<PAGE>
FORM 10-KSB - ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended MAY 31, 1996
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Commission File No. 0-8765
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BIOMERICA, INC.
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(Name of 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, CALIFORNIA 92663
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(Address of Principal Executive Offices) (Zip Code)
(714) 645-2111
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.08
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the issuer was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
X Yes No
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Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained herein, and will not be contained, to the best of issuer's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
[X]
State issuer's revenues for its most recent fiscal year: $9,480,658.
State the aggregate market value of the voting stock held by non-affiliates of
the issuer (based upon 2,923,774 shares held by non-affiliates and the closing
price $3.875 per share for Common Stock in the over-the-counter market as of
August 13, 1996: $11,329,624).
Number of shares of the issuer's common stock, par value $.08, outstanding as of
August 13, 1996: 3,516,719 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
The issuer's proxy statement for its 1996 Annual Meeting of Stockholders is
incorporated into Part III hereof. Also incorporated by reference is the Annual
Report on Form 10KSB for the fiscal year ended May 31, 1996, for Lancer
Orthodontics, Inc.
This Form 10-KSB/A is being filed in order to include certain information that
was inadvertently omitted from the Annual Report on Form 10-KSB filed by
Biomerica, Inc. (the "Company") for the fiscal year ended May 31, 1996. This
Form 10-KSB/A includes all of the information required by the rules under Form
10-KSB and represents a complete amendment to the Form 10-KSB filed by the
Company.
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PART I*
ITEM 1. BUSINESS
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INTRODUCTION
Biomerica, Inc. ("Biomerica" or the "Company") is primarily engaged in the
development, manufacture and marketing of medical diagnostic test kits. In
addition, since 1984, Biomerica has followed a corporate strategy of developing
new business opportunities through selected investments in companies in which
synergistic benefits could be realized through sharing of technology, corporate
administration and/or capital resources. Each of these companies is or has been
in a business involving the application of advanced technologies in the
biomedical, pharmaceutical, and/or other applied sciences. As of May 31, 1996,
Biomerica held the following percentage ownership in the issued and outstanding
common stock of subsidiaries:
Subsidiary Company Biomerica Percent Ownership
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Lancer Orthodontics, Inc. ("Lancer") 29.9%
Allergy Immuno Technologies, Inc. ("AIT") 73.5%
The Company was incorporated in Delaware in September 1971 under the name
"Nuclear Medical Systems, Inc." The Company changed its corporate name in
February 1983 to NMS Pharmaceuticals, Inc. and in November 1987 to Biomerica,
Inc. Its principal place of business and executive offices are located at 1533
Monrovia Avenue, Newport Beach, California 92663 (telephone number 714-645-2111,
telefax number 714-722-6674).
In addition to Biomerica's ownership of Lancer, the President of Biomerica
owns approximately 15.9% of the outstanding Lancer common stock and is an
officer and director of Lancer. Another Biomerica director also serves on
Lancer's board of directors. In addition, Biomerica's president controls an
additional 835,066 shares of Lancer's common stock either through proxy or
other controlled persons. As a result, Biomerica continues to exercise
effective control of Lancer. As a consequence, Lancer's financial statements
are consolidated with those of Biomerica.
In 1986, Biomerica began to implement a strategy of investing a portion of
its cash resources in marketable securities of biotech and large publicly-traded
companies which are in the forefront of advanced technologies. This is intended
to enable Biomerica to share in the overall growth of the health care industry
and to monitor new developments in related advanced fields. Biomerica's
holdings in these various companies are insignificant with respect to these
companies.
As of May 31, 1996, the Company's businesses included the following:
. CORE BUSINESS IN DIAGNOSTICS, VIA BIOMERICA, INC.
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Biomerica develops, manufactures, and sells medical diagnostic products
designed to detect certain medical conditions and diseases in the areas of
certain cancers, heart attack, fertility, gastritis and ulcers, diabetes and
Candida.
. ADVANCED ORTHODONTIC PRODUCTS, VIA LANCER
-----------------------------------------
Lancer is engaged in manufacturing, sales and development of high technology
orthodontic products including, among others, ceramic brackets and wires.
Lancer is well established in the field of orthodontics and its products are
sold worldwide through distributors and a direct sales force.
* Exhibit 99.2, "Part I of the Annual Report on Form 10-KSB of Lancer
Orthodontics, Inc." is hereby incorporated by reference into this Report.
<PAGE>
. ALLERGY AND IMMUNO DIAGNOSTICS, VIA AIT
---------------------------------------
Until recently, AIT was engaged in developing research diagnostic test and
therapeutic methods for treatment of allergies. In addition, AIT has been
providing clinical testing services to doctors, clinics and drug firms in
specialized areas of allergy and sensitivity determinations. In the
meantime, as a consequence of its development effort in the field of allergy
treatment, AIT owns four patents covering several inventions relating to the
therapeutic aspect of allergy. AIT intends to utilize these patents to
develop new allergy drugs on its own and/or in conjunction with other
companies.
BIOMERICA'S CORE BUSINESS
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IMMUNO-DIAGNOSTIC PRODUCTS
--------------------------
The Company has developed, produced and sold immunoassay diagnostic test
kits since the late 1970's. Immunoassay kits are used by hospitals, clinical
laboratories and medical researchers to analyze blood or urine from patients in
the diagnosis of various diseases and other medical complications, or to measure
the level of specific hormones or other substances which may exist in the human
body in extremely small concentrations.
Biomerica currently manufactures and sells diagnostic test kits which
utilize radioimmunoassay (RIA) or enzyme immunoassay (EIA) technology. Biomerica
also sells other kits to researchers which products have not yet been cleared by
the FDA for diagnostic use. Biomerica products include:
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Diagnostic Test Kit Use
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NEONATAL TSH (RIA) -For early detection of congenital primary hypo-
thyroidism. (Newborn thyroid hormone assessment).
ALPHA-SUBUNIT (RIA) -For measurement of elevated blood levels of alpha
subunit which are suspected to be associated with
testicular, colorectal, pituitary, and other
cancers. Also for delayed puberty. This product
is used for research only.
THYROID PANEL: -For measurement of thyroid function in manual and
T3, T4, TSH (EIA) automated systems.
THYROGLOBULIN (RIA) -For prognostic testing for the detection of
metastasis after the treatment or removal of thyroid
tumor. This product is used for research only.
THYROGLOBULIN AUTO- -For measurement of autoantibodies to thyroglobulin
ANTIBODY TEST in human blood. High levels of patient's Tg
(EIA & RIA) autoantibodies are present with Hashimoto's disease
and lymphadenoid goiter. This product has just been
cleared by the FDA.
MYOGLOBIN (RIA) -For measurement of myoglobin in blood as a result of
skeletal muscle injury including heart.
<PAGE>
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Diagnostic Test Kit Use
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HISTAMINE (RIA) -For determination of blood histamine levels which
are associated with leukemia, allergy diseases, and
sensitivity determinations in animals and humans.
FDA clearance was received to market the histamine
RIA test kit for a special type of leukemia disease.
For allergy applications, the product is sold for
research and investigational use only since FDA
clearance has not yet been obtained for that
purpose.
HELICOBACTER PYLORI -A non-invasive blood test for gastritis and peptic
ANTIBODY (EIA) ("GAP") ulcer infection. The "GAP" test is amenable to
FOR GASTRITIS & ULCER screen populations for the bacterium (Helicobacter
DETECTION pylori) that causes gastritis and peptic ulcers. FDA
clearance for the GAP was received in July 1991.
Since then, Biomerica has entered into a three year
exclusive agreement with BioRad of Hercules,
California, to distribute the GAP test worldwide
with the exception of Japan. Biomerica has entered
into another exclusive agreement with Nisshin/
Fujirebio for distribution of the GAP test in Japan.
After 18 months of conducting the necessary clinical
studies, Japan's Ministry of Health has approved the
GAP test kit for sale in Japan for diagnostic
purposes. The Company believes that it is the first
test of its kind to receive such clearance in Japan.
Nisshin/Fujirebio have recently begun the sale of
the GAP in Japan.
ISLET CELL- -A non-invasive blood test for predisposition of
AUTOANTIBODIES(EIA) Type I diabetes. It is for detecting the onset
(ISLETEST(TM)) of type I diabetes[insulin dependent diabetes
(FOR DETECTION IDDM)] mellitus years before the manifestation of
OF TYPE I DIABETES the disease. IDDM is a disease characterized by
abnormalities in the regulation of blood sugar. The
disease may cause serious injury to the eyes,
kidneys, blood vessels, and nervous system.
Presently, this kit is provided to medical
institutions for investigational use only.
INSULIN -A non-invasive blood test for assessment of status
AUTOANTIBODY (EIA) of type I diabetes. This kit is provided for
investigational use only.
GAD AUTOANTIBODY (EIA) -A non-invasive blood test for individuals
predisposed to Type I diabetes.
PHYSICIANS' OFFICE AND OVER-THE-COUNTER PRODUCTS
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The over-the-counter and professional markets for diagnostic products are
expanding as a result of significant economic pressures affecting the health
care industry. Changes in federal regulation and reimbursement policies, and
increased competition among physicians have led to increased emphasis on the
delivery of health care outside the hospital and clinical laboratory
environment. At the same time, technological advances in medical diagnostics
have made it possible to perform diagnostic tests within the home and the
physician's office, rather than in the clinical laboratory. The Company's
objective has been to address these markets by developing rapid diagnostic tests
that are accurate, employ easily obtained specimens, and are simple to perform
without instrumentation.
<PAGE>
Until recently, tests of this kind required the services of medical
technologists and sophisticated instrumentation; frequently, results were not
available until at least the following day. Most of the Company's over-the-
counter tests are FDA cleared. The Company believes that such tests are as
accurate as laboratory tests when used properly, require no instrumentation,
give reliable results in minutes and can be performed with confidence in the
home or the doctor's office.
The emphasis on producing easy to use tests that require no instrumentation
has led to the development of the products indicated below which currently are
through drugstores such as Walgreens, K-Mart, Osco/Sav-On, etc.
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Diagnostic Test Kit Use
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EZ DETECT(TM) -Do-it-yourself kit for both the physician's
HIDDEN BLOOD office and over-the-counter markets for
IN STOOL determining occult (hidden) blood in stool. The
test produces a color change and requires no
instrumentation. The test is based on placing a
test pad in the toilet bowl after a bowel movement
and observing the development of blue color. It
serves as an early warning signal for bleeding
disorders, including cancer of the colon or rectum,
ulcers, hemorrhoids, polyps, colitis, diverticulitis
and lower intestinal problems. This test gives
accurate results without diet restrictions. Unlike
other tests on the market, it does not require the
patient to dig in the stool, mail the specimen to
the laboratory, and abstain from taking vitamin C or
eating certain fruits, vegetables and rare meats for
several days before and during testing.
ULTRA SENSITIVE -An over-the-counter test for the determination
URINE OCCULT of hidden blood in urine. It detects very
BLOOD TEST (UBT) small amounts of blood in urine caused by
infections, cancer, stones, prostatic enlargement,
kidney disease, trauma, or malformations of the
genito-urinary tract.
OVULATION -One-step, five minute visual test for laboratory or
TEST (EZ-LH(TM)) home use for determination of the proper time of
ovulation.
PREGNANCY TEST -One-step, five minute visual test for laboratory
(FORTEL(R)) or home use for determination of pregnancy.
PSA TEST -One-step, five minute visual test to detect
(EZ-PSA(TM)) Prostate Specific Antigen (PSA). The test is
intended for professional use as an aid in the
diagnosis of prostate cancer. FDA approval is
needed before marketing in the U.S.
HELICOBACTER PYLORI -A rapid visual test intended for the physician's
(EZ-H.P.(TM)) office to detect duodenal and gastric ulcer.
Clinical studies are underway to obtain FDA
clearance.
BIOMERICA'S OTHER PRODUCTS: QUALITY CONTROL SERA
-------------------------------------------------
Biomerica markets a variety of quality control sera which are used in
conjunction with diagnostic products of Biomerica and other companies. These
control sera serve the user by monitoring the consistency in performance of the
diagnostic kits being used.
<PAGE>
LANCER ORTHODONTICS, INC.
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Lancer designs, manufactures and sells orthodontic products. The product
line includes preformed bands, direct bonding pads, various brackets, buccal
tubes, arch wires, lingual attachments and related accessories. The foregoing
are assembled to the orthodontists' prescriptions or the specifications of
private label customers. Lancer also markets products which are purchased and
resold to orthodontists, including sealants, adhesives, elastomerics, headgear
cases, retainer cases, orthodontic wire, and preformed arches. Lancer sells its
products directly to orthodontists through company-paid sales representatives in
the United States. At the end of its 1996 fiscal year, Lancer had twelve sales
representatives all in the United States, all of whom are employees of Lancer.
In selected foreign countries, Lancer sells its products directly to
orthodontists through its international marketing division. Lancer also sells
its products through distributors in certain foreign countries and to other
companies on a `private label'' basis. Lancer has entered into a number of
distributor agreements whereby it sold or granted the marketing rights to its
products in certain sales territories in Mexico, Central America, South America,
Europe, Canada, Australia and Japan. The distributors complement the
international marketing division which was established in 1982.
As of May 31, 1993, Lancer had moved all of its manufacturing and shipping
operations to Mexicali, Mexico in order to reduce the cost of manufacturing and
compete more effectively worldwide. Lancer maintains its headquarters in San
Marcos, California where it houses the administration, the engineering, the
sales and marketing, and the customer services. Presently, the total number of
employees in San Marcos alone is about 46.
ALLERGY IMMUNO TECHNOLOGIES, INC.
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AIT and its predecessors commenced development activities in allergy and
immune disorder research diagnostic reagents and services in 1980. AIT
currently operates a clinical reference laboratory at 1527 Monrovia Avenue,
Newport Beach, CA, for allergy and other esoteric diagnostic testing services
for physicians, other laboratories and pharmaceutical companies. AIT employs
one medical doctor and two technicians and receives substantial assistance from
Biomerica whose laboratory is contiguous to AIT.
As a result of its research activities, AIT has discovered new methods for
treating allergies. AIT has succeeded in obtaining the rights to four patents
pertaining to its discoveries for allergy treatment. These are:
. Immunotherapy agents for treatment of IgE mediated allergies: U.S. Patent
#5,116,612 (issued May 6, 1992).
. Liposome containing immunotherapy agents for treatment of IgE mediated
allergies: U.S. Patent #5,049,390 (issued September 17, 1991).
. Immunotherapy agents for treatment of IgE mediated allergies: U.S. Patent
#4,946,945 (issued August 7, 1990).
. Allergen-thymic hormone conjugates for treatment of IgE mediated allergies:
U.S. Patent #5,275,814 (issued January 4, 1994).
AIT intends to utilize these patents either on its own or via a joint
venture with a pharmaceutical company to develop unique products for the
treatment of allergy, especially those that can be taken orally, and avoid the
help from Biomerica, AIT has begun preclinical studies using animals utilizing
some of these patents.
<PAGE>
AIT is focused on the discovery and commercialization of novel bio-
pharmaceutical drugs for the treatment of allergies. The Company's research has
led to new therapeutic approaches and inventions which are covered by four U.S.
patents. AIT's strategy is to utilize its proprietary technologies to create
unique drugs for the treatment of allergies, especially those that can be taken
orally avoiding the present injection therapy which is tedious, expensive and
unpredictable.
The objective of AIT is to tap the allergy market which is estimated to be
$6 billion in the U.S. alone by developing drugs for allergy treatment based on
Liposome-Encapsulated Allergens (LEA).
Liposomes are minute fatty particles in which allergens may be enclosed
(encapsulated). LEA favorably alters the immunological response to allergens
compared to the response elicited by native allergens presently used in
desensitizing immunotherapy. The results of pre-clinical studies conducted on
rodents (adminstering liposome encapsulated house dust mite by both injeciton
and mouth) indicate a dramatic increase in the densensitizaiton process. This
new type of therapy may revolutionize allergy treatment for reasons indicated
below:
FEATURES BENEFIT
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Oral delivery possible Increased patient compliance, no injections necessary.
Complete treatment Treats the disease and not the symptoms as in histamine
blockers.
Reduced patient visits Convenient to patient and less costly to managed care.
AIT is looking for a collaborative partner to continue this effort.
The Company has also developed a Histamine Basophil Release (BHR) test that
is a surrogate to humans wherein sensitivities to allergens may be determined in
a test tube. Food sensitivity studies for large pharmaceutical and nutritional
firms such as Mead Johnson and Carnation were conducted utilizing the BHR test.
AIT intends to use the same BHR in the development of the new drug.
Being a credited clinical laboratory, AIT provides specialized testing
services to large organizations such as Hoffman La Roche, American Homes
Products, as well as other clinics and physicians.
Biomerica owns about 73.5% of AIT outstanding stock.
PRODUCTION
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The Company's diagnostic kits include reagents, antibodies, labeled
antigens, buffers, standards, and reference controls. The Company supplies each
customer with detailed written instructions for the use of its diagnostic
products.
All of the Company's diagnostic test kits are processed and assembled at its
facilities in Newport Beach, California. Production of diagnostic tests involve
formulating and coloring component antibodies and antigens in specified
concentrations, attaching a tracer to the antigen, filling components into
vials, packaging and labeling. The Company continually engages in quality
control procedures to assure the consistency and quality of its products and to
comply with applicable FDA regulations.
In 1990, Lancer entered into a manufacturing subcontractor agreement whereby
the subcontractor agreed to provide manufacturing services to Lancer through its
affiliated entities located in Mexicali, B.C., Mexico. During fiscal 1992 and
1991, Lancer moved the majority of its manufacturing operations to Mexico.
Lancer's agreement with the subcontracts has been renegotiated several times
since inception. The agreement that is in effect now through June 1998 allows
for the pass through of actual costs plus a weekly administrative fee. This
gives Lancer greater control over all costs associated with the manufacturing
operation than did the hourly rate per employee cost.
<PAGE>
RESEARCH AND DEVELOPMENT
- ------------------------
Biomerica is continually engaged in research and development of additional
diagnostic tests in keeping with its strategy of continuing to broaden its
product line in specific areas such as predisposition of diabetes, cancer
diagnostics, and rapid testing kits for the physician's office and the consumer
market. Research and development expenses include the costs of materials,
supplies, personnel, facilities and equipment which were devoted both to
research and development and to production and quality control of diagnostic
test kits for sale. Lancer is engaged in development programs directed toward
improving its orthodontic products and production techniques. Lancer consults
frequently with practicing orthodontists. Research and development expenses
incurred by the Company for the years ended May 31, 1996 and 1995 aggregated
$257,125 and $292,979, respectively. These expenses included approximately
$130,000 and $163,000 for fiscal 1996 and 1995, respectively, for Lancer's
product development.
MARKETS AND METHODS OF DISTRIBUTION
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The Company and its subsidiaries (excluding Lancer) have approximately 320
current customers of which approximately 50 are distributors and the balance are
hospital and clinical laboratories, medical research institutions, medical
schools, pharmaceutical companies, drug stores and physicians' offices.
The Company relies upon unaffiliated distributors, advertising in medical
and trade journals, exhibitions at trade conventions, direct mailings and an
internal sales staff to market its diagnostic products. Biomerica targets three
main markets: (a) clinical laboratories, (b) physicians' offices, and (c) over-
the-counter (OTC) drug stores. Separate sales forces and marketing plans are
utilized to expand sales in each of the three markets. The newest market to the
company is the OTC segment. This market is divided into independent drug stores
and chain drug stores. The Company believes that it has been aggressively
targeting both the chain and independent stores. The independents are widely
dispersed and therefore are focused on by engaging wholesalers (e.g. Bergen
Brunswig, Foxmeyer, etc.) to promote the Company's products. The chain stores
are focused on by manufacturers representatives and dealings with chain store
buyers.
The loss of any one or a few customers would not have a material adverse
effect upon the revenues of the Company.
Lancer sells its products directly or indirectly through its sales
representatives, to a relative large number of customers. At the end of its
1996 fiscal year, Lancer had twelve sales representatives, all in the United
States, all of whom are employees of Lancer. No customer of Lancer accounted
for 10% or more of Lancer's sales in the fiscal years ended May 31, 1996 and
1995.
BACKLOG
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As of May 31, 1996 and 1995, Lancer had a backlog of $353,000 and $635,000,
respectively.
GOVERNMENT REGULATIONS
- ----------------------
In 1976, Lancer and many of its products became subject to regulation by the
FDA pursuant to the Medical Device Amendments of 1976. Lancer has registered
with the FDA as required by the amendments. Certain existing products have been
listed, and new products of Lancer will be listed with the FDA for
classification. The effect on Lancer of complying with the registration and
classification requirements of the Amendments has not had a material effect on
Lancer's operations to date.
<PAGE>
RAW MATERIALS
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The principal raw materials utilized by the Company consist of various
chemicals, serums, reagents, radioactive isotopes and packaging supplies.
Almost all of its raw materials are available from several sources, and the
Company is not dependent upon any single source of supply or a few suppliers.
Many antibodies used in the Company's immunoassay products are produced by the
Company itself by injecting antigens into animals which are maintained by the
Company.
The Company maintains inventories of antibodies and antigens as components
for its diagnostic test kits. Due to a limited shelf life which averages 60
days for RIA products, finished kits are prepared as required for immediate
delivery of pending and anticipated orders. Sales orders are normally processed
on the day of receipt.
The principal raw materials used by Lancer in the manufacture of its product
include: Stainless steel which is available from several commercial sources;
nickel titanium which is available from three sources; and lucolux translucent
ceramic which is currently only available from one source, General Electric, and
is purchased on open account. Ceramic material similar to General Electric's
Lucolux translucent ceramic is available from other sources. Lancer had no
difficulty in obtaining an adequate supply of raw materials during its 1996
fiscal year, and does not anticipate that there will be any interruption or
cessation of supply in the future.
COMPETITIVE FACTORS
- -------------------
Immunodiagnostic products are currently produced by more than 100 companies,
a majority of which are located within the United States. The Company and its
subsidiaries are not a significant factor in the market. Allergy diagnostic
products are currently produced by approximately five competitors, and there are
even fewer producing allergy therapeutics.
The Company's competitors vary greatly in size. Many are divisions or
subsidiaries of well-established medical and pharmaceutical concerns which are
much larger than the Company and expend substantially greater amounts than the
Company for research and development, manufacturing, advertising and marketing.
The primary competitive factors affecting the sale of diagnostic products
are uniqueness, quality of product performance, price, service and marketing.
The prices for the Company's products compare favorably with those charged by
most of its competitors.
The Company believes it competes primarily on the basis of its reputation
for the quality of its products, the speed of its test results, the unique
niches in the market, and its prompt shipment of orders. The Company offers a
broader range of products than many competitors of comparable size, but to date
has had limited marketing capability. This capability is presently being
expanded.
Lancer encounters intense competition in the sale of orthodontic products.
Lancer's management believes that Lancer's seven major competitors are: Unitek,
a subsidiary or division of 3M; `A'' Company, a private company; Ormco, a
subsidiary or division of Sybron; RMO Inc., a private company; American
Orthodontics, a private company; GAC, a foreign company; and Dentaurum, a
foreign company. Lancer estimates that these seven competitors account for
approximately 80% of the orthodontic products manufactured and sold in the
United States. Lancer's management also believes that each of these seven
competitors is larger than Lancer, has more diversified product lines and has
financial resources exceeding those of Lancer. While there is no assurance that
Lancer will be successful in meeting the competition of these seven major
competitors or other competitors, Lancer has, in the past, successfully competed
in the orthodontic market and has achieved wide recognition of both its name and
its products.
<PAGE>
SEASONALITY OF BUSINESS
- -----------------------
The business of the Company and its subsidiaries have not been subject to
significant seasonal fluctuations.
EMPLOYEES
- ---------
As of August 15, 1996, the Company's operations with subsidiaries employed
70 full-time employees and 3 part-time employees, including two Ph.D.'s.
Lancer, through its Mexican subcontractor, employs approximately 150 people in
Mexico. The Company also engages the services of various outside Ph.D. and M.D.
consultants as well as medical institutions for technical support on a regular
basis. The Company is not a party to any collective bargaining agreement and
has never experienced a work stoppage.
FOREIGN BUSINESS
- ----------------
All of the Company's fixed assets, excluding some of Lancer, are located
within southern California. The following table sets forth the dollar volume of
revenue attributable to sales to domestic customers and foreign customers during
the last two fiscal years for the Company and its consolidated subsidiaries:
<TABLE>
<CAPTION>
Year ended May 31,
------------------
1996 1995
----------------- -----------------
<S> <C> <C>
Revenues from sales to:
United States customers............. $ 6,218,000/66% $ 5,994,000/65%
Foreign customers................... $ 3,263,000/34% $ 3,168,000/35%
----------------- -----------------
Total revenues...................... $ 9,481,000/100% $ 9,162,000/100%
================= =================
</TABLE>
The Company does not believe that its foreign sales are subject to any
special or unusual risks which are not present in the ordinary course of
business in the United States, except for possible future changes in
governmental regulations and import restrictions. Foreign countries have
licensing requirements applicable to the sale of diagnostic products which vary
substantially from domestic requirements; depending upon the product and the
foreign country, these may be more or less restrictive than requirements within
the United States.
Foreign sales are made primarily through a network of 30 independent
distributors in approximately 20 countries.
GOVERNMENT REGULATION AND LICENSES
- ----------------------------------
Medical diagnostic products in the United States are subject to governmental
regulation and supervision by various federal and state agencies. The Company's
facilities, manufacturing procedures and records are periodically inspected by
the FDA and other government agencies such as the USDA to review compliance with
applicable regulations. Diagnostic test kits are required to comply with
certain manufacturing standards of the FDA. Under normal circumstances, FDA
clearance of diagnostic test kits takes 90 days after notifications have been
filed with the FDA if the diagnostic test is of a type that has already been
cleared for marketing by other companies. Most of the Company's products have
received FDA clearance. FDA clearance of immunoassays not previously marketed
by other companies normally requires longer periods of as much as two years.
Various foreign government agencies regulate the sale of medical diagnostic
products in foreign countries. Although the Company does not anticipate any
unusual difficulties in complying with government regulations applicable to its
business, it cannot predict whether future changes in government regulation
might increase its cost of conducting business or increase the time required for
development and introduction of new products.
<PAGE>
The Company holds a radioactive materials license from the State of
California (currently expiring on June 20, 1997), and a permit from the U.S.
Drug Enforcement Administration (currently expiring on June 30, 1997), which are
renewed periodically. Although the Company has never failed to obtain renewals,
its business operations would be materially and adversely affected if it were
unable to do so.
In 1976, Lancer and many of its products became subject to regulation by the
U.S. Food and Drug Administration ("FDA") pursuant to the Medical Device
Amendments of 1976 ("Amendments"). Lancer has registered with the FDA as
required by the Amendments. Certain existing products have been listed, and new
products of Lancer will be listed with the FDA for classification. The effect
on Lancer of complying with the registration and classification requirements of
the Amendments has not had a material effect on Lancer's operations to date.
The Company registered the tradenames, "Nimbus" and "GAP" with the Office
of Patents and Trademarks on December 31, 1985. The Company's unregistered
tradenames are: "EZ Detect", "CAST", "COT", "Fortel", "EquistiK", "FelistiK",
"Tri-Level Controls", "Tru-Level Controls", "T-Marker Controls", "AllerHalt",
"Candiquant", and "Candigen".
On April 4, 1989, Lancer was granted a patent on its CounterForce design of
a nickel titanium orthodontic archwire. On August 1, 1989, Lancer was granted a
patent on its bracket design used in the manufacturing of Sinterline and
Intrigue orthodontic brackets. Both patents are for a duration of seventeen
years. Lancer has entered into a number of license and/or royalty agreements
pursuant to which it has obtained rights to certain of the products which it
manufactures and/or markets. The patents and agreements have had a favorable
effect on the Lancer image in the orthodontic marketplace and sales.
ITEM 2. PROPERTIES
----------
During fiscal 1995 Biomerica leased approximately 13,500 square feet of
space at 1527-1533 Monrovia Avenue, Newport Beach, California. Approximately
13,500 square feet were leased for a term which expired May 31, 1993 (and which
was renewed until May 31, 1998) at a base rental of approximately $10,720 per
month, plus taxes and insurance. These facilities are used for research and
development and diagnostic test kit manufacturing and marketing.
The facilities are leased from Mr. Joseph H. Irani and Mrs. Ilse Sultanian
(Mr. Joseph H. Irani is an officer, director and stockholder of the Company).
The terms of such leases cannot be considered to have been negotiated at arms-
length, but in the opinion of management are no less favorable to the Company
than would be available from an unaffiliated party.
In the first quarter of fiscal 1997, the Company began expansion into an
additional 7,000 sq.ft. space to be used for production.
AIT currently leases approximately 1,600 square feet at the above facility
for $1,400 per month. These properties are leased by AIT on a month to month
basis from Mr. Joseph H. Irani and Mrs. Ilse Sultanian.
Lancer leases a 9,240 square foot manufacturing building at 253 Pawnee
Street, San Marcos, California. The term of the lease is for five years
commencing January 1, 1994, with the following future minimum annual cash rental
payments.
Fiscal 1997 $48,300
1998 51,400
1999 30,800
<PAGE>
Lancer has also subcontracted for a significant portion of its
manufacturing in Mexicali, Mexico. The manufacturing is performed in
approximately 12,500 square feet of space leased by the subcontractor.
The Company maintains animals at a ranch in Vista, California, which are
treated biologically to produce antibodies used in certain of the Company's
immunodiagnostic products. These facilities are utilized on a month-to-month
basis at a charge based on the number of animals maintained at the facility.
The Company believes that its facilities and equipment are in suitable
condition and are adequate to satisfy the foreseeable requirements of Biomerica
and its subsidiaries.
ITEM 3. LEGAL PROCEEDINGS
-----------------
Inapplicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
-------------------------------------------------
Inapplicable.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCK
------------------------------------------
HOLDER MATTERS
--------------
The Company's Common Stock is traded in the over-the-counter NASDAQ Stock
Market (SmallCap stocks, symbol "BMRA").
The following tables show the high and low bid prices for the Company's
common stock over the last two years based upon data reported by NASDAQ. Prices
shown represent quotations by dealers, and do not reflect markups, markdowns or
commissions.
Bid Prices
-----------------
High Low
----- -------
Quarter ended:
May 31, 1996........ 2-11/16 1-7/8
February 28, 1996... 2-1/2 1-11/16
November 30, 1995... 2-1/2 1-3/4
August 31, 1995..... 2-1/4 15/16
May 31, 1995........ 1-1/4 15/16
February 29, 1995... 1-7/16 7/8
November 30, 1994... 1-1/2 5/8
August 31, 1994..... 1 9/16
As of August 2, 1996, the number of holders of record of the Company's
common stock was approximately 1,984, excluding stock held in street name.
No dividends have been declared or paid by the Company. The Company intends
to employ all available funds for development of its business and, accordingly,
does not intend to pay cash dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
RESULTS OF OPERATIONS
- ---------------------
FISCAL 1996 COMPARED TO FISCAL 1995
- -----------------------------------
Consolidated net sales for the Company were $9,480,658 for fiscal 1996
compared to $9,161,758 for fiscal 1995. This represents an increase of $318,900
for fiscal 1996. Lancer's sales decreased by $342,701. Therefore, Biomerica
showed a sales increase of $654,633, a 34% increase for Biomerica. AIT had a
slight increase of $3,983 (4%). This decrease at Lancer was attributable to (1)
various manufacturing and purchasing problems experienced in Mexico, (2) an
unpredictable domestic market, and (3) renewed pricing pressures. Lancer
continues to embark on programs that may result in increasing sales. The
increase at Biomerca was primarily due to an increase of sales to foreign
distributors as well as an increase in domestic sales at Biomerica. Cost of
sales in fiscal 1996 as compared to fiscal 1995 increased by 4%, which
approximated the percentage increase in sales. Lancer realized higher costs of
sales as a percentage of sales due to manufacturing problems. They are taking
steps to rectify these problems.
<PAGE>
Selling, general and administrative costs decreased in fiscal 1996 as
compared to fiscal 1995 by $284,100. Lancer had a decrease of $289,615 in these
costs, which decrease was due to decreased payroll and related expenses, travel,
office supplies, bad debt expense, brochures, samples, show registration,
advertising and telephone expenses. Lancer decreased these expenses to lower
costs to offset the manufacturing problems that caused lower sales. Biomerica
had a slight decrease in fiscal 1996 as compared to fiscal 1995.
Research and development decreased in fiscal 1996 as compared to fiscal 1995
by $35,854 (12%). Of this, Lancer had a decrease of $32,757 as a result of
decreased payroll, supplies and professional fees. Biomerica and AIT had a
research and development decrease of $3,097.
Interest expense, which was incurred primarily by Lancer, decreased in
fiscal 1996 as compared to fiscal 1995 by $67,065 due to reduced levels of debt,
which decrease was partially offset by increased interest rates.
Other income decreased by $24,251 in fiscal 1996 as compared to fiscal 1995.
A decrease of $3,108 is attributable to Lancer, and the remainder of $21,143 was
attributable to Biomerica and AIT.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of May 31, 1996, the Company had cash and available for sale securities
of $978,426 (Note 1) and current working capital of $3,247,648 as opposed to
$1,033,415 and $2,858,737, respectively, for the previous two years. All of the
cash and available for sale securities are easily mobilized. In 1996, Lancer
negotiated a restructuring of its bank term loan, arranging for the debt to be
divided into a new term loan and a line of credit. The term loan is for two
years and requires monthly principal and interest payments by Lancer of $18,889.
The line of credit is for $500,000 and is limited to specified percentages of
Lancer's eligible accounts receivable. Borrowings are made at prime plus 1%.
The line of credit expires on November 1, 1996. Immediately after the
restructuring, Lancer paid down the line of credit with its available cash. The
Company is currently able to meet their costs of operations through the
collection of trade accounts receivable generated by sales and its working
capital position.
The Company experienced losses during the period 1983 to 1993 due in part to
research and development activities as well as providing support to several
startup entities. Biomerica and AIT have no material capital commitments.
Please refer to Exhibit 99.2, Lancer Orthodontics, Inc. 1996 Form 10-KSB for
Lancer's capital commitments.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Exhibit 99.1, "Biomerica, Inc. and Subsidiaries Consolidated Financial
Statements" is incorporated herein by this reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
--------------------
Inapplicable.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
-------------------------------------------------------------------
REGISTRANT; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
---------------------------------------------------------
This information is incorporated by reference to the Company's proxy
statement for its 1996 Annual Meeting of Stockholders which will be filed not
later than 120 days after the end of the Company's fiscal year ended May 31,
1996.
ITEM 10. EXECUTIVE COMPENSATION
----------------------
This information is incorporated by reference to the Company's proxy
statement for its 1996 Annual Meeting of Stockholders which will be filed not
later than 120 days after the end of the Company's fiscal year ended May 31,
1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
This information is incorporated by reference to the Company's proxy
statement for its 1996 Annual Meeting of Stockholders which will be filed not
later than 120 days after the end of the Company's fiscal year ended May 31,
1996.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
This information is incorporated by reference to the Company's proxy
statement for its 1996 Annual Meeting of Stockholders which will be filed not
later than 120 days after the end of the Company's fiscal year ended May 31,
1996.
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
-------------------------------------
(a) EXHIBITS
--------
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Certificate of Incorporation of Registrant filed with the Secretary of
the State of Delaware on September 22, 1971 (incorporated by reference
to Exhibit 3.1 filed with Amendment No. 1 to Registration Statement on
Form S-1, Commission File No. 2-83308).
3.2 Certificate of Amendment to Certificate of Incorporation of Registrant
filed with the Secretary of the State of Delaware on February 6, 1978
(incorporated by reference to Exhibit 3.1 filed with Amendment No. 1 to
Registration Statement on Form S-1, Commission File No. 2-83308).
3.3 Certificate of Amendment to Certificate of Incorporation of Registrant
filed with the Secretary of the State of Delaware on February 4, 1983
(incorporated by reference to Exhibit 3.1 filed with Amendment No. 1 to
Registration Statement on Form S-1, Commission File No. 2-83308).
<PAGE>
3.4 Certificate of Amendment to Certificate of Incorporation of Registrant
filed with the Secretary of the State of Delaware on January 19, 1987
(incorporated by reference to Exhibit 3.4 filed with Form 8 Amendment
No. 1 to the Registrant's Annual Report on Form 10-K for the fiscal year
ended May 31, 1987).
3.5 Certificate of Amendment of Certificate of Incorporation of Registrant
filed November 4, 1987 with the Secretary of State of the State of
Delaware (incorporated by reference to Exhibit 3.1 filed with Amendment
No. 1 to Registration Statement on Form S-1, Commission File No. 2-
83308).
3.6 Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 filed
with Amendment No. 1 to Registration Statement on Form S-1, Commission
File No. 2-83308).
3.7 Certificate of Amendment of Certificate of Incorporation of Registrant
filed with the Secretary of the State of Delaware on December 20, 1994
(incorporated by reference to Exhibit 3.7 filed with Registrant's Annual
Report or Form 10-KSB for the fiscal year ended May 31, 1995).
10.1 Office lease dated June 1, 1988 between Registrant and Redington Company
covering Registrant's lease of premises at 1531/1533 Monrovia Avenue,
Newport Beach, California (incorporated by reference to Exhibit 10.1
filed with Registrant's Annual Report on Form 10-K for the fiscal year
ended May 31, 1989).
10.2 Contract for Employment of Joseph H. Irani dated June 1, 1986
(incorporated by reference to Exhibit 10.2 filed with Registrant's
Annual Report on Form 10-K for the fiscal year ended May 31, 1986).
10.5 Lancer purchase agreement and warrants (incorporated by reference to
Exhibit 10.10 filed with Registrant's Annual Report on Form 10-K for the
fiscal year ended May 31, 1989).
10.6 1995 Stock Option and Restricted Stock Plan of Registrant (incorporated
by reference to Exhibit 4.3 to Registration Statement on Form S-8 filed
with the Securities and Exchange Commission on December 20, 1995).
10.7 1991 Stock Option and Restricted Stock Plan of Registrant (incorporated
by reference to Exhibit 4.1 to Registration Statement on Form S-8 filed
with the Securities and Exchange Commission on April 6, 1992).
10.8 Biomerica, Inc.'s report on Form 8-K filed with the Securities and
Exchange Commission on May 24, 1994 (incorporated by reference to
Exhibit 99.3 filed with Registrant's Annual Report on Form 10-KSB for
the fiscal year ended May 31, 1994.).
16 Letter on Change of Certifying Accountant (incorporated by reference to
Exhibit A to Form 8-K filed with the Securities and Exchange Commission
on May 24, 1993).
21 Subsidiaries of Registrant.
99.1 Biomerica, Inc. and Subsidiaries Consolidated Financial Statements For
The Years Ended May 31, 1996 and 1995 and Independent Auditors' Report.
<PAGE>
99.2 Lancer Orthodontics, Inc. Annual Report on Form 10-KSB for Fiscal Year
Ended May 31, 1996 (incorporated by reference to Lancer's Form 10-KSB
dated August 15, 1996).
99.3 Biomerica's report on Form 10-C filed with the Securities and Exchange
Commission November 8, 1994 (incorporated by reference to Exhibit 99.3
filed with Form 10-KSB for the fiscal year ended May 31, 1995).
99.4 Consent of Independent Auditors
(b) Reports on Form 8-K
-------------------
None.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BIOMERICA, INC.
Registrant
By /S/JOSEPH H. IRANI
--------------------------
Joseph H. Irani
President
Dated: January 28, 1997
------------------------
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated:
Signature and Capacity
- ----------------------
/S/JOSEPH H. IRANI Date: 1/28/97
- ------------------------------ ------------
Joseph H. Irani
President, Director, Chief Executive
Officer, Chief Financial Officer
and Chief Accounting Officer
/S/P. B. KAPLAN Date: 1/28/97
- ---------------------------- ------------
P. B. Kaplan, M.D.
Director
/S/ROBERT ORLANDO Date: 1/28/97
- ------------------------------ ------------
Robert Orlando, M.D., Ph.D.
Director
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF BIOMERICA, INC.
Jurisdiction Percentage of
of Stock Owned by
Name of Subsidiary Incorporation Biomerica, Inc.
- ------------------ ------------- ---------------
Allergy Immuno Technologies, Inc. Delaware 73/5%
Lancer Orthodontics, Inc. California 29.9%
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> MAY-31-1996
<CASH> 622,828
<SECURITIES> 355,598
<RECEIVABLES> 1,940,317
<ALLOWANCES> 152,265
<INVENTORY> 2,072,551
<CURRENT-ASSETS> 4,934,838
<PP&E> 3,163,517
<DEPRECIATION> 2,699,271
<TOTAL-ASSETS> 6,066,546
<CURRENT-LIABILITIES> 1,687,190
<BONDS> 0
0
0
<COMMON> 277,266
<OTHER-SE> 1,718,947
<TOTAL-LIABILITY-AND-EQUITY> 6,066,546
<SALES> 9,480,658
<TOTAL-REVENUES> 9,480,658
<CGS> 5,429,627
<TOTAL-COSTS> 5,429,627
<OTHER-EXPENSES> 3,289,104
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 104,113
<INCOME-PRETAX> 445,464
<INCOME-TAX> 12,737
<INCOME-CONTINUING> 445,464
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 445,464
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
<PAGE>
EXHIBIT 99.1
ITEM 7. FINANCIAL STATEMENTS
- ------------------------------
INDEX
Independent Auditors' Report..........................................F-1
Consolidated Balance Sheet as of May 31, 1996.........................F-2
Consolidated Statements of Operations for the Years Ended
May 31, 1996 and 1995...............................................F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
May 31, 1996 and 1995...............................................F-5
Consolidated Statements of Cash Flows for the Years Ended
May 31, 1996 and 1995...............................................F-7
Notes to Consolidated Financial Statements for the Years Ended
May 31, 1996 and 1995...............................................F-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Biomerica, Inc.
We have audited the accompanying consolidated balance sheet of Biomerica, Inc.
and subsidiaries (the "Company") as of May 31, 1996 and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
years in the two-year period ended May 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Biomerica, Inc. and subsidiaries as of May 31, 1996 and the results of their
operations and their cash flows for each of the years in the two-year period
ended May 31, 1996 in conformity with generally accepted accounting principles.
CORBIN & WERTZ
[CAPTION]
Irvine, California
July 19, 1996
<PAGE>
<TABLE>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
May 31, 1996
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 622,828
Available-for-sale securities (Note 2) 355,598
Accounts receivable, less allowance for
doubtful accounts and sales returns of
$152,265 (Notes 5 and 6) 1,788,052
Inventories (Notes 5 and 6) 2,035,551
Notes receivable 27,985
Prepaid expenses and other 104,824
-----------
Total current assets 4,934,838
-----------
Inventories, non-current (Notes 5 and 6) 37,000
-----------
Land held for investment 46,000
-----------
Property and equipment, at cost (Notes 5 and 6):
Equipment 2,512,371
Furniture, fixtures and leasehold improvements 625,115
Construction in progress 26,031
-----------
3,163,517
Accumulated depreciation and amortization (2,699,271)
-----------
464,246
-----------
Intangible assets, net of accumulated amortization
(Note 4) 564,394
Other assets 20,068
-----------
Total assets $ 6,066,546
===========
Continued
</TABLE>
<PAGE>
<TABLE>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - CONTINUED
May 31, 1996
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C>
Current liabilities:
Line of credit (Note 5) $ 250,000
Long-term debt and capital lease obligations,
current portion (Notes 6 and 7) 198,842
Accounts payable and other accrued liabilities 701,619
Accrued compensation (Note 12) 526,514
Other 10,215
-----------
Total current liabilities 1,687,190
Long-term debt and capital lease obligations
(Notes 6 and 7) 278,653
Minority interests (Note 3) 2,104,490
-----------
Total liabilities 4,070,333
-----------
Commitments and contingencies (Note 12)
Shareholders' equity (Note 8):
Common stock, $.08 par value; 10,000,000 shares
authorized; 3,465,819 shares issued and
outstanding 277,266
Additional paid-in capital 11,348,664
Unrealized holding gain on available-for-sale
securities 90,687
Accumulated deficit (9,720,404)
-----------
Total shareholders' equity 1,996,213
-----------
$ 6,066,546
===========
<FN>
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended May 31, 1996 and 1995
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Net sales (Notes 3 and 11) $ 9,480,658 $ 9,161,758
Cost of sales (Note 3) 5,429,627 5,213,335
------------ -----------
Gross profit 4,051,031 3,948,423
------------ -----------
Operating expenses (Note 3):
Selling, general and administrative 3,051,829 3,335,929
Research and development 257,125 292,979
------------ -----------
Total operating expenses 3,308,954 3,628,908
------------ -----------
Operating profit 742,077 319,515
Other income (expense):
Interest expense (Notes 5 and 6) (104,113) (171,178)
Other income (Note 10) 19,850 44,101
------------ -----------
Income before minority interest in net
profits of consolidated subsidiaries
and income taxes 657,814 192,438
Minority interest in net profits
of consolidated subsidiaries (Note 3) (212,350) (101,540)
---------- -----------
Income before income taxes 445,464 90,898
Income tax expense (Note 9) 12,737 2,400
------------ -----------
Net income $ 432,727 $ 88,498
============ ===========
Per share data:
Net income $ .12 $ .03
============ ===========
Weighted average number of common
and common equivalent shares 3,589,494 3,406,241
============ ===========
<FN>
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For The Years Ended May 31, 1996 and 1995
<CAPTION>
Unrealized
Holding Gain
Additional On Available-
Common Stock Paid-In For-Sale Prepaid Accumulated
------------
Shares Amount Capital Securities Expenses Deficit Total
---------- --------- ----------- ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
June 1, 1994 3,365,069 $ 269,206 $11,290,796 $ 280,739 $ (11,382) $(10,241,629) $ 1,587,730
Exercise of stock
options (Note 8) 750 60 540 600
Issuance of stock for
services (Note 8) 27,000 2,160 8,481 10,641
Issuance of stock for
services (Note 8) 22,500 1,800 11,981 13,781
Issuance of stock for
payment of accrued
compensation (Notes
8 and 10) 16,000 1,280 12,026 13,306
Change in unrealized
gain on available-
for-sale securities (278,417) (278,417)
Amortization of prepaid
expenses (Note 8) 6,240 6,240
Net income 88,498 88,498
--------- --------- ----------- ----------- ----------- ------------- -----------
Balance at
May 31, 1995 3,431,319 274,506 11,323,824 2,322 (5,142) (10,153,131) 1,442,379
Continued
</TABLE>
<PAGE>
<TABLE>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
For The Years Ended May 31, 1996 and 1995
<CAPTION>
Unrealized
Holding Gain
Additional On Available-
Common Stock Paid-In For-Sale Prepaid Accumulated
------------
Shares Amount Capital Securities Expenses Deficit Total
---------- --------- ----------- ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Exercise of stock
options (Note 8) 34,500 2,760 24,840 27,600
Change in unrealized
gain on available-
for-sale securities 88,365 88,365
Amortization of prepaid
expenses (Note 8) 5,142 5,142
Net income 432,727 432,727
--------- --------- ----------- ---------- ----------- ------------ -----------
Balance at
May 31, 1996 3,465,819 $ 277,266 $11,348,664 $ 90,687 $ --- $(9,720,404) $ 1,996,213
========= ========= =========== ========== =========== ============ ===========
<FN>
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended May 31, 1996 and 1995
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 432,727 $ 88,498
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 272,996 386,419
Provision for losses on accounts
receivable (20,936) 27,595
Realized loss (gain) on sale of
available-for-sale securities 15,930 (14,380)
Minority interest in net profits
of consolidated subsidiaries 212,350 101,540
Deferred compensation 44,080 41,234
Stock issued for services and bonuses 24,422
Changes in current assets and
liabilities:
Accounts receivable (220,505) (136,798)
Inventories (222,172) (39,003)
Prepaid expenses and other
current assets 4,392 9,121
Accounts payable and other
accrued liabilities (5,085) 35,509
Accrued compensation 25,413 8,250
Other current liabilities (48,385) (47,151)
----------- ----------
Net cash provided by operating
activities 490,805 485,256
----------- ---------
Cash flows from investing activities:
Sales of available-for-sale securities 124,250 179,822
Purchases of available-for-sale securities (68,562)
Issuances of notes receivable (8,000)
Principal payments received on
notes receivable 8,681 23,834
Purchases of property and equipment (135,741) (203,079)
Proceeds from sale of property and
equipment 1,250
Purchase of intangible assets (3,140) (620)
Other assets (15,472) (196)
---------- ---------
Net cash used in investing activities (89,984) (6,989)
---------- ---------
Continued
</TABLE>
<PAGE>
<TABLE>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
For The Years Ended May 31, 1996 and 1995
<CAPTION>
1996 1995
----------- ---------
<S> <C> <C>
Cash flows from financing activities:
Net repayments of short-term borrowings
and note payable to bank (745,000) (561,248)
Payments of long-term debt and
capital lease obligations (25,407) (27,084)
Net borrowings under line of credit
agreement 250,000
Investments by minority interests 20,250
Exercise of stock options 27,600 600
---------- ---------
Net cash used in financing activities (472,557) (587,732)
---------- ---------
Net change in cash and cash equivalents (71,736) (109,465)
Cash and cash equivalents at beginning
of year 694,564 804,029
---------- ---------
Cash and cash equivalents at end of year $ 622,828 $ 694,564
========== =========
Supplemental disclosure of cash flow
information -
Cash paid during the year for:
Interest $ 104,113 $ 175,046
========== =========
Income taxes $ 2,726 $ 3,331
========== =========
Supplemental schedule of non-cash
investing and financing activities:
Change in unrealized holding gain on
available-for-sale securities $ 88,365 $(278,417)
Conversion of accounts payable and
accrued liabilities into common
stock of consolidated subsidiary
(minority interest) $ 50,816 $ 35,819
Conversion of deferred compensation
into common stock $ 13,306
Property acquired through issuance
of capital lease $ 62,814
Conversion of note payable to
account payable $ 17,500
<FN>
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended May 31, 1996 and 1995
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------
Organization
- ------------
Biomerica, Inc, and subsidiaries (collectively "the Company") are primarily
engaged in the development, manufacture and marketing of medical diagnostic
kits, the design, manufacture and distribution of various orthodontic products,
and the performance of specialized diagnostic testing services.
Principles of Consolidation
- ---------------------------
The consolidated financial statements for the years ended May 31, 1996 and 1995
(see Note 3) include the accounts of Biomerica, Inc. ("Biomerica"), Lancer
Orthodontics, Inc. ("Lancer") and Allergy Immuno Technologies, Inc. ("AIT").
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Accounting Estimates
- --------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Actual results could materially differ from those estimates.
Fair Value of Financial Instruments
- -----------------------------------
The Company has financial instruments whereby the fair market value of the
financial instruments could be different than that recorded on a historical
basis. The Company's financial instruments consist of its cash and cash
equivalents, accounts receivable, a note receivable, line of credit, long-term
debt and accounts payable. The carrying amounts of the Company's financial
instruments generally approximate their fair values at May 31, 1996. The fair
values of the notes receivable were not readily determinable as market
comparables were not available for such instruments.
Concentration of Credit Risk
- ----------------------------
The Company, on occasion, maintains cash balances at certain financial
institutions in excess of amounts insured by federal agencies.
The Company provides credit in the normal course of business to customers
throughout the United States and foreign markets. The Company's sales are not
materially dependent on a single customer or a small group of customers. The
Company performs ongoing credit evaluations of its customers. The Company does
not obtain collateral with which to secure its accounts receivable. The Company
does maintain reserves for potential credit losses based upon the Company's
historical experience related to credit losses.
Cash Equivalents
- ----------------
Cash and cash equivalents consists of demand deposits, money market accounts and
mutual funds with remaining maturities of three months or less when purchased.
Continued
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1996 and 1995
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- -------------------------------------------------------------------------------
Available-For-Sale Securities
- -----------------------------
The Company accounts for investments in accordance with Statement of Financial
Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in
Debt and Equity Securities." This statement addresses the accounting and
reporting for investments in equity securities which have readily determinable
fair values and all investments in debt securities. The Company's marketable
equity securities are classified as available-for-sale under SFAS 115 and
reported at fair value, with changes in the unrealized holding gain or loss
included in shareholders' equity. Available-for-sale securities consist of
common stock of unrelated publicly-held companies and are stated at market value
in accordance with SFAS 115. Cost for purposes of computing realized gains and
losses is computed on a specific identification basis. The proceeds from the
sale of available-for-sale securities during fiscal 1996 and 1995 totaled
$124,250 and $179,822, respectively, with realized (losses) gains of $(15,930)
and $14,380, respectively (see Note 10). The change in the net unrealized
holding gain (loss) on available-for-sale securities that has been included as a
separate component of shareholders' equity totaled $88,365 and $(278,417) for
the years ended May 31, 1996 and 1995, respectively.
Inventories
- -----------
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist primarily of orthodontic products and biological chemicals.
Cost includes raw materials, labor, manufacturing overhead and purchased
products.
Inventories at May 31, 1996 consist of the following:
Raw materials $ 525,232
Work in process 371,488
Finished products 1,138,831
----------
Total $ 2,035,551
==========
Approximately $1,359,000 of Lancer's inventory is located at its manufacturing
facility in Mexico as of May 31, 1996.
Land Held For Investment
- ------------------------
Land held for investment consists of a parcel of land located in the state of
Utah, and is stated at the lower of cost or market.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Expenditures for additions and major
improvements are capitalized. Repairs and maintenance costs are charged to
operations as incurred. When property and equipment are retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the
accounts, and gains or losses from retirements and dispositions are credited or
charged to income.
Continued
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1996 and 1995
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- -------------------------------------------------------------------------------
Depreciation and amortization are provided over the estimated useful lives of
the related assets, ranging from 3 to 12 years, using straight-line and
declining-balance methods. Leasehold improvements are amortized over the lesser
of the estimated useful life of the asset or the term of the lease.
Depreciation expense amounted to $188,384 and $284,166 for the years ended May
31, 1996 and 1995, respectively. Approximately $179,000 of property and
equipment, net of accumulated depreciation and amortization, is located at
Lancer's manufacturing facility in Mexico.
Included in property and equipment at May 31, 1996 is $62,814 of capitalized
leased assets, net of $18,843 of accumulated amortization.
Intangible Assets
- -----------------
Intangible assets, consisting of marketing and distribution rights, technology
use rights, patents and distributor agreements, are amortized using the straight
line method over their estimated useful lives of 5 to 18 years. Amortization
expense amounted to $79,470 and $96,012 for the years ended May 31, 1996 and
1995, respectively.
The Company assesses the recoverability of these intangible assets by
determining whether the amortization of the asset's balance over its remaining
life can be recovered through projected undiscounted future cash flows. The
amount of impairment, if any, is measured based on projected undiscounted future
cash flows and charged to operations in the period in which the impairment is
determined by management. Management has determined that there was no
impairment of intangible assets as of May 31, 1996.
Minority Interest
- -----------------
Minority interest represents the minority shareholders' proportionate share of
the equity of Lancer and AIT. At May 31, 1996, Biomerica owned 29.9% of Lancer
(see Note 3) and 73.5% of AIT (see Note 3).
Minority interest of Lancer includes $185,242 represented by 370,483 shares of
Series D redeemable convertible preferred stock. Each share of Series D
preferred stock is entitled to a $.04 non-cumulative dividend and is convertible
at the option of the holder into one share of common stock of Lancer. Lancer,
at its option, can redeem outstanding shares of the preferred stock for $.50 per
share after December 31, 1994. There were no dividends declared or paid in
1996.
Revenue Recognition
- -------------------
Revenues from product sales are recognized at the time the product is shipped.
Revenues from specialized diagnostic testing services are recognized when the
related services are performed.
Continued
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1996 and 1995
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- -------------------------------------------------------------------------------
Income Taxes
- ------------
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under the asset
and liability method of Statement No. 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under Statement No. 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Biomerica, Lancer and AIT file separate income tax returns for Federal and state
income tax purposes.
Income Per Share
- ----------------
Income per share is computed using the weighted average number of common and
common equivalent shares outstanding during each year. The approximate number
of shares used in the computation was 3,589,494 and 3,406,241 in 1996 and 1995,
respectively. Common stock equivalents were excluded in 1995 because they were
insignificant. Primary and fully diluted income per share are the same for both
years presented.
NOTE 2 - INVESTMENTS
- --------------------
As of May 31, 1996, Biomerica owns 72,792 shares of Pharma Patch-plc which is
less than 5% of the total outstanding common shares of Pharma Patch-plc. The
Company has reflected the investment in Pharma Patch-plc as an available-for-
sale security in the accompanying consolidated balance sheet as of May 31, 1996.
NOTE 3 - CONSOLIDATED SUBSIDIARIES
- ----------------------------------
During the period July 1988 through August 1989, Biomerica acquired a total of
3,041,776 shares of common stock of Lancer for cash and other consideration
totaling $2,060,231. In August 1989, control of Lancer was constructively
obtained through such acquisitions, coupled with holdings of the outstanding
shares of Lancer by the president and major shareholder of Biomerica (also a
director of Lancer). Additionally, another Biomerica director also serves as a
director on Lancer's Board of Directors. It is deemed that, effectively,
Biomerica has control of Lancer.
Biomerica's investment in Lancer was accounted for as a purchase effective in
August 1989. Accordingly, Lancer's balance sheet at May 31, 1996 and operating
results for the years ended May 31, 1996 and 1995, have been included in the
accompanying consolidated financial statements. The excess of the cost of the
investment over the amount of underlying equity in net assets acquired
($451,934) was ascribed to certain identifiable intangible assets, namely
patents and distributor agreements and was being amortized using the straight-
line method over 17 years. However, as a result of Lancer's recurring operating
losses and net working capital deficiencies, Biomerica elected to write down
approximately 50% of the intangible assets during fiscal 1991 and the remaining
balance during fiscal 1992.
Continued
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1996 and 1995
NOTE 3 - CONSOLIDATED SUBSIDIARIES, continued
- ---------------------------------------------
During the year ended May 31, 1992, Biomerica received an additional 1,465,646
shares of Lancer common stock, upon conversion of $293,129 of 8% unsecured
subordinated convertible debentures and accrued interest at $.20 per share.
During 1993, Lancer issued to unrelated entities 501,774 shares of its common
stock for $98,006 in exchange for cash and for forgiveness of debt and sold
1,355,200 shares of common stock for $360,000. Additionally, Lancer issued to
unrelated entities 570,483 shares of redeemable convertible preferred stock that
has voting rights equivalent to 670,483 shares of common stock. The issuance of
these shares caused Biomerica's ownership percentage of Lancer to decrease to
31.6% and Biomerica's president's ownership percentage to increase to 16.1%.
During 1994, Lancer issued 190,608 shares and canceled 9,679 shares of its
common stock to unrelated entities totaling $134,750 and $5,617, respectively.
In addition, 200,000 shares of Series C preferred stock were converted into an
account payable which was subsequently paid during fiscal 1994. Biomerica sold
60,000 shares of Lancer common stock to unrelated entities. The result of these
transactions was a decrease in Biomerica's ownership percentage of Lancer to
30.8% and an increase in Biomerica's president's ownership to 16.4%. During
1995, Lancer issued 137,617 shares of its common stock to unrelated parties
totaling $35,819. The result of this transaction was a decrease in Biomerica's
ownership percentage of Lancer to 30.5% and a decrease in Biomerica's
president's ownership to 16.3%. During 1996, Lancer issued 194,779 shares of
its common stock to an unrelated party totaling $50,816 for the conversion of
accrued royalties and sold 72,600 shares of its common stock to unrelated
parties for cash of $20,250. The result of these transactions is a decrease in
Biomerica's ownership percentage of Lancer to 29.9% and a decrease in
Biomerica's president's ownership to 16%. Biomerica's president controls an
additional 835,066 shares of Lancer's common stock either through proxy or other
controlled persons (representing approximately 5.6% of Lancer's outstanding
common stock).
In connection with Biomerica's conversion of debentures during fiscal 1992,
Biomerica received warrants to purchase an additional 83,333 and 425,000 shares
of Lancer's common stock at $.30 and $.20 per share, respectively. All of the
warrants expired in fiscal 1994. During fiscal 1994, Biomerica received
warrants to purchase 508,333 shares of Lancer's common stock at $.25 per share
and options to purchase 140,000 shares of Lancer's common stock at $.28 per
share. Both the options and warrants expire in April 1998.
Allergy Immuno Technologies, Inc. (AIT) provides immune allergy testing and
products to physicians and medical institutions. As of May 31, 1992,
Biomerica's ownership interest in AIT amounted to 49.8% and thus Biomerica
accounted for its investment in AIT under the equity method. During fiscal year
1992, Biomerica paid operating expenses on behalf of AIT of approximately
$56,000. In addition, as a result of AIT's recurring operating losses and
shareholders' deficiency, Biomerica wrote-off the net investments in and
advances to AIT. During June 1992, 8,360,000 additional shares of AIT's common
stock were issued to Biomerica as a repayment of advances made to AIT, thus
increasing Biomerica's ownership interest in AIT to 76.2%. During 1995 and
1994, an additional 480,000 and 25,000 shares of AIT were issued to outside
parties decreasing Biomerica's interest in AIT to 73.5% and 76.1%, respectively.
Accordingly, as of May 31, 1996 and for the years ended May 31, 1996 and 1995,
the accounts of AIT have been included in the consolidated financial statements.
The acquisition of AIT's ownership interest during 1993 was accounted for as a
purchase. The purchase price was not significant and was allocated among the
net tangible assets acquired and liabilities assumed on the basis of their
estimated fair values. The acquisition cost approximated the estimated fair
values of the net assets acquired.
Continued
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1996 and 1995
NOTE 3 - CONSOLIDATED SUBSIDIARIES, continued
- ---------------------------------------------
Operating results for Lancer and AIT in the aggregate for the years ended May
31, 1996 and 1995, which are included in the consolidated operating results of
the Company, are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Net sales $ 6,922,275 $ 7,229,694
Cost of sales 4,097,311 4,225,022
---------- ----------
Gross profit 2,824,964 3,004,672
---------- ----------
Operating expenses:
Selling, general and administrative 2,287,958 2,558,690
Research and development 136,364 169,114
---------- ----------
Total operating expenses 2,424,322 2,727,804
---------- ----------
Other income (expense):
Interest expense (104,113) (168,879)
Other income, net 12,702 40,268
---------- ----------
(91,411) (128,611)
---------- ----------
Income before income taxes 309,231 148,257
Income tax expense 1,600 1,600
---------- ----------
Net income $ 307,631 $ 146,657
========== ==========
</TABLE>
NOTE 4 - INTANGIBLE ASSETS
- --------------------------
Intangible assets, net of accumulated amortization, consist of the following at
May 31, 1996:
Marketing and distribution rights $ 442,750
Technology use rights 985,507
Patents and capitalized patent application costs 35,862
-----------
1,464,119
Less accumulated amortization (899,725)
------------
$ 564,394
===========
Included in marketing and distribution rights are repurchased sales territories
by Lancer which are being amortized over the estimated useful life of eighteen
years. In each of the fiscal years 1996 and 1995, the Company recorded
amortization expense of $24,900 related to repurchased sales territories.
During fiscal 1985, Lancer purchased certain assets and technology which is
being amortized over the estimated useful life of eighteen years. Lancer
recorded amortization expense of $53,970 and $70,512 for the years ended May 31,
1996 nd 1995, respectively, related to these assets.
Amortization expense related to patents which is included in the accompanying
consolidated statements of operations amounted to $600 for each of the years
ended May 31, 1996 and 1995.
Continued
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1996 and 1995
NOTE 5 - LINE OF CREDIT
- -----------------------
At May 31, 1996, Lancer had a $500,000 line of credit with a bank. Borrowings
are made at prime plus 1% (9.25% at May 31, 1996) and are limited to specified
percentages of eligible accounts receivable. The unused portion available to
Lancer under the line of credit at May 31, 1996 was $103,000. The line of
credit expires on November 1, 1996. As of May 31, 1996, there was $250,000
outstanding under the line of credit.
The following summarizes information on short-term borrowings from October 11,
1995 (the date the line was established) through May 31, 1996.
Average month end balance $196,747
Maximum balance outstanding at any month end $250,000
Weighted average interest rate (computed by
dividing interest expense by average
monthly balance) 9.53%
Interest rate at year end 9.25%
NOTE 6 - LONG-TERM DEBT
- -----------------------
Effective October 10, 1995, Lancer arranged for a restructuring of its previous
note payable. The note was divided into a new term note, with an original
balance of $645,000 and a line of credit with an original balance of $400,000
(see Note 5). The new note payable is for a term of two years and requires
monthly principal and interest payments of $18,889. Interest is at prime rate
plus 1% (9.25% at May 31, 1996). All unpaid principal and accrued interest is
due and payable on November 1, 1997.
At May 31, 1996, the note payable is due as follows:
Years Ending
May 31,
-----------
1997 $ 177,194
1998 262,806
-----------
440,000
Less current portion (177,194)
-----------
$ 262,806
===========
The note payable and line of credit are collateralized by inventories,
receivables and equipment. The lending agreement requires, among other things,
that Lancer maintain a tangible net worth of $2,000,000, a debt to tangible net
worth ratio of no more than 1.25 to 1 and a current ratio of at least 1.5 to 1.
Lancer is not required to maintain compensating balances in connection with this
lending agreement.
NOTE 7 - CAPITAL LEASE OBLIGATIONS
- ----------------------------------
Lancer is the lessee of equipment under a capital lease which expires in the
year 1998. The assets and liabilities under the capital lease are recorded at
the lower of the present value of the minimum lease payments or the fair market
value of the asset. The asset is depreciated over its estimated useful lives.
Depreciation of the asset is included in depreciation expense for the years
ended May 31, 1996 and 1995.
Continued
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1996 and 1995
NOTE 7 - CAPITAL LEASE OBLIGATIONS, continued
- ---------------------------------------------
The future annual minimum lease payments under the capital lease are as follows:
Years Ending
May 31,
------------
1997 $ 24,791
1998 16,528
-----------
Total annual future minimum lease payments 41,319
Less amounting representing interest (3,824)
-----------
Present value of net minimum lease payments 37,495
Less current portion (21,648)
-----------
$ 15,847
===========
NOTE 8 - SHAREHOLDERS' EQUITY
- -----------------------------
1995, 1991 and 1980 Stock Option and Restricted Stock Plans
- -----------------------------------------------------------
Under the currently expired 1980 Employee Stock Option Plan (the 1980 Plan), the
Company was authorized to grant stock options to full-time and part-time
employees of, and consultants to, the Company, subject to certain limitations.
Options granted under the 1980 Plan could be granted at prices not less than 90%
of the then fair market value of the common stock and expire not more than five
years after the date of grant. During 1995, the remaining 7,500 unexercised
options under the 1980 Plan expired.
In December 1991, the Company adopted a stock option and restricted stock plan
which provides that non-qualified options and incentive stock options and
restricted stock covering an aggregate of 350,000 of the Company's unissued
common stock may be granted to officers, employees or consultants of the
Company. During 1995, the Company issued 49,500 shares of restricted common
stock to certain employees and consultants of Biomerica for services totaling
$24,422 rendered during fiscal 1995.
In January 1996, the Company adopted a stock option and restricted stock plan
(the "1995 Plan") which provides that non-qualified options and incentive stock
options and restricted stock covering an aggregate of 500,000 of the Company's
unissued common stock may be granted to affiliates, employees or consultants of
the Company. Options granted under the 1995 Plan may be granted at prices not
less than 85% of the then fair market value of the common stock and expire not
more than 10 years after the date of grant. No options under the 1995 Plan were
granted during the year ended May 31, 1996.
Activity as to stock options under the 1980 and 1991 plan is as follows:
Options outstanding at May 31, 1994 126,191 $ .80- $2.88
Options granted 257,500 $ .80- $ .85
Options exercised (750) $ .80
Options canceled or expired (117,441) $ .80- $2.88
----------
Options outstanding at May 31, 1995 265,500 $ .80- $2.00
Options granted 11,000 $ .95
Options exercised (34,500) $ .80
Options canceled or expired (12,250) $ .80- $ .95
----------
Options outstanding at May 31, 1996 229,750 $ .80- $2.00
==========
Options exercisable at May 31, 1996 166,375 $ .80- $2.00
==========
Continued
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1996 and 1995
NOTE 8 - SHAREHOLDERS' EQUITY, continued
- ---------------------------------------
Common Stock Split
- ------------------
During the year ended May 31, 1995, the Company declared a 1-for-2 reverse stock
split. Accordingly, all share and per share information throughout the
consolidated financial statements have been retroactively restated to reflect
the reverse split.
Stock Grants
- ------------
During 1995, the Company issued 16,000 shares, respectively, not covered by the
1991 Stock Option and Restricted Stock Plan, to certain employees and
consultants, primarily to the president and two directors of Biomerica. These
shares were issued for services rendered in fiscal 1995. These shares vested
immediately and generally related to services previously rendered. The Company
recorded a prepaid bonus of $11,382 at May 31, 1994 which is being amortized on
a straight-line basis over two years. During 1996 and 1995, the Company
recorded amortization expense of $5,142 and $6,240, respectively, on such bonus.
Stock Options Issued
- --------------------
During 1995, the Company and the Chief Executive Officer agreed not to defer any
compensation for the period June 1994 through November 1994 and instead issue
stock options to purchase 60,000 shares of the Company's common stock at $.85
per share. At the time of grant, market price and the exercised price was
approximately the same price. No compensation expense was recorded.
New Disclosure Standard
- -----------------------
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123 "Accounting for Stock Based Compensation"
("Statement No. 123"). Statement No. 123 is primarily a disclosure standard for
the Company because it will continue to account for employee stock options under
Accounting Principal Board Opinion No. 25. The disclosure requirements for the
Company required by Statement No. 123 are effective for financial statements
issued after fiscal year 1996.
NOTE 9 - INCOME TAXES
- ---------------------
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at May 31, 1996 and 1995 are
presented below.
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due
to allowance for doubtful accounts
and sales returns $ 60,958 $ 69,334
Inventories, principally due to
additional costs inventoried for
tax purposes pursuant to the Tax
Reform Act of 1986 and allowance
for inventory obsolescence 129,472 118,146
Compensated absences and deferred
payroll, principally due to accrual
for financial reporting purposes 231,432 208,305
Continued
</TABLE>
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1996 and 1995
<TABLE>
NOTE 9 - INCOME TAXES, continued
- --------------------------------
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
State net operating loss carryforwards 53,961 158,466
Federal net operating loss carryforwards 2,956,980 3,230,263
Tax credit carryforwards 244,403 242,911
Investment in affiliates 451,217 464,870
---------- -----------
Total gross deferred tax assets 4,128,423 4,492,295
Less valuation allowance (4,044,593) (4,398,505)
---------- -----------
83,830 93,790
Deferred tax liabilities:
Marketing rights, principally
due to amortization (83,830) (93,790)
---------- -----------
Net deferred tax liability $ --- $ ---
---------- -----------
Income tax expense for the years ended May 31, 1996 and 1995 consists of the following current provisions:
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
U.S. Federal $ --- $ ---
State and local 12,737 2,400
---------- -----------
$ 12,737 $ 2,400
========== ===========
Income tax expense differs from the amounts computed by applying the U.S. Federal income tax rate of 34 percent to pretax income
from operations as a result of the following:
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Computed "expected" tax expense $ 151,458 $ 30,905
Increase (reduction) in income taxes
resulting from:
Change in the beginning-of-the-year
balance of the valuation allowance
for deferred tax assets allocated
to income tax expense (28,287)
Meals and entertainment 9,855 12,721
Utilization of net operating loss (140,960)
Other (net) 11,836
Equity in earnings of affiliates
not subject to taxation because
of dividends-received deduction
for tax purposes (32,189) (15,339)
State income taxes 12,737 2,400
---------- -----------
$ 12,737 $ 2,400
========== ===========
Continued
</TABLE>
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1996 and 1995
NOTE 9 - INCOME TAXES, continued
- --------------------------------
As of May 31, 1996, Biomerica had net tax operating loss carryforwards of
approximately $4,484,000 and investment tax and research and development credits
of approximately $18,702, which are available to offset future Federal tax
liabilities. The carryforwards expire at varying dates from 1997 to 2010.
As of May 31, 1996, Lancer had net tax operating loss carryforwards of
approximately $2,688,000 and business tax credits of approximately $174,131
available to offset future Federal tax liabilities. The carryforwards expire at
varying dates from 1996 to 2008. Lancer also had net tax operating loss
carryforwards of approximately $546,000 and business tax credits of
approximately $23,000 available to offset future California taxable income,
expiring at varying dates between 1997 and 1998.
As of May 31, 1996, AIT had net tax operating loss carryforwards of
approximately $1,525,000 and business tax credits of approximately $28,570
available to offset future Federal tax liabilities. The carryforwards expire at
varying dates from 1995 to 2008. AIT also had net tax operating loss
carryforwards of approximately $333,000 to offset future California taxable
income, expiring at varying dates between 1997 and 2001.
NOTE 10 - OTHER INCOME (EXPENSE)
- --------------------------------
Other income consists of the following:
<TABLE>
<CAPTION>
1996 1995
------------- -----------
<S> <C> <C>
Realized (losses) gains on available-
for-sale securities transactions $ (15,930) $ 14,380
Dividend income 8,920 7,585
Other 26,860 22,136
------------ -----------
$ 19,850 $ 44,101
============ ===========
NOTE 11 - BUSINESS SEGMENTS
- ---------------------------
Reportable business segments for the years ended May 31, 1996 and 1995 are as follows:
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Domestic sales:
Orthodontic products $ 3,999,000 $ 4,580,000
============ ===========
Medical diagnostic products $ 2,219,000 $ 1,414,000
============ ===========
Foreign sales:
Orthodontic products $ 2,781,000 $ 2,543,000
============ ===========
Medical diagnostic products $ 482,000 $ 625,000
============ ===========
Net sales:
Orthodontic products $ 6,780,000 $ 7,123,000
Medical diagnostic products 2,701,000 2,039,000
------------ -----------
Total $ 9,481,000 $ 9,162,000
============ ===========
Operating profit:
Orthodontic products $ 416,000 $ 315,000
Medical diagnostic products 326,000 5,000
------------ -----------
Total operating profit $ 742,000 $ 320,000
============ ===========
Continued
</TABLE>
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1996 and 1995
<TABLE>
NOTE 11 - BUSINESS SEGMENTS, continued
- --------------------------------------
<S> <C> <C>
Identifiable assets:
Orthodontic products $ 4,033,000 $ 4,389,000
Medical diagnostic products 2,034,000 1,400,000
------------ -----------
Total 6,067,000 5,789,000
------------ -----------
Total assets $ 6,067,000 $ 5,789,000
============ ===========
Depreciation and amortization
expense:
Orthodontic products $ 234,000 $ 355,000
Medical diagnostic products 39,000 31,000
------------ -----------
Total $ 273,000 $ 386,000
============ ===========
Capital expenditures:
Orthodontic products $ 104,000 $ 117,000
Medical diagnostic products 32,000 86,000
------------ -----------
Total $ 136,000 $ 203,000
============ ===========
</TABLE>
Total net sales as reflected above consist of sales to unaffiliated customers
only as there were no significant intersegment sales during fiscal years 1996
and 1995. Foreign sales consist primarily of sales to Canada, Europe, Japan and
Korea. No customer accounted for more than 10% of net sales during fiscal years
1996 and 1995.
Identifiable assets by business segment are those assets that are used in the
Company's operations in each industry. There were no significant corporate
assets as of May 31, 1996 and 1995. The Company's interests in AIT, whose
operations are in the United States, are vertically integrated with the
Company's operations in the medical diagnostic products industry.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
Biomerica leases its primary facility under a non-cancelable operating lease
which expires on May 31, 1998. AIT leases its primary facility under a month-
to-month operating lease. These facilities are owned by two of the Company's
shareholders, including its president. The lease rate is $10,720 and $1,400 per
month, respectively.
Lancer leases its main facility under an operating lease expiring December 31,
1998, which requires monthly rentals that increase annually. The lease expense
is being recognized on a straight-line basis over the term of the lease. The
excess of the expense recognized over the cash paid is included as deferred
lease expense in accounts payable and other accrued liabilities in the
accompanying consolidated balance sheet as of May 31, 1996.
Continued
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1996 and 1995
NOTE 12 - COMMITMENTS AND CONTINGENCIES, continued
- --------------------------------------------------
Rental expense for all operating leases amounted to $191,000 and $197,000 for
the years ended May 31, 1996 and 1995, respectively. The future annual minimum
lease payments are as follows:
Years Ending
May 31,
------------
1997 $ 194,000
1998 197,000
1999 31,000
-----------
Minimum lease payments $ 422,000
===========
In May 1990, Lancer entered into a manufacturing subcontractor agreement whereby
the subcontractor agreed to provide manufacturing services to Lancer through its
affiliated entities located in Mexicali, B.C., Mexico. Lancer moved the
majority of its manufacturing operations to Mexico during fiscal 1992 and 1991.
Under the terms of the original agreement, the subcontractor manufactured
Lancer's products based on an hourly rate per employee based on the number of
employees in the subcontractor's workforce. As the number of employees
increases, the hourly rate decreases. In December 1992, Lancer renegotiated the
agreement changing from an hourly rate per employee cost to a pass through of
actual costs plus a weekly administrative fee. The amended agreement gives
Lancer greater control over all costs associated with the manufacturing
operation.
In July 1994, Lancer again renegotiated the agreement reducing the
administrative fee and extending the agreement through June 1998. After June
1996, either party may cancel the agreement with three months notice. The
Company has retained the option to convert the manufacturing operation to a
wholly-owned subsidiary of Lancer at any time. Should Lancer discontinue
operations in Mexico, it is responsible for the accumulated employee seniority
obligation as prescribed by Mexican law.
In June 1986, the Company entered into an employment agreement with its chief
executive officer. In May 1996, the agreement was extended for an additional
three years expiring in May 1999. The agreement requires minimum annual
compensation payments of $169,000 and provides for periodic cost of living
increases. The chief executive officer was paid approximately $81,000 and
$60,000 during the years ended May 31, 1996 and 1995, respectively. The Chief
Executive Officer and the Company agreed to amend the employment agreement for
fiscal year 1995, whereby the Chief Executive Officer would not receive any
deferred compensation for the period June 1994 through November 1994 of
approximately $54,500 and instead received 60,000 stock options (see Note 8).
The chief executive officer and the Company agreed to amend the employment
agreement for fiscal year 1996, whereby the chief executive officer would reduce
his salary by $44,000 for the period June 1995 through November 1995. The
remaining amount of approximately $44,000 and $54,500 for fiscal years 1996 and
1995, respectively, have been deferred and are included in accrued compensation
in the accompanying consolidated balance sheet as of May 31, 1996 and 1995.
During the year ended May 31, 1995, the Company issued 16,000 shares of its
common stock valued at $13,306 as a reduction of the deferred compensation.
Approximately $500,000 of the total accrued compensation included in the 1996
consolidated balance sheet is due to the chief executive officer.
Continued
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1996 and 1995
NOTE 12 - COMMITMENTS AND CONTINGENCIES, continued
- --------------------------------------------------
Government Regulation
- ---------------------
Medical diagnostic products in the United States are subject to governmental
regulation and supervision by various federal and state agencies. The Company's
facilities, manufacturing procedures and records are periodically inspected by
the FDA and other government agencies such as the USDA to review compliance with
applicable regulations. Diagnostic test kits are required to comply with
certain manufacturing standards of the FDA. Various foreign government agencies
regulate the sale of medical diagnostic products in foreign countries. Although
the Company does not anticipate any unusual difficulties in complying with
government regulations applicable to its business, it cannot predict whether
future changes in government regulation might increase its cost of conducting
business or increase the time required for development and introduction of new
products.
License and Royalty Agreements
- ------------------------------
Lancer has entered into a number of license and/or royalty agreements pursuant
to which it has obtained rights to manufacture and market certain products. The
agreements are for various durations and they require the Company to make
payments based on the sales of the individual licensed products.
Retirement Savings Plan
- -----------------------
Effective September 1, 1986, Lancer established a 401(k) plan for the benefit of
its employees. The plan permits eligible employees to contribute to the plan up
to the maximum percentage of total annual compensation allowable under the
limits of Internal Revenue Code Sections 415, 401(k) and 404. Lancer, at the
discretion of its Board of Directors, may make contributions to the plan in
amounts determined by the Board each year. No contributions by Lancer have been
made since the plan's inception.
NOTE 13 - RELATED PARTY TRANSACTIONS
- ------------------------------------
During fiscal 1991, Biomerica borrowed $70,000 from its president. During 1996,
the remaining balance of $4,000 was repaid in full.
NOTE 14 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
- -----------------------------------------------------------
The following represents the condensed balance sheet for Biomerica, Inc. as of
May 31, 1996, and condensed statements of operations and of cash flows for the
years ended May 31, 1996 and 1995. No cash dividends were paid by the
consolidated subsidiaries (see Note 3) during the years ended May 31, 1996 and
1995.
<TABLE>
Condensed Balance Sheet
May 31, 1996
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 533,030
Available-for-sale securities 355,598
Accounts receivable, net 298,942
Inventories 443,144
Notes receivable 27,985
Prepaid expenses and other 58,276
-----------
Total current assets 1,716,975
Continued
</TABLE>
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1996 and 1995
NOTE 14 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY, continued
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
Condensed Balance Sheet - Continued
May 31, 1996
<S> <C>
Investment in and advances to affiliates and consolidated
subsidiaries 923,280
Inventory, non-current 37,000
Property and equipment, net 119,507
Intangible assets 22,653
Other 15,668
-----------
$ 2,835,083
===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C>
Current liabilities:
Accounts payable and accrued liabilities $ 302,141
Accrued compensation 526,514
Other 10,215
-----------
Total current liabilities 838,870
-----------
Shareholders' equity:
Common stock 277,266
Additional paid-in capital 11,348,664
Unrealized holding gain on available-for-sale securities 90,687
Accumulated deficit (9,720,404)
-----------
Total shareholders' equity 1,996,213
-----------
$ 2,835,083
===========
Condensed Statements of Operations
May 31, 1996 and 1995
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Net revenues $ 2,586,697 $ 1,932,064
Cost of sales 1,360,630 1,015,426
----------- -----------
Gross profit 1,226,067 916,638
Operating expenses:
Selling, general and administrative 763,871 777,239
Research and development 120,761 123,865
------------ -----------
Total operating expenses 884,632 901,104
----------- -----------
Operating income 341,435 15,534
Other income (expense):
Interest income (expense) (2,299)
Other income 7,148 30,946
------------ -----------
Income before interest in net income of
consolidated subsidiaries and income taxes 348,583 44,181
Interest in net income of consolidated
subsidiaried 95,281 45,117
Income tax expense 11,137 800
------------ -----------
Net income $ 432,727 $ 88,498
============ ===========
Continued
</TABLE>
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1996 and 1995
NOTE 14 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY, continued
- ----------------------------------------------------------------------
<TABLE>
Condensed Statements of Cash Flows
May 31, 1996 and 1995
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 432,727 $ 88,498
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 36,270 28,265
Realized loss (gain) on sale of
available-for-sale securities 15,930 (14,380)
Provision for losses on accounts
receivable (936) (2,284)
Income of subsidiaries (95,281) (45,117)
Deferred compensation 44,080 57,837
Issuance of stock for services
and bonuses 24,422
Net change in other current assets
and current liabilities (31,118) 1,484
------------ -----------
Net cash provided by operating activities 401,672 138,725
------------ -----------
Cash flows from investing activities:
Sales of available-for-sale securities 124,250 179,822
Purchases of available-for-sale securities (68,562)
Issuance of notes receivable (8,000)
Principal payments received on notes
receivable 8,681 23,834
Decrease (increase) in investment in
and advances to affiliates and
consolidated subsidiaries (36,561) 10,770
Purchases of property and equipment (30,855) (82,931)
Proceeds from sale of property and
equipment 1,250
Purchases of intangible assets (750) (620)
Decrease in other assets (15,472) 3,138
------------ -----------
Net cash (used in) provided by investing
activities (19,269) 127,263
------------ -----------
Cash flows from financing activities:
Payment on short-term borrowings (4,000) (161,248)
Issuance of notes payable (5,751)
Proceeds from sale of stock and
exercise of stock options 27,600 600
------------ -----------
Net cash provided by (used in) financing
activities 23,600 (166,399)
------------ -----------
Continued
</TABLE>
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1996 and 1995
NOTE 14 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY, continued
- ----------------------------------------------------------------------
<TABLE>
Condensed Statements of Cash Flows - Continued
May 31, 1996 and 1995
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Net change in cash and cash equivalents 406,003 99,589
Cash and cash equivalents at beginning of year 127,027 27,438
------------ -----------
Cash and cash equivalents at end of year $ 533,030 $ 127,027
============ ===========
Supplemental disclosure of cash flow
information -
Cash paid during the year for:
Income taxes $ 800 $ 800
============ ===========
Interest $ --- $ 4,482
============ ===========
Supplemental schedule of non-cash investing
and financing activities:
Conversion of deferred compensation into
common stock $ 13,306
Conversion of note payable to account
payable $ 17,500
Change in unrealized holding gain on
available-for-sale securitie $ 88,365 $ (278,417)
</TABLE>
