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, 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)
11/30/97
ASSETS
CURRENT ASSETS:
Cash $ 149,178
Accounts Receivable, less allowances of $97,727 (Note G) 1,195,887
Inventories (Note G) 1,733,887
Prepaid Expenses 51,651
Total Current Assets 3,130,603
PROPERTY AND EQUIPMENT, at cost (Note G) 2,308,282
Less: Accumulated depreciation (2,096,131)
212,151
INTANGIBLE ASSETS:
Marketing and Distribution Rights, net 172,225
Technology Use Rights, net 247,513
419,738
OTHER ASSETS 4,400
Total Assets $3,766,892
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Accrued Liabilities $ 323,089
Line of Credit (Note F) 200,000
Current Portion of Note Payable to Bank (Note G) 60,000
Capital Lease Obligation (Note H) 4,074
Total Current Liabilities 587,163
COMMITMENTS AND CONTINGENCIES (Note I) --
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 2,125,712 4,710,614
Accumulated Deficit (1,716,127)
Total Stockholders' Equity 3,179,729
Total Liabilities and Stockholders' Equity $3,766,892
LANCER ORTHODONTICS, INC.
CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
11/30/97 11/30/96 11/30/97 11/30/96
NET SALES $1,563,507 $1,599,996 $3,011,290 $3,085,278
COST OF SALES 976,283 958,818 1,866,011 1,872,721
Gross Profit 587,224 641,178 1,145,279 1,212,557
OPERATING EXPENSES:
Selling, General & Admin 506,834 567,345 1,012,201 1,083,277
Product Development 46,533 25,264 86,175 50,498
TOTAL OPERATING EXPENSES 553,367 592,609 1,098,376 1,133,775
INCOME FROM OPERATIONS 33,857 48,569 46,903 78,782
OTHER INCOME (EXPENSE):
Interest Expense ( 7,601) ( 15,076) ( 17,074) ( 31,879)
Other Income (Exp), net 1,516 682 417 1,328
TOTAL OTHER INCOME (EXP) ( 6,085) ( 14,394) ( 16,657) ( 30,551)
INCOME BEFORE INCOME TAXES 27,772 34,175 30,246 48,231
INCOME TAXES (NOTE J) 800 -- 800 800
NET INCOME $ 26,972 $ 34,175 $ 29,446 $ 47,431
NET INCOME PER COMMON
SHARE (NOTE K) $ .012 $ .016 $ .014 $ .022
LANCER ORTHODONTICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED
11/30/97 11/30/96
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 29,446 $ 47,431
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 128,778 108,438
Changes in assets and liabilities:
Decrease (increase) in accounts rec, net ( 17,051) 125,544
Decrease (increase) in inventories 111,767 (174,937)
Increase in prepaid expenses ( 13,845) ( 12,038)
Increase (decrease) in accounts
payable and accrued liabilities ( 61,113) 105,071
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 177,982 199,509
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ( 31,791) ( 14,978)
CASH FLOWS USED IN INVESTING ACTIVITIES ( 31,791) ( 14,978)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on note payable to bank (140,000) (120,000)
Principal payments of capital leases ( 11,774) ( 10,519)
CASH FLOWS USED IN FINANCING ACTIVITIES (151,774) (130,519)
INCREASE (DECREASE) IN CASH ( 5,583) 54,012
CASH AT BEGINNING OF PERIOD 154,761 64,731
CASH AT END OF PERIOD $149,178 $118,743
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 related to the determination
of the allowance for sales returns and doubtful receivables, and the
realizeability of inventories and intangible assets. Actual results could
materially 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 November 30, 1997, the Company had a $500,000 line of credit with a bank.
Borrowings are made at prime plus 1% (9.5% at November 30, 1997) and are limited
to specified percentages of eligible accounts receivable. The unused portion
available under the line of credit at November 30, 1997 was $140,232. 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 November 30, 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 November
30, 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 November 30, 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
LANCER ORTHODONTICS, INC.
NOTES TO FINANCIAL STATEMENTS - continued
(I) COMMITMENTS AND CONTINGENCIES - continued
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. 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 $4,499 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 is computed based on the weighted average number of
common shares and common equivalent shares outstanding (2,178,638 and 2,175,783
for the six months ended November 30, 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 six months
ended November 30, 1997 and November 30, 1996.
LANCER ORTHODONTICS, INC.
NOTES TO FINANCIAL STATEMENTS - continued
(L) NEW DISCLOSURE STANDARDS
In February 1997, Statement of Financial Accounting Standards ("SFAS") No. 128
(SFAS 128"), "Earnings per Share" was issued which establishes new standards for
computing and presenting earnings per share ("EPS"). Specifically, SFAS 128:
(a) eliminates the presentation of primary EPS and replaces it with basic EPS,
(b) eliminates the modified treasury stock method and the three percent
materiality provision, and (c) revised the contingent share provision and the
supplemental EPS data requirements. SFAS 128 also makes a number of changes to
existing disclosure requirements. SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997; early
implementation is not permitted. The effect of adopting SFAS 128 has not yet
been determined by management of the Company.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 129
("SFAS 129"), "Disclosure of Information about Capital Structure." SFAS 129
requires companies to disclose descriptive information about securities that is
not necessarily related to the computation of earnings per share. It also
requires disclosure of information about the liquidation preference of preferred
stock and redeemable stock. SFAS 129 is effective for financial statements for
periods ending after December 15, 1997. The Company does not expect that the
implementation of SFAS 129 will require significant revision of prior
disclosures. The effect of adopting SFAS 129 has not yet been determined by
management of the Company.
In June 1997, SFAS No. 130 (SFAS 130"), "Comprehensive Income" was issued which
becomes effective in 1998 and requires reclassification of earlier financial
statements for comparative purposes. SFAS 130 requires that changes in the
amounts of certain items, including foreign currency translation adjustments and
gains and losses on certain securities, be shown in the financial statements.
SFAS 130 does not require a specific format for the financial statement in which
comprehensive income is reported, but does require that an amount representing
total comprehensive income be reported in that statement. The Company does not
expect that the implementation of SFAS 130 will have a material effect upon the
Company's financial statements. The effect of adopting SFAS 130 has not yet
been determined by management of the Company.
In June 1997, SFAS No. 131 ("SFAS 131"), "Disclosures about Segments of an
Enterprise and Related Information" was issued. This statement will change the
way public companies report information about segments of their business in
their annual financial statements and requires them to report selected segment
information in their quarterly reports issued to shareholders. It also requires
entity-wide disclosures about the product, services an entity provides, the
material countries in which it holds assets and reports revenues, and its major
customers. SFAS 131 is effective for fiscal years beginning after December 15,
1997. The Company does not expect that the implementation of SFAS 131 will have
a material effect upon the Company's financial statements. The effect of
adopting SFAS 131 has not yet been determined by management of the Company.
LANCER ORTHODONTICS, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements in this Report on Form 10-QSB and other statements made by Lancer
Orthodontics, Inc. that relate to future plans, events, or performance are
forward-looking statements which involve risks and uncertainties. Actual
results, events, or performance may differ materially from those anticipated in
any forward-looking statements as a result of a variety of factors, including
those set forth in this Report on Form 10-QSB.
RESULTS OF OPERATIONS
For the six months ended November 30, 1997, net income decreased $17,985 as
compared to the year earlier period. For the three months ended November 30,
1997, net income decreased $7,203 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.
For the six months ended November 30, 1997, net sales decreased $73,988 (2.39%)
compared to the year earlier period. For the three months ended November 30,
1997, net sales decreased $36,489 (2.28%) as compared to the year earlier
period. The decrease is attributable to competition pressures and lower prices
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.
For the six months and three months ended November 30, 1997, cost of sales as a
percentage of sales (60-62%) 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 should
enable the Company to reduce cost of sales.
For the six months ended November 30, 1997, selling and general and
administrative expenses decreased $71,076 (6.56%) compared to the year earlier
period. For the three months ended November 30, 1997, selling and general and
administrative expenses decreased $60,511 (10.66%) as compared to the year
earlier period. The decrease is attributable to a decrease in travel, postage,
salaries, and commissions.
For the six months ended November 30, 1997, product development expenses
increased $35,677 (70.7%) compared to the year earlier period. For the three
months ended November 30, 1997, product development expenses increased $21,267
(84.25%) compared to the year earlier period. The increase is attributable to
an increase in wage costs.
For the six months ended November 30, 1997, interest expense decreased $14,805
(46.4%) compared to the year earlier period. For the three months ended
November 30, 1997, interest expense decreased $7,475 (49.6%) as compared to the
year earlier period. The decrease is attributable to reduced debt and interest
rates.
LANCER ORTHODONTICS, INC.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
The Company's financial condition at November 30, 1997 and its previous two
fiscal year ends was as follows:
11/30/97 05/31/97 05/31/96
Current Assets $3,130,603 $3,217,057 $3,157,621
Current Liabilities 587,163 800,050 836,714
Working Capital 2,543,440 2,417,007 2,320,907
Bank Debt & Capitalized Leases 264,074 415,848 727,495
Shareholder Equity 3,179,729 3,150,283 2,917,526
Total Assets 3,766,892 3,950,333 4,032,893
Working capital increased $126,433 during the six 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.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS Not Applicable
Item 2. CHANGES IN SECURITIES Not Applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. The Company's 1997 annual meeting of shareholders was held on October 24,
1997.
b. The following nominees were elected directors:
Zackary Irani Janet Moore Douglas Miller Robert Orlando
c.
For Against Abstentions
Zackary Irani 1,959,824 0 6,515
Douglas Miller 1,959,815 0 6,524
Janet Moore 1,959,821 0 6,518
Robert Orlando 1,965,572 0 767
Total Response 1,966,339
There were no broker non-votes.
Item 5. OTHER INFORMATION Not Applicable
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 14, 1998 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 second quarter 10-Q and is qualified in its entirety by
reference to such 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> NOV-30-1997
<CASH> 149,178
<SECURITIES> 0
<RECEIVABLES> 1,293,614
<ALLOWANCES> (97,727)
<INVENTORY> 1,733,887
<CURRENT-ASSETS> 3,130,603
<PP&E> 2,308,282
<DEPRECIATION> (2,096,131)
<TOTAL-ASSETS> 3,766,892
<CURRENT-LIABILITIES> 587,163
<BONDS> 0
0
185,242
<COMMON> 4,710,614
<OTHER-SE> (1,716,127)
<TOTAL-LIABILITY-AND-EQUITY> 3,766,892
<SALES> 3,011,290
<TOTAL-REVENUES> 3,011,290
<CGS> 1,866,011
<TOTAL-COSTS> 1,866,011
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<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,074
<INCOME-PRETAX> 30,246
<INCOME-TAX> 800
<INCOME-CONTINUING> 29,446
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<NET-INCOME> 29,446
<EPS-PRIMARY> .014
<EPS-DILUTED> .014
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