UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
Form 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended May 31, 1996 Commission File No. 0-5920
LANCER ORTHODONTICS, INC.
(Name of small business issuer 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 92069-2437
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (619) 744-5585
Securities Registered Pursuant to Section 12(b)
of the Act: NONE
Securities Registered Pursuant to Section 12(g)
of the Act: Common Stock, Without Par Value
(Title of Class)
Check whether the Issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the Issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained to
the best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
Issuer's revenue for its most recent fiscal year $6,780,314.
The aggregate market value of the voting stock held by non-affiliates of Issuer,
based upon the closing sale price of the common stock as reported on NASDAQ, on
August 15, 1996, was approximately $1,809,314.
The number of shares of Issuer's no par value common stock outstanding as of
August 15, 1996, was 14,879,884.
Documents Incorporated by Reference:
1. Portions of Issuer's Proxy Statement for the Annual Meeting of
Shareholders to be held on October 25, 1996, are incorporated by reference into
Part III.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Lancer Orthodontics, Inc. ("Lancer") was incorporated in California on August
25, 1967. Lancer conducts its operations at one facility which is located at
253 Pawnee Street, San Marcos, California 92069-2347. Since its inception,
Lancer has been engaged in the business of manufacturing and marketing
orthodontic products.
In May, 1990, Lancer entered into a manufacturing subcontractor agreement
whereby the subcontractor agreed to provide manufacturing services to Lancer
through its affiliated entities located in Mexicali, B.C., Mexico. During
fiscal 1992 and 1991, Lancer moved the majority of its manufacturing
operations to Mexico. Under the terms of the original agreement, the
subcontractor manufactured Lancer's products charging Lancer 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, Lancer renegotiated the agreement changing from an hourly
rate per employee cost to a pass through of actual costs plus a weekly
administrative fee. The new agreement gives Lancer greater control over all
costs associated with the manufacturing operation. In July, 1994, Lancer
again renegotiated the agreement reducing the administrative fee and
extending the agreement through June, 1998. Lancer has retained the option
to convert the manufacturing operation to a wholly-owned subsidiary at any
time. Should Lancer discontinue operations in Mexico, it is responsible for
accumulated employee seniority obligations as prescribed by Mexican law.
Lancer has undergone no material change in the mode of conducting its
business other than as described above and it did not dispose of any material
amount of its assets during the fiscal year ended May 31, 1996.
NARRATIVE DESCRIPTION OF THE BUSINESS
PRINCIPAL PRODUCTS AND INDUSTRY SEGMENTS. Lancer's manufactured product line
includes preformed bands, direct bonding brackets, buccal tubes, arch wires,
lingual attachments, and related accessories. The foregoing are assembled to
the orthodontists' prescriptions or the specifications of private label
customers. Lancer's manufactured products are also sold to distributors and
private label customers. Lancer also markets products which are purchased
and resold to orthodontists, including sealants, adhesives, elastomerics,
headgear cases, retainer cases, orthodontic wire, and preformed arches.
Lancer sells its products directly to orthodontists through company-paid
sales representatives in the United States. At the end of its 1996 fiscal
year, Lancer had twelve sales representatives, all in the United States, all
of whom are employees of Lancer.
In selected foreign countries, Lancer sells its products directly to
orthodontists through its international marketing division. Lancer also
sells its products through distributors in certain foreign countries and to
other companies on a private label basis. Lancer has entered into a number
of distributor agreements whereby it granted the marketing rights to its
products in certain sales territories in Mexico, Central America, South
America, Europe, Canada, Australia, and Japan. The distributors complement
the international marketing division which was established in 1982.
For the fiscal years ended May 31, 1996 and 1995, sales by class of product
are:
Class of Product 1996 1995
Manufactured Products $5,653,000 $5,987,000
Resale Products 1,127,000 1,136,000
TOTAL $6,780,000 $7,123,000
Lancer has only one industry segment, which is the manufacture and
distribution of orthodontic products.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES.
For the fiscal years ended May 31, 1996 and 1995:
1996 1995
Sales to unaffiliated customers:
United States $3,999,000 $4,580,000
Europe 1,419,000 1,117,000
Other Foreign 1,362,000 1,426,000
$6,780,000 $7,123,000
Sales or transfers between geographic areas none none
Operating profit:
United States $ 163,000 $ 108,000
Europe 129,000 91,000
Other Foreign 124,000 116,000
$ 416,000 $ 315,000
Identifiable assets:
United States $2,494,000 $2,916,000
Mexico 1,539,000 1,473,000
$4,033,000 $4,389,000
Export sales $2,781,000 $2,543,000
COMPETITION. Lancer encounters intense competition in the sale of
orthodontic products. Lancer's management believes that Lancer's seven major
competitors are Unitek, a subsidiary or division of 3M; "A" Company, a
private company; Ormco, a subsidiary or division of Sybron; RMO, Inc., a
private company; American Orthodontics, a private company; GAC, a private
company; and Dentaurum, a foreign company. Lancer estimates that these seven
competitors account for approximately 80% of the orthodontic products
manufactured and sold in the United States. Lancer's management also
believes that each of these seven competitors is larger than Lancer, has more
diversified product lines, and has financial resources exceeding those of
Lancer. While there is no assurance that Lancer will be successful in
meeting the competition of its major competitors, Lancer has, in the past,
successfully competed in the orthodontic market and has achieved wide
recognition of both its name and its products.
SOURCES AND AVAILABILITY OF RAW MATERIALS. The principal raw materials used
by Lancer in the manufacture of its products include: stainless steel, which
is available from several commercial sources; nickel titanium, which is
available from three sources; and lucolux translucent ceramic, which is
currently only available from one source, General Electric, and is purchased
on open account. Ceramic material similar to General Electric's lucolux
translucent ceramic is available from other sources. Lancer had no
difficulty in obtaining an adequate supply of raw materials during its 1996
fiscal year, and does not anticipate that there will be any interruption or
cessation of supply in the future.
CUSTOMERS, BACKLOG, AND SEASONALITY OF BUSINESS. Lancer sells its products
directly or indirectly through its sales representatives, to a relatively
large number of customers. No customer of Lancer's accounted for 10% or more
of Lancer's sales in the fiscal years ended May 31, 1996 and 1995. Lancer's
backlog at May 31, 1996 and 1995, was $353,000 and $635,000, respectively.
Lancer's business has not been subject to significant seasonal fluctuations.
PATENTS AND TRADEMARKS, LICENSES, FRANCHISES, AND CONCESSIONS HELD. On April
4, 1989, Lancer was granted a patent on its Counter Force design of a nickel
titanium orthodontic archwire. On August 1, 1989, Lancer was granted a
patent on its bracket design used in the manufacturing of Sinterline and
Intrigue orthodontic brackets. Both patents are for a duration of seventeen
years. Lancer has entered into a number of license and/or royalty agreements
pursuant to which it has obtained rights to certain of the products which it
manufactures and/or markets. The patents and agreements have had a favorable
effect on Lancer's image in the orthodontic marketplace and Lancer's sales.
Lancer has made a practice of selling its products under trademarks and of
obtaining protection for those trademarks in the United States. Lancer
considers these trademarks to be of importance in the operation of its
business.
PRODUCT DEVELOPMENT AND IMPROVEMENT. Lancer is engaged in, and intends to
continue development programs directed toward improving its orthodontic
products and production techniques. To this end, Lancer maintains a close
liaison and consults frequently with practicing orthodontists. The costs
incurred by Lancer on product development activities were approximately
$130,000 and $163,000 for Lancer's fiscal years ended May 31, 1996 and 1995,
respectively.
GOVERNMENT REGULATIONS. In 1976, Lancer and many of its products became
subject to regulation by the U.S. Food and Drug Administration ("FDA")
pursuant to the Medical Device Amendments of 1976 ("Amendments"). Lancer has
registered with the FDA as required by the Amendments. Certain existing
products have been listed, and new products of Lancer will be listed with the
FDA for classification. The effect on Lancer of complying with the
registration and classification requirements of the Amendments has not had a
material effect on Lancer's operations to date.
EFFECT OF ENVIRONMENTAL REGULATIONS. Compliance with Federal, State, and
local environmental regulations has not had a material effect on Lancer's
operations to date.
EMPLOYEES. As of August 15, 1996, Lancer had 49 employees, 2 of whom are
employed on a part-time basis. Additionally, Lancer, through its Mexican
subcontractor, employed approximately 150 people in Mexico.
ITEM 2. PROPERTIES
Lancer conducts its operations in a leased facility located in San Marcos,
California, which consists of a 9,240 square foot manufacturing and office
building. The term of the lease is for five years commencing January 1, 1994
and ending December 31, 1998, with the following future minimum annual cash
rental payments:
Fiscal Year Amount
1997 $48,300
1998 $51,400
1999 $30,800
Lancer has subcontracted for a significant portion of its manufacturing in
Mexicali, Mexico. The manufacturing is performed in approximately 12,500 square
feet of space leased by the subcontractor.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Lancer's security holders during the
quarter ended May 31, 1996.
PART II
ITEM 5. MARKET FOR LANCER'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
High and low sales prices for Lancer's common stock as reported by NASDAQ for
the last two years are presented below. Lancer's stock is sold under the
symbol LANZ.
Quarter Ended High Low
August 31, 1994 $.19 $.16
November 30, 1994 $.38 $.19
February 28, 1995 $.25 $.19
May 31, 1995 $.19 $.13
August 31, 1995 $.28 $.09
November 30, 1995 $.81 $.25
February 29, 1996 $.38 $.22
May 31, 1996 $.38 $.25
The approximate number of beneficial holders of Lancer's common stock and
Series D preferred stock at May 31, 1996, was 1,056.
No dividends have been declared or paid on Lancer's common stock since its
inception.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULT OF OPERATIONS
For the fiscal year ended May 31, 1996, net sales were $6,780,314, a decrease of
$342,701 from the prior year. The sales decrease experienced from 1995 to 1996
is attributable to: (1) various manufacturing and purchasing problems
experienced in Mexico; (2) an unpredictable domestic market; (3) renewed pricing
pressures; and (4) the severe winter weather conditions in the United States
during Lancer's fiscal third quarter. Lancer continues to search for new sales
representatives, distributors, private label customers, products, and product
ideas, all of which, if successful, will result in increased sales.
Cost of sales, as a percentage of sales, increased from 58.2% to 59.3%. Over
the past few years, Lancer had been experiencing improvements in manufacturing
productivity. However, in fiscal 1996, these improvements were substantially
offset by manufacturing problems such as: (1) molds damaged by vendors; (2)
defective product received from a vendor; (3) delays in receiving products from
vendors; and (4) management changes at its manufacturing plant. Lancer is
taking steps to identify the causes of the problems and to rectify the problems.
Lancer anticipates that it will need to invest further time and money to solve
the problems.
Selling expenses, as a percentage of sales, decreased from 28.7% to 26.0%. The
decrease is attributed to decreases in payroll, commissions, travel, office
supplies, bad debt expense, advertising, samples, show registration, and
telephone expenses. The decreases were the result of management's decisions to
lower costs to offset the manufacturing problems that caused lower sales.
General and Administrative expenses, as a percentage of sales, increased from
6.5% to 6.6%. The percentage increase can be attributed to the reduction in the
sales base used to calculate the percentage. Actual expenses decreased from the
previous year, primarily as a result of lower professional fees, partially
offset by increased payroll.
Product Development expenses, as a percentage of sales, decreased from 2.3% to
1.9%. This can be attributed to a decrease in payroll, supplies, and
professional fees. Lancer's management believes product development is vital to
its future, and expects expenditures to increase over the next few years.
Interest expense, as a percentage of sales, decreased from 2.4% to 1.5%. The
decrease is attributable to reduced levels of debt, partially offset by higher
interest rates.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
During fiscal 1996, Lancer's management negotiated a restructuring of its bank
term debt, arranging for the debt to be divided into a new term loan and a line
of credit. The term loan is for two years and requires monthly principal and
interest payments of $18,889. Interest is at prime plus 1%. All unpaid
principal and accrued interest is due and payable on November 1, 1997. The line
of credit is for $500,000 and is limited to specified percentages of eligible
accounts receivable. The unused portion available under the line of credit at
May 31, 1996, was $103,000. Borrowings are made at prime plus 1%. The line of
credit expires on November 1, 1996. Immediately after the restructuring, Lancer
paid down a portion of the line of credit with its available cash.
Lancer's inventory and sales practices affect its financing requirements,
however, management believes that the working capital relating to these are
within normal ranges for Lancer's business.
Working capital decreased by $91,677, as compared to the prior year, primarily
because of the restructuring of the bank debt, partially offset by profitability
and non-cash expenses.
Lancer's management believes that capital expansion and modernization of
equipment is required to be able to introduce new products, to improve
manufacturing efficiencies, and to stay competitive in the marketplace. To meet
its goals, Lancer has budgeted to spend up to $250,000 for capital improvements
during 1997, if sufficient operating funds are available.
ITEM 7. FINANCIAL STATEMENTS
Reference is made to Exhibit A attached hereto wherein Lancer's financial
statements are contained which are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF LANCER
Information regarding directors, set forth under the caption "Election of
Directors" in Lancer's annual proxy statement for the annual meeting of
shareholders to be held October 25, 1996, which will be filed with the
Commission not later than 120 days after the end of Lancer's fiscal year period
ended May 31, 1996, is incorporated herein by reference. Information regarding
executive officers, set forth under caption "Executive Compensation and Other
Information" in the annual proxy statement for the annual meeting of
shareholders to be held October 25, 1996, which will be filed with the
Commission not later than 120 days after the end of Lancer's fiscal year ended
May 31, 1996, is also incorporated herein by reference. Information regarding
Section 16 compliance, set forth under caption "Section 16 Compliance" in the
annual proxy statement for the annual meeting of shareholders to be held October
25, 1996, which will be filed with the Commission not later than 120 days after
the end of Lancer's fiscal year ended May 31, 1996, is incorporated herein by
reference.
ITEM 10. EXECUTIVE COMPENSATION
Information regarding executive compensation, set forth under the caption
"Compensation Committee Report on Executive Compensation" in Lancer's annual
proxy statement for the annual meeting of shareholders to be held October 25,
1996, which will be filed with the Commission not later than 120 days after the
end of Lancer's fiscal year ended May 31, 1996, is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership, set forth under the caption
"Beneficial Ownership of the Company's Securities" in Lancer's annual proxy
statement for the annual meeting of shareholders to be held October 25, 1996,
which will be filed with the Commission not later than 120 days after the end of
Lancer's fiscal year ended May 31, 1996, is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Documents filed as a part of the report
1. Financial Statements
See Index to Financial Statements Exhibit A, attached hereto, wherein
Lancer's financial statements are contained.
2. Exhibits Required to be Filed by Item 601 of Regulation S-B
3(i) Articles of Incorporation as amended - Incorporated herein by
reference to Exhibit 4.5 of Lancer's S-8 filed March 8, 1994.
3(ii) By-laws as amended - Incorporated herein by reference to Exhibit
4.6 of Lancer's S-8 filed March 8, 1994.
10 1993 Stock Option Plan as amended - Incorporated herein by
reference to Exhibit 4.1 of Lancer's S-8 filed March 8, 1994.
(b) Reports on Form 8-K
There were no Form 8-K reports filed during the final quarter of the
Lancer's fiscal year ended May 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: August 15, 1996
LANCER ORTHODONTICS, INC.
By: /s/ Douglas D. Miller /s/ Scott R. Striblen
Douglas D. Miller Scott R. Striblen
President and Chief Vice President, Finance
Operating Officer (Principal Financial Officer,
Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities on the dates indicated.
Signature Title Date
/s/ Joseph H. Irani August 15, 1996
Joseph H. Irani Chairman of the Board,
Chief Executive Officer,
Secretary, Treasurer &
Director
/s/ Zackary Irani August 15, 1996
Zackary Irani Director
/s/ Douglas D. Miller August 15, 1996
Douglas D. Miller President, Chief Operating
Officer & Director
Robert Orlando Director
EXHIBIT A
LANCER ORTHODONTICS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report
Balance Sheet - May 31, 1996
Statements of Operations - For Each of the Years in the
Two-Year Period Ended May 31, 1996
Statements of Stockholders' Equity - For Each of the Years
in the Two-Year Period Ended May 31, 1996
Statements of Cash Flows - For Each of the Years in the
Two-Year Period Ended May 31, 1996
Notes to Financial Statements - For Each of the Years in the
Two-Year Period Ended May 31, 1996
Independent Auditors' Report
The Board of Directors
Lancer Orthodontics, Inc.:
We have audited the accompanying balance sheet of Lancer Orthodontics, Inc. (the
"Company") as of May 31, 1996, and the related statements of operations,
stockholders' equity and cash flows for each of the years in the two-year period
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lancer Orthodontics, Inc. as of
May 31, 1996, and the results of its operations and its cash flows for each of
the years in the two-year period then ended, in conformity with generally
accepted accounting principles.
Irvine, California Corbin & Wertz
July 19, 1996
BALANCE SHEET
MAY 31, 1996
ASSETS
CURRENT ASSETS:
Cash $ 64,731
Accounts receivable, less allowance for sales returns
and doubtful receivables of $115,000 (Notes 7 and 8) 1,465,417
Inventories (Notes 3 and 8) 1,585,963
Prepaid expenses 41,510
Total current assets 3,157,621
PROPERTY AND EQUIPMENT, at cost (Notes 4, 8 and 9) 2,523,585
Less: Accumulated depreciation and amortization (2,182,845)
340,740
INTANGIBLE ASSETS, net (Note 5) 530,132
OTHER ASSETS 4,400
$4,032,893
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities (Note 6) $ 387,872
Line of credit (Note 7) 250,000
Current portion of note payable to bank (Note 8) 177,194
Current portion of capital lease obligation (Note 9) 21,648
Total current liabilities 836,714
LONG TERM PORTION OF NOTE PAYABLE TO BANK (NOTE 8) 262,806
LONG TERM PORTION OF CAPITAL LEASE OBLIGATION (NOTE 9) 15,847
Total liabilities 1,115,367
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY (Note 11):
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; $.50 par value:
Authorized 500,000 shares; 370,483 shares issued
and outstanding ($.50 liquidation preference) 185,242
Common stock, no par value: Authorized 50,000,000
shares; 14,851,896 shares issued and outstanding 4,701,182
Accumulated deficit (1,968,898)
Total stockholders' equity 2,917,526
$4,032,893
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF OPERATIONS
For Each of the Years in the Two-Year Period Ended May 31, 1996
1996 1995
NET SALES (Note 14) $6,780,314 $7,123,015
COST OF SALES (Note 10) 4,021,428 4,142,994
Gross profit 2,758,886 2,980,021
OPERATING EXPENSES:
Selling 1,765,325 2,040,907
General and administrative (Note 10) 447,322 461,355
Product development 130,240 162,997
TOTAL OPERATING EXPENSES 2,342,887 2,665,259
INCOME FROM OPERATIONS (Note 14) 415,999 314,762
OTHER INCOME (EXPENSE):
Interest expense (Notes 7, 8 and 9) ( 104,113) ( 168,879)
Other income, net 7,885 10,993
TOTAL OTHER INCOME (EXPENSE) ( 96,228) ( 157,886)
INCOME BEFORE INCOME TAXES 319,771 156,876
INCOME TAXES (Note 13) 800 800
NET INCOME $ 318,971 $ 156,076
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE (Note 1) $ .02 $ .01
<TABLE>
STATEMENTS OF STOCKHOLDERS' EQUITY
For Each of the Years in the Two-Year Period Ended May 31, 1996
<CAPTION>
Series D
Preferred Stock Common Stock Accumulated
Shares Amount Shares Amount Deficit Total
<S> <C> <C> <C> <C> <C> <C>
Balance at June 1, 1994 370,483 $185,242 14,446,900 $4,594,297 $(2,443,945) $2,335,594
Conversion of Accrued
Royalties (Note 11) -- -- 137,617 35,819 -- 35,819
Net Income -- -- -- -- 156,076 156,076
Balance at May 31, 1995 370,483 185,242 14,584,517 4,630,116 (2,287,869) 2,527,489
Conversion of Accrued
Royalties (Note 11) -- -- 194,779 50,816 -- 50,816
Issuance of Common
Stock (Note 11) -- -- 600 -- -- --
Exercise of Stock
Options (Note 11) -- -- 72,000 20,250 -- 20,250
Net Income -- -- -- -- 318,971 318,971
Balance at May 31, 1996 370,483 $185,242 14,851,896 $4,701,182 $(1,968,898) $2,917,526
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
STATEMENTS OF CASH FLOWS
For Each of the Years in the Two-Year Period Ended May 31, 1996
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $318,971 $156,076
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 234,145 354,982
Provision for losses on accounts receivable ( 20,000) 35,000
Net change in operating assets and liabilities:
Increase in accounts receivable ( 77,106) (198,775)
(Increase) decrease in inventories (164,010) 34,946
(Increase) decrease in prepaid expenses ( 2,511) 11,569
Decrease in accounts payable and accrued liabilities(179,188) ( 40,302)
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 110,301 353,496
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (104,017) (116,953)
NET CASH FLOWS USED IN INVESTING ACTIVITIES (104,017) (116,953)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit agreement (Note 7) 250,000 --
Principal payments on note payable to bank (Note 8) (745,000) (400,000)
Principal payments on capital leases ( 21,407) ( 21,833)
Proceeds from sale of common stock (Note 11) 20,250 --
NET CASH FLOWS USED IN FINANCING ACTIVITIES (496,157) (421,833)
NET DECREASE IN CASH AND CASH EQUIVALENTS (489,873) (185,290)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 554,604 739,894
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 64,731 $554,604
continued
STATEMENTS OF CASH FLOWS - CONTINUED
For Each of the Years in the Two-Year Period Ended May 31, 1996
Supplemental disclosures of cash flow information:
Cash paid during the year for:
1996 1995
Interest $104,113 $170,564
Income taxes $ 1,126 $ 1,108
Supplemental disclosure of non-cash financing and investing activities:
In fiscal 1996, the Company issued 194,779 shares of its common stock in
satisfaction of $50,816 in accrued royalties (Note 11).
In fiscal 1995, the Company issued 137,617 shares of its common stock in
satisfaction of $35,819 in accrued royalties (Note 11).
In fiscal 1995, the Company acquired $62,814 in equipment under a capital lease
(Note 9).
The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS
For Each of the Years in the Two-Year Period Ended May 31, 1996
(1) ORGANIZATION
Lancer Orthodontics, Inc. (the "Company") was incorporated on August 25, 1967,
in the state of California, for the purpose of engaging in the design,
manufacture, and distribution of orthodontic products. The Company has a
manufacturing facility in Mexico where a majority of its inventory is
manufactured (Note 10). The Company also purchases certain orthodontic and
dental products for purposes of resale. Sales of manufactured and resale
products comprise approximately 83% and 17% of total sales, respectively, for
fiscal 1996 and 84% and 16% of total sales, respectively, for fiscal 1995.
Sales are made directly to orthodontists world-wide through Company
representatives and independent distributors, with approximately 59% and 64%
during fiscal 1996 and 1995, respectively, being domestic in nature. The
Company also sells certain of its products on a private label basis.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING METHODS - The Company uses the accrual method of accounting for
financial and income tax reporting purposes.
CONCENTRATION OF CREDIT RISK - The Company provides credit in the normal course
of business to customers throughout the United States and foreign markets. The
Company's sales are not materially dependent on a single customer or a small
group of customers. At May 31, 1996, two customers accounted for approximately
16% and 14%, respectively, of accounts receivable. The Company performs ongoing
credit evaluations of its customers. The Company does not obtain collateral
with which to secure its accounts receivable. The Company does maintain
reserves for potential credit losses based upon the Company's historical
experience related to credit losses.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The preparation of
financial statements in conformity with generally accepted accounting principles
("GAAP"), requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company has financial instruments
whereby the fair value of the financial instruments could be different than that
recorded on a historical basis on the accompanying balance sheet. The Company's
financial instruments consist of cash, accounts receivable, accounts payable, a
line of credit, a note payable, and capital leases. The carrying amounts of the
Company's financial instruments generally approximate their fair values at May
31, 1996.
CASH AND CASH EQUIVALENTS - For financial statement purposes, cash and cash
equivalents are defined as demand deposits, money market accounts, and mutual
funds, which have a remaining maturity of three months or less when purchased.
All of the Company's cash equivalents matured as of May 31, 1996.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of the Years in the Two-Year Period Ended May 31, 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
INVENTORIES - Inventories are stated at the lower of cost or market. Cost is
determined on the first-in, first-out method or market. Costs include
materials, direct labor, and an allocable portion of direct and indirect
manufacturing overhead based upon standard rates derived from historical trends
and experience factors. Market is determined by comparison with recent
purchases or net realizable value.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost and are
depreciated using straight-line and declining-balance methods over the estimated
useful lives of the related assets, ranging from three to twelve years.
Leasehold improvements are amortized over the useful life of the asset or the
remaining term of the lease, whichever is shorter.
INTANGIBLE ASSETS - Intangible assets are being amortized using the straight-
line method over 18 years for the marketing and distribution rights and the
technology use rights, and 7 years for certain units purchased under the
technology use rights. Marketing and distribution rights include repurchased
sales territories. Technology use rights include the 1985 purchase of the
assets and technology of Titan Research Associates, Ltd. Under the technology
use rights, the Company purchased 38 units of LP Research Associates, Ltd.
between 1985 and 1993. No additional purchases have been made since 1993.
The Company assesses the recoverability of these intangible assets by
determining whether the amortization of the asset's balance over its remaining
life can be recovered through projected undiscounted future cash flows. The
amount of impairment, if any, is measured based on projected undiscounted future
cash flows and charged to operations in the period in which the impairment is
determined by management. Management has determined that there is no impairment
of intangible assets as of May 31, 1996. Amortization for the year ended May
31, 1996 amounted to approximately $24,900, $48,696, and $5,274, for the
marketing and distribution rights, the technology use rights, and the units
purchased of LP Research, respectively. Amortization for the year ended May 31,
1995 amounted to approximately $24,900, $48,696, and $21,816, for the marketing
and distribution rights, the technology use rights, and the units purchased of
LP Research, respectively.
REVENUE RECOGNITION - Revenues from product sales are recognized at the time the
product is shipped.
INCOME TAXES - The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", ("SFAS
109"). Under SFAS 109, the asset and liability method is used in accounting for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
NET INCOME PER COMMON SHARE AND DIVIDENDS - Net income per common share is
computed based on the weighted average number of common and common equivalent
shares outstanding (15,534,416 for 1996 and 14,959,600 for 1995 on a primary
basis and 15,705,817 for 1996 and 15,037,499 for 1995 on a fully diluted basis).
Net income per common share is the same on a primary and fully diluted bases for
both years presented. Outstanding stock options, warrants, and convertible
preferred stock are common stock equivalents and have been included in the
number of shares outstanding for 1996 and 1995. Dividends have never been
declared or paid by the Company.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of the Years in the Two-Year Period Ended May 31, 1996
(3) INVENTORIES
The components of inventories at May 31, 1996 consist of the following:
Raw materials $ 301,161
Work in process 190,635
Finished products 1,094,167
Total $1,585,963
Approximately $1,360,000 of inventory is located at the Company's manufacturing
facility in Mexico (Note 10).
(4) PROPERTY AND EQUIPMENT
The components of property and equipment at May 31, 1996 consist of the
following:
Machinery and equipment $1,798,222
Tooling, jigs, and fixtures 317,081
Leasehold improvements 239,365
Furniture and fixtures 74,672
Asset under capital lease 68,214
Construction in progress 26,031
2,523,585
Less accumulated depreciation and amortization (2,182,845)
Total $ 340,740
Approximately $179,000 of property and equipment, net of accumulated
depreciation and amortization, is located at the Company's manufacturing
facility in Mexico (Note 10).
Included in accumulated depreciation is $20,464 relating to the asset under
capital lease.
Total depreciation expense for the years ended May 31, 1996 and 1995, was
$155,275 and $259,570, respectively.
(5) INTANGIBLE ASSETS
The components of intangible assets at May 31, 1996 consist of the following:
Marketing and distribution rights $ 442,750
Technology use rights 858,328
LP Research technology 127,179
1,428,257
Less accumulated amortization ( 898,125)
` $ 530,132
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of the Years in the Two-Year Period Ended May 31, 1996
(6) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at May 31, 1996 consist of the
following:
` Trade accounts payable $190,709
Accrued payroll 81,981
Other accrued liabilities 115,182
Total $387,872
(7) LINE OF CREDIT
At May 31, 1996, the Company had a $500,000 line of credit with a bank.
Borrowings are made at prime plus 1% (9.25% at May 31, 1996) and are limited to
specified percentages of eligible accounts receivable. The unused portion
available under the line of credit at May 31, 1996 was $103,000. The line of
credit expires on November 1, 1996. The Company is not required to maintain
compensating balances in connection with this borrowing arrangement.
The following summarizes information on short-term borrowings from October 11,
1995 (the date the line was established) through May 31, 1996.
Average month end balance $196,747
Maximum balance outstanding at any month end $250,000
Weighted average interest rate (computed by dividing
interest expense by average monthly balance) 9.53%
Interest rate at year end 9.25%
(8) NOTE PAYABLE TO BANK
Effective October 10, 1995, the Company arranged for a restructuring of its note
payable. The note was divided into a new term note, with an original balance of
$645,000 and a line of credit with an original balance of $400,000 (Note 7).
The new note payable is for a term of two years and requires monthly principal
and interest payments of $18,889. Interest is at prime plus 1% (9.25% at May
31, 1996). All unpaid principal and accrued interest is due and payable on
November 1, 1997.
At May 31, 1996, the note payable is due as follows:
Years Ending May 31,
1997 $177,194
1998 262,806
440,000
Less current portion (177,194)
$262,806
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of the Years in the Two-Year Period Ended May 31, 1996
(8) NOTE PAYABLE TO BANK -CONTINUED
The loan is collateralized by inventories, receivables, and equipment. The
lending agreement requires, among other things, that the Company maintain a
tangible net worth of $2,000,000, a debt to tangible net worth ratio of no more
than 1.25 to 1, and a current ratio of at least 1.5 to 1. The Company is not
required to maintain compensating balances in connection with this lending
agreement.
(9) CAPITAL LEASE
The Company is the lessee of equipment under a capital lease which expires in
the year 1998. The assets and liabilities under the capital lease are recorded
at the lower of the present value of the minimum lease payments or the fair
market value of the asset. The asset is depreciated over its estimated useful
life. Depreciation of the asset is included in depreciation expense for the
years ended May 31, 1996 and 1995.
The future annual minimum lease payments under the capital lease are as follows:
Years Ending May 31,
1997 $24,791
1998 16,528
Total annual future minimum lease payments 41,319
Less amount representing interest ( 3,824)
Present value of net minimum lease payments 37,495
Less current portion (21,648)
$15,847
(10) COMMITMENTS AND CONTINGENCIES
LEASES - The Company leases its main facility under a non-cancelable operating
lease expiring December 31, 1998, which requires monthly rentals that increase
annually, from $2,900 per month (1994) to $4,400 per month (1998). The lease
expense is being recognized on a straight-line basis over the term of the lease.
The excess of the expense recognized over the cash paid is included in deferred
lease expense in accrued liabilities in the accompanying balance sheet.
The future minimum lease payments are as follows:
Years Ending May 31,
1997 $ 48,300
1998 51,400
1999 30,800
$130,500
Total rental expense for the years ended May 31, 1996 and 1995, was $45,840 and
$50,400, respectively.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of the Years in the Two-Year Period Ended May 31, 1996
(10) COMMITMENTS AND CONTINGENCIES - CONTINUED
MANUFACTURING AGREEMENT - In May, 1990, the Company entered into a manufacturing
subcontractor agreement whereby the subcontractor agreed to provide
manufacturing services to the Company through its affiliated entities located in
Mexicali, B.C., Mexico. The Company moved the majority of its manufacturing
operations to Mexico during fiscal 1992 and 1991. Under the terms of the
original agreement, the subcontractor manufactured the Company'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 increase, the hourly rate
decreases. In December, 1992, the Company renegotiated the agreement changing
from an hourly rate per employee cost to a pass through of actual costs, plus a
weekly administrative fee. The amended agreement gives the Company greater
control over all costs associated with the manufacturing operation. In July,
1994, the Company again renegotiated the agreement reducing the administrative
fee and extending the agreement through June, 1998. The Company has retained
the option to convert the manufacturing operation to a wholly-owned subsidiary
at any time. Should the Company discontinue operations in Mexico, it is
responsible for the accumulated employee seniority obligation as prescribed by
Mexican law.
LICENSE AND ROYALTY AGREEMENTS - The Company has entered into a number of
license and/or royalty agreements pursuant to which it has obtained rights to
manufacture and market certain products. The agreements are for various
durations and they require the Company to make payments based on the sales of
the individual licensed products.
(11) STOCKHOLDERS' EQUITY
COMMON STOCK - During 1996, the Company issued 194,779 shares of its common
stock in satisfaction of $50,816 in accrued royalties, and issued 72,000 shares
of common stock in connection with the exercise of stock options and issued 600
shares of common stock for aggregate consideration of $20,250 (see Stock Option
Agreements below). During 1995, the Company issued 137,167 shares of its common
stock in satisfaction of $35,819 in accrued royalties.
REDEEMABLE CONVERTIBLE PREFERRED STOCK - SERIES C - The Company has authorized
250,000 shares of Series C preferred stock. Each share is entitled to a $.06
non-cumulative dividend and is convertible at the option of the holder into one
and one-half shares of common stock. The Company, at its option, can redeem
outstanding shares of the preferred stock for cash at $.75 per share after
December 31, 1994. At May 31, 1996, there were no shares issued and
outstanding. There were no dividends declared or paid in 1996 or 1995.
REDEEMABLE CONVERTIBLE PREFERRED STOCK - SERIES D - The Company has authorized
500,000 shares of Series D preferred stock. Each share is entitled to a $.04
non-cumulative dividend and is convertible at the option of the holder into one
share of common stock. The company, at its option, can redeem outstanding
shares of the preferred stock for cash at $.50 per share after December 31,
1994. There were 370,483 shares issued and outstanding at May 31, 1996. There
were no dividends declared or paid in 1996 or 1995.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of the Years in the Two-Year Period Ended May 31, 1996
(11) STOCKHOLDERS' EQUITY - CONTINUED
STOCK OPTION AGREEMENTS - The Company has incentive stock option and non-
qualified stock option plans for directors, officers, and key employees. The
plans provide for the granting of options for common shares at exercise prices
equal to the fair market value at the date of grant, as determined by the Board
of Directors. Options may become exercisable over a period of up to three years
from the date of grant and may be exercised over a period of three to seven
years from the date of the grant, as determined by the Board of Directors. The
Company's shareholders have authorized a total of 2,500,000 shares to be
available for grant under the Company's stock option plan.
Stock option information as of May 31, 1996 and 1995 consists of the following:
1996 1995
Outstanding at the beginning of the year
at prices ranging from $.20 to $.35 1,546,000 1,633,000
Granted at prices ranging from $.25 to $.28 -- 172,000
Exercised at a price of $.28 ( 72,000) --
Canceled or lapsed at prices ranging from
$.20 to $.35 ( 34,000) ( 259,000)
Outstanding at year end at prices ranging from
$.20 to $.35 1,440,000 1,546,000
Outstanding and exercisable at year end
at prices ranging from $.20 to $.35 1,274,167 1,219,001
In fiscal years ending 1998 and 2000, options covering 1,340,000 and 100,000
shares, respectively, will expire.
WARRANTS - In 1994, the Company issued warrants to purchase 1,404,167 shares of
Common Stock at $.25 per share to two major shareholders and a member of the
Board of Directors. The warrants expire in 1998. In view of the exercise price
of the warrants, the Board of Directors determined that no value should be
ascribed to the warrants at the date of issuance.
No warrants were issued in 1996 or 1995.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of the Years in the Two-Year Period Ended May 31, 1996
(11) STOCKHOLDERS' EQUITY - CONTINUED
COMMON STOCK RESERVED - Shares of the Company's common stock, which have been
reserved for issuance at May 31, 1996 and 1995 consists of the following:
1996 1995
Stock Options:
Outstanding 1,440,000 1,546,000
Future Issuance 988,000 954,000
Warrants 1,404,167 1,404,167
For Conversion of Preferred Stock 370,483 370,483
Total 4,202,650 4,274,650
Total shares reserved for directors, officers, and employees included above are
2,019,167 and 2,053,167 at May 31, 1996 and 1995, respectively.
(12) RETIREMENT SAVINGS PLAN
Effective September 1, 1986, the Company established a 401(k) plan for the
benefit of its employees. The plan permits eligible employees to contribute to
the plan up to the maximum percentage of total annual compensation allowable
under the limits of Internal Revenue Code Sections 415, 401(k), and 404. The
Company, at the discretion of its Board of Directors, may make contributions to
the plan in amounts determined by the Board each year. No contributions by the
Company have been made since the plan's inception.
(13) INCOME TAXES
The provision for income taxes for the years ended May 31, 1996 and 1995
consists of the following:
Current Deferred Total
Year ended May 31, 1996:
U.S. Federal $ -- $ -- $ --
State and Local 800 -- 800
$ 800 $ -- $ 800
Year ended May 31, 1995:
U.S. Federal $ -- $ -- $ --
State and Local 800 -- 800
$ 800 $ -- $ 800
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of the Years in the Two-Year Period Ended May 31, 1996
(13) INCOME TAXES - CONTINUED
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at May 31, 1996 and 1995 are
presented below:
1996 1995
Deferred tax assets:
Accounts receivable, principally due to allowance
for doubtful accounts and sales returns $ 46,000 $ 54,000
Inventories, principally due to additional costs
inventoried for tax purposes pursuant to the
Tax Reform Act of 1986 and allowance for
inventory obsolescence 98,261 91,262
Compensated absences principally due to accrual
for financial reporting 20,100 22,892
Net operating loss carryforwards 996,391 1,153,732
Business tax credit carryforwards 197,131 201,925
Less valuation allowance (1,274,053) (1,430,021)
Net deferred tax assets 83,830 93,790
Deferred tax liabilities:
Unamortized marketing rights ( 83,830) ( 93,790)
$ -- $ --
Income tax expense for the years ended May 31, 1996 and 1995, differed from the
amounts computed by applying the U.S. Federal income tax rate of 34 % to pre-tax
income as a result of:
1996 1995
Computed "expected" tax expense $108,722 $ 53,338
Income (reduction) in income taxes resulting from:
Meals and entertainment 9,855 12,721
Change in beginning of the year balance of the
valuation allowance for deferred tax assets
allocated to income tax expense (118,305) ( 65,787)
State and local income taxes, net of tax benefit 528 528
$ 800 $ 800
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of the Years in the Two-Year Period Ended May 31, 1996
(13) INCOME TAXES - CONTINUED
As of May 31, 1996, the Company had net tax operating loss carryforwards of
approximately $2,688,000 and business tax credits of approximately $175,000
available to offset future Federal taxable income and tax liabilities,
respectively. The Federal carryforwards expire in varying amounts from 1997 to
2008. The Company also had net tax operating loss carryforwards of
approximately $546,000 and business tax credits of approximately $23,000
available to offset future California taxable income and tax liabilities,
respectively. The State carryforwards expire in varying amounts between 1997
and 1998.
(14) EXPORT SALES
The Company has significant export sales, which are primarily to Western
European countries. The net sales and operating activities for the years ended
May 31, 1996 and 1995 are as follows:
1996 1995
Net Sales:
Domestic $3,999,000 $4,580,000
Foreign 2,781,000 2,543,000
Total $6,780,000 $7,123,000
Operating Profit:
Domestic $ 163,000 $ 108,000
Foreign 253,000 207,000
Total $ 416,000 $ 315,000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Lancer
Orthodontics, Inc.'s May 31, 1996 Form 10-KSB and is qualified in its entirety
by reference to such Form 10-KSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> MAY-31-1996
<CASH> 64,731
<SECURITIES> 0
<RECEIVABLES> 1,580,417
<ALLOWANCES> 115,000
<INVENTORY> 1,585,963
<CURRENT-ASSETS> 3,157,621
<PP&E> 2,523,585
<DEPRECIATION> (2,182,845)
<TOTAL-ASSETS> 4,032,893
<CURRENT-LIABILITIES> 836,714
<BONDS> 278,653
0
185,242
<COMMON> 4,701,182
<OTHER-SE> (1,968,898)
<TOTAL-LIABILITY-AND-EQUITY> 4,032,893
<SALES> 6,780,314
<TOTAL-REVENUES> 6,780,314
<CGS> 4,021,428
<TOTAL-COSTS> 4,021,428
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 104,113
<INCOME-PRETAX> 319,771
<INCOME-TAX> 800
<INCOME-CONTINUING> 318,971
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 318,971
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
