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, 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)
11/30/00
ASSETS
CURRENT ASSETS:
Cash $ 185,631
Accounts Receivable, less allowances for sales
returns and doubtful receivables of $158,171 1,119,903
Inventories, net of reserve of $128,167 2,070,114
Prepaid Expenses 31,711
Total Current Assets 3,407,359
PROPERTY AND EQUIPMENT, at cost 2,406,129
Less: Accumulated depreciation (2,310,145)
95,984
INTANGIBLE ASSETS:
Marketing and Distribution Rights, net 97,525
Technology Use Rights, net 101,425
198,950
OTHER ASSETS 6,560
Total Assets $3,708,853
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Accrued Liabilities $ 586,427
Line of Credit 220,000
Total Current Liabilities 806,427
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 (1,912,648)
Total Stockholders' Equity 2,902,426
Total Liabilities and Stockholders' Equity $3,708,853
LANCER ORTHODONTICS, INC.
CONDENSED STATEMENTS OF OPERATIONS AND
CONDENSED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
11/30/00 11/30/99 11/30/00 11/30/99
NET SALES $1,385,436 $1,387,370 $2,716,534 $2,658,914
COST OF SALES 903,332 864,587 1,828,913 1,765,669
Gross Profit 482,104 522,783 887,621 893,245
OPERATING EXPENSES:
Selling, General &
Administrative 512,475 549,056 979,800 1,087,604
Product Development 33,484 49,672 69,724 106,337
TOTAL OPERATING EXP 545,959 598,728 1,049,524 1,193,941
LOSS FROM OPERATIONS ( 63,855) ( 75,945) (161,903) ( 300,696)
OTHER INCOME (EXPENSE):
Interest Expense ( 4,653) ( 4,466) ( 9,860) ( 8,171)
Other Inc (Exp), net 482 ( 2,817) 956 167,585
TOTAL OTHER INCOME (EXP)( 4,171) ( 7,283) ( 8,904) 159,414
LOSS BEFORE INCOME TAXES (68,026) ( 83,228) ( 170,807) ( 141,282)
INCOME TAXES 800 -- 800 800
NET LOSS ( 68,826) ( 83,228) ( 171,607) ( 142,082)
OTHER COMPREHENSIVE INC -- -- -- --
COMPREHENSIVE LOSS $( 68,826) $( 83,228)$( 171,607)$( 142,082)
NET LOSS PER WEIGHTED AVERAGE OF COMMON SHARES
Weighted average number
of common shares 2,098,618 2,049,059 2,098,618 2,062,502
BASIC $ (.03) $ (.04) $ (.08) $ (.07)
Weighted average number of shares
used in calculation of diluted
earnings per share 2,098,618 2,049,059 2,098,618 2,062,502
DILUTED $ (.03) $ (.04) $ (.08) $ (.07)
LANCER ORTHODONTICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED
11/30/00 11/30/99
Cash flows from operating activities:
Net loss $(171,607) $(142,082)
Adjustments to reconcile net loss to
net cash (used in) provided by operating activities:
Depreciation and amortization 60,384 75,409
Provision for losses on accounts rec ( 16,829) ( 5,234)
Provision for losses on inventory 18,000 22,000
Common stock issued for services to
directors -- 23,170
Net change in operating assets and liabilities:
Accounts receivable, net 129,696 119,679
Inventories ( 74,869) ( 39,257)
Prepaid expenses 14,989 20,565
Insurance claim receivable -- 110,000
Accounts payable and accrued liabilities 65,060 ( 81,511)
Net cash (used in) provided by operating
Activities 24,824 102,739
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 -- (117,550)
Increase in line of credit 60,000 40,000
Cash flows provided by (used in) by
financing activities 60,000 ( 77,550)
Net change in cash 82,424 22,206
Cash, beginning of period 103,207 106,292
Cash, end of period $185,631 $128,498
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.
(E) Line of Credit
At November 30, 2000, the Company has a $300,000 line of credit
with a bank. Borrowings are made at prime plus 1.25% (10.75% at
November 30, 2000) and are limited to specified percentages of
eligible accounts receivable. The unused portion available
under the line of credit at November 30, 2000 was $80,000. The
line of credit expires on September 10, 2001.
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 November 30, 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 November 30, 2000, this
obligation was approximately $354,000. Such obligation is
contingent in nature and accordingly has not been accrued in the
accompanying balance sheet.
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 $ 71,963
May 31, 2002 145,547
May 31, 2003 148,401
Thereafter 75,651
Total $441,562
Listing Requirements - The Company must maintain a minimum bid
price and certain capitalization levels as required by the NASD
Marketplace Rule 4310(c). In a letter dated November 10, 2000,
NASDAQ had advised the Company that it was not in compliance
With the minimum bid price required for listing. The Company
Was being afforded a ninety-day grace period, until February 8,
2000 to remedy this deficiency. If the deficiency is not
remedied by then, the Company's stock will trade under the
Bulletin Board rather than on the NASDAQ SmallCap Stock Market.
NASDAQ also advised the Company on January 5, 2001, that it was
not in compliance with the minimum market value of public float
and that the Company was being afforded a ninety day grace
period, until April 5, 2001, to remedy this deficiency. If the
deficiency is not remedied by then, the Company's stock will
trade under the Bulletin Board rather than on the NASDAQ Small
Cap 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.
During the quarter six months ended November 30, 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 FOR THE SIX
MONTHS ENDED MONTHS ENDED
11/30/00 11/30/99 11/30/00 11/30/99
Basic Loss per Share:
Net loss $( 68,826) $( 83,228) $( 171,607) $( 142,082)
Net loss applicable
to common
shareholders $( 68,826) $( 83,228) $( 171,607) $( 142,082)
Weighted average
number of common
shares 2,098,618 2,049,059 2,098,618 2,062,502
Basic loss
per share $( .03) $( .04) $( .08) $( .07)
Diluted Loss per Share:
Net loss from primary
income per
common share $( 68,826) $( 83,228) $( 171,607) $( 142,082)
Net loss for
diluted earnings
per share $( 68,826) $( 83,228) $( 171,607) $( 142,082)
Weighted average
number of shares
used in calculation
of diluted earnings
per share 2,098,618 2,049,059 2,098,618 2,062,502
Diluted loss
per share $( .03) $( .04) $( .08) $( .07)
(J) Financial Information About Foreign and Domestic Operations
and Export Sales
FOR THE SIX MONTHS ENDED
11/30/00 11/30/99
Sales to unaffiliated customers:
United States $1,386,874 $1,659,302
Europe 864,442 568,011
South America 166,338 171,951
Other Foreign 298,880 259,650
$2,716,534 $2,658,914
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 $(197,726) $(200,071)
Europe 23,289 ( 57,178)
South America 4,482 ( 17,309)
Other Foreign 8,052 ( 26,138)
$(161,903) $(300,696)
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, 2000, net loss increased
from a net loss of $142,082 at November 30, 1999, to a net loss
of $171,607 at November 30, 2000. For the three months ended
November 30, 2000, net loss decreased from a net loss of $83,228
at November 30, 1999, to a net loss of $68,826 at November 30,
2000. The six month increase in net loss is primarily
attributable to the 1999 other income of insurance claim
proceeds. The three month decrease in net loss is primarily
attributable to the decrease in operating expenses, offset by
the decrease in sales.
For the six months ended November 30, 2000, net sales increased
$57,620 (2.2%) as compared to the year earlier period. For the
three months ended November 30, 2000, net sales decreased $1,934
(.1%) as compared to the year earlier period. International net
sales increased $330,048 (33.0%) and $118,693 (21.0%),
respectively, for the six months and three months ended
November 30, 2000, as compared to the year earlier period.
The increase in sales was primarily in Europe. Domestic net
sales decreased $272,428 (16.4%) and $120,627 (14.7%),
respectively, for the six months and three months ended
November 30, 2000, 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, 2000, cost of sales as a
percentage of sales (67.3%), increased .1% compared to the year
earlier period. For the three months ended November 30, 2000,
cost of sales as a percentage of sales (65.2%), increased .3%
compared to the year earlier period. The increase is primarily
attributable to increased production costs.
For the six months ended November 30, 2000, selling and general
and administrative expenses decreased $107,804 (9.9%) compared
to the year earlier period. For the three months ended
November 30, 2000, selling and general and administrative
expenses decreased $36,581 (6.7%) as compared to the year
earlier period. The decrease is primarily attributable to a
decrease in labor costs and commissions.
For the six months ended November 30, 2000, product development
expenses decreased $36,613 (34.4%) as compared to the year
earlier period. For the three months ended November 30, 2000,
product development expenses decreased $16,188 (32.6%) compared
to the year earlier period. The decrease is primarily
attributable to the discontinuance of dental amalgam development.
For the six months ended November 30, 2000, interest expense
increased $1,689 (20.7%) as compared to the year earlier period.
For the three months ended November 30, 2000, interest expense
increased $187 (4.2%) as compared to the year earlier period.
The increase is primarily attributable to borrowings against the
line of credit 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, 2000 and its
previous two fiscal year ends was as follows:
11/30/00 05/31/00 05/31/99
Current Assets $3,407,359 $3,395,922 $3,827,011
Current Liabilities 806,427 681,367 888,820
Working Capital 2,600,932 2,714,555 2,938,191
Bank Debt 220,000 160,000 180,000
Shareholder Equity 2,902,426 3,074,033 3,438,301
Total Assets 3,708,853 3,755,400 4,327,121
Cash increased $82,424 during the six months ended November 30,
2000.
Working capital decreased $113,623 during the six months ended
November 30, 2000, primarily attributable to a decrease in sales,
partially offset by an increase in inventories and cash. The
Company expects to meet 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
During the six months ended November 30, 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
a. The Company's 2000 annual meeting of shareholders was held
on November 20, 2000.
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 1,830,199 0 12,247
Douglas Miller 1,830,199 0 12,247
Janet Moore 1,830,199 0 12,247
Robert Orlando 1,830,199 0 12,247
Total Response 1,842,446
There were no broker non-votes.
d. Approval of 2000 Stock Incentive Plan:
For Against Abstentions
1,275,229 45,104 2,800
There were 519,313 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 May 15, 2002 By /s/ Zackary Irani
Zackary Irani,
Chief Executive Officer