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, 1999 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: 2,076,420
Traditional small business disclosure format (check one):
Yes X No
PART I. FINANCIAL INFORMATION
Item 1. SUMMARIZED FINANCIAL INFORMATION
LANCER ORTHODONTICS, INC.
CONDENSED BALANCE SHEET (UNAUDITED)
8/31/99
ASSETS
CURRENT ASSETS:
Cash $ 214,082
Accounts Receivable, less allowances for sales
returns and doubtful receivables of $169,600 1,201,777
Inventories 2,284,662
Prepaid Expenses 33,637
Total Current Assets 3,734,158
PROPERTY AND EQUIPMENT, at cost 2,396,227
Less: Accumulated depreciation (2,228,343)
167,884
INTANGIBLE ASSETS:
Marketing and Distribution Rights, net 128,650
Technology Use Rights, net 162,294
<PAGE>
290,944
OTHER ASSETS 6,560
Total Assets $4,199,546
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Accrued Liabilities $ 675,639
Line of Credit 180,000
Total Current Liabilities 855,639
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 2,076,420 4,661,575
Accumulated Deficit (1,502,910)
Total Stockholders' Equity 3,343,907
Total Liabilities and Stockholders' Equity $4,199,546
LANCER ORTHODONTICS, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
<PAGE>
FOR THE THREE MONTHS ENDED
8/31/99 8/31/98
NET SALES $1,271,545 $1,540,302
COST OF SALES 901,083 941,277
Gross Profit 370,462 599,025
OPERATING EXPENSES:
Selling, General & Administrative 538,549 523,569
Product Development 56,665 32,322
TOTAL OPERATING EXPENSES 595,214 555,891
(LOSS) INCOME FROM OPERATIONS ( 224,752) 43,134
OTHER INCOME (EXPENSE):
Interest Expense ( 3,705) ( 1,979)
Other Income (Expense), net 170,403 ( 132)
TOTAL OTHER INCOME (EXPENSE) 166,698 ( 2,111)
(LOSS) INCOME BEFORE INCOME TAXES ( 58,054) 41,023
INCOME TAXES 800 800
NET (LOSS) INCOME $( 58,854) $ 40,223
<PAGE>
PER SHARE DATA:
BASIC $( .03) $ .02
DILUTED $( .03) $ .02
LANCER ORTHODONTICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS(UNAUDITED)
FOR THE THREE MONTHS ENDED
8/31/99 8/31/98
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $( 58,854) $ 40,223
Adjustments to reconcile net income to
net cash provided by (used in)operating
activities:
Depreciation and amortization 37,705 40,719
Provision for losses on accounts
receivable ( 6,386) 20,175
Provision for losses on inventory 12,000 9,000
Common stock issued for services to
<PAGE>
directors 23,170 --
Net change in operating assets and
liabilities:
Accounts receivable 156,329 ( 50,834)
Inventories ( 89,508) (289,161)
Prepaid expenses 18,208 33,525
Insurance claim receivable 110,000 --
Accounts payable and accrued liabilities ( 33,181) ( 2,764)
Net cash provided by (used in) operating activities 169,483 (199,117)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ( 2,983) ( 8,615)
Net cash (used in) investing activities ( 2,983) ( 8,615)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock ( 58,710) ( 4,488)
Net cash (used in) financing activities ( 58,710) ( 4,488)
NET CHANGE IN CASH 107,790 (212,220)
CASH, beginning of period 106,292 321,036
CASH, end of period $214,082 $108,816
<PAGE>
LANCER ORTHODONTICS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(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 G). 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
<PAGE>
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
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 (UNAUDITED) - continued
(E) INSURANCE CLAIM
<PAGE>
Management of the Company completed an assessment of a theft of inventory
located at its facility in Mexicali, Mexico on April 6, 1999. The carrying
value of the inventory stolen approximated $110,000, valued at standard cost,
which was reflected in the May 31, 1999 financial statements as a reduction in
inventories and an addition to insurance claim receivable. In July 1999, the
Company settled the claim with the insurance carrier and received $279,672; the
value of the stolen inventory at net average selling price, less commissions and
royalties. The Company recorded other income of $169,672 from the proceeds
received in excess of standard cost.
(F) LINE OF CREDIT
At August 31, 1999, the Company had a $1,000,000 line of credit with a bank.
Borrowings are made at prime plus .75% (9.0% at August 31, 1999) and are limited
to specified percentages of eligible accounts receivable. The unused portion
available under the line of credit at August 31, 1999 was $182,442. The line of
credit expires on November 3, 1999.
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 $2,500,000, and a debt to tangible net worth
ratio of no more than 1 to 1. The Company is not required to maintain
compensating balances in connection with this lending agreement.
(G) COMMITMENTS AND CONTINGENCIES
MANUFACTURING AGREEMENT - The Company has 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. In December 1992, the Company renegotiated the agreement
<PAGE>
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. Effective April 1, 1996, the Company leased the Mexicali facility under
a separate arrangement. In November 1998, the Company extended the
Manufacturing Agreement through December 2003. 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, 1999, this obligation was approximately $258,000.
Such obligation is contingent in nature and accordingly has not been accrued in
the accompanying balance sheet.
LANCER ORTHODONTICS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - continued
(G) COMMITMENTS AND CONTINGENCIES - continued
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 2003, which requires average monthly rentals of
approximately $6,040. 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, 2000 $138,362
May 31, 2001 140,994
May 31, 2002 143,733
May 31, 2003 146,587
Thereafter 74,884
Total $644,560
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 accounting and MRP software
for the Company'' main frame computer system has been upgraded to the year 2000
compliant and is actively supported by the developer. The Company does not
anticipate to incur significant additional costs to be completely year 2000
compliant.
The Company does not place orders electronically nor does it make disbursements
to vendors or employees in that medium. The Company has a broad base of
customers and suppliers and therefore is not heavily reliant on any one outside
company. However, the Company has no way of completely knowing how the year
2000 may affect its various vendors or customers if such conversions are not
completed on a timely basis by them, and thus it cannot estimate with certainty
the impact the year 2000 may have on the Company.
(H) INCOME TAXES
At May 31, 1999, the Company had net tax operating loss carryforwards of
approximately $1,850,000 and business tax credits of approximately $150,000
available to offset future Federal taxable income and tax liabilities,
respectively. The Federal carryforwards expire in varying amounts from 1999 to
<PAGE>
2012. As of May 31, 1999, 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 $255,000 expired
during the year ended May 31, 1998.
LANCER ORTHODONTICS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - continued
(I) NET (LOSS) 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.
EARNINGS PER SHARE (UNAUDITED)
FOR THE THREE MONTHS ENDED
8/31/99 8/31/98
BASIC (LOSS) EARNINGS PER SHARE:
<PAGE>
Net (loss) income $( 58,854 $ 40,223
Net (loss) income applicable to common
shareholders $( 58,854) $ 40,223
Weighted average number of common shares 2,075,799 2,118,280
Basic (Loss) Earnings per Share $( .03) $ .02
DILUTED (LOSS) EARNINGS PER SHARE:
Net (loss) income from primary income
per common share $( 58,854) $ 40,223
Net (loss) income for diluted earnings
per share $( 58,854) $ 40,223
Weighted average number of shares used in
Calculation of basic earnings
per common share 2,075,799 2,118,280
Add: Common equivalent shares 52,926 52,926
Weighted average number of shares used in
calculation of diluted earnings
per share 2,128,725 2,171,206
Diluted (loss) earnings per share $( .03) $ .02
<PAGE>
LANCER ORTHODONTICS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) _ continued
(J) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
FOR THE THREE MONTHS ENDED
8/31/99 8/31/98
Sales to unaffiliated customers:
United States $ 836,392 $ 871,154
Europe 224,799 348,766
South America 98,150 185,549
Other Foreign 112,204 134,833
$1,271,545 $1,540,302
No other geographic concentrations exist where net sales exceed 10% of total
net sales.
Sales or transfers between geographic areas none none
Operating (loss) profit:
United States $( 144,749) $ 64,001
Europe ( 41,329) ( 10,875)
South America ( 18,045) ( 5,784)
Other Foreign ( 20,629) ( 4,208)
$( 224,752) $ 43,134
(K) STOCKHOLDERS' EQUITY
<PAGE>
In March 1998, the Company's Board of Directors approved the repurchase of up to
4% of the Company's outstanding common stock over twelve months. In June 1999,
the repurchase was extended until May 2000. During the three months ended
August 31, 1999, the Company repurchased and retired 56,840 shares of its common
stock for an aggregate consideration of $58,706.
The Company issued 27,295 new shares of its common stock valued at $23,170 for
directors fees previously outstanding and included in accrued liabilities as of
May 31, 1999.
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, 1999, net income decreased $99,077 as
compared to the year earlier period. The decrease in net income is primarily
attributable to the decrease in sales, offset by the insurance claim proceeds.
<PAGE>
For the three months ended August 31, 1999, net sales decreased $268,757 (17.4%)
as compared to the year earlier period. International net sales decreased
$233,995, primarily in Europe and South America, attributable to economic
conditions and seasonal demand. The decrease in domestic net sales of $34,762
is attributable to increased discounting due to competition pressures.
For the three months ended August 31, 1999, cost of sales as a percentage of
sales totaled 70.9%, a increase of 9.8% as compared to the year earlier period
which totaled 61.1%. This increase is attributable to decreased production due
to demand, while costs remained fixed. The Company is in the process of
automating several of its manufacturing processes which should reduce unit
costs.
For the three months ended August 31, 1999, selling and general and
administrative expenses increased $14,980 (2.9%) as compared to the year earlier
period. The increase is primarily attributable to an increase in financial
personnel and professional fees.
For the three months ended August 31, 1999, product development expenses
increased $24,343 (75.3%) as compared to the year earlier period. The increase
is primarily attributable to development costs of an innovative dental amalgum.
For the three months ended August 31, 1999, interest expense increased $1,726
(87.2%) as compared to the year earlier period. The increase is attributable to
borrowings against the line of credit to finance development costs and an
increase in the prime rate.
For the three months ended August 31, 1999, other income of $169,672 was
realized from the insurance claim settlement of $279,672 for the theft of
inventory at the Company's Mexicali facility, less $110,000 insurance claim
receivable valued at cost.
<PAGE>
LANCER ORTHODONTICS, INC.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
The Company's financial condition at August 31, 1999 and its previous two fiscal
year ends was as follows:
08/31/99 05/31/99 05/31/98
Current Assets $3,734,158 $3,827,011 $3,488,437
Current Liabilities 855,639 888,820 684,222
Working Capital 2,878,519 2,938,191 2,804,215
Bank Debt 180,000 180,000 100,000
Shareholder Equity 3,343,907 3,438,301 3,404,548
Total Assets 4,199,546 4,327,121 4,088,770
Cash increased $107,790 during the three months ended August 31, 1999, primarily
due to the insurance claim settlement.
Working capital decreased $59,672 during the three months ended August 31, 1999,
primarily attributable to a decrease in sales, partially offset by an increase
in inventories and cash. 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
<PAGE>
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
<PAGE>
Date October 15, 1999 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.'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-31-2000
<PERIOD-END> AUG-31-1999
<CASH> 214,082
<SECURITIES> 0
<RECEIVABLES> 1,371,377
<ALLOWANCES> 169,600
<INVENTORY> 2,284,662
<CURRENT-ASSETS> 3,734,158
<PP&E> 2,396,227
<DEPRECIATION> (2,228,343)
<TOTAL-ASSETS> 4,199,546
<CURRENT-LIABILITIES> 855,639
<BONDS> 0
0
185,242
<COMMON> 4,661,575
<OTHER-SE> (1,502,910)
<TOTAL-LIABILITY-AND-EQUITY> 4,119,546
<SALES> 1,271,545
<TOTAL-REVENUES> 1,271,545
<CGS> 901,083
<TOTAL-COSTS> 901,083
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,705
<INCOME-PRETAX> (58,054)
<INCOME-TAX> 800
<INCOME-CONTINUING> (58,854)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (58,854)
<EPS-BASIC> (.03)
<EPS-DILUTED> (.03)
</TABLE>
