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 DECEMBER 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 (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
3904 N. TEXAS AVENUE
BRYAN, TEXAS 77803 (409) 778-0502
(Address of principal (Issuer's telephone
executive offices) number)
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 JANUARY 31, 2000, THERE WERE 3,171,800 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 December 31, 1999
(Unaudited)
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Balance Sheets as of December 31, 1999 and June 30, 1999 . . 1
Condensed Statements of Income for the Three and Six Months Ended
December 31, 1999 and 1998 . . . . . . . . . . . . . . . . . . . . . . 2
Condensed Statements of Cash Flows for the Six Months Ended
December 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. . . . . . . . . . . . . . . . . . . . . . . .9
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . .10
Item 4. Submission of Matters to a Vote of Security Holders . . . . . .11
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . .11
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . .11
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
<PAGE>
NEUTRAL POSTURE ERGONOMICS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, JUNE 30,
1999 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents ..................................... $ 3,228,896 $ 3,316,257
Accounts receivable - net ..................................... 3,067,280 2,667,461
Inventories ................................................... 1,322,402 1,195,158
Deferred income tax benefits .................................. 164,000 164,000
Prepaid expenses and other .................................... 337,934 336,083
Income tax receivable ......................................... -- 98,058
------------ ------------
Total current assets ..................................... 8,120,512 7,777,017
Property and Equipment - net ......................................... 2,204,323 2,277,482
Notes Receivable - shareholders ...................................... 14,725 14,725
Intangibles - net .................................................... 196,979 226,791
Deposits and Other ................................................... 214,254 198,007
------------ ------------
Total .................................................... $ 10,750,793 $ 10,494,022
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt ............................. $ 32,790 $ 43,632
Accounts payable .............................................. 1,432,245 1,576,141
Accrued liabilities ........................................... 486,435 544,308
Income taxes payable .......................................... 56,402 --
------------ ------------
Total current liabilities ................................ 2,007,872 2,164,081
Long-Term Debt - Less current portion ................................ 520,259 550,554
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; 3,171,800 shares outstanding .... 33,088 33,088
Common stock warrants ......................................... 75,000 75,000
Additional paid-in capital .................................... 5,671,138 5,671,138
Retained earnings ............................................. 2,621,061 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 ............................... 8,091,662 7,648,387
------------ ------------
Total .................................................... $ 10,750,793 $ 10,494,022
============ ============
</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 SIX MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales ........................ $ 4,571,491 $ 5,211,391 $ 8,955,511 $ 9,423,835
Cost of Sales .................... 2,819,667 3,197,344 5,523,693 5,853,205
----------- ----------- ----------- -----------
Gross Profit ..................... 1,751,824 2,014,047 3,431,818 3,570,630
Operating Expenses:
Selling .................. 473,345 487,999 946,449 860,080
General and administrative 1,059,604 882,912 1,841,349 1,633,177
----------- ----------- ----------- -----------
Total ............... 1,532,949 1,370,911 2,787,798 2,493,257
----------- ----------- ----------- -----------
Operating Income ................. 218,875 643,136 644,020 1,077,373
Other Income (Expense):
Interest expense ......... (11,515) (12,493) (25,531) (25,700)
Interest income .......... 41,718 54,511 79,714 90,420
Other .................... (1) (17) (468) 3,635
----------- ----------- ----------- -----------
Total ............... 30,202 42,001 53,715 68,355
----------- ----------- ----------- -----------
Income Before Income Taxes ....... 249,077 685,137 697,735 1,145,728
Income Tax Expense ............... 92,158 256,926 254,460 429,649
----------- ----------- ----------- -----------
Net Income ....................... $ 156,919 $ 428,211 $ 443,275 $ 716,079
=========== =========== =========== ===========
Earnings Per Share:
Basic .................... $ 0.05 $ 0.13 $ 0.14 $ 0.22
=========== =========== =========== ===========
Diluted .................. $ 0.05 $ 0.13 $ 0.14 $ 0.21
=========== =========== =========== ===========
Weighted Average Common Shares
Outstanding:
Basic .................... 3,171,800 3,296,843 3,171,800 3,248,422
=========== =========== =========== ===========
Diluted .................. 3,171,800 3,382,984 3,171,800 3,363,156
=========== =========== =========== ===========
</TABLE>
See notes to condensed financial statements.
2
<PAGE>
NEUTRAL POSTURE ERGONOMICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED DECEMBER 31,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Operating Activities:
Net income ................................................ $ 443,275 $ 716,079
Noncash items in net income:
Depreciation and amortization .......................... 227,368 130,093
Changes in operating working capital:
Accounts receivable .................................... (399,819) (1,824,500)
Notes receivable ....................................... 19,008 --
Inventories ............................................ (127,244) (244,025)
Prepaid expenses and other ............................. (20,859) 11,244
Income taxes receivable/payable ........................ 154,460 (65,129)
Accounts payable ....................................... (143,896) 528,007
Accrued liabilities .................................... (57,873) 139,664
Deposits and other ..................................... (18,856) 16,622
----------- -----------
Net cash provided by (used for) operating activities 75,564 (591,945)
----------- -----------
Investing Activities:
Additions to property and equipment ....................... (121,788) (462,364)
----------- -----------
Net cash used for investing activities ............. (121,788) (462,364)
----------- -----------
Financing Activities:
Issuance of debt .......................................... -- 32,663
Payments of debt .......................................... (41,137) (19,774)
Proceeds from issuance of common stock .................... -- 48,900
----------- -----------
Net cash provided by (used for) financing activities (41,137) 61,789
----------- -----------
Decrease in Cash and Cash Equivalents ......................... (87,361) (992,520)
Cash and Cash Equivalents:
Beginning of period ....................................... 3,316,257 3,370,278
----------- -----------
End of period ............................................. $ 3,228,896 $ 2,377,758
=========== ===========
</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 price 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 SIX MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
----------------- -----------------
1999 1998 1999 1998
----- ----- ----- -----
Net sales ............. 100.0% 100.0% 100.0% 100.0%
Cost of sales ......... 61.7 61.4 61.7 62.1
----- ----- ----- -----
Gross profit .......... 38.3 38.6 38.3 37.9
Selling, general and
administrative expenses 33.5 26.3 31.1 26.5
----- ----- ----- -----
Operating income ...... 4.8% 12.3% 7.2% 11.4%
===== ===== ===== =====
THREE AND SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE AND SIX MONTHS
ENDED DECEMBER 31, 1998
NET SALES. Net sales for the three and six month periods ended December
31, 1999 totaled approximately $4.6 million and $9.0 million, respectively, a
decrease of approximately 12% and 5% as compared to the three and six month
periods ended December 31, 1998. For the six month period ended December 31,
1999, sales volumes for the Neutral Posture(R) chair line were down
approximately 12.4% when compared to the similar 1998 period, which included a
single order in excess of $1.2 million. This volume decrease was partially
offset by higher average prices realized during the current period when compared
to the same period last year. Although volumes on the Harvard chair line
remained comparable to prior periods, the remaining decrease in sales resulted
from a decrease in the average selling price related to the product mix of
chairs sold.
GROSS PROFIT. Gross profit for the three and six month periods ended
December 31, 1999 was approximately $1.8 and $3.4 million, respectively,
decreasing approximately $262,000 or 13% and $139,000 or 4%, from gross profit
of $2.0 million and $3.6 million for the same periods in 1998. The gross profit
as a percent of net sales remained relatively flat at 38.3% for the three month
period ended December 31, 1999 as compared to 38.6% for the same period in 1998
on $600,000 fewer sales. For the six month periods, gross profit as a percent of
net sales also remained relatively flat, increasing slightly to 38.3% for 1999
from 37.9% for 1998. The slight increase in gross profit margin for the six
month period was primarily the result of improved material costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative costs for the three and six month periods ended December 31, 1999
increased $162,038 or 12%, and $294,541 or 12%, respectively, from the same
periods in 1998. The increases over last year are primarily due to increased
legal fees related to the arbitration scheduled for April 2000, higher
consulting fees relating to the establishment and implementation of the new
ergonomic accessory line, and higher commission expenses as a percentage of
sales related to sales promotions for the six months ending December 31, 1999 of
7.6% as compared to 6.4% for the same period in 1998.
5
<PAGE>
OPERATING INCOME. Based on the items discussed above, operating income for
the three and six month periods ended December 31, 1999 totaled $218,875 and
$644,020, respectively, as compared to $643,136 and $1,077,373 for the similar
1998 periods, a decrease of 66% and 40% for the three and six month periods,
respectively. As a percentage of net sales, operating income for the three and
six month periods ended December 31, 1999 decreased to 4.8% and 7.2%,
respectively, from 12.3% and 11.4% respectively, for the same 1998 periods.
OTHER INCOME (EXPENSE). Other income (expense) decreased by $11,799 and
$14,640, respectively, for the three and six month periods ended December 31,
1999 as compared to the same 1998 periods. The decrease was primarily due to
lower interest income in the current periods due to a one-time adjustment of
interest income on officer notes in December 1998.
EARNINGS PER SHARE (EPS). The EPS amounts of $0.05 and $0.13 (basic and
diluted), respectively, for the three month periods ended December 31, 1999 and
1998, and $0.14 (basic and diluted) for the six month period ended December 31,
1999 and $0.22 (basic) and $0.21 (diluted) for the six month period ended
December 31, 1998 are based on the weighted average shares outstanding for basic
EPS. 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 $75,564 for the six month
period ended December 31, 1999, as compared to cash used for operating
activities of $591,945 for the six month period ended December 31, 1998. The use
of funds for the six month period ended December 31, 1998 related primarily to
net income offset by a large increase in accounts receivable related to a large
order shipped late in the period. The cash provided from the current six month
period represents net income reduced by working capital needs.
Cash used for investing activities totaled $121,788 and $462,364 for the
six month periods ended December 31, 1999 and 1998, respectively. The cash used
for investing activities in both periods was primarily comprised of capital
expenditures for computers and machinery, equipment and molds used in the
production process.
Financing activities used funds totaling $41,137 for the six month period
ended December 31, 1999 to reduce long term debt. For the six month period ended
December 31, 1998, financing activities provided funds totaling $61,789 from the
exercising of stock options by an officer of the Company and the grant and
issuance of shares to employees partially offset by reductions of 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 December 31, 1999, no amount was outstanding under either
facility.
At December 31, 1999, the Company had two loans outstanding in the amounts
of approximately $128,000 and $425,000 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
6
<PAGE>
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 there can be no assurance that the Company's capital
resources will be sufficient to fund the Company's operations beyond such date.
See "Cautionary Statement" below.
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 emphasized purchases during these two quarters.
The Company's results of operations would be adversely and disproportionately
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 software and installation cost was $75,000. As a result,
the Company has completed all five phases which included the testing and
validation phase. The Company has not experienced any Year 2000 issues in
connection with its internal financial systems software to date.
INTERNAL NON-FINANCIAL SOFTWARE AND IMBEDDED CHIP TECHNOLOGY. 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 cost of achieving
Year 2000 compliance for its non-financial software was $12,000. The company
does not currently have a contingency plan in place for its internal
non-financial software and imbedded chip technology, but any problems that could
occur should not have a material impact on the operations of the Company. As of
January 20, 2000, the Company has not experienced any problems relating to the
Year 2000 Issue.
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 were 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 Year 2000 compliant. To the extent that responses to Year
2000 readiness inquiries were unsatisfactory, the Company intended to change
suppliers, service providers or contractors to those who have demonstrated Year
2000 readiness. To date, the Company has not replaced current suppliers, service
providers or contractors for Year 2000 compliancy issues nor has the Company
experienced any Year 2000 compliancy issues with these third parties.
EXPENSES. To date, the Company has incurred expenses of approximately
$110,000 related to the assessment of, and efforts in connection with, its Year
2000 project and the development of a remediation plan. Of the total project
cost attributable to the purchase and installation of new software,
approximately $100,000 has been capitalized.
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, fluctuations in sales prices
as implemented by the Company's dealers, the impact of ongoing litigation and
arbitration, the development of additional product lines, 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. ("Ergobilt"), 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 deceptive advertising under
the Lanham Act, unfair competition, breach of contract, tortious interference,
slander and trade libel.
Regardless of the outcome of the arbitration, which is scheduled for April
2000, 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
9
<PAGE>
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.
In the Registration Statement, the Company stated that it planned to use
an estimated $1,250,000 of the net proceeds of the offering to develop,
manufacture and market computERGO(TM) . As noted below, the Company has as of
December 31, 1999, utilized approximately $144,000 of the net offering proceeds
for these purposes. As a result of the Company's decision to discontinue
computERGO(TM) , the Company now plans to use, of the remaining estimated
$1,100,000 net proceeds of the offering previously allocated to computERGO(TM) ,
(i) approximately $660,000 towards the development, manufacturing and marketing
of the N*hancements accessory line, (ii) approximately $100,000 to increase the
original amount allocated to new product development, (iii) approximately
$140,000 to increase the original amount allocated to enhancing the marketing
efforts and (iv) approximately $200,000 to provide additional funds for the
Company's working capital requirements. These uses and amounts, however, are
estimated based on the current plans of the Company.
As of December 31, 1999, the Company has utilized net offering proceeds
for the following:
(1) approximately $144,000 in the development of computERGO(TM);
(2) approximately $221,000 towards the development, manufacturing and
marketing of the N*hancements accessory line;
(3) 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;
(4) approximately $121,000 in the Company's effort to become ISO 9001
certified;
(5) approximately $535,000 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 professional ergonomists);
(6) approximately $313,000 related to the hiring of engineering
personnel, including a Vice President -Engineering;
(7) approximately $1,040,000 of working capital to fund inventory
purchases and finance receivables; and
(8) $200,000 to repay outstanding indebtedness on its revolving credit
facility.
In addition, the Company had approximately $700,000 included in temporary
investments as of December 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.
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 $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.
10
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on November 10, 1999, the
shareholders approved the election of Jaye Congleton as a Class II Director of
the Company until the 2002 Annual Meeting of Shareholders or until her successor
shall be elected and qualified. Jaye Congleton received 2,758,093 votes for,
zero votes against, zero votes withheld and 1,425 Abstentions and Broker
Non-Votes.
The term of office of each of the following directors continued after the
meeting: Rebecca Boenigk, Maryla Fitch, Cynthia Pladziewicz, and Jim Thompson.
The shareholders also approved the Neutral Posture Ergonomics, Inc. 1997
Omnibus Securities Plan with 1,992,453 affirmative votes, 21,224 negative votes
and 134,274 abstentions by the holders of the Company's common stock.
In addition, the shareholders approved the proposal to ratify the
appointment of Deloitte & Touche LLP as the Company's independent public
accountant for the fiscal year ending June 30, 2000. The proposal received
2,758,718 affirmative votes, zero negative votes, and 800 abstentions by the
holders of the Company's common stock.
ITEM 5. OTHER INFORMATION
RESIGNATION OF DIRECTOR. Effective December 31, 1999, Mr. James W.
Thompson resigned his position as member of the Company's Board of Directors.
APPOINTMENT OF PRESIDENT AND CHIEF OPERATING OFFICER. On January 13,
2000, Mr. Tom Peterson was named as the Company's President and Chief
Operating Officer. Prior to joining the Company, Mr. Peterson was Vice
President of Business Development for the preceding five years for the
International Source for Ergonomics, Inc., a Canadian distributor of
ergonomic accessory products.
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: February 9, 2000 By: /s/ REBECCA E. BOENIGK
Rebecca E. Boenigk
Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
Date: February 9, 2000 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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