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 November 30, 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
------ ------
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 14,778,833
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Traditional small business disclosure format (check one):
Yes X No
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PART I. FINANCIAL INFORMATION
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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 six months of fiscal 1996, the Registrant's financial condition
was as follows:
11-30-95 05-31-95 05-31-94
--------- --------- ----------
Current Assets $3,186,157 $3,383,867 $3,451,897
Current Liabilities 904,290 971,283 2,296,618
Working Capital 2,281,867 2,412,584 1,154,979
Bank Debt & Capitalized Leases 797,438 1,243,902 1,602,921
Shareholder Equity 2,763,006 2,527,489 2,335,594
Total Assets 4,090,834 4,389,267 4,632,512
For the six months ended November 30, 1995, net income increased $88,304 (88.5%)
as compared to the year earlier. The increase in net income is primarily
attributable to an improvement in cost of goods sold and a reduction in
operating expenses.
Net sales decreased $140,814 (3.9%) compared to the year earlier period. The
decrease is primarily the result of a soft domestic market during the second
quarter. To improve sales performance, 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 57.1% to 55.8% 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 and a reduction in
manufacturing costs.
Selling and general & administrative expenses decreased $96,351 (7.4%) compared
to the year earlier period. The decrease is attributable to a decrease in
professional fees, samples, and shipping costs.
Product development expenses increased $6,697 (8.4%) 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 $11,139 (14.1%) compared to the year earlier period,
reflecting reduced debt and interest rates.
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.
Under the line of credit, the Registrant can borrow up to $500,000. Borrowings
are secured by specific percentages of eligible accounts receivable. At
November 30, 1995, the unused portion available under the line of credit was
$275,000.
Working capital decreased $158,286 during the six 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 and cash flow.
PART II. OTHER INFORMATION
-----------------
Item 4. Submission of Matters to a Vote of Security Holders
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a. The Registrant's 1995 annual meeting of shareholders was held on
October 20, 1995.
b. The following nominees were elected directors:
Joseph H. Irani
Zackary Irani Robert Orlando
Douglas D. Miller Roger Wolk
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 December 15, 1995 By /s/ Douglas D. Miller
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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 FOR THE SIX MONTHS
ENDED NOVEMBER 30 ENDED NOVEMBER 30
1995 1994 1995 1994
--------------------- ---------------------
NET SALES $1,676,300 $1,870,829 $3,472,902 $3,613,716
COST OF SALES 926,596 1,027,749 1,937,619 2,063,382
---------- --------- --------- ---------
Gross Profit 749,704 843,080 1,535,283 1,550,334
OPERATING EXPENSES:
Selling, General & Admin 591,569 707,410 1,200,188 1,296,539
Product Development 46,970 39,940 85,557 78,860
---------- ---------- --------- ---------
TOTAL OPERATING EXPENSES 638,539 747,350 1,285,745 1,375,399
---------- ---------- --------- ---------
INCOME FROM OPERATIONS 111,165 95,730 249,538 174,935
OTHER (INCOME) EXPENSE:
Interest Expense 31,555 39,518 67,854 78,993
Other (Income) Expense, Net ( 470)( 1,924)( 7,193)( 3,831)
---------- ---------- ---------- ----------
TOTAL OTHER (INCOME) EXPENSE 31,085 37,594 60,661 75,162
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 80,080 58,136 188,877 99,773
INCOME TAXES (NOTE E) -- -- 800 --
---------- --------- --------- ----------
NET INCOME $ 80,080 $ 58,136 $ 188,077 $ 99,773
========== ========= ========= =========
NET INCOME PER COMMON
SHARE (NOTE D) $ .005 $ .004 $ .012 $ .007
========== ========= ======== =========
LANCER ORTHODONTICS, INC.
-------------------------
CONDENSED BALANCE SHEETS (UNAUDITED)
------------------------------------
11-30-95
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ASSETS
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CURRENT ASSETS:
Cash $ 161,184
Accounts Receivable, less Allowances of $130,568 1,282,528
Inventories 1,682,782
Prepaid Expenses 59,663
---------
Total Current Assets 3,186,157
---------
PROPERTY AND EQUIPMENT, at cost 2,461,417
Less: Accumulated Depreciation (2,128,070)
---------
333,347
---------
INTANGIBLE ASSETS:
Marketing and Distribution Rights 222,025
Technology Use Rights 344,905
---------
566,930
OTHER ASSETS ,400
---------
Total Assets $4,090,834
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts Payable and Accrued Liabilities $ 530,390
Line of Credit (Note B) 175,000
Current Portion of Note Payable to Bank (Note B) 178,438
Capital Lease Obligations 20,462
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Total Current Liabilities 904,290
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LONG TERM PORTION OF NOTE PAYABLE TO BANK (Note B) 396,562
LONG TERM PORTION OF CAPITAL LEASES 26,976
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 14,778,833 4,677,556
Accumulated Deficit (2,099,792)
---------
Total Stockholders' Equity 2,763,006
---------
Total Liabilities And Equity $4,090,834
=========
LANCER ORTHODONTICS, INC.
-------------------------
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
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FOR THE SIX MONTHS
ENDED NOVEMBER 30
1995 1994
---------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $188,077 $ 99,773
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 142,572 178,506
Provision for losses on accounts receivable -- 50,500
Changes in assets and liabilities:
(Increase) in accounts receivable, net 85,783 (113,382)
(Increase) decrease in inventory (260,829) 98,017
(Increase) decrease in prepaid expenses ( 20,664) 19,993
Decrease in accounts payable and
accrued liabilities ( 60,296) (203,613)
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CASH FLOWS USED BY OPERATING ACTIVITIES 74,643 129,794
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ( 41,849) ( 50,948)
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CASH FLOWS USED IN INVESTING ACTIVITIES ( 41,849) ( 50,948)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under line of credit agreement (225,000) --
Principal payments on note payable to bank (210,000) (216,000)
Principal payments of long-term debt and
capital leases ( 11,464) ( 16,844)
Proceeds from sale of stock 20,250 --
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CASH FLOWS USED IN FINANCING ACTIVITIES (426,214) (232,844)
------- -------
DECREASE IN CASH (393,420) (153,998)
CASH AT BEGINNING OF PERIOD 554,604 739,894
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CASH AT END OF PERIOD $161,184 $585,896
======= =======
In fiscal 1996, the Registrant issued 122,316 shares of its common stock in
satisfaction of $27,190 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 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.
At November 30, 1995, the Registrant had a $500,000 line of credit with the
bank. Borrowings are made at prime (8.75% at November 30, 1995) plus 1% and are
limited to specific percentages of eligible accounts receivable. The unused
portion available under the line of credit at November 30, 1995 was $275,000.
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 company. The lending agreement requires the
Registrant to maintain 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 November 30,
1995 and May 31, 1995, were as follows:
11-30-95 5-31-95
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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
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 (15,354,569 and
14,934,002 at November 30, 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 November 30, 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, 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
1998 $51,400
1999 $30,800
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Lancer
Orthodontics, Inc. second quarter fiscal 1996 10-QSB and is qualified in its
entirety by reference to such 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> NOV-30-1995
<CASH> 161,184
<SECURITIES> 0
<RECEIVABLES> 1,413,096
<ALLOWANCES> 130,568
<INVENTORY> 1,682,782
<CURRENT-ASSETS> 3,186,157
<PP&E> 2,461,417
<DEPRECIATION> 2,128,070
<TOTAL-ASSETS> 4,090,834
<CURRENT-LIABILITIES> 904,290
<BONDS> 423,538
0
185,242
<COMMON> 4,677,556
<OTHER-SE> (2,099,792)
<TOTAL-LIABILITY-AND-EQUITY> 4,090,834
<SALES> 3,472,902
<TOTAL-REVENUES> 3,472,902
<CGS> 1,937,619
<TOTAL-COSTS> 1,937,619
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,299
<INCOME-PRETAX> 188,877
<INCOME-TAX> 800
<INCOME-CONTINUING> 188,077
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 188,077
<EPS-PRIMARY> .012
<EPS-DILUTED> .012
</TABLE>
