
nine month period ended September 30, 1996 and 1997, respectively. Substantially
all of the cash used in the first
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nine months of 1997 related to three areas: the acquisition of BodyBilt,
advances to CTSS per its licensing agreement with the Company and capital
expenditures associated with the purchase of and improvements to the Dallas
headquarters property. BodyBilt anticipates continuing to make capital
expenditures in connection with plant machinery and equipment. The Company has
also installed new manufacturing and accounting software and expects to continue
to acquire additional computer equipment for this upgrade.
Financing activities provided cash totaling $317,191 and $11,004,138
for the nine month periods ended September 30, 1996 and 1997, respectively. The
Company's initial public offering, referred to in financial statement footnote
number 4, provided approximately $9.9 million in cash proceeds net of costs in
the first nine months of 1997. Additionally, proceeds from borrowings were
utilized primarily to provide working capital.
Asset Management. BodyBilt typically sells its products and services on net
30-day terms and seeks to minimize its credit risk by performing credit checks
and conducting its own collection efforts. BodyBilt had trade accounts
receivable of $4.8 million at September 30, 1997. Bad debt expense as a
percentage of total revenue for this period was negligible.
BodyBilt attempts to keep its raw materials inventory low to minimize
the risk of obsolescence. BodyBilt also attempts to maintain the minimum level
of such inventory necessary to meet its near term manufacturing requirements by
relying on just-in-time delivery of products from its principal suppliers.
Credit Facilities. BodyBilt maintains a revolving line of credit
facility with Comerica Bank Texas (the "Line of Credit"). Borrowings under the
Line of Credit are utilized primarily for working capital to finance inventory
and receivables. Borrowings under the Line of Credit bear interest at a rate
equal to LIBOR + 285 basis points per annum. The Line of Credit is secured by a
first lien on the accounts receivable and inventory of ErgoBilt.
On September 6, 1996, ErgoBilt obtained a $500,000 loan from Summit
Partners Management Co. ("Summit") to fund the Merger and expenses relating to
the Company's initial public offering (the "Offering"). The convertible note
evidencing this loan (the "Convertible Note") was repaid in part from the
proceeds of the Company's Offering and by conversion into shares of Common Stock
at the initial offering price per share (one-half of the principal balance of
the loan). The interest rate on this loan was 8.0% per annum and was scheduled
to mature on September 6, 1997. The Convertible Note was secured by a pledge of
certain assets of Gerald McMillan. In connection with the issuance of the
Convertible Note, Dr. McMillan sold 34,000 shares of Common Stock to Summit, and
the Company agreed to issue to Summit at the closing of the Offering a warrant
to acquire up to 51,000 shares of Common Stock at a price of 120% of the price
to public exercisable over a period of four years commencing one year after
issuance. The shares of Common Stock sold to Summit and the Common Stock
issuable upon exercise of the lender's warrant are subject to certain
registration rights.
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Subsequent to the end of the Company's third quarter, a $750,000
mortgage loan was closed on the Dallas headquarters. This mortgage represents a
portion of the $2.3 million real estate line negotiated with Comerica Bank. The
Company is negotiating a construction loan with the Bank for the necessary
improvements. The Company is also negotiating an increase in the line of credit
facility with the Bank. Additionally, the Company is exploring alternative
sources of financing to support its continued growth.
INFLATION. The cost of raw materials and component parts, salaries and
manufacturing wages have increased modestly. The increases have not had a
significant effect on BodyBilt's results of operations because of substantially
increasing sales volumes and relatively stable product prices.
NEW ACCOUNTING PRONOUNCEMENTS. Effective December 15, 1997, the Company
will be required to adopt Statement of Financial Accounting Standard ("SFAS")
No. 128, "Earnings Per Share." SFAS No. 128 introduces the concept of basic
earnings per share, which represents net income divided by the weighted average
common shares outstanding - without the dilutive effects of common stock
equivalents (options, warrants, etc.). Diluted earnings per share will continue
to be reported when SFAS No. 128 is adopted.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The seat design used in certain BodyBilt chairs, which accounted for
sales of approximately $1.2 million and $1.8 million for the years ended
December 31, 1995 and 1996, respectively, is derived from a design patented by
Dr. Jerome Congleton (the "Congleton Patent"). Dr. Congleton granted a license
to manufacture seats using the Congleton Patent to both BodyBilt and Ergonomics
Chairs, Inc., predecessor in interest to Neutral Posture Ergonomics, Inc.
("NPE"). Under the terms of this license agreement and related agreements, if
more than 50% of the outstanding capital stock of BodyBilt is transferred, its
license to manufacture chairs under the Congleton Patent will terminate.
Accordingly, as a result of the Merger, BodyBilt no longer holds a license of
the Congleton Patent. However, an agreement executed in connection with a 1991
settlement of litigation between BodyBilt, NPE and Dr. Congleton provides that a
successor to BodyBilt has the right to manufacture, market, distribute and sell
commercial, industrial and laboratory chairs using the Congleton Patent,
although such successor may not advertise its use of the Congleton Patent. The
Company believes that the restriction on advertising this patent will have no
material impact on its business.
BodyBilt is involved in a legal dispute with NPE in two forums. A
portion of this dispute is presently being arbitrated under a binding
arbitration agreement. The specific issue involved is whether BodyBilt needs a
license from NPE to manufacture and sell its chairs. NPE is claiming it is
entitled to a royalty payment. BodyBilt contends that it does not need a license
because the chairs do not come under the Congleton patent. Additionally,
BodyBilt contends that under a 1991 Settlement Agreement it is entitled to
produce its chair without a license.
Additionally, the Company has filed an action styled "BodyBilt, Inc. v.
Jerome J. Congleton," in the 85th District Court of Brazos County, Texas. This
suit relates to the assignment of the Congleton Patent from the inventor, Dr.
Congleton, to his affiliated company, NPE that is bringing the above arbitration
matter. BodyBilt contends that the manner in which Dr. Congleton assigned the
Congleton patent to NPE breached the 1991 Settlement Agreement and is demanding
Dr. Congleton indemnify and hold BodyBilt harmless in the above arbitration.
The Company believes the above actions between BodyBilt, Inc., NPE and
Jerome J. Congleton are not likely to have a material adverse effect on the
Company.
Ergobilt has recently filed a Section 43 Lanham Act case against NPE
arising out of false and misleading claims that NPE is making in the market
place and in the investment community. This case is pending in the U.S. District
Court for the Northern District of Texas, Dallas Division. This suit relates to
the misleading statements made by NPE that all of its chairs fall under the
Congleton patent. This case is in its inception.
The Company is also involved from time to time in various legal
proceedings and claims incident to the normal conduct of its business. The
Company believes that such legal proceedings and claims, individually and in the
aggregate, are not likely to have a material adverse effect on the Company.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
See Exhibit Index beginning on page 21 of this Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ErgoBilt, Inc.
- -------------------------
(Registrant)
/s/ Gerard Smith Date November 14, 1997
- -------------------------
Gerard Smith, President, Chief
Executive Officer and Director
/s/ William B. Glenn Date November 14, 1997
- -------------------------
William B. Glenn, Senior Vice
President and Chief Financial
Officer
(Principal Financial and Accounting Officer)
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INDEX TO EXHIBITS
Exhibit No. Description
- ---------- -----------
10.1 Comerica Bank - $975,000 Promissory Note*
10.2 Comerica Bank - $375,000 Promissory Note*
11.0 Statement regarding computation of per share earnings - 13 weeks
11.1 Statement regarding computation of per share earnings - 26 weeks
27.1 Financial Data Schedule (for EDGAR filing purposes only)
* To be filed by amendment.
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