TABLE OF CONTENTS
receivable of Twincraft and Regal at December 31, 2007 were approximately $3,730,000 and $1,009,000, respectively, which is the primary reason for the increase. The allowance for doubtful accounts and returns and allowances increased by approximately $928,000 over the year ended December 31, 2007, which correlates with the increase in overall receivables outstanding.
Inventories, net, increased from approximately $2,858,000 at December 31, 2006 to approximately $6,680,000 at December 31, 2007, an increase of approximately $3,822,000. The net inventories of Twincraft and Regal at December 31, 2007 were approximately $3,852,000 and $60,000, respectively, which is the primary reason for the increase.
Assets held for sale of approximately $1,502,000, along with liabilities related to assets held for sale of approximately $472,000, represent the assets and liabilities of Langer UK, which were sold in January 2008.
Property and equipment, net, increased from approximately $8,042,000 at December 31, 2006 to approximately $14,593,000 at December 31, 2007, an increase of approximately $6,551,000. This increase is due to the addition of assets acquired from Twincraft and Regal of approximately $7,722,000 and $25,000 respectively, purchases of new property and equipment during the year of approximately $1,522,000, and depreciation expense during the year of $2,801,000. Included in depreciation expense is $115,886, which represents the additional expense associated with the acceleration of the term of the depreciation of leasehold improvements on our 41 Madison Avenue, New York City corporate headquarters and sales office. Management anticipates that we will vacate the premises in May 2008 and find new, smaller and lower cost office space.
Identifiable intangible assets, net, increased from approximately $5,961,000 at December 31, 2006 to approximately $14,458,000 at December 31, 2007, an increase of approximately $8,497,000. This increase is attributable to the addition of approximately $7,215,000 related to the Twincraft repeat customer base and approximately $2,629,000 of trade names used by Twincraft, less amortization of intangible assets in the year ended December 31, 2007 of approximately $1,347,000.
Goodwill increased from approximately $14,119,000 at December 31, 2006 to approximately $21,956,000 at December 31, 2007, an increase of approximately $7,837,000. The increases were as a result of the acquisitions of Twincraft with associated goodwill of $7,022,000 and Regal with associated goodwill of $1,278,000, which is offset by the approximately $463,000 decrease in goodwill associated with Langer UK’s disposed operations.
Accounts payable increased from approximately $1,106,000 at December 31, 2006 to approximately $3,149,000 at December 31, 2007, an increase of $2,043,000. This increase is attributable to the additions to accounts payable from our newly-acquired subsidiaries, Twincraft and Regal, who had accounts payable at December 31, 2007 of approximately $1,880,000 and $178,000, respectively.
Changes in Significant Balance Sheet Accounts — December 31, 2006
Accounts receivable, net, decreased from approximately $4,690,000 at December 31, 2005, to approximately $4,216,000 at December 31, 2006, a decrease of approximately $474,000. The decrease is primarily attributable to a decrease in accounts receivable relating to our custom orthotics business of approximately $482,000, along with a net increase in our allowance for doubtful accounts of approximately $41,000.
Inventories, net, decreased from approximately $3,738,000 at December 31, 2005, to approximately $2,858,000 at December 31, 2006, a decrease of approximately $880,000, which was attributable partially to the net increase in the reserve for excess or obsolete inventory from approximately $564,000 at December 31, 2005 to approximately $885,000 at December 31, 2006 and partly to our focus to reduce certain excess inventory levels, principally in the distributed products group of our medical products segment.
Prepaid expenses and other current assets increased from approximately $778,000 at December 31, 2005, to approximately $816,000 at December 31, 2006, an increase of approximately $38,000. The increase was primarily attributable to increases in prepaid insurance, which was partially offset by decreases in prepaid medical premiums, prepaid convention expenses and prepaid supplies due to the establishment of certain cost containment initiatives, and the write-off of certain assets.
TABLE OF CONTENTS
Property and equipment, net, increased from approximately $6,857,000 at December 31, 2005, to approximately $8,042,000 at December 31, 2006, an increase of approximately $1,185,000. The change was primarily attributable to the investment in property and equipment of approximately $2,360,000, offset by depreciation expense of approximately $1,147,000 in the year ended December 31, 2006. The increase is primarily attributable to the leasehold improvements and furnishings made to the new New York City lease office space totaling approximately $1,685,000, plus other additions of approximately $675,000.
Identifiable intangible assets, net, decreased from approximately $6,604,000 at December 31, 2005, to approximately $5,961,000 at December 31, 2006, a decrease of approximately $643,000, of which was attributable to amortization expense recorded for the year ended December 31, 2006.
Other assets increased from approximately $460,000 at December 31, 2005, to approximately $1,989,000 at December 31, 2006, an increase of approximately $1,529,000. The increase was contributed principally by a net increase in deferred costs of approximately $1,734,000, offset by the amortization of debt acquisition costs of approximately $144,000, and the decrease of approximately $61,000 due to the write-off of certain assets.
Goodwill was approximately $13,656,000 at both December 31, 2005 and December 31, 2006, which excludes approximately $463,000 of goodwill attributable to Langer UK, which is classified as assets held for sale.
Accounts payable increased from approximately $970,000 at December 31, 2005, to approximately $1,106,000 at December 31, 2006, an increase of approximately $136,000, which was consistent with our level of operation.
Other current liabilities decreased from approximately $3,395,000 at December 31, 2005, to approximately $3,212,000 at December 31, 2006, a decrease of approximately $183,000. The change was primarily attributable to decreases in accrued professional fees of approximately $396,000, accrued severance of approximately $219,000, accrued bonuses of approximately $126,000, and accrued interest with respect to our capital lease of approximately $104,000. These decreases were partially offset by increases in certain accrued liabilities such as accrued acquisition costs of approximately $473,000 relating to our acquisitions finalized in January 2007, and costs relating to the loss on abandonment of certain New York City office space of approximately $200,000.
Deferred income taxes payable increased by approximately $362,000, from approximately $1,309,000 at December 31, 2005, to approximately $1,671,000 at December 31, 2006. The increase was primarily attributable to the income tax effect of the amortization deducted for income tax purposes related to goodwill and trade names, which are not amortizable for financial reporting purposes.
51
TABLE OF CONTENTS
Contractual Obligations
Certain of our facilities and equipment are leased under noncancelable operating and capital leases. Additionally, as discussed below, we have certain long-term and short-term indebtedness. The following is a schedule, by fiscal year, of future minimum rental payments required under current operating and capital leases and debt repayment requirements as of December 31, 2007 measured from the end of our current fiscal year (December 31):
 | | | | | | | | | | |
| | Payments Due by Period (In Thousands) |
| Contractual Obligations | | Total | | Less Than Year | | 1 – 3 Years | | 4 – 5 Years | | More Than
5 Years |
Operating Lease
Obligations | | $ | 10,941 | | | $ | 2,009 | | | $ | 3,192 | | | $ | 2,409 | | | $ | 3,331 | |
| Capital Lease Obligations | | | 5,147 | | | | 432 | | | | 897 | | | | 948 | | | | 2,870 | |
| Interest on Long-term Debt | | | 6,427 | | | | 1,455 | | | | 4,351 | | | | 621 | | | | — | |
5% Convertible Notes due
December 7, 2011 | | | 28,880 | | | | — | | | | — | | | | 28,880 | | | | — | |
| Note Payable to Landlord | | | 149 | | | | 36 | | | | 86 | | | | 27 | | | | — | |
| Severance Obligations | | | 10 | | | | 10 | | | | — | | | | — | | | | — | |
| Total | | $ | 51,554 | | | $ | 3,942 | | | $ | 8,526 | | | $ | 32,885 | | | $ | 6,201 | |
Long-Term Debt
On December 8, 2006, the Company entered into a note purchase agreement for the sale of $28,880,000 of 5% convertible subordinated notes due December 7, 2011 (the “5% Convertible Notes”). The 5% Convertible Notes are not registered under the Securities Act of 1933, as amended. The shares of the Company’s common stock acquirable upon conversion of the 5% Convertible Notes, which may include additional number of shares of common stock as may be issuable on account of adjustments of the conversion price under the 5% Convertible Notes. The Company filed a registration statement with respect to the shares acquirable on conversion of the 5% Convertible Notes (the “Underlying Shares”) and has filed Amendment No. 1 of the registration statement on November 19, 2007. The Company has received a comment letter from the Securities and Exchange Commission dated December 18, 2007, and expects to file Amendment No. 2 thereof in April 2008.
The 5% Convertible Notes bear interest at the rate of 5% per annum, payable in cash semiannually on June 30 and December 31 of each year, commencing June 30, 2007. For the years ended December 31, 2007 and 2006 the Company recorded interest expense related to the 5% Convertible Notes of approximately $1,443,000 and $97,000, respectively. Subject to the agreements of certain holders of the 5% Convertible Notes described at the end of this paragraph, at the date of issuance, the 5% Convertible Notes were convertible at the rate of $4.75 per share, subject to certain reset provisions. At the original conversion price at December 31, 2006, the number of Underlying Shares was 6,080,000. Since the conversion price was above the market price on the date of issuance and there were no warrants attached, there was no beneficial conversion. Subsequent to December 31, 2006, on January 8, 2007 and January 23, 2007, in conjunction with common stock issuances related to two acquisitions, the conversion price was adjusted to $4.6706, and the number of Underlying Shares was thereby increased to 6,183,359, pursuant to the anti-dilution provisions applicable to the 5% Convertible Notes. On May 15, 2007, as a result of the issuance of an additional 68,981 shares of common stock to the Twincraft sellers on account of upward adjustments to the Twincraft purchase price, and the surrender to the Company of 45,684 shares of common stock on account of downward adjustments in the Regal purchase price, the conversion price under the 5% Convertible Notes was reduced to $4.6617, and the number of Underlying Shares was increased to 6,195,165 shares. This resulted in a debt discount of $476,873, which is amortized over the term of the 5% Convertible Notes and is recorded as interest expense in the consolidated statements of operations. The charge to interest expense relating to the debt discount for the years ended December 31, 2007 was approximately $86,000.
52
TABLE OF CONTENTS
The principal of the 5% Convertible Notes is due on December 7, 2011, subject to the earlier call of the 5% Convertible Notes by the Company, as follows: (i) the 5% Convertible Notes may not be called prior to December 7, 2007; (ii) from December 7, 2007, through December 7, 2009, the 5% Convertible Notes may be called and redeemed for cash, in the amount of 105% of the principal amount of the 5% Convertible Notes (plus accrued but unpaid interest, if any, through the call date); (iii) after December 7, 2009, the 5% Convertible Notes may be called and redeemed for cash in the amount of 100% of the principal amount of the 5% Convertible Notes (plus accrued but unpaid interest, if any, through the call date; and (iv) at any time after December 7, 2007, if the closing price of the Common Stock of the Company on the NASDAQ Stock Market (or any other exchange on which the Company’s common stock is then traded or quoted) has been equal to or greater than $7.00 per share for 20 of the preceding 30 trading days immediately prior to the Company’s issuing a call notice, then the 5% Convertible Notes shall be mandatorily converted into Common Stock at the conversion price then applicable. The Company has obtained agreements from holders of approximately $24,000,000 in principal amount of the 5% Convertible Notes not to convert their notes prior to the approval by the stockholders of the issuance of the common stock issuable upon conversion of the notes. The Company had a Special Meeting of Stockholders on April 19, 2007, to obtain such approval, and holders of approximately 50% of the Company’s common stock agreed to vote in favor of such approval at any meeting of stockholders held prior to July 1, 2007.
In the event of a default on the 5% Convertible Notes, the due date of the 5% Convertible Notes may be accelerated if demanded by holders of at least 40% of the 5% Convertible Notes, subject to a waiver by holders of 51% of the 5% Convertible Notes if the Company pays all arrearages of interest on the 5% Convertible Notes. Events of default are defined to include change in control of the Company.
The payment of interest and principal of the 5% Convertible Notes is subordinate to the Company’s presently existing capital lease obligations, in the amount of $2,700,000 as of December 31, 2007. The 5% Convertible Notes would also be subordinated to any additional debt which the Company may incur hereafter for borrowed money, or under additional capital lease obligations, obligations under letters of credit, bankers’ acceptances or similar credit transactions.
In connection with the sale of the 5% Convertible Notes, the Company paid a commission of $1,338,018 based on a rate of 4% of the amount of 5% Convertible Notes sold, excluding the 5% Convertible Notes sold to members of the Board of Directors and their affiliates, to Wm Smith & Co., who served as placement agent in the sale of the 5% Convertible Notes. The total cost of raising these proceeds was $1,338,018, which will be amortized through December 7, 2011, the due date for the payment on the 5% Convertible Notes. The amortization of these costs for the year ended December 31, 2007 was $262,700.
On October 31, 2001, the Company completed the sale in a private placement, of $14,589,000 principal amount of its 4% convertible subordinated notes due and paid in full, plus accrued interest, on August 31, 2006. The amortization of acquisition costs associated with these notes for the year ended December 31, 2006 was $127,853, and was included in interest expense in the consolidated statements of operations. Interest expense on the 4% Convertible Notes for the year ended December 31, 2006 was $385,040. The notes were paid in full on the due date, August 31, 2006.
In June 2006, the Company elected, pursuant to its option under the lease of space at 41 Madison Avenue, New York, N.Y., to finance $202,320 of leasehold improvements by delivery of a note payable to the landlord (the “Note”). The Note, which matures in July 2011, provides for interest at a rate of 7% per annum and 60 monthly installments of principal and interest totaling $4,006, commencing August 2006. The Note is secured by a $202,320 increase to an unsecured letter of credit originally provided to the landlord at lease commencement. The amount of the revised unsecured letter of credit is $570,992. The current portion of the Note, $35,541, is included in other current liabilities, including current installments of note payable, and the non-current portion of the Note of $113,309 at December 31, 2007.
Seasonality
Revenue derived from our sales of orthotic devices in North America has historically been significantly higher in the warmer months of the year. Other factors which can result in quarterly variations include the timing and amount of new business generated by us, the timing of new product introductions, our revenue mix, the timing of additional selling, general and administrative expenses to support the anticipated growth
53
TABLE OF CONTENTS
and development of new business units and the competitive and fluctuating economic conditions in the medical products, personal care, and durable medical goods industries.
Inflation
We have in the past been able to increase the prices of our products or reduce overhead costs sufficiently to offset the effects of inflation on wages, materials and other expenses, and anticipate that we will be able to continue to do so in the future.
Recently Issued Accounting Pronouncements
On September 15, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. SFAS No. 157 provides guidance related to estimating fair value and requires expanded disclosures. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. In February 2008, the FASB provided a one year deferral for the implementation of SFAS No. 157 for non-financial assets and liabilities recognized or disclosed at fair value in the financial statements on a non-recurring basis. The Company is evaluating SFAS No. 157 and its impact on the Company’s consolidated financial statements, but it is not expected to have a significant impact.
On February 22, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This statement gives entities the option to carry most financial assets and liabilities at fair value, with changes in fair value recorded in earnings. This statement, which will be effective in the first quarter fiscal 2009, is not expected to have a material impact on the Company’s consolidated financial position or results of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141 (R)”), which requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest of an acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. SFAS No.141 (R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier application is prohibited. We anticipate this will have a material effect on future acquisitions upon adoption.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” which requires (1) ownership interests in subsidiaries held by parties other than the parent to be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity; (2) the amount of consolidated net income attributable to the parent and to the non-controlling interest be clearly identified and presented on the face of the consolidated statement of income; and (3) changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently as equity transactions. SFAS No. 160 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier application is prohibited. The adoption of SFAS No. 160 is not expected to have a material impact on our results of operations or our financial position.
Unaudited Quarterly Financial Data
Set forth below is certain unaudited quarterly financial data for each of the last eight quarters, and such data expressed as a percentage of our revenue for the respective quarters. The information has been derived from unaudited financial statements that, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary to fairly present such quarterly information in accordance with generally accepted accounting principles. The operations of Langer UK, Limited have been classified as discontinued operations in our consolidated financial statements. As a result, the information reported below may be different than amounts reported previously. The operating results for any quarter are not necessarily indicative of the results to be expected for any future period.
54
TABLE OF CONTENTS
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Mar. 31, 2006 | | June 30, 2006 | | Sep. 30, 2006 | | Dec. 31, 2006(1) | | Mar. 31, 2007 | | June 30, 2007 | | Sep. 30, 2007 | | Dec. 31,
2007(2) |
| | | (In Thousands, Except per Share Data) |
| Net sales | | $ | 7,787 | | | $ | 8,541 | | | $ | 8,373 | | | $ | 7,998 | | | $ | 14,321 | | | $ | 16,598 | | | $ | 16,611 | | | $ | 15,383 | |
| Cost of sales | | | 4,923 | | | | 4,921 | | | | 4,862 | | | | 5,350 | | | | 9,030 | | | | 10,817 | | | | 10,384 | | | | 10,292 | |
| Gross profit | | | 2,864 | | | | 3,620 | | | | 3,511 | | | | 2,648 | | | | 5,291 | | | | 5,781 | | | | 6,227 | | | | 5,091 | |
| Selling expenses | | | 1,741 | | | | 1,573 | | | | 1,443 | | | | 1,278 | | | | 2,098 | | | | 2,468 | | | | 2,476 | | | | 2,376 | |
| General and administrative expenses | | | 2,185 | | | | 2,206 | | | | 2,321 | | | | 3,013 | | | | 3,244 | | | | 3,394 | | | | 3,689 | | | | 3,739 | |
| Research and development expenses | | | 123 | | | | 142 | | | | 152 | | | | 111 | | | | 197 | | | | 211 | | | | 224 | | | | 208 | |
| Operating (loss) income | | | (1,185 | ) | | | (301 | ) | | | (405 | ) | | | (1,754 | ) | | | (248 | ) | | | (292 | ) | | | (162 | ) | | | (1,232 | ) |
Other Income (Expense)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | 159 | | | | 211 | | | | 151 | | | | 108 | | | | 132 | | | | 73 | | | | 22 | | | | 30 | |
| Interest expense | | | (303 | ) | | | (277 | ) | | | (217 | ) | | | (147 | ) | | | (526 | ) | | | (548 | ) | | | (556 | ) | | | (556 | ) |
| Other income (expense) | | | (8 | ) | | | 28 | | | | 3 | | | | (26 | ) | | | (7 | ) | | | (11 | ) | | | 4 | | | | 36 | |
| Other expense, net | | | (152 | ) | | | (38 | ) | | | (63 | ) | | | (65 | ) | | | (401 | ) | | | (486 | ) | | | (530 | ) | | | (490 | ) |
Loss from continuing
operations before income taxes | | | (1,337 | ) | | | (339 | ) | | | (468 | ) | | | (1,819 | ) | | | (649 | ) | | | (778 | ) | | | (692 | ) | | | (1,722 | ) |
| (Provision for) benefit from income taxes | | | (7 | ) | | | (6 | ) | | | 21 | | | | (510 | ) | | | (63 | ) | | | (44 | ) | | | (102 | ) | | | (24 | ) |
Loss from continuing
operations | | | (1,344 | ) | | | (345 | ) | | | (447 | ) | | | (2,329 | ) | | | (712 | ) | | | (822 | ) | | | (794 | ) | | | (1.746 | ) |
Discontinued operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Loss) from operations of
discontinued
subsidiary | | | (81 | ) | | | (136 | ) | | | (106 | ) | | | (121 | ) | | | (72 | ) | | | (28 | ) | | | (43 | ) | | | (301 | ) |
Income tax benefit
(provision) | | | (1 | ) | | | | | | | | | | | 57 | | | | | | | | | | | | | | | | | |
| Loss from discontinued operations | | | (82 | ) | | | (136 | ) | | | (106 | ) | | | (64 | ) | | | (72 | ) | | | (28 | ) | | | (43 | ) | | | (301 | ) |
| Net loss | | $ | (1,426 | ) | | $ | (481 | ) | | $ | (553 | ) | | $ | (2,393 | ) | | $ | (784 | ) | | $ | (850 | ) | | $ | (837 | ) | | $ | (2,047 | ) |
Net loss per share:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic and diluted:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loss from continuing
operations | | $ | (0.14 | ) | | $ | (0.03 | ) | | $ | (0.04 | ) | | $ | (0.23 | ) | | $ | (0.06 | ) | | $ | (0.07 | | | $ | (0.07 | ) | | $ | (0.15 | ) |
Loss from discontinued
operations | | | (0.01 | ) | | | (0.01 | ) | | | (0.01 | ) | | | (0.01 | ) | | | (0.01 | ) | | | (0.00 | ) | | | (0.00 | ) | | | (0.03 | ) |
| Basic and diluted loss per share | | $ | (0.15 | ) | | $ | (0.04 | ) | | $ | (0.05 | ) | | $ | (0.24 | ) | | $ | (0.07 | ) | | $ | (0.07 | ) | | $ | (0.07 | ) | | $ | (0.18 | ) |
| Net sales | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| Cost of sales | | | 63.2 | | | | 57.6 | | | | 58.1 | | | | 66.9 | | | | 63.1 | | | | 65.2 | | | | 62.5 | | | | 66.9 | |
| Gross profit | | | 36.8 | | | | 42.4 | | | | 41.9 | | | | 33.1 | | | | 36.9 | | | | 34.8 | | | | 37.5 | | | | 33.1 | |
| Selling expenses | | | 22.4 | | | | 18.4 | | | | 17.2 | | | | 16.0 | | | | 14.6 | | | | 14.9 | | | | 14.9 | | | | 15.4 | |
| General and administrative expenses | | | 29.1 | | | | 26.8 | | | | 28.7 | | | | 38.7 | | | | 23.2 | | | | 21.0 | | | | 22.7 | | | | 24.9 | |
| Research and development expenses | | | 1.6 | | | | 1.7 | | | | 1.8 | | | | 1.4 | | | | 1.4 | | | | 1.3 | | | | 1.3 | | | | 1.4 | |
| Provision for impairment of identifiable intangible assets. | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Operating (loss) income | | | (15.3 | ) | | | (3.5 | ) | | | (4.8 | ) | | | (22.0 | ) | | | (1.8 | ) | | | (1.8 | ) | | | (0.9 | ) | | | (8.0 | ) |
Other Income (Expense)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | 2.0 | | | | 2.5 | | | | 1.8 | | | | 1.4 | | | | 0.9 | | | | 0.4 | | | | 0.1 | | | | 0.2 | |
| Interest expense | | | (3.9 | ) | | | (3.2 | ) | | | (2.6 | ) | | | (1.8 | ) | | | (3.7 | ) | | | (3.3 | ) | | | (3.3 | ) | | | (3.6 | ) |
Other income
(expense) | | | (0.1 | ) | | | 0.3 | | | | 0.0 | | | | (0.3 | ) | | | (0.0 | ) | | | (0.1 | ) | | | 0.0 | | | | 0.2 | |
| Other expense, net | | | (2.0 | ) | | | (0.4 | ) | | | (0.8 | ) | | | (0.7 | ) | | | (2.8 | ) | | | (3.0 | ) | | | (3.2 | ) | | | (3.2 | ) |
Loss from continuing
operations before income taxes | | | (17.3 | ) | | | (3.9 | ) | | | (5.6 | ) | | | (22.7 | ) | | | (4.6 | ) | | | (4.8 | ) | | | (4.1 | ) | | | (11.2 | ) |
| (Provision for) benefit from income taxes | | | (0.1 | ) | | | (0.1 | ) | | | (0.3 | ) | | | (6.4 | ) | | | (0.4 | ) | | | (0.3 | ) | | | (0.6 | ) | | | (0.2 | ) |
| Net loss from continuing operations | | | (17.4 | ) | | | (4.0 | ) | | | (5.3 | ) | | | (29.1 | ) | | | (5.0 | ) | | | (5.1 | ) | | | (4.7 | ) | | | (11.4 | ) |
Discontinued operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations of discontinued
subsidiary | | | (1.0 | ) | | | (1.6 | ) | | | (1.3 | ) | | | (1.5 | ) | | | (0.5 | ) | | | (0.2 | ) | | | (0.3 | ) | | | (1.9 | ) |
| Income tax benefit (provision) | | | (0.0 | ) | | | — | | | | — | | | | 0.7 | | | | — | | | | — | | | | — | | | | — | |
Loss from discontinued
operations | | | (1.1 | ) | | | (1.6 | ) | | | (1.3 | ) | | | (0.8 | ) | | | (0.5 | ) | | | (0.2 | ) | | | (0.3 | ) | | | (1.9 | ) |
| Net loss | | | (18.3 | )% | | | (5.6 | )% | | | (6.6 | )% | | | (29.9 | )% | | | (5.5 | )% | | | (5.1 | )% | | | (5.0 | )% | | | (13.3 | )% |
55
TABLE OF CONTENTS
| (1) | Included in the operating results for the quarter ended December 31, 2006 were: |
| (a) | an additional provision for inventory obsolescence of approximately $286,000; |
| (b) | a pension settlement loss of approximately $397,000; |
| (c) | the loss on abandonment of certain New York City office space of approximately $112,000; and |
| (d) | a provision for income taxes of approximately $437,000. |
| (2) | Included in the discontinued operations for the quarter ended December 31, 2007 were: |
| (a) | an accrual for the loss on the sale of Langer UK of approximately $176,000. |
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following discussion about our market risk involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements.
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 activities. 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 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, which 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.
56
TABLE OF CONTENTS
Item 8. Financial Statements and Supplementary Data
LANGER, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
57
TABLE OF CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Langer, Inc.
Deer Park, New York
We have audited the accompanying consolidated balance sheets of Langer, Inc. and Subsidiaries (the “Company”) as of December 31, 2007 and 2006 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. We have also audited the schedule in connection with our audits of the financial statements, listed in the accompanying Index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Langer, Inc. and Subsidiaries at December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1(p) to the consolidated financial statements, in 2006, the Company changed their method of accounting for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment.”
Also, in our opinion, the schedule when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
(Signed BDO Seidman, LLP)
Melville, New York
March 28, 2008
58
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | |
| | December 31, 2007 | | December 31, 2006 |
ASSETS
| | | | | | | | |
Current assets:
| | | | | | | | |
| Cash and cash equivalents | | $ | 2,422,453 | | | $ | 29,608,479 | |
| Restricted cash – escrow | | | 1,000,000 | | | | — | |
| Accounts receivable, net of allowances for doubtful accounts and returns and allowances aggregating $1,048,837 and $539,321, respectively | | | 8,764,401 | | | | 4,216,016 | |
| Inventories, net | | | 6,680,353 | | | | 2,857,570 | |
| Assets held for sale | | | 1,501,717 | | | | 1,241,368 | |
| Prepaid expenses and other current assets | | | 1,156,333 | | | | 815,513 | |
| Total current assets | | | 21,525,257 | | | | 38,738,946 | |
| Property and equipment, net | | | 14,592,616 | | | | 8,041,808 | |
| Identifiable intangible assets, net | | | 14,457,669 | | | | 5,960,590 | |
| Goodwill | | | 21,956,430 | | | | 14,119,213 | |
| Other assets | | | 1,158,697 | | | | 1,988,913 | |
| Total assets | | $ | 73,690,669 | | | $ | 68,849,470 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY
| | | | | | | | |
Current liabilities:
| | | | | | | | |
| Accounts payable | | $ | 3,148,921 | | | $ | 1,105,509 | |
| Liabilities related to assets held for sale | | | 472,318 | | | | 501,907 | |
| Other current liabilities, including current installment of note payable | | | 3,614,462 | | | | 3,212,415 | |
| Unearned revenue | | | 336,232 | | | | 392,215 | |
| Total current liabilities | | | 7,571,933 | | | | 5,212,046 | |
Long-term debt:
| | | | | | | | |
5% Convertible Notes, net of debt discount of $390,771 at
December 31, 2007 | | | 28,489,229 | | | | 28,880,000 | |
| Notes payable | | | 113,309 | | | | 151,970 | |
| Obligation under capital lease | | | 2,700,000 | | | | 2,700,000 | |
| Unearned revenue | | | 83,682 | | | | 100,438 | |
| Deferred income taxes payable | | | 1,801,653 | | | | 1,670,529 | |
| Other liabilities | | | 1,043,288 | | | | 1,117,623 | |
| Total liabilities | | | 41,803,094 | | | | 39,832,606 | |
Commitments and contingencies
| | | | | | | | |
Stockholders’ equity:
| | | | | | | | |
| Preferred stock, $1.00 par value; authorized 250,000 shares; no shares issued | | | — | | | | — | |
| Common stock, $.02 par value; authorized 50,000,000 shares; issued 11,588,512 and 10,156,673 respectively | | | 231,771 | | | | 203,134 | |
| Additional paid in capital | | | 53,800,139 | | | | 46,951,501 | |
| Accumulated deficit | | | (22,713,086 | ) | | | (18,195,109 | ) |
| Accumulated other comprehensive income | | | 765,392 | | | | 253,979 | |
| | | | 32,084,216 | | | | 29,213,505 | |
| Treasury stock at cost, 84,300 shares | | | (196,641 | ) | | | (196,641 | ) |
| Total stockholders’ equity | | | 31,887,575 | | | | 29,016,864 | |
| Total liabilities and stockholders’ equity | | $ | 73,690,669 | | | $ | 68,849,470 | |
See accompanying notes to consolidated financial statements.
59
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | |
| | For the Years Ended December 31, |
| | | 2007 | | 2006 | | 2005 |
| Net sales | | $ | 62,912,298 | | | $ | 32,699,304 | | | $ | 37,403,853 | |
| Cost of sales | | | 40,523,793 | | | | 20,055,605 | | | | 20,489,589 | |
| Gross profit | | | 22,388,505 | | | | 12,643,699 | | | | 16,914,264 | |
| General and administrative expenses | | | 14,066,476 | | | | 9,726,270 | | | | 11,498,704 | |
| Selling expenses | | | 9,418,661 | | | | 6,035,326 | | | | 7,079,229 | |
| Research and development expenses | | | 837,934 | | | | 528,421 | | | | 469,971 | |
| Provision for impairment of identifiable intangible assets | | | — | | | | — | | | | 2,102,000 | |
| Operating loss | | | (1,934,566 | ) | | | (3,646,318 | ) | | | (4,235,640 | ) |
Other expense, net:
| | | | | | | | | | | | |
| Interest income | | | 257,964 | | | | 629,409 | | | | 441,517 | |
| Interest expense | | | (2,186,100 | ) | | | (943,629 | ) | | | (2,689,638 | ) |
| Change in fair value of Put Option | | | — | | | | — | | | | 1,750,000 | |
| Other | | | 22,329 | | | | (3,731 | ) | | | 52,875 | |
| Other expense, net | | | (1,905,807 | ) | | | (317,951 | ) | | | (445,246 | ) |
| Loss from continuing operations before income taxes | | | (3,840,373 | ) | | | (3,964,269 | ) | | | (4,680,886 | ) |
| (Provision for) benefit from income taxes (Note 17) | | | (234,771 | ) | | | (502,396 | ) | | | 227,391 | |
| Loss from continuing operations | | | (4,075,144 | ) | | | (4,466,665 | ) | | | (4,453,495 | ) |
Discontinued Operations:
| | | | | | | | | | | | |
Loss from operations of discontinued subsidiary
(including goodwill impairment of $175,558) | | | (442,833 | ) | | | (443,127 | ) | | | (77,542 | ) |
| (Provision for) benefit from income taxes | | | — | | | | 56,303 | | | | (26,231 | ) |
| Loss from discontinued operations | | | (442,833 | ) | | | (386,824 | ) | | | (103,773 | ) |
| Net Loss | | $ | (4,517,977 | ) | | $ | (4,853,489 | ) | | $ | (4,557,268 | ) |
Net Loss per common share:
| | | | | | | | | | | | |
Basic and diluted:
| | | | | | | | | | | | |
| Loss from continuing operations | | $ | (0.36 | ) | | $ | (0.45 | ) | | $ | (0.61 | ) |
| Loss from discontinued operations | | | (0.04 | ) | | | (0.04 | ) | | | (0.02 | ) |
| Basic and diluted loss per share | | $ | (0.40 | ) | | $ | (0.49 | ) | | $ | (0.63 | ) |
Weighted average number of common shares used in computation of net (loss) per share:
| | | | | | | | | | | | |
| Basic and diluted | | | 11,484,486 | | | | 9,977,972 | | | | 7,277,240 | |
See accompanying notes to consolidated financial statements.
60
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | | | | | | | | Accumulated Other
Comprehensive Income (Loss) |
| | | Shares | | Amount | | Treasury Stock | | Unearned
Stock
Compensation | | Additional Paid-in Capital | | Accumulated Deficit | | Foreign
Currency
Translation | | Unrecognized Periodic
Pension Costs | | Comprehensive Income | | Total
Stockholders’ Equity |
| Balance at January 1, 2005 | | | 4,505,033 | | | $ | 90,101 | | | $ | (115,457 | ) | | $ | (277,083 | ) | | $ | 14,441,541 | | | $ | (8,784,352 | ) | | $ | 294,151 | | | $ | (434,208 | ) | | | | | | | 5,214,693 | |
| Net loss | | | | | | | | | | | | | | | | | | | | | | | (4,557,268 | ) | | | | | | | | | | $ | (4,557,268 | ) | | | | |
Foreign currency
adjustment | | | | | | | | | | | | | | | | | | | | | | | | | | | (67,383 | ) | | | | | | | (67,383 | ) | | | | |
| Minimum pension liability adjustment, net of tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 4,349 | | | | 4,349 | | | | | |
| Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (4,620,302 | ) | | | (4,620,302 | ) |
Stock grant for
consulting services | | | 901 | | | | 18 | | | | | | | | | | | | 4,982 | | | | | | | | | | | | | | | | | | | | 5,000 | |
| Common stock issued for restricted stock grants | | | 100,000 | | | | 2,000 | | | | | | | | (465,000 | ) | | | 463,000 | | | | | | | | | | | | | | | | | | | | | |
Amortization of unearned stock
compensation | | | | | | | | | | | | | | | 742,083 | | | | | | | | | | | | | | | | | | | | | | | | 742,083 | |
Effect of stock options issued for
compensation for services | | | | | | | | | | | | | | | | | | | 1,256,988 | | | | | | | | | | | | | | | | | | | | 1,256,988 | |
| Sale of stock in public offering | | | 5,226,989 | | | | 104,540 | | | | | | | | | | | | 33,870,889 | | | | | | | | | | | | | | | | | | | | 33,975,429 | |
| Expenses of public offering, including sales commissions | | | | | | | | | | | | | | | | | | | (4,673,686 | ) | | | | | | | | | | | | | | | | | | | (4,673,686 | ) |
Stock returned to
treasury in settlement of obligations | | | | | | | | | | | (81,184 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | (81,184 | ) |
Effect of modification to stock option
agreement | | | | | | | | | | | | | | | | | | | 1,045,625 | | | | | | | | | | | | | | | | | | | | 1,045,625 | |
Conversion of
Convertible Note to common stock, net | | | 25,000 | | | | 500 | | | | | | | | | | | | 147,115 | | | | | | | | | | | | | | | | | | | | 147,615 | |
| Exercise of stock options | | | 110,000 | | | | 2,200 | | | | | | | | | | | | 165,550 | | | | | | | | | | | | | | | | | | | | 167,750 | |
| Exercise of warrants | | | 25,000 | | | | 500 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 500 | |
| Balance at December 31, 2005 | | | 9,992,923 | | | | 199,859 | | | | (196,641 | ) | | | | | | | 46,722,004 | | | | (13,341,620 | ) | | | 226,768 | | | | (429,859 | ) | | | | | | | 33,180,511 | |
61
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY – (continued)
| | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | | | | | | | | Accumulated Other
Comprehensive Income (Loss) |
| | | Shares | | Amount | | Treasury Stock | | Unearned
Stock
Compensation | | Additional Paid-in Capital | | Accumulated Deficit | | Foreign
Currency
Translation | | Unrecognized Periodic
Pension Costs | | Comprehensive Income | | Total
Stockholders’ Equity |
| Net loss | | | | | | | | | | | | | | | | | | | | | | | (4,853,489 | ) | | | | | | | | | | $ | (4,853,489 | ) | | | | |
Foreign currency
adjustment | | | | | | | | | | | | | | | | | | | 170,682 | | | | | | | | | | | | | | | | 170,682 | | | | | |
| Unrecognized actuarial loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 375,335 | | | | | | | | 375,335 | |
| Unrecognized transition costs | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (88,947 | ) | | | | | | | (88,947 | ) |
| Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (4,682,807 | ) | | | (4,682,807 | ) |
Stock-based
compensation
expense | | | | | | | | | | | | | | | | | | | 186,322 | | | | | | | | | | | | | | | | | | | | 186,322 | |
| Exercise of stock options | | | 128,750 | | | | 2,575 | | | | | | | | | | | | 43,175 | | | | | | | | | | | | | | | | | | | | 45,750 | |
| Exercise of warrants | | | 35,000 | | | | 700 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 700 | |
| Balance at December 31, 2006 | | | 10,156,673 | | | | 203,134 | | | | (196,641 | ) | | | | | | | 46,951,501 | | | | (18,195,109 | ) | | | 397,450 | | | | (143,471 | ) | | | | | | | 29,016,864 | |
| Net loss | | | | | | | | | | | | | | | | | | | | | | | (4,517,977 | ) | | | | | | | | | | | (4,517,977 | ) | | | | |
Actuarial loss written off due to plan
termination | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 54,524 | | | | | | | | 54,524 | |
| Unrecognized transition costs written off due to plan termination | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 88,947 | | | | | | | | 88,947 | |
Foreign currency
adjustment | | | | | | | | | | | | | | | | | | | | | | | | | | | 367,942 | | | | | | | | 367,942 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4,150,035 | ) | | | (4,150,035 | ) |
Stock-based
compensation expense | | | | | | | | | | | | | | | | | | | 281,660 | | | | | | | | | | | | | | | | | | | | 281,660 | |
Discount on 5%
Convertible Notes | | | | | | | | | | | | | | | | | | | 476,873 | | | | | | | | | | | | | | | | | | | | 476,873 | |
| Issuance of stock to purchase Regal | | | 333,483 | | | | 6,670 | | | | | | | | | | | | 1,365,279 | | | | | | | | | | | | | | | | | | | | 1,371,949 | |
| Issuance of stock to purchase Twincraft | | | 1,068,356 | | | | 21,367 | | | | | | | | | | | | 4,679,676 | | | | | | | | | | | | | | | | | | | | 4,701,043 | |
| Exercise of stock options | | | 30,000 | | | | 600 | | | | | | | | | | | | 45,150 | | | | | | | | | | | | | | | | | | | | 45,750 | |
| Balance at December 31, 2007 | | | 11,588,512 | | | $ | 231,771 | | | $ | (196,641 | ) | | | | | | $ | 53,800,139 | | | $ | (22,713,086 | ) | | $ | 765,392 | | | $ | — | | | | | | | $ | 31,887,575 | |
62
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | |
| | For the Years Ended December 31, |
| | | 2007 | | 2006 | | 2005 |
Cash Flows From Operating Activities:
| | | | | | | | | | | | |
| Net loss | | $ | (4,517,977 | ) | | $ | (4,853,489 | ) | | $ | (4,557,268 | ) |
| Loss from discontinued operations | | | 442,833 | | | | 386,824 | | | | 103,773 | |
| Loss from continuing operations | | | (4,075,144 | ) | | | (4,466,665 | ) | | | (4,453,495 | ) |
Adjustments to reconcile net loss from continuing operations to net cash provided by (used in) operating activities:
| | | | | | | | | | | | |
Depreciation of property and equipment and
amortization of identifiable intangible assets | | | 4,118,038 | | | | 1,758,780 | | | | 1,620,763 | |
| Gain on sale of property and equipment | | | — | | | | (1,348 | ) | | | (10,402 | ) |
| Loss on abandonment of property and equipment | | | 28,193 | | | | 8,046 | | | | — | |
| Provision for impairment of identifiable intangible assets | | | — | | | | — | | | | 2,102,000 | |
| Change in fair value of Put Option | | | — | | | | — | | | | (1,750,000 | ) |
| Amortization of debt acquisition costs | | | 320,283 | | | | 144,185 | | | | 262,940 | |
| Amortization of debt discount | | | 86,102 | | | | — | | | | 678,502 | |
| Amortization of unearned stock compensation | | | — | | | | — | | | | 742,083 | |
| Compensation expense for options issued for services and option modification | | | — | | | | — | | | | 2,302,613 | |
| Loss on plan termination | | | 143,471 | | | | — | | | | — | |
| Loss on pension settlement | | | — | | | | 407,154 | | | | — | |
| Stock-based compensation expense | | | 281,660 | | | | 186,322 | | | | — | |
| Provision for doubtful accounts receivable | | | 1,357,545 | | | | 223,168 | | | | 151,066 | |
| Deferred income tax (benefit) provision | | | 131,124 | | | | 307,673 | | | | (312,818 | ) |
| Issuance of stock for services | | | — | | | | — | | | | 5,000 | |
Changes in operating assets and liabilities, net of
acquisitions:
| | | | | | | | | | | | |
| Accounts receivable | | | (1,382,955 | ) | | | 311,560 | | | | 1,672,015 | |
| Inventories | | | 483,640 | | | | 927,018 | | | | 708,465 | |
| Prepaid expenses and other current assets | | | (77,169 | ) | | | 223,725 | | | | 91,920 | |
| Other assets | | | 777,426 | | | | 126,021 | | | | 167,512 | |
| Accounts payable and other current liabilities | | | (262,372 | ) | | | 315,078 | | | | 134 | |
| Unearned revenue and other liabilities | | | (171,138 | ) | | | (497,301 | ) | | | (141,288 | ) |
| Net cash provided by (used in) operating activities of continuing operations | | | 1,758,704 | | | | (26,584 | ) | | | 3,837,010 | |
| Net cash provided by (used in) operating activities of discontinued operations | | | (226,194 | ) | | | (314,224 | ) | | | 30,145 | |
| Net cash provided by operating activities | | | 1,532,510 | | | | (340,808 | ) | | | 3,867,155 | |
Cash Flows From Investing Activities:
| | | | | | | | | | | | |
| Proceeds from sale of property and equipment | | | 1,000 | | | | 2,270 | | | | 70,000 | |
| Purchase of property and equipment | | | (1,339,989 | ) | | | (1,492,469 | ) | | | (970,071 | ) |
| Increase in restricted cash – escrow | | | (1,000,000 | ) | | | — | | | | — | |
| Deferred acquisition costs | | | (419,823 | ) | | | (506,526 | ) | | | — | |
| Deposits | | | — | | | | — | | | | (130,975 | ) |
| Purchase of businesses, net of cash acquired | | | (25,901,387 | ) | | | — | | | | (1,277,194 | ) |
| Net cash used in investing activities for continuing operations | | | (28,660,199 | ) | | | (1,996,725 | ) | | | (2,308,240 | ) |
Net cash used in investing activities of
discontinued operations | | | (29,836 | ) | | | (33,072 | ) | | | (19,810 | ) |
| Net cash used in investing activities | | | (28,690,035 | ) | | | (2,029,797 | ) | | | (2,328,050 | ) |
63
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS – (continued)
| | | | | | |
| | For the Years Ended December 31, |
| | | 2007 | | 2006 | | 2005 |
| |
Cash Flows From Financing Activities:
| | | | | | | | | | | | |
| Proceeds from issuance of debt | | | — | | | | 28,880,000 | | | | — | |
| Proceeds from the exercise of stock options | | | 45,750 | | | | 45,750 | | | | 167,750 | |
| Proceeds from the exercise of warrants | | | — | | | | 700 | | | | 500 | |
| Repayment of convertible notes | | | — | | | | (14,439,000 | ) | | | — | |
| Deferred financing costs | | | (267,492 | ) | | | (1,215,082 | ) | | | — | |
| Repayment of note payable | | | (36,265 | ) | | | (17,205 | ) | | | — | |
| Sale of stock in public offering | | | — | | | | — | | | | 33,975,429 | |
| Repayment of promissory notes | | | — | | | | — | | | | (10,491,000 | ) |
| Repayment of senior subordinated notes payable | | | — | | | | — | | | | (5,500,000 | ) |
| Offering expense paid, including sales commission | | | — | | | | — | | | | (4,665,383 | ) |
| Cash paid to settle withholding obligation | | | — | | | | — | | | | (81,184 | ) |
Net cash provided by financing activities of
continuing operations | | | (258,007 | ) | | | 13,255,163 | | | | 13,406,112 | |
| Net cash provided by (used in) financing activities of discontinued operations | | | — | | | | — | | | | — | |
| Net cash provided by (used in) financing activities | | | (258,007 | ) | | | 13,255,163 | | | | 13,406,112 | |
| Effect of exchange rate changes on cash | | | 70,988 | | | | 53,450 | | | | (26,077 | ) |
| Net increase (decrease) in cash and cash equivalents | | | (27,344,544 | ) | | | 10,938,008 | | | | 14,919,140 | |
Cash and cash equivalents at beginning of year,
including $158,518, $99,847, and $58,671, reported under assets held for sale in 2007, 2006 and 2005,
respectively. | | | 29,766,997 | | | | 18,828,989 | | | | 3,909,849 | |
| Cash and cash equivalents at end of year, including $158,518, and $99,847, reported under assets available for sale in 2006 and 2005, respectively. | | $ | 2,422,453 | | | $ | 29,766,997 | | | $ | 18,828,989 | |
Supplemental Disclosures of Cash Flow Information:
| | | | | | | | | | | | |
Cash paid during the period for:
| | | | | | | | | | | | |
| Interest | | $ | 1,876,744 | | | $ | 761,786 | | | $ | 1,959,481 | |
| Income taxes | | $ | 67,932 | | | $ | 59,983 | | | $ | 100,669 | |
Supplemental Disclosures of Non Cash Investing Activities:
| | | | | | | | | | | | |
| Issuance of stock related to acquisition of Regal | | $ | 1,371,949 | | | | | | | | | |
| Issuance of stock related to acquisition of Twincraft | | $ | 4,700,766 | | | | | | | | | |
| Certain capitalized acquisition costs are unpaid and in accrued liabilities | | | | | | $ | 419,823 | | | | | |
| Reduction in purchase price of business acquired satisfied by the reduction of the principal balance of the $7.5 Million Note | | | | | | | | | | $ | 232,000 | |
Supplemental Disclosures of Non Cash Financing Activities:
| | | | | | | | | | | | |
| Leasehold improvement funded by landlord accounted for as deferred credit | | | | | | $ | 606,960 | | | | | |
| Issuance of note payable to fund leasehold improvements | | | | | | $ | 202,320 | | | | | |
| Accounts payable and accrued liabilities relating to property and equipment | | $ | 184,800 | | | $ | 33,056 | | | $ | 7,887 | |
| Conversion of Convertible Note to common stock, net | | | | | | | | | | $ | 147,615 | |
| Increase in accounts payable relating to expenses of public offering | | | | | | | | | | $ | 8,303 | |
| Stock returned to treasury from stock award to satisfy withholding obligation | | | | | | | | | | $ | 81,184 | |
| Discount on debt | | $ | 476,873 | | | | | | | | | |
64
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements include the accounts of Langer, Inc. and its subsidiaries (the “Company” or “Langer”). All significant intercompany transactions and balances have been eliminated in consolidation.
In accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the assets and liabilities relating to Langer (UK) Limited (“Langer UK”) have been reclassified as held for sale in the Consolidated Balance Sheets for all periods presented and the results of operations of Langer UK for the current and prior periods have been reported as discontinued operations. The Company sold the capital stock of Langer UK to a third party on January 18, 2008. We classify as discontinued operations for all periods presented any component of our business that we believe is probable of being sold or has been sold that has operations and cash flows that are clearly distinguishable operationally and for financial reporting purposes. For those components, we have no significant continuing involvement after disposal, and their operations and cash flows are eliminated from our ongoing operations. Sales of significant components of our business not classified as discontinued operations are reported as a component of income from continuing operations.
(b) Description of the Business
The Company specializes in the designing, manufacturing, distributing and marketing of high quality foot and gait-related biomechanical products. Through its wholly owned subsidiaries, Silipos, Inc. and Twincraft, Inc., the Company offers a diverse line of bar soap and other skincare products for the private label retail, medical and therapeutic markets. In addition, the Company maintains a diversified range of products that is comprised of (i) custom orthotic devices ordered by healthcare professionals, and (ii) pre-fabricated orthopedic rehabilitation and recovery devices, targeting the long-term care, orthopedic, orthotic and prosthetic markets. Another wholly owned subsidiary, Regal, markets and distributes durable medical goods to long-term care facilities.
(c) Revenue Recognition
Revenue from the sale of the Company’s products is recognized upon shipment. The Company generally does not have any post-shipment obligations to customers other than for product warranties. The Company generally warrants its medical products against defects in materials and workmanship for a period of six months. The Company records a provision for estimated future costs associated with its warranties of fabricated products/custom orthotics as warranty reserves upon shipment, based upon historical experience. The Company offers extended warranty contracts which are recorded as deferred revenue and recognized over the lives of the contracts (24 months) on a straight-line basis. Revenue from shipping and handling fees is included in net sales in the consolidated statements of operations. Costs incurred for shipping and handling are included in cost of sales in the consolidated statements of operations.
(d) Advertising and Promotion Expenses
Advertising and promotion costs are expensed as incurred. Advertising and promotion expenses were approximately $503,000, $988,000 and $1,098,000 for the years ended December 31, 2007, 2006 and 2005, respectively.
The Company accounts for sales and incentives which include discounts, coupons, co-operative advertising and free products or services in accordance with Emerging Issues Task Force Issue No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer”. Generally, cash consideration is to be classified as a reduction of net sales, unless specific criteria are met regarding goods or services that a vendor may receive in return for this consideration. The Company’s consideration given to customers does not meet these conditions and, accordingly is classified as a reduction to revenue.
65
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies – (continued)
(e) Cash Equivalents
The Company considers all short-term, highly liquid investments purchased with a maturity of three months or less to be cash equivalents consisting primarily of money market funds.
(f) Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method.
(g) Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method. The lives on which depreciation and amortization are computed are as follows:
| | |
| Building and improvements | | 20 years |
| Office furniture and equipment | | 3 – 10 years |
| Computer equipment and software | | 3 – 10 years |
| Machinery and equipment | | 5 – 15 years |
| Leasehold improvements | | 5 – 10 years or term of lease if shorter |
| Automobiles | | 3 – 5 years |
The Company reviews long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of expected future cash flows (undiscounted and without interest charges) is less than the carrying value of the asset, an impairment loss is recognized. Otherwise, an impairment loss is not recognized. If an impairment loss is required, the amount of such loss is equal to the excess of the carrying value of the impaired asset over its fair value.
(h) Goodwill and Identifiable Intangible Assets with Indefinite Lives and Identifiable Intangible Assets with Definite Lives
In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company no longer amortizes goodwill and identifiable intangible assets with indefinite lives (trade names). Instead these assets are reviewed for impairment on an annual basis (October 1). Goodwill is reviewed at the reporting unit level, using a discounted cash flow approach, and trade names are valued using the relief of royalty method. Based upon the review of impairment, the Company recorded a provision for impairment of $1,600,000 in the year ended December 31, 2005 with respect to the Benefoot trademark because the fair value of the trademark was de minimus based upon management’s determination that it will no longer rely on or use such trademark in the marketplace. In December 2007 the Company recorded an impairment of $175,558 related to the allocated portion of goodwill related to Langer UK as a result of the net loss associated with the sale of Langer UK in January 2008. Such impairment is included in loss from operations of discontinued subsidiary. No impairment provision for goodwill was recorded for the year ended December 31, 2006.
The Company has certain identifiable intangible assets with definite lives such as non-compete agreements, license agreements, and customer lists, which are amortized over their useful lives on a straight-line method or on an accelerated method which appropriately reflects the economic benefit of the related intangible asset. These intangibles are reviewed for impairment under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” For the year ended December 31, 2005, the Company recorded a provision for impairment of $502,000 with respect to identifiable intangible assets with definite lives in accordance with SFAS No. 144. The provision was determined based upon expected discounted cash flow and recoverability of net assets. No impairment provision was recorded for the years ended December 31, 2006 and 2007.
66
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies – (continued)
(i) Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”), an interpretation of SFAS No. 109. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.
The Company adopted FIN 48 on January 1, 2007. Under FIN 48, tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed or to be claimed in tax returns that do not meet these measurement standards. The Company’s adoption of FIN 48 did not have a material effect on the Company’s financial statements, as the Company believes they have no uncertain tax positions.
As permitted by FIN 48, the Company also adopted an accounting policy to prospectively classify accrued interest and penalties related to any unrecognized tax benefits in its income tax provision. Previously, the Company’s policy was to classify interest and penalties as an operating expense in arriving at pre-tax income. At December 31, 2007, the Company does not have accrued interest and penalties related to any unrecognized tax benefits. The years subject to potential audit vary depending on the tax jurisdiction. Generally, the Company’s statutes of limitation for tax liabilities are open for tax years ended December 31, 2003 and forward. The Company’s major taxing jurisdictions include the United States, Canada, and the United Kingdom. Within the United States, Vermont, Pennsylvania and New York could give rise to significant tax liabilities.
(j) Net Income (Loss) per Share
Basic income (loss) per share is based on the weighted average number of shares of common stock outstanding during the period. Diluted income (loss) per share is based on the weighted average number of shares of common stock and common stock equivalents (options, warrants, stock awards and convertible subordinated notes) outstanding during the period, except where the effect would be antidilutive.
(k) Foreign Currency Translation
Assets and liabilities of the foreign subsidiaries that are denominated in local currencies have been translated at year-end exchange rates, while revenues and expenses have been translated at average exchange rates in effect during the year. Resulting cumulative translation adjustments have been recorded as a separate component of accumulated other comprehensive income (loss) in stockholders’ equity.
(l) Comprehensive Income (Loss)
Comprehensive income (loss) consists of changes to shareholders’ equity, other than contributions from or distributions to shareholders, and net income (loss). The Company’s other comprehensive income (loss) principally consists of unrealized foreign currency translation gains and losses and pension liability. The components of, and changes in, accumulated other comprehensive income (loss) are presented in the Company’s consolidated statements of stockholders’ equity.
67
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies – (continued)
(m) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(n) Fair Value of Financial Instruments
At December 31, 2007 and 2006, the carrying amount of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximated fair value because of their short-term maturity. The carrying value of long-term debt at December 31, 2007 and 2006 also approximated fair value based on borrowing rates currently available to the Company for debt with similar terms.
(o) Internal Use Software
In accordance with Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”, the Company capitalizes internal-use software costs upon the completion of the preliminary project stage and ceases capitalization when the software project is substantially complete and ready for its intended use. Capitalized costs are amortized on a straight-line basis over the estimated useful life of the software.
(p) Stock-Based Compensation
The Company’s consolidated financial statements as of and for the year ended December 31, 2007 and 2006 reflect the impact of SFAS No. 123(R), “Share-Based Payment,” which replaced SFAS No. 123, “Accounting for Stock-Based Compensation.” In accordance with the modified prospective transition method, the Company’s consolidated financial statements for the prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123(R). Prior to 2006, the Company accounted for its stock option plans under the recognition and measurement principles of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. No stock-based employee compensation expense is reflected in net income (loss), as all options granted under those plans had an exercise price equal to or greater than the market price of the underlying common stock on the date of grant. Stock-based compensation expense recognized under SFAS No. 123(R) was $281,660 and $186,322 for the years ended December 31, 2007 and 2006, respectively. See Note 14, “Stock Options” for additional information.
The following table shows the pro forma expense for the year ended December 31, 2005 had the Company adopted SFAS No. 123(R):
| | |
| | For the Year Ended December 31, 2005 |
| Net (loss) income – as reported | | $ | (4,557,268 | ) |
| Deduct: Total stock-based employee compensation expense determined under fair value basis method for all awards | | | (3,882,026 | ) |
| Add: Total stock-based employee compensation expense determined under the intrinsic value method reflected in the statement of operations | | | 1,045,625 | |
| Pro forma net loss: | | $ | (7,393,669 | ) |
(Loss) Earnings per share:
| | | | |
| Basic and diluted – as reported | | $ | (.63 | ) |
| Basic and diluted – pro forma | | $ | (1.02 | ) |
68
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies – (continued)
(q) Defined Benefit Pension and Other Postretirement Plans
On September 29, 2006, the FASB issued SFAS No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans.” SFAS No. 158 changes the requirements for accounting for defined benefit pension and other postretirement plans, including requiring companies to recognize in their statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status. SFAS No. 158 also requires that companies measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions). The requirement to recognize the funded status of a benefit plan and the disclosure requirements were effective for the year ended December 31, 2006.
The adoption of SFAS No. 158 did not have a significant effect on the Company’s balance sheet since it had recognized an additional minimum pension liability in the year ended December 31, 2006, in conjunction with the plan. The balance sheet was impacted by the adoption of SFAS No. 158 for its accrued benefit costs. Upon the adoption of SFAS No. 158 in 2006, the Company recognized an immediate reduction in its deferred benefit costs of $286,386, with a corresponding decrease to accumulated other comprehensive (loss).
(r) Concentration of Credit Risk
Financial instruments which potentially expose the Company to concentration of credit risk consist primarily of cash investments and accounts receivable. The Company places its cash investments with high-credit quality financial institutions and currently invests primarily in money market accounts. Accounts receivable are generally diversified due to the number of customers comprising the Company’s customer base. As of December 31, 2007 and 2006, the Company’s allowance for doubtful accounts was approximately $1,467,000 and $539,000. The Company believes no significant concentration of credit risk exists with respect to these cash investments and accounts receivable. The carrying amounts of these financial instruments are reasonable estimates of their fair value.
(s) Recently Issued Accounting Pronouncements
On September 15, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. SFAS No. 157 provides guidance related to estimating fair value and requires expanded disclosures. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. In February 2008, the FASB provided a one year deferral for the implementation of SFAS No. 157 for non-financial assets and liabilities recognized or disclosed at fair value in the financial statements on a non-recurring basis. The Company is evaluating SFAS No. 157 and its impact on the Company’s consolidated financial statements, but it is not expected to have a significant impact.
On February 22, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This statement gives entities the option to carry most financial assets and liabilities at fair value, with changes in fair value recorded in earnings. This statement, which will be effective in the first quarter fiscal 2009, is not expected to have a material impact on the Company’s consolidated financial position or results of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141 (R)”), which requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest of an acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. SFAS No.141 (R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier application is prohibited. We anticipate this will have a material effect on future acquisitions upon adoption.
69
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies – (continued)
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” which requires (1) ownership interests in subsidiaries held by parties other than the parent to be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity; (2) the amount of consolidated net income attributable to the parent and to the non-controlling interest be clearly identified and presented on the face of the consolidated statement of income; and (3) changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently as equity transactions. SFAS No. 160 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier application is prohibited. The adoption of SFAS No. 160 is not expected to have a material impact on our results of operations or our financial position.
(2) Acquisitions
(a) Acquisition of Regal
On January 8, 2007, the Company acquired the business of Regal Medical Supply, LLC (“Regal”), which is a provider of contracture management products and services to the long-term care market of skilled nursing and assisted living facilities in 22 states. Regal was acquired in an effort to gain access to the long-term care market, to gain a captive distribution channel for certain custom orthotic products the Company manufactures into markets the Company has not previously penetrated, and to establish a national network of service professionals to enhance its customer relationships in both its core and new markets. The results of operations of Regal since January 8, 2007 have been included in the Company’s consolidated financial statements as part of its own operating segment.
The initial consideration for the acquisition of Regal (before post-closing adjustments) was approximately $1,640,000, which was paid through the issuance of 379,167 shares of the Company’s common stock valued under the asset purchase agreement at a price of $4.329 per share. In addition, transaction costs in the amount of $69,721 were incurred, which increased the purchase price to $1,709,721. The purchase price was subject to a post-closing downward adjustment to the extent that the working capital as reflected on Regal’s January 8, 2007 (closing date) balance sheet was less than $675,000. On March 12, 2007, the Company and Regal agreed to a post-closing downward adjustment, pursuant to terms of the purchase agreement, reducing the price from $1,709,721 to $1,441,670, which was effected by the cancellation of 45,684 shares, which were valued for purposes of the adjustment at $4.114 per share, which was the average closing price of the Company’s common stock on The NASDAQ Global Market (“NASDAQ”) for the 5 trading days ended December 19, 2006. Subsequently, the Company reclassified certain assets of $100,000, which represents amounts to be paid to the Company resulting from receivables acquired but not collected pursuant to the terms of the purchase agreement, and is now the subject of a claim by the Company pursuant to the purchase agreement. The return of the purchase price consideration may be settled in the form of cash or the return of shares. The Company entered into a three-year employment agreement with a former employee and member of the seller and a non-competition agreement with the seller and seller’s members.
The following table sets forth the components of the purchase price:
| | |
| Total stock consideration | | $ | 1,371,949 | |
| Transaction costs | | | 69,721 | |
| Total purchase price | | $ | 1,441,670 | |
70
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Acquisitions – (continued)
The following table provides the final allocation of the purchase price based upon the fair value of the assets acquired and liabilities assumed at January 8, 2007:
| | |
Assets:
| | | | |
| Accounts receivable | | $ | 387,409 | |
| Amounts receivable from seller | | | 100,000 | |
| Property and equipment | | | 25,030 | |
| Goodwill | | | 1,277,521 | |
| | | | 1,789,960 | |
Liabilities:
| | | | |
| Accounts payable | | | 275,206 | |
| Accrued liabilities | | | 73,084 | |
| | | | 348,290 | |
| Total purchase price | | $ | 1,441,670 | |
In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company will not amortize goodwill. The value of allocated goodwill is not deductible for income tax purposes.
(b) Acquisition of Twincraft
On January 23, 2007, the Company completed the acquisition of all of the outstanding stock of Twincraft. Twincraft is a leading private label manufacturer of specialty bar soaps supplying the health and beauty markets, mass markets and direct marketing channels and operates out of a manufacturing facility in Winooski, Vermont. Twincraft was acquired to enable the Company to expand into additional product categories in the personal care market, to increase the Company’s customer exposure for its current line of Silipos gel-based skincare products, and to take advantage of potential commonalities in research and development advances between Twincraft’s and the Company’s current product lines. The purchase price for Twincraft was determined by arm’s length negotiations between the Company and the former stockholders of Twincraft and was based in part upon analyses and due diligence, which the Company performed on the financial records of Twincraft, focusing on enterprise value, historic cash flows and expected future cash flows to determine valuation. The results of operations of Twincraft since January 23, 2007 (the date of acquisition) have been included in the Company’s consolidated financial statements as part of the personal care products operating segment.
The purchase price paid for Twincraft at the time of closing was approximately $26,650,000, of which $1,500,000 was held in two separate escrows to partially secure payment of any indemnification claims, and payment for any purchase price adjustments and/or working capital adjustments based on the final post-closing audit. On May 30, 2007, the escrow of $500,000 was released to the sellers of Twincraft. The remaining escrow of $1,000,000 will not be released until 18 months after the closing, net of any claims which the Company has against the escrow. This portion of the escrow is considered to be contingent consideration and not part of the purchase price and is classified as restricted cash on the Company’s consolidated balance sheet. These escrow funds will increase goodwill when and if they are released in July 2008. The purchase price was paid 85% in cash and the balance through the issuance of the Company’s common stock to the sellers of Twincraft, which was valued based on the average closing price of the Company’s common stock on the two days before, two days after, and on November 14, 2006, which was the date the Company and Twincraft’s stockholders entered into the purchase agreement. The purchase price was subject to adjustment based on Twincraft’s working capital target of $5,100,000 at closing, and operating performance for the year ended December 31, 2006. On May 15, 2007, the working capital adjustment, which was agreed to by the Company and the sellers of Twincraft, in effect increased the purchase price of the Twincraft acquisition by approximately $1,276,000 payable in cash. In addition, on May 15, 2007, the operating performance adjustments,
71
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Acquisitions – (continued)
which were agreed to by the Company and the sellers of Twincraft, increased the purchase price of Twincraft by approximately $1,867,000, and the adjustments were made by the issuance of 68,981 shares of the Company’s common stock (representing 15% of the adjustment to the purchase consideration) and the balance of approximately $1,564,000 was paid in cash. The cash adjustments for working capital and operating performance totaling approximately $2,840,000 were paid to the sellers in May 2007. During the year, approximately $193,000 of additional transaction costs relating to the Twincraft acquisition were determined, resulting in an increase to the cost of the Twincraft acquisition, and is reflected in goodwill. Total transactions costs were $1,445,714.
Effective January 23, 2007, Twincraft entered into three-year employment agreements with Peter A. Asch, who serves as President of Twincraft, and A. Lawrence Litke, who serves as Chief Operating Officer of Twincraft. Twincraft also entered into a consulting agreement with Fifth Element, LLC, a consulting firm controlled by Joseph Candido, who serves as Vice President of Sales and Marketing for Twincraft. The employment agreements of Mr. Asch and Mr. Litke, and the consulting agreement of Fifth Element, LLC, contain non-competition and non-solicitation provisions covering the terms of their agreements and for any extended severance periods and for one year after termination of the agreements or the extended severance periods, if any. Messrs. Asch, Litke and Candido were stockholders of Twincraft immediately before the sale of Twincraft to the Company.
Subject to the terms and conditions set forth in the Twincraft purchase agreement, the sellers of Twincraft (including Mr. Asch) can earn additional deferred consideration for the years ended 2007 and 2008. Deferred consideration would have been earned for the year ending December 31, 2007 if Twincraft’s adjusted EBITDA exceeded its 2006 adjusted EBITDA. For the year ended December 31, 2007, the sellers of Twincraft did not earn any additional consideration. The sellers of Twincraft would earn deferred consideration for the year ending December 31, 2008, if Twincraft’s 2008 EBITDA exceeds $4,383,000; the Company would be obligated to pay to the Sellers three times the difference between Twincraft’s 2008 EBITDA and $4,383,000. In the event this target is met, the payment would be compensation expense not purchase price since it is contingent upon their being employed.
On January 23, 2007, as part of their employment agreements, the Company granted stock options of 200,000 and 100,000 shares, respectively, to Messrs. Asch and Litke, all under the Company’s 2005 Stock Incentive Plan, to purchase shares of the Company’s common stock having an exercise price equal to $4.20 per share, which vest in three equal consecutive annual tranches beginning on January 23, 2009. The Company also granted stock options, on January 23, 2007, to Mr. Mark Davitt, another Twincraft employee, for 25,000 shares with an exercise price of $4.20 per share, vesting in three equal consecutive annual tranches commencing on the first anniversary of the grant date. The Company is recognizing stock compensation expenses related to these options over the requisite service period in accordance with SFAS No. 123(R). Pursuant to EITF No. 96-18, the Company recorded consulting expenses relating to 100,000 stock options granted to Fifth Element, LLC, a non-employee consultant, which is controlled by Mr. Joseph Candido, a Twincraft officer and one of the former Twincraft stockholders.
The following table sets forth the components of the purchase price:
| | |
| Total cash consideration | | $ | 24,492,639 | |
| Total stock consideration | | | 4,701,043 | |
| Transaction costs | | | 1,445,714 | |
| Total purchase price | | $ | 30,639,396 | |
72
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Acquisitions – (continued)
The following table provides the final allocation of the purchase price based upon the fair value of the assets acquired and liabilities assumed at January 23, 2007:
| | |
Assets:
| | | | |
| Cash and cash equivalents | | $ | 36,966 | |
| Accounts receivable | | | 3,984,756 | |
| Inventories | | | 4,200,867 | |
| Other current assets | | | 127,911 | |
| Property and equipment | | | 7,722,140 | |
| Goodwill | | | 7,022,425 | |
Identifiable intangible assets (trade names of $2,629,300 and repeat customer
base of $7,214,500) | | | 9,843,800 | |
| | | | 32,938,865 | |
Liabilities:
| | | | |
| Accounts payable | | | 517,929 | |
| Accrued liabilities | | | 1,781,540 | |
| | | | 2,299,469 | |
| Total purchase price | | $ | 30,639,396 | |
In accordance with the provisions of SFAS No. 142, the Company will not amortize goodwill. The intangible assets are deemed to have definite lives and will be amortized over an appropriate period that matches the economic benefit of the intangible assets. The trade names will be amortized over a 23 year period and the repeat customer base over a 19 year period. The customer list is amortized using an accelerated method that reflects the economic benefit of the asset. The value allocated to goodwill and identifiable intangible assets in the purchase of Twincraft are not deductible for income tax purposes.
(c) Unaudited Pro Forma Results
Below are the unaudited pro forma results of operations for the years ended December 31, 2007, 2006 and 2005, as if the Company had acquired Regal and Twincraft on January 1, 2005. Such pro forma results are not necessarily indicative of the actual consolidated results of operations that would have been achieved if the acquisition occurred on the date assumed, nor are they necessarily indicative of future consolidated results of operations.
Unaudited pro forma results for the years ended December 31, 2007, 2006 and 2005 were:
| | | | | | |
| | Year Ended December 31, |
| | | 2007 | | 2006 | | 2005 |
| Net sales | | $ | 64,847,487 | | | $ | 66,321,904 | | | $ | 65,385,737 | |
| Net (loss) | | | (4,217,681 | ) | | | (1,554,543 | ) | | | (3,855,617 | ) |
| (Loss) income per share – basic and diluted | | | (.37 | ) | | | (.16 | ) | | | (.53 | ) |
73
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Discontinued Operations
On January 18, 2008, the Company completed the sale of Langer (UK) Limited (“Langer UK”). (See note 22.) In accordance with SFAS No. 144, the results of operations of Langer UK for the current and prior periods have been reported as discontinued operations and the assets and liabilities related to Langer UK have been classified as held for sale in the Consolidated Balance Sheets. Operating results of Langer UK, which were formerly included in our medical products segment, are summarized as follows:
| | | | | | |
| | Year Ended December 31, |
| | | 2007 | | 2006 | | 2005 |
| Total revenues | | $ | 3,168,499 | | | $ | 2,537,101 | | | $ | 2,737,645 | |
| Net income (loss) from Langer UK operations | | $ | 91,096 | | | $ | (104,096 | ) | | $ | 215,655 | |
| Other expense, net (including goodwill impairment of $175,558 for 2007) | | | (533,929 | ) | | | (339,031 | ) | | | (293,197 | ) |
| Loss before income taxes | | | (442,833 | ) | | | (443,127 | ) | | | (77,542 | ) |
| (Provision for) benefit from income taxes | | | — | | | | 56,303 | | | | (26,231 | ) |
| Loss from discontinued operations | | $ | (442,833 | ) | | $ | (386,824 | ) | | $ | (103,773 | ) |
(4) Net Assets Held for Sale
The assets and liabilities of Langer UK have been reclassified as held for sale in the Consolidated Balance Sheets for both years presented and have ceased depreciation in December 2007. The assets and liabilities related to Langer UK consist of the following:
| | | | |
| | December 31, |
| | | 2007 | | 2006 |
| Cash | | $ | — | | | $ | 158,518 | |
| Accounts receivable | | | 572,870 | | | | 385,854 | |
| Inventories | | | 380,132 | | | | 417,543 | |
| Other current assets | | | 54,209 | | | | 75,844 | |
| Goodwill (See Note 6) | | | 287,171 | | | | — | |
| Property and equipment | | | 207,335 | | | | 203,609 | |
| Assets held for sale | | $ | 1,501,717 | | | $ | 1,241,368 | |
| Accounts payable | | $ | 132,102 | | | $ | 137,022 | |
| Other current liabilities | | | 340,216 | | | | 364,885 | |
| Liabilities related to assets held for sale | | $ | 472,318 | | | $ | 501,907 | |
74
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) Identifiable Intangible Assets
Identifiable intangible assets at December 31, 2007 consisted of:
| | | | | | | | |
| Assets | | Estimated
Useful Life (Years) | | Adjusted
Cost | | Accumulated
Amortization | | Net Carrying
Value |
| Non-competition agreements – Benefoot/Bi-Op | | | 4 | | | $ | 572,000 | | | $ | 431,089 | | | $ | 140,911 | |
| License agreements and related technology – Benefoot | | | 5 to 8 | | | | 1,156,000 | | | | 762,806 | | | | 393,194 | |
| Repeat customer base – Bi-Op | | | 7 | | | | 500,000 | | | | 200,926 | | | | 299,074 | |
| Trade names – Silipos | | | Indefinite | | | | 2,688,000 | | | | — | | | | 2,688,000 | |
| Repeat customer base – Silipos | | | 7 | | | | 1,680,000 | | | | 885,807 | | | | 794,193 | |
| License agreements and related technology – Silipos | | | 9.5 | | | | 1,364,000 | | | | 466,632 | | | | 897,368 | |
| Repeat customer base – Twincraft | | | 19 | | | | 7,214,500 | | | | 494,080 | | | | 6,720,420 | |
| Trade names – Twincraft | | | 23 | | | | 2,629,300 | | | | 104,791 | | | | 2,524,509 | |
| | | | | | | $ | 17,803,800 | | | $ | 3,346,131 | | | $ | 14,457,669 | |
Identifiable intangible assets at December 31, 2006 consisted of:
| | | | | | | | |
| Assets | | Estimated
Useful Life (Years) | | Adjusted
Cost | | Accumulated
Amortization | | Net Carrying
Value |
| Non-competition agreements – Benefoot/Bi-Op | | | 4 | | | $ | 572,000 | | | $ | 350,570 | | | $ | 221,430 | |
| License agreements and related technology – Benefoot | | | 5 to 8 | | | | 1,156,000 | | | | 647,824 | | | | 508,176 | |
| Repeat customer base – Bi-Op | | | 7 | | | | 500,000 | | | | 137,963 | | | | 362,037 | |
| Trade names – Silipos | | | Indefinite | | | | 2,688,000 | | | | — | | | | 2,688,000 | |
| Repeat customer base – Silipos | | | 7 | | | | 1,680,000 | | | | 540,000 | | | | 1,140,000 | |
| License agreements and related technology – Silipos | | | 9.5 | | | | 1,364,000 | | | | 323,053 | | | | 1,040,947 | |
| | | | | | | $ | 7,960,000 | | | $ | 1,999,410 | | | $ | 5,960,590 | |
Aggregate amortization expense relating to the above identifiable intangible assets for the years ended December 31, 2007, 2006 and 2005, were $1,346,721, $643,425, and $636,883, respectively. As of December 31, 2007, the estimated future amortization expense is $1,380,903 for 2008, $1,318,039 for 2009, $1,200,257 for 2010, $1,137,073 for 2011, $1,133,308 for 2012 and $5,600,089 thereafter.
75
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Goodwill
Changes in goodwill for the years ended December 31, 2005, 2006 and 2007 are as follows:
| | | | | | | | |
| | Medical
Products | | Personal Care Products | | Regal | | Total |
| Balance, January 1, 2005 | | $ | 10,734,851 | | | $ | 2,586,300 | | | $ | — | | | $ | 13,321,151 | |
| Purchase price adjustments related to Silipos | | | 558,643 | | | | 239,419 | | | | — | | | | 798,062 | |
| Balance, December 31, 2005 and 2006 | | | 11,293,494 | | | | 2,825,719 | | | | — | | | | 14,119,213 | |
Goodwill related to the Regal
acquisition | | | — | | | | — | | | | 1,277,521 | | | | 1,277,521 | |
Goodwill related to the Twincraft
acquisition | | | — | | | | 7,022,425 | | | | — | | | | 7,022,425 | |
Allocated to Langer UK, assets held for sale of which $175,558 was impaired and is included in discontinued
operations | | | (462,729 | ) | | | — | | | | — | | | | (462,729 | ) |
| Balance, December 31, 2007 | | $ | 10,830,765 | | | $ | 9,848,144 | | | $ | 1,277,521 | | | $ | 21,956,430 | |
(7) Inventories, Net
Inventories, net, consisted of the following:
| | | | |
| | December 31, |
| | | 2007 | | 2006 |
| Raw materials | | $ | 4,266,875 | | | $ | 2,318,201 | |
| Work-in-process | | | 552,778 | | | | 159,162 | |
| Finished goods | | | 3,422,556 | | | | 1,265,358 | |
| | | | 8,242,209 | | | | 3,742,721 | |
| Less: Allowance for excess and obsolescence | | | 1,561,856 | | | | 885,151 | |
| | | $ | 6,680,353 | | | $ | 2,857,570 | |
(8) Property and Equipment, Net
Property and equipment, net, is comprised of the following:
| | | | |
| | December 31, |
| | | 2007 | | 2006 |
| Land, building and improvements (see Note 9) | | $ | 2,557,738 | | | $ | 2,557,738 | |
| Office furniture and equipment | | | 1,715,367 | | | | 1,270,813 | |
| Computer equipment and software | | | 5,106,213 | | | | 3,824,235 | |
| Machinery and equipment | | | 9,823,613 | | | | 2,719,507 | |
| Leasehold improvements | | | 5,148,113 | | | | 2,432,832 | |
| | | | 24,351,044 | | | | 12,805,125 | |
| Less: Accumulated depreciation and amortization | | | 9,758,428 | | | | 4,763,317 | |
| | | $ | 14,592,616 | | | $ | 8,041,808 | |
Depreciation and amortization expense relating to property and equipment was $2,801,394, $1,147,400 and $1,010,797 for the years ended December 31, 2007, 2006 and 2005, respectively. Property and equipment held under capital leases had a net book value of $1,539,534 as of December 31, 2007 (See Note 11, “Long-Term Debt”).
76
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Other Current Liabilities
Other current liabilities consisted of the following:
| | | | |
| | December 31, |
| | | 2007 | | 2006 |
| Accrued payroll and related payroll taxes | | $ | 1,244,537 | | | $ | 562,918 | |
| Accrued professional fees | | | 830,474 | | | | 482,030 | |
| Accrued merchandise | | | 518,650 | | | | — | |
| Accrued acquisition costs | | | — | | | | 473,447 | |
| Deferred interest – capital lease | | | 356,625 | | | | 455,655 | |
| Lease abandonment | | | — | | | | 199,770 | |
| Accrued bonuses | | | 115,283 | | | | 190,065 | |
| Accrued severance and severance related | | | 10,689 | | | | 116,005 | |
| Accrued interest | | | — | | | | 100,034 | |
| Credits due customers | | | — | | | | 82,650 | |
| Accrued rent | | | 175,474 | | | | 79,105 | |
| Accrued warranty | | | 60,000 | | | | 70,000 | |
| Current portion of note payable | | | 35,541 | | | | 33,145 | |
| Other | | | 267,189 | | | | 367,591 | |
| | | $ | 3,614,462 | | | $ | 3,212,415 | |
The following is a summary of the activity related to the Company’s warranty reserve:
| | | | | | |
| | Years Ended December 31, |
| | | 2007 | | 2006 | | 2005 |
| Balance at the beginning of the year | | $ | 70,000 | | | $ | 70,000 | | | $ | 70,000 | |
| Provisions for warranty | | | 99,189 | | | | 153,610 | | | | 290,146 | |
| Warranty utilized | | | (109,189 | ) | | | (153,610 | ) | | | (290,146 | ) |
| Balance at the end of the year | | $ | 60,000 | | | $ | 70,000 | | | $ | 70,000 | |
(10) Credit Facility
On May 11, 2007, the Company entered into a secured revolving credit facility agreement (the “Credit Facility”) with Wachovia Bank, N.A., expiring on September 30, 2011. The Credit Facility provides an aggregate maximum availability, if and when the Company has the requisite levels of assets, in the amount of $20 million, and is subject to a sub-limit of $5 million for the issuance of letter of credit obligations, another sub-limit of $5 million for term loans, and a sub-limit of $7.5 million on loans against inventory. The Credit Facility is collateralized by a first priority security interest in inventory, accounts receivables and all other assets and is guaranteed on a full and unconditional basis by the Company and each of the Company’s domestic subsidiaries (Silipos, Twincraft and Regal) and any other company or person that hereafter becomes a borrower or owner of any property in which the lender has a security interest under the Credit Facility. As of December 31, 2007, the Company had not made draws on the Credit Facility and has approximately $5.9 million available under the Credit Facility.
If the Company’s availability under the Credit Facility drops below $3 million or borrowings under the facility exceed $10 million, the Company is required under the Credit Facility to deposit all cash received from customers into a blocked bank account that will be swept daily to directly pay down any loan outstanding under the Credit Facility. The Company would not have any control over the blocked bank account.
77
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Credit Facility – (continued)
The Company’s borrowings availabilities are limited to 85% of eligible accounts receivable and 60% of eligible inventory, and are subject to the satisfaction of certain conditions. Term loans shall be secured by equipment or real estate hereafter acquired. The Company is required to submit monthly unaudited financial statements to the lender.
If the Company’s availability is less than $3,000,000, the Credit Facility requires compliance with various covenants including but not limited to a Fixed Charge Coverage Ratio of not less than 1.0 to 1.0. Availability under the Credit Facility is reduced by 40% of the outstanding letters of credit related to the purchase of eligible inventory, as defined, and 100% of all other outstanding letters of credit. At December 31, 2007, the Company had outstanding letters of credit related to the purchase of eligible inventory of approximately $85,000, and other outstanding letters of credit of approximately $571,000.
The Company is required to pay monthly interest in arrears at the lender’s prime rate or, at the Company’s election, at 2 percentage points above an Adjusted Eurodollar Rate, as defined. To the extent that amounts under the Credit Facility remain unused, while the Credit Facility is in effect and for so long thereafter as any of the obligations under the Credit Facility are outstanding, the Company will pay a monthly commitment fee of one-quarter of one percent on the unused portion of the loan commitment. The Company paid the lender a closing fee in the amount of $75,000 in August 2007. As of December 31, 2007, the Company has recorded deferred financing costs in connection with the Credit Facility of $394,556, of which $57,583 has been amortized during the year ended December 31, 2007 and the balance will be amortized over the life of the Credit Facility.
(11) Long-Term Debt
On December 8, 2006, the Company entered into a note purchase agreement for the sale of $28,880,000 of 5% convertible subordinated notes due December 7, 2011 (the “5% Convertible Notes”). The 5% Convertible Notes are not registered under the Securities Act of 1933, as amended. The Company has agreed to register the shares of the Company’s common stock acquirable upon conversion of the 5% Convertible Notes, which may include an additional number of shares of common stock issuable on account of adjustments of the conversion price under the 5% Convertible Notes. The Company filed a registration statement with respect to the shares acquirable upon conversion of the 5% Convertible Notes (the “Underlying Shares”) on January 9, 2007, and has filed Amendment No. 1 of the registration statement on November 19, 2007. The Company has received a comment letter from the Securities and Exchange Commission dated December 18, 2007, and expects to file Amendment No. 2 thereof in April 2008.
The 5% Convertible Notes bear interest at the rate of 5% per annum, payable in cash semiannually on June 30 and December 31 of each year, commencing June 30, 2007. For years ended December 31, 2007 and 2006, the Company recorded interest expense relating to the 5% Convertible Notes of approximately $1,443,000 and approximately $97,000, respectively.
At the date of issuance, the 5% Convertible Notes were convertible into shares of the Company’s common stock at the rate of $4.75 per share, subject to an adjustment for certain anti-dilution provisions. At the original conversion price at December 31, 2006, the number of shares acquirable on conversion was 6,080,000. Since the conversion price was above the market price on the date of issuance, there was no beneficial conversion. Effective January 8, 2007 and January 23, 2007, in conjunction with common stock issuances related to two acquisitions (see Note 2, “Acquisitions”), the conversion price was adjusted to $4.6706 per share, and the number of shares acquirable upon conversion was thereby increased to 6,183,359, pursuant to the anti-dilution provisions applicable to the 5% Convertible Notes. On May 15, 2007, as a result of the issuance of an additional 68,981 shares of common stock to the Twincraft sellers on account of upward adjustments to the Twincraft purchase price, and the surrender to the Company of 45,684 shares of common stock, on account of downward adjustments in the Regal purchase price, the conversion price under the 5% Convertible Notes was reduced to $4.6617 per share, and the number of shares acquirable on conversion was
78
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) Long-Term Debt – (continued)
increased to 6,195,165 shares. This resulted in a debt discount of $476,873,which is being amortized over the term of the 5% Convertible Notes and is being recorded as interest expense in the consolidated statements of operations. The charge to interest expense relating to the debt discount for the year ended December 31, 2007 is approximately $86,000. The principal of the 5% Convertible Notes is due on December 7, 2011, subject to the earlier call of the 5% Convertible Notes by the Company, as follows: (i) the 5% Convertible Notes may not be called prior to December 7, 2007; (ii) from December 7, 2007, through December 7, 2009, the 5% Convertible Notes may be called and redeemed for cash, in the amount of 105% of the principal amount of the 5% Convertible Notes (plus accrued but unpaid interest, if any, through the call date); (iii) after December 7, 2009, the 5% Convertible Notes may be called and redeemed for cash in the amount of 100% of the principal amount of the 5% Convertible Notes (plus accrued but unpaid interest, if any, through the call date); and (iv) at any time after December 7, 2007, if the closing price of the common stock of the Company on the Nasdaq Global Market (or any other exchange on which the Company’s stock is then traded or quoted) has been equal to or greater than $7.00 per share for 20 of the preceding 30 trading days immediately prior to the Company’s issuing a call notice, then the 5% Convertible Notes shall be mandatorily converted into common stock at the conversion price then applicable. The Company held a Special Meeting of Stockholders on April 19, 2007, at which the Company’s stockholders approved the issuance by the Company of the shares acquirable on conversion of the 5% Convertible Notes.
In the event of a default on the 5% Convertible Notes, the due date of the 5% Convertible Notes may be accelerated if demanded by holders of at least 40% of the 5% Convertible Notes, subject to a waiver by at least 51% of the 5% Convertible Notes if the Company pays all arrearages of interest on the 5% Convertible Notes.
The payment of interest and principal of the 5% Convertible Notes is subordinate to the Company’s presently existing capital lease obligation, in the amount of $2,700,000, excluding current installments, as of December 31, 2007, and the Company’s obligations under the Credit Facility. The 5% Convertible Notes would also be subordinated to any additional debt which the Company may incur hereafter for borrowed money, or under additional capital lease obligations, obligations under letters of credit, bankers’ acceptances or similar credit transactions (see Note 10, Credit Facility”).
In connection with the sale of the 5% Convertible Notes, the Company paid a commission of $1,060,000 based on a rate of 4% of the amount of 5% Convertible Notes sold, excluding the 5% Convertible Notes sold to members of the Board of Directors and their affiliates, to Wm Smith & Co., who served as placement agent in the sale of the 5% Convertible Notes. The total cost of raising these proceeds was $1,338,018, which is being amortized through December 7, 2011, the due date for the payment on the 5% Convertible Notes. The amortization of these costs for the year ended December 31, 2007 was $262,700, and is recorded as interest expense in the consolidated statements of operations.
On October 31, 2001, the Company completed the sale in a private placement, of $14,589,000 principal amount of its 4% convertible subordinated notes due and paid in full, plus accrued interest, on August 31, 2006 (the “4% Convertible Notes”). The 4% Convertible Notes were paid in full on the due date. The cost of raising these proceeds was $920,933, which was amortized through August 31, 2006. The amortization of these costs for the year ended December 31, 2006 was $127,853, and was included in interest expense in the consolidated statements of operations. Interest expense on the 4% Convertible Notes for the year ended December 31, 2006 was $385,040.
In June 2006, the Company elected, pursuant to its option under the lease of 41 Madison Avenue, New York, N.Y., to finance $202,320 of leasehold improvements by delivery of a note payable to the landlord (the “Note”). The Note, which matures in July 2011, provides for interest at a rate of 7% per annum and 60 monthly installments of principal and interest totaling $4,006, commencing August 2006. The Note is secured by a $202,320 increase to an unsecured letter of credit originally provided to the landlord at lease commencement. The amount of the revised unsecured letter of credit is $570,992. The current portion of the Note was
79
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) Long-Term Debt – (continued)
$35,541 and $33,145 at December 31, 2007 and 2006, respectively, and is included in other current liabilities, including current installments of note payable, and the non-current portion of the Note was $113,309 and $151,970 at December 31, 2007, and 2006, respectively.
Pursuant to the acquisition of Silipos, the Company is obligated under a capital lease covering the land and building at the Silipos facility in Niagara Falls, N.Y. that expires in 2018. This lease also contains two five-year renewal options. As of December 31, 2007 and 2006, the Company’s obligation under capital lease, excluding current installments, is $2,700,000.
Annual future minimum capital lease payments are as follows:
| | |
| Years Ending December 31: |
| 2008 | | $ | 432,511 | |
| 2009 | | | 443,012 | |
| 2010 | | | 453,512 | |
| 2011 | | | 467,117 | |
| 2012 | | | 481,130 | |
| Later years through 2018 | | | 2,870,391 | |
| Total minimum lease payments | | | 5,147,673 | |
| Less: Amount representing interest | | | 2,447,673 | |
| Present value of net minimum capital lease payments | | | 2,700,000 | |
| Less: Current installments of obligations under capital lease | | | — | |
| Obligations under capital lease, excluding current installment | | $ | 2,700,000 | |
Additionally, the Company has accrued interest of $356,625 and $455,655 at December 31, 2007 and 2006, respectively, with respect to the capital lease which is included in other current liabilities at the respective balance sheet dates.
At December 31, 2007 and 2006, the gross amount of land and building and related accumulated depreciation recorded under the capital lease was as follows:
| | | | |
| | December 31, |
| | | 2007 | | 2006 |
| Land | | $ | 278,153 | | | $ | 278,153 | |
| Building | | | 1,654,930 | | | | 1,654,930 | |
| | | | 1,933,083 | | | | 1,933,083 | |
| Less: Accumulated Depreciation | | | 393,549 | | | | 272,457 | |
| | | $ | 1,539,534 | | | $ | 1,660,626 | |
(12) Commitments and Contingencies
(a) Leases
Certain of the Company’s facilities and equipment are leased under noncancelable operating leases. Rental expense amounted to $2,014,652, $1,390,458 and $753,553 for the years ended December 31, 2007, 2006 and 2005, respectively. The leases expire at various dates through 2018.
80
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Commitments and Contingencies – (continued)
Future minimum rental payments required under current operating leases are:
| | |
| Years Ending December 31: |
| 2008 | | $ | 2,009,486 | |
| 2009 | | | 1,765,174 | |
| 2010 | | | 1,426,929 | |
| 2011 | | | 1,197,748 | |
| 2012 | | | 1,211,445 | |
| Thereafter | | | 3,330,369 | |
| | | $ | 10,941,151 | |
On December 19, 2005, the Company entered into a lease (as tenant) with 41 Madison, L.P. (the “Landlord”) of certain space, for use as sales, marketing and executive offices. The lease runs for 10 years, 8 months, commencing July 5, 2006, which was the date of completion of the build-out of the space. The Company incurred build-out costs (in excess of the expense paid by the landlord of $607,000) of approximately $1,685,000 for the year ended December 31, 2006. The Company has a one-time right to renew the lease for a term of 5 years in year 2017 at a base rent equal to the fair market value of the space at the time of renewal. The Company also has the right to terminate the lease as of October 31, 2013, upon 12 months prior notice to the Landlord. The Company began recording rent expense on a straight line basis commencing in December 2005 in accordance with FASB Staff Position SFAS No. 13-1, “Accounting for Rental Costs Incurred during a Construction Period.”
The loss on abandonment of lease cost of approximately $236,000 in 2006 was associated with our abandonment of our former sales offices located at 366 Madison Avenue, New York, New York, which expired on January 31, 2008. The amount represents the present value of the remaining lease payments. The Company completed its move to the new sales, marketing and executive offices at 41 Madison Avenue, New York, New York as of July 5, 2006.
On August 6, 2007, the Company entered into a sublease agreement with a related party for a portion of its leased space at 41 Madison Avenue. This sublease commenced on September 1, 2007. The sublease, which has a term of three years, requires the subtenant to make monthly payments of $11,250 to the Company. The Company records these amounts as a reduction of its rent expense under the 41 Madison Avenue lease. Sublease payments received by the Company in 2007 amounted to $45,000. (See Note 19, Related Party Transactions)
(b) Royalties
The Company has entered into several agreements with licensors, consultants and suppliers, which require the Company to pay royalty fees relating to the sale of certain products. Royalties in the aggregate under these agreements totaled $326,380, $257,327, and $506,360 for the years ended December 31, 2007, 2006 and 2005, respectively.
(c) Letter of Credit
In connection with the execution of the lease of office space in New York City on December 19, 2005, described above in Note 12(a), the Company exercised its option under the lease to finance $202,320 of leasehold improvements, by delivery of a note payable to the landlord with a maturity date of July 1, 2011, described above in Note 11. The Company issued an irrevocable letter of credit in favor of the landlord in the amount of $570,992 to secure both its performance under the terms, covenants and condition of the lease, and to secure the related note payable. The Letter of Credit has a term of one year, which the term shall automatically renew for successive one year periods such that the letter of credit will not expire less than 60 days beyond the expiration date of the lease, which is April 30, 2017.
81
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) Employee Restricted Stock and Other Stock Issuances
In November 2004, the Company granted 40,000 shares of restricted stock to a key employee of the Company, which was originally scheduled to vest in three annual tranches beginning in 2005. Unearned stock compensation of $300,000 was recorded based on the fair market value of the Company’s common stock at the date of grant, or $7.50 per share. Unearned stock compensation was shown as a separate component of stockholders’ equity and was originally being amortized to expense over the three-year vesting period of the restricted stock. On December 20, 2005, the Board of Directors accelerated the vesting of the stock award subject to lock-up, confidentiality and non-competition agreements. 17,200 shares were returned to the Company to settle related tax obligations. The Company recorded $277,083 of compensation expense with respect to the award in the statement of operations for the year ended December 31, 2005. The restricted stock has all the rights and privileges of the Company’s common stock, subject to certain restrictions and forfeiture provisions.
On November 12, 2004, the Board of Directors approved a grant of 100,000 shares of restricted stock to Kanders & Company, Inc. (“Kanders & Company”), the sole stockholder of which is Warren B. Kanders, subject to certain performance conditions, provided Mr. Kanders has not resigned from the Board of Directors, all of which were originally scheduled to vest on November 12, 2007 and which would accelerate upon the death of Mr. Kanders, or the change of control of the Company. On December 20, 2005, the Board of Directors accelerated the vesting of the stock award, which remains subject to lock-up, confidentiality and non-competition agreements. The Company recorded a compensation charge of $465,000 with respect to such award in the statement of operations for the year ended December 31, 2005, of which approximately $317,000 relates to the acceleration of the vesting of such award.
During the year ended December 31, 2005 the Company issued 901 shares of common stock with a fair value of $5,000 for consulting services. During the year ended December 31, 2006, there were no common stock issuances by the Company to key employees, consultants or to Kanders & Company (see Note 19, “Related Party Transactions”). During January 2007, the Company issued common stock as part of the consideration paid for the acquisitions of Regal and Twincraft. (See Note 2, “Acquisitions.”)
On January 23, 2007, the Board of Directors approved a grant of 75,000 shares of restricted stock to Kathy Kehoe, 275,000 shares of restricted stock to W. Gray Hudkins, 7,500 shares of restricted stock to Stephen M. Brecher, 7,500 shares of restricted stock to Burtt R. Ehrlich, 7,500 shares to Stuart Greenspon and 500,000 shares of restricted stock to Warren B. Kanders, subject to certain performance conditions. In September 2007, the Board of Directors approved a grant of 75,000 shares of restricted stock to Kathleen P. Bloch, subject to certain performance conditions. The Company will record stock compensation expense once the performance criteria is probable.
(14) Stock Options
Effective January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123(R) requires that all stock-based compensation be recognized as an expense in the financial statements and that such costs be measured at the fair value of the award. This statement was adopted using the modified prospective method, which requires the Company to recognize compensation expense on a prospective basis. Therefore, prior period financial statements have not been restated. Under this method, in addition to reflecting compensation expense for new share-based payment awards, expense is also recognized to reflect the remaining vesting period of awards that had been included in pro-forma disclosures in prior periods. However, since all options outstanding as of December 31, 2006 were fully vested (except for 75,000 options, which were forfeited in January 2006), there was no compensation expense recognized for those options in the consolidated statements of income for year ended December 31, 2006. The total stock compensation expense for the years ended December 31, 2007 and 2006 was $281,660 and $186,322, and are included in general and administrative expenses in the consolidated statements of operations.
82
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) Stock Options – (continued)
The fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company’s stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. Because share-based compensation expense is based on awards that are ultimately expected to vest, share-based compensation expense is reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the pro forma information required under SFAS 123 for periods prior to the year ended December 31, 2006, the Company accounted for forfeitures as they occurred. Since there were no unvested options that were granted prior to the adoption of SFAS No. 123(R), there are no cumulative effects of forfeitures.
During the years ended December 31, 2007, 2006 and 2005, the Company’s calculations were made using the Black-Scholes option pricing model and are on a multiple option valuation approach. The Black-Scholes model is affected by the Company’s stock price as well as assumptions regarding certain subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards, the risk-free interest rate, and the expected life of the options. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options granted. The expected volatility, holding period, and forfeitures of options are based on historical experience. The historical period used for volatility is comprised of daily historical activity for a period equal to the term. For the years ended December 31, 2007 and 2006, as permitted under SFAS No. 123(R), the Company calculated its expected term using the short cut method as they believe they do not have enough information related to historical activity.
The following table lists the weighted average assumptions used by the Company in determining the fair value of stock options for the years ended December 31, 2007, 2006, and 2005:
| | | | | | |
| | 2007 | | 2006 | | 2005 |
| Expected volatility | | | 75 | % | | | 73 | % | | | 57 | % |
| Expected dividends | | | — | | | | — | | | | — | |
| Expected terms (in number of months) | | | 74 | | | | 78 | | | | 60 | |
| Risk-free interest rate | | | 3.63 | % | | | 4.70 | % | | | 4.12 | % |
| Option grants (weighted average fair value) | | $ | 3.27 | | | $ | 3.03 | | | $ | 3.01 | |
At the Company’s July 17, 2001 annual meeting, the shareholders approved and adopted a stock incentive plan for a maximum of 1,500,000 shares of common stock (the “2001 Plan”). Outstanding options granted under the 2001 Plan are exercisable for a period of up to ten years from the date of grant at an exercise price at least equal to 100 percent of the fair market value of the Company’s common stock at the date of grant and option awards generally vest in 3 years of continuous service, all of which are subject to the approval of the Board of Directors. At December 31, 2007, there were 407,252 options outstanding under the 2001 Plan. On June 23, 2005, the shareholders approved the Company’s 2005 Stock Incentive Plan (the “2005 Plan”), with substantially the same terms as the 2001 Plan, pursuant to which a maximum 2,000,000 shares of common stock are reserved for issuance and available for awards. At December 31, 2007, there were 1,306,000 options outstanding under the 2005 Plan. Additionally, 250,000 non-plan options were outstanding at December 31, 2007.
83
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) Stock Options – (continued)
| | | | | | | | |
| | Number
of Shares | | Exercise
Price Range
Per Share | | Weighted
Average
Exercise
Price Per
Share | | Aggregate
Intrinsic
Value |
| Outstanding at December 31, 2004 | | | 1,193,504 | | | $ | 1.53 – 8.07 | | | $ | 4.93 | | | | | |
| Granted | | | 1,231,000 | | | | 4.89 – 7.52 | | | | 6.01 | | | | | |
| Exercised | | | (110,000 | ) | | | 1.53 | | | | 1.53 | | | | | |
| Cancelled or forfeited | | | (404,376 | ) | | | 3.20 – 7.50 | | | | 7.39 | | | | | |
| Outstanding at December 31, 2005 | | | 1,910,128 | | | | 1.53 – 8.07 | | | | 5.30 | | | | | |
| Granted | | | 237,500 | | | | 3.50 – 4.96 | | | | 4.30 | | | | | |
| Exercised | | | (128,750 | ) | | | 1.53 | | | | 1.53 | | | | | |
| Cancelled or forfeited | | | (309,626 | ) | | | 1.53 – 8.07 | | | | 4.26 | | | | | |
| Outstanding at December 31, 2006 | | | 1,709,252 | | | | 1.53 – 8.07 | | | | 5.63 | | | | | |
| Granted | | | 425,000 | | | | 4.20 | | | | 4.20 | | | | | |
| Exercised | | | (30,000 | ) | | | 1.53 | | | | 1.53 | | | | | |
| Cancelled or forfeited | | | (141,000 | ) | | | 1.53 – 8.07 | | | | | | | | | |
| Outstanding at December 31, 2007 | | | 1,963,252 | | | | | | | | 5.28 | | | $ | 176,800 | |
| Vested at December 31, 2007 | | | 1,400,752 | | | | | | | | 5.70 | | | | | |
| Exercisable at December 31, 2007 | | | 1,400,752 | | | | | | | | 5.70 | | | $ | 149,700 | |
Under the 2001 Plan, at December 31, 2007, all 407,252 options were exercisable. Under the 2005 Plan, at December 31, 2007, 743,500 options were exercisable. Additionally, at December 31, 2007, there were 250,000 non-plan options which are exercisable.
The options outstanding at December 31, 2007 had remaining lives ranging from approximately 0.1 years to 8.3 years, with a weighted average life of approximately 6.1 years.
The following table summarizes the Company’s nonvested stock option activity for the year ended December 31, 2007:
| | | | |
| | Number
Outstanding | | Weighted
Average
Fair Value
at Grant
Date |
| Non-vested options at December 31, 2006 | | | 137,500 | | | | 469,000 | |
| Options granted | | | 425,000 | | | | 1,365,000 | |
| Vested | | | (12,500 | ) | | | (40,147 | ) |
| Non-vested options at December 31, 2007 | | | 550,000 | | | | 1,793,853 | |
The aggregate intrinsic value of options outstanding at December 31, 2007 and 2006 was approximately $176,800 and $490,400, respectively and the aggregate intrinsic value of exercisable options was $149,700 and $490,400, respectively. Options exercised during the years ended December 31, 2007, 2006 and 2005 had the following intrinsic values related to these options: $33,150, $394,125 and $403,700. At December 31, 2007, there was approximately $853,000 of unrecognized compensation cost related to share-based payments, which is expected to be recognized over a weighted-average period of approximately 3.2 years.
On September 8, 2005, the Company determined not to extend Andrew H. Meyer’s employment contract, and in accordance with its terms, the contract expired December 31, 2005 (except for certain covenants by Mr. Meyers in favor of the Company). In accordance with a modification of the employment contract on November 12, 2004, which extended his right to exercise 175,000 vested options from 90 days to one year
84
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) Stock Options – (continued)
beyond termination, the Company recorded a non-cash charge equal to the intrinsic value of the options on the date the option agreement was modified, or approximately $1,046,000 at December 31, 2005. On September 20, 2006, a total of 98,750 options were exercised and 76,250 were surrendered to the Company as part of a cashless exercise to settle the purchase price and related tax obligations.
The Company issued certain stock options for consulting services. In connection with such options, the Company recorded non-cash compensation expense totaling $1,257,000, which includes the effect of accelerating the vesting of certain stock options in the year ended December 31, 2005 (see Note 9, “Related Party Transactions”).
At December 31, 2007, 2006 and 2005, the Company had 60,000, 60,000 and 95,000 warrants outstanding, respectively.
On December 20, 2005, in order to lessen the impact in future periods, the Company accelerated the vesting of (i) certain unvested stock options previously awarded to employees, officers, consultants and directors of the Company under its 2005 Stock Incentive Plan and 2001 Stock Incentive Plan, and (ii) all unvested restricted stock awards, subject in each case to such optionees and restricted stock award holders entering into lock-up, confidentiality and non-competition agreements. As a result of this action, options to purchase 1,238,503 shares of common stock (387,500 shares of which were consultant stock options and 851,003 shares of which were employee stock options) that would have vested over the next one to five years became fully vested. None of these employee stock options were in the money on that date. Therefore, there was no compensation expense recognized with respect to the acceleration of the 851,003 stock options. Outstanding unvested options (75,000) that were not accelerated will continue to vest on their current schedules. The 75,000 unvested options were forfeited in the first quarter of 2006.
The decision to accelerate the vesting of these options and awards, which the Company believes to be in the interest of its stockholders, was made primarily to reduce non-cash compensation that would have been recorded in future periods following the Company’s adoption of the SFAS No. 123(R) in the year ended December 31, 2006.
The acceleration of the vesting of the employees’ and directors’ options reduced the Company’s non-cash compensation expense related to the options by approximately $2,071,000 (pre-tax) for the years 2006 – 2010. The acceleration of vesting of certain stock awards, and stock options issued for consulting services resulted in a charge to operations of approximately $1,313,000 (pre-tax) in the year ended December 31, 2005.
(15) Segment Information
During the year ended December 31, 2007, the Company operated in three segments (medical products, personal care products, and Regal) principally in the design, development, manufacture and sale of foot and gait-related products. Intersegment sales are recorded at cost.
85
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) Segment Information – (continued)
In 2006 and 2005, the Company operated in two segments: medical and personal care. In January 2007, the Company acquired the business of Regal Medical, LLC, which operates as part of its own segment. Also, in January 2007, the Company acquired Twincraft, which operates as part of the personal care segment. Assets and expenses related to the Company’s executive offices are reported under “other” as they do not relate to any of the operating segments. Segment information for the years ended December 31, 2007, 2006, and 2005 is summarized as follows:
| | | | | | | | | | |
| Year Ended December 31, 2007 | | Medical | | Personal Care | | Regal | | Other | | Total |
| Net sales | | $ | 25,652,321 | | | $ | 33,507,653 | | | $ | 3,752,324 | | | $ | — | | | $ | 62,912,298 | |
| Operating income (loss) from continuing operations | | | 2,507,739 | | | | 1,666,355 | | | | (408,868 | ) | | | (5,699,792 | ) | | | (1,934,566 | ) |
Depreciation of property and
equipment and amortization of identifiable intangible assets | | | 1,406,829 | | | | 2,382,291 | | | | 30,578 | | | | 298,340 | | | | 4,118,038 | |
| Long-lived assets | | | 8,313,649 | | | | 19,037,147 | | | | 142,445 | | | | 1,557,044 | | | | 29,050,285 | |
| Assets held for sale | | | 1,501,717 | | | | — | | | | — | | | | — | | | | 1,501,717 | |
| Total assets(a) | | | 24,744,987 | | | | 38,265,821 | | | | 2,390,617 | | | | 6,787,527 | | | | 72,188,952 | |
| Capital expenditures | | | 701,834 | | | | 645,407 | | | | 147,993 | | | | | | | | 1,495,234 | |
| | | | | | | | | | |
| Year Ended December 31, 2006 | | Medical | | Personal Care | | Regal | | Other | | Total |
| Net sales | | $ | 29,764,570 | | | $ | 2,934,734 | | | $ | — | | | $ | — | | | $ | 32,699,304 | |
| Operating (loss) income from continuing operations | | | 357,446 | | | | 182,282 | | | | — | | | | (4,186,046 | ) | | | (3,646,318 | ) |
Depreciation of property and
equipment and amortization of identifiable intangible assets | | | 1,426,177 | | | | 241,400 | | | | — | | | | 91,203 | | | | 1,758,780 | |
| Long-lived assets | | | 9,871,785 | | | | 2,531,266 | | | | — | | | | 1,599,347 | | | | 14,002,398 | |
| Assets held for sale | | | 1,241,368 | | | | — | | | | — | | | | — | | | | 1,241,368 | |
| Total assets(a) | | | 27,413,265 | | | | 8,886,727 | | | | — | | | | 31,308,110 | | | | 67,608,102 | |
| Capital expenditures | | | 2,237,043 | | | | 72,671 | | | | — | | | | — | | | | 2,309,714 | |
| | | | | | | | | | |
| Year Ended December 31, 2005 | | Medical | | Personal Care | | Regal | | Other | | Total |
| Net sales | | $ | 32,904,343 | | | $ | 4,499,510 | | | $ | — | | | $ | — | | | $ | 37,403,853 | |
| Operating (loss) income from continuing operations | | | 1,249,702 | | | | 700,345 | | | | — | | | | (6,185,687 | ) | | | (4,235,640 | ) |
Depreciation of property and
equipment and amortization of identifiable intangible assets | | | 1,377,606 | | | | 243,157 | | | | — | | | | — | | | | 1,620,763 | |
| Long-lived assets | | | 10,756,731 | | | | 2,704,232 | | | | — | | | | — | | | | 13,460,963 | |
| Assets held for sale | | | 1,196,600 | | | | — | | | | — | | | | | | | | 1,196,600 | |
| Total assets(a) | | | 47,501,245 | | | | 8,474,531 | | | | — | | | | — | | | | 55,975,776 | |
| Capital expenditures | | | 839,058 | | | | 79,947 | | | | — | | | | — | | | | 919,005 | |
| (a) | Total assets do not include assets held for sale of $1,501,717, $1,241,368 and $1,196,600 for the years ended December 31, 2007, 2006 and 2005, respectively. Assets held for sale represent the assets of Langer UK, which was sold in January 2008. |
86
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) Segment Information – (continued)
Geographical segment information is summarized as follows:
| | | | | | | | |
| Year Ended December 31, 2007 | | United States | | Canada | | United Kingdom | | Consolidated Total |
| Net sales to external customers | | $ | 58,522,705 | | | $ | 3,196,594 | | | $ | 1,192,999 | | | $ | 62,912,298 | |
| Intersegment net sales | | | 914,836 | | | | — | | | | — | | | | 914,836 | |
| Gross profit | | | 19,972,787 | | | | 1,548,296 | | | | 867,422 | | | | 22,388,505 | |
| Operating income (loss) | | | (2,496,000 | ) | | | 408,810 | | | | 152,624 | | | | (1,934,566 | ) |
| Depreciation of property and equipment and amortization of identifiable intangible assets | | | 3,939,842 | | | | 178,196 | | | | — | | | | 4,118,038 | |
| Long-lived assets | | | 27,947,644 | | | | 1,102,641 | | | | — | | | | 29,050,285 | |
| Assets held for sale | | | — | | | | — | | | | 1,501,717 | | | | 1,501,717 | |
| Total assets(a) | | | 69,747,257 | | | | 2,018,678 | | | | 423,017 | | | | 72,188,952 | |
| Capital expenditures | | | 1,466,399 | | | | 28,835 | | | | — | | | | 1,495,234 | |
| | | | | | | | |
| Year Ended December 31, 2006 | | United States | | Canada | | United Kingdom | | Consolidated Total |
| Net sales to external customers | | $ | 28,552,994 | | | $ | 2,877,645 | | | $ | 1,268,665 | | | $ | 32,699,304 | |
| Intersegment net sales | | | 812,942 | | | | — | | | | — | | | | 812,942 | |
| Gross profit | | | 10,346,355 | | | | 1,369,143 | | | | 928,201 | | | | 12,643,699 | |
| Operating income (loss) | | | (4,001,356 | ) | | | 233,261 | | | | (121,777 | ) | | | (3,646,318 | ) |
| Depreciation of property and equipment and amortization of identifiable intangible assets | | | 1,710,281 | | | | 48,499 | | | | — | | | | 1,758,780 | |
| Long-lived assets | | | 13,407,672 | | | | 594,726 | | | | — | | | | 14,002,398 | |
| Assets held for sale | | | — | | | | — | | | | 1,241,368 | | | | 1,241,368 | |
| Total assets(a) | | | 65,188,305 | | | | 1,745,800 | | | | 673,997 | | | | 67,608,102 | |
| Capital expenditures | | | 2,287,690 | | | | 22,024 | | | | — | | | | 2,309,714 | |
| | | | | | | | |
| Year Ended December 31, 2005 | | United States | | Canada | | United Kingdom | | Consolidated Total |
| Net sales to external customers | | $ | 33,448,447 | | | $ | 2,460,496 | | | $ | 1,494,910 | | | $ | 37,403,853 | |
| Intersegment net sales | | | 963,676 | | | | — | | | | — | | | | 963,676 | |
| Gross profit | | | 14,763,380 | | | | 1,218,533 | | | | 932,351 | | | | 16,914,264 | |
| Operating (loss) income | | | (4,366,138 | ) | | | 269,430 | | | | (138,932 | ) | | | (4,235,640 | ) |
| Depreciation of property and equipment and amortization of identifiable intangible assets | | | 1,574,834 | | | | 45,929 | | | | — | | | | 1,620,763 | |
| Long lived assets | | | 12,841,132 | | | | 619,831 | | | | — | | | | 13,460,963 | |
| Assets held for sale | | | | | | | | | | | 1,196,600 | | | | 1,196,600 | |
| Total assets(a) | | | 52,848,424 | | | | 1,776,858 | | | | 1,350,494 | | | | 55,975,776 | |
| Capital expenditures | | | 871,652 | | | | 47,353 | | | | — | | | | 919,005 | |
| (a) | Total assets do not include assets held for sale of $1,501,717, $1,241,368 and $1,196,600 for the years ended December 31, 2007, 2006 and 2005, respectively. Assets held for sale represent the assets of Langer UK, which was sold in January 2008. |
Export sales from the Company’s United States operations accounted for approximately 9%, 16% and 17% of net sales for each of the years ended December 31, 2007, 2006 and 2005, respectively.
87
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) Pension Plan and 401(k) Plan
Prior to July 30, 1986, the Company maintained a non-contributory defined benefit pension plan covering substantially all employees. Effective July 30, 1986, the Company adopted an amendment to the plan under which future benefit accruals to the plan ceased (freezing the maximum benefits available to employees as of July 30, 1986), other than those required by law. Previously accrued benefits remain in effect and continue to vest under the original terms of the plan.
The following table sets forth the Company’s defined benefit plan status at December 31, 2007 and 2006, determined by the plan’s actuary in accordance with SFAS No. 158:
| | | | |
| | December 31, |
| | | 2007 | | 2006 |
Change In Benefit Obligation
| | | | | | | | |
| Benefit obligation at beginning of year | | $ | (97,068 | ) | | $ | (747,671 | ) |
| Interest cost | | | (4,799 | ) | | | (37,319 | ) |
| Benefits paid | | | 1,640 | | | | 2,811 | |
| Actuarial loss | | | (5,460 | ) | | | (20,938 | ) |
| Settlement | | | 105,687 | | | | 706,049 | |
| Benefit obligation at end of year | | $ | — | | | $ | (97,068 | ) |
Change In Plan Fair Value of Assets
| | | | | | | | |
| Fair value of plan assets, beginning of year | | $ | 99,806 | | | $ | 707,283 | |
| Actual return on plan assets | | | 5,521 | | | | 34,229 | |
| Employer contribution | | | 2,000 | | | | 67,154 | |
| Benefits paid | | | (1,640 | ) | | | (2,811 | ) |
| Settlement | | | (105,687 | ) | | | (706,049 | ) |
| Fair value of plan assets, end of year | | $ | — | | | $ | 99,806 | |
Funded Status of Plan
| | | | | | | | |
| Accumulated benefit obligation | | $ | — | | | $ | (97,068 | ) |
| Fair value plan assets | | | — | | | | 99,806 | |
| Funded status | | $ | — | | | $ | 2,738 | |
| |
Amounts recognized in the consolidated balance sheets consist of:
| | | | | | | | |
| Prepaid pension expense | | $ | — | | | $ | 2,738 | |
| Accumulated other comprehensive loss | | | — | | | | 143,471 | |
| Net Amount Recognized | | $ | — | | | $ | 146,209 | |
Net periodic pension expense is comprised of the following components:
| | | | | | |
| | Years Ended December 31, |
| | | 2007 | | 2006 | | 2005 |
| Interest cost | | $ | 4,799 | | | $ | 37,319 | | | $ | 35,706 | |
| Expected return on plan assets | | | (5,521 | ) | | | (54,274 | ) | | | (47,482 | ) |
| Amortization of unrecognized transition obligation | | | 88,947 | | | | 7,791 | | | | 7,791 | |
| Amortization of net loss | | | 2,344 | | | | 19,727 | | | | 19,064 | |
| Settlement | | | 57,640 | | | | 396,591 | | | | — | |
| Net periodic pension expense | | $ | 148,209 | | | $ | 407,154 | | | $ | 15,079 | |
88
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) Pension Plan and 401(k) Plan – (continued)
During 2007, the Company terminated its pension plan and distributed a total of $57,640 to several participants during 2007 to close the plan. On November 2, 2006 a lump sum payment was made to the benefit of a former owner of the Company for $706,049 as of December 31, 2006, which resulted in a settlement expense of $396,591.
Assumptions
Weighted average assumptions used to determine benefit obligations at December 31:
| | | | | | |
| | 2007 | | 2006 | | 2005 |
| Discount rate | | | 5.0 | % | | | 5.0 | % | | | 5.0 | % |
| Salary increases rate | | | N/A | | | | N/A | | | | N/A | |
Weighted average assumptions used to determine periodic benefit cost for years ended December 31:
| | | | | | |
| | 2007 | | 2006 | | 2005 |
| Discount rate | | | 5.0 | % | | | 5.0 | % | | | 5.0 | % |
| Salary increases rate | | | N/A | | | | N/A | | | | N/A | |
| Expected long-term rate of return on plan assets | | | 7.5 | % | | | 7.5 | % | | | 7.5 | % |
The discount rate is based upon applicable interest rates prescribed in the Plan for lump sum settlement payments.
The expected long-term rate of return is selected based upon the expected duration of the projected benefit obligation for the plan and the asset mix of the plan. There is no assumed increase in compensation levels since future benefit accruals have ceased, as discussed above. The Plan has been terminated, and as of December 31, 2007, all plan assets have been distributed and all accrued benefit obligations have been paid.
The Company has a defined contribution retirement and savings plan (the “401(k) Plan”) designed to qualify under Section 401(k) of the Internal Revenue Code (the “Code”). Eligible employees include those who are at least twenty-one years old and who have worked at least 1,000 hours during any one year. The Company may make matching contributions in amounts that the Company determines at its discretion at the beginning of each year. In addition, the Company may make further discretionary contributions. Participating employees are immediately vested in amounts attributable to their own salary or wage reduction elections, and are vested in Company matching and discretionary contributions under a vesting schedule that provides for ratable vesting over the second through sixth years of service. The assets of the 40l (k) Plan are invested in stock, bond and money market mutual funds. For the years ended December 31, 2007, 2006, and 2005, the Company made contributions totaling $104,398, $75,879, and $73,430, respectively, to the 401(k) Plan.
(17) Income Taxes
The components of net income (loss) before the provision for (benefit from) income taxes are as follows:
| | | | | | |
| | 2007 | | 2006 | | 2005 |
| Domestic operations | | $ | (4,296,138 | ) | | $ | (4,506,340 | ) | | $ | (4,605,120 | ) |
| Foreign operations | | | (221,839 | ) | | | (347,149 | ) | | | 47,852 | |
| | | $ | (4,517,977 | ) | | $ | (4,853,489 | ) | | $ | (4,557,268 | ) |
89
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(17) Income Taxes – (continued)
The provision for (benefit from) income taxes is comprised of the following:
| | | | | | |
| | Years Ended December 31, |
| | | 2007 | | 2006 | | 2005 |
Current:
| | | | | | | | |
| Federal | | $ | (15,280 | ) | | $ | 23,049 | | | $ | — | |
| State | | | — | | | | — | | | | — | |
| Foreign | | | 118,927 | | | | 88,643 | | | | 113,518 | |
| | | | 103,647 | | | | 111,692 | | | | 113,518 | |
Deferred:
| | | | | | | | | | | | |
| Federal | | | 113,520 | | | | 338,579 | | | | (254,779 | ) |
| State | | | 16,994 | | | | 59,749 | | | | (37,399 | ) |
| Foreign | | | 610 | | | | (63,927 | ) | | | (22,500 | ) |
| | | | 131,124 | | | | 334,401 | | | | (314,678 | ) |
| | | $ | 234,771 | | | $ | 446,093 | | | $ | (201,160 | ) |
The above detailed tax provisions (benefit) represents the Company’s total consolidated tax provision (benefit) including the effect of both continuing and discontinued pretax income (loss).
As of December 31, 2007, the Company has net Federal tax operating loss carryforwards of approximately $11,400,000, which may be applied against future taxable income and expires from 2008 through 2027, compared to net Federal operating loss carryforwards of approximately $9,800,000 as of December 31, 2006. Future utilization of these net operating loss carryforwards will be limited under existing tax law due to the change in control of the Company in 2001.
90
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(17) Income Taxes – (continued)
The following is a summary of deferred tax assets and liabilities:
| | | | |
| | December 31, |
| | | 2007 | | 2006 |
Current assets:
| | | | | | | | |
| Accounts receivable | | $ | 575,364 | | | $ | 200,371 | |
| Stock options | | | 650,266 | | | | 625,418 | |
| Inventory reserves | | | 805,254 | | | | 394,335 | |
| Pension | | | — | | | | 154,338 | |
| Accrued expenses and other | | | 107,502 | | | | 201,407 | |
| | | | 2,138,386 | | | | 1,575,869 | |
Non current assets:
| | | | | | | | |
| Capital lease | | | 639,096 | | | | 630,273 | |
| Intangible assets | | | 791,036 | | | | 696,246 | |
| Net operating loss carryforwards | | | 4,552,966 | | | | 3,907,219 | |
| Other | | | 5,958 | | | | 5,958 | |
| | | | 5,989,056 | | | | 5,239,696 | |
| Valuation allowances | | | (2,759,090 | ) | | | (6,718,177 | ) |
Non current liabilities:
| | | | | | | | |
| Property and equipment | | | (1,687,601 | ) | | | (97,388 | ) |
| Goodwill and Trade Names | | | (5,482,404 | ) | | | (1,659,333 | ) |
| | | | (7,170,005 | ) | | | (1,756,721 | ) |
| Net deferred tax liabilities | | $ | (1,801,653 | ) | | $ | (1,659,333 | ) |
The acquisition of Twincraft during 2007 resulted in approximately $5,557,000 of deferred tax liabilities being provided as a result of the carrying value of fixed assets and identifiable intangibles for financial reporting purposes exceeding the related tax basis of such assets. These deferred tax liabilities resulted in a corresponding reduction to the tax valuation allowance relating to the Company’s net deferred tax assets.
91
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(17) Income Taxes – (continued)
The Company’s effective provision for income taxes differs from the Federal statutory rate. The reasons for such differences are as follows:
| | | | | | | | | | | | |
| | Years Ended December 31, |
| | | 2007 | | 2006 | | 2005 |
| | | Amount | | % | | Amount | | % | | Amount | | % |
Provision at Federal
statutory rate | | $ | (1,305,727 | ) | | | (34.0 | ) | | $ | (1,498,515 | ) | | | (34.0 | ) | | $ | (1,617,866 | ) | | | (34.0 | ) |
Change in fair value of
Put Option | | | — | | | | — | | | | — | | | | — | | | | (595,000 | ) | | | (12.5 | ) |
| Compensation expense from stock option modification | | | — | | | | — | | | | — | | | | — | | | | 355,513 | | | | 7.5 | |
| Other Permanent items | | | 134,177 | | | | 3.5 | | | | 77,195 | | | | 1.7 | | | | (153,198 | ) | | | (3.2 | ) |
Increase (decrease) in taxes resulting from:
| | | | | | | | | | | | | | | | | | | | | | | | |
| State income tax expense, net of federal benefit | | | 11,216 | | | | 0.3 | | | | 59,749 | | | | 1.4 | | | | (37,399 | ) | | | (0.8 | ) |
| Expiration of NOL’s | | | 11,215 | | | | 0.3 | | | | — | | | | — | | | | — | | | | — | |
Effect of foreign
operations | | | 20,171 | | | | 0.5 | | | | 93,460 | | | | 2.1 | | | | 11,090 | | | | 0.2 | |
| Change in valuation allowance | | | 1,416,959 | | | | 36.9 | | | | 1,683,574 | | | | 38.2 | | | | 1,841,759 | | | | 38.7 | |
| Other | | | (53,240 | ) | | | (1.8 | ) | | | 30,630 | | | | 0.7 | | | | (6,059 | ) | | | (0.1 | ) |
| Effective tax rate | | $ | 234,771 | | | | 5.7 | % | | $ | 446,093 | | | | 10.1 | % | | $ | (201,160 | ) | | | (4.2 | )% |
The Company does not provide for income taxes on the unremitted earnings of foreign subsidiaries where, in management’s opinion, such earnings have been indefinitely reinvested in those operations or will be remitted as dividends with taxes substantially offset by foreign tax credits, which are immaterial. It is not practical to determine the amount of unrecognized deferred tax liabilities for temporary differences related to these investments. The Company recorded an adjustment of approximately $275,000 for the prior year under-accrual of deferred taxes related to an intangible impairment in the year ended December 31, 2006.
(18) Reconciliation of Basic and Diluted Earnings per Share
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 years ended December 31, 2007, 2006, and 2005 exclude approximately 1,963,000, 1,709,000, and 1,910,000 shares, respectively, related to employee stock options because the effect of including them would be anti-dilutive. The impact of the 5% Convertible Notes and the 4% 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 years ended December 31, 2007, 2006 and 2005.
92
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(19) Related Party Transactions
Consulting Agreement with Kanders & Company, Inc. On November 12, 2004, the Company entered into a consulting agreement (the “Consulting Agreement”) with Kanders & Company, Inc. (“Kanders & Company”), the sole stockholder of which is Warren B. Kanders, who on November 12, 2004, became the Company’s Chairman of the Board of Directors, and who is the sole manager and voting member of Langer Partners, LLC (“Langer Partners”), the Company’s largest stockholder. The Consulting Agreement provides that Kanders & Company will act as the Company’s non-exclusive consultant to provide the Company with strategic consulting and corporate development services for a term of three years. Kanders & Company will receive, pursuant to the Consulting Agreement, an annual fee of $200,000 ($300,000 commencing in the year ended December 31, 2007) and may receive separate compensation for assistance, at the Company’s request, with certain transactions or other matters to be determined by the Board from time to time. Additionally, through the Consulting Agreement, Kanders & Company was granted options to purchase 240,000 shares of the Company’s common stock at an exercise price of $7.50 per share (the market price of the stock on the date of the grant), vesting in three equal annual installments beginning on November 12, 2005. The Company accounted for 15,000 of such options as compensation for duties performed by Mr. Kanders in his capacity as Chairman of the Board under APB No. 25, and accounted for 225,000 of such options as being granted pursuant to the Consulting Agreement and accounted for in accordance with EITF No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods and Services.” The Company recorded non-cash stock option compensation expense of approximately $1,257,000 for the year ended December 31, 2005 with respect to the consulting options of which approximately $882,000 relates to the acceleration of the vesting of such options. The Company has also agreed to provide Kanders & Company with indemnification protection, which survives the termination of the Consulting Agreement for six years, and extends to any actual or wrongfully attempted breach of duty, neglect, error, or misstatement by Kanders & Company alleged by any claimant. The Consulting Agreement replaced a previous agreement for similar consulting services, pursuant to which Kanders & Company received an annual fee of $100,000, options to purchase 100,000 shares of the Company’s common stock at an exercise price of $1.525 per share, and the indemnification protection described above. The Company paid $300,000, $200,000, and $200,000 with respect to the annual fee under the Consulting Agreement during the years ended December 31, 2007, 2006 and 2005, respectively.
On November 12, 2004, the Board of Directors approved a grant of 100,000 shares of restricted stock to Kanders & Company, subject to certain performance conditions, provided Mr. Kanders has not resigned as Chairman of the Board, all of which were originally scheduled to vest on November 12, 2007, and which accelerate upon the death of Mr. Kanders, or the change of control of the Company. On December 20, 2005, the Company accelerated the vesting of the stock award, subject to lock-up, confidentiality and non-competition agreements. The Company recorded a compensation charge of $465,000 with respect to such award in the statement of operations for the year ended December 31, 2005, of which approximately $317,000 relates to the acceleration of the vesting of such award.
5% Convertible Subordinated Notes. On December 8, 2006, the Company sold $28,880,000 of the Company’s 5% Convertible Notes due December 7, 2011 in a private placement. (See Note 11, Long-Term Debt.) The number of shares of common stock acquirable on conversion of the notes, as of December 31, 2007, is 6,195,165 and the conversion rate under the 5% Convertible Notes at such date is $4.6617 per share. A trust controlled by Mr. Warren B. Kanders, the Chairman of the Board of Directors and largest beneficial stockholder, owns (as a trustee for a member of his family) $2,000,000 of the 5% Convertible Notes, and one director, Stuart P. Greenspon, owns $150,000 of the 5% Convertible Notes.
Contract Termination. On September 8, 2005, the Company determined not to extend Andrew H. Meyer’s employment contract, and in accordance with its terms, the contract expired December 31, 2005 (except for certain covenants by Mr. Meyers in favor of the Company). In accordance with a modification of the employment contract on November 12, 2004, which extended his right to exercise 175,000 vested options from 90 days to one year beyond termination, the Company recorded a non-cash charge equal to the intrinsic
93
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(19) Related Party Transactions – (continued)
value of the options on the date the option agreement was modified, or approximately $1,046,000 at December 31, 2005. Of the 175,000 vested options, 98,750 options were exercised and 76,250 options were surrendered to the Company as part of a cashless exercise on September 20, 2006. Additionally, as of December 31, 2005, the Company accrued approximately $335,000 for severance related expenses in accordance with the contract and a related separation agreement.
Other Related Party Transactions. The Company has obtained certain technology related products and services from a company owned by the brother-in-law of Andrew Meyers, who was, until December 31, 2005, the Company’s President and Chief Executive Officer and who remained a director of the Company until March 24, 2006. Costs incurred by the Company for such products and services were approximately $120,000, and $37,000, for the years ended December 31, 2006 and 2005.
During 2007, the Company entered into a sublease agreement for a portion of its leased space at 41 Madison Avenue, New York, NY. (See Note 12.) A member of the Company’s board of directors is also a member of the subtenant’s board of directors. Sublease payments received by the Company amounted to $45,000 for the year ended December 31, 2007.
(20) Litigation
On or about February 13, 2006, Dr. Gerald P. Zook filed a demand for arbitration with the American Arbitration Association, naming the Company and Silipos as 2 of the 16 respondents. (Four of the other respondents are the former owners of Silipos and its affiliates, and the other 10 respondents are unknown entities.) The demand for arbitration alleges that the Company and Silipos are in default of obligations to pay royalties in accordance with the terms of a license agreement between Dr. Zook and Silipos dated as of January 1, 1997, with respect to seven patents owned by Dr. Zook and licensed to Silipos. Silipos has paid royalties to Dr. Gerald P. Zook, but Dr. Gerald P. Zook claims that greater royalties are owed. The demand for arbitration seeks an award of $400,000 and reserves the right to seek a higher award after completion of discovery. Dr. Gerald P. Zook has agreed to drop Langer, Inc. (but not Silipos) from the arbitration, without prejudice. The matter is in the discovery stage.
On or about February 13, 2006, Mr Peter D. Bickel, who was the executive vice president of Silipos, Inc., until January 11, 2006, alleged that he was terminated by Silipos without cause and, therefore, was entitled, pursuant to his employment agreement, to a severance payment of two years’ base salary. On or about February 23, 2006, Silipos commenced action in New York State Supreme Court, New York County, against Mr. Bickel seeking, among other things, a declaratory judgment that Mr. Bickel is not entitled to severance pay or other benefits, on account of his breach of various provisions of his employment agreement with Silipos and his non-disclosure agreement with Silipos, and that he voluntarily resigned his employment with Silipos. Silipos also sought compensatory and punitive damages for breaches of the employment agreement, breach of the non-disclosure agreement, breach of fiduciary duties, misappropriation of trade secrets, and tortious interference with business relationships. On or about March 22, 2006, Mr. Bickel removed the lawsuit to the United States District Court for the Southern District of New York and filed an answer denying the material allegations of the complaints and counterclaims seeking a declaratory judgment that his non-disclosure agreement is unenforceable and that he is entitled to $500,000, representing two years’ base salary, in severance compensation, on the ground that Silipos did not have “cause” to terminate his employment. On August 8, 2006, the Court determined that the restrictive covenant was enforceable against Mr. Bickel for the duration of its term (which expired on January 11, 2007) to the extent of prohibiting Mr. Bickel from soliciting certain key customers of the Company with whom he had worked during his employment with the company. The Company has withdrawn, without prejudice, its claims for compensatory and punitive damages for breaches of the employment agreement, breach of the non-disclosure agreement, breach of fiduciary duties, misappropriation of trade secrets, and tortuous interference with business relations. On October 12, 2007, the court issued an opinion and order dismissing all of Mr. Bickel’s claims against Silipos, denying Mr. Bickel’s
94
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(20) Litigation – (continued)
motion to dismiss the remaining claims of Silipos against him, and allowing Silipos to proceed with its claims against Mr. Bickel for breach of fiduciary duty and disloyalty.
Additionally, in the normal course of business, the Company may be subject to claims and litigation in the areas of general liability, including claims of employees, and claims, litigation or other liabilities as a result of acquisitions completed. The results of legal proceedings are difficult to predict and the Company cannot provide any assurance that an action or proceeding will not be commenced against the Company or that the Company will prevail in any such action or proceeding. An unfavorable outcome of the arbitration proceeding commenced by Dr. Gerald P. Zook against Silipos may adversely affect the Company’s rights to manufacture and/or sell certain products or raise the royalty costs of these certain products.
An unfavorable resolution of any legal action or proceeding could materially adversely affect the market price of the Company’s common stock and its business, results of operations, liquidity, or financial condition.
(21) Restructuring
On May 3, 2007, the Company announced its plan to close its Anaheim manufacturing facility in order to better leverage the Company’s resources by reducing costs, obtaining operational efficiencies and to further align the Company’s business with market conditions, future revenue expectations and planned future product directions. The plan included the elimination of 27 positions, which represented approximately 4.5% of the Company’s workforce. During the year ended December 31, 2007, the Company recognized expenses of $200,485, consisting of employee termination benefits and related costs of $128,572, loss on the abandonment of fixed assets of $28,193, expenses relating to the exiting of our Anaheim leased facility, which would have expired in December, 2007, of $34,560, and other exit costs of $9,160. This plan was completed by the end of 2007.
(22) Subsequent Events
(a) Sale of Langer (UK) Limited
On January 18, 2008, the Company sold all of the outstanding capital stock of its wholly owned subsidiary, Langer (UK) Limited (“Langer UK”) to an affiliate of Sole Solutions, a retailer of specialty footwear based in the United Kingdom. The sales price was $1,155,313, of which $934,083 was paid at closing and the remaining $221,230in the form of a note receivable. In addition, transaction costs in the amount of $125,914 were incurred. The note bears interest at 8.5% and does not require any monthly payments of principal or interest. The note and accrued interest are due in full on January 18, 2010. In addition, upon closing, the Company entered into an exclusive sales agency agreement and distribution services agreement by which Langer UK will act as sales agent and distributor for Silipos products in the United Kingdom, Europe, Africa, and Israel. These agreements have a term of three years. In December 2007, the Company recorded an impairment of $175,558 related to the allocated portion of goodwill related to Langer UK as a result of the net loss associated with this sale. Such impairment is included in loss from operations of discontinued subsidiary.
(b) Stock Repurchase
In accordance with the previously announced stock repurchase program, the Company purchased 342,352 shares of its common stock at a price of $2.00 per share on January 25, 2008. The total cost of this purchase, including brokerage commission, amounted to $694,975.
(c) Termination of lease
The Company anticipates that it will vacate the premises at its 41 Madison Avenue, New York, NY location in May 2008 and find new smaller, and lower cost office space.
95
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(23) Quarterly Operating Results (Unaudited)
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Mar. 31,
2006 | | June 30,
2006 | | Sep. 30,
2006 | | Dec. 31,
2006(1) | | Mar. 31,
2007 | | June 30,
2007 | | Sep. 30,
2007 | | Dec. 31,
2007(2) |
| | | (In Thousands, Except per Share Data) |
| Net Sales | | $ | 7,787 | | | $ | 8,541 | | | $ | 8,373 | | | $ | 7,998 | | | $ | 14,321 | | | $ | 16,598 | | | $ | 16,611 | | | $ | 15,383 | |
| Cost of sales | | | 4,923 | | | | 4,921 | | | | 4,862 | | | | 5,350 | | | | 9,030 | | | | 10,817 | | | | 10,384 | | | | 10,292 | |
| Gross profit | | | 2,864 | | | | 3,620 | | | | 3,511 | | | | 2,648 | | | | 5,291 | | | | 5,781 | | | | 6,227 | | | | 5,091 | |
| Selling expenses | | | 1,741 | | | | 1,573 | | | | 1,443 | | | | 1,278 | | | | 2,098 | | | | 2,468 | | | | 2,476 | | | | 2,376 | |
| General and administrative expenses | | | 2,185 | | | | 2,206 | | | | 2,321 | | | | 3,013 | | | | 3,244 | | | | 3,394 | | | | 3,689 | | | | 3,739 | |
| Research and development expenses | | | 123 | | | | 142 | | | | 152 | | | | 111 | | | | 197 | | | | 211 | | | | 224 | | | | 208 | |
| Operating (loss) income | | | (1,185 | ) | | | (301 | ) | | | (405 | ) | | | (1,754 | ) | | | (248 | ) | | | (292 | ) | | | (162 | ) | | | (1,232 | ) |
Other income (expense)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | 159 | | | | 211 | | | | 151 | | | | 108 | | | | 132 | | | | 73 | | | | 22 | | | | 30 | |
| Interest expense | | | (303 | ) | | | (277 | ) | | | (217 | ) | | | (147 | ) | | | (526 | ) | | | (548 | ) | | | (556 | ) | | | (556 | ) |
| Other income (expense) | | | (8 | ) | | | 28 | | | | 3 | | | | (26 | ) | | | (7 | ) | | | (11 | ) | | | 4 | | | | 36 | |
| Other expense, net | | | (152 | ) | | | (38 | ) | | | (63 | ) | | | (65 | ) | | | (401 | ) | | | (486 | ) | | | (530 | ) | | | (490 | ) |
Loss from continuing
operations before income
taxes | | | (1,337 | ) | | | (339 | ) | | | (468 | ) | | | (1,819 | ) | | | (649 | ) | | | (778 | ) | | | (692 | ) | | | (1,722 | ) |
| (Provision for) benefit from income taxes | | | (7 | ) | | | (6 | ) | | | 21 | | | | (510 | ) | | | (63 | ) | | | (44 | ) | | | (102 | ) | | | (24 | ) |
Loss from continuing
operations | | | (1,344 | ) | | | (345 | ) | | | (447 | ) | | | (2,329 | ) | | | (712 | ) | | | (822 | ) | | | (794 | ) | | | (1,746 | ) |
Discontinued Operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loss from operations of discontinued
subsidiary: | | | (81 | ) | | | (136 | ) | | | (106 | ) | | | (121 | ) | | | (72 | ) | | | (28 | ) | | | (43 | ) | | | (301 | ) |
Income tax benefit
(provision) | | | (1 | ) | | | — | | | | — | | | | 57 | | | | — | | | | — | | | | — | | | | — | |
| Loss from discontinued operations | | | (82 | ) | | | (136 | ) | | | (106 | ) | | | (64 | ) | | | (72 | ) | | | (28 | ) | | | (43 | ) | | | (301 | ) |
| Net loss | | $ | (1,426 | ) | | $ | (481 | ) | | $ | (553 | ) | | $ | (2,393 | ) | | $ | (784 | ) | | $ | (850 | ) | | $ | (837 | ) | | $ | (2,047 | ) |
Net loss per share:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic and diluted:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loss from continuing operations | | $ | (0.14 | ) | | $ | (0.03 | ) | | $ | (0.04 | ) | | $ | (0.23 | ) | | $ | (0.06 | ) | | $ | (0.07 | ) | | $ | (0.07 | ) | | $ | (0.15 | ) |
| Loss from discontinued operations | | | (0.01 | ) | | | (0.01 | ) | | | (0.01 | ) | | | (0.01 | ) | | | (0.01 | ) | | | (0.00 | ) | | | (0.00 | ) | | | (0.03 | ) |
| Basic and diluted loss per share | | $ | (0.15 | ) | | $ | (0.04 | ) | | $ | (0.05 | ) | | $ | (0.24 | ) | | $ | (0.07 | ) | | $ | (0.07 | ) | | $ | (0.07 | ) | | $ | (0.18 | ) |
| (1) | Included in the operating results for the quarter ended December 31, 2006 were: |
| (a) | an additional provision for inventory obsolescence of approximately $286,000; |
| (b) | a pension settlement loss of approximately $397,000; |
| (c) | the loss on abandonment of certain New York City office space of approximately $112,000; and |
| (d) | a provision for income taxes of approximately $437,000. |
| (2) | Included in discontinued operations for the quarter ended December 31, 2007 were: |
| (a) | an accrual for the loss on the sale of Langer UK of $175,558. |
96
TABLE OF CONTENTS
LANGER, INC. AND SUBSIDIARIES
PART III
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Nothing to report.
Item 9A(T). Controls and Procedures
Disclosure Controls and Procedures
The Company’s management, including its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”) as of December 31, 2007. Based on that evaluation, the Company’s CEO and CFO have concluded that the Company’ disclosure controls and procedures are effective in recording, processing, summarizing and reporting, within the time periods specified in the SEC’s rules and forms, information required to be disclosed by the Company in the reports it files or submits under the Exchange Act, and in ensuring that information required to be disclosed is in the reports that the Company files or submits under the Exchange Act is collected and conveyed to the Company’s management, including its CEO and CFO, to allow timely decisions to be made regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate control over financial reporting, as such term defined in Exchange Act Rules 13a-13(f) and 15d-15(f). The Company performed an evaluation, under supervision and with participation of the Company’s management, including its CEO and CFO, of the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, the CEO and CFO concluded that the Company’s internal control over financial reporting was effective as of December 31, 2007.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permits the Company to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during the most recent quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 10. Directors and Executive Officers of the Company
The information set forth under the caption “Election of Directors” in the proxy statement to be distributed by the Board of Directors of the Company in connection with the 2008 Annual Meeting of Stockholders, which is expected to be filed on or before April 30, 2008, is incorporated herein by reference.
The Company has adopted a code of ethics that applies to its Chief Executive Officer and Chief Financial Officer, who are the Company’s principal executive officer and principal financial and accounting officer, and to all of its other officers, directors and managerial employees. The code of ethics may be accessed atwww.langerinc.com, our Internet website, at the tab “Investor Relations”. The Company intends to disclose future amendments to, or waivers from, certain provision of its code of ethics, if any, on the above website within four business days following the date of such amendment or waiver.
Item 11. Executive Compensation
The information required by Item 11 appearing under the caption “Executive Compensation” of the Company’s proxy statement for the 2008 Annual Meeting of Stockholders, which is expected to be filed on or before April 30, 2008, is incorporated herein by reference.
97
TABLE OF CONTENTS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 appearing under the caption “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of the Company’s proxy statement for the 2008 Annual Meeting of Stockholders, which is expected to be filed on or before April 30, 2008, is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 appearing under the caption “Certain Relationships and Related Transactions” of the Company’s proxy statement for the 2008 Annual Meeting of the Stockholders, which is expected to be filed on or before April 30, 2008, is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by Item 14 appearing under the caption “Principal Accountant Fees and Services” of the Company’s proxy statement for the 2008 Annual Meeting of the Stockholders, which is expected to be filed on or before April 30, 2008, is incorporated herein by reference.
98
TABLE OF CONTENTS
PART IV
Item 15. Exhibits and Financial Statement Schedules
1. Financial Statements
For a list of the financial statements of the Company included in this report, please see the Index to Consolidated Financial Statements appearing at the beginning of Item 8, Financial Statements and Supplementary Data.
2. Financial Statement Schedules
The following Financial Statement Schedule is filed as part of this Form 10-K:
Schedule II — Valuation and Qualifying Accounts
LANGER, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
| | | | | | | | |
| | Sales Returns
and
Allowances | | Allowance
for Doubtful
Accounts
Receivable | | Inventory
Reserve | | Valuation
Allowance for
Deferred
Tax Assets |
| At January 1, 2005 | | $ | 68,000 | | | $ | 379,657 | | | $ | 369,244 | | | $ | 2,568,330 | |
| Additions | | | — | | | | 151,066 | | | | 453,027 | | | | 2,111,784 | |
| Deletions | | | — | | | | (100,650 | ) | | | (258,003 | ) | | | — | |
| At December 31, 2005 | | | 68,000 | | | | 430,073 | | | | 564,268 | | | | 4,680,114 | |
| Additions | | | — | | | | 223,168 | | | | 467,918 | | | | 2,038,063 | |
| Deletions | | | — | | | | (181,920 | ) | | | (147,035 | ) | | | — | |
| At December 31, 2006 | | | 68,000 | | | | 471,321 | | | | 885,151 | | | | 6,718,177 | |
| Additions | | | — | | | | 1,357,545 | | | | 1,180,691 | | | | — | |
| Deletions | | | (18,000 | ) | | | (830,029 | ) | | | (503,986 | ) | | | (3,959,087 | ) |
| At December 31, 2007 | | $ | 50,000 | | | $ | 998,837 | | | $ | 1,561,856 | | | $ | 2,759,090 | |
All other schedules have been omitted because they are not applicable, not required or the information is disclosed in the consolidated financial statements, including the notes thereto.
99
TABLE OF CONTENTS
3. Exhibits
| | |
Exhibit
No. | | Description of Exhibit |
| 3.1 | | Agreement and Plan of Merger dated as of May 15, 2002, between Langer, Inc., a New York corporation, and Langer, Inc., a Delaware corporation (the surviving corporation), incorporated herein by reference to Appendix A of our Definitive Proxy Statement for the Annual Meeting of Stockholders held on June 27, 2002, filed with the Securities and Exchange Commission on May 31, 2002. |
| 3.2 | | Certificate of Incorporation, incorporated herein by reference to Appendix B of our Definitive Proxy Statement for the Annual Meeting of Stockholders held on June 27, 2002, filed with the Securities and Exchange Commission on May 31, 2002. |
| 3.3 | | By-laws, incorporated herein by reference to Appendix C of our Definitive Proxy Statement for the Annual Meeting of Stockholders held on June 27, 2002, filed with the Securities and Exchange Commission on May 31, 2002. |
| 4.1 | | Specimen of Common Stock Certificate, incorporated herein by reference to our Registration Statement of Form S-1 (File No. 2- 87183). |
| 10.1+ | | Employment Agreement between Langer, Inc. and Andrew H. Meyers, dated as of February 13, 2001, incorporated herein by reference to, Exhibit 10.6 of our Annual Report on Form 10-K filed on May 29, 2001 (File No. 000-12991). |
| 10.2†+ | | Employment Agreement between Langer, Inc. and Steven Goldstein, dated as of November 15, 2004. |
| 10.3†+ | | Consulting Agreement between Langer, Inc. and Kanders & Company, Inc., dated November 12, 2004. |
| 10.4+ | | Option Agreement between Langer, Inc. and Kanders & Company, Inc., dated February 13, 2001, incorporated herein by reference to Exhibit (d)(1)(G) to the Schedule TO (File Number 005-36032). |
| 10.5 | | Registration Rights Agreement between Langer, Inc. and Kanders & Company, Inc., dated
February 13, 2001, incorporated herein by reference to Exhibit (d)(1)(I) to the Schedule TO
(File Number 005-36032). |
| 10.6 | | Indemnification Agreement between Langer, Inc. and Kanders & Company, Inc., dated
February 13, 2001, incorporated herein by reference to Exhibit (d)(1)(J) to the Schedule TO
(File Number 005-36032). |
| 10.7+ | | The Company’s 2001 Stock Incentive Plan incorporated herein by reference to Exhibit 10.18 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2001. |
| 10.8 | | Langer Biomechanics Group Retirement Plan, restated as of July 20, 1979 incorporated by reference to our Registration Statement of Form S-1 (File No. 2-87183). |
| 10.9 | | Agreement, dated March 26, 1992, and effective as of March 1, 1992, relating to our 401(k) Tax Deferred Savings Plan incorporated by reference to our Form 10-K for the fiscal year ended February 29, 1992. |
| 10.10 | | Form of Indemnification Agreement for Langer, Inc.’s executive officers and directors,
incorporated by reference to Exhibit 10.23 of our Annual Report on Form 10-K for the fiscal year ended February 28, 2001. |
| 10.11 | | Copy of Lease related to Langer, Inc.’s Deer Park, NY facilities incorporated by reference to Exhibit 10(f) of our Annual Report on Form 10-K for the fiscal year ended February 28, 1993. |
| 10.12†† | | Copy of Amendment to Lease of Langer, Inc.’s Deer Park, NY facility dated February 19, 1999. |
| 10.13 | | Asset Purchase Agreement, dated May 6, 2002, by and among Langer, Inc., GoodFoot
Acquisition Co., Benefoot, Inc., Benefoot Professional Products, Inc., Jason Kraus, and Paul Langer, incorporated herein by reference to Exhibit 2.1 of our Current Report on Form 8-K filed with the Securities and Exchange Commission on May 13, 2002. |
100
TABLE OF CONTENTS
| | |
Exhibit
No. | | Description of Exhibit |
| 10.14 | | Registration Rights Agreement, dated May 6, 2002, among Langer, Inc., Benefoot, Inc.,
Benefoot Professional Products, Inc., and Dr. Sheldon Langer, incorporated herein by reference to Exhibit 10.1 of our Current Report on Form 8-K, filed with the Securities and Exchange
Commission on May 13, 2002. |
| 10.15 | | Promissory Note, dated May 6, 2002, made by Langer, Inc. in favor of Benefoot, Inc.,
incorporated herein by reference to Exhibit 10.2 of our Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 13, 2002. |
| 10.16 | | Promissory Note, dated May 6, 2002, made by Langer, Inc. in favor of Benefoot Professional Products, Inc., incorporated herein by reference to Exhibit 10.3 of our Current Report on
Form 8-K, filed with the Securities and Exchange Commission on May 13, 2002. |
| 10.17 | | Stock Purchase Agreement, dated January 13, 2003, by and among Langer, Inc., Langer Canada Inc., Raynald Henry, Micheline Gadoury, 9117-3419 Quebec Inc., Bi-Op Laboratories Inc., incorporated herein by reference to Exhibit 2.1 of our Current Report on Form 8- K filed with the Securities and Exchange Commission on January 13, 2003. |
| 10.18+ | | Employment Agreement between Langer, Inc. and Joseph Ciavarella dated as of February 16, 2004, incorporated herein by reference to Exhibit 10.33 of our Annual Report on Form 10-K for the year ended December 31, 2003. |
| 10.19+ | | Option Agreement between Langer, Inc. and Joseph P. Ciavarella dated as of March 24, 2004, incorporated herein by reference to Exhibit 10.34 of our Annual Report on Form 10-K for the year ended December 31, 2003. |
| 10.20 | | Stock Purchase Agreement, dated as of September 22, 2004, by and among Langer, Inc.,
LRC North America, Inc., SSL Holdings, Inc., and Silipos, Inc., incorporated herein by reference to Exhibit 2.1 of our Current Report on Form 8-K filed with the Securities and Exchange
Commission on October 6, 2004. |
| 10.21 | | Stock Pledge and Agency Agreement, dated September 30, 2004, by and among Langer, Inc., SSL Holdings, Inc., and Pepper Hamilton LLP., incorporated herein by reference to Exhibit 4.4 of our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 6, 2004. |
| 10.22 | | $7,500,000 Secured Promissory Note due March 31, 2006, incorporated herein by reference to Exhibit 4.5 of our Current Report on Form 8-K filed with the Securities and Exchange
Commission on October 6, 2004. |
| 10.24 | | $3,000,000 Promissory Note due December 31, 2009, incorporated herein by reference to
Exhibit 4.6 of our Current Report on Form 8-K filed with the Securities and Exchange
Commission on October 6, 2004. |
| 10.25 | | Note and Warrant Purchase Agreement, dated September 30, 2004, by and among Langer, Inc., and the investors named therein, incorporated herein by reference to Exhibit 4.1 of our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 6, 2004. |
| 10.26 | | Form of 7% Senior Subordinated Note due September 30, 2007, incorporated herein by reference to Exhibit 4.2 of our Current Report on Form 8-K filed with the Securities and Exchange
Commission on October 6, 2004. |
| 10.27 | | Form of Warrant to purchase shares of the common stock of Langer, Inc., incorporated herein by reference to Exhibit 4.3 of our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 6, 2004. |
| 10.28†+ | | Employment Agreement between Langer, Inc. and W. Gray Hudkins, dated as of November 15, 2004. |
| 10.29†+ | | Amendments dated as of November 12, 2004, October 28, 2004, September 31, 2004, May 28, 2004, March 30, 2004, January 30, 2004 and December 1, 2003, to Employment Agreement dated as of February 13, 2001, between us and Andrew H. Meyers. |
| 10.30†+ | | Stock Option Agreement between Langer, Inc. and W. Gray Hudkins, dated November 12, 2004. |
101
TABLE OF CONTENTS
| | |
Exhibit
No. | | Description of Exhibit |
| 10.31†+ | | Stock Option Agreement between Langer, Inc. and Steven Goldstein, dated November 12, 2004. |
| 10.32†+ | | Restricted Stock Agreement between Langer, Inc. and W. Gray Hudkins, dated November 12, 2004. |
| 10.33 | | Supply Agreement, dated as of September 20, 1999, by and between Silipos, Inc., and
Poly-Gel, L.L.C. incorporated by reference to Exhibit 10.1 to our Quarterly Report on
Form 10-Q for the nine months ended September 30, 2004. |
| 10.34 | | Form of 4% Convertible Subordinated Note due September 31, 2006, incorporated by reference to Exhibit 99.3 of our Current Report on Form 8-K Filed with the Securities and Exchange Commission on November 13, 2001. |
| 10.35† | | Letter Agreement dated October 31, 2001, between Langer Partners, LLC and Oracle
Management. |
| 10.36† | | Stock Option Agreement between Langer, Inc. and Kanders & Company, Inc. dated
November 12, 2004. |
| 10.37 | | Patent License Agreement, including amendment no. 1 thereto, between Applied Elastomerics, Inc. and SSL Americas, Inc., dated effective November 30, 2001, incorporated herein by
reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, filed with the Commission on 3/30/05, Exhibit 10.41. |
| 10.38 | | Assignment and Assumption Agreement, dated as of September 30, 2004, by and between
SSL Americas, Inc. and Silipos, Inc., incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, filed with the Commission on 3/30/05, Exhibit 10.42. |
| 10.39 | | License Agreement, dated as of January 1, 1997, by and between Silipos, Inc. and Gerald P. Zook, incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, filed with the Commission on 3/30/05, Exhibit 10.43. |
| 10.40 | | Copy of Lease between 366 Madison Inc. and Silipos, Inc., dated April, 1995;
Lease Modification and Extension Agreement, dated November 1, 1995; and Second Lease Modification and Extension Agreement, dated December 16, 1997, incorporated herein by
reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, filed with the Commission on 3/30/05, Exhibit 10.44. |
| 10.41 | | Copy of Sublease between Calamar Enterprises, Inc. and Silipos, Inc., dated May 21, 1998;
First Amendment to Sublease between Calamar Enterprises, Inc. and Silipos, Inc., dated July 15, 1998; and Second Amendment to Sublease between Calamar Enterprises, Inc. and Silipos, Inc., dated March 1, 1999, incorporated herein by reference to the Company’s Annual Report on
Form 10-K for the year ended December 31, 2004, filed with the Commission on 3/30/05, Exhibit 10.45. |
| 10.42 | | Lease dated December 19, 2005, between the Company (as tenant) and 41 Madison, L.P., of office space at 41 Madison Avenue, New York, N.Y., incorporated herein by reference to the Exhibit 10.1 of the Company’s Current Report on Form 8-K filed December 22, 2005. |
| 10.43 | | Form of Amendment to Stock Option Agreement, incorporated herein by reference to the
Exhibit 10.1 of the Company’s Current Report on Form 8-K filed December 27, 2005. |
| 10.45 | | Form of Amendment to Restricted Stock Award Agreement, incorporated herein by reference to the Exhibit 10.2 of the Company’s Current Report on Form 8-K filed December 27, 2005. |
| 10.46+ | | Employment Agreement dated as of September 18, 2006, between the Company and Sara
Cormack, incorporated herein by reference to the Exhibit 10.2 of the Company’s Current Report on Form 8-K filed September 18, 2006. |
| 10.47 | | Form of Note Purchase Agreement dated as of December 7, 2006, among the Company and the purchasers of the Company’s 5% Convertible Notes Due December 7, 2011, including letter amendment dated as of December 7, 2006, without exhibits, incorporated herein by reference to the Exhibit 10.1 of the Company’s Current Report on Form 8-K filed December 14, 2006. |
102
TABLE OF CONTENTS
| | |
Exhibit
No. | | Description of Exhibit |
| 10.48 | | Form of the Company’s 5% Convertible Note Due December 7, 2011, incorporated herein by reference to the Exhibit 10.2 of the Company’s Current Report on Form 8-K filed December 14, 2006. |
| 10.49 | | Registration Rights Agreement dated as of January 8, 2007, by and between Langer, Inc., and Regal Medical Supply, LLC, incorporated herein by reference to the Exhibit 10.1 of the
Company’s Current Report on Form 8-K filed January 12, 2007. |
| 10.50 | | Asset Purchase Agreement dated as December 15, 2006, by and among Langer, Inc.,
Regal Acquisition Co., Regal Medical Supply, LLC, John Eric Shero, William Joseph Warning, John P Kenney, Richard Alan Nace, Linda Ann Lee, Carl David Ray, and Roy Kelley,
incorporated herein by reference to the Exhibit 10.2 of the Company’s Current Report on
Form 8-K filed January 12, 2007. |
| 10.51 | | Registration Rights Agreement dated as of January 23, 2007, by and between the Company,
Peter A. Asch, Richard D. Asch, A. Lawrence Litke, and Joseph M. Candido, incorporated herein by reference to the Exhibit 10.1 of the Company’s Current Report on Form 8-K filed January 29, 2007. |
| 10.52+ | | Employment Agreement dated January 23, 2007, between Twincraft, Inc. and Peter A. Asch, incorporated herein by reference to the Exhibit 10.2 of the Company’s Current Report on
Form 8-K filed January 29, 2007. |
| 10.53+ | | Employment Agreement dated January 23, 2007, between Twincraft, Inc. and A. Lawrence Litke, incorporated herein by reference to the Exhibit 10.3 of the Company’s Current Report on
Form 8-K filed January 29, 2007. |
| 10.54+ | | Employment Agreement dated January 23, 2007, between Twincraft, Inc. and Richard. Asch, incorporated herein by reference to the Exhibit 10.4 of the Company’s Current Report on
Form 8-K filed January 29, 2007. |
| 10.55+ | | Consulting Agreement dated January 23, 2007, between Twincraft, Inc. and Fifth Element LLC, incorporated herein by reference to the Exhibit 10.5 of the Company’s Current Report on
Form 8-K filed January 29, 2007. |
| 10.56 | | Lease Agreement dated January 23, 2007, between Twincraft, Inc. and Asch Partnership,
incorporated herein by reference to the Exhibit 10.6 of the Company’s Current Report on
Form 8-K filed January 29, 2007. |
| 10.57 | | Lease dated October 1, 2003 and as amended January 23, 2006, between Twincraft, Inc. and Asch Enterprises, LLC, incorporated herein by reference to the Exhibit 10.7 of the Company’s Current Report on Form 8-K filed January 29, 2007. |
| 10.58 | | Stock Purchase Agreement dated as of November 14, 2006, by and among Langer, Inc.,
Peter A. Asch, Richard D. Asch, A. Lawrence Litke, and Joseph M. Candido, incorporated herein by reference to the Exhibit 10.8 of the Company’s Current Report on Form 8-K filed January 29, 2007. |
| 10.59 | | Employment Agreement dated as of January 16, 2006, between the Company and Kathryn P. Kehoe, incorporated herein by reference to Exhibit 10.59 to our Annual Report on Form 10-K for the year ended December 31, 2006, filed on April 2, 2007. |
| 10.60 | | Loan and Security Agreement dated as of May 11, 2007, between Wachovia Bank, National Association, and Langer, Inc., Silipos, Inc., Regal Medical, Inc., and Twincraft, Inc., incorporated herein by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed May 15, 2007. |
| 10.61+ | | Employment Agreement dated as of July 26, 2007, between the Company and Kathleen P. Bloch, incorporated herein by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed July 27, 2007. |
103
TABLE OF CONTENTS
| | |
Exhibit
No. | | Description of Exhibit |
| 10.62+ | | Employment Agreement dated as of October 1, 2007, between the Company and
W. Gray Hudkins, incorporated herein by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed October 12, 2007. |
| 10.63 | | Amendment dated June 21, 2007, to Loan and Security Agreement dated as of May 11, 2007, between Wachovia Bank, National Association, and Langer, Inc., Silipos, Inc., Regal Medical, Inc., and Twincraft, Inc. |
| 10.64 | | Amendment No. 2 dated as of October 1, 2007, to Loan and Security Agreement dated as of May 11, 2007, between Wachovia Bank, N.A., and Langer, Inc., Silipos, Inc., Regal Medical, Inc., and Twincraft, Inc. |
| 10.65 | | Form of Indemnification Agreement between the Company and each director. |
| 21.1 | | Subsidiaries of the Registrant. |
| 23.1 | | Consent of BDO Seidman, LLP. |
| 31.1 | | Rule 13a-14(a)/15d-14(a) Certification by Principal Executive Officer. |
| 31.2 | | Rule 13a-14(a)/15d-14(a) Certification by Principal Financial Officer. |
| 32.1 | | Section 1350 Certification by Principal Executive Officer. |
| 32.2 | | Section 1350 Certification by Principal Financial Officer. |
| † | Incorporated herein by reference to our Registration Statement on Form S-1 (File No. 333-120718) filed with the Securities and Exchange Commission on November 23, 2004. |
| †† | Incorporated herein by reference to Amendment No. 2 of our Registration Statement on Form S-1 (File No. 333-120718), filed with the Securities and Exchange Commission on February 11, 2005. |
| + | This exhibit represents a management contract or compensation plan. |
104
TABLE OF CONTENTS
SIGNATURES
Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange Act of l934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LANGER, INC.
| Date: March 31, 2008 | By: /s/ W. Gray Hudkins
W. Gray Hudkins
President and Chief Executive Officer
(Principal Executive Officer) |
| Date: March 31, 2008 | By: /s/ Kathleen P. Bloch
Kathleen P. Bloch
Vice President and Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of l934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Date: March 31, 2008 | By: /s/ Warren B. Kanders
Warren B. Kanders
Director |
| Date: March 31, 2008 | By: /s/ Peter A. Asch
Peter A. Asch
Director |
| Date: March 31, 2008 | By: /s/ Stephen M. Brecher
Stephen M. Brecher
Director |
| Date: March 31, 2008 | By: /s/ Burtt R. Ehrlich
Burtt R. Ehrlich
Director |
| Date: March 31, 2008 | By: /s/ Stuart P. Greenspon
Stuart P. Greenspon
Director |
| Date: March 31, 2008 | By: /s/ W. Gray Hudkins
W. Gray Hudkins
Director |
105
TABLE OF CONTENTS
EXHIBIT LIST
| | |
Exhibit
No. | | Description of Exhibit |
| 10.63 | | Amendment dated June 21, 2007, to Loan and Security Agreement dated as of May 11, 2007, between Wachovia Bank, National Association, and Langer, Inc., Silipos, Inc., Regal Medical, Inc., and Twincraft, Inc. |
| 10.64 | | Amendment No. 2 dated October 1, 2007, to Loan and Security Agreement dated as of May 11, 2007, between Wachovia Bank, N.A., and Langer, Inc., Silipos, Inc., Regal Medical Inc., and
Twincraft, Inc. |
| 10.65 | | Form of Indemnification Agreement between the Company and each director. |
| 21.1 | | Subsidiaries |
| 23.1 | | Consent of Independent Registered Public Accounting Firm |
| 31.1 | | Certification of Principal Executive Officer |
| 31.2 | | Certification of Principal Financial Officer |
| 32.1 | | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2 | | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
