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
(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, 1997
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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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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
--- ---
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: $9,243,510.
State the aggregate market value of the voting stock held by non-affiliates of
the issuer (based upon 3,292,107shares held by non-affiliates and the closing
price of $2.9375 per share for Common Stock in the over-the-counter market as of
August 22, 1997: $9,670,564).
Number of shares of the issuer's common stock, par value $.08, outstanding as of
August 22, 1997: 3,893,302 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
The issuer's proxy statement for its 1997 Annual Meeting of Stockholders is
incorporated into Part III hereof. Also incorporated by reference is the Annual
Report on Form 10-KSB for the fiscal year ended May 31, 1997, for Lancer
Orthodontics, Inc.
<PAGE>
PART I*
ITEM 1. DESCRIPTION OF BUSINESS
-----------------------
The statements in this Annual Report on Form 10-KSB and other statements made
by Biomerica, Inc. that relate to future plans, events or performance are
forward-looking statements which involve risks and uncertainties. Actual
results, events or performance may differ materially from those anticipated in
any forward-looking statements as a result of a variety of factors, including
those set forth in this Annual Report on Form 10-KSB.
INTRODUCTION
Biomerica, Inc. ("Biomerica" or the "Company") is an international
biomedical company primarily engaged in the development, manufacture and
marketing of medical diagnostic test products. 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, 1997,
Biomerica held the following percentage ownership in the issued and outstanding
common stock of subsidiaries:
Subsidiary Company Biomerica Percent Ownership
------------------ ---------------------------
Lancer Orthodontics, Inc. ("Lancer") 29.9%
Allergy Immuno Technologies, Inc. ("AIT") 73.9%
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, e-mail: [email protected]).
In addition to Biomerica's ownership of Lancer, a director of Biomerica
controls approximately 15.9% of the outstanding Lancer common stock. Two other
Biomerica directors serve on Lancer's board of directors. In addition,
Biomerica's Board controls an additional 5.7% 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, 1997, the Company's businesses included the following:
o CORE BUSINESS IN DIAGNOSTICS, VIA BIOMERICA, INC.
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Biomerica develops, manufactures, and sells unique 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.
o 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 a direct sales force and distributors.
* 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>
o ALLERGY AND IMMUNO DIAGNOSTICS, VIA AIT
---------------------------------------
AIT is engaged in developing 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. 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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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, antibodies, antigens or other substances which
may exist in the human body in extremely small concentrations. Recently
advances in this technology have led to tests which could be used in the
physcians office and by the patient at home.
The Company targets three distinct markets in its core business of
diagnostic products. These markets are: (1) Clinical laboratories, hospitals
and researchers that perform immunoassays; (2) physicians offices and smaller
laboratories which could benefit from in-office or rapid diagnostic tests; and
(3) pharmacies and consumers who are interested in performing/marketing tests
for home use (over-the-counter products).
CLINICAL DIAGNOSTIC PRODUCTS
- ----------------------------
Biomerica currently manufactures and sells diagnostic test kits which
utilize enzyme immunoassay (EIA) or radioimmunoassay (RIA) technology. Biomerica
also sells other kits to researchers. These products have not yet been cleared
by the FDA for diagnostic use. Biomerica's clinical products include:
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Diagnostic Test Kit Use
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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.
MYOGLOBIN (RIA) -For measurement of myoglobin in blood as a result
of skeletal muscle injury including heart.
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
ANTIBODY TEST thyroglobulin in human blood. High levels of
(EIA & RIA) patient's Tg autoantibodies are present with
Hashimoto's disease and lymphadenoid goiter.
This product has just been cleared by the FDA.
NEONATAL TSH (RIA) -For early detection of congenital primary hypo-
thyroidism. (Newborn thyroid hormone assessment).
<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
ANTIBODY (EIA) ("GAP") peptic ulcer infection. The "GAP" test is
FOR GASTRITIS & ULCER amenable to screen populations for the bacterium
DETECTION (Helicobacter pylori) that causes gastritis and
peptic ulcers. FDA clearance for the GAP was
received in July 1991. Since then, Biomerica has
entered into a multi-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.
ISLET CELL- -A non-invasive blood test for predisposition of
AUTOANTIBODIES (EIA) Type I diabetes. It is for detecting the onset
(ISLETESTTM) of type I diabetes [insulin dependent diabetes
FOR DETECTION mellitus (IDDM)] years before the manifestation
OF TYPE I DIABETES of 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
AUTOANTIBODY (EIA) status 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.
CANDIDA ALBICANS ANTIBODY -A non-invasive blood test for detection of IgG,
(CANDIQUANTTM) IgM or IgA antibodies to Candida albicans. This
kit is provided for investigational use only.
CANDIDA ALBICANS -A non-invasive blood test for detection of
ANTIGEN (CANDIGENTM) Candida albicans antigen. This kit is provided
for investigational use only.
PHYSICIANS' OFFICE AND OVER-THE-COUNTER PRODUCTS
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The over-the-counter and professional markets for rapid diagnostic products
are expanding as a result of significant economic pressures affecting the health
care industry. These types of products are important for the following reasons:
<PAGE>
(1) The tests help to manage existing medical conditions and their costs; (2)
Rapid tests improve healthcare and save lives through prompt diagnosis and early
detection; and (3) These test help health care providers improve productivity
and reduce expenses. At the same time, technological advances in medical
diagnostics have made it possible to perform diagnostic tests within the home
and the physician's office, rather than in the clinical laboratory. The
Company's objective has been to address these markets by developing rapid
diagnostic tests that are accurate, employ easily obtained specimens, and are
simple to perform without instrumentation.
Until recently, tests of this kind required the services of medical
technologists and sophisticated instrumentation; frequently, results were not
available until at least the following day. Most of the Company's over-the-
counter tests are FDA cleared. The Company believes that such tests are as
accurate as laboratory tests when used properly, require no instrumentation,
give reliable results in minutes and can be performed with confidence in the
home or the doctor's office.
The emphasis on producing easy to use tests that require no instrumentation
has led to the development of the products indicated below which currently are
marketed to physicians, clinics, hospital laboratories and the general public
through drugstores such as Walgreens, CVS, Osco/Sav-On, etc.
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Diagnostic Test Kit Use
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EZ DETECTTM -Home test kit for both the physician's office and
HIDDEN BLOOD over-the-counter markets for determining occult
IN STOOL (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 of
URINE OCCULT hidden blood in urine. It detects very small
BLOOD TEST (UBT) amounts of blood in urine caused by infections,
cancer, stones, prostatic enlargement, kidney
disease, trauma, or malformations of the genito-
urinary tract.
OVULATION TEST -One-step, five minute visual test for laboratory
(EZ-LHTM) or 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, ten minute visual test to detect
(EZ-PSATM) 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.
<PAGE>
BIOMERICA'S OTHER PRODUCTS: QUALITY CONTROL SERA
-------------------------------------------------
Biomerica markets a variety of quality control sera which are used in
conjunction with diagnostic products of Biomerica and other companies. These
control sera serve the user by monitoring the consistency in performance of the
diagnostic kits being used.
LANCER ORTHODONTICS, INC.
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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 1997 fiscal year, Lancer had nine 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.
Most of Lancer's manufacturing and shipping operations are in Mexicali,
Mexico, in order to reduce the cost of manufacturing and compete more
effectively worldwide. Lancer maintains its headquarters in San Marcos,
California where it houses the administration, the engineering, the sales and
marketing, and the customer services.
ALLERGY IMMUNO TECHNOLOGIES, INC.
- ---------------------------------
AIT and its predecessors commenced development activities in allergy and
immune disorder research diagnostic reagents and services in 1980. AIT
currently operates a clinical reference laboratory in Newport Beach, California,
for allergy and other esoteric diagnostic testing services for physicians, other
laboratories and pharmaceutical companies. AIT employs one medical technologist
and two technicians and receives substantial assistance from Biomerica whose
laboratory is contiguous to AIT. In addition to the laboratory testing
personnel, AIT hired Dr. Howard Wertheim as its President in June 1997.
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:
o Immunotherapy agents for treatment of IgE mediated allergies: U.S. Patent
#5,116,612 (issued May 6, 1992).
o Liposome containing immunotherapy agents for treatment of IgE mediated
allergies: U.S. Patent #5,049,390 (issued September 17, 1991).
o Immunotherapy agents for treatment of IgE mediated allergies: U.S. Patent
#4,946,945 (issued August 7, 1990).
o Allergen-thymic hormone conjugates for treatment of IgE mediated allergies:
U.S. Patent #5,275,814 (issued January 4, 1994).
<PAGE>
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
present injection therapy which is tedious, expensive and unpredictable. With
help from Biomerica, AIT has begun preclinical animal studies using some of
these patents.
AIT is focused on the discovery and commercialization of novel bio-
pharmaceutical drugs for the treatment of allergies. The Company's research has
led to new therapeutic approaches and inventions which are covered by four U.S.
patents. AIT's strategy is to utilize its proprietary technologies to create
unique drugs for the treatment of allergies, especially those that can be taken
orally avoiding the present injection therapy which is tedious, expensive and
unpredictable.
The objective of AIT is to tap the estimated $6 billion allergy market in
the U.S. 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:
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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 Laboratory Corporation of America,
American Homes Products, as well as other clinics and physicians.
Biomerica owns about 73.9% of AIT's outstanding common stock.
PRODUCTION
- ----------
The Company's diagnostic kits include reagents, antibodies, labeled
antigens, buffers, standards, and reference controls. The Company supplies each
customer with detailed written instructions for the use of its diagnostic
products.
All of the Company's diagnostic test kits are processed and assembled at
its facilities in Newport Beach, California. Production of diagnostic tests
involve formulating and coloring component antibodies and antigens in specified
concentrations, attaching a tracer to the antigen, filling components into
vials, packaging and labeling. The Company continually engages in quality
control procedures to assure the consistency and quality of its products and to
comply with applicable FDA regulations.
<PAGE>
Lancer currently utilizes a subcontractor to provide manufacturing services
to Lancer through its affiliated entities located in Mexicali, B.C., Mexico.
The current agreement, which expires in June 1998, allows for the pass through
of actual costs plus a weekly administrative fee. This gives Lancer greater
control over all costs associated with the manufacturing operation than did the
hourly rate per employee cost.
RESEARCH AND DEVELOPMENT
- ------------------------
Biomerica is continually engaged in the research and development of
additional diagnostic tests 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 are devoted both to research and development and to production
and quality control of diagnostic test kits for sale. Lancer is engaged in
development programs to improve 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,
1997 and 1996 aggregated $283,363 and $257,125, respectively. These expenses
included approximately $93,157 and $130,240 for fiscal 1997 and 1996,
respectively, for Lancer's product development.
MARKETS AND METHODS OF DISTRIBUTION
- -----------------------------------
Biomerica has 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 on 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 has been aggressively targeting both the
chain and independent stores. The independents are widely dispersed and
therefore require wholesalers (e.g. Bergen Brunswig, Foxmeyer, etc.) to promote
the Company's products. Biomerica sells to chain stores through manufacturers
representatives and chain store buyers.
Lancer sells its products directly or indirectly through its sales
representatives, to a relative large number of customers. At the end of its
1997 fiscal year, Lancer had nine sales representatives, all in the United
States, all of whom are employees of Lancer.
The loss of any one or a few customers would not have a material adverse
effect upon the revenues of the Company.
BACKLOG
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As of May 31, 1997 and 1996, Lancer had a backlog of $237,000 and $353,000,
respectively.
RAW MATERIALS
- -------------
The principal raw materials utilized by the Company consist of various
chemicals, serums, reagents, radioactive isotopes and packaging supplies.
Almost all of its raw materials are available from several sources, and the
Company is not dependent upon any single source of supply or a few suppliers.
Many antibodies used in the Company's immunoassay products are produced by the
Company itself by injecting antigens into animals which are maintained by the
Company.
<PAGE>
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
1997 fiscal year, and does not anticipate that there will be any interruption or
cessation of supply in the future.
COMPETITION
- -----------
Immunodiagnostic products are currently produced by more than 100
companies, a majority of which are located within the United States. 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. The Company is working on expanding this
capability.
Lancer encounters intense competition in the sale of orthodontic products.
Lancer's management believes that Lancer's seven major competitors are: Unitek,
a subsidiary or division of 3M; `A'' Company, a private company; Ormco, a
subsidiary or division of Sybron; RMO Inc., a private company; American
Orthodontics, a private company; GAC, a foreign company; and Dentaurum, a
foreign company. Lancer estimates that these seven competitors account for
approximately 80% of the orthodontic products manufactured and sold in the
United States. Lancer's management also believes that each of these seven
competitors is larger than Lancer, has more diversified product lines and has
financial resources exceeding those of Lancer. While there is no assurance that
Lancer will be successful in meeting the competition of these seven major
competitors or other competitors, Lancer has, in the past, successfully competed
in the orthodontic market and has achieved wide recognition of both its name and
its products.
SEASONALITY OF BUSINESS
- -----------------------
The business of the Company and its subsidiaries have not been subject to
significant seasonal fluctuations.
<PAGE>
EMPLOYEES
- ---------
As of August 15, 1997, the Company and its subsidiaries employed 74 full-
time employees and 6 part-time employees, including two Ph.D.'s. Lancer, through
its Mexican subcontractor, employs approximately 120 people in Mexico. The
Company also engages the services of various outside Ph.D. and M.D. consultants
as well as medical institutions for technical support on a regular basis. The
Company is not a party to any collective bargaining agreement and has never
experienced a work stoppage.
FOREIGN BUSINESS
- ----------------
All of the Company's fixed assets, excluding some of Lancer, are located
within southern California. The following table sets forth the dollar volume of
revenue attributable to sales to domestic customers and foreign customers during
the last two fiscal years for the Company and its consolidated subsidiaries:
Year ended May 31,
------------------------------------
1997 1996
----------------- ----------------
Revenues from sales to:
United States customers........ $5,208,000/56% $ 5,262,000/56%
Foreign customers.............. $4,036,000/44% $ 4,219,000/44%
---------------- ---------------
Total revenues................. $9,244,000/100% $9,481,000/100%
================ ===============
The Company does not believe that its foreign sales are subject to any
special or unusual risks which are not present in the ordinary course of
business in the United States, except for possible future changes in
governmental regulations and import restrictions. Foreign countries have
licensing requirements applicable to the sale of diagnostic products which vary
substantially from domestic requirements; depending upon the product and the
foreign country, these may be more or less restrictive than requirements within
the United States.
Foreign sales are made primarily through a network of 30 independent
distributors in approximately 20 countries.
GOVERNMENT REGULATION AND LICENSES
- ----------------------------------
Medical diagnostic products in the United States are subject to
governmental regulation and supervision by various federal and state agencies.
The Company's facilities, manufacturing procedures and records are periodically
inspected by the FDA and other government agencies such as the USDA to review
compliance with applicable regulations. Diagnostic test kits are required to
comply with certain manufacturing standards of the FDA. Under normal
circumstances, FDA clearance of diagnostic test kits takes 90 days after
notifications have been filed with the FDA if the diagnostic test is of a type
that has already been cleared for marketing by other companies. Most of the
Company's products have received FDA clearance. FDA clearance of immunoassays
not previously marketed by other companies normally requires longer periods of
as much as two years. Various foreign government agencies regulate the sale of
medical diagnostic products in foreign countries. Although the Company does not
anticipate any unusual difficulties in complying with government regulations
applicable to its business, it cannot predict whether future changes in
government regulation might increase its cost of conducting business or increase
the time required for development and introduction of new products.
The Company holds a radioactive materials license from the State of
California (currently expiring on June 20, 1998), and a permit from the U.S.
Drug Enforcement Administration (currently expiring on June 30, 1998), 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.
<PAGE>
Lancer and many of its products are 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, "Fortel", "Isletest", "Nimbus" and
"GAP" with the Office of Patents and Trademarks on December 31, 1985. The
Company's unregistered tradenames are: "EZ Detect", "CAST", "COT", "EquistiK",
"FelistiK", "Tri-Level Controls", "Tru-Level Controls", "T-Marker Controls",
"AllerHalt", "Candiquant", "Candigen", "EZ-H.P.", and "EZ-PSA".
On April 4, 1989, Lancer was granted a patent on its CounterForce design of
a nickel titanium orthodontic archwire. On August 1, 1989, Lancer was granted a
patent on its bracket design used in the manufacturing of Sinterline and
Intrigue orthodontic brackets. On September 17, 1996, Lancer was granted a
patent on its method of laser annealing marking of orthodontic appliances. On
March 4, 1997, Lancer was granted a patent on an orthodontic bracket and method
of mounting. All of the patents are for a duration of 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 Lancer's
image in the orthodontic marketplace and Lancer's sales. 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.
ITEM 2. PROPERTIES
----------
During fiscal 1997 Biomerica leased approximately 13,500 square feet of
space in 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 Mrs. Ilse Sultanian and the estate of Mr.
Joseph H. Irani (Mr. Joseph H. Irani was 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. Rent started accruing
in April 1997 for this space at a rate of $2,000 per month.
AIT currently leases approximately 1,600 square feet at the above facility
for $1,400 per month. These properties are leased by AIT on a month to month
basis from Mrs. Ilse Sultanian and the estate of Mr. Joseph H. Irani.
Lancer leases a 9,240 square foot manufacturing building in San Marcos,
California. The term of the lease expires on December 31, 1998. The minimum
annual cash rental payments is $52,800 in 1998 and $34,300 in 1999.
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.
<PAGE>
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 on the NASDAQ SmallCap Stock Market
(SmallCap under the symbol "BMRA".
The following table shows 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, 1997............. 3-5/8 2-1/8
February 28, 1997........ 4-3/8 2-7/8
November 30, 1996........ 6-3/4 3-1/4
August 31, 1996.......... 9-7/8 2-3/16
May 31, 1996............. 2-11/16 1-7/8
February 29, 1996........ 2-1/2 1-11/16
November 30, 1995........ 2-1/2 1-3/4
August 31, 1995.......... 2-1/4 15/16
As of August 2, 1997, the number of holders of record of the Company's
common stock was approximately 1858, 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 1997 COMPARED TO FISCAL 1996
- -----------------------------------
Consolidated net sales for the Company were $9,243,510 for fiscal 1997
compared to $9,480,658 for fiscal 1996. This represents a decrease of $237,148,
or 3% for fiscal 1997. Lancer's sales decreased by $446,516. Therefore,
Biomerica showed a sales increase of $200,167, an 8% increase for Biomerica.
AIT had a slight increase of $9,201. This decrease at Lancer was attributable
to (1) various manufacturing and purchasing problems from fiscal 1996 that were
resolved in fiscal 1997, (2) increased discounting in the domestic market, and
(3) a reduction in sales to a major foreign distributor who began their own
manufacturing. Lancer continues to search for new sales representatives,
distributors, private label customers, products, and product ideas, all of
which, if successful, will 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 1997 as
compared to fiscal 1996 decreased by $52,020 (1%). Lancer realized higher costs
of sales as a percentage of sales due to: (1) manufacturing problems from
fiscal 1996 that were resolved in fiscal 1997; (2) ineffective plant management
in Mexico which dramatically increased costs. The management was changed during
fiscal 1997; and (3) increased discounting in the domestic market. To improve
manufacturing, Lancer has started a program to add new equipment and improve
processes and efficiencies.
<PAGE>
Selling, general and administrative costs decreased in fiscal 1997 as
compared to fiscal 1996 by $102,555. Lancer had a decrease of $87,924 in these
costs due to decreased payroll and related expenses, travel, office supplies,
samples, advertising and telephone expenses. Lancer decreased these expenses in
order to offset the manufacturing problems and lower sales. Biomerica had a
slight decrease in fiscal 1997 as compared to fiscal 1996.
Research and development expense increased in fiscal 1997 as compared to
fiscal 1996 by $26,238 (10%). Of this, Lancer had a decrease of $37,083 as a
result of decreased payroll and supplies. Biomerica had a decrease in research
and development expenses of $56,512 and AIT had an increase of $6,809.
Biomerica has been investing more in research and development in an effort to
complete work on several new products.
Interest expense, which was incurred by Lancer, decreased in fiscal 1997 as
compared to fiscal 1996 by $45,454 (44%) due to reduced levels of debt, and was
partially offset by increased interest rates.
Other income increased by $40,811 in fiscal 1997 as compared to fiscal
1996. A decrease of $1,052 is attributable to Lancer, and $41,863 was
attributable primarily to Biomerica. Biomerica had greater dividend and
interest income due to the funds that were raised in January 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of May 31, 1997, the Company had cash and available for sale securities
of $2,220,528 (see Note 1 to the Financial Statements) and current working
capital of $4,705,139 as opposed to $978,426 and $3,247,648, respectively, for
the previous year. In 1997, Lancer negotiated an extension of its bank term
loan through May 1998 at which time it will be paid in full. The term loan
requires monthly principal payments by Lancer of $18,889 plus interest.
Management also negotiated a renewal of Lancer's line of credit through March 1,
1998. 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 Company and its subsidiaries are 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. 1997 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 1997 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,
1997.
ITEM 10. EXECUTIVE COMPENSATION
----------------------
This information is incorporated by reference to the Company's proxy
statement for its 1997 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,
1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
This information is incorporated by reference to the Company's proxy
statement for its 1997 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,
1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
This information is incorporated by reference to the Company's proxy
statement for its 1997 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,
1997.
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 January 20, 1996).
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.).
10.9 Biomerica, Inc.'s report on Form 8-K filed with the Securities and
Exchange Commission on May 13, 1997.
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, 1997 and 1996 and Independent Auditors' Report.
<PAGE>
99.2 Lancer Orthodontics, Inc. Annual Report on Form 10-KSB for Fiscal Year
Ended May 31, 1997 (incorporated by reference to Lancer's Form 10-KSB
dated August 15, 1997).
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, 1996).
99.4 Consent of Independent Auditors
(b) Reports on Form 8-K
-------------------
Biomerica's report on Form 8-K with the Securities and Exchange
Commission on May 13, 1997.
<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/ Zackary S. Irani
------------------------------
Zackary S. Irani, President
Dated: August 26, 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/ Zackary S. Irani Date: 8/26/97
- ------------------------------ -----------
Zackary S. Irani
President, Director, Chief Executive
Officer
/S/ P. B. Kaplan Date: 8/26/97
- ------------------------------- --------------
P. B. Kaplan, M.D.
Director
/S/ Robert Orlando Date: 8/26/97
- ------------------------------- --------------
Robert Orlando, M.D., Ph.D.
Director
/S/ Janet Moore Date: 8/26/97
- ------------------------------- --------------
Janet Moore, Secretary
Controller, Director,
Chief Accounting Officer and
EXHIBIT 21
SUBSIDIARIES OF BIOMERICA, INC.
Jurisdiction Percentage of
of Stock Owned by
Name of Subsidiary Incorporation Biomerica, Inc.
- ------------------ ------------- ---------------
Allergy Immuno Technologies, Inc. Delaware 73.9%
Lancer Orthodontics, Inc. California 29.9%
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 1,706,151
<SECURITIES> 514,377
<RECEIVABLES> 1,593,057
<ALLOWANCES> 137,410
<INVENTORY> 2,440,049
<CURRENT-ASSETS> 6,254,968
<PP&E> 3,108,699
<DEPRECIATION> 2,560,145
<TOTAL-ASSETS> 7,379,079
<CURRENT-LIABILITIES> 1,549,829
<BONDS> 0
0
0
<COMMON> 311,184
<OTHER-SE> 3,254,038
<TOTAL-LIABILITY-AND-EQUITY> 7,379,079
<SALES> 9,243,510
<TOTAL-REVENUES> 9,243,510
<CGS> 5,377,607
<TOTAL-COSTS> 5,377,607
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,659
<INCOME-PRETAX> 489,875
<INCOME-TAX> 43,030
<INCOME-CONTINUING> 446,845
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 446,845
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended May 31, 1997 and 1996
with
INDEPENDENT AUDITORS' REPORT THEREON
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
- -----------------------------
INDEX
Independent Auditors' Report............................................F-1
Consolidated Balance Sheet as of May 31, 1997...........................F-2
Consolidated Statements of Operations For The Years Ended
May 31, 1997 and 1996..................................................F-4
Consolidated Statements of Shareholders' Equity For The
Years Ended May 31, 1997 and 1996......................................F-5
Consolidated Statements of Cash Flows For The Years
Ended May 31, 1997 and 1996............................................F-6
Notes to Consolidated Financial Statements For The
Years Ended May 31, 1997 and 1996......................................F-8
<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, 1997, 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, 1997. 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, 1997, and the results of their
operations and their cash flows for each of the years in the two-year period
ended May 31, 1997 in conformity with generally accepted accounting principles.
CORBIN & WERTZ
Irvine, California
July 22, 1997
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
May 31, 1997
ASSETS
Current assets:
Cash and cash equivalents $ 1,706,151
Available-for-sale securities 514,377
Accounts receivable, less allowance for doubtful accounts and
sales returns of $137,410 (Notes 5 and 6) 1,455,647
Inventories (Notes 5 and 6) 2,440,049
Notes receivable 9,585
Prepaid expenses and other 129,159
-----------
Total current assets 6,254,968
-----------
Inventories, non-current (Notes 5 and 6) 27,000
-----------
Land held for investment 46,000
-----------
Property and equipment, at cost (Notes 5, 6 and 7):
Equipment 2,414,682
Furniture, fixtures and leasehold improvements 694,017
-----------
3,108,699
Accumulated depreciation and amortization (2,560,145)
-----------
548,554
-----------
Intangible assets, net of accumulated amortization (Note 4) 486,783
Other assets 15,774
-----------
$ 7,379,079
===========
Continued
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - CONTINUED
For The Years Ended May 31, 1997 and 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit (Note 5) $ 200,000
Long-term debt and capital lease obligations, current portion
(Notes 6 and 7) 215,848
Accounts payable and other accrued liabilities 650,033
Accrued compensation (Note 12) 467,788
Other 16,160
-----------
Total current liabilities 1,549,829
Minority interests (Note 3) 2,264,028
-----------
Total liabilities 3,813,857
-----------
Commitments and contingencies (Note 12)
Shareholders' equity (Note 8):
Common stock, $.08 par value; 10,000,000 shares authorized;
3,889,802 shares issued and outstanding 311,184
Additional paid-in capital 12,429,673
Unrealized holding gain on available-for-sale securities 97,924
Accumulated deficit (9,273,559)
-----------
Total shareholders' equity 3,565,222
-----------
$ 7,379,079
===========
See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended May 31, 1997 and 1996
<CAPTION>
1997 1996
---------------- -----------------
<S> <C> <C>
Net sales (Notes 3 and 11) $ 9,243,510 $ 9,480,658
Cost of sales (Note 3) 5,377,607 5,429,627
--------------- ----------------
Gross profit 3,865,903 4,051,031
--------------- ----------------
Operating expenses (Note 3):
Selling, general and administrative 2,949,274 3,051,829
Research and development 283,363 257,125
--------------- ----------------
Total operating expenses 3,232,637 3,308,954
--------------- ----------------
Operating profit (Note 11) 633,266 742,077
Other income (expense):
Interest expense (Notes 5, 6 and 7) (58,659) (104,113)
Other income (Note 10) 60,661 19,850
--------------- ----------------
Income before minority interest in net profits of
consolidated subsidiaries and income taxes 635,268 657,814
Minority interest in net profits of consolidated
subsidiaries (Note 3) (145,393) (212,350)
--------------- ----------------
Income before income taxes 489,875 445,464
Income tax expense (Note 9) 43,030 12,737
--------------- ----------------
Net income $ 446,845 $ 432,727
=============== ================
Per share data:
Net income (primary and fully diluted) $ 0.12 $ 0.12
=============== ================
Weighted average number of common and common
equivalent shares:
Primary 3,858,799 3,589,494
=============== ================
Fully diluted 3,867,207 3,589,494
=============== ================
<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, 1997 and 1996
<CAPTION>
Unrealized
Holding
Gain On
Common Stock Additional Available-For- Prepaid Accumulated
---------------------------
Shares Amount Paid-in Capital Sale Securities Expenses Deficit Total
-------------- ------------ ---------------- --------------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 1, 1995 3,431,319 $ 274,506 $ 11,323,824 $ 2,322 $ (5,142) $(10,153,131) $ 1,442,379
Exercise of stock options 34,500 2,760 24,840 - - - 27,600
Change in unrealized gain on
available-for-sale securities - - - 88,365 - - 88,365
Amortization of prepaid expense - - - - 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
Change in unrealized gain on
available-for-sale securities - - - 7,237 - - 7,237
Exercise of stock options 63,150 5,052 55,310 - - - 60,362
Tax benefit from exercise of - - 22,247 - - - 22,247
stock options
Issuance of common stock 27,500 2,200 52,800 - - - 55,000
Private placement 333,333 26,666 950,652 - - - 977,318
Net income - - - - - 446,845 446,845
---------- ---------- ------------ ------------ ---------- ------------ -----------
Balance at May 31, 1997 3,889,802 $ 311,184 $ 12,429,673 $ 97,924 $ - $(9,273,559) $ 3,565,222
========== ========== ============ ============ ========== ============ ============
<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, 1997 and 1996
<CAPTION>
1997 1996
---------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 446,845 $ 432,727
Adjustments to reconcile net income to net cash
provided by operating activities:,
Depreciation and amortization 236,930 272,996
Provision for losses on accounts receivable (14,855) (20,936)
Realized loss on sale of available-for-sale securities 7,673 15,930
Minority interest in net profits of consolidated subsidiaries 145,393 212,350
Deferred compensation - 44,080
Changes in current assets and liabilities:
Accounts receivable 347,260 (220,505)
Inventories (394,498) (222,172)
Prepaid expenses and other current assets (24,335) 4,392
Accounts payable and other accrued liabilities (19,907) (5,085)
Accrued compensation (58,726) 25,413
Other current liabilities 5,945 (48,385)
--------------- ----------------
Net cash provided by operating activities 677,725 490,805
--------------- ----------------
Cash flows from investing activities:
Sales of available-for-sale securities 37,842 124,250
Purchases of available-for-sale securities (197,057) (68,562)
Principal payments received on notes receivable 18,400 8,681
Purchases of property and equipment (243,627) (135,741)
Purchase of intangible assets - (3,140)
Other assets 4,294 (15,472)
--------------- ----------------
Net cash used in investing activities (380,148) (89,984)
--------------- ----------------
Cash flows from financing activities:
Net repayments of short-term borrowings and note
payable to bank (240,000) (745,000)
Payments of long-term debt and capital lease obligations (21,647) (25,407)
Net (repayments) borrowings under line of credit agreement (50,000) 250,000
Investments by minority interests 4,713 20,250
Exercise of stock options 60,362 27,600
Proceeds from sale of common stock 1,032,318 -
--------------- ----------------
Net cash provided by (used in) financing activities 785,746 (472,557)
--------------- ----------------
Net change in cash and cash equivalents 1,083,323 (71,736)
Cash and cash equivalents at beginning of year 622,828 694,564
--------------- ----------------
Cash and cash equivalents at end of year $ 1,706,151 $ 622,828
=============== ================
Continued
</TABLE>
<PAGE>
<TABLE>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended May 31, 1997 and 1996
<CAPTION>
1997 1996
---------------- -----------------
<S> <C> <C>
Supplemental disclosure of cash flow information -
Cash paid during the year for:
Interest $ 58,020 $ 104,113
=============== ================
Income taxes $ 22,840 $ 2,726
=============== ================
Supplemental schedule of non-cash investing and financing
activities:
Change in unrealized holding gain on available-for-sale
securities $ 7,237 $ 88,365
Conversion of accounts payable and accrued liabilities
into common stock of consolidated subsidiary (minority
interest) $ 9,432 $ 50,816
Reduction in taxes payable and increase in additional
paid-in capital for exercise of non-qualified stock options $ 22,247 $ -
<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, 1997 and 1996
NOTE 1 - ORGANIZATION
- ---------------------
Biomerica, Inc. and subsidiaries (collectively "the Company") are primarily
engaged in the development, manufacture and marketing of medical diagnostic
kits, the design, manufacture and distribution of various orthodontic products,
and the performance of specialized diagnostic testing services.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Principles of Consolidation
- ---------------------------
The consolidated financial statements for the years ended May 31, 1997 and 1996
(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, notes 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, 1997. 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
maintains reserves for potential credit losses based upon the Company's
historical experience related to credit losses. At May 31, 1997, one customer
accounted for approximately 14% of accounts receivable.
Continued
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended May 31, 1997 and 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------
Cash Equivalents
- ----------------
Cash and cash equivalents consists of demand deposits, money market accounts and
mutual funds with remaining maturities of three months or less when purchased.
Available-For-Sale Securities
- -----------------------------
The Company accounts for investments in accordance with Statement of Financial
Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in
Debt and Equity Securities." This statement addresses the accounting and
reporting for investments in equity securities which have readily determinable
fair values and all investments in debt securities. The Company's marketable
equity securities are classified as available-for-sale under SFAS 115 and
reported at fair value, with changes in the unrealized holding gain or loss
included in shareholders' equity. Available-for-sale securities consist of
common stock of unrelated publicly-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 1997 and 1996 totaled
$37,842 and $124,250, respectively, with realized (losses) gains of $(7,673) and
$(15,930), 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 $7,237 and $88,365 for the
years ended May 31, 1997 and 1996, respectively.
Inventories
- -----------
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist primarily of orthodontic products and biological chemicals.
Cost includes raw materials, labor, manufacturing overhead and purchased
products. Market is determined by comparison with recent purchases or net
realizable value. Such net realizable value is based on forecasts for sales of
the Company's products in the ensuing years. The industries in which the
Company operates are characterized by technological advancement and change.
Should demand for the Company's products prove to be significantly less than
anticipated, the ultimate realizable value of the Company's inventories could be
substantially less than the amount shown on the accompanying consolidated
balance sheet.
Inventories at May 31, 1997 consist of the following:
Raw materials $ 595,455
Work in process 304,279
Finished products 1,540,315
-----------
$ 2,440,049
===========
Approximately $1,534,000 of Lancer's inventory is located at its manufacturing
facility in Mexico as of May 31, 1997.
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.
Continued
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended May 31, 1997 and 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Expenditures for additions and major
improvements are capitalized. Repairs and maintenance costs are charged to
operations as incurred. When property and equipment are retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the
accounts, and gains or losses from retirements and dispositions are credited or
charged to income.
Depreciation and amortization are provided over the estimated useful lives of
the related assets, ranging from 3 to 12 years, using straight-line and
declining-balance methods. Leasehold improvements are amortized over the lesser
of the estimated useful life of the asset or the term of the lease.
Depreciation expense amounted to $159,319 and $188,384 for the years ended May
31, 1997 and 1996, respectively. Approximately $116,000 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, 1997 is $62,814 of capitalized
leased assets, net of $31,405 of accumulated amortization.
Management of the Company assesses the recoverability of property and equipment
by determining whether the depreciation and amortization of such assets over
their remaining lives can be recovered through projected undiscounted cash
flows. The amount of impairment, if any, is measured based on fair value and is
charged to operations in the period in which such impairment is determined by
management. Management has determined that there is no impairment of property
and equipment at May 31, 1997.
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 $77,611 and $79,470 for the years ended May 31, 1997 and
1996, 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 fair value and charged to
operations in the period in which the impairment is determined by management.
Management has determined that there was no impairment of intangible assets as
of May 31, 1997.
Risks and Uncertainties
- -----------------------
Licenses - Certain of the Company's sales of products are governed by license
agreements with outside third parties. All of such license agreements to which
the Company currently is a party are for fixed terms which will expire after ten
years or upon the expiration of the underlying patents. After the expiration of
the agreements or the patents, the Company is free to use the technology that
had been licensed. There can be no assurance that the Company will be able to
obtain future license agreements as deemed necessary by management. The loss of
some of the current licenses or the inability to obtain future licenses could
have an adverse affect on the Company's financial position and operations.
Historically, the Company has successfully obtained all the licenses it believed
necessary to conduct its business.
Continued
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended May 31, 1997 and 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------
Government Regulation - Biomerica's immunodiagnostic products are regulated in
the United States as medical devices primarily by the FDA and as such, require
regulatory clearance or approval prior to commercialization. Pursuant to the
Federal Food, Drug and Cosmetic Act, and the regulations promulgated thereunder,
the FDA regulates, among other things, the clinical testing, manufacture,
labeling, promotion, distribution, sale and use of medical devices in the United
States. Failure of Biomerica to comply with applicable regulatory requirements
can result in, among other things, warning letters, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, the government's refusal to grant premarket clearance or premarket
approval of devices, withdrawal of marketing approvals, and criminal
prosecution.
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain registrations or approvals required by foreign countries may
be longer or shorter than that required for FDA clearance or approval, and
requirements for licensing may differ significantly from FDA requirements.
There can be no assurance that Biomerica will be able to obtain regulatory
clearances for its current or any future products in the United States or in
foreign markets.
Lancer's products are also subject to regulation by the FDA under the Medical
Device Amendments of 1976 (the `Amendments''). Lancer has registered with the
FDA as required by the Amendments. There can be no assurance that Lancer will
be able to obtain regulatory clearances for its current or any future products
in the United States or in foreign markets.
Risk of Product Liability - Testing, manufacturing and marketing of Biomerica's
products entail risk of product liability. Biomerica currently has product
liability insurance. There can be no assurance, however, that Biomerica will be
able to maintain such insurance at a reasonable cost or in sufficient amounts to
protect Biomerica against losses due to product liability. An inability could
prevent or inhibit the commercialization of Biomerica's products. In addition,
a product liability claim or recall could have a material adverse effect on the
business or financial condition of the Company.
Lancer is subject to the same risks or product liability. Lancer currently has
product liability insurance. Lancer also is subject to the risk of loss of its
product liability insurance and the consequent exposure to liability.
Hazardous Materials - Biomerica's research and development involves the
controlled use of hazardous materials and chemicals. Although Biomerica
believes that safety procedures for handling and disposing of such materials
comply with the standards prescribed by state and Federal regulations, the risk
of accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result and any such liability could exceed the resources of
the Company. The Company may incur substantial costs to comply with
environmental regulations.
Stock-Based Compensation
- ------------------------
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (`SFAS 123''), ``Accounting for Stock-
Based Compensation', which defines a fair value based method of accounting for
stock-based compensation. However, SFAS 123 allows an entity to continue to
measure compensation cost related to stock and stock options issued to employees
using the intrinsic method of accounting prescribed by Accounting Principles
Board Opinion No. 25 (`APB 25''), ``Accounting for Stock Issued to Employees''.
Entities electing to remain with the accounting method of APB 25 must make pro
forma disclosures of net income and earnings per share, as if the fair value
method of accounting defined in SFAS 123 had been
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended May 31, 1997 and 1996
applied (see Note 8). The Company has elected to account for its stock-based
compensation to employees under APB 25.
Continued
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended May 31, 1997 and 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------
Minority Interest
- -----------------
Minority interest represents the minority shareholders' proportionate share of
the equity of Lancer and AIT. At May 31, 1997, Biomerica owned 29.9% of Lancer
(see Note 3) and 73.9% 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 common stock at the rate of seven shares of
preferred stock for 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 1997 or 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.
Income Taxes
- ------------
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under the asset
and liability method of Statement No. 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under Statement No. 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance is provided for certain
deferred tax assets if it is more likely than not that the Company will not
realize tax assets through future operations.
Biomerica, Lancer and AIT file separate income tax returns for Federal and state
income tax purposes.
Advertising Costs
- -----------------
The Company reports the cost of all advertising as expense in the period in
which those costs are incurred. Advertising costs were $50,000 and $48,000 for
the years ended May 31, 1997 and 1996, respectively.
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 of primary income per share was 3,858,799 and
3,589,494 in 1997 and 1996, respectively. The approximate number of shares used
in the computation of fully diluted income per share was 3,867,207 in 1997.
Common stock equivalents were excluded in 1996 because they were insignificant.
Primary and fully diluted income per share are the same for both years
presented.
Continued
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended May 31, 1997 and 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128, `Earnings Per Share'' (``SFAS 128''). SFAS 128 is
primarily a disclosure standard which requires public companies to present basic
earnings per share (EPS) and, if applicable, diluted earnings per share, instead
of primary and fully diluted earnings per share. SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997. The
effect of adopting SFAS 128 has not yet been determined by management.
NOTE 3 - CONSOLIDATED SUBSIDIARIES
- ----------------------------------
Lancer is engaged in the design, manufacture and distribution of orthodontic
products. Lancer effected a one-for-seven reverse stock split on November 15,
1996. All references to Lancer's shares herein have been adjusted to reflect
the reverse split. During 1996, Lancer issued 27,826 shares of its common stock
to an unrelated party totaling $50,816 for the conversion of accrued royalties
and sold 10,371 shares of its common stock to unrelated parties for cash of
$20,250. During 1997, Lancer issued 3,998 shares of its common stock to an
unrelated party totaling $9,432 for the conversion of accrued royalties. The
result of these transactions decreased Biomerica's direct ownership percentage
of Lancer to 29.9% and decreased its direct and indirect voting control over
Lancer to 51.5%.
During fiscal 1994, Biomerica received warrants to purchase 72,619 shares of
Lancer's common stock at $.25 per share and options to purchase 20,000 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. During 1997, 400,000 shares of
AIT were issued to outside parties decreasing Biomerica's interest in AIT to
73.9%.
Operating results for Lancer and AIT in the aggregate for the years ended May
31, 1997 and 1996, which are included in the consolidated operating results of
the Company, are as follows:
1997 1996
----------- ------------
Net sales $ 6,484,960 $ 6,922,275
Cost of sales 3,967,825 4,097,311
----------- -----------
Gross profit 2,517,135 2,824,964
----------- -----------
Operating expenses:
Selling, general and administrative 2,219,915 2,287,958
Research and development 106,090 136,364
----------- -----------
Total operating expenses 2,326,005 2,424,322
----------- -----------
Other income (expense):
Interest expense (58,659) (104,113)
Other income, net 14,618 12,702
----------- -----------
(44,041) (91,411)
----------- -----------
Income before income taxes 147,089 309,231
Income tax expense 1,600 1,600
----------- -----------
Net income $ 145,489 $ 307,631
=========== ===========
Continued
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended May 31, 1997 and 1996
NOTE 4 - INTANGIBLE ASSETS
- --------------------------
Intangible assets, net of accumulated amortization, consist of the following at
May 31, 1997:
Marketing and distribution rights $ 442,750
Technology use rights 858,328
Patents and capitalized patent application costs 35,862
-----------
1,336,940
Less accumulated amortization (850,157)
-----------
$ 486,783
===========
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 1997 and 1996, the Company recorded
amortization expense of $24,900 related to repurchased sales territories.
During fiscal 1985, Lancer purchased certain assets and technology which is
being amortized over the estimated useful life of eighteen years. Lancer
recorded amortization expense of $48,696 and $53,970 for the years ended May 31,
1997 and 1996, respectively, related to these assets.
Amortization expense related to patents which is included in the accompanying
consolidated statements of operations amounted to $4,015 and $600 for the years
ended May 31, 1997 and 1996, respectively.
NOTE 5 - LINE OF CREDIT
- -----------------------
At May 31, 1997, Lancer had a $500,000 line of credit with a bank. Borrowings
are made at prime plus 1% (9.50% at May 31, 1997) 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 $145,000. The line of
credit expires on March 1, 1998. As of May 31, 1997, there was $200,000
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, 1997.
Average month end balance $245,250
Maximum balance outstanding at any month end $250,000
Weighted average interest rate (computed by dividing interest expense
by average monthly balance) 9.55%
Interest rate at year end 9.50%
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% (9.50% at May 31, 1997). In March 1997, the note was extended to May
1, 1998, at which time all unpaid principal and accrued interest is due and
payable. As of May 31, 1997, the outstanding balance of the note payable was
$200,000.
Continued
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended May 31, 1997 and 1996
NOTE 6 - LONG-TERM DEBT, continued
- ----------------------------------
The note payable and line of credit are collateralized by substantially all of
the assets of Lancer, including inventories, receivables and equipment. The
lending agreement requires, among other things, that Lancer maintain a tangible
net worth of $2,250,000, a debt to tangible net worth ratio of no more than .75
to 1 and a current ratio of at least 2 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 life.
Depreciation of the asset is included in depreciation expense for the years
ended May 31, 1997 and 1996.
The future annual minimum lease payments under the capital lease are as follows:
Year Ending May 31, 1998 $ 16,528
Less amount representing interest at 11.3% (680)
---------
Present value of net minimum lease payments $ 15,848
=========
NOTE 8 - SHAREHOLDERS' EQUITY
- -----------------------------
1995 and 1991 Stock Option and Restricted Stock Plans
- -----------------------------------------------------
In December 1991, the Company adopted a stock option and restricted stock plan
(the `1991 Plan'') which provides that non-qualified options and incentive
stock options and restricted stock covering an aggregate of 350,000 of the
Company's unissued common stock may be granted to officers, employees or
consultants of the Company. Options granted under the 1991 Plan may be granted
at prices not less than 85% of the then fair market value of the common stock,
vest at not less than 20% per year and expire not more than 10 years after the
date of grant.
In January 1996, the Company adopted a stock option and restricted stock plan
(the "1995 Plan") which provides that non-qualified options and incentive stock
options and restricted stock covering an aggregate of 500,000 of the Company's
unissued common stock may be granted to affiliates, employees or consultants of
the Company. Options granted under the 1995 Plan may be granted at prices not
less than 85% of the then fair market value of the common stock and expire not
more than 10 years after the date of grant.
During 1997, the Company granted options to purchase 72,000 and 45,000 shares of
common stock at exercise prices of $1.90 and $1.92 per share, respectively, to
various employees of the Company. The options vest over a period ranging from
four to five years. During 1997, the Company granted options to purchase 31,000
and 25,000 shares of common stock at exercise prices of $1.90 and $3.00 per
share respectively, to various consultants of the Company. Management did not
record any expense related to the granting of these options to the consultants,
as such was immaterial.
Continued
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended May 31, 1997 and 1996
NOTE 8 - SHAREHOLDERS' EQUITY, continued
- ----------------------------------------
Activity as to stock options under the 1991 and 1995 plans are as follows:
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
Options granted 173,000 $ 1.90 - $3.00
Options exercised (63,150) $ .80 - $2.00
Options canceled or expired (7,000) $ .80 - $1.90
------------
Options outstanding at May 31, 1997 332,600 $ .80 - $3.00
============
Options exercisable at May 31, 1997 182,050 $ .80 - $1.92
============
SFAS 123 Pro Forma Information
- ------------------------------
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of SFAS 123. The fair value
for these options was estimated at the date of grant using the Black Scholes
option pricing model with the following assumptions for the years ended May 31,
1997 and 1996; risk free interest rate 7.2%; dividend yield of 0%; expected life
of the option of 3 years; and volatility factor of the expected market price of
the Company's common stock of 115%.
The Black Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option vesting period. Adjustments are made
for options forfeited prior to vesting. The effect on compensation expense, net
income, and net income per common share had compensation costs for the Company's
stock option plans been determined based on a fair value of the date of grant
consistent with the provisions of SFAS 123, for the years ended May 31, 1997 and
1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
Net income, as reported $ 446,845 $ 432,727
Adjustment to compensation expense under SFAS 123 12,480 2,287
------------ ------------
Net income, pro forma $ 434,365 $ 430,440
============ ============
Net income per common and common equivalent share, as reported $ .12 $ .12
============ =============
Net income per common and common equivalent share, pro forma $ .11 $ .12
============ =============
Continued
</TABLE>
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended May 31, 1997 and 1996
NOTE 8 - SHAREHOLDERS' EQUITY, continued
- ----------------------------------------
Stock Grants
- ------------
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, the Company
recorded amortization expense of $5,142 on such bonus.
Stock Options Issued Outside of Plans
- -------------------------------------
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
fully vested 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.
Stock Issuances
- ---------------
During 1997, the Company sold 333,333 shares of its common stock at $3.00 per
share. Proceeds to the Company were $977,318, net of offering costs of $22,682.
During 1997, the Company issued 27,500 shares of previously canceled common
stock for $55,000 to a previous debtor to the Company. The common stock issued
was previously held by the Company as collateral for a loan issued to the
shareholder. In a prior year, the Company wrote off the receivable and recorded
a charge to common stock and additional paid in capital for the amount of the
loan.
Subsidiary Options and Warrants
- -------------------------------
Lancer has 205,715 options outstanding as of May 31, 1997 at prices ranging from
$1.40 to $2.45. Lancer also has issued warrants to acquire 200,596 shares of
its common stock at $1.75 per share which are outstanding as of May 31, 1997.
Continued
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended May 31, 1997 and 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, 1997 and 1996 are
presented below.
<TABLE>
<CAPTION>
1997 1996
---------------- -----------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts and sales returns $ 55,009 $ 60,958
Inventories, principally due to additional costs inventoried
for tax purposes pursuant to the Tax Reform Act of 1986
and allowance for inventory obsolescence 127,175 129,472
Compensated absences and deferred payroll, principally
due to accrual for financial reporting purposes 202,721 231,432
State net operating loss carryforwards 77,595 53,961
Federal net operating loss carryforwards 2,794,869 2,956,980
Tax credit carryforwards 238,939 244,403
Investment in affiliates 451,222 451,217
--------------- ----------------
3,947,530 4,128,423
Less valuation allowance (3,874,860) (4,044,593)
--------------- ----------------
Net deferred tax asset 72,670 83,830
Deferred tax liability -
Marketing rights, principally due to amortization (72,670) (83,830)
--------------- ----------------
Net deferred tax liability $ - $ -
=============== ================
Income tax expense for the years ended May 31, 1997 and 1996 consists of the following current provisions:
<CAPTION>
1997 1996
---------------- -----------------
<S> <C> <C>
U.S. Federal $ - $ -
State and local 43,030 12,737
--------------- ----------------
$ 43,030 $ 12,737
=============== ================
Continued
</TABLE>
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended May 31, 1997 and 1996
NOTE 9 - INCOME TAXES, continued
- --------------------------------
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:
<TABLE>
<CAPTION>
1997 1996
---------------- ------------------
<S> <C> <C>
Computed `expected'' tax expense $ 166,558 $ 151,458
Increase (reduction) in income taxes resulting from:
Meals and entertainment 9,860 9,855
Utilization of net operating loss carryforwards (165,228) (140,960)
Other (net) (11,157) 11,836
Equity in earnings of affiliates not subject to taxation
because of dividends-received deduction for tax
purposes (33) (32,189)
State income taxes 43,030 12,737
--------------- ----------------
$ 43,030 $ 12,737
=============== ================
</TABLE>
As of May 31, 1997, Biomerica had net tax operating loss carryforwards of
approximately $4,323,000 and investment tax and research and development credits
of approximately $19,000, which are available to offset future Federal tax
liabilities. The carryforwards expire at varying dates from 1997 to 2010.
As of May 31, 1997, Lancer had net tax operating loss carryforwards of
approximately $2,418,000 and business tax credits of approximately $169,000
available to offset future Federal tax liabilities. The carryforwards expire at
varying dates from 1998 to 2008. Lancer also had net tax operating loss
carryforwards of approximately $618,000 and business tax credits of
approximately $23,000 available to offset future California taxable income,
expiring at varying dates in 1998.
As of May 31, 1997, AIT had net tax operating loss carryforwards of
approximately $1,603,000 and business tax credits of approximately $29,000
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 $327,000 to offset future California taxable
income, expiring at varying dates between 1997 and 2001.
The Tax Reform Act of 1986 includes provisions which limit the Federal net
operating loss carryforwards available for use in any given year if certain
events, including a significant change in stock ownership, occur.
Continued
<PAGE>
<TABLE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended May 31, 1997 and 1996
<CAPTION>
NOTE 10 - OTHER INCOME
- ----------------------
Other income consists of the following:
1997 1996
---------------- ------------------
<S> <C> <C>
Realized (losses) gains on available-for-sale securities
transactions $ (7,673) $ (15,930)
Dividend and interest income 53,716 8,920
Other 14,618 26,860
$ 60,661 $ 19,850
================ =================
<CAPTION>
NOTE 11 - BUSINESS SEGMENTS
- ---------------------------
Reportable business segments for the years ended May 31, 1997 and 1996 are as follows:
1997 1996
---------------- ------------------
<S> <C> <C>
Domestic sales:
Orthodontic products $ 3,764,000 $ 3,999,000
=============== ================
Medical diagnostic products $ 1,444,000 $ 1,263,000
=============== ================
Foreign sales:
Orthodontic products $ 2,570,000 $ 2,781,000
=============== ================
Medical diagnostic products $ 1,466,000 $ 1,438,000
=============== ================
Net sales:
Orthodontic products $ 6,334,000 $ 6,780,000
Medical diagnostic products 2,910,000 2,701,000
--------------- ----------------
Total $ 9,244,000 $ 9,481,000
=============== ================
Operating profit:
Orthodontic products $ 276,000 $ 416,000
Medical diagnostic products 357,000 326,000
--------------- ----------------
Total $ 633,000 $ 742,000
=============== ================
Identifiable assets:
Orthodontic products $ 3,494,000 $ 3,503,000
Medical diagnostic products 3,398,000 2,000,000
--------------- ----------------
Total $ 6,892,000 $ 5,503,000
=============== ================
Total assets:
Orthodontic products $ 3,950,000 $ 4,033,000
Medical diagnostic products 3,429,000 2,034,000
--------------- ----------------
Total $ 7,379,000 $ 6,067,000
=============== ================
</TABLE>
Continued
<PAGE>
<TABLE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended May 31, 1997 and 1996
<CAPTION>
NOTE 11 - BUSINESS SEGMENTS, continued
- --------------------------------------
1997 1996
---------------- ------------------
<S> <C> <C>
Depreciation and amortization expense:
Orthodontic products $ 193,000 $ 234,000
Medical diagnostic products 44,000 39,000
--------------- ----------------
Total $ 237,000 $ 273,000
=============== ================
Capital expenditures:
Orthodontic products $ 51,000 $ 104,000
Medical diagnostic products 193,000 32,000
--------------- ----------------
Total $ 244,000 $ 136,000
=============== ================
</TABLE>
Total net sales as reflected above consist of sales to unaffiliated customers
only as there were no significant intersegment sales during fiscal years 1997
and 1996. 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
1997 and 1996.
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, 1997 and 1996. 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
- ---------------------------------------
Operating Leases
- ----------------
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 former president. The lease rate is $12,720 and
$1,400 per month, respectively.
Lancer leases its main facility under a non-cancelable operating lease expiring
December 31, 1998, which requires monthly rentals that increase annually, from
$2,900 per month (1994) to $4,400 per month (1998). The lease expense is being
recognized on a straight-line basis over the term of the lease. The excess of
the expense recognized over the cash paid aggregates $9,620 at May 21, 1997, and
is included in accrued liabilities in the accompanying balance sheet.
Effective April 1, 1996, Lancer entered into a non-cancelable operating lease
for its Mexico facility expiring October 31, 1998, which requires average
monthly rentals of $5,182. The rentals are subject to annual increases based on
the United States Consumer Price Index. Prior to April 1, 1996, such was
included in amounts paid under the terms of the manufacturing agreement as
discussed below.
Continued
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended May 31, 1997 and 1996
NOTE 12 - COMMITMENTS AND CONTINGENCIES, continued
- --------------------------------------------------
Rental expense for all operating leases amounted to approximately $263,000 for
the year ended May 31, 1997 and 1996. The future annual minimum lease payments
are as follows:
Years Ending
May 31,
------------
1998 $ 283,021
1999 56,794
-----------
Minimum lease payments $ 339,815
===========
Manufacturing Agreement
- -----------------------
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. 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. At May 31, 1997, this obligation was
approximately $221,000. Such obligation is contingent in nature and accordingly
has not been accrued in the accompanying consolidated balance sheet.
Employment Agreement
- --------------------
In June 1986, the Company entered into an employment agreement with its then
chief executive officer. In May 1996, the agreement was extended for an
additional three years expiring in May 1999. 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
during the year ended May 31, 1996. The chief executive officer and the Company
agreed to amend the employment agreement for fiscal year 1995, whereby the chief
executive officer would not receive any deferred compensation for the period
June 1994 through November 1994 of approximately $54,500 and instead received
60,000 stock options (see Note 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 for fiscal year 1996 was deferred. The
chief executive officer and the Company agreed to amend the employment agreement
for fiscal year 1997, whereby the chief executive officer would reduce his
salary by approximately $63,000 for the period June 1996 through November 1996.
The chief executive officer was paid approximately $85,000 during the year ended
May 31, 1997. The remaining amount of approximately $27,000 for fiscal year
1997, has been deferred and is included in accrued compensation in the
Continued
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended May 31, 1997 and 1996
accompanying consolidated balance sheet as of May 31, 1997. Approximately
$457,000 of the total accrued compensation included in the 1997 consolidated
balance sheet is due to the chief executive officer's estate.
Continued
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended May 31, 1997 and 1996
NOTE 12 - COMMITMENTS AND CONTINGENCIES, continued
- --------------------------------------------------
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, the Company established a 401(k) plan for the
benefit of its employees. The plan permits eligible employees to contribute to
the plan up to the maximum percentage of total annual compensation allowable
under the limits of Internal Revenue Code Sections 415, 401(k) and 404. The
Company, at the discretion of its Board of Directors, may make contributions to
the plan in amounts determined by the Board each year. No contributions by the
Company have been made since the plan's inception.
NOTE 13 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
- -----------------------------------------------------------
The following represents the condensed unconsolidated balance sheet for
Biomerica, Inc. as of May 31, 1997, and the condensed unconsolidated statements
of operations and of cash flows for the years ended May 31, 1997 and 1996. No
cash dividends were paid by the consolidated subsidiaries (see Note 3) during
the years ended May 31, 1997 and 1996.
Condensed Unconsolidated Balance Sheet
May 31, 1997
ASSETS
Current assets:
Cash and cash equivalents $ 1,548,005
Available-for-sale securities 514,377
Accounts receivable, net 282,252
Inventories 585,788
Notes receivable 9,585
Prepaid expenses and other 86,287
-----------
Total current assets 3,026,294
Investment in and advances to affiliates and consolidated subsidiaries
941,305
Inventory, non-current 27,000
Property and equipment, net 274,450
Intangible assets 19,238
Other 11,374
-----------
$ 4,299,661
===========
Continued
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended May 31, 1997 and 1996
NOTE 13 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY, continued
- ----------------------------------------------------------------------
Condensed Unconsolidated Balance Sheet - Continued
May 31, 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 250,491
Accrued compensation 467,788
Other 16,160
-----------
Total current liabilities 734,439
-----------
Shareholders' equity:
Common stock 311,184
Additional paid-in capital 12,429,673
Unrealized holding gain on available-for-sale securities
97,924
Accumulated deficit (9,273,559)
-----------
Total shareholders' equity 3,565,222
-----------
$ 4,299,661
===========
<TABLE>
<CAPTION>
Condensed Unconsolidated Statements of Operations
May 31, 1997 and 1996
1997 1996
--------------- -----------------
<S> <C> <C>
Net revenues $ 2,784,200 $ 2,586,697
Cost of sales 1,435,432 1,360,630
--------------- ----------------
Gross profit 1,348,768 1,226,067
--------------- ----------------
Operating expenses:
Selling, general and administrative 729,359 763,871
Research and development 177,273 120,761
--------------- ----------------
Total operating expenses 906,632 884,632
--------------- ----------------
Operating income 442,136 341,435
Other income 46,043 7,148
--------------- ----------------
Income before interest in net income of consolidated
subsidiaries and income taxes 488,179 348,583
Interest in net income of consolidated subsidiaries 96 95,281
Income tax expense 41,430 11,137
--------------- ----------------
Net income $ 446,845 $ 432,727
=============== ================
Continued
</TABLE>
<PAGE>
<TABLE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended May 31, 1997 and 1996
<CAPTION>
NOTE 13 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY, continued
- ----------------------------------------------------------------------
Condensed Unconsolidated Statements of Cash Flows
May 31, 1997 and 1996
1997 1996
---------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 446,845 $ 432,727
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 40,748 36,270
Realized loss (gain) on sale of available-for-sale securities 7,673 15,930
Provision for losses on accounts receivable (4,855) (936)
Income of subsidiaries 96 (95,281)
Deferred compensation (58,726) 44,080
Net change in other current assets and current liabilities (162,568) (31,118)
--------------- ----------------
Net cash provided by operating activities 269,213 401,672
--------------- ----------------
Cash flows from investing activities:
Sales of available-for-sale securities 37,842 124,250
Purchases of available-for-sale securities (197,057) (68,562)
Principal payments received on notes receivable 18,400 8,681
Decrease (increase) in investment in and advances to
affiliates and consolidated subsidiaries (18,121) (36,561)
Purchases of property and equipment (192,276) (30,855)
Purchase of intangible assets - (750)
Other assets 4,294 (15,472)
--------------- ----------------
Net cash used in investing activities (346,918) (19,269)
--------------- ----------------
Cash flows from financing activities:
Payment on short-term borrowings - (4,000)
Proceeds from sale of stock and exercise of stock options 1,092,680 27,600
--------------- ----------------
Net cash used in financing activities 1,092,680 23,600
--------------- ----------------
Net increase in cash and cash equivalents 1,014,975 406,003
Cash and cash equivalents at beginning of year 533,030 127,027
--------------- ----------------
Cash and cash equivalents at end of year $ 1,548,005 $ 533,030
=============== ================
Supplemental disclosure of cash flow information -
Cash paid during the year for:
Interest $ - $ -
=============== ================
Income $ 20,800 $ 800
=============== ================
Continued
</TABLE>
<PAGE>
<TABLE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended May 31, 1997 and 1996
<CAPTION>
NOTE 13 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY, continued
- ----------------------------------------------------------------------
Condensed Unconsolidated Statements of Cash Flows - Continued
May 31, 1997 and 1996
1997 1996
--------------- -----------------
<S> <C> <C>
Supplemental schedule of non-cash investing and financing
activities:
Change in unrealized holding gain on available-for-sale
securities $ 7,237 $ 88,365
Reduction in taxes payable and increase in additional
paid-in capital for exercise of non-qualified stock options $ 22,247 $ -
</TABLE>
