SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
--------------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File No. 0-12991
-------
LANGER, INC.
------------
(Exact name of Registrant as specified in its charter)
DELAWARE 11-2239561
- --------------------------------------- --------------------------------
(State or other jurisdiction (I.R.S. employer iden-
of incorporation or tification number)
organization)
450 COMMACK ROAD, DEER PARK, NEW YORK 11729-4510
------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (631) 667-1200
--------------
* * * * * * * * * * *
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- -------
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
YES NO X
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, Par Value $.02 - 4,447,451 shares as of November 6, 2003.
1
INDEX
LANGER, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets 3
Unaudited Consolidated Statements of Operations 4
Unaudited Consolidated Statement of Stockholders' Equity 5
Unaudited Consolidated Statements of Cash Flows 6
Notes to Unaudited Consolidated Financial Statements 7-16
Item 2. Management's Discussion and Analysis of Financial Condition 17-19
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LANGER, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 DECEMBER 31, 2002
---------------------- -----------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 5,669,923 $ 9,411,710
Accounts receivable, net of allowance for doubtful
accounts of $172,987 and $124,935, respectively 3,565,477 2,937,340
Inventories, net 2,521,302 2,353,153
Prepaid expenses and other 634,902 627,154
---------------------- -----------------------
Total current assets 12,391,604 15,329,357
Property and equipment, net 2,330,896 943,893
Identifiable intangible assets, net 4,023,432 3,313,413
Goodwill 4,020,938 3,186,386
Other assets 916,817 1,037,105
---------------------- -----------------------
Total assets $ 23,683,687 $ 23,810,154
====================== =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 800,000 $ 1,000,000
Accounts payable 1,121,801 1,235,598
Other current liabilities 2,129,286 1,864,344
Unearned revenue 665,006 660,866
---------------------- -----------------------
Total current liabilities 4,716,093 4,760,808
Long-term debt 14,589,000 15,389,000
Unearned revenue 166,346 162,455
Accrued pension expense 209,539 209,539
Other liabilities 544,141 176,138
---------------------- -----------------------
Total liabilities 20,225,119 20,697,940
---------------------- -----------------------
Stockholders' equity
Preferred stock, no par value; authorized 250,000 shares;
no shares issued - -
Common stock, $.02 par value; authorized 50,000,000 and
10,000,000 shares; issued 4,444,355 and 4,336,744, respectively 88,887 86,735
Additional paid-in capital 13,192,191 12,825,237
Accumulated deficit (9,335,980) (9,153,669)
Accumulated other comprehensive loss (371,073) (530,632)
---------------------- -----------------------
3,574,025 3,227,671
Treasury stock at cost, 67,100 shares (115,457) (115,457)
---------------------- -----------------------
Total stockholders' equity 3,458,568 3,112,214
---------------------- -----------------------
Total liabilities and stockholders' equity $ 23,683,687 $ 23,810,154
====================== =======================
See accompanying notes to unaudited financial statements.
3
LANGER, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
--------------- --------------- ---------------- -----------------
Net sales $ 6,332,684 $ 5,483,148 $ 18,282,606 $ 13,314,076
Cost of sales 4,113,520 3,517,419 11,981,180 8,523,885
--------------- --------------- ---------------- -----------------
Gross profit 2,219,164 1,965,729 6,301,426 4,790,191
Selling expenses 783,423 870,760 2,333,850 2,190,400
General and administrative expenses 1,206,363 1,035,923 3,564,550 2,891,307
--------------- --------------- ---------------- -----------------
Operating income (loss) 229,378 59,046 403,026 (291,516)
--------------- --------------- ---------------- -----------------
Other income (expense):
Interest income 33,462 58,510 111,235 202,933
Interest expense (157,281) (165,548) (483,274) (471,182)
Other (17,990) (46,443) (86,648) (143,647)
--------------- --------------- ---------------- -----------------
Other income (expense), net (141,809) (153,481) (458,687) (411,896)
--------------- --------------- ---------------- -----------------
Income (loss) before income taxes 87,569 (94,435) (55,661) (703,412)
Provision for income taxes 38,100 7,000 126,650 20,500
--------------- --------------- ---------------- -----------------
Net income (loss) $ 49,469 $ (101,435) $ (182,311) $ (723,912)
=============== =============== ================ =================
Weighted average number of common shares used in
computation of net income (loss) per share:
Basic 4,377,255 4,269,644 4,372,525 4,237,645
=============== =============== ================ =================
Diluted 4,625,874 4,269,644 4,372,525 4,237,645
=============== =============== ================ =================
Net income (loss) per common share:
Basic $ .01 $ (.02) $ (.04) $ (.17)
=============== =============== ================ =================
Diluted $ .01 $ (.02) $ (.04) $ (.17)
=============== =============== ================ =================
See accompanying notes to unaudited consolidated financial statements.
4
LANGER, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
Accumulated Other
Comprehensive Loss
------------------
Common Stock Additional Foreign Minimum Total
------------ Treasury Paid-in Accumulated Currency Pension Stockholders'
Shares Amount Stock Capital Deficit Translation Liability Equity
------------------------------------------------------------------------------------------------------------
Balance at
January 1, 2003 4,336,744 $ 86,735 $ (115,457) $ 12,825,237 $ (9,153,669) $ (26,217) $ (504,415) $ 3,112,214
Net loss for nine
months ended
September 30, 2003 (182,311) (182,311)
Foreign currency
adjustment 159,559 159,559
Issuance of stock
to purchase business 107,611 2,152 366,954 369,106
------------------------------------------------------------------------------------------------------------
Balance at
September 30, 2003 4,444,355 $ 88,887 $ (115,457) $ 13,192,191 $ (9,335,980) $ 133,342 $ (504,415) $ 3,458,568
============================================================================================================
See accompanying notes to unaudited consolidated financial statements.
5
LANGER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR NINE MONTHS ENDED SEPTEMBER 30,
2003 2002
-------------------- ------------------
Cash Flows From Operating Activities:
Net loss $ (182,311) $ (723,912)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 575,929 531,262
Compensation expense for options acceleration -- 20,057
Provision for doubtful accounts receivable 63,565 45,556
Deferred income taxes 100,000 (118)
Issuance of common stock and options for consulting services -- 5,242
Changes in operating assets and liabilities:
Accounts receivable (337,138) (430,833)
Inventories (2,943) (376,150)
Prepaid expenses and other assets 186,461 (165,785)
Accounts payable and other current liabilities (79,179) 340,448
Unearned revenue and other liabilities (199,205) (1,871)
-------------------- ------------------
Net cash provided by (used in) operating activities 125,179 (756,104)
-------------------- ------------------
Cash Flows From Investing Activities:
Purchase of business, net of cash acquired (1,747,913) (4,528,914)
Purchase of fixed assets (1,119,053) (333,504)
-------------------- ------------------
Net cash used in investing activities (2,866,966) (4,862,418)
-------------------- ------------------
Cash Flows From Financing Activities:
Proceeds from the exercise of stock options -- 6,563
Payment of promissory notes (1,000,000) --
-------------------- ------------------
Net cash (used in) provided by financing activities (1,000,000) 6,563
-------------------- ------------------
Net decrease in cash and cash equivalents (3,741,787) (5,611,959)
Cash and cash equivalents at beginning of period 9,411,710 15,796,922
-------------------- ------------------
Cash and cash equivalents at end of period $ 5,669,923 $ 10,184,963
==================== ==================
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest $ 337,384 $ 471,182
==================== ==================
Income taxes $ -- $ --
==================== ==================
See accompanying notes to unaudited consolidated financial statements.
6
LANGER, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
------------------------------------------------------------
(A) BASIS OF PRESENTATION
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. These unaudited consolidated financial statements should be read
in conjunction with the financial statements and footnotes included in the
Company's annual report on Form 10-K for the fiscal year ended December 31,
2002.
Operating results for the three and nine months ended September 30, 2003 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2003.
(B) CHANGE IN STATE OF INCORPORATION
--------------------------------
At the Company's June 27, 2002 annual meeting, the stockholders approved the
changing of the State of Incorporation of the Company from New York to
Delaware. The new Certificate of Incorporation authorizes the issuance of
50,000,000 shares of common stock, par value $.02 per share, and the
issuance of 250,000 shares of blank check preferred stock. No shares of
preferred stock are issued or outstanding.
(C) 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 and convertible subordinated
notes) outstanding during the period, except where the effect would be
antidilutive, computed in accordance with the treasury stock method.
(D) PROVISION FOR INCOME TAXES
--------------------------
For the three and nine months ended September 30, 2003 and 2002, there were
no current provisions for income taxes on domestic operations. The provision
for income taxes on foreign operations was $2,850 and $26,650 for the three
and nine months ended September 30, 2003, respectively. The provision for
income taxes on foreign operations for the three and nine months ended
September 30, 2002 was estimated at $7,000 and $20,500, respectively.
Prior to the adoption of Statement of Financial Accounting Standards
("SFAS") No. 142, the Company would not have needed a valuation allowance
for the portion of the net operating losses equal to the amount of
tax-deductible goodwill and trade names amortization expected to occur
during the carryforward period of the net operating losses based on the
timing of the reversal of these taxable temporary differences. As a result
of the adoption of SFAS No. 142, the reversal will not occur during the
carryforward period of the net operating losses. Therefore, the Company
recorded a deferred income tax expense of approximately $35,250 and $100,000
during the three and nine months ended September 30, 2003, respectively,
which would not have been required prior to the adoption of SFAS No. 142.
7
(E) RECLASSIFICATIONS
-----------------
Certain amounts have been reclassified in the prior period consolidated
financial statements to present them on a basis consistent with the current
year.
(F) SEASONALITY
-----------
A substantial portion of the Company's revenue is derived from the sale of
custom orthotics. North American custom orthotic revenue has historically
been significantly higher in the warmer months of the year, while custom
orthotic revenue of the Company's United Kingdom subsidiary has historically
not evidenced any seasonality.
(G) STOCK OPTIONS
-------------
At September 30, 2003, the Company has two stock-based employee compensation
plans. The Company accounts for those plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in net income (loss), as all options granted under those
plans had an exercise price equal to market value of the underlying common
stock on the date of grant. The following table illustrates the effect on
net income (loss) and income (loss) per share if the company had applied the
fair value recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
Three months ended Nine months ended
September 30, September 30,
--------------------------------- ---------------------------------
2003 2002 2003 2002
-------------- -------------- --------------- --------------
Net income (loss) - as reported $ 49,469 $ (101,435) $ (182,311) $ (723,912)
Deduct: Total stock-based employee
compensation expense determined
under fair value basis method for
all rewards, net of tax (31,478) (31,478) (112,838) (47,217)
-------------- -------------- --------------- --------------
Pro forma net income (loss) $ 17,991 $ (132,913) $ (295,149) $ (771,129)
============== ============== =============== ==============
Net income (loss) per share:
Basic- as reported $ .01 $ (.02) $ (.04) $ (.17)
============== ============== =============== ==============
Basic- pro forma $ .00 $ (.03) $ (.07) $ (.18)
============== ============== =============== ==============
Diluted- as reported $ .01 $ (.02) $ (.04) $ (.17)
============== ============== =============== ==============
Diluted- pro forma $ .00 $ (.03) $ (.07) $ (.18)
============== ============== =============== ==============
8
(H) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
-----------------------------------------
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities"
("FIN 46"), which requires variable interest entities (commonly referred to
as SPEs) to be consolidated by the primary beneficiary of the entity if
certain criteria are met. FIN 46 applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities
in which an enterprise obtains an interest after that date. The
Interpretation applies in the first fiscal year or interim period beginning
after June 15, 2003, to variable interest entities in which an enterprise
holds a variable interest that it acquired before February 1, 2003. The
Company does not have any variable interest entities. Therefore, the
adoption of FIN 46 did not have a material effect on the Company's
consolidated financial statements.
In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS No. 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 149 is
generally effective for derivative instruments, including derivative
instruments embedded in certain contracts, entered into or modified after
June 30, 2003 and for hedging relationships designated after June 30, 2003.
The adoption of SFAS No. 149 did not have a material effect on the Company's
consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No.
150 establishes standards for how to classify and measure certain financial
instruments with characteristics of both liabilities and equity. The
statement is effective for financial instruments entered into or modified
after May 31, 2003. The adoption of SFAS No. 150 did not have a material
impact on the Company's consolidated financial statements.
In 2002, the Company adopted the provision of Emerging Issues Task Force
("ETIF") Consensus No. 00-10 "Accounting for Shipping and Handling Fees and
Costs," which addresses the income statement classification for shipping and
handling fees. In accordance with EITF 00-10, net sales and cost of sales
have been increased by $252,710 and $610,033 for the three and nine months
ended September 30, 2002, respectively. Net sales and cost of sales have
been restated from previously issued reports. The change in classification
had no impact on the Company's consolidated results of operations, cash
flows or financial position.
NOTE 2 - ACQUISITIONS
------------
A) BI-OP, INC.
Effective January 1, 2003, the Company, through a wholly-owned subsidiary,
acquired all of the issued and outstanding stock of Bi-Op Laboratories, Inc.
("Bi-Op") pursuant to the terms of a Stock Purchase Agreement dated as of
January 13, 2003 (the "Stock Purchase Agreement").
In connection with the acquisition, the Company paid consideration in Canadian
dollars, determined through arms-length negotiation of the parties. When
converted to U.S. dollars the total purchase price approximated $1.6 million of
which $1.2 million was paid in cash and $.4 million was paid by issuing 107,611
shares of the Company's common stock. $250,000 CDN of the cash portion of the
consideration was deposited in escrow until final determination of the closing
date balance sheet of Bi-Op as set forth in the Stock Purchase Agreement. The
purchase price will be reduced dollar for dollar to the extent that the net
assets of Bi-Op as of December 31, 2002 were less than $1,000,000 CDN.
Conversely, the purchase price will be increased dollar for dollar to the extent
that the net assets of Bi-Op as of the closing date exceeded $1,000,000 CDN. We
funded the entire cash portion of the purchase price through working capital.
In connection with the Stock Purchase Agreement, the Company entered into an
employment agreement with Raynald Henry, Bi-Op's principal owner, having a term
of three years and providing for an annual base salary of $75,000 CDN and
benefits, including certain severance payments.
9
The following table sets forth the components of the estimated purchase price:
Cash consideration $ 1,201,574
Common stock issued 369,106
Transaction costs 513,149
---------------
Total purchase price $ 2,083,829
===============
The following table provides the preliminary allocation of the estimated
purchase price:
Assets: Cash and cash equivalents $ 194,531
Accounts receivables 292,372
Inventories 111,153
Prepaid expenses and other 143,919
Property and equipment 437,478
Goodwill 606,832
Identified intangible assets 900,000
Other assets 41,803
---------------
2,728,088
---------------
Liabilities: Accounts payable 68,801
Accrued liabilities 118,633
Deferred income tax 270,000
Long term debt and other liabilities 186,825
---------------
644,259
---------------
Total purchase price $ 2,083,829
===============
B) BENEFOOT, INC. AND BENEFOOT PROFESSIONAL PRODUCTS, INC.
-------------------------------------------------------
On May 6, 2002, the Company, through a wholly-owned subsidiary, acquired
substantially all of the assets and liabilities of each of Benefoot, Inc. and
Benefoot Professional Products, Inc. (jointly, "Benefoot"), pursuant to the
terms of an asset purchase agreement (the "Asset Purchase Agreement"). The
assets acquired include machinery and equipment, other fixed assets, inventory,
receivables, contract rights, and intangible assets.
In connection with the acquisition, the Company paid consideration of $6.1
million, of which $3.8 million was paid in cash, $1.8 million was paid through
the issuance of promissory notes (the "Promissory Notes") and $500,000 was paid
by issuing 61,805 shares of common stock (the "Shares"), together with certain
registration rights. $1,000,000 of the Promissory Notes were paid on May 6, 2003
and the balances are due on May 6, 2004. The Promissory Notes bear interest at
4%. The Company also assumed certain liabilities of Benefoot, including
approximately $300,000 of long-term indebtedness. The Company also agreed to pay
Benefoot up to an additional $1,000,000 upon satisfaction of certain performance
targets on or prior to May 6, 2004. As of September 30, 2003, the Company has
paid $301,201 based upon the satisfaction of performance targets for 2002. The
Company funded the entire cash portion of the purchase price through working
capital generated principally through the prior sale of the Company's 4%
convertible subordinated notes due August 31, 2006.
In connection with the Asset Purchase Agreement, the Company entered into an
employment agreement with each of two former shareholders of Benefoot, each
having a term of two years and providing for an annual base salary of $150,000
and benefits, including certain severance arrangements. One of these
shareholders subsequently terminated his employment agreement with the Company.
As a result, the Company accrued $94,000 for termination costs. The Company also
entered into an agreement with Sheldon Langer as a medical consultant providing
for an annual fee of $45,000 and a one-time grant of 3,090 shares of common
stock, together with certain registration rights. The allocation of the purchase
price among the assets acquired and liabilities assumed is based on the
Company's valuation of the fair value of the assets and liabilities of Benefoot.
10
The following table sets forth the components of the estimated purchase price:
Cash consideration $ 3,800,351
Benefoot long term debt paid at closing 307,211
--------------
Total cash paid at closing $ 4,107,562
Promissory notes issued 1,800,000
Common stock issued 529,512
Transaction costs 680,228
Contingent consideration 301,201
--------------
Total purchase price $ 7,418,503
==============
The following table provides the allocation of the purchase price:
Assets: Cash and cash equivalents $ 225,953
Accounts receivables 806,370
Inventories 660,559
Prepaid expenses and other 76,973
Property and equipment 155,110
Goodwill 3,414,106
Identified intangible assets 3,430,000
Other assets 6,162
--------------
8,775,233
--------------
Liabilities: Accounts payable 647,873
Accrued liabilities 389,400
Unearned revenue 210,355
Long term debt & other liabilities 109,102
--------------
1,356,730
--------------
Total purchase price $ 7,418,503
==============
In accordance with the provisions of SFAS No. 142, the Company will not amortize
goodwill and intangible assets with indefinite lives (trade names with an
estimated fair value of $1,600,000). The Company did not recognize any
impairment losses on goodwill during the three and nine months ended September
30, 2003 and 2002.
Identifiable intangible assets at September 30, 2003 consist of:
Accumulated
Assets Amortization Period Gross Carrying Value Amortization Net Carrying Value
- ----------------------------------- ------------------- -------------------- ------------ ------------------
Trade names indefinite $ 1,600,000 $ - $ 1,600,000
Non-competition agreements 7-8 years 630,000 83,625 546,375
License agreements and 11 years 1,600,000 204,193 1,395,807
related technology
Repeat customer base 20 years 500,000 18,750 481,250
-------------------- ------------ ------------------
$ 4,330,000 $ 306,568 $ 4,023,432
==================== ============ ==================
11
Aggregate amortization expense for the three and nine months ended September 30,
2003 was $63,327 and $189,981, respectively and was $48,034 and $72,010 for the
three and nine months ended September 30, 2002, respectively.
At September 30, 2003, estimated future amortization expense is approximately
$63,000 for the remaining three months of 2003 and approximately $253,000 per
annum for 2004 to 2008.
Unaudited pro forma results of operations for the three and nine months ended
September 30, 2002, as if the Company acquired Bi-Op and Benefoot at the
beginning of that year, include estimates and assumptions which management
believes are reasonable. However, pro forma results do not include the
realization of cost savings from operating efficiencies, synergies or other
effects resulting from the acquisition, and are not necessarily indicative of
the actual consolidated results of operations had the acquisition occurred on
the date assumed, nor are they necessarily indicative of future consolidated
results of operations.
Unaudited pro forma results were:
Three months ended Nine months ended
September 30, 2002 September 30, 2002
------------------ ------------------
Net sales $ 5,927,596 $ 17,147,879
Net loss $ (48,240) $ (553,253)
Basic and diluted loss
per share $ (.01) $ (.13)
NOTE 3 - INVENTORIES, NET
----------------
Inventories consist of:
September 30, 2003 December 31, 2002
------------------- ------------------
(Unaudited)
Raw materials $ 1,592,513 $ 1,224,136
Work-in-process 180,030 180,135
Finished goods 1,050,668 1,169,287
------------------- ------------------
2,823,211 2,573,558
Less: allowance for excess and obsolescence 301,909 220,405
------------------- ------------------
$ 2,521,302 $ 2,353,153
=================== ==================
12
NOTE 4 - LONG TERM DEBT
--------------
On October 31, 2001, the Company completed the sale of $14,589,000 principal
amount of its 4% convertible subordinated notes due August 31, 2006 (the
"Notes"), in a private placement. The Notes are convertible into shares of the
Company's common stock at a conversion price of $6.00 per share (equal to the
market value of the Company's stock on October 31, 2001), subject to
anti-dilution protections, and are subordinated to existing or future senior
indebtedness of the Company. Among other provisions, the Company may, at its
option, call, prepay, redeem, repurchase, convert or otherwise acquire
(collectively, "Call") the Notes, in whole or in part, (1) after August 31, 2003
or (2) at any time if the closing price of the Company's common stock equals or
exceeds $9.00 per share for at least ten consecutive trading days. If the
Company elects to Call any of the Notes, the holders of the Notes may elect to
convert the Notes for the Company's common stock. Interest is payable
semi-annually on the last day of June and December. Interest expense on these
Notes for both the three and nine month periods ended September 30, 2003 and
2002 was $145,890 and $437,670, respectively.
The Company received net proceeds of $13,668,067 from the offering of the Notes.
The cost of raising these proceeds was $920,933, which is being amortized over
the life of the Notes. The amortization of these costs for the three and nine
months ended September 30, 2003 was $48,443 and $145,329, respectively and for
the three and nine months ended September 30, 2002 was $48,443 and $144,662,
respectively.
The Company issued $1,800,000 in Promissory Notes in connection with the
acquisition of Benefoot. $1,000,000 of the notes were paid on May 6, 2003 and
the balances are due on May 6, 2004. Interest expense for the three and nine
months ended September 30, 2003 was $8,000 and $37,932, respectively, and
$18,000 and $29,200 for the three and nine months ended September 30, 2002,
respectively.
NOTE 5 - SEGMENT INFORMATION
-------------------
In the quarter and nine months ended September 30, 2003, the Company operated in
two segments (custom orthotics and distributed products) principally in the
design, development, manufacture and sale of foot and gait-related products.
Intersegment net sales are recorded at cost. Segment information for the three
and nine months ended September 30, 2003 is summarized as follows:
CUSTOM DISTRIBUTED
THREE MONTHS ENDED SEPTEMBER 30, 2003 ORTHOTICS PRODUCTS TOTAL
- ---------------------------------------------------- ------------- -------------- -------------
Net sales $ 4,924,434 $ 1,408,250 $ 6,332,684
Gross profit 1,777,956 441,208 2,219,164
Operating profit (loss) (45,263) 274,641 229,378
Depreciation and amortization 195,824 4,495 200,319
Capital expenditures 388,953 - 388,953
CUSTOM DISTRIBUTED
NINE MONTHS ENDED SEPTEMBER 30, 2003 ORTHOTICS PRODUCTS TOTAL
- ---------------------------------------------------- ------------- -------------- -------------
Net sales $ 14,075,019 $ 4,207,587 $ 18,282,606
Gross profit 5,134,980 1,166,446 6,301,426
Operating profit (loss) (248,084) 651,110 403,026
Depreciation and amortization 563,254 12,675 575,929
Capital expenditures 1,103,479 15,574 1,119,053
13
The Company operated in one segment (custom orthotics) in the three and nine
months ended September 30, 2002 since the distributed products segment
established in the year ended December 31, 2002 had not been considered
significant. Net sales for custom orthotics were $4,174,875 and $10,647,101,
respectively and net sales for distributed products were $1,308,273 and
$2,666,975, respectively, for the three and nine months ended September 30,
2002. Information regarding gross profit, operating profit (loss), depreciation
and amortization and capital expenditures for the three and nine months ended
September 30, 2002 is not available.
Geographical segment information is summarized as follows:
NORTH UNITED CONSOLIDATED
THREE MONTHS ENDED SEPTEMBER 30, 2003 AMERICA KINGDOM TOTAL
- ------------------------------------------------------- -------------- ----------- -------------
Net sales from external customers $ 5,739,657 $ 593,027 $ 6,332,684
Intersegment net sales 56,012 - 56,012
Gross profit 1,994,984 224,180 2,219,164
Operating profit 144,677 84,701 229,378
Depreciation and amortization 186,614 13,705 200,319
Capital expenditures 386,061 2,892 388,953
NORTH UNITED CONSOLIDATED
THREE MONTHS ENDED SEPTEMBER 30, 2002 AMERICA KINGDOM TOTAL
- ------------------------------------------------------- -------------- ----------- -------------
Net sales from external customers $ 4,916,468 $ 566,680 $ 5,483,148
Intersegment net sales 66,180 - 66,180
Gross profit 1,718,038 247,691 1,965,729
Operating profit (loss) (48,212) 107,258 59,046
Depreciation and amortization 190,974 12,778 203,752
Capital expenditures 112,720 15,610 128,330
NORTH UNITED CONSOLIDATED
NINE MONTHS ENDED SEPTEMBER 30, 2003 AMERICA KINGDOM TOTAL
- ------------------------------------------------------- -------------- ----------- -------------
Net sales from external customers $ 16,382,112 $ 1,900,494 $ 18,282,606
Intersegment net sales 213,064 - 213,064
Gross profit 5,554,212 747,214 6,301,426
Operating profit 69,850 333,176 403,026
Depreciation and amortization 534,862 41,067 575,929
Capital expenditures 1,104,326 14,727 1,119,053
NORTH UNITED CONSOLIDATED
NINE MONTHS ENDED SEPTEMBER 30, 2002 AMERICA KINGDOM TOTAL
- ------------------------------------------------------- -------------- ---------- -------------
Net sales from external customers $ 11,661,376 $ 1,652,700 $ 13,314,076
Intersegment net sales 231,581 - 231,581
Gross profit 4,082,729 707,462 4,790,191
Operating profit (loss) (614,430) 322,914 (291,516)
Depreciation and amortization 494,078 37,184 531,262
Capital expenditures 308,708 24,796 333,504
14
NOTE 6 - COMPREHENSIVE INCOME (LOSS)
---------------------------
The Company's comprehensive income (loss) were as follows:
Three months ended September 30, Nine months ended September 30,
-------------------------------- --------------------------------
2003 2002 2003 2002
---------- ----------- ---------- -----------
Net income (loss) $ 49,469 $ (101,435) $ (182,311) $ (723,912)
Other comprehensive income (loss) net of tax:
Change in equity resulting from
translation of financial statements
into U.S. dollars 22,035 5,758 159,559 17,850
---------- ----------- ---------- -----------
Comprehensive income (loss) $ 71,504 $ (95,677) $ (22,752) $ (706,062)
========== =========== ========== ===========
NOTE 7 - INCOME (LOSS) PER SHARE
The following table provides a reconciliation between basic and diluted earnings
per share:
Three months ended September 30,
-----------------------------------------------------------------------------------------
2003 2002
------------------------------------------- ------------------------------------------
Per Per
Basic EPS Income(loss) Shares Share Income(loss) Shares Share
----------------------------- ------------- ----------- ---------- ------------ ---------- -----------
Income (loss) available to
common stockholders $ 49,469 4,377,255 $ .01 $ (101,435) 4,269,644 $ (.02)
Effect of Dilutive Securities
-----------------------------
Stock options -- 248,619 -- -- -- --
------------- ----------- ---------- ------------ ---------- -----------
Diluted EPS
-----------------------------
Income (loss) available to
common stockholders plus
assumed exercise of stock
options $ 49,469 4,625,874 $ .01 $ (101,435) 4,269,644 $ (.02)
============= =========== ========== ============ ========== ===========
Nine months ended September 30,
-----------------------------------------------------------------------------------------
2003 2002
------------------------------------------- ------------------------------------------
Per Per
Basic EPS Income(loss) Shares Share Income(loss) Shares Share
----------------------------- ------------- ----------- ---------- ------------ ---------- -----------
Loss available to common
stockholders $ (182,311) 4,372,525 $ (.04) $ (723,912) 4,237,645 $ (.17)
Effect of Dilutive Securities
-----------------------------
Stock options -- -- -- -- -- --
------------- ----------- ---------- ------------ ---------- -----------
Diluted EPS
-----------------------------
Loss available to common
stockholders plus assumed
exercise of stock options $ (182,311) 4,372,525 $ (.04) $ (723,912) 4,237,645 $ (.17)
============= =========== ========== ============ ========== ===========
15
The diluted income (loss) per share computations for the nine months ended
September 30, 2003 and for the three and nine months ended September 30, 2002
exclude incremental shares of approximately 251,805 and 275,607 and 447,202,
respectively, related to employee stock options. These shares are excluded due
to their antidilutive effect as a result of the Company's loss during the
period. In addition, the Company's Debentures were not included in the
computation of diluted income (loss) per share for the nine and three months
ended months ended September 30, 2003 and 2002 because the effect of including
them would be antidilutive.
NOTE 8 - RELATED PARTY TRANSACTIONS
--------------------------
Langer has engaged a company which is owned by the brother-in-law of a senior
executive of Langer, to provide certain technology related products and
services. Costs incurred for products and services provided by this company were
approximately $27,000 and $110,000 during the three and nine months ended
September 30, 2003, respectively, and approximately $10,500 and $41,500, during
the three and nine months ended September 30, 2002, respectively.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ------------------------------------------
The Company disclosed its critical accounting policies and estimates in the
December 31, 2002 Form 10-K. There have been no changes to those critical
accounting policies and estimates during the nine months ended September 30,
2003.
RESULTS OF OPERATIONS
- ---------------------
Net sales for the nine months ended September 30, 2003 were $18,282,606 or 37.3%
above net sales of $13,314,076 for the nine months ended September 30, 2002. Net
sales for the three months ended September 30, 2003 were $6,332,684 or 15.5%
above net sales of $5,483,148 for the three months ended September 30, 2002. Net
sales of custom orthotics were $14,075,019 and $4,924,434 while net sales of
distributed products were $4,207,587 and $1,408,250 for the nine and three
months ended September 30, 2003, respectively. Net sales for the nine and three
months ended September 30, 2003 attributable to acquisitions were $3,356,624 and
$427,770, respectively.
Net sales of custom orthotics for the nine months ended September 30, 2003 were
$14,075,019 as compared to $10,647,101 for the nine months ended September 30,
2002, an increase of $3,427,918 or 32.2%. Net sales of custom orthotics for the
three months ended September 30, 2003 were $4,924,434 as compared to $4,174,875
for the three months ended September 30, 2002, an increase of $749,559 or 18.0%.
Net sales of custom orthotics related to acquisitions were $2,196,478 and
$425,202 for the nine and three months ended September 30, 2003, respectively.
Net sales of custom orthotics, exclusive of net sales related to acquisitions,
increased $1,231,440 or approximately 11.6% and $324,357 or approximately 7.8%
for the nine and three months ended September 30, 2003, respectively, as a
result of increases in the Company's Canadian and United Kingdom business and
increases in the Company's Langer Ankle Stabilizing Technology (LAST) business.
Net sales of distributed products for the nine months ended September 30, 2003
were $4,207,587 as compared to $2,666,975 for the nine months ended September
30, 2002, an increase of $1,540,612 or 57.8%. Net sales of distributed products
for the three months ended September 30, 2003 were $1,408,250 as compared to
$1,308,273 for the three months ended September 30, 2002, an increase of $99,977
or 7.6%. Net sales of distributed products attributable to acquisitions were
$1,160,146 and $2,568 for the nine and three months ended September 30, 2003,
respectively. Net sales of distributed products exclusive of net sales related
to acquisitions increased $380,466 or approximately 14.3% and $97,409 or
approximately 7.4% for the nine and three months ended September 30, 2003
respectively, as a result of increases in unit sales of most of the distributed
product line.
Gross profit as a percentage of net sales for the nine months ended September
30, 2003 was 34.5%, as compared to 36.0% for the nine months ended September 30,
2002. Gross profit as a percentage of net sales for the three months ended
September 30, 2003 was 35.0% as compared to 35.9% for the three months ended
September 30, 2002. Gross profit as a percentage of net sales declined as a
result of higher material costs, offset in part as a percentage of sales by
lower labor costs and lower manufacturing overhead.
17
Selling expenses for the nine months ended September 30, 2003 were $2,333,850
or 12.8% of net sales as compared to $2,190,400 or 16.5% of net sales for the
nine months ended September 30, 2002. Selling expenses for the three months
ended September 30, 2003 were $783,423 or 12.4% of net sales as compared to
$870,760 or 15.9% of net sales for the three months ended September 30, 2002.
Selling expenses as a percentage of sales for the quarter improved primarily as
a result of the increased revenues from acquisitions which spread the fixed
selling costs incurred over a larger sales base.
General and administrative expenses for the nine months ended September 30, 2003
were $3,564,550 or 19.5% of net sales for the nine months ended September 30,
2003 as compared to $2,891,307 or 21.7% of net sales for the nine months ended
September 30, 2002. General and administrative expenses for the three months
ended September 30, 2003 were $1,206,363 or 19.0% as compared to $1,035,923 or
18.9% of net sales for the three months ended September 30, 2002. General and
administrative expense as a percentage of net sales improved primarily as a
result of the increased revenues from acquisitions, which spread the fixed costs
over a larger sales base. General and administrative costs increased in dollars
as a result of increased costs incurred as we continue to strengthen our
infrastructure.
Other income (expense), net, was $(458,687) for the nine months ended September
30, 2003, as compared to $(411,896) for the nine months ended September 30,
2002. Other income (expense), net, was $(141,809) for the three months ended
September 30, 2003, as compared to $(153,481) for the three months ended
September 30, 2002. The increase in other income (expense) is primarily
attributable to reduced interest income as cash on hand was expended to complete
acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working capital as of September 30, 2003 was $7,675,511, as compared to
$10,568,549 as of December 31, 2002. Cash balances at September 30, 2003 were
$5,669,923, a decrease of $3,741,787 from the $9,411,710 at December 31, 2002.
The reduction in cash is primarily attributable to the cash used to complete the
acquisition of Bi-Op, the repayment of $1,000,000 of Promissory Notes in
connection with the Benefoot acquisition, the payment of contingent
consideration in connection with the Benefoot acquisition as well as cash used
to pay year end bonuses, annual insurance premiums and the purchase and
implementation of an enterprise wide computer software system.
In connection with the acquisition of Benefoot, the Company issued $1,800,000
of 4% Promissory Notes. $1,000,000 of the Promissory Notes were paid on
May 6, 2003 and the balances are due on May 6, 2004. Interest expense on these
notes for the three and nine months ended September 30, 2003 was $8,000 and
$37,932, respectively.
The Company's United Kingdom subsidiary maintains a line of credit with a local
bank in the amount of 50,000 British pounds, which is guaranteed by the Company
pursuant to a standby Letter of Credit. If this credit facility, which has been
renewed through February 2004, would not be available, the Company believes it
can readily find a suitable replacement, or the Company could supply the
necessary capital.
Repurchases of the Company's common stock may be made from time to time in the
open market at prevailing prices or in privately negotiated transactions,
subject to available resources. The Company may also finance acquisitions of
other companies or product lines in the future from existing cash balances, from
borrowings from institutional lenders, and/or the public or private offerings of
debt or equity securities. Management believes that its existing cash balances
will be adequate to meet the Company's cash needs for the next twelve months.
18
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
- -----------------------------------------
In January 2003, the Financial Accounting Standard Board ("FASB") issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"),
which requires variable interest entities (commonly referred to as SPEs) to be
consolidated by the primary beneficiary of the entity if certain criteria are
met. FIN 46 applies immediately to variable interest entities created after
January 31, 2003, and to variable interest entities in which an enterprise
obtains an interest after that date. The Interpretation applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The Company does not have any variable
interest entities. Therefore, the adoption of FIN 46 did not have a material
effect on the Company's consolidated financial statements.
In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS No. 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149 is generally
effective for derivative instruments, including derivative instruments embedded
in certain contracts, entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The adoption of SFAS No.
149 did not have a material effect on the Company's consolidated financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how to classify and measure certain financial
instruments with characteristics of both liabilities and equity. The statement
is effective for financial instruments entered into or modified after May 31,
2003. The adoption of SFAS No. 150 did not have a material impact on the
Company's consolidated financial statements.
In 2002, the Company adopted the provision of Emerging Issues Task Force
("ETIF") Consensus No. 00-10 "Accounting for Shipping and Handling Fees and
Costs," which addresses the income statement classification for shipping and
handling fees. In accordance with EITF 00-10, net sales and cost of sales have
been increased by $252,710 and $610,033 for the three and nine months ended
September 30, 2002, respectively. Net sales and cost of sales have been restated
from previously issued reports. The change in classification had no impact on
the Company's consolidated results of operations, cash flows or financial
position.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
- ----------------------------------------------
Information contained or incorporated by reference in the quarterly report on
Form 10-Q, in other SEC filings by the Company, in press releases, and in
presentations by the Company or its management, contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 which can be identified by the use of forward-looking terminology such
as "believes," "expects," "plans," "intends," "estimates," "projects," "could,"
"may," "will," "should," or "anticipates" or the negative thereof, other
variations thereon or comparable terminology, or by discussions of strategy. No
assurance can be given that future results covered by the forward-looking
statements will be achieved. Such forward-looking statements include, but are
not limited to, those relating to the Company's financial and operating
prospects, future opportunities, the Company's acquisition strategy and ability
to integrate acquired companies and assets, outlook of customers, and reception
of new products, technologies, and pricing. In addition, such forward looking
statements involve known and unknown risks, uncertainties, and other factors
including those described from time to time in the Company's Registration
Statement on Form S-3, most recent Form 10-K and 10-Q's and other Company
filings with the Securities and Exchange Commission which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results expressed or implied by such forward-looking statements.
Also, the Company's business could be materially adversely affected and the
trading price of the Company's common stock could decline if any such risks and
uncertainties develop into actual events. The Company undertakes no obligation
to publicly update or revise forward-looking statements to reflect events or
circumstances after the date of this Form 10-Q or to reflect the occurrence of
unanticipated events.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
In general, business enterprises can be exposed to market risks, including
fluctuation in commodity and raw materials prices, foreign currency exchange
rates, and interest rates that can adversely affect the cost and results of
operating, investing, and financing. In seeking to minimize the risks and/or
costs associated with such activities, the Company manages exposure to changes
in commodities and raw material prices, interest rates and foreign currency
exchange rates through its regular operating and financing activities. The
Company does not utilize financial instruments for trading or other speculative
purposes, nor does the Company utilize leveraged financial instruments or other
derivatives. The following discussion about our market rate risk involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements.
The Company's exposure to market rate risk for changes in interest rates relates
primarily to the Company's short-term monetary investments. There is a market
rate risk for changes in interest rates earned on short-term money market
instruments. There is inherent rollover risk in the short-term money market
instruments as they mature and are renewed at current market rates. The extent
of this risk is not quantifiable or predictable because of the variability of
future interest rates and business financing requirements. However, there is no
risk of loss of principal in the short-term money market instruments, only a
risk related to a potential reduction in future interest income. Derivative
instruments are not presently used to adjust the Company's interest rate risk
profile.
The majority of the Company's business is denominated in United States dollars.
There are costs associated with the Company's operations in foreign countries,
primarily the United Kingdom and Canada, that require payments in the local
currency and payments received from customers for goods sold in these countries
are typically in the local currency. The Company partially manages its foreign
currency risk related to those payments by maintaining operating accounts in
these foreign countries and by having customers pay the Company in those same
currencies.
20
ITEM 4. CONTROLS AND PROCEDURES
-----------------------
(a) Based on their evaluation of the Company's disclosure controls and
procedures as of a date within 90 days of the filing of this report, the
Company's principal executive officer and chief financial officer have concluded
that such controls and procedures are effective.
(b) There were no significant changes in the Company's internal controls or in
other factors that could significantly affect such controls subsequent to the
date of their evaluation.
21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1* - Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2* - Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1* - Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on August 11, 2003, to
report information under Item 9, Regulation FD Disclosure, regarding the
announcement of the Company's results for the quarter ended June 30,
2003.
* Filed herewith.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of l934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LANGER, INC.
Date: November 13, 2003 By: /s/ Andrew H. Meyers
-----------------------------
Andrew H. Meyers
President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Anthony J. Puglisi
-----------------------------
Anthony J. Puglisi
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
23