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, 2000 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: 2,098,618
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)
8/31/00
ASSETS
CURRENT ASSETS:
Cash $ 136,358
Accounts Receivable, less allowances for sales
returns and doubtful receivables of $157,581 1,302,915
Inventories, net of reserve of $119,167 1,982,706
Prepaid Expenses 27,601
Total Current Assets 3,449,580
PROPERTY AND EQUIPMENT, at cost 2,406,129
Less: Accumulated depreciation (2,298,352)
107,777
INTANGIBLE ASSETS:
Marketing and Distribution Rights, net 103,750
Technology Use Rights, net 113,599
217,349
OTHER ASSETS 6,560
Total Assets $3,781,266
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Accrued Liabilities $ 610,013
Line of Credit 200,000
Total Current Liabilities 810,013
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; $.50 par value:
Authorized 500,000 shares; 0 shares issued and
outstanding ($.50 liquidation preference) --
Common Stock, no par value: Authorized 50,000,000 shares;
issued and outstanding 2,098,618 4,815,074
Accumulated Deficit (1,843,821)
Total Stockholders' Equity 2,971,253
Total Liabilities and Stockholders' Equity $3,781,266
LANCER ORTHODONTICS, INC.
CONDENSED STATEMENTS OF OPERATIONS AND
CONDENSED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
FOR THE THREE MONTHS ENDED
8/31/00 8/31/99
NET SALES $1,331,099 $1,271,545
COST OF SALES 925,582 901,083
Gross Profit 405,517 370,462
OPERATING EXPENSES:
Selling, General & Administrative 467,325 538,549
Product Development 36,240 56,665
TOTAL OPERATING EXPENSES 503,565 595,214
LOSS FROM OPERATIONS ( 98,048) ( 224,752)
OTHER INCOME (EXPENSE):
Interest Expense ( 5,207) ( 3,705)
Other Income (Expense), net 474 170,403
TOTAL OTHER INCOME (EXPENSE) ( 4,733) 166,698
LOSS BEFORE INCOME TAXES ( 102,781) ( 58,054)
INCOME TAXES 0 800
NET LOSS ( 102,781) ( 58,854)
OTHER COMPREHENSIVE INCOME -- --
COMPREHENSIVE LOSS $( 102,781 $( 58,854)
NET LOSS PER WEIGHTED AVERAGE OF COMMON SHARES
Weighted average number of common shares 2,098,618 2,075,799
BASIC $( .05) $( .03)
Weighted average number of shares used in calculation
of diluted earnings per share 2,098,618 2,075,799
DILUTED $( .05) $( .03)
LANCER ORTHODONTICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED
8/31/00 8/31/99
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(102,781) $( 58,854)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Depreciation and amortization 30,192 37,705
Provision for losses on accounts receivable -- ( 6,386)
Provision for losses on inventory 9,000 12,000
Common stock issued for services to directors -- 23,170
Net change in operating assets and liabilities:
Accounts receivable, net ( 70,145) 156,329
Inventories 21,539 ( 89,508)
Prepaid expenses 19,099 18,208
Insurance claim receivable -- 110,000
Accounts payable and accrued liabilities 88,647 ( 33,181)
Net cash (used in) provided by operating activities ( 4,449) 169,483
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ( 2,400) ( 2,983)
Net cash used in investing activities ( 2,400) ( 2,983)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock -- ( 58,710)
Increase in line of credit 40,000 --
Cash flows provided by (used in) by
financing activities 40,000 ( 58,710)
NET CHANGE IN CASH 33,151 107,790
Cash, beginning of period 103,207 106,292
Cash, end of period $136,358 $214,082
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 F). 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) LINE OF CREDIT
At August 31, 2000, the Company has a $500,000 line of credit with a bank.
Borrowings are made at prime plus 1.25% (10.75% at August 31, 2000) and are
limited to specified percentages of eligible accounts receivable. The unused
portion available under the line of credit at August 31, 2000 was $110,089. 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. The Company
was in violation of certain of its debt covenants at August 31, 2000. A waiver
has been requested but not yet received as of the date of filing.
(F) 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, 2000, this obligation was approximately $329,000.
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
(F) COMMITMENTS AND CONTINGENCIES _ continued
LEASES _ Lancer conducts its operations in leased facilities located in San
Marcos, California and Mexicali, Mexico. The San Marcos facility consists of a
9,240 square foot manufacturing and office building. The term of the initial
lease was for five years commencing January 1, 1994 and ending December 31,
1998. In 1998, Lancer renegotiated the lease and extended the terms to December
31, 2003. The Mexicali facility consists of a 16,000 square foot manufacturing
and office building. The term of the lease is for sixty months commencing
November 1, 1998 and ending October 31, 2003. Management believes that the
properties are currently suitable and adequate for Lancer's operations. Future
aggregate minimum annual cash lease payments are as follows:
Years ending
May 31, 2001 $142,808
May 31, 2002 145,547
May 31, 2003 148,401
Thereafter 75,651
Total $512,407
LISTING REQUIREMENTS _ The Company must maintain a minimum bid price and certain
capitalization levels as required by the NASD Marketplace Rule 4310(c). As of
August 31, 2000, the Company was in compliance with these requirements. There
can be no assurance that the Company will continue to comply with these
requirements which could impair the Company's ability to be listed on the NASDAQ
Stock Market.
(G) INCOME TAXES
At May 31, 2000, the Company had net tax operating loss carryforwards of
approximately $2,101,000 and business tax credits of approximately $114,735
available to offset future Federal taxable income and tax liabilities,
respectively. The Federal carryforwards expire in varying amounts from 2000 to
2019. As of May 31, 2000, the Company had net tax operating loss carryforwards
of approximately $250,000 and business tax credits of approximately $23,000
available to offset future state income tax liabilities.
(H) STOCKHOLDERS' EQUITY
The Company has incentive stock option and non-qualified stock option plans for
directors, officers, and key employees. The plans provide for the granting of
options for common shares at exercise prices equal to or exceeding the fair
market value at the date of grant, as determined by the Board of Directors.
Options may become exercisable over a period of up to four years from the date
of grant and may be exercised over a period of three to seven years from the
date of the grant, as determined by the Board of Directors. The Company's
shareholders have authorized a total of 357,143 shares to be available for grant
under the Company's stock option plan. Options granted prior to May 31, 1995,
generally vested on the date of grant and expired through August 1999.
LANCER ORTHODONTICS, INC.
NOTES TO FINANCIAL STATEMENTS - continued
(H) STOCKHOLDERS' EQUITY - continued
During the quarter ended August 31, 2000, the Company granted 157,000 options to
purchase shares of the Company's common stock at an exercise price of $.875 to
certain employees of the Company, with one half vested immediately and the other
half vesting one year from the grant date. The options have a term of five
years.
(I) NET LOSS 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 MONTHS ENDED
8/31/00 8/31/99
BASIC LOSS PER SHARE:
Net loss $( 102,781) $( 58,854)
Net loss applicable to common shareholders $( 102,781) $( 58,854)
Weighted average number of common shares 2,098,618 2,075,799
Basic loss per Share $( .05) $( .03)
DILUTED LOSS PER SHARE:
Net loss from primary income per common share $( 102,781) $( 58,854)
Net loss for diluted earnings per share $( 102,781) $( 58,854)
Weighted average number of shares used in
Calculation of diluted earnings per share 2,098,618 2,075,799
Diluted loss per share $( .05) $( .03)
LANCER ORTHODONTICS, INC.
NOTES TO FINANCIAL STATEMENTS - continued
(J) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
FOR THE THREE MONTHS ENDED
8/31/00 8/31/99
Sales to unaffiliated customers:
United States $ 684,591 $ 836,392
Europe 394,817 224,799
South America 106,434 98,150
Other Foreign 145,257 112,204
$1,331,099 $1,271,545
No other geographic concentrations exist where net sales exceed 10% of total
net sales.
Sales or transfers between geographic areas none none
Operating loss:
United States $( 96,531) $(144,749)
Europe ( 926) ( 41,329)
South America ( 250) ( 18,045)
Other Foreign ( 341) ( 20,629)
$( 98,048) $(224,752)
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, 2000, net loss increased $43,927 as
compared to the year earlier period. The increase in net loss is primarily
attributable to the 1999 other income of insurance claim proceeds.
For the three months ended August 31, 2000, net sales increased $59,554 (4.7%)
as compared to the year earlier period. International net sales increased
$211,355 primarily in Europe and South America. The decrease in domestic net
sales of $151,801 is attributable to increased discounting due to competition
pressures.
For the three months ended August 31, 2000, cost of sales as a percentage of
sales totaled 69.5%, a decrease of 1.4% as compared to the year earlier period
which totaled 70.9%. This decrease is attributable to a decrease in production
costs and royalty expense.
For the three months ended August 31, 2000, selling and general and
administrative expenses decreased $71,224 (13.2%) as compared to the year
earlier period. The decrease is primarily attributable to a decrease in labor
costs and commissions.
For the three months ended August 31, 2000, product development expenses
decreased $20,425 (36.1%) as compared to the year earlier period. The decrease
is primarily attributable to the discontinuance of dental amalgam development.
For the three months ended August 31, 2000, interest expense increased $1,502
(40.5%) as compared to the year earlier period. The increase is primarily
attributable to an increase in the interest 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, 2000 and its previous two fiscal
year ends was as follows:
8/31/00 05/31/00 05/31/99
Current Assets $3,449,580 $3,395,922 $3,827,011
Current Liabilities 810,013 681,367 888,820
Working Capital 2,639,567 2,714,555 2,938,191
Bank Debt 200,000 160,000 180,000
Shareholder Equity 2,971,253 3,074,033 3,438,301
Total Assets 3,781,266 3,755,400 4,327,121
Cash increased $33,151 during the three months ended August 31, 2000.
Working capital decreased $74,988 during the three months ended August 31, 2000,
primarily attributable to a decrease in inventories and an increase in accounts
payable and accrued liabilities, partially offset by an increase in receivables.
The Company expects to meet all of its cash requirements for the foreseeable
future 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
During the three months ended August 31, 2000, the Company granted
157,000 options to purchase shares of the Company's common stock at an
exercise price of $.875 to certain employees of the Company, which
vest ratably over a term of two years and have a term of five years.
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 13, 2000 By /s/ Douglas D. Miller
Douglas D. Miller,
President and Chief Operating Officer