-----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, EsUhceiRmf5/WAEzdRMF+wXUPqwaryNrKV7N0Fpl+vta0AljBx/jBPGxQRKDolQP BGLPU/XwKxz+Byl96Y0h8g== 0000073290-97-000011.txt : 19970912 0000073290-97-000011.hdr.sgml : 19970912 ACCESSION NUMBER: 0000073290-97-000011 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970531 FILED AS OF DATE: 19970829 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIOMERICA INC CENTRAL INDEX KEY: 0000073290 STANDARD INDUSTRIAL CLASSIFICATION: DENTAL EQUIPMENT & SUPPLIES [3843] IRS NUMBER: 952645573 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-08765 FILM NUMBER: 97672969 BUSINESS ADDRESS: STREET 1: 1533 MONROVIA AVENUE CITY: NEWPORT BEACH STATE: CA ZIP: 92663 BUSINESS PHONE: 714-645-2111 MAIL ADDRESS: STREET 1: 1533 MONROVIA AVENUE CITY: NEWPORT BEACH STATE: CA ZIP: 92663 FORMER COMPANY: FORMER CONFORMED NAME: NMS PHARMACEUTICALS INC DATE OF NAME CHANGE: 19871130 FORMER COMPANY: FORMER CONFORMED NAME: NUCLEAR MEDICAL SYSTEMS INC DATE OF NAME CHANGE: 19830216 FORMER COMPANY: FORMER CONFORMED NAME: NUCLEAR INSTRUMENTS INC DATE OF NAME CHANGE: 19720508 10KSB 1 FORM 10-KSB - ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the fiscal year ended MAY 31, 1997 ---------------------------------------------------- Commission File No. 0-8765 ----------------------------------------------------------- BIOMERICA, INC. - ------------------------------------------------------------------------------- (Name of Small Business Issuer In Its Charter) DELAWARE 95-2645573 - ------------------------------------------------------------------------------ State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 1533 MONROVIA AVENUE, NEWPORT BEACH, CALIFORNIA 92663 ----------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (714) 645-2111 - ------------------------------------------------------------------------------ Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK, PAR VALUE $.08 - ------------------------------------------------------------------------------- (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No --- --- Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] State issuer's revenues for its most recent fiscal year: $9,243,510. State the aggregate market value of the voting stock held by non-affiliates of the issuer (based upon 3,292,107shares held by non-affiliates and the closing price of $2.9375 per share for Common Stock in the over-the-counter market as of August 22, 1997: $9,670,564). Number of shares of the issuer's common stock, par value $.08, outstanding as of August 22, 1997: 3,893,302 shares. DOCUMENTS INCORPORATED BY REFERENCE: The issuer's proxy statement for its 1997 Annual Meeting of Stockholders is incorporated into Part III hereof. Also incorporated by reference is the Annual Report on Form 10-KSB for the fiscal year ended May 31, 1997, for Lancer Orthodontics, Inc. PART I* ITEM 1. DESCRIPTION OF BUSINESS ----------------------- The statements in this Annual Report on Form 10-KSB and other statements made by Biomerica, Inc. that relate to future plans, events or performance are forward-looking statements which involve risks and uncertainties. Actual results, events or performance may differ materially from those anticipated in any forward-looking statements as a result of a variety of factors, including those set forth in this Annual Report on Form 10-KSB. INTRODUCTION Biomerica, Inc. ("Biomerica" or the "Company") is an international biomedical company primarily engaged in the development, manufacture and marketing of medical diagnostic test products. In addition, since 1984, Biomerica has followed a corporate strategy of developing new business opportunities through selected investments in companies in which synergistic benefits could be realized through sharing of technology, corporate administration and/or capital resources. Each of these companies is or has been in a business involving the application of advanced technologies in the biomedical, pharmaceutical, and/or other applied sciences. As of May 31, 1997, Biomerica held the following percentage ownership in the issued and outstanding common stock of subsidiaries: Subsidiary Company Biomerica Percent Ownership ------------------ --------------------------- Lancer Orthodontics, Inc. ("Lancer") 29.9% Allergy Immuno Technologies, Inc. ("AIT") 73.9% The Company was incorporated in Delaware in September 1971 under the name "Nuclear Medical Systems, Inc." The Company changed its corporate name in February 1983 to NMS Pharmaceuticals, Inc. and in November 1987 to Biomerica, Inc. Its principal place of business and executive offices are located at 1533 Monrovia Avenue, Newport Beach, California 92663 (telephone number 714-645-2111, telefax number 714-722-6674, e-mail: bmra@biomerica.com). In addition to Biomerica's ownership of Lancer, a director of Biomerica controls approximately 15.9% of the outstanding Lancer common stock. Two other Biomerica directors serve on Lancer's board of directors. In addition, Biomerica's Board controls an additional 5.7% of Lancer's common stock either through proxy or other controlled persons. As a result, Biomerica continues to exercise effective control of Lancer. As a consequence, Lancer's financial statements are consolidated with those of Biomerica. In 1986, Biomerica began to implement a strategy of investing a portion of its cash resources in marketable securities of biotech and large publicly-traded companies which are in the forefront of advanced technologies. This is intended to enable Biomerica to share in the overall growth of the health care industry and to monitor new developments in related advanced fields. Biomerica's holdings in these various companies are insignificant with respect to these companies. As of May 31, 1997, the Company's businesses included the following: o CORE BUSINESS IN DIAGNOSTICS, VIA BIOMERICA, INC. ------------------------------------------------- Biomerica develops, manufactures, and sells unique medical diagnostic products designed to detect certain medical conditions and diseases in the areas of certain cancers, heart attack, fertility, gastritis and ulcers, diabetes and Candida. o ADVANCED ORTHODONTIC PRODUCTS, VIA LANCER ----------------------------------------- Lancer is engaged in manufacturing, sales and development of high technology orthodontic products including, among others, ceramic brackets and wires. Lancer is well established in the field of orthodontics and its products are sold worldwide through a direct sales force and distributors. * Exhibit 99.2, "Part I of the Annual Report on Form 10-KSB of Lancer Orthodontics, Inc." is hereby incorporated by reference into this Report. o ALLERGY AND IMMUNO DIAGNOSTICS, VIA AIT --------------------------------------- AIT is engaged in developing therapeutic methods for treatment of allergies. In addition, AIT has been providing clinical testing services to doctors, clinics and drug firms in specialized areas of allergy and sensitivity determinations. As a consequence of its development effort in the field of allergy treatment, AIT owns four patents covering several inventions relating to the therapeutic aspect of allergy. AIT intends to utilize these patents to develop new allergy drugs on its own and/or in conjunction with other companies. BIOMERICA'S CORE BUSINESS - ------------------------- The Company has developed, produced and sold immunoassay diagnostic test kits since the late 1970's. Immunoassay kits are used by hospitals, clinical laboratories and medical researchers to analyze blood or urine from patients in the diagnosis of various diseases and other medical complications, or to measure the level of specific hormones, antibodies, antigens or other substances which may exist in the human body in extremely small concentrations. Recently advances in this technology have led to tests which could be used in the physcians office and by the patient at home. The Company targets three distinct markets in its core business of diagnostic products. These markets are: (1) Clinical laboratories, hospitals and researchers that perform immunoassays; (2) physicians offices and smaller laboratories which could benefit from in-office or rapid diagnostic tests; and (3) pharmacies and consumers who are interested in performing/marketing tests for home use (over-the-counter products). CLINICAL DIAGNOSTIC PRODUCTS - ---------------------------- Biomerica currently manufactures and sells diagnostic test kits which utilize enzyme immunoassay (EIA) or radioimmunoassay (RIA) technology. Biomerica also sells other kits to researchers. These products have not yet been cleared by the FDA for diagnostic use. Biomerica's clinical products include: - ------------------------------------------------------------------------------- Diagnostic Test Kit Use - ------------------------------------------------------------------------------- ALPHA-SUBUNIT (RIA) -For measurement of elevated blood levels of alpha subunit which are suspected to be associated with testicular, colorectal, pituitary, and other cancers. Also for delayed puberty. This product is used for research only. MYOGLOBIN (RIA) -For measurement of myoglobin in blood as a result of skeletal muscle injury including heart. THYROID PANEL: -For measurement of thyroid function in manual and T3, T4, TSH (EIA) automated systems. THYROGLOBULIN (RIA) -For prognostic testing for the detection of metastasis after the treatment or removal of thyroid tumor. This product is used for research only. THYROGLOBULIN AUTO- -For measurement of autoantibodies to ANTIBODY TEST thyroglobulin in human blood. High levels of (EIA & RIA) patient's Tg autoantibodies are present with Hashimoto's disease and lymphadenoid goiter. This product has just been cleared by the FDA. NEONATAL TSH (RIA) -For early detection of congenital primary hypo- thyroidism. (Newborn thyroid hormone assessment). - ------------------------------------------------------------------------------- Diagnostic Test Kit Use - ------------------------------------------------------------------------------- HISTAMINE (RIA) -For determination of blood histamine levels which are associated with leukemia, allergy diseases, and sensitivity determinations in animals and humans. FDA clearance was received to market the histamine RIA test kit for a special type of leukemia disease. For allergy applications, the product is sold for research and investigational use only since FDA clearance has not yet been obtained for that purpose. HELICOBACTER PYLORI -A non-invasive blood test for gastritis and ANTIBODY (EIA) ("GAP") peptic ulcer infection. The "GAP" test is FOR GASTRITIS & ULCER amenable to screen populations for the bacterium DETECTION (Helicobacter pylori) that causes gastritis and peptic ulcers. FDA clearance for the GAP was received in July 1991. Since then, Biomerica has entered into a multi-year exclusive agreement with BioRad of Hercules, California, to distribute the GAP test worldwide with the exception of Japan. Biomerica has entered into another exclusive agreement with Nisshin/Fujirebio for distribution of the GAP test in Japan. After 18 months of conducting the necessary clinical studies, Japan's Ministry of Health has approved the GAP test kit for sale in Japan for diagnostic purposes. The Company believes that it is the first test of its kind to receive such clearance in Japan. ISLET CELL- -A non-invasive blood test for predisposition of AUTOANTIBODIES (EIA) Type I diabetes. It is for detecting the onset (ISLETESTTM) of type I diabetes [insulin dependent diabetes FOR DETECTION mellitus (IDDM)] years before the manifestation OF TYPE I DIABETES of the disease. IDDM is a disease characterized by abnormalities in the regulation of blood sugar. The disease may cause serious injury to the eyes, kidneys, blood vessels, and nervous system. Presently, this kit is provided to medical institutions for investigational use only. INSULIN -A non-invasive blood test for assessment of AUTOANTIBODY (EIA) status of type I diabetes. This kit is provided for investigational use only. GAD AUTOANTIBODY (EIA) -A non-invasive blood test for individuals predisposed to Type I diabetes. CANDIDA ALBICANS ANTIBODY -A non-invasive blood test for detection of IgG, (CANDIQUANTTM) IgM or IgA antibodies to Candida albicans. This kit is provided for investigational use only. CANDIDA ALBICANS -A non-invasive blood test for detection of ANTIGEN (CANDIGENTM) Candida albicans antigen. This kit is provided for investigational use only. PHYSICIANS' OFFICE AND OVER-THE-COUNTER PRODUCTS ------------------------------------------------ The over-the-counter and professional markets for rapid diagnostic products are expanding as a result of significant economic pressures affecting the health care industry. These types of products are important for the following reasons: (1) The tests help to manage existing medical conditions and their costs; (2) Rapid tests improve healthcare and save lives through prompt diagnosis and early detection; and (3) These test help health care providers improve productivity and reduce expenses. At the same time, technological advances in medical diagnostics have made it possible to perform diagnostic tests within the home and the physician's office, rather than in the clinical laboratory. The Company's objective has been to address these markets by developing rapid diagnostic tests that are accurate, employ easily obtained specimens, and are simple to perform without instrumentation. Until recently, tests of this kind required the services of medical technologists and sophisticated instrumentation; frequently, results were not available until at least the following day. Most of the Company's over-the- counter tests are FDA cleared. The Company believes that such tests are as accurate as laboratory tests when used properly, require no instrumentation, give reliable results in minutes and can be performed with confidence in the home or the doctor's office. The emphasis on producing easy to use tests that require no instrumentation has led to the development of the products indicated below which currently are marketed to physicians, clinics, hospital laboratories and the general public through drugstores such as Walgreens, CVS, Osco/Sav-On, etc. - ------------------------------------------------------------------------------- Diagnostic Test Kit Use - ------------------------------------------------------------------------------- EZ DETECTTM -Home test kit for both the physician's office and HIDDEN BLOOD over-the-counter markets for determining occult IN STOOL (hidden) blood in stool. The test produces a color change and requires no instrumentation. The test is based on placing a test pad in the toilet bowl after a bowel movement and observing the development of blue color. It serves as an early warning signal for bleeding disorders, including cancer of the colon or rectum, ulcers, hemorrhoids, polyps, colitis, diverticulitis and lower intestinal problems. This test gives accurate results without diet restrictions. Unlike other tests on the market, it does not require the patient to dig in the stool, mail the specimen to the laboratory, and abstain from taking vitamin C or eating certain fruits, vegetables and rare meats for several days before and during testing. ULTRA SENSITIVE -An over-the-counter test for the determination of URINE OCCULT hidden blood in urine. It detects very small BLOOD TEST (UBT) amounts of blood in urine caused by infections, cancer, stones, prostatic enlargement, kidney disease, trauma, or malformations of the genito- urinary tract. OVULATION TEST -One-step, five minute visual test for laboratory (EZ-LHTM) or home use for determination of the proper time of ovulation. PREGNANCY TEST -One-step, five minute visual test for laboratory (FORTEL(R)) or home use for determination of pregnancy. PSA TEST -One-step, ten minute visual test to detect (EZ-PSATM) Prostate Specific Antigen (PSA). The test is intended for professional use as an aid in the diagnosis of prostate cancer. FDA approval is needed before marketing in the U.S. HELICOBACTER PYLORI -A rapid visual test intended for the physician's (EZ-H.P.TM) office to detect duodenal and gastric ulcer. Clinical studies are underway to obtain FDA clearance. BIOMERICA'S OTHER PRODUCTS: QUALITY CONTROL SERA ------------------------------------------------- Biomerica markets a variety of quality control sera which are used in conjunction with diagnostic products of Biomerica and other companies. These control sera serve the user by monitoring the consistency in performance of the diagnostic kits being used. LANCER ORTHODONTICS, INC. - ------------------------- Lancer designs, manufactures and sells orthodontic products. The product line includes preformed bands, direct bonding pads, various brackets, buccal tubes, arch wires, lingual attachments and related accessories. The foregoing are assembled to the orthodontists' prescriptions or the specifications of private label customers. Lancer also markets products which are purchased and resold to orthodontists, including sealants, adhesives, elastomerics, headgear cases, retainer cases, orthodontic wire, and preformed arches. Lancer sells its products directly to orthodontists through company-paid sales representatives in the United States. At the end of its 1997 fiscal year, Lancer had nine sales representatives all in the United States, all of whom are employees of Lancer. In selected foreign countries, Lancer sells its products directly to orthodontists through its international marketing division. Lancer also sells its products through distributors in certain foreign countries and to other companies on a `private label'' basis. Lancer has entered into a number of distributor agreements whereby it sold or granted the marketing rights to its products in certain sales territories in Mexico, Central America, South America, Europe, Canada, Australia and Japan. The distributors complement the international marketing division which was established in 1982. Most of Lancer's manufacturing and shipping operations are in Mexicali, Mexico, in order to reduce the cost of manufacturing and compete more effectively worldwide. Lancer maintains its headquarters in San Marcos, California where it houses the administration, the engineering, the sales and marketing, and the customer services. ALLERGY IMMUNO TECHNOLOGIES, INC. - --------------------------------- AIT and its predecessors commenced development activities in allergy and immune disorder research diagnostic reagents and services in 1980. AIT currently operates a clinical reference laboratory in Newport Beach, California, for allergy and other esoteric diagnostic testing services for physicians, other laboratories and pharmaceutical companies. AIT employs one medical technologist and two technicians and receives substantial assistance from Biomerica whose laboratory is contiguous to AIT. In addition to the laboratory testing personnel, AIT hired Dr. Howard Wertheim as its President in June 1997. As a result of its research activities, AIT has discovered new methods for treating allergies. AIT has succeeded in obtaining the rights to four patents pertaining to its discoveries for allergy treatment. These are: o Immunotherapy agents for treatment of IgE mediated allergies: U.S. Patent #5,116,612 (issued May 6, 1992). o Liposome containing immunotherapy agents for treatment of IgE mediated allergies: U.S. Patent #5,049,390 (issued September 17, 1991). o Immunotherapy agents for treatment of IgE mediated allergies: U.S. Patent #4,946,945 (issued August 7, 1990). o Allergen-thymic hormone conjugates for treatment of IgE mediated allergies: U.S. Patent #5,275,814 (issued January 4, 1994). AIT intends to utilize these patents either on its own or via a joint venture with a pharmaceutical company to develop unique products for the treatment of allergy, especially those that can be taken orally, and avoid the present injection therapy which is tedious, expensive and unpredictable. With help from Biomerica, AIT has begun preclinical animal studies using some of these patents. AIT is focused on the discovery and commercialization of novel bio- pharmaceutical drugs for the treatment of allergies. The Company's research has led to new therapeutic approaches and inventions which are covered by four U.S. patents. AIT's strategy is to utilize its proprietary technologies to create unique drugs for the treatment of allergies, especially those that can be taken orally avoiding the present injection therapy which is tedious, expensive and unpredictable. The objective of AIT is to tap the estimated $6 billion allergy market in the U.S. by developing drugs for allergy treatment based on Liposome- Encapsulated Allergens (LEA). Liposomes are minute fatty particles in which allergens may be enclosed (encapsulated). LEA favorably alters the immunological response to allergens compared to the response elicited by native allergens presently used in desensitizing immunotherapy. The results of pre-clinical studies conducted on rodents (adminstering liposome encapsulated house dust mite by both injeciton and mouth) indicate a dramatic increase in the densensitizaiton process. This new type of therapy may revolutionize allergy treatment for reasons indicated below: - ------------------------------------------------------------------------------- FEATURES BENEFIT - ------------------------------------------------------------------------------- Oral delivery possible Increased patient compliance, no injections necessary Complete treatment Treats the disease and not the symptoms as in histamine blockers Reduced patient visits Convenient to patient and less costly to managed care AIT is looking for a collaborative partner to continue this effort. The Company has also developed a Histamine Basophil Release (BHR) test that is a surrogate to humans wherein sensitivities to allergens may be determined in a test tube. Food sensitivity studies for large pharmaceutical and nutritional firms such as Mead Johnson and Carnation were conducted utilizing the BHR test. AIT intends to use the same BHR in the development of the new drug. Being a credited clinical laboratory, AIT provides specialized testing services to large organizations such as Laboratory Corporation of America, American Homes Products, as well as other clinics and physicians. Biomerica owns about 73.9% of AIT's outstanding common stock. PRODUCTION - ---------- The Company's diagnostic kits include reagents, antibodies, labeled antigens, buffers, standards, and reference controls. The Company supplies each customer with detailed written instructions for the use of its diagnostic products. All of the Company's diagnostic test kits are processed and assembled at its facilities in Newport Beach, California. Production of diagnostic tests involve formulating and coloring component antibodies and antigens in specified concentrations, attaching a tracer to the antigen, filling components into vials, packaging and labeling. The Company continually engages in quality control procedures to assure the consistency and quality of its products and to comply with applicable FDA regulations. Lancer currently utilizes a subcontractor to provide manufacturing services to Lancer through its affiliated entities located in Mexicali, B.C., Mexico. The current agreement, which expires in June 1998, allows for the pass through of actual costs plus a weekly administrative fee. This gives Lancer greater control over all costs associated with the manufacturing operation than did the hourly rate per employee cost. RESEARCH AND DEVELOPMENT - ------------------------ Biomerica is continually engaged in the research and development of additional diagnostic tests to broaden its product line in specific areas such as predisposition of diabetes, cancer diagnostics, and rapid testing kits for the physician's office and the consumer market. Research and development expenses include the costs of materials, supplies, personnel, facilities and equipment which are devoted both to research and development and to production and quality control of diagnostic test kits for sale. Lancer is engaged in development programs to improve its orthodontic products and production techniques. Lancer consults frequently with practicing orthodontists. Research and development expenses incurred by the Company for the years ended May 31, 1997 and 1996 aggregated $283,363 and $257,125, respectively. These expenses included approximately $93,157 and $130,240 for fiscal 1997 and 1996, respectively, for Lancer's product development. MARKETS AND METHODS OF DISTRIBUTION - ----------------------------------- Biomerica has approximately 320 current customers, of which approximately 50 are distributors and the balance are hospital and clinical laboratories, medical research institutions, medical schools, pharmaceutical companies, drug stores and physicians' offices. The Company relies on unaffiliated distributors, advertising in medical and trade journals, exhibitions at trade conventions, direct mailings and an internal sales staff to market its diagnostic products. Biomerica targets three main markets: (a) clinical laboratories, (b) physicians' offices, and (c) over- the-counter (OTC) drug stores. Separate sales forces and marketing plans are utilized to expand sales in each of the three markets. The newest market to the company is the OTC segment. This market is divided into independent drug stores and chain drug stores. The Company has been aggressively targeting both the chain and independent stores. The independents are widely dispersed and therefore require wholesalers (e.g. Bergen Brunswig, Foxmeyer, etc.) to promote the Company's products. Biomerica sells to chain stores through manufacturers representatives and chain store buyers. Lancer sells its products directly or indirectly through its sales representatives, to a relative large number of customers. At the end of its 1997 fiscal year, Lancer had nine sales representatives, all in the United States, all of whom are employees of Lancer. The loss of any one or a few customers would not have a material adverse effect upon the revenues of the Company. BACKLOG - ------- As of May 31, 1997 and 1996, Lancer had a backlog of $237,000 and $353,000, respectively. RAW MATERIALS - ------------- The principal raw materials utilized by the Company consist of various chemicals, serums, reagents, radioactive isotopes and packaging supplies. Almost all of its raw materials are available from several sources, and the Company is not dependent upon any single source of supply or a few suppliers. Many antibodies used in the Company's immunoassay products are produced by the Company itself by injecting antigens into animals which are maintained by the Company. The Company maintains inventories of antibodies and antigens as components for its diagnostic test kits. Due to a limited shelf life which averages 60 days for RIA products, finished kits are prepared as required for immediate delivery of pending and anticipated orders. Sales orders are normally processed on the day of receipt. The principal raw materials used by Lancer in the manufacture of its product include: stainless steel, which is available from several commercial sources; nickel titanium, which is available from three sources; and lucolux translucent ceramic, which is currently only available from one source, General Electric, and is purchased on open account. Ceramic material similar to General Electric's Lucolux translucent ceramic is available from other sources. Lancer had no difficulty in obtaining an adequate supply of raw materials during its 1997 fiscal year, and does not anticipate that there will be any interruption or cessation of supply in the future. COMPETITION - ----------- Immunodiagnostic products are currently produced by more than 100 companies, a majority of which are located within the United States. The Company and its subsidiaries are not a significant factor in the market. Allergy diagnostic products are currently produced by approximately five competitors, and there are even fewer producing allergy therapeutics. The Company's competitors vary greatly in size. Many are divisions or subsidiaries of well-established medical and pharmaceutical concerns which are much larger than the Company and expend substantially greater amounts than the Company for research and development, manufacturing, advertising and marketing. The primary competitive factors affecting the sale of diagnostic products are uniqueness, quality of product performance, price, service and marketing. The prices for the Company's products compare favorably with those charged by most of its competitors. The Company believes it competes primarily on the basis of its reputation for the quality of its products, the speed of its test results, the unique niches in the market, and its prompt shipment of orders. The Company offers a broader range of products than many competitors of comparable size, but to date has had limited marketing capability. The Company is working on expanding this capability. Lancer encounters intense competition in the sale of orthodontic products. Lancer's management believes that Lancer's seven major competitors are: Unitek, a subsidiary or division of 3M; `A'' Company, a private company; Ormco, a subsidiary or division of Sybron; RMO Inc., a private company; American Orthodontics, a private company; GAC, a foreign company; and Dentaurum, a foreign company. Lancer estimates that these seven competitors account for approximately 80% of the orthodontic products manufactured and sold in the United States. Lancer's management also believes that each of these seven competitors is larger than Lancer, has more diversified product lines and has financial resources exceeding those of Lancer. While there is no assurance that Lancer will be successful in meeting the competition of these seven major competitors or other competitors, Lancer has, in the past, successfully competed in the orthodontic market and has achieved wide recognition of both its name and its products. SEASONALITY OF BUSINESS - ----------------------- The business of the Company and its subsidiaries have not been subject to significant seasonal fluctuations. EMPLOYEES - --------- As of August 15, 1997, the Company and its subsidiaries employed 74 full- time employees and 6 part-time employees, including two Ph.D.'s. Lancer, through its Mexican subcontractor, employs approximately 120 people in Mexico. The Company also engages the services of various outside Ph.D. and M.D. consultants as well as medical institutions for technical support on a regular basis. The Company is not a party to any collective bargaining agreement and has never experienced a work stoppage. FOREIGN BUSINESS - ---------------- All of the Company's fixed assets, excluding some of Lancer, are located within southern California. The following table sets forth the dollar volume of revenue attributable to sales to domestic customers and foreign customers during the last two fiscal years for the Company and its consolidated subsidiaries: Year ended May 31, ------------------------------------ 1997 1996 ----------------- ---------------- Revenues from sales to: United States customers........ $5,208,000/56% $ 5,262,000/56% Foreign customers.............. $4,036,000/44% $ 4,219,000/44% ---------------- --------------- Total revenues................. $9,244,000/100% $9,481,000/100% ================ =============== The Company does not believe that its foreign sales are subject to any special or unusual risks which are not present in the ordinary course of business in the United States, except for possible future changes in governmental regulations and import restrictions. Foreign countries have licensing requirements applicable to the sale of diagnostic products which vary substantially from domestic requirements; depending upon the product and the foreign country, these may be more or less restrictive than requirements within the United States. Foreign sales are made primarily through a network of 30 independent distributors in approximately 20 countries. GOVERNMENT REGULATION AND LICENSES - ---------------------------------- Medical diagnostic products in the United States are subject to governmental regulation and supervision by various federal and state agencies. The Company's facilities, manufacturing procedures and records are periodically inspected by the FDA and other government agencies such as the USDA to review compliance with applicable regulations. Diagnostic test kits are required to comply with certain manufacturing standards of the FDA. Under normal circumstances, FDA clearance of diagnostic test kits takes 90 days after notifications have been filed with the FDA if the diagnostic test is of a type that has already been cleared for marketing by other companies. Most of the Company's products have received FDA clearance. FDA clearance of immunoassays not previously marketed by other companies normally requires longer periods of as much as two years. Various foreign government agencies regulate the sale of medical diagnostic products in foreign countries. Although the Company does not anticipate any unusual difficulties in complying with government regulations applicable to its business, it cannot predict whether future changes in government regulation might increase its cost of conducting business or increase the time required for development and introduction of new products. The Company holds a radioactive materials license from the State of California (currently expiring on June 20, 1998), and a permit from the U.S. Drug Enforcement Administration (currently expiring on June 30, 1998), which are renewed periodically. Although the Company has never failed to obtain renewals, its business operations would be materially and adversely affected if it were unable to do so. Lancer and many of its products are subject to regulation by the U.S. Food and Drug Administration (`FDA'') pursuant to the Medical Device Amendments of 1976 (`Amendments''). Lancer has registered with the FDA as required by the Amendments. Certain existing products have been listed, and new products of Lancer will be listed with the FDA for classification. The effect on Lancer of complying with the registration and classification requirements of the Amendments has not had a material effect on Lancer's operations to date. The Company registered the tradenames, "Fortel", "Isletest", "Nimbus" and "GAP" with the Office of Patents and Trademarks on December 31, 1985. The Company's unregistered tradenames are: "EZ Detect", "CAST", "COT", "EquistiK", "FelistiK", "Tri-Level Controls", "Tru-Level Controls", "T-Marker Controls", "AllerHalt", "Candiquant", "Candigen", "EZ-H.P.", and "EZ-PSA". On April 4, 1989, Lancer was granted a patent on its CounterForce design of a nickel titanium orthodontic archwire. On August 1, 1989, Lancer was granted a patent on its bracket design used in the manufacturing of Sinterline and Intrigue orthodontic brackets. On September 17, 1996, Lancer was granted a patent on its method of laser annealing marking of orthodontic appliances. On March 4, 1997, Lancer was granted a patent on an orthodontic bracket and method of mounting. All of the patents are for a duration of seventeen years. Lancer has entered into a number of license and/or royalty agreements pursuant to which it has obtained rights to certain of the products which it manufactures and/or markets. The patents and agreements have had a favorable effect on Lancer's image in the orthodontic marketplace and Lancer's sales. Lancer has entered into a number of license and/or royalty agreements pursuant to which it has obtained rights to certain of the products which it manufactures and/or markets. ITEM 2. PROPERTIES ---------- During fiscal 1997 Biomerica leased approximately 13,500 square feet of space in Newport Beach, California. Approximately 13,500 square feet were leased for a term which expired May 31, 1993 (and which was renewed until May 31, 1998) at a base rental of approximately $10,720 per month, plus taxes and insurance. These facilities are used for research and development and diagnostic test kit manufacturing and marketing. The facilities are leased from Mrs. Ilse Sultanian and the estate of Mr. Joseph H. Irani (Mr. Joseph H. Irani was an officer, director and stockholder of the Company). The terms of such leases cannot be considered to have been negotiated at arms-length, but in the opinion of management are no less favorable to the Company than would be available from an unaffiliated party. In the first quarter of fiscal 1997, the Company began expansion into an additional 7,000 sq.ft. space to be used for production. Rent started accruing in April 1997 for this space at a rate of $2,000 per month. AIT currently leases approximately 1,600 square feet at the above facility for $1,400 per month. These properties are leased by AIT on a month to month basis from Mrs. Ilse Sultanian and the estate of Mr. Joseph H. Irani. Lancer leases a 9,240 square foot manufacturing building in San Marcos, California. The term of the lease expires on December 31, 1998. The minimum annual cash rental payments is $52,800 in 1998 and $34,300 in 1999. Lancer has also subcontracted for a significant portion of its manufacturing in Mexicali, Mexico. The manufacturing is performed in approximately 12,500 square feet of space leased by the subcontractor. The Company maintains animals at a ranch in Vista, California, which are treated biologically to produce antibodies used in certain of the Company's immunodiagnostic products. These facilities are utilized on a month-to-month basis at a charge based on the number of animals maintained at the facility. The Company believes that its facilities and equipment are in suitable condition and are adequate to satisfy the foreseeable requirements of Biomerica and its subsidiaries. ITEM 3. LEGAL PROCEEDINGS ----------------- Inapplicable. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS ------------------------------------------------- Inapplicable. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCK ------------------------------------------ HOLDER MATTERS -------------- The Company's common stock is traded on the NASDAQ SmallCap Stock Market (SmallCap under the symbol "BMRA". The following table shows the high and low bid prices for the Company's common stock over the last two years based upon data reported by NASDAQ. Prices shown represent quotations by dealers, and do not reflect markups, markdowns or commissions. Bid Prices ------------------- High Low ------- -------- Quarter ended: May 31, 1997............. 3-5/8 2-1/8 February 28, 1997........ 4-3/8 2-7/8 November 30, 1996........ 6-3/4 3-1/4 August 31, 1996.......... 9-7/8 2-3/16 May 31, 1996............. 2-11/16 1-7/8 February 29, 1996........ 2-1/2 1-11/16 November 30, 1995........ 2-1/2 1-3/4 August 31, 1995.......... 2-1/4 15/16 As of August 2, 1997, the number of holders of record of the Company's common stock was approximately 1858, excluding stock held in street name. No dividends have been declared or paid by the Company. The Company intends to employ all available funds for development of its business and, accordingly, does not intend to pay cash dividends in the foreseeable future. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ RESULTS OF OPERATIONS - --------------------- FISCAL 1997 COMPARED TO FISCAL 1996 - ----------------------------------- Consolidated net sales for the Company were $9,243,510 for fiscal 1997 compared to $9,480,658 for fiscal 1996. This represents a decrease of $237,148, or 3% for fiscal 1997. Lancer's sales decreased by $446,516. Therefore, Biomerica showed a sales increase of $200,167, an 8% increase for Biomerica. AIT had a slight increase of $9,201. This decrease at Lancer was attributable to (1) various manufacturing and purchasing problems from fiscal 1996 that were resolved in fiscal 1997, (2) increased discounting in the domestic market, and (3) a reduction in sales to a major foreign distributor who began their own manufacturing. Lancer continues to search for new sales representatives, distributors, private label customers, products, and product ideas, all of which, if successful, will result in increasing sales. The increase at Biomerca was primarily due to an increase of sales to foreign distributors as well as an increase in domestic sales at Biomerica. Cost of sales in fiscal 1997 as compared to fiscal 1996 decreased by $52,020 (1%). Lancer realized higher costs of sales as a percentage of sales due to: (1) manufacturing problems from fiscal 1996 that were resolved in fiscal 1997; (2) ineffective plant management in Mexico which dramatically increased costs. The management was changed during fiscal 1997; and (3) increased discounting in the domestic market. To improve manufacturing, Lancer has started a program to add new equipment and improve processes and efficiencies. Selling, general and administrative costs decreased in fiscal 1997 as compared to fiscal 1996 by $102,555. Lancer had a decrease of $87,924 in these costs due to decreased payroll and related expenses, travel, office supplies, samples, advertising and telephone expenses. Lancer decreased these expenses in order to offset the manufacturing problems and lower sales. Biomerica had a slight decrease in fiscal 1997 as compared to fiscal 1996. Research and development expense increased in fiscal 1997 as compared to fiscal 1996 by $26,238 (10%). Of this, Lancer had a decrease of $37,083 as a result of decreased payroll and supplies. Biomerica had a decrease in research and development expenses of $56,512 and AIT had an increase of $6,809. Biomerica has been investing more in research and development in an effort to complete work on several new products. Interest expense, which was incurred by Lancer, decreased in fiscal 1997 as compared to fiscal 1996 by $45,454 (44%) due to reduced levels of debt, and was partially offset by increased interest rates. Other income increased by $40,811 in fiscal 1997 as compared to fiscal 1996. A decrease of $1,052 is attributable to Lancer, and $41,863 was attributable primarily to Biomerica. Biomerica had greater dividend and interest income due to the funds that were raised in January 1997. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- As of May 31, 1997, the Company had cash and available for sale securities of $2,220,528 (see Note 1 to the Financial Statements) and current working capital of $4,705,139 as opposed to $978,426 and $3,247,648, respectively, for the previous year. In 1997, Lancer negotiated an extension of its bank term loan through May 1998 at which time it will be paid in full. The term loan requires monthly principal payments by Lancer of $18,889 plus interest. Management also negotiated a renewal of Lancer's line of credit through March 1, 1998. The line of credit is for $500,000 and is limited to specified percentages of Lancer's eligible accounts receivable. Borrowings are made at prime plus 1%. The Company and its subsidiaries are currently able to meet their costs of operations through the collection of trade accounts receivable generated by sales and its working capital position. The Company experienced losses during the period 1983 to 1993 due in part to research and development activities as well as providing support to several startup entities. Biomerica and AIT have no material capital commitments. Please refer to Exhibit 99.2, Lancer Orthodontics, Inc. 1997 Form 10-KSB for Lancer's capital commitments. ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- Exhibit 99.1, "Biomerica, Inc. and Subsidiaries Consolidated Financial Statements" is incorporated herein by this reference. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURE. -------------------- Inapplicable. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE ------------------------------------------------------------------- REGISTRANT; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE --------------------------------------------------------- This information is incorporated by reference to the Company's proxy statement for its 1997 Annual Meeting of Stockholders which will be filed not later than 120 days after the end of the Company's fiscal year ended May 31, 1997. ITEM 10. EXECUTIVE COMPENSATION ---------------------- This information is incorporated by reference to the Company's proxy statement for its 1997 Annual Meeting of Stockholders which will be filed not later than 120 days after the end of the Company's fiscal year ended May 31, 1997. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- This information is incorporated by reference to the Company's proxy statement for its 1997 Annual Meeting of Stockholders which will be filed not later than 120 days after the end of the Company's fiscal year ended May 31, 1997. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- This information is incorporated by reference to the Company's proxy statement for its 1997 Annual Meeting of Stockholders which will be filed not later than 120 days after the end of the Company's fiscal year ended May 31, 1997. ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K ------------------------------------- (a) EXHIBITS -------- EXHIBIT NO. DESCRIPTION - ----------- ----------- 3.1 Certificate of Incorporation of Registrant filed with the Secretary of the State of Delaware on September 22, 1971 (incorporated by reference to Exhibit 3.1 filed with Amendment No. 1 to Registration Statement on Form S-1, Commission File No. 2-83308). 3.2 Certificate of Amendment to Certificate of Incorporation of Registrant filed with the Secretary of the State of Delaware on February 6, 1978 (incorporated by reference to Exhibit 3.1 filed with Amendment No. 1 to Registration Statement on Form S-1, Commission File No. 2-83308). 3.3 Certificate of Amendment to Certificate of Incorporation of Registrant filed with the Secretary of the State of Delaware on February 4, 1983 (incorporated by reference to Exhibit 3.1 filed with Amendment No. 1 to Registration Statement on Form S-1, Commission File No. 2-83308). 3.4 Certificate of Amendment to Certificate of Incorporation of Registrant filed with the Secretary of the State of Delaware on January 19, 1987 (incorporated by reference to Exhibit 3.4 filed with Form 8 Amendment No. 1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1987). 3.5 Certificate of Amendment of Certificate of Incorporation of Registrant filed November 4, 1987 with the Secretary of State of the State of Delaware (incorporated by reference to Exhibit 3.1 filed with Amendment No. 1 to Registration Statement on Form S-1, Commission File No. 2- 83308). 3.6 Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 filed with Amendment No. 1 to Registration Statement on Form S-1, Commission File No. 2-83308). 3.7 Certificate of Amendment of Certificate of Incorporation of Registrant filed with the Secretary of the State of Delaware on December 20, 1994 (incorporated by reference to Exhibit 3.7 filed with Registrant's Annual Report or Form 10-KSB for the fiscal year ended May 31, 1995). 10.1 Office lease dated June 1, 1988 between Registrant and Redington Company covering Registrant's lease of premises at 1531/1533 Monrovia Avenue, Newport Beach, California (incorporated by reference to Exhibit 10.1 filed with Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1989). 10.2 Contract for Employment of Joseph H. Irani dated June 1, 1986 (incorporated by reference to Exhibit 10.2 filed with Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1986). 10.5 Lancer purchase agreement and warrants (incorporated by reference to Exhibit 10.10 filed with Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1989). 10.6 1995 Stock Option and Restricted Stock Plan of Registrant (incorporated by reference to Exhibit 4.3 to Registration Statement on Form S-8 filed with the Securities and Exchange Commission on January 20, 1996). 10.7 1991 Stock Option and Restricted Stock Plan of Registrant (incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-8 filed with the Securities and Exchange Commission on April 6, 1992). 10.8 Biomerica, Inc.'s report on Form 8-K filed with the Securities and Exchange Commission on May 24, 1994 (incorporated by reference to Exhibit 99.3 filed with Registrant's Annual Report on Form 10-KSB for the fiscal year ended May 31, 1994.). 10.9 Biomerica, Inc.'s report on Form 8-K filed with the Securities and Exchange Commission on May 13, 1997. 16 Letter on Change of Certifying Accountant (incorporated by reference to Exhibit A to Form 8-K filed with the Securities and Exchange Commission on May 24, 1993). 21 Subsidiaries of Registrant. 99.1 Biomerica, Inc. and Subsidiaries Consolidated Financial Statements For The Years Ended May 31, 1997 and 1996 and Independent Auditors' Report. 99.2 Lancer Orthodontics, Inc. Annual Report on Form 10-KSB for Fiscal Year Ended May 31, 1997 (incorporated by reference to Lancer's Form 10-KSB dated August 15, 1997). 99.3 Biomerica's report on Form 10-C filed with the Securities and Exchange Commission November 8, 1994 (incorporated by reference to Exhibit 99.3 filed with Form 10-KSB for the fiscal year ended May 31, 1996). 99.4 Consent of Independent Auditors (b) Reports on Form 8-K ------------------- Biomerica's report on Form 8-K with the Securities and Exchange Commission on May 13, 1997. SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BIOMERICA, INC. Registrant By /S/ Zackary S. Irani ------------------------------ Zackary S. Irani, President Dated: August 26, 1997 --------------------------- In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature and Capacity ---------------------- /S/ Zackary S. Irani Date: 8/26/97 - ------------------------------ ----------- Zackary S. Irani President, Director, Chief Executive Officer /S/ P. B. Kaplan Date: 8/26/97 - ------------------------------- -------------- P. B. Kaplan, M.D. Director /S/ Robert Orlando Date: 8/26/97 - ------------------------------- -------------- Robert Orlando, M.D., Ph.D. Director /S/ Janet Moore Date: 8/26/97 - ------------------------------- -------------- Janet Moore, Secretary Controller, Director, Chief Accounting Officer and EX-21 2 EXHIBIT 21 SUBSIDIARIES OF BIOMERICA, INC. Jurisdiction Percentage of of Stock Owned by Name of Subsidiary Incorporation Biomerica, Inc. - ------------------ ------------- --------------- Allergy Immuno Technologies, Inc. Delaware 73.9% Lancer Orthodontics, Inc. California 29.9% EX-27 3
5 YEAR MAY-31-1997 MAY-31-1997 1,706,151 514,377 1,593,057 137,410 2,440,049 6,254,968 3,108,699 2,560,145 7,379,079 1,549,829 0 0 0 311,184 3,254,038 7,379,079 9,243,510 9,243,510 5,377,607 5,377,607 0 0 58,659 489,875 43,030 446,845 0 0 0 446,845 .12 .12
EX-99 4 BIOMERICA, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended May 31, 1997 and 1996 with INDEPENDENT AUDITORS' REPORT THEREON ITEM 7. FINANCIAL STATEMENTS - ----------------------------- INDEX Independent Auditors' Report............................................F-1 Consolidated Balance Sheet as of May 31, 1997...........................F-2 Consolidated Statements of Operations For The Years Ended May 31, 1997 and 1996..................................................F-4 Consolidated Statements of Shareholders' Equity For The Years Ended May 31, 1997 and 1996......................................F-5 Consolidated Statements of Cash Flows For The Years Ended May 31, 1997 and 1996............................................F-6 Notes to Consolidated Financial Statements For The Years Ended May 31, 1997 and 1996......................................F-8 INDEPENDENT AUDITORS' REPORT The Board of Directors Biomerica, Inc. We have audited the accompanying consolidated balance sheet of Biomerica, Inc. and subsidiaries (the "Company") as of May 31, 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the two-year period ended May 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Biomerica, Inc. and subsidiaries as of May 31, 1997, and the results of their operations and their cash flows for each of the years in the two-year period ended May 31, 1997 in conformity with generally accepted accounting principles. CORBIN & WERTZ Irvine, California July 22, 1997 BIOMERICA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET May 31, 1997 ASSETS Current assets: Cash and cash equivalents $ 1,706,151 Available-for-sale securities 514,377 Accounts receivable, less allowance for doubtful accounts and sales returns of $137,410 (Notes 5 and 6) 1,455,647 Inventories (Notes 5 and 6) 2,440,049 Notes receivable 9,585 Prepaid expenses and other 129,159 ----------- Total current assets 6,254,968 ----------- Inventories, non-current (Notes 5 and 6) 27,000 ----------- Land held for investment 46,000 ----------- Property and equipment, at cost (Notes 5, 6 and 7): Equipment 2,414,682 Furniture, fixtures and leasehold improvements 694,017 ----------- 3,108,699 Accumulated depreciation and amortization (2,560,145) ----------- 548,554 ----------- Intangible assets, net of accumulated amortization (Note 4) 486,783 Other assets 15,774 ----------- $ 7,379,079 =========== Continued BIOMERICA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET - CONTINUED For The Years Ended May 31, 1997 and 1996 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Line of credit (Note 5) $ 200,000 Long-term debt and capital lease obligations, current portion (Notes 6 and 7) 215,848 Accounts payable and other accrued liabilities 650,033 Accrued compensation (Note 12) 467,788 Other 16,160 ----------- Total current liabilities 1,549,829 Minority interests (Note 3) 2,264,028 ----------- Total liabilities 3,813,857 ----------- Commitments and contingencies (Note 12) Shareholders' equity (Note 8): Common stock, $.08 par value; 10,000,000 shares authorized; 3,889,802 shares issued and outstanding 311,184 Additional paid-in capital 12,429,673 Unrealized holding gain on available-for-sale securities 97,924 Accumulated deficit (9,273,559) ----------- Total shareholders' equity 3,565,222 ----------- $ 7,379,079 =========== See accompanying notes to consolidated financial statements BIOMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For The Years Ended May 31, 1997 and 1996
1997 1996 ---------------- ----------------- Net sales (Notes 3 and 11) $ 9,243,510 $ 9,480,658 Cost of sales (Note 3) 5,377,607 5,429,627 --------------- ---------------- Gross profit 3,865,903 4,051,031 --------------- ---------------- Operating expenses (Note 3): Selling, general and administrative 2,949,274 3,051,829 Research and development 283,363 257,125 --------------- ---------------- Total operating expenses 3,232,637 3,308,954 --------------- ---------------- Operating profit (Note 11) 633,266 742,077 Other income (expense): Interest expense (Notes 5, 6 and 7) (58,659) (104,113) Other income (Note 10) 60,661 19,850 --------------- ---------------- Income before minority interest in net profits of consolidated subsidiaries and income taxes 635,268 657,814 Minority interest in net profits of consolidated subsidiaries (Note 3) (145,393) (212,350) --------------- ---------------- Income before income taxes 489,875 445,464 Income tax expense (Note 9) 43,030 12,737 --------------- ---------------- Net income $ 446,845 $ 432,727 =============== ================ Per share data: Net income (primary and fully diluted) $ 0.12 $ 0.12 =============== ================ Weighted average number of common and common equivalent shares: Primary 3,858,799 3,589,494 =============== ================ Fully diluted 3,867,207 3,589,494 =============== ================ See accompanying notes to consolidated financial statements
BIOMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For The Years Ended May 31, 1997 and 1996
Unrealized Holding Gain On Common Stock Additional Available-For- Prepaid Accumulated --------------------------- Shares Amount Paid-in Capital Sale Securities Expenses Deficit Total -------------- ------------ ---------------- --------------- ----------- ------------- ------------ Balance at June 1, 1995 3,431,319 $ 274,506 $ 11,323,824 $ 2,322 $ (5,142) $(10,153,131) $ 1,442,379 Exercise of stock options 34,500 2,760 24,840 - - - 27,600 Change in unrealized gain on available-for-sale securities - - - 88,365 - - 88,365 Amortization of prepaid expense - - - - 5,142 - 5,142 Net income - - - - - 432,727 432,727 ---------- ---------- ----------- ----------- ---------- ------------ ----------- Balance at May 31, 1996 3,465,819 277,266 11,348,664 90,687 - (9,720,404) 1,996,213 Change in unrealized gain on available-for-sale securities - - - 7,237 - - 7,237 Exercise of stock options 63,150 5,052 55,310 - - - 60,362 Tax benefit from exercise of - - 22,247 - - - 22,247 stock options Issuance of common stock 27,500 2,200 52,800 - - - 55,000 Private placement 333,333 26,666 950,652 - - - 977,318 Net income - - - - - 446,845 446,845 ---------- ---------- ------------ ------------ ---------- ------------ ----------- Balance at May 31, 1997 3,889,802 $ 311,184 $ 12,429,673 $ 97,924 $ - $(9,273,559) $ 3,565,222 ========== ========== ============ ============ ========== ============ ============ See accompanying notes to consolidated financial statements
BIOMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For The Years Ended May 31, 1997 and 1996
1997 1996 ---------------- ----------------- Cash flows from operating activities: Net income $ 446,845 $ 432,727 Adjustments to reconcile net income to net cash provided by operating activities:, Depreciation and amortization 236,930 272,996 Provision for losses on accounts receivable (14,855) (20,936) Realized loss on sale of available-for-sale securities 7,673 15,930 Minority interest in net profits of consolidated subsidiaries 145,393 212,350 Deferred compensation - 44,080 Changes in current assets and liabilities: Accounts receivable 347,260 (220,505) Inventories (394,498) (222,172) Prepaid expenses and other current assets (24,335) 4,392 Accounts payable and other accrued liabilities (19,907) (5,085) Accrued compensation (58,726) 25,413 Other current liabilities 5,945 (48,385) --------------- ---------------- Net cash provided by operating activities 677,725 490,805 --------------- ---------------- Cash flows from investing activities: Sales of available-for-sale securities 37,842 124,250 Purchases of available-for-sale securities (197,057) (68,562) Principal payments received on notes receivable 18,400 8,681 Purchases of property and equipment (243,627) (135,741) Purchase of intangible assets - (3,140) Other assets 4,294 (15,472) --------------- ---------------- Net cash used in investing activities (380,148) (89,984) --------------- ---------------- Cash flows from financing activities: Net repayments of short-term borrowings and note payable to bank (240,000) (745,000) Payments of long-term debt and capital lease obligations (21,647) (25,407) Net (repayments) borrowings under line of credit agreement (50,000) 250,000 Investments by minority interests 4,713 20,250 Exercise of stock options 60,362 27,600 Proceeds from sale of common stock 1,032,318 - --------------- ---------------- Net cash provided by (used in) financing activities 785,746 (472,557) --------------- ---------------- Net change in cash and cash equivalents 1,083,323 (71,736) Cash and cash equivalents at beginning of year 622,828 694,564 --------------- ---------------- Cash and cash equivalents at end of year $ 1,706,151 $ 622,828 =============== ================ Continued
BIOMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For The Years Ended May 31, 1997 and 1996
1997 1996 ---------------- ----------------- Supplemental disclosure of cash flow information - Cash paid during the year for: Interest $ 58,020 $ 104,113 =============== ================ Income taxes $ 22,840 $ 2,726 =============== ================ Supplemental schedule of non-cash investing and financing activities: Change in unrealized holding gain on available-for-sale securities $ 7,237 $ 88,365 Conversion of accounts payable and accrued liabilities into common stock of consolidated subsidiary (minority interest) $ 9,432 $ 50,816 Reduction in taxes payable and increase in additional paid-in capital for exercise of non-qualified stock options $ 22,247 $ - See accompanying notes to consolidated financial statements
BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended May 31, 1997 and 1996 NOTE 1 - ORGANIZATION - --------------------- Biomerica, Inc. and subsidiaries (collectively "the Company") are primarily engaged in the development, manufacture and marketing of medical diagnostic kits, the design, manufacture and distribution of various orthodontic products, and the performance of specialized diagnostic testing services. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - --------------------------------------------------- Principles of Consolidation - --------------------------- The consolidated financial statements for the years ended May 31, 1997 and 1996 (see Note 3) include the accounts of Biomerica, Inc. ("Biomerica"), Lancer Orthodontics, Inc. ("Lancer") and Allergy Immuno Technologies, Inc. ("AIT"). All significant intercompany accounts and transactions have been eliminated in consolidation. Accounting Estimates - -------------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. Actual results could materially differ from those estimates. Fair Value of Financial Instruments - ----------------------------------- The Company has financial instruments whereby the fair market value of the financial instruments could be different than that recorded on a historical basis. The Company's financial instruments consist of its cash and cash equivalents, accounts receivable, notes receivable, line of credit, long-term debt and accounts payable. The carrying amounts of the Company's financial instruments generally approximate their fair values at May 31, 1997. The fair values of the notes receivable were not readily determinable as market comparables were not available for such instruments. Concentration of Credit Risk - ---------------------------- The Company, on occasion, maintains cash balances at certain financial institutions in excess of amounts insured by federal agencies. The Company provides credit in the normal course of business to customers throughout the United States and foreign markets. The Company's sales are not materially dependent on a single customer or a small group of customers. The Company performs ongoing credit evaluations of its customers. The Company does not obtain collateral with which to secure its accounts receivable. The Company maintains reserves for potential credit losses based upon the Company's historical experience related to credit losses. At May 31, 1997, one customer accounted for approximately 14% of accounts receivable. Continued BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended May 31, 1997 and 1996 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued - -------------------------------------------------------------- Cash Equivalents - ---------------- Cash and cash equivalents consists of demand deposits, money market accounts and mutual funds with remaining maturities of three months or less when purchased. Available-For-Sale Securities - ----------------------------- The Company accounts for investments in accordance with Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities." This statement addresses the accounting and reporting for investments in equity securities which have readily determinable fair values and all investments in debt securities. The Company's marketable equity securities are classified as available-for-sale under SFAS 115 and reported at fair value, with changes in the unrealized holding gain or loss included in shareholders' equity. Available-for-sale securities consist of common stock of unrelated publicly-held companies and are stated at market value in accordance with SFAS 115. Cost for purposes of computing realized gains and losses is computed on a specific identification basis. The proceeds from the sale of available-for-sale securities during fiscal 1997 and 1996 totaled $37,842 and $124,250, respectively, with realized (losses) gains of $(7,673) and $(15,930), respectively (see Note 10). The change in the net unrealized holding gain (loss) on available-for-sale securities that has been included as a separate component of shareholders' equity totaled $7,237 and $88,365 for the years ended May 31, 1997 and 1996, respectively. Inventories - ----------- Inventories are stated at the lower of cost (first-in, first-out method) or market and consist primarily of orthodontic products and biological chemicals. Cost includes raw materials, labor, manufacturing overhead and purchased products. Market is determined by comparison with recent purchases or net realizable value. Such net realizable value is based on forecasts for sales of the Company's products in the ensuing years. The industries in which the Company operates are characterized by technological advancement and change. Should demand for the Company's products prove to be significantly less than anticipated, the ultimate realizable value of the Company's inventories could be substantially less than the amount shown on the accompanying consolidated balance sheet. Inventories at May 31, 1997 consist of the following: Raw materials $ 595,455 Work in process 304,279 Finished products 1,540,315 ----------- $ 2,440,049 =========== Approximately $1,534,000 of Lancer's inventory is located at its manufacturing facility in Mexico as of May 31, 1997. Land Held For Investment - ------------------------ Land held for investment consists of a parcel of land located in the state of Utah, and is stated at the lower of cost or market. Continued BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended May 31, 1997 and 1996 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued - -------------------------------------------------------------- Property and Equipment - ---------------------- Property and equipment are stated at cost. Expenditures for additions and major improvements are capitalized. Repairs and maintenance costs are charged to operations as incurred. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and gains or losses from retirements and dispositions are credited or charged to income. Depreciation and amortization are provided over the estimated useful lives of the related assets, ranging from 3 to 12 years, using straight-line and declining-balance methods. Leasehold improvements are amortized over the lesser of the estimated useful life of the asset or the term of the lease. Depreciation expense amounted to $159,319 and $188,384 for the years ended May 31, 1997 and 1996, respectively. Approximately $116,000 of property and equipment, net of accumulated depreciation and amortization, is located at Lancer's manufacturing facility in Mexico. Included in property and equipment at May 31, 1997 is $62,814 of capitalized leased assets, net of $31,405 of accumulated amortization. Management of the Company assesses the recoverability of property and equipment by determining whether the depreciation and amortization of such assets over their remaining lives can be recovered through projected undiscounted cash flows. The amount of impairment, if any, is measured based on fair value and is charged to operations in the period in which such impairment is determined by management. Management has determined that there is no impairment of property and equipment at May 31, 1997. Intangible Assets - ----------------- Intangible assets, consisting of marketing and distribution rights, technology use rights, patents and distributor agreements, are amortized using the straight line method over their estimated useful lives of 5 to 18 years. Amortization expense amounted to $77,611 and $79,470 for the years ended May 31, 1997 and 1996, respectively. The Company assesses the recoverability of these intangible assets by determining whether the amortization of the asset's balance over its remaining life can be recovered through projected undiscounted future cash flows. The amount of impairment, if any, is measured based on fair value and charged to operations in the period in which the impairment is determined by management. Management has determined that there was no impairment of intangible assets as of May 31, 1997. Risks and Uncertainties - ----------------------- Licenses - 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 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. Continued BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended May 31, 1997 and 1996 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued - -------------------------------------------------------------- Government Regulation - Biomerica's immunodiagnostic products are regulated in the United States as medical devices primarily by the FDA and as such, require regulatory clearance or approval prior to commercialization. Pursuant to the Federal Food, Drug and Cosmetic Act, and the regulations promulgated thereunder, the FDA regulates, among other things, the clinical testing, manufacture, labeling, promotion, distribution, sale and use of medical devices in the United States. Failure of Biomerica to comply with applicable regulatory requirements can result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, the government's refusal to grant premarket clearance or premarket approval of devices, withdrawal of marketing approvals, and criminal prosecution. Sales of medical devices outside the United States are subject to foreign regulatory requirements that vary widely from country to country. The time required to obtain registrations or approvals required by foreign countries may be longer or shorter than that required for FDA clearance or approval, and requirements for licensing may differ significantly from FDA requirements. There can be no assurance that Biomerica will be able to obtain regulatory clearances for its current or any future products in the United States or in foreign markets. Lancer's products are also subject to regulation by the FDA under the Medical Device Amendments of 1976 (the `Amendments''). Lancer has registered with the FDA as required by the Amendments. There can be no assurance that Lancer will be able to obtain regulatory clearances for its current or any future products in the United States or in foreign markets. Risk of Product Liability - Testing, manufacturing and marketing of Biomerica's products entail risk of product liability. Biomerica currently has product liability insurance. There can be no assurance, however, that Biomerica will be able to maintain such insurance at a reasonable cost or in sufficient amounts to protect Biomerica against losses due to product liability. An inability could prevent or inhibit the commercialization of Biomerica'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. Lancer is subject to the same risks or product liability. Lancer currently has product liability insurance. Lancer also is subject to the risk of loss of its product liability insurance and the consequent exposure to liability. Hazardous Materials - Biomerica's research and development involves the controlled use of hazardous materials and chemicals. Although Biomerica believes that safety procedures for handling and disposing of such materials comply with the standards prescribed by state and Federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result and any such liability could exceed the resources of the Company. The Company may incur substantial costs to comply with environmental regulations. Stock-Based Compensation - ------------------------ During 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (`SFAS 123''), ``Accounting for Stock- Based Compensation', which defines a fair value based method of accounting for stock-based compensation. However, SFAS 123 allows an entity to continue to measure compensation cost related to stock and stock options issued to employees using the intrinsic method of accounting prescribed by Accounting Principles Board Opinion No. 25 (`APB 25''), ``Accounting for Stock Issued to Employees''. Entities electing to remain with the accounting method of APB 25 must make pro forma disclosures of net income and earnings per share, as if the fair value method of accounting defined in SFAS 123 had been BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended May 31, 1997 and 1996 applied (see Note 8). The Company has elected to account for its stock-based compensation to employees under APB 25. Continued BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended May 31, 1997 and 1996 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued - -------------------------------------------------------------- Minority Interest - ----------------- Minority interest represents the minority shareholders' proportionate share of the equity of Lancer and AIT. At May 31, 1997, Biomerica owned 29.9% of Lancer (see Note 3) and 73.9% of AIT (see Note 3). Minority interest of Lancer includes $185,242 represented by 370,483 shares of Series D redeemable convertible preferred stock. Each share of Series D preferred stock is entitled to a $.04 non-cumulative dividend and is convertible at the option of the holder into common stock at the rate of seven shares of preferred stock for one share of common stock of Lancer. Lancer, at its option, can redeem outstanding shares of the preferred stock for $.50 per share after December 31, 1994. There were no dividends declared or paid in 1997 or 1996. Revenue Recognition - ------------------- Revenues from product sales are recognized at the time the product is shipped. Revenues from specialized diagnostic testing services are recognized when the related services are performed. Income Taxes - ------------ The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under the asset and liability method of Statement No. 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 Statement No. 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. Biomerica, Lancer and AIT file separate income tax returns for Federal and state income tax purposes. Advertising Costs - ----------------- The Company reports the cost of all advertising as expense in the period in which those costs are incurred. Advertising costs were $50,000 and $48,000 for the years ended May 31, 1997 and 1996, respectively. Income Per Share - ---------------- Income per share is computed using the weighted average number of common and common equivalent shares outstanding during each year. The approximate number of shares used in the computation of primary income per share was 3,858,799 and 3,589,494 in 1997 and 1996, respectively. The approximate number of shares used in the computation of fully diluted income per share was 3,867,207 in 1997. Common stock equivalents were excluded in 1996 because they were insignificant. Primary and fully diluted income per share are the same for both years presented. Continued BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended May 31, 1997 and 1996 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued - -------------------------------------------------------------- The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 128, `Earnings Per Share'' (``SFAS 128''). SFAS 128 is primarily a disclosure standard which requires public companies to present basic earnings per share (EPS) and, if applicable, diluted earnings per share, instead of primary and fully diluted earnings per share. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997. The effect of adopting SFAS 128 has not yet been determined by management. NOTE 3 - CONSOLIDATED SUBSIDIARIES - ---------------------------------- Lancer is engaged in the design, manufacture and distribution of orthodontic products. Lancer effected a one-for-seven reverse stock split on November 15, 1996. All references to Lancer's shares herein have been adjusted to reflect the reverse split. During 1996, Lancer issued 27,826 shares of its common stock to an unrelated party totaling $50,816 for the conversion of accrued royalties and sold 10,371 shares of its common stock to unrelated parties for cash of $20,250. During 1997, Lancer issued 3,998 shares of its common stock to an unrelated party totaling $9,432 for the conversion of accrued royalties. The result of these transactions decreased Biomerica's direct ownership percentage of Lancer to 29.9% and decreased its direct and indirect voting control over Lancer to 51.5%. During fiscal 1994, Biomerica received warrants to purchase 72,619 shares of Lancer's common stock at $.25 per share and options to purchase 20,000 shares of Lancer's common stock at $.28 per share. Both the options and warrants expire in April 1998. Allergy Immuno Technologies, Inc. (AIT) provides immune allergy testing and products to physicians and medical institutions. During 1997, 400,000 shares of AIT were issued to outside parties decreasing Biomerica's interest in AIT to 73.9%. Operating results for Lancer and AIT in the aggregate for the years ended May 31, 1997 and 1996, which are included in the consolidated operating results of the Company, are as follows: 1997 1996 ----------- ------------ Net sales $ 6,484,960 $ 6,922,275 Cost of sales 3,967,825 4,097,311 ----------- ----------- Gross profit 2,517,135 2,824,964 ----------- ----------- Operating expenses: Selling, general and administrative 2,219,915 2,287,958 Research and development 106,090 136,364 ----------- ----------- Total operating expenses 2,326,005 2,424,322 ----------- ----------- Other income (expense): Interest expense (58,659) (104,113) Other income, net 14,618 12,702 ----------- ----------- (44,041) (91,411) ----------- ----------- Income before income taxes 147,089 309,231 Income tax expense 1,600 1,600 ----------- ----------- Net income $ 145,489 $ 307,631 =========== =========== Continued BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended May 31, 1997 and 1996 NOTE 4 - INTANGIBLE ASSETS - -------------------------- Intangible assets, net of accumulated amortization, consist of the following at May 31, 1997: Marketing and distribution rights $ 442,750 Technology use rights 858,328 Patents and capitalized patent application costs 35,862 ----------- 1,336,940 Less accumulated amortization (850,157) ----------- $ 486,783 =========== Included in marketing and distribution rights are repurchased sales territories by Lancer which are being amortized over the estimated useful life of eighteen years. In each of the fiscal years 1997 and 1996, the Company recorded amortization expense of $24,900 related to repurchased sales territories. During fiscal 1985, Lancer purchased certain assets and technology which is being amortized over the estimated useful life of eighteen years. Lancer recorded amortization expense of $48,696 and $53,970 for the years ended May 31, 1997 and 1996, respectively, related to these assets. Amortization expense related to patents which is included in the accompanying consolidated statements of operations amounted to $4,015 and $600 for the years ended May 31, 1997 and 1996, respectively. NOTE 5 - LINE OF CREDIT - ----------------------- At May 31, 1997, Lancer had a $500,000 line of credit with a bank. Borrowings are made at prime plus 1% (9.50% at May 31, 1997) and are limited to specified percentages of eligible accounts receivable. The unused portion available to Lancer under the line of credit at May 31, 1996 was $145,000. The line of credit expires on March 1, 1998. As of May 31, 1997, there was $200,000 outstanding under the line of credit. The following summarizes information on short-term borrowings from October 11, 1995 (the date the line was established) through May 31, 1997. Average month end balance $245,250 Maximum balance outstanding at any month end $250,000 Weighted average interest rate (computed by dividing interest expense by average monthly balance) 9.55% Interest rate at year end 9.50% NOTE 6 - LONG-TERM DEBT - ----------------------- Effective October 10, 1995, Lancer arranged for a restructuring of its previous note payable. The note was divided into a new term note, with an original balance of $645,000 and a line of credit with an original balance of $400,000 (see Note 5). The new note payable is for a term of two years and requires monthly principal and interest payments of $18,889. Interest is at prime rate plus 1% (9.50% at May 31, 1997). In March 1997, the note was extended to May 1, 1998, at which time all unpaid principal and accrued interest is due and payable. As of May 31, 1997, the outstanding balance of the note payable was $200,000. Continued BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended May 31, 1997 and 1996 NOTE 6 - LONG-TERM DEBT, continued - ---------------------------------- The note payable and line of credit are collateralized by substantially all of the assets of Lancer, including inventories, receivables and equipment. The lending agreement requires, among other things, that Lancer maintain a tangible net worth of $2,250,000, a debt to tangible net worth ratio of no more than .75 to 1 and a current ratio of at least 2 to 1. Lancer is not required to maintain compensating balances in connection with this lending agreement. NOTE 7 - CAPITAL LEASE OBLIGATIONS - ---------------------------------- Lancer is the lessee of equipment under a capital lease which expires in the year 1998. The assets and liabilities under the capital lease are recorded at the lower of the present value of the minimum lease payments or the fair market value of the asset. The asset is depreciated over its estimated useful life. Depreciation of the asset is included in depreciation expense for the years ended May 31, 1997 and 1996. The future annual minimum lease payments under the capital lease are as follows: Year Ending May 31, 1998 $ 16,528 Less amount representing interest at 11.3% (680) --------- Present value of net minimum lease payments $ 15,848 ========= NOTE 8 - SHAREHOLDERS' EQUITY - ----------------------------- 1995 and 1991 Stock Option and Restricted Stock Plans - ----------------------------------------------------- In December 1991, the Company adopted a stock option and restricted stock plan (the `1991 Plan'') which provides that non-qualified options and incentive stock options and restricted stock covering an aggregate of 350,000 of the Company's unissued common stock may be granted to officers, employees or consultants of the Company. Options granted under the 1991 Plan may be granted at prices not less than 85% of the then fair market value of the common stock, vest at not less than 20% per year and expire not more than 10 years after the date of grant. In January 1996, the Company adopted a stock option and restricted stock plan (the "1995 Plan") which provides that non-qualified options and incentive stock options and restricted stock covering an aggregate of 500,000 of the Company's unissued common stock may be granted to affiliates, employees or consultants of the Company. Options granted under the 1995 Plan may be granted at prices not less than 85% of the then fair market value of the common stock and expire not more than 10 years after the date of grant. During 1997, the Company granted options to purchase 72,000 and 45,000 shares of common stock at exercise prices of $1.90 and $1.92 per share, respectively, to various employees of the Company. The options vest over a period ranging from four to five years. During 1997, the Company granted options to purchase 31,000 and 25,000 shares of common stock at exercise prices of $1.90 and $3.00 per share respectively, to various consultants of the Company. Management did not record any expense related to the granting of these options to the consultants, as such was immaterial. Continued BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended May 31, 1997 and 1996 NOTE 8 - SHAREHOLDERS' EQUITY, continued - ---------------------------------------- Activity as to stock options under the 1991 and 1995 plans are as follows: Options outstanding at May 31, 1995 265,500 $ .80 - $2.00 Options granted 11,000 $ .95 Options exercised (34,500) $ .80 Options canceled or expired (12,250) $ .80 - $.95 ------------ Options outstanding at May 31, 1996 229,750 Options granted 173,000 $ 1.90 - $3.00 Options exercised (63,150) $ .80 - $2.00 Options canceled or expired (7,000) $ .80 - $1.90 ------------ Options outstanding at May 31, 1997 332,600 $ .80 - $3.00 ============ Options exercisable at May 31, 1997 182,050 $ .80 - $1.92 ============ SFAS 123 Pro Forma Information - ------------------------------ Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant using the Black Scholes option pricing model with the following assumptions for the years ended May 31, 1997 and 1996; risk free interest rate 7.2%; dividend yield of 0%; expected life of the option of 3 years; and volatility factor of the expected market price of the Company's common stock of 115%. 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 disclosures, the estimated fair value of the options is amortized to expense over the option vesting period. Adjustments are made for options forfeited prior to vesting. The effect on compensation expense, net income, and net income per common share had compensation costs for the Company's stock option plans been determined based on a fair value of the date of grant consistent with the provisions of SFAS 123, for the years ended May 31, 1997 and 1996, are as follows:
1997 1996 ----------- ------------ Net income, as reported $ 446,845 $ 432,727 Adjustment to compensation expense under SFAS 123 12,480 2,287 ------------ ------------ Net income, pro forma $ 434,365 $ 430,440 ============ ============ Net income per common and common equivalent share, as reported $ .12 $ .12 ============ ============= Net income per common and common equivalent share, pro forma $ .11 $ .12 ============ ============= Continued
BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended May 31, 1997 and 1996 NOTE 8 - SHAREHOLDERS' EQUITY, continued - ---------------------------------------- Stock Grants - ------------ The Company recorded a prepaid bonus of $11,382 at May 31, 1994 which is being amortized on a straight-line basis over two years. During 1996, the Company recorded amortization expense of $5,142 on such bonus. Stock Options Issued Outside of Plans - ------------------------------------- During 1995, the Company and the Chief Executive Officer agreed not to defer any compensation for the period June 1994 through November 1994 and instead issue fully vested stock options to purchase 60,000 shares of the Company's common stock at $.85 per share. At the time of grant, market price and the exercised price was approximately the same price. No compensation expense was recorded. Stock Issuances - --------------- During 1997, the Company sold 333,333 shares of its common stock at $3.00 per share. Proceeds to the Company were $977,318, net of offering costs of $22,682. During 1997, the Company issued 27,500 shares of previously canceled common stock for $55,000 to a previous debtor to the Company. The common stock issued was previously held by the Company as collateral for a loan issued to the shareholder. In a prior year, the Company wrote off the receivable and recorded a charge to common stock and additional paid in capital for the amount of the loan. Subsidiary Options and Warrants - ------------------------------- Lancer has 205,715 options outstanding as of May 31, 1997 at prices ranging from $1.40 to $2.45. Lancer also has issued warrants to acquire 200,596 shares of its common stock at $1.75 per share which are outstanding as of May 31, 1997. Continued BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended May 31, 1997 and 1996 NOTE 9 - INCOME TAXES - --------------------- The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at May 31, 1997 and 1996 are presented below.
1997 1996 ---------------- ----------------- Deferred tax assets: Accounts receivable, principally due to allowance for doubtful accounts and sales returns $ 55,009 $ 60,958 Inventories, principally due to additional costs inventoried for tax purposes pursuant to the Tax Reform Act of 1986 and allowance for inventory obsolescence 127,175 129,472 Compensated absences and deferred payroll, principally due to accrual for financial reporting purposes 202,721 231,432 State net operating loss carryforwards 77,595 53,961 Federal net operating loss carryforwards 2,794,869 2,956,980 Tax credit carryforwards 238,939 244,403 Investment in affiliates 451,222 451,217 --------------- ---------------- 3,947,530 4,128,423 Less valuation allowance (3,874,860) (4,044,593) --------------- ---------------- Net deferred tax asset 72,670 83,830 Deferred tax liability - Marketing rights, principally due to amortization (72,670) (83,830) --------------- ---------------- Net deferred tax liability $ - $ - =============== ================ Income tax expense for the years ended May 31, 1997 and 1996 consists of the following current provisions: 1997 1996 ---------------- ----------------- U.S. Federal $ - $ - State and local 43,030 12,737 --------------- ---------------- $ 43,030 $ 12,737 =============== ================ Continued
BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended May 31, 1997 and 1996 NOTE 9 - INCOME TAXES, continued - -------------------------------- Income tax expense differs from the amounts computed by applying the U.S. Federal income tax rate of 34 percent to pretax income from operations as a result of the following:
1997 1996 ---------------- ------------------ Computed `expected'' tax expense $ 166,558 $ 151,458 Increase (reduction) in income taxes resulting from: Meals and entertainment 9,860 9,855 Utilization of net operating loss carryforwards (165,228) (140,960) Other (net) (11,157) 11,836 Equity in earnings of affiliates not subject to taxation because of dividends-received deduction for tax purposes (33) (32,189) State income taxes 43,030 12,737 --------------- ---------------- $ 43,030 $ 12,737 =============== ================
As of May 31, 1997, Biomerica had net tax operating loss carryforwards of approximately $4,323,000 and investment tax and research and development credits of approximately $19,000, which are available to offset future Federal tax liabilities. The carryforwards expire at varying dates from 1997 to 2010. As of May 31, 1997, Lancer had net tax operating loss carryforwards of approximately $2,418,000 and business tax credits of approximately $169,000 available to offset future Federal tax liabilities. The carryforwards expire at varying dates from 1998 to 2008. Lancer also had net tax operating loss carryforwards of approximately $618,000 and business tax credits of approximately $23,000 available to offset future California taxable income, expiring at varying dates in 1998. As of May 31, 1997, AIT had net tax operating loss carryforwards of approximately $1,603,000 and business tax credits of approximately $29,000 available to offset future Federal tax liabilities. The carryforwards expire at varying dates from 1995 to 2008. AIT also had net tax operating loss carryforwards of approximately $327,000 to offset future California taxable income, expiring at varying dates between 1997 and 2001. The Tax Reform Act of 1986 includes provisions which limit the Federal net operating loss carryforwards available for use in any given year if certain events, including a significant change in stock ownership, occur. Continued BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended May 31, 1997 and 1996
NOTE 10 - OTHER INCOME - ---------------------- Other income consists of the following: 1997 1996 ---------------- ------------------ Realized (losses) gains on available-for-sale securities transactions $ (7,673) $ (15,930) Dividend and interest income 53,716 8,920 Other 14,618 26,860 $ 60,661 $ 19,850 ================ ================= NOTE 11 - BUSINESS SEGMENTS - --------------------------- Reportable business segments for the years ended May 31, 1997 and 1996 are as follows: 1997 1996 ---------------- ------------------ Domestic sales: Orthodontic products $ 3,764,000 $ 3,999,000 =============== ================ Medical diagnostic products $ 1,444,000 $ 1,263,000 =============== ================ Foreign sales: Orthodontic products $ 2,570,000 $ 2,781,000 =============== ================ Medical diagnostic products $ 1,466,000 $ 1,438,000 =============== ================ Net sales: Orthodontic products $ 6,334,000 $ 6,780,000 Medical diagnostic products 2,910,000 2,701,000 --------------- ---------------- Total $ 9,244,000 $ 9,481,000 =============== ================ Operating profit: Orthodontic products $ 276,000 $ 416,000 Medical diagnostic products 357,000 326,000 --------------- ---------------- Total $ 633,000 $ 742,000 =============== ================ Identifiable assets: Orthodontic products $ 3,494,000 $ 3,503,000 Medical diagnostic products 3,398,000 2,000,000 --------------- ---------------- Total $ 6,892,000 $ 5,503,000 =============== ================ Total assets: Orthodontic products $ 3,950,000 $ 4,033,000 Medical diagnostic products 3,429,000 2,034,000 --------------- ---------------- Total $ 7,379,000 $ 6,067,000 =============== ================
Continued BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended May 31, 1997 and 1996
NOTE 11 - BUSINESS SEGMENTS, continued - -------------------------------------- 1997 1996 ---------------- ------------------ Depreciation and amortization expense: Orthodontic products $ 193,000 $ 234,000 Medical diagnostic products 44,000 39,000 --------------- ---------------- Total $ 237,000 $ 273,000 =============== ================ Capital expenditures: Orthodontic products $ 51,000 $ 104,000 Medical diagnostic products 193,000 32,000 --------------- ---------------- Total $ 244,000 $ 136,000 =============== ================
Total net sales as reflected above consist of sales to unaffiliated customers only as there were no significant intersegment sales during fiscal years 1997 and 1996. Foreign sales consist primarily of sales to Canada, Europe, Japan and Korea. No customer accounted for more than 10% of net sales during fiscal years 1997 and 1996. Identifiable assets by business segment are those assets that are used in the Company's operations in each industry. There were no significant corporate assets as of May 31, 1997 and 1996. The Company's interests in AIT, whose operations are in the United States, are vertically integrated with the Company's operations in the medical diagnostic products industry. NOTE 12 - COMMITMENTS AND CONTINGENCIES - --------------------------------------- Operating Leases - ---------------- Biomerica leases its primary facility under a non-cancelable operating lease which expires on May 31, 1998. AIT leases its primary facility under a month- to-month operating lease. These facilities are owned by two of the Company's shareholders, including its former president. The lease rate is $12,720 and $1,400 per month, respectively. Lancer leases its main facility under a non-cancelable operating lease expiring December 31, 1998, which requires monthly rentals that increase annually, from $2,900 per month (1994) to $4,400 per month (1998). 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 $9,620 at May 21, 1997, and is included in accrued liabilities in the accompanying balance sheet. Effective April 1, 1996, Lancer entered into a non-cancelable operating lease for its Mexico facility expiring October 31, 1998, which requires average monthly rentals of $5,182. The rentals are subject to annual increases based on the United States Consumer Price Index. Prior to April 1, 1996, such was included in amounts paid under the terms of the manufacturing agreement as discussed below. Continued BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended May 31, 1997 and 1996 NOTE 12 - COMMITMENTS AND CONTINGENCIES, continued - -------------------------------------------------- Rental expense for all operating leases amounted to approximately $263,000 for the year ended May 31, 1997 and 1996. The future annual minimum lease payments are as follows: Years Ending May 31, ------------ 1998 $ 283,021 1999 56,794 ----------- Minimum lease payments $ 339,815 =========== Manufacturing Agreement - ----------------------- 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. Lancer moved the majority of its manufacturing operations to Mexico during fiscal 1992 and 1991. Under the terms of the original agreement, the subcontractor manufactured Lancer's products based on an hourly rate per employee based on the number of employees in the subcontractor's workforce. In December 1992, Lancer renegotiated the agreement changing from an hourly rate per employee cost to a pass through of actual costs plus a weekly administrative fee. The amended agreement gives Lancer greater control over all costs associated with the manufacturing operation. In July 1994, Lancer again renegotiated the agreement reducing the administrative fee and extending the agreement through June 1998. After June 1996, either party may cancel the agreement with three months notice. The Company has retained the option to convert the manufacturing operation to a wholly-owned subsidiary of Lancer at any time. Should Lancer discontinue operations in Mexico, it is responsible for the accumulated employee seniority obligation as prescribed by Mexican law. At May 31, 1997, this obligation was approximately $221,000. Such obligation is contingent in nature and accordingly has not been accrued in the accompanying consolidated balance sheet. Employment Agreement - -------------------- In June 1986, the Company entered into an employment agreement with its then chief executive officer. In May 1996, the agreement was extended for an additional three years expiring in May 1999. The agreement requires minimum annual compensation payments of $169,000 and provides for periodic cost of living increases. The chief executive officer was paid approximately $81,000 during the year ended May 31, 1996. The chief executive officer and the Company agreed to amend the employment agreement for fiscal year 1995, whereby the chief executive officer would not receive any deferred compensation for the period June 1994 through November 1994 of approximately $54,500 and instead received 60,000 stock options (see Note 8). The chief executive officer and the Company agreed to amend the employment agreement for fiscal year 1996, whereby the chief executive officer would reduce his salary by $44,000 for the period June 1995 through November 1995. The remaining amount of approximately $44,000 for fiscal year 1996 was deferred. The chief executive officer and the Company agreed to amend the employment agreement for fiscal year 1997, whereby the chief executive officer would reduce his salary by approximately $63,000 for the period June 1996 through November 1996. The chief executive officer was paid approximately $85,000 during the year ended May 31, 1997. The remaining amount of approximately $27,000 for fiscal year 1997, has been deferred and is included in accrued compensation in the Continued BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended May 31, 1997 and 1996 accompanying consolidated balance sheet as of May 31, 1997. Approximately $457,000 of the total accrued compensation included in the 1997 consolidated balance sheet is due to the chief executive officer's estate. Continued BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended May 31, 1997 and 1996 NOTE 12 - COMMITMENTS AND CONTINGENCIES, continued - -------------------------------------------------- License and Royalty Agreements - ------------------------------ Lancer has entered into a number of license and/or royalty agreements pursuant to which it has obtained rights to manufacture and market certain products. The agreements are for various durations and they require the Company to make payments based on the sales of the individual licensed products. Retirement Savings Plan - ----------------------- Effective September 1, 1986, the Company established a 401(k) plan for the benefit of its employees. The plan permits eligible employees to contribute to the plan up to the maximum percentage of total annual compensation allowable under the limits of Internal Revenue Code Sections 415, 401(k) and 404. The Company, at the discretion of its Board of Directors, may make contributions to the plan in amounts determined by the Board each year. No contributions by the Company have been made since the plan's inception. NOTE 13 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY - ----------------------------------------------------------- The following represents the condensed unconsolidated balance sheet for Biomerica, Inc. as of May 31, 1997, and the condensed unconsolidated statements of operations and of cash flows for the years ended May 31, 1997 and 1996. No cash dividends were paid by the consolidated subsidiaries (see Note 3) during the years ended May 31, 1997 and 1996. Condensed Unconsolidated Balance Sheet May 31, 1997 ASSETS Current assets: Cash and cash equivalents $ 1,548,005 Available-for-sale securities 514,377 Accounts receivable, net 282,252 Inventories 585,788 Notes receivable 9,585 Prepaid expenses and other 86,287 ----------- Total current assets 3,026,294 Investment in and advances to affiliates and consolidated subsidiaries 941,305 Inventory, non-current 27,000 Property and equipment, net 274,450 Intangible assets 19,238 Other 11,374 ----------- $ 4,299,661 =========== Continued BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended May 31, 1997 and 1996 NOTE 13 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY, continued - ---------------------------------------------------------------------- Condensed Unconsolidated Balance Sheet - Continued May 31, 1997 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 250,491 Accrued compensation 467,788 Other 16,160 ----------- Total current liabilities 734,439 ----------- Shareholders' equity: Common stock 311,184 Additional paid-in capital 12,429,673 Unrealized holding gain on available-for-sale securities 97,924 Accumulated deficit (9,273,559) ----------- Total shareholders' equity 3,565,222 ----------- $ 4,299,661 ===========
Condensed Unconsolidated Statements of Operations May 31, 1997 and 1996 1997 1996 --------------- ----------------- Net revenues $ 2,784,200 $ 2,586,697 Cost of sales 1,435,432 1,360,630 --------------- ---------------- Gross profit 1,348,768 1,226,067 --------------- ---------------- Operating expenses: Selling, general and administrative 729,359 763,871 Research and development 177,273 120,761 --------------- ---------------- Total operating expenses 906,632 884,632 --------------- ---------------- Operating income 442,136 341,435 Other income 46,043 7,148 --------------- ---------------- Income before interest in net income of consolidated subsidiaries and income taxes 488,179 348,583 Interest in net income of consolidated subsidiaries 96 95,281 Income tax expense 41,430 11,137 --------------- ---------------- Net income $ 446,845 $ 432,727 =============== ================ Continued
BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended May 31, 1997 and 1996
NOTE 13 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY, continued - ---------------------------------------------------------------------- Condensed Unconsolidated Statements of Cash Flows May 31, 1997 and 1996 1997 1996 ---------------- ------------------ Cash flows from operating activities: Net income $ 446,845 $ 432,727 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 40,748 36,270 Realized loss (gain) on sale of available-for-sale securities 7,673 15,930 Provision for losses on accounts receivable (4,855) (936) Income of subsidiaries 96 (95,281) Deferred compensation (58,726) 44,080 Net change in other current assets and current liabilities (162,568) (31,118) --------------- ---------------- Net cash provided by operating activities 269,213 401,672 --------------- ---------------- Cash flows from investing activities: Sales of available-for-sale securities 37,842 124,250 Purchases of available-for-sale securities (197,057) (68,562) Principal payments received on notes receivable 18,400 8,681 Decrease (increase) in investment in and advances to affiliates and consolidated subsidiaries (18,121) (36,561) Purchases of property and equipment (192,276) (30,855) Purchase of intangible assets - (750) Other assets 4,294 (15,472) --------------- ---------------- Net cash used in investing activities (346,918) (19,269) --------------- ---------------- Cash flows from financing activities: Payment on short-term borrowings - (4,000) Proceeds from sale of stock and exercise of stock options 1,092,680 27,600 --------------- ---------------- Net cash used in financing activities 1,092,680 23,600 --------------- ---------------- Net increase in cash and cash equivalents 1,014,975 406,003 Cash and cash equivalents at beginning of year 533,030 127,027 --------------- ---------------- Cash and cash equivalents at end of year $ 1,548,005 $ 533,030 =============== ================ Supplemental disclosure of cash flow information - Cash paid during the year for: Interest $ - $ - =============== ================ Income $ 20,800 $ 800 =============== ================ Continued
BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended May 31, 1997 and 1996
NOTE 13 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY, continued - ---------------------------------------------------------------------- Condensed Unconsolidated Statements of Cash Flows - Continued May 31, 1997 and 1996 1997 1996 --------------- ----------------- Supplemental schedule of non-cash investing and financing activities: Change in unrealized holding gain on available-for-sale securities $ 7,237 $ 88,365 Reduction in taxes payable and increase in additional paid-in capital for exercise of non-qualified stock options $ 22,247 $ -
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