SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of
1934
For Quarter Ended August 31, 1995 Commission File No. 0-5920
- ----------------------------------- --------------------------
LANCER ORTHODONTICS, INC.
-------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
CALIFORNIA 95-2497155
- -------------------------------- ---------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
253 Pawnee Street, San Marcos, California 92069
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(Address of Principal Executive Offices)
Issuer's telephone number, including area code: (619) 744-5585
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act 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
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State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 14,656,551
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Traditional small business disclosure format (check one):
Yes X No
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PART I. FINANCIAL INFORMATION
---------------------
Item 1. SUMMARIZED FINANCIAL INFORMATION See Exhibit A
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
----------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
For the first three months of fiscal 1996, the Registrant's financial condition
was as follows:
08-31-95 05-31-95 05-31-94
---------- ---------- -----------
Current Assets $3,311,658 $3,383,867 $3,451,897
Current Liabilities 871,505 971,283 2,296,618
Working Capital 2,440,153 2,412,584 1,154,979
Bank Debt &
Capitalized Leases 1,132,203 1,243,902 1,602,921
Shareholder Equity 2,650,118 2,527,489 2,335,594
Total Assets 4,277,932 4,389,267 4,632,512
For the three months ended August 31, 1995, net income increased $66,360
(159.4%) as compared to the year earlier. The increase in net income is
primarily attributable to an improvement in cost of goods sold and increased
sales.
Net sales increased $53,715 (3.1%) compared to the year earlier period. The
increase is the result of an increase in both the Registrant's domestic sales
force and foreign distributors. To further increase sales, the Registrant
continues to search for new distributors, private label customers, and sales
representatives. Additionally, the Registrant is very active in adding new
products to its growing product line. By adding new products, the Registrant
believes its product line will appeal to a wider range of customers.
Cost of sales as a percentage of sales decreased from 59.4% to 56.3% as compared
to the year earlier period. The improvement in gross margin is attributable to
actions taken in the first quarter to identify and correct manufacturing
problems that were causing unusually high levels of scrap.
Selling and general & administrative expenses increased $19,490 (3.3%) compared
to the year earlier period. The increase is attributable to an increase in
personnel and the publishing of a new catalog, partially offset by reduced
professional fees.
Product development expenses decreased $333 (0.9%) compared to the year earlier
period. The Registrant continues to invest time and money in product
development to develop new products, to identify products for purchase and
resale, and to improve manufacturing procedures.
Interest expense decreased $3,176 (8.0%) compared to the year earlier period,
reflecting reduced debt, partially offset by higher interest rates.
Working capital increased $27,569 during the three months, primarily because of
profitability and non-cash expenses. The Registrant expects to meet its cash
requirements out of its cash reserves and cash flow.
PART II. OTHER INFORMATION
-----------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
There were no Form 8-K reports filed during the quarter.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LANCER ORTHODONTICS, INC.
-----------------------------
Registrant
Date September 27, 1995 By /s/ Douglas D. Miller
----------------------- --------------------------
Douglas D. Miller,
President and Chief Operating Officer
By /s/ Scott R. Striblen
--------------------------
Scott R. Striblen,
Vice President, Finance
EXHIBIT A
SUMMARIZED FINANCIAL INFORMATION
--------------------------------
LANCER ORTHODONTICS, INC.
-------------------------
CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
---------------------------------------------
FOR THE THREE MONTHS
ENDED AUGUST 31
1995 1994
------------------------
NET SALES $1,796,602 $1,742,887
COST OF SALES 1,011,023 1,035,633
--------- ---------
Gross Profit 785,579 707,254
OPERATING EXPENSES:
Selling, General & Administrative 608,619 589,129
Product Development 38,587 38,920
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TOTAL OPERATING EXPENSES 647,206 628,049
--------- ---------
INCOME FROM OPERATIONS 138,373 79,205
OTHER (INCOME) EXPENSE:
Interest Expense 36,299 39,475
Other (Income) Expense, Net ( 6,723) ( 1,907)
--------- ---------
TOTAL OTHER (INCOME) EXPENSE 29,576 37,568
--------- ---------
INCOME BEFORE INCOME TAXES 108,797 41,637
INCOME TAXES (NOTE E) 800 --
--------- ---------
NET INCOME $ 107,997 $ 41,637
========= =========
NET INCOME PER COMMON SHARE (NOTE D) $ .007 $ .003
========= =========
LANCER ORTHODONTICS, INC.
-------------------------
CONDENSED BALANCE SHEETS (UNAUDITED)
------------------------------------
08-31-95
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ASSETS
------
CURRENT ASSETS:
Cash $ 316,870
Accounts Receivable,
less Allowances of $129,521 1,401,060
Inventories 1,584,214
Prepaid Expenses 9,514
---------
Total Current Assets 3,311,658
---------
PROPERTY AND EQUIPMENT, at cost 2,454,365
Less: Accumulated Depreciation (2,077,820)
---------
376,545
INTANGIBLE ASSETS:
Marketing and Distribution Rights 228,250
Technology Use Rights 357,079
---------
585,329
OTHER ASSETS 4,400
---------
Total Assets $4,277,932
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts Payable and Accrued Liabilities $ 495,611
Current Portion of Note Payable to Bank (Note B) 356,000
Capital Lease Obligations 19,894
---------
Total Current Liabilities 871,505
---------
LONG TERM PORTION OF NOTE PAYABLE TO BANK (Note B) 724,000
LONG TERM PORTION OF CAPITAL LEASES 32,309
COMMITMENTS AND CONTINGENCIES (Notes G and H) --
STOCKHOLDERS' EQUITY (Note C):
Redeemable Convertible Preferred Stock,
Series C, $.06 noncumulative annual dividend;
$.75 par value: Authorized 250,000 shares;
no shares issued and outstanding
($.,75 liquidation preference) --
Redeemable Convertible Preferred Stock,
Series D, $.04 noncumulative annual dividend;
$.50 par value: Authorized 500,000 shares;
issued and outstanding 370,483 shares
($.50 liquidation preference) 185,242
Common Stock, no par value:
Authorized 50,000,000 shares; issued
and outstanding 14,656,551 4,644,748
Accumulated Deficit (2,179,872)
---------
Total Stockholders' Equity 2,650,118
---------
Total Liabilities And Equity $4,277,932
=========
LANCER ORTHODONTICS, INC.
-------------------------
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
----------------------------------------------
FOR THE THREE MONTHS
ENDED AUGUST 31
1995 1994
-----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $107,997 $ 41,637
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization 73,923 89,253
Changes in assets and liabilities:
(Increase) in accounts
receivable, net ( 32,749) ( 39,209)
(Increase) decrease in inventory (162,261) 77,402
Decrease in prepaid expenses 29,485 31,899
Decrease in accounts payable and
accrued liabilities (107,633) (235,349)
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CASH FLOWS USED BY OPERATING ACTIVITIES ( 91,238) ( 34,367)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ( 34,797) ( 26,560)
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CASH FLOWS USED IN INVESTING ACTIVITIES ( 34,797) ( 26,560)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on note
payable to bank (105,000) (109,271)
Principal payments of long-term
debt and capital leases ( 6,699) ( 12,853)
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CASH FLOWS USED IN FINANCING ACTIVITIES (111,699) (122,124)
------- -------
DECREASE IN CASH (237,734) (183,051)
CASH AT BEGINNING OF PERIOD 554,604 739,894
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CASH AT END OF PERIOD $316,870 $556,843
======= =======
In fiscal 1996, the Registrant issued 72,034 shares of its common stock in
satisfaction of $14,632 in accrued royalties.
LANCER ORTHODONTICS, INC.
-------------------------
Notes to Financial Statements
-----------------------------
NOTE A - BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited condensed financial statements have been prepared in
accordance with the instructions to Form 10-QSB and therefore do not include all
information and notes necessary for a fair presentation of financial position,
results of operations, and cash flow in conformity with generally accepted
accounting principles. The unaudited condensed financial statements include the
accounts of Lancer Orthodontics, Inc. (The Registrant). The operating results
for interim periods are unaudited and are not necessarily an indication of the
results to be expected for the full fiscal year. In the opinion of management,
the results of operations as reported for the interim period reflect all
adjustments which are necessary for a fair presentation of operating results.
NOTE B - NOTE PAYABLE TO BANK
- -----------------------------
Effective November 1, 1994, the Registrant arranged for a two year renewal of
its bank term loan through November 1, 1996. The new bank loan requires monthly
principal payments of $23,000 during the first year and $31,000 during the
second year, plus interest at prime plus 3%. All unpaid principal and accrued
interest is due and payable on November 1, 1996. The loan is collaterized by
inventories, receivables, and equipment. The lending agreement requires the
Registrant to maintain a tangible net worth of $1,800,000, a debt to tangible
net worth ratio of no more than 1.25 to 1, and a current ration of at least 1.5
to 1.0. The Registrant is not required to maintain compensating balances.
NOTE C - STOCKHOLDER'S EQUITY
- -----------------------------
Common Stock Reserved
- ---------------------
Shares of the Registrant's common stock reserved for issuance at August 31, 1995
and May 31, 1994, were as follows:
8-31-95 5-31-95
--------- ---------
Stock Options:
Outstanding 1,546,000 1,546,000
Future Issuance 954,000 954,000
Warrants issued in conjunction with
loans and convertible debt 1,404,167 1,404,167
For conversion of preferred stock 370,483 370,483
--------- ---------
4,274,650 4,274,650
========= =========
NOTE D- EARNINGS PER COMMON SHARE
- ---------------------------------
Net income per common share is computed based on the weighted average number of
common shares and common equivalent shares outstanding (14,967,006 and
14,817,383 at August 31, 1995 and 1994, respectively) during each period.
Outstanding stock options, warrants, and convertible preferred stock are common
stock equivalents and they have been included in the number of shares
outstanding at August 31, 1995 and 1994.
NOTE E - INCOME TAXES
- ---------------------
At May 31, 1995, the Registrant had net tax operating loss carryforwards of
approximately $3,051,000 and business tax credits of approximately $179,000
available to offset future Federal taxable income and tax liabilities,
respectively, expiring at varying dates between 1996 and 2007. The Registrant
also had net tax operating loss carryforwards of approximately $1,251,000 and
business tax credits of approximately $23,000 available to offset future
California taxable income and tax liabilities, expiring at varying dates between
1996 and 1998.
NOTE F - MANUFACTURING AGREEMENT
- --------------------------------
In May, 1990, the Registrant entered into a manufacturing subcontractor
agreement whereby, the subcontractor agreed to provide manufacturing services to
the Registrant through its affiliated entities located in Mexicali, B.C.,
Mexico. The Registrant has moved the majority of its manufacturing operations
to Mexico. Under the terms of the original agreement, the subcontractor
manufactured the Registrant's products based on an hourly rate per employee
based on the number of employees in the subcontractor's workforce. As the
number of employees increased, the hourly rate decreased. In December 1992, the
Registrant renegotiated the agreement changing from an hourly rate per employee
to a pass through of actual costs plus a weekly administrative fee. The amended
agreement gives the Registrant greater control over all costs associated with
the manufacturing operation. In July, 1994, the Registrant again renegotiated
the agreement, reducing the administrative fee and extending the agreement
through June 30, 1998. After June 30, 1996, either party may terminate the
agreement with three months written notice. The Registrant has retained the
option to convert the manufacturing operation to a wholly-owned subsidiary at
any time. Should the Registrant discontinue operations in Mexico, it is
responsible for the accumulated employee seniority obligation as prescribed by
Mexican law.
NOTE G - LEASES
- ---------------
The Registrant leases its main facility under an operating lease expiring
December 31, 1998, which requires monthly rental payments that increase
annually. As of May 31, 1994, future minimum annual cash rental payments under
the Registrant's facility lease are as follows:
Fiscal Year Amount
1996 $45,000
1997 $48,300
1998 $51,400
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Lancer
Orthodontics, Inc. first quarter fiscal 1996 10-QSB and is qualified in its
entirety by reference to such 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> AUG-31-1995
<CASH> 316,870
<SECURITIES> 0
<RECEIVABLES> 1,530,581
<ALLOWANCES> 129,521
<INVENTORY> 1,584,214
<CURRENT-ASSETS> 3,311,658
<PP&E> 2,454,365
<DEPRECIATION> 2,077,820
<TOTAL-ASSETS> 4,277,932
<CURRENT-LIABILITIES> 871,505
<BONDS> 756,309
<COMMON> 4,644,748
0
185,242
<OTHER-SE> (2,179,872)
<TOTAL-LIABILITY-AND-EQUITY> 4,277,932
<SALES> 1,796,602
<TOTAL-REVENUES> 1,796,602
<CGS> 1,011,023
<TOTAL-COSTS> 1,011,023
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,299
<INCOME-PRETAX> 108,797
<INCOME-TAX> 800
<INCOME-CONTINUING> 107,997
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 107,997
<EPS-PRIMARY> .007
<EPS-DILUTED> .007
</TABLE>
