-----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, EP65hC4sK5/BeFovjJmIcuvm6O2hlrgxFJ40q3/KzDfmxLSFzVzMAtrzGfrPJsnB wvCZZy6UFo0k/qgj1t595A== 0000073290-97-000005.txt : 19970203 0000073290-97-000005.hdr.sgml : 19970203 ACCESSION NUMBER: 0000073290-97-000005 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960531 FILED AS OF DATE: 19970131 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-08765 FILM NUMBER: 97515296 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/A 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/A (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 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: $9,480,658. 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. This Form 10-KSB/A is being filed in order to include certain information that was inadvertently omitted from the Annual Report on Form 10-KSB filed by Biomerica, Inc. (the "Company") for the fiscal year ended May 31, 1996. This Form 10-KSB/A includes all of the information required by the rules under Form 10-KSB and represents a complete amendment to the Form 10-KSB filed by the Company. 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 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, 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 utilize radioimmunoassay (RIA) or enzyme immunoassay (EIA) technology. Biomerica 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, 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. 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 through drugstores such as Walgreens, K-Mart, Osco/Sav-On, etc. - ------------------------------------------------------------------------------- Diagnostic Test Kit Use - ------------------------------------------------------------------------------- EZ DETECT(TM) -Do-it-yourself kit for both the physician's HIDDEN BLOOD office and over-the-counter markets for IN STOOL determining occult (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 URINE OCCULT of hidden blood in urine. It detects very BLOOD TEST (UBT) small amounts of blood in urine caused by infections, cancer, stones, prostatic enlargement, kidney disease, trauma, or malformations of the genito-urinary tract. OVULATION -One-step, five minute visual test for laboratory or TEST (EZ-LH(TM)) 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, five minute visual test to detect (EZ-PSA(TM)) 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 1996 fiscal year, Lancer had twelve 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. As of May 31, 1993, Lancer had moved all of its manufacturing and shipping operations to 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. Presently, the total number of employees in San Marcos alone is about 46. 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 at 1527 Monrovia Avenue, Newport Beach, CA, for allergy and other esoteric diagnostic testing services for physicians, other laboratories and pharmaceutical companies. AIT employs one medical doctor and two technicians and receives substantial assistance from Biomerica whose laboratory is contiguous to AIT. 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: . Immunotherapy agents for treatment of IgE mediated allergies: U.S. Patent #5,116,612 (issued May 6, 1992). . Liposome containing immunotherapy agents for treatment of IgE mediated allergies: U.S. Patent #5,049,390 (issued September 17, 1991). . Immunotherapy agents for treatment of IgE mediated allergies: U.S. Patent #4,946,945 (issued August 7, 1990). . 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 help from Biomerica, AIT has begun preclinical studies using animals utilizing 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 allergy market which is estimated to be $6 billion in the U.S. alone 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 Hoffman La Roche, American Homes Products, as well as other clinics and physicians. Biomerica owns about 73.5% of AIT outstanding 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. In 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. During fiscal 1992 and 1991, Lancer moved the majority of its manufacturing operations to Mexico. Lancer's agreement with the subcontracts has been renegotiated several times since inception. The agreement that is in effect now through 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 research and development of additional diagnostic tests in keeping with its strategy of continuing 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 were devoted both to research and development and to production and quality control of diagnostic test kits for sale. Lancer is engaged in development programs directed toward improving 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, 1996 and 1995 aggregated $257,125 and $292,979, respectively. These expenses included approximately $130,000 and $163,000 for fiscal 1996 and 1995, respectively, for Lancer's product development. MARKETS AND METHODS OF DISTRIBUTION - ----------------------------------- The Company and its subsidiaries (excluding Lancer) have 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 upon 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 believes that it has been aggressively targeting both the chain and independent stores. The independents are widely dispersed and therefore are focused on by engaging wholesalers (e.g. Bergen Brunswig, Foxmeyer, etc.) to promote the Company's products. The chain stores are focused on by manufacturers representatives and dealings with chain store buyers. The loss of any one or a few customers would not have a material adverse effect upon the revenues of the Company. Lancer sells its products directly or indirectly through its sales representatives, to a relative large number of customers. At the end of its 1996 fiscal year, Lancer had twelve sales representatives, all in the United States, all of whom are employees of Lancer. No customer of Lancer accounted for 10% or more of Lancer's sales in the fiscal years ended May 31, 1996 and 1995. BACKLOG - ------- As of May 31, 1996 and 1995, Lancer had a backlog of $353,000 and $635,000, respectively. GOVERNMENT REGULATIONS - ---------------------- In 1976, Lancer and many of its products became subject to regulation by the FDA pursuant to the Medical Device Amendments of 1976. 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. 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 1996 fiscal year, and does not anticipate that there will be any interruption or cessation of supply in the future. COMPETITIVE FACTORS - ------------------- 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. This capability is presently being expanded. 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, 1996, the Company's operations with subsidiaries employed 70 full-time employees and 3 part-time employees, including two Ph.D.'s. Lancer, through its Mexican subcontractor, employs approximately 150 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, ------------------ 1996 1995 ----------------- ----------------- Revenues from sales to: United States customers............. $ 6,218,000/66% $ 5,994,000/65% Foreign customers................... $ 3,263,000/34% $ 3,168,000/35% ----------------- ----------------- Total revenues...................... $ 9,481,000/100% $ 9,162,000/100% ================= =================
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, 1997), and a permit from the U.S. Drug Enforcement Administration (currently expiring on June 30, 1997), 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. In 1976, Lancer and many of its products became 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, "Nimbus" and "GAP" with the Office of Patents and Trademarks on December 31, 1985. The Company's unregistered tradenames are: "EZ Detect", "CAST", "COT", "Fortel", "EquistiK", "FelistiK", "Tri-Level Controls", "Tru-Level Controls", "T-Marker Controls", "AllerHalt", "Candiquant", and "Candigen". 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. Both 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 the Lancer image in the orthodontic marketplace and sales. ITEM 2. PROPERTIES ---------- During fiscal 1995 Biomerica leased approximately 13,500 square feet of space at 1527-1533 Monrovia Avenue, 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 Mr. Joseph H. Irani and Mrs. Ilse Sultanian (Mr. Joseph H. Irani is 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. 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 Mr. Joseph H. Irani and Mrs. Ilse Sultanian. Lancer leases a 9,240 square foot manufacturing building at 253 Pawnee Street, San Marcos, California. The term of the lease is for five years commencing January 1, 1994, with the following future minimum annual cash rental payments. Fiscal 1997 $48,300 1998 51,400 1999 30,800 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 in the over-the-counter NASDAQ Stock Market (SmallCap stocks, symbol "BMRA"). The following tables show 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, 1996........ 2-11/16 1-7/8 February 28, 1996... 2-1/2 1-11/16 November 30, 1995... 2-1/2 1-3/4 August 31, 1995..... 2-1/4 15/16 May 31, 1995........ 1-1/4 15/16 February 29, 1995... 1-7/16 7/8 November 30, 1994... 1-1/2 5/8 August 31, 1994..... 1 9/16 As of August 2, 1996, the number of holders of record of the Company's common stock was approximately 1,984, 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 1996 COMPARED TO FISCAL 1995 - ----------------------------------- Consolidated net sales for the Company were $9,480,658 for fiscal 1996 compared to $9,161,758 for fiscal 1995. This represents an increase of $318,900 for fiscal 1996. Lancer's sales decreased by $342,701. Therefore, Biomerica showed a sales increase of $654,633, a 34% increase for Biomerica. AIT had a slight increase of $3,983 (4%). This decrease at Lancer was attributable to (1) various manufacturing and purchasing problems experienced in Mexico, (2) an unpredictable domestic market, and (3) renewed pricing pressures. Lancer continues to embark on programs that may 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 1996 as compared to fiscal 1995 increased by 4%, which approximated the percentage increase in sales. Lancer realized higher costs of sales as a percentage of sales due to manufacturing problems. They are taking steps to rectify these problems. Selling, general and administrative costs decreased in fiscal 1996 as compared to fiscal 1995 by $284,100. Lancer had a decrease of $289,615 in these costs, which decrease was due to decreased payroll and related expenses, travel, office supplies, bad debt expense, brochures, samples, show registration, advertising and telephone expenses. Lancer decreased these expenses to lower costs to offset the manufacturing problems that caused lower sales. Biomerica had a slight decrease in fiscal 1996 as compared to fiscal 1995. Research and development decreased in fiscal 1996 as compared to fiscal 1995 by $35,854 (12%). Of this, Lancer had a decrease of $32,757 as a result of decreased payroll, supplies and professional fees. Biomerica and AIT had a research and development decrease of $3,097. Interest expense, which was incurred primarily by Lancer, decreased in fiscal 1996 as compared to fiscal 1995 by $67,065 due to reduced levels of debt, which decrease was partially offset by increased interest rates. Other income decreased by $24,251 in fiscal 1996 as compared to fiscal 1995. A decrease of $3,108 is attributable to Lancer, and the remainder of $21,143 was attributable to Biomerica and AIT. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- As of May 31, 1996, the Company had cash and available for sale securities of $978,426 (Note 1) and current working capital of $3,247,648 as opposed to $1,033,415 and $2,858,737, respectively, for the previous two years. All of the cash and available for sale securities are easily mobilized. In 1996, Lancer negotiated a restructuring of its bank term loan, arranging for the debt to be divided into a new term loan and a line of credit. The term loan is for two years and requires monthly principal and interest payments by Lancer of $18,889. 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 line of credit expires on November 1, 1996. Immediately after the restructuring, Lancer paid down the line of credit with its available cash. The Company is 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. 1996 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 1996 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, 1996. ITEM 10. EXECUTIVE COMPENSATION ---------------------- This information is incorporated by reference to the Company's proxy statement for its 1996 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, 1996. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- This information is incorporated by reference to the Company's proxy statement for its 1996 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, 1996. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- This information is incorporated by reference to the Company's proxy statement for its 1996 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, 1996. 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 December 20, 1995). 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.). 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, 1996 and 1995 and Independent Auditors' Report. 99.2 Lancer Orthodontics, Inc. Annual Report on Form 10-KSB for Fiscal Year Ended May 31, 1996 (incorporated by reference to Lancer's Form 10-KSB dated August 15, 1996). 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, 1995). 99.4 Consent of Independent Auditors (b) Reports on Form 8-K ------------------- None. 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/JOSEPH H. IRANI -------------------------- Joseph H. Irani President Dated: January 28, 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/JOSEPH H. IRANI Date: 1/28/97 - ------------------------------ ------------ Joseph H. Irani President, Director, Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer /S/P. B. KAPLAN Date: 1/28/97 - ---------------------------- ------------ P. B. Kaplan, M.D. Director /S/ROBERT ORLANDO Date: 1/28/97 - ------------------------------ ------------ Robert Orlando, M.D., Ph.D. Director 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-27 3
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
EX-99 4 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 [CAPTION] 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)
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