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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
---------------------------------
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended FEBRUARY 29, 2000
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 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 (I.R.S. employer iden-
of incorporation or tification number)
organization)
450 COMMACK ROAD, DEER PARK, NEW YORK 11729
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (516) 667-1200
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Securities registered pursuant to Section 12(b) of the Act: NONE
----
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.02 PER SHARE
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Title of Class
* * * * * * * * * * *
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
As of May 12, 2000 the aggregate market value of voting stock held by
non-affiliates of the Registrant was $2,519,485, as computed by reference to the
average bid and ask prices of the stock (1 11/16) multiplied by the number of
shares of voting stock outstanding on May 12, 2000 held by non-affiliates
(1,493,028).
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of May 12, 2000.
CLASS OF COMMON STOCK OUTSTANDING AT MAY 12, 2000
- --------------------- ---------------------------
Common Stock, par value 2,539,081 shares
$.02 per share
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Not applicable.
2
PART I
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ITEM 1. BUSINESS
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GENERAL
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The Langer Biomechanics Group, Inc. ("LBG" or the "Company") is engaged
in the design, manufacture and marketing of foot and gait-related biomechanical
products. The Company's largest product line, custom-made, prescription orthotic
devices, accounted for approximately 84% of revenues for the fiscal year ended
February 29, 2000. Foot orthoses are contoured molds made from plastic,
graphite, leather or composite materials, which are placed in patients' shoes to
(i) correct or mitigate abnormalities in their gait and (ii) relieve symptoms
associated with foot or postural malalignment. These devices function by
maintaining the proper relationships between a patient's forefoot, rearfoot, leg
and horizontal walking surface. To the Company's knowledge, it has the greatest
overall unit volume and revenue in the custom foot orthoses industry. The
Company's customers are primarily podiatrists, and also include orthopedists,
physical therapists and Orthotic & Prosthetic ("O&P") centers. The Company also
makes ankle foot orthoses ("AFO"), boot-like devices which assist individuals
afflicted with neurological impairments, foot deformities and injuries to
achieve a more natural gait.
In addition to its line of orthotics products, the Company has
developed and markets a number of other products that help treat biomechanical
medical problems related to feet and gait, including:
o A proprietary medical grade soft tissue cushioning material named
PPT(R), which the Company believes provides superior protection against
forces of pressure, shock and shear. PPT conforms and bonds to a broad
array of orthotic and prosthetic devices, braces and assemblies; and
o The Pediatric Counter Rotation System ("CRS"(R)), a device which
corrects in-toe/out-toe disorders of infancy, while allowing
unrestricted movement of the feet and legs.
BACKGROUND
- ----------
Since its formation under the laws of the state of New York in 1971,
the Company has engaged in activities relating to the application of scientific
and quantitative methods for the diagnosis and treatment of foot and
gait-related problems. To date, the majority of the Company's revenues have been
derived from the sale of prescription biomechanical foot orthotic devices to
health care practitioners in the field of podiatric biomechanics. Podiatric
biomechanics deals essentially with the structure and function of segments of
the feet as they relate to each other and to the function of the legs, hips and
spine.
The Company has also endeavored to manufacture and market complementary
products relating to locomotor dysfunctions. Building on its experience in
treating disorders associated with the biomechanics of the foot and leg, the
Company has directed efforts towards producing therapeutic products which can
treat and improve patients' motor capabilities, biomechanical alignment and
function.
3
Net sales by product category of the Company as derived from its
accounting records are set forth below (dollars in thousands):
FISCAL YEARS ENDED:
------------------------------------------------------------
FEB. 29, FEB. 28, FEB. 28, FEB. 28,
PRODUCT CATEGORY 2000 1999 1998 1997
---------------- ------------------------------------------------------------
Custom Orthoses $ 9,305 $ 8,521 $ 8,618 $ 8,994
PPT Products 1,303 1,269 1,281 1,085
Materials and Other 537 517 257 436
--------- --------- -------- ---------
Total $ 11,145 $ 10,307 $ 10,156 $ 10,515
========= ========= ======== =========
Export and foreign sales constituted approximately 34%, 26% and 26% of
revenues for the fiscal years ended February 29, 2000, and February 28, 1999 and
February 28, 1998, respectively.
CUSTOM ORTHOTIC DEVICES
- -----------------------
The Company is engaged in the design, development, manufacture and sale
of custom-made foot orthoses. Biomechanical orthotic devices help provide near
normal function by maintaining the angular anatomical relationships between the
patient's forefoot, rearfoot, leg and horizontal walking surface. This is
achieved by the inherent contours of the neutral position shell of the device
and by the angled posts on the front and/or rear ends which cause the orthotic
device to move into specific positions at specific times during the gait cycle.
Accordingly, muscle action is enhanced and the efficiency and smoothness of
weight stress transmission through the feet and legs is improved. The result is
a reduction of abnormal motion without total restriction of normal motion and an
increase in foot and leg stability. Foot problems may be alleviated or
eliminated, as may leg and back fatigue caused by improper muscle use. The
formation and further growth of excrescences (e.g., corns or callouses) may be
prevented, decreased in size or eliminated. In addition, the future formation of
bunions may be prevented.
During the twelve months ended February 29, 2000, sales of orthotic
products totaled $9,305,000, compared to $8,521,000 for the twelve months ended
February 28, 1999. Increased revenue resulted from increased unit volume in both
the Company's domestic operations and the United Kingdom subsidiary.
While sales were primarily made to practitioners within the United
States, the Company also sold its orthotic products in approximately thirty-two
foreign countries. No single orthotic customer presently accounts for more than
1% of the Company's annual sales. The primary market for custom orthotic devices
is podiatrists who prescribe such devices for their patients. There are
approximately 11,000 practitioners of podiatry licensed in the United States.
Orthotic devices are also sold to other health care professionals, such as
orthopedists, engaged in the treatment of the foot. The cost of the device to
the patient is typically included by the practitioner as part of his fee for
treatment. The Company does not sell the devices directly to the user-patient.
Orthotic devices are made in the Company's three facilities in Deer Park, New
York; Brea, California; and Stoke-on-Trent, England. The prescribing
practitioner furnishes plaster impression casts of the patient's feet and
necessary clinical information on an appropriate prescription order form. In
addition to its six-month warranty, the Company offers an optional "Protect
Program" at an additional cost of $55 per pair of orthoses. Under the program,
the Company will repair or replace the orthotics at no charge, or at a reduced
charge, during the first 24 months following sale.
Biomechanical orthotic devices can be fabricated with different
functional capabilities and from various materials, depending upon the
requirements of the patient. The Company has designed orthotic devices to
address the needs of particular segments of the market. For example, the general
interest in physical fitness has resulted in demand for orthotic devices and it
has heightened the awareness of the importance of proper foot function and foot
care. To address this segment of the market, the Company manufactures an
extensive line of orthotics called Sporthotics(R), designed for the specific
needs of runners and other sport-specific athletes, including football,
basketball and tennis players. Other specialized products include: Healthflex(R)
(designed for the needs of aerobic dance, walking and exercise enthusiasts),
DesignLine(R)
4
(a functional orthotic designed to fit into dress shoes, such as high fashion
shoes and loafers which cannot accommodate a full-size orthotic),
DressFlex(TM) (a unique proprietary device for use in women's high-heeled
shoes), Slimthotics(R) (designed to fit into shoes, such as high heels and
ballet slippers), Lyte Fit(R) (ultra-thin and lightweight devices made from
LBG's exclusive Superform(R) thermoplastic material), the Golden Series(TM)
(designed for the needs of active individuals who are over 50 years of age),
Bioflex(R) (devices suitable for younger, more active individuals),
BlueLine(TM) (a flexible, durable, accommodative device that provides a
moderate level of control), D.S.I.S.(R) (a patented device for the effective
treatment of pediatric flat foot), and Diab-A-Thotics(R) (designed to meet
the needs of diabetic patients in the growing diabetic population).
An additional product line called "FirstChoice" was introduced in
fiscal 1995 in order to address price-sensitive market areas, including managed
care organizations. The product offering is limited to several basic products
and has flat rate pricing. The manufacturing and service areas are also limited
in order to reduce costs.
Superform(R) is a proprietary composite material believed to be
superior to other composite materials available for orthotic fabrication.
Superform was first introduced in fiscal 1994 in several of the Company's
orthotic products due to its strength and mouldability. During fiscal 1995, the
Company began to market Superform to other orthotic labs.
Ankle Foot Orthoses ("AFO") are plastic devices which are composed of a
foot plate and leg support. They assist individuals afflicted with neurological
impairments, previous trauma, ankle and leg instability, and arthritic
deformities, to achieve a more natural gait. These products include the Hinged
Ankle Foot Orthosis ("HAFO") used for neurological problems, the
Supra-Malleoloar Orthosis ("SMO") for instability of the ankle joint, the Solid
Ankle Foot Orthoses ("SAFO") to restrict motion at the ankle to treat arthritis
and other joint conditions, and the Posterior Leaf Spring ("PLS"), useful in
tendon ruptures and flaccid drop foot. AFO devices are prescribed by
podiatrists, physical therapists and rehabilitation therapists.
While the Company obtains a number of its fabrication materials from
single sources, it has not experienced any significant shortages other than
occasional backorders. In most cases, any needed materials can usually be
obtained from an alternate distributor.
The Company believes that a relatively small percentage of custom
orthotic devices continue to be made by practitioners in their own offices or
laboratories. The vast majority of the market is serviced by professional
laboratories based on casts and prescriptions furnished by practitioners. There
are several other custom orthotic laboratories that are national in scope which
the Company believes hold approximately a combined 40% to 45% of the overall
custom market. The remainder of the market is fragmented among smaller regional
and local facilities.
PPT(R) PRODUCTS
- ---------------
PPT is a medical grade soft tissue cushioning material with a high
density, open-celled urethane foam structure. PPT, a registered trademark of the
Company, is manufactured, pursuant to an agreement, for the Company by a large
industrial manufacturing company. This company manufactures urethane foam
materials of which PPT is a derivative. Pursuant to the agreement, the Company
has the exclusive worldwide rights to serve footcare, orthopedic and related
medical markets with such materials.
The Company has developed and sells a variety of products fabricated
from PPT including moulded insoles, components for orthotic devices, laminated
sheets, and diabetic products. Some manufacturing operations associated with
these products are performed by outside vendors.
Sales of PPT products for the twelve months ended February 29, 2000
were $1,303,000 versus $1,269,000 in the prior fiscal year. The increase is
primarily attributable to increased sales in Europe.
In 1993, the Company introduced a new generation of PPT, which
independent tests show to have improved properties over competitive materials.
The essential function of PPT and other soft tissue supplements is to provide
protection against forces of pressure, shock and shear. The Company believes
that PPT's characteristics make it a superior product in its field. PPT has a
superior "memory" that enables it to return to its original shape faster and
more accurately than other materials
5
used for similar purposes. PPT is also odorless and non-sensitizing to the skin,
and has a porosity which helps the skin to remain dry, cool and comfortable.
These factors are especially important in sports medicine applications.
Besides podiatric use, PPT is suitable for other orthopedic and
medical-related uses such as liners for braces and prosthetics, as shock
absorbers and generally in devices used in sports and physical therapy.
The Company has awarded exclusive distribution arrangements to certain
leading distributors serving selected end-use markets in the United States and
other countries. The Company sells direct to practitioners in non-exclusive
markets.
The market for soft tissue supplements is highly competitive. Brand
products as well as commodity type foam rubber are all widely used. Brand name
products include Spenco, Sorbothane, medical-grade Poron, and DCS. The remainder
of the market is fragmented. The Company competes directly with one other
manufacturer of cellular urethane foam.
MATERIALS AND OTHER SALES - (MOS)
- ---------------------------------
This category includes all other revenue sources for the Company, including
Superform(R) and the Pediatric Counter Rotation System ("CRS" (R) ).
Superform(R)
Superform thermoplastic composite is the Company's proprietary material
used for orthotic shell fabrication. Superform is lightweight and has superior
impact resistance, making it a suitable material for orthotics that are used by
athletes.
CRS(R)
The Company introduced the CRS device in fiscal 1987 for the correction and
management of a variety of in-toe and out-toe disorders of infancy. The
disorders manifest themselves in an excessive angle, either inward or outward,
from that which is normal in the relationship of the foot to the direction of
movement. The CRS is designed to replace rigid bars or splints which have
traditionally been used (since 1934) and which not only inhibit normal leg
movement and are cumbersome and inconvenient, but can also lead to permanent
knee and hip damage. Unlike rigid bars or splints, the CRS requires no specific
measurement for sizing and may be used with almost any type of children's shoes.
Also, unlike other devices, it will allow the infant unrestricted movement of
the feet and legs while maintaining the abnormal foot or feet in the corrected
position. The CRS is also designed to compensate automatically for the rapid
growth of an infant's legs and hips, thus avoiding the possibility of damage to
the hips and knees. The potential for permanent knee and hip joint damage is a
significant drawback of rigid bar therapy.
The CRS is prescribed by pediatricians, orthopedists and podiatrists
and is sold by the Company directly to practitioners as well as through selected
distributors. The level of reimbursement from third-party insurers for the CRS
varies from one state to another.
The CRS was developed by BioResearch Ithaca, Inc. of Ithaca, New York,
which has obtained patents on the device in the United States and certain other
countries. In accordance with a license agreement entered into in l986 between
the Company and BioResearch Ithaca, Inc., the Company has been granted an
exclusive license, with the right to grant sublicenses, to make, use and sell
the CRS. Food and Drug Administration acceptance to market the CRS has been
obtained by the Company. See "Governmental Regulation".
Sales for MOS totaled $537,000 during the twelve months ended February
29, 2000 compared to sales of $517,000 in the prior twelve-month period. The
increase in revenues resulted principally from an increase in miscellaneous
revenues at the Company's United Kingdom operation.
6
MARKETING
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The Company vitalized its field sales effort, targeting
multi-practitioner facilities, in addition to trade shows, advertising,
educational sponsorships, public relations and maintenance marketing. The
Company continues to emphasize customer service by maintaining a staff of
customer service representatives at each of its facilities.
The Company continues its focus on providing the education and training
for healthcare practitioners who treat biomechanical problems of the lower
extremity through seminar and in-service programs. A comprehensive program is
offered in biomechanics, gait analysis and the cost-effectiveness of orthotic
therapy.
Management promotes awareness of orthotics through marketing and
operational initiatives. A Volume Incentive Program ("VIP") along with practice
building assistance is oriented toward helping practitioners expand the orthotic
components of their practices.
RESEARCH AND DEVELOPMENT
- ------------------------
As of March 1, 1999, the Company established a Product Development
department to explore new applications for existing products and ensure that the
Company remains on the cutting edge of orthotic therapy. Costs incurred during
the twelve months ended February 29, 2000 were approximately $149,000.
PATENTS AND TRADEMARKS
- ----------------------
The Company believes that patent and trademark protection are
beneficial. The Company holds 13 patents, 94 trademarks and 9 copyrights. These
patents and trademarks are held in 12 countries, including the United States.
The Company has exclusive licenses to three types of orthotic devices which are
patented in the United States and several foreign countries. In addition,
patents have also been granted to a third party in the United States and
numerous foreign countries with respect to the CRS (as to which the Company has
exclusive marketing rights).
Although a patent would have a statutory presumption of validity in the
United States, in the event that any patent awarded to the Company or a third
party is later tested in litigation, the issuance of a patent is not conclusive
as to such validity or as to the enforceable scope of the claims therein. The
validity and enforceability of a patent can be attacked after its issuance. If
the outcome of such litigation is adverse to the owner or licensor of the
patent, third parties may use the invention or technology pertaining to the
patent without restriction. Accordingly, any patents granted to the Company or
to third parties from whom the Company obtained licenses may not afford any
protection against competitors with similar products. Loss of patent protection
could have an adverse effect on the Company's business by permitting competitors
to utilize techniques developed by the Company.
GOVERNMENTAL REGULATION
- -----------------------
Rules of the Food and Drug Administration ("FDA") may require the
submission of a 510(k) notification of intent to market certain products. Upon
submission of a 510(k), the FDA may determine the product to be substantially
equivalent to products previously marketed in interstate commerce. Such
submissions have been made and determined to be substantially equivalent for the
CRS.
EMPLOYEES
- ---------
At March 1, l999, the Company had 148 employees, of which 82 were
located in Deer Park, New York, 37 in Brea, California, and 29 in
Stoke-on-Trent, England. The employees are not represented by a union. During
Fiscal 2000, the Stoke-on-Trent facility was a 75% owned subsidiary of the
Company. Subsequent to February 29, 2000, the Company acquired the remaining 25%
interest in this subsidiary. See Notes to Consolidated Financial Statements.
7
CONSULTANTS AND FIELD EVALUATION FORCE
- --------------------------------------
The Company has oral or written agreements with four medical
specialists with respect to their providing professional consultative services
to the Company in their areas of specialization. Two of the consultants are on
the faculties of podiatric medicine colleges in the United States.
The consultants test and evaluate the Company's products, act as
speakers for the Company at symposiums and professional meetings, generally
participate in the development of the Company's products and services and
disseminate information about them. The Company also relies on practitioners in
various parts of the country to act as field evaluators of the Company's
products.
SEASONALITY
- -----------
Revenue derived from the Company's sale of orthotic devices, a
substantial portion of the Company's operations, has historically been
significantly higher in the warmer months of the year.
ITEM 2. PROPERTIES
- ------------------
The Company's executive offices, and its primary manufacturing
facilities, are located in Deer Park, New York. The Deer Park facility is leased
through July 31, 2005, with a four year extension option, and with monthly lease
payments averaging $25,181. The Company also leases space in Brea, California
(manufacturing facility) which expires on December 31, 2000, and with aggregate
monthly lease payments of $7,576. The Company's United Kingdom subsidiary (see
notes to consolidated financial statements) occupied new premises in fiscal
2000. The facility in Stoke-on-Trent, England is leased through August 2004
,with a five year extension, with quarterly lease payments of $10,500 (at the
current exchange rate). The Company believes that its manufacturing facilities
are suitable and adequate and provide the productive capacity necessary for its
current and reasonably foreseeable future needs. The Company believes that while
these manufacturing facilities are being adequately utilized, they could be more
fully utilized (e.g. with extended night shift operations) should this become
necessary.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
PRICE RANGE OF COMMON STOCK
- ---------------------------
The Registrant's common stock, par value $.02 per share ("Common
Stock"), is traded on the over-the-counter market with quotations reported on
the National Association of Securities Dealers Automated Quotation System
(NASDAQ) under the symbol GAIT. The following table sets forth the high and low
closing bid prices for the Common Stock for the fiscal years ended February 28,
1999 and February 29, 2000. The NASDAQ quotations represent prices between
dealers, do not include retail markups, markdowns or commissions, and may not
represent actual transactions.
TWELVE MONTHS ENDED FEBRUARY 28, 1999 HIGH LOW
- ------------------------------------- ---- --------
1st quarter 1-9/16 1-5/16
2nd quarter 1-7/16 1-5/16
3rd quarter 1-3/8 1-1/16
4th quarter 1 7/8 1-1/4
TWELVE MONTHS ENDED FEBRUARY 29, 2000 HIGH LOW
- ------------------------------------- ------- --------
1st quarter 2 1-1/4
2nd quarter 1-13/16 1-3/8
3rd quarter 2 1-5/8
4th quarter 1-15/16 1-11/16
On February 29, 2000, there were approximately 300 holders of record of
the Common Stock. However, this figure is exclusive of all owners whose stock is
held beneficially or in "street" name. Based on information supplied by various
securities dealers, the Company believes that there are in excess of 650
shareholders in total, including holders of record as well as those whose shares
are beneficially held.
DIVIDEND HISTORY AND POLICY
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The Registrant has never paid cash dividends on its Common Stock and
anticipates that, for the foreseeable future, it will follow a policy of
retaining earnings to finance the expansion and development of its business.
Under the Company's current revolving credit facility with a bank, under which
there are currently no borrowings, restrictions are applicable to the payment of
dividends. In any event, future dividend policy will depend upon the Company's
earnings, financial condition, working capital requirements and other factors.
9
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
(In thousands, except per share data.)
Fiscal Year Ended:
---------------------------------------------------------------------------
Feb. 29, Feb. 28, Feb. 28, Feb. 28, Feb. 29,
2000 1999 1998 1997 1996
------------ ------------ ------------- ------------- ------------
Consolidated Statement of Operations:
Net sales $11,145 $10,307 $ 10,156 $ 10,515 $10,113
Income (loss) before non-recurring charges
and income taxes (337) 329 370 331 113
Non-recurring changes:
Discontinuance of CAD-CAM project - - - - (499)
Lab closings, write down of selected assets
and legal fees - - - - (49)
Income (loss) before income taxes (337) 329 370 331 (435)
Provision for (benefit from) income taxes (2) 25 5 28 (2)
Net income (loss) (335) 304 365 303 (433)
Earnings per share:
Income (loss) before non-recurring charges
and income taxes (0.13) 0.12 0.14 0.12 0.04
Non-recurring changes:
Discontinuance of CAD-CAM project - - - - (0.19)
Lab closings, write down of selected assets
and legal fees - - - - (0.02)
Net income (loss) per common share:
Basic (0.13) 0.12 0.14 0.12 (0.17)
Diluted (0.13) 0.12 0.14 0.11 (0.17)
Weighted average number of common shares:
Basic 2,571 2,584 2,585 2,583 2,568
Diluted 2,571 2,607 2,658 2,666 2,568
Cash dividends per share - - - - -
Consolidated Balance Sheets: Feb. 29, Feb. 28, Feb. 28, Feb. 28, Feb. 29,
2000 1999 1998 1997 1996
------------ ------------ ------------- ------------- ------------
Working Capital 1,715 2,423 2,090 2,050 1,576
Total Assets 4,738 5,125 4,848 4,445 4,035
Long-term Liabilities
(excluding current maturities) 277 305 375 444 430
Stockholders' Equity 2,536 2,934 2,663 2,291 1,978
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
STATEMENTS OF OPERATIONS:
- -------------------------
The Company's net sales of $11,145,000 for the twelve months ended
February 29, 2000 were 8.1 percent above net sales of $10,307,000 for the twelve
months ended February 28, 1999. Net sales in fiscal 1999 were 1.5 percent above
net sales of $10,156,000 for the twelve months ended February 28, 1998.
Sales of orthotic products, which accounted for 84 percent of the
Company's fiscal 2000 sales, increased by approximately $784,000 or 9.2 percent
to approximately $9,305,000 in the most recent twelve-month period. The
increased sales of orthotci products is principally due to increased unit volume
resulting from increased marketing activities in both the Company's domestic
operations as well as its United Kingdom operations. Sales of orthotic products
in fiscal 1999 decreased by $97,000 or 1.1 percent to $8,521,000 from fiscal
1998. Decreased revenue resulted from decreased unit volume in the Company's
United Kingdom subsidiary. The United Kingdom's volume decline in custom
orthotics was largely offset by a volume increase in the Company's North America
operations.
Sales of PPT (the Company's soft tissue supplement material) for the
recent twelve months were $1,303,000, which increased by $34,000 or 2.7 percent
from sales in the prior fiscal year. For the year ended February 28, 1999, sales
were $1,269,000, representing a .9 percent decrease of $12,000 from the prior
year. The decrease in PPT sales over the prior fiscal year was due to supply
chain problems that resulted in cancelled orders from larger direct accounts and
distributors.
Sales of material and other revenues increased by 3.9 percent to
approximately $537,000 for the most recent twelve-month period. This increase is
principally due to an increase in miscellaneous revenues at the Company's United
Kingdom operation. For the year ended February 28, 1999, sales of materials and
other revenues increased approximately $260,000 to $517,000 from sales in the
prior fiscal year. This increase in revenues resulted from the use of Superform
in non-Company products sold throughout the United Kingdom and sold to
distributors.
Gross profit (net sales less cost of sales) as a percentage of sales
decreased from 36.4 percent for the twelve months ended February 28, 1999 to
35.5 percent for the recent twelve-month period. The decrease in the gross
profit percentage was primarily the result of increased overhead costs and
production inefficiencies. Subsequent to February 29, 2000, management
implemented a new productivity incentive plan to increase production efficiency
and tightened controls over overhead spending. Gross profit as a percentage of
sales decreased from 40.0 percent for the twelve months ended February 28, 1998
to 36.4 percent for the year-end February 28, 1999. The decreased gross profit
percentage largely resulted from increased labor and freight costs associated
with unusual customer support efforts that revolved around operational issues
caused by the installation of a new company-wide computer system. Increased
material costs also accounted for some of the decrease in gross margin.
For the current fiscal year, selling expenses increased by $308,000 (or
22.0 percent), and general and administrative expenses increased by $214,000 (or
9.5 percent), compared to the prior twelve-month period. The increase in selling
expenses is primarily due to increased salary and travel expenses and increased
commissions associated with the increased sales and increased promotional
activities focused on increasing market share and future sales. The increase in
general and administrative expenses is principally due to increased professional
fees and travel expenses. For the twelve-month period ended February 28, 1999,
selling expenses decreased by $97,000, and general and administrative expenses
decreased by $3,000, compared to the prior twelve-month period. The decrease in
selling expenses was driven by reductions in salaries, direct mail and
advertising. The decrease in general and administrative expenses was due to net
reductions in salaries and fringe benefits.
11
As of March 1, 1999, the Company established a Product Development
department to explore new applications for existing products and ensure that the
Company remains on the cutting edge of orthotic therapy. Costs incurred during
the twelve months ended February 29, 2000 were $149,000. The Company incurred no
research and development expenses in fiscal 1999 or 1998.
Interest income for the recent twelve-month period of $31,000 decreased
$13,000 from the prior twelve-month period. The decrease is principally due to
the reduction in cash balances from the prior year. Interest income of $44,000
for fiscal 1999 was below fiscal 1998 by $9,000 due to a reduction in interest
charged on past due receivables.
Other income for fiscal year 2000 was $(11,000) as compared to $208,000
in the prior fiscal year. The significant decrease is due to an insurance claim
settlement received in 1999 for a fire at the main production facility several
years ago. For the twelve months ended February 28, 1998, other income was
$13,000.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working capital as of February 29, 2000 decreased $691,000 to
$1,715,000 from $2,406,000 at February 28, 1999 and cash balances at February
29, 2000 of $918,000 were $782,000 below the prior year-end balance of
$1,700,000. During the past year, the Company made significant investments in
the long-term assets necessary to grow the business. Fixed asset additions were
approximately $577,000 for the year and included the construction of a new
leased facility at the Company's subsidiary in the United Kingdom, a new
telecommunications system at the Company's Deer Park headquarters, a CNC router
and various other pieces of production machinery and equipment. Management
anticipates that it will invest in additional fixed assets in fiscal 2002 with
additions concentrated on process improvement and automation. Additionally, the
Company purchased approximately $97,000 of its common stock in the open market.
The Company's net loss in fiscal 2000 also contributed to the reduction in
working capital and cash.
The Company has a one year agreement for a revolving credit facility of
$1,500,000, which expires November 30, 2000. The facility provides borrowings at
an interest rate of prime plus 1/2 percent, from a bank, but to date the Company
has not found it necessary to use this credit line. The agreement contains,
among other items, restrictions relating to incurrence of additional
indebtedness and the payment of dividends. Additionally, the Company is required
to maintain certain minimum financial ratios. Borrowings under this agreement
are collateralized by substantially all of the assets of the Company. The
Company also has a $500,000 equipment credit line with a bank to finance the
long-term capital equipment needed to grow the Company's business. In December
1999, the Company borrowed $115,000 on this line to finance the acquisition of
certain machinery and equipment. The loan bears interest at 9.5% per annum and
requires 48 monthly payments of $2,396. At February 29, 2000, $110,000 was
outstanding under this line.
Repurchases of the Company's common stock are contemplated to be made
from time to time in the open market at prevailing 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. The Company has never borrowed on the revolving credit
facility and management believes that its existing cash balances, funds
generated from operations and the revolver will be adequate to meet cash needs
12
SEASONALITY
- -----------
Revenue derived from the Company's sale of orthotic devices, a
substantial portion of the Company's operations, has historically been
significantly higher in the warmer months of the year.
INFLATION
- ---------
The Company has in the past been able to increase the prices of its
products or reduce overhead costs sufficiently to offset the effects of
inflation on wages, materials and other expenses, and anticipates that it will
be able to continue to do so in the future.
RECENT PRONOUNCEMENTS 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( as amended by SFAS No.
137) 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.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
- ----------------------------------------------
Information contained or incorporated by reference in the annual report
on Form 10-K and in other SEC filings by the Company 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
Begins on the next page.
13
THE LANGER BIOMECHANICS GROUP, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
FEBRUARY 29, 2000, FEBRUARY 28, 1999 AND FEBRUARY 28, 1998
PAGE
----
Independent Auditors' Report 15
Consolidated Financial Statements:
Consolidated Balance Sheets as of February 29, 2000 and February 28, 1999 16
Consolidated Statements of Operations for the years ended February 29, 2000,
February 28,1999 and February 28,1998 17
Consolidated Statements of Stockholders' Equity for the years ended
February 29, 2000, February 28, 1999 and February 28, 1998 18
Consolidated Statements of Cash Flows for the years ended
February 29, 2000, February 28, 1999 and February 28, l998 19
Notes to Consolidated Financial Statements 20 - 29
Consolidated Financial Statement Schedule II -
Valuation and Qualifying Accounts for the years ended
February 29, 2000, February 28, 1999 and February 28, 1998 30
All other schedules have been omitted because they are not applicable, not
required or the information is disclosed in the consolidated financial
statements, including the notes thereto.
14
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
The Langer Biomechanics Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of The Langer
Biomechanics Group, Inc. and subsidiaries (the "Company") as of February 29,
2000 and February 28, 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended February 29, 2000. Our audits also included the consolidated
financial statement schedule listed in the foregoing index for the three years
in the period ended February 29, 2000. These consolidated financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at February 29, 2000
and February 28, 1999, and the results of its operations and its cash flows
for each of the three years in the period ended February 29, 2000 in
conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, such consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
Jericho, New York
May 3, 2000
15
THE LANGER BIOMECHANICS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
2000 1999
---- ----
Assets
Current assets:
Cash and cash equivalents $ 918,115 $ 1,700,156
Accounts receivables, net of allowance for
doubtful accounts of approximately
$63,000 in 2000 and $36,000 in 1999 1,316,530 1,396,878
Inventories, net (Note 2) 1,189,384 1,034,001
Prepaid expenses and other current receivables 215,580 160,723
----------------- ----------------
Total current assets 3,639,609 4,291,758
Property and equipment, net (Note 3) 945,270 673,152
Other Assets (Note 7) 153,312 159,670
----------------- ----------------
Total Assets (Note 11) $ 4,738,191 $ 5,124,580
================= ================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 580,057 $ 700,590
Accrued liabilities:
Accrued payroll and related payroll taxes 303,452 285,540
Other current liabilities (Note 4) 592,473 542,250
Current portion of long-term debt (Note 11) 28,750 -
Unearned revenue (Note 1) 420,221 356,887
----------------- ----------------
Total current liabilities 1,924,953 1,885,267
-
Accrued pension expense (Note 7) 82,910 195,254
Unearned revenue (Note 1) 104,380 104,420
Long-term debt (Note 11) 81,458
Deferred income taxes (Note 5) 8,167 5,288
----------------- ----------------
Total liabilities 2,201,868 2,190,229
----------------- ----------------
Commitments and Contingencies (Note 6)
Stockholders' equity (Note 8):
Common stock, $.02 par value. Authorized
10,000,000 shares; issued 2,640,281
shares in 2000 and 2,598,281 shares in 1999 52,806 51,966
Additional paid-in capital 6,325,880 6,291,564
Accumulated deficit (3,405,904) (3,070,630)
Accumulated other comprehensive loss (Note 7) (300,266) (299,199)
----------------- ----------------
2,672,516 2,973,701
Less treasury stock at cost, 81,500 shares in 2000
and 25,000 in 1999 (136,193) (39,350)
----------------- ----------------
Total stockholders' equity 2,536,323 2,934,351
----------------- ----------------
Total Liabilities and Stockholders' Equity $ 4,738,191 $ 5,124,580
================= ================
See accompanying notes to consolidated financial statements.
16
THE LANGER BIOMECHANICS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED FEBRUARY 29, 2000, FEBRUARY 28, 1999 AND FEBRUARY 28, 1998
2000 1999 1998
-------------- -------------- --------------
Net sales (Note 9) $ 11,145,054 $ 10,307,114 $ 10,156,085
Cost of sales 7,186,446 6,557,200 6,095,412
-------------- -------------- --------------
Gross profit 3,958,608 3,749,914 4,060,673
Selling expenses 1,706,879 1,399,339 1,496,148
Research and development expenses 148,710 - -
General and administrative expenses 2,459,079 2,245,467 2,248,365
-------------- -------------- --------------
Operating profit (loss) (356,060) 105,108 316,160
-------------- -------------- --------------
Other income (expense):
Interest income 31,032 43,958 52,592
Interest expense (6,711) (11,303) (11,980)
Minority interest 5,240 (16,030) -
Other (Note 9) (10,499) 208,070 13,453
-------------- -------------- --------------
Other income, net 19,062 224,695 54,065
-------------- -------------- --------------
Income (loss) before income taxes (336,998) 329,803 370,225
(Benefit from) provision for income taxes (Note 5) (1,724) 25,313 4,943
--------------- -------------- --------------
Net income (loss) $ (335,274) $ 304,490 $ 365,282
=============== ============== ==============
Weighted average number of common shares used in computation of net income
(loss) per share:
Basic 2,571,004 2,584,336 2,584,780
Diluted 2,571,004 2,607,285 2,658,378
Net income per common share:
Basic $ (0.13) $ 0.12 $ 0.14
============== ============== ==============
Diluted $ (0.13) $ 0.12 $ 0.14
============== ============== ==============
See accompanying notes to consolidated financial statements.
17
THE LANGER BIOMECHANICS GROUP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY FOR THE YEARS ENDED FEBRUARY 29, 2000, FEBRUARY 28, 1999
AND FEBRUARY 28, 1998
Accumulated Other
Comprehensive Income
Common Stock (Loss)
-------------------- -----------------------
Additional Foreign Minimum
Treasury Paid-in Accumulated Currency Pension
Shares Amount Stock Capital Deficit Translation Liability
- --------------------------- ---------- --------- ----------- ----------- ------------ ----------- -----------
Balance at March 1, 1997 2,584,281 $51,686 $6,276,782 ($3,740,402) ($48,509) ($248,248)
Comprehensive income:
Net income for 1998 365,282
Foreign currency
adjustment (1,062)
Minimum pension liability
adjustment 6,420
Total comprehensive income
Exercise of stock options 1,000 20 761
- --------------------------- ---------- --------- ----------- ----------- ------------ ----------- -----------
Balance at February 28, 1998 2,585,281 51,706 6,277,543 (3,375,120) (49,571) (241,828)
Comprehensive income:
Net income for 1999 304,490
Foreign currency
adjustment 2,676
Minimum pension liability
adjustment (10,476)
Total comprehensive income
Treasury stock acquired ($39,350)
Issuance of stock 12,000 240 13,260
Exercise of stock options 1,000 20 761
- --------------------------- ---------- --------- ----------- ----------- ------------ ----------- -----------
Balance at February 28, 1999 2,598,281 51,966 (39,350) 6,291,564 (3,070,630) (46,895) (252,304)
Comprehensive income:
Net loss for 2000 (335,274)
Foreign currency
adjustment (612)
Minimum pension
liability adjustment (455)
Total comprehensive income
Treasury stock acquired (96,843)
Exercise of stock options 42,000 840 34,316
- --------------------------- ---------- --------- ----------- ----------- ------------ ----------- -----------
Balance at February 29, 2000 2,640,281 $ 52,806 ($136,193) $6,325,880 ($3,405,904) ($47,507) ($252,759)
=========================== ========== ========= =========== =========== ============ =========== ===========
Total
Comprehensive Stockholders'
Income Equity
- --------------------------- --------------- ------------
Balance at March 1, 1997 $2,291,309
Comprehensive income:
Net income for 1998 $365,282
Foreign currency
adjustment (1,062)
Minimum pension liability
adjustment 6,420
---------------
Total comprehensive income $370,640 370,640
========
Exercise of stock options 781
- --------------------------- ------------
Balance at February 28, 1998 2,662,730
Comprehensive income:
Net income for 1999 $304,490
Foreign currency
adjustment 2,676
Minimum pension liability
adjustment (10,476)
---------------
Total comprehensive income $296,690 296,690
========
Treasury stock acquired (39,350)
Issuance of stock 13,500
Exercise of stock options 781
- --------------------------- ------------
Balance at February 28, 1999 2,934,351
Comprehensive income:
Net loss for 2000 $(335,274)
Foreign currency
adjustment (612)
Minimum pension
liability adjustment (455)
---------------
Total comprehensive income ($336,341) (336,341)
===============
Treasury stock acquired (96,843)
Exercise of stock options 35,156
- --------------------------- ------------
Balance at February 29, 2000 $2,536,323
=========================== =============== ============
See accompanying notes to consolidated financial statements.
18
THE LANGER BIOMECHANICS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 29, 2000, FEBRUARY 28, 1999 AND FEBRUARY 28, 1998
2000 1999 1998
---- ---- ----
Cash Flows From Operating Activities:
Net income (loss) $ (335,274) $ 304,490 $ 365,282
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Deferred foreign tax provision (benefit) 3,028 (135) 47
Depreciation and amortization 301,469 213,536 207,233
Provision for doubtful accounts receivable 31,167 59,788 17,525
Changes in operating assets and liabilities:
Accounts receivable 44,089 (91,260) 52,540
Inventories (158,572) 9,294 (118,199)
Prepaid expenses and other assets (48,806) 152,831 (30,219)
Accounts payable and accrued liabilities (43,490) 102,290 101,891
Net pension liability (112,344) (28,041) (52,495)
Unearned revenue 65,195 (79,468) (2,154)
--------------- --------------- ---------------
Net cash (used in) provided by operating activites (253,538) 643,325 541,451
--------------- --------------- ---------------
Cash Flows From Investing Activities -
Capital expenditures (577,024) (107,146) (478,474)
--------------- --------------- ---------------
Net cash used in investing activities (577,024) (107,146) (478,474)
--------------- --------------- ---------------
Cash Flows From Financing Activities:
Common stock options exercised 35,156 781 781
Issuance of common stock - 13,500 -
Treasury stock acquired (96,843) (39,350) -
Proceeds from issuance of long-term debt 115,000
Payments on long-term debt (4,792)
Principal payments of note payable - - (301)
--------------- --------------- ---------------
Net cash provided by (used in) financing activites 48,521 (25,069) 480
--------------- --------------- ---------------
Net (decrease) increase in cash and cash equivalents (782,041) 511,110 63,457
Cash and cash equivalents at beginning of year 1,700,156 1,189,046 1,125,589
--------------- --------------- ---------------
Cash and cash equivalents at end of year $ 918,115 $ 1,700,156 $ 1,189,046
=============== =============== ===============
Supplemental Disclosures of Cash Flow Information-
Cash paid during the year for:
Interest $ 6,711 $ 11,303 $ 11,980
=============== =============== ===============
Income taxes $ 8,500 $ 5,600 $ 1,500
=============== =============== ===============
See accompanying notes to consolidated financial statements.
19
THE LANGER BIOMECHANICS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 2000, FEBRUARY 28, 1999 AND FEBRUARY 28, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
(a) PRINCIPLES OF CONSOLIDATION
---------------------------
The accompanying consolidated financial statements include the
accounts of The Langer Biomechanics Group, Inc. and its
subsidiaries (the "Company"). All significant intercompany
transactions and balances have been eliminated in
consolidation.
(b) REVENUE RECOGNITION
-------------------
Revenue from the sale of the Company's products is recognized
at shipment. Revenues derived from extended warranty contracts
relating to sales of orthotics are recorded as deferred
revenue and recognized over the lives of the contracts (24
months) on a straight-line basis.
(c) CASH EQUIVALENTS
----------------
For purposes of the statement of cash flows, the Company
considers all short-term, highly liquid investments purchased
with a maturity of three months or less to be cash equivalents
(money market funds and short-term commercial paper).
(d) INVENTORIES
-----------
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
(e) PROPERTY AND EQUIPMENT
----------------------
Property and equipment is stated at cost less accumulated
depreciation and amortization. Depreciation and amortization
are calculated using the straight-line method. The lives on
which depreciation and amortization are computed are as
follows:
Leasehold improvements Lesser of 5 years or life of lease
Machinery and equipment 5 - 10 years
Office equipment 4 - 10 years
Automobiles 3 - 5 years
The Company reviews long-lived assets and certain identifiable
intangibles whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. If the sum of expected future cash flows
(undiscounted and without interest charges) is less than the
carrying value of the asset, an impairment loss is recognized.
Otherwise, an impairment loss is not recognized.
20
(f) INCOME TAXES
------------
The Company accounts for income taxes using an asset and
liability method. Under this method, deferred tax assets and
liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to
reverse. Income tax expense (benefit) is the tax payable or
refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
(g) NET INCOME (LOSS) 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.
(h) FOREIGN CURRENCY TRANSLATION
----------------------------
Assets and liabilities of the foreign subsidiary have been
translated at year-end exchange rates, while revenues and
expenses have been translated at average exchange rates in
effect during the year. Resulting cumulative translation
adjustments have been recorded as a separate component of
accumulated other comprehensive loss.
(i) RECLASSIFICATIONS
-----------------
Certain amounts in the prior years' financial statements have
been reclassified to conform to the current year's
presentation.
(j) USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
(k) FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
At February 29, 2000 and February 28, 1999, the carrying
amount of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable
and accrued liabilities, approximated fair value because of
their short-term maturity. The carrying value of long-term
debt at February 29, 2000 also approximated fair value based
on borrowing rates currently available to the Company for debt
with similar terms.
(l) INTERNAL USE SOFTWARE
---------------------
In accordance with Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for
Internal Use", the Company capitalizes internal-use software
costs upon the completion of the preliminary project stage and
ceases capitalization when the software project is
substantially complete and ready for its intended use.
Capitalized costs are amortized on a straight-line basis over
the estimated useful life of the software, but in no event
more than four years.
(m) RECENT PRONOUNCEMENTS 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 (as amended by SFAS No.
137) 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.
21
(2) INVENTORIES
-----------
Inventories consist of the following at February 29, 2000 and February
28, 1999:
2000 1999
------------- -------------
Raw materials $ 762,282 $ 744,874
Work-in-process 88,359 84,448
Finished goods 394,473 272,206
-------------- -------------
Total inventories 1,245,114 1,101,528
Less allowance for obsolescence 55,730 67,527
------------- -------------
Net inventories $ 1,189,384 $ 1,034,001
============= =============
(3) PROPERTY AND EQUIPMENT
----------------------
Property and equipment, at cost, is comprised of the following at
February 29, 2000 and February 28, 1999:
2000 1999
------------- -------------
Leasehold improvements $ 592,570 $ 464,189
Machinery and equipment 949,091 851,781
Office equipment 2,168,645 1,897,086
Automobiles 34,712 34,838
------------- -------------
3,745,018 3,247,894
Less accumulated depreciation and amortization 2,799,748 2,574,742
------------- -------------
Property and equipment, net $ 945,270 $ 673,152
============= =============
(4) OTHER CURRENT LIABILITIES
-------------------------
Other current liabilities consist of the following at February 29, 2000
and February 28, 1999:
2000 1999
------------- -------------
Sales credits payable $ 104,134 $ 110,175
Accrued professional fees 83,081 77,785
Management bonuses 25,000 34,000
Health insurance 60,000 59,251
Warranty reserve 46,797 46,797
Accrued severance 29,106 -
Corporate tax 32,323 18,185
Accrued commissions 29,907 19,499
Other accrued liabilities 182,125 176,558
------------- -------------
Total other accrued liabilities $ 592,473 $ 542,250
============= =============
22
(5) INCOME TAXES
------------
The provision for (benefit from) income taxes is comprised of the
following for the years ended February 29, 2000, February 28, 1999
and February 28, 1998:
2000 1999 1998
---------- --------- ----------
Current:
Federal $ 1,500 $ (2,500) $ 502
State (7,200) 9,000 4,439
Foreign 948 18,948 (45)
---------- --------- -----------
(4,752) 25,448 4,896
Deferred - Foreign 3,028 (135) 47
---------- ---------- ----------
$ (1,724) $ 25,313 $ 4,943
=========== ========= ==========
As of February 29, 2000, the Company has net Federal tax operating loss
carryforwards of approximately $3,089,000, which may be applied
against future taxable income and expire from 2001 through 2012. The
Company also has available tax credit carryforwards of approximately
$141,000.
The following is a summary of deferred tax assets and liabilities as of
February 29, 2000 and February 28, 1999:
2000 1999
------------- -------------
Current deferred tax assets $ 148,458 $ 199,443
------------- -------------
Non-current:
Deferred tax assets 1,094,201 909,343
Deferred tax liability (8,167) (5,288)
------------- --------------
Non-current deferred tax assets, net 1,086,034 904,055
------------- -------------
Total deferred tax assets, net 1,234,492 1,103,498
Valuation allowance (1,242,659) (1,108,786)
------------- -------------
Net $ (8,167) $ (5,288)
============= ==============
The current deferred tax assets are primarily composed of deferred
revenue, inventory and accounts receivable reserves, accrued pension
and accrued vacation. The non-current deferred tax assets are primarily
composed of deferred revenue and Federal net operating loss
carryforwards. The non-current deferred tax liability is primarily
composed of excess tax depreciation over book depreciation. The
increase in the valuation allowance during fiscal 2000 resulted from
the creation of additional net operating loss carryforwards not
recognized for financial statement purposes.
The Company's effective provision for income taxes differs from the
Federal statutory rate. The reasons for such differences are as
follows:
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
2000 1999 1998
-------------------------- ---------------------- ---------------------------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
Provision at Federal
statutory rate $ (114,579) (34.0)% $ 112,133 34.0% $ 125,877 34.0%
Increase (decrease) in taxes
resulting from:
State income taxes, net of
Federal benefit (4,752) (1.4) 9,000 2.7 4,439 1.2
Foreign taxes 7,969 2.3 18,813 5.7 2 -
(Use) creation of net operating
loss carryforwards 109,638 32.6 (114,633) (34.7) (125,375) (33.9)
----------- ------ --------- ------ --------- ------
Effective tax rate $ (1,724) (0.5)% $ 25,313 7.7% $ 4,943 1.3%
============ ======= ========== ====== ========= ======
23
(6) COMMITMENTS AND CONTINGENCIES
-----------------------------
(a) LEASES
------
Certain of the Company's facilities and equipment are leased
under noncancellable lease agreements and certain operating
leases contain minimum annual escalations in base rent. Rental
expense amounted to $449,754, $430,345 and $445,088 for the
years ended February 29, 2000, February 28, 1999 and February
28, 1998, respectively.
The following is a schedule, by fiscal year, of future minimum
rental payments required under operating leases as of February
29, 2000:
FISCAL YEAR ENDING FEBRUARY: AMOUNT
2001 $ 376,441
2002 371,874
2003 363,150
2004 322,633
2005 213,717
-------------
Total $ 1,647,815
=============
(b) ROYALTIES
---------
The Company has entered into a number of agreements with
licensors, consultants and suppliers, including:
1. The Company has an agreement with a licensor, which
provides for the Company to pay royalties of 15
percent, with a minimum annual royalty of $25,000, on
the net sales of a product named the Pediatric
Counter Rotation System.
2. The Company has agreements with certain licensors,
which provide for the Company to pay royalties
ranging from 2.5 percent to 15 percent on the net
sales of certain biomechanical devices.
Royalties under the above-mentioned agreements aggregated
$34,285, $34,095 and $34,157 for the years ended February 29,
2000, February 28, 1999 and February 28, 1998, respectively.
(7) PENSION PLAN AND 401(K) PLAN
----------------------------
The Company maintains a non-contributory defined benefit pension plan
covering substantially all employees. In 1986, the Company adopted
an amendment to the plan under which future benefit accruals to the
plan will cease (freezing of the maximum benefits available to
employees as of July 30, 1986), other than those required by law.
Previously accrued benefits will remain in effect and will continue
to vest under the original terms of the plan.
The following table sets forth the Company's defined benefit plan
status at February 29, 2000 and February 28, 1999, determined by the
plan's actuary in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 87, "Employers' Accounting for Pensions", as
amended by SFAS No. 132:
24
The following tables set forth the plan's benefit obligation and funded
status for the years ended February 29, 2000 and February 28, 1999:
2000 1999
------------- -------------
Projected benefit obligation $ (438,900) $ (413,708)
Plan assets at fair market value (primarily bond mutual funds) 355,990 257,244
------------- -------------
Projected benefit obligation in excess of plan assets (82,910) (156,464)
Unrecognized transition liability 143,484 151,275
Unrecognized net loss 252,759 252,304
Minimum additional liability (396,243) (403,579)
------------- -------------
Accrued pension cost $ (82,910) $ (156,464)
============= =============
Change in projected benefit obligation:
Projected benefit obligation, beginning of year $ (413,708) $ (404,730)
Interest cost (31,028) (30,355)
Benefits paid 7,627 27,514
Actuarial loss (1,791) (6,137)
------------- -------------
Projected benefit obligation, end of year $ (438,900) $ (413,708)
============= =============
Change in plan assets:
Fair value of plan assets, beginning of year $ 257,244 $ 184,121
Actual return on plan assets 3,480 9,462
Employer contribution 102,893 91,175
Benefits paid (7,627) (27,514)
-------------- -------------
Fair value of plan assets, end of year $ 355,990 $ 257,244
============= =============
Net periodic pension expense is comprised of the following components
for the years ended February 29, 2000, February 28, 1999 and February
28, 1998:
2000 1999 1998
-------------- ------------- --------------
Interest cost on projected benefit obligations $ 31,028 $ 30,355 $ 27,409
Expected return on plan assets (22,866) (17,595) (12,713)
Amortization of unrecognized transition liability 7,791 7,791 7,791
Recognized actuarial loss 12,680 11,834 11,868
-------------- ------------- --------------
Net periodic pension expense $ 28,633 $ 32,385 $ 34,355
============== ============= ==============
The discount rate used in determining the actuarial present value of
the projected benefit obligation was 7.50% at February 29, 2000 and
February 28, 1999. The rate of return on plan assets was assumed to
be 7.50% at February 29, 2000 and February 28, 1999. No assumed
increase in compensation levels was used since future benefit
accruals have ceased (as discussed above). The unrecognized
transition liability and unrecognized net loss are being amortized
over 30.4 and 20.4 years, respectively.
In fiscal 2000 and l999, as required by Statement of Financial
Accounting Standards No. 87, the Company recorded a pension liability
($82,910 and $156,464, respectively, included in "Accrued pension
expense") to reflect the excess of accumulated benefits over the fair
value of pension plan assets. Since the required additional pension
liability is in excess of the related unrecognized prior service cost
(unrecognized transition liability), an amount equal to the
unrecognized prior service cost has been recognized as an intangible
asset ($143,484 and $151,275 included in "Other
25
assets" as of February 29, 2000 and February 28, 1999, respectively).
The remaining liability required to be recognized is reported as a
separate component of stockholders' equity.
The Company has a defined contribution retirement and savings plan (the
"401(k) Plan") designed to qualify under Section 401(k) of the
Internal Revenue Code (the "Code"). Eligible employees include those
who are at least twenty-one years old and who have worked at least
1,000 hours during any one year. The Company may make matching
contributions in amounts that the Company determines at its
discretion at the beginning of each year. In addition, the Company
may make further discretionary contributions. Participating
employees are immediately vested in amounts attributable to their
own salary or wage reduction elections, and are vested in Company
matching and discretionary contributions under a vesting schedule
that provides for ratable vesting over the second through sixth
years of service. The assets of the 40l(k) Plan are invested in
stock, bond and money market mutual funds. For the years ended
February 29, 2000, February 28, 1999 and February 28, 1998, the
Company made contributions totaling $32,447, $27,387 and $31,477,
respectively, to the 401(k) Plan.
(8) STOCK OPTIONS
-------------
On July 27, 1992, the Company adopted a qualified stock option plan for
employees, officers, directors, consultants and advisors of the Company
covering 125,000 shares of common stock. On January 4, 1995, the Board
of Directors increased the number of shares authorized to be issued
under the plan to 350,000 shares, which amendment was approved by
stockholders at the September 13, 1995 stockholders' meeting. On
January 21, 1999, the Board of Directors further increased the number
of shares authorized to be issued under the plan to 550,000 shares,
which amendment was approved by stockholders at the September 15, 1999
stockholders' meeting. Options granted under the plan are exercisable
for a period of either five or ten years at an exercise price at least
equal to 100 percent of the fair market value of the Company's common
stock at date of grant. Options become exercisable under various
cumulative increments over the next nine years. The Board of Directors
has the discretion as to the persons to be granted options as well as
the number of shares and terms of the option agreements. The expiration
date of the plan is July 26, 2002.
The Company has also granted non-incentive stock options. These options
are generally exercisable for a period of five or ten years and are
issued at a price equal to or higher than the fair market value of the
Company's common stock at the date of grant. At February 29, 2000,
186,000 non-incentive and 185,000 incentive stock options were
outstanding.
The following is a summary of activity related to the Company's
incentive and non-incentive stock options:
EXERCISE WEIGHTED AVERAGE
NUMBER OF PRICE RANGE EXERCISE PRICE
SHARES PER SHARE PER SHARE
------ --------- ---------
Outstanding at February 28, 1997 209,250 $ .56 - $2.19 $1.25
Granted 43,000 1.63 - 1.88 1.81
Exercised (1,000) .78 .78
---------- ------------- --------
Outstanding at February 28, 1998 251,250 .56 - 2.19 1.35
Granted 175,000 1.13 1.13
Exercised (1,000) .78 .78
Cancelled (50,000) .75 .75
---------- ------------- --------
Outstanding at February 28, 1999 375,250 .56 - 2.19 1.36
Granted 105,000 1.5 - 2.00 1.66
Exercised (42,000) .78 - .88 .84
Cancelled (67,250) .56 - 2.19 1.64
---------- ------------- --------
Outstanding at February 29, 2000 371,000 $1.13 -$2.19 $ 1.36
========== ============= ========
At February 29, 2000, 202,000 options were exercisable, 169,000 options
were unexercisable and 101,500 options were available for issuance. The
options outstanding at February 29, 2000 had remaining lives of
between less than one year and more than nine years, with a weighted
average life of 7.02 years. At February 29, 2000, there were 472,500
shares of common stock reserved for issuance under the Company's
stock option plan.
26
ADDITIONAL STOCK PLAN INFORMATION
- ---------------------------------
The Company continues to account for its stock-based awards using the
intrinsic value method in accordance with APB 25, "Accounting for
Stock Issued to Employees", and its related interpretations.
Accordingly, no compensation expense has been recognized in the
financial statements for employee stock arrangements.
SFAS No. 123, "Accounting for Stock-Based Compensation", requires the
disclosure of pro forma net income and net income per share had the
Company adopted the fair value method as of the beginning of fiscal
1997. Under SFAS No. 123, the fair value of stock-based awards to
employees is calculated through the use of option pricing models,
even though such models were developed to estimate the fair value of
freely tradeable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock
option awards. These models also require subjective assumptions,
including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model
with the following weighted average assumptions: expected life, 60
months following vesting; stock volatility of 38.1%, 39.08% and
42.82%, and risk free interest rates of 5.9 %, 5.4% and 7.5% in
fiscal 2000, 1999 and 1998, respectively, and no dividends during
the expected term. The Company's calculations are on a multiple
option valuation approach and forfeitures are recognized as they
occur. If the computed fair values of the award had been amortized
to expense over the vesting period of the awards, the pro forma net
income and net income per share for the years ended February 29,
2000, February 28, 1999 and February 28, 1998 would have been net
income (loss) of $(346,973), or $(.13) per share, $170,020, or $.07
per share, and $311,532, or $.12 per share, respectively, on both a
primary and fully diluted basis.
(9) EXPORT SALES AND OTHER INCOME
-----------------------------
The Company had export sales from its United States operations of
approximately 22 , 15 and 16 percent of net sales for each of the
years ended February 29, 2000, February 28, 1999 and February 28,
1998, respectively.
Included in Other Income for the year ended February 28, 1999 is
$150,000 related to the settlement of an insurance claim.
(10) SEGMENT INFORMATION
-------------------
The Company operates in two 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 for the years ended February 29, 2000,
February 28, 1999 and February 28, 1998 are summarized as follows:
NORTH UNITED CONSOLIDATED
2000 AMERICA KINGDOM TOTAL
-----------------------------------------------------------------------------------------------------------
Net sales from external customers $ 9,598,346 $ 1,546,708 $ 11,145,054
Intersegment net sales 237,439 - 237,439
Gross margins 3,353,581 605,027 3,958,608
Operating (loss) profit (451,267) 95,207 (356,060)
Depreciation and amortization 267,994 33,475 301,469
Total assets 4,027,369 710,822 4,738,191
Capital expenditures 395,075 181,949 577,024
-----------------------------------------------------------------------------------------------------------
1999
-----------------------------------------------------------------------------------------------------------
Net sales from external customers $ 8,948,500 $ 1,358,814 $ 10,307,114
Intersegment net sales 176,277 - 176,277
Gross margins 3,207,393 542,521 3,749,914
Operating (loss) profit (68,615) 173,723 105,108
Depreciation and amortization 196,509 17,027 213,536
Total assets 4,633,039 491,541 5,124,580
27
Capital expenditures 100,351 6,795 107,146
-----------------------------------------------------------------------------------------------------------
1998
-----------------------------------------------------------------------------------------------------------
Net sales from external customers $ 9,024,360 $ 1,131,725 $ 10,156,085
Intersegment net sales 142,814 - 142,814
Gross margins 3,648,092 412,581 4,060,673
Operating profit 240,644 75,516 316,160
Depreciation and amortization 182,191 25,042 207,233
Total assets 4,392,538 455,298 4,847,836
Capital expenditures 435,716 42,758 478,474
-----------------------------------------------------------------------------------------------------------
(11) CREDIT FACILITIES
-----------------
The Company has a revolving credit facility with a bank. The agreement,
which expires November 30, 2000, provides for a revolving credit line
not to exceed $1,500,000. Interest on the outstanding balance is
payable at prime (8.75 percent at February 29, 2000) plus 1/2 percent
per annum. The agreement contains, among other items, restrictions
relating to the incurrence of additional indebtedness and the
payment of dividends. Additionally, the Company is required to
maintain certain minimum financial ratios. Borrowings under this
agreement are collateralized by substantially all of the assets of
the Company. At February 29, 2000 and February 28, 1999, there were
no borrowings outstanding under this credit facility.
In December 1999, the Company borrowed $115,000 on an installment note
to finance the acquisition of certain machinery and equipment. The loan
bears interest at 9.5% per annum and requires 48 monthly payments of
$2,396. Borrowings under this agreement are collateralized by
substantially all of the assets of the Company. At February 29,
2000, $110,208 was outstanding under this note, with $28,750
classified as current. Amounts payable under this installment note
are approximately $28,750 for each of the next three fiscal years
with $23,958 due in fiscal year 2004.
(12) RECONCILIATION OF BASIC AND DILUTED 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:
FOR THE YEAR ENDED
---------------------------------------------------------------------------------
FEBRUARY 29, 2000 FEBRUARY 28, 1999 FEBRUARY 28, 1998
----------------- ----------------- -----------------
PER PER PER
INCOME SHARES SHARE INCOME SHARES SHARE INCOME SHARES SHARE
------ ------ ----- ------ ------ ----- ------ ------ -----
BASIC EPS
Income (loss) available to
common stockholders $(335,274) 2,571,004 $(.13) $304,490 2,584,336 $.12 $ 365,282 2,584,780 $ .14
EFFECT OF DILUTIVE SECURITIES
Stock options - - - - 22,949 - - 73,598 -
--------- --------- ----- -------- --------- ---- --------- --------- -----
DILUTED EPS
Income available to common
stockholders plus assumed
exercise of stock options $(335,274) 2,571,004 $(.13) $304,490 2,607,285 $.12 $ 365,282 2,658,378 $.14
========= ========= ===== ======== ========= ==== ========= ========= ====
28
(13) SUBSEQUENT EVENTS
-----------------
Effective April 5, 2000, the Company purchased the remaining 25%
interest which it did not previously own in its Langer Biomechanics
Group (UK) Limited subsidiary for $80,000 cash and the issuance of
40,000 shares of common stock from treasury. The transaction is being
accounted for as purchase and the excess cost over the fair value of
net assets acquired will be amortized on a straight-line basis over
a ten-year period. If the acquisition were assumed to have
occurred at the beginning of fiscal 2000, the impact on the results
of operations would not have been material.
* * * * *
29
THE LANGER BIOMECHANICS GROUP, INC.
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
FOR THE YEARS ENDED FEBRUARY 29, 2000, FEBRUARY 28, 1999
AND FEBRUARY 28, 1998
ALLOWANCE
SALES FOR DOUBTFUL
RETURNS AND ACCOUNTS WARRANTY INVENTORY
ALLOWANCES RECEIVABLE RESERVE RESERVE
---------- ---------- ------- -------
At February 28, 1997 $ 32,058 $ 19,775 $ 33,797 $ 59,612
Additions - 17,525 -
Deletions - 13,951 601
-------------- ------------- ------------- -------------
At February 28, 1998 32,058 23,349 33,797 59,011
Additions 14,000 59,788 13,000 27,000
Deletions - 46,982 - 18,484
-------------- ------------- ------------- -------------
At February 28, 1999 46,058 36,155 46,797 67,527
Additions 31,167 -
Deletions - 4,669 - 11,797
-------------- ------------- ------------- -------------
At February 29, 2000 $ 46,058 $ 62,653 $ 46,797 $ 55,730
============== ============= ============= =============
30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
OFFICERS AND DIRECTORS
- ----------------------
The executive officers and directors of the Company are as follows:
NAME AGE OFFICE
-------------------- --- -------------------------------------------------
Stephen V. Ardia 58 Chairman of the Board
Kenneth Granat 55 Director
Daniel J. Gorney 56 President and Chief Executive Officer
Dr. Justin Wernick 64 Chief Medical Director, Secretary and Director
Thomas I. Altholz 49 Director
Ronald Spinelli 44 Vice President - Operations
Thomas G. Archbold 40 Vice President - Finance and Chief Financial Officer
Mr. Ardia has been Chairman of the Board of Directors of the Company
since January 1999 and has been a Director of the Company since November 1998.
From 1969 to 1994, he was employed by Goulds Pumps, Inc., including most
recently as President and Chief Executive Officer. Goulds Pumps, Inc. is a
Fortune 500 manufacturer of industrial and residential pumps. From 1995 to 1999,
Mr. Ardia was President at Environment One Corporation, a maker of advanced,
environmentally sensitive sewage collection systems. Mr. Ardia serves on the
Board of Directors of the New York College of Chiropractic Medicine.
Mr. Granat has been a Director of the Company since January 1995,
including serving as Chairman of the Board from January 1995 to January 1999.
Since 1987, he has been President of Active Screw and Fastener Inc., an Elk
Grove Village, Illinois company, engaged in full line distribution of fasteners
with plants in Chicago, Illinois and Tucson, Arizona. Since 1991, he has also
been Vice President and a Director of Trigran Investments Inc., Deerfield,
Illinois, the general partner and investment advisor for Trigran Investments,
L.P., and a more than 10 percent shareholder of the Company. Mr. Granat holds a
J.D. from the University of Illinois as well as a B.B.A. degree in Business from
the University of Michigan.
Mr. Gorney has been President and Chief Executive Officer of the
Company since November 1998. From 1996 to 1998, he was Chief Executive Officer
of LifeVision, LLC, a health care services company. From 1994 to 1996, Mr.
Gorney was Chief Operating Officer of Visionics Corporation, a vision care
company. He received a Bachelor of Arts degree in History and Business from the
University of Buffalo with advanced studies in Organizational Development and
Marketing Management.
Dr. Wernick is the co-founder, Secretary and a Director of the Company
since its formation. From the formation of the Company until June 30, 1997, Dr.
Wernick was Executive Vice President of the Company; commencing July 1, 1997, he
became Chief Medical Director of the Company. In addition, since July 1997, Dr.
Wernick has been Medical Director of Eneslow Comfort Shoe Centers, a shoe
retailer. Dr. Wernick is a Diplomate of the American Board of Podiatric
Orthopedics, a Fellow of the American College of Foot Orthopedics and of the
Academy of Podiatric Sports Medicine and a member of several other professional
societies. In l975, he was the President of the Nassau County Division, Podiatry
Society of the State of New York and was granted the Podiatrist of the Year
Award from that Society in that same year. Since l969, he has held various
academic positions at the New York College of Podiatric Medicine and since l979
has been
31
serving as a professor, and since December 1998 as Chairman, with the Department
of Orthopedic Sciences at the New York College of Podiatric Medicine. He has
guest lectured and directed educational programs, both nationally and
internationally, at many other podiatric colleges and seminars during the past
25 years. He has co-authored a book entitled "A Practical Manual for a Basic
Approach to Biomechanics" in l972 and a report entitled "A Radiologic Study of
Motion of the Foot within a Ski Boot" which was published in the Journal of the
American Podiatry Association for which he is also a corresponding consultant.
Dr. Wernick received his podiatric medical degree from M.J. Lewi College of
Podiatry (now known as the New York College of Podiatric Medicine).
Mr. Altholz has been President, owner and Chief Executive Officer of
TIA Solutions, Highland Park, Illinois, a business consulting firm, since 1997.
From 1995 to 1996, Mr. Altholz was Director of Acquisitions of Unisource
Worldwide, Inc. (since acquired by Georgia Pacific), a company engaged in the
paper and packaging distribution business. From 1980 to 1995, he was President
and owner of Inlander Steindler Paper Company (ISP), a paper distribution
company with regional sales and warehousing centers in the Midwest, which
company was acquired by Alco Standard in November 1995. He has served on several
industry advisory Boards such as Minnesota Mining and Manufacturing (MMM) and
Scott Paper, and was Chairman of Affiliated Paper Companies. He is a member of
the Board of Directors of Regal Ware, Inc., a company engaged in manufacturing
and marketing of housewares products, and Northmoor Country Club and also is a
member of the Board of Trustees of Ripon College. Mr. Altholz received his B.A.
in Economics from Ripon College in Ripon, Wisconsin.
Mr. Spinelli has been Vice President of Operations since October 1999.
From 1998 to 1999, he was Director of Operations for Thompson Industries a
manufacturer of industrial bearings. From 1988 to 1998, he was Director of
Engineering for Pall Corporation, a manufacturer of biomedical and industrial
filtration devices. Mr. Spinelli received a BS in Mechanical Engineering from
the University of Wisconsin.
Mr. Archbold has been Vice President of Finance since June 1999. From
1996 to 1999, he was Corporate Controller of United Capital Corporation , a
publicly traded company with interests in real estate and manufacturing. From
1994 to 1996, he was Director of Finance of AIL Systems, Inc., a manufacturer of
electronic equipment. Prior to that, Mr. Archbold spent nine years with Ernst &
Young LLP, including four years as an audit senior manager, and he is a CPA. He
received a Bachelor of Sciences in Accounting from C.W. Post College.
All directors are normally elected at the annual meeting of
shareholders to hold office until the next annual meeting and until their
successors are duly elected and qualified. The Company's By-Laws provide that
the annual meeting of shareholders be held each year at a time and place to be
designated by the Board of Directors. Directors may be removed at any time for
cause by the Board of Directors and with or without cause by a majority of the
votes cast at a meeting of shareholders entitled to vote for the election of
directors.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
- -------------------------------------------------------
The Company is not aware of any late filings of, or failures to file,
during the fiscal year ended February 29, 2000, the reports required by Section
16(a) of the Securities Exchange Act of 1934.
LIMITATION ON LIABILITY OF DIRECTORS
- ------------------------------------
As permitted by New York law, the Company's Certificate of
Incorporation contains an article providing for the elimination of the personal
liability of the directors of the Company to the fullest extent permitted by the
provisions of paragraph (b) of Section 402 of the New York Business Corporation
Law. Accordingly, a director's personal liability would be eliminated for any
breach of a director's duty, unless, among other things, the director's actions
or omissions were in bad faith, involved intentional misconduct or a knowing
violation of the law, or personal gain in fact of a financial profit to which
the director was not lawfully entitled. This article is intended to afford
directors additional protection, and limit their potential liability, from suits
alleging a breach of the duty of care by a director. The Company believes this
article enhances the Company's ability to attract and retain qualified persons
to serve as directors. As a result of the inclusion of such a provision,
shareholders may be unable to recover monetary damages against directors for
actions taken by them which constitute negligence or gross negligence or which
are in violation of their fiduciary duties, although it may be possible to
32
obtain injunctive or other equitable relief with respect to such actions. If
equitable remedies are found not to be available to shareholders for any
particular case, shareholders may not have any effective remedy against the
challenged conduct.
33
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
SUMMARY COMPENSATION TABLE
- --------------------------
The following table shows the cash compensation received by the two
executive officers either whose compensation (salary and bonus) exceeded
$100,000 during the fiscal year ended February 29, 2000 or was Chief Executive
Officer of the Company during such year (the "named executive officers"):
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
SALARY BONUS OTHER
NAME AND FISCAL ------- -------- ------- OPTIONS
PRINCIPAL POSITION YEAR $ $ $ (NO. OF SHARES)
- ----------------------- ------ ------- -------- ------- ---------------
Daniel J. Gorney 2000 158,830 - (3) 25,000
President and 1999 34,663(1) - -(3) 15,000
Chief Executive Officer
Gary L. Grahn 1999 160,000 64,000 26,666(2) -
Former President and 1998 160,000 53,440 (3) -
Chief Executive Officer 1997 160,000 28,000 (3) 30,000
(1) Mr. Gorney's employment commenced on November 30, 1998.
(2) Mr. Grahn's employment was terminated in December 1999; other
compensation of $26,666 represents severance pay and other minor
non-disclosed items that are less than 10% of total annual salary and
bonus.
(3) Less than 10% of the total annual salary and bonus.
OPTION GRANTS IN LAST FISCAL YEAR
- ---------------------------------
OPTION GRANTS DURING THE FISCAL YEAR ENDED FEBRUARY 29, 2000 TO THE TWO NAMED
EXECUTIVE OFFICERS WERE AS FOLLOWS:
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE
APPRECIATION FOR OPTION
INDIVIDUAL GRANTS TERM (1)
---------------------------------------------------------------------------------------------------------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED TO
UNDERLYING EMPLOYEES IN EXERCISE OR
OPTIONS GRANTED FISCAL YEAR BASE PRICE EXPIRATION
NAME (#) ($/SH) DATE 5%($) 10%($)
---------------------------------------------------------------------------------------------------------------------
Daniel J. Gorney 25,000 23.8 $1.50 5/18/09 $23,584 $59,675
Gary L. Grahn - - - - - -
(1) The potential realizable value portion of the foregoing table
illustrates value that might be received upon exercise of the options
immediately prior to the expiration of their term, assuming the
specified compounded rates of appreciation on the Company's common
stock over the term of the options. These numbers do not take into
account provisions of certain options providing for termination of
the option following termination of employment.
34
FISCAL YEAR-END OPTION VALUES
- -----------------------------
The table below sets forth information regarding unexercised options held
by the Company's named executive officers as of February 29, 2000. No options
were exercised by the Company's executive officers during fiscal 2000.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR END AT FISCAL YEAR END
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
NAME (#) $(1)
-------------------------- -------------------------------- --------------------------
Daniel J. Gorney 20,000/80,000 9,425/37,700
Gary L. Grahn -/- -/-
(1) The closing bid price of the Comany's Common Stock as reported by
NASDAQ on February 29, 2000 was $1.69. Value is calculated on the
difference between the option exercise price of in-the-money options
adn $1.69 multiplied by the number of shares of Common Stock
underlying the option.
LONG-TERM INCENTIVE PLAN-AWARDS IN LAST FISCAL YEAR
- ---------------------------------------------------
None.
COMPENSATION OF DIRECTORS
- -------------------------
Directors, who are not executive officers of the Company, are expected
to be compensated by means of the issuance of shares of Common Stock. There were
no issuances of common stock to outside directors in the fiscal year ended
February 29, 2000. Directors are reimbursed for their out-of-pocket expenses in
connection with the attendance of Board of Directors meetings. On May 12, 2000,
the directors were awarded 4,000 shares of common stock.
EMPLOYMENT AGREEMENT
- --------------------
None of the named executive officers has an employment agreement with
the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The following table sets forth, as of May 8, 2000, the shares of common
stock owned beneficially and of record (unless otherwise indicated) by each
person owning more than five percent (5%) of the outstanding shares, each
director of the Company, each named executive officer of the Company and all
directors and officers of the Company as a group.
NUMBER OF
NAME (AND ADDRESS OF 5% HOLDERS) SHARES OWNED PERCENT
- -------------------------------- ------------ -------
Kenneth Granat 775,353 (1) 29.5%
155 Pfingsten, Suite 360
Deerfield, Illinois 60015
Donald Cecil 248,553 9.8%
1114 Avenue of the Americas
New York, New York 10036
Dr. Justin Wernick 224,867 8.9%
450 Commack Road
Deer Park, New York 11729
35
NUMBER OF
NAME (AND ADDRESS OF 5% HOLDERS) SHARES OWNED PERCENT
- -------------------------------- ------------ -------
Stephen V. Ardia 116,333 (2) 4.5%
Thomas I. Altholz 49,500 (3) 1.9%
Daniel J. Gorney 40,000 (4) 1.6%
Gary Grahn -
All Directors and Officers
as a Group (7 persons) 1,215,053 (6) 44.9%
(1) INCLUDES 85,000 SHARES ISSUABLE UNDER OUTSTAINDING STOCK OPTIONS
EXERCISABLE WITHIN SIXTY DAYS AND 620,953 HELD BY TRIGRAN INVESTMENTS LP.
MR. GRANAT IS A DIRECTOR AND VICE PRESIDENT OF THE GENERAL PARTNER OF
TRIGRAN INVESTMENTS, LP. AN ADDITIONAL 30,000 SHARES ARE OWNED BY THE
GRANAT FAMILY LIMITED PARTNERSHIP OF WHICH MR. GRANAT IS A GENERAL PARTNER
AND 10,400 SHARES ARE OWNED BY A TRUST OF WHICH MR. GRANAT IS A
BENEFICIARY. MR. GRANAT ALSO OWNS 29,000 SHARES PERSONALLY.
(2) INCLUDES 50,000 SHARES ISSUABLE UNDER OUTSTANDING STOCK OPTIONS
EXERCISABLE WITHIN SIXTY DAYS.
(3) INCLUDES 5,000 SHARES ISSUABLE UNDER OUTSTANDING STOCK OPTIONS EXERCISABLE
WITHIN SIXTY DAYS.
(4) INCLUDES 20,000 SHARES ISSUABLE UNDER OUTSTANDING STOCK OPTIONS
EXERCISABLE WITHIN SIXTY DAYS.
(5) INCLUDES 169,000 SHARES ISSUABLE UNDER OUTSTANDING STOCK OPTIONS.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
None.
36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) 1. FINANCIAL STATEMENTS
The following consolidated financial statements are filed as part of
this Form l0-K:
Independent Auditors' Report
Consolidated Financial Statements:
Consolidated Balance Sheets as of February 29, 2000 and
February 28, l999
Consolidated Statements of Operations for the years ended
February 29, 2000, February 28, 1999 and February 28, 1998
Consolidated Statements of Stockholders' Equity for the years
ended February 29, 2000, February 28, 1999 and February 28, l998
Consolidated Statements of Cash Flows for the years ended
February 29, 2000, February 28, l999 and February 28, l998
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
The following Financial Statement Schedule is filed as part of this Form
10-K:
Schedule II - Valuation and Qualifying Accounts for the years ended
February 29, 2000, February 28, l999 and February 28,1998
All other schedules have been omitted because they are not applicable, not
required or the information is disclosed in the consolidated financial
statements, including the notes thereto.
3. EXHIBITS
NUMBER DOCUMENT
- ------ --------
(3) (a) Copy of Restated Certificate of Incorporation and amendments
thereto. (l)(4)
(b) Copy of Bylaws, as amended through July 2, 1987. (3)
(4) (a) Specimen of Common Stock Certificate. (1)
(b) Copy of 1992 Stock Option Plan. (6)
(10) (a) Copy of The Langer Biomechanics Group Retirement Plan, restated
as of July 30, l979. (1)
(b) Copy of Lease related to the Company's Deer Park facilities.
(c) Copy of Agreement, dated July 8, l986, between BioResearch
Ithaca, Inc. and the Company relating the licensing of the
Pediatric Counter Rotation System. (2)
(d) Copy of Leases relating to the Company's Brea, California
facilities.
37
(e) Copy of Agreement, dated March 26, l992 and effective as of
March l, l992, relating to the Company's 40l(k) Tax Deferred
Savings Plan. (5)
(f) Copy of letter agreement, dated January 27, 1995, between the
Company and Tekscan, Incorporated. (7)
(g) Copy of Loan and Security Agreement dated November 30, 1999
between the Company and American National Bank and Trust
Company of Chicago
(21) List of subsidiaries (4)
(23) Consent of Independent Auditors
(l) Incorporated by reference to the Company's Registration
Statement on Form S-1 (No. 2-87183), which became effective with
the Securities and Exchange Commission on January 17, 1984.
(2) Incorporated by reference to the Company's Form 10-K for the
fiscal year ended July 31, 1986.
(3) Incorporated by reference to Post-Effective Amendment No. 1 to
the Company's Registration Statement on Form S-8.
(4) Incorporated by reference to the Company's Form 10-K for the
fiscal year ended February 28, 1989.
(5) Incorporated by reference to the Company's Form 10-K for the
fiscal year ended February 29, 1992.
(6) Incorporated by reference to the Company's Form 10-K for the
fiscal year ended February 28, 1993.
(7) Incorporated by reference to the Company's Form 10-K for the
fiscal year ended February 28, 1995.
(27) Financial Statement Schedule
(b) REPORTS ON FORM 8-K:
None.
38
SIGNATURES
Pursuant to the requirements of Section l3 or l5(d) of the Securities
Exchange Act of l934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE LANGER BIOMECHANICS GROUP, INC.
Date: May 12, 2000 By: /s/ Daniel J. Gorney
---------------------------
Daniel J. Gorney, President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/Thomas G. Archbold
---------------------------
Thomas G. Archbold, Vice President
-Finance (Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of l934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: May 12, 2000 By: /s/ Kenneth Granat
-------------------------------
Kenneth Granat, Director
Date: May 12, 2000 By: /s/ Stephen V. Ardia
-------------------------------
Stephen V. Ardia, Director
Date: May 12, 2000 By: /s/ Justin Wernick
-------------------------------
Dr. Justin Wernick, Director
Date: May 12, 2000 By: /s/ Thomas I. Altholz
-------------------------------
Thomas I. Altholz, Director
39
Exhibit Index
10(d) Copy of lease related to the Company's Brea, California facility
(g) Copy of Loan and Security Agreement dated November 30, 1999 between the
Company and American National Bank and Trust Company of Chicago
23 Consent of Independent Auditors
27 Financial Data Schedule
40