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 & Administrative 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.
LANCER ORTHODONTICS, INC.
Notes to Financial Statements - continued
(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
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 of $62,655. 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.
The exchange rate decline of certain South American currencies
contributed to approximately an $18,000 decrease in 2nd quarter
international sales. 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 ended November 30, 2002, $10,850 represents the
period expense resulting from 60,000 shares of common stock issued to
the Chief Executive Officer for partial compensation of services,
amortized over calendar year 2002.
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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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
The following stock was issued during the quarter ended November 30, 2002.
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 30, 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: April 30, 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 30, 2003
/s/John Dodge
Director of Financial Planning