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, 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
<PAGE>
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 2,117,040
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)
8/31/98
ASSETS
CURRENT ASSETS:
Cash $ 108,816
Accounts Receivable, less allowances for sales
returns and doubtful receivables of $99,825 1,333,509
Inventories 2,076,955
Prepaid Expenses 34,232
Total Current Assets 3,553,512
PROPERTY AND EQUIPMENT, at cost 2,330,494
Less: Accumulated depreciation (2,133,365)
197,129
INTANGIBLE ASSETS:
Marketing and Distribution Rights, net 153,550
Technology Use Rights, net 210,990
364,540
<PAGE>
OTHER ASSETS 6,560
Total Assets $4,121,741
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Accrued Liabilities $ 581,458
Line of Credit 100,000
Total Current Liabilities 681,458
COMMITMENTS AND CONTINGENCIES --
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; $.50 par value:
Authorized 500,000 shares; 370,483 issued and outstanding
($.50 liquidation preference: aggregate liquidation
preference of $185,242) 185,242
Common Stock, no par value: Authorized 50,000,000 shares;
issued and outstanding 2,117,040 4,700,906
Accumulated Deficit (1,445,865)
Total Stockholders' Equity 3,440,283
Total Liabilities and Stockholders' Equity $4,121,741
LANCER ORTHODONTICS, INC.
CONDENSED STATEMENTS OF OPERATIONS AND
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
<PAGE>
FOR THE THREE MONTHS ENDED
8/31/98 8/31/97
NET SALES $1,540,302 $1,447,783
COST OF SALES 941,277 889,729
Gross Profit 599,025 558,054
OPERATING EXPENSES:
Selling, General & Administrative 523,569 504,566
Product Development 32,322 39,642
TOTAL OPERATING EXPENSES 555,891 544,208
INCOME (LOSS) FROM OPERATIONS 43,134 13,846
OTHER INCOME (EXPENSE):
Interest Expense ( 1,979) ( 9,473)
Other Income (Expense), net ( 132) ( 1,099)
TOTAL OTHER INCOME (EXPENSE) ( 2,111) ( 10,572)
INCOME BEFORE INCOME TAXES 41,023 3,274
INCOME TAXES 800 800
NET INCOME 40,223 2,474
OTHER COMPREHENSIVE INCOME -- --
<PAGE>
COMPREHENSIVE INCOME $ 40,223 $ 2,474
WEIGHTED AVERAGE SHARES OF COMMON SHARE
BASIC $ .019 $ .001
DILUTED $ .019 $ .001
LANCER ORTHODONTICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
8/31/98 8/31/97
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 40,223 $ 2,474
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 40,719 64,389
Provision for doubtful accounts 20,175 750
Changes in assets and liabilities:
Decrease (increase) in accounts
receivable ( 50,834) 13,409
Increase in inventories (280,161) ( 41,322)
Decrease in prepaid expenses 33,525 27,064
Decrease in accounts payable and
accrued liabilities ( 2,764) ( 26,892)
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES (199,117) 39,872
<PAGE>
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ( 8,615) ( 29,616)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on note payable to bank -- ( 70,000)
Principal payments of capital leases -- ( 5,804)
Repurchase of common stock ( 4,488) --
CASH FLOWS USED IN FINANCING ACTIVITIES ( 4,488) ( 75,804)
INCREASE (DECREASE) IN CASH (212,220) ( 65,548)
CASH AT BEGINNING OF PERIOD 321,036 154,761
CASH AT END OF PERIOD $108,816 $ 89,213
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
<PAGE>
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 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 made by the Company's management
include, but are not limited to, allowances for doubtful accounts, allowances
for sales returns, the valuation of inventories, and the realizeability of
property and equipment through future operations. Actual results could
materially differ from those estimates.
(D) STOCK BASED COMPENSATION
<PAGE>
The Company accounts for stock based compensation under Statement of Financial
Accounting Standards No. 123 ("SFAS 123"). SFAS 123 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, 1998, the Company had a $300,000 line of credit with a bank.
Borrowings are made at prime plus 1% (9.5% at August 31, 1998) and are limited
to specified percentages of eligible accounts receivable. The unused portion
available under the line of credit at August 31, 1998 was $153,318. The line of
credit expires on December 1, 1998. The Company is not required to maintain
compensating balances in connection with this borrowing arrangement.
<PAGE>
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 August 31, 1997).
(H) CAPITAL LEASE
The Company was the lessee of equipment under a capital lease which expired in
January 1998. The assets and liabilities under the capital lease were recorded
at the lower of the present value of the minimum lease payments or the fair
market value of the asset. The asset was depreciated over its estimated useful
life. Depreciation of the asset is included in depreciation expense for the
period ended August 31, 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
<PAGE>
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
LANCER ORTHODONTICS, INC.
NOTES TO FINANCIAL STATEMENTS - continued
(I) COMMITMENTS AND CONTINGENCIES - continued
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. At August 31, 1998, this obligation was approximately $280,000.
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, 2003, which requires monthly rental payments that
increase annually, from $2,900 per month in 1994 to $6,317 per month in 2003.
The Company also leases its Mexico facility under a non-cancelable operating
lease expiring October 31, 1998, which requires average monthly rentals of
approximately $5,200. The rentals are subject to annual increases based on the
United States Consumer Price Index. Future aggregate minimum annual cash lease
payments are as follows:
<PAGE>
Years ending
May 31, 1999 $76,031
May 31, 2000 $65,880
May 31, 2001 $68,512
May 31, 2002 $71,252
May 31, 2003 $74,105
Thereafter $44,219
YEAR 2000 ISSUES _ Certain computerized systems use only two digits to record
the year in date fields. Such systems may not be able to accurately process
dates ending in the year 2000 and after. The effects of this issue will vary
from system to system and may adversely affect an entity's operations as well as
its ability to prepare financial statements. The Company has begun the process
of upgrading its hardware and software in order to obtain year 2000 compliance
in 1999 and does not anticipate to incur significant additional costs to by year
2000 compliant.
(J) INCOME TAXES
At May 31, 1998, the Company had net tax operating loss carryforwards of
approximately $2,153,000 and business tax credits of approximately $161,000
available to offset future Federal taxable income and tax liabilities,
respectively. The Federal carryforwards expire in varying amounts from 1998 to
2008. As of May 31, 1998, the Company had business tax credits of approximately
$23,000 available to offset future state income tax liabilities. The Company's
state net operating loss carryforward totaling approximately $354,000 expired
during the year ended May 31, 1998.
LANCER ORTHODONTICS, INC.
NOTES TO FINANCIAL STATEMENTS - continued
<PAGE>
(K)NET INCOME PER COMMON SHARE AND DIVIDENDS
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS 128"). SFAS 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. In connection with the implementation of SFAS
128, the basic and diluted earnings per share for the three months ended August
31, 1997 were not materially different from the earnings per share previously
reported for such period.
EARNINGS PER SHARE (UNAUDITED)
FOR THE THREE MONTHS ENDED
8/31/98 8/31/97
BASIC EARNINGS PER SHARE:
Net income $ 40,223 $ 2,474
Net income applicable to common shareholders $ 40,223 $ 2,474
Weighted average number of common shares 2,118,280 2,125,712
Basic Earnings per Share $ .019 $ .001
DILUTED EARNINGS PER SHARE:
<PAGE>
Net income (loss) from primary
income per common share $ 40,223 $ 2,474
Net income (loss) for diluted
earnings per share $ 40,223 $ 2,474
Weighted average number of shares used in calculation
of basic earnings per common share 2,118,280 2,125,712
Add: Common equivalent shares 52,926 52,926
Weighted average number of shares used in calculation
of diluted earnings per share 2,171,206 2,178,638
Diluted earnings per share $ .019 $ .001
LANCER ORTHODONTICS, INC.
NOTES TO FINANCIAL STATEMENTS - continued
(L) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
FOR THE THREE MONTHS ENDED
8/31/98 8/31/97
Sales to unaffiliated customers:
United States $ 871,154 $ 903,355
Europe 348,766 255,884
South America 185,549 138,506
Other Foreign 134,833 150,038
$1,540,302 $1,447,783
<PAGE>
No other geographic concentrations exist where net sales exceed 10% of total
net sales.
Sales or transfers between geographic areas none none
Operating profit:
United States $ 64,001 $ 90,707
Europe ( 10,875) ( 36,125)
South America ( 5,784) ( 19,553)
Other Foreign ( 4,208) ( 21,183)
$ 43,134 $ 13,846
(M) NEW DISCLOSURE STANDARDS
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 implementation of SFAS 130 did not have a material effect
upon the Company's financial statements.
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
<PAGE>
customers. SFAS 131 is effective for fiscal years beginning after December 15,
1997. The implementation of SFAS 131 will not have a material effect upon the
Company's financial statements.
LANCER ORTHODONTICS, INC.
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 three months ended August 31, 1998, net income increased $37,749 as
compared to the year earlier period. The increase in net income is primarily
attributable to the increase in sales.
For the three months ended August 31, 1998, net sales increased $92,519 (6.4%)
as compared to the year earlier period. The Company continues to search for and
add new distributors, private label customers, and sales representatives. The
<PAGE>
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 three months ended August 31, 1998, cost of sales as a percentage of
sales totaled 61.1%, a decrease of .4% as compared to the year earlier period
which totaled 61.5%. The Company is in the process of automating several of
its manufacturing processes which should reduce future cost of sales.
For the three months ended August 31, 1998, selling and general and
administrative expenses increased $19,003 (3.8%) as compared to the year earlier
period. The increase is attributable to an expansion of sales territories and
costs related to increased sales.
For the three months ended August 31, 1998, product development expenses
decreased $7,320 (18.5%) as compared to the year earlier period. The decrease
is attributable to a decrease in wage costs.
For the three months ended August 31, 1998, interest expense decreased $7,494
(79.1%) as compared to the year earlier period. The decrease is attributable to
reduced debt.
LANCER ORTHODONTICS, INC.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
The Company's financial condition at August 31, 1998 and its previous two fiscal
year ends was as follows:
08/31/98 05/31/98 05/31/97
Current Assets $3,553,512 $3,488,437 $3,217,057
Current Liabilities 681,458 684,222 800,050
Working Capital 2,872,054 2,804,215 2,417,007
<PAGE>
Bank Debt & Capitalized Leases 100,000 100,000 415,848
Shareholder Equity 3,440,283 3,404,548 3,150,283
Total Assets 4,121,741 4,088,770 3,950,333
Working capital increased $67,839 during the three months ended August 31, 1998,
primarily attributable to an increase in sales, 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
<PAGE>
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 14, 1998 By /s/ Douglas D. Miller
Douglas D. Miller,
President and Chief Operating
Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Lancer
Orthodontics, Inc 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-31-1999
<PERIOD-END> AUG-31-1998
<CASH> 108,816
<SECURITIES> 0
<RECEIVABLES> 1,433,334
<ALLOWANCES> (99,825)
<INVENTORY> 2,076,955
<CURRENT-ASSETS> 3,553,512
<PP&E> 2,330,494
<DEPRECIATION> (2,133,365)
<TOTAL-ASSETS> 4,121,741
<CURRENT-LIABILITIES> 681,458
<BONDS> 0
0
185,242
<COMMON> 4,700,906
<OTHER-SE> (1,445,865)
<TOTAL-LIABILITY-AND-EQUITY> 4,121,741
<SALES> 1,540,302
<TOTAL-REVENUES> 1,540,302
<CGS> 941,277
<TOTAL-COSTS> 941,277
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,979
<INCOME-PRETAX> 41,023
<INCOME-TAX> 800
<INCOME-CONTINUING> 40,223
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,223
<EPS-PRIMARY> .019
<EPS-DILUTED> .019
</TABLE>
