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 February 28, 2003 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)
02/28/03
ASSETS
CURRENT ASSETS:
Cash $ 568,461
Accounts receivable, less allowances for sales
returns and doubtful receivables of $179,447 1,127,553
Inventories, net of reserve of $233,608 1,646,406
Prepaid expenses 38,080
Total current assets 3,380,500
PROPERTY AND EQUIPMENT, at cost 2,485,088
Less: Accumulated depreciation (2,379,990)
105,098
INTANGIBLE ASSETS:
Marketing and distribution rights, net 41,500
OTHER ASSETS 39,197
Total assets $3,566,295
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 276,191
Accrued payroll and related benefits 103,324
Other current liabilities 102,762
Line of credit 478
Total current liabilities 482,755
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
Common Stock subscribed 14,000
Accumulated deficit (1,774,805)
Total stockholders' equity 3,083,540
Total liabilities and stockholders' equity $3,566,295
LANCER ORTHODONTICS, INC.
CONDENSED STATEMENTS OF OPERATIONS AND
CONDENSED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
02/28/03 02/28/02 02/28/03 02/28/02
NET SALES $1,507,626 $1,440,732 $4,298,029 $4,504,852
COST OF SALES 1,084,096 968,326 3,062,278 3,063,709
Gross Profit 423,530 472,406 1,235,751 1,441,143
OPERATING EXPENSES:
Sales & Marketing 251,182 307,149 831,412 1,085,031
General & Admin 115,875 98,555 337,063 317,176
Product Development 34,842 0 66,024 0
TOTAL OPERATING EXPENSES 401,899 405,704 1,234,499 1,402,207
INCOME FROM OPERATIONS 21,631 66,702 1,252 38,936
OTHER INCOME (EXPENSE):
Interest Expense ( 37) ( 5,373) ( 3,625) ( 12,914)
Other Inc (Exp), net ( 991) ( 10,957) 49,102 ( 31,018)
TOTAL OTHER INC (EXP) ( 1,028) ( 16,330) 45,477 ( 43,932)
INCOME (LOSS) BEFORE
INC TAXES 20,603 50,372 46,729 ( 4,996)
INCOME TAXES 1,224 -- 1,418 800
NET INCOME (LOSS) 19,379 50,372 45,311 ( 5,796)
OTHER COMPREHENSIVE INCOME -- -- -- --
COMPREHENSIVE INC (LOSS) $19,379 $50,372 $45,311 $( 5,796)
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 $ .02 $ .02 $ .00
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 $ .02 $ .02 $ .03
LANCER ORTHODONTICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED
02/28/03 02/28/02
Cash flows from operating activities:
Net income (loss) $ 45,311 $( 5,796)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 64,210 80,568
Provision for losses on inventory 45,000 21,361
Common stock issued for services 26,250 --
Net change in operating assets and liabilities:
Accounts receivable (5,618) 92,947
Inventories 396,353 (61,951)
Prepaid expenses 16,195 (15,411)
Insurance claim receivable 81,758 --
Accounts payable (143,162) (142,939)
Accrued payroll 8,331 (5,546)
Other current liabilities 48,756 68,980
Net cash provided by operating activities 583,384 32,213
Cash flows from investing activities:
Additions to property and equipment (74,666) --
Other assets ( 3,651) (20,764)
Net cash used in investing activities (78,317) (20,764)
Cash flows from financing activities:
Decrease in line of credit (65,191) (22,815)
Cash flows used in financing activities (65,191) (22,815)
Net change in cash 439,876 (11,366)
Cash, beginning of period 128,585 131,550
Cash, end of period $568,461 $120,184
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 3,625 $ 12,914
Taxes $ 1,418 $ 800
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")and its wholly-owned subsidiary Lancer Orthodontics
de Mexico. 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 liabil-
ities 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 February 28, 2003, construction in progress of $79,144 is
included in net property and equipment of $105,098. 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 February 28, 2003, 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 February 28, 2003) and are limited to 80% of
accounts receivable less than 90 days old with a liquidity
factor of 94%. The outstanding balance at February 28, 2003, is
$478 and the unused portion available is approximately $310,000.
Lancer is in compliance with its debt covenants at February 28,
2003.
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 Orthodontics 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 Orthodontics 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 Orthodontics 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 February 28, 2003, this obligation was
approximately $239,000. 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 $5,337 at February 28, 2003, and is
included in accrued liabilities in the accompanying balance sheet.
Total rental expense for this facility for the nine months ended
February 28, 2003, was approximately $52,000.
Effective December 1, 2002, Lancer Orthodontics de Mexico entered into a non-
cancelable operating lease for its Mexico facility through
March 31, 2009. The new lease encompasses the approximately
16,000 square feet of the previous lease, plus additional square
footage of approximately 10,000 feet, for a total of approximately
26,000 square feet. Lancer Orthodontics de Mexico will provide sub-
contracted manufacturing services to Biomerica, Inc., using a
portion of the additional square footage. The new lease requires
four monthly lease payments of approximately $5,300 through March
2003, and seventy-two monthly payments of approximately $9,600
through March 2009. An agreement is being negotiated between
Lancer Orthodontics de Mexico and Biomerica regarding the amount of additional
rent that will be reimbursed by Biomerica. The remainder of the
space will be used by Lancer Orthodontics de Mexico, and therefore, the non-
reimbursed expense will be absorbed by Lancer Orthodontics, Inc.
Total rental expense for this facility for the nine months ended
February 28, 2003, was approximately $53,000.
The new Lancer Orthodontics de Mexico lease also requires an additional
refundable security deposit of $26,550, payable over twelve
months beginning January 2003. Lancer Orthodontics, Inc. is
paying half and Biomerica, Inc. the other half. At February 28,
2003, other assets on the balance sheet includes approximately
$35,000 for security deposit paid on the Mexico location.
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 carry-
forwards 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 nine months ended February 28, 2003, 60,000 shares of
common stock valued at $21,000 were issued to Lancer's Chief
Executive Officer. In December 2002, 53,846 shares of Common
Stock valued at $14,000 were authorized to be issued to Lancer's
CEO. The Board of Directors authorized this stock issuance as
partial compensation to Mr. Irani for services as CEO and
Chairman of the Board. General and administrative expense of
$26,250 was recognized for the nine months ended February 28,
2003, and $8,750 was recognized for the fiscal year ended
May 31, 2002. The $14,000 of Common Stock to be issued is
reflected as Common Stock subscribed on the accompanying balance
sheet at February 28, 2003.
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.
Lancer granted incentive stock options to employees to purchase
70,000 shares of Common Stock at $.26 on December 2, 2002.
These options are exercisable at the rate of one-fourth per
year, starting immediately, 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 NINE
MONTHS ENDED MONTHS ENDED
02/28/03 02/28/02 02/28/03 02/28/02
Basic Income (Loss) per Share:
Net income (loss) $19,379 $50,372 $45,311 $( 5,796)
Net income (loss)
applicable to
common shareholders $19,379 $50,372 $45,311 $( 5,796)
Weighted average number
Of common shares 2,196,233 2,098,624 2,196,233 2,098,624
Basic income per share $ .01 $ .02 $ .02 $ .00
Diluted Income (Loss) per Share:
Net income (loss)
from primary income
per common share $ 19,379 $ 50,372 $ 45,311 $( 5,796)
Net income (loss)
for diluted earnings
per share $ 19,379 $ 50,372 $ 45,311 $( 5,796)
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 per share $ .01 $ .02 $ .02 $ .00
(K) Financial Information About Foreign and Domestic Operations
and Export Sales
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
02/28/03 02/28/02 02/28/03 02/28/02
Sales to unaffiliated customers:
United States $756,081 $796,747 $2,322,982 $2,272,598
Europe 480,378 383,423 1,276,767 1,376,944
Central and
South America 82,727 81,208 162,903 287,412
Other Foreign 188,440 179,354 535,377 567,898
$1,507,626 $1,440,732 $4,298,029 $4,504,852
No other geographic concentrations exist where net sales
exceed 10% of total net sales.
Sales or transfers between geographic areas none none
2/28/03 02/28/02
Long-lived Assets:
United States $89,431 $24,056
Mexico 15,668 28,946
$105,099 $53,002
(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 Orthodontics 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 nine
months ended February 28, 2003, 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) Related Party Transactions
Lancer's wholly owned subsidiary, Lancer Orthodontics de Mexico,
is negotiating with Biomerica, Inc. to provide sub-contractor
services at its manufacturing plant in Mexicali, Mexico.
Biomerica has paid Lancer Orthodontics de Mexico $6,041 for a
lease security deposit (see Note G) and reimbursement of other
startup costs. Lancer Orthodontics, Inc. paid labor costs of
approximately $2,600 to Lancer Orthodontics de Mexico on behalf
of Biomerica, Inc. The Lancer balance sheet at February 28, 2003
reflects this amount in Accounts Receivable (net).
(N) Recent Accounting Pronouncements
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. We do not expect the
adoption of this statement to have a material effect on our
financial statements.
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 ith 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.
In December 2002, the FASB issued SFAS No. 148 "Accounting for
Stock-Based Compensation, Transition and Disclosure, an amendment
of FASB Statement No. 123." SFAS No. 148 provides alternative
methods of transition for an entity that voluntarily changes to
the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions
of SFAS No. 123 to require prominent disclosure about the effects
on reported net income of an entity's accounting policy decisions
with respect to stock-based employee compensation. Finally, this
Statement amends APB Opinion No. 28, "Interim Financial
Reporting," to require disclosure about those effects in the
interim financial information. The amendments to SFAS No. 123
that provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting
for stock-based employee compensation are effective for financial
statements for fiscal years ending after December 15, 2002.
The amendment to SFAS No. 123 relating to disclosure and the
amendment to Opinion 28 is effective for financial reports
containing condensed financial statements for interim periods
beginning after December 15, 2002. Early application is
encouraged. Management currently believes that the adoption of
SFAS No. 148 will not have a material impact on the financial
statements.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the nine months ended February 28, 2003, net income increased
from a net loss of $5,796 at February 28, 2002 to net income of
$45,311 at February 28, 2003. For the three months ended
February 28, 2003, net income decreased from net income of
$50,372 at February 28, 2002 to a net income of $19,379 at
February 28, 2003. The nine month increase is primarily due to
other income from insurance proceeds of $62,655. The three month
decrease is primarily due to increases in cost of sales and
product development.
For the nine months ended February 28, 2003, net sales decreased
$206,823 (4.6%) as compared to the nine months ended February 28,
2002. For the three months ended February 28, 2003, net sales
increased $66,894 (4.6%) as compared to the three months ended
February 28, 2002. International net sales decreased $257,207
(11.5%) and increased $107,560 (16.7%), respectively, for the
nine months and three months ended February 28, 2003, as compared
to the nine months and three months ended February 28, 2002.
The nine month decrease in sales was primarily in Europe and
South America. The three month increase was primarily in Europe.
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, although not in the current quarter.
Domestic net sales increased $50,384 (2.2%) and decreased $40,666
(5.1%), respectively, for the nine months and three months ended
February 28, 2003, as compared to the nine months and three
months ended February 28, 2002.
For the nine months ended February 28, 2003, cost of sales as a
percentage of sales (71.2%), increased 3.2% as compared to the
nine months ended February 28, 2002, which totaled 68.0%. For
the three months ended February 28, 2003, cost of sales as a
percentage of sales (71.9%), increased 4.7% as compared the
three months ended February 28, 2002, which totaled 67.2%.
The increase is primarily attributable to increased production
costs.
For the nine months and three months ended February 28, 2003,
selling and marketing expenses decreased $253,619 (23.4%) and
$55,967 (18.2%), respectively, as compared to the same periods
ended February 28, 2002. 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 nine months ended February 28, 2003, general and
administrative expenses increased $19,887 (6.3%) as compared to
the nine months ended February 28, 2002. The increase is
primarily due to an increase in insurance costs and $26,250 of
expense resulting from shares of common stock issued to the Chief
Executive Officer for partial compensation of services (Note G),
offset by a decrease in professional fees. For the three months
ended February 28, 2003, general and administrative expenses
increased $17,320 (17.6%) as compared to the three months ended
February 28, 2002. The increase is primarily attributable to a
2002 reclassification of contract labor costs from G & A to
occupancy costs, which was then distributed to all San Marcos
departments, and compensation to the CEO.
For the nine months and three months ended February 28, 2003,
product development expense increased $66,024 (100.0%) and
$34,842 (100.0%), respectively, as compared to the same periods
ended February 28, 2002. The increase is attributable to the
resumption of product development.
For the nine months and three months ended February 28, 2003,
interest expense decreased $9,289 (71.9%) and $5,336 (99.3%),
respectively, as compared to the same periods ended February
28, 2002. The decrease is attributable to the pay down of the
line of credit with insurance claim proceeds.
For the nine months ended February 28, 2003, 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 of inventory related thereto.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
Lancer's financial condition at February 28, 2003 (unaudited)
and its previous two fiscal year ends was as follows:
02/28/03 05/31/02 05/31/01
Current Assets $3,380,500 $3,474,312 $3,476,962
Current Liabilities 482,755 634,021 779,462
Working Capital 2,897,745 2,840,291 2,697,500
Line of Credit 478 65,669 140,000
Shareholder Equity 3,083,540 3,011,979 2,957,174
Total Assets 3,566,295 3,646,000 3,736,636
Cash increased $439,876 during the nine months ended
February 28, 2003.
Working capital increased $57,454 during the nine months ended
February 28, 2003, 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 February 28, 2003, 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 February 28, 2003) and are limited to 80% of
accounts receivable less than 90 days old with a liquidity factor
of 94%. There is an outstanding balance of $478 at February
28, 2003 and the unused portion available is approximately
$310,000. Lancer was in compliance with its debt covenants at
February 28, 2003.
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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
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 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
The following stock was issued during the nine months ended
February 28, 2003:
Date Title Shares Amount Class
9-25-02 Restricted Common 37,595 $ 8,271 Insider &
Qualified Investor
9-25-02 Restricted Common 60,000 $21,000 Insider &
Qualified Investor
The exemption relied upon for the issuance of the unregistered
shares was that the shares were issued to qualified investors
within the meaning of Securities and Exchange Commission Rule
501, Regulation D.
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 April 14, 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 February 28, 2003 (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 February 28, 2003 (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: April 14, 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: April 14, 2003
/s/John Dodge
Director of Financial Planning