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
(No fee required)
For the Fiscal Year Ended May 31, 1997 Commission File No. 0-5920
(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: (760) 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. X
Issuer's revenue for its most recent fiscal year $6,333,798.
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 11, 1997, was approximately $1,060,307.
The number of shares of Issuer's no par value common stock outstanding as of
August 11, 1997, was 2,125,712.
Documents Incorporated by Reference:
1. Portions of Issuer's Proxy Statement for the Annual Meeting of
Shareholders to be held on October 24, 1997, 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. In March 1996, Lancer agreed to
extend the agreement through October 1998, to coincide with the building
lease. Effective April 1, 1996, Lancer leased the Mexicali facility under a
separate agreement. 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, 1997.
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 1997 fiscal
year, Lancer had nine 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, 1997 and 1996, sales by class of product
are:
Class of Product 1997 1996
Manufactured Products $5,196,000 $5,653,000
Resale Products 1,138,000 1,127,000
TOTAL $6,334,000 $6,780,000
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, 1997 and 1996:
1997 1996
Sales to unaffiliated customers:
United States $3,764,000 $3,999,000
Europe 1,276,000 1,419,000
Other Foreign 1,294,000 1,362,000
$6,334,000 $6,780,000
Sales or transfers between geographic areas none none
Operating profit:
United States $ 123,000 $ 163,000
Europe 76,000 129,000
Other Foreign 77,000 124,000
$ 276,000 $ 416,000
Identifiable assets:
United States $2,300,000 $2,494,000
Mexico 1,650,000 1,539,000
$3,950,000 $4,033,000
Export sales $2,570,000 $2,781,000
Lancer has retained a consulting firm to assist in developing a quality
system which will achieve ISO 9002 and EN 46002 registration. Lancer
anticipates achieving this registration within the current fiscal year.
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 1997
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, 1997 and 1996. Lancer's
backlog at May 31, 1997 and 1996, was $237,000 and $353,000, 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. On September 17, 1996, Lancer was granted a
patent on its method of laser annealing marking of orthodontic appliances.
On March 4, 1997, Lancer was granted a patent on an orthodontic bracket and
method of mounting. All of the patents are for a duration of seventeen
years. Lancer has entered into license agreements expiring in 2006 whereby,
for cash consideration, the counter party has obtained the rights to
manufacture and market certain products patented by Lancer. Lancer has also
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 and certain
foreign countries. 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
$93,000 and $130,000 for the fiscal years ended May 31, 1997 and 1996,
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 11, 1997, Lancer had 45 employees, 3 of whom are
employed on a part-time basis. Additionally, Lancer, through its Mexican
subcontractor, employed approximately 120 people in Mexico.
ITEM 2. PROPERTIES
Lancer conducts its operations in leased facilities located in San Marcos,
California and Mexicali, Mexico. The San Marcos facility 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. The
Mexicali facility consists of a 16,000 square foot manufacturing and office
building. The term of the lease is for thirty-one months commencing April 1,
1996 and ending October 31, 1998. Future aggregate minimum annual cash lease
payments for the years ending May 31, 1998 and 1999, are $113,581 and $56,794,
respectively.
Lancer has subcontracted for a significant portion of its manufacturing in
Mexicali, Mexico. The manufacturing is performed in approximately 16,000 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, 1997.
PART II
ITEM 5. MARKET FOR LANCER'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
On November 15, 1996, Lancer effected a one-for-seven reverse stock split of
its common stock. High and low sales prices for Lancer's common stock, after
giving effect for its one-for-seven reverse stock split, 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, 1995 $1.96 $ .63
November 30, 1995 $5.67 $1.75
February 29, 1996 $2.66 $1.54
May 31, 1996 $2.66 $1.75
August 31, 1996 $2.84 $1.31
November 30, 1996 $2.41 $ .50
February 28, 1997 $1.50 $ .50
May 31, 1997 $1.50 $ .63
The approximate number of beneficial holders of Lancer's common stock and
Series D preferred stock at May 31, 1997, was 1,209.
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, 1997, net sales were $6,333,798, a decrease of
$446,514 (6.6%) from the prior year. The sales decrease experienced from 1996
to 1997 is attributable to: (1) increased discounting in the domestic market;
(2) a reduction in sales to a major foreign distributor who began their own
manufacturing; and (3) manufacturing problems from fiscal 1996 that were
resolved in fiscal 1997. 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 59.3% to 60.6%. The
increase is attributable to: (1) manufacturing problems from fiscal 1996 that
were resolved in fiscal 1997; (2) ineffective plant management in Mexico which
dramatically increased costs. The management was changed during fiscal 1997;
and (3) increased discounting in the domestic market. To improve manufacturing,
Lancer has started a program to add new equipment and improve processes and
efficiencies.
Selling expenses, as a percentage of sales, decreased from 26.0% to 25.5%. The
decrease is attributed to decreases in payroll, travel, office supplies,
advertising, samples, and telephone expenses. The decreases were the result of
management's decisions to lower costs to offset manufacturing costs and lower
sales.
General and Administrative expenses, as a percentage of sales, increased from
6.6% to 8.0%. The percentage increase can be attributed to an increase in
professional fees and the reduction in the sales base used to calculate the
percentage.
Product Development expenses, as a percentage of sales, decreased from 1.9% to
1.5%. This can be attributed to a decrease in payroll and supplies. 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 1.5% to .9%. The
decrease is attributable to reduced levels of debt, partially offset by higher
interest rates.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
During fiscal 1997, Lancer's management negotiated an extension of its bank term
loan through May 1998, at which time it will be paid in full. The term loan
requires monthly principal payments of $18,889, plus interest. Interest is at
prime plus 1% (9.5% at May 31, 1997). Management also negotiated a renewal of
Lancer's line of credit through March 1, 1998. 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,
1997, was $145,000. Borrowings are made at prime plus 1% (9.5% at May 31,
1997).
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 increased by $96,100, as compared to the prior year, primarily
because of 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 $700,000 for capital improvements
during 1998, primarily in manufacturing, if sufficient operating funds or
borrowings 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 24, 1997, which will be filed with the
Commission not later than 120 days after the end of Lancer's fiscal year period
ended May 31, 1997, 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 24, 1997, which will be filed with the
Commission not later than 120 days after the end of Lancer's fiscal year ended
May 31, 1997, 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
24, 1997, which will be filed with the Commission not later than 120 days after
the end of Lancer's fiscal year ended May 31, 1997, 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 24,
1997, which will be filed with the Commission not later than 120 days after the
end of Lancer's fiscal year ended May 31, 1997, 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 24, 1997,
which will be filed with the Commission not later than 120 days after the end of
Lancer's fiscal year ended May 31, 1997, 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
Lancer filed one Form 8-K, dated April 28, 1997, during the final quarter of
Lancer's fiscal year ended May 31, 1997. The Form 8-k reported that on
April 28, 1997, Mr Joseph Irani, Chairman of the Board, Secretary,
Treasurer, and significant shareholder of Lancer died of natural causes.
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 11, 1997
LANCER ORTHODONTICS, INC.
By: /s/ Douglas D. Miller
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/ Zackary Irani August 11, 1997
Zackary Irani Chairman of the Board
& Director
/s/ Douglas D. Miller August 11, 1997
Douglas D. Miller President, Chief Operating
Officer & Director
/s/ Janet Moore August 11, 1997
Janet Moore Secretary & Director
Robert Orlando Director
EXHIBIT A
LANCER ORTHODONTICS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report 11
Balance Sheet - May 31, 1997 12
Statements of Operations - For Each of the Years in the
Two-Year Period Ended May 31, 1997 13
Statements of Stockholders' Equity - For Each of the Years
in the Two-Year Period Ended May 31, 1997 13
Statements of Cash Flows - For Each of the Years in the
Two-Year Period Ended May 31, 1997 14
Notes to Financial Statements - For Each of the Years in the
Two-Year Period Ended May 31, 1997 15
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, 1997, and the related statements of operations,
shareholders' 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, 1997, 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 22, 1996
BALANCE SHEET
MAY 31, 1997
ASSETS (Notes 7 and 8)
CURRENT ASSETS:
Cash $ 154,761
Accounts receivable, less allowance for sales returns
and doubtful receivables of $105,000 1,178,836
Inventories (Note 3) 1,845,654
Prepaid expenses 37,806
Total current assets 3,217,057
PROPERTY AND EQUIPMENT, Net (Notes 4 and 9) 272,340
INTANGIBLE ASSETS, net (Note 5) 456,536
OTHER ASSETS 4,400
$3,950,333
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities (Note 6) $ 384,202
Line of credit (Note 7) 200,000
Note payable to bank (Note 8) 200,000
Capital lease obligation (Note 9) 15,848
Total current liabilities 800,050
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;
2,125,712 shares issued and outstanding 4,710,614
Accumulated deficit (1,745,573)
Total stockholders' equity 3,150,283
$3,950,333
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, 1997
1997 1996
NET SALES (Note 14) $6,333,798 $6,780,314
COST OF SALES (Note 10) 3,839,967 4,021,428
Gross profit 2,493,831 2,758,886
OPERATING EXPENSES:
Selling 1,615,484 1,765,325
General and administrative (Note 10) 509,239 447,322
Product development 93,157 130,240
TOTAL OPERATING EXPENSES 2,217,880 2,342,887
INCOME FROM OPERATIONS (Note 14) 275,951 415,999
OTHER INCOME (EXPENSE):
Interest expense (Notes 7, 8 and 9) ( 58,659) ( 104,113)
Other income, net 6,833 7,885
TOTAL OTHER INCOME (EXPENSE) ( 51,826) ( 96,228)
INCOME BEFORE INCOME TAXES 224,125 319,771
INCOME TAXES (Note 13) 800 800
NET INCOME $ 223,325 $ 318,971
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE (PRIMARY AND
FULLY DILUTED) $ .10 $ .14
WEIGHTED AVERAGE SHARES OF COMMON STOCK
PRIMARY 2,208,239 2,219,202
FULLY DILUTED 2,208,239 2,243,688
<TABLE>
STATEMENTS OF STOCKHOLDERS' EQUITY
For Each of the Years in the Two-Year Period Ended May 31, 1997
<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, 1995 370,483 $185,242 2,083,516 $4,630,116 $(2,287,869) $2,527,489
Conversion of Accrued
Royalties (Note 11) -- -- 27,826 50,816 -- 50,816
Issuance of Common
Stock (Note 11) -- -- 86 -- -- --
Exercise of Stock
Options (Note 11) -- -- 10,286 20,250 -- 20,250
Net Income -- -- -- -- 318,971 318,971
Balance at May 31, 1996 370,483 185,242 2,121,714 4,701,182 (1,968,898) 2,917,526
Conversion of Accrued
Royalties (Note 11) -- -- 3,998 9,432 -- 9,432
Net Income -- -- -- -- 223,325 223,325
Balance at May 31, 1997 370,483 $185,242 2,125,712 $4,710,614 $(1,745,573) $3,150,283
<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, 1997
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $223,325 $318,971
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 193,347 234,145
Provision for losses on accounts receivable ( 10,000) ( 20,000)
Net change in operating assets and liabilities:
Decrease (increase) in accounts receivable 296,581 ( 77,106)
Increase in inventories (259,691) (164,010)
Decrease (increase) decrease in prepaid expenses 3,704 ( 2,511)
Increase (decrease) in accounts payable and
accrued liabilities 5,762 (179,188)
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 453,028 110,301
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ( 51,351) (104,017)
NET CASH FLOWS USED IN INVESTING ACTIVITIES ( 51,351) (104,017)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings under line of credit
agreement (Note 7) ( 50,000) 250,000
Principal payments on note payable to bank (Note 8)(240,000) (745,000)
Principal payments on capital leases (Note 9) ( 21,647) ( 21,407)
Proceeds from exercise of stock options (Note 11) -- 20,250
NET CASH FLOWS USED IN FINANCING ACTIVITIES (311,647) (496,157)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 90,030 (489,873)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 64,731 554,604
CASH AND CASH EQUIVALENTS AT END OF PERIOD $154,761 $ 64,731
Supplemental disclosures of cash flow information:
Cash paid during the year for:
1997
Interest $58,020 $104,113
Income taxes $ 1,240 $ 1,126
Supplemental disclosure of non-cash financing and investing activities:
In fiscal 1997, the Company issued 3,998 shares of its common stock in
satisfaction of $9,432 in accrued royalties (Note 11).
In fiscal 1996, the Company issued 27,826 shares of its common stock in
satisfaction of $50,816 in accrued royalties (Note 11).
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, 1997
(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 82% and 18% of total sales, respectively, for
fiscal 1997 and 83% and 17% of total sales, respectively, for fiscal 1996.
Sales are made directly to orthodontists worldwide through Company
representatives and independent distributors, with approximately 59% during
fiscal 1997 and 1996, respectively, being domestic in nature. The Company also
sells certain of its products on a private label basis.
The Company is a partially owned and consolidated subsidiary of Biomerica, Inc.
("Biomerica"). Biomerica exercises significant financial control over the
Company and its operations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING METHODS - The Company uses the accrual method of accounting for
financial and income tax reporting purposes.
ACCOUNTING FOR THE IMPAIRMENT OF LONG LIVED ASSETS _ For the year ended May 31
1997, the Company adopted Statement of Financial Accounting Standards 121,
"Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to
be Disposed Of", ("SFAS 121"). SFAS 121 requires impairment losses to be
recorded on long lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. SFAS 121 also addresses the
accounting for long-lived assets that are expected to be disposed of.
Management has determined that there is no impairment of long lived assets as of
May 31, 1997.
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 a capital lease. The carrying amounts of
the Company's financial instruments generally approximate their fair values at
May 31, 1997.
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. Significant
estimates primarily relate to the determination of the allowance for sales
returns and doubtful receivables, and the realizeability of inventories and
intangible assets. Actual results could differ from those estimates.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of the Years in the Two-Year Period Ended May 31, 1997
(2)
CONCENTRATIONS OF CREDIT RISK - The Company at times maintains cash balances at
certain financial institutions in excess of the federally insured deposits.
The Company performs periodic credit evaluations of its customers and maintains
allowances for potential credit losses and returns. The Company estimates
credit losses and returns based on management's evaluation of historical
experience and current industry trends. Although the Company expects to collect
amounts due, actual collections may differ from the estimated amounts. As of
May 31, 1997, reserves for credit losses totaled $65,000. Reserves for sales
returns totaled $40,000. At May 31, 1997, two customers accounted for
approximately 17% and 11%, respectively, of accounts receivable.
No one company accounted for more than 10% of consolidated purchases for the
year ended May 31, 1997. At May 31, 1997, one company accounted for
approximately 12% of accounts payable.
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.
The Company had no cash equivalents as of May 31, 1997.
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, generally five 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 fair value 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, 1997. Amortization for the year ended May 31, 1997, amounted to $24,900
and $48,696 for the marketing and distribution rights and the technology use
rights, respectively. 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. The LP Research units were fully amortized as of May 31, 1996.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of the Years in the Two-Year Period Ended May 31, 1997
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES _ CONTINUED
RISKS AND UNCERTAINTIES _ LICENSES _ Certain of the Company's sales of products
are governed by license agreements with outside third parties. All of such
license agreements to which the Company currently is a party are for fixed terms
which will expire after ten years or upon the expiration of the underlying
patents. After the expiration of the agreements or the patents, the Company is
free to use the technology that had been licensed. There can be no assurance
that the Company will be able to obtain future license agreements as deemed
necessary by management. The loss of some of the current licenses or the
inability to obtain future licenses could have an adverse affect on the
Company's financial position and operations. Historically, the Company has
successfully obtained all the licenses it believed necessary to conduct its
business.
STOCK BASED COMPENSATION _ During 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock Based Compensation", which defines a fair value based
method of accounting for stock based compensation. However, SFAS 123 allows an
entity to continue to measure compensation cost related to stock and stock
options issued to employees using the intrinsic method of accounting prescribed
by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees". Entities electing to remain with the accounting method of
APB 25 must make pro forma disclosures of net income and earnings per share, as
if the fair value method of accounting defined in SFAS 123 had been applied.
The Company has elected to account for its stock based compensation to employees
under APB 25.
REVENUE RECOGNITION - Revenues from product sales are recognized at the time the
product is shipped.
INCOME TAXES - The Company accounts for income taxes using the asset and
liability approach under Statement of Financial Accounting Standards No. 109,
("SFAS 109"). Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS 109, the effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation allowance is
provided for certain deferred tax assets if it is more likely than not that the
Company will not realize tax assets through future operations.
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 after giving effect for the one-for-seven reverse stock
split. Net income per common share is the same on a primary and fully diluted
basis 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 1997 and 1996. Dividends have never
been declared or paid by the Company.
The Financial Accounting Standards Board has Issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 is
primarily a disclosure standard which requires public companies to present basic
earnings per share (EPS) and, if applicable, diluted earnings per share, instead
of primary and fully diluted EPS. SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997. The effect of
adopting SFAS 128 has not been determined by management.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of the Years in the Two-Year Period Ended May 31, 1997
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES _ CONTINUED
ONE-FOR-SEVEN REVERSE STOCK SPLIT _ On November 15, 1996, the Company effected a
one-for-seven reverse stock split of its common stock. For all periods
presented, the components of shareholders' equity have been adjusted to reflect
the reverse stock split.
(3) INVENTORIES
The components of inventories at May 31, 1997, consist of the following:
Raw materials $ 323,974
Work in process 90,268
Finished products 1,431,412
Total $1,845,654
Approximately $1,534,000 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, 1997, consist of the
following:
Machinery and equipment $1,793,910
Tooling, jigs, and fixtures 368,223
Furniture and fixtures 51,544
Asset under capital lease (Note 9) 62,814
2,276,491
Less accumulated depreciation and amortization (2,004,151)
Total $ 272,340
Approximately $116,000 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 $31,405 relating to the asset under
capital lease (See Note 9). Total depreciation expense for the years ended May
31, 1997 and 1996, was $119,751 and $155,275, respectively.
(5) INTANGIBLE ASSETS
The components of intangible assets at May 31, 1997, consist of the following:
Marketing and distribution rights $ 442,750
Technology use rights 858,328
1,301,078
Less accumulated amortization ( 844,542)
` $ 456,536
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of the Years in the Two-Year Period Ended May 31, 1997
(6) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at May 31, 1997, consist of the
following:
` Trade accounts payable $177,653
Accrued payroll and related benefits 65,568
Other accrued liabilities 140,981
Total $384,202
(7) LINE OF CREDIT
At May 31, 1997, the Company had a $500,000 line of credit with a bank.
Borrowings are made at prime plus 1% (9.5% at May 31, 1997) and are limited to
specified percentages of eligible accounts receivable. The unused portion
available under the line of credit at May 31, 1997, was $145,000. The line of
credit expires on March 1, 1998. The Company is not required to maintain
compensating balances in connection with this borrowing arrangement.
The following summarizes information on short-term borrowings for the year ended
May 31, 1997:
Average month end balance $245,250
Maximum balance outstanding at any month end $250,000
Weighted average interest rate (computed by dividing
interest expense by average monthly balance) 9.55%
Interest rate at year end 9.50%
(8) NOTE PAYABLE TO BANK
At May 31, 1997, the Company had a note payable to a bank requiring monthly
principal payments of $18,889, plus interest at prime plus 1% (9.5% at May 31,
1997). In March 1997, the note was extended to May 1, 1998, at which time all
unpaid principal and accrued interest is due and payable.
The line of credit (see Note 7) and the note are collateralized by substantially
all the assets of the Company, including inventories, receivables, and
equipment. The lending agreement for both the line of credit and the note
requires, among other things, that the Company maintain a tangible net worth of
$2,250,000, a debt to tangible net worth ratio of no more than .75 to 1, and a
current ratio of at least 2 to 1. The Company is not required to maintain
compensating balances in connection with this lending agreement.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of the Years in the Two-Year Period Ended May 31, 1997
(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, 1997 and 1996 (See Note 4).
The future annual minimum lease payments under the capital lease are as follows:
Year Ending May 31, 1998 $16,528
Less amount representing interest at 11.3% ( 680)
Present value of net minimum lease payments $15,848
(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 aggregates $9,620 at May
31, 1997, and is included in accrued liabilities in the accompanying balance
sheet. Total rental expense for this facility for each of the years ended May
31, 1997 and 1996, was $45,840.
Effective April 1, 1996, the Company entered into a non-cancelable operating
lease for its Mexico facility expiring October 31, 1998, which requires average
monthly rentals of $5,182. The rentals are subject to annual increases based on
the United States Consumer Price Index. Prior to April 1, 1996, such was
included in amounts paid under the terms of the manufacturing agreement,
discussed in the following paragraph. Total expense for this for this facility
for the years ended May 31, 1997 and 1996, was $71,772 and $71,287 respectively.
Future aggregate minimum lease payments for the years ending May 31, 1998 and
1999, are $113,581 and $56,794, respectively.
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
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of the Years in the Two-Year Period Ended May 31, 1997
(10) COMMITMENTS AND CONTINGENCIES - CONTINUED
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. In March 1996, the Company agreed to
extend the agreement through October 1998, to coincide with the building lease.
Effective April 1, 1996, the Company leased the Mexicali facility under a
separate arrangement, as discussed in the preceding paragraph. 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. At May 31, 1997, this obligation was approximately $221,000.
Such obligation is contingent in nature and accordingly has not been accrued in
the accompanying balance sheet.
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 expiring through 2007 and they require the Company to make payments
based on the sales of the individual licensed products.
The Company has entered into license agreements expiring in 2006 whereby, for
cash consideration, the counter party has obtained the rights to manufacture and
market certain products patented by the Company.
(11) STOCKHOLDERS' EQUITY
On November 15, 1996, the Company effected a one-for-seven reverse stock split
of its common stock. For all periods presented, components of shareholders'
equity and share information have been adjusted to reflect the reverse stock
split.
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
common stock at the rate of seven shares of preferred stock for 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 1997 or 1996.
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
common stock at the rate of seven shares of preferred stock for 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, 1997. There were no dividends
declared or paid in 1997 or 1996.
COMMON STOCK - During 1997, the Company issued 3,998 shares of its common stock
in satisfaction of $9,432 in accrued royalties. During 1996, the Company issued
27,826 shares of its common stock in satisfaction of $50,816 in accrued
royalties, and issued 10,286 shares of common stock in connection with the
exercise of stock options and issued 86 shares of common stock for aggregate
consideration of $20,250 (see Stock Option Agreements below).
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of the Years in the Two-Year Period Ended May 31, 1997
(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 or exceeding 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 four 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 357,143 shares
to be available for grant under the Company's stock option plan.
Options granted prior to May 31, 1995, generally vested on date of grant and
expire in April 1998 or August 1999. No options were granted during the year
ended May 31, 1996. During the year ended May 31, 1997, the Company granted
options to purchase 14,286 and 21,429 shares of common stock at $1.750 and
$2.625 per share, respectively, to two employees. The options vest over four
years and expire in 2001.
SFAS 123 PRO FORMA INFORMATION - Pro forma information regarding net income and
earnings per share is required by SFAS 123, and has been determined as if the
Company had accounted for its employee stock options under the fair value method
of SFAS 123. The fair value for these options was estimated at the date of
grant using the Black Scholes option pricing model with the following weighted
average assumptions for the year ended May 31, 1997, (no options were issued in
the year ended May 31, 1996): risk free interest rate of 6.5%; dividend yield of
0%; expected life of the option of 5 years; and volatility factor of the
expected market price of the Company's common stock of 70%.
The Black Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options vesting period. Adjustments are made
for options forfeited prior to vesting. The effect on compensation expense, net
income, and net income per common share had compensation costs for the Company's
stock option plans been determined based on a fair value at the date of grant
consistent with the provisions of SFAS 123, for the year ended May 31, 1997, are
as follows:
Net income, as reported $223,325
Adjustment to compensation expense under SFAS 123 3,961
Net income, pro forma $219,364
Net income per common and common equivalent share, as reported $ .10
Net income per common and common equivalent share, pro forma $ .10
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of the Years in the Two-Year Period Ended May 31, 1997
(11) STOCKHOLDERS' EQUITY - CONTINUED
The following summary presents the options granted and outstanding as of May 31,
1997:
Weighted
average
Number of Shares
exercise
Employee Nonemployee Total price
Outstanding, June 1, 1995 189,144 31,715 220,859 $1.55
Granted -- -- -- --
Exercised -- (10,286) ( 10,286) 1.97
Canceled ( 4,858) -- ( 4,858) 2.43
Outstanding, May 31, 1996 184,286 21,429 205,715 1.51
Granted 35,715 -- 35,715 2.28
Exercised -- -- -- --
Canceled ( 35,715) -- ( 35,715) 2.28
Outstanding, May 31, 1997 184,286 21,429 205,715 1.51
The following table sets forth the exercise prices, the number of options
outstanding and exercisable, and the remaining contractual lives of the
Company's stock options at May 31, 1997:
Weighted
average
contractual
Number of options life
Exercise price Outstanding Exercisable remaining
$1.40 110,715 110,715 .9 years
1.47 57,143 57,143 .9
1.75 14,286 -- 4.4
1.96 20,000 20,000 .9
2.10 2,142 2,142 .9
2.45 1,429 1,429 .9
Total 205,715 191,429
WARRANTS - In 1994, the Company issued warrants to purchase 200,596 shares of
Common Stock at $1.75 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 1997, 1996, or 1995.
(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.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of the Years in the Two-Year Period Ended May 31, 1997
(13) INCOME TAXES
The provision for income taxes for the years ended May 31, 1997 and 1996,
consists of the following:
Current Deferred Total
Year ended May 31, 1997:
U.S. Federal $ -- $ -- $ --
State and Local 800 -- 800
$ 800 $ -- $ 800
Year ended May 31, 1996:
U.S. Federal $ -- $ -- $ --
State and Local 800 -- 800
$ 800 $ -- $ 800
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at May 31, 1997 and 1996, are
presented below:
1997 1996
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts and sales returns $42,000 $46,000
Inventories, principally due to additional costs
inventoried for tax purposes pursuant to the Tax
Reform Act of 1986 and allowance for inventory
obsolescence 89,978 98,261
Compensated absences principally due to accrual for
financial reporting 14,960 20,100
Net operating loss carryforwards 879,626 996,391
Business tax credit carryforwards 191,096 197,131
Less valuation allowance (1,144,990) (1,274,053)
Net deferred tax assets 72,670 83,830
Deferred tax liabilities:
Unamortized marketing rights ( 72,670) ( 83,830)
$ -- $ --
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of the Years in the Two-Year Period Ended May 31, 1997
(13) INCOME TAXES - CONTINUED
Income tax expense for the years ended May 31, 1997 and 1996, differed from the
amounts computed by applying the U.S. Federal income tax rate of 34 % to pre-tax
income as a result of:
1997 1996
Computed "expected" tax expense $ 76,203 $108,722
Income (reduction) in income taxes resulting from:
Meals and entertainment 9,860 9,855
Change in beginning of the year balance of the
valuation allowance for deferred tax assets
allocated to income tax expense ( 85,791) (118,305)
State and local income taxes, net of tax benefit 528 528
$ 800 $ 800
As of May 31, 1997, the Company had net tax operating loss carryforwards of
approximately $2,418,000 and business tax credits of approximately $169,000
available to offset future Federal taxable income and tax liabilities,
respectively. The Federal carryforwards expire in varying amounts from 1998 to
2008. The Company also had net tax operating loss carryforwards of
approximately $618,000 and business tax credits of approximately $23,000
available to offset future California taxable income and tax liabilities,
respectively. The State carryforwards expire in 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, 1997 and 1996, are as follows:
1997 1996
Net Sales:
Domestic $3,764,000 $3,999,000
Foreign 2,570,000 2,781,000
Total $6,334,000 $6,780,000
Operating Profit:
Domestic $ 123,000 $ 163,000
Foreign 153,000 253,000
Total $ 276,000 $ 416,000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Lancer
Orthodontics, Inc. annual 10-KSB and is qualified in its entirety by reference
to such 10-KSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 154,761
<SECURITIES> 0
<RECEIVABLES> 1,283,836
<ALLOWANCES> 105,000
<INVENTORY> 1,845,654
<CURRENT-ASSETS> 3,217,057
<PP&E> 2,276,491
<DEPRECIATION> (2,004,151)
<TOTAL-ASSETS> 3,950,333
<CURRENT-LIABILITIES> 800,050
<BONDS> 0
0
185,242
<COMMON> 4,710,614
<OTHER-SE> (1,745,573)
<TOTAL-LIABILITY-AND-EQUITY> 3,950,333
<SALES> 6,333,798
<TOTAL-REVENUES> 6,333,798
<CGS> 3,839,967
<TOTAL-COSTS> 3,839,967
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,659
<INCOME-PRETAX> 224,125
<INCOME-TAX> 800
<INCOME-CONTINUING> 223,325
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 223,325
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
