UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
AMENDMENT NO. 1
TO
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended MAY 31, 1998
----------------------------------------------------
Commission File No. 0-8765
-----------------------------------------------------------
BIOMERICA, INC.
-----------------------------------------------------------------------------
(Name of Small Business Issuer In Its Charter)
DELAWARE 95-2645573
- -------------------------------------------------------------------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
1533 MONROVIA AVENUE, NEWPORT BEACH, CALIFORNIA 92663
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(714) 645-2111
- -------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.08
- -------------------------------------------------------------------------------
(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: $9,376,498.
State the aggregate market value of the voting stock held by non-affiliates of
the issuer (based upon 3,485,511 shares held by non-affiliates and the closing
price of $1.25 per share for Common Stock in the over-the-counter market as of
September 3, 1998: $4,356,889).
Number of shares of the issuer's common stock, par value $.08, outstanding as of
September 3, 1998: 3,978,302 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
The issuer's proxy statement for its 1998 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, 1998, for Lancer
Orthodontics, Inc.
Transitional Small Business Disclosure Format (check one) Yes No X
--- ---
<PAGE>
EXPLANATORY NOTE
This Annual Report on Form 10-KSB/A ("Form 10-KSB/A") is being filed as
Amendment No. 1 to the Registrant's Annual Report on Form 10-KSB for the fiscal
year ended May 31, 1998 filed with the Securities and Exchange Commission on
September 14, 1998 ("Form 10-KSB") for the purpose of making non-material
amendments to Item 7 of Part II (in particular the Consolidated Statements of
Cash Flows-Cash Flows From Investing Activities and Note 11-Condensed
Unconsolidated Statements of Cash Flows-Cash Flows From Investing and Financing
Activities of such item) and Item 13 of Part III of Biomerica, Inc.'s Form
10-KSB.
BIOMERICA, INC.
FORM 10-KSB/A
FOR THE FISCAL YEAR ENDED MAY 31, 1998
INDEX
PAGE
PART II
ITEM 7. Financial Statements and Supplementary Data ....................1
PART III
ITEM 13. Exhibits List and Reports on Form 8-K ..........................2
<PAGE>
PART II
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Exhibit 99.1, "Biomerica, Inc. and Subsidiaries Consolidated Financial
Statements" is incorporated herein by reference.
<PAGE>
PART III
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
-------------------------------------
(a) EXHIBITS
--------
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Certificate of Incorporation of Registrant filed with the
Secretary of the State of Delaware on September 22, 1971
(incorporated by reference to Exhibit 3.1 filed with Amendment
No. 1 to Registration Statement on Form S-1, Commission File No.
2-83308).
3.2 Certificate of Amendment to Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware on
February 6, 1978 (incorporated by reference to Exhibit 3.1 filed
with Amendment No. 1 to Registration Statement on Form S-1,
Commission File No. 2-83308).
3.3 Certificate of Amendment to Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware on
February 4, 1983 (incorporated by reference to Exhibit 3.1 filed
with Amendment No. 1 to Registration Statement on Form S-1,
Commission File No. 2-83308).
3.4 Certificate of Amendment to Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware on
January 19, 1987 (incorporated by reference to Exhibit 3.4 filed
with Form 8 Amendment No. 1 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended May 31, 1987).
3.5 Certificate of Amendment of Certificate of Incorporation of
Registrant filed 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).
10.5 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).
<PAGE>
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).
10.9 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 (incorporated by reference to Exhibit
A to form 10-KSB for the fiscal year ended May 31, 1998).
99.1 Biomerica, Inc. and Subsidiaries Consolidated Financial
Statements For The Years Ended May 31, 1998 and 1997 and
Independent Auditors' Report.
99.2 Lancer Orthodontics, Inc. Annual Report on Form 10-KSB for Fiscal
Year Ended May 31, 1998 (incorporated by reference to Lancer's
Form 10-KSB dated August 15, 1998).
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: November 3, 1998
-----------------------------
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: November 3, 1998
- ----------------------------------- ----------------------
Zackary S. Irani
President, Director, Chief Executive
Officer
/S/ P. B. Kaplan Date: November 3, 1998
- ------------------------------------ ----------------------
P. B. Kaplan, M.D.
Director
/S/ Robert Orlando Date: November 3, 1998
- ------------------------------------ ---------------------
Robert Orlando, M.D., Ph.D.
Director
/S/ Janet Moore Date: November 3, 1998
- ------------------------------------ ---------------------
Janet Moore, Secretary
Controller, Director,
Chief Accounting Officer and
Chief Financial Officer
Item 7. Financial Statements
- -----------------------------
INDEX
Independent Auditors' Report............................................F-1
Consolidated Balance Sheet as of May 31, 1998...........................F-2
Consolidated Statements of Operations For The Years Ended
May 31, 1998 and 1997..................................................F-4
Consolidated Statements of Shareholders' Equity For The
Years Ended May 31, 1998 and 1997......................................F-5
Consolidated Statements of Cash Flows For The Years
Ended May 31, 1998 and 1997............................................F-7
Notes to Consolidated Financial Statements For The
Years Ended May 31, 1998 and 1997......................................F-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Biomerica, Inc.
We have audited the accompanying consolidated balance sheet of Biomerica, Inc.
and subsidiaries (the "Company") as of May 31, 1998, 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, 1998. 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, 1998, and the results of their
operations and their cash flows for each of the years in the two-year period
ended May 31, 1998, in conformity with generally accepted accounting principles.
CORBIN & WERTZ
Irvine, California
July 24, 1998
<PAGE>
<TABLE>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
May 31, 1998
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 1,840,575
Available-for-sale securities 334,859
Accounts receivable, less allowance for doubtful accounts and
sales returns of $144,059 1,606,688
Inventories 2,534,552
Notes receivable 28,485
Prepaid expenses and other 124,497
-----------
Total current assets 6,469,656
-----------
Inventories, non-current 24,000
-----------
Land held for investment 46,000
-----------
Property and equipment, at cost:
Equipment 2,385,516
Furniture, fixtures and leasehold improvements 723,567
Construction in progress 15,771
-----------
3,124,854
Accumulated depreciation and amortization (2,648,027)
----------
476,827
-----------
Intangible assets, net of accumulated amortization 454,600
Other assets 23,914
-----------
$ 7,494,997
===========
Continued
</TABLE>
<PAGE>
<TABLE>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - CONTINUED
May 31, 1998
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C>
Current liabilities:
Line of credit $ 100,000
Accounts payable and other accrued liabilities 791,270
Accrued compensation 445,046
Other 15,214
-----------
Total current liabilities 1,351,530
Minority interests 2,457,428
-----------
Total liabilities 3,808,958
-----------
Commitments and contingencies
Shareholders' equity:
Common stock, $.08 par value; 10,000,000 shares authorized;
3,978,302 shares issued and outstanding 318,264
Additional paid-in capital 12,513,000
Unrealized holding gain on available-for-sale securities 57,902
Shareholder loan (71,000)
Accumulated deficit (9,132,127)
-----------
Total shareholders' equity 3,686,039
-----------
$ 7,494,997
===========
<FN>
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended May 31, 1998 and 1997
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net sales $ 9,376,498 $ 9,243,510
Cost of sales 5,484,046 5,377,607
----------- -----------
Gross profit 3,892,452 3,865,903
----------- -----------
Operating expenses:
Selling, general and administrative 3,108,149 2,949,274
Research and development 553,740 283,363
----------- -----------
Total operating expenses 3,661,889 3,232,637
----------- -----------
Operating profit 230,563 633,266
Other income (expense):
Interest expense (25,360) (58,659)
Other income 152,623 60,661
----------- -----------
Income before minority interest in net profits of
consolidated subsidiaries and income taxes 357,826 635,268
Minority interest in net profits of consolidated
subsidiaries (196,169) (145,393)
----------- -----------
Income before income taxes 161,657 489,875
Income tax expense 20,225 43,030
----------- -----------
Net income $ 141,432 $ 446,845
========== ==========
Per share data:
Net income (basic) $ 0.04 $ 0.12
========== ==========
Net income (diluted) $ 0.03 $ 0.11
========== ==========
Weighted average number of common and common
equivalent shares:
Basic 3,951,552 3,681,233
=========== ===========
Diluted 4,061,235 3,887,394
=========== ===========
<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, 1998 and 1997
<CAPTION>
Unrealized
Holding
Gain On
Additional Available- Share-
Common Stock Paid-in For-Sale holder Accumulated
-----------------------
Shares Amount Capital Securities Loan Deficit Total
----------------------- ------------ ------------ ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 1, 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
stock options - - 22,247 - - - 22,247
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
Change in unrealized gain on
available-for-sale securities - - - (40,022) - - (40,022)
Exercise of stock options 93,500 7,480 73,070 - (71,000) - 9,550
Stock repurchase (5,000) (400) (8,261) - - - (8,661)
Continued
</TABLE>
<PAGE>
<TABLE>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
For The Years Ended May 31, 1998 and 1997
<CAPTION>
Unrealized
Holding
Gain On
Additional Available- Share-
Common Stock Paid-in For-Sale holder Accumulated
-------------------------
Shares Amount Capital Securities Loan Deficit Total
------------------------- ------------ ------------ ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Offering expenses - - (4,771) - - - (4,771)
Compensation expense - - 10,471 - - - 10,471
Tax benefit from exercise of
stock options - - 12,818 - - - 12,818
Net income - - - - - 141,432 141,432
---------- --------- ---------- --------- -------- ---------- ----------
Balance at May 31, 1998 3,978,302 $ 318,264 $12,513,000 $ 57,902 $(71,000) $(9,132,127) $ 3,686,039
========== ========== =========== ========== ========= ============ ===========
<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, 1998 and 1997
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 141,432 $ 446,845
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 248,933 236,930
Provision for losses on accounts receivable 6,649 (14,855)
Loss on disposal of assets 7,763 -
Realized (gain)/loss on sale of available-for-sale securities (66,339) 7,673
Options issued for services rendered 10,471 -
Minority interest in net profits of consolidated subsidiaries 196,169 145,393
Changes in current assets and liabilities:
Accounts receivable (157,690) 347,260
Inventories (91,503) (394,498)
Prepaid expenses and other current assets 4,662 (24,335)
Accounts payable and other accrued liabilities 154,055 (19,907)
Accrued compensation (22,742) (58,726)
Other current liabilities (946) 5,945
----------- -----------
Net cash provided by operating activities 430,914 677,725
----------- -----------
Cash flows from investing activities:
Sales of available-for-sale securities 205,835 37,842
Purchases of available-for-sale securities - (197,057)
Principal payments received on notes receivable - 18,400
Increase in notes receivable (18,900) -
Purchases of property and equipment (110,428) (243,627)
Increase in intangible assets (42,358) -
Other assets (8,140) 4,294
----------- -----------
Net cash used in investing activities 26,009 (380,148)
----------- -----------
Cash flows from financing activities:
Net repayments of short-term borrowings and note
payable to bank (200,000) (240,000)
Payments of long-term debt and capital lease obligations (15,848) (21,647)
Net repayments under line of credit agreement (100,000) (50,000)
Investments by minority interests (2,769) 4,713
Exercise of stock options 9,550 60,362
Proceeds from sale of common stock - 1,032,318
Offering expenses (4,771) -
Stock repurchase (8,661) -
----------- -----------
Net cash (used in) provided by financing activities (322,499) 785,746
----------- -----------
Continued
</TABLE>
<PAGE>
<TABLE>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
For The Years Ended May 31, 1998 and 1997
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net change in cash and cash equivalents 134,424 1,083,323
Cash and cash equivalents at beginning of year 1,706,151 622,828
----------- -----------
Cash and cash equivalents at end of year $ 1,840,575 $ 1,706,151
=========== ===========
Supplemental disclosure of cash flow information -
Cash paid during the year for:
Interest $ 25,761 $ 58,020
========== ==========
Income taxes $ 2,840 $ 22,840
========== ==========
Supplemental schedule of non-cash investing and financing
activities:
Change in unrealized holding gain on available-for-sale
securities $ (40,022) $ 7,237
Conversion of accounts payable and accrued liabilities
into common stock of consolidated subsidiary (minority
interest) $ - $ 9,432
Reduction in taxes payable and increase in additional
paid-in capital for exercise of non-qualified stock options $ 12,818 $ 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, 1998 and 1997
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, 1998 and 1997
(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 and accounts
payable. The carrying amounts of the Company's financial instruments generally
approximate their fair values at May 31, 1998. 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, 1998, one customer
accounted for approximately 12% of accounts receivable.
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1998 and 1997
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-traded companies and are stated at market
value in accordance with SFAS 115. Cost for purposes of computing realized
gains and losses is computed on a specific identification basis. The proceeds
from the sale of available-for-sale securities during fiscal 1998 and 1997
totaled $205,835 and $37,842, respectively, with realized gains (losses) of
$66,339 and $(7,673), respectively (see Note 8). The change in the net
unrealized holding (loss) gain on available-for-sale securities that has been
included as a separate component of shareholders' equity totaled $(40,022) and
$7,237 for the years ended May 31, 1998 and 1997, 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, 1998 consist of the following:
Raw materials $ 712,793
Work in process 397,560
Finished products 1,424,199
---------
$2,534,552
=========
Approximately $1,472,000 of Lancer's inventory is located at its manufacturing
facility in Mexico as of May 31, 1998.
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1998 and 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- -----------------------------------------------------------
Land Held For Investment
- ------------------------
Land held for investment consists of a parcel of land located in the state of
Utah, and is stated at the lower of cost or market.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Expenditures for additions and major
improvements are capitalized. Repairs and maintenance costs are charged to
operations as incurred. When property and equipment are retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the
accounts, and gains or losses from retirements and dispositions are credited or
charged to income.
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 $174,392 and $159,319 for the years ended May
31, 1998 and 1997, respectively. Approximately $79,000 of property and
equipment, net of accumulated depreciation and amortization, is located at
Lancer's manufacturing facility in Mexico.
Management of the Company assesses the recoverability of property and equipment
by determining whether the depreciation and amortization of such assets over
their remaining lives can be recovered through projected undiscounted cash
flows. The amount of impairment, if any, is measured based on fair value
(projected discounted cash flows) and is charged to operations in the period in
which such impairment is determined by management. Management has determined
that there is no impairment of property and equipment at May 31, 1998.
Intangible Assets
- -----------------
Intangible assets are being amortized using the straight-line method over 18
years for marketing and distribution rights and purchased technology use rights,
and over 17 years for patents. Marketing and distribution rights include
repurchased sales territories. Technology use rights consists of the 1985
purchase (the "Purchase") by Lancer of the manufacturing assets and t echnology
of Titan Research Associates, Ltd. ("Titan"). Prior to the Purchase, certain
former officers of Lancer and shareholders of Lancer owned 29% of Titan. Prior
to the Purchase, the Company paid royalties ranging from 15% to 20% of gross
sales, as defined, to license such technology. Amortization expense amounted to
$74,541 and $77,611 for the years ended May 31, 1998 and 1997, respectively (see
Note 4).
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1998 and 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------
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, 1998.
Risks and Uncertainties
- -----------------------
Licenses - Certain of the Company's sales of products are governed by license
agreements with outside third parties. All of such license agreements to which
the Company currently is a party are for fixed terms which will expire after ten
years or upon the expiration of the underlying patents. After the expiration of
the agreements or the patents, the Company is free to use the technology that
had been licensed. There can be no assurance that the Company will be able to
obtain future license agreements as deemed necessary by management. The loss of
some of the current licenses or the inability to obtain future licenses could
have an adverse affect on the Company's financial position and operations.
Historically, the Company has successfully obtained all the licenses it believed
necessary to conduct its business.
Government Regulation - Biomerica's immunodiagnostic products are regulated in
the United States as medical devices primarily by the FDA and as such, require
regulatory clearance or approval prior to commercialization in the United
States. Pursuant to the 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.
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1998 and 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------
Risk of Product Liability - Testing, manufacturing and marketing of Biomerica's
products entail risk of product liability. Biomerica currently has product
liability insurance. There can be no assurance, however, that Biomerica will be
able to maintain such insurance at a reasonable cost or in sufficient amounts to
protect Biomerica against losses due to product liability. An inability could
prevent or inhibit the commercialization of Biomerica's products. In addition,
a product liability claim or recall could have a material adverse effect on the
business or financial condition of the Company.
Lancer is subject to the same risks of product liability. Lancer currently has
product liability insurance. Lancer also is subject to the risk of loss of its
product liability insurance and the consequent exposure to liability.
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.
Listing Requirements
- --------------------
The Company must maintain a minimum bid price and certain capitalization levels
as required by the NASD Marketplace Rule 4310(c). There can be no assurance that
the Company will continue to comply with these requirements which could impair
the Company's ability to be listed on the NASDAQ Stock Market.
Year 2000
- ---------
Certain computerized systems use only two digits to record the year in date
fields. Such systems may not be able to accurately process dates ending in the
year 2000 and after. The effects of this issue will vary from system to system
and may adversely affect an entity's operations as well as its ability to
prepare financial statements. The Company has begun the process of upgrading
its hardware and software in order to obtain year 2000 compliance in 1999 and
does not anticipate to incur significant additional costs to be year 2000
compliant.
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1998 and 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------
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 applied (see Note 6). The
Company has elected to account for its stock-based compensation to employees
under APB 25.
Minority Interest
- -----------------
Minority interest represents the minority shareholders' proportionate share of
the equity of Lancer and AIT. At May 31, 1998, Biomerica owned 29.4% of Lancer
(see Note 3) and 74.6% 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 1998 or 1997.
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.
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1998 and 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------
Biomerica, Lancer and AIT file separate income tax returns for Federal and state
income tax purposes.
Advertising Costs
- -----------------
The Company reports the cost of all advertising as expense in the period in
which those costs are incurred. Advertising costs were approximately $77,000
and $50,000 for the years ended May 31, 1998 and 1997, respectively.
Earnings Per Share
- ------------------
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share
("EPS"). SFAS No. 128 requires dual presentation of basic EPS and diluted EPS
on the face of all income statements issued after December 15, 1997 for all
entities with complex capital structures. Basic EPS is computed as net income
divided by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur from
common shares issuable through stock options, warrants and other convertible
securities. Both years presented have been restated to adopt the provisions of
SFAS No. 128.
The following table illustrates the required disclosure of the reconciliation of
the numerators and denominators of the basic and diluted EPS computations.
<TABLE>
<CAPTION>
For The Year Ended May 31, 1998
-----------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS -
Income available to common
shareholders $ 141,432 3,951,552 $ 0.04
==========
Effect of dilutive securities -
Options - 109,683
----------- -----------
Diluted EPS -
Income available to common
shareholders plus assumed
conversions $ 141,432 4,061,235 $ 0.03
========== =========== ==========
</TABLE>
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1998 and 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------
<TABLE>
<CAPTION>
For The Year Ended May 31, 1998
-----------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS -
Income available to common
shareholders $ 446,845 3,681,233 $ 0.12
========
Effect of dilutive securities -
Options - 206,161
----------- -----------
Diluted EPS -
Income available to common
shareholders plus assumed
conversions $ 446,845 3,887,394 $ 0.11
========== --------- ========
</TABLE>
New Accounting Pronouncements
- -----------------------------
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, and
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 130 requires that an enterprise report, by major
components and as a single total, the change in its net assets during the period
from nonowner sources; and SFAS No. 131 establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas and major customers. Adoption of these
statements will not impact the Company's financial position, results of
operations or cash flows and any effect will be limited to the form and content
of its disclosures. Both statements are effective for fiscal years beginning
after December 15, 1997, with earlier application permitted.
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 1998, Lancer repurchased 5,000 shares of its common
stock for aggregate consideration of $5,220. 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 29.4% and decreased its
direct and indirect voting control over Lancer to 50.34%.
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1998 and 1997
NOTE 3 - CONSOLIDATED SUBSIDIARIES, continued
- ---------------------------------------------
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 expired
in April 1998.
Allergy Immuno Technologies, Inc. (AIT) provides immune allergy testing and
products to physicians and medical institutions. During 1998, 1,916,429 shares
of AIT were subscribed to Biomerica in exchange for debt (see Note 6) and
35,000 shares of AIT were issued to two AIT employees. The net effect of these
issues increased Biomerica's interest in AIT to 74.6%.
Operating results for Lancer and AIT in the aggregate for the years ended May
31, 1998 and 1997, which are included in the consolidated operating results of
the Company, are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net sales $ 6,293,254 $ 6,484,960
Cost of sales 3,734,537 3,967,825
----------- -----------
Gross profit 2,558,717 2,517,135
----------- -----------
Operating expenses:
Selling, general and administrative 2,218,890 2,219,915
Research and development 188,359 106,090
----------- -----------
Total operating expenses 2,407,249 2,326,005
----------- -----------
Other income (expense):
Interest expense (25,360) (58,659)
Other income, net 1,943 14,618
----------- -----------
(23,417) (44,041)
----------- -----------
Income before income taxes 128,051 147,089
Income tax expense 1,600 1,600
----------- -----------
Net income $ 126,451 $ 145,489
========== ==========
</TABLE>
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1998 and 1997
NOTE 4 - INTANGIBLE ASSETS
- --------------------------
Intangible assets, net of accumulated amortization, consist of the following at
May 31, 1998:
Marketing and distribution rights $ 442,750
Technology use rights 858,328
Patents and other 78,220
---------
1,379,298
Less accumulated amortization (924,698)
---------
$ 454,600
=========
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 1998 and 1997, the Company recorded
amortization expense of $24,900 related to repurchased sales territories.
During fiscal 1985, Lancer purchased certain assets and technology which is
being amortized over the estimated useful life of eighteen years. Lancer
recorded amortization expense of $48,696 for both of the years ended May 31,
1998 and 1997 related to these assets.
Amortization expense related to patents which is included in the accompanying
consolidated statements of operations amounted to $945 and $4,015 for the years
ended May 31, 1998 and 1997, respectively.
NOTE 5 - LINE OF CREDIT
- -----------------------
At May 31, 1998, Lancer had a $300,000 line of credit with a bank. Borrowings
are made at prime plus 1% (9.50% at May 31, 1998) and are limited to specified
percentages of eligible accounts receivable. The unused portion available to
Lancer under the line of credit at May 31, 1998 was $200,000. The line of
credit expires on October 1, 1998. As of May 31, 1998, there was $100,000
outstanding under the line of credit.
The following summarizes information on short-term borrowings for the year ended
May 31, 1998:
Average month end balance $177,083
Maximum balance outstanding at any month end $200,000
Weighted average interest rate (computed by dividing interest expense
by average monthly balance) 9.62%
Interest rate at year end 9.50%
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1998 and 1997
NOTE 6 - SHAREHOLDERS' EQUITY
- -----------------------------
Shareholder Loan
- ----------------
During fiscal 1998, the estate of the chief executive officer exercised a stock
option to purchase 25,000 common shares at $0.80 per share and 60,000 common
shares at $0.85 per share for a total of $71,000. Since the amount had not been
collected prior to May 31, 1998, the unpaid balance has been reflected as a
shareholder loan in the accompanying consolidated financial statements. The
loan is interest free and is due on demand. The loan is secured by the unpaid
compensation due to the estate (see Note 10) and which is also non-interest
bearing.
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 18,000
and 5,000 shares of common stock at exercise prices of $1.90 and $3.00 per share
respectively, to various consultants of the Company. Management recorded
$10,471 and $0 during the years ended May 31, 1998 and 1997, respectively, of
expense related to the granting of these options.
During 1998, the Company granted options to purchase 152,500 shares at an
exercise price of $1.85 to employees and a total of 1,500 shares to non-
employees, at an exercise price of $1.91 to two consultants. Management elected
not to record any compensation expense related to the options issued to non-
employees, as such was immaterial.
Activity as to stock options under the 1991 and 1995 plans are as follows:
Options outstanding at May 31, 1996 229,750 $ .80 - $2.00
Options granted 173,000 $ 1.90 - $3.00
Options exercised (63,150) $ .80 - $2.00
Options canceled or expired (7,000) $ .80 - $1.90
-------
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1998 and 1997
NOTE 6 - SHAREHOLDERS' EQUITY, continued
- ----------------------------------------
Options outstanding at May 31, 1997 332,600 $ .80 -$3.00
Options granted 154,000 $1.85 -$1.91
Options exercised (93,500) $ .85 -$1.90
Options canceled or expired (36,750) $1.90 -$3.00
--------
Options outstanding at May 31, 1998
356,350 $ .80 -$3.00
=======
Options exercisable at May 31, 1998
173,950 $ .80 -$3.00
=======
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,
1998 and 1997; risk free interest rate 5.74% and 7.2%, respectively; 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 73% and 115%,
respectively.
The Black Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
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 share (basic and diluted) 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, 1998 and 1997, are as follows:
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1998 and 1997
NOTE 6 - SHAREHOLDERS' EQUITY, continued
- ----------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net income, as reported $ 141,432 $ 446,845
Adjustment to compensation expense under SFAS 123 (24,688) (12,480)
------------ ------------
Net income, pro forma $ 116,744 $ 434,365
========== ==========
Pro forma net income per share - basic $ 0.04 $ 0.12
========== ==========
Pro forma net income per share - diluted $ 0.03 $ 0.11
========== ==========
</TABLE>
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 1998, the Company incurred an additional $4,771 of offering costs related
to this stock issuance.
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 14,286 options outstanding as of May 31, 1998 at $1.75 per share. In
1994, Lancer issued warrants to acquire 200,596 shares of its common stock at
$1.75. These warrants expired in 1998. Based on the exercise price of the
warrants, the Board of Directors determined that no value should be ascribed to
the warrants at the date of issuance.
During fiscal 1998, AIT granted options to purchase 1,185,000 shares of common
stock to various employees and directors of AIT, including an option to purchase
250,000 shares granted to Biomerica, Inc., the parent company. The options
will vest 50% per year and expire five years from the pricing date. The
exercise price will be the fair market value AIT's common stock on the date
when certain conditions are met, as defined.
During 1998, intercompany advances outstanding of $134,150 were retired by the
Company, in exchange for 1,916,429 shares of AIT's previously unissued common
stock.
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1998 and 1997
NOTE 7 - INCOME TAXES
- ---------------------
Income tax expense for the years ended May 31, 1998 and 1997 consists of the
following current provisions:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
U.S. Federal $ - $ -
State and local 20,225 43,030
----------- -----------
$ 20,225 $ 43,030
========== ==========
</TABLE>
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>
1998 1997
------------ ------------
<S> <C> <C>
Computed "expected" tax expense $ 54,963 $ 166,558
Increase (reduction) in income taxes resulting from:
Meals and entertainment 4,864 9,860
Utilization of net operating loss carryforwards (54,963) (165,228)
Other (net) 18,840 (11,157)
Equity in earnings of affiliates not subject to taxation
because of dividends-received deduction for tax
purposes (23,704) (33)
State income taxes 20,225 43,030
----------- -----------
$ 20,225 $ 43,030
========== ==========
</TABLE>
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1998 and 1997
NOTE 7 - INCOME TAXES, continued
- --------------------------------
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at May 31, 1998 and 1997 are
presented below.
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts and sales returns $ 60,982 $ 55,009
Inventories, principally due to additional costs inventoried
for tax purposes pursuant to the Tax Reform Act of 1986
and allowance for inventory obsolescence 105,065 127,175
Compensated absences and deferred payroll, principally
due to accrual for financial reporting purposes 198,097 202,721
State net operating loss carryforwards 20,679 77,595
Federal net operating loss carryforwards 2,769,131 2,794,869
Tax credit carryforwards 240,924 238,939
Investment in affiliates 425,361 451,222
----------- -----------
3,820,239 3,947,530
Less valuation allowance (3,751,855) (3,874,860)
----------- -----------
Net deferred tax asset 68,384 72,670
Deferred tax liability -
Marketing rights, principally due to amortization (68,384) (72,670)
----------- -----------
Net deferred tax liability $ - $ -
========== ==========
</TABLE>
The Company has provided a valuation allowance with respect to substantially all
of its deferred tax assets as of May 31, 1998 and 1997. Management provided
such allowance as it is currently more likely than not that tax-planning
strategies will not generate taxable income sufficient to realize such assets in
foreseeable future reporting periods (see Note 1).
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1998 and 1997
NOTE 7 - INCOME TAXES, continued
- --------------------------------
As of May 31, 1998, Biomerica had net tax operating loss carryforwards of
approximately $4,163,000 and investment tax and research and development credits
of approximately $28,000, which are available to offset future Federal tax
liabilities. The carryforwards expire at varying dates from 1998 to 2010.
As of May 31, 1998, Lancer had net tax operating loss carryforwards of
approximately $2,153,000 and business tax credits of approximately $161,000
available to offset future Federal tax liabilities. The carryforwards expire at
varying dates from 1998 to 2008. Lancer also had business tax credits of
approximately $23,000 available to offset future California taxable income,
expiring at varying dates in 1998.
As of May 31, 1998, AIT had net tax operating loss carryforwards of
approximately $1,737,000 and business tax credits of approximately $29,000
available to offset future Federal tax liabilities. The carryforwards expire at
varying dates from 1998 to 2008. AIT also had net tax operating loss
carryforwards of approximately $354,000 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.
NOTE 8 - OTHER INCOME
- ---------------------
Other income consists of the following for the years ending May 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Realized (losses) gains on available-for-sale securities
transactions $ 66,339 $ (7,673)
Dividend and interest income 84,341 53,716
Other 1,943 14,618
----------- -----------
$ 152,623 $ 60,661
========== ==========
</TABLE>
NOTE 9 - BUSINESS SEGMENTS
- --------------------------
Reportable business segments for the years ended May 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Domestic sales:
Orthodontic products $ 3,456,000 $ 3,764,000
========== ==========
Medical diagnostic products $ 1,585,000 $ 1,444,000
========== ==========
</TABLE>
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1998 and 1997
NOTE 9 - BUSINESS SEGMENTS, continued
- -------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Foreign sales:
Orthodontic products $ 2,738,000 $ 2,570,000
========== ==========
Medical diagnostic products $ 1,597,000 $ 1,466,000
========== ==========
Net sales:
Orthodontic products $ 6,194,000 $ 6,334,000
Medical diagnostic products 3,182,000 2,910,000
----------- -----------
Total $ 9,376,000 $ 9,244,000
========== ==========
Operating profit:
Orthodontic products $ 284,000 $ 276,000
Medical diagnostic products (53,000) 357,000
----------- -----------
Total $ 231,000 $ 633,000
========== ==========
Identifiable assets:
Orthodontic products $ 3,706,000 $ 3,494,000
Medical diagnostic products 3,334,000 3,398,000
----------- -----------
Total $ 7,040,000 $ 6,892,000
========== ==========
Total assets:
Orthodontic products $ 4,089,000 $ 3,950,000
Medical diagnostic products 3,406,000 3,429,000
----------- -----------
Total $ 7,495,000 $ 7,379,000
========== ==========
Depreciation and amortization expense:
Orthodontic products $ 180,000 $ 193,000
Medical diagnostic products 69,000 44,000
----------- -----------
Total $ 249,000 $ 237,000
========== ==========
Capital expenditures:
Orthodontic products $ 45,000 $ 51,000
Medical diagnostic products 65,000 193,000
----------- -----------
Total $ 110,000 $ 244,000
========== ==========
</TABLE>
Total net sales as reflected above consist of sales to unaffiliated customers
only as there were no significant intersegment sales during fiscal years 1998
and 1997. No customer accounted for more than 10% of net sales during fiscal
years 1998 and 1997.
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1998 and 1997
NOTE 9 - BUSINESS SEGMENTS, continued
- -------------------------------------
<TABLE>
<CAPTION>
Geographic information regarding net sales and operating profit is as follows:
1998 1997
------------ ------------ --------
<S> <C> <C>
Net sales:
United States $ 5,041,000 $ 5,208,000
Europe 1,798,000 1,660,000
South America 810,000 745,000
Asia 878,000 822,000
Other - foreign 849,000 809,000
----------- -----------
Total net sales $ 9,376,000 $ 9,244,000
========== ==========
Operating profit:
United States $ (9,000) $ 311,000
Europe 114,000 127,000
South America 59,000 57,000
Asia 14,000 83,000
Other - foreign 53,000 55,000
----------- -----------
Total operating profit $ 231,000 $ 633,000
========== ==========
</TABLE>
Identifiable assets by business segment are those assets that are used in the
Company's operations in each industry. Identifiable assets are held primarily
in the United States. The Company's interests in AIT, whose operations are in
the United States, are vertically integrated with the Company's operations in
the medical diagnostic products industry.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
Operating Leases
- ----------------
Biomerica leases its primary facility under a non-cancelable operating lease
which expired on May 31, 1998. The lease is currently month-to-month. AIT leases
its primary facility under a month-to-month operating lease. These facilities
are owned by two of the Company's shareholders. The lease rate is $12,720 and
$1,400 per month, respectively.
Lancer leases its main facility under a non-cancelable operating lease expiring
December 31, 2003, as extended, which requires monthly rentals that increase
annually, from $2,900 per month (1994) to $6,317 per month (2003). The lease
expense is being recognized on a straight-line basis over the term of the lease.
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1998 and 1997
NOTE 10 - COMMITMENTS AND CONTINGENCIES, continued
- --------------------------------------------------
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.
Rental expense for all operating leases amounted to approximately $263,000 for
the year ended May 31, 1998 and 1997. The future annual minimum lease payments
are as follows:
Years Ending
May 31,
-------
1999 $ 250,811
2000 65,880
2001 68,512
2002 71,251
2003 74,105
Thereafter 44,219
---------
Minimum lease payments $ 574,778
=========
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. In March
1996, the Company agreed to extend the manufacturing agreement through October
1998, to coincide with the building lease. 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. Such is anticipated to occur during fiscal 1999 (see Note
12). Should Lancer discontinue operations in Mexico, it is responsible for the
accumulated employee seniority obligation as prescribed by Mexican law. At May
31, 1998, this obligation was approximately $226,000. Such obligation is
contingent in nature and accordingly has not been accrued in the accompanying
consolidated balance sheet.
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1998 and 1997
NOTE 10 - COMMITMENTS AND CONTINGENCIES, continued
- --------------------------------------------------
Employment Agreement
- --------------------
In June 1986, the Company entered into an employment agreement with its then
chief executive officer. In May 1996, the agreement was extended for an
additional three years expiring in May 1999. This agreement was cancelled in
April 1997. This agreement required minimum annual compensation payments of
$169,000 and provided for periodic cost of living increases. The chief
executive officer was paid approximately $81,000 during the year ended May 31,
1996. The chief executive officer and the Company agreed to amend the
employment agreement for fiscal year 1995, whereby the chief executive officer
would not receive any deferred compensation for the period June 1994 through
November 1994 of approximately $54,500 and instead received 60,000 stock options
(see Note 6).
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
accompanying consolidated balance sheet as of May 31, 1997. Approximately
$434,000 of the total accrued compensation included in the 1998 consolidated
balance sheet is due to the chief executive officer's estate.
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 expiring through 2007 and they require the
Company to make payments based on the sales of the individual licensed products.
Lancer has entered into license agreements expiring in 2006 whereby, for cash
consideration, the counter party has obtained the rights to manufacture and
market certain products patented by the Lancer.
At May 31, 1998, Lancer is negotiating to purchase certain technology and
development rights.
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.
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1998 and 1997
NOTE 11 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
- -----------------------------------------------------------
The following represents the condensed unconsolidated balance sheet for
Biomerica, Inc. as of May 31, 1998, and the condensed unconsolidated statements
of operations and cash flows for the years ended May 31, 1998 and 1997. No cash
dividends were paid by the consolidated subsidiaries (see Note 3) during the
years ended May 31, 1998 and 1997.
<TABLE>
<CAPTION>
Condensed Unconsolidated Balance Sheet
May 31, 1998
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $1,515,977
Available-for-sale securities 334,859
Accounts receivable, net 329,928
Inventories 730,747
Notes receivable 28,485
Prepaid expenses and other 53,269
---------
Total current assets 2,993,265
Investment in and advances to affiliates and consolidated subsidiaries 990,653
Inventory, non-current 24,000
Property and equipment, net 264,358
Intangible assets 58,136
Other 17,354
---------
$ 4,347,766
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 201,467
Accrued compensation 445,046
Other 15,214
---------
Total current liabilities 661,727
---------
Shareholders' equity:
Common stock 318,264
Additional paid-in capital 12,513,000
Unrealized holding gain on available-for-sale securities 57,902
Shareholder loan (71,000)
Accumulated deficit (9,132,127)
----------
Total shareholders' equity 3,686,039
---------
$ 4,347,766
=========
</TABLE>
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1998 and 1997
NOTE 11 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY, continued
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
Condensed Unconsolidated Statements of Operations
May 31, 1998 and 1997
1998 1997
------------ ------------
<S> <C> <C>
Net revenues $ 3,107,116 $ 2,784,200
Cost of sales 1,773,381 1,435,432
----------- -----------
Gross profit 1,333,735 1,348,768
----------- -----------
Operating expenses:
Selling, general and administrative 889,259 729,359
Research and development 365,381 177,273
----------- -----------
Total operating expenses 1,254,640 906,632
----------- -----------
Operating income 79,095 442,136
Other income 150,680 46,043
----------- -----------
Income before interest in net income of consolidated
subsidiaries and income taxes 229,775 488,179
Interest in net (loss) income of consolidated subsidiaries (69,718) 96
----------- -----------
Income before income taxes 160,057 488,275
Income tax expense 18,625 41,430
----------- -----------
Net income $ 141,432 $ 446,845
========== ==========
<CAPTION>
Condensed Unconsolidated Statements of Cash Flows
May 31, 1998 and 1997
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 141,432 $ 446,845
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 66,834 40,748
Realized loss (gain) on sale of available-for-sale securities (66,339) 7,673
Provision for losses on accounts receivable - (4,855)
(Loss) income of subsidiaries (69,718) 96
Options issued for services rendered 10,471 -
</TABLE>
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1998 and 1997
NOTE 11 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY, continued
- ----------------------------------------------------------------------
<TABLE>
Condensed Unconsolidated Statements of Cash Flows - Continued
May 31, 1998 and 1997
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Deferred compensation - (58,726)
Loss on disposal of assets 7,763 -
Net change in other current assets and current liabilities (216,511) (162,568)
----------- -----------
Net cash (used in) provided by operating activities (126,068) 269,213
----------- -----------
Cash flows from investing activities:
Sales of available-for-sale securities 205,835 37,842
Purchases of available-for-sale securities - (197,057)
Principal payments received on notes receivable - 18,400
Additional notes receivable (18,900) -
Decrease (increase) in investment in and advances to
affiliates and consolidated subsidiaries 20,370 (18,121)
Purchases of property and equipment (64,505) (192,276)
Other assets (44,878) 4,294
----------- -----------
Net cash provided by (used in) investing activities 97,922 (346,918)
----------- -----------
Cash flows from financing activities:
Exercise of stock options 9,550 -
Proceeds from sale of stock - 1,092,680
Offering expenses (4,771) -
Stock repurchase (8,661) -
----------- -----------
Net cash provided by financing activities (3,882) 1,092,680
----------- -----------
Net change in cash and cash equivalents (32,028) 1,014,975
Cash and cash equivalents at beginning of year 1,548,005 533,030
----------- -----------
Cash and cash equivalents at end of year $ 1,515,977 $ 1,548,005
========== ==========
Supplemental disclosure of cash flow information -
Cash paid during the year for:
Interest $ - $ -
========== ==========
Income taxes $ 13,280 $ 20,800
========== ==========
</TABLE>
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1998 and 1997
NOTE 11 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY, continued
- ----------------------------------------------------------------------
<TABLE>
Condensed Unconsolidated Statements of Cash Flows - Continued
May 31, 1998 and 1997
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Supplemental schedule of non-cash investing and financing
activities:
Change in unrealized holding gain on available-for-sale
securities $ (40,022) $ 7,237
Reduction in taxes payable and increase in additional
paid-in capital for exercise of non-qualified stock options $ 12,818 $ 22,247
</TABLE>
NOTE 12 - SUBSEQUENT EVENT
- --------------------------
In June 1998, Lancer incorporated Lancer de Mexico S.A. de C.V. The purpose of
this company is to continue existing manufacturing operations and to sell,
import and export medical, orthodontic, and dental instruments upon the
expiration of the manufacturing agreement in October 1998 (see Note 10).
Management of the Company anticipates that costs associated with the transfer of
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Biomerica, Inc.
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (333-00159) and S-3 (333-19977) of our report dated July
24, 1998 appearing in the Annual Report on Form 10-KSB of Biomerica, Inc. and
subsidiaries for the year ended May 31, 1998.
/S/ Corbin & Wertz
CORBIN & WERTZ
Irvine, California
October 22, 1998
