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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ________________
COMMISSION FILE NUMBER 000-23207
NEUTRAL POSTURE ERGONOMICS, INC.
(Exact name of small business issuer as specified in its charter)
TEXAS 74-2563656
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3904 N. TEXAS AVENUE
BRYAN, TEXAS 77803 (409) 778-0502
(Address of principal (Issuer's telephone number)
executive offices)
CHECK WHETHER THE ISSUER (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PAST 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 [ ]
ON OCTOBER 13, 1998, THERE WERE 3,208,800 SHARES OF COMMON STOCK
OUTSTANDING, PAR VALUE $0.01 PER SHARE.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
YES [ ] NO [X]
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<PAGE>
NEUTRAL POSTURE ERGONOMICS, INC.
Quarterly Report on Form 10-QSB
for the Quarter Ended September 30, 1998
(Unaudited)
PAGE
NUMBER
-------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Balance Sheets as of September
30, 1998 and June 30, 1998 .............................. 1
Condensed Statements of Income for the
Three Months Ended September 30, 1998 and 1997 .......... 2
Condensed Statements of Cash Flows for the
Three Months Ended September 30, 1998 and 1997 .......... 3
Notes to Condensed Financial Statements ................... 4
Item 2. Management's Discussion and Analysis
or Plan of Operation .............................. 5
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................. 9
Item 2. Changes in Securities and Use of Proceeds .......... 10
Item 6. Exhibits and Reports on Form 8-K ................... 11
SIGNATURES ...................................................... 12
<PAGE>
<TABLE>
<CAPTION>
NEUTRAL POSTURE ERGONOMICS, INC.
CONDENSED BALANCE SHEETS
ASSETS
SEPTEMBER 30, JUNE 30,
1998 1998
--------------- -----------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents .......................... $ 2,956,634 $ 3,370,278
Accounts receivable - net .......................... 2,681,363 1,991,105
Inventories ........................................ 1,429,444 1,061,212
Deferred income tax benefits ....................... 144,000 144,000
Prepaid expenses and other ......................... 275,089 228,062
----------- -----------
Total current assets ......................... 7,486,530 6,794,657
Property and Equipment - net ............................. 2,001,240 1,849,910
Notes Receivable - shareholders .......................... 118,175 118,175
Intangibles - net ........................................ 214,834 222,253
Deposits and Other ....................................... 106,121 137,851
----------- -----------
Total ........................................ $ 9,926,900 $ 9,122,846
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt .................. $ 28,649 $ 28,649
Accounts payable ................................... 1,354,412 956,341
Accrued liabilities ................................ 495,676 341,294
Income taxes payable ............................... 129,770 169,294
----------- -----------
Total current liabilities .................... 2,008,507 1,495,578
Long-Term Debt - Less current portion .................... 564,494 576,237
Deferred Income Tax Liability ............................ 162,000 162,000
Commitments and Contingencies
Shareholders' Equity:
Preferred stock: $.01 par value, 1,000,000
shares authorized; no shares
issued and outstanding ....................... -- --
Common stock: $.01 par value, 14,000,000
shares authorized; 3,200,000 shares
issued and outstanding ....................... 32,000 32,000
Common stock warrants .............................. 75,000 75,000
Additional paid-in capital ......................... 5,524,986 5,524,986
Retained earnings .................................. 1,627,413 1,339,545
Accounts and notes receivable - shareholders ....... (52,500) (52,500)
Deferred compensation - stock options granted ...... (15,000) (30,000)
----------- -----------
Total stockholders' equity ................... 7,191,899 6,889,031
----------- -----------
Total ........................................ $ 9,926,900 $ 9,122,846
=========== ===========
</TABLE>
See notes to condensed financial statements.
1
<PAGE>
NEUTRAL POSTURE ERGONOMICS, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
---------------------------
1998 1997
---------- ------------
Net Sales ...................................... $ 4,212,444 $ 2,949,237
Cost of Sales .................................. 2,655,861 1,791,611
----------- -----------
Gross Profit ................................... 1,556,583 1,157,626
Operating Expenses:
Selling ................................... 372,081 313,590
General and administrative ................ 750,265 505,824
----------- -----------
Total ................................ 1,122,346 819,414
----------- -----------
Operating Income ............................... 434,237 338,212
Other Income (Expense):
Interest expense .......................... (13,207) (16,184)
Interest income ........................... 35,909 252
Other ..................................... 3,652 --
----------- -----------
Total ................................ 26,354 (15,932)
----------- -----------
Income Before Income Taxes ..................... 460,591 322,280
Income Tax Expense (A) ......................... 172,723 118,827
----------- -----------
Net Income (A) ................................. $ 287,868 $ 203,453
=========== ===========
Earnings Per Share: (A)
Basic ..................................... $ 0.09 $ 0.09
=========== ===========
Diluted ................................... $ 0.09 $ 0.08
=========== ===========
Weighted Average Common Shares Outstanding:
Basic ..................................... 3,200,000 2,300,000
=========== ===========
Diluted ................................... 3,343,757 2,500,000
=========== ===========
(A) Pro Forma prior to October 1997: see Note 4.
See notes to condensed financial statements.
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NEUTRAL POSTURE ERGONOMICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
Operating Activities:
Net income .................................................... $ 287,868 $ 203,453
Noncash items in net income:
Depreciation and amortization .............................. 88,727 63,041
Changes in operating working capital:
Accounts receivable ........................................ (663,591) (348,702)
Inventories ................................................ (368,232) (59,146)
Prepaid expenses and other ................................. (73,694) 6,310
Accounts payable ........................................... 398,071 (117,040)
Accrued liabilities ........................................ 154,382 18,506
Income taxes payable ....................................... (39,524) 14,018
Notes receivable - shareholders ............................ -- (100,000)
Deposits and other ......................................... 25,425 (25,517)
----------- -----------
Net cash used for operating activities .................. (190,568) (345,077)
Pro forma income tax expense .................................. -- 104,809
----------- -----------
Historical net cash used for operating activities ....... (190,568) (240,268)
----------- -----------
Investing Activities:
Additions to property and equipment ........................... (211,333) (50,980)
----------- -----------
Net cash used for investing activities .................. (211,333) (50,980)
----------- -----------
Financing Activities:
Issuance of debt .............................................. -- 200,000
Payments of debt .............................................. (11,743) (6,395)
Capital contribution by S Corp. shareholders .................. -- 43,345
Stock offering costs .......................................... -- (61,812)
----------- -----------
Net cash provided by (used for) financing activities .... (11,743) 175,138
----------- -----------
Decrease in Cash and Cash Equivalents ............................ (413,644) (116,110)
Cash and Cash Equivalents:
Beginning of period ........................................... 3,370,278 294,014
----------- -----------
End of period ................................................. $ 2,956,634 $ 177,904
=========== ===========
</TABLE>
(A) Pro Forma prior to October 1997: see Note 4
See notes to condensed financial statements.
3
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NEUTRAL POSTURE ERGONOMICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. INTERIM FINANCIAL STATEMENTS
The condensed interim financial statements included herein have been
prepared by Neutral Posture Ergonomics, Inc. ( the "Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "Commission"). The financial statements reflect adjustments of a normal
recurring nature which are, in the opinion of management, necessary to present
fairly such information. Although the Company believes that the disclosures are
adequate to make the interim information presented not misleading, certain
information and footnote disclosures, including significant accounting policies,
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. These interim financial statements should be read in
conjunction with the financial statements and the notes thereto included in the
Annual Report on Form 10-KSB filed by the Company with the Commission for the
fiscal year ended June 30, 1998. Quarterly operating results may vary
significantly and are not necessarily indicative of the results for the full
year or any future period.
2. INVENTORIES
Inventories consist primarily of raw materials and are stated at the lower
of cost (on the first-in, first-out method) or market.
3. ASSET ACQUISITION
On March 19, 1998, the Company acquired certain assets of the furniture
business of Harvard Industries, Inc. ("Harvard") for $760,000 in cash and
incurred approximately $100,000 of related costs and expenses. The acquisition
included inventory, equipment and use of the Harvard name for a period of three
years. The Company has recorded intangibles totaling $214,834, net of
amortization of $24,691 as of September 30, 1998, as part of the acquisition.
Subsequent to the acquisition, the Company sold inventory and equipment of one
of the chair lines to a third party which reduced the costs of the Harvard
acquisition by $140,000.
4. PRO FORMA INCOME TAXES
Effective April 1, 1996, the Company elected taxation status as an
S Corporation under the Internal Revenue Code, with profits and losses
reportable by the shareholders on their individual income tax returns. Pro forma
income taxes represent the applicable pro forma adjustments for federal and
state income taxes as if the Company had not been treated as an S Corporation
for the three month period ended September 30, 1997. Upon completion of the
public offering in October 1997 as described in note 5 below, the Company
terminated its status as an S Corporation and is subject to federal and state
income taxes. After that date, current and deferred income taxes have been
provided for as appropriate.
5. INITIAL PUBLIC OFFERING
On October 20, 1997, the Company completed an initial public offering of
common stock and the private placement of common stock warrants. Proceeds of the
offering, less underwriter's commissions and fees and other offering expenses,
were approximately $4.4 million for the 900,000 shares of common stock issued by
the Company. Selling shareholders sold 434,000 shares of common stock for which
the Company received no proceeds. In addition to the common stock issued,
warrants to purchase 133,400 shares of common stock at an exercise price of
$7.20 per share were granted to the underwriter. These warrants are exercisable
over a period of four years commencing one year from consummation of the
offerings.
4
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following should be read in conjunction with the financial statements,
notes to the financial statements, and "Management's Discussion and Analysis or
Plan of Operation" contained in the Company's Annual Report on Form 10-KSB filed
with the Commission.
GENERAL. The Company generates revenue through sales of its products to
corporate customers and retailers through independent sales representatives, who
generally are paid a commission for each unit sold. These independent sales
representatives channel sales through dealers located throughout the United
States and Puerto Rico who acquire the products from the Company at a discount
from suggested retail and then resell the products to the ultimate customers.
These dealers typically provide end-users a range of "value-added" services that
may include installation, delivery, site planning and warranty repairs.
Because the Company is utilizing "value-added" dealers, the Company has
been able to increase sales of higher priced models in recent years. The Company
believes that those end-users reached through such higher quality dealers
generally prefer, in addition to the value-added services of such dealers, its
higher-priced models inasmuch as the Company believes the purchasing decisions
of such end-users are not focused solely on price but also on other factors.
In March 1998, the Company acquired certain assets of the furniture
business of Harvard Industries, Inc. ("Harvard"). Production of a limited number
of the Harvard chair lines acquired began on April 2, 1998. Almost all of the
remaining Harvard chair lines acquired began production by June 30, 1998. As
such, the acquisition of the Harvard chair lines accounts for a majority of the
increases in sales and costs of sales for the three month period ended September
30, 1998 as compared to the corresponding period in 1997.
RESULTS OF OPERATIONS. The following table sets forth the percentage
relationship to net sales of certain items in the Company's statements of income
for the periods indicated.
THREE MONTHS
ENDED SEPTEMBER 30,
--------------------
1998 1997
------- -------
Net sales ............. 100.0% 100.0%
Cost of sales ......... 63.0 60.7
----- -----
Gross profit .......... 37.0 39.3
Selling, general and
administrative expenses 26.6 27.8
----- -----
Operating income ...... 10.4% 11.5%
===== =====
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
NET SALES. Net sales for the three month period ended September 30, 1998
increased approximately $1.3 million or 43% as compared to the three month
period ended September 30, 1997. The total number of units sold increased
approximately 95% from the same 1997 quarter. The increase in net sales and
units was primarily the result of the addition of the Harvard chair lines which
began production in the fourth quarter of fiscal year 1998. Net sales for the
Neutral Posture chair line increased approximately $100,000 or 3% for the three
month period ended September 30, 1998 as compared to the same 1997 period while
net sales for the Harvard chair lines increased total net sales by approximately
$1.2 million.
GROSS PROFIT. Gross profit for the three months ended September 30, 1998
was $1.6 million, increasing approximately $400,000 or 33%, from gross profit of
$1.2 million for the same period in 1997. The gross profit margin as a percent
of net sales decreased to 37.0% for the three months period ended September 30,
1998 from 39.3% for the three month period ended September 30, 1997. The
decreased gross profit margin was primarily the result of a decrease in average
selling price in Neutral Posture(R) chair line due to a shift in the product mix
of
5
<PAGE>
units sold during the period and an increase in labor costs related to
processing the increased chair orders late in the quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $1.1 million for the three month period ended
September 30, 1998, increasing approximately $300,000 or 37%, from $800,000 for
the three month period ended September 30, 1997. The increase was primarily due
to increases in compensation expense as a result of hiring additional sales and
marketing personnel and staff in connection with the Harvard chair lines
acquisition and costs associated with being a publicly held entity. As a percent
of net sales, selling, general and administrative expenses decreased to 26.6%
for the three month period ended September 30, 1998 from 27.8% for the similar
three month period ended September 30, 1997.
OPERATING INCOME. As a result of the foregoing, operating income for the
three month period ended September 30, 1998 was approximately $434,000
increasing $96,000, or approximately 28%, from $338,000 for the three month
period ended September 30, 1997.
OTHER INCOME (EXPENSE). Other income (expense) increased approximately
$42,000 for the three month period ended September 30, 1998 as compared to the
same l997 period. Reductions in interest expense resulting from the repayment of
debt on the Revolving Credit Facility (defined below) out of proceeds from the
initial public offering and increases in interest income resulting from the
investment of unutilized offering proceeds accounted for a majority of the
increase.
EARNINGS PER SHARE (EPS). The EPS amounts of $0.09 (Basic and Diluted) for
the three month period ended September 30, 1998, are based on the weighted
average shares outstanding during the period, which includes 900,000 additional
shares issued in the initial public offering in October 1997. Diluted EPS also
includes the dilutive effect of common stock options outstanding.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of capital are net cash provided by
operating activities, together with the net proceeds from its initial public
offering and its unused capacity under the Revolving Credit Facility (defined
below). The Company's primary capital requirements are to fund component parts
inventory, receivables, research and development activities and product
improvements.
Cash used for operating activities totaled $190,568 for the three month
period ended September 30, 1998, as compared to cash used for operating
activities of $240,268 for the three month period ended September 30, 1997. The
majority of the usage variance between the periods resulted from changes in
working capital related to increases in receivables and inventories, partially
offset by increases in payables and increases in net income.
Cash used for investing activities totaled $211,333 and $50,980 for the
three month period ended September 30, 1998 and 1997, respectively. The cash
used for investing activities was primarily comprised of miscellaneous capital
expenditures for building improvements, machinery and equipment.
Financing activities used funds totaling $11,743 for the three month
period ended September 30, 1998 to reduce long-term debt. For the three month
period ended September 30, 1997, financing activities provided funds totaling
$175,138, which were primarily generated from borrowing under the Revolving
Credit Facility (defined below) to fund interim working capital needs offset by
approximately $62,000 of offering costs related to the initial public offering.
The Company currently maintains a $2.0 million revolving credit facility
("Revolving Credit Facility"). This facility is utilized to fund operating
activities, including working capital needs such as providing funds for
increases in inventory levels. In addition to the Revolving Credit Facility, the
Company maintains a term facility ("Term Facility") in the amount of $500,000
and is restricted to financing equipment or mold purchases with borrowings under
the Term Facility. At September 30, 1998, no amount was outstanding under either
facility.
6
<PAGE>
At September 30, 1998, the Company had two loans outstanding in the
amounts of $130,000 and $457,000 pursuant to certain loan agreements incurred in
connection with the Company's acquisition in 1996 of the land and building
currently used by the Company. The Revolving Credit Facility, Term Facility and
the outstanding loan agreements require maintenance of specified levels of
tangible net worth and other financial covenants and restrict additional
borrowings, the purchase and disposal of assets, the payment of dividends, the
purchase of treasury stock and other specified changes in the Company's
business.
In January 1997, the Company entered into an agreement with a third party
to design and produce injection molds to be utilized in the production process
for approximately $400,000. The Company has paid approximately $150,000 for
fiscal years ended 1998 and 1997, respectively, and expects to pay the remaining
$100,000 in fiscal year 1999.
The Company believes that cash flow from operations, together with the net
proceeds from its initial public offering and its unused capacity under the
Revolving Credit Facility and Term Facility should be sufficient to fund its
anticipated operating needs and capital expenditures through fiscal year 1999.
However, because the Company's future operating results will depend on a number
of factors, including the demand for the Company's products, the level of
competition and general economic conditions and other factors beyond the
Company's control, there can be no assurance that the Company's capital
resources will be sufficient to fund the Company's operations beyond such date.
Historically, the Company's business has been subject to seasonality.
Typically, the Company's revenue is greater during the second and third quarters
of the Company's fiscal year. These seasonal fluctuations in sales are due to
customer ordering patterns that emphasize purchases of these two quarters. The
Company's results of operations would be adversely and disproportionally
affected if customer ordering patterns were substantially lower than those
normally expected during these two fiscal quarters.
IMPACT OF THE YEAR 2000 ISSUES. The Year 2000 Issue is the result of
computer programs being written using two digits rather than four to define the
applicable year. Certain of the Company's computer programs have date-sensitive
software which may recognize a date using "00" as the year 1900 rather than the
year 2000. This situation could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities. Based on an internal assessment, the Company determined
that it will be required to modify or replace portions of its software
applications so that its computer systems will properly utilize dates beyond
December 31, 1999. The Company has identified its Year 2000 risk in three
categories: internal business software; internal non-financial software and
imbedded chip technology; and external compliance by customers and suppliers.
INTERNAL BUSINESS SOFTWARE. During 1998, the Company purchased upgraded
software which the software vendor has indicated is Year 2000 compliant. The
total estimated software and installation cost is $110,000 of which $40,000 has
been spent to date. The Company is in the implementation phase for this system
and other ancillary financial systems with full implementation scheduled for
December 1998. Based on this schedule, the Company expects to be in full
compliance with its internal financial systems before the year 2000. However, if
due to unforeseen circumstances, the implementation is not completed on a timely
basis, the Year 2000 risk could have a material impact on the operations of the
Company. Year 2000 contingency plans have been established in those areas where
the Company feels that the system bears the most risk of not implementing
compliance. Those plans include adapting some of the Company's currently
existing systems to be Year 2000 compliant. The cost of making those adaptations
is not expected to be material and will be expensed in the period incurred.
INTERNAL NON-FINANCIAL SOFTWARE AND IMBEDDED CHIP TECHNOLOGY. The Company
is in the data gathering phase with regard to non-financial software and
imbedded chip technology and is currently gathering data to assess the impact of
the Year 2000 on its non-financial systems such as manufacturing equipment,
security equipment, etc., with Year 2000 compliance scheduled for June 1999. The
Company does not, at this time, have sufficient data to estimate the cost of
achieving Year 2000 compliance for its non-financial systems. Even if the
Company is unable to achieve Year 2000 compliance for its major non-financial
systems, the Year 2000 should not have a material impact on the operations of
the Company. Because the Company is in the information-gathering phase, the
7
<PAGE>
Company does not currently have a contingency plan in place for its internal
non-financial software and imbedded chip technology.
EXTERNAL COMPLIANCE BY CUSTOMERS AND SUPPLIERS. The Company is in the
process of identifying and contacting its critical suppliers, service providers
and contractors to determine the extent to which the Company's interface systems
are vulnerable to those third parties' failure to remedy their own Year 2000
issues. It is expected that full identification will be completed by June 1999.
To the extent that responses to Year 2000 readiness inquiries are
unsatisfactory, the Company intends to change suppliers, service providers or
contractors to those who have demonstrated Year 2000 readiness. The Company,
however, cannot be assured that it will be successful in finding such
alternative suppliers, service providers and contractors. The Company does not
currently have any formal information concerning the Year 2000 compliance status
of its customers but has received indications that most of its customers are
working on Year 2000 compliance. In the event that any of the Company's
significant customers and suppliers do not successfully and timely achieve Year
2000 compliance, and the Company is unable to replace them with new customers or
alternate suppliers, respectively; the Company's business or operations could be
adversely affected.
EXPENSES. To date, the Company has incurred expenses of approximately
$40,000 related to the assessment of, and preliminary efforts in connection
with, its Year 2000 project and the development of a remediation plan. The total
remaining cost of the Year 2000 project is estimated at $70,000 and is being
funded through operating cash flows. Of the total project cost of $110,000
attributable to the purchase and installation of new software, approximately
$100,000 will be capitalized. The costs of the project and the dates on which
the Company plans to complete the various Year 2000 modifications are based on
management's best estimates, which estimates were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved, and actual results could
differ materially from those estimated for the reasons mentioned above.
NEW ACCOUNTING STANDARDS. In June 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS 130, "Reporting Comprehensive Income" and SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information." Both
standards became effective for fiscal years beginning after December 15, 1997.
The reporting changes resulting from adoption of both of these standards on the
Company were not material.
CAUTIONARY STATEMENT. With the exception of historical information, the
matters discussed under "Liquidity and Capital Resources," including but not
limited to, "Impact of the Year 2000 Issues," contain forward-looking
statements. There are certain important factors which could cause actual results
to differ materially from those anticipated by the forward-looking statements.
Certain of the important factors which could cause actual results to differ
materially from those in the forward-looking statements include, among other
things, changes from anticipated levels of sales, the ability to integrate
acquired product lines and related businesses, future national or regional
economic and competitive conditions, changes in relationships with customers,
customer acceptance of existing and new products, pricing pressures due to
excess capacity, raw material cost increases, change of tax rates, change of
interest rates, declining conditions in the industry, validity of patents,
availability of key component parts, casualty to or other disruption of the
Company's production facility and equipment, delays and disruptions in the
shipment of the Company's products and other factors that generally affect
business.
8
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than routine litigation matters, the Company is currently involved
in three lawsuits and in an arbitration proceeding. Two lawsuits and the
arbitration proceedings involve the Company's United States Patent No. 4,552,404
(the "Patent") which covers the design of virtually all models in the Neutral
Posture(R) chair line. The third lawsuit involves computERGO(TM).
On September 23, 1997, the Company was served with a suit filed by
Bodybilt on September 18, 1997 in the 361st District Court of Brazos County,
Texas against Dr. Jerome Congleton. Although the sole defendant in the suit was
Dr. Congleton, both the American Arbitration Association and the Company were
listed as "Injunctive Respondents." In general, the suit claims: (i) that Dr.
Congleton exceeded the scope of his rights when he assigned the Patent to the
Company; (ii) that Dr. Congleton's assigns are prohibited from contending that
Bodybilt's chairs infringe the Patent; and (iii) that Dr. Congleton materially
breached the 1991 Settlement Agreement. The suit sought : (v) an injunction
against both the American Arbitration Association and the Company from
proceeding with the arbitration initiated May 21, 1997; (w) unspecified monetary
damages against Dr. Congleton; (x) a declaratory judgment as to Bodybilt's
claims; (y) rescission of the 1991 assignment of the Patent to Dr. Congleton;
and (z) other relief against Dr. Congleton. The Company intervened in this
lawsuit. On September 3, 1998, the Court rescinded the original assignment of
the Patent from Dr. Congleton to the Company, however, the Court invited Dr.
Congleton to re-execute the assignment of the Patent to the Company subject to
any restrictions arising out of the 1991 Settlement Agreement. The assignment
was re-executed by Dr. Congleton on September 3, 1998, subject to any
restrictions arising out of the 1991 Settlement Agreement. Also on September 3,
1998, the Court granted a Plea in Abatement filed by the Company and Dr.
Congleton, conditioned upon Dr. Congleton's consent to participate and his
participation in binding arbitration, and the Court stayed further proceedings
in this lawsuit until further order of the Court.
On October 16, 1997, Ergobilt, the parent company of Bodybilt, sued the
Company in the United States District Court for the Northern District of Texas.
In general, the lawsuit alleges that the Company, in violation of the Lanham
Trademark Act, (i) published false and misleading information that its chairs
are covered by the Patent, that it knows of no other chairs on the market that
are similar to its chairs and that Bodybilt's chairs infringe the Patent and
(ii) furnished false and misleading information concerning Ergobilt (including
the Company's claim that substantially all of the chairs sold by Ergobilt's
subsidiary, Bodybilt are designed in such a manner that they infringe the
Patent). The suit seeks unspecified monetary damages and injunctive relief from
the Company. The Company has obtained an opinion of counsel that virtually all
of its chairs are covered by the Patent. On October 17, 1997, the Company filed
a motion to dismiss the lawsuit or compel arbitration, and on November 26, 1997,
the Company filed its counter-claim against Ergobilt and a motion to join
Bodybilt as a third party defendant. On August 10, 1998, the Court dismissed
without prejudice Ergobilt's claims against the Company, and entered an order
compelling the Company and Bodybilt to submit their disputes to arbitration. In
this lawsuit, the Company's counter-claim against Ergobilt for patent
infringement and dilution of the Company's trademark remain pending.
On August 31, 1998, the Company initiated a new arbitration proceeding
against Bodybilt claiming patent infringement, breach of contract, tortious
interference, slander, trade libel, unfair competition and dilution of the
Company's mark. The Company believes that substantially all of the chairs sold
by Bodybilt are designed in such a manner that they infringe the Patent. The
Company intends to enforce what it believes to be exclusive ownership rights to
the Patent by seeking injunctive relief as well as damages. The demand for
arbitration was filed with the American Arbitration Association pursuant to a
mandatory arbitration clause included in the Settlement Agreement executed in
1996 between the Company and Bodybilt, and pursuant to the Federal Court order
compelling arbitration described above. Dr. Congleton has joined in the
arbitration. On October 14, 1998, Bodybilt filed a counter-claim in the
arbitration proceeding against the Company claiming deceptive advertising under
the Lanham Act, unfair competition, breach of contract, tortious interference,
slander and trade libel.
Regardless of the outcome of the arbitration and the Brazos county
lawsuit, the Company will continue to pay all defense costs of Dr. Congleton
associated with the arbitration and the lawsuit. Although uncertainties
associated with arbitration and other litigation risks make it impossible for
the Company to predict the outcome of
9
<PAGE>
the arbitration and lawsuits with certainty, the Company does not believe that
the outcome of the arbitration and the lawsuits will have a material adverse
impact on its financial position, results of operations and cash flows.
COMPUTERGO(TM) In May 1998, the Company was served with a suit filed By
Destech, L.L.C. ("Destech") in United States District Court, Eastern District of
Michigan. In general, the lawsuit alleges that the Company breached a contract
for the development, design and tooling cost of computERGO(TM), a portable
laptop workstation and for the cost of establishing a manufacturing assembly
line. The Company intends to vigorously defend Destech's claims and in June 1998
filed a response with the Court denying such allegations. In May 1998, the
Company also filed suit against J&J Automotive Group, Inc. ("AGI"), the parent
company of Destech, in the county court of Brazos County, Texas alleging breach
of contract and warranty to the Company. Although uncertainties associated with
jury trials and other litigation risks make it impossible for the Company to
predict the outcome of this proceeding with certainty, the Company does not
expect the outcome to have a material adverse effect upon the Company's
financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company filed a Registration Statement on Form SB-1 (File No.
333-33675), which was declared effective by the Securities and Exchange
Commission on October 16, 1997. The offering commenced on October 20, 1997 with
net proceeds of approximately $4.4 million.
As of September 30, 1998, the Company has utilized net offering proceeds
for the following:
(1) approximately $45,000 in the development of computERGO(TM);
(2) approximately $875,000 in the acquisition and development of
additional ergonomic products; of which $860,000 was used to acquire
certain assets of the furniture business of Harvard;
(3) approximately $20,000 in the Company's effort to become ISO 9000
certified;
(4) approximately $65,000 in enhancing the Company's marketing efforts
primarily resulting from salaries and travel-related expenditures for
the additional sales personnel hired, including a vice president -
sales and two professional ergonomists;
(5) approximately $85,000 related to the hiring of engineering personnel,
including a vice president -engineering;
(6) approximately $1,040,000 of working capital to fund inventory
purchases; and
(7) $200,000 to repay outstanding indebtedness on its revolving credit
facility.
In addition, the Company had approximately $2.3 million included in
temporary investments as of September 30,1998 comprised of short-term, interest
bearing, investment grade securities. Each of the foregoing amounts represents
the reasonable estimate of the Company for the amounts of the net proceeds
applied. None of the foregoing payments were direct or indirect payments to (i)
directors of the Company or their respective associates, (ii) persons owning 10%
or more of any class of equity securities or (iii) affiliates of the Company.
Included in the applied net offering proceeds was compensation expense of
approximately $110,000 for the Vice President - Engineering and the Vice
President - Sales.
The terms of the Revolving Credit Facility, Term Facility and the loan
agreements, as defined above, restrict the Company's ability to pay dividends to
its shareholders and acquire capital stock.
10
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which
this report is filed.
11
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NEUTRAL POSTURE ERGONOMICS, INC.
Date: November 6, 1998 By: /s/ REBECCA E. BOENIGK
Rebecca E. Boenigk
Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
Date: November 6, 1998 By: /s/ GREGORY A. KATT
Gregory A. Katt
Vice President, Chief Financial
Officer and Treasurer (Principal
Financial and Accounting Officer)
12
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