-----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, DAfExC1VdB7WLfVuTWlE6m7Te0ejSJ8lYNq0JU+bgf+ER/wwnCDOE1aD//UuiQdM 1KXHPnXcWWW1PuHnJjt3JA== 0001005477-98-001848.txt : 19980529 0001005477-98-001848.hdr.sgml : 19980529 ACCESSION NUMBER: 0001005477-98-001848 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980228 FILED AS OF DATE: 19980528 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LANGER BIOMECHANICS GROUP INC CENTRAL INDEX KEY: 0000725460 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 112239561 STATE OF INCORPORATION: NY FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-12991 FILM NUMBER: 98632983 BUSINESS ADDRESS: STREET 1: 450 COMMACK ROAD CITY: DEER PARK STATE: NY ZIP: 11729 BUSINESS PHONE: 5166671200 MAIL ADDRESS: STREET 1: 450 COMMACK ROAD CITY: DEER PARK STATE: NY ZIP: 11729 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 --------------------------------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 28, 1998 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-12991 ------- THE LANGER BIOMECHANICS GROUP, INC. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) New York 11-2239561 ---------------------------- ---------------------- (State or other jurisdiction (I.R.S. employer iden- of incorporation or tification number) organization) 450 Commack Road, Deer Park, New York 11729 --------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (516) 667-1200 -------------- Securities registered pursuant to Section 12(b) of the Act: NONE ---- Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.02 per share -------------------------------------- Title of Class * * * * * * * * * * * Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| As of May 19,1998, the aggregate market value of voting stock held by non-affiliates of the Registrant was $2,328,938 as computed by reference to the average bid and ask prices of the stock (1 3/8) multiplied by the number of shares of voting stock outstanding on May 19,1998 held by non-affiliates (1,634,261). Indicate the number of shares outstanding of each of the Registrant's classes of common stock as of May 19, 1998. Class of Common Stock Outstanding at May 19, 1998 - --------------------- --------------------------- Common Stock, par value 2,585,281 shares $.02 per share DOCUMENTS INCORPORATED BY REFERENCE Not applicable. 2 PART I ITEM 1. BUSINESS General The Langer Biomechanics Group, Inc. ("LBG" or the "Company") is engaged in the design, manufacture and marketing of foot and gait-related biomechanical products. The Company's largest product line, custom-made, prescription orthotic devices, accounted for approximately 84.9 % of revenues for the fiscal year ended February 28, 1998. Foot orthoses are contoured molds made from plastic, graphite, leather or composite materials, which are placed in patients' shoes to (i) correct or mitigate abnormalities in their gait and (ii) relieve symptoms associated with foot or postural malalignment. These devices function by maintaining the proper relationships between a patient's forefoot, rearfoot, leg and horizontal walking surface. To the Company's knowledge, it has the greatest overall unit volume and revenue in the custom foot orthoses industry. The Company's customers are primarily podiatrists, and also include orthopedists, physical therapists and Orthotic & Prosthetic ("O&P") centers. The Company also makes ankle foot orthoses ("AFO"), boot-like devices which assist individuals afflicted with neurological impairments, foot deformities and injuries to achieve a more natural gait. In addition to its line of orthotics products, the Company has developed and markets a number of other products that help treat biomechanical medical problems related to feet and gait, including: o A proprietary medical grade soft tissue cushioning material named PPT(R), which the Company believes provides superior protection against forces of pressure, shock and shear. PPT conforms and bonds to a broad array of orthotic and prosthetic devices, braces and assemblies; and o The Pediatric Counter Rotation System ("CRS"(R)), a device which corrects in-toe/out-toe disorders of infancy, while allowing unrestricted movement of the feet and legs. Background Since its formation under the laws of the state of New York in 1971, the Company has engaged in activities relating to the application of scientific and quantitative methods for the diagnosis and treatment of foot and gait-related problems. To date, the majority of the Company's revenues have been derived from the sale of prescription biomechanical foot orthotic devices to health care practitioners in the field of podiatric biomechanics. Podiatric biomechanics deals essentially with the structure and function of segments of the feet as they relate to each other and to the function of the legs, hips and spine. The Company has also endeavored to manufacture and market complementary products relating to locomotor dysfunctions. Building on its experience in treating disorders associated with the biomechanics of the foot and leg, the Company has directed efforts towards producing therapeutic products which can treat and improve patients' motor capabilities, biomechanical alignment and function. 3 Sales by product category of the Company as derived from its accounting records are set forth below (dollars in thousands):
Fiscal Years Ended: ------------------------------------- Feb. 28, Feb. 28, Feb. 29, Feb. 28, Product Category 1998 1997 1996 1995 - ---------------- ------------------------------------- Custom Orthoses $8,618 $8,994 $8,652 $8,746 PPT Products 1,281 1,085 1,121 1,168 Counter Rotation System ("CRS") 111 129 165 207 Materials and Other (including Superform) 146 307 175 194 Discontinued Product Line -- -- -- 152 ------- ------- ------- ------- Total $10,156 $10,515 $10,113 $10,467 ======= ======= ======= =======
Export and foreign sales constituted approximately 26%, 25% and 24% of revenues for the fiscal years ended February 28, 1998, February 28, 1997 and February 29, 1996, respectively. Custom Orthotic Devices The Company is engaged in the design, development, manufacture and sale of custom-made foot orthoses. Biomechanical orthotic devices help provide near normal function by maintaining the angular anatomical relationships between the patient's forefoot, rearfoot, leg and horizontal walking surface. This is achieved by the inherent contours of the neutral position shell of the device and by the angled posts on the front and/or rear ends which cause the orthotic device to move into specific positions at specific times during the gait cycle. Accordingly, muscle action is enhanced and the efficiency and smoothness of weight stress transmission through the feet and legs is improved. The result is a reduction of abnormal motion without total restriction of normal motion and an increase in foot and leg stability. Foot problems may be alleviated or eliminated, as may leg and back fatigue caused by improper muscle use. The formation and further growth of excrescences (e.g., corns or callouses) may be prevented, decreased in size or eliminated. In addition, the future formation of bunions may be prevented. During the twelve months ended February 28, 1998, sales of orthotic products totaled $8,618,000, compared to $8,994,000 for the twelve months ended February 28, 1997. Decreased revenues resulted from a decreased unit volume from the elimination of marginal accounts and a shift in doctor preference toward lower priced orthoses. While sales were primarily made to practitioners within the United States, the Company also sold its orthotic products in approximately thirty-two foreign countries. No single orthotic customer presently accounts for more than 1% of the Company's annual sales. The primary market for custom orthotic devices is podiatrists who prescribe such devices for their patients. There are approximately l2,800 practitioners of podiatry licensed in the United States. Orthotic devices are also sold to other health care professionals, such as orthopedists, engaged in the treatment of the foot. The cost of the device to the patient is typically included by the practitioner as part of his fee for treatment. The Company does not sell the devices directly to the user-patient. Orthotic devices are made in the Company's three facilities in Deer Park, New York; Brea, California; and Stoke-on-Trent, England. The prescribing practitioner furnishes plaster impression casts of the patient's feet and necessary clinical information on an appropriate prescription order form. In addition to its six-month warranty, the Company offers an optional "Protect Program" at an additional cost of $55 per pair of orthoses. Under the program, the 4 Company will repair or replace the orthotics at no charge, or at a reduced charge, during the first 24 months following sale. Biomechanical orthotic devices can be fabricated with different functional capabilities and from various materials, depending upon the requirements of the patient. The Company has designed orthotic devices to address the needs of particular segments of the market. For example, the general interest in physical fitness has resulted in demand for orthotic devices and it has heightened the awareness of the importance of proper foot function and foot care. To address this segment of the market, the Company manufactures an extensive line of orthotics called Sporthotics(R), designed for the specific needs of runners and other sport-specific athletes, including football, basketball and tennis players. Other specialized products include: Healthflex(R) (designed for the needs of aerobic dance, walking and exercise enthusiasts), DesignLine(R) (a functional orthotic designed to fit into dress shoes, such as high fashion shoes and loafers which cannot accommodate a full-size orthotic), DressFlex(TM) (a unique proprietary device for use in women's high-heeled shoes), Slimthotics(R) (designed to fit into shoes, such as high heels and ballet slippers), Lyte Fit(R) (ultra-thin and lightweight devices made from LBG's exclusive Superform(R) carbon graphite material), the Golden Series(TM) (designed for the needs of active individuals who are over 50 years of age), Bioflex(R) (devices suitable for younger, more active individuals), BlueLine(TM) (a flexible, durable, accommodative device that provides a moderate level of control), D.S.I.S.(R) (a patented device for the effective treatment of pediatric flat foot), and Diab-A-Thotics(R) (designed to meet the needs of diabetic patients in the growing diabetic population). An additional product line called "FirstChoice" was introduced in fiscal 1995 in order to address price-sensitive market areas, including managed care organizations. The product offering is limited to several basic products and has flat rate pricing. The manufacturing and service areas are also limited in order to reduce costs. Superform(R) is a proprietary composite material believed to be superior to other composite materials available for orthotic fabrication. Superform was first introduced in fiscal 1994 in several of the Company's orthotic products due to its strength and mouldability. During fiscal 1995, the Company began to market Superform to other orthotic labs. Ankle Foot Orthoses ("AFO") are plastic devices which are composed of a foot plate and leg support. They assist individuals afflicted with neurological impairments, previous trauma, ankle and leg instability, and arthritic deformities, to achieve a more natural gait. These products include the Hinged Ankle Foot Orthosis ("HAFO") used for neurological problems, the Supra-Malleoloar Orthosis ("SMO") for instability of the ankle joint, the Solid Ankle Foot Orthoses ("SAFO") to restrict motion at the ankle to treat arthritis and other joint conditions, and the Posterior Leaf Spring ("PLS"), useful in tendon ruptures and flaccid drop foot. AFO devices are prescribed by podiatrists, physical therapists and rehabilitation therapists. While the Company obtains a number of its fabrication materials from single sources, it has not experienced any significant shortages other than occasional backorders. In most cases, any needed materials can usually be obtained from a distributor. The Company believes that a relatively small percentage of custom orthotic devices continue to be made by practitioners in their own offices or laboratories. The vast majority of the market is serviced by professional laboratories based on casts and prescriptions furnished by practitioners. There are several other custom orthotic laboratories that are national in scope which the Company believes hold approximately a combined 40% to 45% of the overall custom market. The remainder of the market is fragmented among smaller regional and local facilities. PPT(R) Products PPT is a medical grade soft tissue cushioning material with a high density, open-celled urethane foam structure. PPT, a registered trademark of the Company, is manufactured, pursuant to an agreement, for the 5 Company by a large industrial manufacturing company. This company manufactures urethane foam materials of which PPT is a derivative. Pursuant to the agreement, the Company has the exclusive worldwide rights to serve footcare, orthopedic and related medical markets with such materials. The Company has developed and sells a variety of products fabricated from PPT including moulded insoles, components for orthotic devices, laminated sheets, and diabetic products. Some manufacturing operations associated with these products are performed by outside vendors. Sales of PPT products for the twelve months ended February 28, 1998 were $1,281,000 versus $1,085,000 in the prior fiscal year. The increase is attributable to an increase in sales through key distributors, and the addition of several new accounts. In April of 1993, the Company introduced a new generation of PPT, which independent tests show to have improved properties over competitive materials. The essential function of PPT and other soft tissue supplements is to provide protection against forces of pressure, shock and shear. The Company believes that PPT's characteristics make it a superior product in its field. PPT has a superior "memory" that enables it to return to its original shape faster and more accurately than other materials used for similar purposes. PPT is also odorless and non-sensitizing to the skin, and has a porosity which helps the skin to remain dry, cool and comfortable. These factors are especially important in sports medicine applications. Besides podiatric use, PPT is suitable for other orthopedic and medical-related uses such as liners for braces and prosthetics, as shock absorbers and generally in devices used in sports and physical therapy. The Company has awarded exclusive distribution arrangements to certain leading distributors serving selected end-use markets in the United States and other countries. The Company sells direct to practitioners in non-exclusive and new markets. The market for soft tissue supplements is highly competitive. Brand products as well as commodity type foam rubber are all widely used. Brand name products include Spenco, Sorbothane, medical-grade Poron, and DCS. The remainder of the market is fragmented. The Company competes directly with one other manufacturer of cellular urethane foam. The Pediatric Counter-Rotation System ("CRS") The Company introduced the CRS(R) device in fiscal 1987 for the correction and management of a variety of in-toe and out-toe disorders of infancy. The disorders manifest themselves in an excessive angle, either inward or outward, from that which is normal in the relationship of the foot to the direction of movement. Sales for CRS totaled $111,000 during the twelve months ended February 28, 1998 compared to sales of $129,000 in the prior twelve-month period. The decrease in revenues resulted from a reduced level of direct promotion with a shift toward wholesale sales to distributors in the United States and overseas. The CRS is designed to replace rigid bars or splints which have traditionally been used (since 1934) and which not only inhibit normal leg movement and are cumbersome and inconvenient, but can also lead to permanent knee and hip damage. Unlike rigid bars or splints, the CRS requires no specific measurement for sizing and may be used with almost any type of children's shoes. Also, unlike other devices, it will allow the infant unrestricted movement of the feet and legs while maintaining the abnormal foot or feet in the corrected position. The CRS is also designed to compensate automatically for the rapid growth of an infant's legs and hips, thus avoiding the possibility of damage to the hips and knees. The potential for permanent knee and hip joint damage is a significant drawback of rigid bar therapy. The CRS is prescribed by pediatricians, orthopedists and podiatrists and is sold by the Company directly to practitioners as well as through selected distributors. The level of reimbursement from third-party insurers for the CRS varies from one state to another. 6 The CRS was developed by BioResearch Ithaca, Inc. of Ithaca, New York, which has obtained patents on the device in the United States and certain other countries. In accordance with a license agreement entered into in July l986 between the Company and BioResearch Ithaca, Inc., the Company has been granted an exclusive license, with the right to grant sublicenses, to make, use and sell the CRS. Food and Drug Administration acceptance to market the CRS has been obtained by the Company. See "Governmental Regulation". The primary competitive products for the CRS are rigid bars and splints. Marketing The Company seeks to be recognized as an educator, and leader in product quality, customer service, technical knowledge and product innovation. The marketing mix includes trade shows, trade advertising, sponsorship of educational programs, public relations and maintenance marketing with a strong emphasis on customer service. The Company maintains a staff of customer representatives at each of its facilities. Management continues to utilize a number of marketing and operational initiatives to promote awareness of and incentives to purchase Company orthotic products. These include a volume incentive program ("VIP") and a practice building program. Also, the Company's marketing program entails the sponsorship of seminars. It includes a comprehensive program in biomechanics and gait analysis coupled with addressing the cost effectiveness of orthotic therapy. Research and Development The Company incurred no research and development costs for the twelve months ended February 28, 1998 and February 28, 1997. The Company also incurred no research and development costs for the twelve months ended February 29, 1996, except in connection with an in-house CAD-CAM project that was discontinued, which resulted in a $499,000 write-off in such fiscal year. The Company does not expect to incur significant research and development costs in the future. Patents and Trademarks The Company believes that patent and trademark protection are beneficial. It holds 13 patents, 111 trademarks and 9 copyrights. Various patents and trademarks are held in 12 countries. The Company has exclusive licenses to three types of orthotic devices which are patented in the United States and several foreign countries. In addition, patents have also been granted to a third party in the United States and numerous foreign countries with respect to the CRS (as to which the Company has exclusive marketing rights). Although a patent would have a statutory presumption of validity in the United States, in the event that any patent awarded to the Company or a third party is later tested in litigation, the issuance of a patent is not conclusive as to such validity or as to the enforceable scope of the claims therein. The validity and enforceability of a patent can be attacked after its issuance. If the outcome of such litigation is adverse to the owner or licensor of the patent, third parties may use the invention or technology pertaining to the patent without restriction. Accordingly, any patents granted to the Company or to third parties from whom the Company obtained licenses may not afford any protection against competitors with similar products. Loss of patent protection could have an adverse effect on the Company's business by permitting competitors to utilize techniques developed by the Company. 7 Governmental Regulation Rules of the Food and Drug Administration ("FDA") may require the submission of a 510(k) notification of intent to market certain products. Upon submission of a 510(k), the FDA may determine the product to be substantially equivalent to products previously marketed in interstate commerce. Such submissions have been made and determined to be substantially equivalent for the CRS. Employees At March 1, l998, the Company had 145 employees, of which 92 were located in Deer Park, New York, 27 in Brea, California, and 26 in Stoke-on-Trent, England. The Stoke-on-Trent facility is operated by a 75% owned subsidiary of the Company. Included among the Deer Park employees are the three executive officers of the Company, including the Company's co-founder who is a licensed Doctor of Podiatric Medicine and a faculty member of the New York School of Podiatric Medicine. The Company considers its employee relations to be excellent. The employees are not represented by a union. Consultants and Field Evaluation Force The Company has oral or written agreements with four medical specialists with respect to their providing professional consultative services to the Company in their areas of specialization. Two of the consultants are on the faculties of the colleges of podiatric medicine in the United States. The consultants test and evaluate the Company's products, act as speakers for the Company at symposiums and professional meetings, generally participate in the development of the Company's products and services and disseminate information about them. The Company also relies on practitioners in various parts of the country to act as field evaluators of the Company's products. Seasonality Revenue derived from the Company's sale of orthotic devices, a substantial portion of the Company's operations, have historically been significantly higher in the warmer months of the year. ITEM 2. PROPERTIES The Company's executive offices, and its primary manufacturing facilities, are located in Deer Park, New York. The Deer Park facility is leased through July 31, l999, with a four year extension option, and with monthly lease payments of $23,414. The Company also leases space in Brea, California (manufacturing facility) and Northbrook, Illinois (prior sales office), under separate leases which expire through December 31, 1998, and with aggregate monthly lease payments of $8,265. The Northbrook Illinois facility was closed in October 1996 with the space sublet at $1,200 per month or approximately $150 per month below the Company's lease cost. This sub-lease expires at the end of the Company's lease on July 31, 1998. A 75% owned subsidiary of the Company currently leases facilities in Stoke-on-Trent, England under a lease expiring December 31, 1998 and for which it currently pays $1,550 (at the current exchange rate) per month. The Company believes that its manufacturing facilities are suitable and adequate and provide the productive capacity necessary for its current and reasonably foreseeable future needs. The Company believes that while these manufacturing facilities are being adequately utilized, they could be more fully utilized (e.g. with extended night shift operations) should this become necessary. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Price Range of Common Stock The Registrant's common stock, par value $.02 per share ("Common Stock"), is traded on the over-the-counter market with quotations reported on the National Association of Securities Dealers Automated Quotation System (NASDAQ) under the symbol GAIT. The following table sets forth the high and low closing bid prices for the Common Stock for the fiscal years ended February 28, 1997 and February 28, 1998. The NASDAQ quotations represent prices between dealers, do not include retail markups, markdowns or commissions, and may not represent actual transactions. Twelve Months Ended February 28, 1997 High Low - ------------------------------------- ---- --- 1st quarter ....... 1 7/8 1 1/2 2nd quarter ....... 2 1/4 1 5/8 3rd quarter ....... 2 1 5/8 4th quarter ....... 2 1/8 1 9/16 Twelve Months Ended February 28, 1998 High Low - ------------------------------------- ---- --- 1st quarter ....... 1 7/8 1 5/8 2nd quarter ....... 2 1/4 1 11/16 3rd quarter ....... 2 1 7/16 4th quarter ....... 1 3/4 1 13/32 On February 28, 1998, there were approximately 300 holders of record of the Common Stock. However, this figure is exclusive of all owners whose stock is held beneficially or in "street" name. Based on information supplied by various securities dealers, the Company believes that there are in excess of 650 shareholders in total, including holders of record as well as those whose shares are beneficially held. Dividend History and Policy The Registrant has never paid cash dividends on its Common Stock and anticipates that, for the foreseeable future, it will follow a policy of retaining earnings to finance the expansion and development of its business. In any event, future dividend policy will depend upon the Company's earnings, financial condition, working capital requirements and other factors. 9 ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data.) Fiscal Year Ended: ----------------------------------------------------- Feb. 28, Feb. 28, Feb 29, Feb. 28, Feb. 28, 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- Consolidated Statement of Operations: Net sales $10,156 $10,515 $10,113 $10,467 $11,664 Income (loss) before non-recurring charges and income taxes 370 331 113 (266) (950) Non-recurring charges: Discontinuance of CAD-CAM project -- -- (499) -- -- Lab closings, write down of selected assets and legal fees -- -- (49) (363) -- Income (loss) before income taxes 370 331 (435) (629) (950) Provision for (benefit from) income taxes 5 28 (2) 8 13 Net income (loss) 365 303 (433) (637) (963) Earnings per share: Income (loss) before non-recurring charges and income taxes .14 .12 .04 (.11) (.38) Non-recurring charges: Discontinuance of CAD-CAM project -- -- (.19) -- -- Lab closings, write down of selected assets and legal fees -- -- (.02) (.14) -- Net income (loss) per common share: Basic .14 .12 (.17) (.25) (.38) Diluted .14 .11 (.17) (.25) (.38) Weighted average number of common shares: Basic 2,585 2,583 2,568 2,547 2,547 Diluted 2,658 2,666 2,568 2,547 2,548 Cash dividends per share -- -- -- -- -- Consolidated Balance Sheets: Working Capital 2,090 2,050 1,576 1,456 1,871 Total Assets 4,848 4,445 4,035 4,535 5,426 Long-term Indebtedness (excluding current maturities) 375 444 430 482 551 Stockholders' Equity 2,663 2,291 1,978 2,311 2,850
10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements of Operations: The Company's net sales of $10,156,000 for the twelve months ended February 28, 1998 were 3.4 percent below net sales of $10,515,000 for the twelve months ended February 28, 1997. Net sales in fiscal 1997 were 4.0 percent above net sales of $10,113,000 for the twelve months ended February 29, 1996. Sales of orthotic products, which accounted for 84.9 percent of the Company's fiscal 1998 sales, decreased by approximately $376,000 or 4.2 percent to approximately $8,618,000 in the most recent twelve-month period. Decreased revenues resulted from decreased unit volume from the elimination of marginal accounts and a shift in doctor preference toward lower priced orthoses, partially offset by an earlier unit price increase. Sales of orthotic products in fiscal 1997 increased by $342,000 or 4.0 percent to $8,994,000 from fiscal 1996. Increased revenues resulted from increased unit volume which more than offset a shift in doctor preferences toward lower priced orthoses. A unit price increase equal to approximately 3.5 percent on an annual basis became effective at the end of October, 1996. Sales of PPT (the Company's soft tissue supplement material) for the recent twelve months were $1,281,000, which increased by $196,000 or 18.1 percent from sales in the prior fiscal year. The increase in PPT sales over the prior fiscal year was due to the addition of several larger volume accounts. For the year ended February 28, 1997, sales were $1,085,000, representing a 3.2 percent decrease of $36,000 from the prior year. The decrease was due to an increased level of competition. Sales of the Counter Rotation System ("CRS"(R)) were $111,000 for the twelve months ended February 28, 1998, representing a $18,000 or 14.0 percent decrease from the prior twelve-month period. Sales for fiscal 1997 declined by $36,000 or 21.8 percent from the prior fiscal year. The decreased revenue resulted from a reduced level of direct promotion together with a shift toward wholesale sales to distributors in the United States and overseas. Gross profit (net sales less cost of sales) as a percentage of sales decreased from 41.5 percent for the twelve months ended February 28, 1997 to 40.0 percent for the recent twelve-month period. The decreased gross profit percentage resulted from increased manufacturing overhead on reduced unit sales in United States operations, and increased labor costs in United Kingdom operations. Gross profit as a percentage of sales increased from 40.5 percent for the twelve months ended February 29, 1996 to 41.5 percent for the year-end February 28, 1997. The increased gross profit percentage resulted from increased labor efficiencies, higher unit volumes and the sales price increase. For the current fiscal year, selling expenses decreased by $332,000, and general and administrative expenses decreased by $18,000, compared to the prior twelve-month period. These reductions were due to lower promotional expense and tighter controls over operational expenditures and staff reductions. For the twelve-month period ended February 28, 1997, selling, general and administrative expenses increased by $14,000 from the prior year's expense of $4,080,000. Expense increases were due primarily to higher promotion expense in fiscal 1997. However, as a percent of sales, these expenses were down to 38.9% versus 40.3% in the prior fiscal year. The Company incurred no research and development expenses in fiscal 1998 or fiscal 1997. All related costs ($499,000) associated with the decision to discontinue the in-house CAD-CAM project were written off during fiscal 1996. Interest income for the recent twelve-month period of $53,000 increased $3,000 from the prior twelve-month period. Interest income of $49,000 for fiscal 1997 was above fiscal 1996. This was primarily due to higher cash balances and more effective short-term investment of excess cash. 11 Other income for fiscal year 1998 was $13,000. For the twelve months ended February 28, 1997 and February 29, 1996, other income was $20,000 and $14,000, respectively. For the year ended February 28, 1998, the Company had net income of $365,000 compared with a profit of $303,000 for the prior fiscal year. Income increased due to increased sales of PPT, the sales price increase on orthotic products for the full fiscal year, reduced selling expenses and a lower effective tax rate. For the year ended February 28, 1997, the Company had net income of $303,000 compared with a profit of $115,000 before non-recurring expenses for the prior fiscal year. Income increased primarily due to higher unit volume, a sales price increase effective in the last four months of the year, improved manufacturing efficiencies and reduced general and administrative expenses. For the year ended February 29, 1996, the Company had a net loss of $433,000 or $.17 per share, of which $548,000 were non-recurring expenses ($499,000 for discontinuance of the Company's in-house CAD-CAM project and $49,000 for the closing of our New Jersey manufacturing facility). Fiscal 1996 income of $115,000, before non-recurring expenses, exceeded the prior year's loss of $274,000, before non-recurring expenses, by $389,000. The increase was mainly due to savings achieved by closing the Company's Wheeling, Illinois manufacturing facility plus staffing cutbacks in corporate departments. Liquidity and Capital Resources Working capital as of February 28, 1998 increased $40,000 to $2,090,000 from $2,050,000 at February 28, 1997. The increase is due to increases in cash, inventories and prepaid expenses of $63,000, $117,000 and $32,000, respectively, as well as decreases in accrued payroll liabilities and other current liabilities of $18,000 and $19,000, respectively. The increase is offset by an increase in accounts payable and a decrease in accounts receivable of $138,000 and $71,000, respectively. Cash balances at February 28, 1998 of $1,189,000 were $63,000 above the prior year-end balance of $1,126,000. The Company anticipates that cash generated from operations as well as existing funds will be adequate to finance its present and contemplated future level of operations for a period of at least twelve months. Revolving Credit The Company has a one year (August 1, 1997 - July 31, 1998) agreement for revolving credit of $1,500,000, at an interest rate of prime plus 2 percent, from a bank, but to date has not found it necessary to use this credit line. The agreement contains, among other items, restrictions relating to incurrence of additional indebtedness and the payment of dividends. Additionally, the Company is required to maintain certain minimum financial ratios. Borrowings under this agreement are collateralized by substantially all of the assets of the Company. Seasonality Revenue derived from the Company's sale of orthotic devices, a substantial portion of the Company's operations, has historically been significantly higher in the warmer months of the year. Inflation The Company has in the past been able to increase the prices of its products or reduce overhead costs sufficiently to offset the effects of inflation on wages, materials and other expenses, and anticipates that it will be able to continue to do so in the future. 12 Recent Pronouncements of the Financial Accounting Standards Board Recent pronouncements of the Financial Accounting Standards Board ("FASB"), which are not required to be adopted at this date, include Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") and SFAS No. 131, "Disclosures about Segments of an Enterprise as Related Information" ("SFAS No. 131") . SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a set of financial statements. SFAS No. 131 establishes standards for reporting financial and descriptive information about reportable operating segments on the basis that is used internally for evaluating segment performance and allocating segment resources. These statements are effective for fiscal years beginning after December 15, 1997. The Company does not expect that the adoption of SFAS No. 130 and 131 will have a material effect on the Company's consolidated financial statements. Year 2000 Compliance The inability of computers, software and other equipment utilizing microprocessors to recognize and properly process data fields containing a 2 digit year is commonly referred to as the Year 2000 Compliance issue. As the year 2000 approaches, such systems may be unable to accurately process certain date-based information. The Company is taking steps to ensure that all software used in the Company's internal systems will manage data involving the transition of dates from 1999 to 2000 without functional or data abnormality and without inaccurate results. New computer systems are being implemented that will substantially insure that the Company's operating systems are not subject to Year 2000 transition problems. However, there can be no assurance that problems will not surface that the Company is currently unaware of. In addition, the Company is in the process of communicating with others with whom it does significant business to determine their Year 2000 Compliance readiness and the extent to which the Company is vulnerable to any third party Year 2000 issues. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Begins on the next page. 13 THE LANGER BIOMECHANICS GROUP, INC. AND SUBSIDIARIES Index to Consolidated Financial Statements and Schedule February 28, 1998, February 28, 1997 and February 29, 1996 Page ---- Independent Auditors' Report 15 Consolidated Financial Statements: Consolidated Balance Sheets as of February 28, 1998 and February 28, 1997 16 Consolidated Statements of Operations for the years ended February 28, 1998, February 28, 1997 and February 29, 1996 17 Consolidated Statements of Stockholders' Equity for the years ended February 28, 1998, February 28, 1997 and February 29, 1996 18 Consolidated Statements of Cash Flows for the years ended February 28, 1998, February 28, 1997 and February 29, l996 19 Notes to Consolidated Financial Statements 20 - 30 Consolidated Financial Statement Schedule II - Valuation and Qualifying Accounts for the years ended February 28, 1998, February 28, 1997 and February 29, 1996 31 All other schedules have been omitted because they are not applicable, not required or the information is disclosed in the consolidated financial statements, including the notes thereto. 14 INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of The Langer Biomechanics Group, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of The Langer Biomechanics Group, Inc. and subsidiaries (the "Company") as of February 28, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended February 28, 1998. Our audits also included the consolidated financial statement schedule listed in the foregoing index for the three years in the period ended February 28, 1998. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at February 28, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended February 28, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Jericho, New York May 15, 1998 15 THE LANGER BIOMECHANICS GROUP, INC. AND SUBSIDIARIES Consolidated Balance Sheets February 28, 1998 and February 28, 1997
1998 1997 ---- ---- Assets Current assets: Cash and cash equivalents $ 1,189,046 $ 1,125,589 Accounts receivable, net of allowance for doubtful accounts of approximately $23,000 in 1998 and $20,000 in 1997 1,360,420 1,431,567 Inventories, net (Note 2) 1,039,718 922,346 Prepaid expenses and other current receivables 311,447 279,558 ----------- ----------- Total current assets 3,900,631 3,759,060 Property and equipment, net (Note 3 and 6) 777,991 507,195 Other assets (Note 8) 169,214 178,771 ----------- ----------- Total Assets (Note 13) $ 4,847,836 $ 4,445,026 =========== =========== Liabilities and Stockholders' Equity Current liabilities: Current maturities of note payable (Note 6) $ -- $ 301 Accounts payable 478,590 341,078 Accrued liabilities: Accrued payroll and related payroll taxes 281,961 299,519 Other (Note 4) 658,709 677,669 Unearned revenue 391,081 390,727 ----------- ----------- Total current liabilities 1,810,341 1,709,294 Accrued pension expense (Note 8) 220,609 287,315 Unearned revenue 148,733 151,732 Deferred income taxes (Note 5) 5,423 5,376 ----------- ----------- Total liabilities 2,185,106 2,153,717 ----------- ----------- Commitments and contingencies (Note 7) Stockholders' equity (Note 9): Common stock, $.02 par value. Authorized 10,000,000 shares; outstanding 2,585,281 shares in 1998 and 2,584,281 in 1997 51,706 51,686 Additional paid-in capital 6,277,543 6,276,782 Accumulated deficit (3,375,120) (3,740,402) Aggregate adjustment resulting from foreign currency translation (49,571) (48,509) Minimum pension liability adjustment (Note 8) (241,828) (248,248) ----------- ----------- Total stockholders' equity 2,662,730 2,291,309 ----------- ----------- Total Liabilities and Stockholders' Equity $ 4,847,836 $ 4,445,026 =========== ===========
See accompanying notes to consolidated financial statements. 16 THE LANGER BIOMECHANICS GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Operations For the years ended February 28, l998, February 28, l997 and February 29, l996
1998 1997 l996 ------------ ------------ ------------ Net sales (Note 11) $ 10,156,085 $ 10,514,842 $ 10,113,486 Cost of sales 6,095,412 6,149,872 6,012,690 ------------ ------------ ------------ Gross profit 4,060,673 4,364,970 4,100,796 Selling expenses 1,496,148 1,828,144 1,761,498 General and administrative expenses 2,248,365 2,266,217 2,318,495 Discontinuance of in-house CAD-CAM project (Note l0) -- -- 498,735 ------------ ------------ ------------ Operating profit (loss) 316,160 270,609 (477,932) ------------ ------------ ------------ Other income (expense): Interest income 52,592 48,978 37,412 Interest expense (11,980) (9,298) (8,753) Other 13,453 20,261 14,162 ------------ ------------ ------------ Other income, net 54,065 59,941 42,821 ------------ ------------ ------------ Income (loss) before income taxes 370,225 330,550 (435,111) Provision for (benefit from) income taxes (Note 5) 4,943 27,503 (2,126) ------------ ------------ ------------ Net income (loss) $ 365,282 $ 303,047 $ (432,985) ============ ============ ============ Weighted average number of common shares used in computation of net income (loss) per share: Basic 2,584,780 2,583,344 2,568,458 Diluted 2,658,378 2,666,420 2,568,458 Net income (loss) per common share: Basic $ 0.14 $ 0.12 $ (0.17) ============ ============ ============ Diluted $ 0.14 $ 0.11 $ (0.17) ============ ============ ============
See accompanying notes to consolidated financial statements. 17 THE LANGER BIOMECHANICS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED FEBRUARY 28, 1998, FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
AGGREGATE ADJUSTMENT RESULTING FROM MINIMUM TOTAL ADDITIONAL FOREIGN PENSION STOCK- COMMON PAID-IN ACCUMULATED CURRENCY LIABILITY HOLDERS' STOCK CAPITAL DEFICIT TRANSLATION ADJUSTMENT EQUITY --------------------------------------------------------------------------- Balance at February 28, 1995 $50,947 $6,248,755 $(3,610,464) $(47,274) $(330,786) $2,311,178 Minimum pension liability adjustment -- -- -- -- 75,618 75,618 Aggregate adjustment resulting from translation of financial statements into U.S. dollars -- -- -- (2,514) -- (2,514) Exercise of stock options 680 25,742 -- -- -- 26,422 Net loss for year -- -- (432,985) -- -- (432,985) --------------------------------------------------------------------------- Balance at February 29, 1996 51,627 6,274,497 (4,043,449) (49,788) (255,168) 1,977,719 Minimum pension liability adjustment -- -- -- -- 6,920 6,920 Aggregate adjustment resulting from translation of financial statements into U.S. dollars -- -- -- 1,279 -- 1,279 Exercise of stock options 59 2,285 -- -- -- 2,344 Net income for year -- -- 303,047 -- -- 303,047 --------------------------------------------------------------------------- Balance at February 28, 1997 51,686 6,276,782 (3,740,402) (48,509) (248,248) 2,291,309 Minimum pension liability adjustment -- -- -- -- 6,420 6,420 Aggregate adjustment resulting from translation of financial statements into U.S. dollars -- -- -- (1,062) -- (1,062) Exercise of stock options 20 761 -- -- -- 781 Net Income for year -- -- 365,282 -- -- 365,282 --------------------------------------------------------------------------- Balance at February 28, 1998 $51,706 $6,277,54 $(3,375,120) $(49,571) $(241,828) $2,662,730 ======= ========= =========== ======== ========= ==========
See accompanying notes to consolidated financial statements. 18 THE LANGER BIOMECHANICS GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the years ended February 28, 1998, February 28, 1997 and February 29, 1996
1998 1997 1996 ---- ---- ---- Cash Flows From Operating Activities: Net income (loss) $ 365,282 $ 303,047 $ (432,985) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Deferred foreign tax provision 47 747 -- Depreciation and amortization 207,233 190,618 223,778 Loss on disposal of property and equipment -- -- 392,584 Changes in operating assets and liabilities: Accounts receivable 70,065 (151,344) (3,149) Inventories (118,199) (52,516) (61,402) Prepaid expenses and other assets (30,219) 38,435 678 Accounts payable and accrued liabilities 101,891 81,157 (96,672) Net pension liability (52,495) 2,845 42,702 Unearned revenue (2,154) 27,484 (16,173) ----------- ----------- ----------- Net cash provided by operating activities 541,451 440,473 49,361 ----------- ----------- ----------- Cash Flows From Investing Activities- Capital expenditures (478,474) (53,282) (138,443) ----------- ----------- ----------- Net cash used in investing activities (478,474) (53,282) (138,443) ----------- ----------- ----------- Cash Flows From Financing Activities: Common stock options exercised 781 2,344 26,422 Principal payments of note payable (301) (3,406) (6,631) Principal payments under capital lease obligations -- -- (2,906) ----------- ----------- ----------- Net cash provided by (used in) financing activities 480 (1,062) 16,885 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 63,457 386,129 (72,197) Cash and cash equivalents at beginning of year 1,125,589 739,460 811,657 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 1,189,046 $ 1,125,589 $ 739,460 =========== =========== =========== Supplemental Disclosures of Cash Flow Information - Cash paid (refunded) during the year for: Interest $ 11,980 $ 9,298 $ 8,636 =========== =========== =========== Income taxes $ 1,500 $ 8,286 $ (488) =========== =========== ===========
See accompanying notes to consolidated financial statements. 19 THE LANGER BIOMECHANICS GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements For the years ended February 28, l998, February 28, l997 and February 29, 1996 (l) Summary of Significant Accounting Policies (a) Principles of Consolidation The accompanying consolidated financial statements include the accounts of The Langer Biomechanics Group, Inc. and its subsidiaries (the "Company"). All significant intercompany transactions and balances have been eliminated in consolidation. (b) Revenue Recognition Revenue from the sale of the Company's products is recognized at shipment. Revenues derived from extended warranty contracts relating to sales of orthotics are recorded as deferred revenue and recognized over the lives of the contracts (24 months) on a straight-line basis. (c) Cash Equivalents For purposes of the statement of cash flows, the Company considers all short-term, highly liquid investments purchased with a maturity of three months or less to be cash equivalents (money market funds and short-term commercial paper). (d) Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. (e) Property and Equipment Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method. The lives on which depreciation and amortization are computed are as follows: Leasehold improvements Lesser of 5 years or life of lease Machinery and equipment 5 - l0 years Office equipment 5 - l0 years Diagnostic equipment 7 - l0 years Automobiles 3 - 5 years In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). SFAS No. 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used for long-lived assets and certain identifiable intangibles to be disposed of SFAS No. 121 requires review of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption of SFAS No. 121, during fiscal 1997, did not have a material effect on the consolidated financial statements of the Company. 20 (f) Income Taxes The Company accounts for income taxes using an asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Income tax expense (benefit) is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. (g) Net Income (Loss) Per Share During the year ended February 28, 1998, the Company adopted SFAS No. 128, "Earnings per share" ("SFAS No. 128"), which requires dual presentation of basic and diluted earnings per share on the face of the statements of operations. In accordance with SFAS No. 128 the prior year earnings per share were restated. Basic earnings per share are based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share are based on the weighted average number of shares of common stock and common stock equivalents (options and warrants) outstanding during the period, except where the effect would be antidilutive, computed in accordance with the treasury stock method. (h) Foreign Currency Translation Assets and liabilities of the foreign subsidiary have been translated at year-end exchange rates, while revenues and expenses have been translated at average exchange rates in effect during the year. Resulting cumulative translation adjustments have been recorded as a separate component of stockholders' equity. (i) Reclassifications Certain amounts in the prior years' financial statements have been reclassified to conform to the current year's presentation. (j) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (k) Fair Value of Financial Instruments At February 28, 1998 and February 28, 1997, the carrying amount of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and note payable, approximated fair value because of their short-term maturity. (l) Fourth Quarter Adjustments During the fourth quarter of the year ended February 28, 1998, the Company re-evaluated certain expense accruals which had been systematically accrued, based upon budgeted expenditures, during the previous three quarters. The Company determined that the amounts accrued were in excess of current 21 estimates for the year and have reversed such excess accruals. Fourth quarter net income has been increased by approximately $90,000 as a result of these entries. (m) Recent Pronouncements of the Financial Accounting Standards Board Recent pronouncements of the Financial Accounting Standards Board ("FASB"), which are not required to be adopted at this date, include SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a set of financial statements. SFAS No. 131 establishes standards for reporting financial and descriptive information about reportable operating segments on the basis that is used internally for evaluating segment performance and allocating segment resources. These statements are effective for fiscal years beginning after December 15, 1997. The Company does not expect that the adoption of SFAS No. 130 and 131 will have a material effect on the Company's consolidated financial statements. (2) Inventories At February 28, l998 and February 28, l997, inventories consist of the following: 1998 1997 ---------- ---------- Raw materials $ 921,065 $ 706,184 Work-in-process 62,925 156,421 Finished goods 114,739 119,353 ---------- ---------- Total inventories 1,098,729 981,958 Less allowance for obsolescence 59,011 59,612 ---------- ---------- Net inventories $1,039,718 $ 922,346 ========== ========== (3) Property and Equipment Property and equipment, at cost, at February 28, l998 and February 28, l997, is comprised of the following: 1998 1997 ---------- ---------- Leasehold improvements $ 465,019 $ 445,069 Machinery and equipment 851,807 825,689 Office equipment 1,787,304 1,364,386 Automobiles 35,067 26,024 ---------- ---------- 3,139,197 2,661,168 Less accumulated depreciation and amortization 2,361,206 2,153,973 ---------- ---------- Property and equipment, net $ 777,991 $ 507,195 ========== ========== 22 (4) Other Accrued Liabilities Other accrued liabilities consist of the following at February 28, l998 and February 28, l997: 1998 1997 -------- -------- Sales credits payable $102,710 $ 97,057 Accrued professional fees 70,800 52,100 Warranty reserve 33,797 33,797 Other accrued liabilities 451,402 494,715 -------- -------- Total other accrued liabilities $658,709 $677,669 ======== ======== (5) Income Taxes The provision for (benefit from) income taxes is comprised of the following for the years ended February 28, l998, February 28, l997 and February 29, l996: 1998 1997 l996 -------- -------- -------- Current: Federal $ 502 $ - $ - State 4,439 4,639 (4,294) Foreign 2 22,864 2,168 -------- -------- -------- $ 4,943 $ 27,503 $ (2,126) ======== ======== ======== As of February 28, l998, the Company has net Federal tax operating loss carryforwards of approximately $2.8 million, which may be applied against future taxable income and expire from 2000 through 2011. The Company also has available tax credit carryforwards of approximately $141,000. Included in the provision for foreign income taxes are deferred income taxes of $47, $747 and $0 for the years ended February 28, 1998, February 28, 1997 and February 29, 1996. The following is a summary of deferred tax assets and liabilities as of February 28, 1998 and February 28, 1997: 1998 1997 ----------- ----------- Current deferred tax assets $ 227,994 $ 336,490 ----------- ----------- Non-current: Deferred tax assets 1,156,364 1,310,023 Deferred tax liability (5,423) (5,376) ----------- ----------- Non-current deferred tax assets, net 1,150,941 1,304,647 ----------- ----------- Total deferred tax assets, net 1,378,935 1,641,137 Valuation allowance (1,384,358) (1,646,513) ----------- ----------- Net $ (5,423) $ (5,376) =========== =========== The current deferred tax assets are primarily composed of deferred revenue, inventory and accounts receivable reserves, and accrued vacation. The non-current deferred tax assets are primarily composed of deferred revenue and Federal net operating loss carryforwards. The non-current deferred tax liability is primarily composed of excess tax depreciation over book depreciation. The decrease in the valuation allowance during fiscal 1998 resulted from a reduction in the net deferred tax assets. 23 The Company's effective provision for (benefit from) income taxes differs from the Federal statutory rate. The reasons for such differences are as follows:
February 28, February 28, February 29, 1998 1997 1996 --------------------- -------------------- -------------------- Amount % Amount % Amount % ------ ----- ------ ----- ------ ----- Provision (benefit) at Federal statutory rate $ 125,877 34.0% $ 112,387 34.0% $(147,938) (34.0)% Increase (decrease) in taxes resulting from: State income taxes, net of Federal benefit 4,439 1.2 4,639 1.4 (4,294) (1.0) Foreign taxes 2 -- 22,864 6.9 2,168 0.5 (Use) creation of net operating loss carryforwards (125,375) (33.9) (112,387) (34.0) 147,938 34.0 --------- ----- --------- ----- --------- ----- Effective tax rate $ 4,943 1.3% $ 27,503 8.3% $ (2,126) (0.5)% ========= ===== ========= ===== ========= =====
(6) Long-Term Note Payable Long-term note payable, less current maturities, at February 28, l998 and February 28, l997 consists of the following: l998 l997 ---- ---- Equipment note bearing interest at 10.5% due March 1997. The note is payable in monthly installments of principal and interest of $304. The note is collateralized by certain equipment with a carrying value of approximately $4,600 at February 28, l997 $ - $ 301 ------ -------- Less current maturities $ - $ 301 ------ -------- Long-term note payable $ - $ - ====== ======== 24 (7) Commitments and Contingencies (a) Leases Certain of the Company's facilities and equipment are leased under noncancellable lease agreements and certain operating leases contain minimum annual escalations in base rent. Rental expense amounted to $445,088, $439,972, and $500,429 for the years ended February 28, 1998, February 28, l997, and February 29, l996, respectively. The following is a schedule, by fiscal year, of future minimum rental payments required under operating leases as of February 28, l998: Fiscal year ending February: Amount ---------------------------- ------ 1999 $420,026 2000 134,048 -------- Total $554,074 ======== (b) Royalties The Company has entered into a number of agreements with licensors, consultants and suppliers, including: 1. The Company has an agreement with a licensor, which provides for the Company to pay royalties of 15 percent, with a minimum annual royalty of $25,000, on the net sales of a product named the Pediatric Counter Rotation System. 2. The Company has agreements with certain licensors, which provide for the Company to pay royalties ranging from 2.5 percent to 4 percent on the net sales of certain biomechanical devices. Royalties under the above-mentioned agreements aggregated $34,157, $37,881 and $36,016 for the years ended February 28, 1998, February 28, 1997 and February 29, l996, respectively. (c) Employment Agreements Two officers of the Company have employment agreements. In April 1997, one agreement was terminated and replaced by another agreement. Under these agreements, the Company is committed to maximum severance pay of approximately $80,000 upon termination of one of these officers. In addition, the employment agreements commit the Company to pay these two officers annual salaries and allowances of approximately $235,000 and additional bonus compensation depending on performance and profits achieved by the Company. (d) Litigation The Company is involved in certain litigation in the normal course of business. The outcome of such litigation is not expected to have a material impact on the consolidated financial statements. 25 (8) Pension Plan and 401(k) Plan The Company maintains a non-contributory defined benefit pension plan covering substantially all employees. In l986, the Company adopted an amendment to the plan under which future benefit accruals to the plan will cease (freezing of the maximum benefits available to employees as of July 30, l986), other than those required by law. Previously accrued benefits will remain in effect and will continue to vest under the original terms of the plan. The following table sets forth the Company's defined benefit plan status at February 28, l998 and February 28, l997, determined by the plan's actuary in accordance with Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions":
1998 l997 --------- --------- Actuarial present value of benefit obligation: Accumulated benefit obligation, including vested benefits of $404,730 and $388,431 in l998 and l997, respectively $ 404,730 $ 388,431 ========= ========= Projected benefit obligation for services rendered to date $(404,730) $(388,431) Market value of plan net assets (primarily bond mutual funds) 184,121 101,116 --------- --------- Projected benefit obligation in excess of plan assets (220,609) (287,315) Unrecognized transition liability 159,066 166,856 Unrecognized net loss 241,828 248,248 Adjustment required to recognize minimum liability (400,894) (415,104) --------- --------- Accrued pension expense $(220,609) $(287,315) ========= =========
Net pension expense is comprised of the following for the years ended February 28, 1998, February 28, 1997 and February 29, 1996: 1998 1997 1996 -------- -------- -------- Interest cost $ 27,409 $ 27,585 $ 24,775 Return on assets (14,610) 7,882 (8,921) Net amortization and deferral 21,556 4,775 26,848 -------- -------- -------- Net pension expense $ 34,355 $ 40,242 $ 42,702 ======== ======== ======== The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.5 percent in 1998, l997 and l996. No assumed increase in compensation levels was used since future benefit accruals have ceased (as discussed above). The rate of return on assets used was 7.5 percent in 1998, l997 and l996. The unrecognized transition liability and unrecognized net loss are being amortized over 30.4 and 20.9 years, respectively. 26 In fiscal l998 and l997, as required by Statement of Financial Accounting Standards No. 87, the Company recorded additional pension liability to reflect the excess of accumulated benefits over the fair value of pension plan assets. Since this liability is in excess of the related unrecognized prior service cost (unrecognized transition liability), an amount equal to the unrecognized prior service cost has been recognized as an intangible asset (included in "Other assets" on the accompanying Consolidated Balance Sheets). The remaining liability required to be recognized is reported as a separate component of stockholders' equity. The Company has a defined contribution retirement and savings plan (the "401(k) Plan") designed to qualify under Section 401(k) of the Internal Revenue Code (the "Code"). Eligible employees include those who are at least twenty-one years old and who have worked at least 1,000 hours during any one year. The Company may make matching contributions in amounts that the Company determines at its discretion at the beginning of each year. In addition, the Company may make further discretionary contributions. Participating employees are immediately vested in amounts attributable to their own salary or wage reduction elections, and are vested in Company matching and discretionary contributions under a vesting schedule that provides for ratable vesting over the second through sixth years of service. The assets of the 40l(k) Plan are invested in stock, bond and money market mutual funds. For the years ended February 28, 1998, February 28, 1997 and February 29, 1996, the Company made contributions totaling $31,477, $25,734 and $33,547, respectively, to the 401(k) Plan. (9) Stock Options and Warrants On July 27, l992, the Company adopted a qualified stock option plan for employees, officers, directors, consultants and advisors of the Company covering 125,000 shares of common stock. On January 4, 1995, the Board of Directors increased the number of shares authorized to be issued under the plan to 350,000 shares, which amendment has been approved by shareholders at the September 13, 1995 shareholders' meeting. Options granted under the plan are exercisable during a period of five years at an exercise price at least equal to l00 percent of the fair market value of the Company's common stock at date of grant. Options become exercisable under various cumulative increments over a three-year period. The Board of Directors has the discretion as to the persons to be granted options as well as the number of shares and terms of the option agreements. The expiration date of the plan is July 26, 2002. The Company has also granted non-incentive stock options. These options are generally exercisable for a period of five years and are issued at a price equal to or higher than the fair market value of the Company's common stock at the date of grant. At February 28, 1998, 110,000 non-incentive and 126,250 incentive stock options were outstanding. 27 The following is a summary of activity related to the Company's incentive and non-incentive stock options:
Exercise Weighted average Number of price range exercise price shares per share per share --------- ----------- ---------------- Outstanding at February 28, 1995 118,250 $.56 -$.88 $ .77 Granted 90,000 .75 -1.31 1.00 Cancelled (34,000) .75 -.78 .77 Expired (18,000) .78 .78 -------- ------------ ----- Outstanding at February 29, 1996 156,250 .78 - 1.31 .90 Granted 58,000 1.56 - 2.19 2.14 Exercised (3,000) .78 .78 Cancelled (2,000) .78 .78 -------- ------------ ----- Outstanding at February 28, 1997 209,250 .78-$2.19 1.25 Granted 43,000 1.63- 1.88 1.81 Exercised (1,000) .78 .78 -------- ------------ ----- Outstanding at February 28, 1998 251,250 $.78-$2.19 $1.35 ======== ============ =====
At February 28, l998, 251,250 options were exercisable and 65,250 options were available for issuance. The 251,250 shares outstanding at February 28, 1998 had remaining lives of between less than one year and less than five years, with a weighted average life of 3.58 years. At February 28, 1998, there were 313,500 shares of common stock reserved for issuance under the Company's stock option plan. Additional Stock Plan Information The Company continues to account for its stock-based awards using the intrinsic value method in accordance with APB 25, "Accounting for Stock Issued to Employees", and its related interpretations. Accordingly, no compensation expense has been recognized in the financial statements for employee stock arrangements. SFAS No. 123, "Accounting for Stock-Based Compensation", requires the disclosure of pro forma net income (loss) and net income (loss) per share had the Company adopted the fair value method as of the beginning of fiscal 1997. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradeable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: expected life, 60 months following vesting; stock volatility of 42.82%, 44.95% and 100.76%, and risk free interest rates of 7.5%, 7.0% and 6.5% in fiscal 1998, 1997 and 1996, respectively, and no dividends during the expected term. The Company's calculations are on a multiple option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the award had been amortized to expense over the vesting period of the awards, the pro forma net income (loss) and net income (loss) per share for the fiscal years ended February 28, 1998, 28 February 28, 1997 and February 29, 1996 would have been net income of $311,532, or $12 per share, net income of $280,553, or $.11 per share, and net loss of $440,347, or $(.17) per share, respectively, on both a primary and fully diluted basis. (10) Discontinuance of In-House CAD-CAM Project In fiscal 1996, the Company concluded that it was no longer appropriate to devote capital resources to in-house development of proprietary computer-controlled milling equipment, laser scanning devices and related software. Therefore, the Company expensed approximately $499,000 of costs related to this CAD-CAM project in the fourth quarter of fiscal 1996. (11) Export Sales The Company had export sales from its United States operations of approximately 16, 16 and 15 percent of net sales for each of the years ended February 28, 1998, February 28, l997 and February 29, 1996. (12) Segment Information The Company operates in one segment, principally in the design, development, manufacture and sale of foot and gait-related products. (13) Revolving Credit Line The Company has a credit facility with a bank. The agreement, which expires July 31, 1998, provides for a revolving credit line not to exceed $1,500,000. Interest on the outstanding balance is payable at prime, 8 1/2 percent at February 28, 1998, plus 1/2 percent per annum. The agreement contains, among other items, restrictions relating to the incurrence of additional indebtedness and the payment of dividends. Additionally, the Company is required to maintain certain minimum financial ratios. Borrowings under this agreement are collateralized by substantially all of the assets of the Company. At February 28, 1998 and February 28, 1997, there were no borrowings outstanding under this credit facility. 29 (14) Reconciliation of Basic and Diluted Earnings Per Share In accordance with SFAS No. 128, basic earnings per common share ("EPS") are computed based on the weighted average number of common shares outstanding during each period. Diluted earnings per common share are computed based on the weighted average number of common shares, after giving effect to dilutive common stock equivalents outstanding during each period. The following table provides a reconciliation between basic and diluted earnings per share:
For The Year Ended -------------------------------------------------------------------------------------------- February 28, 1998 February 28, 1997 February 29, 1996 ----------------- ------------------ ----------------- Per Per Per Income Shares Share Income Shares Share Loss Shares Share ------ ------ ----- ------ ------ ----- ---- ------ ----- Basic EPS Income available to common Stockholders $ 365,282 2,584,780 $.14 $ 303,047 2,583,344 $.12 $(432,985) 2,568,458 $(.17) Effect of Dilutive Securities Stock options -- 73,598 -- -- 83,076 (.01) -- -- -- -------------------------------------------------------------------------------------------- Diluted EPS Income available to common stockholders plus assumed exercise of stock options $ 365,282 2,658,378 $.14 $ 303,047 2,666,420 $.11 $(432,985) 2,568,458 $(.17) ========= ========= ==== ========= ========= ==== ========= ========= =====
* * * * * 30 THE LANGER BIOMECHANICS GROUP, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS SCHEDULE II For the years ended February 28, 1998, February 28, 1997 and February 29, 1996 Sales Returns and Bad Warranty Inventory Allowances Debts Reserve Reserve ---------- ----- ------- ------- At March 1, 1995 $ 21,286 $ 48,216 $ 26,251 $108,442 Additions 10,772 -- 7,741 -- Deletions -- 27,646 2,513 30,422 -------- -------- -------- -------- At February 29, 1996 32,058 20,570 31,479 78,020 Additions -- 7,524 6,207 -- Deletions -- 8,319 3,889 18,408 -------- -------- -------- -------- At February 28, 1997 32,058 19,775 33,797 59,612 Additions -- 17,525 -- -- Deletions -- 13,951 -- 601 -------- -------- -------- -------- At February 28, 1998 $ 32,058 $ 23,349 $ 33,797 $ 59,011 ======== ======== ======== ======== 31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Officers and Directors The executive officers and directors of the Company are as follows: Name Age Office ---- --- ------ Kenneth Granat 53 Chairman of the Board Gary L. Grahn 54 President, Chief Executive Officer and Director Dr. Justin Wernick 62 Chief Medical Director, Secretary and Director Thomas I. Altholz 47 Director Howell S. Schorr 52 Vice President - Operations Mr. Granat has been Chairman of the Board of Directors of the Company since January 4, 1995. Since 1987, he has been President of Active Screw and Fastener Inc., an Elk Grove Village, Illinois company, engaged in full line distribution of fasteners with plants in Chicago, Illinois and Tucson, Arizona. Since 1991, he has also been Vice President and a Director of Trigran Investments Inc., Deerfield, Illinois, the general partner and investment advisor for Trigran Investments, L.P., a more than 10 percent shareholder of the Company. Mr. Granat holds a J.D. from the University of Illinois as well as a B.B.A. degree in Business from the University of Michigan. Mr. Grahn has been President and Chief Executive Officer of the Company since January 3, 1995 and a Director since August 1995. From 1992 to 1994, he was President of PML Inc., a management consulting firm which specializes in marketing and business development assignments for consumer businesses. From 1989 to 1992, Mr. Grahn was Vice President General Manager of R. Stevens, Inc., subsidiary of Delphi Technology, Inc., a privately-held company which markets Automated Photo Machines. Previously, he had been Executive Vice President for the American Photo Group, a multi-plant processor of consumer products, located in Atlanta, Georgia. He holds an M.B.A. in Marketing Management from the University of Rochester Graduate School of Business and a B.A. in Mathematics/Economics from Gettysburg College. Dr. Wernick is the co-founder and Secretary and a Director of the Company since its formation. From the formation of the Company until June 30, 1997, Dr. Wernick was Executive Vice President of the Company; commencing July 1, 1997, he became Chief Medical Director of the Company. Dr. Wernick is a Diplomate of the American Board of Podiatric Orthopedics, a Fellow of the American College of Foot Orthopedics and of the Academy of Podiatric Sports Medicine and a member of several other professional societies. In l975, he was the President of the Nassau County Division, Podiatry Society of the State of New York and was granted the Podiatrist of the Year Award from that Society in that same year. Since l969, he has held various academic positions at the New York College of Podiatric Medicine and since l979 has been serving as a professor with the Department of Orthopedic Sciences at the New York College of Podiatric Medicine. He has guest lectured and directed educational programs, both nationally and internationally, at many other podiatric colleges and seminars 32 during the past 25 years. He has co-authored a book entitled "A Practical Manual for a Basic Approach to Biomechanics" in l972 and a report entitled "A Radiologic Study of Motion of the Foot within a Ski Boot" which was published in the Journal of the American Podiatry Association for which he is also a corresponding consultant. Dr. Wernick received his podiatric medical degree from M.J. Lewi College of Podiatry (now known as the New York College of Podiatric Medicine). Mr. Altholz has been President, owner and CEO of TIA Solutions, Highland Park, Illinois, a business consulting firm, since 1996. From 1990 to November 1995, he was President and owner of Inlander Steindler Paper Company (ISP), a paper distribution company with regional sales and warehousing centers in the Midwest, which Company was acquired by Alco Standard in November 1995. He has served on several industry advisory Boards such as Minnesota Mining and Manufacturing (MMM) and Scott Paper, and was Chairman of Affiliated Paper Companies. He is a member of the Board of Directors of Regal Ware, Inc., a company engaged in manufacturing and marketing of housewares products, and Northmoor Country Club and also is a member of the Board of Trustees of Ripon College. Mr. Altholz received his B.A. in Economics from Ripon College in Ripon, Wisconsin. Mr. Schorr has been Vice President of Operations since l99l. From l988 to 1991, prior to becoming an executive officer of the Company, he was the Operations Manager for the Deer Park, New York, and Branch Manager for the Brea, California, facilities of the Company. From l966 to l987, Mr. Schorr was employed by Hazeltine Corporation/Esprit Systems, Inc. During his 21 years of service with Hazeltine Corporation/Esprit Systems, Inc., he held the positions of Director of Operations, National Service Manager, Customer Service/Production Manager, as well as other various supervisory and managerial positions. He has a B.S. in Business Administration from New York Institute of Technology. All directors are normally elected at the annual meeting of shareholders to hold office until the next annual meeting and until their successors are duly elected and qualified. The Company's By-Laws provide that the annual meeting of shareholders be held each year at a time and place to be designated by the Board of Directors. Directors may be removed at any time for cause by the Board of Directors and with or without cause by a majority of the votes cast at a meeting of shareholders entitled to vote for the election of directors. The Company is not aware of any late filings of, or failures to file, during the fiscal year ended February 28, 1998, the reports required by Section 16(a) of the Securities Exchange Act of 1934. Limitation on Liability of Directors As permitted by New York law, the Company's Certificate of Incorporation contains an article providing for the elimination of the personal liability of the directors of the Company to the fullest extent permitted by the provisions of paragraph (b) of Section 402 of the New York Business Corporation Law. Accordingly, a director's personal liability would be eliminated for any breach of a director's duty, unless, among other things, the director's actions or omissions were in bad faith, involved intentional misconduct or a knowing violation of the law, or personal gain in fact of a financial profit to which the director was not lawfully entitled. This article is intended to afford directors additional protection, and limit their potential liability, from suits alleging a breach of the duty of care by a director. The Company believes this article enhances the Company's ability to attract and retain qualified persons to serve as directors. As a result of the inclusion of such a provision, shareholders may be unable to recover monetary damages against directors for actions taken by them which constitute negligence or gross negligence or which are in violation of their fiduciary duties, although it may be possible to obtain injunctive or other equitable relief with respect to such actions. If equitable remedies are found not to be available to shareholders for any particular case, shareholders may not have any effective remedy against the challenged conduct. 33 ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table shows the cash compensation received by the three executive officers whose compensation exceeded $100,000 during the fiscal year ended February 28, 1998:
Annual Compensation Compensation ------------------- ------------ Name and Fiscal Salary Bonus Other Options Principal Position Year $ $ $ (No. of Shares) - ------------------ ---- ---- ---- --- --------------- Gary L. Grahn 1998 160,000 53,440 (2) -- President and 1997 160,000 28,000 (2) 30,000 Chief Executive Officer (1) 1996 159,846 -- (2) 50,000 Dr. Justin Wernick 1998 89,191 -- (2) -- Chief Medical Director 1997 138,996 7,000 (2) -- and Secretary 1996 139,000 -- (2) -- Thomas F. Belleau 1998 102,042 5,000 (2) -- Vice President - Finance 1997 68,462 -- (2) -- Chief Financial Officer (3)
(1) Mr. Grahn's employment with the Company commenced January 2, 1995. (2) Less than 10% of the total annual salary and bonus. (3) As of March 1998, Mr. Belleau left the employ of the Company. OPTION GRANTS IN LAST FISCAL YEAR
------------------------ Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term (1) - -------------------------------------------------------------------------------------------------------- Number of Percent of Total Securities Options/SARs Exercise underlying Granted to or Base option/SARs Employees in Price Expiration Name Granted (#) Fiscal Year ($/Sh) Date 5%($) 10%($) - -------------------------------------------------------------------------------------------------------- Gary L.Grahn -- -- -- -- -- -- Dr. Justin Wernick -- -- -- -- -- -- Thomas F. Belleau -- -- -- -- -- --
(1) The potential realizable value portion of the foregoing table illustrates value that might be received upon exercise of the options immediately prior to the expiration of their term, assuming the specified compounded rates of appreciation on the Company's Common Stock over the term of the options. These numbers do not take into account provisions of certain options providing for termination of the option following termination of employment. FISCAL YEAR-END OPTION VALUES The table below sets forth information regarding unexercised options held by the Company's named executive officers as of February 28, 1998. No options were exercised by the Company's executive officers during fiscal 1998. 34
Number of Securities Underlying Value of Unexercised Unexercised Options At In-The-Money Options Fiscal Year End At Fiscal Year End Exercisable/Unexercisable Exercisable/Unexercisable Name (#) $ (1) ---- ------------------------- ---------------------- Gary L. Grahn 80,000/- 37,500/- Dr. Justin Wernick - - Thomas F. Belleau 10,000/- -/-
(1) The closing bid price of the Company's Common Stock as reported by NASDAQ on February 28, 1998 was $1.75. Value is calculated on the difference between the option exercise price of in-the-money options and $1.75 multiplied by the number of shares of Common Stock underlying the option. LONG-TERM INCENTIVE PLAN-AWARDS IN LAST FISCAL YEAR None. COMPENSATION OF DIRECTORS Directors, who are not executive officers of the Company, are compensated at a rate of $1,500 per Board of Directors' meeting attended. EMPLOYMENT AGREEMENTS On December 13, 1994, the Company entered into an employment agreement (the "Employment Agreement") with Gary L. Grahn, President and Chief Executive Officer, commencing March 1, 1995 and continuing for a one year period, with automatic renewal for additional one year terms unless sooner terminated in accordance with the Employment Agreement. The Employment Agreement provides for Mr. Grahn to receive an annual base salary of $160,000, subject to adjustment as determined by the Board of Directors of the Company. Pursuant to the Employment Agreement, Mr. Grahn may be entitled to receive up to 50% of base salary as additional bonus compensation depending on profits achieved by the Company. In addition, pursuant to the Employment Agreement, Mr. Grahn was granted options to purchase 50,000 shares of the common stock of the Company at an exercise price of $.75 per share for a five year term. Such options may be exercised, on a cumulative basis, as to 33 1/3% thereof per year commencing on the date of grant. The Employment Agreement also provides for competitive restrictions on Mr. Grahn's business activities, absent the Company's prior written approval, for a period of two years after the termination or expiration of the Employment Agreement. On June 25, 1992, the Company entered into an employment agreement (the "Wernick Employment Agreement") with Dr. Justin Wernick, Executive Vice President of the Company, commencing as of July 1, l992 and continuing for a two year period, with automatic renewal for additional one year terms unless sooner terminated in accordance with the Wernick Employment Agreement. The Wernick Employment Agreement provides for Dr. Wernick to receive an annual base salary of $139,000, subject to adjustment as determined by the Board of Directors of the Company, plus a discretionary annual bonus up to $10,000 based upon performance, as determined by the Board of Directors and President of the Company. The Wernick Employment Agreement also provides for competitive restrictions on Dr. Wernick's business activities, absent the Company's prior written approval, for a period of two years after the termination or expiration of the Wernick Employment Agreement. 35 On May 2, 1997, the Company entered into a new employment agreement (the "Revised Wernick Employment Agreement") with Dr. Justin Wernick, commencing July 1, 1997 and continuing for one year. Under the term s of the Revised Wernick Employment Agreement, Dr. Wernick will serve as Chief Medical Director and Corporate Secretary at an annual salary of $65,000 plus approximately $10,400 in office allowance. Among other duties, he will represent the Company at various educational seminars and conventions as well as provide technical advice in medical areas with respect to product development. The Revised Wernick Employment Agreement is also subject to the same competitive restrictions present in the original Wernick Employment Agreement. After the first year, automatic renewal for one additional year is specified, but may be terminated by either party with ninety days written notice. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of May 20, l998, the shares of Common Stock owned beneficially and of record (unless otherwise indicated) by each person owning more than five percent (5%) of the outstanding shares, each director of the Company, each named executive officer of the Company and all directors and officers of the Company as a group. Number of Name (and address of 5% holders) Shares Owned Percent - -------------------------------- ------------ ------- Kenneth Granat 683,153(1) 25.5% 155 Pfingsten, Suite 360 Deerfield, Illinois 60015 Dr. Justin Wernick 242,867 9.4% 450 Commack Road Deer Park, New York 11729 Donald Cecil 244,153 9.4% 1114 Avenue of the Americas New York, New York 10036 Gary L. Grahn 170,000(2) 6.4% 450 Commack Road Deer Park, New York 11729 Thomas I. Altholz 25,000 1.0% 59 Lakewood Place Highland Park, Illinois 60035 All Directors and Officers as a Group (5 persons) 1,136,020(3) 41.0% (1) Includes 90,000 shares issuable under outstanding stock options and 552,753 held by Trigran Investments LP. Mr. Granat is a Director and Vice President of the general partner of Trigran Investments, LP. An additional 30,000 shares are owned by the Granat Family Limited Partnership of which Mr. Granat is a general partner and 10,400 shares are owned by a trust of which Mr. Granat is a beneficiary. (2) Includes 80,000 shares issuable under outstanding stock options. (3) Includes an aggregate of 185,000 shares issuable under outstanding stock options. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 36 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (a) 1. Financial Statements The following consolidated financial statements are filed as part of this Form l0-K: Independent Auditors' Report Consolidated Financial Statements: Consolidated Balance Sheets as of February 28, l998 and February 28, l997 Consolidated Statements of Operations for the years ended February 28, l998, February 28, l997 and February 29, 1996 Consolidated Statements of Stockholders' Equity for the years ended February 28, l998, February 28, l997 and February 29, l996 Consolidated Statements of Cash Flows for the years ended February 28, l998, February 28, l997 and February 29, 1996 Notes to Consolidated Financial Statements 2. Financial Statement Schedules The following Financial Statement Schedule is filed as part of this Form 10-K : Schedule II - Valuation and Qualifying Accounts for the years ended February 28, l998, February 28, l997 and February 29, l996 All other schedules have been omitted because they are not applicable, not required or the information is disclosed in the consolidated financial statements, including the notes thereto. 3. Exhibits Number Document - ------ -------- (3) (a) Copy of Restated Certificate of Incorporation and amendments thereto.(l)(4) (b) Copy of Bylaws, as amended through July 2, 1987.(3) (4) (a) Specimen of Common Stock Certificate.(1) (b) Copy of 1992 Stock Option Plan.(6) (10) (a) Copy of Agreements, dated February 23, l993, relating to the Company's 75% ownership interest in Langer Orthotic Laboratory (U.K.) Limited.(6) (b) Copy of The Langer Biomechanics Group Retirement Plan, restated as of July 30, l979.(1) (c) Copy of Leases related to the Company's Deer Park facilities.(6) 37 (d) Copy of Agreement, dated July 8, l986, between BioResearch Ithaca, Inc. and the Company relating to the licensing of the Pediatric Counter Rotation System.(2) (e) Copy of Leases relating to the Company's Brea, California facilities.(5) (f) Copy of Agreement, dated March 26, l992 and effective as of March l, l992, relating to the Company's 40l(k) Tax Deferred Savings Plan.(5) (g) Copy of Employment Agreement, dated December 13, 1994, between the Company and Gary L. Grahn.(7) (h) Copy of letter agreement, dated January 27, 1995, between the Company and Tekscan, Incorporated.(8) (i) Copy of Employment Agreement, dated as of May 2, 1997, between the Company and Dr. Justin Wernick.(9) (22) List of subsidiaries(4) (24) Consent of Independent Auditors (l) Incorporated by reference to the Company's Registration Statement on Form S-l (No. 2-87l83), which became effective with the Securities and Exchange Commission on January l7, l984. (2) Incorporated by reference to the Company's Form l0-K for the fiscal year ended July 3l, l986. (3) Incorporated by reference to Post-Effective Amendment No. l to the Company's Registration Statement on Form S-8. (4) Incorporated by reference to the Company's Form l0-K for the fiscal year ended February 28, l989. (5) Incorporated by reference to the Company's Form 10-K for the fiscal year ended February 29, 1992. (6) Incorporated by reference to the Company's Form 10-K for the fiscal year ended February 28, 1993. (7) Incorporated by reference to the Company's Form 8-K, the Date of Report which was January 3, 1995. (8) Incorporated by reference to the Company's Form 10-K for the fiscal year ended February 28, 1995. (9) Incorporated by reference to the Company's Form 10-K for the fiscal year ended February 28, 1997. (27) Financial Statement Schedule (b) Reports on Form 8-K: None. 38 SIGNATURES Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange Act of l934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE LANGER BIOMECHANICS GROUP, INC. Date: May 28, 1998 By: /s/ Gary L.Grahn ------------------------------ Gary L. Grahn, President and Chief Executive Officer (Principal Executive Officer) Date: May 28, 1998 By: /s/ Nancy T. Bizzaro ------------------------------ Nancy T. Bizzaro Controller (Principal Financial Officer) Pursuant to the requirements of the Securities Exchange Act of l934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: May 28, 1998 By: /s/ Kenneth Granat ------------------------------ Kenneth Granat, Director Date: May 28, 1998 By: /s/ Gary L. Grahn ------------------------------ Gary L. Grahn, Director Date: May 28, 1998 By: /s/ Justin Wernick ------------------------------ Dr. Justin Wernick, Director Date: May 28, 1998 By: /s/ Thomas I. Altholz ------------------------------ Thomas I. Altholz, Director 39 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-89880 of The Langer Biomechanics Group, Inc. on Form S-8 of our report dated May 15, 1998 appearing in this Annual Report on Form 10-K of The Langer Biomechanics Group, Inc. for the year ended February 28, 1998. Jericho, New York May 27, 1998 40 -----END PRIVACY-ENHANCED MESSAGE-----