-----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, QihUfdZKFiOvb/fkTahxLRVU+syCZOkM18enXpYIZEmxuNwQ5FNo0lygfRzfTvFs 8VEyJHtqi/L/bnh1lL6EeA== 0000057538-99-000020.txt : 19991018 0000057538-99-000020.hdr.sgml : 19991018 ACCESSION NUMBER: 0000057538-99-000020 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990831 FILED AS OF DATE: 19991015 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: 99729005 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, 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: 2,076,420 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) 8/31/99 ASSETS CURRENT ASSETS: Cash $ 214,082 Accounts Receivable, less allowances for sales returns and doubtful receivables of $169,600 1,201,777 Inventories 2,284,662 Prepaid Expenses 33,637 Total Current Assets 3,734,158 PROPERTY AND EQUIPMENT, at cost 2,396,227 Less: Accumulated depreciation (2,228,343) 167,884 INTANGIBLE ASSETS: Marketing and Distribution Rights, net 128,650 Technology Use Rights, net 162,294 290,944 OTHER ASSETS 6,560 Total Assets $4,199,546 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable and Accrued Liabilities $ 675,639 Line of Credit 180,000 Total Current Liabilities 855,639 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 2,076,420 4,661,575 Accumulated Deficit (1,502,910) Total Stockholders' Equity 3,343,907 Total Liabilities and Stockholders' Equity $4,199,546 LANCER ORTHODONTICS, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS ENDED 8/31/99 8/31/98 NET SALES $1,271,545 $1,540,302 COST OF SALES 901,083 941,277 Gross Profit 370,462 599,025 OPERATING EXPENSES: Selling, General & Administrative 538,549 523,569 Product Development 56,665 32,322 TOTAL OPERATING EXPENSES 595,214 555,891 (LOSS) INCOME FROM OPERATIONS ( 224,752) 43,134 OTHER INCOME (EXPENSE): Interest Expense ( 3,705) ( 1,979) Other Income (Expense), net 170,403 ( 132) TOTAL OTHER INCOME (EXPENSE) 166,698 ( 2,111) (LOSS) INCOME BEFORE INCOME TAXES ( 58,054) 41,023 INCOME TAXES 800 800 NET (LOSS) INCOME $( 58,854) $ 40,223 PER SHARE DATA: BASIC $( .03) $ .02 DILUTED $( .03) $ .02 LANCER ORTHODONTICS, INC. CONDENSED STATEMENTS OF CASH FLOWS(UNAUDITED) FOR THE THREE MONTHS ENDED 8/31/99 8/31/98 CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $( 58,854) $ 40,223 Adjustments to reconcile net income to net cash provided by (used in)operating activities: Depreciation and amortization 37,705 40,719 Provision for losses on accounts receivable ( 6,386) 20,175 Provision for losses on inventory 12,000 9,000 Common stock issued for services to directors 23,170 -- Net change in operating assets and liabilities: Accounts receivable 156,329 ( 50,834) Inventories ( 89,508) (289,161) Prepaid expenses 18,208 33,525 Insurance claim receivable 110,000 -- Accounts payable and accrued liabilities ( 33,181) ( 2,764) Net cash provided by (used in) operating activities 169,483 (199,117) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment ( 2,983) ( 8,615) Net cash (used in) investing activities ( 2,983) ( 8,615) CASH FLOWS FROM FINANCING ACTIVITIES: Repurchase of common stock ( 58,710) ( 4,488) Net cash (used in) financing activities ( 58,710) ( 4,488) NET CHANGE IN CASH 107,790 (212,220) CASH, beginning of period 106,292 321,036 CASH, end of period $214,082 $108,816 LANCER ORTHODONTICS, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (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 G). 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 (UNAUDITED) - 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 August 31, 1999, the Company had a $1,000,000 line of credit with a bank. Borrowings are made at prime plus .75% (9.0% at August 31, 1999) and are limited to specified percentages of eligible accounts receivable. The unused portion available under the line of credit at August 31, 1999 was $182,442. The line of credit expires on November 3, 1999. 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 $2,500,000, 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 August 31, 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 (UNAUDITED) - 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 (UNAUDITED) - 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. EARNINGS PER SHARE (UNAUDITED) FOR THE THREE MONTHS ENDED 8/31/99 8/31/98 BASIC (LOSS) EARNINGS PER SHARE: Net (loss) income $( 58,854 $ 40,223 Net (loss) income applicable to common shareholders $( 58,854) $ 40,223 Weighted average number of common shares 2,075,799 2,118,280 Basic (Loss) Earnings per Share $( .03) $ .02 DILUTED (LOSS) EARNINGS PER SHARE: Net (loss) income from primary income per common share $( 58,854) $ 40,223 Net (loss) income for diluted earnings per share $( 58,854) $ 40,223 Weighted average number of shares used in Calculation of basic earnings per common share 2,075,799 2,118,280 Add: Common equivalent shares 52,926 52,926 Weighted average number of shares used in calculation of diluted earnings per share 2,128,725 2,171,206 Diluted (loss) earnings per share $( .03) $ .02 LANCER ORTHODONTICS, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) _ continued (J) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES FOR THE THREE MONTHS ENDED 8/31/99 8/31/98 Sales to unaffiliated customers: United States $ 836,392 $ 871,154 Europe 224,799 348,766 South America 98,150 185,549 Other Foreign 112,204 134,833 $1,271,545 $1,540,302 No other geographic concentrations exist where net sales exceed 10% of total net sales. Sales or transfers between geographic areas none none Operating (loss) profit: United States $( 144,749) $ 64,001 Europe ( 41,329) ( 10,875) South America ( 18,045) ( 5,784) Other Foreign ( 20,629) ( 4,208) $( 224,752) $ 43,134 (K) STOCKHOLDERS' EQUITY In March 1998, the Company's Board of Directors approved the repurchase of up to 4% of the Company's outstanding common stock over twelve months. In June 1999, the repurchase was extended until May 2000. During the three months ended August 31, 1999, the Company repurchased and retired 56,840 shares of its common stock for an aggregate consideration of $58,706. 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. 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 three months ended August 31, 1999, net income decreased $99,077 as compared to the year earlier period. The decrease in net income is primarily attributable to the decrease in sales, offset by the insurance claim proceeds. For the three months ended August 31, 1999, net sales decreased $268,757 (17.4%) as compared to the year earlier period. International net sales decreased $233,995, primarily in Europe and South America, attributable to economic conditions and seasonal demand. The decrease in domestic net sales of $34,762 is attributable to increased discounting due to competition pressures. For the three months ended August 31, 1999, cost of sales as a percentage of sales totaled 70.9%, a increase of 9.8% as compared to the year earlier period which totaled 61.1%. This increase is attributable to decreased production due to demand, while costs remained fixed. The Company is in the process of automating several of its manufacturing processes which should reduce unit costs. For the three months ended August 31, 1999, selling and general and administrative expenses increased $14,980 (2.9%) as compared to the year earlier period. The increase is primarily attributable to an increase in financial personnel and professional fees. For the three months ended August 31, 1999, product development expenses increased $24,343 (75.3%) as compared to the year earlier period. The increase is primarily attributable to development costs of an innovative dental amalgum. For the three months ended August 31, 1999, interest expense increased $1,726 (87.2%) 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 prime rate. For the three months ended August 31, 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. LANCER ORTHODONTICS, INC. FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES The Company's financial condition at August 31, 1999 and its previous two fiscal year ends was as follows: 08/31/99 05/31/99 05/31/98 Current Assets $3,734,158 $3,827,011 $3,488,437 Current Liabilities 855,639 888,820 684,222 Working Capital 2,878,519 2,938,191 2,804,215 Bank Debt 180,000 180,000 100,000 Shareholder Equity 3,343,907 3,438,301 3,404,548 Total Assets 4,199,546 4,327,121 4,088,770 Cash increased $107,790 during the three months ended August 31, 1999, primarily due to the insurance claim settlement. Working capital decreased $59,672 during the three months ended August 31, 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. 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 October 15, 1999 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 first quarter 10-Q and is qualified in its entirety by reference to such 10-Q. 3-MOS MAY-31-2000 AUG-31-1999 214,082 0 1,371,377 169,600 2,284,662 3,734,158 2,396,227 (2,228,343) 4,199,546 855,639 0 0 185,242 4,661,575 (1,502,910) 4,119,546 1,271,545 1,271,545 901,083 901,083 0 0 3,705 (58,054) 800 (58,854) 0 0 0 (58,854) (.03) (.03)
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