-----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, ELnY4z3rpRC5GLPwB9GZL0b92/jLdsdGze+kgIO0YwfUDzsV6urLcEE/A4a1ESI9 8+/LAl+XQvCYg6eODFYlrg== 0000057538-98-000009.txt : 19980420 0000057538-98-000009.hdr.sgml : 19980420 ACCESSION NUMBER: 0000057538-98-000009 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980228 FILED AS OF DATE: 19980417 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: 98596258 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, 1998 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) 2/28/98 ASSETS CURRENT ASSETS: Cash $ 245,083 Accounts Receivable, less allowances of $103,508 (Note F) 1,152,939 Inventories (Note F) 1,650,811 Prepaid Expenses 22,952 Total Current Assets 3,071,785 PROPERTY AND EQUIPMENT, at cost (Note F) 2,312,981 Less: Accumulated depreciation (2,082,121) 230,860 INTANGIBLE ASSETS: Marketing and Distribution Rights, net 166,000 Technology Use Rights, net 235,339 401,339 OTHER ASSETS 4,400 Total Assets $3,708,384 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable and Accrued Liabilities $ 349,399 Line of Credit (Note F) 200,000 Current Portion ofNote Payable to Bank (Note G) -- Capital Lease Obligation (Note H) -- Total Current Liabilities 549,399 COMMITMENTS AND CONTINGENCIES (Note I) -- 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; $.50 par value: Authorized 500,000 shares; issued and outstanding 370,483 shares ($.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 (1,736,871) Total Stockholders' Equity 3,158,985 Total Liabilities and Stockholders' Equity $3,708,384 LANCER ORTHODONTICS, INC. CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE THREE FOR THE NINE MONTHS ENDED MONTHS ENDED 2/28/98 2/28/97 2/28/98 2/28/97 NET SALES $1,370,068 $1,622,618 $4,381,358 $4,707,896 COST OF SALES 828,058 1,072,613 2,694,070 2,945,334 Gross Profit 542,010 550,005 1,687,288 1,762,562 OPERATING EXPENSES: Selling, General & Admin 506,691 520,977 1,519,692 1,604,254 Product Development 49,266 20,458 135,441 70,956 TOTAL OPERATING EXPENSES 555,957 541,435 1,655,133 1,675,210 INCOME (LOSS) FROM OPERATIONS ( 13,947) 8,570 32,155 87,352 OTHER INCOME (EXPENSE): Interest Expense ( 6,338) ( 13,348) ( 23,412) ( 45,227) Other Income (Expense), net 342 2,366 759 3,694 TOTAL OTHER INCOME (EXP) ( 5,996) ( 10,982) ( 22,653) ( 41,533) INCOME (LOSS) BEFORE INCOME TAXES ( 19,943) ( 2,412) 9,502 45,819 INCOME TAXES (NOTE J) 800 -- 800 800 NET INCOME (LOSS) $( 20,743)$( 2,412) $ 8,702 $ 45,019 NET INCOME (LOSS) PER COMMON SHARE (NOTE K) $( .010)$( .001) $ .004 $ .021 NET INCOME (LOSS) PER COMMON SHARE DILUTED (NOTE K) $( .010)$( .001) $ .004 $ .020 LANCER ORTHODONTICS, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED 2/28/98 2/28/97 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 8,702 $ 45,019 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 133,167 162,657 Changes in assets and liabilities: Decrease in accounts receivable, net 25,897 44,886 Decrease (increase) in inventories 194,843 (116,502) Decrease in prepaid expenses 14,854 37,434 Increase (decrease) in accounts payable and accrued liabilities ( 34,803) 101,341 CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 342,660 274,835 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment ( 36,490) ( 41,172) CASH FLOWS USED IN INVESTING ACTIVITIES ( 36,490) ( 41,172) CASH FLOWS FROM FINANCING ACTIVITIES: Net payments under line of credit agreement -- ( 2,000) Principal payments on note payable to bank (200,000) (180,000) Principal payments of capital leases ( 15,848) ( 16,005) CASH FLOWS USED IN FINANCING ACTIVITIES (215,848) (198,005) INCREASE IN CASH 90,322 35,658 CASH AT BEGINNING OF PERIOD 154,761 64,731 CASH AT END OF PERIOD $245,083 $100,389 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) 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) 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 February 28, 1998, the Company had a $500,000 line of credit with a bank. Borrowings are made at prime plus 1% (9.5% at February 28, 1998) and are limited to specified percentages of eligible accounts receivable. The unused portion available under the line of credit at February 28, 1998 was $157,698. The line of credit expires on May 1, 1998. The Company is not required to maintain compensating balances in connection with this borrowing arrangement. 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 $2,250,000, a debt to tangible net worth ratio of no more than .75 to 1, and a current ration of at least 2 to 1. The Company is not required to maintain compensating balances in connection with this lending agreement. (G) NOTE PAYABLE TO BANK At February 28, 1998, all unpaid principal and accrued interest on the note payable to a bank was paid. The note required monthly payments of $18,889 plus interest at prime plus 1% (9.5% at February 28, 1998). (H) CAPITAL LEASE The Company is the lessee of equipment under a capital lease which expired in January 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, 1998 and February 28, 1997. (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 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 LANCER ORTHODONTICS, INC. NOTES TO FINANCIAL STATEMENTS - continued (I) COMMITMENTS AND CONTINGENCIES - continued 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. At February 28, 1998, this obligation was approximately $190,000. 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 rental payments 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 AND DIVIDENDS In February 1997, the Financial Accounting Standards Board issued a new statement titled "EARNINGS PER SHARE" ("FAS 128"). The new statement is effective for both interim and annual periods ending after December 15, 1997. FAS 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. LANCER ORTHODONTICS, INC. NOTES TO FINANCIAL STATEMENTS - continued (K) NET INCOME PER COMMON SHARE AND DIVIDENDS - continued EARNINGS PER SHARE (UNAUDITED) FOR THE THREE FOR THE NINE MONTHS ENDED MONTHS ENDED 2/28/98 2/28/97 2/28/98 2/28/97 BASIC EARNINGS PER SHARE: Net income (loss) $( 20,743)$( 2,412) $ 8,702 $ 45,019 Net income (loss) applicable to common shareholders $( 20,743)$( 2,412) $ 8,702 $ 45,019 Weighted average number of common shares 2,125,712 2,125,698 2,125,712 2,125,698 Basic Earnings (loss) per Share$( .010)$( .001) $ .004 $ .021 DILUTED EARNINGS PER SHARE: Net income (loss) from primary income per common share $( 20,743)$( 2,412)$ 8,702 $ 45,019 Net income (loss) for diluted earnings per share $( 20,743)$( 2,412) $ 8,702 $ 45,019 Weighted average number of shares used in calculating basis earnings per common share 2,125,712 2,125,698 2,125,712 2,125,698 Add: Common equivalent shares 52,926 90,496 52,926 90,496 Weighted average number of shares used in calculation of diluted earnings per share 2,178,638 2,216,194 2,178,638 2,216,194 Diluted earnings (loss) per share $( .010) $( .001) $ .004 $ .020 LANCER ORTHODONTICS, INC. NOTES TO FINANCIAL STATEMENTS - continued (L) In June 1997, SFAS No. 130 (SFAS 130"), "Comprehensive Income" was issued which is effective for fiscal years beginning after December 15, 1997, 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"), "Disclosure 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. 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 nine months ended February 28, 1998, net income decreased $36,317 as compared to the year earlier period. For the three months ended February 28, 1998, net income decreased $18,331 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. LANCER ORTHODONTICS, INC. For the nine months ended February 28, 1998, net sales decreased $326,538 (6.94%) compared to the year earlier period. For the three months ended February 28, 1998, net sales decreased $252,550 (15.56%) 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 that will contribute strategically to its product line, believing that a larger and more diverse product line will appeal to a wider range of customers. For the nine months ended February 28, 1998, cost of sales as a percentage of sales (61.5%) decreased from 1.1% as compared to the year earlier period (62.6%). For the three months ended February 28, 1998, cost of sales as a percentage of sales (60.4%) decreased 5.7% as compared to the year earlier period (66.1%). 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 nine months ended February 28, 1998, selling and general and administrative expenses decreased $84,562 (5.27%) compared to the year earlier period. For the three months ended February 28, 1998, selling and general and administrative expenses decreased $14,286 (2.74%) as compared to the year earlier period. The decrease is attributable to a decrease in general and administrative salaries and selling commissions. For the nine months ended February 28, 1998, product development expenses increased $64,485 (90.9%) compared to the year earlier period. For the three months ended February 28, 1998, product development expenses increased $28,808 (140.8%) compared to the year earlier period. The increase is attributable to an increase in wage costs. For the nine months ended February 28, 1998, interest expense decreased $21,815 (48.2%) compared to the year earlier period. For the three months ended February 28, 1998, interest expense decreased $7,010 (52.5%) as compared to the year earlier period. The decrease is attributable to reduced debt and interest rates. FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES The Company's financial condition at February 28, 1998 and its previous two fiscal year ends was as follows: 02/28/98 05/31/97 05/31/96 Current Assets $3,071,785 $3,217,057 $3,157,621 Current Liabilities 549,399 800,050 836,714 Working Capital 2,522,386 2,417,007 2,320,907 Bank Debt & Capitalized Leases 200,000 415,848 727,495 Shareholder Equity 3,158,985 3,150,283 2,917,526 Total Assets 3,708,384 3,950,333 4,032,893 Working capital increased $105,379 during the nine months, primarily because of accounts receivable collections, 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 Not Applicable 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 April 17, 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 third quarter 10-Q and is qualified in its entirety by reference to such 10-Q. 9-MOS MAY-31-1998 FEB-28-1998 245,083 0 1,253,245 (100,306) 1,650,811 3,071,785 2,312,981 (2,082,121) 3,708,384 549,399 0 0 185,242 4,710,614 (1,736,871) 3,708,384 4,381,358 4,381,358 2,694,070 2,694,070 0 0 23,412 9,502 800 8,702 0 0 0 8,702 .004 .004
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