-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NjQxNCVADV78kfIWTDj1tu+a5purJB30xN8h3EwxB13dl2XspRu/3zlcuv2zStBh HKV0TiWnjFt4oORuBadHWA== 0000950136-03-000740.txt : 20030331 0000950136-03-000740.hdr.sgml : 20030331 20030331155939 ACCESSION NUMBER: 0000950136-03-000740 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LANGER INC CENTRAL INDEX KEY: 0000725460 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 112239561 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-12991 FILM NUMBER: 03630635 BUSINESS ADDRESS: STREET 1: 450 COMMACK ROAD CITY: DEER PARK STATE: NY ZIP: 11729 BUSINESS PHONE: 6136671200 MAIL ADDRESS: STREET 1: 450 COMMACK ROAD CITY: DEER PARK STATE: NY ZIP: 11729 10-K 1 file001.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K -------------------------------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 31, 2002 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 -------------- Securities registered pursuant to Section 12(b) of the Act: NONE ---- Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.02 PER SHARE -------------------------------------- Title of Class * * * * * * * * * * * 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 [ ] 1 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act): Yes [ ] No [X] As of March 25, 2003, the aggregate market value of voting stock held by non-affiliates of the registrant was $8,654,462, as computed by reference to the closing price of such common stock ($3.10) multiplied by the number of shares of voting stock outstanding on March 25, 2003 held by non-affiliates (2,791,762 shares). Exclusion of shares from the calculation of aggregate market value does not signify that a holder of any such shares is an "affiliate" of the Company. Indicate the number of shares outstanding of each of the registrant's classes of common stock as of March 25, 2003. CLASS OF COMMON STOCK OUTSTANDING AT MARCH 25, 2003 --------------------- ----------------------------- Common Stock, par value 4,444,355 shares $.02 per share DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- The information required by Part III of this report is incorporated herein by reference to the Company's proxy statement for the 2003 annual meeting of the registrant's stockholders or amendment hereto which will be filed not later than 120 days after the end of the fiscal year covered by this report. 2 LANGER, INC. FORM 10-K TABLE OF CONTENTS PAGE PART I ITEM 1. BUSINESS............................................................4 ITEM 2. PROPERTIES.........................................................11 ITEM 3. LEGAL PROCEEDINGS..................................................11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................................................12 ITEM 6. SELECTED FINANCIAL DATA............................................14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................15 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................................22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................23 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND DISCLOSURE..........................................47 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY....................47 ITEM 11. EXECUTIVE COMPENSATION.............................................47 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....................................................47 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................47 PART IV ITEM 14. CONTROLS AND PROCEDURES............................................48 ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.................................48 SIGNATURES...................................................................52 3 PART I ITEM 1. BUSINESS - ---------------- Langer, Inc. (the "Company or "we") is a leading orthotics products company specializing in designing, manufacturing, distributing and marketing high quality foot and gait-related biomechanical products. The Company's diversified range of products is comprised of (i) custom orthotic devices ordered by licensed medical practitioners and (ii) distribution of pre-fabricated orthopedic rehabilitation and recovery devices and related devices sold to a patient by licensed medical practitioners. The Company's custom orthotic devices are contoured molds, purchased by a licensed medical practitioner for a patient, which are worn in the shoe to correct biomechanical foot and postural disorders in patients which often result in pain or discomfort, or otherwise impede an individual's ability to maintain a normal gait. The Company also provides custom orthotics which support or control the ankle region (ankle foot orthosis). The Company's distributed products are purchased by licensed medical practitioners for resale to patients and consist of prefabricated products for the foot and lower extremities and a selection of footware. These products, which supplement our custom orthotic devices, consist of shoe inserts, ankle braces, compression hose and socks, and therapeutic shoes and sneakers. In addition, we distribute PPT(R) to manufacturers who incorporate PPT(R) into their products. PPT(R) is a soft tissue cushioning material made from medical grade urethane produced in laminated sheet form, molded insoles, and components for orthotic devices. INDUSTRY BACKGROUND - ------------------- The Company competes in the portion of the orthopedic rehabilitation and recovery market segment which manufactures, markets, sells, and distributes orthopedic products and retail orthopedic products. The Company estimates that global orthopedic rehabilitation and recovery market revenues exceed $8 billion annually. The Company believes the estimated revenues of the orthopedic products and retail orthopedic products markets in which we compete exceed $2 billion annually. The Company believes the growth of these markets is being driven by strong demographic and other trends, including: o an aging population who historically have required a higher than average percentage of orthotic and orthopedic products and services than the general population; o a growth rate of persons 65 and older which is nearly triple that of the balance of the population; o an increased participation in exercise, sports, and other physical activities by all age groups which has directly led to increased orthopedic related strains and injuries requiring orthotic and related products; o a growing awareness of the importance of prevention and rehabilitation of orthopedic injuries; and o an industry-wide consolidation leading to greater marketing and sales resources. Podiatrists in the United States are the largest single source of custom foot orthotic products. In the United States, Medicare and most health care organizations that provide coverage for foot orthotics require a podiatrist or other licensed doctor to write a prescription and indicate the diagnosis and need for the custom orthotic. Due to the nature of this reimbursement environment, little effort is directed at marketing to the end user of the product. Instead, custom orthotics manufacturers market and distribute their foot orthotic laboratory services to licensed medical practitioners, including podiatrists, chiropractors, orthopedic surgeons, orthotists/prosthetists, physical therapists, and athletic trainers. 4 While the market for custom orthotics outside the United States is similar in size to the United States market, prefabricated orthotic devices are generally preferred in Europe due to reimbursement policies in several European countries. The Company currently markets our products in Canada and the United Kingdom, markets where favorable national reimbursement and payment structures prevail. The Company also markets our products in thirty other countries. GROWTH STRATEGY - --------------- The Company expects the demand for orthotic products will continue to grow. We plan to execute our growth strategy primarily through internal expansion of our existing businesses and through strategic acquisitions of businesses offering complementary services, markets, and customer bases. The following elements define our growth strategy: Pursue Strategic Acquisitions. The foot orthotic products industry is highly fragmented and characterized primarily by smaller, geographically restricted manufacturers. As a result, we selectively pursue acquisitions that complement and expand our product offerings and provide access to new geographic markets and new medical practitioner relationships. Expand Distribution Network and Product Offerings. The Company believes that a broader product line will encourage additional licensed medical practitioners to order our custom orthotics products and will enhance our brand appeal with licensed medical practitioners and patients. We will seek to continue to expand our range of products through the acquisition of niche product manufacturers and by investing in the development of new and enhanced products which complement our existing offerings. Broaden Product Offerings to Licensed Medical Practitioner and Customer Base. The Company will seek to increase penetration of our existing licensed medical practitioner and customer base with sales of additional products. We also intend to increase customer satisfaction and strengthen our customer relationships through expanded product offerings. Research and Development. The Company will continue to conduct research and development to conceive and evaluate new or alternative orthotics products and services. We believe that increased investment in research and development will provide bases for new products and improved practice management programs such as new techniques to measure and cast our custom orthotics products. ACQUISITIONS - ------------ General With continued advances in technology, the Company believes that the larger orthotics manufacturers that employ advanced technologies will lower per unit manufacturing costs, improve quality, accelerate turnaround time and will continue to grow their overall share of the market. Concurrently, many of the smaller orthotics manufacturers will find it increasingly difficult to remain competitive and may not be able to access the capital required to purchase and implement the required technological advances. Moreover, the Company believes that many licensed medical practitioners in the industry would prefer to deal with a consolidated entity that can provide a broad spectrum of branded orthotics products. We believe that the orthopedic rehabilitation and recovery market and foot orthotic device markets will consolidate as the smaller manufacturers are acquired by the larger, and faster growing, manufacturers. 5 The Company expects to pursue a strategy of growth through acquisitions by focusing on acquisitions of companies which have a core customer base similar to ours and manufacture or sell products which are synergistic with our product offerings. Orthotic manufacturing companies we may acquire are intended to become hubs for further penetration into their industry niche or geographic sales area. Generally, we will seek to streamline operations in acquired companies to improve turnaround time and reduce expenses, resulting in economies of scale, reduced general and administrative expenses and facilities consolidation. We will seek to consolidate operations with our acquired product manufacturing companies. This is intended to allow us to leverage efficiencies and operational best practices. The Company uses several criteria to evaluate prospective acquisitions, including whether the business to be acquired: o broadens the scope of the services or products we offer or the geographic areas we serve; o offers attractive margins; o provides earnings accretion; o offers the opportunity to enhance profitability by improving the efficiency of our operations; o offers consistent management with our existing businesses; o complements our portfolio of existing businesses by increasing our ability to manage our customers needs; and o has a strong management team that is interested in continuing in their roles with us. Recent Acquisitions On May 6, 2002, the Company acquired the net assets of Benefoot, Inc., and Benefoot Professional Products, Inc. Benefoot, Inc., designs, manufactures and distributes foot and gait-related biomechanical products, including custom-made prescription orthotic devices, custom-made Birkenstock(R) sandals and off-the-shelf orthotic devices to healthcare professionals. Benefoot Professional Products markets and distributes footwear products to podiatrists' patients. The purchase price was $6.1 million of which $3.8 million was paid in cash, $1.8 million was paid through the issuance of promissory notes and $.5 million was paid by issuing to the sellers 61,805 shares of the Company's common stock. The Company also assumed certain liabilities including approximately $.3 million of long term indebtedness. The Company also agreed to pay Benefoot up to an additional $1.0 million upon satisfaction of certain performance targets on or prior to May 6, 2004. On January 13, 2003, the Company acquired all the capital stock of Bi-Op Laboratories, Inc. which is engaged in the development, manufacture and sale of footwear products and foot orthotic devices, for $2.45 million CDN, of which $1.85 million CDN was paid in cash, and $.6 million CDN was paid by issuing to the sellers 107,611 shares of the Company's common stock. $.25 million CDN of the cash portion of the consideration was deposited in escrow until final determination of the closing date balance sheet of Bi-Op. PRODUCTS - -------- The Company manufactures, markets, sells, and distributes two principal categories of products: (i) custom orthotic devices ordered by licensed medical practitioners and (ii) pre-fabricated orthopedic rehabilitation and recovery devices and related devices sold to a patient by licensed medical practitioners. These products are designed to provide relief from symptoms and complications arising from (i) ankle, knee, pelvis, hip, and spinal pain caused by biomechanical misalignment, (ii) diabetes, stroke, nerve damage, cerebral palsy, multiple sclerosis and similar ailments, and (iii) post-operative recovery. 6 Custom Orthotic Devices Orthotic foot devices, or foot orthoses, are contoured molds made from plastic, graphite, or composite materials, depending upon the requirements of the patient, which are placed in the patient's shoe to correct or mitigate abnormalities in gait and relieve symptoms associated with foot or postural alignment. Orthotic devices help provide more normal function by maintaining the angular anatomical relationships between the patient's forefoot, rearfoot, leg and horizontal walking surface. Accordingly, muscle is enhanced and the efficiency and smoothness of weight stress transmission through the feet and legs is improved. The result is a reduction of abnormal motion without total restriction of normal motion and an increase in foot and leg stability. Foot problems may be alleviated or eliminated, as well as leg and back fatigue caused by improper muscle use. Traditionally, when a licensed medical practitioner orders a custom foot orthotic for the Company to manufacture, the licensed medical practitioner will take a plaster cast or an imprint of the patient's foot by having the patient stand on a piece of foam slightly larger than the patient's foot. The plaster or foam cast is sent to our laboratory where it is used to make a plaster cast of the patient's foot, from which we manufacture and customize the orthotic insert. We have developed a new proprietary technology which will permit a podiatrist to take measurements of a patient's foot at several specified locations and transmit the measurements to us electronically. From these measurements, we will be able to make the model of the patient's foot, from which we will manufacture and customize the orthotic insert. We anticipate this new proprietary technology, along with CAD/CAM technology and laser scanning, will enable us to reduce the time required and costs associated with the production of our custom foot orthotics. The Company also offers a full line of custom Ankle-Foot Orthoses (AFO's) devices, which are used to support, align, prevent, correct, substitute or enhance function, and decrease pain or discomfort of the foot and ankle. These products are often used for the more difficult and challenging foot and ankle involvements. The Company's custom orthotic product offerings include: o Sporthotics(R), designed for the specific needs of runners and other sport-specific athletes, including football, basketball and tennis players; o Healthflex(R), designed for patients that participate in aerobic exercise, high-power walking, or step classes; o Design-Line(R), a functional orthotic designed to fit into dress shoes, such as loafers and high fashion shoes, which cannot accommodate a full-size orthotic; and; o Slimthotics(R), a device for use in women's high-heeled shoes, narrow flats, ballet slippers, tap shoes, and women's ballroom dancing shoes. Distributed Products The Company distributes prefabricated orthotic devices and related orthotic supplies and materials. This line of prefabricated foot orthotic products is Langer XP(R), which provides patients a low cost alternative to a custom orthotic. The products provide additional cushioning in a patient's footwear. We provide these products to a podiatrist or other licensed medical practitioner based upon several criteria, including shoe size, and the licensed medical practitioner sells the product to a patient based upon the patient's needs. In 2000, the Company launched our prefabricated foot orthoses, called Contours(TM), which require no special casting by the licensed medical practitioner. This off-the-shelf product line, sold to licensed medical practitioners through the Company and its distributors, has been expanded to include dress (low profile), sport and standard models and provides a lower cost option when pricing is an issue for the patient. 7 The Company also provides orthopedic devices that are used in the treatment of ailments of the lower leg. These include products which support or control the ankle region (ankle foot orthoses). In addition, we market products that address the diabetic market, including insoles, and a selection of footwear (shoes, socks, and other related products) which offers protection for patients with diabetes. We believe these ancillary product lines will help us achieve our goal of being able to provide a variety of orthopedic needs for our core podiatry customer. In many of our orthotic products, we use PPT(R), a medical grade soft tissue cushioning material with a high density, open-celled urethane foam structure. The essential function of PPT(R), which independent tests show to have improved properties over competitive materials, is to provide protection against forces of pressure, shock and shear. We believe that PPT's(R) characteristics make it a superior product in its field. PPT(R) has a superior "memory" that enables it to return to its original shape faster and more accurately than other materials used for similar purposes. PPT(R) is also odorless and non-sensitizing to the skin and has a porosity that helps the skin to remain dry, cool and comfortable. These factors are especially important in sports medicine applications. We have developed and sell a variety of products fabricated from PPT(R), including molded insoles, components for orthotic devices, laminated sheets, and diabetic products. Some manufacturing operations associated with these products are performed by outside vendors. Besides podiatric use, we believe PPT(R) is suitable for other orthopedic and medical-related uses such as liners for braces and prosthetics, as shock absorbers and generally in devices used in sports and physical therapy. We expect to expand our products to include shock absorbing PPTGel(TM) products to be used as shoe inserts and brace liners. CUSTOMERS - --------- The majority of the Company's sales are within the United States to podiatrists, orthopedic surgeons, orthotists, physical therapists, and other health care professionals. However, we also sell our products in the United Kingdom, Canada, and 30 other countries. We intend to expand our product offerings into new territories. The Company markets our custom orthotic products primarily to podiatrists who order the custom orthotic devices for their patients. However, we will seek to broaden our referral channels by increased penetration of orthopedic surgeons, physical therapists, orthotists, chiropractors, athletic trainers, and other podiatrists currently working in the United States. We also anticipate that we will seek to increase our referral channels outside the United States. The Company sells our distributed products primarily to wholesale distributors and licensed medical practitioners for sale to patients. For both our custom orthotics and our distributed products, licensed medical practitioners usually include the cost of the orthotic products in the fee charged to the patient. MARKETING AND DISTRIBUTION - -------------------------- The Company believes that we have built strong name recognition and an excellent reputation in the orthotics industry. We are seeking to become a more comprehensive source of orthopedic supplies for health care professionals who treat the lower extremities. The Company utilizes a network of regional sales representatives to target multi-practitioner and individual facilities. In addition, we use trade shows, advertising, direct mail, educational sponsorships, public relations and customer visits to market and distribute our products. We emphasize customer service by maintaining a staff of customer service representatives. The Company provides education and training for licensed medical practitioners who treat biomechanical problems of the lower extremity through seminars and in-service programs. We offer licensed medical practitioners a comprehensive program in biomechanics, gait analysis and the cost-effectiveness of orthotic therapy. 8 The Company promotes awareness of orthotics through marketing and operational initiatives. We maintain a volume incentive program and offer practice building assistance to help licensed medical practitioners expand the orthotic components portion of their practices. We believe these medical practitioner assistance programs strengthen our relationships with our existing customer base. MANUFACTURING AND RAW MATERIALS - ------------------------------- The Company manufactures our custom orthotics and warehouses our distributed products internally at our production facilities located in Deer Park, New York; Brea, California; Montreal, Canada; and Stoke-on-Trent, England. We obtain most of our fabrication materials other than PPT(R) from a variety of sources. We believe that we maintain good relationships with these suppliers. However, if necessary, we could readily obtain alternate suppliers at a competitive price. We are aware of multiple suppliers for these materials and would not anticipate a significant impact if we were to lose any suppliers, and we have not experienced any significant shortages other than occasional backorders. To date, we have found that the components, supplies and raw materials that are necessary for the manufacture, production and delivery of our products have been available in the quantities that are required. However, the failure of our suppliers to deliver components, supplies, and raw materials in sufficient quantities and in a timely manner, and the inability to find replacement suppliers, could adversely affect our business and results of operations. COMPETITION - ----------- The market for orthotic products is highly competitive and we compete with a variety of companies ranging from small businesses to large corporations. The Company believes the foot orthotics market is highly fragmented and regional (and in many instances local) in nature. Although a few licensed medical practitioners produce foot orthotics in-house, the custom orthotic market is serviced primarily by third-party laboratories, such as the Company. Included among these laboratories that sell nationally in the United States are Bergmann Orthotic Laboratory, Foot Levelers, Inc., Footmaxx Holdings Inc., KLM Orthotic Laboratories, Allied OSI Labs, ProLab Orthotics, and PAL Health Systems. We estimate that, including Langer, these firms comprise approximately 35% of the $200 million custom foot orthotics market in the United States. The market for soft tissue products such as PPT(R) is highly competitive and includes the following brand name products: Spenco, Sorbothane, and Poron. In both the custom and distribution products markets, the principal competitive factors are efficiencies of scale, quality of engineering and design, brand recognition, reputation in the industry, production capability and capacity, and price. In the custom orthotic market, ability to meet delivery schedules is another principal competitive factor. We believe that we provide superior design and production expertise. MEDICAL CONSULTANTS - ------------------- The Company has relationships with three medical specialists who provide professional consultative services to the Company in their areas of specialization. The consultants test and evaluate the Company's products, act as speakers for the Company at symposiums and professional meetings, generally participate in the development of the Company's products and services and disseminate information about them. The Company also relies on practitioners in various parts of the country to act as field evaluators of the Company's products. 9 EMPLOYEES - --------- As of January 1, 2003, the Company had 220 employees, of which 117 were located in Deer Park, New York, 37 were located in Brea, California, 31 were located in Montreal, Canada and 35 were located in Stoke-on-Trent, England. None of our employees are represented by unions or covered by any collective bargaining agreements. The Company has not experienced any work stoppages or employee-related slowdowns and believes that our relationship with our employees is satisfactory. PATENTS AND TRADEMARKS - ---------------------- The Company holds a variety of patents, trademarks, and copyrights in several countries, including the United States. We have exclusive licenses to three types of orthotic devices which are patented in the United States and several foreign countries. We believe that none of our active patents, trademarks, or licenses are essential to the successful operation of our business as a whole. However, one or more of the patents, trademarks, or licenses may be material in relation to individual products or product lines. Loss of patent protection could have an adverse effect on our business by permitting competitors to utilize techniques developed by us. GOVERNMENT REGULATION - --------------------- The jurisdictions in which we seek to market our products may regulate and supervise our products and operations. In some circumstances, we may be required to obtain regulatory approvals and otherwise comply with regulations regarding safety, quality and efficacy standards. These regulations vary from country to country, and the regulatory review can be lengthy, expensive and uncertain. In the United States, we are subject to federal and state governmental regulation and supervision, including anti-kickback statutes, self-referral laws, and fee-splitting laws. SEASONALITY - ----------- Revenue derived from the Company's sales of orthotic devices, a substantial portion of the Company's operations, has in North America historically been significantly higher in the warmer months of the year, while sales of orthotic devices by the Company's United Kingdom subsidiary has historically not evidenced any seasonality. 10 ITEM 2. PROPERTIES - ------------------ We have manufacturing, warehouse, and office space at the following locations:
ANNUAL OWNED/ APPROXIMATE LOCATION RENT LEASED SIZE - --------------------------- ------------ ----------- ------------------- Deer Park, NY $ 310,000 Leased(1) 44,500 sq. ft. Deer Park, NY $ 24,000 Leased(2) 3,500 sq. ft. Brea, CA $ 99,000 Leased(3) 9,300 sq. ft. Stoke-on-Trent, England $ 42,000(4) Leased 15,000 sq. ft. Montreal, Canada - Owned 7,800 sq. ft
(1) Principal executive office location. Expires at the end of July, 2005. We have the option to extend the lease for an additional four (4) years. (2) Expires on July 31, 2004. (3) Expires on December 31, 2004. (4) Based upon an exchange rate of $1.6044 dollars per British pound, expires on June 30, 2004 The Company believes our manufacturing, warehouse and office facilities are suitable and adequate and afford sufficient capacity for our current and reasonably foreseeable future needs. The Company believes it has adequate insurance coverage for our properties and their contents. ITEM 3. LEGAL PROCEEDINGS - ------------------------- None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ None. 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ----------------------------------------------------------------------------- PRICE RANGE OF COMMON STOCK - --------------------------- The Company's common stock, par value $.02 per share ("Common Stock"), is traded on the over-the-counter market with quotations reported on the National Association of Securities Dealers Automated Quotation System (NASDAQ) under the symbol GAIT. The following table sets forth the high and low closing bid prices for the Common Stock for the year ended December 31, 2002 and the ten months ended December 31, 2001. The NASDAQ quotations represent prices between dealers, do not include retail markups, markdowns or commissions, and may not represent actual transactions. YEAR ENDED DECEMBER 31, 2002 HIGH LOW ------------------------------------------- ---------- ---------- Three months ended March 31, 2002 $ 8.30 $ 7.11 Three months ended June 30, 2002 $ 8.25 $ 5.90 Three months ended September 30, 2002 $ 6.43 $ 4.50 Three months ended December 31, 2002 $ 5.25 $ 3.51 TEN MONTHS ENDED DECEMBER 31, 2001 HIGH LOW ------------------------------------------- ---------- ---------- One month ended March 31, 2001 $ 5.22 $ 4.00 Three months ended June 30, 2001 $ 5.25 $ 3.10 Three months ended September 30, 2001 $ 5.80 $ 3.66 Three months ended December 31, 2001 $11.85 $ 4.80 The closing price on March 25, 2003 was $3.10. On March 25, 2003, there were approximately 249 holders of record of the Common Stock. However, this figure is exclusive of all owners whose stock is held beneficially or in "street" name. Based on information supplied by various securities dealers, the Company believes that there are in excess of 249 shareholders in total, including holders of record and beneficial owners of shares held in "street" name. DIVIDEND HISTORY AND POLICY - --------------------------- The Company did not pay cash dividends on its Common Stock and anticipates that, for the foreseeable future, it will follow a policy of retaining earnings to finance the expansion and development of its business. In any event, future dividend policy will depend upon the Company's earnings, financial condition, working capital requirements and other factors. EQUITY COMPENSATION PLANS - ------------------------- The following table sets forth certain information regarding our equity plans as at December 31, 2002.
- ---------------------------------------------------------------------------------------------------------------------- (a) (b) (c) - ---------------------------------------------------------------------------------------------------------------------- Number of securities Number of securities remaining available for to be issued upon Weighted average exercise future issuance under equity exercise of price of outstanding compensation plans outstanding options, options, warrants and (excluding securities Plan Category warrants and rights rights reflected in column (a)) - ---------------------------------------------------------------------------------------------------------------------- Equity compensation plans approved by security holders 609,000 $2.92 1,145,213 - ---------------------------------------------------------------------------------------------------------------------- Equity compensation plans not approved by security holders 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Total 609,000 $2.92 1,145,213 - ----------------------------------------------------------------------------------------------------------------------
12 RECENT SALES OF UNREGISTERED SECURITIES - --------------------------------------- Described below is information regarding securities the Company issued in the year ended December 31, 2002 which were not registered under the Securities Act of 1933. On May 6, 2002 the Company completed the acquisition of Benefoot. In connection with the acquisition, the Company issued 64,895 shares of the Company's common stock. On January 13, 2003, the Company completed the acquisition of Bi-Op. In connection with the acquisition, the Company issued 107,611 shares of the Company's common stock. The Company issued 787 shares of the Company's common stock to one of its medical directors as compensation for services. The above sales were private transactions not involving a public offering and were exempt from the registration provisions of the Securities Act pursuant to Section 4(2) thereof. No underwriter was engaged in connection with the foregoing sales of securities. The Company has reason to believe that: (i) all of the foregoing purchasers were familiar with or had access to information concerning the Company's operations and financial condition, (ii) all of those individuals purchasing securities represented that they acquired the shares for investment and not with a view to the distribution thereof, and (iii) the foregoing purchasers are accredited investors within the meaning of Regulation D promulgated under the Securities Act. 13 ITEM 6. SELECTED FINANCIAL DATA - --------------------------------
Ten months Year ended Year ended ended ----------------------------------------- (in thousands, except per share data) Dec. 31, Dec. 31, Feb. 28, Feb. 29, Feb. 28, 2002 2001 2001 2000 1999 ------------- ----------- ----------- ----------- ----------- $ $ $ $ $ Consolidated Statement of Operations Net sales 18,677 10,936 12,072 11,572 10,734 Change in control and restructuring expenses - - (1,008) - - Operating profit (loss) (353) 139 (1,504) (356) 105 Income (loss) before income taxes (998) 73 (1,502) (337) 329 Net income (loss) (1,106) 70 (1,506) (335) 304 Net income (loss) per common share: Basic (.26) .02 (.58) (.13) .12 Diluted (.26) .02 (.58) (.13) .12 Weighted average number of common shares: Basic 4,246 3,860 2,583 2,571 2,584 Diluted 4,246 4,307 2,583 2,571 2,607 Dec. 31, Dec. 31, Feb. 28, Feb. 29, Feb. 28, 2002 2001 2001 2000 1999 ------------- ----------- ----------- ------------ ----------- $ $ $ $ $ Consolidated Balance Sheets: Working capital 10,569 16,655 757 1,715 2,423 Total assets 23,810 20,700 4,554 4,738 5,125 Long-term liabilities (excluding current maturities) 15,937 14,719 126 277 305 Stockholders' equity 3,112 3,866 1,599 2,536 2,934
14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - ------------------------------------------------------------------------------- OF OPERATIONS ------------- The following discussion and analysis should be read in conjunction with the financial statements and notes thereto of the Company which are included in Item 8. CRITICAL ACCOUNTING POLICIES AND ESTIMATES - ------------------------------------------ The Company's accounting policies are more fully described in Note 1 of Notes to Consolidated Financial Statements. 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. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results may differ from these estimates under different assumptions or conditions. Management believes the most significant accounting estimates inherent in the preparation of the Company's consolidated financial statements include estimates associated with its determination of liabilities related to warranty activity and estimates associated with the Company's reserves with respect to collectibility of accounts receivable, allowances for sales returns, inventory valuations, and valuation allowance for deferred tax assets. Various assumptions and other factors underlie the determination of these significant estimates. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, and product mix. The Company constantly re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the estimates described above. The warranty reserve at December 31, 2001 was $40,342. During the year ended December 31, 2002, the Company acquired an additional reserve of $80,000 relating to the Benefoot acquisition and charged $50,342 against the reserve for costs incurred to complete warranty repairs. The warranty reserve at December 31, 2002 was $70,000. The allowance for doubtful accounts at December 31, 2001 was $43,269. During the year ended December 31, 2002 the Company added $88,348 to the allowance based upon increased net sales and it's review of the accounts receivable aging. The Company wrote off $6,682 in uncollectible accounts. The allowance for doubtful accounts at December 31, 2002 was $124,935. The sales returns and allowances at December 31, 2001 was $20,944. During the year ended December 31, 2002 the Company added $7,056 in current expense charges to the allowance based upon the increased net sales and it's review of sales return and allowance trends during the year. The sales returns and allowance at December 31, 2002 was $28,000. The inventory reserve for obsolete inventory at December 31, 2001 was $213,906. During the year ended December 31, 2002 the Company added $14,017 of additional reserves and wrote off $7,518 in obsolete inventory which was disposed of during the year. The Company reviewed its inventory levels and aging and determined that it did not need to provide additions to the reserve. The inventory reserve for obsolete inventory at December 31, 2002 was $220,405. 15 The valuation allowance relating to deferred tax assets was $1,570,761 at December 31, 2001 which represented a full allowance against all deferred tax assets. During the year ended December 31, 2002, the deferred tax asset and related valuation allowance increased by $837,480 to $2,408,241 at December 31, 2002. The Company believes a full valuation allowance is required because it is more likely than not that these deferred tax assets will not be recognized. RESULTS OF OPERATIONS: - ---------------------- The following table presents the results for the year ended December 31, 2002, the comparable unaudited pro forma results for the year ended December 31, 2001 and the comparable results for the year ended February 28, 2001. For comparative purposes the unaudited pro forma results of operations for the twelve months ended December 31, 2001 have been derived from the previously reported results for the ten months ended December 31, 2001 plus the results for the two months ended February 28, 2001, and are unaudited.
Year ended ---------------------------------------------------------- December 31, December 31, February 28, 2002 2001 2001 -------------- ------------- -------------- (unaudited) Net sales $ 18,676,503 $ 12,782,366 $ 12,072,004 Cost of sales 11,962,104 8,503,020 8,292,850 -------------- ------------- -------------- Gross profit 6,714,399 4,279,346 3,779,154 Selling expenses 3,151,205 1,623,259 2,011,390 Research and development expenses 164,872 182,497 252,345 General and administrative expenses 3,751,295 2,768,134 2,010,905 Change in control expenses - 795,667 1,008,081 -------------- ------------- -------------- Income (loss) from operations (352,973) (1,090,211) (1,503,567) -------------- ------------- -------------- Other income (expense): Interest income 214,481 86,614 3,440 Interest expense (636,393) (112,696) (20,062) Other (223,478) (42,367) 18,329 -------------- ------------- -------------- Other income (expense), net (645,390) (68,449) 1,707 -------------- ------------- -------------- Income (loss) before income taxes (998,363) (1,158,660) (1,501,860) Provision for income taxes 107,294 3,118 4,527 -------------- ------------- -------------- Net income (loss) $ (1,105,657) $ (1,161,778) $ (1,506,387) ============== ============= ==============
Net sales for the year ended December 31, 2002 were $18,676,503 as compared to $12,782,366 for the comparable unaudited pro forma year ended December 31, 2001 and $12,072,004 for the year end February 28, 2001. Net sales attributable to the Benefoot acquisition approximated $4,899,000 for the year ended December 31, 2002. Net sales exclusive of net sales attributable to the Benefoot acquisition increased approximately $995,000 primarily as a result of increased net sales of custom orthotic products offset slightly by a decline in distributed products. The increase in net sales for the unaudited pro forma year ended December 31, 2001 as compared to the year ended February 28, 2001 resulted from an increase in orthotic net sales partially offset by a decrease in net sales of distributed products. 16 Net sales of orthotic products were $14,668,572 for the year ended December 31, 2002 as compared to $11,422,835 for the comparable unaudited pro forma year ended December 31, 2001 and $10,335,852 for the year ended February 28, 2001. Net sales of custom orthotic products attributable to the Benefoot acquisition approximated $2,702,000 for the year ended December 31, 2002. Net sales of custom orthotic products exclusive of net sales attributable to the Benefoot acquisition increased approximately $544,000 or 4.8% primarily as a result of increased sales in the Company's base business. The increase in net sales for the unaudited pro forma year ended December 31, 2001 as compared to the year ended February 28, 2001 was principally due to increased unit volume resulting from increased turnaround time and increased results form sales representatives in both the Company's United States and United Kingdom operations. Net sales of distributed products were $4,007,931 for the year ended December 31, 2002 as compared to $1,359,531 for the comparable unaudited pro forma year ended December 31, 2001 and $1,736,152 for the year ended February 28, 2001. Net sales of distributed products attributable to the Benefoot acquisition approximated $2,197,000 for the year ended December 31, 2002. Net sales of distributed products exclusive of net sales attributable to the Benefoot acquisition increased approximately $451,000 as a result of increases in sales of PPT and our distributed products. The decrease in net sales of distributed products for the unaudited pro forma year ended December 31, 2001 as compared to the year ended February 28, 2001 was principally due to lower sales of PPT(R) in the United States operations. Gross profit as a percentage of net sales was 35.9% for the year ended December 31, 2002 as compared to 33.5% for the unaudited pro forma year ended December 31, 2001 and 31.3% for the year ended February 28, 2001. Gross profit for 2002 improved primarily as a result of improvements in efficiencies in the manufacturing process, reductions in overhead costs and increased sales. Gross profit for the pro forma year ended December 31, 2001 improved as compared to the year ended February 28, 2001 primarily as a result of efficiencies in manufacturing costs which resulted in reduced overhead costs. Selling expenses were $3,151,205 or 16.9% of net sales for the year ended December 31, 2002 as compared to $1,623,259 or 12.7% of net sales for the unaudited pro forma year ended December 31, 2001 and $2,011,390 or 16.7% of net sales for the year ended February 28, 2001. Selling expenses in the 2002 year increased over the comparable pro forma 2001 year due to the effect of the Benefoot acquisition, increased salaries and related costs for the investments made in improving our sales and marketing infrastructure, and increased promotional activity. Selling expenses for the 2001 pro forma year decreased slightly due to efficiencies and cost reductions instituted subsequent to the change of control in February 2001. General and administrative expenses were $3,751,295 or 20% of net sales for the year ended December 31, 2002 as compared to $2,768,134 or 21.7% of net sales for the unaudited pro forma year ended December 31, 2001 and $2,010,905 or 16.7% of net sales for the year ended February 28, 2001. General and administrative expenses increased in the year ended December 31, 2002 as compared to the pro forma year ended December 31, 2001 as a result of increased cost of salaries as we strengthened our infrastructure, costs attributable to the Company's incentive plan and costs attributable to the integration of the Benefoot acquisition. General and administrative costs as a percentage of sales decreased to 20% as a result of the increase in sales primarily attributable to the Benefoot acquisition. General and administrative costs for the pro forma year ended December 31, 2001 increased primarily as a result of higher salary costs, implementation of the Company's incentive plan, increased consulting fees and higher bank fees due to increased credit card sales. These expenses were necessary as the Company expanded its infrastructure in anticipation of executing the Company's internal growth and acquisition strategy. 17 Other income (expense) was $(645,390) for the year ended December 31, 2002 as compared to $(68,449) for the unaudited pro forma year ended December 31, 2001 and $1,707 for the year ended February 28, 2001. The increase in other expense is attributable to interest expense and amortization of financing costs on the 4% convertible subordinated notes issued on October 31, 2001 and the 4% Notes issued in connection with the acquisition of Benefoot on May 6, 2002 offset in part by interest earned from overnight investment of cash. The increase in expense for the pro forma year ended December 31, 2001 as compared to the year ended February 28, 2001 resulted from an increase in interest expense attributable to the 4% convertible subordinated debentures issued on October 31, 2001 offset in part by interest earned from overnight investment of cash. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Working capital as of December 31, 2002 was $10,568,549 as compared to $16,655,179 at December 31, 2001. Cash balances at December 31, 2002 were $9,411,710, a decrease of $6,385,212 from December 31, 2001. The decline in working capital and cash is attributable to the acquisition of Benefoot. Intangible assets and goodwill acquired amounted to approximately $6,616,000. On October 31, 2001, the Company sold $14,589,000 of its 4% convertible subordinated notes, due August 31, 2006, in a private placement (the "Notes"). The Notes are convertible into the Company's common stock at a conversion price of $6.00 per share and are subordinated to all existing or future senior indebtedness of the Company. The Company received net proceeds of $13,668,067 from this offering. The costs of raising these proceeds, including placement and legal fees, was $920,933, which is being amortized over the life of the Notes. The amortization of these costs for the year ended December 31, 2002 and for the ten-month period ended December 31, 2001 was $193,105 and $30,698, respectively. Interest is payable semi-annually on the last date in June and December. Interest expense for the year ended December 31, 2002 and the ten months ended December 31, 2001 on these Notes was $583,560 and $97,260, respectively. The Company issued $1,800,000 in Promissory Notes in connection with the acquisition of Benefoot. $1,000,000 of the notes is due on May 6, 2003 and the balance is due on May 6, 2004. Interest expense from the date of acquisition was $47,200. Certain of the Company's facilities and equipment are leased under noncancellable operating leases. The following is a schedule, by fiscal year, of future minimum rental payments required under current operating leases as of December 31, 2002: FISCAL YEAR ENDING DECEMBER 31: AMOUNT ------------------------------- ------ 2003 $ 505,000 2004 473,000 2005 200,000 2006 and thereafter 10,000 The Company may 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 during the fiscal year ending December 31, 2003. 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 would supply the necessary capital. 18 INFLATION - --------- The Company has in the past been able to increase the prices of its products or reduce overhead costs sufficiently to offset the effects of inflation on wages, materials and other expenses, and anticipates that it will be able to continue to do so in the future. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - ----------------------------------------- In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations." SFAS No. 141 applies prospectively to all business combinations initiated after June 30, 2001, and all business combinations accounted using the purchase method for which the date of acquisition is July 1, 2001, or later. This statement requires all business combinations to be accounted for using one method, the purchase method. Under previously existed accounting rules, business combinations were accounted for using one of two methods, pooling-of-interests method or the purchase method. As of January 1, 2002 the Company adopted the provisions of SFAS No. 141. Accordingly, the Company accounted for it's acquisition of Benefoot under the purchase method accounting. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. Under SFAS No. 142, goodwill and some intangible assets will no longer be amortized, but rather reviewed for impairment on a periodic basis. As of January 1, 2002 the Company adopted the provisions of SFAS No. 142. Therefore, goodwill and certain identifiable intangible assets with indefinite lives have not been amortized and will be reviewed for impairment on an annual basis. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This standard requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time the liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The standard is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 is not expected to have a material impact on the Company's financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 144 requires that long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS No. 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. As of January 1, 2002 the Company adopted the provisions of SFAS No. 144. The adoption of SFAS No. 144 did not have a significant impact on the Company's financial statements. 19 In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145, among other things, rescinds SFAS No. 4, which required all gains and losses from the extinguishment of debt to be classified as an extraordinary item and amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. The rescission of SFAS No. 4 is effective for fiscal years beginning after May 15, 2002. The remainder of the statement is generally effective for transactions occurring after May 15, 2002 with earlier application encouraged. The Company does not expect the adoption of SFAS No. 145 to have a material impact on its consolidated financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities." This statement addresses the recognition, measurement and reporting of costs that are associated with exit and disposal activities. This statement includes the restructuring activities that are currently accounted for pursuant to the guidance set forth in EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and other Costs to exit an Activity (including Certain Costs Incurred in a Restructuring)," costs related to terminating a contract that is not a capital lease and one-time benefit arrangements received by employees who are involuntarily terminated- nullifying the guidance under EITF 94-3. Under SFAS No. 146 the cost associated with an exit or disposal activity is recognized in the periods in which it is incurred rather than at the date the company committed to the exit plan. This statement is effective for exit or disposal activities initiated after December 31, 2002 with earlier application encouraged. The Company does not believe that the adoption of SFAS No. 146 will have a material effect on its consolidated financial statements. In November 2002, the FASB issued Financial Interpretation ("FIN") 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires that the guarantor recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing such guarantee. FIN 45 also requires additional disclosure requirements about the guarantor's obligations and under certain guarantees that it has issued. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of this interpretation are effective for financial statement periods ending after December 15, 2002. The Company has included the required disclosures under FIN 45 in the notes to the consolidated financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based Compensation-Transitions and Disclosure- an amendment of FASB Statements No. 123." This amendment provides alternative methods of transition for voluntary change to the fair value based method of accounting for stock-based employee compensation. Additionally, prominent disclosures in both annual and interim financial statements are required for the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company will continue to account for it's stock based awards using the intrinsic value method and has disclosed the required information under SFAS No. 148 in the Notes to the consolidated financial statements. In 2002, the Company adopted the provision of Emerging Issues Task Force ("EITF") 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 $407,445 and $429,852 for the ten months ended December 31, 2001 and the year ended February 28, 2001, 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. 20 CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS - ---------------------------------------------- Information contained or incorporated by reference in the annual report on Form 10-K, 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, and other factors could also cause actual results to vary materially from the future results covered in such forward-looking statements. 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 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-K or to reflect the occurrence of unanticipated events. 21 ITEM 7A. 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, 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. 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA LANGER, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE II PAGE Independent Auditors' Report 24 Consolidated Financial Statements: Consolidated Balance Sheets 25 Consolidated Statements of Operations 26 Consolidated Statements of Stockholders' Equity 27 Consolidated Statements of Cash Flows 28 Notes to Consolidated Financial Statements 29 Consolidated Financial Statement Schedule II - Valuation and Qualifying Accounts 46 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. 23 INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of Langer, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Langer, Inc. and subsidiaries (the "Company") as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity and cash flows for the year ended December 31, 2002, for the ten months ended December 31, 2001, and for the year ended February 28, 2001. Our audits also included the financial statement schedule listed in the foregoing index for the year ended December 31, 2002, for the ten months ended December 31, 2001, and for the year ended February 28, 2001. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2002 and 2001, and the results of its operations and its cash flows for the year ended December 31, 2002, for the ten months ended December 31, 2001, and for the year ended February 28, 2001, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement 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. DELOITTE & TOUCHE LLP Jericho, New York March 27 , 2003 24 LANGER, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, ----------------------------------- 2002 2001 ---------------- --------------- Assets Current assets: Cash and cash equivalents $ 9,411,710 $ 15,796,922 Accounts receivable, net of allowance for doubtful accounts of approximately $124,935 and $43,269 respectively 2,937,340 1,646,696 Inventories, net (Note 3) 2,353,153 1,141,151 Prepaid expenses and other 627,154 185,740 ---------------- --------------- Total current assets 15,329,357 18,770,509 Property and equipment, net (Note 4) 943,893 701,996 Identifiable intangible assets, net (Note 2) 3,313,413 -- Goodwill 3,186,386 -- Other assets (Notes 8 and 11) 1,037,105 1,227,741 ---------------- --------------- Total assets $ 23,810,154 $ 20,700,246 ================ =============== Liabilities and stockholders' equity Current liabilities: Current maturities of long-term debt (Note 6) $ 1,000,000 $ -- Accounts payable 1,235,598 429,531 Other current liabilities (Notes 5 and 12) 1,864,344 1,224,444 Unearned revenue (Note 1) 660,866 461,355 ---------------- --------------- Total current liabilities 4,760,808 2,115,330 Long-term debt (Note 6) 15,389,000 14,589,000 Unearned revenue (Note 1) 162,455 113,740 Accrued pension expense (Note 11) 209,539 -- Other (Note 12) 176,138 15,967 ---------------- --------------- Total liabilities 20,697,940 16,834,037 ---------------- --------------- Commitments and contingencies (Note 7) -- -- Stockholders' equity (Note 9): Common stock, $.02 par value. Authorized 50,000,000 and 10,000,000 shares; issued 4,336,744 and 4,268,022 shares, respectively 86,735 85,361 Additional paid-in capital 12,825,237 12,258,724 Accumulated deficit (9,153,669) (8,048,012) Accumulated other comprehensive loss (Note 11) (530,632) (314,407) ---------------- --------------- 3,227,671 3,981,666 Treasury stock at cost, 67,100 shares (115,457) (115,457) ---------------- --------------- Total stockholders' equity 3,112,214 3,866,209 ---------------- --------------- Total liabilities and stockholders' equity $ 23,810,154 $ 20,700,246 ================ ===============
See accompanying notes to consolidated financial statements. 25 LANGER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
TEN MONTHS YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, FEBRUARY 28, 2002 2001 2001 ------------ ------------ ------------ Net sales $ 18,676,503 $ 10,936,112 $ 12,072,004 Cost of sales 11,962,104 6,934,402 8,292,850 ------------ ------------ ------------ Gross profit 6,714,399 4,001,710 3,779,154 Selling expenses 3,151,205 1,294,991 2,011,390 Research and development expenses 164,872 142,192 252,345 General and administrative expenses 3,751,295 2,425,177 2,010,905 Change in control and restructuring expenses (Note 8) -- -- 1,008,081 ------------ ------------ ------------ Operating income (loss) (352,973) 139,350 (1,503,567) ------------ ------------ ------------ Other income (expense): Interest income 214,481 86,635 3,440 Interest expense (636,393) (108,148) (20,062) Other (223,478) (44,440) 18,329 ------------ ------------ ------------ Other (expense) income, net (645,390) (65,953) 1,707 ------------ ------------ ------------ Income (loss) before income taxes (998,363) 73,397 (1,501,860) Provision for income taxes (Note 12) 107,294 3,118 4,527 ------------ ------------ ------------ Net income (loss) $ (1,105,657) $ 70,279 $ (1,506,387) ============ ============ ============ Weighted average number of common shares used in computation of net income (loss) per share: Basic 4,245,711 3,860,167 2,582,615 ============ ============ ============ Diluted 4,245,711 4,306,536 2,582,615 ============ ============ ============ Net income (loss) per common share: Basic $ (.26) $ .02 $ (.58) ============ ============ ============ Diluted $ (.26) $ .02 $ (.58) ============ ============ ============
See accompanying notes to consolidated financial statements 26 LANGER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock --------------------- Additional Treasury paid-in Accumulated Shares Amount stock capital deficit --------- --------- ----------- ------------ ------------ Balance at March 1, 2000: 2,640,281 $ 52,806 $ (136,193) $ 6,325,880 $ (3,405,904) Net loss (1,506,387) Foreign currency adjustment Minimum pension liability adjustment Total comprehensive (loss) Issuance of stock 147,541 2,951 222,049 Issuance of shares from treasury 100,949 Non-cash dividend 3,206,000 (3,206,000) Treasury stock acquired (80,213) Issuance of stock options for consulting services 245,000 Exercise of stock options 61,200 1,224 87,626 --------- --------- ----------- ------------ ------------ Balance at February 28, 2001: 2,849,022 56,981 (115,457) 10,086,555 (8,118,291) Net income for ten months ended December 31, 2001 70,279 Foreign currency adjustment Minimum pension liability adjustment Total comprehensive income Issuance of stock 1,400,000 28,000 2,107,000 Exercise of stock options 19,000 380 30,183 Issuance of stock options for consulting services 8,243 Compensation expense to accelerate stock options 26,743 --------- --------- ----------- ------------ ------------ Balance at December 31, 2001 4,268,022 85,361 (115,457) 12,258,724 (8,048,012) Net loss (1,105,657) Foreign currency adjustment Minimum pension liability adjustment Total comprehensive (loss) Issuance of stock to purchase business 64,895 1,298 528,214 Issuance of stock and exercise of stock options 3,827 76 11,729 Issuance of stock options for consulting services 6,513 Compensation expense to accelerate stock options 20,057 --------- --------- ----------- ------------ ------------ Balance at December 31, 2002 4,336,744 $ 86,735 $ (115,457) $ 12,825,237 $ (9,153,669) ========= ========= =========== ============ ============ Accumulated Other Comprehensive Income (Loss) ------------------------------ Foreign Minimum Total currency pension Comprehensive stockholders' translation liability income equity ----------- ----------- ------------ -------------- Balance at March 1, 2000: $ (47,507) $ (252,759) - $ 2,536,323 Net loss $ (1,506,387) Foreign currency adjustment (5,227) (5,227) Minimum pension liability adjustment (4,964) (4,964) ------------ Total comprehensive (loss) $ (1,516,578) (1,516,578) ============ Issuance of stock 225,000 Issuance of shares from treasury 100,949 Non-cash dividend - Treasury stock acquired (80,213) Issuance of stock options for consulting services 245,000 Exercise of stock options 88,850 ----------- ----------- ------------ -------------- Balance at February 28, 2001: (52,734) (257,723) 1,599,331 Net income for ten months ended December 31, 2001 $ 70,279 Foreign currency adjustment (53) (53) Minimum pension liability adjustment (3,897) (3,897) ------------ Total comprehensive income $ 66,329 66,329 ============ Issuance of stock 2,135,000 Exercise of stock options 30,563 Issuance of stock options for consulting services 8,243 Compensation expense to accelerate stock options 26,743 ----------- ----------- ------------ -------------- Balance at December 31, 2001 (52,787) (261,620) 3,866,209 Net loss $ (1,105,657) Foreign currency adjustment 26,570 26,570 Minimum pension liability adjustment (242,795) (242,795) ------------ Total comprehensive (loss) $ (1,321,882) (1,321,882) ============ Issuance of stock to purchase business 529,512 Issuance of stock and exercise of stock options 11,805 Issuance of stock options for consulting services 6,513 Compensation expense to accelerate stock options 20,057 ----------- ----------- -------------- Balance at December 31, 2002 $ (26,217) $ (504,415) $ 3,112,214 =========== =========== ==============
See accompanying notes to consolidated financial statements. 27 LANGER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
TEN MONTHS YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, FEBRUARY 28, 2002 2001 2001 ---------------- ---------------- ---------------- Cash Flows From Operating Activities: Net income (loss) $ (1,105,657) $ 70,279 $ (1,506,387) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization 648,215 254,921 301,902 Compensation expense for options acceleration 20,057 26,743 -- Provision for doubtful accounts receivable 88,348 15,015 19,000 Deferred income taxes 79,606 7,181 976 Issuance of stock and stock options for consulting services 11,755 8,243 245,000 Changes in operating assets and liabilities: Accounts receivable (533,849) (116,976) (262,412) Inventories (519,701) (166,021) 206,813 Prepaid expenses and other assets (389,302) (932,588) 26,106 Accounts payable and other current liabilities 356,231 (168,549) 367,861 Unearned revenue and other liabilities (10,175) 28,416 (59,445) ---------------- ---------------- ---------------- Net cash (used in) operating activities (1,354,472) (973,336) (660,586) ---------------- ---------------- ---------------- Cash Flows From Investing Activities: Purchase of fixed assets (333,697) (271,693) (49,381) Purchase of business, net of cash acquired (4,703,606) -- (145,138) ---------------- ---------------- ---------------- Net cash (used in) investing activities (5,037,303) (271,693) (194,519) ---------------- ---------------- ---------------- Cash Flows From Financing Activities: Proceeds from the exercise of stock options 6,563 30,563 88,850 Issuance of common stock for purchase of business -- -- 65,139 Proceeds from issuance of debt -- 14,589,000 500,000 Payments on debt -- (581,458) (28,750) Issuance of shares from option exercise -- 2,135,000 -- Treasury stock (acquired) issued -- -- (80,213) Issuance of common stock -- -- 260,810 ---------------- ---------------- ---------------- Net cash provided by financing activities 6,563 16,173,105 805,836 ---------------- ---------------- ---------------- Net (decrease) increase in cash and cash equivalents (6,385,212) 14,928,076 (49,269) Cash and cash equivalents at beginning of period 15,796,922 868,846 918,115 ---------------- ---------------- ---------------- Cash and cash equivalents at end of period $ 9,411,710 $ 15,796,922 $ 868,846 ================ ================ ================ Supplemental Disclosures of Cash Flow Information Cash paid during the period for: Interest $ 636,393 $ 110,548 $ 17,663 ================ ================ ================ Income taxes $ -- $ -- $ 2,348 ================ ================ ================
See accompanying notes to consolidated financial statements. 28 LANGER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) CHANGE IN NAME AND FISCAL YEAR END AND STATE OF INCORPORATION At the Company's July 17, 2001 annual meeting, the shareholders approved changing the name of the Company from The Langer Biomechanics Group, Inc. to Langer, Inc. Additionally, the stockholders approved changing the fiscal year end from February 28 to December 31 of each year. At the Company's June 27, 2002 annual meeting, the shareholders approved changing the state of incorporation from New York to Delaware. (B) DESCRIPTION OF THE BUSINESS The Company is a leading orthotics products company specializing in the designing, manufacturing, distributing and marketing of high quality foot and gait-related biomechanical products. The Company's diversified range of products is comprised of (i) custom orthotic devices ordered by licensed medical practitioners and (ii) distribution of pre-fabricated orthopedic rehabilitation and recovery devices and related devices sold to a patient by licensed medical practitioners. (C) PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Langer, Inc. and its subsidiaries (the "Company"). All significant intercompany transactions and balances have been eliminated in consolidation. (D) REVENUE RECOGNITION Revenue from the sale of the Company's products is recognized at shipment. Revenues derived from extended warranty contracts relating to sales of orthotics are recorded as deferred revenue and recognized over the lives of the contracts (24 months) on a straight-line basis. (E) CASH EQUIVALENTS For purposes of the statement of cash flows, the Company considers all short-term, highly liquid investments purchased with a maturity of three months or less to be cash equivalents (money market funds and short-term commercial paper). (F) INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. 29 (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: Office furniture and equipment 3-10 years Computer equipment and software 3-5 years Machinery and equipment 5-10 years Leasehold improvements lesser of 5 years or life of lease 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) INCOME TAXES The Company accounts for income taxes in accordance with SFAS No. 109. 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. (I) NET INCOME (LOSS) PER SHARE Basic earnings per share are based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share are 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. (J) FOREIGN CURRENCY TRANSLATION Assets and liabilities of the foreign subsidiary 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 loss in stockholders' equity. (K) RECLASSIFICATIONS Certain amounts in the prior years' financial statements have been reclassified to conform to the current year's presentation. (L) 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. 30 (M) FAIR VALUE OF FINANCIAL INSTRUMENTS At December 31, 2002 and 2001 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, 2002 and 2001 also approximated fair value based on borrowing rates currently available to the Company for debt with similar terms. (N) 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, but in no event more than four years. (O) DERIVATIVE FINANCIAL INSTRUMENTS As of March 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), as amended. As a result of adopting SFAS No. 133, the Company recognizes all derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. Changes in the fair value of derivative financial instruments are either recognized periodically in income or in stockholders' equity as a component of other comprehensive income depending on whether the derivative financial instrument qualifies for hedge accounting or, if so, whether it qualifies as a fair value or cash flow hedge. Generally, the changes in the fair value of derivatives accounted for as fair value hedges are recorded in income along with the portions of the changes in the fair value of the hedged item that relate to the hedged risks. Changes in the fair value of derivatives accounted for as cash flow hedges, to the extent they are effective as hedges, are recorded in other comprehensive income net of deferred taxes. Changes in fair values of derivatives not qualifying as hedges are reported in income. To date, the Company has not entered into any derivative financial instruments. The adoption of SFAS No. 133 did not have a material impact on the results reported in the consolidated financial statements. 31 (P) STOCK OPTIONS At December 31, 2002, the Company has two stock-based employee compensation plans, which are described more fully in Note 9. 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, 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 and earnings 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.
Periods ended ------------------------------------------------------------ December 31, December 31, February 28, 2002 2001 2001 -------------- -------------- --------------- Net income (loss) - as reported $ (1,105,657) $ 70,279 $ (1,506,387) Deduct: Total stock-based employee compensation expense determined under fair value basis method for all awards, net of tax (78,695) (67,263) (327,545) -------------- -------------- --------------- Pro forma net income (loss) $ (1,184,352) $ 3,016 $ (1,833,932) ============== ============== =============== Earnings Per Share: Basic - as reported $ (.26) $ .02 $ (.58) ============== ============== =============== Basic - pro forma $ (.28) $ .00 $ (.71) ============== ============== =============== Diluted- as reported $ (.26) $ .02 $ (.58) ============== ============== =============== Diluted- pro forma $ (.28) $ .00 $ (.71) ============== ============== ===============
(Q) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations." SFAS No. 141 applies prospectively to all business combinations initiated after June 30, 2001, and all business combinations accounted using the purchase method for which the date of acquisition is July 1, 2001, or later. This statement requires all business combinations to be accounted for using one method, the purchase method. Under previously existed accounting rules, business combinations were accounted for using one of two methods, pooling-of-interests method or the purchase method. As of January 1, 2002 the Company adopted the provisions of SFAS No. 141. Accordingly, the Company accounted for it's acquisition of Benefoot under the purchase method of accounting. 32 In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. Under SFAS No. 142, goodwill and some intangible assets will no longer be amortized, but rather reviewed for impairment on a periodic basis. As of January 1, 2002 the Company adopted the provisions of SFAS No. 142. Therefore, goodwill and certain identifiable intangible assets with indefinite lives have not been amortized and will be reviewed for impairment on an annual basis. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This standard requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time the liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The standard is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 is not expected to have a material impact on the Company's financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 144 requires that long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS No. 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. As of January 1, 2002 the Company adopted the provisions of SFAS No. 144. The adoption of SFAS No. 144 did not have a significant impact on the Company's financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145, among other things, rescinds SFAS No. 4, which required all gains and losses from the extinguishment of debt to be classified as an extraordinary item and amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. The rescission of SFAS No. 4 is effective for fiscal years beginning after May 15, 2002. The remainder of the statement is generally effective for transactions occurring after May 15, 2002 with earlier application encouraged. The Company does not expect the adoption of SFAS No. 145 to have a material impact on its consolidated financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities." This statement addresses the recognition, measurement and reporting of costs that are associated with exit and disposal activities. This statement includes the restructuring activities that are currently accounted for pursuant to the guidance set forth in EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and other Costs to exit an Activity (including Certain Costs Incurred in a Restructuring)," costs related to terminating a contract that is not a capital lease and one-time benefit arrangements received by employees who are involuntarily terminated- nullifying the guidance under EITF 94-3. Under SFAS No. 146 the cost associated with an exit or disposal activity is recognized in the periods in which it is incurred rather than at the date the company committed to the exit plan. This statement is effective for exit or disposal activities initiated after December 31, 2002 with earlier application encouraged. The Company does not believe that the adoption of SFAS No. 146 will have a material effect on its consolidated financial statements. 33 In November 2002, the FASB issued Financial Interpretation ("FIN") 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires that the guarantor recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing such guarantee. FIN 45 also requires additional disclosure requirements about the guarantor's obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of this interpretation are effective for financial statement periods ending after December 15, 2002. The Company has included the required disclosures under FIN 45 in the notes to the consolidated financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based Compensation-Transitions and Disclosure- an amendment of FASB Statements No. 123." This amendment provides alternative methods of transition for voluntary change to the fair value based method of accounting for stock-based employee compensation. Additionally, prominent disclosures in both annual and interim financial statements are required for the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company will continue to account for it's stock based awards using the intrinsic value method and has disclosed the required information under SFAS No. 148 in the notes to the consolidated financial statements. In 2002, the Company adopted the provision of Emerging Issues Task Force ("EITF") 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 $407,445 and $429,852 for the ten months ended December 31, 2001 and the year ended February 28, 2001, 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. (2) ACQUISITION 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 $.5 million was paid by issuing 61,805 shares of common stock (the "Shares"), together with certain registration rights. The Shares were valued based upon the market price of the Company's common stock two days before, two days after and on the day the acquisition was announced. $1.0 million of the Promissory Notes is due on May 6, 2003 and the balance is 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. 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. 34 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 note issued 1,800,000 Common stock issued 529,512 Transaction costs 821,997 ----------- Total purchase price $ 7,259,071 =========== 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 223,398 Goodwill 3,186,386 Identified intangible assets 3,430,000 Other assets 6,162 ----------- 8,615,801 ----------- 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 $ 7,259,071 =========== 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) recorded in this acquisition. Identifiable intangible assets consisted of:
Amortization expense Amortization for year ended Net Carrying Assets Period Value December 31, 2002 Value ------ ------ ----- ----------------- ----- Trade names indefinite $ 1,600,000 - $ 1,600,000 Non-competition agreements 7 years 230,000 21,483 208,517 License agreements and related technology 11 years 1,600,000 95,104 1,504,896 ----------- ---------- ------------ $ 3,430,000 $ 116,587 $ 3,313,413 =========== ========== ============
35 Pro forma information presented as if the acquisition had occurred on January 1, 2002 and March 1, 2001, respectively is: 2002 2001 ---- ---- Net sales $ 21,177,198 $17,324,253 Income (loss) before taxes $ (900,413) $ 342,236 Effective April 5, 2000, the Company purchased the remaining 25% interest, which it did not previously own, in its Langer Biomechanics Group (UK) Limited subsidiary for $80,000 cash and the issuance of 40,000 shares of common stock from treasury. Such shares were valued at $65,139, representing the market value of the Company's common stock at the date of the transaction. The transaction was accounted for as a purchase and the excess cost over the fair value of net assets acquired (including legal and accounting fees) was being amortized on a straight-line basis over a ten-year period. Amortization expense for the ten months ended December 31, 2001 was $23,438 and for the year ended February 28, 2001 was $7,300. (3) INVENTORIES, NET Inventories, net consisted of the following: DECEMBER 31, -------------------------- 2002 2001 ----------- ----------- Raw materials $ 1,224,136 $ 994,186 Work-in-process 180,135 105,453 Finished goods 1,169,287 255,418 ----------- ----------- 2,573,558 1,355,057 Less: allowance for excess and obsolescence 220,405 213,906 ----------- ----------- $ 2,353,153 $ 1,141,151 =========== =========== (4) PROPERTY AND EQUIPMENT, NET Property and equipment, net, is comprised of the following: DECEMBER 31, -------------------------- 2002 2001 ----------- ----------- Office furniture and equipment $ 537,238 $ 1,572,383 Computer equipment and software 1,012,259 751,972 Machinery and equipment 533,124 1,082,297 Leasehold improvements 504,394 587,411 Automobiles 173 39,966 ----------- ----------- 2,587,188 4,034,029 Less: accumulated depreciation 1,643,295 3,332,033 ----------- ----------- $ 943,893 $ 701,996 =========== =========== Depreciation and amortization expense, relating to property and equipment, was $338,524 for the year ended December 31, 2002, $254,921 for the ten months ended December 31, 2001, and $301,902 for the year ended February 28, 2001. 36 (5) OTHER CURRENT LIABILITIES Other current liabilities consisted of the following: DECEMBER 31, -------------------------- 2002 2001 ----------- ----------- Accrued payroll and related payroll taxes $ 705,376 $ 495,216 Sales credits payable 185,118 110,683 Accrued professional fees 148,250 267,651 Accrued health and welfare 170,000 51,570 Other 655,600 299,324 ----------- ----------- $ 1,864,344 $ 1,224,444 =========== =========== (6) 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 for the year ended December 31, 2002 was $583,560 and for the ten months ended December 31, 2001 was $97,260. The Company received net proceeds of $13,668,067 from the offering of the Notes. The cost of raising these proceeds including placement and legal fees was $920,933, and is being amortized over the life of the Notes. The amortization of these costs for the year ended December 31, 2002 was $193,105 and for the ten months ended December 31, 2001 was $30,698. The Company issued $1,800,000 in 4% Promissory Notes in connection with the acquisition of Benefoot. $1,000,000 of the notes is due on May 6, 2003 and the balance is due on May 6, 2004. Interest expense from the date of acquisition was $47,200. (7) COMMITMENTS AND CONTINGENCIES (A) LEASES Certain of the Company's facilities and equipment are leased under noncancellable operating leases. Rental expense amounted to $500,558 for the year ended December 31, 2002, $405,117 for the ten months ended December 31, 2001 and $496,401 and for the year ended February 28, 2001. Future minimum rental payments required under current operating leases are: 2003 $ 505,000 2004 $ 473,000 2005 $ 200,000 2006 and thereafter $ 10,000 37 (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 $43,865 for the year ended December 31, 2002, $51,532 for the ten months ended December 31, 2001, and $79,138 for the fiscal year ended February 28, 2001. (8) CHANGE IN CONTROL AND RESTRUCTURING EXPENSES Effective February 13, 2001, Andrew H. Meyers, Greg Nelson and Langer Partners LLC, and its designees ("Offerors"), acquired a controlling interest in the Company when they purchased 1,362,509 validly tendered shares of the Company at $1.525 per share, or approximately 51% of the then outstanding common stock of the Company, under the terms of a December 27, 2000 Tender Offer Agreement (the "Tender") under which the Offerors offered to purchase up to 75% of the Company's common stock. In order to provide the Company with adequate equity to maintain the Company's compliance with the listing requirements of the NASDAQ Small Cap Market and to enable the Company to finance its ongoing operations as well as potentially take advantage of opportunities in the marketplace and in order to induce the Offerors to enter into the Tender Offer Agreement, pursuant to its terms, the Offerors were granted 180 day options to purchase up to 1,400,000 shares of the Company's common stock, with an initial exercise price of $1.525 per share, rising up to $1.60 per share (the "Options"). These Options have been recorded as a non-cash dividend of $3,206,000, the fair market value of the Options on the date of grant. Upon the closing of the Tender, the Board of Directors of the Company resigned in favor of Andrew H. Meyers (President and Chief Executive Officer), Burtt Ehrlich (Chairman of the Board), Jonathan R. Foster, Greg Nelson and Arthur Goldstein. The Company issued 30,000 non-qualified options at $1.525 to each of the four new outside members of the Board of Directors in connection with their services as members of the Board. In connection with the Tender and the resultant change in control, the Company recorded expenses of approximately $1,008,000 for the year ended February 28, 2001, which included legal fees of $263,000, valuation and consultant fees of $95,000, severance and related expenses for terminated employees and executives of approximately $236,000, and other costs directly attributable to the change in control of approximately $169,000. As part of the change in control, a consulting firm which is owned by the sole manager and voting member of Langer Partners LLC, a principal shareholder of the Company, was granted 100,000 fully vested stock options with an exercise price of $1.525 per share. Accordingly, the Company immediately recognized the fair value of the options of $245,000 as consulting fees, associated with these options. Additionally, the Company entered into a consulting agreement with this consulting firm, whereby the consulting firm would receive an annual fee of $100,000 for three years for services provided. Upon closing of the Tender and the resultant change in control, the Company's existing revolving credit facility with a bank was terminated. In order to provide for the Company's short-term cash needs, in February 2001, the Company's Chief Executive Officer loaned the Company $500,000. As part of the change in control, new management determined that the Company required additional cash to potentially take advantage of opportunities in the marketplace. On February 13, 2001, three Directors of the Company purchased 147,541 restricted shares at $1.525 for total proceeds of $225,000. On May 11, 2001, the Offerors fully exercised the Options at $1.525 per share for $2,135,000, which was invested in the Company. The Company's Chief Executive Officer, Andrew H. Meyers, converted the $500,000 loan plus accrued interest as partial proceeds toward the exercise of these Options. 38 (9) STOCK OPTIONS The Company maintained a stock option plan for employees, officers, directors, consultants and advisors of the Company covering 550,000 shares of common stock (the "1992 Plan"). Options granted under the 1992 Plan are exercisable for a period of either five or ten years 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. Options become exercisable under various cumulative increments over a ten year period from date of grant. The Board of Directors has the discretion as to the persons to be granted options as well as the number of shares and terms of the option agreements. The expiration date of the plan is July 26, 2002. At the Company's July 17, 2001 annual meeting, the shareholders approved and adopted a new stock incentive plan for a maximum of 1,500,000 shares of common stock (the "2001 Plan"). In December 2000, 175,000 incentive stock options were granted to Andrew H. Meyers under the 1992 Plan and 80,000 incentive options were granted to Steven Goldstein under the 1992 Plan. The Company has also granted non-qualified stock options. These options are generally exercisable for a period of five or ten years and are issued at a price equal to or lower than the fair market value of the Company's common stock at the date of grant. On February 13, 2001, the Company granted 30,000 non-qualified stock options, at an exercise price of $1.525 per share, to each of the Company's four outside directors under the 2001 Plan and 100,000 options to a consulting firm, which is owned by the sole manager and voting member of Langer Partners LLC, a principal shareholder of the Company (see Note 8). Options granted under both the 1992 Plan and the 2001 Plan do not include the 1,400,000 Options granted pursuant to the Tender Offer Agreement in connection with the change in control (see Note 8). During the ten-month period ended December 31, 2001, the Company granted 10,000 stock options pursuant to a consulting agreement with an outside consultant. These options are exercisable for a period of ten years from the date of grant, at an exercise price of $5.34. 2,000 of these options vested immediately and the remaining 8,000 options vest 2,000 shares annually on October 1, 2002 through October 1, 2005. In connection with these options, the Company recognized consulting expense of $6,513 and $8,243 in the year ended December 31, 2002 and the ten-month period ended December 31, 2001, respectively. In connection with a separation agreement with a former employee, the Company agreed to accelerate the vesting of 12,000 options at the date of separation in exchange for transitional consulting assistance. As a result, the Company recognized an expense of $20,057 and $26,743 for these options for the year ended December 31, 2002 and the ten-month period ended December 31, 2001, respectively. The following is a summary of activity related to the Company's qualified and non-qualified stock options:
EXERCISE PRICE WEIGHTED AVERAGE NUMBER OF RANGE PER SHARE EXERCISE PRICE SHARES PER SHARE --------------- ------------------ ------------------- Outstanding at March 1, 2000 371,000 $ 1.13-2.19 $ 1.36 Granted 480,000 1.525-1.69 1.53 Exercised (86,200) 1.13-2.00 1.36 Cancelled (247,800) 1.13-2.00 1.35 --------------- ------------------ ------------------- Outstanding at February 28, 2001 517,000 1.50-2.19 1.54 Granted 85,000 5.34-6.50 6.36 Exercised (19,000) 1.50-2.19 1.61 Cancelled - - - --------------- ------------------ ------------------- Outstanding at December 31, 2001 583,000 1.53-6.50 2.24 Granted 154,000 8.07-8.15 8.07 Exercised (3,000) 2.19 2.19 Cancelled (125,000) 1.56-8.07 6.11 --------------- ------------------ ------------------- Outstanding at December 31, 2002 609,000 $ 1.53-8.15 $ 2.92 =============== ================== ===================
39
Options Outstanding Options Exercisable ---------------------------- ---------------------- Weighted Avg. Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life (yrs) Price Exercisable Price - --------------- ----------- ------------- -------- ----------- --------- $ 1.53 475,000 8.13 $1.53 390,001 $1.53 $ 5.34 10,000 8.75 $5.34 4,000 $5.34 $8.07 - $8.15 124,000 9.30 $8.07 -- -- ------- ------- 609,000 394,001 ======= =======
At December 31, 2002, 170,001 options were exercisable, 84,999 options were unexercisable and no options were available for issuance under the 1992 Plan. At December 31, 2002, 224,000 options were exercisable, 130,000 options were unexercisable and 1,145,213 options were available for future grants under the 2001 Plan. The options outstanding at December 31, 2002 under both the 1992 Plan and the 2001 Plan had remaining lives ranging from less than one year to more than nine years, with a weighted-average life of 8.32 years. At December 31, 2002, there were 1,499,213 and 255,000 shares of common stock reserved for issuance under the 2001 Plan and 1992 Plan, respectively. ADDITIONAL STOCK PLAN INFORMATION --------------------------------- The Company continues to account for its stock-based awards using the intrinsic value method in accordance with APB 25, "Accounting for Stock Issued to Employees", and its related interpretations. Accordingly, no compensation expense has been recognized in the financial statements for employee stock arrangements. SFAS No. 123, "Accounting for Stock-Based Compensation", requires the disclosure of pro forma net income and net income per share had the Company adopted the fair value method as of the beginning of fiscal 1997. Under SFAS No. 123, 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. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: expected life, 60 months following vesting; stock volatility of 52%, 67.9% and 64.1%, and risk free interest rates of 4.64%, 5.00% and 6.73% for the year ended December 31, 2002, for the ten-month period ended December 31, 2001 and the year ended February 28, 2001, respectively, and no dividends during the expected term. The Company's calculations are on a multiple option valuation approach and forfeitures are recognized as they occur. (10) SEGMENT INFORMATION In the year ended December 31, 2002, 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 year ended December 31, 2002 is summarized as follows:
DISTRIBUTED YEAR ENDED DECEMBER 31, 2002 CUSTOM ORTHOTICS PRODUCTS TOTAL ---------------------------- ---------------- --------------- --------------- Net sales $ 14,668,572 $ 4,007,931 $ 18,676,503 Operating profit (loss) (993,188) 640,215 (352,973) Depreciation and amortization 639,072 9,143 648,215 Total assets 22,228,457 1,581,697 23,810,154 Capital expenditures 327,120 6,577 333,697
40 The company operated in one segment (custom orthotics) in the ten months ended December 31, 2001 and the year ended February 28, 2001 since the distributed products segment established in the year ended December 31, 2002 had not been considered significant. Net sales for custom orthotics were $9,857,296 and net sales for distributed products were $1,078,816 for the ten months ended December 31, 2001. Net sales for custom orthotics were $10,335,852 and net sales for distributed products were $1,736,152 for the year ended February 28, 2001. Information regarding operating profit, depreciation and amortization, total assets or capital expenditures for the ten months ended December 31, 2001 or the year ended February 28, 2001 is not available. Geographical segment information is summarized as follows:
NORTH UNITED CONSOLIDATED AMERICA KINGDOM TOTAL YEAR ENDED DECEMBER 31, 2002 ----------------------------------------------------------------------------------------------- Net sales from external customers $ 16,560,280 $ 2,116,223 $ 18,676,503 Intersegment net sales 305,798 - 305,798 Gross margins 5,735,147 979,252 6,714,399 Operating (loss) profit (739,606) 386,633 (352,973) Depreciation and amortization 598,002 50,213 648,215 Total assets 22,850,246 959,908 23,810,154 Capital expenditures 266,755 66,942 333,697 TEN MONTHS ENDED DECEMBER 31, 2001 ----------------------------------------------------------------------------------------------- Net sales from external customers $ 9,359,893 $ 1,576,219 $ 10,936,112 Intersegment net sales 203,933 - 203,933 Gross margins 3,309,404 692,306 4,001,710 Operating (loss) profit (150,262) 289,612 139,350 Depreciation and amortization 218,861 26,060 254,921 Total assets 19,965,627 734,619 20,700,246 Capital expenditures 180,506 91,187 271,693 YEAR ENDED FEBRUARY 28, 2001 ----------------------------------------------------------------------------------------------- Net sales from external customers $ 10,466,090 $ 1,605,914 $ 12,072,004 Intersegment net sales 248,390 - 248,390 Gross margin 3,121,133 658,021 3,779,154 Operating (loss) profit (1,587,547) 83,980 (1,503,567) Depreciation and amortization 252,520 49,382 301,902 Total assets 3,855,618 698,601 4,554,219 Capital expenditures 38,465 10,916 49,381
Export sales from the Company's United States operations accounted for approximately 21 percent, 22 percent and 25 percent of net sales for the year ended December 31, 2002, for the ten month period ended December 31, 2001, and for the year ended February 28, 2001, respectively. (11) PENSION PLAN AND 401(K) PLAN The Company maintained a non-contributory defined benefit pension plan covering substantially all employees. In 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. 41 The following table sets forth the Company's defined benefit plan status at December 31, 2002 and December 31, 2001, determined by the plan's actuary in accordance with Statement of Financial Accounting Standards ("SFAS") No. 87, "Employers' Accounting for Pensions", as amended by SFAS No. 132:
DECEMBER 31, --------------------------------------- 2002 2001 ----------------- ----------------- Projected benefit obligation $ (672,483) $ (482,554) Plan assets at fair market value 462,944 510,728 ----------------- ----------------- Projected plan assets in excess of benefit obligation (209,539) 28,174 Unrecognized transition liability 120,111 127,902 Unrecognized net loss 504,415 261,620 Minimum additional liability - - ----------------- ----------------- Accrued pension (liability) cost $ 414,987 $ 417,696 ================= ================= Change in projected benefit obligation: Projected benefit obligation, beginning of year $ (482,554) $ (455,334) Interest cost (42,030) (28,458) Benefits paid 2,577 1,774 Actuarial loss (150,476) (536) ----------------- ----------------- Projected benefit obligation, end of year $ 672,483 $ (482,554) ================= ================= Change in plan assets: Fair value of plan assets, beginning of year $ 510,728 $ 442,216 Actual return on plan assets (66,207) 17,555 Employer contribution 21,000 52,731 Benefits paid (2,577) (1,774) ----------------- ----------------- Fair value of plan assets, end of year $ 462,944 $ 510,728 ================= =================
Net periodic pension expense is comprised of the following components:
TEN MONTHS YEAR ENDED ENDED YEAR ENDED DEC. 31, 2002 DEC. 31, 2001 FEB. 28, 2001 ------------------ ------------------- --------------- Interest cost on projected benefit obligations $ 42,030 $ 28,458 $ 32,918 Expected return on plan assets (38,995) (35,077) (29,426) Amortization of unrecognized transition liability 7,791 7,791 7,791 Recognized actuarial loss 12,883 14,161 13,517 ------------------ ------------------- --------------- Net periodic pension expense $ 23,709 $ 15,333 $ 24,800 ================== =================== ===============
42 The discount rate used in determining the actuarial present value of the projected benefit obligation was 5.40% and 7.50% at December 31, 2002 and 2001, respectively. The rate of return on plan assets was assumed to be 7.50% at December 31, 2002 and 2001, respectively. No assumed increase in compensation levels was used since future benefit accruals have ceased (as discussed above). The unrecognized transition liability and unrecognized net loss are being amortized over 30.4 and 18.2 years, respectively. As required by Statement of Financial Accounting Standards No. 87, the Company recorded a pension liability of $209,539 at December 31, 2002 (included in Accrued Pension Expense) to reflect the excess of accumulated benefits over the fair value of pension plan assets. Since the required additional pension liability is in excess of the unrecognized prior service cost (unrecognized transition liability), an amount equal to the unrecognized prior service cost has been recognized as an intangible asset ($120,111 and $156,076 included in "Other assets" as of December 31, 2002 and 2001, respectively). The remaining liability required to be recognized is reported as a separate component of stockholders' equity. 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 year ended December 31, 2002, the ten months ended December 31, 2001 and the year ended February 28, 2001, the Company made contributions totaling $42,288, $26,530 and $34,683, respectively, to the 401(k) Plan. (12) INCOME TAXES The provision for (benefit from) income taxes is comprised of the following:
YEAR ENDED YEAR ENDED DECEMBER 31, TEN MONTHS ENDED FEBRUARY 28, 2002 DECEMBER 31, 2001 2001 ------------------ ------------------- ------------------- Current: Federal $ - $ - $ - State - (7,565) 5,000 Foreign 27,688 3,456 (1,774) ------------------ ------------------- ------------------- 27,688 (4,109) 3,226 Deferred: Federal 72,000 - - State 10,000 - - Foreign (2,394) 7,227 1,301 ------------------ ------------------- ------------------- 79,606 7,227 1,301 ------------------ ------------------- ------------------- $ 107,294 $ 3,118 $ 4,527 ================== =================== ===================
As of December 31, 2002, the Company has net Federal tax operating loss carryforwards of approximately $4,607,000 which may be applied against future taxable income and expire from 2003 through 2014. The Company also has available tax credit carryforwards of approximately $141,000. The net deferred tax liability is included in other liabilities on the accompanying balance sheet. 43 The following is a summary of deferred tax assets and liabilities: DECEMBER 31, ---------------------------------- 2002 2001 -------------- ---------------- Current deferred tax assets $ 507,219 $ 196,481 -------------- ---------------- Non-current: Deferred tax assets 1,901,022 1,374,280 Deferred tax liabilities (95,573) (15,967) -------------- ---------------- Non-current deferred tax assets, net 1,805,449 1,358,313 -------------- ---------------- -------------- ---------------- Net deferred tax assets 2,312,668 1,554,794 Valuation allowance (2,408,241) (1,570,761) -------------- ---------------- Net deferred tax liabilities $ (95,573) $ (15,967) ============== ================ The current deferred tax assets primarily relate to inventory and accounts receivable and other reserves, unicap adjustment, stock options, and accrued vacation. The non-current deferred tax assets are primarily composed of Federal net operating loss carryforwards and book to tax differences in fixed assets. The non-current deferred tax liabilities are primarily composed of a U.S. component related to the basis difference in acquired intangibles and a foreign component related to excess tax depreciation over book depreciation. Future utilization of these net operating loss carry-forwards will be limited under existing tax law due to the change in control of the Company (Note 8). Prior to the adoption of SFAS No. 142, the Company would not have needed a valuation allowance for the portion of the net operating losses equal to the amount of tax-deductible goodwill and trade names amortization expected to occur during the 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 $82,000 during the year ended December 31, 2002 which would have been required prior to the adoption of SFAS 142. The following is a summary of the domestic and foreign components of income (loss) before taxes:
YEAR ENDED TEN MONTHS ENDED YEAR ENDED DECEMBER 31,2002 DECEMBER 31, 2001 FEBRUARY 28, 2001 ---------------- ----------------- ----------------- Domestic $ (1,113,923) $ 48,615 $ (1,466,510) Foreign 115,560 24,782 (35,350) ---------------- ----------------- ----------------- $ (998,363) $ 73,397 $ (1,501,860) ================ ================= =================
The Company's effective provision for income taxes differs from the Federal statutory rate. The reasons for such differences are as follows:
YEAR ENDED TEN MONTHS ENDED YEAR ENDED DECEMBER 31, 2002 DECEMBER 31, 2001 FEBRUARY 28, 2001 ------------------------ -------------------------- ------------------------- AMOUNT % AMOUNT % AMOUNT % ------------- --- ------------ --- ----------- --- Provision at Federal statutory rate $ (339,443) (34.0) $ 24,789 33.8 $ (510,633) (34.0) Other (Permanent items) (23,576) (2.4) Increase (decrease) in taxes resulting from: State income taxes, net of Federal benefit 6,600 0.7 (4,993) (6.8) 3,300 0.2 Foreign taxes 25,294 2.5 2,891 3.9 11,546 0.8 (Use) creation of net operating Loss and credit carryforwards (140,761) (14.1) (19,569) (26.7) 500,314 33.3 Change in tax rate (258,300) (25.9) - - - - Change in valuation allowance 837,480 83.9 - - - - ------------- --- ------------ --- ----------- --- Effective tax rate $ 107,294 10.7 $ 3,118 4.2 $ 4,527 0.3 ============= ==== ============ === =========== ===
44 (13) 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. There are no potential dilutive shares included for the years ended December 31, 2002 and February 28, 2001, as their effect would have been anti dilutive. The impact of the Convertible Notes on the calculation of the fully-diluted earnings per share was anti-dilutive and is therefore not included in the computation for the ten months ended December 31, 2001. The following table provides a reconciliation between basic and diluted earnings per share:
YEAR ENDED TEN MONTHS ENDED DECEMBER 31, 2001 DECEMBER 31, 2001 ------------------------------------- -------------------------------- PER PER INCOME SHARES SHARE INCOME SHARES SHARE ----------- --------- ------ -------- --------- ------ Basic EPS Income (loss) available to common stockholders $(1,105,657) 4,245,711 $ (.26) $ 70,279 3,860,167 $ .02 Effect of Dilutive Securities Stock options - - - - 446,369 - ----------- --------- ------ -------- --------- ------ Diluted EPS Income (loss) available to common stockholders plus exercise of stock options $(1,105,657) 4,245,711 $ (.26) $ 70,279 4,306,536 $ .02 =========== ========= ====== ======== ========= ====== YEAR ENDED FEBRUARY 28, 2001 ------------------------------------ PER INCOME SHARES SHARE ----------- --------- ------- Basic EPS Income (loss) available to common stockholders $(1,506,387) 2,582,615 $(.58) Effect of Dilutive Securities Stock options - - - ----------- --------- ------- Diluted EPS Income (loss) available to common stockholders plus exercise of stock options $(1,506,387) 2,582,615 $ (.58) =========== ========= =======
(14) SUBSEQUENT EVENT On January 13, 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, we 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. 45 LANGER, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS SCHEDULE II
ALLOWANCE FOR VALUATION SALES DOUBTFUL ALLOWANCE FOR RETURNS AND ACCOUNTS WARRANTY INVENTORY DEFERRED TAX ALLOWANCES RECEIVABLE RESERVE RESERVE ASSETS -------------- ---------------- ------------- -------------- ---------------- At March 1, 2000 $ 46,058 $ 62,653 $ 46,797 $ 55,730 $ 1,242,659 Additions - 19,000 21 137,593 396,321 Deletions 17,259 23,833 - - - -------------- ---------------- ------------- -------------- ---------------- At February 28, 2001 28,799 57,820 46,818 193,323 1,638,980 Additions 245 15,015 - 80,408 - Deletions 8,100 29,566 6,476 59,825 68,219 -------------- ---------------- ------------- -------------- ---------------- At December 31, 2001 20,944 43,269 40,342 213,906 1,570,761 Acquired - - 80,000 - - Additions 7,056 88,348 - 14,017 837,480 Deletions - 6,682 50,342 7,518 - -------------- ---------------- ------------- -------------- ---------------- At December 31, 2002 $ 28,000 $ 124,935 $ 70,000 $ 220,405 $ 2,408,241 ============== ================ ============= ============== ================
46 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ----------------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- Not applicable. PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY - -------------------------------------------------------- The information required by Item 10, appearing under the caption "Directors and Executive Officers of the Company" of the Company's Proxy Statement for the 2003 Annual Meeting of Stockholders, is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION - ------------------------------- The information required by Item 11 appearing under the caption "Executive Compensation" of the Company's proxy statement for the 2003 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ----------------------------------------------------------------------- The information required by Item 12 appearing under the caption "Security Ownership of Certain Beneficial Owners and Management" of the Company's proxy statement for the 2003 Annual Meeting of Stockholders 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 2003 Annual Meeting of the Stockholders is incorporated herein by reference. 47 PART IV ------- ITEM 14. CONTROLS AND PROCEDURES - --------------------------------- Within 90 days prior to the date of filing of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's Principal Executive Officer and the Principal Financial Officer, of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. Based on this evaluation, the Company's Principal Executive Officer and Principal Financial Officer concluded that the Company's disclosure controls and procedures are effective for gathering, analyzing and disclosing the information the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC's rules and forms. The Principal Executive Officer and the Principal Financial Officer also concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company's periodic SEC filings. In connection with the new rules, the Company is in the process of further reviewing and documenting its disclosure controls and procedures, including its internal controls and procedures for financial reporting, and may from time to time make changes designed to enhance their effectiveness and to ensure that the Company's systems evolve with its business. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of this evaluation. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K - ------------------------------------------------------------------------ 1. FINANCIAL STATEMENTS See the Index to Financial Statements in Item 8 hereto. 2. FINANCIAL STATEMENT SCHEDULES The following Financial Statement Schedule is filed as part of this Form 10-K: Schedule II - Valuation and Qualifying Accounts 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. 3. EXHIBITS NUMBER DOCUMENT 2.1 Tender Offer Agreement, dated as of December 28, 2000, between OrthoStrategies, OrthoStrategies Acquisition Corp., and Langer, Inc. (filed as Exhibit (d)(1)(A) to Schedule TO, Tender Offer Statement, filed with the Securities and Exchange Commission on January 10, 2001 ("Schedule TO") and incorporated herein by reference). 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 the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders held on June 27, 2002, filed with the Securities and Exchange Commission on May 31, 2002. 48 3.2 Certificate of Incorporation of the Company, incorporated herein by reference to Appendix B of the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders held on June 27, 2002, filed with the Securities and Exchange Commission on May 31, 2002. 3.3 By-laws of the Company, incorporated herein by reference to Appendix C of the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders held on June 27, 2002, filed with the Securities and Exchange Commission on May 31, 2002. 4.1 Specimen of Common Stock Certificate incorporated by reference to the Company's Registration Statement of Form S-1 (No. 2-87183), which became effective with the Securities and Exchange Commission on January 17, 1984. 4.2 Form of Convertible Note Purchase Agreement, dated as of October 31, 2001, incorporated herein by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K filed with the Commission on November 13, 2001. 4.3 Form of Convertible Note, dated as of October 31, 2001, incorporated herein by reference to Exhibit 99.3 to the Company's Current Report on Form 8-K filed with the Commission on November 13, 2001. 10.1* Option Agreement with Andrew H. Meyers, dated February 13, 2001 incorporated by reference to the Company's Annual Report on Form 10-K filed on May 29, 2001. 10.2 Option Agreement with Langer Partners, LLC, dated February 13, 2001 incorporated by reference to the Company's Annual Report on Form 10-K filed on May 29, 2001. 10.3* Option Agreement with Jonathan Foster, dated February 13, 2001 incorporated by reference to the Company's Annual Report on Form 10-K filed on May 29, 2001. 10.4* Option Agreement with Greg Nelson, dated February 13, 2001 incorporated by reference to the Company's Annual Report on Form 10-K filed on May 29, 2001. 10.5 Form of Registration Rights Agreement between the Company and Andrew H. Meyers, Langer Partners, LLC, Jonathan Foster, and Greg Nelson, dated February 13, 2001 incorporated by reference to the Company's Annual Report on Form 10-K filed on May 29, 2001. 10.6* Employment Agreement between the Company and Andrew H. Meyers, dated as of February 13, 2001 incorporated by reference to the Company's Annual Report on Form 10-K filed on May 29, 2001. 10.7* Employment Agreement between the Company and Steven Goldstein, dated as of February 13, 2001 incorporated by reference to the Company's Annual Report on Form 10-K filed on May 29, 2001. 10.8* Option Agreement between the Company and Andrew H. Meyers, dated as of December 28, 2000 incorporated by reference to the Company's Annual Report on Form 10-K filed on May 29, 2001. 10.9* Option Agreement between the Company and Steven Goldstein, dated as of December 28, 2000 incorporated by reference to the Company's Annual Report on Form 10-K filed on May 29, 2001. 10.10* Consulting Agreement between the Company and Kanders & Company, Inc., dated February 13, 2001 (the form of which was filed as Exhibit (d)(1)(H) to the Schedule TO and is incorporated herein by reference). 49 10.11* Option Agreement between the Company and Kanders & Company, Inc., dated February 13, 2001 (the form of which was filed as Exhibit (d)(1)(G) to the Schedule TO and is incorporated herein by reference). 10.12 Registration Rights Agreement between the Company and Kanders & Company, Inc., dated February 13, 2001 (the form of which was filed as Exhibit (d) (1) (I) to the Schedule TO and is incorporated herein by reference). 10.13 Indemnification Agreement between the Company and Kanders & Company, Inc., dated February 13, 2001 (the form of which was filed as Exhibit (d) (1) (J) to the Schedule TO and is incorporated herein by reference). 10.14 Letter Agreement among the Company, OrthoStrategies, OrthoStrategies Acquisition Corp, Steven V. Ardia, Thomas I. Altholz, Justin Wernick, and Kenneth Granat, dated December 28, 2000 (filed as Exhibit (d)(1)(K) to the Schedule TO and incorporated herein by reference). 10.15* Letter Agreement between the Company and Daniel Gorney, dated as of December 28, 2000 (filed as Exhibit (d) (1) (O) to the Schedule TO and incorporated herein by reference). 10.16* Letter Agreement between the Company and Thomas Archbold, dated as of December 28, 2000 (filed as Exhibit (d) (1) (P) to the Schedule TO and incorporated herein by reference). 10.17* Letter Agreement between the Company and Ronald J. Spinilli, dated as of December 28, 2000 (filed as Exhibit (d) (1) (Q) to the Schedule TO and incorporated herein by reference). 10.18* The Company's 2001 Stock Incentive Plan, incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001, Exhibit 10.18. 10.19 Langer Biomechanics Group Retirement Plan, restated as of July 20, 1979 and incorporated by reference to the S-1. 10.20 Agreement, dated March 26, 1992, and effective as of March 1, 1992, relating to the Company's 401(k) Tax Deferred Savings Plan and incorporated by reference to the Company's Form 10-K for the fiscal year ended February 29, 1992. 10.21* Consulting Agreement between the Company and Stephen V. Ardia, dated November 29, 2000 incorporated by reference to the Company's Annual Report on Form 10-K filed on May 29, 2001. 10.22* Promissory Note of the Company in favor of Andrew H. Meyers, dated February 13, 2001 (filed as Exhibit 99.1 to the Company's Form 8-K Current Report, dated February 13, 2001, and incorporated herein by reference). 10.23 Form of Indemnification Agreement for non-management directors of the Company incorporated by reference to the Company's Annual Report on Form 10-K filed on May 29, 2001. 10.24 Copy of Lease related to the Company's Deer Park facilities incorporated by reference to the Company's Annual Report on Form 10-K filed on May 29, 2000. 10.25 Asset Purchase Agreement, dated May 6, 2002, by and among the Company, GoodFoot Acquisition Co., Benefoot, Inc., Benefoot Professional Products, Inc., Jason Kraus, and Paul Langer, incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the Commission on May 13, 2002. 50 10.26 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 to the Company's Current Report on Form 8-K filed with the Commission on May 13, 2002. 10.27 Promissory Note, dated May 6, 2002, made by the Company in favor of Benefoot, Inc., incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the Commission on May 13, 2002. 10.28 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 to the Company's Current Report on Form 8-K filed with the Commission on May 13, 2002. 10.29 Stock Purchase Agreement, dated January 13, 2003, by and among the Company, Langer Canada Inc., Raynald Henry, Micheline Gadoury, 9117-3419 Quebec Inc., Bi-Op Laboratories Inc., incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the Commission on January 13, 2003. 10.30* Employment Agreement between the Company and Ronald E. Buron, dated as of December 3, 2001, incorporated herein by reference to Amendment No. 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2001, filed April 30, 2002, Exhibit 10.26. 10.31* Employment Agreement between the Company and Anthony J. Puglisi, dated as of April 15, 2002, incorporated herein by reference to Amendment No. 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2001, filed April 30, 2002, Exhibit 10.27. 10.32* Option Agreement between the Company and Anthony J. Puglisi, dated as of April 15, 2002, incorporated herein by reference to Amendment No. 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2001, filed April 30, 2002, Exhibit 10.28. 21.1 List of subsidiaries. 23.1 Consent of accountants 99.1 Certification Pursuant to 18 U.S.C. Section 1350. * This exhibit represents a management contract or a compensatory plan. (b) Reports on Form 8-K: No reports on Form 8-K were filed in the fourth quarter of the year covered by this Annual Report on Form 10-K. 51 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, 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 Accounting 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, 2003 By: /s/ Burtt Ehrlich ------------------------- Burtt Ehrlich Director Date: March 31, 2003 By: /s/ Jonathan Foster ------------------------- Jonathan Foster Director Date: March 31, 2003 By: /s/ Arthur Goldstein ------------------------- Arthur Goldstein Director Date: March 31, 2003 By: /s/ Greg Nelson ------------------------- Greg Nelson Director Date: March 31, 2003 By: /s/ Thomas Strauss ------------------------- Thomas Strauss Director 52 CERTIFICATIONS I, Andrew H. Meyers, certify that: 1. I have reviewed this annual report on Form 10-K of Langer, Inc. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 /s/ Andrew H. Meyers - --------------------- Andrew H. Meyers President and Chief Executive Officer 53 CERTIFICATIONS I, Anthony J. Puglisi, certify that: 1. I have reviewed this annual report on Form 10-K of Langer, Inc. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 /s/ Anthony J. Puglisi - ---------------------- Anthony J. Puglisi Vice President and Chief Financial Officer 54 EX-21.1 3 file002.txt SUBSIDIARY LIST EXHIBIT 21.1 LIST OF SUBSIDIARIES Langer, Inc., a Delaware corporation, owns 100% of the outstanding capital stock of each of the following corporations: 1. Langer (UK) Limited, a United Kingdom limited company (formerly known as The Langer Biomechanics Group (UK) Limited). 2. Langer Distribution Services, Inc., a Delaware corporation (formerly known as GoodFoot Acquisition Co.). 3. Langer Canada Inc., a New Brunswick (Canada) corporation. Langer Canada Inc., owns 100% of the outstanding capital stock of Bi-Op Laboratories Inc., a Quebec (Canada) corporation. EX-23.1 4 file003.txt CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 333-92014 of Langer, Inc. on Form S-3, and Registration Statement No. 333-89880 and No. 333-94769 on Form S-8 of our report dated March 27, 2003, appearing in this Annual Report on Form 10-K of Langer, Inc. for the year ended December 31, 2002. /s/ DELOITTE & TOUCHE LLP Jericho, New York March 27, 2003 EX-99.1 5 file004.txt CERTIFICATION EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Langer, Inc. (the "Company") on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned hereby certifies in his capacity as an officer of the Company, (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Andrew H. Meyers /s/ Anthony J. Puglisi - ------------------------------- ------------------------------- Andrew H. Meyers Anthony J. Puglisi President and Vice President and Chief Executive Officer Chief Financial Officer March 31, 2003 March 31, 2003 55 -----END PRIVACY-ENHANCED MESSAGE-----