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, 2001 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: 2,098,620
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)
8/31/01
ASSETS
CURRENT ASSETS:
Cash $ 112,219
Accounts receivable, less allowances for sales
returns and doubtful receivables of $172,941 1,219,736
Inventories, net of reserve of $248,201 2,281,270
Prepaid expenses 20,374
Total current assets 3,633,599
PROPERTY AND EQUIPMENT, at cost 2,413,035
Less: Accumulated depreciation (2,343,119)
69,916
INTANGIBLE ASSETS:
Marketing and distribution rights, net 78,850
Technology use rights, net 64,903
143,753
OTHER ASSETS 26,935
Total assets $3,874,203
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 725,102
Accrued payroll and related benefits 93,771
Other current liabilities 66,493
Line of credit 160,000
Total current liabilities 1,045,366
Mandatorily redeemable convertible preferred stock Series C, $.06
Noncumulative
annual dividend, $.75 par value, 250,000 shares authorized;
0 shares issued and outstanding in 2001($.75 liquidation preference) --
COMMITMENTS AND CONTINGENCIES --
STOCKHOLDERS' EQUITY:
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 per share) --
Common stock, no par value: authorized 50,000,000 shares; issued and
outstanding 2,098,620 4,815,074
Accumulated deficit (1,986,237)
Total stockholders' equity 2,828,837
Total liabilities and stockholders' equity $3,874,203
LANCER ORTHODONTICS, INC.
CONDENSED STATEMENTS OF OPERATIONS AND
CONDENSED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
FOR THE THREE MONTHS ENDED
8/31/01 8/31/00
NET SALES $1,434,788 $1,331,099
COST OF SALES 1,077,398 925,582
Gross Profit 357,390 405,517
OPERATING EXPENSES:
Selling, General & Administrative 483,265 467,325
Product Development -- 36,240
TOTAL OPERATING EXPENSES 483,265 503,565
LOSS FROM OPERATIONS ( 125,875) ( 98,048)
OTHER INCOME (EXPENSE):
Interest Expense ( 3,222) ( 5,207)
Other Income (Expense), net 760 474
TOTAL OTHER INCOME (EXPENSE) ( 2,462) ( 4,733)
LOSS BEFORE INCOME TAXES ( 128,337) ( 102,781)
INCOME TAXES 0 0
NET LOSS ( 128,337) ( 102,781)
OTHER COMPREHENSIVE INCOME -- --
COMPREHENSIVE LOSS $( 128,337) $( 102,781)
NET LOSS PER WEIGHTED AVERAGE OF COMMON SHARES
Weighted average number of common shares 2,098,620 2,098,618
BASIC $( .06) $( .05)
Weighted average number of shares used in calculation
of diluted earnings per share 2,098,620 2,098,618
DILUTED $( .06) $( .05)
LANCER ORTHODONTICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED
8/31/01 8/31/00
Cash flows from operating activities:
Net loss $(128,337) $(102,781)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Depreciation and amortization 26,856 30,192
Provision for losses on accounts receivable ( 2,059) (17,419)
Provision for losses on inventory 9,000 9,000
Net change in operating assets and liabilities:
Accounts receivable ( 56,726) ( 52,726)
Inventories (150,427) 21,539
Prepaid expenses 24,244 19,099
Accounts payable 263,750 96,687
Accrued payroll ( 23,954) ( 3,750)
Other current liabilities 6,108 ( 4,290)
Net cash used in operating activities ( 31,545) ( 4,449)
Cash flows from investing activities:
Purchases of property and equipment -- ( 2,400)
Other assets ( 7,786) --
Net cash used in investing activities ( 7,786) ( 2,400)
Cash flows from financing activities:
Increase in line of credit 20,000 40,000
Cash flows provided by financing activities 20,000 40,000
Net change in cash ( 19,331) 33,151
Cash, beginning of period 131,550 103,207
Cash, end of period $112,219 $136,358
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 3,222 $ 5,207
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 accounting
principles generally
accepted in the United States of America ("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) Liquidity
At August 31, 2001, the Company was not in compliance with its required
minimum tangible net
worth ratio and is in technical default under the compliance provisions of
the bank line of credit.
The line of credit expired on September 30, 2001. As of the date of this
filing, the Company has
obtained approval of a new line of credit with a new lender, however, final
documents have not
been executed.
(E) 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
LANCER ORTHODONTICS, INC.
Notes to Financial Statements - continued
(E) Stock Based Compensation - continued
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.
(F) Line of Credit
At August 31, 2001, the Company has a $300,000 line of credit with a bank.
Borrowings are
made at prime plus 1.25% (7.75% at August 31, 2001) and are limited to
specified percentages
of eligible accounts receivable. The unused portion available under the
line of credit at August
31, 2001 was $140,000. The line of credit expired on September 30, 2001.
The line of credit was 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, 2001.
As of the date of this filing, the Company has obtained approval of a new
line of credit with a
new lender, however, final documents have not been executed.
(G) 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. During fiscal
1992 and 1991, the Company 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 gave 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 October 2000. Should the Company discontinue operations in Mexico,
it is responsible
for the accumulated employee seniority obligation as prescribed by Mexican
law. At August 31,
2001, this obligation was approximately $352,000. Such obligation is
contingent in nature and
accordingly has not been accrued in the accompanying balance sheet.
The Company is in the process of converting Mexican assets and obligations
to its own division,
a Mexican corporation named Lancer Orthodontics de Mexico (Lancer de Mexico).
This
division will administer services previously provided by an independent
manufacturing
contractor. A new lease was negotiated effective April 1, 2001, for the
16,000 square foot
LANCER ORTHODONTICS, INC.
Notes to Financial Statements - continued
(G) Commitments and Contingencies - continued
facility used for Lancer's Mexican operations. Utility and Mexican vendor
obligations have
been converted to the Lancer de Mexico name. This conversion will eliminate
the expense of an
administrative fee and is expected to provide better control in meeting
obligations.
Leases - The Company leases its main facility under a non-cancelable
operating lease expiring
December 31, 2003, as extended, which requires monthly rentals that increase
annually, from
$2,900 per month in 1994 to $6,317 per month in 2004. The lease expense is
being recognized
on a straight-line basis over the term of the lease. The excess of the
expense recognized over the
cash paid aggregates $10,792 at August 31, 2001, and is included in
accrued liabilities in the
accompanying balance sheet. Total rental expense for this facility for the
three months ended
August 31, 2001 was approximately $17,000.
The Company has entered into a non-cancelable operating lease for its Mexico
facility which
expires in March 2006 and requires average monthly rentals of approximately
$6,000. Total
expense for this facility for the three months ended August 31, 2001 was
approximately $17,000.
At May 31, 2001, future aggregate minimum lease payments are as follows:
Years ending May 31,
2002 $133,543
2003 136,397
2004 106,511
2005 62,292
2006 51,910
Total $490,653
Common Stock - The Company's stock is now traded on the OTC Bulletin Board.
(H) Income Taxes
At May 31, 2001, the Company had net tax operating loss carryforwards of
approximately
$2,049,000 and business tax credits of approximately $98,000 available to
offset future Federal
taxable income and tax liabilities, respectively. The Federal carryforwards
expire in varying
amounts through the year 2021. As of May 31, 2001, the Company had net tax
operating loss
carryforwards of approximately $205,000 and business tax credits of
approximately $23,000
available to offset future state income tax liabilities. The state
carryforwards expire through the
year 2011.
(I) 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
LANCER ORTHODONTICS, INC.
Notes to Financial Statements - continued
(I) Stockholders' Equity - continued
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 450,000 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.
During the quarter ended August 31, 2001, no options were granted.
(J) 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
8/31/01 8/31/00
Basic Loss per Share:
Net loss $( 128,337) $( 102,781)
Net loss applicable to common shareholders $( 128,337) $( 102,781)
Weighted average number of common shares 2,098,620 2,098,618
Basic loss per Share $( .06) $( .05)
Diluted Loss per Share:
Net loss from primary income per common share $( 128,337) $( 102,781)
Net loss for diluted earnings per share $( 128,337) $( 102,781)
Weighted average number of shares used in calculation
of diluted earnings per share 2,098,620 2,098,618
Diluted loss per share $( .06) $( .05)
LANCER ORTHODONTICS, INC.
Notes to Financial Statements - continued
(K) Financial Information About Foreign and Domestic Operations and Export
Sales
FOR THE THREE MONTHS ENDED
8/31/01 8/31/00
Sales to unaffiliated customers:
United States $ 742,271 $ 684,591
Europe 439,879 394,817
Central and South America 91,889 106,434
Other Foreign 160,749 145,257
$1,434,788 $1,331,099
No other geographic concentrations exist where net sales exceed 10%
of total net sales.
Sales or transfers between geographic areas none none
(L) Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin
No. 101, Revenue Recognition in Financial Statements ("SAB 101"). SAB 101
summarizes
certain areas of the Staff's views in applying generally accepted accounting
principles to revenue
recognition in financial statements. The Company believes that its current
revenue recognition
policies comply with SAB 101.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44
("FIN 44"), "Accounting for Certain Transactions involving Stock
Compensation." The adoption
of this Interpretation did not have a material impact on the consolidated
results of operations or
financial position of the Company.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial
Accounting Standards No. 141 ("SFAS 141"), "Business Combinations", which
eliminates the
pooling method of accounting for business combinations initiated after
June 30, 2001. In addition,
SFAS 141 addresses the accounting for intangible assets and goodwill
acquired in a business
combination. This portion of SFAS 141 is effective for business combinations
completed after
June 30, 2001. The Company does not expect SFAS 141 will have a material
impact on the
Company's financial position or results of operations.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS
142"), "Goodwill and Intangible Assets", which revises the accounting for
purchased goodwill
and intangible assets. Under SFAS 142, goodwill and intangible assets with
indefinite lives will
no longer be amortized and will be tested for impairment annually. SFAS 142
is effective for
fiscal years beginning after December 15, 2001, with earlier adoption
permitted. The Company
does not expect SFAS 142 will have a material impact on the Company's
financial position or
results of operations.
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, 2001, net loss increased $25,556 as
compared to the year
earlier period. The increase in net loss is primarily attributable to an
increase in costs of sales
and marketing costs.
For the three months ended August 31, 2001, net sales increased $103,689
(7.8%) as compared
to the year earlier period. International net sales increased $46,009,
primarily in Europe. The
domestic net sales increased $57,680, primarily in the western region.
For the three months ended August 31, 2001, cost of sales as a percentage
of sales totaled 75.1%,
an increase of 5.6% as compared to the year earlier period which totaled
69.5%. This increase is
attributable to increased discounting due to competition pressures.
For the three months ended August 31, 2001, selling and general and
administrative expenses
increased $15,940 (3.4%) as compared to the year earlier period. The
increase is primarily
attributable to an increase in marketing costs.
For the three months ended August 31, 2001, product development expenses
decreased $36,240
(100.00%) as compared to the year earlier period. The decrease is
primarily attributable to the
reduction of product development expense.
For the three months ended August 31, 2001, interest expense decreased
$1,985 (38.1%) as
compared to the year earlier period. The decrease is primarily
attributable to a decrease in the
average outstanding loan balance.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
The Company's financial condition at August 31, 2001 and its previous two
fiscal year ends was
as follows:
08/31/01 05/31/01 05/31/00
Current Assets $3,633,599 $3,476,962 $3,395,922
Current Liabilities 1,045,366 779,462 681,367
Working Capital 2,588,233 2,697,500 2,714,555
Bank Debt 160,000 140,000 160,000
Shareholder Equity 2,828,837 2,957,174 3,074,033
Total Assets 3,874,203 3,736,636 3,755,400
Cash decreased $19,331 during the three months ended August 31, 2001.
Working capital decreased $109,267 during the three months ended August 31,
2001, primarily
attributable to an increase in accounts payable. 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.
At August 31, 2001, the Company was not in compliance with its required
minimum tangible net
worth ratio and is in technical default under the compliance provisions of
the bank line of credit.
The line of credit expired on September 30, 2001. As of the date of this
filing, the Company has
obtained approval of a new line of credit with a new lender, however, final
documents have not
been executed.
We may face interruption of production and services due to increased
security measures in
response to terrorism. Our business depends on the free flow of products
and services through
the channels of commerce. Recently, in response to terrorists' activities
and threats aimed at the
United States, transportation, mail, financial and other services have been
slowed or stopped
altogether. Further delays or stoppages in transportation, mail, financial
or other services could
have a material adverse effect on our business, results of operations and
financial condition.
Furthermore, we may experience an increase in operating costs, such as costs
for transportation,
insurance and security as a result of the activities and potential activities.
We may also
experience delays in receiving payments from payers that have been affected
by the terrorist
activities and potential activities. The U. S. economy in general is being
adversely affected by
the terrorist activities and potential activities and any economic downturn
could adversely impact
our results of operations, impair our ability to raise capital or otherwise
adversely affect our
ability to grow our business.
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 22, 2001 By /s/ Zackary Irani
Zackary Irani,
Chief Executive Officer
9