10QSB/A 1 qsb022801.txt AMENDED 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, 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 April 16, 2001: 2,098,619 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) 02/28/01 ASSETS CURRENT ASSETS: Cash $ 237,351 Accounts Receivable, less allowances for sales returns and doubtful receivables of $158,224 1,035,593 Inventories, net of reserve of $137,167 2,151,054 Prepaid Expenses 27,237 Total Current Assets 3,451,235 PROPERTY AND EQUIPMENT, at cost 2,406,129 Less: Accumulated depreciation (2,321,938) 84,191 INTANGIBLE ASSETS: Marketing and Distribution Rights, net 91,300 Technology Use Rights, net 89,251 180,551 OTHER ASSETS 13,522 Total Assets $3,729,499 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable and Accrued Liabilities $ 627,218 Line of Credit 180,000 Total Current Liabilities 807,218 COMMITMENTS AND CONTINGENCIES -- STOCKHOLDERS' EQUITY: Redeemable Convertible Preferred Stock, Series C, $.06 noncumulative annual dividend; $.75 par value: Authorized 250,000 shares; no shares issued and outstanding ($.75 liquidation preference) -- 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). -- Common Stock, no par value: Authorized 50,000,000 shares; issued and outstanding 2,098,619 4,815,074 Accumulated Deficit (1,892,793) Total Stockholders' Equity 2,922,281 Total Liabilities and Stockholders' Equity $3,729,499 LANCER ORTHODONTICS, INC. CONDENSED STATEMENTS OF OPERATIONS AND CONDENSED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED) FOR THE THREE FOR THE NINE MONTHS ENDED MONTHS ENDED 02/28/01 02/29/00 02/28/01 02/29/00 NET SALES $1,512,970 $1,372,209 $4,229,504 $4,031,123 COST OF SALES 932,147 967,936 2,761,060 2,733,605 Gross Profit 580,823 404,273 1,468,444 1,297,518 OPERATING EXPENSES: Selling, General & Administrative 546,247 525,224 1,526,047 1,612,829 Product Development 9,649 32,032 79,373 138,368 TOTAL OPERATING EXPENSES 555,896 557,256 1,605,420 1,751,197 INCOME (LOSS) FROM OPERATIONS 24,927 ( 152,983) ( 136,976) ( 453,679) OTHER INCOME (EXPENSE): Interest Expense ( 5,543) ( 5,137) ( 15,404) ( 13,308) Other Income (Expense), net 471 4,660 1,428 172,245 TOTAL OTHER INCOME (EXP)( 5,072) ( 477) ( 13,976) 158,937 INCOME (LOSS) BEFORE INCOME TAXES 19,855 ( 153,460) ( 150,952) ( 294,742) INCOME TAXES -- -- 800 800 NET INCOME (LOSS) 19,855 ( 153,460) ( 151,752) ( 295,542) OTHER COMPREHENSIVE INC -- -- -- -- COMPREHENSIVE INCOME (LOSS) $ 19,855 $(153,460) $(151,752) $(295,542) NET INCOME (LOSS) PER WEIGHTED AVERAGE OF COMMON SHARES Weighted average number Of common shares 2,098,619 2,018,262 2,098,619 2,047,809 BASIC $ .01 $ (.08) $ (.07) $ (.14) Weighted average number of shares used in calculation of diluted earnings per share 2,098,619 2,018,262 2,098,619 2,047,809 DILUTED $ .01 $ (.08) $ (.07) $ (.14) LANCER ORTHODONTICS, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED 02/28/01 02/29/00 Cash flows from operating activities: Net loss $(151,752) $(295,542) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 90,576 113,113 Provision for losses on accts rec -- ( 3,425) Provision for losses on inventory 27,000 24,000 Common stock issued for services to directors -- 23,170 Net change in operating assets and liabilities: Accounts receivable 197,177 131,905 Inventories (164,809) 13,069 Prepaid expenses 19,463 23,443 Insurance claim receivable -- 110,000 Refundable Utility Deposits ( 6,962) -- Accounts payable and accrued liabilities 105,851 ( 3,705) Net cash provided by operating activities 116,544 136,028 Cash flows from investing activities: Purchases of property and equipment ( 2,400) ( 6,683) Net cash used in investing activities ( 2,400) ( 6,683) Cash flows from financing activities: Repurchase of common stock -- (117,883) Increase in line of credit 20,000 40,000 Cash flows provided by (used in) by financing activities 20,000 ( 77,883) Net change in cash 134,144 51,462 Cash, beginning of period 103,207 106,292 Cash, end of period $237,351 $157,754 Supplemental disclosure of cash flow information: Cash paid for: Interest $ 15,404 $ 13,308 Taxes $ 800 $ 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"). 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 generally accepted accounting principles ("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 February 28, 2001, the Company has a $300,000 line of credit with a bank. Borrowings are made at prime plus 1.25% (9.75% at February 28, 2001) and are limited to specified percentages of eligible accounts receivable. The unused portion available under the line of credit at February 28, 2001 was $120,000. The line of credit expires on September 10, 2001. The line of credit is collateralized by substantially all the assets of the Company, including inventories, receivables, and equipment. The lending agreement for the line of credit requires, among other things, that the Company maintain a tangible net worth of $2,800,000 and a debt to tangible net worth ratio of no more than 1 to 1. The Company is not required to maintain compensating balances in connection with this lending agreement. The Company was in violation of certain of its debt covenants at February 28, 2001. A waiver has been requested but not yet received as of the date of filing. (F) Commitments and Contingencies Manufacturing Agreement - The Company has 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. The Company has 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 gives 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 December 2003. The Company has retained the option to convert the 2004. manufacturing operation to a wholly-owned subsidiary at any time. Should the Company discontinue operations in Mexico, it is responsible for the accumulated employee seniority obligation as prescribed by Mexican law. At February 28, 2001, this obligation was approximately $379,000. Such obligation is contingent in nature and accordingly has not been accrued in the accompanying balance sheet. Leases - Lancer conducts its operations in leased facilities located in San Marcos, California and Mexicali, Mexico. The San Marcos facility consists of a 9,240 square foot manufacturing and office building. The term of the initial lease was for five years commencing January 1, 1994 and ending December 31, 1998. In 1998, Lancer renegotiated the lease and extended the terms to December 31, 2003. The Mexicali facility consists of a 16,000 square foot manufacturing and office building. The term of the lease is for sixty months commencing November 1, 1998 and ending October 31, 2003. Management believes that the properties are currently suitable and adequate for Lancer's operations. Future aggregate minimum annual cash lease payments are as follows: Years ending May 31, 2001 $ 38,951 May 31, 2002 145,547 May 31, 2003 148,401 Thereafter 75,651 Total $408,550 Mexico Operations - The Company is in the process of converting Mexican assets and obligations to its own division, a Mexican corporation named Lancer Orthodontics de Mexico (Lancer de Mexico). This division will administer services currently provided by an independent manufacturing contractor. A new lease is being negotiated for the 16,000 square foot facility currently used for Lancer's Mexican operations. The new lease will replace the sub-lease currently in effect with the independent contractor. Utility and Mexican vendor obligations are also being 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. Cash at February 28, 2001 on the accompanying balance sheet includes a Lancer de Mexico peso bank account converted to approximately $800 USD. Listing Requirements - In a letter dated November 10, 2000, NASDAQ had advised the Company that it was not in compliance with the minimum bid price required for listing on the Nasdaq National Market. The Company was being afforded a ninety-day grace period, until February 8, 2001, to remedy this deficiency. NASDAQ also advised the Company on January 5, 2001, that it was not in compliance with the minimum market value of public float and that the Company was being afforded a ninety-day grace period, until April 5, 2001, to remedy this deficiency. A hearing before a Nasdaq panel was held on March 23, 2001 in Washington D.C. regarding the proposed delisting of the Company's stock. A letter dated March 30, 2001 stated that the panel determined to delist the Company's securities from the Nasdaq Stock Market effective with the open of business Monday, April 2, 2001. The Company's stock will thereafter trade on the OTC Bulletin Board. (G) Income Taxes At May 31, 2000, the Company had net tax operating loss carryforwards of approximately $2,101,000 and business tax credits of approximately $114,735 available to offset future Federal taxable income and tax liabilities, respectively. The Federal carryforwards expire in varying amounts from 2000 to 2019. As of May 31, 2000, the Company had net tax operating loss carryforwards of approximately $250,000 and business tax credits of approximately $23,000 available to offset future state income tax liabilities. (H) Stockholders' Equity Common Stock - On February 5, 2001, the Board of Directors approved a reverse stock split at a rate of 2 shares converted to 1 share. Written consents from stockholders holding 1,100,246 shares of Common Stock (approximately 52% of issued and outstanding stock) were received on March 1, 2001 approving the split. On the record date of February 21, 2001, there were 2,098,619 shares issued and outstanding. A SEC Schedule 14C Information Statement was mailed on March 26, 2001 to stockholders of record. A hearing before a Nasdaq panel was held on March 23, 2001 in Washington D.C. regarding the proposed delisting of the Company's stock. A letter dated March 30, 2001 stated that the panel determined to delist the Company's securities from the Nasdaq Stock Market effective with the open of business Monday, April 2, 2001. The Board of Directors voted on April 2, 2001, to cancel the reverse stock split since the purpose of the split was to prevent delisting. Stock Options - 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 357,143 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 nine months ended February 28, 2001, the Company granted 157,000 options to purchase shares of the Company's common stock at an exercise price of $.875 to certain employees of the Company, with one half vested immediately and the other half vesting one year from the grant date. The options have a term of five years. (I) Net Loss per Common Share and Dividends The Company calculates earnings per share in accordance with Statement of Financial Accounting Standards ("SFAS 128"). SFAS 128 replaces the presentation of primary and fully diluted earnings per share with the presentation of basic and diluted earnings per share. Basic earnings per share excludes dilution and is calculated by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. For all periods presented, no common stock equivalents have been included in the computation of diluted earnings per share as they were determined to be anti-dilutive. EARNINGS PER SHARE (UNAUDITED) FOR THE THREE FOR THE NINE MONTHS ENDED MONTHS ENDED 02/28/01 02/29/00 02/28/01 02/29/00 Basic Earnings (Loss) per Share: Net income (loss) $ 19,855 $( 153,460) $( 151,752) $( 295,542) Net income (loss) applicable to common shareholders $ 19,855 $( 153,460) $( 151,752) $( 295,542) Weighted average number of common shares 2,098,619 2,018,262 2,098,619 2,047,809 Basic income (loss) per share $ .01 $( .08) ( .07) $( .14) Diluted Earnings (Loss) per Share: Net income (loss) from primary income per common share $ 19,855 $( 153,460) $( 151,752) $( 295,542) Net income (loss) for diluted earnings per share $ 19,855 $( 153,460) $( 151,752) $( 295,542) Weighted average number of shares used in calculation of diluted earnings per share 2,098,619 2,018,262 2,098,619 2,047,809 Diluted earnings (loss) per share $ .01 $( .08) $( .07) $( .14) (J) Financial Information About Foreign and Domestic Operations and Export Sales FOR THE NINE MONTHS ENDED 02/28/01 02/29/00 Sales to unaffiliated customers: United States $2,134,981 $2,383,087 Europe 1,373,921 996,214 South America 267,532 218,225 Other Foreign 453,070 433,597 $4,229,504 $4,031,123 No other geographic concentrations exist where net sales exceed 10% of total net sales. Sales or transfers between geographic areas none none Operating loss: United States $(254,970) $(336,572) Europe 77,400 ( 70,790) South America 15,070 ( 15,507) Other Foreign 25,524 ( 30,810) $(136,976) $(453,679) (K) New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." The statement will require recognition of all derivatives as either assets or liabilities on the balance sheet at fair value. The statement is effective for the Company's fiscal year 2002, as deferred by SFAS No 137, but early adoption is permitted. Management has completed an evaluation of the effects of this statement and does not believe that it will have a material effect on the Company's consolidated financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." The effective date of the bulletin was delayed according to SAB No. 101A and SAB No. 101B and will be effective for the Company's fourth quarter of fiscal year 2001. Management has completed an evaluation of the effects of this bulletin and does not believe that it will have a material effect on the Company's consolidated financial statements. 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 nine months ended February 28, 2001, net income increased from a net loss of $295,542 at February 29, 2000, to a net loss of $151,752 at February 28, 2001. For the three months ended February 28, 2001, net income increased from a net loss of $153,460 at February 29, 2000, to a net profit of $19,855 at February 28, 2001. The increase is primarily attributable to the increase in sales. For the nine months ended February 28, 2001, net sales increased $198,381 (4.9%) as compared to the year earlier period. For the three months ended February 28, 2001, net sales increased $140,761 (10.3%) as compared to the year earlier period. International net sales increased $446,487 (27.1%) and $116,439 (18.0%), respectively, for the nine months and three months ended February 28, 2001, as compared to the year earlier period. The increase in sales was primarily in Europe. Domestic net sales decreased $248,106 (10.4%) for the nine months ended February 28, 2001, as compared to the year earlier period. This decrease is primarily attributable to increased discounting due to competition pressures. Domestic net sales increased $24,322 (3.4%) for the three months ended February 28, 2001, as compared to the year earlier period. The increase is primarily attributable to aggressive marketing techniques and the introduction of new products. For the nine months ended February 28, 2001, cost of sales as a percentage of sales (65.3%), decreased 2.5% compared to the year earlier period. For the three months ended February 28, 2001. cost of sales as a percentage of sales (61.6%), decreased 8.9% compared to the year earlier period. The decrease is primarily attributable to decreased production costs. For the nine months ended February 28, 2001, selling and general and administrative expenses decreased $86,782 (5.4%) compared to the year earlier period. The decrease is primarily attributable to a decrease in labor costs and commissions. For the three months ended February 28, 2001, selling and general and administrative expenses increased $21,023 (4.0%) as compared to the year earlier period. The increase is primarily attributable to non-recurring sales labor costs due to termination of personnel and an increase in sales commissions, partially offset by a decrease in general and administrative labor costs. For the nine months ended February 28, 2001, product development expenses decreased $58,995 (42.6%) as compared to the year earlier period. For the three months ended February 28, 2001, product development expenses decreased $22,383 (69.9%) compared to the year earlier period. The decrease is primarily attributable to the discontinuance of dental amalgam development and the reclassification of labor costs. For the nine months ended February 28, 2001, interest expense increased $2,096 (15.8%) as compared to the year earlier period. For the three months ended February 28, 2001, interest expense increased $406 (7.9%) as compared to the year earlier period. The increase is primarily attributable to borrowings against the line of credit and an increase in the interest rate. For the nine months ended February 29, 1999, other income of $169,672 was realized from the insurance claim settlement of $279,672 for the theft of inventory at the Company's Mexicali facility, less $110,000 insurance claim receivable valued at cost at May 31, 1999. FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES The Company's financial condition at February 28, 2001 and its previous two fiscal year ends was as follows: 02/28/01 05/31/00 05/31/99 Current Assets $3,451,235 $3,395,922 $3,827,011 Current Liabilities 807,218 681,367 888,820 Working Capital 2,644,017 2,714,555 2,938,191 Bank Debt 180,000 160,000 180,000 Shareholder Equity 2,922,281 3,074,033 3,438,301 Total Assets 3,729,499 3,755,400 4,327,121 Cash increased $134,144 during the nine months ended February 28, 2001. Working capital decreased $70,538 during the nine months ended February 28, 2001, primarily attributable to a decrease in receivables and an increase in payables, partially offset by an increase in inventories and cash. The Company expects to meet its cash requirements out of its cash reserves, cash flow, and line of credit. The $300,000 line of credit is collateralized by substantially all the assets of the Company, including inventories, receivables, and equipment. The lending agreement for the line of credit requires, among other things, that the Company maintain a tangible net worth of $2,800,000 and a debt to tangible net worth ration of no more than 1 to 1. The Company is not required to maintain compensating balances in connection with this lending agreement. The Company was in violation of certain of its debt covenants at February 28, 2001. A waiver has been requested but not yet received as of the date of filing. 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 On February 5, 2001, the Board of Directors approved a reverse stock split at a rate of 2 shares converted to 1 share. Written consents from stockholders holding 1,100,246 shares of Common Stock (approximately 52% of issued and outstanding stock) were received on March 1, 2001 approving the split. On the record date of February 21, 2001, there were 2,098,619 shares issued and outstanding. A SEC Schedule 14C Information Statement was mailed on March 26, 2001 to stockholders of record. A hearing before a Nasdaq panel was held on March 23, 2001 in Washington D.C. regarding the proposed delisting of the Company's stock. A letter dated March 30, 2001 stated that the panel determined to delist the Company's securities from the Nasdaq Stock Market effective with the open of business Monday, April 2, 2001. The Board of Directors voted on April 2, 2001, to cancel the reverse stock split since the purpose of the split was to prevent delisting. 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