-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LSl0L9AcXByR1FBffgfu1Oho9l0597JAxhu509hTa7FM1VJ5meW9FBD1SISRZLIX aqaTmmyFJnc5D8b0niBCBA== 0000057538-04-000005.txt : 20040120 0000057538-04-000005.hdr.sgml : 20040119 20040120143835 ACCESSION NUMBER: 0000057538-04-000005 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20031130 FILED AS OF DATE: 20040120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LANCER ORTHODONTICS INC /CA/ CENTRAL INDEX KEY: 0000057538 STANDARD INDUSTRIAL CLASSIFICATION: DENTAL EQUIPMENT & SUPPLIES [3843] IRS NUMBER: 952497155 STATE OF INCORPORATION: CA FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-05920 FILM NUMBER: 04532298 BUSINESS ADDRESS: STREET 1: 253 PAWNEE STREET CITY: SAN MARCOS STATE: CA ZIP: 92069-2437 BUSINESS PHONE: 7607445585 MAIL ADDRESS: STREET 1: 253 PAWNEE ST CITY: SAN MARCOS STATE: CA ZIP: 92069-2437 FORMER COMPANY: FORMER CONFORMED NAME: LANCER PACIFIC INC DATE OF NAME CHANGE: 19870412 10QSB 1 qsb113003.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, 2003 Commission File No. 0-5920 LANCER ORTHODONTICS, INC. (Exact Name of Small Business Issuer as Specified in its Charter) CALIFORNIA 95-2497155 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 253 Pawnee Street, San Marcos, California 92069 (Address of Principal Executive Offices) Issuer's telephone number, including area code: (760) 744-5585 Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports, and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether registrant is an accelerated filer, as defined in Rule 12b-2 of the Exchange Act. Yes No X State the number of shares outstanding of each of the issuer's classes of common equity, as of January 16, 2004: 2,284,445 Transitional small business disclosure format (check one): Yes X No LANCER ORTHODONTICS, INC. FORM 10-Q QUARTERLY REPORT TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Page(s) Item 1 Financial Statements (Unaudited) Condensed Consolidated Balance Sheet 3 Condensed Consolidated Statements of Operations 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6-17 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 17-19 Item 3 Quantitative and Qualitative Disclosures about Market Risk 19-20 Item 4 Procedures and Controls 20 PART II - OTHER INFORMATION Item 1 Legal Proceedings 20 Item 2 Changes in Securities and Use of Proceeds 20 Item 3 Defaults Upon Senior Securities 20 Item 4 Submission of Matters to a Vote of Security Holders 20 Item 5 Other Information 20 Item 6 Exhibits and Reports on Form 8-K 20 Signature 21 PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS (UNAUDITED) LANCER ORTHODONTICS, INC. CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) 11/30/03 ASSETS CURRENT ASSETS: Cash $ 224,237 Accounts receivable, less allowances for sales returns and doubtful receivables of $111,008 1,029,989 Inventories, net of reserve of $182,225 1,745,152 Related party receivables 4,516 Prepaid expenses 76,850 Other receivables 30,847 Total current assets 3,111,591 PROPERTY AND EQUIPMENT, at cost 2,838,557 Less: Accumulated depreciation (2,400,933) 437,624 INTANGIBLE ASSETS: Marketing and distribution rights, net 22,825 OTHER ASSETS 49,485 Total assets $3,621,525 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 341,686 Accrued payroll and related benefits 210,651 Accrued professional fees 47,234 Accrued royalties 22,460 Other current liabilities 12,547 Line of credit 0 Total current liabilities 634,578 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, various series; 750,000 shares authorized; no shares issued and outstanding -- Common stock, no par value; 50,000,000 authorized; 2,196,224 shares issued and outstanding 4,844,345 Common stock subscribed, 88,221 shares subscribed 27,750 Accumulated deficit (1,885,148) Total stockholders' equity 2,986,947 Total liabilities and stockholders' equity $3,621,525 LANCER ORTHODONTICS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED 11/30/03 11/30/02 11/30/03 11/30/02 NET SALES $1,565,652 $1,504,904 $2,883,759 $2,790,403 COST OF SALES 1,101,351 1,054,601 2,076,618 1,978,181 Gross Profit 464,301 450,303 807,141 812,222 OPERATING EXPENSES: Sales & Marketing 342,924 298,129 687,870 580,230 General & Administrative 95,696 110,926 206,714 221,189 Product Development 27,358 15,996 59,861 31,182 TOTAL OPERATING EXPENSES 465,978 425,051 954,445 832,601 INCOME (LOSS) FROM OPERATIONS (1,677) 25,252 (147,304) (20,379) OTHER INCOME (EXPENSE): Interest Expense (261) (16) (261) (3,588) Other Income, net 5,946 3,821 11,358 50,093 TOTAL OTHER INCOME 5,685 3,805 11,097 46,505 INCOME (LOSS) BEFORE INC TAXES 4,008 29,057 (136,207) 26,126 INCOME TAXES -- 194 -- 194 NET INCOME (LOSS) $4,008 $28,863 $(136,207) $25,932 NET INCOME (LOSS) PER WEIGHTED AVERAGE OF COMMON SHARES Weighted average number of common shares 2,362,416 2,196,233 2,362,416 2,196,233 BASIC $.00 $.01 $(.06) $.01 Weighted average number of shares used in calculation of diluted earnings per share 2,362,416 2,196,233 2,362,416 2,196,233 DILUTED $.00 $.01 $(.06) $.01 LANCER ORTHODONTICS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED 11/30/03 11/30/02 Cash flows from operating activities: Net (loss) income $(136,207) $25,932 Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 25,511 48,234 Provision for losses on accounts receivable 6,008 132 Provision for losses on inventory 45,000 30,000 Common stock issued in lieu of salary 7,500 10,500 Net change in operating assets and liabilities: Accounts receivable 63,443 81,031 Inventories (41,136) 213,395 Related party receivables 9,374 -- Prepaid expenses (21,364) 263 Insurance claim receivable -- 81,758 Other receivables (11,316) -- Accounts payable (55,176) (178,340) Accrued payroll and related benefits 69,500 53,815 Other current liabilities (14,418) 40,285 Net cash (used in) provided by operating activities (53,281) 407,005 Cash flows from investing activities: Purchases of property and equipment (227,378) (35,609) Other assets (6,085) -- Net cash used in investing activities (233,463) (35,609) Cash flows from financing activities: Net decrease in line of credit (426) (65,669) Cash flows used in financing activities (426) (65,669) Net change in cash (287,170) 305,727 Cash, beginning of period 511,407 128,585 Cash, end of period $224,237 $434,312 Supplemental disclosure of cash flow information: Cash paid for: Interest $261 $16 Shares of common stock issued for services to be rendered $-- $1,750 LANCER ORTHODONTICS, INC. Notes to Condensed Consolidated Financial Statements (A) Basis of Presentation The accompanying unaudited condensed consolidated 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 consolidated financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. The unaudited condensed consolidated financial statements include the accounts of Lancer Orthodontics, Inc. (the "Company" or "Lancer") and its wholly-owned subsidiary Lancer Orthodontics de Mexico. The consolidated 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 the Consolidated Financial Statements contained in Lancer's Annual Report on Form 10-KSB for the fiscal year ended May 31, 2003, 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. The Company is a partially owned and consolidated subsidiary of Biomerica, Inc. ("Biomerica"). Biomerica's direct ownership percentage of Lancer is 31.12% and its direct and indirect (via agreements with certain shareholders) voting control over Lancer is greater than 50% as of November 30, 2003. (C) Use of Estimates in the Preparation of Financial Statements The preparation of consolidated 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 consolidated 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, valuation of inventories, realizeability of property and equipment through future operations, and realizeability of deferred tax assets. Actual results could materially differ from those estimates. LANCER ORTHODONTICS, INC. Notes to Condensed Consolidated Financial Statements - continued (D) Stock Based Compensation In December 2002, the FASB issued FAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," which amended FAS No. 123 "Accounting for Stock-Based Compensation." The new standard provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Additionally, the statement amends the disclosure requirements of FAS No. 123 to require prominent disclosures in the annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This statement is effective for financial statements for fiscal years ending after December 15, 2002. In compliance with FAS No. 148, the Company has elected to continue to follow the intrinsic value method in accounting for our stock-based employee compensation plan as defined by APB No. 25, "Accounting for Stock Issued to Employees". The Black Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options vesting period. Adjustments are made for options forfeited prior to vesting. The effect on compensation expense, net loss, and net loss per common share had compensation costs for the Company's stock option plans been determined based on a fair value at the date of grant consistent with the provisions of SFAS 148, for the three and six months ended November 30, 2003 as follows: FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED 11/30/02 11/30/01 11/30/02 11/30/01 Net income (loss), as reported $4,008 $28,863 $(136,207) $25,932 Add: Stock-based employee compensation expense recorded -- -- -- -- Less: Stock-based employee compensation expense determined under fair value calculations (12,488) (9,291) (26,706) (9,291) Net income (loss) pro forma 20,936 114,315 80,176 206,204 Basic income (loss) per share, as reported: $.00 $.01 $(.06) $.01 Add: Stock-based employee compensation expense recorded -- -- -- -- Less: Stock-based employee compensation determined under fair value calculations (.00) (.00) (.01) (.00) Proforma $.00 $.01 $(.07) $.01 Diluted income (loss) per share, as reported: $.00 $.01 $(.06) $.01 Add: Stock-based employee compensation expense recorded -- -- -- -- Less: Stock-based employee compensation determined under fair value calculations (.00) (.00) (.01) (.00) Pro forma $.00 $.01 $(.07) $.01 (E) Property and Equipment Costs in construction in progress consist of two projects, a new product line and a new information system. Costs capitalized into the new product line at November 30, 2003 were $268,650, with approximately $52,000 in additional costs estimated to complete the project. Costs capitalized into the new information system are $41,158, with approximately $30,000 in additional costs estimated to complete the project. (F) Line of Credit At November 30, 2003, Lancer has a $400,000 line of credit with GE Capital Healthcare Financial Services, which expires January 24, 2004. Borrowings are made at prime plus 2.0%, however not less than 8.0%, (8.0% at November 30, 2003), and are limited to 80% of accounts receivable less than 90 days old with a liquidity factor of 94%. The outstanding balance at November 30, 2003, is $0 and the unused portion available is approximately $326,000. Lancer is in compliance with its debt covenants at November 30, 2003. The line of credit is collateralized by substantially all the assets of Lancer, including inventories, receivables, and equipment. The lending agreement for the line of credit requires, among other things, that Lancer maintain a tangible net worth of $2,100,000 and that receivables payments be sent to a controlled lockbox. In addition to interest, a management fee of 0.25% of the average monthly outstanding loan balance and an unused balance fee of .0425% on the average monthly unused portion available are required. Lancer is not required to maintain compensating balances in connection with this lending agreement. In October 2003 the line of credit was extended to January 24, 2004 by GE Capital Healthcare Financial Services so that Lancer could explore other financing options. An agreement with another financing institution is in the process of being finalized. LANCER ORTHODONTICS, INC. Notes to Condensed Consolidated Financial Statements - continued (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. In November 1998, Lancer extended the manufacturing agreement through October 2000. During fiscal 2002, the facility in Mexico was incorporated as Lancer Orthodontics de Mexico, ("Lancer de Mexico"), a wholly-owned subsidiary of the Company. 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. Should Lancer discontinue operations in Mexico, it is responsible for accumulated employee seniority obligations as prescribed by Mexican law. At November 30, 2003, this obligation was approximately $367,000. Such obligation is contingent in nature and accordingly has not been accrued in Lancer's consolidated 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 2003. 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 $561 at November 30, 2003, and is included in accrued liabilities in the accompanying consolidated balance sheet. Total rental expense for this facility for the six months ended November 30, 2003, was approximately $35,000. The lease is extended on a month-to-month basis at a rate of $7,900 per month starting in January, 2004 while a new lease is being negotiated for the current facility. Effective December 1, 2002, Lancer Orthodontics de Mexico entered into a non-cancelable operating lease for its Mexico facility through March 31, 2009. The new lease encompasses the approximately 16,000 square feet of the previous lease, plus additional square footage of approximately 10,000 feet, for a total of approximately 26,000 square feet. Lancer Orthodontics de Mexico will provide sub-contracted manufacturing services to Biomerica, Inc., a related party, using a portion of the additional square footage. The new lease requires four monthly lease payments of approximately $5,300 through March 2003, and seventy-two monthly payments of approximately $9,600 through March 2009. An agreement has been negotiated between Lancer Orthodontics de Mexico and Biomerica for lease reimbursement of approximately $2,000 per month. The remainder of approximately $7,600 monthly lease will be borne by Lancer. Total rental expense for this facility for the six months ended November 30, 2003, was approximately $51,000. LANCER ORTHODONTICS, INC. Notes to Condensed Consolidated Financial Statements - continued (G) Commitments and Contingencies - continued The new Lancer Orthodontics de Mexico lease also requires an additional refundable security deposit of $26,550, payable over twelve months beginning January 2003. Lancer Orthodontics, Inc. is paying half and Biomerica, Inc. the other half. At November 30, 2003, other assets on the consolidated balance sheet includes approximately $45,000 for security deposit paid on the Mexico location. At May 31, 2003, future aggregate minimum lease payments are as follows: Years ending May 31, 2004 $173,950 2005 132,003 2006 131,148 2007 129,438 2008 127,767 2009 105,776 Total $800,082 A sub-lease agreement for approximately 459 square feet of Lancer's main facility was entered into in April 2003, effective through November 2003 with an unrelated third party. The leased space is to be used for a machine shop and requires monthly payments of $344. Rental income for the six months ended November 30, 2003 was $2,064. Employment Agreement - Pursuant to the terms of the employment agreement between the Company and Dan Castner, the Vice President of Sales and Marketing of the Company, dated as of May 20, 2003, the Company agreed to pay Mr. Castner an annual base salary of $135,000. In addition, the Company granted Mr. Castner stock options on June 2, 2003, to purchase an aggregate of 120,000 shares of the Company's common stock at an exercise price of $0.43 per share. The stock options have a term of five years and will vest over four years as follows: (i) 25% vesting on the first anniversary of the date of the grant; (ii) 25% vesting on the second anniversary of the date of the grant; (iii) the remaining 50% vesting as to one-twenty fourth (1/24th) per month each month thereafter for the next two years. Should the Company be purchased by an unaffiliated third party, the options shall vest 100%. Common Stock - Lancer's stock is traded on the OTC Bulletin Board. (H) Income Taxes At May 31, 2003, Lancer had net tax operating loss carryforwards of approximately $2,059,000 and business tax credits of approximately $64,000 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, 2003, Lancer had net tax operating loss carryforwards of approximately $70,000 and business tax credits of approximately $10,000 available to offset future state income tax liabilities. The state carryforwards expire through the year 2011. LANCER ORTHODONTICS, INC. Notes to Condensed Consolidated Financial Statements - continued (H) Income Taxes (continued) The Company accounts for income taxes using the asset and liability approach under Statement of Financial Accounting Standards No. 109, ("SFAS 109"). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations. (I) Stockholders' Equity Stock Option Agreements Under the 2000 Stock Incentive Plan (the "Plan"), the Company is authorized to grant stock options to key employees, officers, and directors of the Company (or its parent corporation), non-employee members of the Board of Directors of the Company (or its parent), and consultants who provide valuable services to the Company. Any options outstanding at date of plan termination will remain in effect. Under the plan, 450,000 shares have been authorized for grant or issuance. Stock options granted under the Plan shall be granted at an option price not less than 85% of the fair market value for options granted to employees, or less than 100% of the fair market value for options granted to non-employees. The fair market value of the stock is as of the date the option is granted. Most options granted under the Plan to date expire five (5) years from the date of their respective grant and all were granted at fair market value at the date of grant. Options granted prior to May 31, 1995, generally vested on the date of grant and expired through August 1999. During the year ended May 31, 2002, the Company granted 20,000 options to purchase shares of the Company's common stock at an exercise price of $0.40 to an employee of the Company for services rendered. The options have a term of one year. Management recorded $0 intrinsic value with respect to these options. During the year ended May 31, 2002, the Company granted 113,000 options to purchase shares of the Company's common stock at an exercise price of $0.30 to its' Chief Executive Officer in lieu of salary. The options vest over three years and have a term of five years. Management recorded $0 intrinsic value with respect to these options. During the year ended May 31, 2003, the Company granted 70,000 options to purchase shares of the Company's common stock at an exercise price of $0.26 to certain employees of the Company for services rendered. The options vest over four years and have a term of five years. Management recorded $0 intrinsic value with respect to these options. LANCER ORTHODONTICS, INC. Notes to Condensed Consolidated Financial Statements - continued During the year ended May 31, 2003, the Company granted 40,000 options to purchase shares of the Company's common stock at an exercise price of $0.28 to an employee of the Company for services rendered. The options vest over four years and have a term of five years. Management recorded $0 intrinsic value with respect to these options. During the year ended May 31, 2003, the Company granted 30,000 options to purchase shares of the Company's common stock at an exercise price of $0.28 to certain employees of the Company for services rendered. The options vest over four years and have a term of five years. Management recorded $0 intrinsic value with respect to these options. On June 2, 2003, the Company granted 120,000 stock options to purchase shares of the Company's common stock at an exercise price of $0.43 per share as pursuant to terms of the employment agreement between the Company and Dan Castner, the Vice President of Sales and Marketing. The options vest over four years and have a term of five years. Management recorded $0 intrinsic value with respect to these options. On June 2, 2003, the Company granted 52,500 stock options to purchase shares of the Company's common stock at an exercise price of $0.43 per share to directors of the Company for services rendered. The options vest over two years and have a term of five years. Management recorded $0 intrinsic value with respect to these options. On June 2, 2003, the Company granted 75,000 stock options to purchase shares of the Company's common stock at an exercise price of $0.43 per share to its Chief Executive Officer in lieu of salary. The options vest over three years and have a term of five years. Management recorded $0 intrinsic value with respect to these options. SFAS 148 Pro Forma Information The following summary presents the options granted, exercised, expired, and outstanding as of November 30, 2003: Weighted Average Number of Shares Exercise Employee Non-employee Total Price Outstanding, May 31, 2003 428,500 2,000 430,500 $0.53 Granted 247,500 -- 247,500 $0.43 Exercised -- -- -- -- Expired 94,000 2,000 96,000 $0.95 Outstanding, November 30, 2003 582,000 0 582,000 $0.43 LANCER ORTHODONTICS, INC. Notes to Condensed Consolidated Financial Statements - continued (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. Basic and diluted net loss per share is computed using the weighted average number of common shares outstanding during the period. Potentially dilutive securities are excluded from the diluted net loss per share calculation, as the effect would be anti-dilutive. Potentially dilutive shares not included are 582,000 shares for outstanding employee stock options. (K) Financial Information About Foreign and Domestic Operations and Export Sales FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED 11/30/03 11/30/02 11/30/03 11/30/02 Sales to unaffiliated customers: United States $ 783,526 $812,304 $1,517,643 $1,566,901 Europe 476,838 507,954 785,466 796,389 Central and South America 75,418 20,936 174,314 80,176 Middle East 73,735 86,611 130,516 102,694 Other Foreign 156,135 77,099 275,820 244,243 $1,565,652 $1,504,904 $2,883,759 $2,790,403 No other geographic concentrations exist where net sales exceed 10% of total net sales. Sales or transfers between geographic areas none none 11/30/03 05/31/03 Long-lived Assets: United States $317,323 $164,000 Mexico 120,301 59,000 $437,624 $223,000 LANCER ORTHODONTICS, INC. Notes to Condensed Consolidated Financial Statements - continued (L) Related Party Transactions In April 2003, Lancer de Mexico entered into a manufacturing subcontractor agreement with Biomerica, Inc., to provide manufacturing services in Mexicali, Mexico. The agreement requires reimbursement from Biomerica for discrete expenses such as payroll, shipping, and customs fees; lease and security deposits of approximately $2,000 and $1,100 per month, respectively; and service fees of approximately $2,900 per month. The accompanying consolidated balance sheet includes a total receivable of approximately $4,516 due from Biomerica at November 30, 2003 for other expenses to be reimbursed. (M) Directors and Officers Insurance Under its bylaws, the Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer or director's serving in such capacity. The term of the indemnification period is for the officer's or director's lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. However, the Company has a directors and officer liability insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal and has no liabilities recorded for these agreements as of November 30, 2003. The Company enters into indemnification provisions under (i) its agreements with other companies in its ordinary course of business, typically with business partners, contractors, and customers, landlords and (ii) its agreements with investors. Under these provisions the Company generally indemnifies and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company's activities or, in some cases, as a result of the indemnified party's activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by the Company with regard to intellectual property rights. These indemnification provisions generally survive termination of the underlying agreement. In addition, in some cases, the Company has agreed to reimburse employees for certain expenses and to provide salary continuation during short-term disability. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of November 30, 2003. LANCER ORTHODONTICS, INC. Notes to Condensed Consolidated Financial Statements - continued (N) Recent Accounting Pronouncements In June 2001, the FASB issued SFAS No. 143, "ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS", which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred with the associated asset retirement costs being capitalized as a part of the carrying amount of the long-lived asset. SFAS No. 143 also includes disclosure requirements that provide a description of asset retirement obligations and reconciliation of changes in the components of those obligations. The statement is effective for fiscal years beginning after June 15, 2002. The Company does not expect the adoption of SFAS No. 143 to have a material effect on the Company's consolidated financial position or results of operations. In June 2002, the FASB issued SFAS No. 146, "ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES," which updates accounting and reporting standards for personnel and operational restructurings. The Company was required to adopt SFAS No. 146 for exit, disposal or other restructuring activities that are initiated after December 31, 2002, with early application encouraged. The Company adoption of SFAS No. 146 did not have a material effect on the Company's consolidated financial position or results of operations. In November 2002, FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," was issued. FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for guarantees issued after December 31, 2002, while the disclosure requirements were effective for financial statements for periods ending after December 15, 2002. The adoption of FIN 45 did not have a material impact on the Company's consolidated financial position or results of operations. In January 2003, FIN No. 46, "CONSOLIDATION OF VARIABLE INTEREST ENTITIES" was issued. This interpretation clarifies the application of Accounting Research Bulletin No. 51, " Financial Statements," relating to consolidation of certain entities. FIN No. 46 will require identification of the Company's participation in variable interests entities ("VIEs"), which are defined as entities with a level of invested equity that is not sufficient to fund future activities to permit them to operate on a stand-alone basis, or whose equity holders lack certain characteristics of a controlling financial interest. For entities identified as VIEs, FIN No. 46 sets forth a model to evaluate potential consolidation based on an assessment of which party to the VIE, if any, bears a majority of the exposure to its expected losses, or stands to gain from a majority of its expected returns. FIN No. 46 also sets forth certain disclosures regarding interests in VIE that are deemed significant, even if consolidation is not required. The adoption of FIN No. 46 did not have a material impact on the Company's financial position, results of operations or cash flows. LANCER ORTHODONTICS, INC. Notes to Condensed Consolidated Financial Statements - continued In April 2003, SFAS No. 149, "AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" was issued. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement is effective for contracts entered into or modified after June 30, 2003. The adoption of this statement did not have a significant effect on the Company's consolidated financial position or results of operations. In May 2003, SFAS No. 150, "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY" was issued. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003. The adoption of SFAS No. 150 did not have a significant effect on the Company's consolidated financial position, results of operations, or cash flows. (O) Critical Accounting Policies The discussion and analysis of our financial condition and results of operations are based on the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires estimates and assumptions that affect the reported amounts and disclosures. We believe the following to be critical accounting policies as they require more significant judgments and estimates used in the preparation of our consolidated financial statements. Although we believe that our judgments and estimates are appropriate and correct, actual future results may differ from our estimates. In general, the critical accounting policies that may require judgments or estimates relate specifically to the recognition of revenue, the Allowance for Doubtful Accounts, Inventory Reserves for Obsolescence and Declines in Market Value, Impairment of Long-Lived Assets, Stock Based Compensation, and Deferred Income Tax Valuation and Allowances. We recognize product revenues when an arrangement exists, delivery has occurred, the price is determinable and collection is reasonably assured. The Allowance for Doubtful Accounts is established for estimated losses resulting from the inability of our customers to make required payments. The assessment of specific receivable balances and required reserves is performed by management and discussed with the audit committee. We have identified specific customers where collection is probable and have established specific reserves, but to the extent collection is made, the allowance will be released. Additionally, if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Reserves are provided for excess and obsolete inventory, which are estimated based on a comparison of the quantity and cost of inventory on hand to management's forecast of customer demand. Customer demand is dependent on many factors and requires us to use significant judgment in our forecasting process. We must also make assumptions regarding the rate at which new products will be accepted in the marketplace and at which customers will transition from older products to newer products. Once a reserve is established, it is maintained until the product to which it relates is sold or otherwise disposed of, even if in subsequent periods we forecast demand for the product. In general, we are in a loss position for tax purposes, and have established a valuation allowance against deferred tax assets, as we do not believe it is likely that we will generate sufficient taxable income in future periods to realize the benefit of our deferred tax assets. Predicting future taxable income is difficult, and requires the use of significant judgment. At November 30, 2003, all of our deferred tax assets were reserved. Accruals are made for specific tax exposures and are generally not material to our operating results or financial position, nor do we anticipate material changes to these reserves in the near future. We have adopted SFAS No. 123, "Accounting for Stock-Based Compensation," for disclosure purposes. Under SFAS No. 123, we measure compensation expense for our stock-based employee compensation plan using the intrinsic value method prescribed in Accounting Principles Board ("APB") No. 25, "Accounting for Stock Issued to Employees" and its related interpretations. We provide pro forma disclosure of the effect on net income or loss as if the fair value based method prescribed in SFAS No. 123 has been applied in measuring compensation expense. We have provided a full valuation reserve related to our substantial deferred tax assets. In the future, if sufficient evidence of our ability to generate sufficient future taxable income in certain tax jurisdictions becomes apparent, we may be required to reduce our valuation allowances, resulting in income tax benefits in our consolidated statement of operations. We evaluate the realizability of the deferred tax assets and assess the need for valuation allowance quarterly. The utilization of the net operating loss carryforwards could be substantially limited due to restrictions imposed under federal and state laws upon a change in ownership. (P) Risks and Uncertainties License Agreements - Certain of the Company's sales of products are governed by license agreements with outside third parties. All of such license agreements to which the Company currently is a party, are for fixed terms which will expire after ten years from the commencement of the agreement or upon the expiration of the underlying patents. After the expiration of the agreements or the patents, the Company is free to use the technology that had been licensed. There can be no assurance that the Company will be able to obtain future license agreements as deemed necessary by management. The loss of some of the current licenses or the inability to obtain future licenses could have an adverse affect on the Company's financial position and operations. Historically, the Company has successfully obtained all the licenses it believed necessary to conduct its business. LANCER ORTHODONTICS, INC. Notes to Condensed Consolidated Financial Statements - continued Distribution - The Company has entered into various exclusive and non- exclusive distribution agreements (the "Agreements") which generally specify territories of distribution. The Agreements range in term from one to five years. The Company may be dependent upon such distributors for the marketing and selling of its products worldwide during the terms of these agreements. Such distributors are generally not obligated to sell any specified minimum quantities of the Company's product. There can be no assurance of the volume of product sales that may be achieved by such distributors. Government Regulations - The Company's products are subject to regulation by the FDA under the Medical Device Amendments of 1976 (the "Amendments"). The Company has registered with the FDA as required by the Amendments. There can be no assurance that the Company will be able to obtain regulatory clearances for its current or any future products in the United States or in foreign markets. European Community - The Company is required to obtain certification in the European community to sell products in those countries. The certification requires the Company to maintain certain quality standards. The Company has been granted certification. However, there is no assurance that the Company will be able to retain its certification in the future. Risk of Product Liability - Testing, manufacturing and marketing of the Company's products entail risk of product liability. The Company currently has product liability insurance. There can be no assurance, however, that the Company will be able to maintain such insurance at a reasonable cost or in sufficient amounts to protect the Company against losses due to product liability. An inability could prevent or inhibit the commercialization of the Company's products. In addition, a product liability claim or recall could have a material adverse effect on the business or financial condition of the Company. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the six months ended November 30, 2003, net loss increased from net income of $25,932 at November 30, 2002 to a net loss of $136,207 at November 30. 2003. For the three months ended November 30, 2003, net income decreased from net income of $28,863 at November 30, 2002 to net income of $4,008 at November 30, 2003. The decrease is primarily attributable to increased marketing costs. For the six months ended November 30, 2003, net sales increased $93,356 (3.3%) as compared to the six months ended November 30, 2002. For the three months ended November 30, 2003, net sales increased $60,748 (4.0%) as compared the three months ended November 30, 2002. International net sales increased $142,614 (11.7%) and $89,526 (12.9%), respectively, for the six months and three months ended November 30, 2003, as compared to the six months and three months ended November 30, 2002. The increase in sales was primarily in Central 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. Domestic net sales decreased $49,258 (3.1%) and $28,778 (3.5%) respectively, for the six months and three months ended November 30, 2003, as compared to the six months and three months ended November 30, 2002.For the six months ended November 30, 2003, cost of sales as a percentage of sales (72.0%), increased 1.1% as compared to the six months ended November 30, 2002, which totaled 70.9%. For the three months ended November 30, 2003, cost of sales as a percentage of sales (70.3%), increased .2% as compared to the three months ended November 30, 2002. The increase is primarily attributable to increased production costs and reserve for obsolete inventory. For the six months and three months ended November 30, 2003, selling and marketing expenses increased $107,640 (18.6%) and $44,795 (15.0%), respectively, as compared to the same periods ended November 30, 2002. The increase is primarily due to increased labor costs. For the six months and three months ended November 30, 2003, general and administrative expenses decreased $14,475 (6.5%) and $15,230 (13.7%), respectively, as compared to the same periods ended November 30, 2002. The decrease is primarily due to decreased labor costs and professional fees. For the six months ended November 30, 2003, $7,500 represents the period expense resulting from the 37,500 shares of common stock to be issued to the Chief Executive Officer for partial compensation of services, amortized over calendar year 2003. For the six months and three months ended November 30, 2003, product development expense increased $28,679 (92.0%) and $11,362 (71.0%), respectively, as compared to the same periods ended November 30, 2002. The increase is attributable to the development of a new product line. For the six months ended November 30, 2003, interest expense decreased $3,327 (92.7%) as compared to the same period ended November 30, 2002. For the three months ended November 30, 2003, interest expense increased $245 (1,531.3%) as compared to the same period ended November 30, 2002. The six month decrease is attributable to use of available cash instead of the line of credit in the early part of the period. The three month increase is attributable to a decrease in cash. For the six months ended November 30, 2003, other income decreased $38,735 (77.3%) as compared to the same period ended November 30, 2002. The decrease is attributable to the insurance claim proceeds received in 2002. For the three months ended November 30, 2003, other income increased $2,125 (55.6%) as compared to the same period ended November 30, 2002. The increase is attributable to services provided by Lancer de Mexico to Biomerica, Inc., offset by a decrease due to insurance proceeds received in 2002. For the six months and three months ended November 30, 2003, rental income of $2,064 and $1,032, respectively, was realized. FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES The Company's financial condition at November 30, 2003 and its previous two fiscal year ends was as follows: 11/30/03 05/31/03 05/31/02 Current Assets $3,111,591 $3,448,770 $3,474,312 Current Liabilities 634,578 635,098 634,021 Working Capital 2,477,013 2,813,672 2,840,291 Line of Credit 0 426 65,669 Shareholder Equity 2,986,947 3,115,654 3,011,979 Total Assets 3,621,525 3,750,752 3,646,000 Cash decreased $287,170 during the six months ended November 30, 2003. Working capital decreased $336,659 during the six months ended November 30, 2003, primarily attributable to a decrease in cash and receivables. The Company expects to meet all of its cash requirements for the foreseeable future out of its cash reserves, cash flow, and line of credit. At November 30, 2003, Lancer has a $400,000 line of credit with GE Capital Healthcare Financial Services, which expires January 24, 2004. Borrowings are made at prime plus 2.0%, however not less than 8.0%, (8.0% at November 30, 2003), and are limited to 80% of accounts receivable less than 90 days old with a liquidity factor of 94%. At November 30, 2003 the outstanding balance is $0 and the unused portion available is approximately $326,000. Lancer is in compliance with its debt covenants at November 30, 2003. The line of credit is collateralized by substantially all the assets of Lancer, including inventories, receivables, and equipment. The lending agreement for the line of credit requires, among other things, that Lancer maintain a tangible net worth of $2,100,000 and that receivables payments be sent to a controlled lockbox. In addition to interest, a management fee of 0.25% of the average monthly outstanding loan balance and an unused balance fee of .0425% on the average monthly unused portion available are required. Lancer is not required to maintain compensating balances in connection with this lending agreement. In October 2003 the line of credit was extended to January 24, 2004 by GE Capital Healthcare Financial Services so that Lancer could explore other financing options. An agreement with another financing institution is in the process of being finalized. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Factors That May Affect Future Results You should read the following factors in conjunction with the factors discussed elsewhere in this and our other filings with the SEC and in materials incorporated by reference in these filings. 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 successfully 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 effect on our revenues and profitability; possible costs in complying with government regulations and the delays in receiving required regulatory approvals or the enactment of new adverse regulations or regulatory requirements; numerous competitors, some of which have substantially greater financial and other resources than we do; potential claims and litigation brought by patients or dental professionals alleging harm caused by the use of or exposure to our products; quarterly variations in operating results caused by a number of factors, including business and industry conditions and other factors beyond our control. All these factors make it difficult to predict operating results for any particular period. Item 4. PROCEDURES AND CONTROLS Within the 90 days prior to the date of this report, Lancer carried out an evaluation, under the supervision and with the participation of Lancer's management, including the Company's Chief Executive Officer and Director of Financial Planning, of the effectiveness of the design and operation of Lancer's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Director of Financial Planning concluded that Lancer's disclosure controls and procedures are effective. There were no significant changes in Lancer's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS Not Applicable Item 2. CHANGES IN SECURITIES Not Applicable Item 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable 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 January 20, 2004 By /s/ Zackary Irani Zackary Irani, Chief Executive Officer CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Zackary Irani, certify that the Quarterly Report on Form 10-QSB for the quarter ended November 30, 2003, fully complies with the requirements in Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, and that the information contained in such Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of Lancer Orthodontics, Inc. for the periods being presented. /s/ Zackary Irani Zackary Irani Chief Executive Officer Date: January 20, 2004 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this 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-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of our internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or other persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: January 20, 2004 /s/Zackary Irani Chief Executive Officer CERTIFICATION OF ACCOUNTING MANAGER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, John Dodge, certify that the Quarterly Report on Form 10-QSB for the quarter ended November 30, 2003, fully complies with the requirements in Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, and that the information contained in such Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of Lancer Orthodontics, Inc. for the periods being presented. /s/ John Dodge John Dodge Director of Financial Planning Date: January 20, 2004 CERTIFICATION OF ACCOUNTING MANAGER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this 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-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of our internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or other persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: January 20, 2004 /s/John Dodge Director of Financial Planning -----END PRIVACY-ENHANCED MESSAGE-----