-----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, Cyu0wJ7iUrx27ZkP6Z9ATEjancuz7JLb6FfFUjKeBbFm2Vwqkfgi1faWa9eo41Gc lgd2vZQi9mLVWseyPBWr3A== 0000057538-98-000004.txt : 19980115 0000057538-98-000004.hdr.sgml : 19980115 ACCESSION NUMBER: 0000057538-98-000004 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971130 FILED AS OF DATE: 19980114 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: SEC FILE NUMBER: 000-05920 FILM NUMBER: 98506523 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 November 30, 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: (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: 2,125,712 Traditional small business disclosure format (check one): Yes X No PART I. FINANCIAL INFORMATION Item 1. SUMMARIZED FINANCIAL INFORMATION LANCER ORTHODONTICS, INC. CONDENSED BALANCE SHEETS (UNAUDITED) 11/30/97 ASSETS CURRENT ASSETS: Cash $ 149,178 Accounts Receivable, less allowances of $97,727 (Note G) 1,195,887 Inventories (Note G) 1,733,887 Prepaid Expenses 51,651 Total Current Assets 3,130,603 PROPERTY AND EQUIPMENT, at cost (Note G) 2,308,282 Less: Accumulated depreciation (2,096,131) 212,151 INTANGIBLE ASSETS: Marketing and Distribution Rights, net 172,225 Technology Use Rights, net 247,513 419,738 OTHER ASSETS 4,400 Total Assets $3,766,892 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable and Accrued Liabilities $ 323,089 Line of Credit (Note F) 200,000 Current Portion of Note Payable to Bank (Note G) 60,000 Capital Lease Obligation (Note H) 4,074 Total Current Liabilities 587,163 COMMITMENTS AND CONTINGENCIES (Note I) -- 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 2,125,712 4,710,614 Accumulated Deficit (1,716,127) Total Stockholders' Equity 3,179,729 Total Liabilities and Stockholders' Equity $3,766,892 LANCER ORTHODONTICS, INC. CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED 11/30/97 11/30/96 11/30/97 11/30/96 NET SALES $1,563,507 $1,599,996 $3,011,290 $3,085,278 COST OF SALES 976,283 958,818 1,866,011 1,872,721 Gross Profit 587,224 641,178 1,145,279 1,212,557 OPERATING EXPENSES: Selling, General & Admin 506,834 567,345 1,012,201 1,083,277 Product Development 46,533 25,264 86,175 50,498 TOTAL OPERATING EXPENSES 553,367 592,609 1,098,376 1,133,775 INCOME FROM OPERATIONS 33,857 48,569 46,903 78,782 OTHER INCOME (EXPENSE): Interest Expense ( 7,601) ( 15,076) ( 17,074) ( 31,879) Other Income (Exp), net 1,516 682 417 1,328 TOTAL OTHER INCOME (EXP) ( 6,085) ( 14,394) ( 16,657) ( 30,551) INCOME BEFORE INCOME TAXES 27,772 34,175 30,246 48,231 INCOME TAXES (NOTE J) 800 -- 800 800 NET INCOME $ 26,972 $ 34,175 $ 29,446 $ 47,431 NET INCOME PER COMMON SHARE (NOTE K) $ .012 $ .016 $ .014 $ .022 LANCER ORTHODONTICS, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED 11/30/97 11/30/96 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 29,446 $ 47,431 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 128,778 108,438 Changes in assets and liabilities: Decrease (increase) in accounts rec, net ( 17,051) 125,544 Decrease (increase) in inventories 111,767 (174,937) Increase in prepaid expenses ( 13,845) ( 12,038) Increase (decrease) in accounts payable and accrued liabilities ( 61,113) 105,071 CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 177,982 199,509 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment ( 31,791) ( 14,978) CASH FLOWS USED IN INVESTING ACTIVITIES ( 31,791) ( 14,978) CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on note payable to bank (140,000) (120,000) Principal payments of capital leases ( 11,774) ( 10,519) CASH FLOWS USED IN FINANCING ACTIVITIES (151,774) (130,519) INCREASE (DECREASE) IN CASH ( 5,583) 54,012 CASH AT BEGINNING OF PERIOD 154,761 64,731 CASH AT END OF PERIOD $149,178 $118,743 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) 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 primarily related to the determination of the allowance for sales returns and doubtful receivables, and the realizeability of inventories and intangible assets. Actual results could materially differ from those estimates. (D) STOCK BASED COMPENSATION During 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock Based Compensation", which 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) ONE-FOR-SEVEN REVERSE STOCK SPLIT On November 15, 1996, the Company effected a one-for-seven reverse stock split of its common stock. For all periods presented, that components of shareholders' equity have been adjusted to reflect the reverse stock split. (F) LINE OF CREDIT At November 30, 1997, the Company had a $500,000 line of credit with a bank. Borrowings are made at prime plus 1% (9.5% at November 30, 1997) and are limited to specified percentages of eligible accounts receivable. The unused portion available under the line of credit at November 30, 1997 was $140,232. The line of credit expires on March 1, 1998. The Company is not required to maintain compensating balances in connection with this borrowing arrangement. (G) NOTE PAYABLE TO BANK At November 30, 1997, the Company had a note payable to a bank requiring monthly principal payments of $18,889, plus interest at prime plus 1% (9.5% at November 30, 1997). The note expires on May 1, 1998, at which time all unpaid principal and accrued interest is due and payable. The line of credit (see Note F) and the note are collateralized by substantially all the assets of the Company, including inventories, receivables, and equipment. The lending agreement for both the line of credit and the note 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. (H) 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 November 30, 1997 and 1996. (I) 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 LANCER ORTHODONTICS, INC. NOTES TO FINANCIAL STATEMENTS - continued (I) COMMITMENTS AND CONTINGENCIES - continued 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. In March 1996, the Company agreed to extend the agreement through October 1998, to coincide with the building lease. Effective April 1, 1996, the Company leased the Mexicali facility under a separate arrangement. 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. Such obligation is contingent in nature and accordingly has not been accrued in the accompanying balance sheet. LEASES - The Company leases its main facility under a non-cancelable operating lease expiring December 31, 1998, which requires monthly rentals that increase annually, from $2,900 per month (1994) to $4,499 per month (1998). The Company also leases its Mexico facility under a non-cancelable operating lease expiring October 31, 1998, which requires average monthly rentals of $5,182. The rentals are subject to annual increases based on the United States Consumer Price Index. Future aggregate rentals for the years ended May 31, 1998 and 1999, are $113,581 and $56,794, respectively. (J) INCOME TAXES At May 31, 1997, the Company had net tax operating loss carryforwards of approximately $2,418,000 and business tax credits of approximately $169,000 available to offset future Federal taxable income and tax liabilities, respectively, expiring at varying dates between 1998 and 2008. The Company also had net tax operating loss carryforwards of approximately $618,000 and business tax credits of approximately $23,000 available to offset future California taxable income and tax liabilities, respectively, expiring in 1998. (K) Net income per common share is computed based on the weighted average number of common shares and common equivalent shares outstanding (2,178,638 and 2,175,783 for the six months ended November 30, 1997 and 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 six months ended November 30, 1997 and November 30, 1996. LANCER ORTHODONTICS, INC. NOTES TO FINANCIAL STATEMENTS - continued (L) NEW DISCLOSURE STANDARDS In February 1997, Statement of Financial Accounting Standards ("SFAS") No. 128 (SFAS 128"), "Earnings per Share" was issued which establishes new standards for computing and presenting earnings per share ("EPS"). Specifically, SFAS 128: (a) eliminates the presentation of primary EPS and replaces it with basic EPS, (b) eliminates the modified treasury stock method and the three percent materiality provision, and (c) revised the contingent share provision and the supplemental EPS data requirements. SFAS 128 also makes a number of changes to existing disclosure requirements. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997; early implementation is not permitted. The effect of adopting SFAS 128 has not yet been determined by management of the Company. In February 1997, the Financial Accounting Standards Board issued SFAS No. 129 ("SFAS 129"), "Disclosure of Information about Capital Structure." SFAS 129 requires companies to disclose descriptive information about securities that is not necessarily related to the computation of earnings per share. It also requires disclosure of information about the liquidation preference of preferred stock and redeemable stock. SFAS 129 is effective for financial statements for periods ending after December 15, 1997. The Company does not expect that the implementation of SFAS 129 will require significant revision of prior disclosures. The effect of adopting SFAS 129 has not yet been determined by management of the Company. In June 1997, SFAS No. 130 (SFAS 130"), "Comprehensive Income" was issued which becomes effective in 1998 and requires reclassification of earlier financial statements for comparative purposes. SFAS 130 requires that changes in the amounts of certain items, including foreign currency translation adjustments and gains and losses on certain securities, be shown in the financial statements. SFAS 130 does not require a specific format for the financial statement in which comprehensive income is reported, but does require that an amount representing total comprehensive income be reported in that statement. The Company does not expect that the implementation of SFAS 130 will have a material effect upon the Company's financial statements. The effect of adopting SFAS 130 has not yet been determined by management of the Company. In June 1997, SFAS No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information" was issued. This statement will change the way public companies report information about segments of their business in their annual financial statements and requires them to report selected segment information in their quarterly reports issued to shareholders. It also requires entity-wide disclosures about the product, services an entity provides, the material countries in which it holds assets and reports revenues, and its major customers. SFAS 131 is effective for fiscal years beginning after December 15, 1997. The Company does not expect that the implementation of SFAS 131 will have a material effect upon the Company's financial statements. The effect of adopting SFAS 131 has not yet been determined by management of the Company. LANCER ORTHODONTICS, INC. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The statements in this Report on Form 10-QSB and other statements made by Lancer Orthodontics, Inc. that relate to future plans, events, or performance are forward-looking statements which involve risks and uncertainties. Actual results, events, or performance may differ materially from those anticipated in any forward-looking statements as a result of a variety of factors, including those set forth in this Report on Form 10-QSB. RESULTS OF OPERATIONS For the six months ended November 30, 1997, net income decreased $17,985 as compared to the year earlier period. For the three months ended November 30, 1997, net income decreased $7,203 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 interest expenses. For the six months ended November 30, 1997, net sales decreased $73,988 (2.39%) compared to the year earlier period. For the three months ended November 30, 1997, net sales decreased $36,489 (2.28%) as compared to the year earlier period. The decrease is attributable to competition pressures and lower prices in the industry. 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. For the six months and three months ended November 30, 1997, cost of sales as a percentage of sales (60-62%) was consistent with the year earlier period. During the first quarter of 1998, the Company initiated a review of its manufacturing processes and intends to automate several of them. This should enable the Company to reduce cost of sales. For the six months ended November 30, 1997, selling and general and administrative expenses decreased $71,076 (6.56%) compared to the year earlier period. For the three months ended November 30, 1997, selling and general and administrative expenses decreased $60,511 (10.66%) as compared to the year earlier period. The decrease is attributable to a decrease in travel, postage, salaries, and commissions. For the six months ended November 30, 1997, product development expenses increased $35,677 (70.7%) compared to the year earlier period. For the three months ended November 30, 1997, product development expenses increased $21,267 (84.25%) compared to the year earlier period. The increase is attributable to an increase in wage costs. For the six months ended November 30, 1997, interest expense decreased $14,805 (46.4%) compared to the year earlier period. For the three months ended November 30, 1997, interest expense decreased $7,475 (49.6%) as compared to the year earlier period. The decrease is attributable to reduced debt and interest rates. LANCER ORTHODONTICS, INC. FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES The Company's financial condition at November 30, 1997 and its previous two fiscal year ends was as follows: 11/30/97 05/31/97 05/31/96 Current Assets $3,130,603 $3,217,057 $3,157,621 Current Liabilities 587,163 800,050 836,714 Working Capital 2,543,440 2,417,007 2,320,907 Bank Debt & Capitalized Leases 264,074 415,848 727,495 Shareholder Equity 3,179,729 3,150,283 2,917,526 Total Assets 3,766,892 3,950,333 4,032,893 Working capital increased $126,433 during the six months, primarily because of profitability and non-cash expenses partially offset by the paydown of bank debt. 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 Item 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS a. The Company's 1997 annual meeting of shareholders was held on October 24, 1997. b. The following nominees were elected directors: Zackary Irani Janet Moore Douglas Miller Robert Orlando c. For Against Abstentions Zackary Irani 1,959,824 0 6,515 Douglas Miller 1,959,815 0 6,524 Janet Moore 1,959,821 0 6,518 Robert Orlando 1,965,572 0 767 Total Response 1,966,339 There were no 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 14, 1998 By /s/ Douglas D. Miller Douglas D. Miller, President and Chief Operating Officer EX-27 2
5 This schedule contains summary financial information extracted from Lancer Orthodontics, Inc.'s second quarter 10-Q and is qualified in its entirety by reference to such 10-Q. 6-MOS MAY-31-1998 NOV-30-1997 149,178 0 1,293,614 (97,727) 1,733,887 3,130,603 2,308,282 (2,096,131) 3,766,892 587,163 0 0 185,242 4,710,614 (1,716,127) 3,766,892 3,011,290 3,011,290 1,866,011 1,866,011 0 0 17,074 30,246 800 29,446 0 0 0 29,446 .014 .014
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