-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N2trNMjWUnAaG9XXWKIPAqvpPuNJk3P2aST8BWlLozsIQEnwWGHDc2rs5+W3klKP +wuadil6ysUY4Eyo1IRpMw== 0000950134-97-003336.txt : 19970501 0000950134-97-003336.hdr.sgml : 19970501 ACCESSION NUMBER: 0000950134-97-003336 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970430 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ERGOBILT INC CENTRAL INDEX KEY: 0001023874 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FURNITURE & FIXTURES [2590] IRS NUMBER: 752600529 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 333-14205 FILM NUMBER: 97591049 BUSINESS ADDRESS: STREET 1: 5000 QUORUM DRIVE STREET 2: SUITE 147 CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 9722338540 MAIL ADDRESS: STREET 1: 5000 QUORUM DRIVE STREET 2: SUITE 147 CITY: DALLAS STATE: TX ZIP: 75240 10-K405/A 1 AMENDMENT NO. 2 TO FORM 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A2 (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - ---- EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended December 31, 1996 or - ---- TRANSITIONAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the transitional period from ______ to ________ Commission File Number 0-22077 ERGOBILT, INC. ----------------------------------------------------- (Exact name of registrant as specified in its charter) Texas 75-2600529 ------------------------------ -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5000 Quorum Drive, Suite 147, Dallas, Texas 75240 ------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (972) 233-8504 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ---------------------------- None -- Securities registered under Section 12(g) of the Exchange Act: Common Stock ($.01 Par Value) ---------------------------- (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 past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No X ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) 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 March 26, 1997, 6,056,000 shares of ErgoBilt, Inc. Common Stock, $.01 par value, were outstanding, and the aggregate market price of the shares held by nonaffiliates was approximately $14,535,732. (Solely for the purpose of calculating the preceding amount, all directors and officers of the registrant are deemed to be affiliates.) 2 ERGOBILT, INC. TABLE OF CONTENTS FORM 10-K December 31, 1996
PAGE ---- PART I. Item 1. Business 1 Item 2. Description of Property 8 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 9 PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 10 Item 6. Selected Financial Data 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 8. Financial Statements and Supplementary Data 17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 18 PART III. Item 10. Directors and Executive Officers of the Registrant 19 Item 11. Executive Compensation 22 Item 12. Security Ownership of Certain Beneficial Owners and Management 24 Item 13. Certain Relations and Related Transactions 25 PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 27 Index to Financial Statements F-1 Signatures II-1 Index to Exhibits II-3
3 This Annual Report on Form 10-K contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts included in this Form 10-K, including without limitation those under "Market Trends" and "Competition" under Item 1 and "Liquidity and Capital Resources" under Item 7 regarding the Company's financial position and results of operations, are forward looking statements. Such statements are subject to certain risks and uncertainties, such as changes in prices or demand for the Company's products as a result of competitive actions or economic factors, changes in the cost of raw materials, changes in operating costs resulting from new technologies or inflation and the Company's ability to continue to have access to capital markets and commercial bank financing on favorable terms. Should one or more of these risk or uncertainties, among others as set forth in this Form 10-K, materialize, actual results may vary materially from those estimated, anticipated or projected. Although the Company believes that the expectations reflected by such forward-looking statements are reasonable based on information currently available to the Company, no assurance can be given that such expectation will prove to have been correct. Cautionary statements identifying important factors that could cause actual results to differ materially from the Company's expectations are set forth in this Form 10-K, including without limitation in conjunction with the forward- looking statements included in this Form 10-K that are referred to above. All forward-looking statements included in this Form 10-K and all subsequent oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. PART I ITEM 1. BUSINESS. GENERAL The Company (for purposes of this discussion, the Company includes the combined operations of ErgoBilt, Inc. and BodyBilt Seating, Inc.) is a developer, manufacturer and marketer of customized, high-end ergonomic products that re-engineer the workplace and the home office by scientifically minimizing the physical stress imposed upon the human body. Its current product line primarily consists of four series of premium-priced, ergonomic office chairs, marketed under the BodyBilt(R) tradename, which can be customized through proprietary modular designs to meet the needs of each customer. In February and March of 1997 the Company issued 1,800,000 shares of its common stock in its initial public offering for net cash proceeds of approximately $10.7 million and acquired BodyBilt Seating, Inc. ("BodyBilt"), which has manufactured ergonomic office chairs since 1988, for $17.6 million in cash and stock. This acquisition was effected through a merger (the "Merger") of BodyBilt into a subsidiary of the Company and was accounted for as a purchase. Prior to these events the Company was engaged in providing advertising and marketing services to BodyBilt. 1 4 BodyBilt(R) chairs are based on NASA research conducted during its SkyLab missions that identified the least stressful body position for astronauts during extended missions in space. BodyBilt(R) chairs have a 10-Point Posture Control -- system that allows each individual user to assume a posture similar to the stress-free posture of astronauts in space. The Company is also the licensee of certain hardware and software for voice-to-text transcription and data capture which are sold under the name "IMPACTwriter". This technology significantly reduces the number of keystrokes needed for transcription. MARKET TRENDS. The Company believes that certain trends in the work environment have expanded the market opportunity for ergonomic office products. First, increased reliance on the personal computer has resulted in more workers spending more time in a constantly seated position. A result has been a significant increase in the number of work-related employee injury claims and lost employee time from (i) back and upper extremity injuries and (ii) repetitive stress injuries or "RSI," including carpal tunnel syndrome. Second, OSHA, has required employers to provide safe work environments, which may include the acquisition of ergonomic office products. As a result, the Company believes that employers are seeking ways to alleviate injuries related to body stress in the workplace. Third, the emergence of the corporate "telecommuter" has produced significant growth in the number of home offices, now estimated at 41.1 million in the United States alone. PRODUCTS. In the mid-1970s, NASA collected detailed anthropometric data during successive SkyLab missions, including in-depth studies on posture. According to data published in NASA's Anthropometric Source Book, NASA discovered that when the body is placed in the weightless, or zero-gravity environment of space, it assumes a specific posture that is substantially different from a traditional upright or seated posture. The body assumes a trunk-to-thigh angle of 128 degrees, placing the musculoskeletal system in its most relaxed state. This discovery led to the design of the BodyBilt(R) chair with the 10-Point Posture Control -- system. This system allows each individual user to emulate a similar relaxed, stress-free posture while at work, providing a high degree of personal comfort and helping to alleviate problems associated with back and repetitive stress injuries. Corporate comparative tests based on comfort conducted by the Safety Department of Lockheed Austin Division ("LAD") and the Austin, Texas Service Center of the Internal Revenue Service ("IRS-Austin") have documented the effectiveness of the BodyBilt(R) chair in alleviating worker discomfort and increasing productivity. In its 1991 study, LAD concluded that the use of ergonomic equipment (chairs and workstations) resulted in a 12% increase in productivity and improved employee morale. The LAD study noted that the highest ranked piece of equipment for improving comfort and job performance was the ergonomic chair. This study confirmed the findings of an earlier study conducted by the IRS-Austin that demonstrated an 8% increase in productivity from using an ergonomic chair alone. The ergonomic chairs used in both studies were BodyBilt(R) chairs. BodyBilt(R) chairs' contoured seats are made with multi-densities of foam strategically placed to distribute the user's body weight over a greater surface area. Additionally, the angle between the back rest and the seat structure can be adjusted to approximate the posture that the 2 5 body assumes naturally in the gravity-free environment of space. Five different seat designs provide additional comfort for customers of various sizes and shapes. The back rests also contain multi-densities of strategically placed foam and are shaped to provide maximum support in the lumbar area. The personal Air Lumbar -- pump inflates the lumbar area, allowing the back rest to conform even more closely to the unique curvature of each person's back. The eight different arms available with all BodyBilt(R) chairs are designed for different workplace tasks and offer customers more choices to reduce neck and shoulder strain. Available armrests include the Linear Tracking Arm -- and Pivot Arm -- for specialized applications, including medical, micro-surgical and desk-top needs. The 3-Way Arm mechanism allows for proper arm support which can help the user avoid repetitive stress injuries. The Company manufactures BodyBilt(R) chairs designed for non-managerial task workers (J Task Series), managerial task workers (J-Manager Series), managers and executives (K Series) and "Big & Tall" workers (S Series). The S Series chairs feature a reinforced seat which is 23.5% larger than the average seat. These chairs are capable of supporting persons weighing up to 350 pounds. The Company's collection of BodyBilt(R) chairs meets and often exceeds the current ergonomic standards in seating design, from American National Standards Institute -- Human Factors Society 100-88 to those proposed by OSHA. The modular design of the BodyBilt(R) chairs allows each customer to create a custom chair, selecting from more than 1,600 possible combinations of arms, backrests, headrests, seats and bases, in addition to style and fabric choices. The Company has been able to provide this myriad of choices to the customer without maintaining excessive inventory levels as a result of its use of interchangeable parts. The Company generally can deliver a customized BodyBilt(R) chair to the customer in less than four weeks, about one-half the time required by large manufacturers. The chairs require minimal assembly by the customer and are delivered with a computer diskette that provides each customer with a visual explanation of how to adjust the chair for maximum comfort. BodyBilt(R) chairs are warranted against defects in materials or work quality as follows: seven years on the base, the steel structure of the mechanism and the backrest post; five years on the casters, clutch plates, torsion springs, handles, seat and backrest plastic structure, backrest height adjuster, foam, polyurethane arm pads, pneumatic height cylinder, armrest structure and all welds; and two years on the Air Lumbar -- pillow. Although the Company does not have a stated return policy, the Company endeavors to minimize product returns by offering prompt, on-site customer service and repair. BodyBilt(R) chairs' interchangeable components permit easy replacement of worn or defective components. Currently, the Company utilizes its direct sales force, independent sales representatives and dealers to perform on-site service and warranty repairs. Product returns to date have been negligible. CUSTOMERS. The Company had a diversified customer base of over 1,500 accounts during the year ending December 31, 1996. No single customer accounted for more than 10% of the Company's sales for the 12-month period ended December 31, 1996. The Company's largest 3 6 customers include Hewlett Packard, Boeing Commercial Aircraft Company and Texas Instruments, Inc. MARKETING, SALES AND DISTRIBUTION. The Company primarily markets and sells its chairs to corporate ergonomists and health, human services and safety managers in Fortune 1000 companies. The chairs are sold mostly for "special use" applications, where employees have requested a non-standard chair to reduce or alleviate existing back problems or repetitive stress injuries. The sales process usually involves a detailed technical explanation of how the chairs function and documentation of the chairs' effectiveness in alleviating and/or preventing back problems and repetitive stress injuries. This process may also involve a comparative test of several ergonomic chairs conducted by the customer where employees complaining of work-related discomfort are asked to evaluate the chairs on a wide range of factors. Termed "sit-offs" by the trade, these tests provide a practical and useful means of measuring the chair's effectiveness in relieving individual discomfort. The typical BodyBilt(R) chair order is one to three chairs because BodyBilt(R) chairs are purchased for "special-use" purposes. The Company believes that it has an advantage over larger competitors whose culture and structure are not adapted to accommodate the unique approach required to sell "special-use" ergonomic chairs effectively. Historically, the vast majority of the Company's sales have been to corporate customers, but a growing percentage of the Company's sales have been made through retail distribution directly to end users. The Company believes it has achieved a high level of brand identity and consumer awareness not typically found in the office furniture industry. BodyBilt(R) chairs have received national publicity in newspapers, magazines and television, including the New York Times , Wall Street Journal , People magazine, Entertainment Tonight, The CBS Morning Show and The Tonight Show. The Company also exhibits its products at numerous ergonomic, computer and office furniture industry trade shows. In both 1995 and 1996, the Company spent in excess of $1.0 million on advertising, promotional materials and trade shows. The Company's products are marketed by its direct sales force of 17 persons and 21 independent sales representatives and its sales are channeled through a network of over 550 dealers. Dealers typically purchase the product at a discount from retail and resell the product at a higher price. MANUFACTURING AND ASSEMBLY. The Company normally operates one shift, five days per week, at its manufacturing and assembly facility located in Navasota, Texas. A second shift is added to meet demand in peak periods, generally in the fourth quarter when customers spend the remainder of their annual capital budgets. Approximately 32,000 chairs were manufactured and assembled during for the 12-month period ended December 31, 1996. The Company believes that the maximum capacity of this facility is approximately 100,000 chairs per year and that its future production requirements can therefore be satisfied with routine additional capital investment, which is not expected to be substantial. At its Navasota facility, the Company vacuum-forms seats and backs and cuts and punches holes in various steel supports for the back rests, front wings, arms-capable brackets and 4 7 vertical/horizontal braces. The Company then assembles the chairs and applies coverings. The Company manufactures BodyBilt(R) chairs primarily to meet specific customer orders. A significant portion of finished chairs are shipped within 24 hours after the manufacturing process is complete. The Company's manufacturing goals are to: (i) strive to improve quality; (ii) seek the best values in purchasing; (iii) uphold stringent zero defect quality controls; and (iv) deliver orders promptly. SUPPLIERS. The Company uses a variety of materials in its manufacturing, including plastic, foam, steel and various coverings. Certain components of BodyBilt(R) chairs, principally the base mechanism, are made by other manufacturers to the Company's specifications. The Company is dependent upon its suppliers for timely delivery and product quality. While the Company's strategy is to maintain multiple sources of supply, the Company's largest supplier, Leggett & Platt, Inc., is currently the only source of a key component for BodyBilt(R) chairs. While the Company has not had any adverse experience with this supplier, the Company does not have binding supply contract with Leggett & Platt, Inc. Until alternative supply sources are identified, the Company could be subject to pricing risks, delivery delays and quality control problems, which could have a material adverse effect on its results of operations. PATENTS AND TRADEMARKS. The Company has applied to register the "ErgoBilt" trademark and has registered "BodyBilt" in the United States. The Company believes that protection of this trademark is important because of customer association of the trademark with BodyBilt(R) chairs. The Company also has two patents pending which relate to its current arm design and one patent pending which relates to its seat design. The Company's success and its ability to compete are dependent in part upon its proprietary technology. While the Company relies on patent, trademark, trade secret and copyright laws to protect its technology, the Company believes that factors such as the technological and creative skills of its personnel, new product developments, frequent product enhancements, name recognition and reliable product maintenance are more essential to establishing and maintaining a technology leadership position. There can be no assurance that others will not develop technologies that are similar or superior to the Company's technology. The seat design used in certain BodyBilt(R) chairs, which accounted for sales of approximately $1.2 million and $1.8 million for the years ended December 31, 1995 and 1996, respectively, is derived from a design patented by Dr. Jerome Congleton (the "Congleton Patent"). Dr. Congleton granted a license to manufacture seats using the Congleton Patent to both BodyBilt and Ergonomic Chairs, Inc., predecessor in interest to Neutral Posture Ergonomics, Inc. ("NPE"). Under the terms of this license agreement and related agreements, if more than 50% of the outstanding capital stock of BodyBilt is transferred, its license to manufacture chairs under the Congleton Patent will terminate. Accordingly, as a result of the Merger, the Company no longer holds a license of the Congleton Patent. However, an agreement executed in connection with a 1991 settlement of litigation between BodyBilt, NPE and Dr. Congleton provides that a successor to BodyBilt has the right to manufacture, market, distribute and sell commercial, industrial and laboratory chairs using the Congleton Patent, although such successor may not advertise its use of the Congleton Patent. Recently, the Company and its counsel received correspondence from NPE 5 8 and Dr. Congleton asserting that a license is required for the Company to continue to manufacture seats using the Congleton patent. However, based upon the advice of counsel, the Company believes that under the 1991 settlement, no such license is necessary. Accordingly, the Company believes that termination of its license of the Congleton Patent upon consummation of the Merger will have no material impact on the Company's business. NPE is owned and controlled in part by Drew Congleton's mother and sister. Dr. Congleton is the father of Drew Congleton, and Drew is a director of the Company and is an officer of BodyBilt. Dr. Congleton is a consultant to NPE and has no association with the Company. LICENSE. On February 18, 1997, BodyBilt, entered into a non-exclusive license agreement with Computer Translation Systems & Support, Inc. (CTSS), Lawrence West Melquiond and Jerold P. Lefler. The terms of the agreement allow BodyBilt the right, among other things, to manufacture, market and sell a state-of-the-art computer and keyboard system which significantly reduces the number of keystrokes (every keystroke on a CTSS keyboard is equal to 4-4.5 strokes on a standard keyboard) needed for direct voice-to-text transcription and data capture services. CTSS products are sold under the name "IMPACTwriter". CTSS has assigned certain trademarks to BodyBilt. The input speeds of the IMPACTwriter are three to five times faster than a traditional typist using a standard keyboard. This increased productivity translates into lower expenses for the employer, and the ergonomic benefit of reduced keystrokes should help decrease the instances of repetitive stress injuries. The ergonomic benefits offered by the IMPACTwriter is an excellent fit with ErgoBilt's overall strategy for growth. The Company paid $19,000 upon execution of the license agreement and will pay a 5% royalty on gross revenue received and collected from the sales of the Impactwriter. The Company has agreed to use its best efforts to sell at least 250 units within 60 days after the signing of this agreement. The license granted is perpetual although it can be terminated by mutual written consent of the licensors and the licensees. COMPETITION. The Company faces significant competition in the office furniture market. BodyBilt(R) chairs compete on the basis of quality, health benefits, comfort, service, price, design and durability. Existing and future competitors within the office furniture industry, including Herman Miller, Inc., Steelcase Design Partnership and Haworth Group, Inc., offer or will offer ergonomic products. Many of these competitors have much greater financial and other resources, and offer a broader product line, than the Company. By targeting its marketing efforts to corporate ergonomists and health, human services and safety managers rather than traditional facilities or purchasing managers, the Company has been able to establish a market niche in which the Company believes it is difficult for large office furniture producers to compete effectively. There is also competition from numerous smaller ergonomic furniture companies. The Company believes, however, that smaller competitors are often constrained by a lack of capital, access to distribution channels, manufacturing capabilities and/or management expertise. 6 9 The Company believes that the following aspects of its marketing, sales, distribution and customer service are its competitive strengths: (i) the modular design and interchangeable components of BodyBilt(R) chairs permit customization to each worker's specifications, and the chairs can be adjusted to accommodate changing individual needs; (ii) manufacturing, sales and customer service are equipped to handle small orders, the traditional mainstay of the ergonomic business; (iii) orders generally are processed, manufactured and delivered in four weeks, approximately half the time normally required by large companies; and (iv) using interchangeable components facilitates on-site service and repair. GOVERNMENT REGULATION. The Company's operations must meet federal, state and local regulatory standards in the areas of safety, health and environmental pollution controls. Historically, those standards have not had any material adverse effect on the Company's sales or operations. The Company believes that its Navasota facility is in compliance in all material respects with applicable federal, state and local laws and regulations relating to safety, health and the environment. The Company cannot at this time estimate the impact of any new standards which may be applicable to the Company's operations or the costs of compliance with such standards. RECENT DEVELOPMENTS. The Company has entered into a non-binding letter of intent to purchase certain intellectual property from Metamorphosis Design & Development, Inc. ("Metamorphosis"), a company that owns the rights to certain design patents, including patents relating to an ergonomic workcenter, and an assignment of licensing fees relating to this workcenter of approximately $15,000 per month. The Company anticipates that this intellectual property will enable the Company to broaden its product line. The Company will not acquire any manufacturing facilities, employees or other business assets from Metamorphosis. If this purchase is consummated, the Company would pay Metamorphosis up to $500,000 in cash and issue warrants to purchase 150,000 shares of Common Stock exercisable at the closing price on the date of the acquisition. The Company has agreed to pay Metamorphosis additional cash and/or securities aggregating up to $15 million if after-tax earnings derived from the acquired intellectual property meet certain targets over a three-year period commencing on the closing date and/or certain revenue targets are met and certain other events occur within the first five years immediately following the closing date. The acquisition of this intellectual property is subject to the completion of satisfactory due diligence and other conditions. There can be no assurance that a definitive agreement will be executed or that this acquisition will be consummated. BACKLOG The company does not have a significant backlog of orders and does not consider backlog to be material to its business. 7 10 EXECUTIVE OFFICERS
Name Age Position ---- --- -------- Gerard Smith 54 President and Chief Executive Officer (1) P. Michael Sullivan 43 Senior Vice President and Chief Financial Officer(2)
- ------------------------------------ (1) Position held since August 15, 1996 (2) Position held since January 31, 1997 The executive officers of the Company are elected annually by the Board of Directors and serve at the discretion of the Board of Directors until their successors are elected and qualified or their earlier resignation or removal. EMPLOYEES As of December 31, 1996 the Company had approximately 159 full-time employees. None of the Company's employees is subject to a collective bargaining agreement, and the Company has not experienced any work stoppages. The Company believes that its relations with its employees are good. ITEM 2. DESCRIPTION OF PROPERTY. The Company's manufacturing and assembly operations are conducted in its 65,000 square-foot Navasota facility. The Company leases approximately 2,000 square feet in Dallas for its principal executive offices. The Company also leases a showroom in Denver, a showroom in the Chicago Merchandise Mart and a small sales office in Dallas. The Company believes that suitable additional or alternative space will be available to accommodate the expansion of corporate operations and additional sales offices. ITEM 3. LEGAL PROCEEDINGS. The Company is involved from time to time in various legal proceedings and claims incident to the normal conduct of its business. The Company believes that such legal proceedings and claims, individually and in the aggregate, are not likely to have a material adverse effect on the Company's results of operations. 8 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Written Consents of Shareholders in Lieu of Meetings dated August 1996 to change the par value of the Company's common stock. A meeting of the shareholders of the Company was held on November 6, 1996. The items approved were i) the amendment and restatement of the Corporation's Bylaws originally adopted on July 6, 1996, in connection with the Corporation's initial public offering and ii) ratification and approval of the Corporation's 1996 Incentive Stock Option Plan. The shareholders of the Company approved both matters by unanimous vote. 9 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock has traded on the NASDAQ National Market under the symbol "ERGB" since January 31, 1997. As of March 28, 1997, there were approximately 41 holders of record of the Company's Common Stock. The Company intends to retain all earnings to provide funds for its operations and expansion, and therefore does not anticipate paying cash dividends or making any other distributions on its shares of Common Stock in the foreseeable future. The Company's future dividend policy will be determined by its Board of Directors based on various factors, including the Company's results of operations, financial condition, business opportunities, capital requirements, credit restrictions and such other factors as the Board of Directors may deem relevant. 10 13 ITEM 6. SELECTED FINANCIAL DATA. The selected financial data presented below are derived from the financial statements of BodyBilt and should be read in conjunction with and are qualified by reference to BodyBilt's financial statements and the notes thereto included elsewhere in this Form 10-K.
Year Ended December 31, --------------------------------------------------- 1992 1993 1994 1995 1996 (in thousands) INCOME STATEMENT DATA: Sales $4,448 $6,535 $9,189 $13,672 $17,578 Cost of sales 2,053 3,237 4,789 7,218 9,326 ------- ------ ------ ------- ------- Gross profit 2,395 3,298 4,400 6,454 8,252 Selling, general and administrative expenses 1,353 2,164 3,266 4,555 5,676 ------- ------ ------ ------- ------- Operating income 1,042 1,134 1,134 1,899 2,576 Other expense, net 14 24 24 20 142 ------- ------ ------ ------- ------- Income before income taxes 1,028 1,110 1,110 1,879 2,434 Income tax expense 46 50 50 85 57 ------- ------ ------ ------- ------- Net income $ 982 $1,060 $1,060 $ 1,794 $ 2,377 ======= ====== ====== ======= ======= BALANCE SHEET DATA: Working capital $891 $1,742 $2,137 $2,905 $3,693 Total assets 1,319 2,687 3,606 5,812 7,487 Long-term debt, including current portion 75 633 877 1,385 2,090 Shareholders' equity 1,004 1,481 2,208 3,402 4,440
SELECTED PRO FORMA FINANCIAL DATA The following unaudited pro forma combined condensed statement of income for the year ended December 31, 1996 adjusts the historical results of BodyBilt (considered the predecessor to the Company) to give effect to (i) the Merger as if it had been consummated at January 1, 1996; (ii) the amortization of approximately $13.2 million of goodwill that was created as a result of the acquisition of BodyBilt by the Company pursuant to purchase accounting; (iii) the income tax effect resulting from the conversion of BodyBilt from an S corporation to a C corporation; and (iv) eliminate transactions between ErgoBilt and BodyBilt. The computation of pro forma shares outstanding is based on 4,256,000 weighted average shares of Common Stock outstanding and 1,278,000 shares issued at an initial public offering price of $7.00 per share (after deducting the underwriting discount and the Representatives' non-accountable expense allowance) to (i) fund 11 14 payments of $7.2 million to BodyBilt Shareholders and (ii) repay approximately $850,000 of indebtedness. The computation of pro forma shares outstanding excludes an additional 522,000 shares sold in the offering. The Company believes that a 40-year amortization period is appropriate for goodwill, since BodyBilt is a manufacturer of office furniture that is expected to have value to the Company beyond 40 years. The Merger will be accounted for as a purchase with ErgoBilt as the acquirer. The unaudited pro forma combined condensed statement of income should be read in conjunction with the historical financial statements of the Company and BodyBilt and the notes thereto included elsewhere in this Form 10-K and are not necessarily indicative of the results of operations that might have occurred if the Merger had not taken place on the dates indicated or of the Company's results of operations for any future period. Pro Forma Combined Condensed Statement of Income for the Year Ended December 31, 1996
Pro Forma BodyBilt ErgoBilt Adjustments Pro Forma -------- -------- ----------- --------- (in thousands, except per share data) Sales $17,578 $ 373 $(338) $17,613 Cost of sales 9,326 154 - 9,480 ------- ------ ------ -------- Gross profit 8,252 219 (338) 8,133 Selling, general and administrative expenses 5,676 677 (9) 6,344 ------- ------ ------ -------- Operating income 2,576 (458) (329) 1,789 Interest expense and other, net 142 14 - 156 ------- ------ ------ -------- Income before income taxes 2,434 (472) (329) 1,633 Income tax expense (benefit) 57 (158) 623 724 ------- ------ ------ -------- Net income $ 2,377 $(314) $(952) $ 909 ======= ====== ======= ======== Pro forma earnings per share $ .16 Pro forma shares outstanding 5,534
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The operations of ErgoBilt are discussed under the heading "ErgoBilt" below. The remainder of Management's Discussion and Analysis of Financial Condition and Results of Operations relates to the operations of BodyBilt. Following the Merger, BodyBilt became the operating company, and ErgoBilt became the parent company. ErgoBilt's assets and results of operations are not significant to the combined operations on a going-forward basis. The following discussion and analysis should be read in conjunction with the information set forth under "Selected Financial Data" and the financial statements of ErgoBilt and BodyBilt and the accompanying notes thereto included elsewhere in this Form 10-K. 12 15 ERGOBILT Since its incorporation in 1995, ErgoBilt's operations have consisted primarily of providing advertising and marketing activities to BodyBilt, conducting activities necessary to complete the Merger and the sale of the shares of Common Stock offered on January 31, 1997, and conducting other activities necessary to plan for the operations and activities of ErgoBilt and BodyBilt subsequent to the Merger. Operating income for the period from June 12, 1995 to December 31, 1995 was $57,000. For the year ended December 31, 1996, ErgoBilt had a net loss from operations of $314,000. The loss was attributable to increased compensation related to management employed in contemplation of the Merger, expenses accrued for consulting services related to the Merger and the offering rendered by a company wholly- owned by Mark McMillan, the President of BodyBilt, and other costs of the Merger and offering. BODYBILT GENERAL. BodyBilt generates revenue through sales of its products to corporate customers, dealers and retailers. The majority of BodyBilt's sales are generated by either BodyBilt's direct sales force or by independent sales representatives, who are paid a commission for each unit sold. Typically, BodyBilt's sales are directed through a network of over 550 dealers who acquire the products at a discount from retail and then resell the products to the ultimate customer. In certain instances, BodyBilt drop-ships products directly to the ultimate customer. BodyBilt's sales increased at a compound annual growth rate of 41.0% from 1992 through 1996 and increased 28.6% for the year ended December 31, 1996 as compared to the year ended December 31, 1995. BodyBilt believes that its growth has been driven by increasing market acceptance of ergonomics and its success in (i) providing superior quality products and service; (ii) expanding its direct sales force; (iii) upgrading the quality of its independent sales representative firms; and (iv) educating consumers about the benefits of ergonomics and the solutions provided by BodyBilt's products. BodyBilt did not increase the suggested retail prices of its chairs during this period. From 1992 to December 31, 1996, BodyBilt expanded its direct sales force from four to 17 individuals while during the same period the number of independent sales representatives decreased from 22 to 21. There can be no assurance that BodyBilt's growth will continue at the historic rate in the future. Contemporaneously with the closing of the Company's initial public offering, the Company completed the Merger. The historical results of operations through December 31, 1996, do not include the impact of the Merger. The total consideration paid in connection with the Merger was $17.6 million, consisting of cash, Common Stock and Series A Preferred Stock. The transaction was treated as a purchase for accounting purposes and resulted in approximately $13.2 million of goodwill, which will be amortized over a 40-year period. The amortization of goodwill associated with the Merger will total approximately $329,000 annually and will not be deductible for income tax purposes. 13 16 RESULTS OF OPERATIONS. The following table sets forth certain historical financial data as a percentage of sales for the periods indicated:
Year Ended December 31, ---------------------------------- 1994 1995 1996 ----- ----- ----- Sales 100.0% 100.0% 100.0% Cost of sales 52.2 52.8 53.1 ----- ----- ----- Gross profit 47.8 47.2 46.9 Selling, general and administrative expenses 35.5 33.3 32.2 ----- ----- ----- Operating income 12.3% 13.9% 14.7%
Comparison of Years Ended December 31, 1995, and 1996. Sales increased $3.9 million, or 28.6%, from $13.7 million for the year ended December 31, 1995, to $17.6 million for the year ended December 31, 1996. Units sold increased by 6,177, or 24.0%, from 25,759 for the year ended December 31, 1995, to 31,936 for the year ended December 31, 1996. This sales increase was attributable to a shift in the mix of products sold to higher-end, more technologically-equipped chairs, the addition of direct sales personnel, increased advertising and marketing expenditures and increased acceptance of the Company's products. Gross profit increased $1.8 million or 27.9%, from $6.5 million in the year ended December 31, 1995 to $8.3 million for the year ended December 31, 1996. As a percentage of sales, gross profit declined from 47.2% in the year ended December 31, 1995 to 46.9% in the year ended December 31, 1996. This decrease in the percentage is a result of expenses related to placing additional demonstration chairs in the field and nominal increase in large chair orders which carried a lower margin. Selling, general and administrative expenses increased by $1.1 million, or 24.6%, from $4.6 million for the year ended December 31, 1995, to $5.7 million for the year ended December 31, 1996. As a percentage of sales, selling, general and administrative expense decreased from 33.3% in the year ended December 31, 1995, to 32.2% in the year ended December 31, 1996. This dollar increase was attributable to increases in compensation and commissions due to the addition of direct sales and customer support personnel, increases in advertising and promotional expenses and additional depreciation expense. Operating income increased by $677,000, or 35.7%, from $1.9 million for the year ended December 31, 1995, to $2.6 million for the year ended December 31, 1996. Comparison of Years Ended December 31, 1994, and 1995. Sales increased $4.5 million, or 48.8%, from $9.2 million for the year ended December 31, 1994, to $13.7 million for the year ended December 31, 1995. Units sold increased by 6,813, or 36.0%, from 18,946 for the year ended December 31, 1994, to 25,759 for the year ended December 31, 1995. This increase was the result of the addition of direct sales personnel, an increase in the number of corporate accounts and increased acceptance of the Company's products. 14 17 Gross profit increased $2,054,000 or 46.7%, from $4,400,000 in the year ended December 31, 1994 to $6,454,000 for the year ended December 31, 1995. As a percentage of sales, gross profit declined from 47.8% in the year ended December 31, 1994 to 47.2% in the year ended December 31, 1995. The decline in gross profit as a percentage in sales was attributable to enhancements in product quality, resulting in an increase in the cost of certain components. In addition, sales of lower-margin chairs to certain corporate and government accounts increased as a percentage of total sales. The effect of these two factors on the overall gross margin was partially offset by greater plant utilization. Selling, general and administrative expenses increased by $1.3 million, or 39.5%, from $3.3 million for the year ended December 31, 1994, to $4.6 million for the year ended December 31, 1995. As a percentage of sales, selling, general and administrative expenses decreased from 35.5% in the year ended December 31, 1994, to 33.3% in the year ended December 31, 1995. This dollar increase was attributable to increases in compensation and commissions as a result of the addition of direct sales and sales support personnel and increased advertising, literature and other promotional expenses. Operating income increased by $765,000, or 67.4%, from $1.1 million for the year ended December 31, 1994, to $1.9 million for the year ended December 31, 1995. LIQUIDITY AND CAPITAL RESOURCES Cash Flow. Historically, BodyBilt has satisfied its cash requirements through profitable operations and borrowings under a bank line of credit facility. Operating activities provided net cash totaling $734,000, $1.1 million and $1.6 million for 1994, 1995 and 1996, respectively. The primary use of cash in operating activities has been to fund increases in accounts receivable and inventories resulting from BodyBilt's rapid growth. Investing activities used cash totaling $629,000, $918,000 and $951,000 during 1994, 1995 and 1996, respectively. Substantially all of the cash used for investing activities during these periods related to capital expenditures. BodyBilt anticipates continuing to make capital expenditures in connection with plant, equipment, software and computer equipment improvements. Financing activities used cash totaling $89,000, $80,000 and $719,000, respectively, during 1994, 1995 and 1996. The primary uses of cash for financing activities were distributions to the BodyBilt Shareholders of $333,000, $600,000 and $1.3 million in 1994, 1995 and 1996, respectively. The distributions in 1994 and 1995 were made primarily to provide the BodyBilt Shareholders with cash to pay individual tax liabilities related to the net income of BodyBilt attributed to them as shareholders of an S corporation, and in 1996 were made based on projected earnings of BodyBilt for the year ended 1996. The primary source of cash for the financing activities during each period was borrowings under BodyBilt's line of credit. 15 18 Asset Management. BodyBilt typically sells its products and services on net 30 day terms and seeks to minimize its credit risk by performing credit checks and conducting its own collection efforts. BodyBilt had trade accounts receivable of $1.7 million, $2.5 million and $3.0 million at December 31, 1994, 1995 and 1996 respectively. The number of days' sales outstanding in trade accounts receivable were 66 days, 66 days and 63 days respectively, for the same periods. Bad debt expense as a percentage of total revenue for the same periods was negligible. BodyBilt maintains no allowance for doubtful accounts. BodyBilt attempts to keep its raw materials inventory low to minimize the risk of obsolescence. BodyBilt also attempts to maintain the minimum level of such inventory necessary to meet its near term manufacturing requirements by relying on just-in-time delivery of products from its principal suppliers. Inventory turnover was 4.9 times, 6.0 times and 5.9 times for 1994, 1995 and 1996 respectively. Credit Facilities. BodyBilt maintains a revolving line of credit facility with The First National Bank of Bryan (the "Line of Credit"). Borrowings under the Line of Credit are utilized primarily for working capital to finance inventory and receivables and for distributions to the BodyBilt Shareholders. Borrowings under the Line of Credit bear interest at a bank's prime rate per annum. The Line of Credit is secured by a first lien on the accounts receivable and inventory of BodyBilt and the proceeds of a life insurance policy insuring the life of BodyBilt's President, Mark McMillan. The Line of Credit is personally guaranteed by Mark McMillan. At December 31, 1996, the interest rate on the Line of Credit was 8.25% and total borrowings under the Line of Credit were $1,350,000. The remaining available credit under the Line of Credit, subject to borrowing base limitations which are generally computed as a percentage of various classes of eligible accounts receivable and qualifying inventory, was $650,000 at December 31, 1996. In May 1994, BodyBilt purchased a building and land that was formerly a large retail facility, in Navasota, Texas. During the summer of 1994, BodyBilt moved its manufacturing and administrative operations from leased facilities to the Navasota facility. Since June 1994, this facility has undergone significant renovations, improvements and equipment additions. The merger and improvement of this facility was financed through an amortizing bank loan from The First National Bank of Bryan in the principal amount of $571,000, currently bearing interest at the bank's prime rate plus 0.75% per annum and maturing in the year 2000. At December 31, 1996, the interest rate on this loan was 9.50% and the outstanding principal balance was $438,278. The loan is secured by a lien on the facility and by a life insurance policy insuring the life of Mark McMillan. This loan is personally guaranteed by Mark McMillan. At December 31, 1996, BodyBilt also had other term note obligations to the First National Bank of Bryan aggregating approximately $226,000 the proceeds of which were used to fund working capital and equipment and vehicle purchases. On September 6, 1996, ErgoBilt obtained a $500,000 loan from Summit Partners Management Co. ("Summit") to fund the Merger and offering expenses. The convertible note evidencing this loan (the "Convertible Note") was repaid in part from the proceeds of the Company's initial public offering and by conversion into shares of Common Stock at the initial 16 19 offering price per share (one-half of the principal balance of the loan). This loan bears interest at 8.0% per annum and matures on September 6, 1997. The Convertible Note was secured by a pledge of certain assets of Gerald McMillan. In connection with the issuance of the Convertible Note, Dr. McMillan sold 34,000 shares of Common Stock to Summit, and the Company agreed to issue to Summit at the closing of this offering a warrant to acquire up to 51,000 shares of Common Stock at a price of 120% of the price to public exercisable over a period of four years commencing one year after issuance. The shares of Common Stock sold to Summit and the Common Stock issuable upon exercise of the lender's warrant are subject to certain registration rights. INFLATION. The cost of raw materials and component parts, salaries and manufacturing wages have increased modestly. The increases have not had a significant effect on BodyBilt's results of operations because of substantially increasing sales volumes and relatively stable product prices. NEW ACCOUNTING PRONOUNCEMENTS. Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in the event that facts and circumstances indicate that property and equipment, and intangible or other assets, may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future cash flows associated with the asset is compared to the asset's carrying amount to determine if a write-down to market value was necessary. Adoption of this standard did not have a material effect on the financial position or results of operations of the Company. As of January 1, 1996, SFAS No. 123, "Accounting for Stock-Based Compensation," became effective for the Company. SFAS No. 123 permits, but does not require a fair value-based method of accounting for employee stock option plans which results in compensation expense recognition when stock options are granted. As permitted by SFAS no. 123, the Company will provide pro forma disclosure of net income and earnings per share, as applicable, in the notes to future annual consolidated financial statements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Company's Balance Sheets as of December 31, 1995 and 1996 and the Company's Statements of Income, Stockholders' Equity and Cash Flows for the year ended December 31, 1996 and the period ended December 31, 1995 together with the notes thereto and the report of the Company's independent auditors thereon as well as BodyBilt's Balance Sheets as of December 31, 1995 and 1996 and BodyBilt's Statements of Income, Stockholders' Equity and Cash Flows for the years ended December 31, 1994, 1995 and 1996 together with the notes thereto and the reports of BodyBilt's independent auditors thereon are included as a separate section of this Form 10-K which begins on page F-1. 17 20 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Thompson, Derrig & Slovacek PC was succeeded as BodyBilt's auditors on February 28,1996 by KPMG Peat Marwick LLP. BodyBilt's decision to change auditors was approved by BodyBilt's board of Directors. During BodyBilt's two most recent fiscal years and the interim period preceding the change in auditors, there were no disagreements between BodyBilt and Thompson, Derrig & Slovacek PC on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which, if not resolved to the satisfaction of Thompson, Derrig & Slovacek PC, would have caused it to make reference to the subject matter of the disagreement in connection with its report. Their report on the financial statements did not contain any adverse opinion or disclaimer of opinion nor was it qualified or modified as to uncertainty, audit scope or accounting principles. Subsequent to BodyBilt's change in auditors there have been no disagreements with accountants on accounting and financial disclosure. There have been no changes in or disagreements by ErgoBilt with its accountants on accounting and financial disclosure. 18 21 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Name Age Position ---- --- -------- Gerald McMillan, PhD(1) 45 Chairman of the Board and Director Gerard Smith(1) 54 President and Chief Executive Officer of the Company, President of BodyBilt and Director P. Michael Sullivan 43 Senior Vice President and Chief Financial Officer Drew Congleton(1) 34 Executive Vice President of Sales of BodyBilt and Director Robert E. Faust(2) 57 Director William Brown Glenn, Jr.(1) 43 Director Mark McMillan(1) 41 Director W. Barton Munro(2)(3) 54 Director William Weed(3) 66 Director
- ------------------ (1) Member of the Acquisition Committee (2) Member of the Audit Committee (3) Member of the Compensation Committee Gerald McMillan, PhD, has been Chairman of the Board of Directors of ErgoBilt since its inception on June 12, 1995, and was President from inception to August 15, 1996. Dr. McMillan currently serves as Chairman of the Board of Directors of ErgoBilt pursuant to the terms of that certain Executive Employment Agreement dated October 1, 1996, between ErgoBilt and Dr. McMillan (the "McMillan Employment Agreement"). He was employed as BodyBilt's Director of Marketing from January 1, 1993 to July 31, 1994 and served as a consultant to BodyBilt from August 1, 1994, until the creation of ErgoBilt. He also served as a consultant, directly and indirectly, to BodyBilt during 1991 and 1992. Dr. McMillan taught economics at the University of Dallas Graduate School of Management. He holds a PhD, an MS and a BS in economics from Texas A&M University. Dr. McMillan is the brother of Mark McMillan, a consultant, director and a principal shareholder of the Company. 19 22 Gerard Smith became President and Chief Executive Officer of the Company and a director of ErgoBilt as of August 15, 1996. Mr. Smith became President and Chief Executive Officer of BodyBilt upon completion of the Merger. In August 1994, Mr. Smith formed Smith & Associates, a marketing consulting firm, where he served as President from 1994 to 1996. He also served as Chief Executive Officer of WTA TOUR Players Association, the organization responsible for managing the worldwide women's professional tennis tour, from 1989 to 1994. Mr. Smith previously served as Publisher and Vice Chairman of Newsweek from 1984 to 1989. Mr. Smith was Managing Director of the Los Angeles office of Ogilvy & Mather Advertising from 1978 to 1984. He holds a BA in psychology from Seton Hall University. P. Michael Sullivan became Senior Vice President and Chief Financial Officer of ErgoBilt on February 5, 1997. Mr. Sullivan was Vice President, Chief Financial Officer, Secretary and Treasurer for USDATA Corporation from 1978 until he joined the Company. Mr. Sullivan is a certified public accountant and a member of the Texas Society of Certified Public Accountants. He holds a BS in Finance and Accounting from the University of Texas. Drew Congleton became a director on February 5, 1997. In March of 1997 Mr. Congleton became BodyBilt's Executive Vice President of Sales. Prior to that time, he had served as National Sales Manager of BodyBilt since 1988. He is a member of the Human Factors and Ergonomic Society and represents BodyBilt on the National Science Foundation Industry/University Cooperative Research Center for Ergonomics at Texas A&M University. Mr. Congleton holds a BS in Organizational Communication from the University of Texas. Robert E. Faust became a director of the Company on February 5, 1997. From 1965 to 1996, Mr. Faust served Westinghouse Electric Corporation in various executive and management capacities, including Executive Vice President of Westinghouse Communications, Vice President and Controller of Westinghouse Electric, and Vice President and Controller of Westinghouse Broadcasting. Mr. Faust has served as a director of Duquesne University, Mercy Hospital Foundation, Civic Light Opera of Pittsburgh, and Pittsburgh Hearing, Speech and Deaf Services, Inc., and as Chairman of Information Systems Management Council Manufacturers' Alliance for Productivity and Innovation. He holds a BS and an MBA in Finance from Duquesne University. He is a graduate of the Harvard University Advanced Management Program. William Brown Glenn, Jr. became a director of the on February 5, 1997. Mr. Glenn is principally engaged in private investments. Since 1994, Mr. Glenn has been a Vice President of Air Age Services, Inc., a privately-held commercial aircraft maintenance and modification facility. Mr. Glenn was a Senior Vice President of Eastbridge Capital Inc./Eastbridge Asset Management from 1988 to 1994. Eastbridge is a primary dealer to the Federal Reserve and also provides hedge fund management, proprietary trading and investment banking services. Prior to November 1996, Mr. Glenn was a registered representative of APEX Securities, Inc. Mr. Glenn also has held capital markets and corporate finance positions with Merrill Lynch and Smith Barney, Harris Upham, Co. He holds a BA in Business Administration from the University of North Carolina. Mark McMillan became a director, and a consultant of the Company on February 5, 1997. Mr. McMillan served as President of BodyBilt from 1994 to 1997 and as Vice-President of 20 23 BodyBilt from 1988 to 1994. He holds a BA in Agricultural Economics from Texas A&M University. W. Barton Munro became a director of the Company on February 5, 1997. He has served as a management consultant to BodyBilt for the past two years and has provided tax, legal and financial consulting services to various other clients. Mr. Munro has been Vice President, Smith Dairy Queen, Bryan, Texas, since 1991. Mr. Munro served as a tax partner in the Houston office of Peat, Marwick, Mitchell & Co. from 1972 to 1980 and was a Tax Manager in the Dallas office of Price Waterhouse & Co. from 1963 to 1972. Mr. Munro is a certified public accountant and is a member of the Texas Society of Certified Public Accountants. He holds a BBA and a JD from Southern Methodist University. William Weed became a director of the Company on February 5, 1997. Mr. Weed has been managing partner of Paul Ray Berndtson, a New York executive search firm, since 1987. Prior to that, he was a Director of The Ogilvy Group, Director of Worldwide Accounts and member of the Personnel Committee for Ogilvy & Mather Worldwide and Chairman of Ogilvy & Mather/Europe, all engaged in advertising and marketing. Mr. Weed also serves the American Red Cross of Greater New York as Vice Chairman of the Board and is a member of the Board's executive and nominating committees. He is a trustee emeritus and a former member of the executive committee of the American Academy in Rome, Italy. He holds a BS from Carleton College and an MBA from Harvard University. COMMITTEES OF THE BOARD Audit Committee. The Company's Board of Directors has established an Audit Committee comprised entirely of independent directors. The functions of the Audit Committee are to make recommendations to the Board of Directors regarding the engagement of the Company's independent accountants and to review with management and the independent accountants the Company's financial statements, basic accounting and financial policies and practices, audit scope and competency of accounting personnel. Members of the Audit Committee are appointed annually by the Board of Directors and serve at the discretion of the Board of Directors until their successors are appointed or their earlier resignation or removal. Compensation Committee. The Company's Board of Directors has established a Compensation Committee. The Compensation Committee is responsible for reviewing and making recommendations to the Board of Directors with respect to compensation of executive officers, other compensation matters and awards under the Company's stock option plan. Members of the Compensation Committee are appointed annually by the Board of Directors and serve at the discretion of the Board until their successors are appointed or their earlier resignation or removal. Acquisition Committee. The Board of Directors has established an Acquisition Committee. The Acquisition Committee's function is to evaluate potential acquisitions for the Company and make recommendations to the Board of Directors. Members of the Acquisition Committee are appointed annually by the Board of Directors and serve at the discretion of the Board until their successors are appointed or their earlier resignation or removal. 21 24 ITEM 11. EXECUTIVE COMPENSATION. SUMMARY COMPENSATION TABLE The following table sets forth the compensation paid by the Company to certain of its executive officers for services rendered to the Company in all capacities during each of the last two fiscal years.
ANNUAL COMPENSATION --------------------------------------------------------- NAME AND PRINCIPAL OTHER ANNUAL POSITION YEAR SALARY BONUS COMPENSATION (1) -------------------------------- ---- ----------------- --------------- ---------------- Gerald McMillan 1995 72,377 - - Chairman of the Board and President 1996 86,852 - - Drew Congleton 1995 92,392 30,000 - Executive Vice President and National 1996 80,000 - - Sales Director of BodyBilt and Director Gerard Smith 1996 100,000(2) - - President and Chief Executive Officer and Director
(1) Certain of the Company's executive officers receive personal benefits in addition to salary and bonuses. The aggregate amount of such personal benefits, however, does not exceed the lesser of $50,000 or 10% of the total annual salary and bonus reported for any of the named executive officers. (2) Includes $77,500 for services rendered pursuant to a consulting services agreement entered into with the Company in July of 1996. This agreement terminated upon the closing of the Offering. Companies owed by Gerald McMillan received payments from BodyBilt during 1996. See "Certain Relationships and Related Transactions." EMPLOYMENT AND CONSULTING AGREEMENTS Gerald McMillan. The Company has entered into the McMillan Employment Agreement with Gerald McMillan to serve as Chairman of the Board of Directors of the Company for a term commencing as of October 1, 1996, and continuing for three years from February 5, 1997. Dr. McMillan will receive an annual base salary of $1, be eligible to participate in all Company bonus/ incentive programs and stock option plans and be eligible to receive benefits under all other Company employee benefit plans. The McMillan Employment Agreement contains a non-competition covenant for the term of his employment and for a period of two years thereafter. 22 25 Gerard Smith. ErgoBilt has entered into the Smith Employment Agreement with Gerard Smith to serve as a director and President and Chief Executive Officer of ErgoBilt and BodyBilt, for a term commencing as of August 15, 1996, and continuing for three years after January 31, 1997. Mr. Smith will receive an annual base salary of $125,000 following the closing of the Offering and will be eligible to participate in all Company bonus/incentive programs and stock option plans and to receive benefits under all other Company employee benefit plans. The Smith Employment Agreement also sets forth certain terms under which Mr. Smith is granted registration rights for shares of Common Stock owned by him. Pursuant to the terms of the Smith Employment Agreement, upon Mr. Smith's voluntary termination of employment with the Company, Gerald McMillan has the right to purchase varying amounts of Mr. Smith's shares of Common Stock based upon Mr. Smith's length of service, less that number of shares having a value equal to $500,000, based on the price per share of Common Stock at the Offering. Upon the termination of Mr. Smith's employment with the Company for due cause or the breach of the Smith Employment Agreement by the Company, Dr. McMillan has the right to purchase varying amounts of Mr. Smith's shares of Common Stock, less that number of shares having a value equal to $1,750,000, based on the price per share of Common Stock in the Offering. Upon the occurrence of any triggering event, if Dr. McMillan does not purchase all of the shares he is entitled to purchase, any unpurchased shares may be redeemed by the Company. Mr. Smith has also agreed to a non-competition covenant with ErgoBilt during the term of his employment and for a period of two years thereafter. P. Michael Sullivan. ErgoBilt has entered into the Sullivan Employment Agreement with P. Michael Sullivan to serve as Senior Vice President and Chief Financial Officer of the Company for a three-year term commencing as of January 31, 1997. Mr. Sullivan will receive an annual base salary of $85,000 and be eligible to participate in all Company bonus/incentive programs and stock option plans and to receive benefits under all other Company employee benefit plans. Mr. Sullivan has also agreed to a non-competition covenant with the Company during the term of his employment and for a period of two years thereafter. Drew Congleton. BodyBilt has entered into an Executive Employment Agreement with Drew Congleton, who became a director and principal shareholder of the Company on January 31, 1997, pursuant to which Mr. Congleton serves as Executive Vice President and National Sales Director of BodyBilt for an initial three-year term. The term shall be automatically renewed for successive one year terms until either party gives written notice of termination 60 days prior to the expiration of a then current term. Mr. Congleton will receive an annual base salary of $80,000 and be eligible to participate in all Company bonus/incentive programs and stock option plans and to receive benefits under all other Company employee benefit plans. The Executive Employment Agreement will include a non-competition covenant for the term of his employment and for a period of three years thereafter. Compensation of Directors. Directors who are not also employees of the Company receive $500 per board meeting attended and $200 per board committee meeting attended and are reimbursed for out-of-pocket expenses incurred for attendance at meetings. Under the Company's stock option plan, they will each receive an annual formula grant of nonqualified options to purchase 2,000 shares of Common Stock exercisable at the fair market value on the date of grant. 23 26 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information, as of March 31, 1997, with respect to the beneficial ownership of Common Stock by each current director, each nominee for director, each executive officer included in the Summary Compensation Table, the directors and executive officers as a group and each shareholder known to management to own beneficially more than 5% of the Common Stock. Unless otherwise noted, the persons listed below have sole voting and investment power with respect to such shares.
Name and Address of Number of Shares Percentage Beneficial Owner(1) Beneficially Owned Beneficially Owned ------------------- ------------------ ------------------ Gerald McMillan(2)(4) 2,054,795 33.9% Gerard Smith(3)(4) 664,868 11.0% Drew Congleton 371,429 6.1% Robert E. Faust - 0.0% William Brown Glenn, Jr. - 0.0% Mark McMillan(5) 539,286 8.9% W. Barton Munro - 0.0% Dr. Richard Troutman 539,286 8.9% William Weed - 0.0% All directors and executive officers as a Group (8 persons) 3,630,378 59.9%
(1) The address for Gerald McMillan and Gerard Smith is 5000 Quorum Drive, Suite 147, Dallas, Texas 75240. The address for Drew Congleton is 2815 Manzano Court, College Station, Texas 77845. The address for Mark McMillan is 2506 River Forest, Bryan, Texas 77802. The address for Dr. Richard Troutman is 10225 Collins Avenue, Bal Harbour, Florida 33157. (2) Includes 290,880 shares held by a trust for the benefit of Gerald McMillan's three minor children, as to which Gerald McMillan disclaims beneficial ownership. (3) Includes 24,933 shares held by the Ashleigh Lynch Smith 1996 Irrevocable Trust for which Mr. Smith is trustee and 24,933 shares held by the Alyssa Kay Smith 1996 Irrevocable Trust for which Mr. Smith is trustee. Mr. Smith disclaims beneficial ownership of all shares held by such trusts. (4) The Smith Employment Agreement gives Gerald McMillan and/or the Company the right to purchase varying amounts of the shares of Common Stock beneficially owned by Mr. Smith upon the termination of Mr. Smith's employment with the Company during the three-year term of the Smith Employment Agreement. (5) All of the shares of common stock are held of record by Carter Creek Investments, Ltd., a Texas limited partnership, the general partner of which is River Forest Investments, Inc., a Texas corporation wholly-owned by Mark McMillan. 24 27 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. During 1996 payments $309,510 were made by BodyBilt to companies owned by Dr. Gerald McMillan, the Chairman of the Board and a principal shareholder of the Company, including the Company, for promotional literature and marketing development. Additionally, in 1996 goods and services, were sold by BodyBilt to ErgoBilt for $76,555 in cash and services. Payment in February of 1997 for $229,350 from the net proceeds of the Offering were used to pay certain obligations to Agrivest, Inc., a corporation owned by Mark McMillan ("Agrivest"), for consulting services related to the Merger and this offering. During 1996 BodyBilt also paid Agrivest $103,300 for management services and $5,000, for equipment rental. Additionally, BodyBilt purchased vehicles from Agrivest for $6,133 in 1996. In January 1996, BodyBilt entered into a revised Business Management Contract with Agrivest, pursuant to which Agrivest provided accounting and other administrative services. Agrivest received $5,000 a month for bookkeeping and general administrative services and $150 an hour for chief executive officer and chief financial officer services. During the year ended December 31, 1996, BodyBilt paid Agrivest an aggregate of $60,000 pursuant to this contract. This contract was terminated in February of 1997. During 1996 BodyBilt purchased $47,901 of furniture and fixtures and building and leasehold improvements from Genemco, Inc., a corporation owned by Mark McMillan. All of BodyBilt's loans from The First National Bank of Bryan are guaranteed by Mark McMillan. The total amount of these loans was approximately $2.0 million at December 31, 1996. Mr. McMillan has also guaranteed the Company's obligations to Leggett & Platt, Inc. In February of 1997 the Company purchased 17,857 shares of common stock each from Mark McMillan and Dr. Troutman at a purchase price of $6.30 per share, which the Company delivered to the holder of the convertible note upon conversion. In October 1996, the Company entered into a Consulting Services Agreement with Mark McMillan, who became a director and a principal shareholder of the Company, for a two-year term commencing on the closing of the Offering. Mr. McMillan will serve as a consultant to the Company with respect to the Company's operations, particularly during the transition period. Mr. McMillan will be compensated at the rate of $150 per hour. Mr. McMillan will be eligible to participate in all Company bonus/incentive programs and stock option plans and to receive benefits under all other Company employee benefit plans. The Consulting Services Agreement includes a non-competition covenant by Mr. McMillan during the term of the agreement and for three years thereafter. In connection with the execution and delivery of Mr. Smith's Consulting Services Agreement, Gerald McMillan, Chairman of the Board of Directors of the Company, sold and transferred 664,868 shares of Common Stock to Mr. Smith in exchange for $31,040 in the form of a 25 28 promissory note bearing interest at 7.5%. Principal and interest accrued are payable on June 27, 1999. Mr. Smith's payment obligation is secured by a pledge of the transferred shares. The Smith Employment Agreement gives Dr. McMillan and/or the Company the right to purchase varying amounts of such shares upon the termination of his employment with the Company, based upon his length of service. In 1989, BodyBilt borrowed $75,000 for working capital from Dr. Richard Troutman, a principal shareholder of the Company. The Company repaid the loan in February of 1997. The foregoing transactions were among affiliated parties and necessarily involved conflicts of interest. The Company believes that these transactions were on no less favorable terms than were reasonably available from unaffiliated third parties. Except as described above, all agreements pursuant to which the transactions described above in "Certain Transactions" were conducted were terminated on the effective date of the Merger. Although the Company has no present intention to do so, it may in the future enter into other transactions incident to its business with its directors, officers, prior shareholders and other affiliates. The Company's policy is that any transaction in the future with an affiliated entity, executive officer or director will be subject to review and approval by a majority of the Company's directors who have no interest in the transaction and will be on no less favorable terms than the Company could obtain from unaffiliated parties. 26 29 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Exhibits. See Exhibit Index beginning on page II-3 of this Form 10-K. (b) Financial Statement Schedules None (c) Reports on Form 8-K. On February 7, 1997, the Company filed a Current Report on Form 8-K to report under Items 2 and 7 the Company's merger of BodyBilt Seating, Inc., a manufacturer of premium-priced ergonomic office chairs since 1988. BodyBilt was merged into ErgoBilt's wholly owned subsidiary, EB Subsidiary, Inc., which was formed for the purposes of the merger. 27 30 INDEX TO FINANCIAL STATEMENTS ERGOBILT, INC. Report of Independent Auditors F-2 Balance Sheets as of December 31, 1995 and December 31, 1996 F-3 Statements of Income (Loss) for the Period ended December 31, 1995 and the Year Ended December 31, 1996 F-4 Statements of Shareholders' Equity for the Period Ended December 31, 1995 and the Year Ended December 31, 1996 F-5 Statements of Cash Flows for the Period Ended December 31, 1995 and the Year Ended December 31, 1996 F-6 Notes to Financial Statements F-7 BODYBILT SEATING, INC. Reports of Independent Auditors F-11 Balance Sheets as of December 31, 1995 and 1996 F-12 Statements of Income for the Years Ended December 31, 1994, 1995 and 1996 F-14 Statements of Shareholders' Equity for the Years Ended December 31, 1994, 1995 and 1996 F-15 Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996 F-16 Notes to Financial Statements F-18
F-1 31 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders ErgoBilt, Inc.: We have audited the accompanying balance sheets of ErgoBilt, Inc., as of December 31, 1995 and 1996, and the related statements of income (loss), shareholders' equity, and cash flows for the period from June 12, 1995 to December 31, 1995 and the year ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ErgoBilt, Inc. as of December 31, 1995 and 1996, and the results of its operations and its cash flows for the period from June 12, 1995 to December 31, 1995 and the year ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Dallas, Texas March 21, 1997 F-2 32 ERGOBILT, INC. Balance Sheets December 31, 1995 and 1996
Assets 1995 1996 ------ ---- ---- Current assets: Cash $ 14,150 32,150 Accounts receivable 32,617 28,198 Income taxes receivable - 28,374 Deferred tax assets 6,728 61,954 -------- --------- Total current assets 53,495 150,676 -------- --------- Property and equipment: Furniture and fixtures 2,050 12,513 Equipment 9,205 9,455 Computer equipment 17,677 32,623 -------- --------- 28,932 54,591 Less accumulated depreciation 2,380 10,387 -------- --------- Property and equipment, net 26,552 44,204 -------- --------- Other assets: Shareholder receivable 39,313 48,325 Offering and merger costs - 661,453 Deferred tax assets - 85,543 Organizational cost, net 274 212 -------- --------- Total other assets 39,587 795,533 -------- --------- $119,634 990,413 ======== ========= Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Accounts payable $ 4,217 692,490 Accrued expenses 51,604 65,174 Income taxes 9,894 - Notes payable - 500,000 -------- --------- Total current liabilities 65,715 1,257,664 -------- --------- Deferred income taxes 7,676 - Shareholders' equity: Preferred stock, $.01 par value; 10,000,000 shares authorized - - Common stock, $.0001 par value; 20,000,000 shares authorized; 2,770,285 shares issued and outstanding 277 277 Additional paid-in capital 723 823 Retained earnings (deficit) 45,243 (268,351) -------- --------- Total shareholders' equity 46,243 (267,251) Commitments and contingencies -------- --------- $119,634 990,413 ======== =========
See accompanying notes to financial statements. F-3 33 ERGOBILT, INC. Statements of Income (Loss) For the period from June 12, 1995 (inception) to December 31, 1995 and for the year ended December 31, 1996
1995 1996 ---- ---- Sales $403,917 372,808 Cost of sales 107,009 154,217 -------- -------- Gross profit 296,908 218,591 Selling, general and administrative expenses 239,502 676,968 -------- -------- Operating income (loss) 57,406 (458,377) Interest expense 1,321 13,556 -------- -------- Income (loss) before income taxes 56,085 (471,933) Income tax expense (benefit) 10,842 (158,339) -------- -------- Net income (loss) $ 45,243 (313,594) ======== ========
See accompanying notes to financial statements. F-4 34 ERGOBILT, INC. Statements of Shareholders' Equity For the period from June 12, 1995 (inception) to December 31, 1995 and for the year ended December 31, 1996
Common stock Additional Retained ---------------- paid-in earnings Shares Amount capital (deficit) Total ------ ------ ------- --------- ----- Balance at June 12, 1995 (inception) 2,770,285 $277 723 - 1,000 Net income - - - 45,243 45,243 --------- ---- --- ------- ------- Balance at December 31, 1995 2,770,285 277 723 45,243 46,243 Issuance of stock warrants - - 100 - 100 Net income (loss) - - - (313,594) (313,594) --------- ---- --- -------- -------- Balance at December 31, 1996 2,770,285 $277 823 (268,351) (267,251) ========= ==== === ======== ========
See accompanying notes to financial statements. F-5 35 ERGOBILT, INC. Statements of Cash Flows For the period from June 12, 1995 (inception) to December 31, 1995 and for the year ended December 31, 1996
1995 1996 ---- ---- Cash flows from operating activities: Net income (loss) $ 45,243 (313,594) Adjustment to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,416 8,487 Loss on disposal of assets - 2,370 Deferred income taxes 948 (148,445) Changes in assets and liabilities: Accounts receivable (32,617) 4,419 Income taxes 5,308 (38,268) Shareholder receivable (39,313) (9,012) Other noncurrent assets (310) - Accounts payable 4,217 688,273 Accrued expenses 56,190 13,570 -------- ------- Net cash provided by operating activities 42,082 207,800 -------- ------- Cash flows from investing activities - purchase of property and equipment (28,932) (28,447) -------- ------- Cash flows from financing activities: Issuance of common stock and warrants 1,000 100 Proceeds from borrowings - 500,000 Offering and merger costs - (661,453) -------- ------- Net cash provided by (used in) financing activities 1,000 (161,353) -------- ------- Net increase in cash 14,150 18,000 Cash at beginning of period - 14,150 -------- ------ Cash at end of period $ 14,150 32,150 ======== ====== Supplemental disclosure: Interest paid $ 1,321 - ======== ====== Taxes paid $ - 28,374 ======== ======
See accompanying notes to financial statements. F-6 36 ERGOBILT, INC. Notes to Financial Statements December 31, 1995 and 1996 (1) Summary of Significant Accounting Policies (a) Organization and Operations ErgoBilt, Inc. (the Company) was incorporated on June 12, 1995 pursuant to the laws of the State of Texas as The Chafferton Company, Inc. The Company is engaged in consulting services regarding design and advertising trade issues. See discussion of the Company's merger and initial public offering in note 7. (b) Revenue Recognition Revenue is recognized as consulting projects are completed as the projects are of short duration. (c) Accounts Receivable The Company considers accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts is required. (d) Income Taxes Deferred income taxes are determined using the asset and liability method, under which deferred tax assets and liabilities are determined based on differences between financial accounting and tax bases of assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense or benefit is the payable or refund for the period plus or minus the change during the period in deferred tax assets and liabilities. (e) Property and Equipment Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the related equipment ranging from 5 to 7 years. Maintenance and repairs are charged to operations when incurred. Replacements and betterments are capitalized. Effective January 1, 1996, the Company adopted SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Accordingly, in the event that facts and circumstances indicate that property and equipment and intangible or other assets, may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future cash flows associated with the asset are compared to the asset's carrying amount to determine if a write-down to market value is necessary. Adoption of this statement did not have a material effect on the financial position or results of operations of the Company. F-7 (Continued) 37 ERGOBILT, INC. Notes to Financial Statements (f) Organizational, Merger and Offering Costs Organizational costs are amortized over five years. Offering and merger costs are deferred until the transaction is either completed or aborted. Costs related to completed offerings are charged against the gross proceeds of the offering. Costs related to completed mergers are included in the cost of the acquired enterprise. Offering and merger costs related to aborted transactions are written off. (g) Fair Market Value of Financial Instruments The carrying amount for cash, notes receivable and notes payable is not materially different than fair market value because of the short maturities of the instruments and/or their respective interest rates. (h) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could vary from the estimates that were used. (2) Stock Option Plan The board of directors and shareholders of the Company have approved the ErgoBilt 1996 Stock Option Plan (the Stock Option Plan). The Stock Option Plan authorizes the Company to award 400,000 shares of common stock to be used for incentive stock options and nonqualified stock options or restricted stock grants, of which no options have been granted at December 31, 1996. As of January 1, 1996, SFAS No. 123, Accounting for Stock-Based Compensation, was effective for the Company. SFAS No. 123 permits, but does not require, a fair value-based method of accounting for employee stock option plans which results in compensation expense recognition when stock options are granted. As permitted by SFAS No. 123, the Company will provide pro forma disclosure of net income and earnings per share, as applicable, in the notes to the financial statements. (3) Stock Split The Company affected a 2,770-for-1 stock split in January 1997. The effects of the stock split have been retroactively applied to the financial statements. (4) Related Party Transactions At December 31, 1995 and 1996, the Company had amounts due from the Company's chairman of $39,313 and $48,325, respectively. The chairman of the Company is also the shareholder of F-8 (Continued) 38 ERGOBILT, INC. Notes to Financial Statements another company which provided services to the Company as a subcontractor and consultant during 1995. The total expenses related to these services amounted to $49,034. The Company has had one primary customer since inception, BodyBilt Seating, Inc. (BodyBilt) which was partially owned (37.5%) by the brother of the Company's chairman during 1996. During 1995 and 1996, BodyBilt accounted for 100% and 91% of the company's revenues, respectively. At December 31, 1995 and 1996, amounts due from BodyBilt comprised 100% of trade accounts receivable. Additionally, the Company purchased $76,555 of goods and services from BodyBilt during 1996. At December 31, 1996, the Company owed BodyBilt $73,155 related to these goods and services. During 1996, the Company incurred $206,100 of costs for consulting services related to the merger of the Company with BodyBilt. These services were provided by another company that is wholly owned by the chairman's brother. (5) Income Taxes Deferred tax assets and liabilities as of December 31, 1995 and 1996 are as follows:
1995 1996 ---- ---- Deferred tax asset: Net operating loss carryforward (expiring in 2011) $ - 95,130 Differences from the use of cash basis reporting for federal income tax purposes 6,728 64,440 ------ ------ Total deferred tax assets $6,728 159,570 ====== ====== Total deferred tax liabilities, primarily from the use of statutory accelerated depreciation for federal income tax purposes $2,102 12,073 ====== ======
The components of income tax expense for the years ended December 31, 1995 and 1996 are as follows:
1995 1996 ---- ---- Federal: Current $ 7,622 (7,622) Deferred 729 (148,445) State: Current 2,272 (2,272) Deferred 219 -- --------- --------- $ 10,842 (158,339) ========= =========
F-9 (Continued) 39 ERGOBILT, INC. Notes to Financial Statements The Company's effective tax rate was approximately 34% in 1996 and approximately 19% in 1995 due to the graduated tax rates available to the Company. The Company did not record a valuation allowance for deferred tax assets at December 31, 1995 and 1996. In assessing the realizability of deferred tax assets, management considers the carryback potential, the scheduled reversal of deferred tax assets and liabilities, future taxable income and tax planning strategies. Management believes that it is more likely than not the Company will realize the benefits of these deductible differences. (6) Note Payable In September 1996, the Company obtained a $500,000 loan at an interest rate of 8% per annum which will mature on September 6, 1997. In connection with the establishment of this borrowing, the Company's chairman sold and transferred 34,000 shares of common stock to the lender for an aggregate consideration of $34,000 and the Company issued a warrant to the lender to acquire up to 51,000 shares of common stock at an initial per share exercise price equal to 120% of the price to the public in the initial public offering of the Company. The warrant is exercisable for a period of four years, commencing one year after the initial public offering of the company. This note is secured by a personal guarantee of the Company's chairman. (7) Subsequent Events BodyBilt Seating, Inc. ("BodyBilt") was merged into a wholly-owned subsidiary of the Company on February 5, 1997. As consideration for the merger, the shareholders of BodyBilt received $17.6 million payable in a combination of cash ($7.2 million), 780,630 shares of common stock of the Company valued at $5.46 million, and 705,085 shares of Series A Preferred Stock of the Company valued at $4.94 million, which was immediately converted into 705,085 shares of common stock. On February 5, 1997 the Company closed its initial public offering for the sale of 1,700,000 shares of common stock at a price of $7 per share. On March 18, 1997, the underwriters exercised their overallotment provision and issued an additional 100,000 shares of the Company's common stock at a price of $7 per share. On February 5, 1997 the Company issued to the underwriters warrants to purchase 170,000 shares of common stock at a price of 120% of the price to the public exercisable over a period of four years commencing one year from February 3, 1997. The Company paid the loan referred to in note 6 by delivery of $266,889 in cash and 35,714 shares of common stock. F-10 40 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders BodyBilt Seating, Inc.: We have audited the accompanying balance sheets of BodyBilt Seating, Inc. as of December 31, 1995 and 1996, and the related statements of income, shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BodyBilt Seating, Inc. as of December 31, 1995 and 1996, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Dallas, Texas March 18, 1997 F-11 41 BODYBILT SEATING, INC. Balance Sheets December 31, 1995 and 1996
Assets 1995 1996 ------ ---- ---- Current assets: Cash $ 86,541 56,499 Accounts receivable 2,470,488 3,013,958 Inventory 1,456,248 1,696,250 Prepaid expenses 124,694 204,052 Employee receivables 17,787 14,920 Shareholder receivable -- 9,700 ---------- ---------- Total current assets 4,155,758 4,995,379 ---------- ---------- Property, plant and equipment: Land 7,450 7,450 Building and improvements 945,611 1,324,082 Furniture and fixtures 65,377 148,176 Equipment 383,916 591,974 Vehicles 288,146 402,304 Computer equipment 217,517 493,452 ---------- ---------- 1,908,017 2,967,438 Less accumulated depreciation 254,804 541,957 ---------- ---------- 1,653,213 2,425,481 ---------- ---------- Other assets 2,573 66,089 ---------- ---------- $5,811,544 7,486,949 ========== ==========
(Continued) F-12 42 BODYBILT SEATING, INC. Balance Sheets, Continued
Liabilities and Shareholders' Equity 1995 1996 ------------------------------------ ---- ---- Current liabilities: Current portion of long-term debt $ 225,935 344,435 Accounts payable 668,290 378,518 Taxes payable 114,771 107,296 Commissions payable 139,150 208,654 Accrued expenses 102,487 263,418 ---------- --------- Total current liabilities 1,250,633 1,302,321 ---------- --------- Long-term debt: Notes payable, less current portion 1,083,944 1,670,080 Notes payable - shareholder 75,000 75,000 ---------- --------- Total long-term liabilities 1,158,944 1,745,080 ---------- --------- Shareholders' equity: Common stock, no par value; authorized 500 shares; issued and outstanding - 200 shares 1,000 1,000 Retained earnings 3,400,967 4,438,548 ---------- --------- Total shareholders' equity 3,401,967 4,439,548 Commitments and contingencies ---------- --------- $5,811,544 7,486,949 ========== =========
See accompanying notes to financial statements. F-13 43 BODYBILT SEATING, INC. Statements of Income Years ended December 31, 1994, 1995 and 1996
1994 1995 1996 ---- ---- ---- Sales $9,188,830 13,672,349 17,578,210 Cost of sales 4,789,293 7,218,561 9,325,725 ---------- ---------- ---------- Gross profit 4,399,537 6,453,788 8,252,485 Selling, general and administrative expenses 3,265,310 4,554,798 5,676,625 ---------- ---------- ---------- Operating income 1,134,227 1,898,990 2,575,860 Interest expense (30,155) (56,910) (139,433) Other income (expense) 6,385 37,111 (2,498) ---------- ---------- ---------- Income before income taxes 1,110,457 1,879,191 2,433,929 Income tax expense 50,000 85,000 56,677 ---------- ---------- ---------- Net income $1,060,457 1,794,191 2,377,252 ========== ========== ==========
See accompanying notes to financial statements. F-14 44 BODYBILT SEATING, INC. Statements of Shareholders' Equity Years ended December 31, 1994, 1995 and 1996
Common stock ------------ Retained Shares Amount earnings Total ------ ------ -------- ----- Balances at December 31, 1993 200 $1,000 1,479,652 1,480,652 Distributions to shareholders -- -- (333,333) (333,333) Net income -- -- 1,060,457 1,060,457 --- ------ ---------- ---------- Balances at December 31, 1994 200 1,000 2,206,776 2,207,776 Distributions to shareholders -- -- (600,000) (600,000) Net income -- -- 1,794,191 1,794,191 --- ------ ---------- ---------- Balances at December 31, 1995 200 1,000 3,400,967 3,401,967 Distributions to shareholders -- -- (1,339,671) (1,339,671) Net income -- -- 2,377,252 2,377,252 --- ------ ---------- ---------- Balances at December 31, 1996 200 $1,000 4,438,548 4,439,548 === ====== ========== ==========
See accompanying notes to financial statements. F-15 45 BODYBILT SEATING, INC. Statements of Cash Flows Years ended December 31, 1994, 1995 and 1996
1994 1995 1996 ---- ---- ---- Cash flows from operating activities: Net income $1,060,457 1,794,191 2,377,252 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 75,926 134,098 292,300 Bad debts 3,619 10,658 45,125 Loss (gain) on sale or disposal of assets (656) 6,178 56,964 Barter transactions - - (246,244) Change in assets and liabilities: Accounts receivable (455,052) (817,720) (588,595) Inventory 50,580 (495,189) (240,002) Prepaid expenses (11,760) (85,125) 34,492 Employee and shareholder receivables 34,173 (2,623) (6,833) Other assets 29,561 6,142 (25,491) Trade accounts payable (124,371) 387,533 (282,152) Accrued expenses 27,586 12,775 160,931 Taxes payable 13,354 49,102 (7,475) Commissions payable (417) 105,169 69,504 Customer deposits (19,574) - - Deferred revenue 51,031 (51,031) - ----------- ---------- ---------- Net cash provided by operations 734,457 1,054,158 1,639,776 ----------- ---------- ---------- Cash flows from investing activities: Purchase of property, plant and equipment (632,358) (917,577) (950,739) Proceeds from sale of property, plant and equipment 3,397 - - ----------- ---------- ---------- Net cash used in investing activities (628,961) (917,577) (950,739) ----------- ---------- ---------- Cash flows from financing activities: Proceeds from borrowings 1,164,309 2,660,309 4,699,444 Repayment of borrowings (920,447) (2,140,422) (4,078,852) Distributions to shareholders (333,333) (600,000) (1,339,671) ---------- --------- ---------- Net cash used in financing activities (89,471) (80,113) (719,079) ---------- --------- --------- Net increase in cash 16,025 56,468 (30,042) Cash at beginning of year 14,048 30,073 86,541 ---------- --------- --------- Cash at end of year $ 30,073 86,541 56,499 ========== ========== =======
(Continued) F-16 46 BODYBILT SEATING, INC. Statements of Cash Flows, Continued
1994 1995 1996 ---- ---- ---- Supplemental disclosure of noncash investing and financing activities: Purchase of equipment in exchange for notes payable $ - - 84,044 ======= ====== ======= Sale of equipment in settlement of note payable $ - 12,060 - ======= ====== ======= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $30,155 94,738 139,433 ======= ====== ======= Federal income taxes $ - - - ======= ====== =======
See accompanying notes to financial statements. F-17 47 BODYBILT SEATING, INC. Notes to Financial Statements December 31, 1994, 1995 and 1996 (1) Summary of Significant Accounting Policies (a) Organization and Operations BodyBilt Seating, Inc. (the Company) (formerly the Chair Works, Inc., Congleton Chair Works, Inc., and Lubbock Molasses, Inc.) was incorporated on November 22, 1982 pursuant to the laws of the State of Texas and elected to be treated as an S Corporation. The Company is engaged in the manufacture and assembly of custom built ergonomic chairs for commercial, industrial, and residential use. All of the Company's chairs are manufactured in a plant in Navasota, Texas, and are sold primarily to customers in Texas. (b) Revenue Recognition The Company recognizes revenue at the time chairs are shipped to customers. (c) Accounts Receivable Accounts receivable are stated net of all known uncollectible accounts. The Company uses historical experience to determine an allowance for doubtful accounts. At December 31, 1995 and 1996 it was determined that no allowance was necessary. No single customer accounted for more than ten percent of the Company's sales during the years ended December 31, 1994, 1995 and 1996, and no account receivable from any customer exceeded ten percent of total accounts receivable at December 31, 1995 and 1996. (d) Income Taxes No provision or benefit for federal income taxes has been included in these financial statements since taxable income or loss passes through to and is reported by the shareholders individually. At December 31, 1995 and 1996 the net difference between the tax bases and the amounts recorded of assets and liabilities was not significant. (e) Inventories Inventories consist of the following:
1994 1995 1996 ---- ---- ---- Raw materials $299,361 371,703 262,173 Component parts 435,698 757,795 883,504 Finished goods, including demos 226,000 326,750 550,573 -------- --------- --------- $961,059 1,456,248 1,696,250 ======== ========= =========
F-18 (Continued) 48 BODYBILT SEATING, INC. Notes to Financial Statements Inventory is stated at average cost for purchased parts and average cost plus allocated labor and overhead for parts manufactured by the Company. All inventory is stated at the lower of cost or market value. For the year ended December 31, 1996, the Company purchased 25.1% of its inventory from one supplier. This supplier is currently the only source of a key component of BodyBilt chairs. (f) Property, Plant, and Equipment Property, plant and equipment are stated at cost and depreciated using the straight-line method of depreciation. The assets are depreciated over the following estimated useful lives:
Years ----- Buildings and improvements 39 Furniture and fixtures 10 Equipment 10 Vehicles 5 Computer equipment 5
Effective January 1, 1996, the Company adopted SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Accordingly, in the event that facts and circumstances indicate that property and equipment, and intangible or other non-current assets may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future cash flows associated with the asset are compared to the asset's carrying amount to determine if a write-down to market value is necessary. Adoption of this statement did not have a material effect on the financial position or results of operations of the Company. (g) Fair Value of Financial Instruments The carrying amounts of accounts receivable, employee and shareholder receivables, other current assets, accounts payable and accrued expenses approximate fair value because of the short maturity of those instruments. The estimated fair value of notes payable is equivalent to its carrying value due to the floating interest rate. (h) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. F-19 (Continued) 49 BODYBILT SEATING, INC. Notes to Financial Statements (2) Related Party Transactions The Company paid Agrivest, Inc. (Agrivest), a corporation wholly-owned by the Company's president and director, a management fee of $36,000 in 1994 and 1995 and $60,000 in 1996 for accounting, payroll and other administrative services provided. The Company paid consulting fees to Agrivest for additional management services of $109,275, $192,900 and $103,300 during 1994, 1995 and 1996, respectively. The Company purchased vehicles from Agrivest for $6,133 in 1996. Additionally, the Company leased vehicles and equipment from Agrivest and paid rentals of $6,000, $2,000 and $5,000 during 1994, 1995 and 1996, respectively. The brother of the Company's president and director assisted in the development of the Company's promotional literature. During part of 1994, the Company employed this individual. During 1994, 1995 and 1996, payments of $119,036, $413,157 and $309,510, respectively, were made to companies owned by this individual, including ErgoBilt, Inc. (ErgoBilt), for promotional literature and marketing development. Additionally, goods and services, some of which were received through barter transactions, were sold to ErgoBilt for $76,555 in 1996. At December 31, 1996, receivables from this individual and ErgoBilt were $19,102 and $73,155, respectively. During 1994, the Company purchased $100,851 of furniture and fixtures, computer equipment and building improvements from a company owned by the Company's secretary/treasurer. During 1995 and 1996, the Company purchased $172,588 and $47,901, respectively, of furniture and fixtures and building and leasehold improvements from a company owned by the Company's president and director. The Company leased vehicles and paid rentals of $4,508 to a shareholder during 1994. Accounts payable to related parties were $60,834 and $28,198 at December 31, 1995 and 1996, respectively. (3) Barter Transactions During the year ended December 31, 1996, BodyBilt recorded sales of $651,926 and selling, general and administrative expenses of $405,682 related to agreements with various parties to exchange custom built ergonomic chairs for advertising and other goods and services. At December 31, 1996, prepaid expenses, accounts payable, other assets and property, plant and equipment include $204,052, $19,561, $38,025 and $81,602, respectively related to barter transactions. The exchanges are recorded at the fair value of the chairs (prices to its customers). F-20 (Continued) 50 BODYBILT SEATING, INC. Notes to Financial Statements (4) Notes Payable Notes payable at December 31, 1995 and 1996: Interest Balance at December 31, -------------------------- Payee rate Maturity 1995 1996 Collateral ----- ---- -------- ---- ---- ---------- First National Bank, Prime rate of Texas 2000 (1) $ 610,000 1,350,000 Accounts Bryan Commerce Bank receivable, (8.25%) inventory, and life insurance policy (2) First National Bank, Prime rate of First 2000 473,667 438,278 Property, plant and Bryan National Bank of equipment and life Bryan + .75% (9.5%) insurance policy (2) First National Bank, Prime rate of 2000 76,850 60,950 Equipment (2) Bryan First National Bank of Bryan + .75% (9.5%) First National Bank, 6.75% to 9.5% 1997 to 2001 149,362 165,287 Vehicles (2) Bryan Richard Troutman, 0% 2000 (3) 75,000 75,000 Company stock Shareholder ------------ ------------ 1,384,879 2,089,515 Less amounts due 225,935 344,435 within one year ------------ ------------ $1,158,944 1,745,080 ============ ============
(1) Repayment of the line of credit requires monthly interest payments beginning July 30, 1996 until June 30, 1997, at which time equal monthly principal installments and interest are required until June 30, 2002, the maturity date. Effective June 30, 1996, the Company renewed its revolving loan agreement with a bank. Under the terms of the agreement, the company may borrow up to $2,000,000, subject to a borrowing base limitation based on a percentage of eligible accounts receivable and qualified inventory. The revolving feature expires on June 30, 1997, at which time the revolving note payable converts to a term note with a final maturity date at June 30, 2000. At December 31, 1995 and 1996 unused amounts available under the revolving loan agreement were $490,000 and $650,000, respectively. The Company is required to pay a commitment fee of .5% per annum on the unused portion of the line of credit. (2) Personally guaranteed by Mark McMillan, president and director of the Company. (3) As the personal guarantees by Mark McMillan are reduced below $75,000, repayment in amounts equal to the reduction in personal guarantees will begin. F-21 (Continued) 51 BODYBILT SEATING, INC. Notes to Financial Statements Note payable are subject to various restrictive and affirmative covenants. The principal portion of long-term debt outstanding at December 31, 1996 and during the five years succeeding are as follows:
Years ended December 31, - ------------------------ 1997 $ 344,435 1998 550,379 1999 529,505 2000 665,196 ---------- $2,089,515 ==========
(5) Obligations Under Operating Leases The Company has operating leases for office space and vehicles. Minimum annual rental commitments at December 31, 1996, all for office space, are as follows:
Year ended December 31, - ----------------------- 1997 $45,204 1998 4,400 -------- $49,604 ========
For the years ended December 31, 1994, 1995 and 1996, rent expense was $93,104, $69,619 and $88,462, respectively. . (6) Commitments and Contingencies The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect of the Company's financial position, results of operations, or liquidity. (7) Subsequent Events On February 5, 1997, the Company merged into a wholly-owned subsidiary of ErgoBilt contemporaneously with the closing of an offering of shares of common stock by ErgoBilt. As consideration for the merger, the shareholders of the Company received $17.6 million payable in a combination of $7.2 million in cash, ErgoBilt common stock and ErgoBilt Series A Preferred stock. The cash portion of the consideration was reduced by the distribution of approximately $4.4 million related to Subchapter S corporation earnings made to shareholders of the Company prior to the merger. F-22 52 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ErgoBilt, Inc. - ------------------ (Registrant) /s/ Gerard Smith Date April 29, 1997 - ------------------------------------------- ---------------- Gerard Smith, President, Chief Executive Officer and Director II-I 53 SIGNATURES (CONT.) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Gerald McMillan Date April 29, 1997 - ------------------------------------------- ---------------- Gerald McMillan, Chairman of the Board of Directors /s/ Gerard Smith Date April 29, 1997 - ------------------------------------------- ---------------- Gerard Smith, President, Chief Executive Officer and Director (Principal Executive Officer) /s/ P. Michael Sullivan Date April 29, 1997 - ------------------------------------------- ---------------- P. Michael Sullivan, Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Drew Congleton Date April 29, 1997 - ------------------------------------------- ---------------- Drew Congleton, Director /s/ Robert E. Faust Date April 29, 1997 - ------------------------------------------- ---------------- Robert E. Faust, Director /s/ William Brown Glenn, Jr. Date April 29, 1997 - ------------------------------------------- ---------------- William Brown Glenn, Jr., Director /s/ Mark McMillan Date April 29, 1997 - ------------------------------------------- ---------------- Mark McMillan, Director /s/ W. Barton Munro Date April 29, 1997 - ------------------------------------------- ---------------- W. Barton Munro, Director /s/ William Weed Date April 29, 1997 - ------------------------------------------- ---------------- William Weed, Director II-2 54 INDEX TO EXHIBITS
Exhibit No. Description - ----------- ----------- --1(a) Underwriting Agreement ***1(b) Warrant Purchase Agreement *2 Agreement and Plan of Merger by and among ErgoBilt, Inc., EB Subsidiary, Inc., BodyBilt Seating, Inc., Mark A. McMillan, Dr. Richard Troutman and Drew Congleton dated August 19, 1996 (without schedules or exhibits) **3(i) Restated Articles of Incorporation **3(ii) Amended and Restated Bylaws **4(a) Text and Description of Graphics and Images Appearing on Certificate for Common Stock **4(b) Form of Certificate of Designation of Series A Preferred Stock of ErgoBilt, Inc. ***5 Opinion of Wolin, Fuller, Ridley & Miller LLP **9 Voting Agreement among ErgoBilt, Inc. and the Shareholders named therein dated December 1, 1996 *10(a)(1) Loan Agreement between The First National Bank of Bryan and BodyBilt Seating, Inc. dated June 30, 1996, and schedule of substantially similar agreements *10(a)(2) Security Agreement between The First National Bank of Bryan and BodyBilt Seating, Inc. dated June 30, 1996, and schedule of substantially similar agreements *10(a)(3) Third Party Pledge Agreement between The First National Bank of Bryan and Mark A. McMillan dated June 30, 1996, and schedule of substantially similar agreements *10(a)(4) Guaranty in favor of The First National Bank of Bryan by Mark A. McMillan dated June 30, 1996, and schedule of substantially similar agreements *10(a)(5) Promissory Note in the original principal amount of $2,000,000 executed by BodyBilt Seating, Inc. in favor of The First National Bank of Bryan dated June 30, 1996, and schedule of substantially similar agreements *10(b)(1) Agreement Among The First National Bank of Bryan, BodyBilt Seating, Inc. and Mark A. McMillan dated June 15, 1995 *10(c)(1) Loan Agreement Among The First National Bank of Bryan, BodyBilt Seating, Inc. and Mark A. McMillan dated May 26, 1994 *10(c)(2) Promissory Note in the original principal amount of $571,500 executed by BodyBilt Seating, Inc. in favor of The First National Bank of Bryan dated May 26, 1994 *10(c)(3) Specific Guaranty in favor of The First National Bank of Bryan by Mark A. McMillan dated May 26, 1994 *10(c)(4) General Security Agreement Among The First National Bank of Bryan, BodyBilt Seating, Inc. and Mark A. McMillan dated May 26, 1994 *10(c)(5) Modification and/or Extension Agreement Among The First National Bank of Bryan, BodyBilt Seating, Inc. and Mark A. McMillan dated May 31, 1995 *10(c)(6) Third Party Pledge Agreement between The First National Bank of Bryan and Mark A. McMillan dated May 31, 1995 *10(d)(1) Common Stock and Warrant Purchase Agreement among ErgoBilt, Inc., Gerald McMillan, and Summit Partners Management Co. dated September 6, 1996
II-3 55 *10(d)(2) Registration Rights Agreement between ErgoBilt, Inc. and Summit Partners Management Co. dated September 6, 1996 *10(d)(3) Convertible Promissory Note in the original principal amount of $500,000 executed by ErgoBilt, Inc. in favor of Summit Partners Management Co. dated September 6, 1996 *10(d)(4) Investment and Security Agreement among Gerald McMillan, ErgoBilt, Inc. and Summit Partners Management Co. dated September 6, 1996 *10(e)(1) Universal Note Among The First National Bank of Bryan, BodyBilt Seating, Inc. and Mark A. McMillan dated May 27, 1993, and schedule of substantially similar agreements *10(e)(2) Security Agreement Among The First National Bank of Bryan, BodyBilt Seating, Inc. and Mark A. McMillan dated May 27, 1993, and schedule of substantially similar agreements *10(e)(3) Guaranty Among The First National Bank of Bryan, BodyBilt Seating, Inc. and Mark A. McMillan dated May 27, 1993, and schedule of substantially similar agreements *10(f) Non-Recourse Promissory Note in the original principal amount of $75,000 executed by Lubbock Molasses, Inc. in favor of Dr. Richard Troutman dated May 1, 1989 *10(g) Patent License Agreement Between Jerome J. Congleton and The Chair Works dated May 15, 1991 *10(h)(1) Award/Contract --GS-29F-0119C Between BodyBilt Seating, Inc. and General Services Administration (GSA) *10(h)(2) Amendment of Solicitation/Modification of Contract --GS-29F-0119C Between BodyBilt Seating, Inc. and General Services Administration (GSA) **10(i)(1) Settlement Agreement among Jerome J. Congleton, Jaye Congleton, Rebecca Congleton Boenigk and Congleton Ergonomic Chairs, Inc., Mark McMillan, Michael McWhorter, and Congleton Chair Works, Inc. (f/k/a Lubbock Molasses, Inc., d/b/a Congleton Chair Works, Inc.), entered into May 1991 *10(i)(2) Settlement Agreement among BodyBilt Seating, Inc., Mark A. McMillan, Drew Congleton, Michael Jack, and Galen Green, and Neutral Posture Ergonomics, Inc., Jerome J. Congleton, Jay Congleton and Rebecca Congleton Boenigk, entered into January 1995 **10(j) Executive Employment Agreement between Drew Congleton and a corporation to be known as BodyBilt Seating, Inc. dated December 19, 1996 *10(k) Consulting Agreement between Mark A. McMillan and ErgoBilt, Inc. dated October 15, 1996 *10(l) Consulting Services Agreement among ErgoBilt, Inc., Gerald McMillan and Gerard Smith dated July 2, 1996 **10(m) First Amended and Restated Executive Employment Agreement between ErgoBilt, Inc. and Gerard Smith dated as of October 15, 1996 *10(n) IPO Consulting Services Agreement between ErgoBilt, Inc. and P. Michael Sullivan dated September 16, 1996 *10(o) Executive Employment Agreement between ErgoBilt, Inc. and P. Michael Sullivan dated September 16, 1996 *10(p) Business Management Contract Between BodyBilt Seating, Inc. and Agrivest, Inc., dated January 1, 1996
II-4 56 *10(q) Consulting Agreement Between The Chafferton Company and BodyBilt Seating, Inc. dated August 1, 1994 *10(r) Conditional Release of Commission Between Gerald McMillan and BodyBilt Seating, Inc. dated May 23, 1996 *10(s) Memorandum of Understanding Regarding 1984 Pace Arrow Motor Home between Mark A. McMillan and Drew Congleton dated December 1992 **10(t) Stock Option Plan **10(u) Letter of Intent between Metamorphosis Design & Development, Inc. and ErgoBilt, Inc. dated January 8, 1997 **10(v) Executive Employment Agreement between Gerald McMillan and ErgoBilt, Inc. dated October 1, 1996 10(w) License Agreement between BodyBilt Seating, Inc. and Computer Translation Systems & Support, Inc., Lawrence West Melquiond and Jerold P. Lefler. **16 Letter of Thompson, Derrig & Slovacek PC 21 Subsidiaries 27 Financial Data Schedule
* Filed on October 16, 1996 as an exhibit of the Company's Registration Statement on Form S-1 (File No. 333- 14205) and incorporated by reference herein. ** Filed on January 13, 1997 as an exhibit to Amendment No. 1 of the Company's Registration Statement on Form S- 1 (File No. 333-14205) and incorporated by reference herein. *** Filed on January 28, 1997 as an exhibit to Amendment No. 2 of the Company's Registration Statement on Form S-1 (File No. 333-14205) and incorporated by reference herein. - -- Filed on January 30, 1997 as an exhibit to Amendment No. 3 of the Company's Registration Statement on Form S- 1 (File No. 333-14205) and incorporated by reference herein. II-5 EX-10.(W) 2 LICENSE AGREEMENT 1 EXHIBIT 10(w) LICENSE AGREEMENT This agreement, which is to become effective February 18, 1997 is made between BodyBilt Seating, Inc. a Texas corporation having a principal office in Navasota, Texas, ("Licensee"), and Computer Translation Systems & Support, Inc. (CTSS), Lawrence West Melquiond and Jerold P. Lefler, (collectively called "Licensors"); and that, in consideration of the mutual promises made in this agreement, the parties agree as follows: ARTICLE 1. DEFINITIONS Certain terms used in this agreement shall be defined as follows: SECTION. 1.01 "Licensed Product" shall mean the Impact Unit hardware, the software used to design, build, manufacture, operate and control the operation of the Impact Unit together with all designs, schematics, drawings, layouts, parts lists, source code, object code, enhancements and modifications, and all files, including input and output materials relating to the Impact Unit and its software. SECTION 1.02 "User Documentation": shall mean any and all installation instructions, user manuals, supporting materials, training manuals and materials, workbooks, product descriptions and technical manuals relating to the Licensed Product. SECTION 1.03 "Purchase order" shall mean a written purchase order or any other written confirmation obligating a person, business, or other entity to purchase goods. ARTICLE 2. ASSIGNMENT OF IMPACT TRADEMARK SECTION 2.01 OWNERSHIP. CTSS represents and warrants that it owns and has the exclusive right to use the trademark Impact for keyboards and represents and warrant that it owns U. S. Trademark Application Serial No. 74-584,649 for Impact and Design in Class 9. SECTION 2.02 ASSIGNMENT. CTSS agrees to assign its interest in the Impact trademark and U.S. Trademark Application Serial No. 74-584,649 for Impact and Design in class 9, together with the associated good will of the business to BodyBilt. CTSS agrees to effect that assignment by executing and returning to BodyBilt the form of assignment attached hereto as Exhibit "A". ARTICLE 3. WARRANTY OF TITLE AND AUTHORITY 1 2 SECTION 3.01 WARRANTY. Licensors warrant and represent that they own, have title to, and have the fully authority and right to the Licensed Product and User Documentation, and to enter into this agreement. ARTICLE 4. LICENSE AND WARRANTY SECTION 4.01 Subject to the terms and conditions of this Agreement, Licensor hereby grants to Licensee and Licensee hereby accepts an exclusive perpetual license under any and all intellectual property rights owned or otherwise assertable by Licensor relation to the Licensed Product and User Documentation, including but not limited to Licensor's rights under any patents, copyrights or trademarks. The license includes, but is not limited to, the right to manufacture, make, have made, use, copy, reproduce, distribute, prepare derivatives, perform, display, market, sell, offer for sale, import or export the Licensed Product or User Documentation and includes the right to sublicense others. SECTION 4.02 SCOPE OF LICENSE GRANT. The License is non-exclusive and extends through out the world including the United States and its territories. Licensor acknowledges that under this License Agreement it does not retain any right to or under the Licensed Product and User Documentation. SECTION 4.03 OTHER RIGHTS GRANTED. In addition to the License enumerated in the Agreement, the License includes a grant by Licensor to Licensee of the right to engage in any activity relating to the manufacture, use, copying , distribution, performance, display, marketing, sale, or offer of sale of the Impact Unit, and all ownership rights, title and interest, in any intellectual property rights relating to the Licensed Product and User Documentation or in any copy or any part of the Licensed Product of User Documentation. SECTION 4.04 IMPROVEMENTS. Licensors agree to tender in writing for incorporation into the Licensed Product and User Documentation a like license under any U.S. or Foreign patents or patent application or copyrights now or hereafter owned or enjoyed in any patent or patent application or copyright included in the Licensed Product and User Documentation, or any method or process for manufacturing any such invention. Licensee at its option may accept such written tender by a written instrument mailed within six months after receipt of tender. Such additional licenses shall be upon the same terms as this license and shall terminate upon any termination or cancellation of this agreement. ARTICLE 5. LUMP SUM AND ROYALTIES SECTION 5.01 LUMP SUM. Licensee shall pay to Licensors a lump sum of Nineteen Thousand And No Cents Dollars ($19,000), which shall not be creditable against royalties earned on the marketing of Licensed Product and User Documentation 2 3 Payment of the lump sum shall be made contemporaneously with the execution of this agreement. SECTION 5.02 EARNED ROYALTIES. In addition to the lump sum payment mentioned in Section 5.01 of this agreement, Licensee shall pay to Licensors within a reasonable times an earned royalty equal to 5% of the gross revenue received from the sales of the Licensed Product and User Documentation marketed by Licensee for which payment has been received. Such royalty shall be earned at the time payment for the relevant Licensed Product and User Documentation is received by Licensee. Royalty shall be directly reduced by any advances paid under Section 7.02.5. SECTION 5.03 ONE ROYALTY. Only one royalty shall be due for any one Licensed Product and User Documentation made or marketed anywhere in the world. ARTICLE 6. REPORTING AND AUDIT SECTION 6.01 Licensee shall keep accurate books of account containing all information necessary to establish the amount payable as royalty under this agreement. Such books of account shall be kept at one of Licensee's principal places of business and shall be open, for three years following the close of the calendar year to which they pertain, to inspection and audit by an independent certified public accountant who is nominated by Licensors and to whom Licensee has no reasonable objection. Such inspection and audit shall take place no more than once each year and shall be confined to verification of the royalties due, and the accountant shall disclose to Licensors only whether the Licensee's reports and payments are accurate or not, and if not accurate shall specify the inaccuracies therein. Each payment of royalties shall be accompanied by a written report signed by the individual who prepared the report and by an officer of Licensee, showing the computation of royalties. ARTICLE 7. WARRANTIES AND PERFORMANCE SECTION 7.01 LICENSORS' WARRANTIES. 7.01.1 WARRANTY PERIOD. The "Warranty Period" begins on the date of execution of this Agreement and terminates one year thereafter. 7.01.2 AS--DOCUMENTED WARRANTY. Licensor warrants to Licensee, during the Warranty Period, that the Licensed Product will function and perform in accordance with the User Documentation and in the same manner that the Licensed Product performed on behalf of Licensor immediately prior to the date hereof. Upon receipt of a breach of this Warranty, Licensor shall have thirty (30) business days to attempt to correct the breach, after which Licensee may attempt to correct the breach itself utilizing the source code provided to License under this Agreement. 3 4 7.01.3 NO SURREPTITIOUS CODE WARRANTY. Licensor warrants to Licensee that no copy of the software provided to Licensee contains or will contain any surreptitious code, including but not limited to any backdoor, timebomb, drop dead device, any other software routine designed to disable a computer program automatically with the passage of time or under the positive control of a person other than a licensee of the program, any virus, Trojan horse, worm or other software routine or hardware components designed to permit unauthorized access, to disable, erase or other harm software, hardware or data, or to perform any other such actions. SECTION 7.02. PERFORMANCE. 7.02.1 PURCHASE ORDERS. Upon Licensors delivering all sales contacts, customer lists, part requests, Licensee shall immediately proceed to order parts, assemble, and sell units. Licensee shall use best efforts to sell a minimum of 250 units in sixty (60) days, but in no event is Licensee obligated to expend more than $600,000, or incur any additional obligation, to achieve these sales. 7.02.2 DELIVERY OF LICENSE MATERIALS. Licensor will deliver the Licensed Product (including all drawings, schematics, source code or other materials to configure and manufacture the Impact Unit as provided herein) and User Documentation to Licensee, at Licensee's address set forth above, upon execution of this Agreement. 7.02.3 INSTALLATION OF MATERIALS BY LICENSEE. All installation of the Licensed Product for use by Licensee will be by, and at the sole expense of Licensee. 7.02.4 DELIVERY OF SOURCE CODE. Licensor shall deliver one copy of the source code of the Licensed Product to Licensee together with all comments and programmers notes. Licensee may also use the source code for any purpose consistent with Licensee's license to the Licensed Product. 7.02.5 CONSULTATION. Licensors shall make themselves available, upon request of the Licensee, at the earliest opportunity to consult with Licensee at one of the Licensee's places of business at no charge to Licensee except that the latter shall reimburse Licensors for travel expenses and reasonable expenditures for food and lodging. From February 18, 1997 to March 31, 1997, Licensee shall advance Licensors $2,000 a week against future royalties. ARTICLE 8. INFRINGEMENT SECTION 8.01 WHO SHALL SUE. Upon learning of any infringement by any third party of any claim of any issue patent included within the Licensed Product and the User Documentation, licensee shall promptly notify Licensors in writing of such infringement, giving details of the infringement. Licensors and Licensee both shall have the option 4 5 either alone or jointly to take such measures as may be required to terminate any infringement. When either party brings an infringement suit, the other party may join as plaintiff and shall cooperate and assist in the preparation and prosecution of the suit. SECTION 8.02 EXPENSES AND RECOVERIES. In the case of mutual agreement on the institution of an infringement suit, Licensee shall bear one half and Licensors collectively shall bear one half of all expenses unless one party declines to participate financially in the prosecution of such infringement suit, in which case the party declining to participate shall be excluded from bearing a part of such expenses. In the case of such mutual agreement on the institution of an infringement suit, Licensee shall have one half and Licensors collectively shall have one half of all damages and penalties recovered that remain after first reimbursing Licensee and then Licensors for any amounts expended by them in prosecuting such infringement suit and next reimbursing Licensors for royalties that they would have earned but for the suspension of royalty payments during the period of infringement. If one party declines to timely participate financially (pay litigation on time) in the prosecution of such infringement suit, the party shall be excluded from any share of the damages and penalties recovered. ARTICLE 9. ADVERSE DECISIONS SECTION 9.01 EFFECT. If any claim of any right to the License Product and User Documentation is held invalid, awarded to another, or held not infringed, by a decision of any tribunal of competent jurisdiction, which decision is not or cannot be thereafter reversed, then with respect to any such claim so held not infringed, the construction placed upon such claim by such tribunal shall be followed from the date of entry of the opinion on such question of infringement, and with respect to any claim that is not infringed, not valid, or not the property of Licensors under such decision, Licensee shall thereafter be relieved from the payment of royalties solely with respect to such claim, and from including in its reports hereunder any equipment covered solely by such claim; provided, however, that if there are conflicting final decisions by courts of equal jurisdiction, the one of latest date shall be controlling. SECTION 9.02 CONTRARY DECISION. In the event of a decision of a tribunal terminating royalty liability followed by a decision of a tribunal that revives royalty liability, no royalty shall be payable for the period between the two decisions. ARTICLE 10. BEST EFFORTS SECTION 10.01 Licensee shall use its best efforts to maximize the number of licensed products sold and to maximize the selling price of each unit sold, subject to the limitations of Section 7.02.1 ARTICLE 11. SUCCESSORS AND ASSIGNS 5 6 SECTION 11.01 BINDING. This agreement shall bind, and inure to the benefit of, each of the parties, and their respective successors in interest and assigns. SECTION 11.02 ASSIGNMENT. BodyBilt may assign part of all of its interest in this agreement to any of its affiliate companies. ARTICLE 12. INFORMATION CONCERNING LICENSED PATENT RIGHTS SECTION 12.01 INSPECTION. Licensors hereby grant, and agree to grant, to Licensee and its duly authorized agents, under 37 CFR Section 1.14(a) and comparable rules of foreign patent practice, a power of inspection of all U.S. and foreign patent applications and copyrights included in the License Product and User Documentation and Licensors further agree to execute and deliver to Licensee such further documents as may be requested to carry out the intent of this provision. SECTION 12.02 INFORMATION. The parties agree to keep each other fully informed of the progress of the prosecution of all U.S. and foreign applications that are included in the Licensed Product and User Documentation. SECTION 12.03 NOTIFICATION. Licensee shall not be liable for any royalty under any claim of any patent or application in any country until after having actual notice of the filing, issuance or acquisition of such patent or application. ARTICLE 13. NOTICES, COMMUNICATIONS, PAYMENTS SECTION 13.01 Licensee may send all notices and reports and other communications and may make all payments under this license to CTSS, 239 Sleepy Hollow Lane, Coppell, Texas 75019, Fax (972) 392-9710. Licensors may send all notices, tenders, and other communications to Rob H. Holt, 4455 Carter Creek, Bryan, Texas, 77802 (409) 268-0102. All notices and other communications mentioned in this agreement, including royalty payments, may be mailed postpaid to the last known address of the designated individual. All notice periods and other times for taking any action mentioned in this license shall start on the day that such notice or other communication is actually mailed. ARTICLE 14. CHOICE OF LAW AND ARBITRATION SECTION 14.01 This agreement and any disputes arising under it shall be governed by the law of the State of Texas. SECTION 14.02 ARBITRATION. The parties agree that any and all claims or disputes between the parties that arise in the future shall be settled by mediation and, if necessary, binding arbitration according to the Rules of the Institute of Christian Conciliation and judgment upon an arbitration award may be entered by any court of competent jurisdiction. In addition to the normal authority of an Arbitrator, the parties agree that the Arbitrator shall 6 7 have the authority to determine the fair and just resolution of any dispute, as well as the authority to order exact remedies to move the defaulting party back into compliance. "Any claim or dispute" means any and all claims and disputes in contract or tort or statutory, and without limitation or restriction general to the foregoing: A. any and all disputes which may arise between the parties relating to the negotiation, drafting, formation, execution, and performance of this Agreement, B. any dispute or claim that arises between the parties outside of this Agreement, and C. any dispute regarding the wording of the of the clauses, covenants, modifications, clarifications of any additional documents which are needed to effectuate the purpose of this Agreement. ARTICLE 15. ALTERATIONS SECTION 15.01 This agreement cannot be altered except by an instrument in writing signed by an authorized officer of the Licensee and an authorized representative of the Licensors. Licensors reserve the right to increase the earned royalty to $860.00 per unit on April 2, 1997. ARTICLE 16. TERM AND TERMINATION SECTION 16.01 TERM. This agreement and the license granted by it is perpetual and it shall terminate only upon by written agreement of the Licensors and Licensee. SECTION 16.02 INVENTORY. Following any cancellation or other termination of this agreement, Licensee at its option shall be entitled to a license limited to all Licensed Product and User Documentation then on hand and that Licensee can manufacture with materials then on hand that were specifically purchased for the purpose of manufacturing the Licensed Product and User Documentation and may pay the same royalty rate with respect to such articles as that which would have been due if this agreement had remained in effect, but no other royalties shall be earned after cancellation or termination. SECTION 16.03 REVERSION. After any cancellation or termination of this license agreement, the Licensed Product and User Documentation shall revert to Licensors. In witness whereof, the parties have executed this agreement by affixing respectively their individual signatures and the signature of a duly authorized Officer of Licensee, as of the effective date mentioned above. COMPUTER TRANSLATION SYSTEMS & SUPPORT, INC. By: /s/ Jerold P. Lefler , -------------------------- Chairman of the Board of CTSS 7 8 /s/ Jerold P. Lefler , - --------------------------------------- Jerold P. Lefler, individually, and as a Shareholder of CTSS. /s/ Lawrence West Melquiond , - --------------------------------------- Lawrence West Melquiond, individually, and as Shareholder of CTSS BODYBILT SEATING, INC. By: /s/ Gerard Smith , -------------------- Gerard Smith, CEO and President 8 EX-21 3 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT - EB Subsidiary II, Inc. Texas 100% owned - BodyBilt, Inc. Texas 100% owned EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER 31, 1996 COMPANY FINANCIAL STATEMENTS OF BODY BILT SEATING INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 56,499 0 3,013,958 0 1,696,250 4,995,379 2,967,438 541,957 7,486,949 1,302,321 0 0 0 1,000 4,438,548 7,486,949 17,578,210 17,578,210 9,325,725 15,002,350 2,498 0 139,433 2,433,929 56,677 2,377,252 0 0 0 2,377,252 0 0
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