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 28, 1997 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
(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: 2,125,698
Traditional small business disclosure format (check one):
Yes X No
PART I. FINANCIAL INFORMATION
Item 1. SUMMARIZED FINANCIAL INFORMATION
LANCER ORTHODONTICS, INC.
CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
2/28/97 2/29/96 2/28/97 2/29/96
NET SALES $1,622,618 $1,353,305 $4,707,896 $4,826,207
COST OF SALES 1,072,613 955,008 2,945,334 2,892,627
Gross Profit 550,005 398,297 1,762,562 1,933,580
OPERATING EXPENSES:
Selling, General & Admin 520,977 456,897 1,604,254 1,657,085
Product Development 20,458 25,342 70,956 110,899
TOTAL OPERATING EXPENSES 541,435 482,239 1,675,210 1,767,984
INCOME (LOSS) FROM OPERATIONS 8,570 ( 83,942) 87,352 165,596
OTHER INCOME (EXPENSE):
Interest Expense ( 13,348) ( 18,516) ( 45,227) ( 86,370)
Other Income (Expense), net 2,366 713 3,694 7,906
TOTAL OTHER INCOME (EXPENSE) ( 10,982) ( 17,803) ( 41,533) ( 78,464)
INCOME (LOSS) BEFORE
INCOME TAXES ( 2,412) ( 101,745) 45,819 87,132
INCOME TAXES (NOTE C) -- -- 800 800
NET INCOME (LOSS) $( 2,412)$( 101,745) $ 45,019 $ 86,332
NET INCOME (LOSS) PER
COMMON SHARE (NOTE D) $( .001)$( .046) $ .020 $ .039
LANCER ORTHODONTICS, INC.
CONDENSED BALANCE SHEETS (UNAUDITED)
2/28/97
ASSETS
CURRENT ASSETS:
Cash $ 100,389
Accounts Receivable, less allowances of $103,508 (Note E) 1,420,531
Inventories (Note E and F) 1,702,465
Prepaid Expenses 4,076
Total Current Assets 3,227,461
PROPERTY AND EQUIPMENT, at cost (Note E) 2,325,392
Less: Accumulated depreciation (2,050,940)
274,452
INTANGIBLE ASSETS:
Marketing and Distribution Rights, net 190,900
Technology Use Rights, net 284,035
474,935
OTHER ASSETS 4,400
Total Assets $3,981,248
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Accrued Liabilities $ 479,781
Line of Credit (Note F) 248,000
Note Payable to Bank (Note E) 260,000
Capital Lease Obligation (Note G) 21,490
Total Current Liabilities 1,009,271
COMMITMENTS AND CONTINGENCIES (Note H)
STOCKHOLDERS' EQUITY (Note I):
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 2,125,698 4,710,614
Accumulated Deficit (1,923,879)
Total Stockholders' Equity 2,971,977
Total Liabilities and Stockholders' Equity $3,981,248
LANCER ORTHODONTICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED
2/28/97 2/29/96
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 45,019 $ 86,332
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 162,657 211,222
Provision for losses on accounts receivable -- 30,000
Changes in assets and liabilities:
Decrease in accounts receivable, net 44,886 152,795
Increase in inventories (116,502) (240,369)
Decrease in prepaid expenses 37,434 1,242
Increase (decrease) in accounts payable
and accrued liabilities 101,341 ( 65,618)
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 274,835 175,604
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ( 41,172) ( 98,316)
CASH FLOWS USED IN INVESTING ACTIVITIES ( 41,172) ( 98,316)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under line of credit agreement ( 2,000) (226,000)
Principal payments on note payable to bank (180,000) (285,000)
Principal payments of capital leases ( 16,005) ( 16,366)
Proceeds from sale of stock -- 20,250
CASH FLOWS USED IN FINANCING ACTIVITIES (198,005) (507,116)
INCREASE (DECREASE) IN CASH 35,658 (429,828)
CASH AT BEGINNING OF PERIOD 64,731 554,604
CASH AT END OF PERIOD $100,389 $124,776
Supplemental disclosure of non-cash financing activities:
In fiscal 1997, the Company issued 27,988 pre-split shares of its common stock
in satisfaction of $9,432 in accrued royalties.
In fiscal 1996, the Company issued 155,700 pre-split shares of its common stock
in satisfaction of $9,432 in accrued royalties.
LANCER ORTHODONTICS, INC.
NOTES TO FINANCIAL STATEMENTS
(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 flows in conformity with generally accepted
accounting principles. The unaudited condensed financial statements include the
accounts of Lancer Orthodontics, Inc. (the "Company"). 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 periods reflect all
adjustments which are necessary for a fair presentation of operating results.
(B) ORGANIZATION
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 H). The Company also
purchases certain orthodontic and dental products for purposes of resale. Sales
are made directly to orthodontists world-wide through Company representatives
and independent distributors. The Company also sells certain of its products on
a private label basis.
(C) INCOME TAXES
At May 31, 1996, the Company had net tax operating loss carryforwards of
approximately $2,688,000 and business tax credits of approximately $175,000
available to offset future Federal taxable income and tax liabilities,
respectively, expiring at varying dates between 1996 and 2008. The Company also
had net tax operating loss carryforwards of approximately $546,000 and business
tax credits of approximately $23,000 available to offset future California
taxable income and tax liabilities, respectively, expiring at varying dates
between 1997 and 1998.
(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 after giving effect for
the one-for-seven reverse stock split (2,216,194 and 2,206,782 for the nine
months ended February 28, 1997 and February 29, 1996 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 28, 1997 and February 29, 1996.
LANCER ORTHODONTICS, INC.
NOTES TO FINANCIAL STATEMENTS - continued
(E) NOTE PAYABLE TO BANK
At February 28, 1997, the Company had a note payable to a bank. The note
payable is due May 1, 1998, and requires 13 monthly principal payments of
$18,889 plus interest and one final principal payment of $14,444 plus interest.
Interest is at prime plus 1% (9.25% at February 28, 1997).
The loan is collateralized by inventories, receivables, and equipment. The
lending agreement requires, among other things, that the Company maintain a
tangible net worth of $2,250,000, 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.
(F) LINE OF CREDIT
At February 28, 1997, the Company had a $500,000 line of credit with a bank.
Borrowings are made at prime plus 1% (9.25% at February 28, 1997) and are
secured by and limited to specified percentages of eligible accounts receivable.
The unused portion available under the line of credit at February 28, 1997 was
$192,000. The line of credit expires on March 1, 1998. The lending agreement
requires the same covenants as the note payable, see Note (E) above. The
Company is not required to maintain compensating balances in connection with
this borrowing arrangement.
(G) 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
periods ended February 28, 1997 and February 29, 1996.
(H) COMMITMENTS AND CONTINGENCIES
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 has moved the majority of its manufacturing
operations to Mexico. 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 increased, the hourly rate decreased. In December 1992,
the Company 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 Company greater control over all costs associated with the
manufacturing operation., In July, 1994, the
Company again renegotiated the agreement, reducing the administrative fee and
extending the agreement through June 30, 1998. After June 30, 1996, either
party may terminate the agreement with three months written notice. 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 for employees dismissed at the request of the Company.
LEASES - The Company leases its main facility under an operating lease expiring
December 31, 1998, which requires monthly rental payments that increase
annually. As of May 31, 1996, future minimum annual cash rental payments under
the Company's facility lease are as follows:
Fiscal Year Amount
1997 $48,300
1998 51,400
1999 30,800
(I) STOCKHOLDER'S EQUITY
REVERSE STOCK SPLIT - On November 15, 1996, the Company effected a one-for-seven
reverse stock split of its no par value common stock. In conjunction with the
reverse split, shares reserved for outstanding options, warrants, and conversion
of preferred shares were adjusted one-for-seven.
COMMON STOCK RESERVED -Shares of the Company's common stock reserved for
issuance at February 28, 1997 and May 31, 1996, adjusted to reflect the one-for-
seven reverse stock split, were as follows:
2/28/97 5/31/96
Stock Options:
Outstanding, at prices ranging from $1.40 to $2.45 212,858 205,715
Future Issuance 133,999 141,142
Warrants. at prices ranging from $1.5125 to $1.75 500,596 200,596
For conversion of preferred stock 52,926 52,926
900,379 600,379
In 1997, the Company issued a warrant to purchase 300,000 shares of Common Stock
at $1.5125 per share to a major shareholder. The warrant expires in 2000.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the nine months ended February 28, 1997, net income decreased $41,313 as
compared to the year earlier period. The decrease in net income is attributable
to the reduction in sales, and no comparable reduction in cost of sales,
partially offset by a reduction in operating and interest expenses.
Net sales decreased $118,311 (2.5%) compared to the year earlier period. The
decrease is attributable to problems that occurred during the first six months.
Corrective actions have been taken to increase manufacturing output. This has
allowed the Company to increase sales. With the increase in manufacturing
output, the Company believes it is in a position to continue to recover lost
customers and increase sales. The Company continues to search for and add new
distributors, private label customers, and sales representatives and is active
in investigating new products to add to its growing product line, believing
that a larger and more diverse product line will appeal to a wider range of
customers.
Cost of sales as a percentage of sales increased from 59.9% to 62.6% as compared
to the year earlier period. The decline in gross margin is attributable to
problems that occurred in the first six months. The increase in manufacturing
output and the resolution of problems will allow the Company to increase sales
and reduce costs.
Selling, general, and administrative expenses decreased $52,831 (3.2%) compared
to the year earlier period. The decrease is attributable to a decrease in wage
costs and catalog costs, partially offset by an increase in postage and
advertising. The decreases were the result of management's decisions to lower
costs to offset the manufacturing problems that caused lower sales.
Product development expenses decreased $39,943 (36.0%) compared to the year
earlier period. The decrease is attributable to a decrease in wage costs.
Interest expense decreased $41,143 (47.6%) compared to the year earlier period,
reflecting reduced debt and interest rates.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
The Company's financial condition at February 28, 1997 and its previous two year
ends was as follows:
02/28/97 05/31/96 05/31/95
Current Assets $3,227,461 $3,157,621 $3,383,867
Current Liabilities 1,009,271 836,714 971,283
Working Capital 2,218,190 2,320,907 2,412,584
Bank Debt & Capitalized Leases 529,490 727,495 1,243,902
Shareholder Equity 2,971,977 2,917,526 2,527,489
Total Assets 3,981,248 4,032,893 4,389,267
Working capital decreased $102,717 during the nine months, primarily because of
the reclassification of the long term portion of the bank debt to a current
liability, partially offset by profitability and non-cash expenses. The Company
is currently considering investing from $500,000 to $600,000 in equipment and
new molds. Funds for this investment are expected to come from cash flow from
operations and new borrowings. The Company expects to meet the rest of its cash
requirements out of its cash reserves, cash flow, and line of credit.
During the third quarter, the Company arranged for the renewal of its line of
credit through March 1, 1998 and an extension of its term loan through May 1,
1998.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
There were no Form 8-k reports filed during the quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LANCER ORTHODONTICS, INC.
Registrant
Date March , 1997 By /s/ Douglas D. Miller
Douglas D. Miller,
President and Chief Operating Officer
By /s/ Scott R. Striblen
Scott R. Striblen,
Vice President, Finance
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial informaton extracted from Lancer
Orthodontics, Inc. February 28, 1997 Form 10-QSB and is qualified in its
entirety be reference to such 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> FEB-28-1997
<CASH> 100,839
<SECURITIES> 0
<RECEIVABLES> 1,524,039
<ALLOWANCES> 103,508
<INVENTORY> 1,702,465
<CURRENT-ASSETS> 3,227,461
<PP&E> 2,325,392
<DEPRECIATION> (2,050,940)
<TOTAL-ASSETS> 3,981,248
<CURRENT-LIABILITIES> 1,009,271
<BONDS> 0
0
185,242
<COMMON> 4,710,614
<OTHER-SE> (1,923,879)
<TOTAL-LIABILITY-AND-EQUITY> 3,981,248
<SALES> 4,707,896
<TOTAL-REVENUES> 4,707,896
<CGS> 2,945,334
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