KANE KESSLER, P.C.
1350 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(212) 541-6222
January 28, 2005
VIA EDGAR
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549
| Attention: | Peggy A. Fisher Assistant Director |
Dear Ms. Fisher:
We hereby submit in electronic format with the Securities and Exchange Commission (the "Commission"), pursuant to the Securities Exchange Act of 1934, as amended (the "Act"), and Regulation S-T, Amendment No. 1 to the Registration Statement on Form S-1 of Langer, Inc. ("Langer" or the "Company").
The Form S-1 has been revised in response to the Staff's comments contained in the Commission's letter of comment (the "Staff Letter") dated December 23, 2004. In connection therewith, set forth on Schedule A hereto are the Company's responses to the Staff Letter, which have been listed in the order of the comments from the Staff Letter.
Please feel free to contact me at (212) 519-5115, with any questions regarding the foregoing.
| Very truly yours, | ||
Steven E. Cohen |
Enclosure
Schedule A—Responses of Langer, Inc. to the
Commission Staff Comment Letter dated December 23, 2004
Prospectus Summary—Pages 1 to 4
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on page 4.
Our market estimates are based in part upon the following reports, copies of which are being sent under separate cover:
(a) "Orthopedic Orthotics" and "Orthopedic Prosthetics" (included), furnished to the Company by: Global Industry Analysts, Inc., 5645 Silver Creek Valley Road, Suite 200 San Jose, California 95138, Phone: (408) 528-9966,www.globind.com; and
(b) "Cosmeceuticals: Global Markets & Breakthrough Therapies" (included) furnished to the Company by: PJB Medical Publications Inc., 1775 Broadway, Suite 511, New York, NY 10019, Phone: (212) 262-8230,www.thetareports.com.
Below please find our analysis with respect to each of the following statements:
"Based on third-party research, we believe that the global orthopedic markets that we target represented approximately $2.4 billion in sales in 2003, with the United States accounting for approximately half of this amount, and are expected to grow to approximately $3.4 billion by the end of 2008."
2003 market estimate:
| | US$ millions | Source | ||
|---|---|---|---|---|
| Global Rehabilitative Orthotics Market | 627.9 | "Orthopedic Orthotics" page II-20, Table 6 | ||
| Global Orthopedic Bracings Market | 705.4 | "Orthopedic Orthotics" page II-21, Table 8 | ||
| Prosthetic Componentry1 | 1,077.1 | "Orthopedic Prosthetics" page II-41, Table 11 | ||
| Total | 2,410.4 |
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| | US$ millions | Source | ||
|---|---|---|---|---|
| U.S. Orthopedic Prosthetics Market | 2,862.9 | "Orthopedic Prosthetics" page II-41, Table 11 | ||
| European Orthopedic Prosthetics Market | 1,445.7 | "Orthopedic Prosthetics" page II-41, Table 11 | ||
| Total | 4,308.5 | |||
| 25% of Total | 1,077.1 |
2008 market estimate:
| | US$ millions | Source | ||
|---|---|---|---|---|
| Global Rehabilitative Orthotics Market | 876.7 | "Orthopedic Orthotics" page II-20, Table 6 | ||
| Global Orthopedic Bracings Market | 939.7 | "Orthopedic Orthotics" page II-21, Table 8 | ||
| Prosthetic Componentry1 | 1,560.4 | "Orthopedic Prosthetics" page II-41, Table 11 | ||
| Total | 3,376.7 |
| | US$ millions | Source | ||
|---|---|---|---|---|
| U.S. Orthopedic Prosthetics Market | 4,157.6 | "Orthopedic Prosthetics" page II-41, Table 11 | ||
| European Orthopedic Prosthetics Market | 2,083.8 | "Orthopedic Prosthetics" page II-41, Table 11 | ||
| Total | 6,241.4 | |||
| 25% of Total | 1,560.4 |
"Based on third party research we believe that the U.S. skincare moisturizer market, which is the market we target, represented approximately $2.0 billion in sales in 2003 and is expected to grow to approximately $2.5 billion by the end of 2008."
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Calculations
2003 market estimate:
| | US$ millions | Source | ||
|---|---|---|---|---|
| 2003 Skincare Market | 2,753.5 | "Cosmeceuticals" page 56, Table 4-7 | ||
| 2003 Scar Management Skincare | 44.7 | "Cosmeceuticals" page 187, Table 11-5 | ||
| Total | 2,798.2 | |||
| Total @ 70% (moisturizer) | 1,958.7 | "Cosmeceuticals" page 52, Paragraph 3 |
2008 market estimate:
| | US$ millions | Source | ||
|---|---|---|---|---|
| 2008 Skincare Market | 3,582.5 | "Cosmeceuticals" page 56, Table 4-7 | ||
| 2008 Scar Management Skincare | 55.5 | "Cosmeceuticals" page 187, Table 11-5 | ||
| Total | 3,368.0 | |||
| Total @ 70% (moisturizer) | 2,546.6 | "Cosmeceuticals" page 52, Paragraph 3 |
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The Company believes its products represent a high level of quality based on third-party studies commissioned by the Company. Nevertheless, the Company has revised the S-1 to remove the previous references to high quality.
Please see the marked changes on pages 1 and 56.
The Company has revised the S-1 in response to the Staff's comment regarding disclosure of transaction costs. Please see the marked changes on pages 1 and 56.
The Company has also revised its description of the working capital adjustment to the Silipos acquisition price. Please see the marked changes on pages 1 and 56. The Company believes that, based on its current calculations, this working capital adjustment may result in a decrease to the purchase price paid by the Company by as much as $800,000. The Seller is disputing the Company's position pursuant to the purchase agreement and, accordingly, the Company believes it would be inappropriate to publicly disclose this estimate at the present time.
Risk Factors—Pages 8 to 18
There are significant risks associated with our strategy....—Page 9
The Company has revised the S-1 in response to the Staff's comment by adding a new Risk Factor under the heading "We may issue a substantial amount of our common stock in the future which could cause dilution to new investors and otherwise adversely affect our stock price" on page 20.
We may face difficulties integrating the operations of Silipos—Page 10
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on page 9.
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The Company has not experienced any material integration delays or unexpected costs with respect to Silipos to date that have resulted in or are expected to result in a materially adverse impact to our business and operations.
We may be adversely affected by legal actions or proceedings commenced against us—Page 10
The basis of the Company's belief that Poly-Gel may raise such claims or bring legal action against it is the Company's knowledge of discussions that occurred between Poly-Gel and SSL International, plc, the party from whom the Company acquired Silipos, in mid-2003 in which Poly-Gel intimated it might bring action against Silipos for the types of claims described in the Risk Factor if Silipos began manufacturing its own oil-based gels. Because of this, the Silipos acquisition agreement contained provisions specifically intended to address possible claims by Poly-Gel. The Company has no knowledge that Poly-Gel has any current intention to bring the actions described in the Risk Factors against the Company. Moreover, since no action or proceeding has been commenced, the Company has revised the heading for this Risk Factor in order to clarify that fact. Please see the marked changes on pages 10 and 11.
Our existing purchase arrangements may be adversely affected...- Page 10
Although there are suppliers that supply products or materials that are material to the Company's business, none of them supply the Company with products or materials that the Company believes could not otherwise be readily purchased or substituted for from other sources without significant delay or significant additional expense to the Company. The Company has not disclosed this in the Risk Factor as it may tend to mitigate the actual risk being disclosed to investors.
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on page 61.
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in a materially adverse impact to your business and operations, and if so, how the matter was resolved.
The Company has not experienced any such interruption or delay for each of the two years ended December 31, 2002 and 2003, and for the nine months ended September 30, 2004. The Company has not disclosed this in the Risk Factor as it may tend to mitigate the actual risk being disclosed to investors.
We may not be successful in manufacturing the raw material oil based gels.... —Page 11
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on page 11.
The nature of our business could subject us to potential product liability...claims. Page 11.
The Company believes that its current level of insurance is adequate based on its consultations with its insurance brokers and underwriters. The language in the Risk Factor reflects the possibility of a large judgment that any manufacturer may face in a product liability claim as well as the vagaries of the insurance coverage market. Nonetheless, the Company has revised this Risk Factor by deleting the sentence regarding the adequacy of its insurance coverage, thus avoiding any inconsistencies with the risk being disclosed to investors. Please see the marked changes on page 12.
The Company has not experienced any product liability claims that resulted in a materially adverse impact to it during the two years ended December 31, 2002 and 2003, and the nine months ended September 30, 2004. The Company has not disclosed this in the Risk Factor as it may tend to mitigate the actual risk being disclosed to investors.
Changes in government and other third-party payor reimbursement levels...—Page 13
Since the Company does not receive any payments directly from Medicare or Medicaid it is unable to quantify the portion of its historical revenues derived indirectly from such payments. However, the Company is aware that a number of its customers are reimbursed
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by Medicare and Medicaid. The Risk Factor discloses the Company's exposure to potential decreases in such reimbursements, and the Company feels that this Risk Factor is appropriate disclosure even though it is unable to quantify the extent to which its sales are dependent upon such reimbursements.
Our products may be subject to product recalls...—Page 14
There have not been any past mandatory or voluntary recalls that have had a material adverse effect on the Company's business.
Our business, operating results and financial condition could be adversely affected if we become involved in litigation regarding our...intellectually property rights—Page 14
The Company is not aware of any party currently intending to pursue intellectual property claims against it. The Company has not disclosed this in the Risk Factor as it may tend to mitigate the actual risk being disclosed to investors. While the Company is not aware of any current intention on the part of Poly-Gel to bring any intellectual property claims against it, as discussed in the Company's response to Comment No. 7, above, the Company has reason to believe that it could be subject to such claims being brought against it. Accordingly, the Company has disclosed these potential claims in this Risk Factor as well. Please see marked changes on pages 15 and 16.
A portion of our revenues and expenditures is subject to exchange rate fluctuations that could adversely affect our reported results of operations—Page 16
The Company has not recently experienced any material reductions in sales and profitability due to foreign currency fluctuations because the value of the local currencies referenced in the Risk Factor, and particularly the British pound and Canadian dollar, have increased in value relative to the U.S. dollar. However, the Company faces a risk that its sales would be affected by any increase in the value of the U.S. dollar compared to these other currencies. The Risk Factor has been revised to reflect this risk. Please see the marked changes on page 17.
Our quarterly results are subject to fluctuations.—Page 16
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The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on page 17.
One stockholder has the ability to significantly influence...—Page 17
The Company has revised the S-1 in response to the Staff's comment to disclose that our current Chairman of the Board of Directors Warren B. Kanders, our President, Chief Executive Officer and Board of Directors member, Andrew H. Meyers, and our Board of Directors member, Gregory R. Nelson also participated in the tender offer by which Langer Partners, LLC, became the largest stockholder of the Company, in February 2001. We have also revised the S-1 to disclose that the entire board was designated by Langer Partners, LLC in 2001 following the tender offer. Please see the marked changes on pages 18 and 19.
The Company complies with corporate governance practices required by the Sarbanes-Oxley Act of 2002 and the revised listing requirements of the Nasdaq Stock Market. Such practices include the adoption of corporate governance guidelines to resolve potential conflicts of interest.
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on page 19.
The price of our common stock has been and is expected to continue to be volatile, which could affect a stockholder's return on investment.—Page 17
The Company has revised the S-1 in response to the Staff's comment. Please see the new Risk Factor under the heading "Shares of our common stock have been thinly traded in the past" on page 19.
We have a significant amount of convertible indebtedness...—Page 17
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Based on the current conversion price for the 4% Convertible Subordinated Notes of $6.00 per share and the Company's net tangible book value per share as of September 30, 2004 of $(3.65), conversion of the 4% Convertible Subordinated Notes at the present would be antidilutive to the Company on a book value basis, and would contribute approximately $3.44 per share to the net tangible book value per share of the Company. We have not disclosed this antidilutive effect in the Risk Factor as it may tend to mitigate the actual risk being disclosed to investors. The risk factor does disclose the potential equity dilution, including the aggregate number of shares issuable if all the convertible notes are converted. Please see the marked changes on page 20.
Our certificate of incorporation, our by laws and Delaware law...—Page 18
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on page 21.
New investors in our common stock will experience immediate and substantial dilution.—Page 18
The effects of conversion of the 4% Convertible Subordinated Notes would be antidilutive on a book value basis. (Please see the Company's response to Comment No. 21.) Accordingly, the Company believes that the Risk Factor as written adequately states the specific risk of immediate dilution upon the consummation of the offering without reference to possible conversion of the 4% Convertible Subordinated Notes.
Use of Proceeds—Page 20
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on pages 23 and 24.
If the Company acquires Poly-Gel, whether pursuant to the Put Option or otherwise, for less than $4,500,000 and the liabilities and damages relating to Potential Poly-Gel Claims do not exceed $2,000,000, we are obligated, pursuant to the terms of the Silipos purchase agreement to pay SSL an additional amount of $4,500,000 less the purchase price paid for Poly-Gel. If we do not acquire Poly-Gel and the amount of any liabilities for Potential Poly-Gel Claims does not exceed $2,500,000, then we will be obligated to pay SSL $1,000,000, plus an amount, not to exceed $500,000, for certain costs incurred by SSL in defense of the Potential Poly-Gel Claims. The Company expects the proceeds of the offering will be available to satisfy these obligations, if they should become due. The Company has accrued a liability of $2.5 million as of September 30, 2004, based on its estimate of the fair value of the Put Option.
The Company has revised the S-1 in response to the Staff's comment to reflect the foregoing. Please see the marked changes on page 27.
Capitalization—Page 23
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on page 26.
Unaudited Pro Forma Condensed Consolidation Financial Statements—Page 26-30
W. Gray Hudkins was hired effective October 1, 2004 and his hiring was not solely attributable to the acquisition of Silipos nor was he a former Silipos employee. Therefore, because the Company could not factually support the conclusion that Mr. Hudkins hiring was solely attributable to the Silipos acquisition, no pro forma adjustments were reflected.
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Dilution—Page 24
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on page 28.
Management's Discussion & Analysis—Pages 31 to 45
General
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes in Management's Discussion and Analysis..., Results of Operations, Nine Months Ended September 30, 2003 and 2004, and Years Ended December 31, 2002 and 2003, and Years Ended December 31, 2001 and 2002.
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes in Management's Discussion and Analysis..., Results of Operations, Nine Months Ended September 30, 2003 and 2004, and Years Ended December 31, 2002 and 2003, and Years Ended December 31, 2001 and 2002.
Results of Operations—Page 34 to 38
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes in Management's Discussion and Analysis..., Results of Operations, Nine Months Ended September 30, 2003 and 2004, and Years Ended December 31, 2002 and 2003, and Years Ended December 31, 2001 and 2002, at pages 41 and 45.
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on pages 41, 42 and 43.
Because of the Company's level of operations, small changes or events which do not reflect trends may impact results of operations from period to period. The Company and Benefoot had certain similar products, and as a result, the operations and recordkeeping of Benefoot were merged into Langer with respect to these products upon the acquisition. While the Company can track certain products attributable to Benefoot, it is not possible to track all such products. Where the Company can provide supportable amounts, therefore, it has, and where not possible, the Company has provided guidance.
Nine Months Ended September 30, 2003 and 2004—Pages 35 to 36
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The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes in Management's Discussion and Analysis..., Results of Operations, Nine Months Ended September 30, 2003 and 2004, at page 41.
We have also revised our description of this market segment.
Liquidity and Capital Resources—Page 39 to 42
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on pages 45 to 49.
Contractual Obligations—Page 40
The Put Option has a fair value of $2,355,000 as of September 30, 2004 and approximately $1,750,000 as of December 31, 2004. The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on pages 23 and 49.
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on page 50.
The potential "claims" referred to are the same ones discussed in the Risk Factors section (and, hence, the use of the terms defined in the Risk Factors section). The Company cannot determine the amount of any potential claims that Poly-Gel has not yet made. However, as it has disclosed, it can determine certain amounts owing in respect of such claims to SSL pursuant to the terms of the Silipos purchase agreement.
Capital Resources—Page 42
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on page 51.
Quarterly Results of Operations (unaudited)—Page 43
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on pages 52 and 53.
Business—Pages 46 to 59
Acquisition History—Page 46
The Company has revised the S-1 in response to the Staff's comment by disclosing the details of the February 2001 acquisition in the section of the S-1 titled "Certain Relationships and Related Party Transactions". Please see the marked changes on page 81.
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The Company has revised the S-1 in response to the Staff's comments (i) to remove the statements that it is obligated to pay "up to" $2.5 million; (ii) to clarify the Company's obligation under the Put Option and the Silipos purchase agreement relating to its possible acquisition of Poly-Gel and that its liability under these obligations could be as high as $4.5 million; and (iii) to disclose that it recorded a liability of $2.5 million which represents the fair value of its obligation under the Put Option.
Please see the marked changes on pages 27, 49 and 50.
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on page 56.
Sheldon Langer has not been an affiliate of the Company during the past three fiscal years. Accordingly, the Company does not believe that Item 404 of S-K would require disclosure of the now terminated medical consulting agreement, in the Certain Relationships and Related Party Transactions section of the prospectus, or elsewhere.
Manufacturing and Sourcing—Page 51
"PPT" is a cushioning material which is manufactured by a third party and sold by the Company under the PPT mark. If the current supply arrangements for the cushioning material were terminated, the Company believes it could obtain the material from other sources and continue to market cushioning material under its PPT mark. Accordingly, we have deleted the reference to PPT under the heading "Sourcing". Please see the marked change on page 61.
Competition—Page 51 to 52
The Company believes that the disclosure in the prospectus accurately describes the nature of the competition it faces in the markets in which it sell its products. However, the Company does not have market share or similar information that would quantify its position relative to its competitors, and such information would not be readily available to the Company.
Patents and Trademarks—Page 52
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on page 62.
Properties—Page 52
The Company has an option under the lease of its facility at Deer Park, NY, for a four-year term commencing on August 1, 2005, carrying annual rent increases of 4% per year based upon the current lease rate. The Company presently intends to renew the lease in accordance with that option.
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on page 63.
Government Regulation—Page 53 - 59
Medical Device Regulation—Page 53 to 55
None of the Company's products has been subject to a recall by international regulatory authorities for a material defect or deficiency in design or manufacturing.
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Principal Stockholders—Page 67 - 68
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on pages 78 and 79.
Mr. Kanders has no voting or dispositive power over the shares owned by Oracle and its affiliates for purposes of Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). However, Oracle could be deemed to be the beneficial owner of shares owned by Mr. Kanders as a result of the agreement described on page 78 of the prospectus. Accordingly, the Company has revised the disclosure in footnote (4) to the Principal Stockholders table. Please see the marked changes on page 78.
Certain Relationships and Related Party Transactions—Page 69 - 70
Consulting Agreement with Kanders & Co., Inc.
This offering will not constitute a "change of control" that would accelerate the restricted stock grant to Kanders & Co.
4% Convertible Subordinated Notes
The Company believes that these shares should not be included in the beneficial ownership table as shares beneficially owned by Mr. Kanders because none of these shares would be considered to be beneficially owned by Mr. Kanders under Rule 13d-3 of the Exchange Act as the 4% Convertible Subordinated Notes are held by members of Mr. Kanders' extended family, none of whom include his spouse or children, or trusts established by the parents of Mr. Kanders, with respect to which he does not possess voting or dispositive power.
The Company has added the requested information about the possible application of proceeds of this offering to pay the 4% Convertible Subordinated Notes, including such notes held by Mr. Kanders, to the "Use of Proceeds" section. For the reasons set forth in the response to Comment 51, the Company does not consider it appropriate to refer to amounts that may be payable out of the proceeds to holders of 4% Convertible Subordinated Notes who are members of Mr. Kanders' extended family, none of whom include his spouse or children, or trusts established by the parents of Mr. Kanders, with respect to which he does not possess voting or dispositive power.
Other Related Party Transactions
The Company believes that the prices and terms of the products and services that the Company obtains from Mr. Meyers' brother-in-law are similar to and at least as favorable as those the Company could have obtained in arms length negotiations or otherwise are at prevailing market prices and terms.
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on page 82.
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Description of Capital Stock—Page 71 to 73
Convertible Notes—Page 71
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on page 83.
Shares Eligible For Future Resale—Page 74
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on page 86. The Company's executive officers, directors and certain of our stockholders and holders of 4% convertible notes, which beneficially own an aggregate of approximately 81.3% of our outstanding shares, prior to giving effect to the offering, will be asked to execute lock-up agreements.
Langer, Inc. Financial Statements for the Year Ended December 31, 2003
Note 1, Summary of Significant Accounting Policies
Revenue Recognition—Page F-8
The Company's terms of sales to distributors and other customers do not include rights of return or price protection. The Company considers it appropriate to recognize revenue upon shipment. Additionally, sales of our custom orthotics and other customized products are not subject to customer acceptance. The Company's only post-shipment obligation to customers is for product warranty (generally for 6 months). See the response to Comment 57 for an explanation of our accounting with respect to product warranty liability.
The Company adopted EITF 00-10 in 2002 and disclosed the impact of the adoption in its Form 10-K for the year ended December 31, 2002, in the Notes to the Consolidated Financial Statements, Note 1, Summary of Significant Accounting Policies. The Company did not include such information in the Consolidated Financial Statements as of and for the year ended December 31, 2003, as such information was reportable only in the prior year.
In response to the Staff's comment, the Company has revised the note on Revenue Recognition to include a discussion of the Company's accounting for shipping and handling fees and costs. Please see the marked changes on page F-8.
Supplementally, the Company advises that it does not offer sales incentives falling within the scope of EITF 01-09, and therefore the adoption of EITF 01-09 did not have any impact on the Company's consolidated results of operations, cash flows or financial position.
In response to the Staff's comment, the Company has revised its revenue recognition policy note to include a discussion of its accounting policy and methodology used in determining the Company's liability for product warranties. Please see the marked changes on page F-8. The Company has revised Note 5 to the consolidated financial statements on page F-18 to include a tabular reconciliation of the changes in the aggregate product warranty liability for each of the years ended December 31, 2003 and 2002 and the ten month period ended December 31, 2001.
(i) Goodwill and Identifiable Intangible Assets with Indefinite Lives—Page F-9
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appraisal firm under "Experts" and include their consent in the registration statement. Alternatively, you could revise the filing to omit this reference.
We have deleted the references to appraisers. Please see the marked changes on page F-9.
Note 2, Acquisitions—Pages F-13 to F-17 and F-36 to F-42
The Company advises the Staff that for the 10 months ended December 31, 2001 it had income of $73,397 from continuing operations before income taxes, extraordinary items and cumulative effect of change in accounting principle and Benefoot had income of $322,607 from continuing operations before income taxes, extraordinary items and cumulative effect of change in accounting principle. Accordingly, the Company believes it is required by Rule 3-05(b)(4)(iii) to include in the S-1 audited Benefoot financial statements for the fiscal years ended December 31, 2001 and 2000.
The S-1 has been revised to include audited Benefoot financial statements for the fiscal years ended December 31, 2001 and 2000. Please see the marked changes on pages F-79 to F-94.
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on pages F-13, F-14, F-37, F-39, and F-40.
In accordance with SFAS 141 and EITF 95-8, the amounts paid to the selling shareholders of Benefoot as contingent purchase consideration were not linked to continuing employment. The selling shareholders who became employees of the Company were paid at rates consistent with other vice presidents of the Company subject to separate contracts that were negotiated at arms' length, and the payments of contingent performance-based consideration were made solely on account of the achievement of performance targets as provided in the Benefoot purchase agreement.
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on pages F-14 and F-39.
The Company concluded that although the Put Option did not meet the definition of a derivative in accordance with paragraph 6(c) of SFAS No. 133 because there is no provision for net settlement, the Put Option should be recorded at its fair value at September 30, 2004 in accordance with EITF 00-6 which describes the Commission's longstanding position that written options initially should be recorded at fair value and subsequently marked to market through earnings.
As of September 30, 2004, the Company recorded a liability of $2,500,000 to reflect its estimate of the fair value of the Put Option. The Company's valuation was based upon the difference between the estimated purchase price under the Put Option ($2,355,000) and the valuation of Poly-Gel which was estimated at zero. The valuation of Poly-Gel was based upon various factors including that the supply agreement was expiring, the Company was no longer purchasing under the supply agreement and Silipos was Poly-Gel's only customer, the development by Silipos' of the capability to make the gel it had previously purchased from Poly-Gel, and the Company's belief based on its due diligence investigation of Poly-Gel, that the net assets of Poly-Gel were not significant. The Company, therefore, concluded that Poly-Gel had no future cash flow stream. The $145,000 difference between the originally estimated value of the Put
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Option of $2,500,000 recorded by the Company and the purchase price under the Put Option of $2,355,000 is not material and will be adjusted prospectively in connection with the finalization of the purchase price of Silipos.
The Company has reviewed its accounting for its obligation under the purchase agreement to comply with paragraphs 25-27 of SFAS 141. This rule states that contingent consideration that is determinable at the date of acquisition shall be included in determining the cost of the entity and recorded at that date and consideration that is issuable at the expiration of the contingency period shall be disclosed but not recorded as a liability unless the outcome of the contingency is determinable beyond a reasonable doubt. Because the obligation under the Silipos purchase agreement to pay Silipos could range from $0 to $4,500,000, the Company can not determine the outcome of an amount within the range beyond a reasonable doubt and, therefore, has determined to not record a liability for such obligation but to disclose such contingent consideration in the notes to the unaudited condensed consolidated financial statements for the nine months ended September 30, 2004.
The Company restated the unaudited consolidated condensed financial statements of Silipos for the period ended September 30, 2004 to reflect the $2.355 million liability associated with recording the fair value of the Put Option. The Company revised the unaudited pro-forma condensed consolidated statement of operations for the nine months ended September 30, 2004 to reflect this restated historical financial information for Silipos. The Company plans to amend its Current Report on Form 8-K/A filed with the Commission on December 13, 2004 to reflect the liability recorded for the Put Option.
The Company has revised the S-1 to reflect the foregoing. Please see the marked changes on pages F-67, F-68, F-69 and F-77.
See the Company's response to the Staff's comment No. 62 which addresses how the Company determined its obligation under the Put Option with Poly-Gel. We have revised the S-1 on page 27 and 49 to clarify how this liability was determined.
Note 3, Inventories, net—Page F-17
Inventory write-downs represent the estimated loss of value of certain slow-moving inventory. Inventory usage is analyzed using turnover analysis, and an allowance for obsolescence is provided when inventory quantity exceeds the Company's annual cycle of usage. The percentage of allowance is based upon actual usage, historical data and experience. Most of these reserves are associated with raw materials used in the fabrication process and either represent items no longer utilized in the process or significant excess inventory. Inventory for which a reserve has been provided was $855,000 and $1,110,000, on an original cost basis, at December 31, 2003 and September 30, 2004, respectively.
Certain of the raw material inventory for which a reserve was provided has subsequently been used in fabrication, with the related reserve being reversed. However, the Company reevaluates the reserve based upon the age of the existing inventory and the usage analysis. Thus, gross profit is not materially affected. With respect to finished goods (distributed products) certain of these items have been sold at reduced prices which have reduced gross profit. However, these items were sold for prices at or slightly above their adjusted carrying value and did not materially impact gross profit.
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on pages 38 and 39.
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Langer, Inc. Financial Statements For The Period Ended September 30, 2004
Consolidated Balance Sheets—Page F-31
As of September 30, 2004, the Company and subsidiaries (excluding Silipos) had an allowance for doubtful accounts of $265,273 or 6.5% of its receivables as compared to $224,273 or 5.7% of its accounts receivable at December 31, 2003. The Company believes the allowances are appropriate based upon collections, write-off history and age of the receivables.
Silipos' accounts receivable of approximately $3,366,000 were consolidated in the unaudited condensed consolidated balance sheet at September 30, 2004 at fair value and thus no allowance was provided.
The Company did not reflect the allowance for sales returns of $68,000 on the face of the unaudited condensed consolidated balance sheet at September 30, 2004.
We have revised the balance at September 30, 2004 to reflect that the correct allowances for doubtful accounts and sales returns of $333,273.
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on page 38.
The Company has evaluated whether a valuation allowance is needed and has reviewed its financial position and its results of operations for the years ended December 31, 2003 and 2002 and the ten month period ended December 31, 2001. In connection with such review the Company has taken into account any changes in its ownership structure. While the Company has had a history of operating losses, Silipos has a history of generating taxable income. The Company believes that it may utilize future reversals of existing taxable temporary differences or future taxable income to realize upon the value of the net deferred tax assets.
The Company presently expects to have taxable income in 2004 and 2005 and the foreseeable future. After reviewing net deferred tax assets, the Company believes it is more likely than not that the deferred tax asset acquired in the Silipos acquisition will be realized.
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on page 39.
Note 5, Segment Information—Page—45
The assets of Silipos at September 30, 2004, including goodwill, were $23,768,853 and were allocable $6,546,831 to skincare and $17,222,022 to orthopedics. On a consolidated basis, assets of $40,274,979 were allocable to orthopedics and $6,546,831 were allocated to skin care.
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on page F-46.
Silipos, Inc. Financial Statements for the Year Ended March 31, 2004
Consolidated Statements of Operations—Page 53
The Company believes that the loss per share information for Silipos is not required by paragraphs 6, 39 and 41 of Statement 128 because Silipos was not a public company and it was owned by one shareholder.
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Note 8, Goodwill and Other Intangible Assets—Page F-65
Silipos was required to test goodwill for impairment as of April 1, 2002 and annually thereafter, in accordance with the provisions of FASB Statement No. 142. The goodwill was created when the ultimate parent of Silipos acquired Silipos in 1999. Subsequent to the acquisition, markets in general slowed down and Silipos did not realize the cash flows originally anticipated. Silipos recognized an impairment loss of $14,132,353 on adoption of FASB Statement No. 142.
In accordance with FASB Statement No. 142, Silipos performed its annual impairment tests as of March 31, 2004 and 2003. Consequently, impairment losses of $9,124,344 and $3,489,631 in 2004 and 2003, respectively, were recognized since the carrying amount of the applicable reporting unit was greater than the fair value of the applicable reporting unit and the carrying amount of the reporting unit's goodwill exceeded the implied fair value of that goodwill.
In 2003 and 2004, Silipos continued to generate less than anticipated cash flows and continued to feel competitive pressure. Additionally, the ultimate parent of Silipos altered its strategic direction and began aggressively marketing Silipos for sale. The valuation on March 31, 2004 was based upon the negotiated sales price of Silipos and resulted in the impairment loss of $9,124,344.
The Company has revised the S-1 in response to the Staff's comment. Please see the marked changes on page F-64, F-65, F-76 and F-77.
Item 16. Exhibits and Financial Statement Schedule
A hard copy of the form of legal opinion to be filed as an exhibit to the S-1 is being sent under separate cover.
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