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, 2000 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: 2,098,618
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)
11/30/00
ASSETS
CURRENT ASSETS:
Cash $ 185,631
Accounts Receivable, less allowances for sales
returns and doubtful receivables of $158,171 1,119,903
Inventories, net of reserve of $128,167 2,070,114
Prepaid Expenses 31,711
Total Current Assets 3,407,359
PROPERTY AND EQUIPMENT, at cost 2,406,129
Less: Accumulated depreciation (2,310,145)
95,984
INTANGIBLE ASSETS:
Marketing and Distribution Rights, net 97,525
Technology Use Rights, net 101,425
198,950
OTHER ASSETS 6,560
Total Assets $3,708,853
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Accrued Liabilities $ 586,427
Line of Credit 220,000
Total Current Liabilities 806,427
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; $.50 par value: Authorized 500,000 shares; 0 shares
issued and outstanding ($.50 liquidation preference). --
Common Stock, no par value: Authorized 50,000,000 shares; issued and
outstanding 2,098,618 4,815,074
Accumulated Deficit (1,912,648)
Total Stockholders' Equity 2,902,426
Total Liabilities and Stockholders' Equity $3,708,853
LANCER ORTHODONTICS, INC.
CONDENSED STATEMENTS OF OPERATIONS AND
CONDENSED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
11/30/00 11/30/99 11/30/00 11/30/99
NET SALES $1,385,436 $1,387,370 $2,716,534 $2,658,914
COST OF SALES 903,332 864,587 1,828,913 1,765,669
Gross Profit 482,104 522,783 887,621 893,245
OPERATING EXPENSES:
Selling, General & Administrative 512,475 549,056 979,800 1,087,604
Product Development 33,484 49,672 69,724 106,337
TOTAL OPERATING EXPENSES 545,959 598,728 1,049,524 1,193,941
LOSS FROM OPERATIONS ( 63,855) ( 75,945) ( 161,903) ( 300,696)
OTHER INCOME (EXPENSE):
Interest Expense ( 4,653) ( 4,466) ( 9,860) ( 8,171)
Other Income (Expense), net 482 ( 2,817) 956 167,585
TOTAL OTHER INCOME (EXPENSE) ( 4,171) ( 7,283) ( 8,904) 159,414
LOSS BEFORE INCOME TAXES ( 68,026) ( 83,228) ( 170,807) ( 141,282)
INCOME TAXES 800 -- 800 800
NET LOSS ( 68,826) ( 83,228) ( 171,607) ( 142,082)
OTHER COMPREHENSIVE INCOME -- -- -- --
COMPREHENSIVE LOSS $( 68,826) $( 83,228) $( 171,607) $( 142,082)
NET LOSS PER WEIGHTED AVERAGE OF COMMON SHARES
Weighted average number of
common shares 2,098,618 2,049,059 2,098,618 2,062,502
BASIC $ (.03) $ (.04) $ (.08) $ (.07)
Weighted average number of shares
used in calculation of diluted
earnings per share 2,098,618 2,049,059 2,098,618 2,062,502
DILUTED $ (.03) $ (.04) $ (.08) $ (.07)
LANCER ORTHODONTICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED
11/30/00 11/30/99
Cash flows from operating activities:
Net loss $(171,607) $(142,082)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 60,384 75,409
Provision for losses on accounts receivable ( 16,829) ( 5,234)
Provision for losses on inventory 18,000 22,000
Common stock issued for services to directors -- 23,170
Net change in operating assets and liabilities:
Accounts receivable, net 129,696 119,679
Inventories ( 74,869) ( 39,257)
Prepaid expenses 14,989 20,565
Insurance claim receivable -- 110,000
Accounts payable and accrued liabilities 65,060 ( 81,511)
Net cash provided by operating activities 24,824 102,739
Cash flows from investing activities:
Purchases of property and equipment ( 2,400) ( 2,983)
Net cash used in investing activities ( 2,400) ( 2,983)
Cash flows from financing activities:
Repurchase of common stock -- (117,550)
Increase in line of credit 60,000 40,000
Cash flows provided by (used in) by financing activities 60,000 ( 77,550)
Net change in cash 82,424 22,206
Cash, beginning of period 103,207 106,292
Cash, end of period $185,631 $128,498
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 F). 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
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) Line of Credit
At November 30, 2000, the Company has a $300,000 line of credit with a
bank. Borrowings are made at prime plus 1.25% (10.75% at November 30, 2000)
and are limited to specified percentages of eligible accounts receivable.
The unused portion available under the line of credit at November 30, 2000
was $80,000. The line of credit expires on September 10, 2001.
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 $2,800,000 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.
The Company was in violation of certain of its debt covenants at November 30,
2000. A waiver has been requested but not yet received as of the date of
filing.
(F) 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 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 November 30, 2000, this obligation was approximately $354,000. Such
obligation is contingent in nature and accordingly has not been accrued
in the accompanying balance sheet.
Leases - Lancer conducts its operations in leased facilities located in San
Marcos, California and Mexicali, Mexico. The San Marcos facility consists
of a 9,240 square foot manufacturing and office building. The term of the
initial lease was for five years commencing January 1, 1994 and ending
December 31, 1998. In 1998, Lancer renegotiated the lease and extended the
terms to December 31, 2003. The Mexicali facility consists of a 16,000
square foot manufacturing and office building. The term of the lease is
for sixty months commencing November 1, 1998 and ending October 31, 2003.
Management believes that the properties are currently suitable and adequate
for Lancer's operations. Future aggregate minimum annual cash lease payments
are as follows:
Years ending
May 31, 2001 $ 71,963
May 31, 2002 145,547
May 31, 2003 148,401
Thereafter 75,651
Total $441,562
LANCER ORTHODONTICS, INC.
Notes to Financial Statements - continued
(F) Commitments and Contingencies - continued
Listing Requirements - The Company must maintain a minimum bid price and
certain capitalization levels as required by the NASD Marketplace
Rule 4310(c). In a letter dated November 10, 2000, NASDAQ had advised the
Company that it was not in compliance with the minimum bid price required
for listing. The Company was being afforded a ninety-day grace period,
until February 8, 2001, to remedy this deficiency. If the deficiency is
not remedied by then, the Company's stock will trade under the Bulletin
Board rather than on the NASDAQ SmallCap Stock Market.
NASDAQ also advised the Company on January 5, 2001, that it was not in
compliance with the minimum market value of public float and that the
Company was being afforded a ninety-day grace period, until April 5, 2001,
to remedy this deficiency. If the deficiency is not remedied by then, the
Company's stock will trade under the Bulletin Board rather than on the NASDAQ
SmallCap Stock Market.
(G) Income Taxes
At May 31, 2000, the Company had net tax operating loss carryforwards of
approximately $2,101,000 and business tax credits of approximately $114,735
available to offset future Federal taxable income and tax liabilities,
respectively. The Federal carryforwards expire in varying amounts from 2000
to 2019. As of May 31, 2000, the Company had net tax operating loss
carryforwards of approximately $250,000 and business tax credits of
approximately $23,000 available to offset future state income tax
liabilities.
(H) Stockholders' Equity
The Company has incentive stock option and non-qualified stock option plans
for directors, officers, and key employees. The plans provide for the
granting of options for common shares at exercise prices equal to or exceeding
the fair market value at the date of grant, as determined by the Board of
Directors. Options may become exercisable over a period of up to four years
from the date of grant and may be exercised over a period of three to seven
years from the date of the grant, as determined by the Board of Directors.
The Company's shareholders have authorized a total of 357,143 shares to be
available for grant under the Company's stock option plan. Options granted
prior to May 31, 1995, generally vested on the date of grant and expired
through August 1999.
During the six months ended November 30, 2000, the Company granted 157,000
options to purchase shares of the Company's common stock at an exercise
price of $.875 to certain employees of the Company, with one half vested
immediately and the other half vesting one year from the grant date. The
options have a term of five years.
LANCER ORTHODONTICS, INC.
Notes to Financial Statements - continued
(I) Net Loss 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. For all periods presented, no
common stock equivalents have been included in the computation of diluted
earnings per share as they were determined to be anti-dilutive.
EARNINGS PER SHARE (UNAUDITED)
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
11/30/00 11/30/99 11/30/00 11/30/99
Basic Loss per Share:
Net loss $( 68,826) $( 83,228) $( 171,607) $( 142,082)
Net loss applicable to
common shareholders $( 68,826) $( 83,228) $( 171,607) $( 142,082)
Weighted average number of
common shares 2,098,618 2,049,059 2,098,618 2,062,502
Basic loss per share $( .03) $( .04) $( .08) $( .07)
Diluted Loss per Share:
Net loss from primary income
per common share $( 68,826) $( 83,228) $( 171,607) $( 142,082)
Net loss for diluted
earnings per share $( 68,826) $( 83,228) $( 171,607) $( 142,082)
Weighted average number of shares
used in calculation of diluted
earnings per share 2,098,618 2,049,059 2,098,618 2,062,502
Diluted loss per share $( .03) $( .04) $( .08) $( .07)
LANCER ORTHODONTICS, INC.
Notes to Financial Statements - continued
(J) Financial Information About Foreign and Domestic Operations and Export
Sales
FOR THE SIX MONTHS ENDED
11/30/00 11/30/99
Sales to unaffiliated customers:
United States $1,386,874 $1,659,302
Europe 864,442 568,011
South America 166,338 171,951
Other Foreign 298,880 259,650
$2,716,534 $2,658,914
No other geographic concentrations exist where net sales exceed 10% of
total net sales.
Sales or transfers between geographic areas none none
Operating loss:
United States $(197,726) $(200,071)
Europe 23,289 ( 57,178)
South America 4,482 ( 17,309)
Other Foreign 8,052 ( 26,138)
$(161,903) $(300,696)
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 six months ended November 30, 2000, net loss increased from a net loss
of $142,082 at November 30, 1999, to a net loss of $171,607 at November 30,
2000. For the three months ended November 30, 2000, net loss decreased from a
net loss of $83,228 at November 30, 1999, to a net loss of $68,826 at November
30, 2000. The six month increase in net loss is primarily attributable to the
1999 other income of insurance claim proceeds. The three month decrease in
net loss is primarily attributable to the decrease in operating expenses,
offset by the decrease in sales.
For the six months ended November 30, 2000, net sales increased $57,620 (2.2%)
as compared to the year earlier period. For the three months ended November
30, 2000, net sales decreased $1,934 (.1%) as compared to the year earlier
period. International net sales increased $330,048 (33.0%) and $118,693
(21.0%), respectively, for the six months and three months ended November 30,
2000, as compared to the year earlier period. The increase in sales was
primarily in Europe. Domestic net sales decreased $272,428 (16.4%) and
$120,627 (14.7%), respectively, for the six months and three months ended
November 30, 2000, as compared to the year earlier period. This decrease is
primarily attributable to increased discounting due to competition pressures.
For the six months ended November 30, 2000, cost of sales as a percentage of
sales (67.3%), increased .1% compared to the year earlier period. For the
three months ended November 30, 2000, cost of sales as a percentage of sales
(65.2%), increased 2.9% compared to the year earlier period. The increase is
primarily attributable to increased production costs.
For the six months ended November 30, 2000, selling and general and
administrative expenses decreased $107,804 (9.9%) compared to the year earlier
period. For the three months ended November 30, 2000, selling and general and
administrative expenses decreased $36,581 (6.7%) as compared to the year
earlier period. The decrease is primarily attributable to a decrease in labor
costs and commissions.
For the six months ended November 30, 2000, product development expenses
decreased $36,613 (34.4%) as compared to the year earlier period. For the
three months ended November 30, 2000, product development expenses decreased
$16,188 (32.6%) compared to the year earlier period. The decrease is
primarily attributable to the discontinuance of dental amalgam development.
LANCER ORTHODONTICS, INC.
For the six months ended November 30, 2000, interest expense increased $1,689
(20.7%) as compared to the year earlier period. For the three months ended
November 30, 2000, interest expense increased $187 (4.2%) as compared to the
year earlier period. The increase is primarily attributable to borrowings
against the line of credit and an increase in the interest rate.
For the six months ended November 30, 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 at May 31, 1999.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
The Company's financial condition at November 30, 2000 and its previous two
fiscal year ends was as follows:
11/30/00 05/31/00 05/31/99
Current Assets $3,407,359 $3,395,922 $3,827,011
Current Liabilities 806,427 681,367 888,820
Working Capital 2,600,932 2,714,555 2,938,191
Bank Debt 220,000 160,000 180,000
Shareholder Equity 2,902,426 3,074,033 3,438,301
Total Assets 3,708,853 3,755,400 4,327,121
Cash increased $82,424 during the six months ended November 30, 2000.
Working capital decreased $113,623 during the six months ended November 30,
2000, primarily attributable to a decrease in sales, partially offset by an
increase in inventories and cash. The Company expects to meet 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
During the six months ended November 30, 2000, the Company granted
157,000 options to purchase shares of the Company's common stock at an
exercise price of $.875 to certain employees of the Company, which vest
ratably over a term of two years and have a term of five years.
Item 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. The Company's 2000 annual meeting of shareholders was held on
b. November 20, 2000.
b. The following nominees were elected directors:
Zackary Irani Janet Moore Douglas Miller Robert Orlando
c. Summary of voting for directors:
For Against Abstentions
Zackary Irani 1,830,199 0 12,247
Douglas Miller 1,830,199 0 12,247
Janet Moore 1,830,199 0 12,247
Robert Orlando 1,830,199 0 12,247
Total Response 1,842,446
There were no broker non-votes.
d. Approval of 2000 Stock Incentive Plan:
For Against Abstentions
1,275,229 45,104 2,800
There were 519,313 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 18, 2001 By /s/ Douglas D. Miller
Douglas D. Miller,
President and Chief Operating Officer
