-----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, Asq7zW/sBbFfmumYhjApO1slHQ1uFbDIS/JJ2jLjNialkv2EZmFBJtyW3F5wkVIz PnSLd1Nzi20xUaKc95VZFA== 0000073290-96-000009.txt : 19960828 0000073290-96-000009.hdr.sgml : 19960828 ACCESSION NUMBER: 0000073290-96-000009 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960531 FILED AS OF DATE: 19960827 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: 1934 Act SEC FILE NUMBER: 000-08765 FILM NUMBER: 96621165 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, 1996 ----------------------------------------------------- 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 - ------------------------------------------------------------------------------- (Issuer's Telephone Number, Including Area Code) Securities registered under Section 12(b) of the Exchange Act: NONE 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 [X] State issuer's revenues for its most recent fiscal year: $9,480,658. State the aggregate market value of the voting stock held by non-affiliates of the issuer (based upon 2,923,774 shares held by non-affiliates and the closing price $3.875 per share for Common Stock in the over-the-counter market as of August 13, 1996: $11,329,624). Number of shares of the issuer's common stock, par value $.08, outstanding as of August 13, 1996: 3,516,719 shares. DOCUMENTS INCORPORATED BY REFERENCE: The issuer's proxy statement for its 1996 Annual Meeting of Stockholders is incorporated into Part III hereof. Also incorporated by reference is the Annual Report on Form 10KSB for the fiscal year ended May 31, 1996, for Lancer Orthodontics, Inc. PART I* ITEM 1. BUSINESS -------- INTRODUCTION Biomerica, Inc. ("Biomerica" or the "Company") is primarily engaged in the development, manufacture and marketing of medical diagnostic test kits. 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, 1996, 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") 73.5% 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). In addition to Biomerica's ownership of Lancer, the President of Biomerica owns approximately 15.9% of the outstanding Lancer common stock and is an officer and director of Lancer. Another Biomerica director also serves on Lancer's board of directors. In addition, Biomerica's president controls an additional 835,066 shares of Lancer's common stock either through proxy or other controlled persons. As a result, Biomerica continues to exercise 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, 1996, the Company's businesses included the following: . CORE BUSINESS IN DIAGNOSTICS, VIA BIOMERICA, INC. ------------------------------------------------- Biomerica develops, manufactures, and sells 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. . 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 distributors and a direct sales force. * 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. . ALLERGY AND IMMUNO DIAGNOSTICS, VIA AIT --------------------------------------- Until recently, AIT was engaged in developing research diagnostic test and 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. In the meantime, 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 - ------------------------- IMMUNO-DIAGNOSTIC PRODUCTS -------------------------- 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 or other substances which may exist in the human body in extremely small concentrations. Biomerica currently manufactures and sells diagnostic test kits which also sells other kits to researchers which products have not yet been cleared by the FDA for diagnostic use. Biomerica products include: - ------------------------------------------------------------------------------- Diagnostic Test Kit Use - ------------------------------------------------------------------------------- NEONATAL TSH (RIA) -For early detection of congenital primary hypo- thyroidism. (Newborn thyroid hormone assessment). 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. 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 thyroglobulin ANTIBODY TEST in human blood. High levels of patient's Tg (EIA & RIA) autoantibodies are present with Hashimoto's disease and lymphadenoid goiter. This product has just been cleared by the FDA. MYOGLOBIN (RIA) -For measurement of myoglobin in blood as a result of skeletal muscle injury including heart. - ------------------------------------------------------------------------------- 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 peptic ANTIBODY (EIA) ("GAP") ulcer infection. The "GAP" test is amenable to FOR GASTRITIS & ULCER screen populations for the bacterium (Helicobacter DETECTION pylori) that causes gastritis and peptic ulcers. FDA clearance for the GAP was received in July 1991. Since then, Biomerica has entered into a three year exclusive agreement with BioRad of Hercules, 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. Nisshin/Fujirebio have recently begun the sale of the GAP in Japan. ISLET CELL- -A non-invasive blood test for predisposition of AUTOANTIBODIES(EIA) Type I diabetes. It is for detecting the onset (ISLETEST(TM)) of type I diabetes[insulin dependent diabetes (FOR DETECTION IDDM)] mellitus years before the manifestation of OF TYPE I DIABETES 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 status AUTOANTIBODY (EIA) 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. PHYSICIANS' OFFICE AND OVER-THE-COUNTER PRODUCTS ------------------------------------------------ The over-the-counter and professional markets for diagnostic products are expanding as a result of significant economic pressures affecting the health care industry. Changes in federal regulation and reimbursement policies, and increased competition among physicians have led to increased emphasis on the delivery of health care outside the hospital and clinical laboratory environment. 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 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 73/5% Lancer Orthodontics, Inc. California 29.9% EX-99 3 EXHIBIT 99.1 ITEM 7. FINANCIAL STATEMENTS - ------------------------------ INDEX Independent Auditors' Report..........................................F-1 Consolidated Balance Sheet as of May 31, 1996.........................F-2 Consolidated Statements of Operations for the Years Ended May 31, 1996 and 1995...............................................F-4 Consolidated Statements of Shareholders' Equity for the Years Ended May 31, 1996 and 1995...............................................F-5 Consolidated Statements of Cash Flows for the Years Ended May 31, 1996 and 1995...............................................F-7 Notes to Consolidated Financial Statements for the Years Ended May 31, 1996 and 1995...............................................F-9 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, 1996 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, 1996. 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, 1996 and the results of their operations and their cash flows for each of the years in the two-year period ended May 31, 1996 in conformity with generally accepted accounting principles. CORBIN & WERTZ Irvine, California July 19, 1996 BIOMERICA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET May 31, 1996
ASSETS Current assets: Cash and cash equivalents $ 622,828 Available-for-sale securities (Note 2) 355,598 Accounts receivable, less allowance for doubtful accounts and sales returns of $152,265 (Notes 5 and 6) 1,788,052 Inventories (Notes 5 and 6) 2,035,551 Notes receivable 27,985 Prepaid expenses and other 104,824 ----------- Total current assets 4,934,838 ----------- Inventories, non-current (Notes 5 and 6) 37,000 ----------- Land held for investment 46,000 ----------- Property and equipment, at cost (Notes 5 and 6): Equipment 2,512,371 Furniture, fixtures and leasehold improvements 625,115 Construction in progress 26,031 ----------- 3,163,517 Accumulated depreciation and amortization (2,699,271) ----------- 464,246 ----------- Intangible assets, net of accumulated amortization (Note 4) 564,394 Other assets 20,068 ----------- Total assets $ 6,066,546 =========== Continued
BIOMERICA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET - CONTINUED May 31, 1996
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Line of credit (Note 5) $ 250,000 Long-term debt and capital lease obligations, current portion (Notes 6 and 7) 198,842 Accounts payable and other accrued liabilities 701,619 Accrued compensation (Note 12) 526,514 Other 10,215 ----------- Total current liabilities 1,687,190 Long-term debt and capital lease obligations (Notes 6 and 7) 278,653 Minority interests (Note 3) 2,104,490 ----------- Total liabilities 4,070,333 ----------- Commitments and contingencies (Note 12) Shareholders' equity (Note 8): Common stock, $.08 par value; 10,000,000 shares authorized; 3,465,819 shares issued and outstanding 277,266 Additional paid-in capital 11,348,664 Unrealized holding gain on available-for-sale securities 90,687 Accumulated deficit (9,720,404) ----------- Total shareholders' equity 1,996,213 ----------- $ 6,066,546 =========== See accompanying notes to consolidated financial statements
BIOMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For The Years Ended May 31, 1996 and 1995
1996 1995 ------------ ----------- Net sales (Notes 3 and 11) $ 9,480,658 $ 9,161,758 Cost of sales (Note 3) 5,429,627 5,213,335 ------------ ----------- Gross profit 4,051,031 3,948,423 ------------ ----------- Operating expenses (Note 3): Selling, general and administrative 3,051,829 3,335,929 Research and development 257,125 292,979 ------------ ----------- Total operating expenses 3,308,954 3,628,908 ------------ ----------- Operating profit 742,077 319,515 Other income (expense): Interest expense (Notes 5 and 6) (104,113) (171,178) Other income (Note 10) 19,850 44,101 ------------ ----------- Income before minority interest in net profits of consolidated subsidiaries and income taxes 657,814 192,438 Minority interest in net profits of consolidated subsidiaries (Note 3) (212,350) (101,540) ---------- ----------- Income before income taxes 445,464 90,898 Income tax expense (Note 9) 12,737 2,400 ------------ ----------- Net income $ 432,727 $ 88,498 ============ =========== Per share data: Net income $ .12 $ .03 ============ =========== Weighted average number of common and common equivalent shares 3,589,494 3,406,241 ============ =========== See accompanying notes to consolidated financial statements
BIOMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For The Years Ended May 31, 1996 and 1995
Unrealized Holding Gain Additional On Available- Common Stock Paid-In For-Sale Prepaid Accumulated ------------ Shares Amount Capital Securities Expenses Deficit Total ---------- --------- ----------- ------------ ---------- ------------ ----------- Balance at June 1, 1994 3,365,069 $ 269,206 $11,290,796 $ 280,739 $ (11,382) $(10,241,629) $ 1,587,730 Exercise of stock options (Note 8) 750 60 540 600 Issuance of stock for services (Note 8) 27,000 2,160 8,481 10,641 Issuance of stock for services (Note 8) 22,500 1,800 11,981 13,781 Issuance of stock for payment of accrued compensation (Notes 8 and 10) 16,000 1,280 12,026 13,306 Change in unrealized gain on available- for-sale securities (278,417) (278,417) Amortization of prepaid expenses (Note 8) 6,240 6,240 Net income 88,498 88,498 --------- --------- ----------- ----------- ----------- ------------- ----------- Balance at May 31, 1995 3,431,319 274,506 11,323,824 2,322 (5,142) (10,153,131) 1,442,379 Continued
BIOMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED For The Years Ended May 31, 1996 and 1995
Unrealized Holding Gain Additional On Available- Common Stock Paid-In For-Sale Prepaid Accumulated ------------ Shares Amount Capital Securities Expenses Deficit Total ---------- --------- ----------- ------------ ---------- ------------ ----------- Exercise of stock options (Note 8) 34,500 2,760 24,840 27,600 Change in unrealized gain on available- for-sale securities 88,365 88,365 Amortization of prepaid expenses (Note 8) 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 See accompanying notes to consolidated financial statements
BIOMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For The Years Ended May 31, 1996 and 1995
1996 1995 ---------- --------- Cash flows from operating activities: Net income $ 432,727 $ 88,498 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 272,996 386,419 Provision for losses on accounts receivable (20,936) 27,595 Realized loss (gain) on sale of available-for-sale securities 15,930 (14,380) Minority interest in net profits of consolidated subsidiaries 212,350 101,540 Deferred compensation 44,080 41,234 Stock issued for services and bonuses 24,422 Changes in current assets and liabilities: Accounts receivable (220,505) (136,798) Inventories (222,172) (39,003) Prepaid expenses and other current assets 4,392 9,121 Accounts payable and other accrued liabilities (5,085) 35,509 Accrued compensation 25,413 8,250 Other current liabilities (48,385) (47,151) ----------- ---------- Net cash provided by operating activities 490,805 485,256 ----------- --------- Cash flows from investing activities: Sales of available-for-sale securities 124,250 179,822 Purchases of available-for-sale securities (68,562) Issuances of notes receivable (8,000) Principal payments received on notes receivable 8,681 23,834 Purchases of property and equipment (135,741) (203,079) Proceeds from sale of property and equipment 1,250 Purchase of intangible assets (3,140) (620) Other assets (15,472) (196) ---------- --------- Net cash used in investing activities (89,984) (6,989) ---------- --------- Continued
BIOMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED For The Years Ended May 31, 1996 and 1995
1996 1995 ----------- --------- Cash flows from financing activities: Net repayments of short-term borrowings and note payable to bank (745,000) (561,248) Payments of long-term debt and capital lease obligations (25,407) (27,084) Net borrowings under line of credit agreement 250,000 Investments by minority interests 20,250 Exercise of stock options 27,600 600 ---------- --------- Net cash used in financing activities (472,557) (587,732) ---------- --------- Net change in cash and cash equivalents (71,736) (109,465) Cash and cash equivalents at beginning of year 694,564 804,029 ---------- --------- Cash and cash equivalents at end of year $ 622,828 $ 694,564 ========== ========= Supplemental disclosure of cash flow information - Cash paid during the year for: Interest $ 104,113 $ 175,046 ========== ========= Income taxes $ 2,726 $ 3,331 ========== ========= Supplemental schedule of non-cash investing and financing activities: Change in unrealized holding gain on available-for-sale securities $ 88,365 $(278,417) Conversion of accounts payable and accrued liabilities into common stock of consolidated subsidiary (minority interest) $ 50,816 $ 35,819 Conversion of deferred compensation into common stock $ 13,306 Property acquired through issuance of capital lease $ 62,814 Conversion of note payable to account payable $ 17,500 See accompanying notes to consolidated financial statements
BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended May 31, 1996 and 1995 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------- 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. Principles of Consolidation - --------------------------- The consolidated financial statements for the years ended May 31, 1996 and 1995 (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, a note 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, 1996. 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 does maintain reserves for potential credit losses based upon the Company's historical experience related to credit losses. 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. Continued BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED For The Years Ended May 31, 1996 and 1995 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued - ------------------------------------------------------------------------------- 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 1996 and 1995 totaled $124,250 and $179,822, respectively, with realized (losses) gains of $(15,930) and $14,380, 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 $88,365 and $(278,417) for the years ended May 31, 1996 and 1995, 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. Inventories at May 31, 1996 consist of the following: Raw materials $ 525,232 Work in process 371,488 Finished products 1,138,831 ---------- Total $ 2,035,551 ========== Approximately $1,359,000 of Lancer's inventory is located at its manufacturing facility in Mexico as of May 31, 1996. 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. 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. Continued BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED For The Years Ended May 31, 1996 and 1995 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued - ------------------------------------------------------------------------------- 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 $188,384 and $284,166 for the years ended May 31, 1996 and 1995, respectively. Approximately $179,000 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, 1996 is $62,814 of capitalized leased assets, net of $18,843 of accumulated amortization. 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 $79,470 and $96,012 for the years ended May 31, 1996 and 1995, 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 projected undiscounted future cash flows 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, 1996. Minority Interest - ----------------- Minority interest represents the minority shareholders' proportionate share of the equity of Lancer and AIT. At May 31, 1996, Biomerica owned 29.9% of Lancer (see Note 3) and 73.5% 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 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 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. Continued BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED For The Years Ended May 31, 1996 and 1995 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued - ------------------------------------------------------------------------------- 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. Biomerica, Lancer and AIT file separate income tax returns for Federal and state income tax purposes. 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 was 3,589,494 and 3,406,241 in 1996 and 1995, respectively. Common stock equivalents were excluded in 1995 because they were insignificant. Primary and fully diluted income per share are the same for both years presented. NOTE 2 - INVESTMENTS - -------------------- As of May 31, 1996, Biomerica owns 72,792 shares of Pharma Patch-plc which is less than 5% of the total outstanding common shares of Pharma Patch-plc. The Company has reflected the investment in Pharma Patch-plc as an available-for- sale security in the accompanying consolidated balance sheet as of May 31, 1996. NOTE 3 - CONSOLIDATED SUBSIDIARIES - ---------------------------------- During the period July 1988 through August 1989, Biomerica acquired a total of 3,041,776 shares of common stock of Lancer for cash and other consideration totaling $2,060,231. In August 1989, control of Lancer was constructively obtained through such acquisitions, coupled with holdings of the outstanding shares of Lancer by the president and major shareholder of Biomerica (also a director of Lancer). Additionally, another Biomerica director also serves as a director on Lancer's Board of Directors. It is deemed that, effectively, Biomerica has control of Lancer. Biomerica's investment in Lancer was accounted for as a purchase effective in August 1989. Accordingly, Lancer's balance sheet at May 31, 1996 and operating results for the years ended May 31, 1996 and 1995, have been included in the accompanying consolidated financial statements. The excess of the cost of the investment over the amount of underlying equity in net assets acquired ($451,934) was ascribed to certain identifiable intangible assets, namely patents and distributor agreements and was being amortized using the straight- line method over 17 years. However, as a result of Lancer's recurring operating losses and net working capital deficiencies, Biomerica elected to write down approximately 50% of the intangible assets during fiscal 1991 and the remaining balance during fiscal 1992. Continued BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED For The Years Ended May 31, 1996 and 1995 NOTE 3 - CONSOLIDATED SUBSIDIARIES, continued - --------------------------------------------- During the year ended May 31, 1992, Biomerica received an additional 1,465,646 shares of Lancer common stock, upon conversion of $293,129 of 8% unsecured subordinated convertible debentures and accrued interest at $.20 per share. During 1993, Lancer issued to unrelated entities 501,774 shares of its common stock for $98,006 in exchange for cash and for forgiveness of debt and sold 1,355,200 shares of common stock for $360,000. Additionally, Lancer issued to unrelated entities 570,483 shares of redeemable convertible preferred stock that has voting rights equivalent to 670,483 shares of common stock. The issuance of these shares caused Biomerica's ownership percentage of Lancer to decrease to 31.6% and Biomerica's president's ownership percentage to increase to 16.1%. During 1994, Lancer issued 190,608 shares and canceled 9,679 shares of its common stock to unrelated entities totaling $134,750 and $5,617, respectively. In addition, 200,000 shares of Series C preferred stock were converted into an account payable which was subsequently paid during fiscal 1994. Biomerica sold 60,000 shares of Lancer common stock to unrelated entities. The result of these transactions was a decrease in Biomerica's ownership percentage of Lancer to 30.8% and an increase in Biomerica's president's ownership to 16.4%. During 1995, Lancer issued 137,617 shares of its common stock to unrelated parties totaling $35,819. The result of this transaction was a decrease in Biomerica's ownership percentage of Lancer to 30.5% and a decrease in Biomerica's president's ownership to 16.3%. During 1996, Lancer issued 194,779 shares of its common stock to an unrelated party totaling $50,816 for the conversion of accrued royalties and sold 72,600 shares of its common stock to unrelated parties for cash of $20,250. The result of these transactions is a decrease in Biomerica's ownership percentage of Lancer to 29.9% and a decrease in Biomerica's president's ownership to 16%. Biomerica's president controls an additional 835,066 shares of Lancer's common stock either through proxy or other controlled persons (representing approximately 5.6% of Lancer's outstanding common stock). In connection with Biomerica's conversion of debentures during fiscal 1992, Biomerica received warrants to purchase an additional 83,333 and 425,000 shares of Lancer's common stock at $.30 and $.20 per share, respectively. All of the warrants expired in fiscal 1994. During fiscal 1994, Biomerica received warrants to purchase 508,333 shares of Lancer's common stock at $.25 per share and options to purchase 140,000 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. As of May 31, 1992, Biomerica's ownership interest in AIT amounted to 49.8% and thus Biomerica accounted for its investment in AIT under the equity method. During fiscal year 1992, Biomerica paid operating expenses on behalf of AIT of approximately $56,000. In addition, as a result of AIT's recurring operating losses and shareholders' deficiency, Biomerica wrote-off the net investments in and advances to AIT. During June 1992, 8,360,000 additional shares of AIT's common stock were issued to Biomerica as a repayment of advances made to AIT, thus increasing Biomerica's ownership interest in AIT to 76.2%. During 1995 and 1994, an additional 480,000 and 25,000 shares of AIT were issued to outside parties decreasing Biomerica's interest in AIT to 73.5% and 76.1%, respectively. Accordingly, as of May 31, 1996 and for the years ended May 31, 1996 and 1995, the accounts of AIT have been included in the consolidated financial statements. The acquisition of AIT's ownership interest during 1993 was accounted for as a purchase. The purchase price was not significant and was allocated among the net tangible assets acquired and liabilities assumed on the basis of their estimated fair values. The acquisition cost approximated the estimated fair values of the net assets acquired. Continued BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED For The Years Ended May 31, 1996 and 1995 NOTE 3 - CONSOLIDATED SUBSIDIARIES, continued - --------------------------------------------- Operating results for Lancer and AIT in the aggregate for the years ended May 31, 1996 and 1995, which are included in the consolidated operating results of the Company, are as follows:
1996 1995 ---------- --------- Net sales $ 6,922,275 $ 7,229,694 Cost of sales 4,097,311 4,225,022 ---------- ---------- Gross profit 2,824,964 3,004,672 ---------- ---------- Operating expenses: Selling, general and administrative 2,287,958 2,558,690 Research and development 136,364 169,114 ---------- ---------- Total operating expenses 2,424,322 2,727,804 ---------- ---------- Other income (expense): Interest expense (104,113) (168,879) Other income, net 12,702 40,268 ---------- ---------- (91,411) (128,611) ---------- ---------- Income before income taxes 309,231 148,257 Income tax expense 1,600 1,600 ---------- ---------- Net income $ 307,631 $ 146,657 ========== ==========
NOTE 4 - INTANGIBLE ASSETS - -------------------------- Intangible assets, net of accumulated amortization, consist of the following at May 31, 1996: Marketing and distribution rights $ 442,750 Technology use rights 985,507 Patents and capitalized patent application costs 35,862 ----------- 1,464,119 Less accumulated amortization (899,725) ------------ $ 564,394 =========== 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 1996 and 1995, 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 $53,970 and $70,512 for the years ended May 31, 1996 nd 1995, respectively, related to these assets. Amortization expense related to patents which is included in the accompanying consolidated statements of operations amounted to $600 for each of the years ended May 31, 1996 and 1995. Continued BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED For The Years Ended May 31, 1996 and 1995 NOTE 5 - LINE OF CREDIT - ----------------------- At May 31, 1996, Lancer had a $500,000 line of credit with a bank. Borrowings are made at prime plus 1% (9.25% at May 31, 1996) 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 $103,000. The line of credit expires on November 1, 1996. As of May 31, 1996, there was $250,000 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, 1996. Average month end balance $196,747 Maximum balance outstanding at any month end $250,000 Weighted average interest rate (computed by dividing interest expense by average monthly balance) 9.53% Interest rate at year end 9.25% 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% (9.25% at May 31, 1996). All unpaid principal and accrued interest is due and payable on November 1, 1997. At May 31, 1996, the note payable is due as follows: Years Ending May 31, ----------- 1997 $ 177,194 1998 262,806 ----------- 440,000 Less current portion (177,194) ----------- $ 262,806 =========== The note payable and line of credit are collateralized by inventories, receivables and equipment. The lending agreement requires, among other things, that Lancer maintain a tangible net worth of $2,000,000, a debt to tangible net worth ratio of no more than 1.25 to 1 and a current ratio of at least 1.5 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 lives. Depreciation of the asset is included in depreciation expense for the years ended May 31, 1996 and 1995. Continued BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED For The Years Ended May 31, 1996 and 1995 NOTE 7 - CAPITAL LEASE OBLIGATIONS, continued - --------------------------------------------- The future annual minimum lease payments under the capital lease are as follows: Years Ending May 31, ------------ 1997 $ 24,791 1998 16,528 ----------- Total annual future minimum lease payments 41,319 Less amounting representing interest (3,824) ----------- Present value of net minimum lease payments 37,495 Less current portion (21,648) ----------- $ 15,847 =========== NOTE 8 - SHAREHOLDERS' EQUITY - ----------------------------- 1995, 1991 and 1980 Stock Option and Restricted Stock Plans - ----------------------------------------------------------- Under the currently expired 1980 Employee Stock Option Plan (the 1980 Plan), the Company was authorized to grant stock options to full-time and part-time employees of, and consultants to, the Company, subject to certain limitations. Options granted under the 1980 Plan could be granted at prices not less than 90% of the then fair market value of the common stock and expire not more than five years after the date of grant. During 1995, the remaining 7,500 unexercised options under the 1980 Plan expired. In December 1991, the Company adopted a stock option and restricted stock 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. During 1995, the Company issued 49,500 shares of restricted common stock to certain employees and consultants of Biomerica for services totaling $24,422 rendered during fiscal 1995. 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. No options under the 1995 Plan were granted during the year ended May 31, 1996. Activity as to stock options under the 1980 and 1991 plan is as follows: Options outstanding at May 31, 1994 126,191 $ .80- $2.88 Options granted 257,500 $ .80- $ .85 Options exercised (750) $ .80 Options canceled or expired (117,441) $ .80- $2.88 ---------- 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 $ .80- $2.00 ========== Options exercisable at May 31, 1996 166,375 $ .80- $2.00 ========== Continued BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED For The Years Ended May 31, 1996 and 1995 NOTE 8 - SHAREHOLDERS' EQUITY, continued - --------------------------------------- Common Stock Split - ------------------ During the year ended May 31, 1995, the Company declared a 1-for-2 reverse stock split. Accordingly, all share and per share information throughout the consolidated financial statements have been retroactively restated to reflect the reverse split. Stock Grants - ------------ During 1995, the Company issued 16,000 shares, respectively, not covered by the 1991 Stock Option and Restricted Stock Plan, to certain employees and consultants, primarily to the president and two directors of Biomerica. These shares were issued for services rendered in fiscal 1995. These shares vested immediately and generally related to services previously rendered. 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 and 1995, the Company recorded amortization expense of $5,142 and $6,240, respectively, on such bonus. Stock Options Issued - -------------------- 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 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. New Disclosure Standard - ----------------------- The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation" ("Statement No. 123"). Statement No. 123 is primarily a disclosure standard for the Company because it will continue to account for employee stock options under Accounting Principal Board Opinion No. 25. The disclosure requirements for the Company required by Statement No. 123 are effective for financial statements issued after fiscal year 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, 1996 and 1995 are presented below.
1996 1995 ---------- --------- Deferred tax assets: Accounts receivable, principally due to allowance for doubtful accounts and sales returns $ 60,958 $ 69,334 Inventories, principally due to additional costs inventoried for tax purposes pursuant to the Tax Reform Act of 1986 and allowance for inventory obsolescence 129,472 118,146 Compensated absences and deferred payroll, principally due to accrual for financial reporting purposes 231,432 208,305 Continued
BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED For The Years Ended May 31, 1996 and 1995 NOTE 9 - INCOME TAXES, continued - --------------------------------
1996 1995 ---------- ----------- State net operating loss carryforwards 53,961 158,466 Federal net operating loss carryforwards 2,956,980 3,230,263 Tax credit carryforwards 244,403 242,911 Investment in affiliates 451,217 464,870 ---------- ----------- Total gross deferred tax assets 4,128,423 4,492,295 Less valuation allowance (4,044,593) (4,398,505) ---------- ----------- 83,830 93,790 Deferred tax liabilities: Marketing rights, principally due to amortization (83,830) (93,790) ---------- ----------- Net deferred tax liability $ --- $ --- ---------- ----------- Income tax expense for the years ended May 31, 1996 and 1995 consists of the following current provisions: 1996 1995 ---------- ----------- U.S. Federal $ --- $ --- State and local 12,737 2,400 ---------- ----------- $ 12,737 $ 2,400 ========== =========== 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: 1996 1995 ---------- ---------- Computed "expected" tax expense $ 151,458 $ 30,905 Increase (reduction) in income taxes resulting from: Change in the beginning-of-the-year balance of the valuation allowance for deferred tax assets allocated to income tax expense (28,287) Meals and entertainment 9,855 12,721 Utilization of net operating loss (140,960) Other (net) 11,836 Equity in earnings of affiliates not subject to taxation because of dividends-received deduction for tax purposes (32,189) (15,339) State income taxes 12,737 2,400 ---------- ----------- $ 12,737 $ 2,400 ========== =========== Continued
BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED For The Years Ended May 31, 1996 and 1995 NOTE 9 - INCOME TAXES, continued - -------------------------------- As of May 31, 1996, Biomerica had net tax operating loss carryforwards of approximately $4,484,000 and investment tax and research and development credits of approximately $18,702, which are available to offset future Federal tax liabilities. The carryforwards expire at varying dates from 1997 to 2010. As of May 31, 1996, Lancer had net tax operating loss carryforwards of approximately $2,688,000 and business tax credits of approximately $174,131 available to offset future Federal tax liabilities. The carryforwards expire at varying dates from 1996 to 2008. Lancer also had net tax operating loss carryforwards of approximately $546,000 and business tax credits of approximately $23,000 available to offset future California taxable income, expiring at varying dates between 1997 and 1998. As of May 31, 1996, AIT had net tax operating loss carryforwards of approximately $1,525,000 and business tax credits of approximately $28,570 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 $333,000 to offset future California taxable income, expiring at varying dates between 1997 and 2001. NOTE 10 - OTHER INCOME (EXPENSE) - -------------------------------- Other income consists of the following:
1996 1995 ------------- ----------- Realized (losses) gains on available- for-sale securities transactions $ (15,930) $ 14,380 Dividend income 8,920 7,585 Other 26,860 22,136 ------------ ----------- $ 19,850 $ 44,101 ============ =========== NOTE 11 - BUSINESS SEGMENTS - --------------------------- Reportable business segments for the years ended May 31, 1996 and 1995 are as follows: 1996 1995 ------------ ----------- Domestic sales: Orthodontic products $ 3,999,000 $ 4,580,000 ============ =========== Medical diagnostic products $ 2,219,000 $ 1,414,000 ============ =========== Foreign sales: Orthodontic products $ 2,781,000 $ 2,543,000 ============ =========== Medical diagnostic products $ 482,000 $ 625,000 ============ =========== Net sales: Orthodontic products $ 6,780,000 $ 7,123,000 Medical diagnostic products 2,701,000 2,039,000 ------------ ----------- Total $ 9,481,000 $ 9,162,000 ============ =========== Operating profit: Orthodontic products $ 416,000 $ 315,000 Medical diagnostic products 326,000 5,000 ------------ ----------- Total operating profit $ 742,000 $ 320,000 ============ =========== Continued
BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED For The Years Ended May 31, 1996 and 1995 NOTE 11 - BUSINESS SEGMENTS, continued - -------------------------------------- Identifiable assets: Orthodontic products $ 4,033,000 $ 4,389,000 Medical diagnostic products 2,034,000 1,400,000 ------------ ----------- Total 6,067,000 5,789,000 ------------ ----------- Total assets $ 6,067,000 $ 5,789,000 ============ =========== Depreciation and amortization expense: Orthodontic products $ 234,000 $ 355,000 Medical diagnostic products 39,000 31,000 ------------ ----------- Total $ 273,000 $ 386,000 ============ =========== Capital expenditures: Orthodontic products $ 104,000 $ 117,000 Medical diagnostic products 32,000 86,000 ------------ ----------- Total $ 136,000 $ 203,000 ============ ===========
Total net sales as reflected above consist of sales to unaffiliated customers only as there were no significant intersegment sales during fiscal years 1996 and 1995. 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 1996 and 1995. 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, 1996 and 1995. 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 - --------------------------------------- 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 president. The lease rate is $10,720 and $1,400 per month, respectively. Lancer leases its main facility under an operating lease expiring December 31, 1998, which requires monthly rentals that increase annually. 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 is included as deferred lease expense in accounts payable and other accrued liabilities in the accompanying consolidated balance sheet as of May 31, 1996. Continued BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED For The Years Ended May 31, 1996 and 1995 NOTE 12 - COMMITMENTS AND CONTINGENCIES, continued - -------------------------------------------------- Rental expense for all operating leases amounted to $191,000 and $197,000 for the years ended May 31, 1996 and 1995, respectively. The future annual minimum lease payments are as follows: Years Ending May 31, ------------ 1997 $ 194,000 1998 197,000 1999 31,000 ----------- Minimum lease payments $ 422,000 =========== 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. As the number of employees increases, the hourly rate decreases. 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. In June 1986, the Company entered into an employment agreement with its 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 and $60,000 during the years ended May 31, 1996 and 1995, respectively. 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 and $54,500 for fiscal years 1996 and 1995, respectively, have been deferred and are included in accrued compensation in the accompanying consolidated balance sheet as of May 31, 1996 and 1995. During the year ended May 31, 1995, the Company issued 16,000 shares of its common stock valued at $13,306 as a reduction of the deferred compensation. Approximately $500,000 of the total accrued compensation included in the 1996 consolidated balance sheet is due to the chief executive officer. Continued BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED For The Years Ended May 31, 1996 and 1995 NOTE 12 - COMMITMENTS AND CONTINGENCIES, continued - -------------------------------------------------- Government Regulation - --------------------- 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. 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. 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, Lancer 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. Lancer, 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 Lancer have been made since the plan's inception. NOTE 13 - RELATED PARTY TRANSACTIONS - ------------------------------------ During fiscal 1991, Biomerica borrowed $70,000 from its president. During 1996, the remaining balance of $4,000 was repaid in full. NOTE 14 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY - ----------------------------------------------------------- The following represents the condensed balance sheet for Biomerica, Inc. as of May 31, 1996, and condensed statements of operations and of cash flows for the years ended May 31, 1996 and 1995. No cash dividends were paid by the consolidated subsidiaries (see Note 3) during the years ended May 31, 1996 and 1995. Condensed Balance Sheet May 31, 1996
ASSETS Current assets: Cash and cash equivalents $ 533,030 Available-for-sale securities 355,598 Accounts receivable, net 298,942 Inventories 443,144 Notes receivable 27,985 Prepaid expenses and other 58,276 ----------- Total current assets 1,716,975 Continued
BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED For The Years Ended May 31, 1996 and 1995 NOTE 14 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY, continued - ----------------------------------------------------------------------
Condensed Balance Sheet - Continued May 31, 1996 Investment in and advances to affiliates and consolidated subsidiaries 923,280 Inventory, non-current 37,000 Property and equipment, net 119,507 Intangible assets 22,653 Other 15,668 ----------- $ 2,835,083 =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 302,141 Accrued compensation 526,514 Other 10,215 ----------- Total current liabilities 838,870 ----------- Shareholders' equity: Common stock 277,266 Additional paid-in capital 11,348,664 Unrealized holding gain on available-for-sale securities 90,687 Accumulated deficit (9,720,404) ----------- Total shareholders' equity 1,996,213 ----------- $ 2,835,083 =========== Condensed Statements of Operations May 31, 1996 and 1995 1996 1995 ------------ ----------- Net revenues $ 2,586,697 $ 1,932,064 Cost of sales 1,360,630 1,015,426 ----------- ----------- Gross profit 1,226,067 916,638 Operating expenses: Selling, general and administrative 763,871 777,239 Research and development 120,761 123,865 ------------ ----------- Total operating expenses 884,632 901,104 ----------- ----------- Operating income 341,435 15,534 Other income (expense): Interest income (expense) (2,299) Other income 7,148 30,946 ------------ ----------- Income before interest in net income of consolidated subsidiaries and income taxes 348,583 44,181 Interest in net income of consolidated subsidiaried 95,281 45,117 Income tax expense 11,137 800 ------------ ----------- Net income $ 432,727 $ 88,498 ============ =========== Continued
BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED For The Years Ended May 31, 1996 and 1995 NOTE 14 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY, continued - ---------------------------------------------------------------------- Condensed Statements of Cash Flows May 31, 1996 and 1995
1996 1995 ------------ ----------- Cash flows from operating activities: Net income $ 432,727 $ 88,498 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 36,270 28,265 Realized loss (gain) on sale of available-for-sale securities 15,930 (14,380) Provision for losses on accounts receivable (936) (2,284) Income of subsidiaries (95,281) (45,117) Deferred compensation 44,080 57,837 Issuance of stock for services and bonuses 24,422 Net change in other current assets and current liabilities (31,118) 1,484 ------------ ----------- Net cash provided by operating activities 401,672 138,725 ------------ ----------- Cash flows from investing activities: Sales of available-for-sale securities 124,250 179,822 Purchases of available-for-sale securities (68,562) Issuance of notes receivable (8,000) Principal payments received on notes receivable 8,681 23,834 Decrease (increase) in investment in and advances to affiliates and consolidated subsidiaries (36,561) 10,770 Purchases of property and equipment (30,855) (82,931) Proceeds from sale of property and equipment 1,250 Purchases of intangible assets (750) (620) Decrease in other assets (15,472) 3,138 ------------ ----------- Net cash (used in) provided by investing activities (19,269) 127,263 ------------ ----------- Cash flows from financing activities: Payment on short-term borrowings (4,000) (161,248) Issuance of notes payable (5,751) Proceeds from sale of stock and exercise of stock options 27,600 600 ------------ ----------- Net cash provided by (used in) financing activities 23,600 (166,399) ------------ ----------- Continued
BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED For The Years Ended May 31, 1996 and 1995 NOTE 14 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY, continued - ---------------------------------------------------------------------- Condensed Statements of Cash Flows - Continued May 31, 1996 and 1995
1996 1995 ------------ ----------- Net change in cash and cash equivalents 406,003 99,589 Cash and cash equivalents at beginning of year 127,027 27,438 ------------ ----------- Cash and cash equivalents at end of year $ 533,030 $ 127,027 ============ =========== Supplemental disclosure of cash flow information - Cash paid during the year for: Income taxes $ 800 $ 800 ============ =========== Interest $ --- $ 4,482 ============ =========== Supplemental schedule of non-cash investing and financing activities: Conversion of deferred compensation into common stock $ 13,306 Conversion of note payable to account payable $ 17,500 Change in unrealized holding gain on available-for-sale securitie $ 88,365 $ (278,417)
EX-27 4
5 YEAR MAY-31-1996 MAY-31-1996 622,828 355,598 1,940,317 152,265 2,072,551 4,934,838 3,163,517 2,699,271 6,066,546 1,687,190 0 0 0 277,266 1,718,947 6,066,546 9,480,658 9,480,658 5,429,627 5,429,627 3,289,104 0 104,113 445,464 12,737 445,464 0 0 0 445,464 .12 .12
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