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 (used in) 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 (used in) 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).
As of November 30,
2000, the Company was in compliance with these requirements.
NASDAQ had 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 or be
de-listed from 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 quarter 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.
(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.
LANCER ORTHODONTICS, INC.
Notes to Financial Statements - continued
(I) Net Loss per Common Share and Dividends - continued
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
.3% 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 genera
l 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 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 12, 2001 By /s/ Douglas D. Miller
Douglas D. Miller,
President and Chief Operating Officer
