-----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, DL5ZEB2AwFJgE+5fFocx9mITX0xvlFpS/WrtyYUWaj+AYfl8/K+oA8W0/R8XgNNq ObjqjIHIsf4DVynay2bESQ== 0001019687-01-500809.txt : 20010914 0001019687-01-500809.hdr.sgml : 20010914 ACCESSION NUMBER: 0001019687-01-500809 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010531 FILED AS OF DATE: 20010913 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIOMERICA INC CENTRAL INDEX KEY: 0000073290 STANDARD INDUSTRIAL CLASSIFICATION: DENTAL EQUIPMENT & SUPPLIES [3843] IRS NUMBER: 952645573 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-08765 FILM NUMBER: 1736618 BUSINESS ADDRESS: STREET 1: 1533 MONROVIA AVENUE CITY: NEWPORT BEACH STATE: CA ZIP: 92663 BUSINESS PHONE: 9496452111 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 INSTRUMENTS INC DATE OF NAME CHANGE: 19720508 FORMER COMPANY: FORMER CONFORMED NAME: NUCLEAR MEDICAL SYSTEMS INC DATE OF NAME CHANGE: 19830216 10KSB 1 biomercia_10k-053101.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MAY 31, 2001 COMMISSION FILE NUMBER: 0-8765 - -------------------------------------- ------------------------------ BIOMERICA, INC. ------------------------------------ (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, CA 92663 - --------------------------------------- -------- (Address of principal executive offices) (Zip Code) Issuer's Telephone Number: (949) 645-2111 -------------------------- ------------- Securities registered under Section 12(b) of the Exchange Act: (Title of each class) (Name of each exchange on which registered) ------------------- ----------------------------------------- NONE NASDAQ Securities registered under Section 12(g) of the Exchange Act: (Title of each class) ----------------------------- COMMON STOCK, PAR VALUE $0.08 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES[x] NO[_] ------------ 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: $8,939,522. State the aggregate market value of the voting and non-voting stock held by non- affiliates of the issuer (based upon 4,223,822 shares held by non-affiliates and the closing price of $0.70 per share for Common Stock in the over-the-counter market as of September 4, 2001): $2,970,475. Number of shares of the issuer's common stock, par value $0.08, outstanding as of August 21, 2001: 5,036,754 shares. DOCUMENTS INCORPORATED BY REFERENCE: The issuer's proxy statement for its 2001 Annual Meeting of Stockholders is incorporated into Part III hereof. Also incorporated by reference are the Annual Reports on Form 10-KSB for the fiscal year ended May 31, 2001, for Lancer Orthodontics, Inc. and Allergy Immuno Technologies, Inc. Transitional Small Business Disclosure Format YES [_] NO [X] - -------------------------------------------------------------------------------- 2 PART I* ITEM 1. DESCRIPTION OF BUSINESS ----------------------- THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 PROVIDES A "SAFE HARBOR" FOR FORWARD-LOOKING STATEMENTS. CERTAIN INFORMATION CONTAINED HEREIN (AS WELL AS INFORMATION INCLUDED IN ORAL STATEMENTS OR OTHER WRITTEN STATEMENTS MADE OR TO BE MADE BY BIOMERICA) CONTAINS STATEMENTS THAT ARE FORWARD-LOOKING, SUCH AS STATEMENTS RELATING TO ANTICIPATED FUTURE REVENUES OF THE COMPANY AND SUCCESS OF CURRENT PRODUCT OFFERINGS. SUCH FORWARD-LOOKING INFORMATION INVOLVES IMPORTANT RISKS AND UNCERTAINTIES THAT COULD SIGNIFICANTLY AFFECT ANTICIPATED RESULTS IN THE FUTURE, AND ACCORDINGLY, SUCH RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS MADE BY OR ON BEHALF OF BIOMERICA. THE POTENTIAL RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS, FLUCTUATIONS IN THE COMPANY'S OPERATING RESULTS. THESE RISKS AND UNCERTAINTIES ALSO INCLUDE THE SUCCESS OF THE COMPANY IN RAISING NEEDED CAPITAL, THE ABILITY OF THE COMPANY TO MAINTAIN REQUIREMENTS TO BE LISTED ON NASDAQ, THE CONTINUAL DEMAND FOR THE COMPANY'S PRODUCTS, COMPETITIVE AND ECONOMIC FACTORS OF THE MARKETPLACE, AVAILABILITY OF RAW MATERIALS, HEALTH CARE REGULATIONS AND THE STATE OF THE ECONOMY. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF, AND THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS. BUSINESS OVERVIEW THE COMPANY Biomerica, Inc. ("Biomerica", the "Company", "we" or "our") was incorporated in Delaware in September 1971 as Nuclear Medical Systems, Inc. We changed our corporate name in February 1983 to NMS Pharmaceuticals, Inc., and in November 1987 to Biomerica, Inc. We have three subsidiaries, Lancer Orthodontics, Inc. ("Lancer"), an international manufacturer of orthodontics products, Allergy Immuno Technologies, Inc.("AIT"), which is engaged in providing specialized laboratory testing services and ReadyScript, Inc. ("ReadyScript"), which developed a wireless handheld point of care system for physicians. All subsidiaries are majority-controlled subsidiaries. In June 1999, we raised $2 million in equity to develop the infrastructure of our e-health business, now incorporated as ReadyScript, Inc. Since that time we used the proceeds for developing an on-line drugstore and ReadyScript's infrastructure (a wireless medication management system that enables physicians to wirelessly transmit legible, pre-qualified formulary- compliant prescription orders directly to the patient's choice of pharmacy). In August 2000 operations of the online drugstore, the BigRx.com, were shut down due to insignificant revenue and non-performance by the other party of a third party backend processing agreement. The Company adopted a formal plan in April 2001 to discontinue operations of its ReadyScript subsidiary. The sale of some of the ReadySript assets is being discussed with various parties. The subsidiary is being reported in the financial statements as a discontinued operation because it is no longer an operating entity. 3 OUR MEDICAL DEVICE BUSINESS Our existing medical device business is conducted through three companies: (1) Biomerica, Inc., engaged in the diagnostic products market; (2) Lancer Orthodontics, Inc., engaged in orthodontic products market; and (3) Allergy Immuno Technologies, Inc., engaged in allergy-related testing services market. BIOMERICA - DIAGNOSTIC PRODUCTS Biomerica develops, manufactures, and markets medical diagnostic products designed for the early detection and monitoring of chronic diseases and medical conditions. The Company's medical diagnostic products are sold into three markets: 1) clinical laboratories, 2) physicians offices and 3) over-the-counter (drugstores). Our diagnostic test kits are used to analyze blood or urine from patients in the diagnosis of various diseases and other medical complications, or to measure the level of specific hormones, antibodies, antigens or other substances which may exist in the human body in extremely small concentrations. 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. One of our main objectives has been to develop and market rapid diagnostic tests that are accurate, employ easily obtained specimens, and are simple to perform without instrumentation. Our over-the-counter and professional rapid diagnostic products help to manage existing medical conditions and may save lives through prompt diagnosis and early detection. 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. We believe 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 physician's office. The majority of our over-the-counter tests are FDA cleared. Our clinical laboratory diagnostic products include tests for thyroid conditions, yeast infections, H. pylori, and others. These diagnostic test kits utilize enzyme immunoassay or radioimmunoassay technology. Some of these products have not yet been submitted for clearance by the FDA for diagnostic use, but can be sold in various foreign countries. LANCER ORTHODONTICS, INC. -- ORTHODONTIC PRODUCTS Lancer is engaged in developing, manufacturing, and selling orthodontic Products. Its products are sold worldwide through a direct sales force and distributors. Lancer's product line includes preformed bands, direct bonding pads, various brackets, buccal tubes, arch wires, lingual attachments and related accessories. The foregoing are assembled to standard 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. 4 Most of Lancer's manufacturing and shipping operations are located in Mexicali, Mexico, in order to reduce the cost of manufacturing and compete more effectively worldwide. Lancer maintains its headquarters in San Marcos, California where it houses administration, engineering, sales and marketing, and customer services. ALLERGY IMMUNO TECHNOLOGIES, INC. -- ALLERGY SERVICES AIT has been providing clinical testing services to doctors, clinics and drug firms in specialized areas of allergy and immunology. AIT also owns four patents covering several inventions relating to the therapeutic treatment of allergy. AIT employs one medical technologist and has received assistance in the past from Biomerica whose operations are adjacent to that of AIT. DISCONTINUED OPERATIONS The Company's fiscal 2001 and 2000 losses were partially the result of its investment in ReadyScript. The ReadyScript subsidiary was a development-stage enterprise and required the raising of a significant amount of capital to fund its short-term working capital needs. The ReadyScript operations were discontinued in May 2001. The net assets and operating results of ReadyScript are shown separately in the accompanying consolidated financial statements as discontinued operations and are held for sale. Prior periods have been restated to reflect the results of ReadyScript as discontinued. PRODUCTION All of our diagnostic test kits are processed and assembled at our facilities in Newport Beach, California. Production of diagnostic tests involve formulating component antibodies and antigens in specified concentrations, attaching a tracer to the antigen, filling components into vials, packaging and labeling. We continually engage in quality control procedures to assure the consistency and quality of our products and to comply with applicable FDA regulations. All manufacturing production is regulated by the FDA Good Manufacturing Practices for medical devices. We have an internal quality control unit that monitors and evaluates product quality and output. In addition, we employ a qualified external quality assurance consultant who monitors procedures and provides guidance in conforming with the Good Manufacturing Practices regulations. We either produce our own antibodies and antigens or purchase these materials from qualified vendors. We have alternate, approved sources for raw materials procurement and we do not believe that material availability in the foreseeable future will be a problem. 5 Lancer currently utilizes a manufacturing subcontractor to provide manufacturing services to Lancer through its affiliated entities located in Mexicali, B.C., Mexico. The current agreement 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. During 1999, Lancer extended the Manufacturing Agreement through October 2000. Lancer has retained an option to convert the manufacturing operation to a wholly owned subsidiary at any time without penalty. Lancer is in the process of converting Mexican assets and obligations to its own division, a Mexican corporation named Lancer Orthodontics de Mexico (Lancer de Mexico). This division will administer services previously provided by an independent manufacturing contractor. A new lease was negotiated effective April 1, 2001, for the 16,000 square foot facility used for Lancer's Mexican operations. Utility and Mexican vendor obligations have been converted to the Lancer de Mexico name. This conversion will eliminate the expense of an administrative fee and is expected to provide better control in meeting obligations. Should Lancer discontinue operations in Mexico, it is responsible for accumulated employee seniority obligations as prescribed by Mexican law. At May 31, 2001, this obligation was approximately $361,000. Such obligation is contingent in nature and accordingly has not been accrued in Lancer's financial statements. RESEARCH AND DEVELOPMENT Biomerica is engaged in research and development to broaden its diagnostic product line in specific areas. Research and development expenses include the costs of materials, supplies, personnel, facilities and equipment. Lancer is engaged in development programs to improve and expand its orthodontic products and production techniques. Lancer consults frequently with practicing orthodontists. Research and development expenses incurred by Biomerica for the years ended May 31, 2001 and 2000 aggregated approximately $322,000 and $465,000, respectively. These expenses included approximately $72,000 and $184,000 for fiscal 2001 and 2000, respectively, for Lancer's product development. MARKETS AND METHODS OF DISTRIBUTION Biomerica has approximately 300 current customers for its diagnostic business, of which approximately 60 are distributors and the balance are hospital and clinical laboratories, medical research institutions, medical schools, pharmaceutical companies, chain drugstores, wholesalers and physicians' offices. We rely on unaffiliated distributors, advertising in medical and trade journals, exhibitions at trade conventions, direct mailings and an internal sales staff to market our diagnostic products. We target three main markets: (a) clinical laboratories, (b) physicians' offices, and (c) over-the-counter drug stores. Separate marketing plans are utilized in targeting each of the three markets. 6 Lancer sells its products directly to orthodontists through company-paid sales representatives in the United States. At the end of its fiscal year, Lancer had seven 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 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 department which was established in 1982 and currently employs three people. Lancer also markets products which are purchased and resold to orthodontists, including sealants, adhesives, elastomerics, headgear cases, retainer cases, orthodontic wire, and preformed arches. The loss of any one or a few customers would not have a material adverse effect upon our revenues. BACKLOG At May 31, 2001 and 2000 Biomerica had a backlog of $80,000 and $0, respectively and Allergy Immuno Technologies, Inc. had no backlog of product orders. As of May 31, 2001 and 2000, Lancer had a backlog of $167,000 and $146,000, respectively. RAW MATERIALS The principal raw materials utilized by us consist of various chemicals, serums, reagents, radioactive isotopes and packaging supplies. Almost all of our raw materials are available from several sources, and we are not dependent upon any single source of supply or a few suppliers. We maintain inventories of antibodies and antigens as components for our diagnostic test kits. Due to a limited shelf life on some products such as the RIA kits, 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 products 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 2001 fiscal year, and does not anticipate that there will be any interruption or cessation of supply in the future. 7 COMPETITION Immunodiagnostic products are currently produced by more than 100 companies, a majority of which are located within the United States. Biomerica and its subsidiaries are not a significant factor in the market. Our competitors vary greatly in size. Many are divisions or subsidiaries of well-established medical and pharmaceutical concerns which are much larger than Biomerica and expend substantially greater amounts than we do 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 our products compare favorably with those charged by most of our competitors. We believe we compete primarily on the basis of our reputation for the quality of our products, the speed of our test results, the unique niches we fill in the market, our patent position, and our prompt shipment of orders. We offer a broader range of products than many competitors of comparable size, but to date have had limited marketing capability. We are working on expanding this capability through strategic cooperations with larger companies and distributors. 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 and Ormco, subsidiaries or divisions of Sybron; RMO Inc., a private company; American Orthodontics, a private company; GAC, a private 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 recognition of both its name and its products. With respect to AIT, the independent clinical laboratory industry in the U.S. and in California is highly competitive and fragmented. According to one industry source, there are approximately 4,500 independent clinical laboratories in the U.S. AIT is not a significant factor in the market. GOVERNMENT REGULATION OF OUR DIAGNOSTIC BUSINESS As part of our diagnostic business, we sell products that are legally defined to be medical devices. As a result, we are considered to be a medical device manufacturer, and as such are subject to the regulations of numerous governmental entities. These agencies include the Food and Drug Administration (the "FDA"), the United States Drug Enforcement Agency (the "DEA"), Environmental Protection Agency, Federal Trade Commission, Occupational Safety and Health Administration, U.S. Department of Agriculture ("USDA"), and Consumer Product Safety Commission. These activities are also regulated by various agencies of the states and localities in which our products are sold. These regulations govern the introduction of new medical devices, the observance of certain standards with respect to the manufacture and labeling of medical devices, the maintenance of certain records and the reporting of potential product problems and other matters. 8 The Food, Drug & Cosmetic Act of 1938 (the "FDCA") regulates medical devices in the United States by classifying them into one of three classes based on the extent of regulation believed necessary to ensure safety and effectiveness. Class I devices are those devices for which safety and effectiveness can reasonably be ensured through general controls, such as device listing, adequate labeling, pre-market notification and adherence to the Quality System Regulation ("QSR") as well as Medical Device Reporting (MDR), labeling and other regulatory requirements. Some Class I medical devices are exempt from the requirement of Pre-Market Approval ("PMA") or clearance. Class II devices are those devices for which safety and effectiveness can reasonably be ensured through the use of special controls, such as performance standards, post-market surveillance and patient registries, as well as adherence to the general controls provisions applicable to Class I devices. Class III devices are devices that generally must receive pre-market approval by the FDA pursuant to a pre-market approval application to ensure their safety and effectiveness. Generally, Class III devices are limited to life-sustaining, life-supporting or implantable devices. However, this classification can also apply to novel technology or new intended uses or applications for existing devices. If the FDA finds that the device is not substantially equivalent to a predicate device, the device is deemed a Class III device, and a manufacturer or seller is required to file a PMA application. Approval of a PMA application for a new medical device usually requires, among other things, extensive clinical data on the safety and effectiveness of the device. PMA applications may take years to be approved after they are filed. In addition to requiring clearance or approval for new medical devices, FDA rules also require a new 510(k) filing and review period, prior to marketing a changed or modified version of an existing legally marketed device, if such changes or modifications could significantly affect the safety or effectiveness of that device. The FDA prohibits the advertisement or promotion or any approved or cleared device for uses other than those that are stated in the device's approved or cleared application. Pursuant to FDA requirement, we have registered our manufacturing facility with the FDA as a medical device manufacturer, and listed the medical devices we manufacture. We are also subject to inspection on a routine basis for compliance with FDA regulations. This includes the QSR, which, unless the device is a Class I exempt device, requires that we manufacture our products and maintain our documents in a prescribed manner with respect to issues such as design controls, manufacturing, testing and validation activities. Further, we are required to comply with other FDA requirements with respect to labeling, and the MDR regulation which requires that we provide information to the FDA on deaths or serious injuries alleged to have been associated with the use of our products, as well as product malfunctions that are likely to cause or contribute to death or serious injury if the malfunction were to recur. We believe that we are currently in material compliance with all relevant QSR and MDR requirements. In addition, our facility is required to have a California Medical Device Manufacturing License. The license is not transferable and must be renewed annually. Approval of the license requires that we be in compliance with QSR, labeling and MDR regulations. Our license expires on March 16, 2002. We are also registered with the Department of Health and Human Services, Public Health Service of the FDA as a Device establishment. This registration expires on February 28, 2002. We also hold two radioactive materials licenses from the State of California (both expiring on June 20, 2002), and two permits from the USDA, one expiring on January 28, 2002 and the other expiring on June 30, 2002. These licenses are renewed periodically, and to date we have never failed to obtain a renewal. 9 Through compliance with FDA and California regulations, we can market our medical devices throughout the United States. International sales of medical devices are also subject to the regulatory requirements of each country. In Europe, the regulations of the European Union require that a device have a "CE Mark" in order to be sold in EU countries. The directive goes into effect beginning March 2003. The Company has begun the process of complying with the "CE Mark" directives and believes it will be in full compliance by the time the directive becomes effective. At present the regulatory international review process varies from country to country. We, in general, rely upon our distributors and sales representatives in the foreign countries in which we market our products to ensure that we comply with the regulatory laws of such countries. We believe that our international sales to date have been in compliance with the laws of the foreign countries in which we have made sales. Exports of most medical devices are also subject to certain FDA regulatory controls. Lancer is licensed to design, manufacture, and sell orthodontic appliances and is subject to the Code of Federal Regulations, Section 21, parts 800-1299. The FDA is the governing body that assesses and issues Lancer's license to assure that it complies with these regulations. Lancer is currently licensed, and its last assessment was in November 1997. Also, Lancer is registered and licensed with the state of California's Department of Health Services. Effective June 18, 1998, fifteen major European countries are requiring a CE (European Community) certification to sell products within their countries. In order to obtain this CE certification Lancer retained British Standards Institution (BSI) to evaluate Lancer's quality system. Lancer's quality system is imaged under International Standards Organization (ISO) 9002. ISO 9002 is an internationally recognized standard in which companies establish their methods of operation and commitment to quality. There are 20 clauses for which Lancer has developed standard operating procedures in accordance with these ISO 9002 requirements. EN 46002 is the medical device directive (MDD) for the European Community. Strict standards and clauses within the MDD are required to be implemented to sell within the European Community. In order for Lancer's medical devices to be sold within the European Community with the CE Mark, Lancer must fully comply with the EN 46002 requirements. Lancer has also constructed a technical file that gives all certifications and risk assessments for Lancer's products as a medical device (the "Product Technical Files"). With ISO 9002, EN 46002, and the Product Technical Files, Lancer applied for and was granted certification under ISO 9002, EN 46002, and CE. AIT currently holds an annually renewed clinical laboratory license with the Department of Health Services, State of California. The current license expires December 31, 2001. AIT also holds a clinical laboratory license from the state of Florida. This current license expires November 11, 2001 and is renewed every two years. AIT holds a CLIA Certificate of Compliance, which is a requirement of the Federal government for clinical laboratories. This certificate expires in February 2002 and is renewed every two years. Although AIT has never failed to obtain renewals, its business operations would be materially and adversely affected if it were unable to do so. 10 SEASONALITY OF BUSINESS The business of the Company and its subsidiaries has not been subject to significant seasonal fluctuations. FOREIGN BUSINESS All of our 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 Biomerica and its consolidated subsidiaries: Year Ended May 31, ------------------ 2001 2000 ---- ---- U.S. Customers $4,700,000/52.6% $4,431,000/55.3% Asia 221,000/2.5% 349,000/ 4.4% Europe 2,207,000/24.7% 1,683,000/21.0% S. America 558,000/6.2% 543,000/ 6.8% Other foreign 1,254,000/14.0% 1,008,000/12.6% --------------- -------------- Total Revenues $8,940,000/100% $8,014,000/100% We recognize that our foreign sales could be subject to some special or unusual risks which are not present in the ordinary course of business in the United States. Changes in economic factors, government regulations and import restrictions all could impact sales within certain foreign countries. 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. We cannot predict the impact that conversion to the Euro in the European countries may have on Biomerica, if any. Foreign diagnostic sales are made primarily through a network of over 60 independent distributors in approximately 40 countries. INTELLECTUAL PROPERTY We regard the protection of our copyrights, service marks, trademarks and trade secrets as critical to our future success. We rely on a combination of copyright, trademark, service mark and trade secret laws and contractual restrictions to establish and protect our proprietary rights in products and services. We have entered into confidentiality and invention assignment agreements with our employees and contractors, and nondisclosure agreements with most of our vendors, fulfillment partners and strategic partners to limit access to and disclosure of proprietary information. We cannot be certain that these contractual arrangements or the other steps taken by us to protect our intellectual property will prevent misappropriation of our technology. We have 11 licensed in the past, and expect that we may license in the future, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. While we attempt to ensure that the quality of our product brands is maintained by such licensees, we cannot be certain that such licensees will not take actions that might hurt the value of our proprietary rights or reputation. BRANDS, TRADEMARKS, PATENTS We registered the tradenames "Fortel," "Isletest," "Nimbus" and "GAP" with the Office of Patents and Trademarks on December 31, 1985. Our unregistered tradenames are "EZ-Detect," "CAST," "COT," "EquistiK," "FelistiK," "Tri-Level Controls," "Tru-Level Controls," "T-Marker Controls," "AllerHalt," "Candiquant," "Candigen," "EZ-H.P." and "EZ-PSA." Allergy Immuno Technologies, Inc. has four patents pertaining to its discoveries for allergy treatment. These are: 1. Immunotherapy agents for treatment of IgE mediated allergies; U.S. Patent #5,116,612, issued May 6, 1992. 2. Liposome containing immunotherapy agents for treatment of IgE medicated allergies, U.S. Patent #5,049,390, issued September 17, 1991. 3. Immunotherapy agents for treatment of IgE mediated allergies, U.S. Patent #4,946,945, issued August 7, 1990. 4. Allergen-thymic hormone conjugates for treatment of IgE mediated allergies, U.S. Patent #5,275,814, issued January 4, 1994. On April 4, 1989, Lancer was granted a patent on its CounterForce design of a nickel titanium orthodontic archwire. On August 1, 1989, Lancer was granted a patent on its bracket design used in the manufacturing of Sinterline and Intrigue orthodontic brackets. On September 17, 1996, Lancer was granted a patent on its method of laser annealing marking of orthodontic appliances. On March 4, 1997, Lancer was granted a patent on an orthodontic bracket and method of mounting. All of the patents are for a duration of 17 years. Lancer has entered into license agreements expiring in 2006 whereby, for cash consideration, the counter party has obtained the rights to manufacture and market certain products patented by Lancer. Lancer has also entered into a number of license and/or royalty agreements pursuant to which it has obtained rights to certain of the products which it manufactures and/or markets. The patents and agreements have had a favorable effect on Lancer's image in the orthodontic marketplace and Lancer's sales. Lancer has made a practice of selling its products under trademarks and of obtaining protection for those trademarks in the United States and certain foreign countries. Lancer considers these trademarks to be of importance in the operation of its business. The laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the U.S. Effective copyright, trademark and trade secret protection may not be available in such jurisdictions. Our efforts to protect our intellectual property rights may not prevent misappropriation of our content. 12 EMPLOYEES As of August 14, 2001, the Company and its subsidiaries employed 73 full- time employees and 9 part-time employees. Lancer, through its Mexican subcontractor, utilizes the services of approximately 129 people in Mexico. We also engage the services of various outside Ph.D. and M.D. consultants as well as medical institutions for technical support on a regular basis. We are not a party to any collective bargaining agreement and have never experienced a work stoppage. We consider our employee relations to be good. ITEM 2. DESCRIPTION OF PROPERTY ----------------------- During fiscal 1993 we leased approximately 21,000 square feet of space in Newport Beach, California for a term which expired May 31, 1998. Pursuant to the prior lease and the current month-to-month tenancy, we pay an annual base rent, set initially at $143,880 and adjusted annually to reflect cost of living increases, plus all real estate taxes and insurance costs. In fiscal 1999 a portion of the rent was paid through the issuance of shares of our restricted common stock to JSJ Management and another individual. During fiscal 2001 the Company paid a total of $169,440 in rent for approximately 24,500 square feet of space. These facilities were used for diagnostic test kit research and development, manufacturing, marketing, administration, and our ReadyScript operations. The ReadyScript subsidiary still owed $12,500 in back rent as of May 31, 2001. The facilities are leased from Mrs. Ilse Sultanian and JSJ Management. Ms. Janet Moore, an officer, director and shareholder of our Company, is a partner in JSJ Management. AIT currently leases approximately 1,600 square feet at the above facility for $1,400 per month. These properties are leased by AIT on a month-to-month basis from Mrs. Sultanian and JSJ Management. Lancer leases its main facility under a non-cancelable operating lease expiring December 31, 2003, as extended, which requires monthly rentals that increase annually, from $2,900 per month in 1994 to $6,317 per month in 2004. The lease expense is being recognized on a straight-line basis over the term of the lease. The excess of the expense recognized over the cash paid aggregates $11,032 at May 31, 2001, and is included in accrued liabilities in the accompanying balance sheet. Total rental expense for this facility for each of the years ended May 31, 2001 and 2000 was approximately $69,000. Lancer has entered into a non-cancelable operating lease for its Mexico facility which expires in March 2006 and requires average monthly rentals of approximately $6,000. Total expense for this facility for the years ended May 31, 2001 and 2000, was approximately $74,000. At May 31, 2001, future aggregate minimum lease payments for Lancer are as follows: Years ending ------------ May 31, 2002 $133,543 May 31, 2003 136,397 May 31, 2004 106,511 May 31, 2005 62,292 Thereafter 51,910 Total $490,653 13 We believe that our facilities and equipment are in suitable condition and are adequate to satisfy the current requirements of our Company and our 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 STOCKHOLDER MATTERS -------------------------------------------------------- Biomerica's common stock is traded on the NASDAQ SmallCap Stock Market under the symbol "BMRA". The following table shows the high and low bid prices for Biomerica'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, 2001 . . . . . . . . . . . . . . $1.25 $0.656 February 28, 2001 . . . . . . . . . . . . $0.969 $0.313 November 30, 2000 . . . . . . . . . . . . $1.75 $0.75 August 31, 2000 .. . . . . . . . . . . . $1.875 $1.25 May 31, 2000 . . . . . . . .............. $4.375 $1.438 February 29, 2000........................ $4.563 $2.031 November 30, 1999........................ $4.25 $2.00 August 31, 1999.......................... $3.75 $1.875 As of August 21, 2001, the number of holders of record of Biomerica's common stock was approximately 1,222, excluding stock held in street name. 14 No dividends have been declared or paid by Biomerica. We intend to employ all available funds for development of our business and, accordingly, do not intend to pay cash dividends in the foreseeable future. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 PROVIDES A "SAFE HARBOR" FOR FORWARD-LOOKING STATEMENTS. CERTAIN INFORMATION CONTAINED HEREIN (AS WELL AS INFORMATION INCLUDED IN ORAL STATEMENTS OR OTHER WRITTEN STATEMENTS MADE OR TO BE MADE BY BIOMERICA) CONTAINS STATEMENTS THAT ARE FORWARD-LOOKING, SUCH AS STATEMENTS RELATING TO ANTICIPATED FUTURE REVENUES OF THE COMPANY AND SUCCESS OF CURRENT PRODUCT OFFERINGS. SUCH FORWARD-LOOKING INFORMATION INVOLVES IMPORTANT RISKS AND UNCERTAINTIES THAT COULD SIGNIFICANTLY AFFECT ANTICIPATED RESULTS IN THE FUTURE, AND ACCORDINGLY, SUCH RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS MADE BY OR ON BEHALF OF BIOMERICA. THE POTENTIAL RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS, FLUCTUATIONS IN THE COMPANY'S OPERATING RESULTS. THESE RISKS AND UNCERTAINTIES ALSO INCLUDE THE SUCCESS OF THE COMPANY IN RAISING NEEDED CAPITAL, THE ABILITY OF THE COMPANY TO MAINTAIN REQUIREMENTS TO BE LISTED ON NASDAQ, THE CONTINUAL DEMAND FOR THE COMPANY'S PRODUCTS, COMPETITIVE AND ECONOMIC FACTORS OF THE MARKETPLACE, AVAILABILITY OF RAW MATERIALS, HEALTH CARE REGULATIONS AND THE STATE OF THE ECONOMY. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF, AND THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS. RESULTS OF OPERATIONS We currently have three subsidiaries, Lancer Orthodontics, Inc. ("Lancer"), which is engaged in manufacturing, sales and development of orthodontic products, Allergy Immuno Technologies, Inc. ("AIT"), which is engaged in providing specialized testing services to pharmaceutical companies and physicians and has obtained four patents related to allergy treatment therapies, and ReadyScript, which developed an innovative point-of-care, wireless handheld technology solutions for the healthcare industry. We own approximately 30.78% of the outstanding stock of Lancer and 74.6% of the outstanding stock of AIT. We exercise effective control of 51.19% over Lancer via voting agreements with certain shareholders. ReadyScript is a 88.9% owned subsidiary of Biomerica. As a result of our control and ownership, our financial statements are consolidated with those of Lancer, AIT and ReadyScript. Both Lancer and AIT are public companies. The common stock of Lancer is traded on the bulletin board system under the symbol "LANZ," and the common stock of AIT is traded in the pink sheets under the symbol "ALIM." In August 2000 operations of the online drugstore, the BigRx.com, were shut down due to insignificant revenue and non-performance by the other party of a third party backend processing agreement. The ReadyScript subsidiary was a development-stage enterprise and required the raising of a significant amount of capital to fund its short-term working capital needs. The ReadyScript operations were discontinued in May 2001. The sale of some of the ReadyScript assets is being discussed with various parties. The subsidiary is being reported in the financial statements as a discontinued operation because it is no longer an operating entity. 15 Fiscal 2001 Compared to Fiscal 2000 Our consolidated net sales were $8,939,522 for fiscal 2001 compared to $8,013,921 for fiscal 2000. This represents an increase of $925,601, or 11.5% for fiscal 2001. Of the total consolidated net sales for fiscal 2001, $5,927,603 is attributable to Lancer, $100,270 to AIT and $2,911,649 to Biomerica. Lancer's sales increased by $277,091, Biomerica showed a sales increase of $628,216 and AIT had an increase of $20,294. The increase at Lancer was attributable to an increase in European sales. The increase in sales at Biomerica was in large part due to an increase of sales in the over-the-counter market domestically. Cost of sales in fiscal 2001 as compared to fiscal 2000 increased by $526,248 or 9.4%. Lancer's cost of sales as a percentage of sales decreased from 68.4% to 67.4% in fiscal 2001 as compared to fiscal 2000. The decrease was primarily attributable to product mix. Biomerica had a decrease in cost of goods as a percentage of sales from 72.0% to 70.4% in fiscal 2001 as compared to fiscal 2000 due to a more profitable sales mix offset by a write-down for obsolete inventory and scrap of approximately $150,000. AIT had a decrease in cost of goods as a percentage of sales of 118.0% to 86.7% primarily due to lower material costs. Selling, general and administrative costs decreased in fiscal 2001 as compared to fiscal 2000 by $712,152 or 18.3%. Lancer had a decrease of $144,652 in these costs due to decreases in labor costs and travel expenses, partially offset by increases in bad debt expense and other expenses. Biomerica had a decrease in fiscal 2001 as compared to fiscal 2000 of $535,427, primarily due to warrant expenses incurred in fiscal 2000. AIT had decreased costs of $32,073 due to higher legal and accounting costs related to new SEC filing requirements in fiscal 2000. Research and development expense decreased in fiscal 2001 as compared to fiscal 2000 by $142,916 or 30.7%. Of this, Lancer had a decrease of $112,744, as a result of the termination of the dental amalgam development. Biomerica had an increase in research and development expenses of $22,828 primarily due to the expenses related to consulting services. AIT had a decrease of $52,600 as a result of termination of a research project. Interest expense, which was incurred primarily by Lancer, increased in fiscal 2001 as compared to fiscal 2000 by $1,996 or 10.2% due to borrowings against the line of credit to finance development costs and an increase in the interest rate. Other income net, decreased by $70,636 or 59.7% in fiscal 2001 as compared to fiscal 2000. A decrease of $225,900 is attributable to Lancer due to income received in the prior fiscal year from an insurance claim for inventory theft. An increase of $152,478 was attributable to Biomerica due to the sale of marketable securities offset by lower interest and dividend income. An increase of $3,722 was attributable to AIT due to income realized from the sale of land this fiscal year. As of May 31, 2001, Biomerica had net tax operating loss carryforwards of approximately $9,466,000 and investment tax and research and development credits of approximately $45,000, which are available to offset future federal tax liabilities. These carryforwards expire at varying dates from 2001 to 2021. As of May 31, 2001, Biomerica has net operating tax loss carryforwards of approximately $2,127,000 available to offset future state income tax liabilities, which expire through 2011. As of May 31, 2001, Lancer had net 16 operating loss carryforwards of approximately $2,049,000 and business tax credits of approximately $98,000 available to offset future Federal tax liabilities. The Lancer carryforwards expire through 2021. As of May 31, 2001, AIT had net tax operating loss carryforwards of $1,931,000 and business tax credits of approximately $29,000 to offset future Federal tax liabilities. The carryforwards expire at varying dates through 2021. AIT also had net tax operating loss carryforwards of approximately $580,000 to offset future California taxable income, expiring at varying dates through 2011. Liquidity and Capital Resources As of May 31, 2001, we had cash and available for sale securities of $136,299 (see Note 1 of Notes to Consolidated Financial Statements) and current working capital of $2,944,596. Of the current working capital, $2,697,500 is attributable to the Lancer subsidiary, which is restricted from distribution to Biomerica as a result of Lancer's line of credit agreement. The Company's fiscal 2001 losses were substantially the result of its investment in ReadyScript, which has been reported as a discontinued operation. During 2001, cash provided by operations was $108,955. During 2000, the Company used cash flows from operations of $723,997. Cash provided by investing activities was $50,532, partially due to the sale of marketable securities and land. The Company generated cash flow from financing activities of $339,662 during fiscal 2001, primarily due to two private placements and a shareholder loan at Biomerica. This compares to cash provided by financing activities of $1,889,295 in 2000 primarily a result of the sale of common stock net of offering proceeds. The Company has suffered substantial recurring losses from operations over the last couple of years. The Company has funded its operations through debt and equity financings and may have to do so in the future. ReadyScript was discontinued in May 2001. ReadyScript was a primary contri- butor to the Company's losses. The Company also plans to reduce operating costs through certain cost reduction efforts and concentrate on its core business in Lancer and Biomerica to increase sales. There can be no assurances that the Company will be able to become profitable, generate positive cash flow from operations or sustain the necessary equity or debt financing to fund operations in the future. At May 31, 2001, Lancer had a $300,000 line of credit with a bank. Borrowings are made at prime plus 1.25% (8.25% at May 31, 2001) and are limited to specified percentages of eligible accounts receivable. The unused portion available to Lancer under the line of credit at May 31, 2001 was $160,000. The line of credit expired on September 10, 2001. As of May 31, 2001, there was $140,000 outstanding under the line of credit. The line of credit is collateralized by substantially all the assets of Lancer, including inventories, receivables, and equipment. The lending agreement for the line of credit requires, among other things, that Lancer maintain a tangible net worth ratio of no more than 1 to 1, and a current ratio in excess of 2 to 1, and prohibits the advancing of funds to Biomerica. Lancer is not required to maintain compensating balances in connection with this lending agreement. Lancer was in violation of certain of its debt covenants at May 31, 2001. Lancer is currently in discussions with a new lender to replace its existing line of credit. Management believes it will be successful in such discussions, however, there can be no assurance of this success nor that management would be successful in finding a replacement lender with acceptable terms. 17 Biomerica, Inc. entered into an agreement, in substance, for a line of credit on September 12, 2000 with a shareholder whereby the shareholder will loan to the Company, as needed, up to $500,000 for working capital needs. The line of credit bears interest at 8%, is secured by Biomerica accounts receivable and inventory and was due to expire September 12, 2001. On September 12, 2001 the line of credit was extended until September 13, 2002 at an interest rate of 8% and is secured by accounts receivable and inventory. The unused portion available under the line of credit at May 31, 2001, was approximately $405,000. During June and July 2001 the Company borrowed an additional $130,000 on the line of credit; therefore, the unused portion of the line of credit as of September 10, 2001, is $275,000. The Company has been notified by Nasdaq that it has failed to maintain the listing requirement that its minimum bid price be $1.00 or more and that it must regain compliance by October 4, 2001, or it will be subject to delisting. The Company will be subject to that and other continuing requirements to be listed on the Nasdaq SmallCap Market. There can be no assurance that the Company can continue to meet such requirements. The price and liquidity of the Common Stock may be materially adversely affected if the Company is unable to meet such requirements in the future. Recent Accounting Pronouncements: In June 1998, the Financial Accounting Standards Board issued Statement of Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and requires recognition of all derivatives as assets or liabilities in the statement of financial position and measurement of those instruments at fair value. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company currently does not engage in derivative or hedging activities, and accordingly, believes that there will be no impact to its consolidated financial statements upon implementation in the Company's fiscal year 2002. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"). SAB 101 summarizes certain areas of the Staff's views in applying accounting principles generally accepted in the United States of America to revenue recognition in financial statements. The Company believes that its current revenue recognition policies comply with SAB 101. In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations", which eliminates the pooling method of accounting for business combinations initiated after June 30, 2001. In addition, SFAS 141 addresses the accounting for intangible assets and goodwill acquired in a business combination. This portion of SFAS 141 is effective for business combinations completed after June 30, 2001. The Company does not expect SFAS 141 will have a material impact on the Company's financial position or results of operations. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Intangible Assets", which revises the accounting for purchased goodwill and intangible assets. Under SFAS 142, goodwill and intangible assets with indefinite lives will no longer be amor- tized and will be tested for impairment annually. SFAS 142 is effective for fiscal years beginning after December 15, 2001, with earlier adoption per- mitted. The Company has not yet determined the impact on the Company's fin- ancial position or results of operations as a result of the future adoption of SFAS 142. 18 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 2001 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, 2001. ITEM 10. EXECUTIVE COMPENSATION ---------------------- This information is incorporated by reference to the Company's proxy statement for its 2001 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, 2001. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- This information is incorporated by reference to the Company's proxy statement for its 2001 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, 2001. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- This information is incorporated by reference to the Company's proxy statement for its 2001 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, 2001. 19 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 with the Secretary of the State of Delaware on November 4, 1987 (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 on Form 10-KSB for the fiscal year ended May 31, 1995). 3.8 First Amended and Restated Certificate of Incorporation Of Biomerica, Inc. filed with the Secretary of State of Delaware on August 1, 2000 (incorporated by reference to Exhibit 3.8 filed with the Registrant's Annual Report on Form 10-KSB for the fiscal year ended May 31, 2000). 4.1 Specimen Stock Certificate of Common Stock of Registrant (incorporated by reference to Exhibit 4.1 filed with Registrant's Registration Statement on Form SB-2, Commission No. 333-87231 filed on September 16, 1999). 20 10.2 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). 10.3 1999 Stock Incentive Plan of Registrant (incorporated by reference to Exhibit 10.1 to Registration Statement on Form S-8 filed with the Securities and Exchange Commission on March 29, 2000). 10.4 1995 Stock Option and Common Stock Plan of Registrant (incorporated by reference to Exhibit 4.3 to Registration Statement on Form S-8 filed with the Securities and Exchange Commission on January 20, 1996). 10.5 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). 10.6 Stock Purchase Agreement by and between Biomerica, Inc., RidgeRose Capital Partners, LLC and Zackary Irani and Janet Moore dated June 11, 1999 (incorporated by reference to Exhibit 10.10 filed with Form 8-K on July 7, 1999). 10.7 Stock Purchase Agreement by and between Biomerica, Inc. and Zackary Irani and Janet Moore dated June 11, 1999 (incorporated by reference to Exhibit 10.11 filed with Form 8-K on July 7, 1999). 10.8 Back-end Processing Agreement by and between TheBigStore.com, Inc. and Biomerica, Inc. and dated June 11, 1999 (incorporated by reference to Exhibit 10.12 filed with Form 8-K on July 7, 1999). 10.9 Common Stock Purchase Warrant granted to TheBigStore.com, Inc. dated June 11, 1999 (incorporated by reference to Exhibit 10.13 filed with Form 8-K on July 7, 1999). 10.10 Common Stock Purchase Warrant granted to RJM Consulting, LLC dated June 11, 1999 (incorporated by reference to Exhibit 10.14 filed with Form 8-K on July 7, 1999). 10.11 Non-Qualified Option Agreement by and between Zackary Irani and the Company dated June 10, 1999 (incorporated by reference to Exhibit 10.15 filed with Form 8-K on July 7, 1999). 10.12 Non-Qualified Option Agreement by and between Janet Moore and the Company dated June 10, 1999 (incorporated by reference to Exhibit 10.16 filed with Form 8-K on July 7, 1999). 10.13 Non-Qualified Option Agreement by and between Philip Kaplan, M.D. and the Company dated June 10, 1999 (incorporated by reference to Exhibit 10.17 filed with Form 8-K on July 7, 1999). 10.14 Non-Qualified Option Agreement by and between Robert A. Orlando, M.D., Ph.D. and the Company dated June 10, 1999 (incorporated by reference to Exhibit 10.18 filed Form 8-K on July 7, 1999). 21 10.15 Strategic Marketing Agreement entered into as of the 2nd day of September, 1999 by and between TheBigHub.com, Inc., a Florida corporation and Biomerica, Inc. (incorporated by reference to Exhibit 10.16 filed with Registrant's Registration Statement on Form SB-2, Commission No. 333-87231 filed on September 16, 1999). 10.16 First Amendment to Back-End Processing Agreement entered into as of September 2, 1999 whereby TheBigStore.com, Inc., a Delaware corporation and Biomerica amend the Back-End Agreement dated June 11, 1999 (incorporated by reference to Exhibit 10.17 filed with Registrant's Registration Statement on Form SB-2, Commission No. 333-87231 filed on September 16, 1999). 10.17 Private Placement Memorandum of Biomerica, Inc. dated June 9, 1999 offering 400,000 shares of its Common Stock at $5.00 per share (incorporated by reference to Exhibit 10.18 filed with Registrant's Registration Statement on Form SB-2, Commission No. 333-87231 filed on September 16, 1999). 10.18 Employment Agreement entered into as of August 30, 1999 by and between the Internet division of Biomerica, Inc. and Steven J. Goto (incorporated by reference to Exhibit 10.19 filed with Registrant's Registration Statement on Form SB-2, Commission No. 333-87231 filed on September 16, 1999). 10.19 Employment Offer Letter dated August 12, 1999 from Biomerica, Inc. to Pete McKinley to join the Internet division of Biomerica, Inc. (incorporated by reference to Exhibit 10.20 filed with Registrant's Registration Statement on Form SB-2, Commission No. 333-87231 filed on September 16, 1999). 10.20 Employment Offer Letter dated August 12, 1999 from Biomerica, Inc. to Richard Jay, Pharm.D. to join the Internet division of Biomerica, Inc. (incorporated by reference to Exhibit 10.21 filed with Registrant's Registration Statement on Form SB-2, Commission No. 333-87231 filed on September 16, 1999). 10.21 Amendment to Lease Extension/Lease Term effective January 1, 1999, whereby Lancer Orthodontics, Inc. and L&T Corporation, a California corporation entered into an amendment and extension to the terms of that certain lease agreement dated November 4, 1993 for the premises located at 253 Pawnee Street, Suite A, San Marcos, California 92069 (incorporated by reference to Exhibit 10.22 filed with Registrant's Registration Statement on Form SB-2, Commission No. 333-87231 filed on September 16, 1999). 10.22 Sublease Agreement entered into by and between Eagleson de California S.A. de C.V. and Lancer Orthodontics, Inc. commencing on November 1, 1998 covering approximately 16,000 square feet located in the Industrial Park at Ave. Saturno No. 20 and of certain improvements constructed on the land as detailed in that certain sublease between the parties dated April 1, 1996 (incorporated by reference to Exhibit 10.23 filed with Registrant's Registration Statement on Form SB-2, Commission No. 333-87231 filed on September 16, 1999). 22 10.23 Fifth Revision to Manufacturing Shelter Agreement effective November 1, 1998, whereby Lancer Orthodontics, Inc. and Eagleson Industries, Inc. revised and amended that certain Manufacturing Shelter Agreement entered into on May 11, 1990, revised on June 20, 1991, December 2, 1992, July 1, 1994 and April 1, 1996 (incorporated by reference to Exhibit 10.24 filed with Registrant's Registration Statement on Form SB-2, Commission No. 333-87231 filed on September 16, 1999). 10.24 Technical Skills Consulting Agreement entered into on January 1, 1999 by and between Lancer Orthodontics, Inc. and Alejandro Carnero, a non-resident alien, independent contractor and citizen of the Republic of Mexico (incorporated by reference to Exhibit 10.25 filed with Registrant's Registration Statement on Form SB-2, Commission No. 333-87231 filed on September 16, 1999). 10.25 Product Development and Marketing Agreement entered into as of August 3, 1998 by and between Lancer Orthodontics, Inc. and AG Metals, Inc., a Nevada corporation (incorporated by reference to Exhibit 10.26 filed with Registrant's Registration Statement on Form SB-2, Commission No. 333-87231 filed on September 16, 1999). 10.26 Agreement between Lancer Orthodontics, Inc. and Gary Weikel, an individual, incorporating by reference that certain Product Development and Marketing Agreement of even date between Lancer Orthodontics, Inc. and AG Metals, Inc. (incorporated by reference to Exhibit 10.27 filed with Registrant's Registration Statement on Form SB-2, Commission No. 333-87231 filed on September 16, 1999). 16.1 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). 16.2 Letter on change of certifying accountant (incorporated by reference to Exhibit A to Form 10-QSB/A filed with the Securities and Exchange Commission on April 14, 1999). 21.1 Subsidiaries of Registrant (incorporated by reference to Exhibit 21.1 to Form 10-KSB filed with the Securities and Exchange Commission on September 14, 1999). 27.1 Financial Data Schedule. 99.1 Biomerica, Inc. and Subsidiaries Consolidated Financial Statements For The Years Ended May 31, 2001 and 2000 and Independent Auditors' Report. (b) Reports on Form 8-K ------------------- Biomerica filed a report on Form 8-K with the Securities and Exchange Commission on July 7, 1999. 23 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BIOMERICA, INC. Registrant By /s/ Zackary S. Irani ----------------------------- Zackary S. Irani, Chief Executive Officer Dated: 9/12/01 ------- In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature and Capacity /s/ Zackary S. Irani Date: 9/12/01 - ------------------------------------ Zackary S. Irani President, Director, Chief Executive Officer /s/ Janet Moore Date: 9/12/01 - ------------------------------------ Janet Moore, Secretary Director, Chief Financial Officer /s/ Robert Orlando Date: 9/12/01 - ------------------------------------ Robert Orlando, M.D., Ph.D. Director /s/ Carlos St. Aubyn Beharie Date: 9/12/01 - ------------------------------------ Carlos St. Aubyn Beharie Director /s/ David Burrows Date: 9/12/01 - ------------------------------------ David Burrows Director /s/ Francis R. Cano - ------------------------------------ Date: 9/12/01 Francis R. Cano Director /s/ Allen Barbieri Date: 9/12/01 - ------------------------------------ Allen Barbieri Director 24 EX-99.1 3 biomerica_financials.txt BIOMERICA, INC. AND SUBSIDIARIES CONTENTS ================================================================================ EPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS FS-2 ONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheet as of May 31, 2001 FS-3 Consolidated Statements of Operations and Comprehensive Loss for the Years Ended May 31, 2001 and 2000, respectively FS-4 - FS-5 Consolidated Statements of Shareholders' Equity for the Years Ended May 31, 2001 and 2000 FS-6 - FS-7 Consolidated Statements of Cash Flows for the Years Ended May 31, 2001 and 2000 FS-8 - FS-9 Notes to Consolidated Financial Statements FS-10 - FS-53 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Biomerica, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheet of Biomerica, Inc. and Subsidiaries (the "Company") as of May 31, 2001, and the related consolidated statements of operations and comprehensive loss, shareholders' equity and cash flows for the years ended May 31, 2001 and 2000. 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 auditing standards generally accepted in the United States of America. 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 financial position of Biomerica, Inc. and subsidiaries as of May 31, 2001, and the results of their operations and their cash flows for the years ended May 31, 2001 and 2000, in conformity with accounting principles generally accepted in the United States of America. The Company has suffered substantial recurring losses from operations and has relied on equity and debt financings to fund operations and may have to do so in the future. Management's plan in regards to these matters are described in Note 1. BDO SEIDMAN, LLP Costa Mesa, California August 10, 2001, except as to Note 6, which is as of September 11, 2001 FS-2 BIOMERICA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ================================================================================ MAY 31, 2001 - -------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 136,299 Available for-sale securities 41,570 Accounts receivable, less allowance for doubtful accounts and sales returns of $192,559 1,525,255 Inventories, net 2,865,956 Notes receivable 18,394 Prepaid expenses and other 89,422 - -------------------------------------------------------------------------------- Total current assets 4,676,896 - -------------------------------------------------------------------------------- INVENTORIES, non-current 15,000 PROPERTY AND EQUIPMENT, at cost Equipment 2,912,011 Furniture, fixtures and leasehold improvements 439,096 - -------------------------------------------------------------------------------- 3,351,107 ACCUMULATED DEPRECIATION AND AMORTIZATION (3,032,659) - ------------------------------------------------------------------------------- Net property and equipment 318,448 INTANGIBLE ASSETS, net of accumulated amortization 297,239 OTHER ASSETS 39,538 - -------------------------------------------------------------------------------- $ 5,347,121 ================================================================================ BIOMERICA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ================================================================================ MAY 31, 2001 - -------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Line of credit $ 140,000 Accounts payable and accrued expenses 930,965 Accrued compensation 263,277 Net liabilities from discontinued operations 398,058 - -------------------------------------------------------------------------------- Total current liabilities 1,732,300 - -------------------------------------------------------------------------------- SHAREHOLDER LOAN 95,000 MINORITY INTEREST 2,046,956 - -------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Common stock, $.08 par value; 25,000,000 shares authorized; 5,036,754 shares subscribed or issued and outstanding 391,254 Additional paid in capital 16,859,742 Accumulated other comprehensive loss (10,289) Accumulated deficit (15,767,842) - -------------------------------------------------------------------------------- Total shareholders' equity 1,472,865 - -------------------------------------------------------------------------------- $ 5,347,121 ================================================================================ See accompanying notes to consolidated financial statements. FS-3 BIOMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS ==========================================================================================
YEARS ENDED MAY 31, 2001 2000 - ------------------------------------------------------------------------------------------ NET SALES $ 8,939,522 $ 8,013,921 Cost of sales 6,129,900 5,603,652 - ------------------------------------------------------------------------------------------ GROSS PROFIT 2,809,622 2,410,269 - ------------------------------------------------------------------------------------------ OPERATING EXPENSES Selling, general and administrative 3,171,085 3,883,237 Research and development 322,121 464,637 - ------------------------------------------------------------------------------------------ Total operating expenses 3,493,206 4,347,874 - ------------------------------------------------------------------------------------------ OPERATING LOSS FROM CONTINUING OPERATIONS (683,584) (1,937,605) OTHER INCOME (EXPENSE) Interest expense (21,558) (19,562) Other income, net 47,762 118,398 - ------------------------------------------------------------------------------------------ LOSS FROM CONTINUING OPERATIONS, before minority interest in net loss of consolidated subsidiaries and income taxes (657,380) (1,838,769) MINORITY INTEREST IN NET LOSS OF CONSOLIDATED SUBSIDIARIES 80,894 202,722 - ------------------------------------------------------------------------------------------ LOSS FROM CONTINUING OPERATIONS, before income taxes (576,486) (1,636,047) INCOME TAX EXPENSE 2,400 2,400 - ------------------------------------------------------------------------------------------ NET LOSS FROM CONTINUING OPERATIONS (578,886) (1,638,447) DISCONTINUED OPERATIONS: Loss from discontinued operations, net (2,093,432) (2,252,402) - ------------------------------------------------------------------------------------------ NET LOSS (2,672,318) (3,890,849)
FS-4 BIOMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (CONTINUED) ============================================================================================
YEARS ENDED MAY 31, 2001 2000 - -------------------------------------------------------------------------------------------- OTHER COMPREHENSIVE (LOSS) INCOME, net of tax Unrealized (loss) gain on available-for-sale securities (5,966) 4,456 - -------------------------------------------------------------------------------------------- COMPREHENSIVE LOSS $ (2,678,284) $ (3,886,393) ============================================================================================ BASIC NET LOSS PER COMMON SHARE: Net loss from continuing operations $ (0.12) $ (0.36) Net loss from discontinued operations (0.43) (0.50) - -------------------------------------------------------------------------------------------- Basic net loss per common share $ (0.55) $ (0.86) ============================================================================================ DILUTED NET LOSS PER COMMON SHARE: Net loss from continuing operations $ (0.12) $ (0.36) Net loss from discontinued operations (0.43) (0.50) - -------------------------------------------------------------------------------------------- Diluted net loss per common share $ (0.55) $ (0.86) ============================================================================================ WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES Basic 4,814,790 4,542,820 ============================================================================================ Diluted 4,814,790 4,542,820 ============================================================================================ See accompanying notes to consolidated financial statements.
FS-5 BIOMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ==================================================================================================================================
Common Stock Additional Accumulated Other --------------------- Paid-in Comprehensive Shareholder Accumulated Shares Amount Capital Income (Loss) Loan Deficit Total - ---------------------------------------------------------------------------------------------------------------------------------- Balances, May 31, 1999 4,110,445 $ 328,835 $ 12,703,339 $ (8,779) $ (1,000) $ (9,204,675) $ 3,817,720 Private placement, net of offering costs of $34,443 400,000 32,000 1,933,557 - - - 1,965,557 Change in unrealized gain (loss) on available-for-sale securities - - - 4,456 - - 4,456 Payment received on shareholder loan - - - - 1,000 - 1,000 Exercise of stock options 56,625 4,530 56,122 - - - 60,652 Shares issued for services rendered 8,000 640 15,360 - - - 16,000 Compensation expense in connection with options and warrants granted - - 821,043 - - - 821,043 Net loss - - - - - (3,890,849) (3,890,849) - ---------------------------------------------------------------------------------------------------------------------------------- Balances, May 31, 2000 4,575,070 366,005 15,529,421 (4,323) - (13,095,524) 2,795,579
FS-6 BIOMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED ====================================================================================================================================
Common Stock Accumulated Common Stock Additional Subscribed Other --------------------- Paid-in ------------------ Comprehensive Shareholder Accumulated Shares Amount Capital Shares Amount Income (Loss) Loan Deficit Total - ------------------------------------------------------------------------------------------------------------------------------------ Private placement, net of offering costs of $1,140 113,375 9,070 142,368 126,075 90,774 - - - 242,212 Change in unrealized gain (loss) on available-for-sale securities - - - - - (5,966) - - (5,966) Common stock issued in satisfaction of payables 34,643 2,772 35,843 - - - - - 38,615 Exercise of stock options 8,500 680 6,088 - - - - - 6,768 Common stock issued for services rendered 159,091 12,727 232,898 - - - - - 245,625 Compensation expense in connection with options and warrants granted - - 89,336 - - - - - 89,336 Common stock subscribed for services rendered - - - 20,000 20,000 - - - 20,000 Conversion of subsidiary debt into common stock of subsidiary - - 713,014 - - - - - 713,014 Net loss - - - - - - - (2,672,318) (2,672,318) - ------------------------------------------------------------------------------------------------------------------------------------ Balances, May 31, 2001 4,890,679 $ 391,254 $16,748,968 146,075 $110,774 $ (10,289) $ - $(15,767,842) $1,472,865 ==================================================================================================================================== See accompanying notes to consolidated financial statements.
FS-7 BIOMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ================================================================================================
FOR THE YEARS ENDED MAY 31, 2001 2000 - ------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss from continuing operations $ (578,886) $(1,638,447) Adjustments to reconcile net loss to net cash provided by (used in) continuing operating activities: Depreciation and amortization 208,990 209,549 Provision for losses on accounts receivable (4,235) (2,834) Provision for losses on inventory 129,034 - Realized loss (gain) on sale of available-for-sale securities (34,427) 13,241 Warrants and options issued for services rendered 89,336 821,043 Common stock of a subsidiary issued for services - 50,631 Gain on conversion of subsidiary preferred stock - (55,487) Common stock issued or subscribed for services rendered 265,625 16,000 Net gain on sale of land (3,722) - Net loss on sale of property and equipment 2,000 - Minority interest in net profits of consolidated subsidiaries (80,894) (202,722) Changes in current liabilities and assets Accounts receivable 180,915 (95,844) Inventories (128,301) 198,406 Prepaid expenses and other 54,756 152,561 Accounts payable and other accrued liabilities 76,507 (121,778) Accrued compensation (67,743) (68,316) - ------------------------------------------------------------------------------------------------ Net cash provided by (used in) operating activities 108,955 (723,997) - ------------------------------------------------------------------------------------------------
FS-8 BIOMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) ======================================================================================
FOR THE YEARS ENDED MAY 31, 2001 2000 - -------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Sales of available-for-sale securities 85,665 18,191 Decrease in notes receivable 16,600 9,491 Purchases of property and equipment (61,919) (101,010) Proceeds from sale of land 49,722 - Increase in intangible assets (20,090) - Other assets (19,446) 110,737 - -------------------------------------------------------------------------------------- Net cash provided by investing activities 50,532 37,409 - -------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net decrease under line of credit agreement (20,000) (20,000) Increase in shareholder loan 95,000 - Repurchase of minority interests 15,682 (117,914) Decrease in shareholder receivable - 1,000 Exercise of stock options 6,768 60,652 Sale of common stock, net of offering expenses 242,212 1,965,557 - -------------------------------------------------------------------------------------- Net cash provided by financing activities 339,662 1,889,295 - -------------------------------------------------------------------------------------- Net cash used in discontinued operations (977,907) (2,256,855) - -------------------------------------------------------------------------------------- Net change in cash and cash equivalents (478,758) (1,054,148) CASH AND CASH EQUIVALENTS, beginning of year 615,057 1,669,205 - -------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, end of year $ 136,299 $ 615,057 ====================================================================================== SUPPLEMENTAL DISCLOSURE OF CASH-FLOW INFORMATION CASH PAID DURING THE YEAR FOR: Interest $ 19,931 $ 19,562 ====================================================================================== Income taxes $ 2,400 $ 2,400 ====================================================================================== SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Change in unrealized holding gain (loss) on available- for-sale securities $ 5,966 $ 4,456 ====================================================================================== See accompanying notes to consolidated financial statements.
FS-9 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 1. ORGANIZATION ORGANIZATION AND LIQUIDITY 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. LIQUIDITY The Company has suffered substantial recurring losses from operations over the last couple of years. The Company has funded its operations through debt and equity financings, and may have to do so in the future. ReadyScript operations were discontinued in May 2001. (see Notes 2 and 13). ReadyScript was a primary contributor to the Company's losses. The Company also plans to reduce operating costs through certain cost reduction efforts and concentrate on its core business in Lancer and Biomerica to increase sales. There can be no assurances that the Company will be able to become profitable, generate positive cash flow from operations or obtain the necessary equity or debt financing to fund operations in the future. 2. SUMMARY OF PRINCIPLES OF CONSOLIDATION SIGNIFICANT ACCOUNTING The consolidated financial statements for the years ended POLICIES May 31, 2001 and 2000 (see Note 3) include the accounts of Biomerica, Inc. ("Biomerica"), Lancer Orthodontics, Inc. ("Lancer"), Allergy Immuno Technologies, Inc. ("AIT") and ReadyScript, Inc. (discontinued). All significant intercompany accounts and transactions have been eliminated in consolidation. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions FS-10 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 2. SUMMARY OF that affect the reported amounts of assets and SIGNIFICANT liabilities and disclosure of contingent assets and ACCOUNTING liabilities at the date of the financial statements, and POLICIES the reported amounts of revenues and expenses during the (Continued) reported period. Actual results could materially differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company has financial instruments whereby the fair market value of the financial instruments could be different than that recorded on a historical basis. The Company's financial instruments consist of its cash and cash equivalents, accounts receivable, notes receivable, line of credit and accounts payable. The carrying amounts of the Company's financial instruments approximate their fair values at May 31, 2001. CONCENTRATION OF CREDIT RISK The Company, on occasion, maintains cash balances at certain financial institutions in excess of amounts insured by federal agencies. The Company provides credit in the normal course of business to customers throughout the United States and foreign markets. The Company's sales are not materially dependent on a single customer or a small group of customers. The Company performs ongoing credit evaluations of its customers. The Company does not obtain collateral with which to secure its accounts receivable. The Company maintains reserves for potential credit losses based upon the Company's historical experience related to credit losses. At May 31, 2001 two customers accounted for approximately 10.7% and 10.6% of gross accounts receivable. No one customer accounted for 10% or more of revenues for the years ended May 31, 2001 and 2000. FS-11 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 2. SUMMARY OF CASH EQUIVALENTS SIGNIFICANT ACCOUNTING Cash and cash equivalents consists of demand deposits, POLICIES money market accounts and mutual funds with remaining (Continued) maturities of three months or less when purchased. AVAILABLE-FOR-SALE SECURITIES The Company accounts for investments in accordance with Statement of Financial Accounting Standards No. 115 (SFAS 115), "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES." This statement addresses the accounting and reporting for investments in equity securities which have readily determinable fair values and all investments in debt securities. The Company's marketable equity securities are classified as available-for-sale under SFAS 115 and reported at fair value, with changes in the unrealized holding gain or loss included in shareholders' equity. Available-for-sale securities consist of common stock of unrelated publicly-traded 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 2001 and 2000 totaled $85,665 and $18,191, respectively (see Note 9). The change in the net unrealized holding (loss) gain on available-for-sale securities that has been included as a separate component of shareholders' equity totaled $(5,966) and $4,456 for the years ended May 31, 2001 and 2000, respectively. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market and consist primarily of orthodontic products and biological chemicals. Cost includes raw materials, labor, manufacturing overhead and purchased products. Market is determined by comparison with recent purchases or net realizable value. Such net realizable value is based on forecasts for sales of the Company's products in the ensuing years. The industries in which the Company operates are characterized by technological FS-12 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 2. SUMMARY OF advancement and change. Should demand for the Company's SIGNIFICANT products prove to be significantly less than anticipated, ACCOUNTING the ultimate realizable value of the Company's POLICIES inventories could be substantially less than the amount (Continued) shown on the accompanying consolidated balance sheet. Inventories consist of the following: MAY 31, 2001 --------------------------------------------------------- Raw materials $ 909,408 Work in progress 442,613 Finished products 1,768,136 Inventory reserve (254,201) --------------------------------------------------------- $ 2,865,956 ========================================================= Approximately $1,878,000 of Lancer's inventory is located at its manufacturing facility in Mexico as of May 31, 2001. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Expenditures for additions and major improvements are capitalized. Repairs and maintenance costs are charged to operations as incurred. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and gains or losses from retirements and dispositions are credited or charged to income. Depreciation and amortization are provided over the estimated useful lives of the related assets, ranging from 3 to 12 years, using straight-line and declining-balance methods. Leasehold improvements are amortized over the lesser of the estimated useful life of the asset or the term of the lease. Depreciation expense amounted to $119,325 and $127,696 for the years ended May 31, 2001 and 2000, respectively. At May 31, 2001, approximately $38,000 of property and equipment, net of accumulated depreciation and amortization, is located at Lancer's manufacturing facility in Mexico. FS-13 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 2. SUMMARY OF Management of the Company assesses the recoverability of SIGNIFICANT property and equipment by determining whether the ACCOUNTING depreciation and amortization of such assets over their POLICIES remaining lives can be recovered through projected (Continued) undiscounted cash flows. The amount of impairment, if any, is measured based on fair value (projected discounted cash flows) and is charged to operations in the period in which such impairment is determined by management. Management has determined that there is no impairment of property and equipment at May 31, 2001. INTANGIBLE ASSETS Intangible assets are being amortized using the straight-line method over 18 years for marketing and distribution rights and purchased technology use rights, and over 17 years for patents. Marketing and distribution rights include repurchased sales territories. Technology use rights consists of the 1985 purchase (the "Purchase") by Lancer of the manufacturing assets and technology of Titan Research Associates, Ltd. ("Titan"). Prior to the Purchase, certain former officers of Lancer and shareholders of Lancer owned 29% of Titan. Prior to the Purchase, the Company paid royalties ranging from 15% to 20% of gross sales, as defined, to license such technology. Amortization amounted to $89,665 and $81,853 for the years ended May 31, 2001 and 2000, respectively (see Note 4). The Company assesses the recoverability of these intangible assets by determining whether the amortization of the asset's balance over its remaining life can be recovered through projected undiscounted future cash flows. The amount of impairment, if any, is measured based on fair value and charged to operations in the period in which the impairment is determined by management. Management has determined that there was no impairment of intangible assets as of May 31, 2001. FS-14 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 2. SUMMARY OF RISKS AND UNCERTAINTIES SIGNIFICANT ACCOUNTING LICENSES - Certain of the Company's sales of products are POLICIES governed by license agreements with outside third (Continued) parties. All of such license agreements to which the Company currently is a party are for fixed terms which will expire after ten years or upon the expiration of the underlying patents. After the expiration of the agreements or the patents, the Company is free to use the technology that had been licensed. There can be no assurance that the Company will be able to obtain future license agreements as deemed necessary by management. The loss of some of the current licenses or the inability to obtain future licenses could have an adverse affect on the Company's financial position and operations. Historically, the Company has successfully obtained all the licenses it believed necessary to conduct its business. DISTRIBUTION - Lancer has entered into various exclusive and non-exclusive distribution agreements (the "Agreements") which generally specify territories of distribution. The Agreements range in term from one to five years. Lancer may be dependent upon such distributors for the marketing and selling of its products worldwide during the terms of these agreements. Such distributors are generally not obligated to sell any specified minimum quantities of Lancer's product. There can be no assurance of the volume of product sales that may be achieved by such distributors. GOVERNMENT REGULATION - Biomerica's immunodiagnostic products are regulated in the United States as medical devices primarily by the FDA and as such, require regulatory clearance or approval prior to commercialization in the United States. Pursuant to the Federal Food, Drug and Cosmetic Act, and the regulations promulgated thereunder, the FDA regulates, among other things, the clinical testing, manufacture, labeling, promotion, distribution, sale and use of medical devices in the United States. Failure of Biomerica to comply with applicable regulatory requirements can result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, the government's refusal to grant premarket clearance or premarket approval of devices, withdrawal of marketing approvals, and criminal prosecution. FS-15 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 2. SUMMARY OF Sales of medical devices outside the United States are SIGNIFICANT subject to foreign requirements for licensing may differ ACCOUNTING regulatory requirements that vary widely from country to POLICIES country. The time significantly from FDA requirements. (Continued) There required to obtain registrations or approvals required by foreign countries may can be no assurance that Biomerica will be be longer or shorter than that required for FDA clearance or approval, and able to obtain regulatory clearances for its current or any future products in the United States or in foreign markets. Lancer's products are subject to regulation by the FDA under the Medical Device Amendments of 1976 (the "Amendments"). Lancer has registered with the FDA as required by the Amendments. There can be no assurance that Lancer will be able to obtain regulatory clearances for its current or any future products in the United States or in foreign markets. EUROPEAN COMMUNITY - Lancer is required to obtain certification in the European community to sell products in those countries. The certification requires Lancer to maintain certain quality standards. Lancer has been granted certification. However, there is no assurance that Lancer will be able to retain its certification in the future. RISK OF PRODUCT LIABILITY - Testing, manufacturing and marketing of Biomerica's products entail risk of product liability. Biomerica currently has product liability insurance. There can be no assurance, however, that Biomerica will be able to maintain such insurance at a reasonable cost or in sufficient amounts to protect Biomerica against losses due to product liability. An inability could prevent or inhibit the commercialization of Biomerica's products. In addition, a product liability claim or recall could have a material adverse effect on the business or financial condition of the Company. Lancer is subject to the same risks of product liability. Lancer currently has product liability insurance. Lancer also is subject to the risk of loss of its product liability insurance and the consequent exposure to liability. FS-16 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 2. SUMMARY OF HAZARDOUS MATERIALS - Biomerica's manufacturing and SIGNIFICANT research and development involves the controlled use of ACCOUNTING hazardous materials and chemicals. Although Biomerica POLICIES believes that safety procedures for handling and (Continued) disposing of such materials comply with the standards prescribed by state and Federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result and any such liability could exceed the resources of the Company. The Company may incur substantial costs to comply with environmental regulations. STOCK-BASED COMPENSATION During 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "ACCOUNTING FOR STOCK-BASED COMPENSATION," which defines a fair value based method of accounting for stock-based compensation. However, SFAS 123 allows an entity to continue to measure compensation cost related to stock and stock options issued to employees using the intrinsic method of accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES." Entities electing to remain with the accounting method of APB 25 must make pro forma disclosures of net (loss) income and (loss) earnings per share, as if the fair value method of accounting defined in SFAS 123 had been applied (see Note 7). The Company has elected to account for its stock-based compensation to employees under APB 25. MINORITY INTEREST Minority interest represents the minority shareholders' proportionate share of the equity of Lancer. At May 31, 2001, Biomerica owned 30.78% of Lancer (see Note 3), 74.6% of AIT (see Note 3) and 88.9% of ReadyScript. FS-17 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 2. SUMMARY OF REVENUE RECOGNITION SIGNIFICANT ACCOUNTING Revenues from product sales are recognized at the time POLICIES the product is shipped. Revenues from specialized (Continued) diagnostic testing services are recognized when the related services are performed. RESEARCH AND DEVELOPMENT Research and development expenses are expensed as incurred. The Company expensed approximately $322,000 and $465,000 of research and development expenses during the years ended May 31, 2001 and 2000, respectively. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "ACCOUNTING FOR INCOME TAXES." Under the asset and liability method of Statement No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations. Biomerica, Lancer and AIT file separate income tax returns for Federal and state income tax purposes. ADVERTISING COSTS The Company reports the cost of all advertising as expense in the period in which those costs are incurred. Advertising costs were approximately $50,000 and $69,000 for the years ended May 31, 2001 and 2000, respectively. FS-18 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 2. SUMMARY OF LOSS PER SHARE SIGNFICANT ACCOUNTING In February 1997, the Financial Accounting Standards POLICIES Board ("FASB") issued Statement of Financial Accounting (Continued) Standards No. 128 ("SFAS 128"), "EARNINGS PER SHARE" ("EPS"). SFAS 128 requires dual presentation of basic EPS and diluted EPS on the face of all income statements issued after December 15, 1997 for all entities with complex capital structures. Basic EPS is computed as net loss divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities. The following table illustrates the required disclosure of the reconciliation of the numerators and denominators of the basic and diluted EPS computations. For the Years Ended May 31, -------------------------- 2001 2000 --------------------------------------------------------- Numerator: Loss from continuing operations $ (578,886) $(1,638,447) Loss from discontinued operations (2,093,432) (2,252,402) --------------------------------------------------------- Numerator for basic and diluted net income per common--net loss $(2,672,318) $(3,890,849) ========================================================= Denominator for basic net loss per common share $ 4,814,790 $ 4,542,820 Effect of dilutive securities: Options and warrants - - --------------------------------------------------------- Denominator for diluted net loss per common share $ 4,814,790 $ 4,542,820 ========================================================= FS-19 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 2. SUMMARY OF For the Years Ended May 31, SIGNIFICANT --------------------------- ACCOUNTING 2001 2000 POLICIES --------------------------------------------------------- (Continued) Basic net loss per common share: Loss from continuing operations $ (0.12) $ (0.36) Loss from discontinued operations (0.43) (0.50) --------------------------------------------------------- Basic net income per common share $ (0.55) $ (0.86) ========================================================= Diluted net loss per common share: Loss from continuing operations $ (0.12) $ (0.36) Loss from discontinued operations (0.43) (0.50) --------------------------------------------------------- Diluted net loss per common share $ (0.55) $ (0.86) ========================================================= The computation of diluted loss per share excludes the effect of incremental common shares attributable to the exercise of outstanding common stock options and warrants because their effect was antidilutive due to losses incurred by the Company. See summary of outstanding stock options and warrants in Note 7. As of May 31, 2001, there was a total of 3,144,234 potential dilutive shares of common stock. FS-20 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 2. SUMMARY OF SEGMENT REPORTING SIGNIFICANT ACCOUNTING The Financial Accounting Standards Board has issued POLICIES Statement of Financial Accounting Standards No. 131 (Continued) "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION" ("SFAS 131"). SFAS 131 requires public companies to report information about segments of their business in their annual financial statements and requires them to report selected segment information in their quarterly reports issued to shareholders. It also requires entity-wide disclosures about the product, services an entity provides, the material countries in which it holds assets and reports revenues, and its major customers. The Company adopted the provisions of this statement for 1999 annual reporting (Note 10). REPORTING COMPREHENSIVE INCOME In June 1997, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 130, "REPORTING COMPREHENSIVE INCOME." This statement establishes standards for reporting the components of comprehensive income and requires that all items that are required to be recognized under accounting standards as components of comprehensive income be included in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income includes net income as well as certain items that are reported directly within a separate component of stockholders' equity. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and requires recognition of all derivatives as assets or liabilities in the statement of financial position and measurement of those instruments at fair value. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company currently does not engage in derivative or hedging activities, and accordingly, believes that there will be no impact to its consolidated financial statements upon implementation in the Company's fiscal year 2002. FS-21 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 2. SUMMARY OF In December 1999, the Securities and Exchange Commission SIGNIFICANT issued Staff Accounting Bulletin No. 101, Revenue ACCOUNTING Recognition in Financial Statements ("SAB 101"). SAB 101 POLICIES summarizes certain areas of the Staff's views in applying (CONTINUED) accounting principles generally accepted in the United States of America to revenue recognition in financial statements. The Company believes that its current revenue recognition policies comply with SAB 101. In March 2000, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions involving Stock Compensation." The adoption of this Interpretation did not have a material impact on the consolidated results of operations or financial position of the Company. In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations", which eliminates the pooling method of accounting for business combinations initiated after June 30, 2001. In addition, SFAS 141 addresses the accounting for intangible assets and goodwill acquired in a business combination. This portion of SFAS 141 is effective for business combinations completed after June 30, 2001. The Company does not expect SFAS 141 will have a material impact on the Company's financial position or results of operations. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Intangible Assets", which revises the accounting for purchased goodwill and intangible assets. Under SFAS 142, goodwill and intangible assets with indefinite lives will no longer be amortized and will be tested for impairment annually. SFAS 142 is effective for fiscal years beginning after December 15, 2001, with earlier adoption permitted. The Company has not yet determined the impact on the Company's financial position or results of operations as a result of the future adoption of SFAS 142. FS-22 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 3. CONSOLIDATED Lancer is engaged in the design, manufacture and SUBSIDIARIES distribution of orthodontic products. During 2000, Lancer repurchased 114,998 shares of its common stock for aggregate consideration of $117,914. During 2000, Lancer issued 54,725 shares of its common stock valued at $50,631 for certain management and consulting services. In May 2000, all 370,483 shares issued and outstanding of Lancer's Redeemable Convertible Preferred Stock-Series C were converted into 52,926 shares of Lancer's common stock. The result of these transactions increased Biomerica's direct ownership percentage of Lancer to 30.78% and increased its direct and indirect (via agreements with certain shareholders) voting control over Lancer to 51.19% as of May 31, 2001. AIT provides immune allergy testing and products to physicians and medical institutions. During 1998, 1,916,429 shares of AIT were subscribed to Biomerica in exchange for debt (see Note 7) and 35,000 shares of AIT were issued to two AIT employees. The net effect of these issues increased Biomerica's interest in AIT to 74.6%. The Company's fiscal 2001 and 2000 losses were partially the result of its investment in ReadyScript. The ReadyScript subsidiary was a development-stage enterprise and required the raising of a significant amount of capital to fund its short-term working capital needs. The ReadyScript operations were discontinued in May 2001. (see Note 13). The net assets and operating results of ReadyScript are shown separately in the accompanying consolidated financial statements as discontinued operations and are held for sale. Prior periods have been restated to reflect the results of ReadyScript as discontinued. FS-23 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 3. CONSOLIDATED Operating results for Lancer, AIT and ReadyScript in the SUBSIDIARIES aggregate for the years ended May 31, 2001 and 2000, (Continued) which are included in the consolidated operating results of the Company, are as follows: 2001 2000 --------------------------------------------------------- Net sales $ 6,027,873 $ 5,730,488 Cost of sales 4,081,143 3,960,362 --------------------------------------------------------- Gross profit 1,946,730 1,770,126 --------------------------------------------------------- Operating expenses: Selling, general and administrative 2,038,565 2,268,090 Research and development 71,505 184,849 --------------------------------------------------------- Total operating expenses 2,110,070 2,452,939 --------------------------------------------------------- Other income (expense): Interest expense (19,931) (19,526) Other income, net 5,358 228,368 --------------------------------------------------------- (14,573) 208,842 --------------------------------------------------------- Loss from continuing operations before income taxes (177,913) (473,971) Income tax expense 1,600 1,600 --------------------------------------------------------- Net loss from continuing operations $ (179,513) $ (475,571) Discontinued operations: Loss from discontinued operations, net (2,093,432) (2,252,402) --------------------------------------------------------- Net loss $(2,272,945) $(2,727,973) ========================================================= FS-24 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 4. INTANGIBLE Intangible assets, net of accumulated amortization, ASSETS consist of the following: MAY 31, 2001 --------------------------------------------------------- Marketing and distribution rights $ 442,750 Technology use rights 858,328 Patents and other intangibles 172,170 --------------------------------------------------------- 1,473,248 Less accumulated amortization (1,176,009) --------------------------------------------------------- $ 297,239 ========================================================= 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 2001 and 2000, the Company recorded amortization expense of $24,900 related to repurchased sales territories. During fiscal 1985, Lancer purchased certain assets and technology which is being amortized over the estimated useful life of eighteen years. Lancer recorded amortization expense of $48,696 for each of the years ended May 31, 2001 and 2000 related to these assets. Amortization expense related to patents and other intangibles which is included in the accompanying consolidated statements of operations amounted to $16,069 and $8,257 for the years ended May 31, 2001 and 2000, respectively. 5. LINE OF At May 31, 2001, Lancer had a $300,000 line of credit CREDIT with a bank. Borrowings are made at prime plus 1.25% (8.25% at May 31, 2001) and are limited to specified percentages of eligible accounts receivable. The unused portion available to Lancer under the line of credit at May 31, 2001 was $160,000. The line of credit expired on September 10, 2001. As of May 31, 2001, there was $140,000 outstanding under the line of credit. FS-25 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 5. LINE OF The line of credit is collateralized by substantially all CREDIT the assets of Lancer, including inventories, receivables, (Continued) and equipment. The lending agreement for the line of credit requires, among other things, that Lancer maintain a tangible net worth of $2,800,000, a debt to tangible net worth ratio of no more than 1 to 1, and a current ratio in excess of 2 to 1, and prohibits the advancing of funds to Biomerica. Lancer is not required to maintain compensating balances in connection with this lending agreement. Lancer was in violation of certain of its debt covenants at May 31, 2001. Lancer is currently in discussions with a new lender to replace its existing line of credit. Management believes it will be successful in such discussions, however, there can be no assurance of this success nor that management would be successful in finding a replacement lender with acceptable terms. The following summarizes information on short-term borrowings for the year ended May 31, 2001: MAY 31, 2001 --------------------------------------------------------- Average month end balance $ 193,333 Maximum balance outstanding at any month end $ 220,000 Weighted average interest rate (computed by dividing interest expense by average monthly balance) 10.31% Interest rate at year end 8.25% ========================================================= 6. RELATED SHAREHOLDER RECEIVABLE PARTY TRANSACTIONS During fiscal 1998, the estate of the chief executive officer exercised a stock option to purchase 25,000 common shares at $0.80 per share and 60,000 common shares at $0.85 per share for a total of $71,000 via a shareholder loan. During 1999, $70,000 of the shareholder loan was repaid. During 2000, the remaining $1,000 was repaid. FS-26 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 6. RELATED SHAREHOLDER LINE OF CREDIT PARTY TRANSACTIONS Biomerica, Inc. entered into an agreement in substance (Continued) for a line of credit agreement on September 12, 2000 with a shareholder whereby the shareholder will loan to the Company, as needed, up to $500,000 for working capital needs. The line of credit bears interest at 8%, is secured by accounts receivable and inventory, and expires September 12, 2001. There was $95,000 outstanding under this line of credit at May 31, 2001. Biomerica and the shareholder are in the process of formalizing this line of credit. During 2001, the Company incurred $1,051 in interest expense related to the shareholder line of credit. Subsequent to year-end, an additional $130,000 was borrowed under the line of credit (Note 14). 7. SHAREHOLDERS' 1991, 1995 AND 1999 STOCK OPTION AND RESTRICTED STOCK EQUITY PLANS In December 1991, the Company adopted a stock option and restricted stock plan (the "1991 Plan") which provides that non-qualified options and incentive stock options and restricted stock covering an aggregate of 350,000 of the Company's unissued common stock may be granted to officers, employees or consultants of the Company. Options granted under the 1991 Plan may be granted at prices not less than 85% of the then fair market value of the common stock, vest at not less than 20% per year and expire not more than 10 years after the date of grant. In January 1996, the Company adopted a stock option and restricted stock plan (the "1995 Plan") which provides that non-qualified options and incentive stock options and restricted stock covering an aggregate of 500,000 of the Company's unissued common stock may be granted to affiliates, employees or consultants of the Company. Options granted under the 1995 Plan may be granted at prices not less than 85% of the then fair market value of the common stock and expire not more than 10 years after the date of grant. During 1997, the Company granted options to purchase 72,000 and 45,000 shares of common stock at exercise prices of $1.90 and $1.92 per share, respectively, to various employees of the Company. The options vest over a period ranging from four to five years. During 1997, the Company granted options to purchase 18,000 and 5,000 shares of common stock at exercise prices of $1.90 and $3.00 per share respectively, to various consultants of the Company. FS-27 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 7. SHAREHOLDERS' During 1998, the Company granted options to purchase EQUITY 152,500 shares at an exercise price of $1.85 to employees (Continued) and a total of 1,500 shares to non-employees, at an exercise price of $1.91. During 1999, the Company granted options to purchase 2,000, 179,850 and 27,900 shares of its common stock at an exercise prices of $0.90, $0.86 and $0.85, respectively, to employees and 2,000 and 7,000 shares to non-employees, at exercise prices of $0.90 and $0.86, respectively. On June 3, 1999, the Company, issued 8,000 shares of common stock to a consultant for services provided. The Company valued these shares at $16,000. On June 11, 1999, the Company issued 1,150,000 and 50,000 options to purchase shares of the Company's stock to employees and non-employees, respectively. The purchase price of the options is $3.00 per share. The options vest immediately and are exercisable for a period of ten years. The Company recorded $58,806 related to the fair value of options granted to non-employees. In addition, the Company issued 1,000,000 stock purchase warrants to unaffiliated entities for consulting and fund-raising services rendered. The holder is granted the right to purchase common stock at an exercise price of $3.00 per share through the year 2005. The Company valued these warrants at $1,176,126. Of this, $588,063 was expensed for consulting services and $588,063 was recorded as a reduction of paid-in-capital in connection with the private placement as discussed below. On June 11, 1999, the Company entered into a Five Year Back-End Processing Agreement with an unaffiliated entity. The unaffiliated entity was to develop customized back-end processing to enable the company to process customer prescription orders on-line and insurance claims and payments. In addition, the unaffiliated entity transferred and assigned to the Company the right, title and interest in and to the internet domain name "TheBigRX.com" and all rights to any trademark relating thereto. FS-28 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 7. SHAREHOLDERS' The Company issued 410,000 stock purchase warrants for EQUITY these services. The holder was granted the right to (Continued) purchase common stock at an exercise price of $5.00. The Company valued these warrants at approximately $333,000 and initially was expensing them over sixty months ($66,493 of expense was recorded during the year ended May 31, 2000). Subsequent to May 31, 2000, the unaffiliated entity stopped providing services to the Company. The Company does not intend to issue any common stock if the aforementioned warrants are presented for exercise because of the breach in performance. The Company stopped amortizing the warrant expense subsequent to May 31, 2000. On June 11, 1999, the Company entered into a Five Year Strategic Marketing Agreement with TheBigHub.com whereby TheBigHub.com will provide strategic placement of advertising and marketing for Biomerica's BigRX.com on its website. The Company issued 250,000 stock purchase warrants for these services. The holder was granted the right to purchase common stock at an exercise price of $5.00. The Company valued these warrants at approximately $203,000 and initially was expensing them over sixty months ($40,545 of expense was recorded during the year ended May 31, 2000). Subsequent to May 31, 2000, the TheBigHub.com stopped providing services to the Company. The Company does not intend to issue any common stock if the aforementioned warrants are presented for exercise because of the breach in performance. The Company stopped amortizing the warrant expense subsequent to May 31, 2000. On June 11, 1999, the Company completed two private placement agreements to sell and issue a total of 400,000 (50,000 of which were sold to related parties) shares of the Company's common stock at $5.00 per share. The Company incurred $34,443 in offering costs related thereto. The shares have piggyback registration rights. FS-29 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 7. SHAREHOLDERS' In August 1999, the Company adopted a stock option and EQUITY restricted stock plan (the "1999 Plan") which provides (Continued) that non-qualified options and incentive stock options and restricted stock covering an aggregate of 1,000,000 of the Company's unissued common stock may be granted to affiliates, employees or consultants of the Company. As of January 1, of each calendar year, commencing January 1, 2000, this amount is subject to automatic annual increases equal the lesser of 1.5% of the total number of outstanding common shares assuming conversion of convertible securities or 500,000. Options granted under the 1999 Plan may be granted at prices not less than 85% of the then fair market value of the common stock and expire not more than 10 years after the date of grant. During 2000, the Company granted 726,000 and 50,000 options to purchase shares of the Company's stock to employees and non-employees, respectively. The purchase price of the options range from $1.38 to $3.88 per share. Management recorded $0 and $25,135, respectively, during the years ended May 31, 2001 and 2000, respectively, of expense related to the granting of options to employees. Management recorded $69,230 and $22,004 during the years ended May 31, 2001 and 2000, respectively, of expense related to the granting of options to non-employees. During 2000, the Company agreed to grant warrants to three medical groups in exchange for services. The Company was committed to, but had not yet issued, 15,000 warrants at exercise prices of $2.00 to $3.25 as of May 31, 2000. During 2001, the Company issued 5,000 of these warrants at an exercise price of $3.25. The Company recorded $17,372 of expense related to these warrants in 2000. Unissued warrants are not included in the table below. During the years ended May 31, 2001 and 2000, the Company recorded compensation expense of $1,207 and $2,625, respectively related to the amortization of the fair value of options to purchase common stock issued prior to June 1, 1999. FS-30 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 7. SHAREHOLDERS' During 2001, the Company granted 257,000 and 6,000 EQUITY options to purchase shares of the Company's stock to (Continued) employees and non-employees, respectively. The purchase price of the options range from $0.50 to $1.50 per share. Management recorded $18,720 during the year ended May 31, 2001 of expense related to the granting of options to employees. Management recorded $1,386 during the year ended May 31, 2001 of expense related to the granting of options to non-employees. During 2001, the Company issued 57,424 warrants to purchase shares of the Company's stock to various employees. The warrants have an exercise price of $2.00. During 2001, the Company, agreed to extend the expiration date of 33,875 expiring options issued to employees. Activity as to stock options and warrants under the 1991, 1995 and 1999 plans are as follows:
WEIGHTED NUMBER AVERAGE OF STOCK PRICE RANGE EXERCISE OPTIONS PER SHARE PRICE --------------------------------------------------------------------------------- Options outstanding at June 1, 1999 454,050 $ .80 - $3.00 $ 1.38 Options and warrants granted 3,636,000 $1.38 - $5.00 $ 3.27 Options exercised (56,625) $ .80 - $1.90 $ 1.07 Options canceled or expired (476,125) $ .86 - $3.88 $ 2.63 --------------------------------------------------------------------------------- Options outstanding at May 31, 2000 3,557,300 $ .85 - $5.00 $ 3.15 Options granted 268,000 $ .50 - $3.25 $ .91 Warrants granted 57,434 $ 2.00 $ 2.00 Options exercised (8,500) $ .50 - $ .86 $ .77 Options canceled or expired (730,000) $ .50 - $5.00 $ 4.75 --------------------------------------------------------------------------------- Options and warrants outstanding at May 31, 2001 3,144,234 $ .50 - $3.25 $ 2.58 ================================================================================= Options and warrants exercisable at May 31, 2001 1,781,240 $ .50 - $3.25 $ 1.37 =================================================================================
FS-31 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 7. SHAREHOLDERS' The weighted average fair value of options and warrants EQUITY granted during 2001 and 2000 was $0.93 and $1.25, (Continued) respectively. The following summarizes information about the Company's stock options and warrants outstanding at May 31, 2001:
WEIGHTED AVERAGE REMAINING WEIGHTED NUMBER WEIGHTED RANGE OF NUMBER CONTRACTUAL AVERAGE EXERCISABLE AVERAGE EXERCISE OUTSTANDING LIFE IN EXERCISE AT MAY 31, EXERCISE PRICES MAY 31, 2001 YEARS PRICE 2000 PRICE ------------------------------------------------------------------------------- $ .50 - $ .90 332,175 3.68 $ ..71 165,181 $ .78 $ 1.38 - $1.92 381,875 2.99 $ 1.67 272,125 $ 1.65 $ 2.00 - $3.25 2,430,184 3.10 $ 2.99 143,934 $ 2.83 ===============================================================================
SFAS 123 PRO FORMA INFORMATION Pro forma information regarding loss per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant using the Black Scholes option pricing model with the following assumptions for the years ended May 31, 2001 and 2000; risk free interest rates ranging from 4.9% to 6.65%; dividend yield of 0%; expected life of the options ranging from one to three years; and volatility factors of the expected market price of the Company's common stock ranging from 120% to 200%. The Black Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. FS-32 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 7. SHAREHOLDERS' For purposes of pro forma disclosures, the estimated fair EQUITY value of the options is amortized to expense over the (Continued) option vesting period. Adjustments are made for options forfeited prior to vesting. The effect on compensation expense, net loss, and net loss per share (basic and diluted) had compensation costs for the Company's stock option plans been determined based on fair value on the date of grant consistent with the provisions of SFAS 123 are as follows: MAY 31, 2001 2000 --------------------------------------------------------- Net loss from continuing operations, as reported $ (578,886) $(1,638,447) Adjustment to compensation expense under SFAS 123 (1,094,095) (1,600,464) --------------------------------------------------------- Net loss from continuing operations, pro forma $(1,672,981) $(3,238,911) ========================================================= Pro forma net loss from continuing operations per share - basic $ (0.35) $ (0.71) ========================================================= Pro forma net loss from continuing operations per share - diluted $ (0.35) $ (0.71) ========================================================= MAY 31, 2001 2000 --------------------------------------------------------- Net loss from discontinued operations, as reported $(2,093,432) $(2,252,402) Adjustment to compensation expense under SFAS 123 - - --------------------------------------------------------- Net loss from discontinued operations, pro forma $(2,093,432) $(2,252,402) ========================================================= Pro forma net loss from discontinued operations per share - basic $ (0.43) $ (0.50) ========================================================= Pro forma net loss from discontinued operations per share - diluted $ (0.43) $ (0.50) ========================================================= FS-33 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 7. SHAREHOLDERS' STOCK ACTIVITY EQUITY (Continued) During 2001, the Company sold 239,450 shares of its common stock at an average selling price of $1.016 per share. Proceeds to the Company were $242,212, net of offering costs of $1,140. At May 31, 2001, 113,375 of the shares have been issued. The remaining 126,075 shares valued at $90,774 were issued subsequent to May 31, 2001 and accordingly have been classified as common stock subscribed. During 2001, the Company, agreed to issue 20,000 shares of common stock to a consultant for services provided. The Company valued these subscribed shares at $20,000. As of May 31, 2001 the shares have not been issued and accordingly have been classified as common stock subscribed. During 2001, the Company, issued 34,643 and 159,091 shares of common stock to various vendors and consultants for satisfaction of payables and services provided, respectively. The Company valued these shares at $38,615 and $245,625, respectively. SUBSIDIARY OPTIONS AND WARRANTS During fiscal 1998, AIT granted options to purchase 1,185,000 shares of common stock to various employees and directors of AIT, including an option to purchase 250,000 shares granted to Biomerica, Inc., the parent company. The exercise price will be the fair market value AIT's common stock on the date when certain conditions are met, as defined. The options will vest 50% per year and expire over five years. During 1999, Lancer granted options to purchase 138,500 shares of its common stock at an exercise price of $1.00 to employees and options to purchase 29,000 shares of its common stock to non-employees, at an exercise price of $1.00. During 2000, Lancer granted options to purchase 15,000 shares of its common stock at an exercise price of $0.85 to employees. FS-34 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 7. SHAREHOLDERS' During 2001, Lancer granted options to purchase 177,000 EQUITY shares of its common stock at an exercise prices of $0.25 (Continued) to $0.875 to employees. During 2001, ReadyScript granted options to purchase 1,574,287 shares of its common stock at an exercise price of $0.25 to employees. During 2001, ReadyScript entered into convertible Promissory Notes totaling $835,000. As of May 31, 2001, $782,000 of that debt had been converted into 1,500,175 shares of ReadyScript common stock. The Company recorded an increase to additional paid-in-capital of $713,014 as a result of this conversion. 8. INCOME TAXES Income tax expense from continuing operations for the years ended May 31, 2001 and 2000 consists of the following current provisions:
MAY 31, 2001 2000 ------------------------------------------------------------------ U.S. Federal $ - $ - State and local 2,400 2,400 ------------------------------------------------------------------ $ 2,400 $ 2,400 ================================================================== Income tax expense from continuing operations differs from the amounts computed by applying the U.S. Federal income tax rate of 35 percent to pretax loss as a result of the following: MAY 31, 2001 2000 ------------------------------------------------------------------ Computed "expected" tax benefit $ (201,770) $ (572,616) Increase (reduction) in income taxes resulting from: Meals and entertainment 8,684 20,312 Change in valuation allowance 153,517 472,752 Equity in earnings of affiliates not subject to taxation because of dividends- received deduction for tax purposes 39,569 79,552 State income taxes 2,400 2,400 ------------------------------------------------------------------ $ 2,400 $ 2,400 ==================================================================
FS-35 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 8. INCOME TAXES The tax effect of temporary differences that give rise to (Continued) significant portions of liabilities are presented below. MAY 31, 2001 --------------------------------------------------------- Deferred tax assets: Accounts receivable, principally due to allowance for doubtful accounts and sales returns $ 76,705 Inventories, principally due to additional costs inventoried for tax purposes pursuant to the Tax Reform Act of 1986 and allowance for inventory obsolescence 101,259 Compensated absences and deferred payroll, principally due to accrual for financial reporting purposes 104,875 State net operating loss carryforwards 290,106 Federal net operating loss carryforwards 4,407,566 Tax credit carryforwards 194,864 Investment in affiliates 525,545 --------------------------------------------------------- 5,700,920 Less valuation allowance (5,667,031) --------------------------------------------------------- Net deferred tax asset 33,889 Deferred tax liability: Marketing rights, principally due to amortization (33,889) --------------------------------------------------------- Net deferred tax liability $ - ========================================================= FS-36 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 8. INCOME TAXES The Company has provided a valuation allowance with (Continued) respect to substantially all of its deferred tax assets as of May 31, 2001 and 2000. Management provided such allowance as it is currently more likely than not that tax-planning strategies will not generate taxable income sufficient to realize such assets in foreseeable future reporting periods. As of May 31, 2001, Biomerica had net tax operating loss carryforwards of approximately $9,466,000 and investment tax and research and development credits of approximately $45,000, which are available to offset future Federal tax liabilities. The carryforwards expire at varying dates from 2001 to 2021. As of May 31, 2001, Biomerica has net operating tax loss carryforwards of approximately $2,127,000 available to offset future state income tax liabilities, which expire through 2011. As of May 31, 2000, Lancer had net tax operating loss carryforwards of approximately $2,049,000 and business tax credits of approximately $98,000 available to offset future Federal tax liabilities. The carryforwards expire through 2021. As of May 31, 2001, Lancer has net tax operating loss carryforwards of approximately $205,000 and business tax credits of approximately $23,000 available to offset future state income tax liabilities. The state carryforwards expire at varying dates through 2011. As of May 31, 2001, AIT had net tax operating loss carryforwards of approximately $1,931,000 and business tax credits of approximately $29,000 available to offset future Federal tax liabilities. The carryforwards expire at varying dates through 2021. AIT also had net tax operating loss carryforwards of approximately $580,000 to offset future California taxable income, expiring at varying dates through 2011. The Tax Reform Act of 1986 includes provisions which limit the Federal net operating loss carryforwards available for use in any given year if certain events, including a significant change in stock ownership, occur. FS-37 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 9. OTHER INCOME Other income consists of the following for the years ending May 31: MAY 31, 2001 2000 --------------------------------------------------------- Realized gain (loss) on available- for-sale securities $ 34,427 $ (13,241) Dividend and interest income 8,081 99,358 Tax reversal - 50,000 Insurance proceeds - 170,000 Offering expenses - (251,574) Other 5,254 63,855 --------------------------------------------------------- $ 47,762 $ 118,398 ========================================================= Management of Lancer completed an assessment of a theft of inventory located at its facility in Mexicali Mexico on April 6, 1999. The carrying value of the inventory stolen approximated $110,000, valued at standard cost. During the year ended May 31, 2000, Lancer settled the claim with the insurance carrier and received approximately $280,000. This amount represents the value of the stolen inventory at net average selling price, less commissions and royalties. The $170,000 received in excess of the $110,000 estimated carrying value was recognized as other income for the year ended May 31, 2000. During 1999, Lancer was assessed $64,724 in pass through net assets taxes by their subcontractor under their Manufacturing Agreement. During 2000, legal counsel determined that Lancer was not liable for portions of the assessment. Accordingly, approximately $50,000 of the prior year accrual was reversed and recognized as other income during the year ended May 31, 2000. During 2000, $251,574 of amounts incurred by the Company in connection with a registration of securities that was cancelled were written-off. FS-38 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 10. BUSINESS SEGMENTS Reportable business segments for the years ended May 31, 2001 and 2000 are as follows: 2001 2000 --------------------------------------------------------- Domestic sales: Orthodontic products $ 3,018,000 $ 3,133,000 ========================================================= Medical diagnostic products $ 1,682,000 $ 1,298,000 ========================================================= Foreign sales: Orthodontic products $ 2,910,000 $ 2,518,000 ========================================================= Medical diagnostic products $ 1,330,000 $ 1,065,000 ========================================================= Net sales: Orthodontic products $ 5,928,000 $ 5,651,000 Medical diagnostic products 3,012,000 2,363,000 --------------------------------------------------------- Total $ 8,940,000 $ 8,014,000 ========================================================= Operating loss: Orthodontic products $ (98,000) $ (504,000) Medical diagnostic products (586,000) (1,434,000) --------------------------------------------------------- Total $ (684,000) $(1,938,000) ========================================================= Operating loss from discontinued segment ReadyScript $(2,093,432) $(2,252,402) --------------------------------------------------------- Total $(2,093,432) $(2,252,402) ========================================================= Domestic long-lived assets: Orthodontic products $ 196,000 $ 283,000 Medical diagnostic products 375,000 484,000 --------------------------------------------------------- Total $ 571,000 $ 767,000 ========================================================= Foreign long-lived assets: Orthodontic products $ 45,000 $ 70,000 Medical diagnostic products - - --------------------------------------------------------- Total $ 45,000 $ 70,000 ========================================================= Total assets: Orthodontic products $ 3,737,000 $ 3,755,000 Medical diagnostic products 1,610,000 3,030,000 --------------------------------------------------------- Total $ 5,347,000 $ 6,785,000 ========================================================= FS-39 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 10. BUSINESS SEGMENTS 2001 2000 (Continued) --------------------------------------------------------- Depreciation and amortization expense: Orthodontic products $ 122,000 $ 151,000 Medical diagnostic products 87,000 59,000 --------------------------------------------------------- Total $ 209,000 $ 210,000 ========================================================= Capital expenditures: Orthodontic products $ 9,000 $ 10,000 Medical diagnostic products 53,000 91,000 --------------------------------------------------------- Total $ 62,000 $ 101,000 ========================================================= The net sales as reflected above consist of sales to unaffiliated customers only as there were no significant intersegment sales during fiscal years 2001 and 2000. No customer accounted for more than 10% of net sales during fiscal years 2001 and 2000. Geographic information regarding net sales and operating loss is as follows: 2001 2000 --------------------------------------------------------- Net sales: United States $ 4,700,000 $ 4,431,000 Europe 2,207,000 1,683,000 South America 558,000 543,000 Asia 221,000 349,000 Other foreign 1,254,000 1,008,000 --------------------------------------------------------- Total net sales $ 8,940,000 $ 8,014,000 ========================================================= FS-40 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 10. BUSINESS SEGMENTS (Continued) 2001 2000 --------------------------------------------------------- Operating loss: United States $ (727,000) $(1,504,000) Europe 102,000 (176,000) South America 20,000 (37,000) Asia (30,000) (66,000) Other foreign (49,000) (155,000) --------------------------------------------------------- Total operating loss $ (684,000) $(1,938,000) ========================================================= Identifiable assets by business segment are those assets that are used in the Company's operations in each industry. Identifiable assets are held primarily in the United States. 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. 11. COMMITMENTS AND OPERATING LEASES CONTINGENCIES Biomerica leases its primary facility under a non-cancelable operating lease which expired on May 31, 1998. The lease is currently month-to-month. AIT leases its primary facility under a month-to-month operating lease. These facilities are owned and operated by four of the Company's shareholders. The lease rate is $12,720 and $1,400 per month, respectively. Lancer leases its main facility under a non-cancelable operating lease expiring December 31, 2003, as extended, which requires monthly rentals that increase annually, from $2,900 per month (1994) to $6,317 per month (2004). The lease expense is being recognized on a straight-line basis over the term of the lease. FS-41 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 11. COMMITMENTS AND Lancer entered into a non-cancelable operating lease for CONTINGENCIES its Mexico facility expiring March 2006, which requires (Continued) average monthly rentals of approximately $6,000. Total expense for this facility for the years ended May 31, 2001 and 2000, was approximately $74,000. Rental expense for all operating leases amounted to approximately $348,000 and $312,000 for the years ended May 31, 2001 and 2000, respectively. The future annual minimum payments are as follows: YEARS ENDING MAY 31, Amount --------------------------------------------------------- 2002 $ 133,543 2003 136,397 2004 106,511 2005 62,292 2006 51,910 --------------------------------------------------------- Minimum lease payments $ 490,653 ========================================================= MANUFACTURING AGREEMENT In May 1990, Lancer entered into a manufacturing subcontractor agreement (the "Manufacturing 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 increase, the hourly rate decreases. In December 1992, Lancer renegotiated the Manufacturing Agreement changing from an hourly rate per employee cost to a pass through of actual costs plus a weekly administrative fee. The amended Manufacturing Agreement gives Lancer greater control over all costs associated with the manufacturing operation. In July FS-42 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 11. COMMITMENTS AND 1994, Lancer again renegotiated the Manufacturing CONTINGENCIES Agreement reducing the administrative fee and extending (Continued) the Manufacturing Agreement through June 1998. In March 1996, Lancer agreed to extend the manufacturing agreement through October 1998, to coincide with the building lease. Effective April 1, 1996, Lancer leased the Mexicali facility under a separate agreement, as discussed above. During 1999, Lancer extended the Manufacturing Agreement through October 31, 2000. The Manufacturing Agreement is currently operating as month-to-month. Should Lancer discontinue operations in Mexico, it is responsible for the accumulated employee seniority obligation as prescribed by Mexican law. At May 31, 2001, this obligation was approximately $361,000. Such obligation is contingent in nature and accordingly has not been accrued in the accompanying balance sheet. Lancer is in the process of converting Mexican assets and obligations to its own division, a Mexican corporation named Lancer Orthodontics de Mexico (Lancer de Mexico). This division will administer services previously provided by an independent manufacturing contractor. A new lease was negotiated effective April 1, 2001, for the 16,000 square foot facility used for Lancer's Mexican operations. Utility and Mexican vendor obligations have been converted to the Lancer de Mexico name. This conversion will eliminate the expense of an administrative fee and is expected to provide better control in meeting obligations. EMPLOYMENT AGREEMENT In June 1986, the Company entered into an employment agreement with its then chief executive officer. In May 1996, the agreement was extended for an additional three years expiring in May 1999. This agreement was cancelled in April 1997. This agreement required minimum annual compensation payments of $169,000 and provided for periodic cost of living increases. The chief executive officer was paid approximately $81,000 during the year ended May 31, 1996. The chief executive officer and the Company agreed to amend the employment agreement for fiscal year 1995, FS-43 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 11. COMMITMENTS AND whereby the chief executive officer would not receive any CONTINGENCIES deferred compensation for the period June 1994 through (Continued) November 1994 of approximately $54,500 and instead received 60,000 stock options (see Note 7). Approximately $121,000 of the total accrued compensation included in the 2001 consolidated balance sheet is due to the chief executive officer's estate. LICENSE AND ROYALTY AGREEMENT Lancer has entered into various 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 expiring through 2007 and they require the Company to make payments based on the sales of the individual licensed products. Lancer has entered into license agreements expiring in 2006 whereby, for cash consideration, the counter party has obtained the rights to manufacture and market certain products patented by Lancer. RETIREMENT SAVINGS PLAN Effective September 1, 1986, the Company established a 401(k) plan for the benefit of its employees. The plan permits eligible employees to contribute to the plan up to the maximum percentage of total annual compensation allowable under the limits of Internal Revenue Code Sections 415, 401(k) and 404. The Company, at the discretion of its Board of Directors, may make contributions to the plan in amounts determined by the Board each year. No contributions by the Company have been made since the plan's inception. LITIGATION The Company is, from time to time, involved in legal proceedings, claims and litigation arising in the ordinary course of business. While the amounts claimed may be substantial, the ultimate liability cannot presently be determined because of considerable uncertainties that exist. Therefore, it is possible the outcome of such legal proceedings, claims and litigation could have a material effect on quarterly or annual operating results or cash flows when resolved in a future period. However, based on facts currently available, management believes such matters will not have a material adverse affect on the Company's consolidated financial position, results of operations or cash flows. FS-44 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 11. COMMITMENTS AND NASDAQ SMALLCAP MARKET LISTING REQUIREMENTS CONTINGENCIES (Continued) The Company has been notified by Nasdaq that it has failed to maintain the listing requirement that its minimum bid price be $1.00 or more and that it must regain compliance by October 4, 2001 or it will be subject to delisting. The Company will be subject to continuing requirements to be listed on the Nasdaq SmallCap Market. There can be no assurance that the Company can continue to meet such requirements. The price and liquidity of the Common Stock may be materially adversely affected if the Company is unable to meet such requirements in the future. 12. CONDENSED Lancer's line-of-credit prohibits the transfer or FINANCIAL dividend of funds to Biomerica, Inc. As a result, the INFORMATION OF following condensed unconsolidated balance sheet for PARENT COMPANY Biomerica, Inc. as of May 31, 2001, and the condensed unconsolidated statements of operations and cash flows for the years ended May 31, 2001 and 2000 have been provided. No cash dividends were paid by the consolidated subsidiaries (see Note 3) during the years ended May 31, 2001 and 2000. CONDENSED UNCONSOLIDATED BALANCE SHEET
MAY 31, 2001 ----------------------------------------------------------------------- ASSETS Current Assets: Available-for-sale securities $ 41,570 Accounts receivable, net 356,831 Inventories 722,344 Notes receivable 18,394 Prepaid expenses and other 20,389 ----------------------------------------------------------------------- Total current assets 1,159,528 Investment in and advances to unconsolidated subsidiary, restricted 910,218 Inventory, non-current 15,000 Property and equipment, net 239,708 Intangible assets 124,363 Other 41,151 ------------------------------------------------------------------------ $ 2,489,968 ======================================================================== FS-45 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 12. CONDENSED CONDENSED UNCONSOLIDATED BALANCE SHEET (CONTINUED) FINANCIAL MAY 31, 2001 INFORMATION OF ------------------------------------------------------------------------ PARENT COMPANY (Continued) LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued liabilities $ 402,205 Accrued compensation 145,552 ------------------------------------------------------------------------ Total current liabilities 547,757 ------------------------------------------------------------------------ Shareholder loan 95,000 Equity in losses of unconsolidated subsidiaries, net of advances, unrestricted 374,346 ------------------------------------------------------------------------ Shareholders' equity: Common stock 391,254 Additional paid-in capital 16,859,742 Accumulated other comprehensive loss (10,289) Accumulated deficit (15,767,842) ------------------------------------------------------------------------ Total shareholders' equity 1,472,865 ------------------------------------------------------------------------ $ 2,489,968 ========================================================================
FS-46 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ============================================================================================
12. CONDENSESD FINANCIAL CONDENSED UNCONSOLIDATED STATEMENTS OF OPERATIONS INFORMATION OF PARENT COMPANY MAY 31, 2001 2000 (Continued) --------------------------------------------------------------------- Net revenues $ 2,911,649 $ 2,283,433 Cost of sales 2,048,757 1,643,290 --------------------------------------------------------------------- Gross profit 862,892 640,143 --------------------------------------------------------------------- Operating expenses: Selling, general and administrative 1,132,519 1,867,520 Research and development 250,616 279,788 --------------------------------------------------------------------- Total operating expenses 1,383,135 2,147,308 --------------------------------------------------------------------- Operating loss (520,243) (1,507,165) Other income 40,776 86,081 --------------------------------------------------------------------- Loss from operations before interest in net income of consolidated subsidiaries and income taxes (479,467) (1,421,084) Interest in net loss of consolidated subsidiaries (2,192,051) (2,468,965) --------------------------------------------------------------------- Loss from continuing operations before income taxes (2,671,518) (3,890,049) Income tax expense 800 800 --------------------------------------------------------------------- Net loss $ (2,672,318) $ (3,890,849) =====================================================================
FS-47 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ============================================================================================
12. CONDENSED CONDENSED UNCONSOLIDATED STATEMENTS OF CASH FLOWS FINANCIAL INFORMATION OF MAY 31, 2001 2000 PARENT COMPANY --------------------------------------------------------------------- (Continued) Cash Flows from Operating Activities: Net loss from continuing operations $ (2,672,318) $ (3,890,849) Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 76,311 93,187 Realized (gain) loss on sale of available-for- sale securities (34,427) 13,241 Loss of subsidiaries 2,192,051 2,468,965 Options and warrants issued for services rendered 89,336 821,043 Common stock is for rent - 16,000 Common stock issued or subscribed for services rendered 265,625 - Deferred compensation - (77,231) Loss on disposal of assets 2,000 - Increase in investment in and advances to consolidated subsidiaries (1,020,476) (2,336,205) Net change in other current assets and current liabilities 166,406 (89,171) --------------------------------------------------------------------- Net cash used in operating activities (935,492) (2,981,020) --------------------------------------------------------------------- Cash flows from investing activities: Sales of available-for-sale securities 85,665 18,191 Principal payments received on notes receivable 16,600 9,491 Increase in intangible assets (20,000) - Purchase of property and equipment - (125,335) --------------------------------------------------------------------- Net cash used in investing activities 82,265 (97,653) ---------------------------------------------------------------------
FS-48 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ============================================================================================
12. CONDENSED CONDENSED UNCONSOLIDATED STATEMENTS OF CASH FLOWS FINANCIAL CONTINUED INFORMATION OF MAY 31, 2001 2000 PARENT COMPANY --------------------------------------------------------------------- (Continued) Cash Flows from financing activities: Exercise of stock options 6,768 60,652 Proceeds from sale of stock 242,212 1,965,557 Increase in shareholder loan 95,000 - Decrease in shareholder receivable - 1,000 --------------------------------------------------------------------- Net cash provided by financing activities 343,980 2,027,209 --------------------------------------------------------------------- Net change in cash and cash equivalents (509,247) (1,051,464) Cash and cash equivalents at beginning of year 509,247 1,560,711 --------------------------------------------------------------------- Cash and cash equivalents at end of year $ - $ 509,247 ===================================================================== Supplemental disclosure of cash flow information - Cash paid during the year for: Interest $ - $ - Income taxes $ 800 $ 800 Supplemental schedule of non-cash investing and financing activities Change in unrealized holding gain on available-for-sale securities $ 5,966 $ 4,456 =====================================================================
FS-49 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 13. DISCONTINUED The following summarizes the net liabilities of the OPERATIONS discontinued operations as of May 31, 2001 and the results of its operations for each of the years in the two-year period ended May 31, 2001. Balance sheet items: MAY 31, 2001 --------------------------------------------------------- Assets: Cash $ 1,081 Prepaid expenses and other 3,886 Other assets 62,831 --------------------------------------------------------- 67,798 Less liabilities Accrued liabilities (465,856) --------------------------------------------------------- Net liabilities $ (398,058) --------------------------------------------------------- Results of its operations items: YEARS ENDED MAY 31, 2001 2000 --------------------------------------------------------- Revenues $ - $ 19,786 Cost and expenses Cost of Sales - 20,978 General and administrative 1,837,187 1,817,725 Research and development 256,245 433,485 --------------------------------------------------------- Total costs 2,093,432 2,272,188 --------------------------------------------------------- Loss from operations $(2,093,432) $(2,252,402) ========================================================= FS-50 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ================================================================================ 14. SUBSEQUENT During June and July 2001, the Company borrowed EVENTS $130,000 from a shareholder according to the September 12, 2000 line of credit agreement (see Note 5).
YEARS ENDED MAY 31, 2001 2000 - -------------------------------------------------------------------------------------------- Deleted from FS-5 OTHER COMPREHENSIVE (LOSS) INCOME, net of tax Unrealized (loss) gain on available-for-sale securities (5,966) 4,456 - -------------------------------------------------------------------------------------------- COMPREHENSIVE LOSS $ (2,667,284) $ (3,886,393) ============================================================================================ PER SHARE DATA FROM CONTINUING OPERATIONS: Net loss from continuing operations (basic) $ (0.12) $ (0.36) Net loss from continuing operations (diluted) $ (0.12) $ (0.36) ============================================================================================ PER SHARE DATA FROM DISCONTINUED OPERATIONS: Net loss from discontinued operations (basic) $ (0.43) $ (0.50) Net loss from discontinued operations (diluted) $ (0.43) $ (0.50) ============================================================================================ PER SHARE DATA: Net loss (basic) $ (0.55) $ (0.86) Net loss (diluted) $ (0.55) $ (0.86) ============================================================================================ WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES Basic 4,814,790 4,542,820 ============================================================================================ Diluted 4,814,790 4,542,820 ============================================================================================
FS-51 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ===========================================================================================
FROM FS-19, NOTE 2 FOR THE YEAR ENDED MAY 31, 2001 ---------------------------------------------- Loss Shares Per Share (Numerator) (Denominator) Amount -------------------------------------------------------------------- BASIC EPS - Loss from continuing operations attributable to common shareholders $ (578,886) 4,772,765 $ (0.12) ==================================================================== Loss from discontinued operations attributable to common shareholders $(2,093,432) 4,772,765 $ (0.56) ==================================================================== EFFECT OF DILUTIVE SECURITIES - Options and warrants - - - -------------------------------------------------------------------- DILUTED EPS - Loss from continuing operations attributable to common shareholders plus assumed conversions $ (578,886) 4,772,765 $ (0.12) ==================================================================== Loss from discontinued operations attributable to common shareholders plus assumed conversions $(2,093,432) 4,772,765 $ (0.56) ====================================================================
FS-52 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2001 AND 2000 ===========================================================================================
FROM FS-19, NOTE 2 FOR THE YEAR ENDED MAY 31, 2001 ---------------------------------------------- 2. SUMMARY OF Loss Shares Per Share SIGNIFICANT (Numerator) (Denominator) Amount ACCOUNTING -------------------------------------------------------------------- POLICIES (Continued) BASIC EPS - Loss from continuing operations attributable to common shareholders $(1,638,447) 4,542,820 $ (0.36) ==================================================================== Loss from discontinued operations attributable to common shareholders $(2,252,402) 4,542,820 $ (0.50) ==================================================================== EFFECT OF DILUTIVE SECURITIES - Options and warrants - - - -------------------------------------------------------------------- DILUTED EPS - Loss from continuing operations attributable to common shareholders plus assumed conversions $(1,638,447) 4,542,820 $ (0.86) ==================================================================== Loss from discontinued operations attributable to common shareholders $(2,252,402) 4,542,820 $ (0.50) ====================================================================
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