-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K9LYkHqWQlWoYGOoLF0r31z1TlJjZdXkgjOEomKIwMEqSFoFWRcdcFzwqzLbemTD h4Vg4HP4K2q/E8WJGoRwtg== 0000057538-96-000012.txt : 19961008 0000057538-96-000012.hdr.sgml : 19961008 ACCESSION NUMBER: 0000057538-96-000012 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960831 FILED AS OF DATE: 19961007 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LANCER ORTHODONTICS INC /CA/ CENTRAL INDEX KEY: 0000057538 STANDARD INDUSTRIAL CLASSIFICATION: DENTAL EQUIPMENT & SUPPLIES [3843] IRS NUMBER: 952497155 STATE OF INCORPORATION: CA FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-05920 FILM NUMBER: 96639707 BUSINESS ADDRESS: STREET 1: 253 PAWNEE STREET CITY: SAN MARCOS STATE: CA ZIP: 92069-2437 BUSINESS PHONE: 6197445585 MAIL ADDRESS: STREET 1: 253 PAWNEE ST CITY: SAN MARCOS STATE: CA ZIP: 92069-2437 FORMER COMPANY: FORMER CONFORMED NAME: LANCER PACIFIC INC DATE OF NAME CHANGE: 19870412 10QSB 1 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, 1996 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: (619) 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: 14,879,884 Traditional small business disclosure format (check one): Yes X No PART I. FINANCIAL INFORMATION Item 1. SUMMARIZED FINANCIAL INFORMATION LANCER ORTHODONTICS, INC. CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS ENDED 8/31/96 8/31/95 NET SALES $1,485,282 $1,796,602 COST OF SALES 913,903 1,011,023 Gross Profit 571,379 785,579 OPERATING EXPENSES: Selling, General & Administrative 515,932 608,619 Product Development 25,234 38,587 Total Operating Expenses 541,166 647,206 INCOME FROM OPERATIONS 30,213 138,373 OTHER INCOME (EXPENSE): Interest Expense ( 16,803) ( 36,299) Other Income (Expense), net 646 6,723 Total Other Income (Expense) ( 16,157) ( 29,576) INCOME BEFORE INCOME TAXES 14,056 108,797 INCOME TAXES (NOTE H) 800 800 NET INCOME $ 13,256 $ 107,997 NET INCOME PER COMMON SHARE (NOTE I) $ .001 $ .007 LANCER ORTHODONTICS, INC. CONDENSED BALANCE SHEETS (UNAUDITED) 8/31/96 ASSETS CURRENT ASSETS: Cash $ 150,418 Accounts Receivable, less allowances of $114,489 (Note D) 1,331,022 Inventories (Note D) 1,675,801 Prepaid Expenses 17,271 Total Current Assets 3,174,512 PROPERTY AND EQUIPMENT, at cost (Note D) 2,535,901 Less: Accumulated depreciation (2,218,665) 317,236 INTANGIBLE ASSETS: Marketing and Distribution Rights, net 203,350 Technology Use Rights, net 308,383 511,733 OTHER ASSETS 4,400 Total Assets $4,007,881 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable and Accrued Liabilities $ 405,357 Line of Credit (Note C) 250,000 Current Portion of Note Payable to Bank (Note D) 182,482 Capital Lease Obligation (Note E) 22,266 Total Current Liabilities 860,105 LONG TERM PORTION OF NOTE PAYABLE TO BANK (Note D) 197,518 LONG TERM PORTION OF CAPITAL LEASE OBLIGATION (Note E) 10,044 COMMITMENTS AND CONTINGENCIES (Note F) -- STOCKHOLDERS' EQUITY (Note G): 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 14,879,884 4,710,614 Accumulated Deficit (1,955,642) Total Stockholders' Equity 2,940,214 Total Liabilities and Stockholders' Equity $4,007,881 LANCER ORTHODONTICS, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED 8/31/96 8/31/95 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 13,256 $107,997 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 54,219 73,923 Changes in assets and liabilities: Decrease (increase) in accounts receivable, net 134,395 (32,749) Increase in inventories (89,838) (162,261) Decrease in prepaid expenses 24,239 29,485 Increase (decrease) in accounts payable and accrued liabilities 26,917 (107,633) CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES 163,188 ( 91,238) CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment ( 12,316) ( 34,797) CASH FLOWS USED IN INVESTING ACTIVITIES ( 12,316) ( 34,797) CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on note payable to bank ( 60,000) (105,000) Principal payments of long-term debt and capital leases ( 5,185) ( 6,699) CASH FLOWS USED IN FINANCING ACTIVITIES ( 65,185) (111,699) INCREASE (DECREASE) IN CASH 85,687 (237,734) CASH AT BEGINNING OF PERIOD 64,731 554,604 CASH AT END OF PERIOD $150,418 $316,870 Supplemental disclosure of non-cash financing activities: In fiscal 1997, the Registrant issued 27,988 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 flow 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 period 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) LINE OF CREDIT At August 31, 1996, the Company had a $500,000 line of credit with a bank. Borrowings are made at prime plus 1% (9.25% at August 31, 1996) and are limited to specified percentages of eligible accounts receivable. The unused portion available under the line of credit at August 31, 1996 was $140,000. The line of credit expires on November 1, 1996. The Company is not required to maintain compensating balances in connection with this borrowing arrangement. (D) NOTE PAYABLE TO BANK Effective October 10, 1995, the Company arranged for a restructuring of its note payable. The note was divided into a new term note, with an original balance of $645,000 and a line of credit with an original balance of $400,000 (Note C). The new note payable is for a term of two years and requires monthly principal and interest payments of $18,889. Interest is at prime plus 1% (9.25% at August 31, 1996). All unpaid principal and accrued interest is due and payable on November 1, 1997. The loan is collateralized by inventories, receivables, and equipment. The lending agreement requires, among other things, that the Company maintain a tangible net worth of $2,000,000, a debt to tangible net worth ratio of no more than 1.25 to 1, and a current ratio of at least 1.5 to 1. The Company is not required to maintain compensating balances in connection with this lending agreement. LANCER ORTHODONTICS, INC. NOTES TO FINANCIAL STATEMENTS - continued (E) CAPITAL LEASE The Company is the lessee of equipment under a capital lease which expires in the year 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 August 31, 1996 and 1995. (F) 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 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. After June 30, 1996, either party may terminate the agreement with three months written notice. 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 for employees dismissed at the request of the Company. LEASES - The Company leases its main facility under an operating lease expiring December 31, 1998, which requires monthly rental payments that increase annually. As of May 31, 1996, future minimum annual cash rental payments under the Company's facility lease are as follows: Fiscal Year Amount 1997 $48,300 1998 51,400 1999 30,800 LANCER ORTHODONTICS, INC. NOTES TO FINANCIAL STATEMENTS - continued (G) STOCKHOLDER'S EQUITY Common Stock Reserved Shares of the Company's common stock reserved for issuance at August 31, 1996 and May 31, 1996, were as follows: 8/31/96 5/31/96 Stock Options: Outstanding 1,540,000 1,440,000 Future Issuance 888,000 988,000 Warrants issued in conjunction with loans and convertible debt 1,404,167 1,404,167 For conversion of preferred stock 370,483 370,483 4,202,650 4,202,650 (H) INCOME TAXES At May 31, 1996, the Company had net tax operating loss carryforwards of approximately $2,688,000 and business tax credits of approximately $175,000 available to offset future Federal taxable income and tax liabilities, respectively, expiring at varying dates between 1996 and 2008. The Company also had net tax operating loss carryforwards of approximately $546,000 and business tax credits of approximately $23,000 available to offset future California taxable income and tax liabilities, respectively, expiring at varying dates between 1997 and 1998. (I) EARNINGS PER COMMON SHARE Net income per common share is computed based on the weighted average number of common shares and common equivalent shares outstanding (15,892,931 and 15,447,474 for the three months ended August 31, 1996 and August 31, 1995 respectively). Outstanding stock options, warrants, and convertible preferred stock are considered in the determination of common stock equivalents and where appropriate, they have been included in the weighted average number of shares outstanding for the three months ended August 31, 1996 and August 31, 1995. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS For the three months ended August 31, 1996, net income decreased $94,741 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 operating and interest expenses. Net sales decreased $311,320 (17.3%) compared to the year earlier period. The decrease is attributable to a manufacturing processing problems and mold problems, which have resulted in lost sales and delayed deliveries. The manufacturing processing problems have been identified and are being corrected. The mold problems are being addressed through replacement of badly worn molds and repairing of other mold. 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 to add to its growing product line, believing that a larger and more diverse product line will appeal to a wider range of customers. Cost of sales as a percentage of sales increased from 56.3% to 61.5% as compared to the year earlier period. The decline in gross margin is attributable to manufacturing processing problems and mold problems experienced in the first quarter. The Company believes that the manufacturing problems have been identified and that aggressive actions are being taken to correct the problems. The elimination of the process and mold problems improve the Company's ability to meet sales demand. Selling and general and administrative expenses decreased $92,687 (15.2%) compared to the year earlier period. The decrease is attributable to a decrease in wage costs, professional fees, samples and catalog costs, partially offset by an increase in postage and advertising. Product development expenses decreased $13,353 (34.6%) compared to the year earlier period. The decrease is attributable to a decrease in wage costs. Interest expense decreased $19,496 (53.7%) compared to the year earlier period, reflecting reduced debt and interest rates. FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES The Company's financial condition at August 31, 1996 and its previous two year ends was as follows: 08/31/96 05/31/96 05/31/95 Current Assets $3,174,512 $3,157,621 $3,383,867 Current Liabilities 860,105 836,714 971,283 Working Capital 2,314,407 2,320,907 2,412,584 Bank Debt & Capitalized Leases 662,310 727,495 1,243,902 Shareholder Equity 2,940,214 2,917,526 2,527,489 Total Assets 4,007,881 4,032,893 4,389,267 Working capital decreased $6,500 during the three months, primarily because of the paydown of bank debt, partially offset by profitability and non-cash expenses. 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. 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 October 4 , 1996 By /s/ Douglas D. Miller Douglas D. Miller, President and Chief Operating Officer By /s/ Scott R. Striblen Scott R. Striblen, Vice President, Finance EX-27 2
5 This schedule contains summary financial information extracted from Lancer Orthodontics, Inc.'s First quarter 1997 10-QSB and is qualified in its entirety by reference to such 10-QSB. 3-MOS MAY-31-1997 AUG-31-1996 150,418 0 1,445,511 114,489 1,675,801 3,174,512 2,535,901 (2,218,665) 4,007,881 860,105 197,518 0 185,242 4,710,614 (1,955,642) 4,007,881 1,485,282 1,485,282 913,903 913,903 0 0 16,803 14,056 800 13,256 0 0 0 13,256 .001 .001
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