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
