-----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, N8yBmjARF/Sbh5pDxEOwqx6v/x7DtRPTXKpCX08621rLCWx9CRcKaV7ZcrklXdFm 57mSdXMK3X52cjR73GBVLA== 0000057538-97-000005.txt : 19970407 0000057538-97-000005.hdr.sgml : 19970407 ACCESSION NUMBER: 0000057538-97-000005 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970228 FILED AS OF DATE: 19970404 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: 97574843 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 February 28, 1997 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: 2,125,698 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 FOR THE NINE MONTHS ENDED MONTHS ENDED 2/28/97 2/29/96 2/28/97 2/29/96 NET SALES $1,622,618 $1,353,305 $4,707,896 $4,826,207 COST OF SALES 1,072,613 955,008 2,945,334 2,892,627 Gross Profit 550,005 398,297 1,762,562 1,933,580 OPERATING EXPENSES: Selling, General & Admin 520,977 456,897 1,604,254 1,657,085 Product Development 20,458 25,342 70,956 110,899 TOTAL OPERATING EXPENSES 541,435 482,239 1,675,210 1,767,984 INCOME (LOSS) FROM OPERATIONS 8,570 ( 83,942) 87,352 165,596 OTHER INCOME (EXPENSE): Interest Expense ( 13,348) ( 18,516) ( 45,227) ( 86,370) Other Income (Expense), net 2,366 713 3,694 7,906 TOTAL OTHER INCOME (EXPENSE) ( 10,982) ( 17,803) ( 41,533) ( 78,464) INCOME (LOSS) BEFORE INCOME TAXES ( 2,412) ( 101,745) 45,819 87,132 INCOME TAXES (NOTE C) -- -- 800 800 NET INCOME (LOSS) $( 2,412)$( 101,745) $ 45,019 $ 86,332 NET INCOME (LOSS) PER COMMON SHARE (NOTE D) $( .001)$( .046) $ .020 $ .039 LANCER ORTHODONTICS, INC. CONDENSED BALANCE SHEETS (UNAUDITED) 2/28/97 ASSETS CURRENT ASSETS: Cash $ 100,389 Accounts Receivable, less allowances of $103,508 (Note E) 1,420,531 Inventories (Note E and F) 1,702,465 Prepaid Expenses 4,076 Total Current Assets 3,227,461 PROPERTY AND EQUIPMENT, at cost (Note E) 2,325,392 Less: Accumulated depreciation (2,050,940) 274,452 INTANGIBLE ASSETS: Marketing and Distribution Rights, net 190,900 Technology Use Rights, net 284,035 474,935 OTHER ASSETS 4,400 Total Assets $3,981,248 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable and Accrued Liabilities $ 479,781 Line of Credit (Note F) 248,000 Note Payable to Bank (Note E) 260,000 Capital Lease Obligation (Note G) 21,490 Total Current Liabilities 1,009,271 COMMITMENTS AND CONTINGENCIES (Note H) STOCKHOLDERS' EQUITY (Note I): 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 2,125,698 4,710,614 Accumulated Deficit (1,923,879) Total Stockholders' Equity 2,971,977 Total Liabilities and Stockholders' Equity $3,981,248 LANCER ORTHODONTICS, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED 2/28/97 2/29/96 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 45,019 $ 86,332 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 162,657 211,222 Provision for losses on accounts receivable -- 30,000 Changes in assets and liabilities: Decrease in accounts receivable, net 44,886 152,795 Increase in inventories (116,502) (240,369) Decrease in prepaid expenses 37,434 1,242 Increase (decrease) in accounts payable and accrued liabilities 101,341 ( 65,618) CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 274,835 175,604 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment ( 41,172) ( 98,316) CASH FLOWS USED IN INVESTING ACTIVITIES ( 41,172) ( 98,316) CASH FLOWS FROM FINANCING ACTIVITIES: Net payments under line of credit agreement ( 2,000) (226,000) Principal payments on note payable to bank (180,000) (285,000) Principal payments of capital leases ( 16,005) ( 16,366) Proceeds from sale of stock -- 20,250 CASH FLOWS USED IN FINANCING ACTIVITIES (198,005) (507,116) INCREASE (DECREASE) IN CASH 35,658 (429,828) CASH AT BEGINNING OF PERIOD 64,731 554,604 CASH AT END OF PERIOD $100,389 $124,776 Supplemental disclosure of non-cash financing activities: In fiscal 1997, the Company issued 27,988 pre-split shares of its common stock in satisfaction of $9,432 in accrued royalties. In fiscal 1996, the Company issued 155,700 pre-split 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 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 H). 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) 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. (D) 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 after giving effect for the one-for-seven reverse stock split (2,216,194 and 2,206,782 for the nine months ended February 28, 1997 and February 29, 1996 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 nine months ended February 28, 1997 and February 29, 1996. LANCER ORTHODONTICS, INC. NOTES TO FINANCIAL STATEMENTS - continued (E) NOTE PAYABLE TO BANK At February 28, 1997, the Company had a note payable to a bank. The note payable is due May 1, 1998, and requires 13 monthly principal payments of $18,889 plus interest and one final principal payment of $14,444 plus interest. Interest is at prime plus 1% (9.25% at February 28, 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 $2,250,000, a debt to tangible net worth ratio of no more than .75 to 1, and a current ratio of at least 2 to 1. The Company is not required to maintain compensating balances in connection with this lending agreement. (F) LINE OF CREDIT At February 28, 1997, the Company had a $500,000 line of credit with a bank. Borrowings are made at prime plus 1% (9.25% at February 28, 1997) and are secured by and limited to specified percentages of eligible accounts receivable. The unused portion available under the line of credit at February 28, 1997 was $192,000. The line of credit expires on March 1, 1998. The lending agreement requires the same covenants as the note payable, see Note (E) above. The Company is not required to maintain compensating balances in connection with this borrowing arrangement. (G) 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 February 28, 1997 and February 29, 1996. (H) 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 (I) STOCKHOLDER'S EQUITY REVERSE STOCK SPLIT - On November 15, 1996, the Company effected a one-for-seven reverse stock split of its no par value common stock. In conjunction with the reverse split, shares reserved for outstanding options, warrants, and conversion of preferred shares were adjusted one-for-seven. COMMON STOCK RESERVED -Shares of the Company's common stock reserved for issuance at February 28, 1997 and May 31, 1996, adjusted to reflect the one-for- seven reverse stock split, were as follows: 2/28/97 5/31/96 Stock Options: Outstanding, at prices ranging from $1.40 to $2.45 212,858 205,715 Future Issuance 133,999 141,142 Warrants. at prices ranging from $1.5125 to $1.75 500,596 200,596 For conversion of preferred stock 52,926 52,926 900,379 600,379 In 1997, the Company issued a warrant to purchase 300,000 shares of Common Stock at $1.5125 per share to a major shareholder. The warrant expires in 2000. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS For the nine months ended February 28, 1997, net income decreased $41,313 as compared to the year earlier period. The decrease in net income is attributable to the reduction in sales, and no comparable reduction in cost of sales, partially offset by a reduction in operating and interest expenses. Net sales decreased $118,311 (2.5%) compared to the year earlier period. The decrease is attributable to problems that occurred during the first six months. Corrective actions have been taken to increase manufacturing output. This has allowed the Company to increase sales. With the increase in manufacturing output, the Company believes it is in a position to continue to recover lost customers and increase sales. The Company continues to search for and add new distributors, private label customers, and sales representatives and is 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 59.9% to 62.6% as compared to the year earlier period. The decline in gross margin is attributable to problems that occurred in the first six months. The increase in manufacturing output and the resolution of problems will allow the Company to increase sales and reduce costs. Selling, general, and administrative expenses decreased $52,831 (3.2%) compared to the year earlier period. The decrease is attributable to a decrease in wage costs and catalog costs, partially offset by an increase in postage and advertising. The decreases were the result of management's decisions to lower costs to offset the manufacturing problems that caused lower sales. Product development expenses decreased $39,943 (36.0%) compared to the year earlier period. The decrease is attributable to a decrease in wage costs. Interest expense decreased $41,143 (47.6%) compared to the year earlier period, reflecting reduced debt and interest rates. FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES The Company's financial condition at February 28, 1997 and its previous two year ends was as follows: 02/28/97 05/31/96 05/31/95 Current Assets $3,227,461 $3,157,621 $3,383,867 Current Liabilities 1,009,271 836,714 971,283 Working Capital 2,218,190 2,320,907 2,412,584 Bank Debt & Capitalized Leases 529,490 727,495 1,243,902 Shareholder Equity 2,971,977 2,917,526 2,527,489 Total Assets 3,981,248 4,032,893 4,389,267 Working capital decreased $102,717 during the nine months, primarily because of the reclassification of the long term portion of the bank debt to a current liability, partially offset by profitability and non-cash expenses. The Company is currently considering investing from $500,000 to $600,000 in equipment and new molds. Funds for this investment are expected to come from cash flow from operations 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. During the third quarter, the Company arranged for the renewal of its line of credit through March 1, 1998 and an extension of its term loan through May 1, 1998. 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 March , 1997 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 informaton extracted from Lancer Orthodontics, Inc. February 28, 1997 Form 10-QSB and is qualified in its entirety be reference to such 10-QSB. 9-MOS MAY-31-1997 FEB-28-1997 100,839 0 1,524,039 103,508 1,702,465 3,227,461 2,325,392 (2,050,940) 3,981,248 1,009,271 0 0 185,242 4,710,614 (1,923,879) 3,981,248 4,707,896 4,707,896 2,945,334 2,945,334 0 0 45,227 45,819 800 45,019 0 0 0 45,019 (.001) (.001)
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