-----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, OmqNrOXeWlmmPZqGjAbibBjDO2ifvHCxoDCqSNkE0etHL0auKVKsTt4t/DbzrKTo V1Z5hY9yMKfBAr4lbAMhaw== 0000057538-00-000003.txt : 20000202 0000057538-00-000003.hdr.sgml : 20000202 ACCESSION NUMBER: 0000057538-00-000003 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991130 FILED AS OF DATE: 20000112 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: 505986 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, 1999 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: 2,018,291 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) 11/30/99 ASSETS CURRENT ASSETS: Cash $ 128,498 Accounts Receivable, less allowances for sales returns and doubtful receivables of $170,752 1,237,275 Inventories 2,224,411 Prepaid Expenses 31,280 Total Current Assets 3,621,464 PROPERTY AND EQUIPMENT, at cost 2,396,227 Less: Accumulated depreciation (2,247,648) 148,579 INTANGIBLE ASSETS: Marketing and Distribution Rights, net 122,425 Technology Use Rights, net 150,120 272,545 OTHER ASSETS 6,560 Total Assets $4,049,148 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable and Accrued Liabilities $ 627,309 Line of Credit 220,000 Total Current Liabilities 847,309 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; $.50 par value: Authorized 500,000 shares; 370,483 issued and outstanding ($.50 liquidation preference: aggregate liquidation preference of $185,242) 185,242 Common Stock, no par value: Authorized 50,000,000 shares; issued and outstanding 2,018,291 4,602,735 Accumulated Deficit (1,586,138) Total Stockholders' Equity 3,201,839 Total Liabilities and Stockholders' Equity $4,049,148 LANCER ORTHODONTICS, INC. CONDENSED STATEMENTS OF OPERATIONS AND CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED 11/30/99 11/30/98 11/30/99 11/30/98 NET SALES $1,387,370 $1,534,218 $2,658,914 $3,074,520 COST OF SALES 864,587 1,022,298 1,765,669 1,963,574 Gross Profit 522,783 511,920 893,245 1,110,946 OPERATING EXPENSES: Selling, Gen & Admin 549,056 553,938 1,087,604 1,077,507 Product Development 49,672 36,232 106,337 68,554 TOTAL OPERATING EXPENSES 598,728 590,170 1,193,941 1,146,061 INCOME (LOSS) FROM OPERATIONS ( 75,945) ( 78,250)( 300,696) ( 35,115) OTHER INCOME (EXPENSE): Interest Expense ( 4,466) ( 2,629)( 8,171) ( 4,608) Other Income (Exp), net ( 2,817) 919 167,585 787 TOTAL OTHER INCOME (EXP) ( 7,283) ( 1,710) 159,414 ( 3,821) INCOME (LOSS) BEFORE INCOME TAXES ( 83,228) ( 79,960)( 141,282) ( 38,936) INCOME TAXES -- -- 800 800 NET INCOME (LOSS) ( 83,228) ( 79,960) ( 142,082)( 39,736) OTHER COMPREHENSIVE INCOME -- -- -- -- COMPREHENSIVE INCOME (LOSS) $( 83,228 $( 79,960)$( 142,082)$( 39,736) NET INCOME (LOSS) PER WEIGHTED AVERAGE OF COMMON SHARES BASIC $ (.04)$ (.04) $ (.07) $ (.02) DILUTED $ (.04)$ (.04) $ (.07) $ (.02) LANCER ORTHODONTICS, INC. CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED 11/30/99 11/30/98 CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $(142,082) $( 39,736) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 75,409 81,439 Provision for losses on accounts receivable ( 5,234) ( 20,882) Provision for losses on inventory 22,000 18,000 Common stock issued for services to directors 23,170 -- Net change in operating assets and liabilities: Accounts receivable 119,679 14,879 Inventories ( 39,257) (363,980) Prepaid expenses 20,565 49,037 Insurance claim receivable 110,000 -- Accounts payable and accrued liabilities ( 81,511) ( 15,375) Net cash provided by (used in) operating activities 102,739 (276,618) CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment ( 2,983) ( 42,120) Net cash (used in) investing activities ( 2,983) ( 42,120) CASH FLOWS FROM FINANCING ACTIVITIES: Repurchase of common stock (117,550) ( 4,488) Line of credit 40,000 100,000 Cash flows used in financing activities ( 77,550) 95,512 NET CHANGE IN CASH 22,206 (223,226) Cash, beginning of period 106,292 321,036 Cash, end of period $128,498 $ 97,810 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 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 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) INSURANCE CLAIM Management of the Company completed an assessment of a theft of inventory located at its facility in Mexicali, Mexico on April 6, 1999. The carrying value of the inventory stolen approximated $110,000, valued at standard cost, which was reflected in the May 31, 1999 financial statements as a reduction in inventories and an addition to insurance claim receivable. In July 1999, the Company settled the claim with the insurance carrier and received $279,672; the value of the stolen inventory at net average selling price, less commissions and royalties. The Company recorded other income of $169,672 from the proceeds received in excess of standard cost. (F) LINE OF CREDIT At November 30, 1999, the Company had a $500,000 line of credit with a bank. Borrowings are made at prime plus 1.25% (9.5% at November 30, 1999) and are limited to specified percentages of eligible accounts receivable. The unused portion available under the line of credit at November 30, 1999 was $121,464. The line of credit expires on November 3, 2000. 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. (G) 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, 1999, this obligation was approximately $258,000. Such obligation is contingent in nature and accordingly has not been accrued in the accompanying balance sheet. LANCER ORTHODONTICS, INC. NOTES TO FINANCIAL STATEMENTS - continued (G) COMMITMENTS AND CONTINGENCIES _ continued LEASES - The Company leases its main facility under a non-cancelable operating lease expiring December 31, 2003, which requires monthly rental payments that increase annually, from $2,900 per month in 1994 to $6,317 per month in 2003. The Company also leases its Mexico facility under a non-cancelable operating lease expiring October 2003, which requires average monthly rentals of approximately $6,040. The rentals are subject to annual increases based on the United States Consumer Price Index. Future aggregate minimum annual cash lease payments are as follows: Years ending May 31, 2000 $138,362 May 31, 2001 140,994 May 31, 2002 143,733 May 31, 2003 146,587 Thereafter 74,884 Total $644,560 YEAR 2000 ISSUES _ Certain computerized systems use only two digits to record the year in date fields. Such systems may not be able to accurately process dates ending in the year 2000 and after. The effects of this issue will vary from system to system and may adversely affect an entity's operations as well as its ability to prepare financial statements. The accounting and MRP software for the Company'' main frame computer system has been upgraded to the year 2000 compliant and is actively supported by the developer. The Company does not anticipate to incur significant additional costs to be completely year 2000 compliant. The Company does not place orders electronically nor does it make disbursements to vendors or employees in that medium. The Company has a broad base of customers and suppliers and therefore is not heavily reliant on any one outside company. However, the Company has no way of completely knowing how the year 2000 may affect its various vendors or customers if such conversions are not completed on a timely basis by them, and thus it cannot estimate with certainty the impact the year 2000 may have on the Company. (H) INCOME TAXES At May 31, 1999, the Company had net tax operating loss carryforwards of approximately $1,850,000 and business tax credits of approximately $150,000 available to offset future Federal taxable income and tax liabilities, respectively. The Federal carryforwards expire in varying amounts from 1999 to 2012. As of May 31, 1999, the Company had business tax credits of approximately $23,000 available to offset future state income tax liabilities. The Company's state net operating loss carryforward totaling approximately $255,000 expired during the year ended May 31, 1998. LANCER ORTHODONTICS, INC. NOTES TO FINANCIAL STATEMENTS - continued (I) NET (LOSS) INCOME 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. EARNINGS PER SHARE (UNAUDITED) FOR THE THREE FOR THE NINE MONTHS ENDED MONTHS ENDED 11/30/99 11/30/98 11/30/99 11/30/98 BASIC (LOSS) EARNINGS PER SHARE: Net (loss) income $( 83,228)$( 79,960)$( 142,082)$( 39,736) Net (loss) income applicable to common shareholders $( 83,228)$( 79,960)$( 142,082)$( 39,736) Weighted average number of common shares 2,049,059 2,117,040 2,062,502 2,117,663 Basic (loss) earnings per share$( .04)$( .04)$( .07)$( .02) DILUTED (LOSS) EARNINGS PER SHARE: Net (loss) income from primary income per common share $( 83,228)$( 79,960)$( 142,082)$( 39,736) Net (loss) income for diluted earnings per share $( 83,228)$( 79,960)$( 142,082)$( 39,736) Weighted average number of shares used in calculation of diluted earnings per share 2,049,059 2,117,040 2,062,502 2,117,663 Diluted (loss) earnings per share$( .04)$( .04) $( .07) $( .02) LANCER ORTHODONTICS, INC. NOTES TO FINANCIAL STATEMENTS - continued (J) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES FOR THE SIX MONTHS ENDED 11/30/99 11/30/98 Sales to unaffiliated customers: United States $1,659,302 $1,739,883 Europe 568,011 740,362 South America 171,951 285,828 Other Foreign 259,650 308,447 $2,658,914 $3,074,520 No other geographic concentrations exist where net sales exceed 10% of total net sales. Sales or transfers between geographic areas none none Operating profit (loss): United States $(200,071) $(63,120) Europe ( 57,178) 15,534 South America ( 17,309) 5,996 Other Foreign ( 26,138) 6,475 $(300,696) $(35,115) (K) STOCKHOLDERS' EQUITY In March 1998, the Company's Board of Directors approved the repurchase of the Company's outstanding common stock in the market place over twelve months. In June 1999, the repurchase was extended until May 2000. During the six months ended November 30, 1999, the Company repurchased and retired 114,969 shares of its common stock for an aggregate consideration of $117,851. The Company issued 27,295 new shares of its common stock valued at $23,170 for directors fees previously outstanding and included in accrued liabilities as of May 31, 1999. LANCER ORTHODONTICS, INC. NOTES TO FINANCIAL STATEMENTS - continued 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, 1999, net income decreased from a net loss of $39,736 at November 30, 1998, to a net loss of $142,082 at November 30, 1999. For the three months ended November 30, 1999, net income decreased from a net loss of $79,960 at November 30, 1998, to a net loss of $83,228 at November 30, 1999. The decrease in net income is primarily attributable to the decrease in sales, offset by the insurance claim proceeds. For the six months ended November 30, 1999, net sales decreased $415,606 (13.5%) as compared to the year earlier period. For the three months ended November 30, 1999, net sales decreased $146,848 (9.6%) as compared to the year earlier period. International net sales decreased $335,025 (25.1%) and $101,029 (15.2%), respectively, for the six months and three months ended November 30, 1999, as compared to the year earlier period. This decrease is primarily attributable to economic conditions in Europe and South America. Domestic net sales decreased $80,581 (4.6%) and $45,819 (5.3%), respectively, for the six months and three months ended November 30, 1999, 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, 1999, cost of sales as a percentage of sales (66.4%) increased 2.5% compared to the year earlier period. For the three months ended November 30, 1999, cost of sales as a percentage of sales (62.3%) decreased 4.3% compared to the year earlier period. The six months increase is primarily attributable to fixed production costs not being absorbed into inventory due to decreased demand. The three months decrease is primarily attributable to a decrease in production labor costs. The Company is in the process of developing improved manufacturing processes to reduce unit costs. For the six months ended November 30, 1999, selling and general and administrative expenses increased $10,097 (.9%) compared to the year earlier period. For the three months ended November 30, 1999, selling and general and administrative expenses decreased $4,882 (.9%) as compared to the year earlier period. The six months increase is primarily attributable to an increase in financial personnel and professional fees. LANCER ORTHODONTICS, INC. NOTES TO FINANCIAL STATEMENTS - continued For the six months ended November 30, 1999, product development expenses increased $37,783 (55.1%) as compared to the year earlier period. For the three months ended November 30, 1999, product development expenses increased $13,440 (37.1%) compared to the year earlier period. The increase is primarily attributable to development costs of an innovative dental amalgam. For the six months ended November 30, 1999, interest expense increased $3,563 (77.3%) as compared to the year earlier period. For the three months ended November 30, 1999, interest expense increased $1,837 (69.9%) as compared to the year earlier period The increase is attributable to borrowings against the line of credit to finance development costs 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, 1999 and its previous two fiscal year ends was as follows: 11/30/99 05/31/99 05/31/98 Current Assets $3,621,464 $3,827,011 $3,488,437 Current Liabilities 847,309 888,820 684,222 Working Capital 2,774,155 2,938,191 2,804,215 Bank Debt 220,000 180,000 100,000 Shareholder Equity 3,201,839 3,438,301 3,404,548 Total Assets 4,049,148 4,327,121 4,088,770 Cash increased $22,206 during the six months ended November 30, 1999, primarily due to the insurance claim settlement. Working capital decreased $164,036 during the six months ended November 30, 1999, primarily attributable to a decrease in sales, partially offset by an increase in inventories and cash. 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. LANCER ORTHODONTICS, INC. 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 1999 annual meeting of shareholders was held on November 17, 1999. 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 1,961,284 0 32,053 Douglas Miller 1,961,312 0 32,025 Janet Moore 1,961,312 0 32,025 Robert Orlando 1,961,312 0 32,025 Total Response 1,993,337 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 12, 2000 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-31-2000 NOV-30-1999 128,498 0 1,408,027 (170,752) 2,224,411 3,621,464 2,396,227 (2,247,648) 4,049,148 847,309 0 0 185,242 4,602,735 (1,586,138) 4,049,148 2,658,914 2,658,914 1,765,669 1,765,669 0 0 8,171 (141,282) 800 (142,082) 0 0 0 (142,082) (.07) (.07)
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