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, 1998 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)
2/28/98
ASSETS
CURRENT ASSETS:
Cash $ 245,083
Accounts Receivable, less allowances of $103,508 (Note F) 1,152,939
Inventories (Note F) 1,650,811
Prepaid Expenses 22,952
Total Current Assets 3,071,785
PROPERTY AND EQUIPMENT, at cost (Note F) 2,312,981
Less: Accumulated depreciation (2,082,121)
230,860
INTANGIBLE ASSETS:
Marketing and Distribution Rights, net 166,000
Technology Use Rights, net 235,339
401,339
OTHER ASSETS 4,400
Total Assets $3,708,384
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Accrued Liabilities $ 349,399
Line of Credit (Note F) 200,000
Current Portion ofNote Payable to Bank (Note G) --
Capital Lease Obligation (Note H) --
Total Current Liabilities 549,399
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 (1,736,871)
Total Stockholders' Equity 3,158,985
Total Liabilities and Stockholders' Equity $3,708,384
LANCER ORTHODONTICS, INC.
CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
2/28/98 2/28/97 2/28/98 2/28/97
NET SALES $1,370,068 $1,622,618 $4,381,358 $4,707,896
COST OF SALES 828,058 1,072,613 2,694,070 2,945,334
Gross Profit 542,010 550,005 1,687,288 1,762,562
OPERATING EXPENSES:
Selling, General & Admin 506,691 520,977 1,519,692 1,604,254
Product Development 49,266 20,458 135,441 70,956
TOTAL OPERATING EXPENSES 555,957 541,435 1,655,133 1,675,210
INCOME (LOSS) FROM
OPERATIONS ( 13,947) 8,570 32,155 87,352
OTHER INCOME (EXPENSE):
Interest Expense ( 6,338) ( 13,348) ( 23,412) ( 45,227)
Other Income (Expense), net 342 2,366 759 3,694
TOTAL OTHER INCOME (EXP) ( 5,996) ( 10,982) ( 22,653) ( 41,533)
INCOME (LOSS) BEFORE
INCOME TAXES ( 19,943) ( 2,412) 9,502 45,819
INCOME TAXES (NOTE J) 800 -- 800 800
NET INCOME (LOSS) $( 20,743)$( 2,412) $ 8,702 $ 45,019
NET INCOME (LOSS) PER
COMMON SHARE (NOTE K) $( .010)$( .001) $ .004 $ .021
NET INCOME (LOSS) PER
COMMON SHARE
DILUTED (NOTE K) $( .010)$( .001) $ .004 $ .020
LANCER ORTHODONTICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED
2/28/98 2/28/97
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 8,702 $ 45,019
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 133,167 162,657
Changes in assets and liabilities:
Decrease in accounts receivable, net 25,897 44,886
Decrease (increase) in inventories 194,843 (116,502)
Decrease in prepaid expenses 14,854 37,434
Increase (decrease) in accounts payable
and accrued liabilities ( 34,803) 101,341
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 342,660 274,835
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ( 36,490) ( 41,172)
CASH FLOWS USED IN INVESTING ACTIVITIES ( 36,490) ( 41,172)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under line of credit agreement -- ( 2,000)
Principal payments on note payable to bank (200,000) (180,000)
Principal payments of capital leases ( 15,848) ( 16,005)
CASH FLOWS USED IN FINANCING ACTIVITIES (215,848) (198,005)
INCREASE IN CASH 90,322 35,658
CASH AT BEGINNING OF PERIOD 154,761 64,731
CASH AT END OF PERIOD $245,083 $100,389
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) 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)
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 February 28, 1998, the Company had a $500,000 line of credit with a bank.
Borrowings are made at prime plus 1% (9.5% at February 28, 1998) and are limited
to specified percentages of eligible accounts receivable. The unused portion
available under the line of credit at February 28, 1998 was $157,698. The line
of credit expires on May 1, 1998. The Company is not required to maintain
compensating balances in connection with this borrowing arrangement.
The line of credit is collateralized by substantially all the assets of the
Company, including inventories, receivables, and equipment. The lending
agreement for the line of credit 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 ration of at least 2 to 1. The Company
is not required to maintain compensating balances in connection with this
lending agreement.
(G) NOTE PAYABLE TO BANK
At February 28, 1998, all unpaid principal and accrued interest on the note
payable to a bank was paid. The note required monthly payments of $18,889 plus
interest at prime plus 1% (9.5% at February 28, 1998).
(H) CAPITAL LEASE
The Company is the lessee of equipment under a capital lease which expired in
January 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, 1998 and February 28, 1997.
(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 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
(I) 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. 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. At February 28, 1998, this
obligation was approximately $190,000. 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 rental payments 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 AND DIVIDENDS
In February 1997, the Financial Accounting Standards Board issued a new
statement titled "EARNINGS PER SHARE" ("FAS 128"). The new statement is
effective for both interim and annual periods ending after December 15, 1997.
FAS 128 replaces the presentation of primary and fully diluted earnings per
share with the presentation of basic and diluted earnings per share. Basic
earnings per share excludes dilution and is calculated by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
LANCER ORTHODONTICS, INC.
NOTES TO FINANCIAL STATEMENTS - continued
(K) NET INCOME PER COMMON SHARE AND DIVIDENDS - continued
EARNINGS PER SHARE (UNAUDITED)
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
2/28/98 2/28/97 2/28/98 2/28/97
BASIC EARNINGS PER SHARE:
Net income (loss) $( 20,743)$( 2,412) $ 8,702 $ 45,019
Net income (loss) applicable to
common shareholders $( 20,743)$( 2,412) $ 8,702 $ 45,019
Weighted average number of
common shares 2,125,712 2,125,698 2,125,712 2,125,698
Basic Earnings (loss) per Share$( .010)$( .001) $ .004 $ .021
DILUTED EARNINGS PER SHARE:
Net income (loss) from primary
income per common share $( 20,743)$( 2,412)$ 8,702 $ 45,019
Net income (loss) for diluted
earnings per share $( 20,743)$( 2,412) $ 8,702 $ 45,019
Weighted average number of shares
used in calculating basis
earnings per common share 2,125,712 2,125,698 2,125,712 2,125,698
Add: Common equivalent shares 52,926 90,496 52,926 90,496
Weighted average number of shares
used in calculation of diluted
earnings per share 2,178,638 2,216,194 2,178,638 2,216,194
Diluted earnings (loss)
per share $( .010) $( .001) $ .004 $ .020
LANCER ORTHODONTICS, INC.
NOTES TO FINANCIAL STATEMENTS - continued
(L)
In June 1997, SFAS No. 130 (SFAS 130"), "Comprehensive Income" was issued which
is effective for fiscal years beginning after December 15, 1997, 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"), "Disclosure 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.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for historical information contained herein, the statements in this Form
10-QSB are forward-looking statements that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Forward-
looking statements involve known and unknown risks and uncertainties which may
cause the Company's actual results in future periods to differ materially from
forecasted results. These risks and uncertainties include, among other things,
the continued demand for the Company's products, availability of raw materials
and the state of the economy. These and other risks are described in the
Company's Annual Report on Form 10-KSB and in the Company's other filings with
the Securities and Exchange Commission.
RESULTS OF OPERATIONS
For the nine months ended February 28, 1998, net income decreased $36,317 as
compared to the year earlier period. For the three months ended February 28,
1998, net income decreased $18,331 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.
LANCER ORTHODONTICS, INC.
For the nine months ended February 28, 1998, net sales decreased $326,538
(6.94%) compared to the year earlier period. For the three months ended
February 28, 1998, net sales decreased $252,550 (15.56%) 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 that will contribute
strategically to its product line, believing that a larger and more diverse
product line will appeal to a wider range of customers.
For the nine months ended February 28, 1998, cost of sales as a percentage of
sales (61.5%) decreased from 1.1% as compared to the year earlier period
(62.6%). For the three months ended February 28, 1998, cost of sales as a
percentage of sales (60.4%) decreased 5.7% as compared to the year earlier
period (66.1%). 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 nine months ended February 28, 1998, selling and general and
administrative expenses decreased $84,562 (5.27%) compared to the year earlier
period. For the three months ended February 28, 1998, selling and general and
administrative expenses decreased $14,286 (2.74%) as compared to the year
earlier period. The decrease is attributable to a decrease in general and
administrative salaries and selling commissions.
For the nine months ended February 28, 1998, product development expenses
increased $64,485 (90.9%) compared to the year earlier period. For the three
months ended February 28, 1998, product development expenses increased $28,808
(140.8%) compared to the year earlier period. The increase is attributable to an
increase in wage costs.
For the nine months ended February 28, 1998, interest expense decreased $21,815
(48.2%) compared to the year earlier period. For the three months ended
February 28, 1998, interest expense decreased $7,010 (52.5%) as compared to the
year earlier period. The decrease is attributable to reduced debt and interest
rates.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
The Company's financial condition at February 28, 1998 and its previous two
fiscal year ends was as follows:
02/28/98 05/31/97 05/31/96
Current Assets $3,071,785 $3,217,057 $3,157,621
Current Liabilities 549,399 800,050 836,714
Working Capital 2,522,386 2,417,007 2,320,907
Bank Debt & Capitalized Leases 200,000 415,848 727,495
Shareholder Equity 3,158,985 3,150,283 2,917,526
Total Assets 3,708,384 3,950,333 4,032,893
Working capital increased $105,379 during the nine months, primarily because of
accounts receivable collections, 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
Not Applicable
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 April 17, 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 third quarter 10-Q and is qualified in its entirety by
reference to such 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> FEB-28-1998
<CASH> 245,083
<SECURITIES> 0
<RECEIVABLES> 1,253,245
<ALLOWANCES> (100,306)
<INVENTORY> 1,650,811
<CURRENT-ASSETS> 3,071,785
<PP&E> 2,312,981
<DEPRECIATION> (2,082,121)
<TOTAL-ASSETS> 3,708,384
<CURRENT-LIABILITIES> 549,399
<BONDS> 0
0
185,242
<COMMON> 4,710,614
<OTHER-SE> (1,736,871)
<TOTAL-LIABILITY-AND-EQUITY> 3,708,384
<SALES> 4,381,358
<TOTAL-REVENUES> 4,381,358
<CGS> 2,694,070
<TOTAL-COSTS> 2,694,070
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,412
<INCOME-PRETAX> 9,502
<INCOME-TAX> 800
<INCOME-CONTINUING> 8,702
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<CHANGES> 0
<NET-INCOME> 8,702
<EPS-PRIMARY> .004
<EPS-DILUTED> .004
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