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 February 29, 1996 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, 812,817
-----------
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
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OF OPERATIONS
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RESULTS OF OPERATIONS
- ---------------------
For the nine months ended February 29, 1996, net income decreased $54,967
(38.9%) as compared to the year earlier period. In addition, for the three
months ended February 29, 1996, net income decreased $143,271 (345.1%) as
compared to the year earlier period. The decrease in net income is primarily
attributable to the reduction in sales, which was caused by manufacturing and
other problems and costs incurred to resolve those problems.
2
Net sales decreased $483,669 (9.1%) compared to the year earlier period. In
addition, for the three months ended February 29, 1996, net sales decreased
$342,855 (20.2%) compared to the year earlier period. The decrease is
attributable to manufacturing and other problems which have resulted in
approximately $635,000 in lost sales and delayed deliveries. To improve
manufacturing performance, the Registrant has reorganized its manufacturing
operations, streamlined its lines of reporting, increased production capacity,
and improved production planning. The Registrant continues to search for and
add new distributors, private label customers, and sales representatives. The
Registrant remains very active in adding new products to its growing product
line, believing that a larger and more varied product line will appeal to a
wider range of customers.
Cost of sales as a percentage of sales increased from 58.1% to 59.9% as compared
to the year earlier period. The decline in gross margin is attributable to
manufacturing problems experienced in the third quarter. The Registrant has
identified the manufacturing problems and has taken aggressive action to correct
the problems.
Selling and general and administrative expenses decreased $187,523 (10.2%)
compared to the year earlier period. The decrease is attributable to
organizational changes made, a decrease in professional fees, samples, and
shipping costs, partially offset by an increase in trade show costs.
Product development expenses decreased $5,693 (4.9%) 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.
3
Interest expense decreased $42,398 (32.9%) compared to the year earlier period,
reflecting reduced debt and interest rates.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
- -----------------------------------------------------
The Registrant's financial condition at February 29, 1996 and its previous two
year ends was as follows:
2/29/96 5/31/95 5/31/94
---------- ---------- ----------
Current Assets $3,010,371 $3,383,867 $3,451,897
Current Liabilities 896,556 971,283 2,296.618
Working Capital 2,113,815 2,412,584 1,154,979
Bank Debt & Capitalized Leases 716,536 1,243,902 1,602,921
Shareholder Equity 2,673,085 2,527,489 2,335,594
Total Assets 3,902,865 4,389,267 4,632,512
Effective October 10, 1995, the Registrant arranged for a restructuring of its
$1,045,000 bank debt. The debt was divided into a term loan, with an original
balance of $645,000 and a line of credit with an original balance of $400,000.,
The Registrant also arranged for a reduction in interest rate from prime plus 3%
to prime plus 1%. Immediately after the restructuring, the Registrant paid down
the line of credit by $225,000.
The new bank term loan requires 24 monthly principal and interest payments of
$18,890. All unpaid principal and accrued interest is due and payable on
November 1, 1997.
4
Under the line of credit, the Registrant can borrow up to $500,000. Borrowings
are secured by specific percentages of eligible accounts receivable. At
February 29, 1996, the unused portion available under the line of credit was
$180,000.
Working capital decreased $298,769 during the nine months, primarily because of
the restructuring of its bank debt, partially offset by profitability and non-
cash expenses. The Registrant expects to meet its cash requirements out of its
cash reserves, cash flow, and line of credit.
Item 6.EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
There were no Form 8-k reports filed during the quarter.
SIGNATURES
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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 April 15, 1996 By /s/ Douglas D. Miller
-------------- -----------------------------
Douglas D. Miller,
President and Chief Operating Officer
By /s/ Scott R. Striblen
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5
Scott R. Striblen, Vice President, Finance
EXHIBIT A
SUMMARIZED FINANCIAL INFORMATION
--------------------------------
LANCER ORTHODONTICS, INC.
-------------------------
CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
---------------------------------------------
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
2/29/96 2/28/95 2/29/96 2/28/95
----------------------- -----------------------
NET SALES $1,353,305 $1,696,160 $4,826,207 $5,309,876
COST OF SALES 955,008 1,021,587 2,892,627 3,084,969
--------- --------- --------- ---------
Gross Profit 398,297 674,573 1,933,580 2,224,907
OPERATING EXPENSES:
Selling, General &
Administrative 456,897 548,069 1,657,085 1,844,608
Product Development 25,342 37,732 110,899 116,592
--------- --------- --------- ---------
TOTAL OPERATING EXPENSES 482,239 585,801 1,767,984 1,961,200
--------- --------- --------- ---------
6
INCOME (LOSS) FROM
OPERATIONS ( 83,942) 88,772 165,596 263,707
OTHER INCOME (EXPENSE):
Interest Expense ( 18,516) ( 9,775) ( 86,370) ( 128,768)
Other Income (Expense), Net 713 2,529 7,906 6,360
--------- --------- --------- ---------
TOTAL OTHER INCOME (EXPENSE) ( 17,803) ( 47,246) ( 78,464) ( 122,408)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE
INCOME TAXES ( 101,745) 41,526 87,132 141,299
INCOME TAXES (NOTE E) -- -- 800 --
--------- --------- --------- ---------
NET INCOME (LOSS) ($ 101,745) $ 41,526 $ 86,332 $ 141,299
========= ========= ========= =========
NET INCOME (LOSS) PER
COMMON SHARE (NOTE D) ($ .007) $ .003 $ .006 $ .009
========= ========= ========= =========
LANCER ORTHODONTICS, INC.
-------------------------
7
CONDENSED BALANCE SHEETS (UNAUDITED)
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2/29/96
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ASSETS (NOTE B)
---------------
CURRENT ASSETS:
Cash $ 124,776
Accounts Receivable, less Allowances of $99,251 1,185,516
Inventories 1,662,322
Prepaid Expenses 37,757
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Total Current Assets 3,010,371
---------
PROPERTY AND EQUIPMENT, at cost 2,517,884
Less: Accumulated Depreciation (2,178,320)
---------
339,564
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INTANGIBLE ASSETS:
Marketing and Distribution Rights, net 215,800
Technology Use Rights, net 332,730
---------
548,530
OTHER ASSETS 4,400
---------
Total Assets $3,902,865
=========
8
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts Payable and Accrued Liabilities $ 513,244
Line of Credit (Note B) 174,000
Current Portion of Note Payable to Bank (Note B) 188,266
Capital Lease Obligations 21,046
---------
Total Current Liabilities 896,556
---------
LONG TERM PORTION OF NOTE PAYABLE TO BANK (Note B) 311,734
LONG TERM PORTION OF CAPITAL LEASES 21,490
COMMITMENTS AND CONTINGENCIES (Note G) --
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 14,812,817 4,689,380
Accumulated Deficit (2,201,537)
---------
Total Stockholders' Equity 2,673,085
---------
9
Total Liabilities and Stockholders' Equity $3,902,865
=========
LANCER ORTHODONTICS INC.
------------------------
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
----------------------------------------------
FOR THE NINE MONTHS
ENDED
2/29/96 2/28/95
-----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 86,332 $141,299
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 211,222 267,759
Provision for losses on accounts receivable 30,000 39,000
Changes in assets and liabilities:
(Increase) in accounts receivable, net 152,795 (125,230)
(Increase) decrease in inventory (240,369) 139,031
(Increase) decrease in prepaid expenses 1,242 44,930
Decrease in accounts payable and
10
accrued liabilities ( 65,618) (277,853)
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CASH FLOWS USED BY OPERATING ACTIVITIES 175,604 228,936
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ( 98,316) ( 91,908)
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CASH FLOWS USED IN INVESTING ACTIVITIES ( 98,316) ( 91,908)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under line of credit agreement (226,000) --
Principal payments on note payable to bank (285,000) (295,000)
Principal payments of long-term debt and
capital leases ( 16,366) ( 17,328)
Proceeds from sale of stock 20,250 --
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CASH FLOWS USED IN FINANCING ACTIVITIES (507,116) (312,328)
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DECREASE IN CASH (429,828) (175,300)
CASH AT BEGINNING OF PERIOD 554,604 739,894
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CASH AT END OF PERIOD $124,776 $564,594
======= =======
In fiscal 1996, the Registrant issued 155,700 shares of its common stock in
satisfaction of $39,014 in accrued royalties.
11
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 October 10, 1995, the Registrant arranged for a restructuring of its
$1,045,000 bank debt. The debt was divided into a line of credit and a term
loan.
12
At February 29, 1996, the Registrant had a $500,000 line of credit with the
bank. Borrowings are made at prime (8.25% at February 29, 1996) plus 1% and are
limited to specific percentages of eligible accounts receivable. The unused
portion available under the line of credit at February 29, 1996 was $180,000.
The line of credit expires on November 1, 1996.
The new bank term loan requires 24 monthly principal and interest payments of
$18,890. Interest is at prime plus 1%. All unpaid principal and accrued
interest is due and payable on November 1, 1997. The loan is secured by
virtually all the assets of the Registrant. The lending agreement requires the
Registrant to maintain minimum tangible net worth of $1,800,000, a debt to
tangible net worth of no more than 1.25 to 1.0 and a current ratio 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 February 29,
1996 and May 31, 1995, were as follows:
2/29/96 5/31/95
---------- ----------
Stock Options:
Outstanding 1,440,000 1,546,000
Future Issuance 988,000 954,000
Warrants issued in conjunction with loans
and convertible debt 1,404,167 1,404,167
13
For conversion of preferred stock 370,483 370,483
--------- ---------
4,202,650 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 (15,447,474 and
14,970,017 for the nine months ended February 29, 1996 and February 28, 1995
respectively). Outstanding stock options, warrants, and convertible preferred
stock are considered in the determination of common stock equivalents and, where
appropriate, they have been included in the weighted average number of shares
outstanding for the nine months ended February 29, 1996 and February 28, 1995.
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
- --------------------------------
14
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, 1995, future minimum annual cash rental payments under
the Registrant's facility lease are as follows:
Fiscal Year Amount
1996 $45,000
1997 $48,300
15
1998 $51,400
1999 $30,800
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Lancer
Orthodontics, Inc. Third quarter 1996 10-QSB and is qualified in its entirety
to such 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> FEB-29-1996
<CASH> 124,776
<SECURITIES> 0
<RECEIVABLES> 1,284,767
<ALLOWANCES> 99,251
<INVENTORY> 1,662,322
<CURRENT-ASSETS> 3,010,371
<PP&E> 2,517,884
<DEPRECIATION> (2,178,320)
<TOTAL-ASSETS> 3,902,865
<CURRENT-LIABILITIES> 896,556
<BONDS> 333,224
0
185,242
<COMMON> 4,689,380
<OTHER-SE> (2,201,537)
<TOTAL-LIABILITY-AND-EQUITY> 3,902,865
<SALES> 4,826,207
<TOTAL-REVENUES> 4,826,207
<CGS> 2,892,627
<TOTAL-COSTS> 2,892,627
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 86,370
<INCOME-PRETAX> 87,132
<INCOME-TAX> 800
<INCOME-CONTINUING> 86,336
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 86,336
<EPS-PRIMARY> .006
<EPS-DILUTED> .006
</TABLE>
