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 August 31, 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: (760) 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: 2,125,712
Traditional small business disclosure format (check one):
Yes X No
PART I. FINANCIAL INFORMATION
Item 1. SUMMARIZED FINANCIAL INFORMATION
LANCER ORTHODONTICS, INC.
CONDENSED BALANCE SHEETS (UNAUDITED)
8/31/97
ASSETS
CURRENT ASSETS:
Cash $ 89,213
Accounts Receivable, less allowances of $104,250 (Note G) 1,164,677
Inventories (Note G) 1,886,976
Prepaid Expenses 10,742
Total Current Assets 3,151,608
PROPERTY AND EQUIPMENT, at cost (Note G) 2,306,107
Less: Accumulated depreciation (2,050,141)
255,966
INTANGIBLE ASSETS:
Marketing and Distribution Rights, net 178,450
Technology Use Rights, net 259,687
438,137
OTHER ASSETS 4,400
Total Assets $3,850,111
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Accrued Liabilities $ 357,310
Line of Credit (Note F) 200,000
Current Portion of Note Payable to Bank (Note G) 130,000
Capital Lease Obligation (Note H) 10,044
Total Current Liabilities 697,354
COMMITMENTS AND CONTINGENCIES (Note I) --
STOCKHOLDERS' EQUITY:
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 2,125,712 4,710,614
Accumulated Deficit (1,743,099)
Total Stockholders' Equity 3,152,757
Total Liabilities and Stockholders' Equity $3,850,111
LANCER ORTHODONTICS, INC.
CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED
8/31/97 8/31/96
NET SALES $1,447,783 $1,485,282
COST OF SALES 889,729 913,903
Gross Profit 558,054 571,379
OPERATING EXPENSES:
Selling, General & Administrative 504,566 515,932
Product Development 39,642 25,234
Total Operating Expenses 544,208 541,166
INCOME FROM OPERATIONS 13,846 30,213
OTHER INCOME (EXPENSE):
Interest Expense ( 9,473) ( 16,803)
Other Income (Expense), net ( 1,099) 646
Total Other Income (Expense) ( 10,572) ( 16,157)
INCOME BEFORE INCOME TAXES 3,274 14,056
INCOME TAXES (NOTE J) 800 800
NET INCOME $ 2,474 $ 13,256
NET INCOME PER COMMON SHARE (NOTE K) $ .001 $ .006
LANCER ORTHODONTICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,474 $ 13,256
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 64,389 54,219
Changes in assets and liabilities:
Decrease in accounts rec, net 14,159 134,395
Increase in inventories ( 41,322) ( 89,838)
Decrease in prepaid expenses 27,064 24,339
Increase (decrease) in accounts payable
and accrued liabilities ( 26,892) 26,917
CASH FLOWS PROVIDED (USED) BY OPERATING
ACTIVITIES 39,872 163,188
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ( 29,616) ( 12,316)
CASH FLOWS USED IN INVESTING ACTIVITIES ( 29,616) ( 12,316)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on note payable to bank ( 70,000) ( 60,000)
Principal payments of capital leases ( 5,804) ( 5,185)
CASH FLOWS USED IN FINANCING ACTIVITIES ( 75,804) ( 65,185)
INCREASE (DECREASE) IN CASH ( 65,548) 85,687
CASH AT BEGINNING OF PERIOD 154,761 64,731
CASH AT END OF PERIOD $ 89,213 $150,418
Supplemental disclosure of non-cash financing activities:
In fiscal 1997, the Registrant issued 27,988 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 flow 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 period 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 I). 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) 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.
(D) 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.
LANCER ORTHODONTICS, INC.
NOTES TO FINANCIAL STATEMENTS _ continued
(E) 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, that components of
shareholders' equity have been adjusted to reflect the reverse stock split.
(F) LINE OF CREDIT
At August 31, 1997, the Company had a $500,000 line of credit with a bank.
Borrowings are made at prime plus 1% (9.5% at August 31, 1997) and are limited
to specified percentages of eligible accounts receivable. The unused portion
available under the line of credit at August 31, 1997 was $176,000. The line of
credit expires on March 1, 1998. The Company is not required to maintain
compensating balances in connection with this borrowing arrangement.
(G) NOTE PAYABLE TO BANK
At August 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 August
31, 1997). The note expires on May 1, 1998, at which time all unpaid principal
and accrued interest is due and payable.
The line of credit (see Note F) 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.
(H) 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 August 31, 1997 and 1996.
(I) 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
LANCER ORTHODONTICS, INC.
NOTES TO FINANCIAL STATEMENTS _ continued
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. 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. 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. Such obligation is contingent in nature and accordingly has not
been accrued in the accompanying balance sheet.
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 Company
also leases its Mexico facility under a non-cancelable operating lease 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.
Future aggregate rentals for the years ended May 31, 1998 and 1999, are $113,581
and $56,794, respectively.
(J) INCOME TAXES
At 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, expiring at varying dates between 1998 and 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, expiring in 1998.
(K) NET INCOME PER COMMON SHARE AND DIVIDENDS
Net income per common share is computed based on the weighted average number of
common shares and common equivalent shares outstanding (2,178,638 and 2,270,419
for the three months ended August 31, 1997 and 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 three
months ended August 31, 1997 and August 31, 1996.
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.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the three months ended August 31, 1997, net income decreased $10,782 as
compared to the year earlier period. The decrease in net income is primarily
attributable to the reduction in sales, partially offset by a reduction in
interest expenses.
Net sales decreased $37,499 (2.5%) compared to the year earlier period. The
decrease is attributable to competition pressures, lower prices, and a general
slowness in the industry. The Company continues to search for and add new
distributors, private label customers, and sales representatives. The Company
remains very 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 (61%) was consistent with the year
earlier period. During the first quarter of 1998, the Company initiated a
review of its manufacturing processes and intends to automate several of
them. This will result in reduced cost of sales.
Selling and general and administrative expenses decreased $11,366 (2.2%)
compared to the year earlier period. The decrease is attributable to a decrease
in travel and postage costs, partially offset by an increase in samples and
collection costs.
Product development expenses increased $14,408 (57.1%) compared to the year
earlier period. The increase is attributable to an increase in wage costs.
Interest expense decreased $7,330 (43.6%) compared to the year earlier period,
reflecting reduced debt and interest rates.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
The Company's financial condition at August 31, 1997 and its previous two year
ends was as follows:
08/31/97 05/31/97 05/31/96
Current Assets $3,151,608 $3,217,057 $3,157,621
Current Liabilities 697,354 800,050 836,714
Working Capital 2,454,254 2,417,007 2,320,907
Bank Debt & Capitalized Leases 340,044 415,848 727,495
Shareholder Equity 3,152,757 3,150,283 2,917,526
Total Assets 3,850,111 3,950,333 4,032,893
Working capital increased $37,247 during the three months, primarily because of
profitability and non-cash expenses, partially offset by the paydown of bank
debt. The Company is currently considering investing from $200,000 to $300,000
in replacement equipment. Funds for this investment will come from cash flow
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.
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 October 6, 1997 By /s/ Douglas D. Miller
Douglas D. Miller,
President and Chief Operating Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
this schedule contains summary financial information extracted from Lancer
Orthodontics, Inc.'s first quarter 10-q and is qualified in its entirety by
reference to such 10-q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> AUG-31-1997
<CASH> 89,213
<SECURITIES> 0
<RECEIVABLES> 1,268,927
<ALLOWANCES> (104,250)
<INVENTORY> 1,886,976
<CURRENT-ASSETS> 3,151,608
<PP&E> 2,306,107
<DEPRECIATION> (2,050,141)
<TOTAL-ASSETS> 3,850,111
<CURRENT-LIABILITIES> 697,354
<BONDS> 0
0
185,242
<COMMON> 4,710,614
<OTHER-SE> (1,743,099)
<TOTAL-LIABILITY-AND-EQUITY> 3,850,111
<SALES> 1,447,783
<TOTAL-REVENUES> 1,447,783
<CGS> 889,729
<TOTAL-COSTS> 889,729
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,473
<INCOME-PRETAX> 3,274
<INCOME-TAX> 800
<INCOME-CONTINUING> 2,474
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<NET-INCOME> 2,474
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<EPS-DILUTED> .001
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