UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 2000 COMMISSION FILE NUMBER: 0-8765
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BIOMERICA, INC.
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(Small Business Issuer in its Charter)
DELAWARE 95-2645573
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1533 MONROVIA AVENUE, NEWPORT BEACH, CA 92663
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(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: (949) 645-2111
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State issuer's revenues for its most recent fiscal year: $8,033,708.
State the aggregate market value of the voting and non-voting stock held by non- affiliates of the issuer (based upon 3,896,865 shares held by non-affiliates and the closing price of $1.3125 per share for Common Stock in the over-the-counter market as of August 21, 2000): $5,114,635.
Number of shares of the issuer's common stock, par value $0.08, outstanding as of August 21, 2000: 4,578,623 shares.
DOCUMENTS INCORPORATED BY REFERENCE: The issuer's proxy statement for its 2000 Annual Meeting of Stockholders is incorporated into Part III hereof. Also incorporated by reference are the Annual Reports on Form 10-KSB for the fiscal year ended May 31, 2000, for Lancer Orthodontics, Inc.
PART I*
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 PROVIDES A "SAFE HARBOR" FOR FORWARD-LOOKING STATEMENTS. CERTAIN INFORMATION CONTAINED HEREIN (AS WELL AS INFORMATION INCLUDED IN ORAL STATEMENTS OR OTHER WRITTEN STATEMENTS MADE OR TO BE MADE BY BIOMERICA) CONTAINS STATEMENTS THAT ARE FORWARD-LOOKING, SUCH AS STATEMENTS RELATING TO ANTICIPATED FUTURE REVENUES OF THE COMPANY AND SUCCESS OF CURRENT PRODUCT OFFERINGS. SUCH FORWARD-LOOKING INFORMATION INVOLVES IMPORTANT RISKS AND UNCERTAINTIES THAT COULD SIGNIFICANTLY AFFECT ANTICIPATED RESULTS IN THE FUTURE, AND ACCORDINGLY, SUCH RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS MADE BY OR ON BEHALF OF BIOMERICA. THE POTENTIAL RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS, FLUCTUATIONS IN THE COMPANY'S OPERATING RESULTS DUE TO ITS NEW BUSINESS MODEL AND EXPANSION PLANS AND THE COMPETITIVE ENVIRONMENT IN WHICH THE COMPANY WILL BE COMPETING. THESE RISKS AND UNCERTAINTIES ALSO INCLUDE THE SUCCESS OF THE COMPANY IN RAISING NEEDED CAPITAL, THE CONTINUAL DEMAND FOR THE COMPANY'S PRODUCTS, COMPETITIVE AND ECONOMIC FACTORS OF THE MARKETPLACE, AVAILABILITY OF RAW MATERIALS, YEAR 2000 ISSUES, HEALTH CARE REGULATIONS AND THE STATE OF THE ECONOMY. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF, AND THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS.
BUSINESS
OVERVIEW
THE COMPANY
Biomerica, Inc. ("Biomerica", the "Company", "we" or "our") was incorporated in Delaware in September 1971 as Nuclear Medical Systems, Inc. We changed our corporate name in February 1983 to NMS Pharmaceuticals, Inc., and in November 1987 to Biomerica, Inc. We have three subsidiaries, Lancer Orthodontics, Inc. ("Lancer"), an international manufacturer of orthodontics products, Allergy Immuno Technologies, Inc.("AIT"), which is engaged in providing specialized laboratory testing services and ReadyScript, Inc. ("ReadyScript"), which is a development stage company which that was created to provide wireless handheld point of care systems to physicians. Both Lancer and AIT are majority-controlled subsidiaries, while ReadyScript is a wholly owned subsidiary of Biomerica. Our business is focused in two separate areas, our diagnostic business and our proposed point-of-care wireless handheld technology solutions. We also continue to develop products for the diagnostics business.
We conduct our medical device business through Biomerica, Lancer and AIT. We operate as a global medical technology company primarily engaged in developing, manufacturing and distributing medical diagnostic products for early detection and monitoring of chronic diseases to facilitate prevention and cure. We use our expertise to manufacture products in the areas of diabetes, allergy, cancer, gastroenterology, cardiology and endocrinology. Our customers include medical schools and universities, pharmaceutical companies, health maintenance organizations, hospitals, clinics, commercial laboratories, physician's offices, drugstores and individual customers.
We intend to conduct our proposed wireless point-of-care business through ReadyScript. In June 1999, we raised $2 million in equity to develop the infrastructure of our e-health business, now incorporated as ReadyScript, Inc. Since that time we have used proceeds for developing an on-line drugstore and ReadyScript's infrastructure (a wireless medication management system that enable physicians to wirelessly transmit legible, pre-qualified formulary- compliant prescription orders directly to the patient's choice of pharmacy).
In order to focus our efforts on the point of care portion of our e-health business, we have closed our former online drugstore, the bigrx.com
OUR MEDICAL DEVICE BUSINESS
Our existing medical device business is conducted through three companies:
(1) Biomerica, Inc., engaged in the diagnostic products field; (2) Lancer
Orthodontics, Inc., engaged in orthodontic products; and (3) Allergy Immuno
Technologies, Inc., engaged in allergy-related testing services.
BIOMERICA - DIAGNOSTIC PRODUCTS
Biomerica develops, manufactures, and markets medical diagnostic products designed to detect certain medical conditions and diseases, such as, certain cancers, heart attack, fertility, gastritis and ulcers, diabetes and candida.
Since 1971, our immunoassay diagnostic test kits have been used by hospitals, clinical laboratories and medical researchers to analyze blood or urine from patients in the diagnosis of various diseases and other medical complications, or to measure the level of specific hormones, antibodies, antigens or other substances which may exist in the human body in extremely small concentrations. Our over-the-counter products such as EZDetect and Fortel are rapid diagnostic test products that are used in the physician's office and by the patient at home.
Our clinical laboratory diagnostic products include tests for thyroid conditions, yeast infections, H. pylori, and others. These diagnostic test kits utilize enzyme immunoassay or radioimmunoassay technology. Some of these products have not yet been submitted for clearance by the FDA for diagnostic use, but can be sold in various foreign countries.
Our over-the-counter and professional rapid diagnostic products help to manage existing medical conditions and may save lives through prompt diagnosis and early detection. Technological advances in medical diagnostics have made it possible to perform diagnostic tests within the home and the physician's office, rather than in the clinical laboratory. Our objective has been to develop rapid diagnostic tests that are accurate, employ easily obtained specimens, and are simple to perform without instrumentation.
Until recently, tests of this kind required the services of medical technologists and sophisticated instrumentation. Frequently, results were not available until at least the following day. The majority of our over-the-counter tests are FDA cleared. We believe that such tests are as accurate as laboratory tests when used properly, require no instrumentation, give reliable results in minutes and can be performed with confidence in the home or the physician's office.
LANCER ORTHODONTICS, INC. -- ORTHODONTIC PRODUCTS
Lancer is engaged in developing, manufacturing, and selling orthodontic products including, among others, ceramic brackets and wires. Lancer is established in the field of orthodontics and its products are sold worldwide through a direct sales force and distributors.
Lancer's product line includes preformed bands, direct bonding pads, various brackets, buccal tubes, arch wires, lingual attachments and related accessories. The foregoing are assembled to the orthodontists' prescriptions or the specifications of private label customers. Lancer also markets products which are purchased and resold to orthodontists, including sealants, adhesives, elastomerics, headgear cases, retainer cases, orthodontic wire, and preformed arches.
Most of Lancer's manufacturing and shipping operations are located in Mexicali, Mexico, in order to reduce the cost of manufacturing and compete more effectively worldwide. Lancer maintains its headquarters in San Marcos, California where it houses administration, engineering, sales and marketing, and customer services.
ALLERGY IMMUNO TECHNOLOGIES, INC. -- ALLERGY SERVICES
AIT has been providing clinical testing services to doctors, clinics and drug firms in specialized areas of allergy and immunology determinations. AIT also owns four patents covering several inventions relating to the therapeutic treatment of allergy.
AIT employs one medical technologist and one technician, and receives substantial assistance from Biomerica whose laboratory is contiguous to that of AIT.
PRODUCTION
All of our diagnostic test kits are processed and assembled at our facilities in Newport Beach, California. Production of diagnostic tests involve formulating component antibodies and antigens in specified concentrations, attaching a tracer to the antigen, filling components into vials, packaging and labeling. We continually engage in quality control procedures to assure the consistency and quality of our products and to comply with applicable FDA regulations.
All manufacturing production is regulated by the FDA Good Manufacturing Practices for medical devices. We have an internal quality control unit that monitors and evaluates product quality and output. In addition, we employ a qualified external quality assurance consultant who monitors procedures and provides guidance in conforming with the Good Manufacturing Practices regulations. We either produce our own antibodies and antigens or purchase these materials from qualified vendors. We have alternate, approved sources for raw materials procurement and we believe that material availability in the foreseeable future does not pose a primary constraint for us in our relevant ranges of production.
Lancer currently utilizes a manufacturing subcontractor to provide manufacturing services to Lancer through its affiliated entities located in Mexicali, B.C., Mexico. The current agreement allows for the pass through of actual costs plus a weekly administrative fee. This gives Lancer greater control over all costs associated with the manufacturing operation. During 1999, Lancer extended the Manufacturing Agreement through December, 2003. Lancer has retained an option to convert the manufacturing operation to a wholly owned subsidiary at any time without penalty. Should Lancer discontinue operations in Mexico, it is responsible for accumulated employee seniority obligations as prescribed by Mexican law. At May 31, 2000, this obligation was approximately $256,000. Such obligation is contingent in nature and accordingly has not been accrued in the financial statements.
RESEARCH AND DEVELOPMENT
Biomerica is engaged in research and development to broaden its diagnostic product line in specific areas. Research and development expenses include the costs of materials, supplies, personnel, facilities and equipment. Lancer is engaged in development programs to improve and expand its orthodontic products and production techniques. Lancer consults frequently with practicing orthodontists.
Research and development expenses incurred by Biomerica for the years ended May 31, 2000 and 1999 aggregated $898,000 and $459,000, respectively. These expenses included approximately $184,000 and $165,000 for fiscal 2000 and 1999, respectively, for Lancer's product development.
In fiscal 1999, development costs of $47,000 and equipment and leasehold costs of $32,000 were incurred by Lancer in the development of PARAGON(TM), a dental amalgam.
MARKETS AND METHODS OF DISTRIBUTION
Biomerica has approximately 320 current customers for its diagnostic business, of which approximately 60 are distributors and the balance are hospital and clinical laboratories, medical research institutions, medical schools, pharmaceutical companies, chain drugstores, wholesalers and physicians' offices.
We rely on unaffiliated distributors, advertising in medical and trade journals, exhibitions at trade conventions, direct mailings and an internal sales staff to market our diagnostic products. We target three main markets: (a) clinical laboratories, (b) physicians' offices, and (c) over-the-counter drug stores. Separate marketing plans are utilized in targeting each of the three markets.
Lancer sells its products directly to orthodontists through company-paid sales representatives in the United States. At the end of its fiscal year, Lancer had five sales representatives, all in the United States, all of whom are employees of Lancer.
In selected foreign countries, Lancer sells its products directly to orthodontists through its international marketing division. Lancer also sells its products through distributors in certain foreign countries and to other companies on a private label basis. Lancer has entered into a number of distributor agreements whereby it granted the marketing rights to its products in certain sales territories in Mexico, Central America, South America, Europe, Canada, Australia, and Japan. The distributors complement the international marketing department which was established in 1982 and currently employs three people.
The loss of any one or a few customers would not have a material adverse effect upon our revenues.
BACKLOG
At May 31, 2000 and 1999 Biomerica and Allergy Immuno Technologies, Inc. had no backlog of product orders. As of May 31, 2000 and 1999, Lancer had a backlog of $146,000 and $213,000, respectively.
RAW MATERIALS
The principal raw materials utilized by us consist of various chemicals, serums, reagents, radioactive isotopes and packaging supplies. Almost all of our raw materials are available from several sources, and we are not dependent upon any single source of supply or a few suppliers. Many antibodies used in our immunoassay products are produced by us by injecting antigens into animals which are maintained by us.
We maintain inventories of antibodies and antigens as components for our diagnostic test kits. Due to a limited shelf life on some products such as the RIA kits, which averages 60 days, finished kits are prepared as required for immediate delivery of pending and anticipated orders. Sales orders are normally processed on the day of receipt.
The principal raw materials used by Lancer in the manufacture of its products include: stainless steel, which is available from several commercial sources; nickel titanium, which is available from three sources; and lucolux translucent ceramic, which is currently only available from one source, General Electric, and is purchased on open account. Ceramic material similar to General Electric's lucolux translucent ceramic is available from other sources. Lancer had no difficulty in obtaining an adequate supply of raw materials during its 1999 fiscal year, and does not anticipate that there will be any interruption or cessation of supply in the future.
COMPETITION
Immunodiagnostic products are currently produced by more than 100 companies, a majority of which are located within the United States. Biomerica and its subsidiaries are not a significant factor in the market. Allergy diagnostic products are currently produced by over ten competitors, and there are
approximately the same number producing allergy therapeutics.
Our competitors vary greatly in size. Many are divisions or subsidiaries of well-established medical and pharmaceutical concerns which are much larger than Biomerica and expend substantially greater amounts than we do for research and development, manufacturing, advertising and marketing.
The primary competitive factors affecting the sale of diagnostic products are uniqueness, quality of product performance, price, service and marketing. The prices for our products compare favorably with those charged by most of our competitors.
We believe we compete primarily on the basis of our reputation for the quality of our products, the speed of our test results, the unique niches we fill in the market, our patent position, and our prompt shipment of orders. We offer a broader range of products than many competitors of comparable size, but to date have had limited marketing capability. We are working on expanding this capability through strategic cooperations with larger companies and distributors.
Lancer encounters intense competition in the sale of orthodontic products. Lancer's management believes that Lancer's seven major competitors are: Unitek, a subsidiary or division of 3M; "A" Company, a private company; Ormco, a subsidiary or division of Sybron; RMO Inc., a private company; American Orthodontics, a private company; GAC, a foreign company; and Dentaurum, a foreign company. Lancer estimates that these seven competitors account for approximately 80% of the orthodontic products manufactured and sold in the United States. Lancer's management also believes that each of these seven competitors is larger than Lancer, have more diversified product lines and have financial resources exceeding those of Lancer. While there is no assurance that Lancer will be successful in meeting the competition of these seven major competitors or other competitors, Lancer has, in the past, successfully competed in the orthodontic market and has achieved recognition of both its name and its products.
With respect to AIT, the independent clinical laboratory industry in the U.S. and in California is highly competitive and fragmented. According to one industry source, there are approximately 4,500 independent clinical laboratories in the U.S. These independent clinical laboratories fall into two separate categories: (1) smaller, local laboratories that generally offer fewer tests and services and (2) larger laboratories. The Company is a small laboratory.
GOVERNMENT REGULATION OF OUR DIAGNOSTIC BUSINESS
As part of our diagnostic business, we sell products that are legally defined to be medical devices. As a result, we are considered to be a medical device manufacturer, and as such are subject to the regulations of numerous governmental entities. These agencies include the Food and Drug Administration (the "FDA"), the United States Drug Enforcement Agency (the "DEA"), Environmental Protection Agency, Federal Trade Commission, Occupational Safety and Health Administration, U.S. Department of Agriculture ("USDA"), and Consumer Product Safety Commission. These activities are also regulated by various agencies of the states and localities in which our products are sold. These regulations govern the introduction of new medical devices, the observance of certain standards with respect to the manufacture and labeling of medical devices, the maintenance of certain records and the reporting of potential product problems and other matters.
The Food, Drug & Cosmetic Act of 1938 (the "FDCA") regulates medical devices in the United States by classifying them into one of three classes based on the extent of regulation believed necessary to ensure safety and effectiveness. Class I devices are those devices for which safety and effectiveness can reasonably be ensured through general controls, such as device listing, adequate labeling, pre-market notification and adherence to the Quality System Regulation ("QSR") as well as Medical Device Reporting (MDR), labeling and other regulatory requirements. Some Class I medical devices are exempt from the requirement of Pre-Market Approval ("PMA") or clearance. Class II devices are those devices for which safety and effectiveness can reasonably be ensured through the use of
special controls, such as performance standards, post-market surveillance and patient registries, as well as adherence to the general controls provisions applicable to Class I devices. Class III devices are devices that generally must receive pre-market approval by the FDA pursuant to a pre-market approval application to ensure their safety and effectiveness. Generally, Class III devices are limited to life-sustaining, life-supporting or implantable devices. However, this classification can also apply to novel technology or new intended uses or applications for existing devices.
If the FDA finds that the device is not substantially equivalent to a predicate device, the device is deemed a Class III device, and a manufacturer or seller is required to file a PMA application. Approval of a PMA application for a new medical device usually requires, among other things, extensive clinical data on the safety and effectiveness of the device. PMA applications may take years to be approved after they are filed. In addition to requiring clearance or approval for new medical devices, FDA rules also require a new 510(k) filing and review period, prior to marketing a changed or modified version of an existing legally marketed device, if such changes or modifications could significantly affect the safety or effectiveness of that device. The FDA prohibits the advertisement or promotion or any approved or cleared device for uses other than those that are stated in the device's approved or cleared application.
Pursuant to FDCA requirement, we have registered our manufacturing facility with the FDA as a medical device manufacturer, and listed the medical devices we manufacture. We are also subject to inspection on a routine basis for compliance with FDA regulations. This includes the QSR, which, unless the device is a Class I exempt device, requires that we manufacture our products and maintain our documents in a prescribed manner with respect to issues such as design controls, manufacturing, testing and validation activities. Further, we are required to comply with other FDA requirements with respect to labeling, and the MDR regulation which requires that we provide information to the FDA on deaths or serious injuries alleged to have been associated with the use of our products, as well as product malfunctions that are likely to cause or contribute to death or serious injury if the malfunction were to recur. We believe that we are currently in material compliance with all relevant QSR and MDR requirements.
In addition, our facility is required to have a California Medical Device Manufacturing License. The license is not transferable and must be renewed annually. Approval of the license requires that we be in compliance with QSR, labeling and MDR regulations. Our license expires on March 16, 2001. We are also registered with the Department of Health and Human Services, Public Health Service of the FDA as a Device establishment. This registration expires on February 28, 2001. We also hold two radioactive materials licenses from the State of California (both expiring on June 20, 2001), and two permits from the USDA, one expiring on January 28, 2001 and the other expiring on June 30, 2001. These licenses are renewed periodically, and to date we have never failed to obtain a renewal.
Through compliance with FDA and California regulations, we can market our medical devices throughout the United States. International sales of medical devices are also subject to the regulatory requirements of each country. In Europe, the regulations of the European Union require that a device have a "CE Mark" in order to be sold in EU countries. The directive goes into effect beginning March 2003. The Company has already started the application process and believes it will be compliant by the time the "CE Mark" directive becomes effective. At present the regulatory international review process varies from country to country. We, in general, rely upon our distributors and sales representatives in the foreign countries in which we market our products to ensure that we comply with the regulatory laws of such countries. We believe that our international sales to date have been in compliance with the laws of the foreign countries in which we have made sales. Exports of most medical devices are also subject to certain FDA regulatory controls.
Lancer is licensed to design, manufacture, and sell orthodontic appliances and is subject to the Code of Federal Regulations, Section 21, parts 800-1299. The FDA is the governing body that assesses and issues Lancer's license to assure that it complies with these regulations. Lancer is currently licensed, and its last assessment was in November 1997. Also, Lancer is registered and licensed with the state of California's Department of Health Services.
Effective June 18, 1998, fifteen major European countries are requiring a CE (European Community) certification to sell products within their countries. In order to obtain this CE certification Lancer retained British Standards Institution (BSI) to evaluate Lancer's quality system. Lancer's quality system is imaged under International Standards Organization (ISO) 9002. ISO 9002 is an internationally recognized standard in which companies establish their methods of operation and commitment to quality. There are 20 clauses for which Lancer has developed standard operating procedures in accordance with these ISO 9002 requirements.
EN 46002 is the medical device directive (MDD) for the European Community. Strict standards and clauses within the MDD are required to be implemented to sell within the European Community. In order for Lancer's medical devices to be sold within the European Community with the CE Mark, Lancer must fully comply with the EN 46002 requirements. Lancer has also constructed a technical file that gives all certifications and risk assessments for Lancer's products as a medical device (the "Product Technical Files").
With ISO 9002, EN 46002, and the Product Technical Files, Lancer applied for and was granted certification under ISO 9002, EN 46002, and CE. With the CE certification, Lancer is now permitted to sell its products within the European Community.
AIT currently holds an annually renewed clinical laboratory license with the Department of Health Services, State of California. The current license expires December 31, 2000. The Company also holds a clinical laboratory license from the state of Florida. This current license expires November 11, 2000 and is renewed every two years. The Company holds a CLIA Certificate of Compliance, which is a requirement of the Federal government for clinical laboratories. This certificate expires in February 2001 and is renewed every two years. Although the Company has never failed to obtain renewals, its business operations would be materially and adversely affected if it were unable to do so.
OUR E-HEALTH BUSINESS
Our e-health business is conducted through ReadyScript.
READYSCRIPT - E-HEALTH TECHNOLOGY
Our e-health division was established in November 1998 to capitalize on the emerging market for healthcare technology. We have fortified the ReadyScript management with a team of executives possessing extensive healthcare industry and technology-based experience.
ReadyScript is engaged in developing point-of-care, wireless handheld technology solutions for the healthcare industry. The Company's first product offering is invested to be ReadyScript-Rx, a wireless medication management system that has been designed to enable physicians to provide legible, pre- qualified, formulary-compliant prescription orders directly to the patient's choice of pharmacy. The ReadyScript point-of-care technology system is being designed to automate today's inefficient and manual processes, substantially reduce healthcare and administrative costs, increase efficiency and enhance patient satisfaction. The Company plans to complement ReadyScript-Rx with other point-of-care applications such as ReadyScript-lab, ReadyScript-Imaging, ReadyScript-Encounter/Billing, ReadyScript-Vitals and ReadyScript-referral currently under development.
The Company's proprietary solution utilizes an embedded relational database
installed directly on a wireless handheld computer that is small enough to fit
into the pocket of a physician's lab coat. The system will be supported by a
wireless local area network (LAN) in the physician's office that is controlled
and maintained by ReadyScript. The Company believes that wireless LANs offer (i)
stronger in-building coverage and thus enhanced reliability and performance;
(ii) greater bandwidth to support additional point-of-care applications; (iii)
greater speed and (iv) higher security.
ReadyScript's strategy is to forge strategic relationships with large and mid-size physician groups to rapidly achieve high physician adoption of the ReadyScript-Rx system in strategic markets throughout the nation. To date, the Company has signed agreements with four highly respected and leading medical groups: Facey Medical Group, HealthCare Partners Medical Group, Talbert Medical group and another major medical group on the West Coast. These groups represent more than 4,000 physicians and provide care to over 600,000 managed care lives. Three of these groups have signed exclusive 5-year agreements.
The First ReadyScript-Rx application is currently being tested in two of the four medical groups. The Company plans to beta test six (6) new software applications outlined above with the Company's leading physician group partner beginning in September/October 2000.
The First ReadyScript-Rx system, with future applications being developed, is offered to medical group practices at a nominal monthly subscription fee per physician. However, the Company plans to derive the majority of its revenue from transaction fees and data management fees collected from health plans, pharmacy benefit managers (PBMs), mail order pharmacies and retail pharmacy chains.
In order to focus our efforts we have closed operations of our former online drugstore, the BigRx.com. The operations were shut down in August 2000 due to insignificant revenue and non-performance by the other party of a third party backend processing agreement.
HEALTHCARE INFORMATION TECHNOLOGY
Though traditional desktop and laptop computers can bring enhanced efficiencies to physician offices, the Company believes that handheld computers are much better for use at the point-of-care, since they are lightweight, fit easily into a lab coat, turn on instantly, and have long battery lives. Early corporate users of handheld computers integrated into network environments, such as FedEx and UPS, have seen tremendous benefits from this form of computing. Only recently has handheld technology become advanced enough to support the complex information needs of physician practices, and begun to experience wider physician acceptance. Harvard Medical School, for example, began acclimating physicians to handheld technology in 1995 by requiring its students to have a handheld computer. With technology becoming more powerful and more affordable, we believe physicians will increasingly use these tools in their practices.
MEETING THE NEEDS OF THREE KEY AUDIENCES
THE PHYSICIAN
We are developing our ReadyScript technology to streamline the prescribing of pharmaceuticals through automation and provide physicians immediate access to critical information. We believe ReadyScript's benefits to physicians include:
. PROMOTING RATIONAL, COST-EFFECTIVE AND OPTIMAL DRUG THERAPIES. We can provide physicians immediate access to up-to-date best practice guidelines for medications and formulary preferred drug information when making their prescribing decisions. We believe this will save physicians and insurers money on overall healthcare costs, and save patients money spent out-of-pocket for non-preferred drugs.
. STREAMLINING THE PRESCRIBING PROCESS. Electronically transmitted prescriptions do not need to be handwritten, phoned or faxed into the pharmacy. Likewise, pharmacists do not need to phone physician offices to verify prescriptions. We believe this will save time and increase productivity for physicians and pharmacies alike.
. EMPOWERS PHYSICIANS. We believe our ReadyScript technology will provide physicians greater confidence in their patient management decisions, as they will have immediate access to pertinent patient information and current best practice standards. We believe they will also be able to reference up-to-date chronic disease management information amassed from various health information sources to help educate their patients and increase patient compliance.
. INCREASING PATIENT SATISFACTION. Physicians should be able to build patient satisfaction by providing patients the convenience of having prescriptions ready for pick up or mailed directly to them.
Facing increasing economic pressures, physicians are seeking tools to help them save time, increase productivity, lower the cost of service delivery, manage pharmacy risk, and improve their practice of medicine. We believe our
technology solutions will help physicians achieve these benefits and maximize their practice revenues.
THE INSURER
The benefits of our ReadyScript technology to the insurer overlap with many of the same benefits for physicians. We believe additional benefits to insurers include:
. IMPROVED FORMULARY COMPLIANCE. We believe physicians can make more compliant prescribing decisions with the benefit of immediate online access to the insurer's formulary preferences.
. REDUCED ADMINISTRATIVE BURDEN AND IMPROVED CUSTOMER SATISFACTION. We expect insurers will realize a reduction in phone calls to their customer service departments regarding formulary guidelines and prescription approvals. We believe this should result in increased physician and patient satisfaction, which can help reduce the number of patients who may consider changing insurance plans.
. INCREASED MAIL-ORDER PHARMACEUTICAL FULFILLMENT. Electronic prescriptions routed directly to the insurer's designated mail-order pharmacy should contribute to lower overall pharmacy costs.
. IMPROVED CLINICAL OUTCOMES. We expect insurers will benefit from lower overall healthcare costs associated with following best practice guidelines for medication, improving clinical outcomes, and minimizing adverse drug reactions.
We anticipate insurers will support our technology to address their escalating healthcare and pharmacy costs, improve their medical-loss ratios, and improve their financial viability.
THE PATIENT
For patients, ReadyScript provides many value-added services and benefits, including:
. IMPROVED CLINICAL OUTCOMES. We expect patients will benefit from the improved health and reduced adverse reactions resulting from their physicians' appropriate and optimal drug prescribing practices.
. Convenience
. Possible reduction of medication errors as a result of 1) poor handwriting and transcription errors and 2) adverse drug interactions. We also expect that ReadyScript will help reduce these errors at the point of care.
We anticipate that patients will be empowered to be more active in managing their health, and be more secure in the care they are receiving.
OPERATIONS AND TECHNOLOGY
We believe our ReadyScript product is easy to use. It is was designed to operate on the various Microsoft platforms including desktop and handheld operating system environments. Built-in state-of-the-art security features are planned to prevent unauthorized access to the ReadyScript system.
COMPETITION
There are many competitors for the ReadyScript system, however we believe there are only two other competitors that use a wireless LAN. We believe that the unique features of ReadyScript offer substantial benefits to users. However, our competitors vary greatly in size. Some are divisions of larger, well established medical companies which are much larger than Biomerica and can expend substantially greater resources then ReadyScript.
GOVERNMENT REGULATION OF OUR READYSCRIPT BUSINESS
Automated prescribing and the electronic routing of prescriptions to pharmacies are governed by state and federal law. States have varying prescription format requirements, which will be incorporated into ReadyScript. Many states permit electronic, and/or faxed prescriptions. Many existing laws and regulations when enacted, did not contemplate the methods of e-commerce now being developed. The laws of several states and the DEA, which governs controlled substances, neither specifically permit nor specifically prohibit electronic transmission of prescription orders. Given the rapid growth of the Internet, it is anticipated that many states, as well as the DEA, will directly address these areas with regulation in the near future.
Until recently, Health Care Financing Administration guidelines prohibited transmission of Medicare eligibility information over the Internet. We are also subject to extensive regulation relating to the confidentiality and release of patient records. Additional legislation governing the distribution of medical records exists or has been proposed at both the state and federal level.
SEASONALITY OF BUSINESS
The business of the Company and its subsidiaries has not been subject to significant seasonal fluctuations.
FOREIGN BUSINESS
All of our fixed assets, excluding some of Lancer, are located within southern California. The following table sets forth the dollar volume of revenue attributable to sales to domestic customers and foreign customers during the last two fiscal years for the Biomerica and its consolidated subsidiaries:
YEAR ENDED MAY 31,
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2000 1999
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Revenues from sales to:
United States customers................................ $ 4,451,000/55.4% $ 4,638,000/53.4%
Asia................................................... 349,000/ 4.3% 426,000/ 4.9%
Europe................................................. 1,683,000/21.0% 1,710,000/19.7%
South America.......................................... 543,000/ 6.8% 749,000/ 8.6%
Other foreign.......................................... 1,008,000/12.6% 1,165,000/13.4%
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Total revenues........................................ $ 8,034,000/ 100% $ 8,688,000/ 100%
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We recognize that our foreign sales could be subject to some special or unusual risks which are not present in the ordinary course of business in the United States. Changes in economic factors, government regulations and import restrictions all could impact sales within certain foreign countries. Foreign countries have licensing requirements applicable to the sale of diagnostic products which vary substantially from domestic requirements; depending upon the product and the foreign country, these may be more or less restrictive than requirements within the United States. We cannot predict the impact that conversion to the Euro in the European countries may have on Biomerica, if any.
Foreign sales are made primarily through a network of over 60 independent distributors in approximately 40 countries.
INTELLECTUAL PROPERTY
We regard the protection of our copyrights, service marks, trademarks and trade secrets as critical to our future success. We rely on a combination of
copyright, trademark, service mark and trade secret laws and contractual restrictions to establish and protect our proprietary rights in products and services. We have entered into confidentiality and invention assignment agreements with our employees and contractors, and nondisclosure agreements with our vendors, fulfillment partners and strategic partners to limit access to and disclosure of proprietary information. We cannot be certain that these contractual arrangements or the other steps taken by us to protect our intellectual property will prevent misappropriation of our technology. We have licensed in the past, and expect that we may license in the future, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. While we attempt to ensure that the quality of our products brand is maintained by such licensees, we cannot be certain that such licensees will not take actions that might hurt the value of our proprietary rights or reputation. We also rely on technologies that we license from third-parties, such as Sybase and Microsoft, the suppliers of key database technology, the operating system and specific hardware components for our service. We cannot be certain that these third-party technology licenses will continue to be available to us on commercially reasonable terms. The loss of such technology could require us to obtain substitute technology of lower quality or performance standards or at greater cost.
BRANDS, TRADEMARKS, PATENTS
We use the trademark "ReadyScript" as identification of our automated medication management prescribing system and have received approval from the United States Department of Commerce, Patent and Trademark Office to use that trademark.
We registered the tradenames "Fortel," "Isletest," "Nimbus" and "GAP" with the Office of Patents and Trademarks on December 31, 1985. Our unregistered tradenames are "EZDetect," "CAST," "COT," "EquistiK," "FelistiK," "Tri-Level Controls," "Tru-Level Controls," "T-Marker Controls," "AllerHalt," "Candiquant," "Candigen," "EZ-H.P." and "EZ-PSA."
Allergy Immuno Technologies, Inc. has four patents pertaining to its discoveries for allergy treatment. These are:
1. Immunotherapy agents for treatment of IgE mediated allergies; U.S. Patent #5,116,612, issued May 6, 1992.
2. Liposome containing immunotherapy agents for treatment of IgE medicated allergies, U.S. Patent #5,049,390, issued September 17, 1991.
3. Immunotherapy agents for treatment of IgE mediated allergies, U.S. Patent #4,946,945, issued August 7, 1990.
4. Allergen-thymic hormone conjugates for treatment of IgE mediated allergies, U.S. Patent #5,275,814, issued January 4, 1994.
On April 4, 1989, Lancer was granted a patent on its CounterForce design of a nickel titanium orthodontic archwire. On August 1, 1989, Lancer was granted a patent on its bracket design used in the manufacturing of Sinterline and Intrigue orthodontic brackets. On September 17, 1996, Lancer was granted a patent on its method of laser annealing marking of orthodontic appliances. On March 4, 1997, Lancer was granted a patent on an orthodontic bracket and method of mounting. All of the patents are for a duration of 17 years. Lancer has entered into license agreements expiring in 2006 whereby, for cash consideration, the counter party has obtained the rights to manufacture and market certain products patented by Lancer. Lancer has also entered into a number of license and/or royalty agreements pursuant to which it has obtained rights to certain of the products which it manufactures and/or markets. The patents and agreements have had a favorable effect on Lancer's image in the orthodontic marketplace and Lancer's sales.
The laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the U.S. Effective copyright, trademark and trade secret protection may not be available in such jurisdictions. Our efforts to protect our intellectual property rights may not prevent misappropriation of our content.
RECENT DEVELOPMENTS
Our e-health division was incorporated in California in May 2000, as ReadyScript, Inc. In connection with the organization of ReadyScript as our wholly owned subsidiary, we have transferred employees and property (both physical and intellectual) to ReadyScript. As of August 2000, ReadyScript has raised $715,000 through issuance of convertible notes at an interest rate of 8%. The notes can be converted into ReadyScript common stock based on a pre- determined valuation. Further, upon a qualified financing or corporate transaction defined within the note, the principal amount of the notes will automatically convert to ReadyScript common stock in an amount that is equal to the principal amount of the note divided by 60% of the per share purchase price of the conversion stock in the financing or corporate transaction, as defined. If no financing occurs prior to July 31, 2001, the principal amount of the notes, plus accrued interest will become due and payable.
EMPLOYEES
As of August 31, 2000, the Company and its subsidiaries employed 89 full- time employees. Lancer, through its Mexican subcontractor, utilizes the services of approximately 100 people in Mexico. We also engage the services of various outside Ph.D. and M.D. consultants as well as medical institutions for technical support on a regular basis. We are not a party to any collective bargaining agreement and have never experienced a work stoppage. We consider our employee relations to be good.
During fiscal 1998 we leased approximately 21,000 square feet of space in Newport Beach, California for a term which expired May 31, 1998 (and which was renewed until May 31, 1999) and is currently being renegotiated. Pursuant to the lease and the current month-to-month tenancy, we pay an annual base rent, set initially at $143,880 and adjusted annually to reflect cost of living increases, plus all real estate taxes and insurance costs. In fiscal 1999 a portion of the rent was paid through the issuance of shares of our restricted common stock to JSJ Management and another individual. During fiscal 1999, an aggregate of 31,793 shares of our restricted common stock were issued at quoted market prices in satisfaction of accrued rent totaling $38,000. During fiscal 2000 the Company paid a total of $172,640 in rent for approximately 24,500 square feet of space. These facilities are used for diagnostic test kit research and development, manufacturing, marketing, administration, and our ReadyScript operations.
The facilities are leased from Mrs. Ilse Sultanian and JSJ Management. Ms. Janet Moore, an officer, director and shareholder of our Company, is a partner in JSJ Management.
AIT currently leases approximately 1,600 square feet at the above facility for $1,400 per month. These properties are leased by AIT on a month-to-month basis from Mrs. Sultanian and JSJ Management.
Lancer leases a 9,240-square-foot manufacturing building in San Marcos, California. The term of the initial lease was for five years commencing January 1, 1994. In 1998, Lancer renegotiated the lease and extended the terms to December 31, 2003. The Mexicali facility consists of a 16,000-square-foot manufacturing and office building. The lease expires in October 2003 and requires monthly rentals of approximately $5,200. Our management believes that the properties are currently suitable and adequate for Lancer's operations.
We maintain animals at a ranch in Vista, California, which are treated biologically to produce antibodies used in certain of our immunodiagnostic products. These facilities are utilized on a month-to-month basis at a charge based on the number of animals maintained at the facility.
We believe that our facilities and equipment are in suitable condition and are adequate to satisfy the current requirements of our Company and our subsidiaries.
Inapplicable.
Inapplicable.
PART II
Biomerica's common stock is traded on the NASDAQ SmallCap Stock Market under the symbol "BMRA".
The following table shows the high and low bid prices for Biomerica's common stock over the last two years based upon data reported by NASDAQ. Prices shown represent quotations by dealers, and do not reflect markups, markdowns or commissions.
Bid Prices
-----------------------------------
High Low
-------------- -------------------
Quarter ended:
May 31, 2000 . . . . . . . .............. $4.375 $1.438
February 29, 2000........................ $4.563 $2.031
November 30, 1999........................ $4.25 $2.00
August 31, 1999.......................... $3.75 $1.875
May 31, 1999............................. $5.00 $0.969
February 28, 1999........................ $1.75 $0.9375
November 30, 1998........................ $2.25 $0.875
August 31, 1998.......................... $2.125 $1.125
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As of August 21, 2000, the number of holders of record of Biomerica's common stock was approximately 1,641, excluding stock held in street name.
No dividends have been declared or paid by Biomerica. We intend to employ all available funds for development of our business and, accordingly, do not intend to pay cash dividends in the foreseeable future.
The following discussion of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes contained elsewhere in this report. This report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements.
Operations for fiscal 1999 relate to our historic diagnostic, orthodontic and allergy product businesses. Operations for the ReadyScript division began after we raised $1,965,557 in equity in June 1999.
RESULTS OF OPERATIONS
We currently have three subsidiaries, Lancer Orthodontics, Inc. ("Lancer"), which is engaged in manufacturing, sales and development of orthodontic products, Allergy Immuno Technologies, Inc. ("AIT"), which is engaged in providing specialized testing services to pharmaceutical companies and physicians and has obtained four patents related to allergy treatment therapies, and ReadyScript, which is engaged in developing innovative point-of-care, wireless handheld technology solutions for the healthcare industry. We own approximately 30.78% of the outstanding stock of Lancer and 74.6% of the outstanding stock of AIT. We exercise effective control of 53.23% over Lancer via voting agreements with certain shareholders. ReadyScript is a wholly owned subsidiary of Biomerica. As a result of our control and ownership, our financial statements are consolidated with those of Lancer and AIT. Both Lancer and AIT are public companies. The common stock of Lancer is traded on the Nasdaq SmallCap market under the symbol "LANZ," and the common stock of AIT is traded in the pink sheets under the symbol "ALIM."
Fiscal 2000 Compared to Fiscal 1999
Our consolidated net sales were $8,033,708 for fiscal 2000 compared to $8,688,106 for fiscal 1999. This represents a decrease of $654,398, or 7.5% for fiscal 2000. Of the total consolidated net sales for fiscal 2000, $5,650,512 is attributable to Lancer, $79,976 to AIT, $2,283,433 to Biomerica and $19,787 to ReadyScript. Lancer's sales decreased by $508,984, Biomerica showed a sales decrease of $174,004, AIT had an increase of $9,625 and ReadyScript had an increase of $18,965. The decrease at Lancer was attributable to increased discounting due to competitive pressures and lower foreign sales as a result of economic conditions in Europe and South America. While the trend in increased discounting at Lancer continues, it has slowed, partially the result of orthodontic industry consolidation. Lancer continues to search for new sales representatives, distributors, private label customers, products, and product ideas, any of which, if successful, could result in increased sales. The decrease in sales at Biomerica was in large part due to a decrease of sales to foreign distributors as well as in domestic sales at, in particular to a domestic distributor which sells the products internationally. ReadyScript had some sales from the on-line pharmacy this fiscal year which increased sales over the prior fiscal year.
Cost of sales in fiscal 2000 as compared to fiscal 1999 increased by $207,910 or (3.7%). Lancer's cost of sales as a percentage of sales increased from 61.4% to 68.4% in fiscal 2000 as compared to fiscal 1999. The increase was primarily attributable to fixed costs of the Mexicali location not producing at full capacity. Biomerica had an decrease in cost of goods as a percentage of sales from 63.1% to 72.1% in fiscal 2000 as compared to fiscal 1999 due to higher labor and other costs as well as a write-down for obsolete inventory of approximately $80,000. AIT had a decrease in cost of goods as a percentage of sales of 127% to 115% primarily due to lower material costs.
Selling, general and administrative costs increased in fiscal 2000 as compared to fiscal 1999 by $2,577,223 (82.5%). Lancer had a decrease of $85,222 in these costs due to decreases in commissions and bad debt expense, partially offset by increases in show expenses and other expenses. Biomerica and ReadyScript had an increase in fiscal 2000 as compared to fiscal 1999 of $2,445,580. This increase was a result of the ReadyScript operation, which has had minor revenues to date, but high start-up costs. AIT had increased costs of $46,421 due to higher legal and accounting costs related to new SEC filing requirements.
Research and development expense increased in fiscal 2000 as compared to fiscal 1999 by $439,512 (95.8%). Of this, Lancer had an increase of $19,211, as a result of increased payroll and development costs of new products. Biomerica and ReadyScript had an increase in research and development expenses of $367,701, primarily due to the expenses related to the development of ReadyScript. AIT had an increase of $52,300 as a result of research on a new project.
Interest expense, which was incurred by Lancer, increased in fiscal 2000 as compared to fiscal 1999 by $3,955 (25.3%) due to borrowings against the line of credit to finance development costs and an increase in the interest rate.
Other income net, decreased by $174,269 (59.6%) in fiscal 2000 as compared to fiscal 1999. An increase of $220,000 is attributable to Lancer due to payment
from an insurance claim for inventory theft and the reversal of an accrual for taxes assessed by a subcontractor in the prior year which was determined by legal counsel in fiscal 2000 not to be owed, a decrease of $125,126 was attributable to Biomerica due to a decrease in the sale of available-for-sale securities, a decrease of $100,000 was attributable to AIT due to a non- recurring consulting fee paid to AIT in fiscal 1999 and a decrease of 251,574 due to the write-off of offering expenses.
As of May 31, 2000, Biomerica had net tax operating loss carryforwards of approximately $6,648,158 and investment tax and research and development credits of approximately $23,000, which are available to offset future federal tax liabilities. As of May 31, 2000, Lancer had net operating loss carryforwards of approximately $2,101,000 and business tax credits of approximately $115,000 available to offset future Federal tax liabilities. As of May 31, 2000, AIT had net tax operating loss carryforwards of $1,866,000 and business tax credits of approximately $29,000 to offset future Federal tax liabilities. The carryforwards expire at varying dates from 2000 to 2012. The Company's effective tax rates for fiscal 2000 and fiscal 1999 were 0% and 8%, respectively. These differ from the statutory tax rates primarily as a result of changes in the Company's valuation allowance.
Liquidity and Capital Resources
As of May 31, 2000, we had cash and available for sale securities of $732,984 (see Note 1 of Notes to Consolidated Financial Statements) and current working capital of $3,981,161. The Company's fiscal 2000 losses were substantially the result of its investment in ReadyScript. ReadyScript subsidiary is a development-stage enterprise and will require the of a significant amount of capital to fund its short-term and longer-term working capital needs until it can support itself through its planned operations. The Board of Directors of the Company have decided that the ReadyScript subsidiary will no longer be funded in any way by Biomerica, Inc. or its other subsidiaries. ReadyScript currently is trying to raise additional capital through a private placement memorandum and through the issuance of convertible debt. ReadyScript has raised $715,000 in convertible debt since May 31, 2000 (See Note 11). Management of the Company expects these funds to sustain ReadyScript through October 31, 2000. There can be no assurances that ReadyScript will be successful in its plans to raise additional capital to meet its short-term and/or future working capital needs. Biomerica, Inc. and its subsidiaries, with the exception of ReadyScript, are expected to fund their operations for at least the next twelve months through their existing available financing, working capital, and its shareholder line of credit (See Note 11).
During 2000, the Company used cash in operations of $2,563,803, primarily as a result of increased losses at the ReadyScript subsidiary. During 1999, the Company used cash flows from operations of $358,366, primarily due to increased in inventories. Cash used in investing activities increased during fiscal 2000 as a result of increased Investments in capital equipment and other assets. During 1999, the Company invested in capital equipment but this was offset by cash obtained by the sale of available-for-sale securities. The Company generated cash flow from financing activities of $1,889,295 during fiscal 2000, primarily due to the sale of common stock (net of offering costs) of $1,965,557. This compares to cash provided by financing activities of $230,282 in 1999, as a result of exercise of stock options, repayment of shareholder loan and an increase in the credit line at Lancer.
During fiscal 2000, Lancer's management negotiated a renewal of Lancer's line of credit through November 3, 2000. The line of credit allows for borrowing up to $500,000 and is limited to specified percentages of eligible accounts receivable. The unused portion available under the line of credit at May 31, 2000, was approximately $173,000. Borrowings bear interest at prime plus 1.25% per annum (10.75% at May 31, 2000).
On June 11, 1999, we sold 400,000 shares of our common stock in a private placement for $5 per share to management and an outside investor. This increased our cash position by $1,965,557 (net of offering costs) which was primarily used for launching of the on line drugstore, theBigRx and development of ReadyScript.
Biomerica, Inc. entered into an agreement, in substance, for a line of credit on September 12, 2000 with a shareholder whereby the shareholder will loan to the Company, as needed, up to $500,000 for working capital needs. The line of credit bears interest at 8%, is secured by Biomerica accounts receivable and inventory and expires September 12, 2001. Biomerica and the shareholder are in the process of formalizing this line of credit.
Exhibit 99.1, "Biomerica, Inc. and Subsidiaries Consolidated Financial Statements" is incorporated herein by this reference.
Inapplicable.
PART III
This information is incorporated by reference to the Company's proxy statement for its 2000 Annual Meeting of Stockholders which will be filed not later than 120 days after the end of the Company's fiscal year ended May 31, 2000.
This information is incorporated by reference to the Company's proxy statement for its 2000 Annual Meeting of Stockholders which will be filed not later than 120 days after the end of the Company's fiscal year ended May 31, 2000.
This information is incorporated by reference to the Company's proxy statement for its 2000 Annual Meeting of Stockholders which will be filed not later than 120 days after the end of the Company's fiscal year ended May 31, 2000.
This information is incorporated by reference to the Company's proxy statement for its 2000 Annual Meeting of Stockholders which will be filed not later than 120 days after the end of the Company's fiscal year ended May 31, 2000.
EXHIBIT NO. DESCRIPTION
3.1 Certificate of Incorporation of Registrant filed with the
Secretary of the State of Delaware on September 22, 1971
(incorporated by reference to Exhibit 3.1 filed with Amendment
No. 1 to Registration Statement on Form S-1, Commission File
No. 2-83308).
3.2 Certificate of Amendment to Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware on
February 6, 1978 (incorporated by reference to Exhibit 3.1
filed with Amendment No. 1 to Registration Statement on Form S-
1, Commission File No. 2-83308).
3.3 Certificate of Amendment to Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware on
February 4, 1983 (incorporated by reference to Exhibit 3.1
filed with Amendment No. 1 to Registration Statement on Form S-
1, Commission File No. 2-83308).
3.4 Certificate of Amendment to Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware on
January 19, 1987 (incorporated by reference to Exhibit 3.4
filed with Form 8 Amendment No. 1 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended May 31, 1987).
3.5 Certificate of Amendment of Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware on
November 4, 1987 (incorporated by reference to Exhibit 3.1
filed with Amendment No. 1 to Registration Statement on Form S-
1, Commission File No. 2-83308).
3.6 Bylaws of the Registrant (incorporated by reference to Exhibit
3.2 filed with Amendment No. 1 to Registration Statement on
Form S-1, Commission File No. 2-83308).
3.7 Certificate of Amendment of Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware on
December 20, 1994 (incorporated by reference to Exhibit 3.7
filed with Registrant's Annual Report or Form 10-KSB for the
fiscal year ended May 31, 1995).
3.8 First Amended and Restated Certificate of Incorporation Of
Biomerica, Inc. filed with the Secretary of State of Delaware
on August 1, 2000.
4.1 Specimen Stock Certificate of Common Stock of Registrant
(incorporated by reference to Exhibit 4.1 filed with
Registrant's Registration Statement on Form SB-2, Commission
No. 333-87231 filed on September 16, 1999).
10.1 Office lease dated June 1, 1988 between Registrant and
Redington Company covering Registrant's lease of premises at
1531/1533 Monrovia Avenue, Newport Beach, California
(incorporated by reference to Exhibit 10.1 filed with
Registrant's Annual Report on Form 10-K for the fiscal year
ended May 31, 1989).
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10.2 Lancer purchase agreement and warrants (incorporated by
reference to Exhibit 10.10 filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended May 31, 1989).
10.3 1999 Stock Incentive Plan of Registrant (incorporated by
reference to Exhibit 10.1 to Registration Statement on Form S-8
filed with the Securities and Exchange Commission on March 29,
2000).
10.4 1995 Stock Option and Common Stock Plan of Registrant
(incorporated by reference to Exhibit 4.3 to Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on January 20, 1996).
10.5 1991 Stock Option and Restricted Stock Plan of Registrant
(incorporated by reference to Exhibit 4.1 to Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on April 6, 1992).
10.6 Stock Purchase Agreement by and between Biomerica, Inc.,
RidgeRose Capital Partners, LLC and Zackary Irani and Janet
Moore dated June 11, 1999 (incorporated by reference to Exhibit
10.10 filed with Form 8-K on July 7, 1999).
10.7 Stock Purchase Agreement by and between Biomerica, Inc. and
Zackary Irani and Janet Moore dated June 11, 1999 (incorporated
by reference to Exhibit 10.11 filed with Form 8-K on July 7,
1999).
10.8 Back-end Processing Agreement by and between TheBigStore.com,
Inc. and Biomerica, Inc. and dated June 11, 1999 (incorporated
by reference to Exhibit 10.12 filed with Form 8-K on July 7,
1999).
10.9 Common Stock Purchase Warrant granted to TheBigStore.com, Inc.
dated June 11, 1999 (incorporated by reference to Exhibit 10.13
filed with Form 8-K on July 7, 1999).
10.10 Common Stock Purchase Warrant granted to RJM Consulting, LLC
dated June 11, 1999 (incorporated by reference to Exhibit 10.14
filed with Form 8-K on July 7, 1999).
10.11 Non-Qualified Option Agreement by and between Zackary Irani and
the Company dated June 10, 1999 (incorporated by reference to
Exhibit 10.15 filed with Form 8-K on July 7, 1999).
10.12 Non-Qualified Option Agreement by and between Janet Moore and
the Company dated June 10, 1999 (incorporated by reference to
Exhibit 10.16 filed with Form 8-K on July 7, 1999).
10.13 Non-Qualified Option Agreement by and between Philip Kaplan,
M.D. and the Company dated June 10, 1999 (incorporated by
reference to Exhibit 10.17 filed with Form 8-K on July 7,
1999).
10.14 Non-Qualified Option Agreement by and between Robert A.
Orlando, M.D., Ph.D. and the Company dated June 10, 1999
(incorporated by reference to Exhibit 10.18 filed Form 8-K on
July 7, 1999).
10.15 Strategic Marketing Agreement entered into as of the 2nd day of
September, 1999 by and between TheBigHub.com, Inc., a Florida
corporation and Biomerica, Inc. (incorporated by reference to
Exhibit 10.16 filed with Registrant's Registration Statement on
Form SB-2, Commission No. 333-87231 filed on September 16,
1999).
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10.16 First Amendment to Back-End Processing Agreement entered into
as of September 2, 1999 whereby TheBigStore.com, Inc., a
Delaware corporation and Biomerica amend the Back-End Agreement
dated June 11, 1999 (incorporated by reference to Exhibit 10.17
filed with Registrant's Registration Statement on Form SB-2,
Commission No. 333-87231 filed on September 16, 1999).
10.17 Private Placement Memorandum of Biomerica, Inc. dated June 9,
1999 offering 400,000 shares of its Common Stock at $5.00 per
share (incorporated by reference to Exhibit 10.18 filed with
Registrant's Registration Statement on Form SB-2, Commission
No. 333-87231 filed on September 16, 1999).
10.18 Employment Agreement entered into as of August 30, 1999 by and
between the Internet division of Biomerica, Inc. and Steven J.
Goto (incorporated by reference to Exhibit 10.19 filed with
Registrant's Registration Statement on Form SB-2, Commission
No. 333-87231 filed on September 16, 1999).
10.19 Employment Offer Letter dated August 12, 1999 from Biomerica,
Inc. to Pete McKinley to join the Internet division of
Biomerica, Inc. (incorporated by reference to Exhibit 10.20
filed with Registrant's Registration Statement on Form SB-2,
Commission No. 333-87231 filed on September 16, 1999).
10.20 Employment Offer Letter dated August 12, 1999 from Biomerica,
Inc. to Richard Jay, Pharm.D. to join the Internet division of
Biomerica, Inc. (incorporated by reference to Exhibit 10.21
filed with Registrant's Registration Statement on Form SB-2,
Commission No. 333-87231 filed on September 16, 1999).
10.21 Amendment to Lease Extension/Lease Term effective January 1,
1999, whereby Lancer Orthodontics, Inc. and L&T Corporation, a
California corporation entered into an amendment and extension
to the terms of that certain lease agreement dated November 4,
1993 for the premises located at 253 Pawnee Street, Suite A,
San Marcos, California 92069 (incorporated by reference to
Exhibit 10.22 filed with Registrant's Registration Statement on
Form SB-2, Commission No. 333-87231 filed on September 16,
1999).
10.22 Sublease Agreement entered into by and between Eagleson de
California S.A. de C.V. and Lancer Orthodontics, Inc.
commencing on November 1, 1998 covering approximately 16,000
square feet located in the Industrial Park at Ave. Saturno No.
20 and of certain improvements constructed on the land as
detailed in that certain sublease between the parties dated
April 1, 1996 (incorporated by reference to Exhibit 10.23 filed
with Registrant's Registration Statement on Form SB-2,
Commission No. 333-87231 filed on September 16, 1999).
10.23 Fifth Revision to Manufacturing Shelter Agreement effective
November 1, 1998, whereby Lancer Orthodontics, Inc. and
Eagleson Industries, Inc. revised and amended that certain
Manufacturing Shelter Agreement entered into on May 11, 1990,
revised on June 20, 1991, December 2, 1992, July 1, 1994 and
April 1, 1996 (incorporated by reference to Exhibit 10.24 filed
with Registrant's Registration Statement on Form SB-2,
Commission No.
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333-87231 filed on September 16, 1999).
10.24 Technical Skills Consulting Agreement entered into on January
1, 1999 by and between Lancer Orthodontics, Inc. and Alejandro
Carnero, a non-resident alien, independent contractor and
citizen of the Republic of Mexico (incorporated by reference to
Exhibit 10.25 filed with Registrant's Registration Statement on
Form SB-2, Commission No. 333-87231 filed on September 16,
1999).
10.25 Product Development and Marketing Agreement entered into as of
August 3, 1998 by and between Lancer Orthodontics, Inc. and AG
Metals, Inc., a Nevada corporation (incorporated by reference
to Exhibit 10.26 filed with Registrant's Registration Statement
on Form SB-2, Commission No. 333-87231 filed on September 16,
1999).
10.26 Agreement between Lancer Orthodontics, Inc. and Gary Weikel, an
individual, incorporating by reference that certain Product
Development and Marketing Agreement of even date between Lancer
Orthodontics, Inc. and AG Metals, Inc. (incorporated by
reference to Exhibit 10.27 filed with Registrant's Registration
Statement on Form SB-2, Commission No. 333-87231 filed on
September 16, 1999).
16.1 Letter on Change of Certifying Accountant (incorporated by
reference to Exhibit A to Form 8-K filed with the Securities
and Exchange Commission on May 24, 1993).
16.2 Letter on change of certifying accountant (incorporated by
reference to Exhibit A to Form 10-QSB/A filed with the
Securities and Exchange Commission on April 14, 1999).
21.1 Subsidiaries of Registrant (incorporated by reference to
Exhibit 21.1 to Form 10-KSB filed with the Securities and
Exchange Commission on September 14, 1999).
27.1 Financial Data Schedule.
99.1 Biomerica, Inc. and Subsidiaries Consolidated Financial
Statements For The Years Ended May 31, 2000 and 1999 and
Independent Auditors' Report.
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Biomerica filed a report on Form 8-K with the Securities and Exchange Commission on July 7, 1999.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BIOMERICA, INC.
Registrant
By /s/ Zackary S. Irani
-----------------------------
Zackary S. Irani, Chief Executive
Officer
Dated: 9/12/00
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In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature and Capacity
/s/ Zackary S. Irani Date: 9/12/00
------------------------------------
Zackary S. Irani
President, Director, Chief Executive
Officer
/s/ Janet Moore Date: 9/12/00
------------------------------------
Janet Moore, Secretary
Director, Chief Financial Officer
Date: 9/12/00
/s/ Robert Orlando Date: 9/12/00
------------------------------------
Robert Orlando, M.D., Ph.D.
Director
/s/ Carlos St. Aubyn Beharie Date: 9/12/00
------------------------------------
Carlos St. Aubyn Beharie
Director
/s/ David Burrows Date: 9/12/00
------------------------------------
David Burrows
Director
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/s/ Francis R. Cano ------------------------------------ Date: 9/12/00 Francis R. Cano Director /s/ Allen Barbieri Date: 9/12/00 ------------------------------------ Allen Barbieri Director |
FIRST AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
BIOMERICA, INC.
EXHIBIT 3.8
Biomerica, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation") does hereby certify as follows:
1. The Corporation filed its original Certificate of Incorporation with the Secretary of State of the State of Delaware on September 22, 1971 under the name of Nuclear Medical Systems, Inc.
2. At a duly called meeting of the Board of Directors of the Corporation at which a quorum was present at all times, a resolution was duly adopted, pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware ("General Corporation Law"), setting forth the First Amended and Restated Certificate of Incorporation of the Corporation, declaring said First Amended and Restated Certificate of Incorporation advisable and directing that said First Amended and Restated Certificate of Incorporation be considered at the next annual meeting of the stockholders. The stockholders of the Corporation duly approved said proposed First Amended and Restated Certificate of Incorporation at such annual meeting of the stockholders in accordance with Sections 222, 242 and 245 of the General Corporation Law.
3. The text of the Certificate of Incorporation of the Corporation, as amended, is hereby further amended and restated in its entirety as follows:
ARTICLE I
NAME
The name of this Corporation is Biomerica, Inc.
ARTICLE II
REGISTERED OFFICE IN STATE AND REGISTERED AGENT
The address of the registered office of this Corporation in the State of Delaware is 1013 Centre Road, City of Wilmington, County of New Castle. The name of this Corporation's registered agent at such registered office is The Prentice-Hall Corporation System, Inc.
ARTICLE III
PURPOSE
The purpose for which this Corporation is organized is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law.
ARTICLE IV
CAPITAL STOCK
This Corporation is authorized to issue two classes of shares designated respectively "Common Stock" and "Preferred Stock" and referred to herein as Common Stock or Common Shares and Preferred Stock or Preferred Shares, respectively. The total number of shares of all classes of stock which the Corporation shall have authority to issue is 30,000,000 shares, par value $.08, consisting of:
(a) 25,000,000 shares of Common Stock; and
(b) 5,000,000 shares of Preferred Stock. The Preferred Shares may be issued from time to time in one or more series. The board of directors is authorized to fix the number of shares of any series of Preferred Stock and to determine the designation of any such series. The board of directors is also authorized to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Shares and, within the limits and restrictions stated in any resolution or resolutions of the board of directors originally fixing the number of shares constituting any series, to increase or decrease (but not below the number of shares of any such series then outstanding) the number of shares of any series subsequent to the issue of shares of that series.
ARTICLE V
PROVISIONS FOR DEFINING, LIMITING AND
REGULATING CERTAIN POWERS OF THIS
CORPORATION AND OF THE DIRECTORS AND STOCKHOLDERS
amended after approval by the stockholders of this Article V to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law, as so amended.
Any repeal or modification of this Section 3 of Article V by the stockholders of this Corporation shall not adversely affect any right or protection of a director of this Corporation existing at the time of such repeal or modification.
ARTICLE VI
AMENDMENTS
This Corporation reserves the right at any time, and from time to time, to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute.
IN WITNESS WHEREOF, this Corporation has caused this First Amended and Restated Certificate of Incorporation to be signed by its President and attested by its Secretary this 26th day of July, 2000.
BIOMERICA, INC.
By: /s/ Zackary Irani
-----------------------------
Zackary Irani, President
ATTEST:
By: /s/ Janet Moore
---------------------------
Janet Moore, Secretary
|
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
| ARTICLE 5 |
| PERIOD TYPE | 12 MOS |
| FISCAL YEAR END | MAY 31 2000 |
| PERIOD END | MAY 31 2000 |
| CASH | 634,210 |
| SECURITIES | 98,774 |
| RECEIVABLE | 1,898,729 |
| ALLOWANCES | 196,794 |
| INVENTORY | 2,860,284 |
| CURRENT ASSETS | 5,808,723 |
| PP&E | 3,396,560 |
| DEPRECIATION | 2,926,110 |
| TOTAL ASSETS | 6,735,309 |
| CURRENT LIABILITIES | 1,827,562 |
| BONDS | 0 |
| COMMON | 366,005 |
| PREFERRED | 0 |
| PREFERRED MANDATORY | 0 |
| OTHER SE | 2,429,574 |
| TOTAL LIABILITY AND EQUITY | 6,735,309 |
| SALES | 8,033,708 |
| TOTAL REVENUES | 8,033,708 |
| CGS | 5,624,630 |
| TOTAL COSTS | 5,624,630 |
| OTHER EXPENSES | 6,599,085 |
| LOSS PROVISION | 0 |
| INTEREST EXPENSE | 19,562 |
| INCOME PRETAX | (3,888,449) |
| INCOME TAX | 2,400 |
| INCOME CONTINUING | (3,890,849) |
| DISCONTINUED | 0 |
| EXTRAORDINARY | 0 |
| CHANGES | 0 |
| NET INCOME | (3,890,849) |
| EPS BASIC | (.86) |
| EPS DILUTED | (.86) |
Biomerica, Inc. and Subsidiaries
EXHIBIT 99.1
Contents
Report of Independent Certified Public Accountants, BDO Seidman, LLP FS-2
Consolidated Financial Statements
Consolidated Balance Sheet as of May 31, 2000 FS-3 - FS-4
Consolidated Statements of Operations and
Comprehensive (Loss) Income for the Years Ended
May 31, 2000 and 1999, respectively FS-5 - FS-6
Consolidated Statements of Shareholders' Equity
for the Years Ended May 31, 2000 and 1999 FS-7 - FS-8
Consolidated Statements of Cash Flows for the
Years Ended May 31, 2000 and 1999 FS-9 - FS-10
Notes to Consolidated Financial Statements FS-11 - FS-43
|
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, 2000, and the related consolidated statements of operations and comprehensive loss, shareholders' equity and cash flows for the years ended May 31, 2000 and 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Biomerica, Inc. and subsidiaries as of May 31, 2000, and the results of their operations and their cash flows for the years ended May 31, 2000 and 1999, in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Costa Mesa, California
August 11, 2000, except as
to Note 11, which is
as of September 12, 2000
FS-2
May 31, 2000
---------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 634,210
Available for-sale securities 98,774
Accounts receivable, less allowance for doubtful accounts
and sales returns of $196,794 1,701,935
Inventories 2,860,284
Notes receivable 34,994
Prepaid expenses and other 478,526
---------------------------------------------------------------------------
Total current assets 5,808,723
---------------------------------------------------------------------------
Inventories, non-current 21,405
---------------------------------------------------------------------------
Land held for investment 46,000
---------------------------------------------------------------------------
Property and equipment, at cost
Equipment 2,876,604
Furniture, fixtures and leasehold improvements 519,956
---------------------------------------------------------------------------
3,396,560
Accumulated depreciation and amortization (2,926,110)
---------------------------------------------------------------------------
Net property and equipment 470,450
Intangible assets, net of accumulated amortization 366,814
Other assets 21,917
---------------------------------------------------------------------------
$ 6,735,309
===========================================================================
|
FS-3
Biomerica, Inc. and Subsidiaries
Consolidated Balance Sheet
May 31, 2000
----------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities
Line of credit $ 160,000
Accounts payable and accrued expenses 1,314,047
Accrued compensation 353,515
----------------------------------------------------------------------------
Total current liabilities 1,827,562
----------------------------------------------------------------------------
Minority interests 2,112,168
Shareholders' equity
Common stock, $.08 par value; 10,000,000 shares authorized;
4,575,070 shares issued and outstanding 366,005
Additional paid in capital 15,529,421
Accumulated other comprehensive loss (4,323)
Accumulated deficit (13,095,524)
----------------------------------------------------------------------------
Total shareholders' equity 2,795,579
----------------------------------------------------------------------------
$ 6,735,309
============================================================================
|
See accompanying notes to consolidated financial statements.
FS-4
Biomerica, Inc. and Subsidiaries
Consolidated Statements of Operations and
Comprehensive Loss
Years Ended May 31, 2000 1999 ------------------------------------------------------------------------------ Net sales $ 8,033,708 $8,688,106 Cost of sales 5,624,630 5,416,720 ------------------------------------------------------------------------------ Gross profit 2,409,078 3,271,386 ------------------------------------------------------------------------------ Operating expenses Selling, general and administrative 5,700,963 3,123,740 Research and development 898,122 458,610 ------------------------------------------------------------------------------ Total operating expenses 6,599,085 3,582,350 ------------------------------------------------------------------------------ Operating loss (4,190,007) (310,964) Other income (expense) Interest expense (19,562) (15,607) Other income, net 118,398 292,667 ------------------------------------------------------------------------------ Loss, before minority interest in net loss (profits) of consolidated subsidiaries and income taxes (4,091,171) (33,904) Minority interest in net loss (profits) of consolidated subsidiaries 202,722 (33,240) ------------------------------------------------------------------------------ Loss, before income taxes (3,888,449) (67,144) Income tax expense 2,400 5,404 ------------------------------------------------------------------------------ Net loss (3,890,849) (72,548) ------------------------------------------------------------------------------ |
FS-5
Biomerica, Inc. and Subsidiaries
Consolidated Statements of Operations and
Comprehensive Loss
Years Ended May 31, 2000 1999 ------------------------------------------------------------------------------- Other comprehensive income (loss), net of tax Unrealized gain (loss) on available-for-sale securities 4,456 (66,681) ------------------------------------------------------------------------------- Comprehensive loss $(3,886,393) $ (139,229) =============================================================================== Per share data: Net loss (basic) $ (0.86) $ (0.02) Net loss (diluted) $ (0.86) $ (0.02) =============================================================================== Weighted average number of common and common equivalent shares Basic 4,542,820 4,001,755 =============================================================================== Diluted 4,542,820 4,001,755 =============================================================================== |
See accompanying notes to consolidates financial statements.
FS-6
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
------------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1998 3,978,302 $ 318,264 $ 12,513,000 $ 57,902 $ (71,000) $ (9,132,127) $ 3,686,039
Change in unrealized gain
(loss) on available-for
sale securities - - - (66,681) - - (66,681)
Payment received on
shareholder loan - - - - 70,000 - 70,000
Exercise of stock options 115,800 9,264 144,602 - - - 153,866
Stock repurchase (15,450) (1,236) (19,340) - - - (20,576)
Common stock issued in
satisfaction of payables 31,793 2,543 35,457 - - - 38,000
Compensation expense in
connection with options
granted - - 4,581 - - - 4,581
Tax benefit from exercise
of stock options - - 25,039 - - - 25,039
Net loss - - - - - (72,548) (72,548)
------------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1999 4,110,445 328,835 12,703,339 (8,779) (1,000) (9,204,675) 3,817,720
|
FS-7
Biomerica, Inc. and Subsidiaries
Additional Accumulated Other
Common Stock Paid-in Comprehensive Shareholder Accumulated
---------------------------
Shares Amount Capital Income (Loss) Loan Deficit Total
------------------------------------------------------------------------------------------------------------------------------------
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)
------------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 2000 4,575,070 $ 366,005 $ 15,529,421 $ (4,323) $ -- $(13,095,524) $ 2,795,579
====================================================================================================================================
|
See accompanying notes to consolidated financial statements.
FS-8
Biomerica, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended May 31, 2000 1999
----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $ (3,890,849) $ (72,548)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 222,325 250,596
Provision for losses on accounts receivable (2,834) 55,569
Loss on disposal of assets - 2,309
Realized loss (gain) on sale of available-for-sale securities 13,241 (111,885)
Warrants and options issued for services rendered 821,043 4,581
Common stock of subsidiary issued for services 50,631 -
Gain on conversion of subsidiary preferred stock (55,487) -
Common stock issued for rent - 38,000
Common stock issued for services rendered 16,000
Minority interest in net profits of consolidated subsidiaries (202,722) 33,240
Changes in current liabilities and assets
Accounts receivable (95,844) (52,138)
Inventories 198,406 (521,543)
Prepaid expenses and other 108,912 (147,204)
Accounts payable and other accrued liabilities 299,196 208,367
Accrued compensation (45,821) (45,710)
----------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (2,563,803) (358,366)
----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Sales of available-for-sale securities 18,191 254,313
Decrease (increase) in notes receivable 9,491 (16,000)
Purchases of property and equipment (206,383) (100,824)
Increase in intangible assets - (73,860)
Other assets (181,786) (106,915)
----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (360,487) (43,286)
----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net (decrease) increase under line of credit agreement (20,000) 80,000
Repurchase of minority interests (117,914) (53,008)
Decrease in shareholder receivable 1,000 70,000
Exercise of stock options 60,652 153,866
Sale of common stock, net of offering expenses 1,965,557 -
Stock repurchase - (20,576)
----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,889,295 230,282
----------------------------------------------------------------------------------------------------------------
|
FS-9
Biomerica, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(continued) 6
For the Years Ended May 31, 2000 1999
-----------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (1,034,995) (171,370)
Cash and cash equivalents, beginning of year 1,669,205 1,840,575
-----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 634,210 $ 1,669,205
=================================================================================================================
Supplemental disclosure of cash-flow information
Cash paid during the year for:
Interest $ 19,562 $ 15,607
=================================================================================================================
Income taxes $ 2,400 $ 2,400
=================================================================================================================
Supplemental disclosure of non-cash investing and
financing activities
Change in unrealized holding gain on available-for-sale
securities $ 4,456 $ (66,681)
=================================================================================================================
Reduction in taxes payable and increase in additional
paid-in capital for exercise of non-qualified stock
options $ - $ 25,039
=================================================================================================================
|
See accompanying notes to consolidated financial statements.
FS-10
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
1. Organization Biomerica, Inc. and subsidiaries (collectively
"the Company") are primarily engaged in: the
development, manufacture and marketing of medical
diagnostic kits, the design, manufacture and
distribution of various orthodontic products, the
performance of specialized diagnostic testing
services and the development of wireless handheld
point-of-care systems for physicians.
Liquidity
The Company's fiscal 2000 losses were
substantially the result of its investment in
ReadyScript. The Company's ReadyScript subsidiary
is a development-stage enterprise and will
require the raising of a significant amount of
capital to fund its short-term and longer-term
working capital needs until it can support itself
through its planned operations. The Board of
Directors of the Company have decided that the
ReadyScript subsidiary will no longer be funded
in any way by Biomerica, Inc. or its other
subsidiaries. ReadyScript currently is trying to
raise additional capital through a private
placement memorandum and through the issuance of
convertible debt. ReadyScript has raised $715,000
in convertible debt since May 31, 2000 (See Note
11). Management of the Company expects these
funds to sustain ReadyScript through October 31,
2000. There can be no assurances that ReadyScript
will be successful in its plans to raise
additional capital to meet its short-term and/or
future working capital needs. Biomerica, Inc. and
its subsidiaries, with the exception of
ReadyScript, are expected to fund their
operations for at least the next twelve months
through their existing available financing,
working capital, and its shareholder line of
credit (See Note 11).
2. Summary of Principles of Consolidation
Significant
Accounting The consolidated financial statements for the
Policies years ended May 31, 2000 and 1999 Policies (see
Note 3) include the accounts of Biomerica, Inc.
("Biomerica"), Lancer Orthodontics, Inc.
("Lancer"), Allergy Immuno Technologies, Inc.
("AIT") and ReadyScript, Inc. All significant
intercompany accounts and transactions have been
eliminated in consolidation.
Accounting Estimates
The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make estimates
and assumptions that affect the reported amounts
of assets and liabilities and disclosure of
contingent assets and liabilities at the date of
the financial statements, and the reported
amounts of revenues and expenses during the
reported period. Actual results could materially
differ from those estimates.
Fair Value of Financial Instruments
The Company has financial instruments whereby the
fair market value of the financial instruments
could be different than that recorded on a
historical basis. The Company's financial
instruments consist of its cash and cash
equivalents, accounts receivable, notes
receivable, line of credit and accounts payable.
The carrying amounts of the Company's financial
instruments approximate their fair values at May
31, 2000.
Concentration of Credit Risk
The Company, on occasion, maintains cash balances
at certain financial institutions in excess of
amounts insured by federal agencies.
FS-11
|
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
================================================================================
2. Summary of Significant The Company provides credit in the normal course
Accounting of business to customers throughout the United
Policies States and foreign markets. The Company's sales
(Continued) 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,
2000 no one customer accounted for more than 10%
of accounts receivable.
Cash Equivalents
Cash and cash equivalents consists of demand
deposits, money market accounts and mutual funds
with remaining maturities of three months or less
when purchased.
Available-for-Sale Securities
The Company accounts for investments in
accordance with Statement of Financial Accounting
Standards No. 115 (SFAS 115), "Accounting for
Certain Investments in Debt and Equity
Securities." This statement addresses the
accounting and reporting for investments in
equity securities which have readily determinable
fair values and all investments in debt
securities. The Company's marketable equity
securities are classified as available-for-sale
under SFAS 115 and reported at fair value, with
changes in the unrealized holding gain or loss
included in shareholders' equity. Available-for-
sale securities consist of common stock of
unrelated publicly-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
2000 and 1999 totaled $18,191 and $254,313,
respectively (see Note 8). The change in the net
unrealized holding gain (loss) on available-for-
sale securities that has been included as a
separate component of shareholders' equity
totaled $4,456 and $(66,681) for the years ended
May 31, 2000 and 1999, respectively.
FS-12
|
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
================================================================================
2. Summary of Inventories
Significant
Accounting Inventories are stated at the lower of cost
Policies (first-in, first-out method) or market and
(Continued) consist primarily of orthodontic products and
biological chemicals. Cost includes raw
materials, labor, manufacturing overhead and
purchased products. Market is determined by
comparison with recent purchases or net
realizable value. Such net realizable value is
based on forecasts for sales of the Company's
products in the ensuing years. The industries in
which the Company operates are characterized by
technological advancement and change. Should
demand for the Company's products prove to be
significantly less than anticipated, the ultimate
realizable value of the Company's inventories
could be substantially less than the amount shown
on the accompanying consolidated balance sheet.
|
Inventories consist of the following:
May 31, 2000
--------------------------------------------------------------------------------
Raw materials $ 935,903
Work in progress 425,557
Finished products 1,715,626
Inventory reserve (195,397)
--------------------------------------------------------------------------------
$ 2,881,689
================================================================================
|
Approximately $1,510,000 of Lancer's inventory is located at its manufacturing facility in Mexico as of May 31, 2000.
Land Held For Investment
Land held for investment consists of a parcel of land located in the state of Utah, and is stated at the lower of cost or fair value less costs to sell.
FS-13
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
2. Summary of Property and Equipment
Significant
Accounting Property and equipment are stated at cost.
Policies Expenditures for additions and major improvements
(Continued) 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
$140,472 and $170,803 for the years ended May 31,
2000 and 1999, respectively. At May 31, 2000,
approximately $70,000 of property and equipment,
net of accumulated depreciation and amortization,
is located at Lancer's manufacturing facility in
Mexico.
Management of the Company assesses the
recoverability of property and equipment by
determining whether the depreciation and
amortization of such assets over their remaining
lives can be recovered through projected
undiscounted cash flows. The amount of
impairment, if any, is measured based on fair
value (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,
2000.
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
FS-14
|
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
================================================================================
2. Summary of (the "Purchase") by Lancer of the manufacturing
Significant assets and technology of Titan Research
Accounting Associates, Ltd. ("Titan"). Prior to the
Policies Purchase, certain former officers of Lancer and
(Continued) 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 $81,853 and $79,793 for the years
ended May 31, 2000 and 1999, 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,
2000.
Risks and Uncertainties
Licenses - Certain of the Company's sales of
products are governed by license agreements with
outside third parties. All of such license
agreements to which the Company currently is a
party are for fixed terms which will expire after
ten years or upon the expiration of the
underlying patents. After the expiration of the
agreements or the patents, the Company is free to
use the technology that had been licensed. There
can be no assurance that the Company will be able
to obtain future license agreements as deemed
necessary by management. The loss of some of the
current licenses or the inability to obtain
future licenses could have an adverse affect on
the Company's financial position and operations.
Historically, the Company has successfully
obtained all the licenses it believed necessary
to conduct its business.
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
FS-15
|
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
2. Summary of Federal Food, Drug and Cosmetic Act, and the
Significant regulations promulgated thereunder, the FDA
Accounting regulates, among other things, the clinical
Policies testing, manufacture, labeling, promotion,
(Continued) distribution, sale and use of medical devices in
the United States. Failure of Biomerica to comply
with applicable regulatory requirements can
result in, among other things, warning letters,
fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension
of production, the government's refusal to grant
premarket clearance or premarket approval of
devices, withdrawal of marketing approvals, and
criminal prosecution.
Sales of medical devices outside the United
States are subject to foreign regulatory
requirements that vary widely from country to
country. The time required to obtain
registrations or approvals required by foreign
countries may be longer or shorter than that
required for FDA clearance or approval, and
requirements for licensing may differ
significantly from FDA requirements. There can be
no assurance that Biomerica will be able to
obtain regulatory clearances for its current or
any future products in the United States or in
foreign markets.
Lancer's products are subject to regulation by
the FDA under the Medical Device Amendments of
1976 (the "Amendments"). Lancer has registered
with the FDA as required by the Amendments. There
can be no assurance that Lancer will be able to
obtain regulatory clearances for its current or
any future products in the United States or in
foreign markets.
Risk of Product Liability - Testing,
manufacturing and marketing of Biomerica's
products entail risk of product liability.
Biomerica currently has product liability
insurance. There can be no assurance, however,
that Biomerica will be able to maintain such
insurance at a reasonable cost or in sufficient
amounts to protect Biomerica against losses due
to product liability. An inability could prevent
or inhibit the commercialization of Biomerica's
products. In addition, a product liability claim
or recall could have a material adverse effect on
the business or financial condition of the
Company.
FS-16
|
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
================================================================================
2. Summary of Lancer is subject to the same risks of product
Significant liability. Lancer currently has product liability
Accounting insurance. Lancer also is subject to the risk of
Policies loss of its product liability insurance and the
(Continued) consequent exposure to liability.
Hazardous Materials - Biomerica's research and
development involves the controlled use of
hazardous materials and chemicals. Although
Biomerica believes that safety procedures for
handling and disposing of such materials comply
with the standards prescribed by state and
Federal regulations, the risk of accidental
contamination or injury from these materials
cannot be completely eliminated. In the event of
such an accident, the Company could be held
liable for any damages that result and any such
liability could exceed the resources of the
Company. The Company may incur substantial costs
to comply with environmental regulations.
Stock-Based Compensation
During 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation," which defines a fair
value based method of accounting for stock-based
compensation. However, SFAS 123 allows an entity
to continue to measure compensation cost related
to stock and stock options issued to employees
using the intrinsic method of accounting
prescribed by Accounting Principles Board Opinion
No. 25 ("APB 25"), "Accounting for Stock Issued
to Employees." Entities electing to remain with
the accounting method of APB 25 must make pro
forma disclosures of net (loss) income and (loss)
earnings per share, as if the fair value method
of accounting defined in SFAS 123 had been
applied (see Note 6). 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 and AIT. At May 31, 2000, Biomerica
owned 30.78% of Lancer (see Note 3), 74.6% of AIT
and 100% of Readyscript (see Note 3).
FS-17
|
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
================================================================================
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 service are recognized when the
related services are performed.
Income Taxes
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Under the asset and
liability method of Statement No. 109, deferred tax
assets and liabilities are recognized for the future tax
consequences attributable to differences between the
financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in
which those temporary differences are expected to be
recovered or settled. Under Statement No. 109, the effect
on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes
the enactment date. A valuation allowance is provided for
certain deferred tax assets if it is more likely than not
that the Company will not realize tax assets through
future operations.
Biomerica, Lancer and AIT file separate income tax
returns for Federal and state income tax purposes.
Advertising Costs
The Company reports the cost of all advertising as
expense in the period in which those costs are incurred.
Advertising costs were approximately $69,000 and $105,000
for the years ended May 31, 2000 and 1999, respectively.
FS-18
|
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
================================================================================
2. Summary of (Loss) Earnings Per Share
Significant
Accounting
Policies In February 1997, the Financial Accounting Standards Board
(Continued) ("FASB") issued Statement of Financial Accounting
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) income 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 Year Ended May 31, 2000
---------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
-------------------------------------------------------------------
Basic EPS -
Loss available
to common
shareholders $ (3,890,849) 4,542,820 $ (0.86)
===================================================================
Effect of dilutive
securities -
Options and Warrants - - --
--------------------------------------------------------------------
Diluted EPS -
Loss available
to common
shareholders plus
assumed conversions $ (3,890,849) 4,542,820 $ (0.86)
===================================================================
|
FS-19
2. Summary of
Significant
Accounting
Policies
(Continued)
For the Year Ended May 31, 1999
---------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
------------------------------------------------------------------------
Basic EPS-
Loss available to
common
shareholders $ (72,548) 4,001,755 $ (0.02)
========================================================================
Effect of dilutive
securities -
Options and Warrants -
------------------------------------------------------------------------
Diluted EPS -
Loss available to
common
shareholders plus
assumed conversions $ (72,548) 4,001,755 $ (0.02)
===========================================================================
|
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 10.
As of May 31, 2000, there was a total of 3,557,300 potential dilutive shares of common stock.
Segment Reporting
The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 131 "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
FS-20
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
2. Summary of requires them to report selected segment information in
Significant their quarterly reports issued to shareholders. It also
Accounting requires entity-wide disclosures about the product,
Policies services an entity provides, the material countries in
(Continued) which it holds assets and reports revenues, and its major
customers. The Company adopted the provisions of this
statement for 1999 annual reporting. These disclosure
requirements had no impact on the Company's financial
position or results of operations, or the Company's
existing segment disclosures.
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. The Company
adopted the provisions of this statement in 1998.
3. Consolidated Lancer is engaged in the design, manufacture and
Subsidiaries distribution of orthodontic products. During 1999, Lancer
issued 10,625 shares of its common stock to Biomerica for
certain management and consulting services valued at
$8,500. During 1999, Lancer repurchased 25,372 shares of
its common stock for aggregate consideration of $25,950.
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 53.23% as of May 31, 2000.
FS-21
|
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
================================================================================
3. Consolidated AIT provides immune allergy testing and product to
Subsidiaries physicians and medical institutions. During 1998,
(Continued) 1,916,429 shares of AIT were subscribed to Biomerica in
exchange for debt (see Note 6) 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%.
Operating results for Lancer and AIT in the aggregate for
the years ended May 31, 2000 and 1999, which are included
in the consolidated operating results of the Company, are
|
as follows:
2000 1999
--------------------------------------------------------------------------
Net sales $ 5,730,488 $ 6,229,847
Cost of sales 3,960,362 3,868,141
--------------------------------------------------------------------------
Gross profit 1,770,126 2,361,706
--------------------------------------------------------------------------
Operating expenses:
Selling, general and
administrative 2,268,090 2,206,839
Research and development 184,849 178,393
--------------------------------------------------------------------------
Total operating expenses 2,452,939 2,385,232
--------------------------------------------------------------------------
Other income (expense):
Interest expense (19,526) (15,607)
Other income, net 228,368 104,329
--------------------------------------------------------------------------
208,842 88,722
--------------------------------------------------------------------------
(Loss) income before income taxes (473,171) 65,196
Income tax expense 1,600 5,404
--------------------------------------------------------------------------
Net (loss) income $ (474,771) $ 59,792
==========================================================================
|
FS-22
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
4. Intangible Intangible assets, net of accumulated amortization, consist of
|
Assets the following:
May 31, 2000
--------------------------------------------------------------
Marketing and distribution rights $ 442,750
Technology use rights 858,328
Patents and other intangibles 152,080
--------------------------------------------------------------
1,453,158
Less accumulated amortization (1,086,344)
--------------------------------------------------------------
$ 366,814
==============================================================
|
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 2000 and 1999, 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, 2000 and 1999
related to these assets.
Amortization expense related to patents and other intangibles
which is included in the accompanying consolidated statements
of operations amounted to $8,257 and $6,197 for the years
ended May 31, 2000 and 1999, respectively.
5. Line of At May 31, 2000, Lancer had a $500,000 line of credit with a
Credit bank. Borrowings are made at prime plus 1.25% (10.75% at May
31, 2000) and are limited to specified percentages of eligible
accounts receivable. The unused portion available to Lancer
under the line of credit at May 31, 2000 was $172,707. The
line of credit expires on November 3, 2000. As of May 31,
2000, there was $160,000 outstanding under the line of credit.
Lancer was in compliance with its bank covenants as of May 31,
2000. Lancer was in violation of certain of its debt covenants
at July 31, 2000, Lancer has not obtained a waiver.
FS-23
|
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
5. Line of The following summarizes information on short-
Credit term borrowings for the year ended May 31, 2000:
(Continued)
|
May 31, 2000 -------------------------------------------------------------------------------- Average month end balance $ 203,333 Maximum balance outstanding at any month end $ 220,000 Weighted average interest rate (computed by dividing interest expense by average monthly balance) 9.62% Interest rate at year end 10.75% =============================================================================== |
6. Shareholders' Shareholder Loan
Equity
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.
1991, 1995 and 1999 Stock Option and Restricted
Stock Plans
In December 1991, the Company adopted a stock
option and restricted stock plan (the "1991
Plan") which provides that non-qualified options
and incentive stock options and restricted stock
covering an aggregate of 350,000 of the Company's
unissued common stock may be granted to officers,
employees or consultants of the Company. Options
granted under the 1991 Plan may be granted at
prices not less than 85% of the then fair market
value of the common stock, vest at not less than
20% per year and expire not more than 10 years
after the date of grant.
FS-24
|
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
6. Shareholders' In January 1996, the Company adopted a stock
Equity option and restricted stock plan (the "1995
(Continued) 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. Management
recorded $10,471 during the year ended May 31,
1998 of expense related to the granting of these
options.
During 1998, the Company granted options to
purchase 152,500 shares at an exercise price of
$1.85 to employees and a total of 1,500 shares to
non-employees, at an exercise price of $1.91.
Management elected not to record any compensation
expense related to the options issued to non-
employees, as such was immaterial.
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.
The Company recorded $4,581 in compensation
expense related to the options issued to non-
employees, calculated using the Black Scholes
option model.
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.
FS-25
|
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
6. Shareholders' On June 11, 1999, the Company issued 1,150,000
Equity and 50,000 options to purchase shares of the
(Continued) Company's stock to employees and non-employees,
respectively. The purchase price of the options
is $3.00 per share. The options 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. The
Company issued 410,000 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 $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 year-end, 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 year-end.
FS-26
|
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
6. Shareholders' On June 11, 1999, the Company entered into a Five
Equity Year Strategic Marketing Agreement with
(Continued) 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 year-end, 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 year-end.
During the year ended May 31, 2000, the Company
recorded compensation expense of $2,625 related
to the amortization of the fair value of options
to purchase common stock previously issued.
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.
In August 1999, the Company adopted a stock
option and restricted stock plan (the "1999
Plan") which provides 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 to
the lessor 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.
FS-27
|
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
6. Shareholders' Additionally, during 2000, the Company granted an
Equity additional 726,000 and 50,000 options to purchase
(Continued) 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 $25,135 during the
year ended May 31, 2000 of expense related to the
granting of options to employees. Management
recorded $22,004 during the year ended May 31,
2000 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. The Company
recorded $17,372 of expense related to these
warrants. These warrants are not included in the
table below.
FS-28
|
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
6. Shareholders' Activity as to stock options and warrants under
Equity the 1991, 1995 and 1999 plans are as follows:
(Continued)
|
Weighted
Number Average
of Stock Price Range Exercise
Options Per share Price
--------------------------------------------------------------------------------
Options outstanding at
June 1, 1998 356,350 $ .80 - $3.00 $ 1.69
Options granted 218,750 $ .85 - $ .90 $ .86
Options exercised (115,800) $ .80 - $3.00 $ 1.33
Options canceled or
expired (5,250) $ .85 - $1.85 $ 1.80
--------------------------------------------------------------------------------
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 and warrants
outstanding at
May 31, 2000 3,557,300 $ .85 - $5.00 $ 3.15
--------------------------------------------------------------------------------
Options and warrants
exercisable at
May 31, 2000 338,125 $ .85 - $3.00 $ 1.76
================================================================================
|
FS-29
Biomerica, Inc. and subsidiaries
Notes to Consolidated financial Statements Years Ended May 31, 2000 and 1999
6. Shareholders' Equity The weighted average fair value of
(Continued) options and warrants granted during 2000 and
1999 was $1.25 and $0.68, respectively.
The following summarizes information about
the Company's stock options and warrants
|
outstanding at May 31, 2000:
Weighted
Average Weighted Number Weighted
Range of Number Remaining Average Exercisable Average
Exercise Outstanding Contractual Exercise at May 31, Exercise
Prices May 31, 2000 Life Price 2000 Price
----------------------------------------------------------------------------------
$ .85 - $ .90 177,175 3.68 $ .86 83,750 $ .86
$ 1.38 - $1.92 307,375 2.98 $ 1.47 199,125 $ 1.82
$ 2.06 - $3.10 2,412,750 5.63 $ 2.99 55,250 $ 2.88
$ $5.00 660,000 2.00 $ 5.00 - $ 5.00
===================================================================================
|
SFAS 123 Pro Forma Information
Pro forma information regarding (loss) earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant using the Black Scholes option pricing model with the following assumptions for the years ended May 31, 2000 and 1999; risk free interest rates ranging from 5.62% to 6.65% and 4.9%, respectively; dividend yield of 0%; expected life of the options of 1 years; and volatility factors of the expected market price of the Company's common stock of 120% and 112%, respectively.
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-30
Biomerica, Inc. and subsidiaries
Notes to Consolidated financial Statements Years Ended May 31, 2000 and 1999
6. Shareholders' Equity For purposes of pro forma disclosures, the estimated
fair value of the options is amortized to expense over
the option vesting period. Adjustments are made for
options forfeited prior to vesting. The effect on
compensation expense, net (loss) income, and net
(loss) income 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, 2000 1999 --------------------------------------------------------------------------- Net loss, as reported $ (3,890,849) $ (72,548) Adjustment to compensation expense under SFAS 123 (1,600,464) (213,436) --------------------------------------------------------------------------- Net loss, pro forma $ (5,491,313) $ (285,984) =========================================================================== Pro forma net loss per share - basic $ (1.21) $ (0.07) =========================================================================== Pro forma net loss per share - diluted $ (1.21) $ (0.07) =========================================================================== |
Stock Activity
During 1998, the Company incurred an additional $4,771
of offering costs related to a 1997 stock issuance.
During 1999, the Company repurchased 15,540 shares of
its common stock at an aggregate cost of $20,576.
During 1999, the Company issued 31,793 shares of its common stock valued at $38,000 in satisfaction of accrued rent.
FS-31
Biomerica, Inc. and subsidiaries
Notes to Consolidated financial Statements Years Ended May 31, 2000 and 1999
6. Shareholders' Equity Subsidiary Options and Warrants
(Continued)
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 1998, intercompany advances
outstanding of $134,150 were retired by the
Company, in exchange for 1,916,429 shares of
AIT's previously unissued common stock.
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.
7. Income Taxes Income tax expense for the years ended May
31, 2000 and 1999 consists of the following
current provisions:
May 31, 2000 1999
---------------------------------------------
U.S. Federal $ - $ -
State and local 2,400 5,404
---------------------------------------------
$ 2,400 $ 5,404
---------------------------------------------
|
FS-32
Biomerica, Inc. and subsidiaries
Notes to Consolidated financial Statements Years Ended May 31, 2000 and 1999
7. Income Taxes Income tax expense differs from the amounts computed by (Continued) applying the U.S. (Continued) Federal income tax rate of 35 percent to pretax (loss) income as a result of the following:
May 31, 2000 1999
---------------------------------------------------------------
Computed "expected" tax
benefit $ (1,360,957) $ (22,829)
Increase (reduction) in income
taxes resulting from:
Meals and entertainment 20,312 9,945
Change in net operating
loss carryforwards 1,261,093 22,829
Other, net - (917)
Equity in earnings of affiliates
not subject to taxation
because of dividends-
received deduction for tax
purposes 79,552 (9,028)
State income taxes 2,400 5,404
---------------------------------------------------------------
$ 2,400 $ 5,404
===============================================================
|
FS-33
Biomerica, Inc. and subsidiaries
Notes to Consolidated financial Statements Years Ended May 31, 2000 and 1999
7. Income Taxes The tax effect of temporary differences that (Continued) give rise to significant portions of liabilities are presented below.
May 31, 2000
-------------------------------------------------------------------
Deferred tax assets:
Accounts receivable, principally
due to allowance for doubtful
accounts and sales returns $ 78,392
Inventories, principally due to
additional costs inventoried for
tax purposes pursuant to the Tax
Reform Act of 1986 and
allowance for inventory
obsolescence 77,835
Compensated absences and
deferred payroll, principally due
to accrual for financial reporting
purposes 91,403
State net operating loss
carryforwards 173,490
Federal net operating loss
carryforwards 3,550,167
Tax credit carryforwards 190,259
Investment in affiliates 479,185
-------------------------------------------------------------------
4,640,731
Less valuation allowance (4,596,923)
-------------------------------------------------------------------
Net deferred tax asset 43,808
Deferred tax liability:
Marketing rights, principally due to
amortization (43,808)
-------------------------------------------------------------------
Net deferred tax liability $ -
===================================================================
|
FS-34
Biomerica, Inc. and subsidiaries
Notes to Consolidated financial Statements Years Ended May 31, 2000 and 1999
7. Income Taxes The Company has provided a valuation
(Continued) allowance with respect to substantially
all of its deferred tax assets as of May 31,
2000 and 1999. 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, 2000, Biomerica had net tax
operating loss carryforwards of approximately
$6,648,158 and investment tax and research
and development credits of approximately
$23,000, which are available to offset future
Federal tax liabilities. The carryforwards
expire at varying dates from 2000 to 2020. As
of May 31, 2000, Biomerica has net operations
tax loss carryforwards of approximately
$1,318,000 available to offset future state
income tax liabilities.
As of May 31, 2000, Lancer had net tax
operating loss carryforwards of approximately
$2,101,000 and business tax credits of
approximately $115,000 available to offset
future Federal tax liabilities. As of May 31,
2000, Lancer has net tax operations loss
carryforwards of approximately $250,000 and
business tax credits of approximately $23,000
available to offset future state income tax
liabilities. The carryforwards expire in
2005. The carryforwards expire at varying
dates from 2000 to 2020.
As of May 31, 2000, AIT had net tax operating
loss carryforwards of approximately
$1,866,000 and business tax credits of
approximately $29,000 available to offset
future Federal tax liabilities. The
carryforwards expire at varying dates from
2000 to 2012. AIT also had net tax operating
loss carryforwards of approximately $395,000
to offset future California taxable income,
expiring at varying dates between 2000 and
2005.
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-35
|
Biomerica, Inc. and subsidiaries
Notes to Consolidated financial Statements
Years Ended May 31, 2000 and 1999
8. Other Income Other income consists of the following for the
|
years ending May 31:
May 31, 2000 1999
-------------------------------------------------------------------------------
Realized (loss) gains on
available-for-sale securities $ (13,241) $ 111,885
Dividend and interest income 99,358 76,453
Tax reversal 50,000 -
Insurance proceeds 170,000 -
Offering expenses (251,574) -
Consulting - 100,000
Other 63,855 4,329
-------------------------------------------------------------------------------
$ 118,398 $ 292,667
===============================================================================
|
During 1999, AIT earned $100,000 as a non-recurring consulting fee from an unrelated entity.
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, which has been reflected in the
accompanying financial statements as of May
31, 1999 as a reduction in inventories and an
addition to insurance claim receivable.
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.
FS-36
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
8. Other Income During 2000, $251,574 of amounts incurred in connection
(Continued) with a registration of securities that was cancelled were
written-off.
|
9. Business Segments Reportable business segments for the years ended May 31, 2000 and 1999 are as follows:
2000 1999
-----------------------------------------------------------
Domestic sales:
Orthodontic products $ 3,133,000 $ 3,413,000
===========================================================
Medical diagnostic products $ 1,318,000 $ 868,000
===========================================================
Foreign sales:
Orthodontic products $ 2,518,000 $ 2,746,000
===========================================================
Medical diagnostic products $ 1,065,000 $ 1,661,000
===========================================================
Net sales:
Orthodontic products $ 5,651,000 $ 6,159,000
Medical diagnostic products 2,383,000 2,529,000
-----------------------------------------------------------
Total $ 8,034,000 $ 8,688,000
===========================================================
Operating (loss) profit:
Orthodontic products $ (504,000) $ 60,000
Medical diagnostic products (3,686,000) (371,000)
-----------------------------------------------------------
Total (4,190,000) $ (311,000)
===========================================================
Identifiable assets:
Orthodontic products $ 3,520,000 $ 4,018,000
Medical diagnostic products 2,848,000 3,383,000
-----------------------------------------------------------
Total 6,368,000 $ 7,401,000
===========================================================
Total assets:
Orthodontic products $ 3,755,000 $ 4,327,000
Medical diagnostic products 2,980,000 3,523,000
-----------------------------------------------------------
Total $ 6,735,000 $ 7,850,000
===========================================================
|
FS-37
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
Orthodontic products $ 151,000 $ 172,000 Medical diagnostic products 71,000 79,000 ----------------------------------------------------------- Total $ 222,000 $ 251,000 =========================================================== Capital expenditures: Orthodontic products $ 10,000 $ 71,000 Medical diagnostic products 196,000 30,000 ----------------------------------------------------------- Total $ 206,000 $ 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 1999 and 1998. No customer accounted for more than 10% of net sales during fiscal years 2000 and 1999.
Geographic information regarding net sales and operating profits is as follows:
2000 1999
-----------------------------------------------------------
Net sales:
United States $4,451,000 $4,638,000
Europe 1,683,000 1,710,000
South America 543,000 749,000
Asia 349,000 426,000
Other foreign 1,008,000 1,165,000
-----------------------------------------------------------
Total net sales $8,034,000 $8,688,000
===========================================================
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FS-38
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
9. Business Segments Geographic information regarding net sales and operating
(Continued) profits is as follows:
2000 1999
----------------------------------------------------------
Operating profit (loss):
United States $ (3,756,000) $ (267,000)
Europe (176,000) 35,000
South America (37,000) 26,000
Asia (66,000) (69,000)
Other foreign (155,000) (36,000)
----------------------------------------------------------
Total operating loss $ (4,190,000) $ (311,000)
==========================================================
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.
10. 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 (2003).
The lease expense is being recognized on a straight-line
basis over the term of the lease.
FS-39
|
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
10. Commitments and Effective November 1, 1998, Lancer entered into a
Contingencies non-cancelable operating lease for its Mexico
(Continued) facility expiring October 31, 2003, which requires
average monthly rentals of approximately $5,500.
The rentals are subject to annual increases based
on the United States Consumer Price Index. Prior
to April 1, 1996, such was included in amounts
paid under the terms of the manufacturing
agreement as discussed below.
Rental expense for all operating leases amounted
to approximately $312,000 and $294,000 for the
years ended May 31, 2000 and 1999, respectively.
The future annual minimum payments are as follows:
Years ending May 31, Amount
--------------------------------------------------
2001 $ 145,547
2002 148,547
2003 75,505
--------------------------------------------------
Minimum lease payments $ 369,599
==================================================
|
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-40
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
10. Commitments and 1994, Lancer again renegotiated the Manufacturing
Contingencies Agreement reducing the administrative fee and
(Continued) extending 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 agreed to extend the Manufacturing
Agreement through October 2003. After June 1996,
either party may cancel the agreement with three
months notice. Lancer has retained the option to
convert the manufacturing operation to a wholly-
owned subsidiary of Lancer at any time without
penalty. Should Lancer discontinue operations in
Mexico, it is responsible for the accumulated
employee seniority obligation as prescribed by
Mexican law. At May 31, 2000, this obligation was
approximately $256,000. Such obligation is
contingent in nature and accordingly has not been
accrued in the accompanying consolidated balance
sheet.
Employment Agreement
In June 1986, the Company entered into an
employment agreement with its then chief executive
officer. In May 1996, the agreement was extended
for an additional three years expiring in May 1999.
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, whereby the chief
executive officer would not receive any deferred
compensation for the period June 1994 through
November 1994 of approximately $54,500 and instead
received 60,000 stock options (see Note 6).
Approximately $ 204,000 of the total accrued
compensation included in the 2000 consolidated
balance sheet is due to the chief executive
officer's estate.
FS-41
|
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
10. Commitments and License and Royalty Agreement
Contingencies
(Continued) Lancer has entered into a number of license and/or
royalty agreements pursuant to which it has
obtained rights to manufacture and market certain
products. The agreements are for various durations
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.
11. Subsequent Events Subsequent to year-end, ReadyScript, Inc., a wholly
owned subsidiary of the Company, entered into
convertible promissory notes totaling $715,000. The
notes mature between July 3 and July 31, 2001. The notes
do not bear interest, provided they are converted. If
not converted, the notes bear interest at 8.0%. Upon
conversion, each note holder shall receive the number of
shares of common stock that is equal to the principal
amount divided by 60% of the then per share purchase
price of the common stock, as defined.
Between June 15, 2000 and August 3, 2000, the
Company granted 87,000 options to purchase shares
of the Company's stock to employees. The exercise
prices of the options range from $1.38 to $3.25.
FS-42
|
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
Between August 4, 2000 and September 8, 2000, the
Company issued 111,174 shares of the Companys common
stock with a total market value of $152 864 to
unaffiliated entities for services rendered and to be
rendered.
The Company has entered into an agreement to issue
50,000 shares of the Company's common stock on
September 15, 2000 to an unaffiliated entity for
services rendered and to be rendered.
11. Subsequent Events Biomerica, Inc. entered into an Agreement, in
(Continued) substance, 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
Biomerica's accounts receivable and inventory, and
expires September 12, 2001. Biomerica and the
shareholder are in the process of formalizing this
line of credit.
12. Condensed Financial Biomerica, Inc. sold 79,375 shares of common stock
Information of Parent between September 11 and 12, 2000 for aggregate
Company proceeds of approximately $106,000. Each shareholder
also received one warrant to purchase common stock
for every four shares of common stock acquired. The
warrants are for a term of five years and have an
exercise price of $2.00.
|
Lancer's line-of-credit prohibits the transfer or dividend of funds to Biomerica, Inc. As a result, the following condensed unconsolidated balance sheet for Biomerica, Inc. as of May 31, 2000, and the condensed unconsolidated statements of operations and cash flows for the years ended May 31, 2000 and 1999 have been provided. No cash dividends were paid by the consolidated subsidiaries (see Note 3) during the years ended May 31, 2000 and 1999.
Condensed Unconsolidated Balance Sheet May 31, 2000
ASSETS
Current assets:
Cash and cash equivalents $ 509,247
Available-for-sale securities 98,774
Accounts receivable, net 457,161
Inventories 842,663
Notes receivable 34,994
Prepaid expenses and other 87,531
-----------------
Total current assets 2,035,370
Investment in and advances to unconsolidated subsidiary, restricted 945,572
Investment in and advances to unconsolidated subsidiaries, unrestricted 100,567
Inventory, non-current 21,405
Property and equipment, net 260,378
Intangible assets 118,862
Other 13,532
-----------------
$ 3,490,686
=================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 463,724
Accrued compensation 229,457
-----------------
Total current liabilities 693,181
-----------------
Shareholders' equity:
Common stock 366,005
Additional paid-in capital 15,529,421
Accumulated other comprehensive loss (4,323)
Accumulated deficit (13,093,598)
-----------------
Total shareholders' equity 2,797,505
-----------------
$ 3,490,686
=================
|
Condensed Unconsolidated Statements of Operations May 31, 2000 and 1999
2000 1999
------------------ ------------------
Net revenues $ 2,283,433 $ 2,458,259
Cost of sales 1,643,290 1,548,579
--------------- ----------------
Gross profit 640,143 909,680
--------------- ----------------
Operating expenses:
Selling, general and administrative 1,867,520 903,046
Research and development 279,788 293,272
--------------- ----------------
Total operating expenses 2,147,308 1,196,318
--------------- ----------------
Operating loss (1,507,165) (286,638)
Other income 86,081 188,338
--------------- ----------------
Loss before interest in net income of consolidated
subsidiaries and income taxes (1,421,084) (98,300)
Interest in net (loss) income of consolidated subsidiaries (2,468,965) 26,552
--------------- ----------------
Loss before income taxes (3,890,049) (71,748)
Income tax expense 800 800
--------------- ----------------
Net loss $ (3,890,849) $ (72,548)
=============== ================
Condensed Unconsolidated Statements of Cash Flows
May 31, 2000 and 1999
2000 1999
------------------ ------------------
Cash flows from operating activities:
Net loss $ (3,890,849) $ (72,548)
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 93,187 65,959
Realized loss (gain) on sale of available-for-sale securities 13,241 (111,885)
Provision for losses on accounts receivable - 6,377
Loss (income) of subsidiaries 2,468,965 (26,552)
Options and warrants issued for services rendered 821,043 4,581
Common stock is for rent 16,000 38,000
Deferred compensation (77,231) (138,358)
Loss on disposal of assets - 6,518
Net change in other current assets and current liabilities (89,171) 94,259
--------------- ---------------
Net cash used in provided by operating activities (644,815) (133,649)
--------------- ---------------
Cash flows from investing activities:
Sales of available-for-sale securities 18,191 254,313
Purchases of available-for-sale securities - -
Principal payments received on notes receivable 9,491 -
Additional notes receivable - (16,000)
Increase in investment in and advances to
affiliates and consolidated subsidiaries (2,336,205) (159,768)
Purchases of property and equipment (125,335) (103,452)
--------------- ---------------
Net cash used in investing activities (2,433,858) (24,907)
---------------- ---------------
Cash flows from financing activities:
Exercise of stock options 60,652 -
Proceeds from sale of stock 1,965,557 133,290
Decrease in shareholder receivable 1,000 70,000
--------------- ---------------
Net cash provided by financing activities 2,027,209 203,290
--------------- ---------------
Net change in cash and cash equivalents (1,051,464) 44,734
Cash and cash equivalents at beginning of year 1,560,711 1,515,977
--------------- ---------------
Cash and cash equivalents at end of year $ 509,247 $ 1,560,711
=============== ===============
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 $ 4,456 $ (66,681)
Reduction in taxes payable and increase in additional
paid-in capital for exercise of non-qualified stock options $ - $ 25,039
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FS-43