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 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 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 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)
(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 his 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 May 13, 2002 By /s/ Zackary Irani
Zackary Irani,
Chief Executive Officer