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, 2002 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
Indicate by check mark whether registrant is an accelerated
filer, as defined in Rule 12b-2 of the Exchange Act.
Yes No X
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
2,196,233
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)
11/30/02
ASSETS
CURRENT ASSETS:
Cash $ 434,312
Accounts receivable, less allowances for sales
returns and doubtful receivables of $180,132 1,040,772
Inventories, net of reserve of $218,608 1,844,364
Prepaid expenses 54,012
Total current assets 3,373,460
PROPERTY AND EQUIPMENT, at cost 2,446,031
Less: Accumulated depreciation (2,374,272)
71,759
INTANGIBLE ASSETS:
Marketing and distribution rights, net 47,725
Technology use rights, net 4,033
51,758
OTHER ASSETS 35,546
Total assets $3,532,523
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 241,013
Accrued payroll and related benefits 148,808
Other current liabilities 94,291
Line of credit --
Total current liabilities 484,112
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 2,196,233 4,844,345
Prepaid expense ( 1,750)
Accumulated deficit (1,794,184)
Total stockholders' equity 3,048,411
Total liabilities and stockholders' equity $3,532,523
LANCER ORTHODONTICS, INC.
CONDENSED STATEMENTS OF OPERATIONS AND
CONDENSED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
11/30/02 11/30/01 11/30/02 11/30/01
NET SALES $1,504,904 $1,629,333 $2,790,403 $3,064,121
COST OF SALES 1,054,601 1,017,986 1,978,181 2,095,384
Gross Profit 450,303 611,347 812,222 968,737
OPERATING EXPENSES:
Sales & Marketing 298,129 400,435 580,230 777,882
General & Admin 110,926 112,803 221,189 218,621
Product Development 15,996 0 31,182 0
TOTAL OPERATING EXPENSES 425,051 513,238 832,601 996,503
INCOME (LOSS) FROM
OPERATIONS 25,252 98,109 ( 20,379) ( 27,766)
OTHER INCOME (EXPENSE):
Interest Expense ( 16) ( 4,319) ( 3,588) ( 7,541)
Other Income
(Expense), net 3,821 ( 20,821) 50,093 ( 20,061)
TOTAL OTHER INCOME
(EXPENSE) 3,805 ( 25,140) 46,505 ( 27,602)
INCOME (LOSS) BEFORE
INC TAXES 29,057 72,969 26,126 ( 55,368)
INCOME TAXES 194 800 194 800
NET INCOME (LOSS) 28,863 72,169 25,932 ( 56,168)
OTHER COMPREHENSIVE INCOME -- -- -- --
COMPREHENSIVE
INCOME (LOSS) $ 28,863 $ 72,169 $ 25,932 $( 56,168)
NET INCOME (LOSS) PER WEIGHTED AVERAGE OF COMMON SHARES
Weighted average number
of common shares 2,196,233 2,098,624 2,196,233 2,098,624
BASIC $ .01 $ .03 $ .01 $ (.03)
Weighted average number
of shares used in
calculation of diluted
earnings per share 2,196,233 2,098,624 2,196,233 2,098,624
DILUTED $ .01 $ .03 $ .01 $ (.03)
LANCER ORTHODONTICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED
11/30/02 11/30/01
Cash flows from operating activities:
Net income (loss) $ 25,932 $( 56,168)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 48,234 53,712
Provision for losses on accounts receivable 132 ( 361)
Provision for losses on inventory 30,000 18,000
Common stock issued for services 10,500 --
Net change in operating assets and liabilities:
Accounts receivable 81,031 12,091
Inventories 213,395 ( 95,796)
Prepaid expenses 263 7,736
Insurance claim receivable 81,758 --
Accounts payable (178,340) ( 43,150)
Accrued payroll 53,815 16,524
Other current liabilities 40,285 30,521
Net cash provided by (used in) operating
Activities 407,005 ( 56,891)
Cash flows from investing activities:
Additions to property and equipment ( 35,609) --
Other assets -- ( 15,573)
Net cash used in investing activities ( 35,609) ( 15,573)
Cash flows from financing activities:
Increase (decrease) in line of credit ( 65,669) 32,845
Cash flows provided by (used in)
financing activities ( 65,669) 32,845
Net change in cash 305,727 ( 39,619)
Cash, beginning of period 128,585 131,550
Cash, end of period $434,312 $ 91,931
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 16 $ 7,541
Lancer issued 5,833 shares of common
stock valued at $1,750 for services to
be rendered $ 1,750 $ --
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.
Reference is made to Note 2 of the Notes to Financial Statements
contained in Lancer's Annual Report on Form 10-KSB for the fiscal
year ended May 31, 2002, for a summary of significant accounting
policies utilized by Lancer.
(B) Organization
Lancer Orthodontics, Inc. 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.
Lancer has a manufacturing facility in Mexico where a majority of
its inventory is manufactured (Note G). The facility is
incorporated and is a wholly-owned and consolidated subsidiary of
Lancer. This subsidiary now also administers services previously
provided by an independent manufacturing contractor. The
conversion had no material effect on manufacturing operations.
Lancer 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. Lancer 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 Lancer'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
Lancer 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.
Lancer has elected to account for its stock based compensation to
employees under APB 25.
(E) Property and Equipment
At November 30, 2002, construction in progress of $43,008 is
included in net property and equipment of $71,759. Construction
in progress is the accumulated cost of machinery and tooling
being developed. Upon project completion, the cost will be
depreciated using straight-line method over the estimated useful
life.
(F) Line of Credit
At November 30, 2002, Lancer has a $400,000 line of credit with
GE Capital Healthcare Financial Services through October 24, 2003.
Borrowings are made at prime plus 2.0%, however not less than
8.0%, (8.0% at November 30, 2002) and are limited to 80% of
accounts receivable less than 90 days old with a liquidity factor
of 94%. There is no outstanding balance at November 30, 2002 and
the unused portion available is approximately $336,000. Lancer
is in compliance with its debt covenants at November 30, 2002.
The line of credit is collateralized by substantially all the
assets of Lancer, including inventories, receivables, and
equipment. The lending agreement for the line of credit requires,
among other things, that Lancer maintain a tangible net worth of
$2,100,000 and that receivables payments be sent to a controlled
lockbox. In addition to interest, a management fee of 0.25% of
the average monthly outstanding loan balance and an unused
balance fee of .0425% on the average monthly unused portion
available are required. Lancer is not required to maintain
compensating balances in connection with this lending agreement.
(G) Commitments and Contingencies
In May 1990, Lancer entered into a manufacturing subcontractor
agreement whereby the subcontractor agreed to provide
manufacturing services to Lancer through its affiliated entities
located in Mexicali, B.C., Mexico. Effective April 1, 1996,
Lancer leased the Mexicali facility under a separate agreement.
Since October 2000, the manufacturing agreement was operated on
a month to month basis.
During fiscal 2002, the facility in Mexico was incorporated as
Lancer Orthodontics de Mexico, ("Lancer de Mexico"), a wholly-
owned and consolidated subsidiary of Lancer. This subsidiary
now administers services previously provided by an independent
manufacturing contractor. A new lease was negotiated in the
name of Lancer de Mexico, effective April 1, 2001, for the
16,000 square foot facility already in use for the Mexican
operations. Mexican utilities and vendor obligations were also
converted to the Lancer de Mexico name. This conversion
eliminated the expense of an administrative fee and is expected
to provide better control in meeting future obligations. The
conversion had no material effect on manufacturing operations.
The potential impact for the use of our own facility, in terms of
a corporate entity with legal standing in Mexico, is that over a
fiscal year Lancer would save approximately $100,000 in service
fees over a Mexican contracted corporate entity.
Should Lancer discontinue operations in Mexico, it is responsible
for accumulated employee seniority obligations as prescribed by
Mexican law. At November 30, 2002, this obligation was
approximately $241,000. Such obligation is contingent in nature
and accordingly has not been accrued in Lancer's financial
statements.
Leases - Lancer leases its corporate 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 $7,008 at November 30, 2002, and is
included in accrued liabilities in the accompanying balance sheet.
Total rental expense for this facility for the six months ended
November 30, 2002 was approximately $35,000.
Lancer 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 six months ended November 30, 2002 was
approximately $35,000.
At May 31, 2002, future aggregate minimum lease payments are as
follows:
Years ending May 31,
2003 $144,545
2004 114,659
2005 70,440
2006 58,700
Total $388,344
Common Stock - Lancer's stock is traded on the OTC Bulletin Board.
(H) Income Taxes
At May 31, 2002, Lancer had net tax operating loss carryforwards
of approximately $2,037,000 and business tax credits of
approximately $80,000 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, 2002, Lancer had net tax operating loss
carryforwards of approximately $185,000 and business tax credits
of approximately $24,000 available to offset future state income
tax liabilities. The state carryforwards expire through the year
2011.
(I) Stockholders' Equity
Lancer 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. Lancer's shareholders have authorized a
total of 357,143 shares to be available for grant under Lancer'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 six months ended November 30, 2002, 60,000 shares of
common stock valued at $21,000 were issued to Lancer's Chief
Executive Officer for certain management services. The Board of
Directors authorized this stock issuance as partial compensation
to Mr. Irani for services as CEO and Chairman of the Board for
the calendar year 2002. General and administrative expense of
$10,500 was recognized for the six months ended November 30, 2002
and $1,750 is shown as prepaid expense in the stockholders equity
section of the balance sheet. General and administrative expense
of $8,750 was recognized for the fiscal year ended May 31, 2002.
Lancer granted non-qualified options to the Chief Executive
Officer to purchase 113,000 shares of Common Stock at $.30.
These options were granted on December 1, 2001 and are exercisable
at the rate of one-third per year and have a term of five years.
Lancer granted incentive stock options to employees to purchase
30,000 shares of Common Stock at $.28 on September 2, 2002.
These options are exercisable at the rate of one-fourth per
year, starting immediately, for a term of five years.
Lancer granted incentive stock options to an employee to purchase
40,000 shares of Common Stock at $.28 on September 2, 2002.
These options are exercisable at the rate of one-third per year,
beginning April 2, 2003, for a term of five years.
(J) Net Loss per Common Share and Dividends
Lancer 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
11/30/02 11/30/01 11/30/02 11/30/01
Basic Income (Loss) per Share:
Net income (loss) $ 28,863 $ 72,169 $ 25,932 $( 56,168)
Net income (loss) applicable to
common shareholders $ 28,863 $ 72,169 $ 25,932 $( 56,168)
Weighted average number of
common shares 2,196,233 2,098,624 2,196,233 2,098,624
Basic income (loss)
per share $ .01 $ .03 $ .01 $( .03)
Diluted Income (Loss) per Share:
Net income (loss) from
primary income per
common share $ 28,863 $ 72,169 $ 25,932 $( 56,168)
Net income (loss) for
Diluted earnings per
Share $ 28,863 $ 72,169 $ 25,932 $( 56,168)
Weighted average number of
Shares used in
calculation of diluted
earnings per share 2,196,233 2,098,624 2,196,233 2,098,624
Diluted income (loss)
per share $ .01 $ .03 $ .01 $( .03)
(K) Financial Information About Foreign and Domestic Operations
and Export Sales
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
11/30/02 11/30/01 11/30/02 11/30/01
Sales to unaffiliated customers:
United States $ 812,304 $ 733,580 $1,566,901 $1,475,851
Europe 507,954 553,642 796,389 993,521
Central and South
America 20,936 114,315 80,176 206,204
Other Foreign 163,710 227,796 346,937 388,545
$1,504,904 $1,629,333 $2,790,403 $3,064,121
No other geographic concentrations exist where net sales exceed
10% of total net sales.
Sales or transfers between geographic areas none none
(L) Insurance Claim Receivable
Lancer's management of the Company completed an assessment of two
occurrences of theft of inventory located at its wholly-owned and
consolidated subsidiary, Lancer de Mexico, in January and April of
2002. The carrying value of the inventory stolen approximated
$81,758, valued at standard cost, which was reflected in the May
31, 2002 financial statements as a reduction in inventories and an
addition to insurance claim receivable. During the six months
ended November 30, 2002, Lancer received $144,413 from the
insurance carrier; the estimated value of the stolen inventory at
net average selling price, less commissions and royalties. Lancer
recorded other income of $62,655 from the proceeds received in
excess of standard cost. In order to deter future thefts, a new
security company has been hired and a new security system installed.
(M) Recent Accounting Pronouncements
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. Lancer does not
expect SFAS 141 will have a material impact on Lancer'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 adoption of SFAS 142 did not have a material
impact on Lancer's financial position or results of operations.
In August 2001, the FASB issued FAS No. 143, "Accounting for
Asset Retirement Obligations." This statement addresses
financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to all entities
and legal obligations associated with the retirement of long-
lived assets that result from the acquisition, construction,
development and/or normal operation of long-lived assets, except
for certain obligations of lessees. This statement amends FAS No.
19, "Financial Accounting and Reporting by Oil and Gas Producing
Company," and is effective for financial statements issued for
fiscal years beginning after June 15, 2002. Management has not
yet determined the impact of the adoption of FAS No. 143 on
Lancer's financial position or results of operations.
In October 2001, the FASB issued FASB Statement No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets,"
or SFAS 144. SFAS No. 144 requires that those long-lived assets
be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in
discontinued operations. Therefore, discontinued operations
will no longer be measured at net realizable value or include
amounts for operating losses that have not yet occurred. SFAS
No. 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001 and, generally, is to be
applied prospectively. The adoption of SFAS 144 did not have a
material impact on Lancer's financial position or results of
operations.
In April 2002, the Financial Accounting Standards Board ("FASB")
issued FASB Statement No. 145, "Rescission of FASB Statements
No. 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," to update, clarify and simplify existing accounting
pronouncements. FASB Statement No. 4, which required all gains
and losses from debt extinguishment to be aggregated and, if
material, classified as an extraordinary item, net of related tax
effect, was rescinded. Consequently, FASB Statement No. 64,
which amended FASB Statement No. 4, was rescinded because it was
no longer necessary. The adoption of SFAS 145 did not have a
material impact on Lancer's financial position or results of
operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 addresses
accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force
Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)."
SFAS No. 146 requires that a liability for a cost associated with
a exit or disposal activity be recognized and measured initially
at fair value when the liability is incurred. SFAS No. 146 is
effective for exit or disposal activities that are initiated
after December 31, 2002, with early application encouraged. We
do not expect the adoption of this statement to have a material
effect on our financial statements.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for forward-looking statements. Certain information
contained herein (as well as information included in oral
statements or other written statements made or to be made by
Lancer Orthodontics) contains statements that are forward-looking,
such as statements relating to anticipated future revenues of
Lancer and success or current product offerings. Such forward-
looking information involves important risks and uncertainties
that could significantly affect anticipated results in the future,
and accordingly, such results may differ materially from those
expressed in any forward-looking statements made by or on behalf
of Lancer Orthodontics. The potential risks and uncertainties
include, among others, fluctuations in the company's operating
results. These risks and uncertainties also include the success
of Lancer in raising needed capital, the continual demand for
Lancer's products, competitive and economic factors of the
marketplace, availability of raw materials, health care
regulations and the state of the economy. Readers are cautioned
not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof, and Lancer undertakes no
obligation to update these forward-looking statements.
RESULTS OF OPERATIONS
For the six months ended November 30, 2002, net income increased
from a net loss of $56,168 at November 30, 2001 to net income of
$25,932 at November 30. 2002. For the three months ended
November 30, 2002, net income decreased from net income of $72,169
at November 30, 2001 to a net income of $28,863 at November 30,
2002. The six month increase is primarily due to other income
from insurance proceeds. The three month decrease is primarily
due to a decrease in sales.
For the six months ended November 30, 2002, net sales decreased
$273,718 (8.9%) as compared to the six months ended November 30,
2001. For the three months ended November 30, 2002, net sales
decreased $124,429 (7.6%) as compared the three months ended
November 30, 2001. International net sales decreased $364,768
(23.0%) and $203,153 (22.7%), respectively, for the six months
and three months ended November 30, 2002, as compared to the six
months and three months ended November 30, 2001. The decrease
in sales was primarily in Europe and South America.
International sales can be affected by fluctuations in the
exchange rate of the host country to the U.S. dollar and by other
economic conditions. Domestic net sales increased $91,050 (6.2%)
and $78,724 (10.7%) respectively, for the six months and three
months ended November 30, 2002, as compared to the six months and
three months ended November 30, 2001.
For the six months ended November 30, 2002, cost of sales as a
percentage of sales (70.9%), increased 2.5% as compared to the
six months ended November 30, 2001, which totaled 68.4%. For
the three months ended November 30, 2002, cost of sales as a
percentage of sales (70.1%), increased 7.6% as compared the three
months ended November 30, 2001, which totaled 62.5%. The
increase is primarily attributable to increased production costs.
For the six months and three months ended November 30, 2002,
selling and marketing expenses decreased $197,652 (25.4%) and
$102,306 (25.6%), respectively, as compared to the same periods
ended November 30, 2001. The decrease is primarily due to labor
and travel costs of terminated marketing support personnel,
whose responsibilities were assumed by existing general and
administrative personnel.
For the six months ended November 30, 2002, general and
administrative expenses increased $2,568 (1.2%) as compared to
the six months ended November 30, 2001. The increase is
primarily due to an increase in insurance costs. For the
three months ended November 30, 2002, general and administrative
expenses decreased $1,877 (1.7%) as compared to the three months
ended November 30, 2002. The decrease is primarily attributable
to a decrease in professional services expense.
For the six months and three months ended November 30, 2002,
product development expense increased $31,182 (100.0%) and
$15,996 (100.0%), respectively, as compared to the same periods
ended November 30, 2001. The increase is attributable to the
resumption of product development.
For the six months and three months ended November 30, 2002,
interest expense decreased $3,953 (52.4%) and $4,303 (99.6%),
respectively, as compared to the same periods ended November 30,
2001. The decrease is attributable to the pay down of the line
of credit with insurance claim proceeds.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
Lancer's financial condition at November 30, 2002 (unaudited) and
its previous two fiscal year ends was as follows:
11/30/02 05/31/02 05/31/01
Current Assets $3,373,460 $3,474,312 $3,476,962
Current Liabilities 484,112 634,021 779,462
Working Capital 2,889,348 2,840,291 2,697,500
Line of Credit 0 65,669 140,000
Shareholder Equity 3,048,411 3,011,979 2,957,174
Total Assets 3,532,523 3,646,000 3,736,636
Cash increased $305,727 during the six months ended November 30,
2002.
Working capital increased $49,057 during the six months ended
November 30, 2002, primarily attributable to an increase in cash.
Lancer's management believes that it will be able to finance
Lancer's operations through cash flow and available borrowings
through the current fiscal year and ensuing fiscal years. This
assumption is based upon a reasonable level of demand for our
products.
At November 30, 2002, Lancer has a $400,000 line of credit with
GE Capital Healthcare Financial Services through October 24, 2003.
Borrowings are made at prime plus 2.0%, however not less than
8.0%, (8.0% at November 30, 2002) and are limited to 80% of
accounts receivable less than 90 days old with a liquidity factor
of 94%. There is no outstanding balance at November 30, 2002
and the unused portion available is approximately $336,000.
Lancer was in compliance with its debt covenants at November 30,
2002.
For the six months ended November 30, 2002, other income of
$62,655 was realized from the insurance claim settlement of
$144,413 for the theft of inventory at Lancer's Mexicali facility,
less $81,758 insurance claim receivable valued at cost.
The line of credit is collateralized by substantially all the
assets of Lancer, including inventories, receivables, and
equipment. The lending agreement for the line of credit requires,
among other things, that Lancer maintain a tangible net worth of
$2,100,000 and that receivables payments be sent to a controlled
lockbox. In addition to interest, a management fee of 0.25% of
the average monthly outstanding loan balance and an unused
balance fee of .0425% on the average monthly unused portion
available are required. Lancer is not required to maintain
compensating balances in connection with this lending agreement.
Factors that May Affect Future Results
You should read the following factors in conjunction with the
factors discussed elsewhere in this and our other filing with
the SEC and in materials incorporated by reference in these
filing. The following is intended to highlight certain factors
that may affect the financial condition and results of operations
of Lancer and are not meant to be an exhaustive discussion of
risks that apply to companies such as Lancer. Like other
businesses, Lancer is susceptible to macroeconomic downturns in
the United States or abroad, as were experienced in fiscal year
2002, that may affect the general economic climate and
performance of Lancer or its customers. Aside from general
macroeconomic downturns, the additional material factors that
could affect future financial results include, but are not
limited to: Terrorist attacks and the impact of such events;
diminished access to raw materials that directly enter into our
manufacturing process; shipping labor disruption or other major
degradation of the ability to ship our products to end users;
inability to successful control our margins which are affected
by many factors including competition and product mix; protracted
shutdown of the US border due to an escalation of terrorist or
counter terrorist activity; the operating and financial covenants
contained in our credit line which could limit our operating
flexibility, any changes in our business relationships with
international distributors or the economic client they operate
in; any event that has a material adverse impact on our foreign
manufacturing operations may adversely affect our operations as a
whole, failure to manage the future expansion of our business
could have a material adverse affect on our revenues and
profitability; possible costs in complying with government
regulations and the delays in receiving required regulatory
approvals or the enactment of new adverse regulations or
regulatory requirements; numerous competitors, some of which
have substantially greater financial and other resources than
we do; potential claims and litigation brought by patients or
dental professionals alleging harm caused by the use of or
exposure to our products; quarterly variations in operating
results caused by a number of factors, including business and
industry conditions and other factors beyond our control. All
these factors make it difficult to predict operating results for
any particular period.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
A discussion of Lancer's exposure to, and management of, market
risk appears in Item 2 of this Form 10-Q under the heading
"Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Item 4. PROCEDURES AND CONTROLS
Within the 90 days prior to the date of this report, Lancer
carried out an evaluation, under the supervision and with the
participation of Lancer's management, including the Company's
Chief Executive Officer and Director of Financial Planning, of
the effectiveness of the design and operation of Lancer's
disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14. Based upon that evaluation, the Chief Executive
Officer and Director of Financial Planning concluded that
Lancer's disclosure controls and procedures are effective.
There were no significant changes in Lancer's internal controls
or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
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
a. The Annual Meeting of Lancer's shareholders was originally
scheduled to be held on November 20, 2002. Lancer's officers
adjourned the meeting prior to any matter being submitted to a
vote of the shareholders. Lancer intends to reschedule the
meeting.
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 January 17, 2003 By /s/ Zackary Irani
Zackary Irani,
Chief Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report on Form 10-QSB of Lancer
Orthodontics, Inc. for the period ended November 30, 2002 (the
Report) as filed with the Securities and Exchange Commission
on the date hereof, I, Zackary Irani, Chief Executive Officer of
the Company, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ Zackary Irani
Zackary Irani
Chief Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report on Form 10-QSB of Lancer
Orthodontics, Inc. for the period ended November 30, 2002 (the
Report) as filed with the Securities and Exchange Commission on
the date hereof, I, John Dodge, Director of Financial Planning,
of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results
of operations of the Company.
/s/ John Dodge
John Dodge
Director of Financial Planning
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 by Principal Executive Officer and Principal Financial
Officer Regarding Facts and Circumstances Relating to Exchange
Act Filings
I, Zackary Irani, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
Lancer Orthodontics, Inc;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the period presented in this
quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and;
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: January 17, 2003
/s/Zackary Irani
Chief Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 by Principal Executive Officer and Principal Financial
Officer Regarding Facts and Circumstances Relating to Exchange
Act Filings
I, John Dodge, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
Lancer Orthodontics, Inc;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the period presented in this
quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and;
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: January 17, 2003
/s/John Dodge
Director of Financial Planning