SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934
For Quarter Ended November 30, 1996 Commission File No. 0-5920
LANCER ORTHODONTICS, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
CALIFORNIA 95-2497155
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
253 Pawnee Street, San Marcos, California 92069
(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 SIX
MONTHS ENDED MONTHS ENDED
11/30/96 11/30/95 11/30/96 11/30/95
NET SALES $1,599,996 $1,676,300 $3,085,278 $3,472,902
COST OF SALES 958,818 926,596 1,872,721 1,937,619
Gross Profit 641,178 749,704 1,212,557 1,535,283
OPERATING EXPENSES:
Selling, General & Admin 567,345 591,569 1,083,277 1,200,188
Product Development 25,264 46,970 50,498 85,557
Total Operating Expenses 592,609 638,539 1,133,775 1,285,745
INCOME FROM OPERATIONS 48,569 111,165 78,782 249,538
OTHER INCOME (EXPENSE):
Interest Expense ( 15,076) ( 31,555) ( 31,879) ( 67,854)
Other Income (Expense), net 682 470 1,328 7,193
Total Other Income (Expense) ( 14,394) ( 31,085) ( 30,551) ( 60,661)
INCOME BEFORE INCOME TAXES 34,175 80,080 48,231 188,877
INCOME TAXES (NOTE C) -- -- 800 800
NET INCOME $ 34,175 $ 80,080 $ 47,431 $ 188,077
NET INCOME PER COMMON
SHARE (NOTE D) $ .016 $ .035 $ .022 $ .084
LANCER ORTHODONTICS, INC.
CONDENSED BALANCE SHEETS (UNAUDITED)
11/30/96
ASSETS
CURRENT ASSETS:
Cash $ 118,743
Accounts Receivable, less allowances of $103,674 (Note E) 1,339,873
Inventories (Note E) 1,760,900
Prepaid Expenses 53,548
Total Current Assets 3,273,064
PROPERTY AND EQUIPMENT, at cost (Note E) 2,299,198
Less: Accumulated depreciation (2,015,120)
284,078
INTANGIBLE ASSETS:
Marketing and Distribution Rights, net 197,125
Technology Use Rights, net 296,209
493,334
OTHER ASSETS 4,400
Total Assets $4,054,876
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Accrued Liabilities $ 483,511
Line of Credit (Note F) 250,000
Note Payable to Bank (Note E) 320,000
Capital Lease Obligation (Note G) 22,902
Total Current Liabilities 1,076,413
LONG TERM PORTION OF CAPITAL LEASE OBLIGATION (Note G) 4,074
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 (1,921,467)
Total Stockholders' Equity 2,974,389
Total Liabilities and Stockholders' Equity $4,054,876
LANCER ORTHODONTICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED
11/30/96 11/30/95
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 47,431 $188,077
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 108,438 142,572
Changes in assets and liabilities:
Decrease (increase) in accounts
receivable, net 125,544 85,783
Increase in inventories (174,937) (260,829)
Decrease in prepaid expenses ( 12,038) ( 20,664)
Increase (decrease) in accounts
payable and accrued liabilities 105,071 ( 60,296)
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES 199,509 74,643
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ( 14,978) ( 41,849)
CASH FLOWS USED IN INVESTING ACTIVITIES ( 14,978) ( 41,849)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under line of credit agreement -- (225,000)
Principal payments on note payable to bank (120,000) (210,000)
Principal payments of capital leases ( 10,519) ( 11,464)
Proceeds from sale of stock -- 20,250
CASH FLOWS USED IN FINANCING ACTIVITIES (130,519) (426,214)
INCREASE (DECREASE) IN CASH 54,012 (393,420)
CASH AT BEGINNING OF PERIOD 64,731 554,604
CASH AT END OF PERIOD $118,743 $161,184
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 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 (2,175,783 and 2,193,510 for the six
months ended November 30, 1996 and November 30, 1995, respectively).
Outstanding stock options, warrants, and convertible preferred stock are
considered in the determination of common stock equivalents and where
appropriate, they have been included in the weighted average number of shares
outstanding for the six months ended November 30, 1996 and November 30, 1995.
LANCER ORTHODONTICS, INC.
NOTES TO FINANCIAL STATEMENTS - continued
(E) NOTE PAYABLE TO BANK
Effective October 10, 1995, the Company arranged for a restructuring of its note
payable. The note was divided into a new term note, with an original balance of
$645,000 and a line of credit with an original balance of $400,000 (Note F).
The new note payable is for a term of two years and requires monthly principal
and interest payments of $18,889. Interest is at prime plus 1% (9.25% at
November 30, 1996). All unpaid principal and accrued interest is due and
payable on November 1, 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 $2,000,000, a debt to tangible net worth ratio of no more
than 1.25 to 1, and a current ratio of at least 1.5 to 1. The Company is not
required to maintain compensating balances in connection with this lending
agreement.
(F) LINE OF CREDIT
At November 30, 1996, the Company had a $500,000 line of credit with a bank.
Borrowings are made at prime plus 1% (9.25% at November 30, 1996) and are
limited to specified percentages of eligible accounts receivable. The unused
portion available under the line of credit at November 30, 1996 was $157,000.
The line of credit expires on January 1, 1997. The bank has indicated that they
intend to renew the line of credit. 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 November 30, 1996 and 1995.
(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
LANCER ORTHODONTICS, INC.
NOTES TO FINANCIAL STATEMENTS - continued
(H) COMMITMENTS AND CONTINGENCIES - continued
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 comon 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 November 30, 1996 and May 31, 1996, adjusted to reflect the one-for-
seven reverse stock split, were as follows:
11/30/96 5/31/96
Stock Options:
Outstanding 234,287 205,715
Future Issuance 2,193,713 2,222,285
Warrants issued in conjunction with loans and
convertible debt 200,596 200,596
For conversion of preferred stock 52,926 52,926
2,681,522 2,681,522
LANCER ORTHODONTICS, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the six months ended November 30, 1996, net income decreased $140,646 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 $387,624 (11.2%) compared to the year earlier period. The
decrease is attributable to manufacturing processing problems and mold problems,
which have resulted in lost sales and delayed deliveries. The manufacturing
processing problems have been identified and corrected. As part of the
correction process, the Company is reworking a substantial portion of its
inventory. The rework will be completed by the end of January 1997. At that
time, the Company believes it will be in a position to recover lost customers
and increase sales. The mold problems are being addressed through replacement
of badly worn molds and repairing of other molds. The Company is reviewing the
possiblity of spending approximately $500,000 to replace badly worn molds. The
Company continues to search for and add new customers, 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 increased from 55.8% to 60.7% as compared
to the year earlier period. The decline in gross margin is attributable to
manufacturing processing problems and mold problems and the cost to rework a
substantial portion of the Company's inventory. The manufacturing problems have
been identified and actions have been taken to correct the problems. The
elimination of the process and mold problems and the rework of the inventory
will allow the Company to increase sales.
Selling and general and administrative expenses decreased $116,911 (9.7%)
compared to the year earlier period. The decrease is attributable to a decrease
in wage costs, professional fees, 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 $35,059 (41.0%) compared to the year
earlier period. The decrease is attributable to a decrease in wage costs.
Interest expense decreased $35,975 (53.0%) compared to the year earlier period,
reflecting reduced debt and interest rates.
LANCER ORTHODONTICS, INC.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
The Company's financial condition at November 30, 1996 and its previous two year
ends was as follows:
11/30/96 05/31/96 05/31/95
Current Assets $3,273,064 $3,157,621 $3,383,867
Current Liabilities 1,076,413 836,714 971,283
Working Capital 2,196,651 2,320,907 2,412,584
Bank Debt & Capitalized Leases 596,976 727,495 1,243,902
Shareholder Equity 2,974,389 2,917,526 2,527,489
Total Assets 4,054,876 4,032,893 4,389,267
Working capital decreased $124,256 during the six months, primarily because of
the reclassification of the long term portion of the bank debt to a current
liability and the paydown of bank debt, partially offset by profitability and
non-cash expenses. The Company is currently considering investing from $400,000
to $500,000 in equipment and new molds. 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.
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. The Company's 1996 annual meeting of shareholders was held on October 25,
1996.
b. The following nominees were elected directors:
Joseph Irani Janet Moore
Zackary Irani Robert Orlando
Douglas Miller
c. The shareholders approved a one-for-seven reverse stock split of the
Company's no par value common stock.
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 January 10, 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 information extracted from Lancer
Orthodontics, Inc.'s November 30, 1996 10-QSB and is qualified in its entirety
by reference to such November 30, 1996 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> NOV-30-1996
<CASH> 118,743
<SECURITIES> 0
<RECEIVABLES> 1,443,547
<ALLOWANCES> 103,674
<INVENTORY> 1,760,900
<CURRENT-ASSETS> 3,273,064
<PP&E> 2,299,198
<DEPRECIATION> (2,015,120)
<TOTAL-ASSETS> 4,054,876
<CURRENT-LIABILITIES> 860,105
<BONDS> 0
0
185,242
<COMMON> 4,710,614
<OTHER-SE> (1,921,467)
<TOTAL-LIABILITY-AND-EQUITY> 4,054,876
<SALES> 3,085,278
<TOTAL-REVENUES> 3,085,278
<CGS> 1,872,721
<TOTAL-COSTS> 1,872,721
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<INTEREST-EXPENSE> 31,879
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<INCOME-TAX> 800
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