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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
--------------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-12991
-------
LANGER, INC.
------------
(Exact name of Registrant as specified in its charter)
DELAWARE 11-2239561
--------------------------- ---------------
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification number)
450 COMMACK ROAD, DEER PARK, NEW YORK 11729 - 4510
--------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (631) 667-1200
--------------
* * * * * * * * * * *
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, Par Value $.02 - 4,336,744 shares as of August 14, 2002.
1
INDEX
LANGER, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets 3
Unaudited Consolidated Statements of Operations 4
Unaudited Consolidated Statements of Stockholders' Equity 5
Unaudited Consolidated Statements of Cash Flows 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and 15
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LANGER, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 10,709,619 $ 15,796,922
Accounts receivable, net of allowance for doubtful
accounts of $80,200 and $43,300, respectively 2,595,140 1,646,696
Inventories, net 1,950,572 1,141,151
Prepaid expenses and other current receivables 399,776 185,740
------------- -------------
Total current assets 15,655,107 18,770,509
Property and equipment, net 945,393 701,996
Identifiable intangible assets, net 3,406,024 -
Goodwill 2,973,626 -
Other assets 1,158,527 1,227,741
------------- -------------
Total assets $ 24,138,677 $ 20,700,246
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,000,000 $ -
Accounts payable 996,328 429,531
Accrued liabilities 2,027,817 1,224,444
Unearned revenue 623,135 461,355
------------- -------------
Total current liabilities 4,647,280 2,115,330
Long-term debt 15,389,000 14,589,000
Unearned revenue 179,234 113,740
Other 105,965 15,967
------------- -------------
Total liabilities 20,321,479 16,834,037
------------- -------------
Stockholders' Equity
Common stock, $.02 par value, authorized
50,000,000 and 10,000,000 shares respectively;
issued 4,336,744 and 4,268,022 respectively 86,735 85,361
Additional paid-in capital 12,818,724 12,258,724
Accumulated deficit (8,670,489) (8,048,012)
Accumulated other comprehensive loss (302,315) (314,407)
------------- -------------
3,932,655 3,981,666
Less: treasury stock at cost, 67,100 shares (115,457) (115,457)
------------- -------------
Total stockholders' equity 3,817,198 3,866,209
------------- -------------
Total liabilities and stockholders' equity $ 24,138,677 $ 20,700,246
============= =============
See accompanying notes to unaudited consolidated financial statements.
3
LANGER, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
------------- ------------- ------------ ------------
Net sales $ 4,480,157 $ 2,985,758 $ 7,473,605 $ 5,775,565
Cost of sales 2,708,646 1,857,784 4,526,728 4,026,880
------------- ------------ ------------ ------------
Gross profit 1,771,511 1,127,974 2,946,877 1,748,685
Selling expenses 797,053 351,249 1,315,951 809,897
Research and development expenses 43,687 30,558 89,575 86,309
General and administrative expenses 1,084,165 695,818 1,870,281 1,246,308
Change in control and restructuring expenses - - - 795,667
------------- ------------- ------------ ------------
Income (loss) from operations (153,394) 50,349 (328,930) (1,189,496)
------------- ------------- ------------ ------------
Other income (expense):
Interest income 57,654 1,905 133,021 2,496
Interest expense (159,126) (5,250) (305,634) (13,965)
Other (61,543) 3,849 (107,434) 3,319
------------- ------------- ------------ ------------
Other income (expense), net (163,015) 504 (280,047) (8,150)
------------- ------------- ------------ ------------
Income (loss) before income taxes (316,409) 50,853 (608,977) (1,197,646)
Provision for income taxes 9,500 10,000 13,500 12,000
------------- ------------- ------------ ------------
Net income (loss) $ (325,909) $ 40,853 $ (622,477) $(1,209,646)
============= ============= ============ ============
Weighted average number of common
shares used in computation of net
income (loss) per share:
Basic 4,241,576 3,515,295 4,221,381 3,092,032
Diluted 4,241,576 3,852,952 4,221,381 3,092,032
Net income (loss) per common share:
Basic $ (0.08) $ 0.01 $ (0.15) $ (0.39)
=============== =============== ============== ==============
Diluted $ (0.08) $ 0.01 $ (0.15) $ (0.39)
=============== =============== ============== ==============
4
LANGER, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(UNAUDITED)
Accumulated Other
Comprehensive Loss
------------------
Common Stock Additional Foreign Minimum Total
------------ Treasury Paid-in Accumulated Currency Pension Stockholders'
Shares Amount Stock Capital Deficit Translation Liability Equity
-----------------------------------------------------------------------------------------------------
Balance at December 31, 2001 4,268,022 $85,361 $ (115,457) 12,258,724 $(8,048,012) $(52,787) $(261,620) $3,866,209
Net loss for six months
ended June 30, 2002 (622,477) (622,477)
Foreign currency adjustment 12,092 12,092
Issuance of stock to purchase
business 64,895 1,298 528,214 529,512
Issuance of common stock and
exercise of stock options 3,827 76 11,729 11,805
Compensation expense to
accelerate stock options 20,057 20,057
-----------------------------------------------------------------------------------------------------
Balance at June 30, 2002 4,336,744 $86,735 $ (115,457) $12,818,724 $(8,670,489) $(40,695) $(261,620) $3,817,198
=====================================================================================================
5
LANGER, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
------------- ------------- ------------- ------------
Cash Flows From Operating Activities:
Net income (loss) $ (325,909) $ 40,853 $ (622,477) $ (1,209,646)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 189,710 85,931 327,510 147,114
Compensation expense for options acceleration - - 20,057 -
Provision for doubtful accounts receivable 8,915 13,051 19,080 25,051
Deferred income taxes (183) 295 (74) 1,778
Issuance of common stock and options for consulting services 5,242 - 5,242 245,000
Changes in operating assets and liabilities:
Accounts receivable (91,377) (82,891) (138,083) (15,086)
Inventories 9,543 (85,239) (135,903) 115,908
Prepaid expenses and other assets 101,871 (14,772) (184,858) (80,050)
Accounts payable and accrued liabilities 397,497 (67,694) 303,812 151,803
Unearned revenue (8,205) 11,920 7,848 8,268
------------- ------------- ------------- ------------
Net cash (used in) provided by operating activities 287,104 (98,546) (397,846) (609,860)
------------- ------------- ------------- ------------
Cash Flows From Investing Activities:
Purchase of businesses, net of cash acquired (6,820,358) - (6,820,358) -
Purchases of fixed assets (160,204) (38,739) (205,174) (42,271)
------------- ------------- ------------- ------------
Net cash used in investing activities (6,980,562) (38,739) (7,025,532) (42,271)
------------- ------------- ------------- ------------
Cash Flows From Financing Activities:
Proceeds from the exercise of stock options 6,563 - 6,563 36,350
Issuance of promissory notes for purchase of businesses 1,800,000 - 1,800,000 -
Issuance of common stock for purchase of businesses 529,512 - 529,512 -
Payments on debt - - - (87,646)
Issuance of shares from Options exercise - 1,635,000 - 2,135,000
Proceeds from the issuance of common stock - - - 225,000
------------- ------------- ------------- ------------
Net cash (used in) provided by financing activities 2,336,075 1,635,000 2,336,075 2,308,704
------------- ------------- ------------- ------------
Net (decrease) increase in cash and cash equivalents (4,357,383) 1,497,715 (5,087,303) 1,656,573
Cash and cash equivalents at beginning of period 15,067,002 576,811 15,796,922 417,953
------------- ------------- ------------- ------------
Cash and cash equivalents at end of period $ 10,709,619 $2,074,526 $ 10,709,619 $ 2,074,526
============= ============= ============= ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest expense $ 159,126 $ 5,250 $ 305,634 $ 13,965
============= ============= ============= ============
Income taxes $ - $ - $ - $ -
============= ============= ============= ============
See notes to condensed consolidated financial statements.
6
LANGER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
(A) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. These unaudited
consolidated financial statements should be read in conjunction with the
financial statements and footnotes included in the Company's annual report
on Form 10-K and any amendments thereto for the fiscal period ended December
31, 2001.
Operating results for the three and six months ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2002.
(B) CHANGE IN NAME AND FISCAL YEAR END
At the Company's July 17, 2001 annual meeting, the stockholders approved
changing the name of the Company from The Langer Biomechanics Group, Inc. to
Langer, Inc. Additionally, the stockholders approved changing the fiscal
year end from February 28 to December 31.
(C) CHANGE IN STATE OF INCORPORATION
At the Company's June 27, 2002 annual meeting, the stockholders approved the
changing of the State of Incorporation of the Company from New York to
Delaware. The new Certificate of Incorporation authorizes the issuance of
50,000,000 of shares of common stock, par value $.02 per share and the
issuance of $250,000 shares of Preferred stock. No shares of Preferred stock
are issued or outstanding.
(D) INCOME (LOSS) PER SHARE
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.
(E) PROVISION FOR INCOME TAXES
For the three and six months ended June 30, 2002, there was no provision for
income taxes on losses related to domestic operations and the provision for
income taxes on foreign operations was estimated at $9,500 and $13,500
respectively. The provision for income taxes on foreign operations for the
three and six months ended June 30, 2001 was estimated at $10,000 and
$12,000 respectively.
(F) RECLASSIFICATIONS
Certain amounts have been reclassified in the prior year consolidated
financial statements to present them on a basis consistent with the current
year.
7
NOTE 2-ACQUISITION OF BENEFOOT, INC. AND BENEFOOT PROFESSIONAL PRODUCTS,
INC.
On May 6, 2002 the Company, through a wholly owned subsidiary, acquired
substantially all of the assets and liabilities of each of Benefoot, Inc.
and Benefoot Professional Products, Inc. (jointly, "Benefoot"), pursuant to
the terms of an asset purchase agreement, (the "Asset Purchase Agreement").
The assets acquired include machinery and equipment, other fixed assets,
inventory, receivables, contract rights, and intangible assets.
In connection with the acquisition, the Company paid consideration of $6.1
million, of which $3.8 million was paid in cash, $1.8 million was paid
through the issuance of promissory notes (the "Promissory Notes") and
$500,000 was paid by issuing 61,805 shares of common stock (the "Shares"),
together with certain registration rights. $1,000,000 of the Promissory
Notes will be paid on May 6, 2003 and the balance will be paid on May 6,
2004. The Promissory Notes bear interest at 4%. The Company also assumed
certain liabilities of Benefoot, including approximately $300,000 of
long-term indebtedness. The Company also agreed to pay Benefoot up to an
additional $1,000,000 upon satisfaction of certain performance targets on or
prior to May 6, 2004. The Company funded the entire cash portion of the
purchase price through working capital generated principally through the
prior sale of the Company's 4% convertible subordinated notes due August 31,
2006.
In connection with the Asset Purchase Agreement, the Company entered into an
employment agreement with each of two former shareholders of Benefoot, each
having a term of two years and providing for an annual base salary of
$150,000 and benefits, including certain severance arrangements. One of
these shareholders subsequently terminated his employment agreement with the
Company. As a result, the Company accrued $94,000 for termination costs. The
Company also entered into an agreement with Sheldon Langer as a medical
consultant providing for an annual fee of $45,000 and a one-time grant of
3,090 shares of common stock, together with certain registration rights. The
allocation of the purchase price among the assets acquired and liabilities
assumed is based on the Company's valuation of the fair value of the assets
and liabilities of Benefoot.
The following table sets forth the components of the estimated purchase
price:
Cash consideration $ 3,800,351
Benefoot long term debt paid at closing 307,211
------------------
Total cash paid at closing $ 4,107,562
Promissory note issued 1,800,000
Common stock issued 529,513
Transaction costs 609,236
--------------
Total purchase price $ 7,046,311
==============
The following table provides the allocation of the
purchase price:
Assets: Cash and cash equivalents $ 225,953
Accounts receivables 806,370
Inventories 660,559
Prepaid expenses and other 76,973
Property and equipment 223,398
Goodwill 2,973,626
Identified intangible assets 3,430,000
Other assets 6,162
-------------
8,403,041
-------------
Liabilities:Accounts payable 647,873
Accrued liabilities 389,400
Unearned revenue 210,355
Long term debt & other liabilities 109,102
-------------
1,356,730
-------------
Total purchase price $ 7,046,311
=============
8
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets, effective
for fiscal years beginning after December 15, 2001. Under the new rules,
goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to annual impairment tests in
accordance with SFAS No. 142. Other intangible assets will continue to be
amortized over their useful lives.
In accordance with the provisions of SFAS No. 142, Langer will not amortize
goodwill and intangible assets with indefinite lives (trade names with an
estimated fair value of $1,600,000) recorded in this acquisition.
Unaudited pro forma results of operations for the six months ended June 30,
2002 and 2001, as if the Company acquired Benefoot at the beginning of each
year include estimates and assumptions which management believes are
reasonable. However, pro forma results do not include the realization of
cost savings from operating efficiencies, synergies or other effects
resulting from the acquisition, and are not necessarily indicative of the
actual consolidated results of operations had the acquisition occurred on
the date assumed, nor are they necessarily indicative of future consolidated
results of operations.
Unaudited Pro forma results were:
Six months ended June 30,
2002 2001
----------------------------------
Net sales $ 9,862,185 $ 9,414,298
Net income (loss) $ (548,568) $ (1,087,678)
Diluted earnings per share $ (.13) $ (.34)
NOTE 3 - INVENTORIES
Inventories consist of:
June 30, December 31,
-------- ------------
2002 2001
---- ----
(Unaudited)
Raw Materials $ 1,161,074 $ 994,186
Work in progress 131,042 105,453
Finished goods 891,876 255,418
---------------- --------------
2,183,992 1,355,057
Less: Allowance for obsolescence 233,420 213,906
---------------- --------------
$ 1,950,572 $ 1,141,151
================ ==============
9
NOTE 4 - LONG TERM DEBT
On October 31, 2001, the Company completed the sale of $14,589,000 principal
amount of its 4% convertible subordinated notes due August 31, 2006 (the
"Notes"), in a private placement. The Notes are convertible into shares of
the Company's common stock at a conversion price of $6.00 per share, (equal
to the market value of the Company's stock on October 31, 2001), subject to
anti-dilution protections and are subordinated to existing or future senior
indebtedness of the Company. Among other provisions, the Company may, at its
option, call, prepay, redeem, repurchase, convert or otherwise acquire
(collectively, "Call") the Notes, in whole or in part, (1) after August 31,
2003 or (2) at any time if the closing price of the Company's common stock
equals or exceeds $9.00 per share for at least ten consecutive trading days.
If the Company elects to call any of the Notes, the holders of the Notes may
elect to convert the Notes for the Company's common stock. Interest is
payable semi-annually on the last day of June and December. Interest expense
for the six and three months ended June 30, 2002 on these Notes was $291,780
and $145,890 respectively.
The Company received net proceeds of $13,668,067 from the offering of the
Notes. The cost of raising these proceeds of $920,933 is being amortized
over the life of the Notes. The amortization of these costs for the six and
three months ended June 30, 2002 was $96,219 and $48,176 respectively.
The Company issued $1,800,000 in Promissory Notes in connection with the
acquisition of Benefoot. $1,000,000 of the notes will be paid on May 6, 2003
and the balance will be paid on May 6, 2004. Interest expense from the date
of acquisition was $11,200.
NOTE 5 - SEASONALITY
A substantial portion of the Company's revenue is derived from the sale of
custom orthotic devices. North American custom orthotic revenue has
historically been significantly higher in the warmer months of the year,
while custom orthotic revenue of the Company's United Kingdom subsidiary has
historically not evidenced any seasonality.
10
NOTE 6 - SEGMENT INFORMATION
The Company operates in two segments (North America and United Kingdom)
principally in the design, development, manufacture and sale of foot and
gait-related products. Intersegment net sales are recorded at cost. Segment
information for the three and six months ended June 30, 2002 and June 30,
2001 are summarized as follows:
UNITED
THREE MONTHS ENDED JUNE 30, 2002 NORTH AMERICA KINGDOM TOTAL
------------------------------------------------------------------------------------------------------------
Net sales to external customers $ 3,952,125 $ 528,032 $ 4,480,157
Intersegment net sales $ 62,489 $ - $ 62,489
Gross margins $ 1,510,072 $ 261,439 $ 1,771,511
Operating (loss) profit $ (270,894) $ 117,500 $ (153,394)
UNITED
THREE MONTHS ENDED JUNE 30, 2001 NORTH AMERICA KINGDOM TOTAL
-------------------------------------------------------------------------------------------------------------
Net sales to external customers $ 2,522,317 $ 463,441 $ 2,985,758
Intersegment net sales $ 63,695 $ - $ 63,695
Gross margins $ 922,266 $ 205,708 $ 1,127,974
Operating (loss) profit $ (28,295) $ 78,644 $ 50,349
UNITED
SIX MONTHS ENDED JUNE 30, 2002 NORTH AMERICA KINGDOM TOTAL
-------------------------------------------------------------------------------------------------------------
Net sales to external customers $ 6,440,356 $1,033,249 $ 7,473,605
Intersegment net sales $ 165,401 $ - $ 165,401
Gross margins $ 2,459,109 $ 487,768 $ 2,946,877
Operating (loss) profit $ (542,244) $ 213,314 $ (328,930)
UNITED
SIX MONTHS ENDED JUNE 30, 2001 NORTH AMERICA KINGDOM TOTAL
--------------------------------------------------------------------------------------------------------------
Net sales to external customers $ 4,882,895 $ 892,670 $ 5,775,565
Intersegment net sales $ 122,029 $ - $ 122,029
Gross margins $ 1,357,970 $ 390,715 $ 1,748,685
Operating (loss) profit $(1,319,797) $ 130,301 $(1,189,496)
11
NOTE 7 - COMPREHENSIVE INCOME
The Company's comprehensive income (loss) was as follows:
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss) $ (325,909) $ 40,853 $ (622,477) $(1,209,646)
Other comprehensive income (loss)
net of tax:
Change in equity resulting from
translation of financial statements
into U.S. dollars 14,880 (3,015) 12,092 (9,900)
------------ -------------- -------------- --------------
Comprehensive income (loss) $ (311,029) $ 37,838 $ (610,385) $(1,219,546)
============ ============== ============== ==============
12
NOTE 8 - INCOME (LOSS) PER SHARE
The following table provides a reconciliation between basic and diluted
earnings per share:
Three months ended June 30,
-----------------------------------
2002 2001
----------- -------------
Income Shares Per Share Income Shares Per Share
-------------- ------------ ------------ ---------------- ------------- -------------
Basic (loss) income per common share
---------------------------------------
(Loss) income available to common
stockholders $ (325,909) 4,241,576 $ (0.08) $ 40,853 3,515,295 $ 0.01
Stock options - - - - 337,657 -
------------- ---------- ----------- ------------- ------------ -------------
Diluted loss per common share
-----------------------------
(Loss) income available to common
stockholders plus assumed exercise
of stock options $ (325,909) 4,241,576 $ (0.08) $ 40,853 3,852,952 $ 0.01
============= ========== =========== ================ ============ =============
Six months ended June 30,
-------------------------------
2002 2001
---------- -------------
Income Shares Per Share Income Shares Per Share
------------- ---------- ----------- ------------- ------------ -------------
Basic loss per common share
---------------------------
Loss available to common
stockholders $ (622,477) 4,221,381 $ (0.15) $ (1,209,646) 3,092,032 $ (0.39)
Stock options - - - - - -
------------ - ---------- - ------------ ------------ ------------ -------------
Diluted loss per common share
-----------------------------
Loss available to common
stockholders plus assumed
exercise of stock options $ (622,477) 4,221,381 $ (0.15) $ (1,209,646) 3,092,032 $ (0.39)
============= ========== =========== ============= ============ =============
13
NOTE 9 - CHANGE IN CONTROL
Effective February 13, 2001, Andrew H. Meyers, Greg Nelson and Langer
Partners LLC, and its designees ("Offerors"), acquired a controlling
interest in the Company when they purchased 1,362,509 validly tendered
shares of the Company at $1.525 per share, or approximately 51% of the then
outstanding common stock of the Company, under the terms of a December 27,
2000 Tender Offer Agreement (the "Tender") under which the Offerors offered
to purchase up to 75% of the Company's common stock. In order to provide the
Company with adequate equity to maintain the Company's compliance with the
listing requirements of the NASDAQ small cap market and to enable the
Company to finance its ongoing operations as well as potentially take
advantage of opportunities in the marketplace and in order to induce the
Offerors to enter into the Tender Offer Agreement, pursuant to its terms,
the Offerors were granted 180 day options to purchase up to 1,400,000 shares
of the Company's common stock, with an initial exercise price of $1.525 per
share, rising up to $1.60 per share (the "Options"). These Options have been
recorded as a non-cash dividend of $3,206,000, the fair market value of the
Options on the date of grant. Upon the closing of the Tender, the Board of
Directors of the Company resigned in favor of Andrew H. Meyers (President
and Chief Executive Officer), Burtt Ehrlich (Chairman of the Board),
Jonathan R. Foster, Greg Nelson and Arthur Goldstein. The Company issued
30,000 non-qualified options at $1.525 to each of the four new outside
members of the Board of Directors in connection with their services as
members of the Board.
In connection with the Tender and the resultant change in control, the
Company recorded expenses of approximately $1,008,000, of which $795,667 was
incurred in the first quarter of 2001. These expenses included legal fees of
$263,000, valuation and consultant fees of $95,000, severance and related
expenses for terminated employees and executives of approximately $236,000,
and other costs directly attributable to the change in control of
approximately $169,000. As part of the change in control, a consulting firm,
which is owned by the sole manager and voting member of Langer Partners LLC,
a principal shareholder of the Company, was granted 100,000 fully vested
stock options with an exercise price of $1.525 per share. Accordingly, the
Company immediately recognized the fair value of the options of $245,000 as
consulting fees associated with these options. Additionally, the Company
entered into a consulting agreement with this consulting firm, whereby the
consulting firm would receive an annual fee of $100,000 for three years for
services provided.
Upon closing of the Tender and the resultant change in control, the
Company's existing revolving credit facility with a bank was terminated. In
order to provide for the Company's short-term cash needs, in February 2001,
the Company's Chief Executive Officer loaned the Company $500,000. As part
of the change in control, new management determined that the Company
required additional cash to potentially take advantage of opportunities in
the marketplace. On February 13, 2001, three Directors of the Company
purchased 147,541 restricted shares at $1.525 for total proceeds of
$225,000.
On May 11, 2001, the Offerors fully exercised the Options at $1.525 per
share for $2,135,000, which was invested in the Company. The Company's Chief
Executive Officer, Andrew H. Meyers, converted the $500,000 loan plus
accrued interest as partial proceeds toward the exercise of these Options.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
REVENUES
Net sales for the six months ended June 30, 2002 were $7,473,605 or 29%
above net sales of $5,775,565 for the comparable period in 2001. Net sales
for the three months ended June 30, 2002 were $4,480,157 or 50% above net
sales of $2,985,758 for the comparable prior quarter. Net sales for the
quarter and the six-month period includes $1,229,299 related to the
acquisition of Benefoot on May 6, 2002.
Net sales for custom orthotic devices for the six months ended June 30, 2002
were $6,137,345 as compared to $5,102,738 for the comparable prior period,
an increase of $1,034,607. Net sales of custom orthotic devices for the
quarter were $3,597,807 as compared to $2,638,237 for the comparable prior
period, an increase of $959,570. Net sales of custom orthotic devices
related to the Benefoot acquisition were $757,313 for the quarter and six
month period. Net sales of custom orthotic devices excluding the impact of
the Benefoot acquisition increased 5.4% for the six months and 7.7% for the
quarter primarily as a result of increased unit sales in both North America
and the United Kingdom.
Net sales of distributed products for the six months ended on June 30, 2002
were $1,336,260 as compared to $672,827 for the six months ended June 30,
2001, an increase of 99%. Net sales of distributed products for the quarter
were $882,350 as compared to $347,521 for the comparable prior quarter. Net
sales of distributed products attributable to the Benefoot acquisition were
$472,986 for the quarter and the six-month period. Net sales of distributed
products excluding the impact of the Benefoot acquisition increased 28% for
the six months and 18% for the quarter primarily as a result of increased
sales of PPT in both North America and the United Kingdom.
GROSS PROFIT
Gross profit as a percentage of sales for the six months ended June 30, 2002
was 39.4%, as compared to 30.3% for the six months ended June 30, 2001.
Gross profit as a percentage of sales for the three months ended June 30,
2002 was 39.5% as compared to 37.8% for the comparable prior quarter. Gross
profit for the six months in 2001 was impacted by the effects of recording
reserves for product obsolescence and material cost variances, which were
not encountered in 2002. Gross profit for the second quarter of 2002 was
39.5% as compared to 39.3% for the first quarter of 2002. Gross profit for
2002 continued to improve as a result of improvements in efficiencies in the
manufacturing process, reductions in overhead costs and increased sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling expenses for the six months ended June 30, 2002, were $1,315,951 or
17.6% of sales as compared to $809,897 or 14% of sales in the prior year.
Selling expenses for the 2002 quarter was $797,053 or 17.8% of sales
compared to $351,249 or 11.8% of sales for the 2001 quarter. Selling
expenses for the six months and quarter ended June 30,2002 attributable to
the Benefoot acquisition were $161,649. Selling expenses excluding costs
directly related to the Benefoot acquisition increased approximately
$344,000 for the six month period and approximately $284,000 for the quarter
primarily as a result of increases in salaries and related costs for the
investments made in the sales and marketing infrastructure.
General and administrative expenses were $1,870,281 or 25% of sales for the
six months ended June 30, 2002 as compared to $1,246,308 or 21.6% of sales
for the comparable period of the prior year. General and administrative
expenses for the quarter ended June 30, 2002 were $1,084,165 or 24.2% of
sales as compared to $695,818 or 23.3% of sales for the comparable prior
period. General and administrative expenses for the six months and quarter
ended June 30, 2002 attributable to the Benefoot acquisition were
approximately $96,000. General and administrative costs excluding costs
directly related to the Benefoot acquisition increased approximately
$528,000 for the six month period and approximately $293,000 for the quarter
primarily as a result of increased salary costs and costs attributable to a
Company wide incentive program as well as integration costs attributable to
the acquisition of Benefoot.
15
OTHER INCOME (EXPENSE), NET
Other income (expense), net was ($280,047) for the six months ended June 30,
2002 as compared to ($8,150) for the comparable prior period. The increase
in expense is primarily attributable to the interest expense of the
Company's 4% Convertible Subordinated Notes, net of related interest income
on the unused cash proceeds.
INTEGRATION COSTS
Costs included in the second quarter attributable to the integration of
Benefoot into the company approximated $184,000 or $.04 per share.
Integration costs including severance costs, moving costs, printing and
stationery costs were charged to expenses as follows:
Cost of sales $ 3,000
Selling 28,000
General and administrative 153,000
------------
$ 184,000
============
CHANGE IN CONTROL
Effective February 13, 2001, Andrew H. Meyers, Greg Nelson and Langer
Partners LLC, and its designees ("Offerors"), acquired a controlling
interest in the Company when they purchased 1,362,509 validly tendered
shares of the Company at $1.525 per share, or approximately 51% of the then
outstanding common stock of the Company, under the terms of a December 27,
2000 Tender Offer Agreement (the "Tender") under which the Offerors offered
to purchase up to 75% of the Company's common stock. In order to provide the
Company with adequate equity to maintain the Company's compliance with the
listing requirements of the NASDAQ small cap market and to enable the
Company to finance its ongoing operations as well as potentially take
advantage of opportunities in the marketplace and in order to induce the
Offerors to enter into the Tender Offer Agreement, pursuant to its terms,
the Offerors were granted 180 day options to purchase up to 1,400,000 shares
of the Company's common stock, with an initial exercise price of $1.525 per
share, rising up to $1.60 per share (the "Options"). These Options have been
recorded as a non-cash dividend of $3,206,000, the fair market value of the
Options on the date of grant. Upon the closing of the Tender, the Board of
Directors of the Company resigned in favor of Andrew H. Meyers (President
and Chief Executive Officer), Burtt Ehrlich (Chairman of the Board),
Jonathan R. Foster, Greg Nelson and Arthur Goldstein. The Company issued
30,000 non-qualified options at $1.525 to each of the four new outside
members of the Board of Directors in connection with their services as
members of the Board.
In connection with the Tender and the resultant change in control, the
Company recorded expenses of approximately $1,008,000, of which $795,667 was
incurred in the first quarter of 2001. These expenses included legal fees of
$263,000, valuation and consultant fees of $95,000, severance and related
expenses for terminated employees and executives of approximately $236,000,
and other costs directly attributable to the change in control of
approximately $169,000. As part of the change in control, a consulting firm,
which is owned by the sole manager and voting member of Langer Partners LLC,
a principal shareholder of the Company, was granted 100,000 fully vested
stock options with an exercise price of $1.525 per share. Accordingly, the
Company immediately recognized the fair value of the options of $245,000 as
consulting fees associated with these options. Additionally, the Company
entered into a consulting agreement with this consulting firm, whereby the
consulting firm would receive an annual fee of $100,000 for three years for
services provided.
Upon closing of the Tender and the resultant change in control, the
Company's existing revolving credit facility with a bank was terminated. In
order to provide for the Company's short-term cash needs, in February 2001,
the Company's Chief Executive Officer loaned the Company $500,000. As part
of the change in control, new management determined that the Company
required additional cash to potentially take advantage of opportunities in
the marketplace. On February 13, 2001, three Directors of the Company
purchased 147,541 restricted shares at $1.525 for total proceeds of
$225,000.
16
On May 11, 2001, the Offerors fully exercised the Options at $1.525 per
share for $2,135,000, which was invested in the Company. The Company's Chief
Executive Officer, Andrew H. Meyers, converted the $500,000 loan plus
accrued interest as partial proceeds toward the exercise of these Options.
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of June 30, 2002 was $11,007,827 as compared to
$16,655,179 as of December 31, 2001. Cash balances at June 30, 2002 were
$10,709,619, a decrease of $5,087,303 from December 31, 2001. This decrease
is attributable to cash payments in connection with the acquisition of
Benefoot, payments in the first quarter for annual insurance premiums,
payout of the Company incentive plan and a consulting agreement, which were
included in accrued liabilities at the fiscal year ended December 31, 2001.
On October 31, 2001, the Company sold $14,589,000 of its 4% convertible
subordinated notes, due August 31, 2006, in a private placement (the
"Notes"). The Notes are convertible into the Company's common stock at a
conversion price of $6.00 per share and are subordinated to all existing or
future senior indebtedness of the Company. The Company received net proceeds
of $13,668,067 from this offering. The costs of raising these proceeds,
including placement and legal fees, was $920,933, which is being amortized
over the life of the Notes. The amortization of these costs for the six
month and three month period ended June 30, 2002 was $96,219 and $48,176
respectively. Interest is payable semi-annually on the last day of June and
December. Interest expense for the six month and three month period ended
June 30, 2002 on these Notes was $291,780 and $145,890 respectively.
In connection with the Tender, the Company's then existing revolving credit
facility with a bank was terminated. In order to provide for the Company's
short-term cash needs, in February 2001, the Company's Chief Executive
Officer loaned the Company $500,000 evidenced by a promissory note, bearing
interest at prime plus 1%. Upon exercise of the Options on May 11, 2001, the
principal amount of the loan, together with accrued interest in the amount
of $11,112 was exchanged as partial consideration for the payment of the
shares of stock. On May 11, 2001, the Offerors fully exercised the Options
at $1.525 per share for $2,135,000, which was invested in the Company.
In connection with the acquisition of Benefoot, the Company issued
$1,800,000 of 4% Promissory notes. $1,000,000 of the Promissory notes are
due on May 6, 2003 with the remaining balance due on May 6, 2004. Interest
expense, which is payable quarterly, for the six months and three months
ended June 30, 2002 on these notes was $11,200.
The Company's United Kingdom subsidiary maintains a line of credit with a
local bank in the amount of 50,000 British pounds, which is guaranteed by
the Company pursuant to a standby Letter of Credit. If this credit facility,
which has been renewed through February 2003, would not be available, the
Company believes it can readily find a suitable replacement or the Company
would supply the necessary capital.
Repurchases of the Company's common stock may be made from time to time in
the open market at prevailing prices or in privately negotiated
transactions, subject to available resources. The Company may also finance
acquisitions of other companies or product lines in the future from existing
cash balances, from borrowings from institutional lenders, and/or the public
or private offerings of debt or equity securities. Management believes that
its existing cash balances will be adequate to meet the Company's cash needs
during the fiscal year ending December 31, 2002.
RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations". SFAS No. 141 applies prospectively to all
business combinations initiated after June 30, 2001, and all business
combinations accounted using the purchase method for which the date of
acquisition is July 1, 2001, or later. This statement requires all business
combinations to be accounted for using one method, the purchase method.
Under previously existed accounting rules, business combinations were
accounted for using one of two methods, pooling-of-interests method or the
purchase method. As of January 1, 2002 the Company adopted the provisions of
SFAS No. 141. The adoption of SFAS No. 141 did not have a significant impact
on the Company's financial statements.
17
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets. Under SFAS No. 142, goodwill
and some intangible assets will no longer be amortized, but rather reviewed
for impairment on a periodic basis. The provisions of the statement are
required to be applied starting with fiscal years beginning after December
15, 2001. This statement is required to be applied at the beginning of the
Company's fiscal year and to be applied to all goodwill and other intangible
assets recognized in its financial statements at that date. Impairment
losses for goodwill and certain intangible assets that arise due to the
initial application of this statement are to be recorded as resulting from a
change in accounting principle. Goodwill and intangible assets acquired
after June 30, 2001, will be subject immediately to the provisions of this
statement. As of January 1, 2002 the Company adopted the provisions of SFAS
No. 142. The adoption of SFAS No. 142 did not have a significant impact on
the Company's financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This standard requires entities to record the fair
value of a liability for an asset retirement obligation in the period in
which it is incurred. When the liability is initially recorded, the entity
capitalizes a cost by increasing the carrying amount of the related
long-lived asset. Over time the liability is accreted to its present value
each period and the capitalized cost is depreciated over the useful life of
the related asset. Upon settlement of the liability, an entity either
settles the obligation for its recorded amount or incurs a gain or loss upon
settlement. The standard is effective for fiscal years beginning after June
15, 2002. The adoption of SFAS No. 143 is not expected to have a material
impact on the Company's financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 replaces SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." SFAS No. 144 requires that long-lived assets be
measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. SFAS No. 144 also broadens the reporting of discontinued
operations to include all components of an entity with operations that can
be distinguished from the rest of the entity and that will be eliminated
from the ongoing operations of the entity in a disposal transaction. The
provisions of SFAS No. 144 are effective for financial statements issued for
fiscal years beginning after December 15, 2001. As of January 1, 2002 the
Company adopted the provisions of SFAS No. 144. The adoption of SFAS No. 144
did not have a significant impact on the Company's financial statements.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Information contained or incorporated by reference in this quarterly report
on Form 10-Q, in other SEC filings by the Company, in press releases, and in
presentations by the Company or its management, contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995 which can be identified by the use of forward-looking
terminology such as "believes," "expects," "plans," intends," "estimates,"
"projects," "could," "may," "will," "should," or "anticipates" or the
negative thereof, other variations thereon or comparable terminology, or by
discussions of strategy. No assurance can be given that future results
covered by the forward-looking statements will be achieved, and other
factors could also cause actual results to vary materially from the future
results covered in such forward-looking statements. Such forward-looking
statements include, but are not limited to, those relating to the Company's
financial and operating prospects, future opportunities, the Company's
acquisition strategy, outlook of customers, and reception of new products,
technologies, and pricing. In addition, such forward-looking statements
involve known and unknown risks, uncertainties, and other factors which may
cause the actual results, performance or achievements of the Company to be
materially different from any future results expressed or implied by such
forward-looking statements. Also, the Company's business could be materially
adversely affected and the trading price of the Company's common stock could
decline if any such risks and uncertainties develop into actual events. The
Company undertakes no obligation to publicly update or revise forward-
looking statements to reflect events or circumstances after the date of this
Form 10-Q or to reflect the occurrence of unanticipated events.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In general, business enterprises can be exposed to market risks, including
fluctuation in commodity and raw materials prices, foreign currency exchange
rates, and interest rates that can adversely affect the cost and results of
operating, investing, and financing. In seeking to minimize the risks and/or
costs associated with such activities, the Company manages exposure to
changes in commodities and raw material prices, interest rates and foreign
currency exchange rates through its regular operating and financing
activities. The Company does not utilize financial instruments for trading
or other speculative purposes, nor does the Company utilize leveraged
financial instruments or other derivatives. The following discussion about
our market rate risk involves forward-looking statements. Actual results
could differ materially from those projected in the forward-looking
statements.
The Company's exposure to market rate risk for changes in interest rates
relates primarily to the Company's short-term monetary investments. There is
a market rate risk for changes in interest rates earned on short-term money
market instruments. There is inherent rollover risk in the short-term money
market instruments as they mature and are renewed at current market rates.
The extent of this risk is not quantifiable or predictable because of the
variability of future interest rates and business financing requirements.
However, there is no risk of loss of principal in the short-term money
market instruments, only a risk related to a potential reduction in future
interest income. Derivative instruments are not presently used to adjust the
Company's interest rate risk profile.
The majority of the Company's business is denominated in United States
dollars. There are costs associated with the Company's operations in foreign
countries, primarily the United Kingdom and Canada, that require payments in
the local currency and payments received from customers for goods sold in
these countries are typically in the local currency. The Company partially
manages its foreign currency risk related to those payments by maintaining
operating accounts in these foreign countries, and by having customers pay
the Company in those same currencies.
19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
(c) On May 6, 2002, the Company issued 61,805 shares of its common stock
as partial consideration for the acquisition of substantially all of
the assets and liabilities of Benefoot. In connection with the
acquisition, the Company issued an additional 3,090 shares of its
common stock pursuant to a consulting agreement. The issuances were
private transactions not involving a public offering and were exempt
from the registration provisions of the Securities Act pursuant to
Section 4(2) thereof. No underwriter was engaged in connection with
foregoing issuances of securities. The Company has reason to believe
that (i) all of the foregoing recipients were familiar with or had
access to information concerning the Company's operations and
financial condition and (ii) all of the recipients represented that
they acquired the shares for investment and not with a view to the
distribution thereof.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on June 27, 2002.
Of the 4,332,957 shares of the Company's common stock entitled to vote
at the meeting 4,040,691 shares of common stock were present in person
or by proxy and entitled to vote. Such number of shares represented
approximately 93% of the Company's outstanding shares of common stock.
At the meeting, the Company's stockholders approved the election of
Burtt R. Ehrlich, Andrew H. Meyers, Jonathan R. Foster, Arthur
Goldstein, Greg Nelson, and Thomas W. Strauss to the Company's board
of directors. The Company's stockholders voted as follows in
connection with such election:
For: Against:
---- --------
Burtt R. Ehrlich 4,040,539 152
Andrew H. Meyers 4,040,491 200
Jonathan R. Foster 4,040,691 0
Arthur Goldstein 4,040,491 200
Greg Nelson 4,040,691 0
Thomas W. Strauss 4,040,691 0
At the meeting, the Company's stockholders approved the
reincorporation of the Company under the laws of the State of Delaware
by merging the Company with and into a newly formed wholly-owned
Delaware corporation. There were 3,384,685 votes in favor 9,000 votes
against, and 0 abstentions in connection with such proposal.
At the meeting, the Company's stockholders approved the appointment of
Deloitte & Touche as the Company's independent auditor for the
Company's fiscal year ending December 31, 2002. There were 4,040,191
votes in favor, 200 votes against and 300 abstentions in connection
with such proposal.
20
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K on May 13, 2002 to
report the acquisition of substantially all of the assets and
liabilities of Benefoot, Inc. and Benefoot Professional Products, Inc.
On July 2, 2002, the Company amended such Form 8-K to report the
filing of financial statements and proforma financial information
relating to the acquisition.
21
SIGNATURES
Pursuant to the requirements 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.
LANGER, INC.
Date: August 14, 2002 By: /s/ Andrew H. Meyers
--------------------
Andrew H. Meyers, President
and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Anthony J. Puglisi
----------------------
Anthony J. Puglisi, Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
22