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 MARCH 31, 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 APRIL 30, 1999, THERE WERE 3,308,800 SHARES OF COMMON STOCK
OUTSTANDING, PAR VALUE $0.01 PER SHARE.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
YES [ ] NO [X]
<PAGE>
NEUTRAL POSTURE ERGONOMICS, INC.
Quarterly Report on Form 10-QSB
for the Quarter Ended March 31, 1999
(Unaudited)
Page
Number
-------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Balance Sheets as of March 31, 1999 and
June 30, 1998 ................................................. 1
Condensed Statements of Income for the Three and Nine
Months Ended March 31, 1999 and 1998 .......................... 2
Condensed Statements of Cash Flows for the Nine Months
Ended March 31, 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 ......................................... 10
Item 2. Changes in Securities and Use of Proceeds ................. 11
Item 6. Exhibits and Reports on Form 8-K .......................... 12
SIGNATURES ............................................................ 13
<PAGE>
NEUTRAL POSTURE ERGONOMICS, INC.
CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents ........................................... $ 2,999,924 $ 3,370,278
Accounts receivable - net ........................................... 2,357,130 1,991,105
Inventories ......................................................... 1,168,224 1,061,212
Deferred income tax benefits ........................................ 144,000 144,000
Prepaid expenses and other .......................................... 210,006 228,062
----------- -----------
Total current assets ........................................... 6,879,284 6,794,657
Property and Equipment - net ............................................. 2,271,715 1,849,910
Notes Receivable - shareholders .......................................... 118,175 118,175
Intangibles - net ........................................................ 239,616 222,253
Deposits and Other ....................................................... 133,901 137,851
----------- -----------
Total .......................................................... $ 9,642,691 $ 9,122,846
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt ................................... $ 28,649 $ 28,649
Accounts payable .................................................... 679,664 956,341
Accrued liabilities ................................................. 455,268 341,294
Income taxes payable ................................................ (39,304) 169,294
----------- -----------
Total current liabilities ...................................... 1,124,277 1,495,578
Long-Term Debt - Less current portion .................................... 577,594 576,237
Deferred Income Tax Liability ............................................ 162,000 162,000
Commitments and Contingencies
Shareholders' Equity:
Preferred stock: $.01 par value, shares authorized: 1,000,000;
no shares issued and outstanding ............................... -- --
Common stock: $.01 par value, shares authorized: 14,000,000;
shares issued and outstanding: 3,308,800 (1999) and
3,200,000 (1998) ............................................... 33,088 32,000
Common stock warrants ............................................... 75,000 75,000
Additional paid-in capital .......................................... 5,572,798 5,524,986
Retained earnings ................................................... 2,150,434 1,339,545
Accounts and notes receivable - shareholders ........................ (52,500) (52,500)
Deferred compensation - stock options granted ....................... -- (30,000)
----------- -----------
Total stockholders' equity ..................................... 7,778,820 6,889,031
----------- -----------
Total .......................................................... $ 9,642,691 $ 9,122,846
=========== ===========
</TABLE>
See notes to condensed financial statements.
1
<PAGE>
NEUTRAL POSTURE ERGONOMICS, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
-------------------------------- --------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales .......................................... $ 3,515,777 $ 2,679,037 $ 12,939,612 $ 8,704,997
Cost of Sales ...................................... 2,287,874 1,743,992 8,141,079 5,353,119
------------ ------------ ------------ ------------
Gross Profit ....................................... 1,227,903 935,045 4,798,533 3,351,878
Operating Expenses:
Selling ........................................ 317,168 262,595 1,177,248 912,756
General and administrative ..................... 776,429 596,184 2,409,606 1,645,589
------------ ------------ ------------ ------------
Total ..................................... 1,093,597 858,779 3,586,854 2,558,345
------------ ------------ ------------ ------------
Operating Income ................................... 134,306 76,266 1,211,679 793,533
Other Income (Expense):
Interest expense ............................... (11,854) (14,804) (37,554) (47,431)
Interest income ................................ 23,171 54,623 113,591 98,626
Other .......................................... 5,743 20,657 9,378 62,344
------------ ------------ ------------ ------------
Total ..................................... 17,060 60,476 85,415 113,539
------------ ------------ ------------ ------------
Income Before Income Taxes ......................... 151,366 136,742 1,297,094 907,072
Income Tax Expense (A) ............................. 56,556 51,818 486,205 311,458
------------ ------------ ------------ ------------
Net Income (A) ..................................... $ 94,810 $ 84,924 $ 810,889 $ 595,614
============ ============ ============ ============
Earnings Per Share: (A)
Basic .......................................... $ 0.03 $ 0.03 $ 0.25 $ 0.21
============ ============ ============ ============
Diluted ........................................ $ 0.03 $ 0.03 $ 0.24 $ 0.20
============ ============ ============ ============
Weighted Average Common Shares
Outstanding:
Basic .......................................... 3,308,800 3,200,000 3,271,209 2,832,117
============ ============ ============ ============
Diluted ........................................ 3,387,226 3,342,188 3,374,005 2,968,882
============ ============ ============ ============
</TABLE>
(A) Pro Forma prior to October 1997: see Note 4.
See notes to condensed financial statements.
2
<PAGE>
NEUTRAL POSTURE ERGONOMICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended March 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Operating Activities:
Net income ........................................... $ 810,889 $ 595,614
Noncash items in net income:
Depreciation and amortization ..................... 234,006 267,583
Gain on disposal of property and equipment ........ -- (849)
Changes in operating working capital:
Accounts receivable ............................... (366,025) (568,465)
Inventories ....................................... (107,012) (319,783)
Deferred income taxes (net) ....................... -- (21,000)
Prepaid expenses and other ........................ (17,077) 2,487
Accounts payable .................................. (276,677) 242,456
Accrued liabilities ............................... 113,974 (193,632)
Income taxes payable .............................. (208,598) 22,079
Notes receivable - shareholders ................... -- --
Deposits and other ................................ 35,169 (93,360)
----------- -----------
Net cash provided by (used for)
operating activies ........................... 218,649 (66,870)
Pro forma income tax expense (A) .................... -- 104,809
----------- -----------
Historical net cash provided by
operating activies ........................... 218,649 37,939
----------- -----------
Investing Activities:
Additions to property and equipment .................. (584,160) (194,297)
Proceeds from sale of property and equipment ......... -- 2,500
Acquisition of furniture line assets ................. (55,100) (811,086)
----------- -----------
Net cash used for investing activities ......... (639,260) (1,002,883)
----------- -----------
Financing Activities:
Issuance of debt ..................................... 33,724 200,000
Payments of debt ..................................... (32,367) (219,577)
Capital contribution by S Corp. shareholders ......... -- 43,345
Distributions to S Corp. shareholders ................ -- (235,000)
Proceeds from issuance of common stock ............... 48,900 5,400,000
Stock offering costs ................................. -- (1,030,775)
----------- -----------
Net cash provided by financing activities ...... 50,257 4,157,993
----------- -----------
Increase (Decrease) in Cash and Cash Equivalents ........ (370,354) 3,193,049
Cash and Cash Equivalents:
Beginning of period .................................. 3,370,278 294,014
----------- -----------
End of period ........................................ $ 2,999,924 $ 3,487,063
=========== ===========
</TABLE>
(A) Pro Forma prior to October 1997: see Note 4.
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, 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 $239,616, net of
amortization of $50,009 as of March 31, 1999, 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
portion of the nine month period ended March 31, 1998 prior to consummation of
the Company's initial public offering. 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
<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, 1998 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 or
retailers. These dealers typically provide end-users a range of "value-added"
services that may include installation, delivery, site planning and warranty
repairs.
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 and nine month periods ended
March 31, 1999 as compared to the corresponding periods in 1998.
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
1999 1998 1999 1998
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 65.1 65.1 62.9 61.5
--------- -------- -------- --------
Gross profit 34.9 34.9 37.1 38.5
Selling, general and administrative
expenses 31.1 32.1 27.7 29.4
--------- -------- -------- --------
Operating income 3.8% 2.8% 9.4% 9.1%
========= ======== ======== ========
</TABLE>
THREE AND NINE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE AND NINE MONTHS
ENDED MARCH 31, 1998
NET SALES. Net sales for the three and nine month periods ended March
31, 1999 increased approximately $837,000 and $4.2 million, respectively, an
increase of approximately 31% and 49% as compared to the three and nine month
periods ended March 31, 1998. The total number of units sold for the three and
nine month periods ended March 31, 1999 increased approximately 55% and 90%,
respectively, from the same three and nine month periods in 1998. The increase
in net sales and units for the three month period ended March 31, 1999 was
primarily the result of the addition of the Harvard chair lines which began
production in the fourth quarter of fiscal year 1998. The increase for the nine
month period resulted primarily from a combination of the acquisition of the
Harvard chair line and the addition of several large orders received during the
nine month period.
GROSS PROFIT. Gross profit for the three and nine month periods ended
March 31, 1999 was approximately $1.2 and $4.8 million, respectively, increasing
approximately $300,000 or 31% and $1.4 million or 43%, from gross profit of
$900,000 and $3.4 million for the same periods in 1998. The gross profit as a
percent of net sales remained flat at 34.9% for the three month period ended
March 31, 1999 and 1998. For the nine month periods, gross profit as a percent
of net sales decreased to 37.1% for 1999 from 38.5% for 1998. The decreased
gross profit margin for the nine month period was primarily the result of a
combination of a decrease in average selling price in the Neutral Posture(R)
chair line due to a shift in product mix of units sold during the period and an
increase in cost associated with increase in activity related to product
development and research and development activities.
5
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative costs for the three and nine month periods ended March 31, 1999
increased $234,818 or 27%, and $1.0 million or 40%, respectively, from the same
periods in 1998. The increase was primarily due to increases in compensation
expenses as a result of hiring additional sales, marketing, and engineering
personnel and staff in connection with the Harvard chair lines acquisition along
with pursuing sales opportunities and improving and expanding our product base.
In addition to increases in compensation expenses, selling expenses related to
increased sales and costs associated with being a publicly-held entity also
contributed to the increases. As a percent of net sales, selling, general and
administrative expenses for the three and nine month periods ended March 31,
1999 decreased to 31.1% and 27.7% respectively, from 32.1% and 29.4%,
respectively, for the same periods in 1998.
OPERATING INCOME. As a result of the foregoing, operating income for the
three and nine month periods ended March 31, 1999 was $134,306 and $1.2 million,
respectively, increasing $58,040, or approximately 76%, from $76,266 for the
three month period ended March 31, 1998 and increasing $418,146, or
approximately 53%, from $793,533 for the nine month period ended March 31, 1998.
As a percentage of net sales, operating income for the three and nine month
periods ended March 31, 1999 increased to 3.8% and 9.4%, respectively, from 2.8%
and 9.1% respectively, for the same 1998 periods.
OTHER INCOME (EXPENSE). Other income (expense) decreased $43,416 and
$28,124, respectively, for the three and nine month periods ended March 31, 1999
as compared to the same 1998 periods. For the three months ended March 31, 1999,
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 were offset by decreases in interest income on the remaining
offering proceeds and decreases in other income. For the nine months ended March
31, 1999, reductions in interest expense resulting from repayment of debt and
increases in interest income resulting from the investment of the remaining
offering proceeds for a full nine month period ended March 31, 1999 as compared
to only six months for the similar 1998 period were offset by a decrease in
other income of $52,966 of which approximately $40,000 related to realization of
cash surrender value of insurance policies recorded in 1998.
EARNINGS PER SHARE (EPS). The EPS amounts of $0.03 (basic and diluted),
for the three month periods ended March 31, 1999 and 1998, and $0.25 (basic) and
$0.24 (diluted) for the nine month period ended March 31, 1999 and $0.21 (basic)
and $0.20 (diluted) for the nine month period ended March 31, 1998 are based on
the weighted average shares outstanding for basic EPS which includes the effects
of the additional 900,000 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 provided by operating activities totaled $218,649 for the nine
month period ended March 31, 1999, as compared to cash provided by operating
activities of $37,939 for the nine month period ended March 31, 1998. The
majority of the variance in funds provided between the periods resulted from an
increase in net income partially offset by changes in working capital.
Cash used for investing activities totaled $639,260 and $1,002,883 for
the nine month period ended March 31, 1999 and 1998, respectively. The cash used
in 1999 for investing activities was primarily comprised of capital expenditures
for building improvements, machinery, equipment and molds used in the production
process. The cash used in 1998 for investing activities was primarily comprised
of approximately $800,000 incurred to purchase certain assets of the furniture
business of Harvard and other miscellaneous capital expenditures for building
improvements, machinery and equipment.
6
<PAGE>
Financing activities provided funds totaling $50,257 for the nine month
period ended March 31, 1999 generated primarily from the proceeds related to the
exercise of stock options by an officer of the Company and the grant and
issuance of shares to employees. For the nine month period ended March 31, 1998,
financing activities provided funds totaling $4,157,993, which were primarily
generated by proceeds from the issuance of stock at 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 March 31, 1999, no amount was outstanding under either
facility.
At March 31, 1999, the Company had two loans outstanding in the amounts
of $130,000 and $444,000 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.
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
and 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.
Historically, the Company's business has been subject to seasonality.
Over the past two years, the Company's revenue is greater during the first and
second quarters of the Company's fiscal year with the third quarter being the
slowest period. These seasonal fluctuations in sales are due to customer
ordering patterns that historically have emphasized purchases during these two
quarters.
MARKET LISTING OF THE COMPANY'S COMMON STOCK. The National Association
of Securities Dealers has informed the Company that the Company may be delisted
from the NASDAQ Stock Market's National Market if the closing bid price of the
Company's shares of Common Stock does not exceed $3.75 per share for a minimum
of ten consecutive trading days, by July 7, 1999. Consequently, there is a
significant risk that the Common Stock could be delisted from the NASDAQ Stock
Market's National Market. If the Common Stock were delisted, the Company would
seek listing on NASDAQ Stock Market's SmallCap Market and there would be a
significant risk that the liquidity of the Common Stock would diminish. However,
should the Company not meet the requirements stated, the Company may and intends
to seek further procedural remedies by requesting a hearing prior to July 7,
1999 to stop any delisting of the Company's securities.
In the event that its stock is de-listed from the National Market, the
Company would pursue admission to the Nasdaq SmallCap Market. Although the
Company believes that it satisfies all the standards for moving from the
National to the SmallCap Market, there can be no assurance that Nasdaq will
admit it to the SmallCap Market if it is de-listed from the National Market.
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)
7
<PAGE>
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
software which the software vendor has indicated is Year 2000 compliant. The
total estimated software and installation cost is $110,000 of which $70,000 has
been spent to date. As a result, the Company has completed the first three
phases and is approximately 90% completed with the testing and validation phase.
The Company anticipates substantial completion of testing of all internal
software by June 30, 1999. The Company's internal financial systems are fully
compliant as of March 31, 1999.
INTERNAL NON-FINANCIAL SOFTWARE AND IMBEDDED CHIP TECHNOLOGY. The
Company is in the assessment 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 believes it is approximately 90% complete with the assessment phase and
anticipates completion of such phase by the end of fiscal 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 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 has
received written responses from 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. 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
$70,000 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 $40,000 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.
8
<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, 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.
9
<PAGE>
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 proceeding 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 and related business and intellectual property issues. The
third lawsuit involves computERGO(TM).
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. ("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; 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 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.
10
<PAGE>
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.
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. In June 1998 the Company 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. On
February 12, 1999, the Company, Destech and AGI settled both lawsuits and
released each other from all claims in exchange for the payment of $3,000 by the
Company to Destech.
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 March 31, 1999, the Company has utilized net offering proceeds for
the following:
(1) approximately $45,000 in the development of computERGO(TM) ;
(2) approximately $1,025,000 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 $60,000 in the Company's effort to become ISO 9000
certified;
(4) approximately $310,000 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 $200,000 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 $1.5 million included in
temporary investments as of March 31, 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. 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, (iii) affiliates of the Company, or
(iv) payments to others.
Included in the applied net offering proceeds was compensation expense
of approximately $208,000 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.
11
<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.
12
<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: May 14, 1999 By: /s/REBECCA E. BOENIGK
Rebecca E. Boenigk
Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1999 By: /s/GREGORY A. KATT
Gregory A. Katt
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and
Accounting Officer)
13
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