================================================================================
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, 1999
[ ] 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 29, 1999, THERE WERE 3,171,800 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, 1999
(Unaudited)
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Balance Sheets as of September 30, 1999 and
June 30, 1999 ................................................... 1
Condensed Statements of Income for the Three Months Ended
September 30, 1999 and 1998 ..................................... 2
Condensed Statements of Cash Flows for the Three Months Ended
September 30, 1999 and 1998 ..................................... 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 ........................... 10
SIGNATURES .............................................................. 11
<PAGE>
NEUTRAL POSTURE ERGONOMICS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30, JUNE 30,
1999 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents ............................................ $ 3,266,345 $ 3,316,257
Accounts receivable - net ............................................ 2,867,104 2,667,461
Inventories .......................................................... 1,067,431 1,195,158
Deferred income tax benefits ......................................... 164,000 164,000
Prepaid expenses and other ........................................... 426,047 336,083
Income tax receivable ................................................ -- 98,058
------------ ------------
Total current assets ............................................ 7,790,927 7,777,017
Property and Equipment - net ................................................ 2,246,331 2,277,482
Notes Receivable - shareholders ............................................. 14,725 14,725
Intangibles - net ........................................................... 211,884 226,791
Deposits and Other .......................................................... 196,704 198,007
------------ ------------
Total ........................................................... $ 10,460,571 $ 10,494,022
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt .................................... $ 43,632 $ 43,632
Accounts payable ..................................................... 1,269,771 1,576,141
Accrued liabilities .................................................. 499,684 544,308
Income taxes payable ................................................. 64,244 --
------------ ------------
Total current liabilities ....................................... 1,877,331 2,164,081
Long-Term Debt - Less current portion ....................................... 517,497 550,554
Deferred Income Tax Liability ............................................... 131,000 131,000
Commitments and Contingencies
Shareholders' Equity:
Preferred stock: $.01 par value, 1,000,000 shares authorized;
no shares issued ................................................ -- --
Common stock: $.01 par value, 14,000,000 shares authorized;
3,308,800 shares issued ......................................... 33,088 33,088
Common stock warrants ................................................ 75,000 75,000
Additional paid-in capital ........................................... 5,671,138 5,671,138
Retained earnings .................................................... 2,464,142 2,177,786
Accounts and notes receivable - shareholders ......................... (17,500) (17,500)
Treasury stock - at cost, 137,000 shares ............................. (291,125) (291,125)
------------ ------------
Total shareholders' equity ...................................... 7,934,743 7,648,387
------------ ------------
Total ........................................................... $ 10,460,571 $ 10,494,022
============ ============
</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,
-----------------------------
1999 1998
----------- -----------
Net Sales ................................. $ 4,384,020 $ 4,212,444
Cost of Sales ............................. 2,704,026 2,655,861
----------- -----------
Gross Profit .............................. 1,679,994 1,556,583
Operating Expenses:
Selling ............................. 473,104 372,081
General and administrative .......... 781,745 750,265
----------- -----------
Total ......................... 1,254,849 1,122,346
----------- -----------
Operating Income .......................... 425,145 434,237
Other Income (Expense):
Interest expense .................... (14,016) (13,207)
Interest income ..................... 37,996 35,909
Other ............................... (467) 3,652
----------- -----------
Total ......................... 23,513 26,354
----------- -----------
Income Before Income Taxes ................ 448,658 460,591
Income Tax Expense ........................ 162,302 172,723
----------- -----------
Net Income ................................ $ 286,356 $ 287,868
=========== ===========
Earnings Per Share:
Basic ............................... $ 0.09 $ 0.09
=========== ===========
Diluted ............................. $ 0.09 $ 0.09
=========== ===========
Weighted Average Common Shares
Outstanding:
Basic ............................... 3,308,800 3,200,000
=========== ===========
Diluted ............................. 3,313,339 3,343,757
=========== ===========
See notes to condensed financial statements.
2
<PAGE>
NEUTRAL POSTURE ERGONOMICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Operating Activities:
Net income ................................................ $ 286,356 $ 287,868
Noncash items in net income:
Depreciation and amortization .......................... 132,041 88,727
Changes in operating working capital:
Accounts receivable .................................... (199,643) (663,591)
Notes receivable ....................................... 9,754 --
Inventories ............................................ 79,218 (368,232)
Prepaid expenses and other ............................. (72,209) (73,694)
Income taxes receivable/payable ........................ 162,302 (39,524)
Accounts payable ....................................... (306,370) 398,071
Accrued liabilities .................................... (44,624) 154,382
Deposits and other ..................................... -- 25,425
----------- -----------
Net cash provided by (used for) operating activities 46,825 (190,568)
Investing Activities:
Additions to property and equipment ....................... (63,680) (211,333)
----------- -----------
Net cash used for investing activities ............. (63,680) (211,333)
----------- -----------
Financing Activities:
Payments of debt .......................................... (33,057) (11,743)
----------- -----------
Net cash used for financing activities ............. (33,057) (11,743)
----------- -----------
Decrease in Cash and Cash Equivalents .......................... (49,912) (413,644)
Cash and Cash Equivalents:
Beginning of period ....................................... 3,316,257 3,370,278
----------- -----------
End of period ............................................. $ 3,266,345 $ 2,956,634
=========== ===========
</TABLE>
See notes to condensed financial statements.
3
<PAGE>
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, 1999. 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. 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. 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 and expire October
24, 2002.
4
<PAGE>
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 for
the year ended June 30, 1999 filed with the Commission.
GENERAL. The Company generates revenue through sales of its products to
corporate customers, distributors and retailers through independent sales
representatives, who generally are paid a commission for each unit sold. These
independent sales representatives usually 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.
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,
-------------------
1999 1998
-------- ---------
Net sales ........................................ 100.0% 100.0%
Cost of sales .................................... 61.7 63.0
----- -----
Gross profit ..................................... 38.3 37.0
Selling, general and administrative expenses ..... 28.6 26.6
----- -----
Operating income ................................. 9.7% 10.4%
===== =====
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
NET SALES. Net sales for the three month period ended September 30, 1999
increased approximately $172,000 or 4% as compared to the three month period
ended September 30, 1998. Sales for the Neutral Posture(R) chair line increased
approximately $449,000 or 15% for the three month period ended September 30,
1999 based on an increase in the average price of the Neutral Posture(R) chairs
as compared to the same 1998 period. The increase in average price of the
Neutral Posture(R) chairs is the result of a change in the mix of chairs sold.
The increase in sales was partially offset by the decrease in sales of the
Harvard chairs of approximately $280,000 or 23% for the three month period ended
September 30, 1999 as compared to the same 1998 period. This decrease is the
result of the absence of the backlog that existed at June 30, 1998 that was
processed during the first quarter of fiscal 1999. This backlog was created
subsequent to the purchase of the Harvard chair line during the initial set-up
of the production line.
GROSS PROFIT. Gross profit for the three months ended September 30, 1999
was $1.7 million, increasing approximately $120,000 or 8%, from gross profit of
$1.6 million for the same period in 1998. The gross profit margin as a percent
of net sales increased to 38.3% for the three month period ended September 30,
1999 from 37.0% for the three month period ended September 30, 1998. The
increased gross profit margin was primarily the result of (i) a reduction of the
cost of certain products and (ii) an increase in the average per unit selling
price of the Neutral Posture(R) chair line as mentioned above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $1.2 million for the three month period ended
September 30, 1999, increasing approximately $133,000 or 12%, from $1.1 million
for the three month period ended September 30, 1998. The increase was primarily
due to increases in consulting fees and in higher commission rates related to
sales promotions offered to the independent sales representatives. As a percent
of net sales, selling, general and administrative expenses increased to 28.6%
for the three month period ended September 30, 1999 from 26.6% for the similar
three month period ended September 30, 1998.
5
<PAGE>
OPERATING INCOME. As a result of the foregoing, operating income for the
three month period ended September 30, 1999 was approximately $425,000,
decreasing slightly from the $434,000 for the three month period ended September
30, 1998.
OTHER INCOME (EXPENSE). Other income (expense) remained relatively
constant for the three month periods ended September 30, 1999 and 1998. The
amount represented is interest income earned in the period offset by interest
expense.
EARNINGS PER SHARE (EPS). The EPS amounts of $0.09 (Basic and Diluted) for
the three month periods ended September 30, 1999 and 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 unexpended 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, fixed assets, research and development activities and
product improvements.
Cash provided by operating activities totaled $46,825 for the three month
period ended September 30, 1999 as compared to cash used for operating
activities of $190,568 for the three month period ended September 30, 1998. The
increase in cash flow for the period ended September 30, 1999 was primarily the
result of decreases in accounts payable partially offset by increases in
accounts receivable.
Cash used for investing activities totaled $63,680 and $211,333 for the
three month periods ended September 30, 1999 and 1998, respectively. The Company
invested $63,680 in building improvements, machinery and equipment.
Financing activities used funds totaling $33,057 and $11,743 for the three
month periods ended September 30, 1999 and 1998 respectively, to reduce long
term debt.
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, 1999, no amount was outstanding under either
facility.
At September 30, 1999, the Company had two loans outstanding in the
amounts of $129,650 and $431,480 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.
The Company believes that cash flow from operations, together with the
unexpended 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 2000. 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.
6
<PAGE>
Historically, the Company's business has been subject to seasonality.
Typically, the Company's revenue is greater during the first and second quarters
of the Company's fiscal year. These seasonal fluctuations in sales are due to
customer ordering patterns that emphasize purchases during 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 complete five phases so that its computer systems
will properly utilize dates beyond December 31, 1999. The five phases are (i)
awareness, (ii) assessment, (iii) analysis, design and remediation, (iv) testing
and validation, and (v) creation of contingency plans in the event of year 2000
failures. 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
financial systems software which the software vendor has indicated is Year 2000
compliant. The total estimated software and installation cost is $75,000 of
which $70,000 has been spent to date. As a result, the Company has completed the
first four phases which includes the testing and validation phase. The Company's
internal financial systems have been Year 2000 compliant since June 30, 1999.
INTERNAL NON-FINANCIAL SOFTWARE AND IMBEDDED CHIP TECHNOLOGY. As of
October 1999, the Company gathered data to assess the impact of the Year 2000 on
its non-financial systems such as manufacturing equipment, security equipment,
etc. The estimated cost of achieving Year 2000 compliance for its non-financial
software is approximately $12,000 of which $10,000 has been spent to date. 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 and the 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 has contacted
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. The Company has received
written responses from approximately 75% of such third parties and a vast
majority of such third parties have assured the Company that their software,
hardware and data is, or on a timely basis will be, Year 2000 compliant. 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. 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, the Company's business or operations could be adversely
affected.
EXPENSES. To date, the Company has incurred expenses of approximately
$80,000 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 $7,000 and is being
funded through operating cash flows. Of the total project cost of $87,000
attributable to the purchase and installation of new software, approximately
$77,000 will be capitalized. The costs of the project and the dates on which the
Company plans to complete the various Year 2000 modifications are forward
looking statements and 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.
7
<PAGE>
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, raw material cost increases,
change of tax rates, change of interest rates, stagnant 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. The Company operates in a changing environment that
involves numerous risks, some of which are beyond the Company's control. Such
risks are highlighted in the Company's Form 10-KSB.
8
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than routine litigation matters, the Company is currently involved
in an arbitration proceeding. The arbitration proceeding involves 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 and related business
and intellectual property issues.
On September 23, 1997, the Company was served with a suit filed by
Bodybilt, Inc. ("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
that: (i) Dr. Congleton exceeded the scope of his rights when he assigned the
Patent to the Company; (ii) Dr. Congleton's assigns are prohibited from
contending that Bodybilt's chairs infringe the Patent; and (iii) 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, Inc., the parent company of Bodybilt, sued
the Company in the United States District Court for the Northern District of
Texas, Dallas Division. 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; however, the parties have agreed to arbitrate these claims and
these claims are pending in the arbitration proceeding described in the
following paragraph.
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 trademark. 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
9
<PAGE>
deceptive advertising under the Lanham Act, unfair competition, breach of
contract, tortious interference, slander and trade libel.
Regardless of the outcome of the arbitration, the Company will continue to
pay all defense costs of Dr. Congleton associated with the arbitration. Although
uncertainties associated with arbitration and other litigation risks make it
impossible for the Company to predict the outcome of 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.
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, 1999, the Company has utilized net offering proceeds
for the following:
(1) approximately $144,000 in the development of computERGO(TM) ;
(2) approximately $1,130,000 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 $96,000 in the Company's effort to become ISO 9001
certified;
(4) approximately $456,000 in enhancing the Company's marketing efforts
primarily resulting from salaries and travel-related expenditures
for the additional sales personnel hired (Danny Skeen as Vice
President - Sales and two professional ergonomists);
(5) approximately $275,000 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 finance receivables; and
(7) $200,000 to repay outstanding indebtedness on its revolving credit
facility.
In addition, the Company had approximately $1.3 million included in
temporary investments as of September 30, 1999 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. Except as stated below, 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 $305,000 for the Vice President - Engineering and the Vice
President - Sales and two professional ergonomists.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
Form 8-K filed on September 8, 1999.
10
<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 12, 1999 By: /s/ REBECCA E. BOENIGK
--------------------------------
Rebecca E. Boenigk
Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 1999 By:/s/ GREGORY A. KATT
---------------------------------
Gregory A. Katt
Vice President, Chief Financial
Officer and Treasurer (Principal
Financial and Accounting Officer)
11
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