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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, 2004
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 iden-
of incorporation or tification number)
organization)
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 by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
YES NO X
------- -------
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 - 4,380,851 shares as of August 12, 2004.
1
INDEX
LANGER, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets -
June 30, 2004 and December 31, 2003.......................... 3
Unaudited Consolidated Statements of Operations - Three and
six month periods ended June 30, 2004 and 2003 .............. 4
Unaudited Consolidated Statement of Stockholders' Equity -
Six months ended June 30, 2004 .............................. 5
Unaudited Consolidated Statements of Cash Flows - Six month
periods ended June 30, 2004 and 2003 ........................ 6
Notes to Unaudited Consolidated Financial Statements .......... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................ 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk .... 21
Item 4. Controls and Procedures ....................................... 22
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders ........... 23
Item 6. Exhibits and Reports on Form 8-K .............................. 23
SIGNATURES ............................................................... 24
EXHIBITS ....................................................... follow page 24
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LANGER, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2004 2003
--------------------- -----------------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 2,796,210 $ 5,533,946
Accounts receivable, net of allowances for doubtful
accounts and returns and allowances aggregating $337,210
and $292,725, respectively 3,859,221 3,628,052
Inventories, net 3,133,850 2,496,583
Prepaid expenses and other 1,234,842 495,386
--------------------- -----------------------
Total current assets 11,024,123 12,153,967
Property and equipment, net 2,812,171 2,496,071
Identifiable intangible assets, net 3,833,451 3,960,105
Goodwill 4,700,150 4,536,198
Other assets 747,639 876,856
--------------------- -----------------------
Total assets $ 23,117,534 $ 24,023,197
===================== =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ - $ 800,000
Accounts payable 1,198,782 1,133,149
Other current liabilities 2,114,800 2,114,270
Unearned revenue 693,177 672,597
--------------------- -----------------------
Total current liabilities 4,006,759 4,720,016
Long-term debt 14,589,000 14,589,000
Unearned revenue 129,282 166,757
Accrued pension expense 171,893 171,893
Other liabilities 671,503 600,338
--------------------- -----------------------
Total liabilities 19,568,437 20,248,004
--------------------- -----------------------
Stockholders' Equity:
Preferred stock, no par value; authorized 250,000 shares;
no shares issued - -
Common stock, $.02 par value; authorized 50,000,000
shares; issued 4,447,951 and 4,447,451, respectively 88,959 88,949
Additional paid-in capital 13,203,719 13,202,129
Accumulated deficit (9,300,737) (9,159,140)
Accumulated other comprehensive loss (327,387) (241,288)
--------------------- -----------------------
3,664,554 3,890,650
Treasury stock at cost, 67,100 shares (115,457) (115,457)
--------------------- -----------------------
Total stockholders' equity 3,549,097 3,775,193
--------------------- -----------------------
Total liabilities and stockholders' equity $ 23,117,534 $ 24,023,197
===================== =======================
See accompanying notes to consolidated financial statements.
3
LANGER, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
--------------- --------------- ---------------- ----------------
Net sales $ 6,547,503 $ 6,364,744 $ 12,311,439 $11,949,922
Cost of sales 4,159,984 4,073,233 7,950,570 7,867,660
--------------- --------------- ---------------- ----------------
Gross profit 2,387,519 2,291,511 4,360,869 4,082,262
Selling expenses 786,445 798,096 1,594,134 1,550,427
General and administrative expenses 1,343,889 1,270,411 2,518,023 2,358,187
--------------- --------------- ---------------- ----------------
Operating income 257,185 223,004 248,712 173,648
Other income (expense):
Interest income 44,021 31,829 88,368 77,773
Interest expense (201,205) (208,739) (406,171) (422,879)
Other 2,494 24,157 2,494 28,228
--------------- --------------- ---------------- ----------------
Other income (expense), net (154,690) (152,753) (315,309) (316,878)
--------------- --------------- ---------------- ----------------
Income (loss) before provision for income taxes 102,495 70,251 (66,597) (143,230)
Provision for income taxes 25,000 43,950 75,000 88,550
--------------- --------------- ---------------- ----------------
Net income (loss) $ 77,495 $ 26,301 $ (141,597) $ (231,780)
=============== =============== ================ ================
Weighted average number of common shares used
in computation of net income (loss) per share:
Basic 4,380,851 4,377,255 4,380,635 4,370,121
=============== =============== ================ ================
Diluted 4,745,083 4,612,806 4,380,635 4,370,121
=============== =============== ================ ================
Net income (loss) per common share:
Basic $ .02 $ .01 $ (.03) $ (.05)
=============== =============== ================ ================
Diluted $ .02 $ .01 $ (.03) $ (.05)
=============== =============== ================ ================
See accompanying notes to unaudited consolidated financial statements.
4
LANGER, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2004
(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 January 1, 2004 4,447,451 $ 88,949 $ (115,457) $ 13,202,129 $ (9,159,140) $ 211,821 $ (453,109) $ 3,775,193
Net loss for the six months (141,597) (141,597)
ended June 30, 2004
Foreign currency adjustment (86,099) (86,099)
Exercise of Stock Options 500 10 1,590 1,600
---------------------------------------------------------------------------------------------------
Balance at June 30, 2004 4,447,951 $ 88,959 $ (115,457) $ 13,203,719 $ (9,300,737) $ 125,722 $ (453,109) $ 3,549,097
===================================================================================================
See accompanying notes to unaudited consolidated financial statements.
5
LANGER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
2004 2003
-------------- -------------
Cash Flows From Operating Activities:
Net income (loss) $ (141,597) $ (231,780)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by
operating activities:
Depreciation and amortization 465,898 375,610
Provision for doubtful accounts receivable 48,000 42,455
Deferred income taxes 75,000 64,750
Changes in operating assets and liabilities:
Accounts receivable (313,120) (274,737)
Inventories (660,529) 65,288
Prepaid expenses and other assets (335,201) 146,085
Accounts payable and other current liabilities (226,040) (343,160)
Unearned revenue and other liabilities (35,311) (206,080)
-------------- -------------
Net cash used in operating activities (1,122,900) (361,569)
-------------- -------------
Cash Flows From Investing Activities:
Purchase of business, net of cash acquired (321,669) (1,629,193)
Purchase of property and equipment (480,474) (730,100)
-------------- -------------
Net cash used in investing activities (802,143) (2,359,293)
-------------- -------------
Cash Flows From Financing Activities:
Payment of promissory notes (800,000) (1,000,000)
Proceeds from the exercise of stock options 1,600 -
-------------- -------------
Net cash used in financing activities (798,400) (1,000,000)
-------------- -------------
Effect of exchange rate changes on cash (14,293) (33,657)
-------------- -------------
Net decrease in cash and cash equivalents (2,737,736) (3,754,519)
Cash and cash equivalents at beginning of period 5,533,946 9,411,710
-------------- -------------
Cash and cash equivalents at end of period $ 2,796,210 $ 5,657,191
============== =============
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest expense $ 309,599 $ 321,712
============== =============
Income taxes $ - $ -
============== =============
See accompanying notes to unaudited consolidated financial statements.
6
LANGER, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 accounting principles generally accepted in the
United States of America ("GAAP") 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 GAAP 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 for the fiscal year ended December 31, 2003.
Operating results for the three and six months ended June 30, 2004 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2004.
(B) PROVISION FOR INCOME TAXES
For the three and six months ended June 30, 2004, there was no current
provision for income taxes on domestic and foreign operations. The
provisions for income taxes on foreign operations for the three and six
month periods ended June 30, 2003 were $11,200 and $23,800 respectively.
Prior to the adoption of SFAS No. 142, the Company would not have needed a
valuation allowance for the portion of the net operating losses equal to
the amount of tax-deductible goodwill and trade names amortization expected
to occur during the carry forward period of the net operating losses based
on the timing of the reversal of these taxable temporary differences. As a
result of the adoption of SFAS 142, the reversal will not occur during the
carry forward period of the net operating losses. Therefore, the Company
recorded a deferred income tax expense of approximately $38,000 and
$75,000, respectively, during the three and six months ended June 30, 2004
and $33,000 and $65,000, respectively during the three and six month
periods ended June 30, 2003, which would not have been required prior to
the adoption of SFAS 142.
7
(C) RECLASSIFICATIONS
Certain amounts have been reclassified in the prior period consolidated
financial statements to present them on a basis consistent with the current
period.
(D) SEASONALITY
A substantial portion of the Company's revenue is derived from the sale of
custom orthotics. 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.
(E) STOCK OPTIONS
At June 30, 2004, the Company has two stock-based employee compensation
plans. The Company accounts for those plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued
to Employees, and related Interpretations. No stock-based employee
compensation cost is reflected in net income (loss), as all options granted
under those plans had an exercise price equal to market value of the
underlying common stock on the date of grant. The following table
illustrates the effect on net income (loss) and earnings (loss) per share
if the company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation.
Three months ended Six months ended
June 30, June 30,
-------------- --- -------------- --------------- -- --------------
2004 2003 2004 2003
-------------- -------------- --------------- --------------
Net income (loss) - as reported $ 77,495 $ 26,301 $ (141,597) $ (231,780)
Deduct: Total stock-based employee
compensation expense determined
under fair value basis method for
all rewards, net of tax (193,145) (49,627) (260,098) (81,360)
-------------- -------------- --------------- --------------
Pro forma net income (loss) $ (115,650) $ (23,326) $ (401,695) $ (313,140)
============== ============== =============== ==============
Earnings (loss) per share:
Basic- as reported $ .02 $ .01 $ (.03) $ (.05)
============== ============== =============== ==============
Basic- pro forma $ (.03) $ (.01) $ (.09) $ (.07)
============== ============== =============== ==============
Diluted- as reported $ .02 $ .01 $ (.03) $ (.05)
============== ============== =============== ==============
Diluted- pro forma $ (.03) $ (.01) $ (.09) $ (.07)
============== ============== =============== ==============
8
(F) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In early December 2003, the FASB issued SFAS No. 132, as revised,
Employers' Disclosures about Pensions and Other Postretirement Benefits,
("Revised SFAS 132"), which requires additional disclosures about assets,
obligation, cash flows, and net periodic benefit cost of defined benefit
pension plans and other defined benefit postretirement plans. The Company
adopted the required revised disclosure provisions of Revised SFAS 132 as
of December 31, 2003, except for the disclosure of estimated future benefit
payments, which the Company is required to and will disclose as of December
31, 2004. The adoption of SFAS No. 132 did not have a material impact on
the Company's financial statements.
NOTE 2 - ACQUISITIONS
A) BI-OP LABORATORIES, INC.
Effective January 1, 2003, the Company, through a wholly-owned subsidiary,
acquired all of the issued and outstanding stock of Bi-Op Laboratories, Inc.
("Bi-Op") pursuant to the terms of a Stock Purchase Agreement dated as of
January 13, 2003 (the "Stock Purchase Agreement").
In connection with the acquisition, the Company paid consideration in Canadian
dollars, determined through arms-length negotiation of the parties. When
converted to U.S. dollars the total purchase price approximated $2.2 million, of
which approximately $1.8 (including $0.5 million for transaction costs) was paid
in cash and approximately $ 0.4 million was paid by issuing 107,611 shares of
the Company's common stock (the "Shares"). The purchase price was funded by
using a portion of the proceeds remaining from the sale of the Company's 4%
convertible subordinated notes due August 31, 2006. The Shares were valued based
upon the market price of the Company's common stock two days before, two days
after, and on the date the acquisition was announced.
In connection with the Stock Purchase Agreement, the Company entered into an
employment agreement with Raynald Henry, Bi-Op's former principal owner, having
a term of three years and providing for an annual base salary of $75,000 CDN and
benefits, including certain severance payments. The allocation of the purchase
price among the assets and liabilities was based upon the Company's valuation of
the fair value of assets and liabilities of Bi-Op.
9
The following table sets forth the components of the purchase price:
Cash consideration $ 1,368,756
Common stock issued 369,106
Transaction costs 495,383
--------------
Total purchase price $ 2,233,245
==============
The following table provides the allocation of the purchase price:
Assets: Cash and cash equivalents $ 194,531
Accounts receivables 212,593
Inventories 109,572
Prepaid expenses and other 232,394
Property and equipment 437,148
Goodwill 820,056
Identified intangible assets (non-competition agreement of $400,000
and repeat customer base of $500,000) 900,000
Other assets 41,802
-----------------
2,948,096
-----------------
Liabilities: Accounts payable 117,809
Accrued liabilities 140,217
Deferred Income Tax 270,000
Long term debt and other liabilities 186,825
-----------------
714,851
-----------------
Total purchase price $ 2,233,245
=================
The value allocated to goodwill in the purchase of Bi-Op is not deductible for
tax purposes.
B) 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 4% promissory notes (the "Promissory Notes") and $0.5 million
was paid by issuing 61,805 shares of common stock (the "Shares"), together with
certain registration rights. The Shares were valued based upon the market price
of the Company's common stock two days before, two days after and on the date
the acquisition was announced. $1.0 million of the Promissory Notes was paid on
May 6, 2003 and the balance of $0.8 million, plus interest was paid on May 6,
2004. The Company also assumed certain liabilities of Benefoot, including
approximately $0.3 million of long-term indebtedness. The Company also agreed to
pay Benefoot up to an additional $1 million ("Performance-based Consideration")
upon achievement of certain performance targets on or prior to May 6, 2004
measured at various intervals. During the six months ended June 30, 2004, the
Company recorded $163,952 of such Performance-based Consideration as additional
goodwill. As of May 6, 2004, the final measurement date for such performance
targets, the Company had paid or accrued a total of $767,190 with respect to
such Performance-based Consideration. The Company funded the entire cash portion
of the purchase price with proceeds from the prior sale of the Company's 4%
convertible subordinated notes due August 31, 2006.
10
In connection with the Asset Purchase Agreement, the Company entered into an
employment agreement with each of two 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 and the second
contract expired in the second quarter of 2004. The Company also entered into an
agreement (which was amended in 2003 and 2004), with Sheldon Langer as a medical
consultant. 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 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 529,512
Transaction costs 680,228
Performance-based consideration paid or accrued 767,190
-------------
Total purchase price $ 7,884,492
=============
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 155,110
Goodwill 3,880,094
Identified intangible assets (trade names of $1,600,000,
non-competition agreements of $230,000, and license agreements
and related technology of $1,600,000) 3,430,000
Other assets 6,163
-------------------
9,241,222
-------------------
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 $ 7,884,492
===================
In accordance with the provisions of SFAS No. 142, the Company will not amortize
goodwill and intangible assets with indefinite lives (trade names with an
estimated fair value of $1,600,000).
The value allocated to goodwill in the purchase of Benefoot is deductible for
tax purposes.
11
(C) IDENTIFIABLE INTANGIBLE ASSETS
Identifiable intangible assets at December 31, 2003 consisted of:
Amortization Original Accumulated Net Carrying
Assets Period Cost Amortization Value
- --------------------------- --------------- ------------- ---------------- -----------------
Trade Names indefinite $ 1,600,000 - $ 1,600,000
Non-competition agreements 7/8 Years 630,000 104,339 525,661
License agreements and
related technology 11 Years 1,600,000 240,556 1,359,444
Repeat customer base 20 Years 500,000 25,000 475,000
------------- ---------------- -----------------
$ 4,330,000 $ 369,895 $ 3,960,105
============= ================ =================
Identifiable intangible assets at June 30, 2004 consisted of:
Amortization Accumulated Net
Assets Period Original Cost Amortization Carrying Value
- ---------------------------- ---------------- ------------- ---------------- -----------------
Trade Names indefinite $1,600,000 - $ 1,600,000
Non-competition agreements 7/8 Years 630,000 145,765 484,235
License agreements and
related technology 11 Years 1,600,000 313,284 1,286,716
Repeat customer base 20 Years 500,000 37,500 462,500
------------- ---------------- -----------------
$4,330,000 $ 496,549 $ 3,833,451
============= ================ =================
Aggregate amortization expense relating to the above identifiable intangible
assets for each of the quarters and six month periods ended June 30, 2004 and
2003 was $63,327 and $126,654, respectively. As of December 31, 2003 the
estimated future amortization expense was approximately $253,000 per annum for
2004 -2008.
(D) GOODWILL
Changes in goodwill for the six months ended June 30, 2004 and for the year
ended December 31 2003, are as follows:
DISTRIBUTED
CUSTOM ORTHOTICS PRODUCTS TOTAL
-------------------- ------------------ ------------------
Balance at January 1, 2003 $ 1,191,986 $ 1,994,400 $ 3,186,386
Purchase price adjustments
related to achievement of
milestones and acquisition
costs 198,175 331,581 529,756
Acquisition - Bi-Op 820,056 - 820,056
-------------------- ------------------ ------------------
Balance December 31, 2003 2,210,217 2,325,981 4,536,198
Purchase price adjustments related to
achievement of milestones and
acquisition costs 44,944 75,199 120,143
-------------------- ------------------ ------------------
Balance March 31, 2004 2,255,161 2,401,180 4,656,341
Purchase price adjustments related to
achievements of milestones and
acquisitions costs 16,388 27,421 43,809
-------------------- ------------------ ------------------
Balance, June 30,2004 $ 2,271,549 $ 2,428,601 $ 4,700,150
==================== ================== ==================
12
NOTE 3 - INVENTORIES, NET
Inventories consist of:
June 30, 2004 December 31, 2003
---------------------- ------------------------
(Unaudited)
Raw materials $ 1,655,727 $ 1,087,916
Work-in-process 161,178 174,164
Finished goods 1,316,945 1,234,503
---------------------- ------------------------
$ 3,133,850 $ 2,496,583
====================== ========================
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 on these
Notes for each of the six and three month periods ended June 30, 2004 and 2003
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 was $920,933, which is being amortized over
the life of the Notes. The amortization of these costs for each of the six and
three months ended June 30, 2004 and 2003 was $96,886 and $48,443, respectively.
The Company issued $1,800,000 in Promissory Notes in connection with the
acquisition of Benefoot. $1,000,000 of the notes were repaid on May 6, 2003 and
the balance was repaid on May 6, 2004. Related interest expense for the six and
three months ended June 30, 2004 was $11,111 and $3,111 respectively. Interest
expense with respect to the Promissory Notes and for the six and three months
ended June 30, 2003 was $29,932 and $11,932 respectively.
NOTE 5 - SEGMENT INFORMATION
The Company operated in two segments (custom orthotics and distributed products)
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 month periods ended June 30, 2004 and 2003 is
summarized as follows:
THREE MONTHS ENDED JUNE 30, 2004 CUSTOM ORTHOTICS DISTRIBUTED PRODUCTS TOTAL
- ------------------------------------- ----------------------- ----------------------- ----------------
Net Sales $ 4,989,223 $ 1,558,280 $ 6,547,503
Gross profit 1,769,180 618,339 2,387,519
Operating income (loss) (101,680) 358,865 257,185
THREE MONTHS ENDED JUNE 30, 2003 CUSTOM ORTHOTICS DISTRIBUTED PRODUCTS TOTAL
- ------------------------------------- ---------------------- ----------------------- ----------------
Net Sales $ 4,925,859 $ 1,438,885 $ 6,364,744
Gross profit 1,701,409 590,102 2,291,511
Operating income (loss) (158,070) 381,074 223,004
13
SIX MONTHS ENDED JUNE 30, 2004 CUSTOM ORTHOTICS DISTRIBUTED PRODUCTS TOTAL
- ------------------------------------- ------------------------ ----------------------- ----------------
Net Sales $ 9,420,636 $ 2,890,803 $12,311,439
Gross profit 3,229,104 1,131,765 4,360,869
Operating income (loss) (375,431) 624,143 248,712
SIX MONTHS ENDED JUNE 30, 2003 CUSTOM ORTHOTICS DISTRIBUTED PRODUCTS TOTAL
- ------------------------------------- ------------------------ ----------------------- ----------------
Net Sales $ 9,103,590 $ 2,846,332 $ 11,949,922
Gross profit $ 2,916,831 $ 1,165,431 $ 4,082,262
Operating income (loss) $ (566,428) $ 740,076 $ 173,648
Geographical segment information is summarized as follows:
THREE MONTHS ENDED JUNE 30, 2004 NORTH AMERICA UNITED KINGDOM TOTAL
- ------------------------------------- ---------------------------- --------------------- -----------------
Net sales to external customers $ 5,820,232 $ 727,271 $ 6,547,503
Intersegment net sales $ 136,144 - $ 136,144
Gross profit $ 2,108,357 $ 279,162 $ 2,387,519
Operating income $ 129,008 $ 128,177 $ 257,185
THREE MONTHS ENDED JUNE 30, 2003 NORTH AMERICA UNITED KINGDOM TOTAL
- ------------------------------------- ---------------------------- --------------------- -----------------
Net sales to external customers $ 5,723,187 $ 641,557 $ 6,364,744
Intersegment net sales $ 88,051 - $ 88,051
Gross profit $ 2,030,692 $ 260,819 $ 2,291,511
Operating income $ 89,453 $ 133,551 $ 223,004
SIX MONTHS ENDED JUNE 30, 2004 NORTH AMERICA UNITED KINGDOM TOTAL
- ------------------------------------- ---------------------------- --------------------- -----------------
Net sales to external customers $ 10,898,803 $ 1,412,636 $ 12,311,439
Intersegment net sales $ 207,096 - $ 207,096
Gross profit $ 3,850,247 $ 510,622 $ 4,360,869
Operating income $ 28,048 $ 220,664 $ 248,712
SIX MONTHS ENDED JUNE 30, 2003 NORTH AMERICA UNITED KINGDOM TOTAL
- ------------------------------------- ---------------------------- --------------------- -----------------
Net sales to external customers $ 10,642,455 $ 1,307,467 $ 11,949,922
Intersegment net sales $ 157,052 - $ 157,052
Gross profit $ 3,559,228 $ 523,034 $ 4,082,262
Operating (loss) income $ (74,827) $ 248,475 $ 173,648
14
NOTE 6 - COMPREHENSIVE INCOME (LOSS)
The Company's comprehensive income (loss) was as follows:
--------------------------------------------------------------------------
Three months ended June 30, Six months ended June 30,
2004 2003 2004 2003
------------- --------------- ------------------- --------------
Net income (loss) $ 77,495 $ 26,301 $ (141,597) $ (231,780)
Other comprehensive income (loss) net of tax:
Change in equity resulting from
translation of financial statements
into U.S. dollars (124,504) 85,752 (86,099) 137,524
------------- --------------- ------------------- --------------
Comprehensive income (loss) $ (47,009) $ 112,053 $ (227,696) $ (94,256)
============= =============== =================== ==============
NOTE 7 - INCOME (LOSS) PER SHARE
The following table provides a reconciliation between basic and diluted earnings
per share:
Three months ended June 30,
------------------------------------------- -- ------------------------------------------
2004 2003
------------------------------------------- ------------------------------------------
Income Per Income Per
Basic EPS (loss) Shares Share (loss) Shares Share
----------------------------- ------------- ----------- ---------- ------------ ---------- -----------
Income (loss) available to $ 77,495 4,380,851 $ .02 $ 26,301 4,377,255 $ .01
common stockholders
Effect of Dilutive Securities
-----------------------------
Stock options - 364,232 - - 235,551 -
------------- ----------- ---------- ------------ ---------- -----------
Diluted EPS
-----------------------------
Income (loss) available to
common stockholders plus
assumed exercise of stock
options $ 77,495 4,745,083 $ .02 $ 26,301 4,612,806 $ .01
============= =========== ========== ============ ========== ===========
Six months ended June 30,
------------------------------------------- -- -------------------------------------------
2004 2003
------------------------------------------- -------------------------------------------
Income Per Income Per
Basic EPS (loss) Shares Share (loss) Shares Share
----------------------------- ------------- ----------- ---------- ------------ ---------- -----------
Loss available to common $ (141,597) 4,380,635 $ (.03) $ (231,780) 4,370,121 $ (.05)
stockholders
Effect of Dilutive Securities
-----------------------------
Stock options - - - - - -
------------- ----------- ---------- ------------ ---------- ------------
Diluted EPS
-----------------------------
Loss available to common
stockholders plus assumed
exercise of stock options $ (141,597) 4,380,635 $ (.03) $ (231,780) 4,370,121 $ (.05)
============= =========== ========== ============ ========== ============
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 diluted income (loss) per share computations for the six
months ended June 30, 2004 and 2003 exclude stock options totaling approximately
351,660 and 253,399, respectively. These shares are excluded due to their
15
anti-dilutive effect as a result of the Company's loss during each of the
periods. The impact of the convertible notes on the calculation of the
fully-diluted earnings per share was anti-dilutive and is therefore not included
in the computation for the three month and six month periods ended June 30, 2004
and 2003. Had the impact of the convertible notes been included in the
calculation of diluted earnings per share, net income would have increased by
approximately $194,000 in each of the three months and six months periods ended
June 30, 2004 and 2003 and $388,000 in each of the six month periods then ended.
Additionally, the diluted weighted average shares would have increased by
2,431,500 for each of the quarters ended June 30, 2004 and 2003, to reflect the
conversion of the convertible notes.
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company has engaged a company which is owned by the brother-in-law of a
senior executive of the Company, to provide certain technology related products
and services. Cost incurred for products and services provided by this company
were approximately $2,400 and $46,000 in the quarters ended June 30, 2004 and
2003, respectively and $14,000 and $53,000 in the six month periods ended June
30, 2004 and 2003 respectively. Langer also engaged a company owned by the
father-in-law of a senior executive of the Company to provide certain
promotional and marketing goods and services. Costs incurred with respect to
such goods and services for the quarters ended June 30, 2004 and 2003 were
$15,730 and $14,650, respectively and $30,465 and $34,960 for the six month
periods ended June 30, 2004 and 2003, respectively. In April 2002, a senior
executive of the Company borrowed $21,000 from the Company ("Executive Note").
The Executive Note earns interest at a rate of 4% per annum and was repaid in
April 2004.
16
NOTE 9 - PENSION
PENSION BENEFITS
----------------------------
SIX MONTHS ENDED JUNE 30: 2004 2003
- -------------------------------------------------- -------------- ------------
Interest cost $ 17,075 $ 18,208
Expected return on plan assets (19,166) (17,338)
Amortization of transition (assets) or obligations 3,896 3,896
Recognized actuarial (gain) loss 9,616 11,563
-------------- ------------
Net periodic benefit cost $ 11,421 $ 16,329
============== ============
PENSION BENEFITS
----------------------------
THREE MONTHS ENDED JUNE 30: 2004 2003
- -------------------------------------------------- -------------- ------------
Interest cost $ 8,525 $ 9,102
Expected return on plan assets (9,563) (8,667)
Amortization of transition (assets) or obligations 1,948 1,948
Recognized actuarial (gain) loss 4,808 5,781
--------------- -----------
Net periodic benefit cost $ 5,718 $ 8,164
=============== ===========
EMPLOYER CONTRIBUTIONS
The Company previously disclosed in its financial statements for the year ended
December 31, 2003, that it expected to contribute $72,000 to its pension plan in
2004. As of June 30, 2004 no contributions have been made. The Company presently
anticipates contributing $72,000 to fund its pension plan in 2004.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company disclosed its critical accounting policies and estimates in the
December 31, 2003 Form 10-K. There have been no changes to those critical
accounting policies and estimates during the six months ended June 30, 2004.
RESULTS OF OPERATIONS
Net sales for the six months ended June 30, 2004 were $12,311,439 or
approximately 3% above net sales of $11,949,922 for the six months ended June
30, 2003. Net sales for the three months ended June 30, 2004, were $6,547,503,
or approximately 3% above net sales of $6,364,744 for the three months ended
June 30, 2003.
Net sales of custom orthotics for the six months ended June 30, 2004, were
$9,420,636 as compared to $9,103,590 for the six months ended June 30, 2003, an
increase of $317,046 or approximately 3.5%. Net sales of custom orthotics for
the three months ended June 30, 2004 were $4,989,223, as compared to $4,925,859
for the three months ended June 30, 2003, an increase of approximately 1%.
Net sales of distributed products for the six months ended June 30, 2004 were
$2,890,803, as compared to $2,846,332 for the six months ended June 30, 2003, an
increase of $44,471, or approximately 1.6%. Net sales of distributed products
for the three months ended June 30, 2004 were $1,558,280 as compared to
$1,438,885 for the three months ended June 30, 2003, or an increase of
approximately 8%.
Gross profit as a percentage of net sales for the six months ended June 30, 2004
was approximately 35.4%, as compared to 34.2% for the six months ended June 30,
2003. Gross profit as a percentage of net sales for the three months ended June
30, 2004 was approximately 36.5% as compared to 36.0% for the three months ended
June 30, 2003. Gross profit as a percentage of net sales increased as a result
of the increase in the prices of orthotic products.
Selling expenses for the six months ended June 30, 2004, were $1,594,134 or
13.0% of net sales as compared to $1,550,427 or 13.0% of net sales for the six
months ended June 30, 2003. Selling expenses for the three months ended June 30,
2004 were $786,445 or 12% of net sales as compared to $798,096, or 12.5% of net
sales for the three months ended June 30, 2003. Selling expenses for the six
months ended June 30, 2004 were consistent with the similar period in the prior
year as the cost of marketing initiatives undertaken in the first quarter of
2004 were offset by cost reductions implemented in the second quarter of 2004.
As a result, selling expenses as a percentage of sales for the 2004 second
quarter improved as compared to the 2003 second quarter.
General and administrative expenses for the six months ended June 30, 2004 were
$2,518,023, or approximately 20.5% of net sales, as compared to $2,358,187 or
19.7% of net sales for the six months ended June 30, 2003. General and
administrative expenses for the three months ended June 30, 2004 were $1,343,889
or 20.5% as compared to $1,270,411 or 20.0% of net sales for the three months
ended June 30, 2003. General and administrative costs increased in both
comparative periods in both dollars and as a percentage of net sales as a result
of increased expenses incurred, including insurance and professional fees, and
depreciation (related to the new information technology platform) as the company
continues to strengthen its infrastructure.
18
Other income (expense), net, was $(315,309) for the six months ended June 30,
2004, as compared to $(316,878) for the six months ended June 30, 2003. The
decrease in other income (expense) is attributable to the reduction in interest
expense resulting from the repayment of the Benefoot note during the quarter
ended June 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of June 30, 2004 was $7,017,364, as compared to $7,433,951 as
of December 31, 2003. Cash balances at June 30, 2004 were $2,796,210, a decrease
of $2,737,736 from the $5,533,946 at December 31, 2003. The reduction in cash is
attributable to the cash utilized for the implementation of the new information
technology system, the repayment of $800,000 of the 4% promissory notes
("Benefoot Notes"), the payment of deferred consideration relating to the
Benefoot transaction, the semi-annual payment of interest on the 4% convertible
notes and the increase in inventory.
The Company originally issued an aggregate $1,800,000 of Benefoot Notes in
connection with the acquisition of Benefoot. $1,000,000 of the Benefoot Notes
were paid on May 6, 2003 and the balance of $800,000 was paid on May 6, 2004.
Interest expense with respect to the Benefoot Notes for the six months ended
June 30, 2004 and 2003 was $11,111 and $29,932, respectively.
In 2003 the Company's United Kingdom subsidiary ("UK Subsidiary") maintained a
line of credit with a local bank in the amount of 50,000 British pounds, which
was guaranteed by the Company pursuant to a standby Letter of Credit. The Letter
of Credit expired in February 2004 and the Company has thereafter provided
sufficient funds to the UK Subsidiary to meet its working capital requirements.
As described above, the Company made the final payment under the Benefoot Notes
totaling $800,000 plus interest in May 2004. The Company was also obligated to
make certain contingent price payments based upon certain defined net sales
through May 6, 2004. During the six months ended June 30, 2004, the Company paid
$321,669 pursuant to such commitments and as of June 30, 2004 had accrued an
additional $144,319 which was paid in July 2004 as the final payment with
respect to such commitments. Additionally, the Company has paid or expects to
pay approximately $700,000 in 2004 (of which approximately $300,000 is expected
to be incurred in the last six months of 2004) to complete its information
technology system conversion. The Company's other significant commitments are
operating lease obligations which total approximately $250,000 for the last six
months of 2004 and the 4% convertible notes which mature in 2006
In 2003, the Company did not have earnings after taxes and it did not have
earnings after taxes for the six months ended June 30, 2004. To the extent that
the Company is unable to increase its profitability in the next two years it
will not have sufficient funds to repay its obligation under the convertible
notes which mature in 2006. The Company would have to refinance or restructure
such convertible notes at that time.
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 for the next twelve months.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued SFAS No. 132, as revised, Employers'
Disclosures about Pensions and Other Postretirement Benefits, ("Revised SFAS
132"), which requires additional disclosures about assets, obligation, cash
flows, and net periodic benefit cost of defined benefit pension plans and other
defined benefit postretirement plans.
19
The Company adopted the required revised disclosure provisions of Revised SFAS
132 as of December 31, 2003, except for the disclosure of estimated future
benefit payments, which the Company is required to and will disclose as of
December 31, 2004. The adoption of SFAS No. 132 did not have a material impact
on the Company's financial statements.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Information contained or incorporated by reference in the 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. 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 and ability
to integrate acquired companies and assets, 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
including those described from time to time in the Company's Registration
Statement on Form S-3, most recent Form 10-K and 10-Q's and other Company
filings with the Securities and Exchange Commission 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.
20
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.
21
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this Report, the Company evaluated the
effectiveness of the design and operation of its disclosure controls and
procedures. The Company's disclosure controls and procedures are designed to
provide reasonable assurance that the information that the Company must
disclose in its reports filed under the Securities Exchange Act of 1934, as
amended, is communicated and processed in a timely manner. Andrew H. Meyers,
President and Chief Executive Officer of the Company, and Joseph P. Ciavarella,
Vice President and Chief Financial Officer, participated in this evaluation.
Based on such evaluation, Messrs. Meyers and Ciavarella concluded that, as of
the end of the period covered by this Report, the Company's disclosure controls
and procedures were effective. During the period covered by this Report, there
have not been any significant changes in the Company's internal controls over
financial reporting or in other factors that could significantly affect those
controls.
22
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on June 23, 2004.
Of the 4,380,851 shares of the Company's common stock entitled to vote
at the meeting, 3,983,751 shares of common stock were present in
person or by proxy and entitled to vote. Such number of shares
represented approximately 90.9 % 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, and Greg Nelson to the Company's board of directors. The
Company's stockholders voted as follows in connection with such
election:
For: Withheld:
---- ---------
Burtt R. Ehrlich 3,982,971 780
Andrew H. Meyers 3,946,671 37,080
Jonathan R. Foster 3,982,971 780
Arthur Goldstein 3,982,971 780
Greg Nelson 3,982,971 780
At the meeting, the Company's stockholders approved the appointment of
Deloitte & Touche LLP as the Company's independent auditor for the
Company's fiscal year ending December 31, 2004. There were 3,983,251
votes in favor, 0 votes against and 500 abstentions in connection with
such proposal.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
31.1 Certification of Principal Executive Officer Pursuant to Rule
13a-14(a) (17 CFR 240.13a-14(a)).
31.2 Certification of Principal Financial Officer Pursuant to Rule
13a-14(a) (17 CFR 240.13a-14(a)).
32.1 Certification of Principal Executive Officer Pursuant to Rule
13a-14(b) (17 CFR 240.13a-14(b)) and Section 1350 of Chapter
63 of Title 18 of the United States Code (18 U.S.C. 1350).
32.2 Certification of Principal Financial Officer Pursuant to Rule
13a-14(b) (17 CFR 240.13a-14(b)) and Section 1350 of Chapter
63 of Title 18 of the United States Code (18 U.S.C. 1350).
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on May 17, 2004, to
report information under Item 9, Regulation FD Disclosure, regarding
the announcement of the Company's results for the quarter ended March
31, 2004.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LANGER, INC.
Date: August 12, 2004 By: /s/ Andrew H. Meyers
-----------------------------
Andrew H. Meyers
President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Joseph P. Ciavarella
-----------------------------
Joseph P. Ciavarella
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
24