10QSB/A 1 q1130small.txt 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, 2001 Commission File No. 0-5920 LANCER ORTHODONTICS, INC. (Exact Name of Small Business Issuer as Specified in its Charter) CALIFORNIA 95-2497155 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 253 Pawnee Street, San Marcos, California 92069 (Address of Principal Executive Offices) Issuer's telephone number, including area code: (760) 744-5585 Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports, and (2) has been subject to such filing requirements for the past 90 days. Yes X No State the number of shares outstanding of each of the issuer's classes of common equity, as of January 15, 2002: 2,098,624 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) 11/30/01 ASSETS CURRENT ASSETS: Cash $ 91,931 Accounts receivable, less allowances for sales returns and doubtful receivables of $174,639 1,149,221 Inventories, net of reserve of $257,201 2,217,639 Prepaid expenses 36,882 Total current assets 3,495,673 PROPERTY AND EQUIPMENT, at cost 2,413,035 Less: Accumulated depreciation (2,351,576) 61,459 INTANGIBLE ASSETS: Marketing and distribution rights, net 72,625 Technology use rights, net 52,729 125,354 OTHER ASSETS 34,722 Total assets $3,717,208 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 418,202 Accrued payroll and related benefits 134,249 Other current liabilities 90,906 Line of credit 172,845 Total current liabilities 816,202 Mandatorily redeemable convertible preferred stock Series C, $.06 noncumulative annual dividend, $.75 par value, 250,000 shares authorized; 0 shares issued and outstanding ($.75 liquidation preference) -- COMMITMENTS AND CONTINGENCIES -- STOCKHOLDERS' EQUITY: Redeemable convertible preferred stock, Series D, $.04 noncumulative annual dividend; $.50 par value: Authorized 500,000 shares; 0 shares issued and outstanding ($.50 liquidation preference per share) -- Common stock, no par value: authorized 50,000,000 shares; issued and outstanding 2,098,620 4,815,074 Accumulated deficit (1,914,068) Total stockholders' equity 2,901,006 Total liabilities and stockholders' equity $3,717,208 LANCER ORTHODONTICS, INC. CONDENSED STATEMENTS OF OPERATIONS AND CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(UNAUDITED) FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED 11/30/01 11/30/00 11/30/01 11/30/00 NET SALES $1,629,333 $1,385,436 $3,064,121 $2,716,534 COST OF SALES 1,017,986 903,332 2,095,384 1,828,913 Gross Profit 611,347 482,104 968,737 887,621 OPERATING EXPENSES: Selling, General & Admin 513,238 512,475 996,503 979,800 Product Development 0 33,484 0 69,724 TOTAL OPERATING EXPENSES 513,238 545,959 996,503 1,049,524 INCOME (LOSS) FROM OPERATIONS 98,109 ( 63,855) ( 27,766) (161,903) OTHER (EXPENSE) INCOME: Interest Expense ( 4,319) ( 4,653) ( 7,541) ( 9,860) Other (Expense) Income, net ( 20,821) 482 ( 20,061) 956 TOTAL OTHER (EXPENSE) INCOME ( 25,140) ( 4,171) ( 27,602) ( 8,904) INCOME (LOSS) BEFORE INC TAXES 72,969 ( 68,026) ( 55,368) (170,807) INCOME TAXES 800 800 800 800 NET INCOME (LOSS) 72,169 ( 68,826) ( 56,168) (171,607) OTHER COMPREHENSIVE INCOME -- -- -- -- COMPREHENSIVE INCOME (LOSS) $ 72,169 $( 68,826) $( 56,168) $(171,607) NET INCOME (LOSS) PER WEIGHTED AVERAGE OF COMMON SHARES Weighted average number of common shares 2,098,624 2,098,618 2,098,624 2,098,618 BASIC $ .03 $ (.03) $ (.03) $ (.08) Weighted average number of shares used in calculation of diluted earnings per share 2,098,624 2,098,618 2,098,624 2,098,618 DILUTED $ .03 $ (.03) $ (.03) $ (.08) LANCER ORTHODONTICS, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED 11/30/01 11/30/00 Cash flows from operating activities: Net loss $( 56,168) $(171,607) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 53,712 60,384 Provision for losses on accounts receivable ( 361) (16,829) Provision for losses on inventory 18,000 18,000 Net change in operating assets and liabilities: Accounts receivable 12,091 129,696 Inventories ( 95,796) (74,869) Prepaid expenses 7,736 14,989 Accounts payable ( 43,150) 1,022 Accrued payroll 16,524 24,602 Other current liabilities 30,521 39,436 Net cash provided by (used in) operating activities ( 56,891) 24,824 Cash flows from investing activities: Purchases of property and equipment -- ( 2,400) Other assets ( 15,573) -- Net cash used in investing activities ( 15,573) ( 2,400) Cash flows from financing activities: Increase in line of credit 32,845 60,000 Cash flows provided by financing activities 32,845 60,000 Net change in cash ( 39,619) 82,424 Cash, beginning of period 131,550 103,207 Cash, end of period $ 91,931 $185,631 Supplemental disclosure of cash flow information: Cash paid for: Interest $ 7,541 $ 9,860 LANCER ORTHODONTICS, INC. Notes to Financial Statements (A) Basis of Presentation The accompanying unaudited condensed financial statements have been prepared in accordance with the instructions to Form 10-QSB and therefore do not include all information and notes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. The unaudited condensed financial statements include the accounts of Lancer Orthodontics, Inc. (the "Company"). The operating results for interim periods are unaudited and are not necessarily an indication of the results to be expected for the full fiscal year. In the opinion of management, the results of operations as reported for the interim periods reflect all adjustments which are necessary for a fair presentation of operating results. (B) Organization The Company was incorporated on August 25, 1967, in the state of California, for the purpose of engaging in the design, manufacture, and distribution of orthodontic products. The Company has a manufacturing facility in Mexico where a majority of its inventory is manufactured (Note F). The Company also purchases certain orthodontic and dental products for purposes of resale. Sales are made directly to orthodontists world-wide through Company representatives and independent distributors. The Company also sells certain of its products on a private label basis. (C) Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP"), requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by the Company's management include, but are not limited to, allowances for doubtful accounts, allowances for sales returns, the valuation of inventories, and the realizeability of property and equipment through future operations. Actual results could materially differ from those estimates. (D) Stock Based Compensation The Company accounts for stock based compensation under Statement of Financial Accounting Standards No. 123 ("SFAS 123"). SFAS 123 defines a fair value based method of accounting for stock based compensation. However, SFAS 123 allows an entity to continue to measure compensation cost related to stock and stock options issued to employees using the intrinsic method of accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees". Entities electing to remain with the accounting method of APB 25 must make pro forma disclosures of net income and earnings per share, as if the fair value method of accounting defined in SFAS 123 had been applied. The Company has elected to account for its stock based compensation to employees under APB 25. (E) Line of Credit At November 30, 2001, the Company has a $400,000 revolving line of credit with a financial institution. Borrowings are made at prime plus 2.00% (7.0% at November 30, 2001) and are limited to specified percentages of eligible accounts receivable. The unused portion available under the line of credit at November 30, 2001 was $42,588. The line of credit expires October 24, 2003. The line of credit is collateralized by substantially all the assets of the Company, including inventories, receivables, and equipment. The lending agreement requires, among other things, that the Company maintain a tangible net worth of $2,100,000, which was met, and that receivables payments be sent to a controlled lockbox. In addition to interest, a management fee of ..25% of the average monthly outstanding loan balance and an unused balance fee of .0425% on the average monthly unused portion available are required. The Company is not required to maintain compensating balances in connection with this lending agreement. (F) Commitments and Contingencies Manufacturing Agreement - In May 1990, the Company entered into a manufacturing subcontractor agreement whereby the subcontractor agreed to provide manufacturing services to the Company through its affiliated entities located in Mexicali, B.C., Mexico. During fiscal 1992 and 1991, the Company moved the majority of its manufacturing operations to Mexico. In December 1992, the Company renegotiated the agreement changing from an hourly rate per employee to a pass through of actual costs plus a weekly administrative fee. The amended agreement gave the Company greater control over all costs associated with the manufacturing operation. In July 1994, the Company again renegotiated the agreement, reducing the administrative fee. Effective April 1, 1996, the Company leased the Mexicali facility under a separate arrangement. In November 1998, the Company extended the Manufacturing Agreement through October 2000. Should the Company discontinue operations in Mexico, it is responsible for the accumulated employee seniority obligation as prescribed by Mexican law. At November 30, 2001, this obligation was approximately $354,000. Such obligation is contingent in nature and accordingly has not been accrued in the accompanying balance sheet. The Company has converted Mexican assets and obligations to its own division, a Mexican corporation named Lancer Orthodontics de Mexico (Lancer de Mexico). This division will administer services previously provided by an independent manufacturing contractor. A new lease was negotiated effective April 1, 2001, for the 16,000 square foot facility used for Lancer's Mexican operations. Utility and Mexican vendor obligations have been converted to the Lancer de Mexico name. This conversion will eliminate the expense of an administrative fee and is expected to provide better control in meeting obligations. Leases - The Company leases its main facility under a non- cancelable operating lease expiring December 31, 2003, as extended, which requires monthly rentals that increase annually, from $2,900 per month in 1994 to $6,317 per month in 2004. The lease expense is being recognized on a straight-line basis over the term of the lease. The excess of the expense recognized over the cash paid aggregates $11,032 at November 30, 2001, and is included in accrued liabilities in the accompanying balance sheet. Total rental expense for this facility for the six months ended November 30, 2001 was approximately $35,000. The Company has entered into a non-cancelable operating lease for its Mexico facility which expires in March 2006 and requires average monthly rentals of approximately $6,000. Total expense for this facility for the six months ended November 30, 2001 was approximately $34,000. Future aggregate minimum lease payments are as follows: Years ending May 31, 2002 (6 months) $ 67,357 2003 136,397 2004 106,511 2005 62,292 2006 51,910 Total $424,467 Common Stock - The Company's stock is now traded on the OTC Bulletin Board. (G) Income Taxes At May 31, 2001, the Company had net tax operating loss carryforwards of approximately $2,049,000 and business tax credits of approximately $98,000 available to offset future Federal taxable income and tax liabilities, respectively. The Federal carryforwards expire in varying amounts through the year 2021. As of May 31, 2001, the Company had net tax operating loss carryforwards of approximately $205,000 and business tax credits of approximately $23,000 available to offset future state income tax liabilities. The state carryforwards expire through the year 2011. (H) Stockholders' Equity The Company has incentive stock option and non-qualified stock option plans for directors, officers, and key employees. The plans provide for the granting of options for common shares at exercise prices equal to or exceeding the fair market value at the date of grant, as determined by the Board of Directors. Options may become exercisable over a period of up to four years from the date of grant and may be exercised over a period of three to seven years from the date of the grant, as determined by the Board of Directors. The Company's shareholders have authorized a total of 450,000 shares to be available for grant under the Company's stock option plan. Options granted prior to May 31, 1995, generally vested on the date of grant and expired through August 1999. During the quarter ended November 30, 2001, no options were granted. (I) Net Income (Loss) per Common Share and Dividends The Company calculates earnings per share in accordance with Statement of Financial Accounting Standards ("SFAS 128"). SFAS 128 replaces the presentation of primary and fully diluted earnings per share with the presentation of basic and diluted earnings per share. Basic earnings per share excludes dilution and is calculated by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. For all periods presented, no common stock equivalents have been included in the computation of diluted earnings per share as they were determined to be anti-dilutive. EARNINGS PER SHARE (UNAUDITED) FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED 11/30/01 11/30/00 11/30/01 11/30/00 Basic Income (Loss) per Share: Net income (loss) $ 72,169 $( 68,826) $( 56,168) $(171,607) Net income (loss) applicable to common shareholders $ 72,169 $( 68,826) $( 56,168) $(171,607) Weighted average number of common shares 2,098,624 2,098,618 2,098,624 2,098,618 Basic income (loss) per share $ .03 $( .03) $( .03) $( .08) Diluted Income (Loss) per Share: Net income (loss) from primary income per common share $ 72,169 $( 68,826) $( 56,168) $(171,607) Net income (loss) for diluted earnings per share $ 72,169 $( 68,826) $( 56,168) $(171,607) Weighted average number of shares used in calculation of diluted earnings per share 2,098,624 2,098,618 2,098,624 2,098,618 Diluted income (loss) per Share $ .03 $( .03) $( .03) $( .08) (J) Financial Information About Foreign and Domestic Operations and Export Sales FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED 11/30/01 11/30/00 11/30/01 11/30/00 Sales to unaffiliated customers: United States $ 733,580 $ 702,283 $1,475,851 $1,386,874 Europe 553,642 469,625 993,521 864,442 Central and South America 114,315 59,904 206,204 166,338 Other Foreign 227,796 153,624 388,545 298,880 $1,629,333 $1,385,436 $3,064,121 $2,716,534 No other geographic concentrations exist where net sales exceed 10% of total net sales. Sales or transfers between geographic areas none none (K) Recent Accounting Pronouncements In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"). SAB 101 summarizes certain areas of the Staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company believes that its current revenue recognition policies comply with SAB 101. In March 2000, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions involving Stock Compensation." The adoption of this Interpretation did not have a material impact on the consolidated results of operations or financial position of the Company. In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations", which eliminates the pooling method of accounting for business combinations initiated after June 30, 2001. In addition, SFAS 141 addresses the accounting for intangible assets and goodwill acquired in a business combination. This portion of SFAS 141 is effective for business combinations completed after June 30, 2001. The Company does not expect SFAS 141 will have a material impact on the Company's financial position or results of operations. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Intangible Assets", which revises the accounting for purchased goodwill and intangible assets. Under SFAS 142, goodwill and intangible assets with indefinite lives will no longer be amortized and will be tested for impairment annually. SFAS 142 is effective for fiscal years beginning after December 15, 2001, with earlier adoption permitted. The Company does not expect SFAS 142 will have a material impact on the Company's financial position or results of operations. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for historical information contained herein, the statements in this Form 10-QSB are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward- looking statements involve known and unknown risks and uncertainties which may cause the Company's actual results in future periods to differ materially from forecasted results. These risks and uncertainties include, among other things, the continued demand for the Company's products, availability of raw materials and the state of the economy. These and other risks are described in the Company's Annual Report on Form 10-KSB and in the Company's other filings with the Securities and Exchange Commission. RESULTS OF OPERATIONS For the six months ended November 30, 2001, net loss decreased from a net loss of $171,607 at November 30, 2000, to a net loss of $56,168 at November 30, 2001. For the three months ended November 30, 2001, net loss decreased from a net loss of $68,826 at November 30, 2000, to a net income of $72,169 at November 30, 2001. The decrease in net loss is primarily attributable to the increase in sales. For the six months ended November 30, 2001, net sales increased $347,587 (12.8%) as compared to the year earlier period. For the three months ended November 30, 2001, net sales increased $243,897 (17.6%) as compared to the year earlier period. International net sales increased $258,610 (19.5%) and $212,600 (31.1%), respectively, for the six months and three months ended November 30, 2001, as compared to the year earlier period. The increase in sales was primarily in Europe. Domestic net sales increased $88,977 (6.4%) and $31,297 (4.5%), respectively, for the six months and three months ended November 30, 2001, as compared to the year earlier period. This increase is primarily due to an increase in sales in the Midwest and Southeast regions. For the six months ended November 30, 2001, cost of sales as a percentage of sales (68.4%), increased 1.1% compared to the year earlier period. For the three months ended November 30, 2001, cost of sales as a percentage of sales (62.5%), decreased 2.7% compared to the year earlier period. The six month increase is primarily attributable to increased discounting due to competition pressures. The three month decrease is due to a reduction in production costs. For the six months ended November 30, 2001, selling and general and administrative expenses increased $16,703 (1.7%) compared to the year earlier period. For the three months ended November 30, 2001, selling and general and administrative expenses increased $763 (0.2%) as compared to the year earlier period. The increase is primarily attributable to an increase in labor costs and commissions. For the six months ended November 30, 2001, product development expenses decreased $69,724 (100%) as compared to the year earlier period. For the three months ended November 30, 2001, product development expenses decreased $33,484 (100%) compared to the year earlier period. The decrease is primarily attributable to a reduction of product development. For the six months ended November 30, 2001, interest expense decreased $2,319 (23.5%) as compared to the year earlier period. For the three months ended November 30, 2001, interest expense decreased $334 (7.2%) as compared to the year earlier period. The decrease is primarily attributable a decrease in the average outstanding loan balance. FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES The Company's financial condition at November 30, 2001 and its previous two fiscal year ends was as follows: 11/30/01 05/31/01 05/31/00 Current Assets $3,495,673 $3,476,962 $3,395,922 Current Liabilities 816,202 779,462 681,367 Working Capital 2,679,471 2,697,500 2,714,555 Bank Debt 172,845 140,000 160,000 Shareholder Equity 2,901,006 2,957,174 3,074,033 Total Assets 3,717,208 3,736,636 3,755,400 Cash decreased $39,619 during the six months ended November 30, 2001. Working capital decreased $18,029 during the six months ended November 30, 2001, primarily attributable to an increase in the line of credit. The Company expects to meet all of its cash requirements out of its cash reserves, cash flow, and line of credit. At November 30, 2001, the Company has a $400,000 revolving line of credit with a financial institution. Borrowings are made at prime plus 2.00% (7.0% at November 30, 2001) and are limited to specified percentages of eligible accounts receivable. The unused portion available under the line of credit at November 30, 2001 was $42,588. The line of credit expires October 24, 2003. The line of credit is collateralized by substantially all the assets of the Company, including inventories, receivables, and equipment. The lending agreement requires, among other things, that the Company maintain a tangible net worth of $2,100,000, which was met, and that receivables payments be sent to a controlled lockbox. In addition to interest, a management fee of .25% of the average monthly outstanding loan balance and an unused balance fee of .0425% on the average monthly unused portion available are required. The Company is not required to maintain compensating balances in connection with this lending agreement. We may face interruption of production and services due to increased security measures in response to terrorism. Our business depends on the free flow of products and services through the channels of commerce. Recently, in response to terrorists' activities and threats aimed at the United States, transportation, mail, financial and other services have been slowed or stopped altogether. Further delays or stoppages in transportation, mail, financial or other services could have a material adverse effect on our business, results of operations and financial condition. Furthermore, we may experience an increase in operating costs, such as costs for transportation, insurance and security as a result of the activities and potential activities. We may also experience delays in receiving payments from payers that have been affected by the terrorist activities and potential activities. The U.S. economy in general is being adversely affected by the terrorist activities and potential activities and any economic downturn could adversely impact our results of operations, impair our ability to raise capital or otherwise adversely affect our ability to grow our business. PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS Not Applicable Item 2. CHANGES IN SECURITIES Not Applicable Item 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS a. The Annual Meeting of the Company's shareholders was originally scheduled on November 12, 2001. The Company adjourned the meeting prior to any matter being submitted to a vote of the shareholders. The Company 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 May 13, 2002 By /s/ Zackary Irani Zackary Irani, Chief Executive Officer