-----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, JQKvG1/ev20RcXM1aDFW8QUjxXGwJUrJiQQ70z/XvdYqoGi/JmCE32A75lS+TUun ykJ3084JmNXY+NWDcCpIEw== 0000057538-04-000008.txt : 20040414 0000057538-04-000008.hdr.sgml : 20040414 20040414163333 ACCESSION NUMBER: 0000057538-04-000008 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040229 FILED AS OF DATE: 20040414 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: 04733434 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 qsb022904.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 February 29, 2004 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 12, 2004: 2,746,945 Transitional small business disclosure format (check one): Yes X No LANCER ORTHODONTICS, INC. FORM 10-QSB 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) 02/29/04 ASSETS CURRENT ASSETS: Cash $170,471 Accounts receivable, less allowances for sales returns and doubtful receivables of $134,918 1,232,258 Inventories, net of reserve of $212,225 1,745,068 Related party receivables 9,028 Prepaid expenses 54,494 Other receivables 50,772 Total current assets 3,262,091 PROPERTY AND EQUIPMENT, at cost 2,925,626 Less: Accumulated depreciation (2,416,842) 508,784 INTANGIBLE ASSETS: Marketing and distribution rights, net 16,600 OTHER ASSETS 49,485 Total assets $3,836,960 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $416,629 Accrued payroll and related benefits 164,528 Accrued professional fees 39,468 Accrued royalties 18,779 Other current liabilities 42,508 Current portion term loan 25,004 Total current liabilities 706,916 LONG TERM PORTION TERM LOAN 72,927 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, 97,596 shares subscribed 31,500 Accumulated deficit (1,818,728) Total stockholders' equity 3,057,117 Total liabilities and stockholders' equity $3,836,960 LANCER ORTHODONTICS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED FOR THE THREE FOR THE NINE MONTHS ENDED MONTHS ENDED 02/29/04 02/28/03 02/29/04 02/28/03 NET SALES $1,638,962 $1,507,626 $4,522,721 $4,298,029 COST OF SALES 1,149,066 1,084,096 3,225,683 3,062,278 Gross Profit 489,896 423,530 1,297,038 1,235,751 OPERATING EXPENSES: Sales & Marketing 303,749 251,182 991,619 831,412 General & Administrative 102,965 115,875 309,680 337,063 Product Development 27,377 34,842 87,238 66,024 TOTAL OPERATING EXPENSES 434,091 401,899 1,388,537 1,234,499 INCOME (LOSS) FROM OPERATIONS 55,805 21,631 (91,499) 1,252 OTHER INCOME (EXPENSE): Interest Expense (625) (37) (886) (3,625) Other Income, net 11,266 (991) 22,624 49,102 TOTAL OTHER INCOME (LOSS) 10,641 (1,028) 21,738 45,477 INCOME (LOSS) BEFORE INC TAXES 66,446 20,603 (69,761) 46,729 INCOME TAXES 26 1,224 26 1,418 NET INCOME (LOSS) $66,420 $19,379 $(69,787) $45,311 NET INCOME (LOSS) PER WEIGHTED AVERAGE OF COMMON SHARES Weighted average number of common shares 2,290,695 2,196,233 2,281,320 2,196,233 BASIC $.03 $.01 $(.03) $.02 Weighted average number of shares used in calculation of diluted earnings per share 2,409,026 2,196,233 2,399,651 2,196,233 DILUTED $.03 $.01 $(.03) $.02 LANCER ORTHODONTICS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED 02/29/04 02/28/03 Cash flows from operating activities: Net (loss) income $(69,787) $45,311 Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 47,645 64,210 Provision for losses on accounts receivable 29,918 (553) Provision for losses on inventory 75,000 45,000 Common stock issued in lieu of salary 11,250 26,250 Net change in operating assets and liabilities: Accounts receivable (162,736) (5,065) Inventories (71,052) 396,353 Related party receivables 4,862 -- Prepaid expenses 992 16,195 Insurance claim receivable -- 81,758 Other receivables (31,241) -- Accounts payable 19,767 (143,162) Accrued payroll and related benefits 23,377 8,331 Other current liabilities 4,096 48,756 Net cash (used in) provided by operating activities (117,909) 583,384 Cash flows from investing activities: Purchases of property and equipment (314,447) (74,666) Other assets (6,085) (3,651) Net cash used in investing activities (320,532) (78,317) Cash flows from financing activities: Net decrease in line of credit (426) (65,191) Proceeds from term loan 97,931 -- Cash flows (used in) provided by financing activities 97,505 (65,191) Net change in cash (340,936) 439,876 Cash, beginning of period 511,407 128,585 Cash, end of period $170,471 $568,461 Supplemental disclosure of cash flow information: Cash paid for: Interest $886 $3,625 Shares of common stock issued for services to be rendered $11,250 $14,000 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 February 29, 2004. (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 nine months ended February 29, 2004 as follows: FOR THE THREE FOR THE NINE MONTHS ENDED MONTHS ENDED 02/29/04 02/28/03 02/29/04 02/28/03 Net income (loss), as reported $66,420 $19,379 $(69,787) $45,311 Add: Stock-based employee compensation expense recorded -- -- -- -- Less: Stock-based employee compensation expense determined under fair value calculations (5,597) (2,410) (32,303) (11,701) Net income (loss) pro forma 60,823 16,969 (102,090) 33,610 Basic income (loss) per share, as reported: $.03 $.01 $(.03) $.02 Add: Stock-based employee compensation expense recorded -- -- -- -- Less: Stock-based employee compensation determined under fair value calculations .00 .00 (.01) (.01) Proforma $0.03 $0.01 $(0.04) $0.01 Diluted income (loss) per share, as reported: $0.00 $0.01 $(0.03) $.02 Add: Stock-based employee compensation expense recorded -- -- -- -- Less: Stock-based employee compensation determined under fair value calculations .00 .00 (.01) (.01) Pro forma $0.00 $0.01 $(0.04) $0.01 (E) Property and Equipment Costs in construction in progress consist of six projects; a new information system, two for new product lines, two for existing equipment replacements, and one for new trade show equipment. Costs capitalized into the new information system at February 29, 2004 are $43,682, with approximately $27,000 in additional costs to complete the project. Costs capitalized for the product lines are $321,818, with approximately $33,000 required for completion. Costs capitalized for replacement equipment are $14,210, with approximately $30,000 required for completion. Costs capitalized for trade show equipment are $17,167, with approximately $17,000 required for completion. (F) Financing At February 29, 2004, Lancer has a $400,000 line of credit with Cuyamaca Bank, which expires January 8, 2005. Borrowings are made at prime plus 2.0%, (6% at February 29, 2004) and are limited to 80% of accounts receivable less than 90 days old. The outstanding balance at February 29, 2004, is $0 and the unused portion available is approximately $400,000. Lancer is in compliance with its debt covenants at February 29, 2004. 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 net worth of $2,700,000 and that a zero outstanding balance be maintained for 30 consecutive days during the term. Lancer also has a term loan for $100,000 with Cuyamaca Bank that matures January 8, 2008. This loan requires 48 monthly payments of approximately $2,300 (principal and interest) at an interest rate of prime plus 2% (6% at February 29, 2004). The outstanding balance at February 29, 2004 is approximately $98,000, with approximately $25,000 classified as a current liability. The term loan is collateralized by substantially all of the assets of the corporation. (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. LANCER ORTHODONTICS, INC. Notes to Condensed Consolidated Financial Statements - continued (G) Commitments and Contingencies - continued 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 February 29, 2004, this obligation was approximately $313,000. 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 April 30, 2004, as extended, which requires monthly rentals that increase annually, from $2,900 per month in 1994 to $7,527 per month in 2009, with no payment required February through April 2004. The lease expense is being recognized on a straight-line basis over the term of the lease. The excess of the expense recognized over the cash paid aggregates $6,763 at February 29, 2004, and is included in accrued liabilities in the accompanying consolidated balance sheet. Total rental expense for this facility for the nine months ended February 29, 2004, was approximately $55,000. 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 nine months ended February 29, 2004, was approximately $77,000. The new Lancer Orthodontics de Mexico lease also required 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 February 29, 2004, other assets on the consolidated balance sheet includes approximately $45,000 for security deposit paid on the Mexico location and approximately $4,400 paid on the San Marcos location previously. LANCER ORTHODONTICS, INC. Notes to Condensed Consolidated Financial Statements - continued (G) Commitments and Contingencies - continued 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 and extended through December 2004, 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 nine months ended February 29, 2004 was $3,096. 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. 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. LANCER ORTHODONTICS, INC. Notes to Condensed Consolidated Financial Statements - continued (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. 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. 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. LANCER ORTHODONTICS, INC. Notes to Condensed Consolidated Financial Statements - continued (I) Stockholders' Equity (continued) 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 February 29, 2004: 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 $0.94 Outstanding, February 29, 2004 582,000 0 582,000 $0.44 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 antidilutive. 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 NINE MONTHS ENDED MONTHS ENDED 02/29/04 02/28/03 02/29/04 02/28/03 Sales to unaffiliated customers: United States $832,763 $756,081 $2,350,406 $2,322,982 Europe 540,339 480,378 1,325,805 1,276,767 Central and South America 69,040 82,727 243,354 162,903 Middle East 79,656 86,611 210,172 189,305 Other Foreign 117,164 101,829 392,984 346,072 $1,638,962 $1,507,626 $4,522,721 $4,298,029 No other geographic concentrations exist where net sales exceed 10% of total net sales. Sales or transfers between geographic areas none none 02/29/04 05/31/03 Long-lived Assets: United States $387,476 $164,000 Mexico 121,308 59,000 $508,784 $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 $9,000 due from Biomerica at February 29, 2004 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 February 29, 2004. 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 February 29, 2004. (N) Subsequent - Private Offering The Lancer Board of Directors approved a private offering of Common Stock, effective March 23, 2004, and ending April 12, 2004. The offering, to officers, board members, and key employees resulted in the sale of 450,000 new shares at $.60 per share with total proceeds of $270,000. In addition, one warrant exercisable for each share purchased (450,000 warrants) will be issued at $.85 per share. These warrants shall be exercisable until April 12, 2009. (Exhibits 1 and 2). LANCER ORTHODONTICS, INC. Notes to Condensed Consolidated Financial Statements - continued (O) Subsequent - CEO The Board of Directors also voted that effective April 12, 2004, Allen Barbieri will become Chief Executive Officer on a part time basis. Mr. Barbieri will receive no cash compensation, but will instead be paid 31,250 shares of restricted Common Stock per quarter, beginning in the 4th quarter of 2004. In addition, Mr. Barbieri has been appointed to the Board of Directors and will be given 17,500 options to purchase Common Stock at $.60 per share, exercisable 50% immediately and 50% at April 12, 2005. The options expire in five years. (Exhibit 3). (P) Recent Accounting Pronouncements 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. (Q) 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. 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. LANCER ORTHODONTICS, INC. Notes to Condensed Consolidated Financial Statements - continued 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 Certain information contained herein (as well as information included in oral statements or other written statements made or to be made by Lancer) contains statements that are forward-looking, such as statements relating to anticipated future revenues of the Company and success or current product offerings. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future, and accordingly, such results may differ materially from those expressed in any forward-looking statements made by or on behalf of Lancer. The potential risks and uncertainties include, among others, fluctuations in the Company's operating results. These risks and uncertainties also include the success of the Company in raising needed capital, the continual demand for the Company's products, competitive and economic factors of the marketplace, availability of raw materials, and the state of the economy. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof, and the Company undertakes no obligation to update these forward-looking statements. 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 February 29, 2004, 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. For the nine months ended February 29, 2004, net income decreased from net income of $45,311 at February 28, 2003 to a net loss of $69,787 at February 29, 2004. For the three months ended February 29, 2004, net income increased from net income of $19,379 at February 28, 2003 to net income of $66,420 at February 29, 2004. The nine month decrease is primarily due to the increase in sales and marketing expense. The three month increase is primarily due to an increase in selling prices. For the nine months ended February 29, 2004, net sales increased $224,692 (5.2%) as compared to the nine months ended February 28, 2003. For the three months ended February 29, 2004, net sales increased $131,336 (8.7%) as compared to the three months ended February 28, 2003. These increases are primarily due to an increase in prices. International net sales increased $197,268 (10.0%) and $54,654 (7.3%), respectively, for the nine months and three months ended February 29, 2004, as compared to the nine months and three months ended February 28, 2003. The nine month increase in sales was primarily in Europe and South America. The three month increase was primarily in Europe. 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, although not in the current quarter. Domestic net sales increased $27,424 (1.2%) and $76,682 (10.1%), respectively, for the nine months and three months ended February 29, 2004, as compared to the nine months and three months ended February 28, 2003. For the nine months ended February 29, 2004 cost of sales as a percentage of sales (71.3%) was consistent with the percentage for the nine months ended February 28, 2003. For the three months ended February 29, 2004 cost of sales as a percentage of sales (70.1%) decreased 1.8% as compared to the three months ended February 28, 2003, which totaled 71.9%. The decrease is primarily attributable to an increase in selling prices. For the nine months and three months ended February 29, 2004, selling and marketing expenses increased $160,207 (19.3%) and $52,567 (20.9%), respectively, as compared to the same periods ended February 28, 2003. The increase is primarily due to increased labor and advertising costs, offset by a decrease in trade show costs. In previous years the costs of the annual trade show held in May were accrued for over the course of the year. For the current year, all costs will be reflected in the month of the show. For the nine months and three months ended February 29, 2004, general and administrative expenses decreased $27,383 (8.1%) and $12,910 (11.1%) respectively, as compared to the nine months and three months ended February 28, 2003. The decreases are primarily due to a decrease in labor costs and professional fees. For the nine months ended February 29, 2004, $11,250 represents the period expense resulting from the 28,125 shares of common stock to be issued to the Chief Executive Officer for partial compensation of services amortized over calendar years 2003 and 2004. For the nine months ended February 29, 2004, product development expense increased $21,214 (32.1%) as compared to the same period ended February 28, 2003, attributable to the development of a new product line. For the three months ended February 29, 2004, product development decreased $7,465 (21.4%) as compared to the same period ended February 28, 2003. Since sales of the new product line occurred in the quarter ended February 29, 2004, current manufacturing costs are being classified as costs of sales, causing the comparison decrease of product development costs. For the nine months ended February 29, 2004, interest expense decreased $2,739 (75.6%) as compared to the same period ended February 28, 2003, primarily attributable to the use of available cash instead of the line of credit for product development and equipment purchases. For the three months ended February 29, 2004, interest expense increased $588 (1,589%) as compared to the same period ended February 28, 2003, primarily attributable to the $100,000 term loan acquired for the purchase of equipment (Notes E & F). For the nine months ended February 29, 2004, other income decreased $26,478 (53.9%) as compared to the same period ended February 28, 2003, primarily attributable to the insurance proceeds received in 2003. For the three months ended February 29, 2004, other income increased $12,257 (1,237%) as compared to the same period ended February 28, 2003, primarily attributable to Lancer de Mexico services provided to Biomerica (note L) and rental income (note G). FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES Lancer's financial condition at February 29, 2004 (unaudited) and its previous two fiscal year ends was as follows: 02/28/04 05/31/03 05/31/02 Current Assets $3,262,091 $3,448,770 $3,474,312 Current Liabilities 706,916 635,098 634,021 Working Capital 2,555,175 2,813,672 2,840,291 Line of Credit 0 426 65,669 Term Loan 97,931 0 0 Shareholder Equity 3,057,117 3,115,654 3,011,979 Total Assets 3,836,960 3,750,752 3,646,000 Cash decreased $340,936 during the nine months ended February 29, 2004, primarily due to the development of two new product lines and the purchase of new equipment. Working capital decreased $258,497 during the nine months ended February 29, 2004, primarily attributable to the decrease in cash. Lancer's management believes that it will be able to finance Lancer's operations through cash flow and available borrowings through the current fiscal year and ensuing fiscal years. This assumption is based upon a reasonable level of demand for our products. At February 29, 2004, Lancer has a $400,000 line of credit with Cuyamaca Bank, which expires January 8, 2005. Borrowings are made at prime plus 2.0%, (6% at February 29, 2004) and are limited to 80% of accounts receivable less than 90 days old. The outstanding balance at February 29, 2004, is $0 and the unused portion available is approximately $400,000. Lancer is in compliance with its debt covenants at February 29, 2004. 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 net worth of $2,700,000 and that a zero outstanding balance be maintained for 30 consecutive days during the term. Lancer also has a term loan for $100,000 with Cuyamaca Bank that matures January 8, 2008. This loan requires 48 monthly payments of approximately $2,300 (principal and interest) at an interest rate of prime plus 2% (6% at February 29, 2004). The outstanding balance at February 29, 2004 is approximately $98,000, with approximately $25,000 classified as a current liability. The term loan is collateralized by substantially all of the assets of the corporation. 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 AND USE OF PROCEEDS. The following shares of restricted common stock were issued after the nine months ended February 29, 2004, as a subsequent event. Class or Persons Price Date Title Amount Sold to per share Total 4/12/04 Common 450,000 qualified investors $.60 $270,000 The exemption relied upon for the issuance of the unregistered shares was that the shares were issued to qualified investors within the meaning of Securities and Exchange Commission Rule 501, Regulation D. Item 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 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 April 14, 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 February 29,2004 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: April 13, 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: April 13, 2004 /s/Zackary Irani Chief Executive Officer CERTIFICATION OF DIRECTOR OF FINANCIAL PLANNING 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 February 29,2004 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: April 13, 2004 CERTIFICATION OF DIRECTOR OF FINANCIAL PLANNING 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: April 13, 2004 /s/John Dodge Director of Financial Planning EX-99.1 CHARTER 3 exh1stockpurchagree.txt Exhibit 1 LANCER ORTHODONTICS, INC. STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (the "Agreement") is entered into as of the date indicated below, by and between Lancer Orthodontics, Inc., a California corporation (the "Company"), and the undersigned investor ("Investor"). 1. Stock Purchase. At the closing, the Company ("the Closing") will issue and sell to Investor, and Investor shall purchase from the Company, ______________________________ (____,______) restricted shares (the "Shares") of Common Stock, no par value, of the Company (the "Common Stock") at a purchase price (the "Purchase Price") of Sixty cents ($0.60) per share. At the Closing, the Company shall also issue to Investor a five-year warrant (the "Warrants") to purchase one (1) share (the "Warrant Shares") of the Company's restricted Common Stock at a per share exercise price of Eighty Five cents ($0.85) for each Share purchased. The Closing shall occur at such time as Investor delivers to the Company an original executed signature page of this Agreement along with the Purchase Price, payable in immediately available funds. Notwithstanding the preceding, this Agreement shall terminate and have no further force or effect unless the Closing occurs on or before_______, 2004. 2. Representations and Warranties of the Company. The Company hereby represents and warrants to Investor as follows: (a) Organization and Standing. The Company is a corporation duly organized and existing under, and by virtue of, the laws of the State of California and is in good standing under such laws. The Company has requisite corporate power to own and operate its properties and assets. (b) Corporate Power. The Company has all requisite legal and corporate power to execute and deliver this Agreement, to sell and issue the Shares, and to carry out and perform its obligations under the terms of this Agreement. (c) Authorization. All corporate action on the part of the Company, its directors and shareholders necessary for the authorization, execution, delivery and performance of this Agreement by the Company, the authorization, sale, issuance and delivery of the Shares and the performance of the Company's obligations hereunder has been taken. This Agreement, when executed and delivered by the Company, shall constitute the valid and binding obligation of the Company enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors, rules of law governing specific performance, injunctive relief or other equitable remedies, and limitations of public policy. (d) Valid Issuance of Common Stock. The Shares being purchased by Investor hereunder when issued, sold and delivered, in accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued, fully paid and nonassessable. The Warrant Shares when issued, sold and delivered, in accordance with the terms of the Warrants, will be duly and validly issued, fully paid and nonassessable. 3. Investor Representations and Warranties. Investor hereby represents and warrants to the Company and agrees as follows: (a) Investor represents and warrants to the Company that Investor is an "accredited investor", within the meaning of Securities and Exchange Commission Rule 501 of Regulation D, as presently in effect or is an Officer or Director of the Company. (b) The execution, delivery, and performance by the Investor under this Agreement and the consummation of the transactions contemplated hereby will not (i) violate any provision of law, statute, rule or regulation, or any ruling, writ, injunction, order, judgement or decree of any court, administrative agency or other governmental body applicable to Investor, or (ii) result in any violation or conflict with or constitute a default under any instrument, judgement, order, writ, decree or contract applicable to Investor. (c) This Agreement is made in reliance upon Investor's representation to the Company, which by execution of this Agreement Investor hereby confirms, that the Shares, the Warrants, and the Warrant Shares to be received by Investor will be acquired for investment for Investor's account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof, and that Investor has no present intention of selling, granting participation in, or otherwise distributing any of the Shares, the Warrants, or the Warrant Shares. (d) Investor understands that the Shares, the Warrants, and the Warrant Shares are not registered under the Securities Act of 1933, as amended (the "1933 Act"), on the basis that the sale provided for in this Agreement and the issuance of Shares and Warrants hereunder and the issuance of Warrant Shares pursuant to the proper exercise of the Warrants are exempt from registration under the 1933 Act pursuant to Section 4(2) thereof, and that the Company's reliance on such exemption is predicated on Investor's representations set forth herein. Investor realizes that the basis for the exemption may not be present if, notwithstanding such representations, Investor has in mind merely acquiring the Shares, the Warrants, or the Warrant Shares for a fixed or determinable period in the future, or for a market rise, or for sale if the market does not rise. Investor does not have any such intention. (e) Investor understands that the Shares, the Warrants, and the Warrant Shares may not be sold, transferred, or otherwise disposed of without registration under the 1933 Act or an exemption therefrom, and that in the absence of an effective registration statement covering the Shares, the Warrants, and the Warrant Shares or an available exemption from registration under the 1933 Act, the Shares, the Warrants, and the Warrant Shares must be held indefinitely. In particular, Investor is aware that the Shares and the Warrant Shares may not be sold pursuant to Rule 144 promulgated under the 1933 Act unless all of the conditions of the applicable Rules are met. Among the conditions for use of Rule 144 is the availability of current information to the public about the Company. Investor represents that, in the absence of an effective registration statement covering the Shares, the Warrants, and the Warrant Shares, it will sell, transfer, or otherwise dispose of the Shares, the Warrants, and the Warrant Shares only in a manner consistent with its representations set forth herein and then only in accordance with the 1933 Act. (f) Investor has adequate means of providing for its current needs and personal contingencies and has no need for liquidity in its investment in the Shares, the Warrants, and the Warrant Shares. (g) Investor has full power and authority to enter into this Agreement and this Agreement constitutes a valid and legally binding obligation of the Investor. (h) Investor has had the opportunity of asking such question(s) to the Company that the Investor believes is required for purchasing the Shares, the Warrants, and the Warrant Shares and has received such answers as the Investor has deemed satisfactory. (i) Investor agrees to be bound to the attached Confidentiality Agreement between the Investor and the Company. 4. Legends. (a) All certificates for the Shares, the Warrants, and the Warrant Shares shall bear substantially the following legend: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. (b) The certificates for the Shares, the Warrants, and the Warrant Shares shall also bear any other legends required by applicable state corporate or securities laws. 5. Lock-Up Agreement. Investor, if requested by the Company or the lead underwriter of any public offering of the Common Stock or other securities of the Company (the "Lead Underwriter"), hereby irrevocably agrees to enter into a customary Lock-Up Agreement with the Company and Lead Underwriter providing that the Investor shall not sell, contract to sell, grant any option to purchase, transfer the economic risk of ownership in, make any short sale of, pledge or otherwise transfer or dispose of any interest in any Common Stock of the Company or any securities convertible into or exchangeable or exercisable for or any other rights to purchase or acquire Common Stock of the Company (except Common Stock included in such public offering or acquired on the public market after such offering) during the period requested by the Lead Underwriter following the effective date of a registration statement of the Company filed under the 1933 Act or such shorter period of time as the Lead Underwriter shall specify. Each Investor further agrees to sign such documents as may be requested by the Lead Underwriter to further effect the foregoing and agrees that the Company may impose stop-transfer instructions with respect to such securities until the end of such period. The Company and the Investor acknowledge that each Lead Underwriter of a public offering of the Company's stock, during the period of such offering and the period requested by the Lead Underwriter thereafter, is an intended beneficiary of this Section 5. 6. California Law. The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California. 7. Notice. Any notice required to be given under the terms of this Agreement shall be addressed to the Company in care of its Secretary at: Lancer Orthodontics, Inc. 253 Pawnee Ave San Marcos, CA 92069 and any notice to be given to Investor shall be addressed to him at the address given by Investor beneath Investor's signature to this Agreement, or such other address as either party to this Agreement may hereafter designate in writing to the other. Any such notice shall be deemed to have been duly given when enclosed in a properly sealed envelope or wrapper addressed as aforesaid, registered or certified and deposited (postage or registration or certification fee prepaid) in a post office or branch post office regularly maintained by the United States. 8. Successors. This Agreement shall be binding upon and inure to the benefit of any successor or successors of the Company. 9. Entire Agreement. The parties intend that the terms of this Agreement and the Warrant issued pursuant hereto shall be the final expression of their agreement with respect to the subject matter hereof and may not be contradicted by evidence of any prior or contemporaneous agreement. No party shall be liable or bound to any other party in any manner by any warranties, representations, or covenants except as specifically set forth herein. The parties further intend that this Agreement shall constitute the complete and exclusive statement of its terms and that no extrinsic evidence whatsoever may be introduced in any judicial, administrative, or other legal proceeding involving this Agreement. 10. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have duly executed this Subscription Agreement as of the date indicated below. COMPANY: LANCER ORTHODONTICS, INC., a California corporation By: _______________________________ Dated: _____________________ Zackary S. Irani Chief Executive Officer INVESTOR SIGNATURES ATTACHED INVESTOR SIGNATURE PAGE LANCER ORTHODONTICS, INC. STOCK PURCHASE AGREEMENT INVESTOR: By: _____________________________ (signature) Name:____________________________ (Print Name) Address: ________________________ _________________________________ _________________________________ _________________________________ Note: Form 10KSB and 3 latest 10Q's attached CONFIDENTIALITY AGREEMENT CONFIDENTIALITY AGREEMENT, effective as of March ____, 2004, by and between Lancer Orthodontics, Inc., a California Corporation ( hereinafter "COMPANY") with offices at 253 Pawnee Street, San Marcos, CA 92069 and ________________________________, (hereinafter "INVESTOR") an individual with the principal address at ________________________________________________________________________. Background. In furtherance of discussions between INVESTOR and COMPANY relating to the Company's financial performance, financial statements, and the Stock Purchase Agreement ("the Program"), it may be necessary or desirable for COMPANY ("Disclosing Party") to disclose certain information to INVESTOR ("Receiving Party") which the Disclosing Party regards as confidential and the Receiving Party has agreed to treat as confidential information of the Disclosing Party. NOW, THEREFORE, in consideration of the mutual promises, covenants and agreements herein contained, and intending to be legally bound hereby, the parties hereto hereby agree as follows: 1. Confidential Information. As used herein the term "Confidential Information" shall mean any and all confidential, proprietary, or trade secret information or material of Disclosing Party and any derivatives, portions, or copies, thereof, including, without limitation, information resulting from or in any way related to (i) the Program; (ii) the business practices or relationships, procedures, property, methods of operation, future plans, financial information, customer or supplier information, medical or scientific data, or other proprietary data of Disclosing Party; (iii) the marketing plans, pricing policies, products, systems, discoveries, designs, ideas, concepts, inventions, innovations, improvements, plans, software, program flowcharts, files layouts, source code, technical "know-how", and other information related thereto, of Disclosing Party; and (iv) any information or material that Disclosing Party designates as Confidential Information or which bears or contains a marking or legend indicating that it is confidential, proprietary, or trade secret information or material. Confidential Information may be disclosed either orally, visually, in writing, or by delivery of materials containing Confidential Information. When disclosed orally or visually, such information shall be designated as "confidential," "proprietary," or the like at the time of disclosure and with subsequent written confirmation within thirty days thereafter, referencing the date and the type of information disclosed. When disclosed in writing or by delivery of materials, the writing or materials shall be designated as "confidential," "proprietary," or the like at the time of disclosure. 2. Obligations of Receiving Party. Receiving Party shall (i) not use any Confidential Information except as required for the performance of its duties directly related to the Program, and (ii) not disclose Confidential Information to any third party without the prior written consent of Disclosing Party. Notwithstanding the foregoing, Receiving Party may disclose to its subsidiaries or parent companies, on a need to know basis, Confidential Information disclosed to it by Disclosing Party under this Agreement, provided that each such subsidiary or parent shall first agree in writing to be bound by the terms and conditions of this Agreement to the same extent as the parties hereto are bound. Receiving Party shall be liable for any breach of the terms of this Agreement by any of its subsidiaries or parent companies. Receiving Party shall maintain the Confidential Information with at least the same degree of care that Receiving Party uses to protect its own confidential and proprietary information, but no less than a reasonable degree of care under the circumstances would warrant. Receiving Party shall neither disclose nor copy Confidential Information except as necessary for its employees with a need to know. Any copies of Confidential Information which are made by Receiving Party shall be identified as belonging to Disclosing Party and shall be marked "confidential," proprietary," or the like. 3. Exceptions to Confidentiality. Receiving Party's obligations set forth in Section 2 shall not extend to any material which is: (a) in the public domain, other than by a breach of this Agreement on the part of Receiving Party; (b) rightfully received from a third party without any obligation of confidentiality; (c) rightfully known to Receiving Party without any limitation on use or disclosure prior to its receipt from Disclosing Party; or (d) generally made available to third parties by Disclosing Party without restriction on disclosure. Information disclosed or made available to Receiving Party by Disclosing Party hereunder shall be presumed to be Confidential Information and the burden of establishing that such information comes within the foregoing exceptions to Receiving Party's obligations of confidentiality shall rest with Receiving Party. Information disclosed to Receiving Party hereunder shall not be deemed by Receiving Party to be available to the public or in the prior possession of Receiving Party merely because it is embraced by more general information available to the public or in the prior possession of Receiving Party. Furthermore, any combination of known information shall be within the scope of this Section 3 only if the combination, as such, is within the scope of this Section 3. 4. Compliance with Law. This Agreement shall not be deemed to restrict Receiving Party from complying with a lawfully issued governmental order or decree or any other legal requirement to produce or disclose Confidential Information. Receiving Party shall promptly notify Disclosing Party of any such request so that Disclosing Party may seek an appropriate protective order. Receiving Party warrants that it shall cooperate fully with Disclosing Party in seeking any protective order. If Disclosing Party is unable to obtain such protective order, Receiving Party shall furnish only that portion of the Confidential Information which Receiving Party is advised by written opinion of counsel is legally required by law to be disclosed and Receiving Party shall exercise its best efforts to obtain a protective order or other reliable assurance that confidential treatment will be accorded to the Confidential Information so disclosed. 5. Return of Confidential Information. Upon request from Disclosing Party, Receiving Party shall return to Disclosing Party all Confidential Information and cause all copies and summaries and synopses thereof to be returned or destroyed. Such destruction shall be confirmed in writing by Receiving Party to Disclosing Party. 6. Period of Confidentiality. Disclosing Party shall not assert any claims against Receiving Party for disclosure of Confidential Information made by Receiving Party more than seven years from the date Disclosing Party discloses Confidential Information to Receiving Party. 7. Title. Receiving Party agrees that any and all Confidential Information is and shall continue to be the sole and exclusive property of Disclosing Party and that title and the right to possess Confidential Information shall at all times remain with Disclosing Party. No right or interest of any kind in Confidential Information is transferred to Receiving Party under this Agreement and any such transfer shall be made only by separate and specific agreement. 8. No Obligation of Disclosure. Neither party shall have any obligation to disclose Confidential Information to the other party. Either party may, at any time, cease disclosing Confidential Information to the other party without any liability. 9. Equitable Relief. Receiving Party acknowledges that money damages would not be a sufficient remedy for breach of this Agreement and that Disclosing Party shall be entitled to seek preliminary and permanent injunctive relief for any such breach without having to prove actual damages or to post a bond and that Disclosing Party shall also be entitled to seek an equitable accounting of all such earnings, profits and other benefits arising from any such breach, which rights shall be cumulative and in addition to any other rights or remedies to which Disclosing Party may be entitled in law and or equity. If Disclosing Party enforces Receiving Party's obligations hereunder, Receiving Party shall reimburse Disclosing Party for all reasonable costs and expenses, including attorney's fees, incurred by Disclosing Party in this regard. 10. Enforcement. Each of the parties shall have the right at all times to enforce the provisions of this Agreement in strict accordance with the terms hereof notwithstanding any conduct or custom on its part in refraining from doing so at any time. The failure of either party at any time to enforce its rights hereunder strictly in accordance with the same shall not be construed as having created a custom contrary to the specific provisions hereof or as having in any way modified or waived the same. 11. Governing Law. This Agreement and the rights and obligations of the parties hereunder shall be governed by and construed under the laws of the State of California without reference to principles of conflicts of laws. 12. Notices. Any notice, request, demand, waiver, consent, approval or other communication which is required or permitted hereunder shall be in writing and shall be deemed given only if delivered personally or sent by a telegram or a telecopy (with transmission confirmed) or by registered or certified mail, return receipt requested and postage prepaid, or by Federal Express or any equivalent overnight delivery service, addressed to the parties at their respective addresses first set forth above or to such other addresses at which notice of change shall have been given. Such notice, request, demand, waiver, consent, approval, or other communication shall be deemed to have been given as of the date so delivered, telegraphed or faxed, or on the fifth day after deposit in the United States mail, or on the second day after deposit with Federal Express or an equivalent overnight delivery service. 13. Headings. The headings in this Agreement are for convenience only and do not in any way limit or amplify the terms or conditions in this Agreement. 14. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and all prior agreements with respect thereto are superseded hereby. No amendment or modifications hereof shall be binding unless in writing and duly executed by authorized representatives of both parties. 15. Severability. The provisions of this Agreement shall be several, and if any provision of this Agreement is held to be invalid or unenforceable, it shall be construed to have the broadest interpretation which would make it valid and enforceable. Invalidity or unenforceability of one provision shall not affect any other provision of this Agreement. 16. Survival. The respective rights and obligations of the parties hereunder shall indefinitely survive the termination or expiration of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 17. No Benefit to Others. The provisions set forth in this Agreement are for the sole benefit of the parties hereto and their successors and assigns, and they shall not be construed as conferring any rights on any other persons. 18. Counterparts. This Agreement may be executed in one or more counterpart copies, each of which shall be deemed an original and all of which shall together be deemed to constitute one agreement. IN WITNESS WHEREOF, the parties hereto, each by a duly authorized representative, have executed this Confidentiality Agreement effective as of the date first written above. LANCER ORTHODONTICS, INC. "Receiving Party" By: Zack Irani, CEO DATE: DATE: EX-99.2 BYLAWS 4 exh2warrant.txt Exhibit 2 COMMON STOCK PURCHASE WARRANT THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED UNLESS SUCH SALE OR TRANSFER IS IN ACCORDANCE WITH THE REGISTRATION REQUIREMENTS OF SUCH ACT AND APPLICABLE LAWS OR SOME OTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND APPLICABLE LAWS IS AVAILABLE WITH RESPECT THERETO. COMMON STOCK PURCHASE WARRANT Number of Shares: __________ Shares of Common Stock LANCER ORTHODONTICS, INC. 1. ISSUANCE. This Warrant is issued to the _______________________________ ("Holder") by LANCER ORTHODONTICS, INC., a California corporation (hereinafter, with its successors, called the "Company"). 2. PURCHASE PRICE; NUMBER OF SHARES. The registered Holder of this Warrant is entitled, upon surrender of this Warrant with the subscription form annexed hereto duly executed and the exercise price thereof, at the principal office of the Company, to purchase from the Company ______________ (___,____) fully paid and nonassessable shares (the "Shares") of Common Stock, zero par value, of the Company (the "Common Stock"), with an exercise price per share of $0.85 (the "Purchase Price"). Until such time as this Warrant is exercised in full or expires, the Purchase Price and the securities issuable upon exercise of this Warrant are subject to adjustment as hereinafter provided. The person or persons in whose name or names any certificate representing Shares of Common Stock is issued hereunder shall be deemed to have become the holder of record of the Shares represented thereby as at the close of business on the date that this Warrant is exercised with respect to such Shares, whether or not the transfer books of the Company shall be closed. 3. PAYMENT OF PURCHASE PRICE; ISSUANCE OF SHARES. The purchase price shall be paid in cash or by check. Upon the exercise of the rights represented by this Warrant, certificates for the Shares of Stock so purchased shall be delivered to the Holder as soon as possible and in any event within thirty (30) days after such exercise and, unless this Warrant has been fully exercised or expired, a new Warrant representing the portion of Shares, if any, with respect to which this Warrant shall not have been exercised shall also be issued to the Holder as soon as possible and in any event within thirty (30) days. 4. PARTIAL EXERCISE. This Warrant may be exercised in part, and the Holder shall be entitled to receive a new warrant, which shall be dated as of the date of this Warrant, covering the number of shares in respect of which this Warrant shall not have been exercised. 5. FRACTIONAL SHARES. In no event shall any fractional share of Common Stock or Common Stock be issued upon any exercise of this Warrant. If, upon exercise of this Warrant in its entirety, the Holder would, except as provided in this Section 5, be entitled to receive a fractional share of Common Stock or Common Stock, then the Company shall pay the Holder cash equal to the fraction of such share multiplied by the Purchase Price per share. 6. EXPIRATION DATE; AUTOMATIC EXERCISE. This Warrant shall expire at 5:00 p.m., Pacific Standard Time, on ________, 2009, and shall be void thereafter. 7. RESERVED SHARES; VALID ISSUANCE. The Company covenants that it will at all times from and after the date hereof reserve and keep available such number of its authorized shares of Common Stock, no par value, of the Company, free from all preemptive or similar rights therein, as will be sufficient to permit the exercise of this Warrant in full. The Company further covenants that such shares as may be issued pursuant to such exercise and/or conversion will, upon issuance, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof. 8. STOCK SPLITS AND DIVIDENDS. If after the date hereof the Company shall subdivide the Common Stock, by stock split or otherwise or combine the Common Stock, or issue additional shares of Common Stock in payment of a stock dividend on the Common Stock, the number of shares of Common Stock issuable on the exercise of this Warrant shall forthwith be proportionately increased in the case of a stock split or stock dividend, or proportionately decreased in the case of a combination, and the Purchase Price shall forthwith be proportionately decreased in the case of stock split or stock dividend, or proportionately increased in the case of a combination. 9. MERGERS AND RECLASSIFICATIONS. If after the date hereof the Company shall enter into any Reorganization (as hereinafter defined), then, as a condition of such Reorganization, lawful provisions shall be made, and duly executed documents evidencing the same from the Company or its successor shall be delivered to the Holder, so that the Holder shall thereafter have the right to purchase, at a total price not to exceed that payable upon the exercise of the then-unexercised portion of this Warrant, the kind and amount of shares of stock and other securities and property receivable upon such Reorganization by a holder of the number of shares of Common Stock which might have been purchased by the Holder immediately prior to such Reorganization upon the exercise of the unexercised portion of this Warrant, and in any case appropriate provisions shall be made with respect to the rights and interest of the Holder to the end that the provisions hereof (including without limitation, provisions for the adjustment of the Purchase Price and the number of shares issuable hereunder and the provisions relating to the net issue election) shall thereafter be applicable in relation to any shares of stock or other securities and property thereafter deliverable upon exercise hereof. For the purposes of this Section 9, the term "Reorganization" shall mean any reclassification or capital reorganization (other than as a result of a subdivision, combination or stock dividend provided for in Section 8 hereof), or any consolidation of the Company with, or merger of the Company into, another corporation or other business organization (other than a merger or consolidation in which the Company is the surviving corporation or which does not result in any reclassification or change of the outstanding Common Stock, or pursuant to which less than 50% of the voting power of the Company is transferred to persons who were not stockholders of the Company prior to the transaction), or any sale or conveyance to another corporation or other business organization of all or substantially all of the assets of the Company. 10. CERTIFICATE OF ADJUSTMENT. Whenever the Purchase Price or the number of Shares purchasable hereunder is adjusted, as herein provided, the Company shall promptly deliver to the Holder a certificate of the Company's chief executive officer setting forth the purchase price and number of shares after such adjustment and setting forth a brief statement of the facts requiring such adjustment. 11. NOTICES OF RECORD DATE, ETC. In the event of: (a) any reclassification of the capital stock of the Company, capital reorganization of the Company, consolidation or merger involving the Company, or sale or conveyance of all or substantially all of its assets; or (b) any voluntary or involuntary dissolution, liquidation or winding-up of the Company; then, in each such event, the Company will provide or cause to be provided to the Holder a written notice thereof at the time such notice is provided to the holders of the Company's Common Stock. 12. REPRESENTATIONS, WARRANTIES, AND COVENANTS OF THE COMPANY. This Warrant is issued and delivered by the Company and accepted by Holder on the basis of the following representations, warranties and covenants made by the Company: A. The Company has all necessary authority to issue, execute and deliver this Warrant and to perform its obligations hereunder. This Warrant has been duly authorized, issued, executed and delivered by the Company and is the valid and binding obligation of the Company, enforceable in accordance with its terms, subject to laws of general application related to bankruptcy, insolvency and the relief of debtors and other laws of general application affecting enforcement of creditors' rights generally, rules of law governing specific performance, injunctive relief or other equitable remedies. B. The shares of Common Stock issuable upon the exercise of this Warrant have been duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and nonassessable. All representations and warranties of the Company and the Holder hereof contained herein shall survive the exercise and conversion of this Warrant (or any part hereof) or the termination or expiration of the rights hereunder. 13. AMENDMENT. The terms of this Warrant may be amended, modified or waived only with the prior written consent of the Holder and the Company. 14. REPRESENTATIONS AND COVENANTS OF THE HOLDER. This Common Stock Purchase Warrant has been entered into by the Company in reliance upon the following representations and covenants of the Holder, which by its execution hereof the Holder hereby confirms: A. Investment Purpose. This Warrant and the right to acquire the Common Stock issuable upon exercise of the Holder's rights contained herein will be acquired for investment and not with a view to the sale or distribution of any part thereof, and the Holder has no present intention of selling or engaging in any public distribution of the same except pursuant to a registration or exemption. B. Accredited Investor. Holder is an "accredited investor" within the meaning of the Securities and Exchange Commission Rule 501 of Regulation D, as presently in effect. C. Private Issue. The Holder understands (i) that the Common Stock issuable upon exercise of the Holder's rights contained herein is not registered under the 1933 Act or qualified under applicable state securities laws on the ground that the issuance contemplated by this Warrant will be exempt from the registration and qualifications requirements thereof, (ii) that the Company's reliance on such exemption is predicated on the representations set forth in this Section 14; and (iii) that the shares issuable upon exercise of this Warrant shall bear a legend substantially similar to the legend on the first page of this Warrant. D. Financial Risk. The Holder has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment and has the ability to bear the economic risks of its investment. 15. NOTICES, TRANSFERS, ETC.. A. Any notice or written communication required or permitted to be given to the Holder may be given by first class mail or delivered to the Holder at the address most recently provided by the Holder to the Company. B. This Warrant may not be transferred by the Holder with respect to any or all of the shares purchasable hereunder without compliance with applicable federal and state securities laws. Upon surrender of this Warrant to the Company, together with the assignment notice annexed hereto duly executed, for transfer of this Warrant as an entirety by the Holder, the Company shall issue a new warrant of the same denomination to the assignee. Upon surrender of this Warrant to the Company, together with the assignment hereof properly endorsed, by the Holder for transfer with respect to a portion of the shares of Common Stock purchasable hereunder, the Company shall issue a new warrant to the assignee, in such denomination as shall be requested by the Holder hereof, and shall issue to such Holder a new warrant covering the number of shares in respect of which this Warrant shall not have been transferred. C. In case this Warrant shall be mutilated, lost, stolen or destroyed, the Company shall issue a new warrant of like tenor and denomination, and deliver the same (i) in exchange and substitution for and upon surrender and cancellation of any mutilated Warrant, or (ii) in lieu of any Warrant lost, stolen or destroyed, upon receive of an affidavit of the Holder or other evidence reasonably satisfactory to the Company of the loss, theft or destruction of such Warrant and the agreement of Holder to indemnify the Company with respect to such matter. 16. NO IMPAIRMENT. The Company will not, by amendment of its Articles or through any reclassification, capital reorganization, consolidation, merger, sale or conveyance of assets, dissolution, liquidation, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance of performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder, provided however, that no issuance of securities, whether convertible or otherwise, when made in accordance with the Company's Articles shall be considered an impairment of the Holder's rights hereunder. 17. GOVERNING LAW. The provisions and terms of this Warrant shall be governed by and construed in accordance with the internal laws of the State of California. 18. SUCCESSORS AND ASSIGNS. This Warrant shall be binding upon the Company's successors and assigns and shall inure to the benefit of the Holder's successors, legal representatives and permitted assigns. 19. Market Stand-Off Agreement. The Holder of this Warrant, if requested by the Company or the lead underwriter of any public offering of the Common Stock or other securities of the Company (the "Lead Underwriter"), hereby irrevocably agrees not to sell, contract to sell, grant any option to purchase, transfer the economic risk of ownership in, make any short sale of, pledge or otherwise transfer or dispose of any interest in any Common Stock or any securities convertible into or exchangeable or exercisable for or any other rights to purchase or acquire Common Stock (except Common Stock included in such public offering or acquired on the public market after such offering) during the one hundred and eighty (180) day period following the effective date of a registration statement of the Company filed under the Securities Act of 1933, as amended, or such shorter period of time as the Lead Underwriter shall specify. The Grantee further agrees to sign such documents as may be requested by the Lead Underwriter to further effect the foregoing and agrees that the Company may impose stop-transfer instructions with respect to such Common Stock subject until the end of such period. The Company and the Grantee acknowledge that each Lead Underwriter of a public offering of the Company's stock, during the period of such offering and for the one hundred and eighty (180) day period thereafter, is an intended beneficiary of this Section 19. LANCER ORTHODONTICS, INC. By ___________________________ Name Printed: Zackary S. Irani Chairman Dated: ________________, 2004 ANNEX A EXERCISE NOTICE To: LANCER ORTHODONTICS, INC. Date: _________________ The undersigned hereby elects to exercise the attached Warrant as to shares of Common Stock covered by this Warrant and hereby tenders the exercise price for such shares, together with applicable transfer taxes, if any. The certificate(s) for such shares shall be issued in the name of the undersigned. The undersigned agrees not to sell or otherwise transfer or dispose of any Common Stock, Preferred Stock, or other securities of the Company held by the undersigned during a period of time determined by the Company and its underwriters (not to exceed 180 days) following the effective date of the registration statement of the Company filed under the 1933 Act with respect to the Company's initial public offering. The undersigned further agrees to execute any standard lock-up agreement that the underwriters require in connection with such offering. The Company may impose stop-transfer instructions with respect to the Common Stock, Preferred Stock, or other securities subject to the foregoing restriction until the end of said period. In exercising its rights hereby, the undersigned hereby confirms the representations and statements made in Section 16 of the Warrant with respect to the shares being acquired upon exercise hereof. Name of Holder: _______________________________ Signature of Holder: __________________________ Name for Registration: ________________________ Mailing Address: ______________________________ ______________________________ ______________________________ ANNEX B ASSIGNMENT For value received, ______________________________ hereby sells, assigns and transfers unto [Please print or typewrite name and address of Assignee] the within Warrant, and does hereby irrevocably constitute and appoint _________ its attorney to transfer the within Warrant on the books of the within named Company with full power of substitution on the premises. Dated: __________________________________ Name of Holder: _________________________ By: ______________________________________ Name Printed: ____________________________ Title: ___________________________________ In the presence of: __________________________________________ EX-99.3 VOTING TRUST 5 exh3barbieri.txt EXHIBIT 3 LANCER-BARBIERI EMPLOYMENT AGREEMENT This employment agreement is entered into this 5th day of April, 2004, by and between Lancer Orthodontics Inc., (Lancer) and Allen Barbieri (Barbieri). Whereas; Lancer desires to hire Barbieri as an employee of the corporation and Barbieri desires to be employed by Lancer. The following will establish the terms and conditions of such employment. Position: Effective immediately, Barbieri shall become and serve as the interim Chief Executive Officer (CEO) of Lancer, and will report directly to the Board of Directors. Further, Barbieri shall become a member of the Board of Directors as soon as such appointment can be made. It is understood and agreed that Barbieri's position as CEO shall be Part-time only, and temporary in term, with the intention of Lancer's Chairman the additional position of CEO. This said, Barbieri shall rely heavily on existing managers to run and manage the day to day operations of the company. Further, Barbieri shall spend some of his time working from his Orange County office. Term: Both Parties agrees to that Barbieri shall be employed in the position of CEO for a period of two years or less. Compensation: Barbieri shall receive as compensation 62,500 restricted shares of Lancer's common stock for every six month of employment by Lancer. The shares shall vest 31,250 at the beginning of each quarter. Other than the above shares of restricted common stock, Barbieri shall not be entitled to any other form of cash or equity compensation, unless determined otherwise in the future by the Board of Directors. Benefits: In addition to the above compensation, Barbieri shall be entitled to all healthcare and other benefits available to employees of Lancer. Employment Termination: Barbieri's employment and this contract may be terminated by Lancer at any time without cause. Further, Barbieri's employment and this contract may be terminated by Barbieri at any time for any reason. In the event Barbieri's employment is terminated by either party, all stock compensation vested as of the date of termination shall be retained by Barbieri. Any unvested stock as of the date of termination shall return to Lancer, and Barbieri shall have no rights to such unvested shares. Change of control: Not withstanding the forgoing, in the event Barbieri's employment is terminated by either party following any transaction wherein over 50% of Lancer's common shares outstanding are transferred to and acquired by a single entity, corporation or individual, all unvested shares shall vest immediately and Barbieri shall be entitled to retain all granted shares. The undersigned acknowledge, agree to and accept all above terms, and further agree that if any individual terms are found to be unenforceable for any reason, the remaining terms shall survive. ____________________ ________________________ Zack Irani Allen Barbieri Chairman of the Board Lancer Orthodontics, Inc. -----END PRIVACY-ENHANCED MESSAGE-----