10QSB/A 1 qsb113000.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, 2000 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 the latest practicable date: 2,098,618 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) 11/30/00 ASSETS CURRENT ASSETS: Cash $ 185,631 Accounts Receivable, less allowances for sales returns and doubtful receivables of $158,171 1,119,903 Inventories, net of reserve of $128,167 2,070,114 Prepaid Expenses 31,711 Total Current Assets 3,407,359 PROPERTY AND EQUIPMENT, at cost 2,406,129 Less: Accumulated depreciation (2,310,145) 95,984 INTANGIBLE ASSETS: Marketing and Distribution Rights, net 97,525 Technology Use Rights, net 101,425 198,950 OTHER ASSETS 6,560 Total Assets $3,708,853 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable and Accrued Liabilities $ 586,427 Line of Credit 220,000 Total Current Liabilities 806,427 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 2,098,618 4,815,074 Accumulated Deficit (1,912,648) Total Stockholders' Equity 2,902,426 Total Liabilities and Stockholders' Equity $3,708,853 LANCER ORTHODONTICS, INC. CONDENSED STATEMENTS OF OPERATIONS AND CONDENSED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED) FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED 11/30/00 11/30/99 11/30/00 11/30/99 NET SALES $1,385,436 $1,387,370 $2,716,534 $2,658,914 COST OF SALES 903,332 864,587 1,828,913 1,765,669 Gross Profit 482,104 522,783 887,621 893,245 OPERATING EXPENSES: Selling, General & Administrative 512,475 549,056 979,800 1,087,604 Product Development 33,484 49,672 69,724 106,337 TOTAL OPERATING EXP 545,959 598,728 1,049,524 1,193,941 LOSS FROM OPERATIONS ( 63,855) ( 75,945) (161,903) ( 300,696) OTHER INCOME (EXPENSE): Interest Expense ( 4,653) ( 4,466) ( 9,860) ( 8,171) Other Inc (Exp), net 482 ( 2,817) 956 167,585 TOTAL OTHER INCOME (EXP)( 4,171) ( 7,283) ( 8,904) 159,414 LOSS BEFORE INCOME TAXES (68,026) ( 83,228) ( 170,807) ( 141,282) INCOME TAXES 800 -- 800 800 NET LOSS ( 68,826) ( 83,228) ( 171,607) ( 142,082) OTHER COMPREHENSIVE INC -- -- -- -- COMPREHENSIVE LOSS $( 68,826) $( 83,228)$( 171,607)$( 142,082) NET LOSS PER WEIGHTED AVERAGE OF COMMON SHARES Weighted average number of common shares 2,098,618 2,049,059 2,098,618 2,062,502 BASIC $ (.03) $ (.04) $ (.08) $ (.07) Weighted average number of shares used in calculation of diluted earnings per share 2,098,618 2,049,059 2,098,618 2,062,502 DILUTED $ (.03) $ (.04) $ (.08) $ (.07) LANCER ORTHODONTICS, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED 11/30/00 11/30/99 Cash flows from operating activities: Net loss $(171,607) $(142,082) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 60,384 75,409 Provision for losses on accounts rec ( 16,829) ( 5,234) Provision for losses on inventory 18,000 22,000 Common stock issued for services to directors -- 23,170 Net change in operating assets and liabilities: Accounts receivable, net 129,696 119,679 Inventories ( 74,869) ( 39,257) Prepaid expenses 14,989 20,565 Insurance claim receivable -- 110,000 Accounts payable and accrued liabilities 65,060 ( 81,511) Net cash (used in) provided by operating Activities 24,824 102,739 Cash flows from investing activities: Purchases of property and equipment ( 2,400) ( 2,983) Net cash used in investing activities ( 2,400) ( 2,983) Cash flows from financing activities: Repurchase of common stock -- (117,550) Increase in line of credit 60,000 40,000 Cash flows provided by (used in) by financing activities 60,000 ( 77,550) Net change in cash 82,424 22,206 Cash, beginning of period 103,207 106,292 Cash, end of period $185,631 $128,498 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 November 30, 2000, the Company has a $300,000 line of credit with a bank. Borrowings are made at prime plus 1.25% (10.75% at November 30, 2000) and are limited to specified percentages of eligible accounts receivable. The unused portion available under the line of credit at November 30, 2000 was $80,000. 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 November 30, 2000. 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 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 November 30, 2000, this obligation was approximately $354,000. 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 $ 71,963 May 31, 2002 145,547 May 31, 2003 148,401 Thereafter 75,651 Total $441,562 Listing Requirements - The Company must maintain a minimum bid price and certain capitalization levels as required by the NASD Marketplace Rule 4310(c). 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. The Company Was being afforded a ninety-day grace period, until February 8, 2000 to remedy this deficiency. If the deficiency is not remedied by then, the Company's stock will trade under the Bulletin Board rather than on the NASDAQ SmallCap Stock Market. 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. If the deficiency is not remedied by then, the Company's stock will trade under the Bulletin Board rather than on the NASDAQ Small Cap Stock Market. (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 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 quarter six months ended November 30, 2000, 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 SIX MONTHS ENDED MONTHS ENDED 11/30/00 11/30/99 11/30/00 11/30/99 Basic Loss per Share: Net loss $( 68,826) $( 83,228) $( 171,607) $( 142,082) Net loss applicable to common shareholders $( 68,826) $( 83,228) $( 171,607) $( 142,082) Weighted average number of common shares 2,098,618 2,049,059 2,098,618 2,062,502 Basic loss per share $( .03) $( .04) $( .08) $( .07) Diluted Loss per Share: Net loss from primary income per common share $( 68,826) $( 83,228) $( 171,607) $( 142,082) Net loss for diluted earnings per share $( 68,826) $( 83,228) $( 171,607) $( 142,082) Weighted average number of shares used in calculation of diluted earnings per share 2,098,618 2,049,059 2,098,618 2,062,502 Diluted loss per share $( .03) $( .04) $( .08) $( .07) (J) Financial Information About Foreign and Domestic Operations and Export Sales FOR THE SIX MONTHS ENDED 11/30/00 11/30/99 Sales to unaffiliated customers: United States $1,386,874 $1,659,302 Europe 864,442 568,011 South America 166,338 171,951 Other Foreign 298,880 259,650 $2,716,534 $2,658,914 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 $(197,726) $(200,071) Europe 23,289 ( 57,178) South America 4,482 ( 17,309) Other Foreign 8,052 ( 26,138) $(161,903) $(300,696) 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, 2000, net loss increased from a net loss of $142,082 at November 30, 1999, to a net loss of $171,607 at November 30, 2000. For the three months ended November 30, 2000, net loss decreased from a net loss of $83,228 at November 30, 1999, to a net loss of $68,826 at November 30, 2000. The six month increase in net loss is primarily attributable to the 1999 other income of insurance claim proceeds. The three month decrease in net loss is primarily attributable to the decrease in operating expenses, offset by the decrease in sales. For the six months ended November 30, 2000, net sales increased $57,620 (2.2%) as compared to the year earlier period. For the three months ended November 30, 2000, net sales decreased $1,934 (.1%) as compared to the year earlier period. International net sales increased $330,048 (33.0%) and $118,693 (21.0%), respectively, for the six months and three months ended November 30, 2000, as compared to the year earlier period. The increase in sales was primarily in Europe. Domestic net sales decreased $272,428 (16.4%) and $120,627 (14.7%), respectively, for the six months and three months ended November 30, 2000, as compared to the year earlier period. This decrease is primarily attributable to increased discounting due to competition pressures. For the six months ended November 30, 2000, cost of sales as a percentage of sales (67.3%), increased .1% compared to the year earlier period. For the three months ended November 30, 2000, cost of sales as a percentage of sales (65.2%), increased .3% compared to the year earlier period. The increase is primarily attributable to increased production costs. For the six months ended November 30, 2000, selling and general and administrative expenses decreased $107,804 (9.9%) compared to the year earlier period. For the three months ended November 30, 2000, selling and general and administrative expenses decreased $36,581 (6.7%) as compared to the year earlier period. The decrease is primarily attributable to a decrease in labor costs and commissions. For the six months ended November 30, 2000, product development expenses decreased $36,613 (34.4%) as compared to the year earlier period. For the three months ended November 30, 2000, product development expenses decreased $16,188 (32.6%) compared to the year earlier period. The decrease is primarily attributable to the discontinuance of dental amalgam development. For the six months ended November 30, 2000, interest expense increased $1,689 (20.7%) as compared to the year earlier period. For the three months ended November 30, 2000, interest expense increased $187 (4.2%) 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 six months ended November 30, 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 November 30, 2000 and its previous two fiscal year ends was as follows: 11/30/00 05/31/00 05/31/99 Current Assets $3,407,359 $3,395,922 $3,827,011 Current Liabilities 806,427 681,367 888,820 Working Capital 2,600,932 2,714,555 2,938,191 Bank Debt 220,000 160,000 180,000 Shareholder Equity 2,902,426 3,074,033 3,438,301 Total Assets 3,708,853 3,755,400 4,327,121 Cash increased $82,424 during the six months ended November 30, 2000. Working capital decreased $113,623 during the six months ended November 30, 2000, primarily attributable to a decrease in sales, 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. PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS Not Applicable Item 2. CHANGES IN SECURITIES During the six months ended November 30, 2000, 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, which vest ratably over a term of two years and have a term of five years. Item 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS a. The Company's 2000 annual meeting of shareholders was held on November 20, 2000. b. The following nominees were elected directors: Zackary Irani Janet Moore Douglas Miller Robert Orlando c. Summary of voting for directors: For Against Abstentions Zackary Irani 1,830,199 0 12,247 Douglas Miller 1,830,199 0 12,247 Janet Moore 1,830,199 0 12,247 Robert Orlando 1,830,199 0 12,247 Total Response 1,842,446 There were no broker non-votes. d. Approval of 2000 Stock Incentive Plan: For Against Abstentions 1,275,229 45,104 2,800 There were 519,313 broker non-votes. 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 15, 2002 By /s/ Zackary Irani Zackary Irani, Chief Executive Officer