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 29, 1998
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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
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 (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization.)
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
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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 - 2,586,281 shares as of October 6, 1998.
INDEX
THE LANGER BIOMECHANICS GROUP, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -- August 29, 1998 and
February 28, 1998 3
Condensed Consolidated Statements of Operations --
Three and Six Months ended August 29, 1998 and August 30, 1997 4
Condensed Consolidated Statements of Cash Flow --
Six Months ended August 29, 1998 and August 30, 1997 5
Notes to Condensed Consolidated Financial Statements --
Six Months ended August 29, 1998 6 - 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8 - 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders 10
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 11
2
PART I. FINANCIAL INFORMATION
THE LANGER BIOMECHANICS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Assets Aug. 29,1998 Feb. 28,1998
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(unaudited)
Current Assets:
Cash and cash equivalents $1,404,117 $1,189,046
Accounts receivable, net of allowance
for doubtful accounts of $15,000 and $23,000 1,541,045 1,360,420
Inventories, net (Note 2) 1,045,290 1,039,718
Other current assets 220,604 311,447
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Total current assets 4,211,055 3,900,631
Property and equipment, net 831,619 777,991
Other assets 169,142 169,214
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$5,211,816 $4,847,836
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Liabilities and Stockholders' Equity
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Current Liabilities:
Accounts payable $ 359,975 $ 478,590
Account liabilities:
Accrued payroll and related payroll taxes 253,301 281,961
Other current liabilities 685,115 658,709
Unearned revenue - current 376,364 391,081
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Total current liabilities 1,674,754 1,810,341
Accrued pension expense 275,209 220,609
Unearned revenue - long-term 149,055 148,733
Deferred income taxes 5,544 5,423
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Total liabilities 2,104,562 2,185,106
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Stockholders' Equity:
Common stock, $.02 par value. Authorized
10,000,000 shares; outstanding 2,586,281
and 2,585,281 shares, respectively 51,726 51,706
Additional paid-in capital 6,278,304 6,277,543
Accumulated deficit (2,931,708) (3,375,120)
Aggregate adjustment resulting from translation
of financial statements into U.S. dollars (49,239) (49,571)
Minimum pension liability adjustment (241,828) (241,828)
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Total stockholders' equity 3,107,254 2,662,730
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$5,211,816 $4,847,836
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3
THE LANGER BIOMECHANICS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended: Six Months Ended:
Aug. 29, 1998 Aug. 30, 1997 Aug. 29, 1998 Aug. 30, 1997
------------- ------------- ------------- -------------
Net sales (Note 3) $2,677,087 $2,550,513 $5,213,718 $5,065,798
Cost of sales 1,635,087 1,591,405 3,250,138 3,099,185
------------ ---------- ---------- ----------
Gross profit 1,042,000 959,108 1,963,580 1,966,613
Selling expenses 329,172 396,693 659,172 782,244
General and administrative expenses 535,885 552,300 1,043,025 1,151,269
------------ ---------- ---------- ---------
Income from operations 176,943 10,115 261,383 33,100
Other income, principally interest 16,164 14,064 50,844 38,433
Gain on legal settlement 149,498 0 149,498 0
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342,605 24,179 461,725 71,533
Other expense, principally interest 0 2,940 0 6,385
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Income before income taxes 342,605 21,239 461,725 65,148
Provision for income taxes (Note 1) 25,341 (4,872) 28,311 (3,576)
Net income $ 317,264 $ 26,111 $ 433,414 $ 68,724
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Weighted average number of common
shares used in computation of net
income per share:
Basic 2,586,281 2,584,281 2,586,188 2,584,281
Diluted 2,634,639 2,676,010 2,639,777 2,676,010
Net income per common share (Note 1):
Basic $0.12 $0.01 $0.17 $0.03
Diluted $0.12 $0.01 $0.16 $0.03
See notes to condensed consolidated financial statements.
4
THE LANGER BIOMECHANICS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
Six Months Ended:
Aug. 29,1998 Aug. 30,1997
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Cash Flows from Operating Activities:
Net income $ 433,414 $ 68,724
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 131,879 97,314
Deferred foreign tax provision 121 0
Changes in operating assets and liabilities:
Accounts receivable (180,625) 103,098
Inventories 5,572 (43,857)
Prepaid expenses and other assets 90,843 27,678
Net pension liability 54,600 54,600
Accounts payable and accrued liabilities (121,612) 6,336
Unearned revenue (14,395) 3,802
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Net cash provided by operating activities 399,797 317,695
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Cash Flows from Investing Activities-
Capital expenditures (185,507) (250,033)
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Net cash used in investing activities (185,507) (250,033)
Cash Flows from Financing Activities:
Common stock options exercised 781 0
Principal payments of notes payable 0 (301)
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Net cash provided by (used in) financing activities 781 (301)
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Net increase in cash and cash equivalents 215,071 67,361
Cash and cash equivalents at beginning of year 1,189,046 1,125,589
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Cash and cash equivalents at end of period $1,404,117 $1,192,950
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Supplemental Disclosures of Cash Flow Information-
Cash paid for interest $ 5,049 $ 6,386
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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
August 29, 1998
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, 1998.
Operating results for the periods ended August 29, 1998 are not necessarily
indicative of the results that may be expected for the year ending February 27,
1999.
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
29, 1998 and August 30, 1997, 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 did not take a physical inventory as of August 29, 1998. Inventories
and cost of sales for the interim period were based on the Company's perpetual
inventory records.
Inventories consist of: AUGUST 29, 1998 FEBRUARY 28, 1998
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(unaudited)
Raw materials $ 923,481 $ 921,065
Work-in-process 67,024 60,231
Finished goods 113,795 117,433
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Total Inventories 1,104,300 1,098,729
Less allowance for obsolescence 59,011 59,011
Net inventories $ 1,045,290 $ 1,039,718
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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
Effective March 1, 1998, the Company has adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," which requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in the financial statements.
Prior periods will be reclassified, as required. The Company's total
comprehensive earnings were as follows:
Six Months Ended
August 29, August 30,
1998 1997
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Net income $433,414 $68,724
Other comprehensive income (loss), net of tax:
Change in equity resulting from translation
of financial statements into U.S. dollars 330 (705)
Comprehensive income $433,744 $68,019
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7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Three and six months ended August 29, 1998 as compared with three and six months
ended August 30, 1997.
REVENUES
Sales of $2,677,087 for the second quarter ended August 29, 1998 were 5.0%
higher than the sales of $2,550,513 in the comparable prior-year quarter. Net
sales of $5,213,718 for the six months ended August 29, 1998 were 2.9% higher
than prior-period's sales of $5,065,798. When compared to the prior year,
second quarter sales were positively effected by unit volume increases in the
Company's core custom orthotic product line, as well as increased sales in the
Company's U.K. subsidiary.
GROSS PROFIT
Gross profit for the current-year's second quarter was $1,042,000 (38.9% of
sales) which represents an increase from the comparable prior-year quarter's
gross profit of $959,108 (37.6% of sales). Gross profit for the recently
concluded six-month period of $1,963,580 (37.7% of sales) was lower than the
comparable prior six-month period's gross profit of $1,966,613 (38.4% of sales).
The gross profit increase in the current-year's second quarter was due to a
reduction of production costs at the Company's U.S. and U.K. production
facilities. The Gross profit decreased for the current year 6 month period
was due, primarily to increased shipping cost incurred to maintain turnaround
time during an automation of the order entry process and an increase in the
material cost for certain portions of the product mix, both of which occurred
during the current-year's first quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the recently ended quarter were
$865,057 compared to $948,993 in the comparable prior-year period, a 8.8%
decrease. Expenses for the six months were $1,702,197 compared with $1,993,513
in the prior comparable period, accounting for a 14.6% decrease. The decrease
in selling, general and administrative expenses was primarily the result of
reduced salaries and related benefits, reflecting a reduction in personnel,
decreased promotional expenses and other direct selling expenses, reduced
consulting expenses, and cost savings attributable to the full implementation
of the new computer system installed at the beginning of the current fiscal
year.
OTHER INCOME AND EXPENSES
Other income consists primarily of income generated from investments and service
charge income generated from the Company's accounts receivable and seminar fees.
Net other income was $16,164 for the second quarter of the current fiscal year
as compared with $14,064 in the comparable prior year's quarter, representing a
14.9% increase. For the six months, net other income was $50,844 this year
versus $38,433 or a 32.3% increase. The three months and six months ended
August 29, 1998 include a gain in legal settlement of $149,498 previously
announced on July 27, 1998, arising from a fire, which occurred on January 6,
1993 at the Company's former Deer Park, New York manufacturing facility.
8
PROVISION FOR INCOME TAXES
The Company has provided an effective tax rate of 4.5% (U.S. operations) of
pre-tax profits after utilizing available net operating loss carryforwards and
taking into account the "Alternative Minimum Tax". Taxes for the U.K. operations
were estimated at 21% of pre-tax profit.
NET INCOME
The Company earned $317,264 or $0.12 per share for the recently concluded
quarter as compared to a gain of $26,111 or $.01 per share generated in the
prior-year's quarter. Six month's net profit of $433,414 or $.16 per share
compares with a profit of $68,724 or $.03 per share in the prior-year's
comparable period. The three months and six months ended August 29, 1998
include a gain in legal settlement of $149,498 or $0.06 per share in each
period.
LIQUIDITY
Working capital, as of August 29, 1998, was $2,535,892 versus $2,090,290 at
February 28, 1998, an increase of $445,602. The increase was due to an increase
in accounts receivable, cash and inventories of $180,625, $215,071, and $5,572
respectively, as well as decreases in accounts payable, accrued payroll
liabilities, and unearned revenue of $118,615, $28,660, and $14,717,
respectively. The increase was partially offset by a decrease in other current
assets of $90,843, and an increase in other current liabilities of $26,406.
Capital expenditures totaled $185,507 for the six months ended August 29, 1998.
Cash balances at August 29, 1998, of $1,404,117 were $215,071 above the February
28, 1998 balance of $1,189,046.
The Company believes its capital position is adequate to meet anticipated cash
needs for the next twelve months and beyond.
As of July 31, 1998, the Company renewed the revolving credit line of
$1,500,000, for an additional year (August 1, 1998 - July 31, 1999) at an
interest rate of prime plus 0.5%, from American National Bank and Trust
Company, but to date has not found it necessary to use this credit line.
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 is taking steps to ensure that all software used in the Company's
internal systems will manage data involving the transition of dates from 1999 to
2000 without functional or data abnormality and without inaccurate results. New
computer systems are being implemented that will substantially insure that the
Company's operating systems are not subject to Year 2000 transition problems.
However, there can be no assurance that problems will not surface that the
Company is currently unaware of.
In addition, the Company is in the process of communicating with others with
whom it does significant business to determine their Year 2000 Compliance
readiness and the extent to which the Company is vulnerable to any third party
Year 2000 issues. However, there can be no guarantee that the systems of other
companies on which the Company's systems rely will be timely converted, or that
a failure to convert by another company, or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect on the
Company.
9
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 October
2, 1998, where the following occurred:
1. Kenneth Granat, Gary L. Grahn, Justin Wernick and Thomas I.
Altholz were re-elected as Directors.
2. Deloitte & Touche LLP was re-appointed as the Company's auditors.
3. The votes cast, in person and by proxy, on the motion to elect
directors were as follows:
For Withhold Authority
Kenneth Granat 2,413,599 200
Gary L. Grahn 2,413,599 200
Dr. Justin Wernick 2,413,599 200
Thomas I. Altholz 2,413,599 200
4. 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 2,417,207
Votes against 18
Abstained 392
10
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
11. Statement Re: Computation of Per Share Earnings
(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.
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(REGISTRANT)
DATE: OCTOBER 13, 1998
BY: /s/ GARY L GRAHN
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GARY L. GRAHN
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
BY: /s/ NANCY T. BIZZARO
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NANCY T. BIZZARO
CONTROLLER
PRINCIPAL FINANCIAL OFFICER
11