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) ====================================================================
FS-53