<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
---------------------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended February 29, 1996
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File No. 0-12991
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THE LANGER BIOMECHANICS GROUP, INC.
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(Exact name of Registrant as specified in its charter)
NEW YORK 11-22395961
---------------------- ---------------------
(State or other jurisdiction (I.R.S. employer iden-
of incorporation or tification number)
organization)
450 Commack Road, Deer Park, New York 11729
------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (516) 667-1200
--------------
Securities registered pursuant to Section 12(b) of the Act: NONE
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.02 per share
--------------------------------------
Title of Class
* * * * * * * * * * *
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
As of May 10, 1996, the aggregate market value of voting stock held by non-
affiliates of the Registrant was $3,090,063 as computed by reference to the
average bid and ask prices of the stock ($1.75) multiplied by the number of
shares of voting stock outstanding on May 10, 1996 held by non-affiliates
(1,765,750).
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock as of May 10, 1996.
Class of Common Stock Outstanding at May 10, 1996
--------------------- ---------------------------
Common Stock, par value 2,581,281 shares
$.02 per share
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Not applicable.
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PART I
ITEM 1. BUSINESS
GENERAL
The Langer Biomechanics Group, Inc. ("LBG" or the "Company") is engaged in
the design, manufacture and marketing of foot and gait-related biomechanical
products. The Company's largest product line, custom-made, prescription
orthotic devices, accounted for approximately 86% of revenues for the fiscal
year ended February 29, 1996. Revenues derived from orthotic devices have
historically been significantly higher in the warmer months of the year. Foot
orthoses are contoured molds made from plastic, graphite, leather or composite
materials, which are placed in patients' shoes to (i) correct or mitigate
abnormalities in their gait and (ii) relieve symptoms associated with foot or
postural malalignment. These devices function by maintaining the proper
relationships between a patient's forefoot, rearfoot, leg and horizontal walking
surface. To the Company's knowledge, it has the greatest overall unit volume
and revenue in the custom foot orthoses industry. The Company's customers are
primarily podiatrists, and also include orthopedists, physical therapists and
Orthotic & Prosthetic (O&P) centers. The Company also makes ankle foot orthoses
("AFO"), boot-like devices which assist individuals afflicted with neurological
impairments, foot deformities and injuries to achieve a more natural gait.
In addition to its line of orthotics products, the Company has developed
and markets a number of other products that help treat biomechanical medical
problems related to feet and gait, including:
- - - A proprietary medical grade soft tissue cushioning material named
PPT-Registered Trademark-, which the Company believes provides superior
protection against forces of pressure, shock and shear. PPT conforms and
bonds to a broad array of orthotic and prosthetic devices, braces and
assemblies; and
- - - The Pediatric Counter-Rotation System ("CRS"-Registered Trademark-), a
device which corrects in-toe/out-toe disorders of infancy, while allowing
unrestricted movement of the feet and legs.
BACKGROUND
Since its formation in 1971, the Company has engaged in activities relating
to the application of scientific and quantitative methods for the diagnosis and
treatment of foot and gait related problems. To date, the majority of the
Company's revenues have been derived from the sale of prescription biomechanical
foot orthotic devices to health care practitioners in the field of podiatric
biomechanics. Podiatric biomechanics deals essentially with the structure and
function of segments of the feet as they relate to each other and to the
function of the legs, hips and spine.
The Company has also endeavored to manufacture and market complementary
products relating to locomotor dysfunctions. Building on its experience in
treating disorders associated with the biomechanics of the foot and leg, the
Company has directed efforts towards producing therapeutic products which can
treat and improve patients' motor capabilities, biomechanical alignment and
function (e.g., foot orthoses and the CRS).
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Sales by product category of the Company as derived from its accounting
records are set forth below (dollars in thousands):
<TABLE>
<CAPTION>
Fiscal Years Ended:
--------------------------------------------
Feb. 29 Feb. 28, Feb. 28, Feb. 28,
Product Category 1996 1995 1994 1993
- - ---------------- ------- -------- -------- --------
<S> <C> <C> <C> <C>
Custom Orthoses $ 8,652 $ 8,746 $ 9,671 $10,957
PPT Products 1,121 1,168 1,433 1,785
Counter Rotation System ("CRS") 165 207 219 244
Materials and Other (including Superform) 175 194 101 13
Discontinued Product Line 0 152 240 292
------- ------- ------- -------
Total $10,113 $10,467 $11,664 $13,291
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Export and foreign (i.e. United Kingdom) sales constituted approximately
24%, 22% and 19% of revenues for the fiscal years ended February 29, 1996,
February 28, 1995 and February 28, 1994, respectively.
CUSTOM ORTHOTIC DEVICES
The Company is engaged in the design, development, manufacture and sale of
custom-made foot orthoses. Biomechanical orthotic devices help provide near
normal function by maintaining the angular anatomical relationships between the
patient's forefoot, rearfoot, leg and horizontal walking surface. This is
achieved by the inherent contours of the neutral position shell of the device
and by the angled posts on the front and/or rear ends which cause the orthotic
device to move into specific positions at specific times during the gait cycle.
Accordingly, muscle action is enhanced and the efficiency and smoothness of
weight stress transmission through the feet and legs is improved. The result is
a reduction of abnormal motion without total restriction of normal motion and an
increase in foot and leg stability. Foot problems may be alleviated or
eliminated, as may leg and back fatigue caused by improper muscle use. The
formation and further growth of excrescences (e.g., corns or callouses) may be
prevented, decreased in size or eliminated. In addition, the future formation
of bunions may be prevented.
During the twelve months ended February 29, 1996, sales of orthotics
products totaled $8,652,000, compared to $8,746,000 for the twelve months ended
February 28, 1995. Decreased revenues resulted from a shift in doctor preference
towards lower-priced orthoses, including those of the Company and others as well
as an extremely poor winter in the Eastern part of the United States which
reduced patient visits to podiatrists during the fourth quarter.
While sales were primarily made to practitioners within the United States,
the Company also sold its orthotic products in five foreign countries. No
single orthotic customer presently accounts for more than 1% of the Company's
annual sales. The primary market for custom orthotic devices is podiatrists who
prescribe such devices for their patients. There are approximately l2,800
practitioners of podiatry licensed in the United States. Orthotic devices are
also sold to other health care professionals, such as orthopedists, engaged in
the treatment of the foot. The cost of the device to the patient is typically
included by the practitioner as part of his fee for treatment. The Company does
not sell the devices directly to the user-patient. Orthotic devices are made in
the Company's three facilities in Deer Park, New York; Brea, California; and
Stoke-on-Trent, England. During fiscal 1996, the Company, in order to reduce
its cost structure, closed a manufacturing facility in Piscataway,
4
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New Jersey. The prescribing practitioner furnishes plaster impression casts of
the patient's feet and necessary clinical information on an appropriate
prescription order form. In addition to its six month warranty, the Company
offers an optional "Protect Program" at an additional cost of $52 per pair of
orthoses. Under the program, the Company will repair or replace the orthotics
at no charge, or at a reduced charge, during the first 24 months following sale.
Biomechanical orthotic devices can be fabricated with different functional
capabilities and from various materials, depending upon the requirements of the
patient. The Company has designed orthotic devices to address the needs of
particular segments of the market. For example, the general interest in
physical fitness has resulted in demand for orthotic devices and it has
heightened the awareness of the importance of proper foot function and foot
care. To address this segment of the market, the Company manufactures an
extensive line of orthotics called Sporthotics-Registered Trademark-, designed
for the specific needs of runners and other sport-specific athletes, including
football, basketball and tennis players. Other specialized products include:
Healthflex-Registered Trademark- (designed for the needs of aerobic dance,
walking and exercise enthusiasts), DesignLine-Registered Trademark- (a
functional orthotic designed to fit into dress shoes, such as high fashion shoes
and loafers which cannot accommodate a full-size orthotic), DressFlex-TM- (a
unique proprietary device for use in women's high-heeled shoes), Slimthotics-TM-
(designed to fit into shoes, such as high heels and ballet slippers), Lyte
Fit-TM- (ultra-thin and lightweight devices made from LBG's exclusive
Superform-TM- carbon graphite material), the Golden Series-TM- (designed for the
needs of active individuals who are over 50 years of age), Bioflex-Registered
Trademark- (devices suitable for younger, more active individuals), BlueLine-TM-
(a flexible, durable, accommodative device that provides a moderate level of
control), D.S.I.S.-Registered Trademark- (a patented device for the effective
treatment of pediatric flat foot), and Diab-A-Thotics-Registered Trademark-
(designed to meet the needs of diabetic patients in the growing diabetic
population).
Ankle Foot Orthoses ("AFO") are plastic devices which are composed of a
foot plate and leg support. They assist individuals afflicted with neurological
impairments, previous trauma, ankle and leg instability, and arthritic
deformities, to achieve a more natural gait. These products include the Hinged
Ankle Foot Orthosis ("HAFO") used for neurological problems, the Supra-
Malleoloar Orthosis ("SMO") for instability of the ankle joint, the Solid Ankle
Foot Orthoses ("SAFO") to restrict motion at the ankle to treat arthritis and
other joint conditions, and the Posterior Leaf Spring ("PLS"), useful in tendon
ruptures and flaccid drop foot. AFO devices are prescribed by podiatrists,
physical therapists and rehabilitation therapists.
While the Company obtains a number of its fabrication materials from single
sources, it has not experienced any significant shortages other than occasional
backorders. In most cases, any needed materials can usually be obtained from a
distributor.
Competition. The Company believes that a relatively small percentage of
custom orthotic devices continue to be made by practitioners in their own
offices or laboratories. The vast majority of the market is serviced by
professional laboratories based on casts and prescriptions furnished by
practitioners. There are several other custom orthotic laboratories that are
national in scope which the Company believes hold approximately a combined 40%
to 45% of the overall custom market. The remainder of the market is fragmented
among smaller regional and local facilities.
PPT-Registered Trademark- PRODUCTS
PPT is a medical grade soft tissue cushioning material with a high density,
open-celled urethane foam structure. PPT, a registered trademark of the
Company, is manufactured, pursuant to an agreement, for the Company by a large
industrial manufacturing company. This company manufactures urethane foam
materials of which PPT is a derivative. Pursuant to the agreement, the Company
has the exclusive worldwide rights to serve footcare, orthopedic and related
medical markets with such materials. The exclusive agreement has an initial 5-
year term (expiring in 1997) followed by, absent notice to the contrary,
automatic annual renewals.
The Company has developed and sells a variety of products fabricated from
PPT including moulded insoles, components for orthotic devices, laminated
sheets, and diabetic products. Various manufacturing operations are performed
by outside vendors.
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Sales of PPT products for the twelve months ended February 29, 1996 were
$1,121,000 versus $1,168,000 in the prior fiscal year. The decline is
attributable to an increase in the number of primary cellular urethane suppliers
to two companies during fiscal 1994 from one, and due to supply problems from
the Company's PPT vendor.
In April of 1993, the Company introduced a new generation of PPT, which
independent tests show to have improved properties over competitive materials.
The essential function of PPT and other soft tissue supplements is to provide
protection against forces of pressure, shock and shear. The Company believes
that PPT's characteristics make it a superior product in its field. PPT has a
superior "memory" that enables it to return to its original shape faster and
more accurately than other materials used for similar purposes. PPT is also
odorless and non-sensitizing to the skin, and has a porosity which helps the
skin to remain dry, cool and comfortable. These factors are especially
important in sports medicine applications.
Besides podiatric use, PPT is suitable for other orthopedic and medical-
related uses such as liners for braces and prosthetics, as shock absorbers and
generally in devices used in sports and physical therapy.
The Company has awarded exclusive distribution arrangements to certain
leading distributors serving selected end-use markets in the United States and
other countries. The Company sells direct to practitioners in non-exclusive and
new markets.
Competition. The market for soft tissue supplements is highly competitive.
Brand products as well as commodity type foam rubber are all widely used. Brand
name products include Spenco, Sorbothane, medical-grade Poron, and DCS. The
remainder of the market is fragmented. The Company competes directly with one
other manufacturer of cellular urethane foam.
THE PEDIATRIC COUNTER-ROTATION SYSTEM ("CRS")
The Company introduced the CRS-Registered Trademark- device in fiscal 1987
for the correction and management of a variety of in-toe and out-toe disorders
of infancy. The disorders manifest themselves in an excessive angle, either
inward or outward, from that which is normal in the relationship of the foot to
the direction of movement.
Sales for CRS totaled $165,000 during the twelve months ended February 29,
1996 compared to sales of $207,000 in the prior twelve-month period. The
decrease in revenues resulted from a reduced level of direct promotion with a
shift toward wholesale sales to distributors in the United States and overseas.
The CRS is designed to replace rigid bars or splints which have
traditionally been used (since 1934) and which not only inhibit normal leg
movement and are cumbersome and inconvenient, but can also lead to permanent
knee and hip damage. Unlike rigid bars or splints, the CRS requires no specific
measurement for sizing and may be used with almost any type of children's shoes.
Also, unlike other devices, it will allow the infant unrestricted movement of
the feet and legs while maintaining the abnormal foot or feet in the corrected
position. The CRS is also designed to compensate automatically for the rapid
growth of an infant's legs and hips, thus avoiding the possibility of damage to
the hips and knees. The potential for permanent knee and hip joint damage is a
significant drawback of rigid bar therapy.
The CRS is prescribed by pediatricians, orthopedists and podiatrists and is
sold by the Company directly to practitioners as well as through selected
distributors. The level of reimbursement from third-party insurers for the CRS
varies from one state to another.
The CRS was developed by BioResearch Ithaca, Inc. of Ithaca, New York,
which has obtained patents on the device in the United States and certain other
countries. In accordance with a license agreement entered into in July l986
between the Company and BioResearch Ithaca, Inc., the Company has been granted
an exclusive license, with the right to grant sublicenses, to make, use and sell
the CRS. Food and Drug Administration acceptance to market the CRS has been
obtained by the Company. See "Governmental Regulation".
6
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Competition. The primary competitive products for the CRS are rigid bars
and splints.
MARKETING
The Company believes that the shortfall in orthotic sales is due to the
ability of the competition to market "me too" products and the practitioner's
need to control costs due to the accelerated managed care initiatives.
Accordingly, management has undertaken a number of marketing and operational
initiatives to promote awareness of and incentives to purchase Company orthotic
products. These include a volume incentive program ("VIP") and a practice
building program. Also, the Company's marketing program entails the sponsorship
of seminars. It includes a comprehensive program in biomechanics and gait
analysis coupled with addressing the cost effectiveness of orthotic therapy.
The Company continues to focus on its recognized strengths as educator, and
leader in product quality, customer service, technical knowledge and product
innovation. The marketing mix includes trade shows, trade advertising,
sponsorship of educational programs, public relations and maintenance marketing
with a strong emphasis on customer service.
In fiscal 1994, the Company introduced Superform-TM-, a proprietary carbon
composite material believed to be superior to the composite material previously
available for orthotic fabrication. The acceptance of Superform is apparent in
the growth of LBG's Lyte Fit-TM- device, which grew from 1% of the Company's
orthotic sales in fiscal 1994 to 4% in fiscal 1995 and 1996. The strength and
mouldability of Superform led the Company to make it available in its flagship
product, Sporthotics-Registered Trademark-; this has been marketed as the
orthotic for athletes who are tough on devices and who need high performance,
both biomechanically and in durability. During the 1995 fiscal year, the
Company began to market Superform to other orthotic labs.
The Company introduced a new product line in the second quarter of fiscal
1995 called "FirstChoice". The philosophy behind FirstChoice was to address the
price-sensitive market areas, including managed care organizations. The product
offering is streamlined to seven basic products with flat rate pricing. The
manufacturing and service areas also are streamlined in order to keep costs
down. The marketing efforts in fiscal 1996 concentrated on direct mail and
telemarketing in conjunction with an independent representative organization in
select geographic areas.
The patented Kinetic Wedge-TM- motion enhancing orthosis received
additional consumer publicity, with an article in the March 1995 issue of
Muscle and Fitness, which has an international readership of over 7.6
million. The seminar series "Gait, Chronic Musculoskeletal Pain and the New
Healthcare Model" conducted by the Company three times during fiscal year
1995 was a major contributor to the growth of this product. In addition,
these interdisciplinary seminars attracted new high volume accounts and
increased loyalty among practitioners already doing some business with the
Company.
RESEARCH AND DEVELOPMENT
The Company incurred no additional research and development costs for the
twelve months ended February 29, 1996 as a result of the decision to
discontinue the in-house CAD-CAM project since project was not able to produce
a satisfactory and economic product. As such, all related costs associated
with the project were written off during fiscal 1996. The prior year's
expenses of $142,000 in 1995 and $148,000 in 1994 related solely to this
CAD-CAM project.
PATENTS AND TRADEMARKS
The Company believes that patent and trademark protection are beneficial.
It holds 13 patents, 107 trademarks and 9 copyrights. Various patents and
trademarks are held in 12 countries. The Company has exclusive licenses to three
types of orthotic devices which are patented in the U.S. and several foreign
countries. In addition, patents have also been granted to a third party in the
U.S. and numerous foreign countries with respect to the CRS (as to which the
Company has exclusive marketing rights).
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Although a patent would have a statutory presumption of validity in the
United States, in the event that any patent awarded to the Company or a third
party is later tested in litigation, the issuance of a patent is not conclusive
as to such validity or as to the enforceable scope of the claims therein. The
validity and enforceability of a patent can be attacked after its issuance. If
the outcome of such litigation is adverse to the owner or licensor of the
patent, third parties may use the invention or technology pertaining to the
patent without restriction. Accordingly, any patents granted to the Company or
to third parties from whom the Company obtained licenses may not afford any
protection against competitors with similar products. Loss of patent protection
could have an adverse effect on the Company's business by permitting competitors
to utilize techniques developed by the Company.
GOVERNMENTAL REGULATION
Rules of the Food and Drug Administration ("FDA") may require the
submission of a 510(k) notification of intent to market certain products. Upon
submission of a 510(k), the FDA may determine the product to be substantially
equivalent to products previously marketed in interstate commerce. Such
submissions have been made and determined to be substantially equivalent for the
CRS.
EMPLOYEES
At March 1, l996, the Company had 151 employees, of which 96 were located
in Deer Park, New York, 28 in Brea, California, 4 in Northbrook, Illinois, and
23 in Stoke-on-Trent, England. The Stoke-on-Trent facility is operated by a 75%
owned subsidiary of the Company. Included among the Deer Park employees are the
four executive officers of the Company, including the Company's co-founder who
is a licensed Doctor of Podiatric Medicine and a faculty member of the New York
School of Podiatric Medicine.
The Company considers its employee relations to be excellent. The
employees are not represented by a union.
CONSULTANTS AND FIELD EVALUATION FORCE
The Company has oral or written agreements with six medical specialists
with respect to their providing professional consultative services to the
Company in their areas of specialization. Three of the consultants are on the
faculties of the colleges of podiatric medicine in the United States.
The consultants test and evaluate the Company's products, act as speakers
for the Company at symposiums and professional meetings, generally participate
in the development of the Company's products and services and disseminate
information about them. The Company also has entered into oral or written
agreements with practitioners in various parts of the country to act as field
evaluators of the Company's products. Generally, the evaluators are among the
leading practitioners in their areas.
ITEM 2. PROPERTIES
The Company's executive offices, and its primary manufacturing facilities,
are located in Deer Park, New York. The Deer Park facility is leased through
July 31, l999, with a four year extension option, and with monthly lease
payments of $23,414. The Company also leases space in Brea, California
(manufacturing facility) and Northbrook, Illinois (sales office), under separate
leases which expire in 1996 through 1998, and with aggregate monthly lease
payments of $8,265. A 75% owned subsidiary of the Company currently leases
facilities in Stoke-on-Trent, England under a lease expiring December 31, 1998
and for which it currently pays $1,550 (at the current exchange rate) per month.
The Company believes that its manufacturing facilities are suitable and adequate
and provide the productive capacity necessary for its current and reasonably
foreseeable future needs. The Company believes that while these manufacturing
facilities are being adequately utilized, they could be more fully utilized
(e.g. with extended night shift operations) should this become necessary.
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ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Registrant's common stock, par value $.02 per share ("Common Stock"),
is traded on the over-the-counter market with quotations reported on the
National Association of Securities Dealers Automated Quotation System (NASDAQ)
under the symbol GAIT. The following table sets forth the high and low closing
bid prices for the Common Stock for the fiscal years ended February 28, 1995 and
February 29, 1996. The NASDAQ quotations represent prices between dealers, do
not include retail markups, markdowns or commissions, and may not represent
actual transactions.
Twelve Months Ended February 28, 1995 High Low
- - ------------------------------------- ------ -----
1st quarter . . . . . . . 7/8 5/8
2nd quarter . . . . . . . 11/16 7/16
3rd quarter . . . . . . . 53/64 9/16
4th quarter . . . . . . . 15/16 23/32
Twelve Months Ended February 29, 1996
- - -------------------------------------
1st quarter . . . . . . . 15/16 5/8
2nd quarter . . . . . . . 2 1/8 1
3rd quarter . . . . . . . 1 7/8 1 5/16
4th quarter . . . . . . . 1 1/2 1 1/2
On February 29, 1996, there were approximately 300 holders of record of the
Common Stock. However, this figure is exclusive of all owners whose stock is
held beneficially or in "street" name. Based on information supplied by various
securities dealers, the Company believes that there are in excess of 650
shareholders in total, including holders of record as well as those whose shares
are beneficially held.
DIVIDEND HISTORY AND POLICY
The Registrant has never paid cash dividends on its Common Stock and
anticipates that, for the foreseeable future, it will follow a policy of
retaining earnings to finance the expansion and development of its business. In
any event, future dividend policy will depend upon the Company's earnings,
financial condition, working capital requirements and other factors.
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ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data.)
<TABLE>
<CAPTION>
Fiscal Year Ended:
--------------------------------------------------------------
Feb. 29, Feb. 28, Feb. 28, Feb. 28, Feb. 29,
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Operations:
Net sales $10,113 $10,467 $11,664 $13,291 $13,336
Income (loss) before non-recurring charges,
minority interest, income taxes and
cumulative effect of a change in
accounting principle 113 (266) (950) 308 762
Non-recurring charges:
Discontinuance of CAD-CAM project (499) -- -- -- --
Lab closings, write-down of selected assets
and legal fees (49) (363) -- (61) (363)
(Loss) income before minority interest,
income taxes and cumulative effect
of a change in accounting principle (435) (629) (950) 247 399
Minority interest in (income) loss of
consolidated subsidiary -- -- -- 5 (5)
(Loss) income before income taxes
and cumulative effect of a change
in accounting principle (435) (629) (950) 252 394
(Benefit from) provision for income taxes (2) 8 13 28 56
(Loss) income before cumulative
effect of a change in accounting principle (433) (637) (963) 224 338
Cumulative effect on prior years (prior
to fiscal 1992) of a change in method of
accounting for extended warranty and
product maintenance contracts -- -- -- -- (441)
Net (loss) income (433) (637) (963) 224 (103)
</TABLE>
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<TABLE>
<CAPTION>
Fiscal Year Ended:
--------------------------------------------------------------
Feb. 29, Feb. 28, Feb. 28, Feb. 28, Feb. 29,
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings per share:
Income (loss) before non-recurring charges,
minority interest, income taxes and
cumulative effect of a change
in accounting principle .04 (.11) (.38) .12 .27
Non-recurring charges:
Discontinuance of CAD-CAM project (.19) -- -- -- --
Lab closings, write-down of selected assets
and legal fees (.02) (.14) -- (.03) (.14)
(Loss) income before cumulative effect
of a change in accounting principle (.17) (.25) (.38) .09 .13
Cumulative effect on prior years
(prior to fiscal l992) of a change in
method of accounting for extended
warranty and product maintenance
contracts -- -- -- -- (.17)
Net (loss) earnings (.17) (.25) (.38) .09 (.04)
Weighted average shares outstanding 2,568 2,547 2,553 2,611 2,682
Cash dividends per share -- -- -- -- --
Feb. 29, Feb. 28, Feb. 28, Feb. 28, Feb. 29,
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheets:
Working Capital $1,576 $1,456 $1,871 $3,115 $2,829
Total Assets 4,035 4,535 5,426 6,340 5,950
Long-term Indebtedness
(excluding current maturities) 430 482 551 542 489
Stockholders' Equity 1,978 2,311 2,850 3,866 3,789
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
STATEMENTS OF OPERATIONS:
The Company's net sales of $10,113,000 for the twelve months ended February
29, 1996 were 3.4 percent below net sales of $10,467,000 for the twelve months
ended February 28, 1995. Net sales in fiscal 1995 were 10.3 percent below net
sales of $11,664,000 for the twelve months ended February 28, 1994.
Sales of orthotic products, which accounted for 86 percent of the Company's
fiscal 1996 sales, decreased by approximately $94,000 or 1.1 percent to
approximately $8,652,000 in the most recent twelve-month period. Decreased
revenues resulted from a shift in doctor preference toward lower-priced
orthoses, including those of the Company and others as well as an extremely
severe winter in the Eastern part of the United States which curtailed patient
visits to podiatrists during the fourth quarter. Sales of orthotic products in
fiscal 1995 decreased by $925,000 or 9.6 percent to $8,746,000 from fiscal 1994.
Decreased revenues resulted from discontinuance of marginal accounts, including
elimination of the unprofitable subcontract business at a subsidiary, the
earlier loss of business at a branch lab due to poor delivery times and an
unusually severe winter in the eastern half of the United States which
substantially reduced patient visits to podiatrists in March 1994.
Sales of PPT (the Company's soft tissue supplement material) for the recent
twelve months were $1,121,000, which decreased by $47,000 or 4.0 percent from
sales in the prior fiscal year. For the year ended February 28, 1995, sales were
$1,168,000 representing a 18.5 percent decrease of $265,000 from the prior year.
The decline in fiscal 1995 from fiscal 1994 is attributable to an increase
during fiscal 1994 in the number of primary cellular urethane producers to two
companies from one and due to supply problems from the Company's PPT vendor.
Sales of the Counter Rotation System ("CRS"-Registered Trademark-) were
$165,000 for the twelve months ended February 29, 1996, representing a $42,000
or 20.3 percent decrease from the prior twelve-month period. Sales for fiscal
1995 declined by $12,000 or 5.5 percent from the prior fiscal year. The
decreased revenue resulted from a reduced level of direct promotion with a shift
toward wholesale sales to distributors in the United States and overseas.
Gross profit (net sales less cost of sales) as a percentage of sales
increased from 39.1 percent for the twelve months ended February 28, 1995 to
40.5 percent for the recent twelve-month period. The increased gross profit
percentage resulted from reduced labor and overhead costs due to consolidation
of the Company's Midwest manufacturing operations into its Deer Park facility.
However, gross profit in fiscal 1996 increased only $8,000 from fiscal 1995 due
to reduced sales volume. Total gross profit for the twelve-month period ended
February 28, 1995 decreased $147,000 from fiscal 1994's $4,239,000 (36.3 percent
of sales) to $4,092,000 (39.1 percent of sales). The improvement in the gross
profit percentage in fiscal 1995 is the result of improved pricing from
addressing marginal business, productivity improvement and decreased staffing in
laboratory personnel. Decreases in rent and other occupancy expenses reduced
manufacturing overhead costs.
For the twelve-month period ended February 29, 1996, selling, general and
administrative expenses decreased by $427,000 from the prior year's expense of
$4,507,000. Expenses for the fiscal year ended February 28, 1995 were $646,000
below the prior fiscal year. The above reductions were due to tighter controls
over operational expenditures.
The Company incurred no additional research and development costs for the
twelve months ended February 29, 1996, as a result of the decision to
discontinue the in-house CAD-CAM project since project was not able to produce
a satisfactory and economic product. As such, all related costs associated
with the project were written off during fiscal 1996. The prior year's
expenses of $142,000 in 1995 and $148,000 in 1994 related solely to this
CAD-CAM project.
Interest income for the recent twelve-month period of $37,000 decreased
$5,000 from the prior twelve-month period. This was primarily due to a slightly
lower investment base during the year. Fiscal 1995's interest income of $42,000
was $30,000 below fiscal 1994's $72,000, again because of a reduced investment
base.
12
<PAGE>
Interest expense of $9,000 for the twelve months ended February 29, 1996
represented an $1,000 increase in interest expense from the year-earlier period,
which was $11,000 less than the twelve-month period ended February 28, 1994.
The reductions were due to the repayment of some of the Company's outstanding
notes on equipment leases.
Other income for the twelve months ended February 29, 1996 was $14,000
compared with an expense of $107,000 for the prior fiscal year, a result of a
write-off of certain fixed assets of $128,000 in fiscal 1995. For the twelve
months ended February 28, 1994, other income was $59,000 which included gains on
disposal of fixed assets.
For the year ended February 29, 1996, the Company had a net loss of
$433,000 or $.17 per share, of which $548,000 were non-recurring expenses
($499,000 for discontinuance of the Company's in-house CAD-CAM project and
$49,000 for the closing of our New Jersey manufacturing facility). Fiscal 1996
profit of $115,000, before non-recurring expenses, exceeded prior year's loss of
$274,000, before non-recurring expenses, by $389,000. The increase was mainly
due to savings achieved by closing the Company's Wheeling, Illinois
manufacturing facility plus staffing cutbacks in corporate departments.
For the year ended February 28, 1995, the Company had a loss of $637,000 or
$.25 per share, of which $363,000 were non-recurring expenses, compared with a
loss of $963,000 or $.38 per share in the year-earlier period. The net loss
reduction of $326,000 was due to improved pricing on marginal accounts,
productivity improvement and decreased staffing in lab personnel, tighter
control of operating expenditures and reduced occupancy costs, all of which
offset a volume loss of $1,157,000.
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of February 29, 1996 increased $120,000 to $1,576,000
from $1,456,000 as of February 28, 1995. The increase is due to increases in
inventories and other current assets of $59,000 and $18,000, respectively.
Additionally, accounts payable and other current liabilities decreased $58,000
and $57,000, respectively. Also, cash balances decreased $72,000 from the prior
year's balance of $812,000. The Company incurred $138,000 in capital
expenditures in fiscal 1996. The Company anticipates that cash generated from
operations as well as existing funds available will be adequate to finance its
present and contemplated future level of operations for a period of twelve
months and beyond.
Cash balances at February 29, 1996 of $740,000 were $72,000 below the prior
year-end balance of $812,000. The Company's net loss of $433,000 was partially
offset by non-cash charges of depreciation expense and loss on disposal of fixed
assets of $224,000 and $393,000, respectively. In addition to the aforementioned
capital expenditures of $138,000, the changes in operating assets and
liabilities utilized cash of $134,000 while stock options exercised generated
cash of $26,000.
Cash balances at February 28, 1995 of $812,000 were $96,000 below the prior
year-end balance of $907,000. The Company's net loss of $637,000 was partially
offset by non-cash charges of depreciation expense and loss on disposal of fixed
assets of $261,000 and $196,000, respectively. Receivables and inventories were
reduced $571,000 partially due to better control of collections and purchasing.
Capital expenditures in fiscal 1995 totaled $272,000, mostly for purchases
regarding the Company's CAD-CAM machining projects. Principal repayments for
equipment and capital leases were $40,000. The liability for the Company's
pension plan increased $37,000.
13
<PAGE>
REVOLVING CREDIT
The Company has a one year (August 1, 1995 - July 31, 1996) agreement for
revolving credit of $750,000, at an interest rate of prime plus 2%, from a bank,
but to date has not found it necessary to use this credit line. The agreement
contains, among other items, restrictions relating to incurrence of additional
indebtedness and the payment of dividends. Additionally, the Company is required
to maintain certain minimum financial ratios. Borrowings under this agreement
are collateralized by substantially all of the assets of the Company.
SEASONALITY
Revenue derived from the Company's sale of orthotic devices, a substantial
portion of the Company's operations, have historically been significantly higher
in the warmer months of the year.
INFLATION
The Company has in the past been able to increase the prices of its
products or reduce overhead costs sufficiently to offset the effects of
inflation on wages, materials and other expenses, and anticipates that it will
be able to continue to do so in the future.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENT
The Company adopted Statement of Financial Accounting Standards No. 109
("SFAS No. 109"), "Accounting for Income Taxes" effective March 1, 1993. SFAS
No. 109 establishes financial accounting and reporting standards for the effects
of income taxes that result from an entity's activities during the current and
preceding years. It requires an asset and liability approach for financial
accounting and reporting for income taxes. Under the provisions of SFAS No.
109, financial statements for fiscal years before the effective date may be
restated or the provisions of SFAS No. 109 may be applied on a prospective
basis. Management has applied the provisions of SFAS No. 109 on a prospective
basis. The adoption of SFAS No. 109 did not have a material effect on the
Company's consolidated financial statements.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Standards No. 123, "Accounting for Stock-Based Compensation", which
requires adoption of its disclosure provisions for fiscal years beginning after
December 15, 1995 and adoption of the measurement and recognition provisions for
non-employee transactions for fiscal years beginning after December 15, 1995.
The new standard defines a fair value method of accounting for stock options and
other equity instruments. Under the fair value method, compensation cost is
measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period.
Pursuant to the new standard, companies are encouraged, but are not
required, to adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board Option No. 25, "Accounting for
Stock Issued to Employees", but would be required to disclose in a note to the
financial statements pro forma net income and pro forma earnings per share as if
the Company had applied the new method of accounting. The new standard also
requires increased disclosure for stock-based compensation arrangements
regardless of the method chosen to measure and recognize compensation for
employee stock-based arrangements.
The accounting requirements of the new method are effective for all
transactions entered into during the fiscal year of adoption. The Company has
not yet determined if it will elect to change to the fair value method, nor has
it determined the effect the new standard will have on net income and earnings
per share should it elect to make such a change.
In March, 1995, the Financial Accounting Standards Board issued Statement
Number 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of". Statement 121 is effective for fiscal years
beginning after December 15, 1995. Statement 121 establishes accounting
standards for the
14
<PAGE>
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used for long-lived assets and certain
identifiable intangibles to be disposed of. Statement 121 requires review of
long-lived assets and certain identifiable intangibles whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company does not expect that the adoption of Statement 121
will have a material effect on the consolidated financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Begins on the next page.
15
<PAGE>
THE LANGER BIOMECHANICS GROUP, INC.
AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedule
February 29, 1996, February 28, 1995 and February 28, 1994
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report 17
Consolidated Financial Statements:
Consolidated Balance Sheets as of February 29, 1996 and February 28, 1995 18
Consolidated Statements of Operations for the years ended February 29, 1996,
February 28, 1995 and February 28, 1994 19
Consolidated Statements of Stockholders' Equity for the years ended
February 29, 1996, February 28, 1995 and February 28, 1994 20
Consolidated Statements of Cash Flows for the years ended
February 29, 1996, February 28, 1995 and February 28, l994 21 - 22
Notes to Consolidated Financial Statements 23 - 33
Consolidated Financial Statement Schedule II -
Valuation and Qualifying Accounts for the years ended February 29, 1996,
February 28, 1995 and February 28, 1994 34
</TABLE>
All other schedules have been omitted because they are not applicable, not
required or the information is disclosed in the consolidated financial
statements, including the notes thereto.
16
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
The Langer Biomechanics Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of The Langer
Biomechanics Group, Inc. and subsidiaries (the "Company") as of February 29,
1996 and February 28, 1995, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended February 29, 1996. Our audits also included the consolidated
financial statement schedule listed in the foregoing index for the three years
in the period ended February 29, 1996. These consolidated financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at February 29, 1996
and February 28, 1995, and the results of their operations and their cash flows
for each of the three years in the period ended February 29, 1996 in conformity
with generally accepted accounting principles. Also, in our opinion, such
consolidated financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
Jericho, New York
May 20, 1996
17
<PAGE>
THE LANGER BIOMECHANICS GROUP, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
February 29, 1996 and February 28, 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 739,460 $ 811,657
Accounts receivable, net of allowance for
doubtful accounts of approximately
$21,000 in 1996 and $48,000 in 1995 1,278,865 1,278,434
Inventories, net (Note 2) 868,562 809,568
Prepaid expenses and Other current assets 316,651 298,903
---------- ----------
Total current assets 3,203,538 3,198,562
Property and equipment, net (Notes 3 and 6) 644,029 1,122,858
Other assets (Note 8) 187,666 214,035
---------- ----------
Total Assets $4,035,233 $4,535,455
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes payable (Note 6) $ 3,707 $ 6,631
Accounts payable 270,291 328,619
Accrued liabilities:
Accrued payroll and related payroll taxes 366,122 322,415
Other (Notes 4) 599,218 686,658
Unearned revenue 388,084 398,217
---------- ----------
Total current liabilities 1,627,422 1,742,540
Long-term note payable, net of current
maturities (Note 6) -- 3,707
Accrued pension expense (Note 8) 299,182 339,889
Unearned revenue 126,281 133,375
Deferred income taxes (Note 5) 4,629 4,766
---------- ----------
Total liabilities 2,057,514 2,224,277
---------- ----------
Commitments and contingencies (Note 7)
Stockholders' equity (Notes 9 and 10):
Common stock, $.02 par value. Authorized
10,000,000 shares; outstanding 2,581,281
shares in 1996 and 2,547,281 in 1995 51,627 50,947
Additional paid-in capital 6,274,497 6,248,755
Accumulated deficit (4,043,449) (3,610,464)
Aggregate adjustment resulting from foreign
currency translation (49,788) (47,274)
Minimum pension liability adjustment (Note 8) (255,168) (330,786)
---------- ----------
Total stockholders' equity 1,977,719 2,311,178
---------- ----------
Total Liabilities and Stockholders' Equity $4,035,233 $4,535,455
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
THE LANGER BIOMECHANICS GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended February 29, l996, February 28, l995 and February 28, l994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ------------ -----------
<S> <C> <C> <C>
Net sales (Note 12) $10,113,486 $10,467,151 $11,664,063
Cost of sales 6,012,690 6,374,708 7,425,078
----------- ----------- -----------
Gross profit 4,100,796 4,092,443 4,238,985
Selling expenses 1,761,498 1,964,636 2,197,933
General and administrative expenses 2,318,495 2,542,128 2,955,121
Research and development expenses -- 141,574 148,368
Discontinuance of in-house
CAD-CAM project (Note l1) 498,735 -- --
----------- ----------- -----------
Operating loss (477,932) (555,895) (1,062,437)
----------- ----------- -----------
Other income (expense):
Interest income 37,412 42,040 72,400
Interest expense (8,753) (7,571) (18,918)
Other 14,162 (107,483) 58,702
----------- ----------- -----------
Other income (expense), net 42,821 (73,014) 112,184
----------- ----------- -----------
Loss before income taxes (435,111) (628,909) (950,253)
(Benefit from) provision for income taxes (Note 5) (2,126) 8,250 12,498
----------- ----------- -----------
Net loss $ (432,985) $ (637,159) $ (962,751)
----------- ----------- -----------
----------- ----------- -----------
Weighted average number of shares used
in computation of net loss per share 2,568,458 2,547,281 2,552,975
----------- ------------ -----------
----------- ------------ -----------
Net loss per share $ (0.17) $ (0.25) $ (0.38)
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
THE LANGER BIOMECHANICS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED FEBRUARY 29, 1996, FEBRUARY 28, 1995 AND FEBRUARY 28, 1994
<TABLE>
<CAPTION>
AGGREGATE
ADJUSTMENT TOTAL
RESULTING MINIMUM
ADDITIONAL FROM FOREIGN PENSION STOCK
COMMON PAID-IN ACCUMULATED CURRENCY LIABILITY HOLDERS'
` STOCK CAPITAL DEFICIT TRANSALATION ADJUSTMENT EQUITY
------- ---------- ----------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 1, 1993 $50,945 $6,248,681 $(2,010,554) $(61,083) $(362,319) $3,865,670
ISSUANCE OF COMMON STOCK FOR
CONTRIBUTION TO PAYSOP (NOTE 10) 2 74 -- -- -- 76
MINIMUM PENSION LIABILITY ADJUSTMENT -- -- -- -- (56,769) (56,769)
AGGREGATE ADJUSTMENT RESULTING
FROM TRANSLATION OF FINANCIAL STATEMENTS
INTO US DOLLARS -- -- -- 3,593 -- 3,593
NET LOSS FOR YEAR -- -- (962,751) -- -- (962,751)
------- ---------- ----------- -------- --------- ----------
BALANCE AT FEBRUARY 28, 1994 50,947 6,248,755 (2,973,305) (57,490) (419,088) 2,849,819
MINIMUM PENSION LIABILITY ADJUSTMENT -- -- -- -- 88,302 88,302
AGGREGATE ADJUSTMENT RESULTING FROM
TRANSLATION OF FINANCIAL STATEMENTS
INTO US DOLLARS -- -- -- 10,216 -- 10,216
NET LOSS FOR YEAR -- -- (637,159) -- -- (637,159)
------- ---------- ----------- -------- --------- ----------
BALANCE AT FEBRUARY 28, 1995 50,947 6,248,755 (3,610,464) (47,274) (330,786) 2,311,178
MINIMUM PENSION LIABILITY ADJUSTMENT -- -- -- -- 75,618 75,618
AGGREGATE ADJUSTMENT RESULTING FROM
TRANSLATION OF FINANCIAL STATEMENTS
INTO US DOLLARS -- -- -- (2,514) -- (2,514)
EXERCISE OF STOCK OPTIONS 680 25,742 -- -- -- 26,422
NET LOSS FOR YEAR -- -- (432,985) -- -- (432,985)
------- ---------- ----------- -------- --------- ----------
BALANCE AT FEBRUARY 29, 1996 $51,627 $6,274,497 $(4,043,449) $(49,788) $(255,168) $1,977,719
------- ---------- ----------- -------- --------- ----------
------- ---------- ----------- -------- --------- ----------
</TABLE>
20
<PAGE>
THE LANGER BIOMECHANICS GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended February 29, l996, February 28, l995 and February 28, l994
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $(432,985) $(637,159) $(962,751)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Deferred foreign tax provision -- 1,589 2,982
Depreciation and amortization 223,778 261,407 336,389
Common stock issued to PAYSOP -- -- 76
Loss on disposal of property and equipment 392,584 196,593 --
Changes in operating assets and liabilities:
Accounts receivable (3,149) 230,900 213,636
Inventories (61,402) 339,727 32,863
Prepaid expenses and other assets 678 50,267 61,740
Net pension liability 42,702 36,920 28,422
Accounts payable and accrued liabilities (96,672) (248,914) 143,708
Unearned revenue (16,173) (15,764) (32,562)
-------- -------- --------
Net cash provided by (used in)
operating activities 49,361 215,566 (175,497)
-------- -------- --------
Cash Flows From Investing Activities:
Capital expenditures (138,443) (271,710) (597,536)
Proceeds from sale of equipment
held for disposition -- -- 1,000
-------- -------- --------
Net cash used in investing activities (138,443) (271,710) (596,536)
-------- -------- --------
</TABLE>
(Continued on following page.)
See accompanying notes to consolidated financial statements.
21
<PAGE>
THE LANGER BIOMECHANICS GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended February 29, l996, February 28, l995 and February 28, l994
(Continued from prior page)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- ----------
<S> <C> <C> <C>
Cash Flows From Financing Activities:
Common stock options exercised 26,422 -- --
Principal payments of notes payable (6,631) (4,116) (56,846)
Principal payments under capital lease obligations (2,906) (35,470) (34,899)
-------- -------- ----------
Net cash provided by (used in) financing activities 16,885 (39,586) (91,745)
-------- -------- ----------
Net decrease in cash and cash equivalents (72,197) (95,730) (863,778)
Cash and cash equivalents at
beginning of year 811,657 907,387 1,771,165
-------- -------- ---------
Cash and cash equivalents at end of year $739,460 $811,657 $ 907,387
-------- -------- ----------
-------- -------- ----------
Supplemental Disclosures of Cash Flow Information -
Cash paid (refunded) during the year for:
Interest $ 8,636 $ 7,564 $ 18,918
-------- -------- ----------
-------- -------- ----------
Income taxes $ (488) $ (4,803) $ 24,910
-------- -------- ----------
-------- -------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
THE LANGER BIOMECHANICS GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the years ended February 29, l996, February 28, l995 and February 28, 1994
(l) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of The Langer Biomechanics Group, Inc. and its subsidiaries.
All significant intercompany transactions and balances have been
eliminated in consolidation.
(b) REVENUE RECOGNITION
Revenue from the sale of the Company's products is recognized at
shipment. Revenues derived from extended warranty contracts relating
to sales of orthotics are recorded as deferred revenue and recognized
over the lives of the contracts (24 months) on a straight-line basis.
(c) CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
short-term, highly liquid investments purchased with a maturity of
three months or less to be cash equivalents (money market funds and
short-term commercial paper).
(d) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
(e) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are
calculated using the straight-line method. The lives on which
depreciation and amortization are computed are as follows:
Leasehold improvements Lesser of 5 years or life of lease
Machinery and equipment 5 - l0 years
Office equipment 5 - l0 years
Diagnostic equipment 7 - l0 years
Automobiles 3 - 5 years
23
<PAGE>
THE LANGER BIOMECHANICS GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(f) INCOME TAXES
Effective March 1, 1993, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes" ("Statement 109"). Under Statement 109, the asset
and liability method is used in accounting for income taxes.
Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
As permitted by Statement 109, the Company has elected not to
restate the financial statements of any prior years. The effect
of the change on the loss before income taxes for the year ended
February 28, 1994, as well as the effect of the cumulative effect
of the change, was not material to the consolidated financial
statements.
(g) INCOME (LOSS) PER SHARE
Income (loss) per share of common stock is computed based on the
weighted average number of common shares outstanding during the
periods presented. Per share amounts include the effect of
common stock equivalents comprised of stock options granted under
the Company's qualified and non-qualified stock option plans and
warrants, except where the effect would be antidilutive.
(h) FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the foreign subsidiary have been
translated at year-end exchange rates, while revenues and
expenses have been translated at average exchange rates in effect
during the year. Resulting cumulative translation adjustments
have been recorded as a separate component of stockholders'
equity.
(i) RECLASSIFICATIONS
To conform to the current year's presentation, fiscal years ended
February 28, 1995 and February 28, 1994 "Product Development"
costs of $71,514 and $68,022, respectively, were reclassified
from "Research and Development Expenses" to "Selling Expenses".
(j) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(k) LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("Statement 121"). Statement 121
is effective for fiscal years beginning after December 15, 1995.
Statement 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used for long-lived assets and
certain identifiable
24
<PAGE>
THE LANGER BIOMECHANICS GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
intangibles to be disposed of. Statement 121 requires review of long-
lived assets and certain identifiable intangibles whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company does not expect that the adoption
of Statement 121 will have a material effect on the consolidated
financial statements.
(l) FAIR VALUE OF FINANCIAL INSTRUMENTS
At February 29, 1996 and February 28, 1995, the carrying amount of the
Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable, accrued liabilities, and notes
payable, approximated fair value because of their short-term of
maturity.
(m) STOCK OPTIONS AND WARRANTS
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"),
which requires adoption of its disclosure provisions for fiscal years
beginning after December 15, 1995 and adoption of the measurement and
recognition provisions for non-employee transactions for fiscal years
beginning after December 15, 1995. The new standard defines a fair
value method of accounting for stock options and other equity
instruments. Under the fair value method, compensation cost is
measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting
period.
Pursuant to Statement 123, companies are encouraged, but are not
required, to adopt the fair value method of accounting for employee
stock-based transactions. Companies are also permitted to continue to
account for such transactions under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", but would
be required to disclose in a note to the financial statements pro-
forma net income and pro-forma earnings per share as if the Company
had applied the new method of accounting. Statement 123 also requires
increased disclosure for stock-based compensation arrangements
regardless of the method chosen to measure and recognize compensation
for employee stock-based arrangements.
The accounting requirements of the new method are effective for all
transactions entered into during the fiscal year of adoption. The
Company has not yet determined if it will elect to change to the fair
value method, nor has it determined the effect the new standard will
have on net income and earnings per share should it elect to make such
a change.
(2) INVENTORIES
At February 29, l996 and February 28, l995, inventories consist of the
following:
1996 1995
--------- ---------
Raw materials $ 645,517 $ 642,408
Work-in-process 169,523 157,667
Finished goods 131,542 117,935
--------- ---------
Total inventories 946,582 918,010
Less: allowance for obsolescence 78,020 108,442
--------- ---------
Net inventories $ 868,562 $ 809,568
--------- ---------
--------- ---------
25
<PAGE>
THE LANGER BIOMECHANICS GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) PROPERTY AND EQUIPMENT
Property and equipment, at cost, at February 29, l996 and February 28,
l995, is comprised of the following:
1996 1995
---- ----
Leasehold improvements $ 436,827 $ 420,071
Machinery and equipment 814,046 813,362
Office equipment 1,325,186 1,304,473
Automobiles 34,567 47,224
Construction-in-progress -0- 309,817
--------- ---------
2,610,626 2,894,947
Less: accumulated depreciation and
amortization 1,966,597 1,772,089
--------- ---------
--------- ---------
$ 644,029 $1,122,858
--------- ---------
--------- ---------
(4) OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following at February 29, l996
and February 28, l995:
1996 1995
------ ------
Sales credits payable $ 95,215 $ 91,728
Accrued professional fees 60,683 80,926
Warranty reserve 31,479 26,251
Other accrued liabilities 411,841 487,753
--------- ---------
Total other accrued liabilities $ 599,218 $ 686,658
--------- ---------
--------- ---------
26
<PAGE>
THE LANGER BIOMECHANICS GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) INCOME TAXES
The (benefit from) provision for income taxes is comprised of the
following for the years ended February 29, l996, February 28, l995 and February
28, l994:
1996 1995 1994
------- -------- --------
Current:
Federal $ -- $ -- $ (5,000)
State (4,294) 2,972 14,516
Foreign 2,168 5,278 2,982
------- -------- -------
$(2,126) $ 8,250 $ 12,498
------- -------- -------
------- -------- -------
As of February 29, l996, the Company has net Federal operating loss
carryforwards of approximately $3.3 million, which may be applied against
future taxable income and expire from 2000 through 2011. The Company also
has available tax credit carryforwards of approximately $141,000.
Included in the provision for foreign income taxes are deferred income taxes of
$0 for 1996, $1,589 for 1995, and $2,982 for 1994.
The following is a summary of deferred tax assets and liabilities as of February
29, 1996 and February 28, 1995:
1996 1995
----------- ------------
Current deferred tax assets $ 361,633 $ 402,216
----------- ------------
Non-current:
Deferred tax assets 1,441,346 1,433,730
Deferred tax liability (16,336) (63,818)
----------- ------------
Non-current deferred tax asset, net 1,425,010 1,369,912
----------- ------------
Total deferred tax assets, net 1,786,643 1,772,128
Valuation allowance (1,786,643) (1,772,128)
----------- ------------
Net $ -0- $ -0-
----------- ------------
----------- ------------
The current deferred tax assets are primarily composed of deferred revenue,
inventory and accounts receivable reserves, and accrued vacation. The non-
current deferred tax assets are primarily composed of deferred revenue and
Federal net operating loss carryforwards. The non-current deferred tax
liability is primarily composed of excess tax depreciation over book
depreciation. The increase in the valuation allowance during fiscal 1996
resulted from a reduction in the net deductible temporary difference.
27
<PAGE>
THE LANGER BIOMECHANICS GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company's effective (benefit from) provision for income taxes differs from
the Federal statutory rate. The reasons for such differences are as follows:
<TABLE>
<CAPTION>
February 29, February 28, February 28,
1996 1995 1994
---- ---- ----
AMOUNT % AMOUNT % AMOUNT %
-------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Benefit at Federal
statutory rate $(147,938) (34.0)% $(216,634) (34.0)% $(323,086) (34.0)%
Increase (decrease) in
taxes resulting from:
State income taxes, net
of Federal benefit (4,294) (1.0) 2,972 0.4 14,516 1.5
Foreign taxes 2,168 0.5 5,278 0.8 2,982 .3
Creation of net operating
loss carryforward 147,938 34.0 216,634 34.0 323,086 34.0
Other -- -- -- -- (5,000) (.5)
--------- ------ --------- ------ --------- ------
Effective tax rate $ (2,126) (0.5)% $ 8,250 1.2% 12,498 1.3%
--------- ------ --------- ------ --------- ------
--------- ------ --------- ------ --------- ------
</TABLE>
(6) LONG-TERM NOTE PAYABLE
Long-term note payable, less current maturities, at February 29, l996
and February 28, l995 consists of the following:
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Equipment note bearing interest at
10.5% due March 1997. The note is
payable in monthly installments of
principal and interest of $304.
The note is collateralized by certain
equipment with a carrying value of
approximately $8,200 at
February 29, l996. $ 3,707 $ 10,338
Less current maturities 3,707 6,631
--------- --------
Long-term note payable $ -0- $ 3,707
--------- ---------
--------- ---------
</TABLE>
28
<PAGE>
THE LANGER BIOMECHANICS GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) COMMITMENTS AND CONTINGENCIES
(a) LEASES
Certain of the Company's facilities and equipment are covered under
noncancellable lease agreements and certain operating leases contain minimum
annual escalations in base rent. Rental expense amounted to $500,429, $550,403,
and $617,368 for the years ended February 29, l996, February 28, l995 and
February 28, l994, respectively.
The following is a schedule, by fiscal year, of future minimum rental
payments required under operating leases as of February 29, l996:
FISCAL YEAR ENDED FEBRUARY: AMOUNT
-------------------------- ------
1997 $ 425,983
1998 357,229
1999 342,409
2000 134,047
-----------
Total $ 1,259,668
-----------
-----------
(b) ROYALTIES
The Company has entered into a number of agreements with licensors,
consultants and suppliers, including:
1. The Company has an agreement with a licensor, which provides for the
Company to pay royalties of l5 percent, with a minimum annual royalty
of $25,000, on the net sales of a product named the Pediatric Counter
Rotation System.
2. The Company has agreements with certain licensors, which provide for
the Company to pay royalties ranging from 2.5 percent to 4 percent on
the net sales of certain biomechanical devices.
Royalties under the above-mentioned agreements aggregated $36,016, $36,797,
and $46,219 for the years ended February 29, l996, February 28, l995 and
February 28, l994, respectively.
(c) EMPLOYMENT AGREEMENTS
Two officers of the Company have employment agreements, which commit the
Company to maximum severance pay of approximately $219,000 upon termination of
these officers. In addition, the employment agreements commit the Company to pay
these two officers annual salaries of approximately $299,000 and additional
bonus compensation depending on performance and profits achieved by the Company.
(d) LEGAL ACTION
The Company is involved in certain litigation in the normal course of
business. The outcome of such litigation is not expected to have a material
impact on the consolidated financial statements.
29
<PAGE>
THE LANGER BIOMECHANICS GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) PENSION PLAN AND 401(K) PLAN
The Company maintains a non-contributory defined benefit pension plan
covering substantially all employees. In l986, the Company adopted an amendment
to the plan under which future benefit accruals to the plan will cease (freezing
of the maximum benefits available to employees as of July 30, l986), other than
those required by law. Previously accrued benefits will remain in effect and
will continue to vest under the original terms of the plan.
The following table sets forth the Company's defined benefit plan status at
February 29, l996 and February 28, l995, determined by the plan's actuary in
accordance with Statement of Financial Accounting Standards No. 87, "Employers'
Accounting for Pensions":
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Actuarial present value of benefit obligation:
Accumulated benefit obligation, including
vested benefits of $372,061 and $435,903
in l996 and l995, respectively $ 372,061 $ 435,903
---------- ----------
---------- ----------
Projected benefit obligation for services rendered to date $ (372,061) $ (435,903)
Market value of plan net assets (primarily bond mutual funds) 72,879 126,564
---------- ----------
Projected benefit obligation in excess of plan assets (299,182) (309,339)
Unrecognized transition liability 174,647 182,438
Unrecognized net loss 255,168 330,786
Adjustment required to recognize minimum liability (429,815) (513,224)
---------- ----------
Accrued pension expense $ (299,182) $ (309,339)
---------- ----------
---------- ----------
</TABLE>
Net pension expense is comprised of the following for the years ended February
29, 1996, February 28, 1995 and February 28, 1994:
1996 1995 1994
------- ------ ------
Interest cost $ 24,775 $ 22,362 $ 21,316
Return on assets (8,921) 13,049 3,203
Net amortization and deferral 26,848 1,509 3,904
-------- -------- --------
Net pension expense $ 42,702 $ 36,920 $ 28,423
-------- -------- --------
-------- -------- --------
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.5 percent in l996 and 4.4
percent in l995. No assumed increase in compensation levels was used since
future benefit accruals have ceased (as discussed above). The rate of
return on assets used was 7.5 percent in l996 and l995. The unrecognized
transition liability and unrecognized net loss are being amortized over
30.4 and 28.2 years, respectively.
30
<PAGE>
THE LANGER BIOMECHANICS GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
In l996 and l995, as required by Statement of Financial Accounting Standards No.
87, the Company recorded additional pension liability to reflect the excess
of accumulated benefits over the fair value of pension plan assets. Since
this liability is in excess of the related unrecognized prior service cost
(unrecognized transition liability), an amount equal to the unrecognized
prior service cost has been recognized as an intangible asset (included in
"Other assets" on the accompanying Consolidated Balance Sheets). The
remaining liability required to be recognized is reported as a separate
component of equity.
The Company has a defined contribution retirement and savings plan (the "401(k)
Plan") designed to qualify under Section 401(k) of the Internal Revenue
Code (the "Code"). Eligible employees include those who are at least
twenty-one years old and who have worked at least 1,000 hours during any
one year. The Company may make matching contributions in amounts that the
Company determines at its discretion at the beginning of each year. In
addition, the Company may make further discretionary contributions.
Participating employees are immediately vested in amounts attributable to
their own salary or wage reduction elections, and are vested in Company
matching and discretionary contributions under a vesting schedule that
provides for ratable vesting over the second through sixth years of
service. The assets of the 401(k) Plan are invested in stock, bond and
money market mutual funds. For the years ended February 29, 1996, February
28, 1995 and February 28, 1994, the Company made contributions totaling
$33,547, $25,076, and $63,396, respectively, to the 401(k) Plan.
(9) STOCK OPTIONS AND WARRANTS
On July 27, l992, the Company adopted a qualified stock option plan for
employees, officers, directors, consultants and advisors of the Company
covering 125,000 shares of common stock. On January 4, 1995, the Board of
Directors increased the number of shares authorized to be issued under the
plan to 350,000 shares, which amendment has been approved by shareholders
at the September 13, 1995 shareholders' meeting. Options granted under the
plan are exercisable during a period of five years at an exercise price at
least equal to l00 percent of the fair market value of the Company's common
stock at date of grant. Options become exercisable under various
cumulative increments over a three-year period. The Board of Directors has
the discretion as to the persons to be granted options as well as the
number of shares and terms of the option agreements. The expiration date of
the plan is July 26, 2002.
The Company has also granted non-incentive stock options. These options are
generally exercisable for a period of five years and are issued at a price equal
to or higher than the fair market value of the Company's common stock at the
date of grant. At February 29, 1996, 80,000 non-incentive stock options were
outstanding.
31
<PAGE>
THE LANGER BIOMECHANICS GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following is a summary of activity related to the Company's incentive
and non-incentive stock options:
Weighted average
Number of option price
shares per share
--------- ------------
Outstanding at February 28, l993 125,500 $ 1.65
Granted 2,000 2.69
Exercised (27,250) 1.33
------- ------
Outstanding at February 28, 1994 100,250 1.75
Granted 121,750 .83
Cancelled (89,000) 1.80
Expired (14,750) 1.70
------- ------
Outstanding at February 28, l995 118,250 .77
Granted 90,000 1.00
Exercised (34,000) (.77)
Expired (18,000) (.78)
------- ------
Outstanding at February 29, 1996 156,250 $ .90
------- ------
------- ------
At February 29, l996, 80,747 options were exercisable and 164,250 options were
available for issuance.
Warrants to purchase up to 10,000 shares of common stock at an exercise price of
$.78125 (the market value at date of grant) were granted during the year
ended February 28, 1995. Such warrants are exercisable during the three-
year period commencing from the date of grant. All previous warrants
issued have either expired or were cancelled.
At February 29, 1996, there were 330,500 shares of common stock reserved for
issuance under the Company's stock option plan and for issued and
outstanding warrants.
(10) PAYROLL BASED EMPLOYEE STOCK OWNERSHIP PLAN
As of July 31, 1993, the Company terminated its Payroll Based Employee
Stock Ownership Plan ("PAYSOP") and all shares were distributed to participants
prior to February 28, 1994. Contributions for fiscal 1994 were $76 and zero for
fiscal 1993.
(11) DISCONTINUANCE OF IN-HOUSE CAD-CAM PROJECT
In fiscal 1996, the Company concluded that it was no longer appropriate to
devote capital resources to in-house development of proprietary computer-
controlled milling equipment, laser scanning devices and related software.
Therefore, the Company expensed approximately $499,000 of costs related to the
CAD-CAM project in the fourth quarter of fiscal 1996.
32
<PAGE>
THE LANGER BIOMECHANICS GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) EXPORT SALES
The Company had export sales from its United States operations of
approximately 16, 15 and 14 percent of net sales for the years ended February
29, l996, February 28, 1995 and February 28, l994, respectively.
(13) SEGMENT INFORMATION
The Company operates in one segment, principally in the design,
development, manufacture and sale of foot and gait related products.
(14) REVOLVING CREDIT LINE
The Company has a credit facility with a bank, effective July 21, 1995. The
agreement, which expires July 31, 1996, provides for a revolving credit line not
to exceed the lesser of $750,000 or 70 percent of eligible receivables, as
defined. Interest on the outstanding balance is payable at prime (8.5% at
February 29, 1996) plus 2% per annum.
The agreement contains, among other items, restrictions relating to the
incurrence of additional indebtedness and the payment of dividends.
Additionally, the Company is required to maintain certain minimum financial
ratios. Borrowings under this agreement are collateralized by substantially all
of the assets of the Company.
At February 29, 1996, there were no borrowings outstanding under this
credit facility.
33
<PAGE>
THE LANGER BIOMECHANICS GROUP, INC.
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
For the years ended February 29, 1996, February 28, 1995 and February 28, 1994
Sales
Returns and Bad Warranty Inventory
Allowances Debts Reserve Reserve
--------- --------- --------- ---------
At March 1, 1993 $ 21,813 $ 73,000 $ 23,105 $ 35,325
Additions 1,596 77,173 1,232 21,310
Deletions 0 86,817 0 8,055
--------- --------- --------- ---------
At February 28, 1994 23,409 63,356 24,337 48,580
Additions 0 27,048 3,638 78,494
Deletions 2,123 42,188 1,724 18,632
--------- --------- --------- ---------
At February 28, 1995 21,286 48,216 26,251 108,442
Additions 10,772 0 7,741 0
Deletions 0 27,646 2,513 30,422
--------- --------- --------- ---------
At February 29, 1996 $ 32,058 $ 20,570 $ 31,479 $ 78,020
--------- --------- --------- ---------
--------- --------- --------- ---------
34
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
Name Age Office
---- --- ------
Kenneth Granat 51 Chairman of the Board
Gary L. Grahn 52 President and Chief Executive Officer
Dr. Justin Wernick 60 Executive Vice President,
Secretary and Director
Donald M. Carbone 58 Vice President - Finance,
and Chief Financial Officer
Howell S. Schorr 50 Vice President - Operations
Dr. Irwin A. Horowitz 60 Director
Daniel J. Feld 50 Director
Mr. Granat has been Chairman of the Board of Directors of the Company since
January 4, 1995. Since 1987, he has been President of Active Screw and Fastener
Inc., an Elk Grove Village, Illinois company, engaged in full line distribution
of fasteners with plants in Chicago, Illinois and Tucson, Arizona. Since 1991,
he has also been Vice President and a Director of Trigran Investments Inc.,
Deerfield, Illinois, the general partner and investment advisor for Trigran
Investments, L.P., a more than 10 percent shareholder of the Company. Mr.
Granat holds a J.D. from the University of Illinois as well as a B.B.A. degree
in Business from the University of Michigan.
Mr. Grahn has been President and Chief Executive Officer of the Company
since January 3, 1995 and a Director since August 1995. From 1992 to 1994, he
was President of PML Inc., a management consulting firm which specializes in
marketing and business development assignments for consumer businesses. From
1989 to 1992, Mr. Grahn was Vice President - General Manager of R. Stevens,
Inc., subsidiary of Delphi Technology, Inc., a privately-held company which
markets Automated Photo Machines. Previously, he had been Executive Vice
President for the American Photo Group, a multi-plant processor of consumer
products, located in Atlanta, Georgia. He holds an M.B.A. in Marketing
Management from the University of Rochester Graduate School of Business and a
B.A. in Mathematics/Economics from Gettysburg College.
Dr. Wernick is the co-founder and Executive Vice President, Secretary and a
director of the Company since its formation. Dr. Wernick is a Diplomate of the
American Board of Podiatric Orthopedics, a Fellow of the American College of
Foot Orthopedics and of the Academy of Podiatric Sports Medicine and a member of
several other professional societies. In l975, he was the President of the
Nassau County Division, Podiatry Society of the State of New York and was
granted the Podiatrist of the Year Award from that Society in that same year.
Since l969, he has held various academic positions at the New York College of
Podiatric Medicine
35
<PAGE>
and since l979 has been serving as a professor with the Department of Orthopedic
Sciences at the New York College of Podiatric Medicine. He has guest lectured
and directed educational programs, both nationally and internationally, at many
other podiatric colleges and seminars during the past 20 years. He has co-
authored a book entitled "A Practical Manual for a Basic Approach to
Biomechanics" in l972 and a report entitled "A Radiologic Study of Motion of the
Foot within a Ski Boot" which was published in the Journal of the American
Podiatry Association for which he is also a corresponding consultant. Dr.
Wernick received his podiatric medical degree from M.J. Lewi College of Podiatry
(now known as the New York College of Podiatric Medicine).
Mr. Carbone has been Vice President-Finance of the Company since l99l.
From l983 to l99l, he was employed by Almac Plastics, Inc. (now known as Laird
Plastics), a distributor and fabricator of various types of plastic sheets,
rods, tubes and film, including most recently as Corporate Controller.
Previously, Mr. Carbone was Director of Costs and Budgets for Morse Electro
Producers Corp. and Manager of Corporate Planning and Analysis of the F&M
Schaefer Corp. He holds an M.S. Degree in Economics and a B.S. Degree of
Accounting from Brooklyn College of The City University of New York.
Mr. Schorr has been Vice President of Operations since l99l. From l988 to
1991, prior to becoming an executive officer of the Company, he was the
Operations Manager for the Deer Park, New York, and Branch Manager for the Brea,
California, facilities of the Company. From l966 to l987, Mr. Schorr was
employed by Hazeltine Corporation/Esprit Systems, Inc. During his 21 years of
service with Hazeltine Corporation/Esprit Systems, Inc., he held the positions
of Director of Operations, National Service Manager, Customer Service/Production
Manager, as well as other various supervisory and managerial positions. He has
a B.S. in Business Administration from New York Institute of Technology.
Dr. Horowitz has been a director of the Company since 1994. Since November
1993, Dr. Horowitz has been the Chairman of the Board, Chief Executive Officer
and President of Diversifax, Inc., a public company engaged in the operation of
public fax machines and copiers. From July 1993 to October 1993, he was Chief
Operating Officer of Diversifax, Inc. From 1969 to November 1993, Dr. Horowitz
was Chairman of the Board and President of IMSG Systems, Inc. and certain
affiliated companies, which are engaged in the operation of public, coin-
operated copying machines, which was merged into Diversifax in November 1993.
Dr. Horowitz received his podiatric medical degree from M.J. Lewi College of
Podiatry (now known as the New York College of Podiatric Medicine).
Mr. Feld has been a director of the Company since August 1995. He has been
President of Traverse Bay Corporation, a consulting company since October, 1994.
From 1988 to 1994, he was President of Saratoga Brands, a publicly held food
manufacturer and distributor which he founded. Previously, he directed marketing
and advertising for several companies including Gloria Vanderbilt Jeans while he
was President of Fisher & Feld, an advertising firm he co-founded. Prior to
that, he supervised several Procter & Gamble Co. Brands while employed at Grey
Advertising. He holds M.A. and B.A. degrees from the University of Michigan.
All directors are normally elected at the annual meeting of shareholders to
hold office until the next annual meeting and until their successors are duly
elected and qualified. The Company's By-Laws provide that the annual meeting of
shareholders be held each year during the month of August at a time and place to
be designated by the Board of Directors. Directors may be removed at any time
for cause by the Board of Directors and with or without cause by a majority of
the votes cast at a meeting of shareholders entitled to vote for the election of
directors.
The Company is not aware of any late filings of, or failures to file,
during the fiscal year ended February 29, 1996, the reports required by Section
16(a) of the Securities Exchange Act of 1934.
LIMITATION ON LIABILITY OF DIRECTORS
As permitted by New York law, the Company's Certificate of Incorporation
contains an article providing for the elimination of the personal liability of
the directors of the Company to the fullest extent permitted by the provisions
of paragraph (b) of Section 402 of the New York Business Corporation Law.
Accordingly, a
36
<PAGE>
director's personal liability would be eliminated for any breach of a director's
duty, unless, among other things, the director's actions or omissions were in
bad faith, involved intentional misconduct or a knowing violation of the law, or
personal gain in fact of a financial profit to which the director was not
lawfully entitled. This article is intended to afford directors additional
protection, and limit their potential liability, from suits alleging a breach of
the duty of care by a director. The Company believes this article enhances the
Company's ability to attract and retain qualified persons to serve as directors.
As a result of the inclusion of such a provision, shareholders may be unable to
recover monetary damages against directors for actions taken by them which
constitute negligence or gross negligence or which are in violation of their
fiduciary duties, although it may be possible to obtain injunctive or other
equitable relief with respect to such actions. If equitable remedies are found
not to be available to shareholders for any particular case, shareholders may
not have any effective remedy against the challenged conduct.
37
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows the cash compensation received by the two
executive officers whose compensation exceeded $100,000 during the fiscal year
ended February 29, 1996:
Long-Term
Annual Compensation Compensation
--------------------- ------------
Fiscal Salary Bonus Other Options
------ ------ ------- -----
PRINCIPAL POSITION Year $ $ $ (No.of Shares)
---- ------ ---- ---- -------------
Gary L. Grahn 1996 159,846 0 (2) 50,000
President and 1995 21,538(1) 0 (2) 0
Chief Executive Officer 1994 0 0 (2) 0
Dr. Justin Wernick 1996 139,000 0 (2) 0
Executive Vice President 1995 138,996 0 (2) 0
and Secretary 1994 138,996 0 (2) 0
(1) Mr. Grahn's employment with the Company commenced January 2, 1995.
(2) Less than 10% of the total annual salary and bonus.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------------------
Potential Realizable Alernative
Value at Assumed to (1) and
Annual Rates of (2): Grant
Stock Price Appreciation Date Value
Individual Grants for Option Term
- - ---------------------------------------------------------------------------------------------------------------------------------
Number of Percent of Total (1) (2) Grant
Securities Options/SARs Date
Underlying Granted to Exercise or Present
Option/SARs Employees in Base Price Expiration
Name Granted(*) Fiscal Year ($/Sh) Date 5%($) 10%($) Value $
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gary L. Grahn 50,000 100 0.75 2/29/00 10,361 22,894 36,500
Dr. Justin Wenick -- -- -- -- -- -- --
</TABLE>
FISCAL YEAR-END OPTION VALUES
The table below sets forth information regarding unexercised options held
by the Company's named executive officers as of February 29, 1996. No options
were exercised by the Company's executive officers during fiscal 1996 and fiscal
1995.
Number of Securities Underlying Value of Unexercised
Unexercised Options At In-The-Money Options
Fiscal Year End At Fiscal Year End
Exercisable/Unexercisable Exercisable/Unexercisable
Name (#) $
----- ------------------------------- -------------------------
Gary L. Grahn 16,665/33,335 12,499/25,001
Dr. Justin Wernick 0 0
38
<PAGE>
LONG-TERM INCENTIVE PLAN-AWARDS IN LAST FISCAL YEAR
None.
COMPENSATION OF DIRECTORS
Directors, who are not executive officers of the Company, are compensated
at a rate of $1,500 per Board of Directors' meeting attended.
EMPLOYMENT AGREEMENTS
On January 2, 1995, the Company entered into an employment agreement (the
"Employment Agreement") with Gary L. Grahn, President and Chief Executive
Officer, commencing March 1, 1995 and continuing for a one year period, with
automatic renewal for additional one year terms unless sooner terminated in
accordance with the Employment Agreement. The Employment Agreement provides
for Mr. Grahn to receive an annual base salary of $160,000, subject to
adjustment as determined by the Board of Directors of the Company. Pursuant to
the Employment Agreement, Mr. Grahn may be entitled to receive up to 50% of base
salary as additional bonus compensation depending on profits achieved by the
Company. In addition, pursuant to the Employment Agreement, Mr. Grahn was
granted options to purchase 50,000 shares of the common stock of the Company at
an exercise price of $.75 per share for a five year term. Such options may be
exercised, on a cumulative basis, as to 33 1/3% thereof per year commencing on
the date of grant. The Employment Agreement also provides for competitive
restrictions on Mr. Grahn's business activities, absent the Company's prior
written approval, for a period of two years after the termination or expiration
of the Employment Agreement.
On June 25, 1992, the Company entered into an employment agreement (the
"Wernick Employment Agreement") with Dr. Justin Wernick, Executive Vice
President of the Company, commencing as of July 1, l992 and continuing for a
two year period, with automatic renewal for additional one year terms unless
sooner terminated in accordance with the Wernick Employment Agreement. The
Wernick Employment Agreement provides for Dr. Wernick to receive an annual base
salary of $139,000, subject to adjustment as determined by the Board of
Directors of the Company, plus a discretionary annual bonus up to $10,000 based
upon performance, as determined by the Board of Directors and President of the
Company. The Wernick Employment Agreement also provides for competitive
restrictions on Dr. Wernick's business activities, absent the Company's prior
written approval, for a period of two years after the termination or expiration
of the Wernick Employment Agreement.
39
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth, as of May 10, l996, the shares of Common
Stock owned beneficially and of record (unless otherwise indicated) by each
person owning more than five percent (5%) of the outstanding shares, each
director of the Company, each named executive officer of the Company and all
directors and officers of the Company as a group.
Number of
Shares
Name (and address of 5% Holders) Owned Percent
- - -------------------------------- ---------- -------
Kenneth Granat 524,953(1) 19.8%
155 Pfingsten, Suite 360
Deerfield, Illinois 60015
Dr. Justin Wernick 293,578 11.4%
450 Commack Road
Deer Park, New York ll729
Donald Cecil 244,153 9.5%
lll4 Avenue of the Americas
New York, New York l0036
Gary L. Grahn 111,000(2) 4.2%
Dr. Irwin A. Horowitz 15,000(3) (5)
Daniel J. Feld 1,000 (5)
All Directors and Officers
as a Group (7 persons) 955,531(4) 35.1%
(1) Includes 65,000 shares issuable under outstanding stock options and 429,953
held by Trigran Investments LP. Mr. Granat is a Director and Vice
President of the general partner. An additional 30,000 shares are owned by
the Granat Family Limited Partnership of which Mr. Granat is a general
partner.
(2) Includes 50,000 shares issuable under outstanding stock options.
(3) Shares are issuable under outstanding stock options.
(4) Includes an aggregate of 140,000 shares issuable under outstanding stock
options.
(5) Less than 1%.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
40
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
a) 1. FINANCIAL STATEMENTS
The following consolidated financial statements are filed as part of
this Form l0-K:
Independent Auditors' Report
Consolidated Financial Statements:
Consolidated Balance Sheets as of February 29, l996 and
February 28, l995
Consolidated Statements of Operations for the years ended
February 29, l996, February 28, l995 and February 28, 1994
Consolidated Statements of Stockholders' Equity for the years
ended February 29, l996, February 28, l995 and February 28, l994
Consolidated Statements of Cash Flows for the years ended
February 29, l996, February 28, l995 and February 28, l994
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
The following Financial Statement Schedule is filed as part of this
Form 10-K :
Schedule II - Valuation and Qualifying Accounts for the years
ended February 29, l996, February 28, l995 and February 28, l994
All other schedules have been omitted because they are not applicable,
not required or the information is disclosed in the consolidated
financial statements, including the notes thereto.
3. EXHIBITS
Number Document
------ --------
(3) (a) Copy of Restated Certificate of Incorporation and amendments
thereto. (l)(4)
(b) Copy of Bylaws, as amended through July 2, 1987. (3)
(4) (a) Specimen of Common Stock Certificate. (1)
(b) Copy of l983 Stock Option Plan, as amended through
January l3, l987. (3)
(c) Copy of 1992 Stock Option Plan. (7)
(10) (a) Copy of Agreements, dated February 23, l993, relating to the
Company's 75% ownership interest in Langer Orthotic
Laboratory (U.K.) Limited. (7)
(b) Copy of The Langer Biomechanics Group Retirement Plan,
restated as of July 30, l979. (1)
41
<PAGE>
(c) Copy of Leases related to the Company's Deer Park
facilities. (7)
(d) Copy of Agreement, dated July 8, l986, between BioResearch
Ithaca, Inc. and the Company relating to the licensing of
the Pediatric Counter Rotation System. (2)
(e) Copy of Leases relating to the Company's Brea, California
facilities. (5)
(f) Copy of Agreement, dated March 26, l992 and effective as of
March l, l992, relating to the Company's 401(k) Tax Deferred
Savings Plan. (5)
(g) Copy of Employment Agreement, dated as of June 25, l992,
between the Company and Dr. Justin Wernick (6).
(h) Copy of Employment Agreement, dated December 13, 1994,
between the Company and Gary L. Grahn (8).
(i) Copy of letter agreement, dated January 27, 1995, between
the Company and Tekscan, Incorporated.
(22) List of subsidiaries (4)
(24) Consent of Independent Auditors
(l) Incorporated by reference to the Company's Registration
Statement on Form S-l (No. 2-87l83), which became effective
with the Securities and Exchange Commission on January l7,
l984.
(2) Incorporated by reference to the Company's Form l0-K for the
fiscal year ended July 3l, l986.
(3) Incorporated by reference to Post-Effective Amendment No. l
to the Company's Registration Statement on Form S-8.
(4) Incorporated by reference to the Company's Form l0-K for the
fiscal year ended February 28, l989.
(5) Incorporated by reference to the Company's Form 10-K for the
fiscal year ended February 29, 1992.
(6) Incorporated by reference to the Company's Form l0-Q for the
quarter ended August 3l, l992.
(7) Incorporated by reference to the Company's Form 10-K for the
fiscal year ended February 28, 1993.
(8) Incorporated by reference to the Company's Form 8-K, the
Date of Report which was January 3, 1995.
(9) Incorporated by reference to the Company's Form 10-K for the
fiscal year ended February 28, 1995.
(b) REPORTS ON FORM 8-K:
None.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section l3 or l5(d) of the Securities
Exchange Act of l934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE LANGER BIOMECHANICS GROUP, INC.
Date: May 20, l996 By: /S/ GARY L. GRAHN
-------------------------------------
Gary L. Grahn, President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 20, l996 By: /S/ DONALD M. CARBONE
-------------------------------------
Donald M. Carbone,
Vice President and
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of l934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: May 20, l996 By: /S/ KENNETH GRANAT
-------------------------------------
Kenneth Granat, Director
Date: May 20, l996 By: /S/ JUSTIN WERNICK
-------------------------------------
Dr. Justin Wernick, Director
Date: May 20, 1996 By: /S/ IRWIN A. HOROWITZ
-------------------------------------
Dr. Irwin A. Horowitz, Director
Date: May 20, 1996 By: /S/ DANIEL J. FELD
-------------------------------------
Daniel J. Feld, Director
43
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No. 33-
89880 of The Langer Biomechanics Group, Inc. on Form S-8 of our report dated May
20, 1996 appearing in this Annual Report on Form 10-K of The Langer Biomechanics
Group, Inc. for the year ended February 29, 1996.
Jericho, New York
May 28, 1996
44
