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 August 28, 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 - 2,547,181 shares as of September 30, 1999.
INDEX
THE LANGER BIOMECHANICS GROUP, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -- August 28,
1999 and February 28, 1999 3
Condensed Consolidated Statements of Operations --
Three and Six Months ended August 28, 1999 and
August 29, 1998 4
Condensed Consolidated Statements of Cash Flow --
Six Months ended August 28, 1999 and August 29, 1998 5
Notes to Condensed Consolidated Financial Statements --
Six Months ended August 28, 1999 6 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
2
THE LANGER BIOMECHANICS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
August 28,1999 February 28,1999
-------------- ----------------
Assets (unaudited)
Current assets:
Cash and cash equivalents $ 1,303,930 $ 1,700,156
Accounts receivable, net of allowance for
doubtful accounts of $44,751 and $36,155, respectively 1,604,548 1,396,878
Inventories, net 1,126,777 1,034,001
Prepaid expenses and other current assets 184,275 160,723
----------- -----------
Total current assets 4,219,530 4,291,758
Property and equipment, net 871,991 673,152
Other assets 160,871 159,670
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Total Assets $ 5,252,392 $ 5,124,580
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 614,115 $ 700,590
Accrued liabilities:
Accrued payroll and related payroll taxes 286,201 285,540
Other current liabilities 652,109 542,250
Unearned revenue-current 312,146 356,887
----------- -----------
Total current liabilities 1,864,571 1,885,267
Accrued pension expense 173,254 195,254
Unearned revenue-long-term 199,908 104,420
Deferred income taxes 5,239 5,288
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Total liabilities 2,242,972 2,190,229
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Stockholders' equity :
Common stock, $.02 par value. Authorized
10,000,000 shares; Issued 2,603,281 and
2,598,281, respectively 52,067 51,966
Additional paid-in capital 6,295,370 6,291,564
Accumulated deficit (2,985,537) (3,070,630)
Accumulated other comprehensive loss (292,500) (299,199)
----------- -----------
3,069,400 2,973,701
Less: treasury stock at cost, 37,000 and
and 25,000 shares, respectively (59,980) (39,350)
----------- -----------
Total stockholders' equity 3,009,420 2,934,351
----------- -----------
Total Liabilities and Stockholders' Equity $ 5,252,392 $ 5,124,580
=========== ===========
See notes to condensed consolidated financial statements.
3
THE LANGER BIOMECHANICS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended
August 28, 1999 August 29,1998 August 28,1999 August 29,1998
--------------- -------------- -------------- --------------
Net sales $ 2,951,637 $ 2,677,087 $ 5,657,497 $ 5,213,718
Cost of sales 1,825,098 1,635,087 3,558,139 3,250,138
----------- ----------- ----------- -----------
Gross profit 1,126,539 1,042,000 2,099,358 1,963,580
Selling expenses 398,534 329,172 764,530 659,172
Research and development expenses 34,658 -- 53,719 --
General and administrative expenses 682,881 535,885 1,200,012 1,043,025
----------- ----------- ----------- -----------
Income from operations 10,466 176,943 81,097 261,383
----------- ----------- ----------- -----------
Other income (expense):
Other income, principally interest 12,104 16,164 36,496 50,844
Gain on legal settlement -- 149,498 149,498
Interest expense (2,200) -- (3,457) --
Minority interest (8,139) -- (12,864) --
----------- ----------- ----------- -----------
Other income, net 1,765 165,662 20,175 200,342
----------- ----------- ----------- -----------
Income before income taxes 12,231 342,605 101,272 461,725
Provision for income taxes 9,409 25,341 16,179 28,311
----------- ----------- ----------- -----------
Net income $ 2,822 $ 317,264 $ 85,093 $ 433,414
=========== =========== =========== ===========
Weighted average number of common
shares used in computation of net
income per share:
Basic 2,570,227 2,586,281 2,571,632 2,586,188
Diluted 2,661,168 2,634,639 2,660,770 2,639,777
Net income per common share :
Basic $ 0.00 $ 0.12 $ 0.03 $ 0.17
=========== =========== =========== ===========
Diluted $ 0.00 $ 0.12 $ 0.03 $ 0.16
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
4
THE LANGER BIOMECHANICS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
August 28, 1999 August 29, 1998
--------------- ---------------
Cash Flows From Operating Activities:
Net income $ 85,093 $ 433,414
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Deferred foreign taxes (1,042) 121
Depreciation and amortization 112,326 131,879
Provision for doubtful accounts receivable 9,046 --
Changes in operating assets and liabilities:
Accounts receivable (170,505) (180,625)
Inventories (59,104) 5,572
Prepaid expenses and other assets (20,669) 90,843
Accounts payable and accrued liabilities (49,921) (121,612)
Net pension liability (22,000) 54,600
Unearned revenue 12,846 (14,395)
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Net cash (used in) provided by operating activities (103,930) 399,797
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Cash Flows From Investing Activities:
Capital expenditures (275,572) (185,507)
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Net cash (used in) investing activities (275,572) (185,507)
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Cash Flows From Financing Activities:
Common stock options exercised 3,906 781
Treasury stock acquired (20,630) --
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Net cash (used in) provided by financing activities (16,724) 781
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Net (decrease) increase in cash and cash equivalents (396,226) 215,071
Cash and cash equivalents at beginning of period 1,700,156 1,189,046
----------- -----------
Cash and cash equivalents at end of period $ 1,303,930 $ 1,404,117
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest expense $ 3,457 $ 5,049
=========== ===========
See notes to condensed consolidated financial statements.
5
THE LANGER BIOMECHANICS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended August 28, 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 August 28, 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 August
28, 1999 and August 29, 1998 were calculated at an effective annual tax rate of
4.5%, reflecting the utilization of available net operating loss carryforwards
and also taking 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 performed a physical inventory as of August 28, 1999. Inventories
and cost of sales for the interim period were based on the results of the
Company's physical inventory.
August 28, 1999 February 28, 1999
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(unaudited)
Inventories consist of:
Raw materials $1,122,008 $1,017,080
Work-in-process 72,296 84,448
Finished goods -- --
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Total inventories 1,194,304 1,101,528
Less: allowance for obsolescence 67,527 67,527
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Inventories,net $1,126,777 $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 Six Months Ended
August 28, August 29, August 28, August 29,
1999 1998 1999 1998
--------------------- ---------------------
Net income $ 2,822 $317,264 $ 85,093 $433,414
Other comprehensive income , net of tax:
Change in equity resulting from translation of
financial statements into U.S. dollars 3,762 986 6,699 330
-------- -------- -------- --------
Comprehensive income $ 6,584 $318,250 $ 91,792 $433,744
======== ======== ======== ========
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 August 28,1999 North America United Kingdom Total
--------------------------------- ------------- -------------- -----
Net sales from external customers $2,576,286 $375,351 $2,951,637
Intersegment net sales 56,394 -- 56,394
Gross margins 967,792 158,747 1,126,539
Operating (loss) profit (44,960) 55,426 10,466
Three months ended August 29,1998
---------------------------------
Net sales from external customers $2,353,851 $323,236 $2,677,087
Intersegment net sales 39,234 _ 39,234
Gross margins 908,232 133,768 1,042,000
Operating profit 119,974 56,969 176,943
Six months ended August 28,1999
-------------------------------
Net sales from external customers $4,924,927 $732,570 $5,657,497
Intersegment net sales 106,415 -- 106,415
Gross margins 1,797,145 302,213 2,099,358
Operating (loss) profit (11,946) 93,043 81,097
Six months ended August 29,1998
-------------------------------
Net sales from external customers $4,590,945 $622,773 $5,213,718
Intersegment net sales 75,457 -- 75,457
Gross margins 1,723,846 239,734 1,963,580
Operating profits 185,204 76,179 261,383
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 Six Months Ended
August 28,1999 August 29,1998 August 28,1999 August 29,1998
-------------------------------- --------------------------------
Numerator:
Income available to common stockholders $2,822 $317,264 $85,093 $433,414
------ -------- ------- --------
Denominators:
Denominator for basic earnings per share-
weighted average shares outstanding 2,570,227 2,586,281 2,571,632 2,586,188
Effect of dilutive securities:
Stock options 90,941 48,358 89,138 53,589
------ ------ ------ ------
Denominator for diluted earnings per share 2,661,168 2,634,639 2,660,770 2,639,777
========= ========= ========= =========
Basic earnings per share $0.00 $0.12 $0.03 $0.17
===== ===== ===== =====
Diluted earnings per share $0.00 $0.12 $0.03 $0.16
===== ===== ===== =====
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Three and six months ended August 28, 1999 as compared with three and six months
ended August 29, 1998.
Revenues
Sales of $2,951,637 for the second quarter ended August 28, 1999 were 10.3%
higher than the sales of $2,677,087 in the comparable prior-year quarter. Sales
of $5,657,497 for the six months ended August 28, 1999 were 8.5% higher than
prior-period's sales of $5,213,718. The increased sales for both the three month
and six 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 sales in the Company's subsidiary in the United Kingdom.
Gross Profit
Gross profit as a percentage of sales for both the three month and six month
periods ended August 28,1999 was consistent with but slightly lower than the
comparable periods in the prior year. For the three months ended August 28,1999
gross profit as a percentage of sales decreased to 38.2% of sales from 38.9% in
the comparable prior period, while for the six month period ended August
28,1999, gross margin as a percentage of sales decreased to 37.1% from 37.7% in
the comparable period in the prior year.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the recently ended quarter were
$1,081,415 compared to $865,057 in the comparable prior-year period, a 25%
increase. Selling expenses increased $69,632 principally due to increased
commissions associated with increased sales and increased travel expenses, while
general and administrative expenses increased $146,996 primarily due to
increased professional fees and salary and salary related expenses. Selling,
general and administrative expenses for the six months ended August 28,1999 were
$1,964,542 compared with $1,702,197 in the prior comparable period. Selling
expenses increased $105,358 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 $156,987 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 six month periods ended August 28,1999 of $34,658 and $53,719,
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 both prior year periods, a gain on legal settlement of $149,498. Net other
income was $1,765 for the second quarter of the current fiscal year as compared
with $16,164 in the comparable prior year's quarter, exclusive of the gain on
legal settlement. For the six month periods, net other income was $20,175 this
year versus $50,844, exclusive of the gain on legal settlement.
10
Liquidity
At August 28, 1999 , the Company had cash and cash equivalents of $1,303,930 and
working capital of $2,354,959. Cash balances decreased $396,226 from February
28,1999 primarily due to the Company's investment in capital equipment of
$275,572. These capital expenditures were made to position the Company for
future growth. The Company's $1.5 million revolving credit facility expired on
July 31,1999 and the Company is currently negotiating the renewal of this
facility and anticipates that this facility will be renewed on terms
substantially similar to the expired facility. 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.
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 substantially 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
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.
Throughout the remainder of 1999 the Company will continue its efforts to
monitor the progress and obtain and evaluate responses of its key vendors,
suppliers and other significant third parties.
11
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
THE LANGER BIOMECHANICS GROUP, INC. AND SUBSIDIARIES
Item 4. Submission of Matters to a Vote of Security-Holders.
Reference is made to an annual meeting of shareholders held on September
15, 1999, where the following occurred:
1. Stephen V. Ardia, Kenneth Granat, Justin Wernick and Thomas I.
Altholz were re-elected as Directors.
2. Shareholders approved an amendment to the Company's 1992 Stock
Option Plan to increase the number of shares authorized to be issued
under the plan to 550,000 shares.
3. Deloitte & Touche LLP was re-appointed as the Company's auditors.
4. The votes cast, in person and by proxy, on the motion to elect
directors were as follows:
For Withhold Authority Abstain Did not Vote
Stephen V. Ardia 2,437,664 200 1,000 888
Kenneth Granat 2,437,664 200 1,000 888
Dr. Justin Wernick 2,437,664 200 1,000 888
Thomas I. Altholz 2,437,664 200 1,000 888
5. The votes cast, in person and by proxy, on the motion to amend the
Company's 1992 Stock Option Plan to increase the number of shares
authorized to be issued under the plan to 550,000 shares were as
follows:
Votes for 1,488,684
Votes against 86,907
Abstained 4,084
Did not vote 860,077
6. The votes cast, in person and by proxy, on the motion to ratify the
appointment of Deloitte & Touche LLP as the independent auditors of
the Company were as follows:
Votes for 2,437,358
Votes against 900
Abstained 633
Did not vote 861
13
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
14
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: October 1, 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