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
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.
<PAGE>
PART I*
ITEM 1. DESCRIPTION OF BUSINESS
-----------------------
Except for historical information contained herein, the statements in this
Annual Report on Form 10-KSB are forward-looking statements that are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements involve known and unknown risks
and uncertainties which may cause the Company's actual results in future periods
to differ materially from forecasted results. These risks and uncertainties
include, among other things, the continued demand for he Company's products,
competitive and economic factors of the market place, availability of raw
materials and the state of the economy.
INTRODUCTION
Biomerica, Inc. ("Biomerica" or the "Company") is a global 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, dental
and/or other applied sciences. As of May 31, 1998, 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") 74.6%
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 16.05% of the outstanding Lancer common stock. Two other
Biomerica directors serve on Lancer's board of directors. Biomerica's Board
controls an additional 4.33% of Lancer's common stock either through proxy or
other controlled persons. As a result, Biomerica continues to exercise
effective control of Lancer. Therefore, Lancer's financial statements
are consolidated with those of Biomerica.
As of May 31, 1998, the Company's businesses included the following:
CORE BUSINESS IN DIAGNOSTICS, VIA BIOMERICA, INC.
-------------------------------------------------
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.
Exhibit 99.2, "Part I of the 1998 Annual Report on Form 10-KSB of Lancer
Orthodontics, Inc." is hereby incorporated by reference into this Report.
<PAGE>
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.
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
- -------------------------
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 LABORATORY DIAGNOSTIC PRODUCTS
- ---------------------------------------
Biomerica currently manufactures and sells diagnostic test kits which
utilize enzyme immunoassay (EIA) or radioimmunoassay (RIA) technology. Some of
these products have not yet been cleared by the FDA for diagnostic use, but can
be sold in various foreign countries. Biomerica's clinical products include:
- -------------------------------------------------------------------------------
Diagnostic Test Kit Use
- -------------------------------------------------------------------------------
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. It is also used to measure for delayed
puberty. This product is used for research only
and has not been cleared with the FDA.
MYOGLOBIN (RIA) -For measurement of myoglobin in blood as a result
of skeletal muscle injury including heart. This
product is FDA cleared.
THYROID PANEL: -For measurement of thyroid function in manual and
T3, T4, TSH (EIA) automated systems. These products have been FDA
cleared.
THYROGLOBULIN (RIA) - For prognostic testing for the detection of
metastasis after the treatment or removal of
thyroid tumor. This product has not been FDA
cleared and is used for research only.
<PAGE>
- -------------------------------------------------------------------------------
Diagnostic Test Kit Use
- -------------------------------------------------------------------------------
THYROGLOBULIN AUTO- -For measurement of autoantibodies to thyroglobulin
ANTIBODY TEST in human blood. High levels of patient's Tg
(EIA & RIA) autoantibodies are present with Hashimoto's disease
and lymphadenoid goiter. The EIA format of this
kit has just been cleared by the FDA. THE RIA
format is not cleared by the FDA and is for
research use.
NEONATAL TSH (RIA) -For early detection of congenital primary hypo-
thyroidism. (Newborn thyroid hormone assessment).
This product has been FDA cleared.
HISTAMINE (RIA) -For determination of blood histamine levels which
are associated with leukemia, allergy diseases, and
sensitivity determinations in animals and humans.
FDA clearance was received to market the histamine
RIA test kit for a special type of leukemia
disease. For allergy applications, the product is
sold for research and investigational use only
since FDA clearance has not yet been obtained for
that purpose.
HELICOBACTER PYLORI -A non-invasive blood test for gastritis and peptic
ANTIBODY (EIA) ulcer infection. The "GAP" test is amenable to
("GAP(R)") screen populations for the bacterium (Helicobacter
FOR GASTRITIS & ULCER pylori) that causes gastritis and peptic ulcers.
DETECTION 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 of
(ISLETEST(R)) type I diabetes [insulin dependent diabetes
FOR DETECTION mellitus (IDDM)] years before the manifestation of
OF TYPE I DIABETES the disease. IDDM is a disease characterized by
abnormalities in the regulation of blood sugar.
The disease may cause serious injury to the eyes,
kidneys, blood vessels, and nervous system.
Presently, this kit is provided to medical
institutions for investigational use only since it
has not been cleared by the FDA. The Company has
just received a patent for this test.
INSULIN -A non-invasive blood test for assessment of status
AUTOANTIBODY (EIA) of type I diabetes. This kit has not been cleared
by the FDA and is provided for investigational use
only.
GAD AUTOANTIBODY (EIA) -A non-invasive blood test for individuals
predisposed to Type I diabetes. This product has
not been cleared by the FDA and is for research use
only.
CANDIDA ALBICANS -A non-invasive blood test for detection of IgG, IgM
ANTIBODY (CANDIQUANT(TM)) or IgA antibodies to Candida albicans. This kit is
provided for investigational use only since it has
not been FDA cleared.
<PAGE>
- -------------------------------------------------------------------------------
Diagnostic Test Kit Use
- -------------------------------------------------------------------------------
CANDIDA ALBICANS -A non-invasive blood test for detection of Candida
ANTIGEN (CANDIGEN(TM)) albicans antigen. This kit is provided for
investigational use only since it has not been FDA
cleared.
In March, 1998, the Company entered into an exclusive licensing agreement for
the Cytotoxin Associated Gene A (CagA) Patents for the diagnostic applications
of the CagA technology. The Company is developing tests to pinpoint individuals
who have strains of the bacterium, H. pylori, which can cause peptic ulcers and
can lead to stomach cancer if untreated. This kit is in the development stage
now and not ready for sale. Sales of this kit are anticipated to begin in the
international market in the last quarter of the 1998 calendar year.
PHYSICIANS' OFFICE AND OVER-THE-COUNTER PRODUCTS
- ------------------------------------------------
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:
(1) The tests help to manage existing medical conditions and their costs; (2)
Rapid tests improve healthcare and may 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.
- -------------------------------------------------------------------------------
Diagnostic Test Kit Use
- -------------------------------------------------------------------------------
EZ DETECT(TM) -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. It 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. This test is FDA approved.
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. This test is FDA approved.
<PAGE>
- -------------------------------------------------------------------------------
Diagnostic Test Kit Use
- -------------------------------------------------------------------------------
OVULATION TEST -One-step, five minute visual test for laboratory or
(EZ-LH(TM)) home use for determination of the proper time of
ovulation. This test is FDA approved.
PREGNANCY TEST -One-step, five minute visual test for laboratory or
(FORTEL(R)) home use for determination of pregnancy. This test
is FDA approved.
PSA TEST -One-step, ten minute visual test to detect Prostate
(EZ-PSA(TM)) Specific Antigen (PSA). The test is intended for
professional use as an aid in the diagnosis of
prostate cancer. FDA approval is needed before
marketing in the U.S.
HELICOBACTER PYLORI -A rapid visual test intended for the physician's
(EZ-H.P.(TM)) office to detect duodenal and gastric ulcer.
Clinical studies are underway to obtain FDA
clearance.
BIOMERICA'S OTHER PRODUCTS: QUALITY CONTROL SERA
- -------------------------------------------------
Biomerica markets a variety of quality control sera which are used in
conjunction with diagnostic products of Biomerica and other companies. These
control sera serve the user by monitoring the consistency in performance of the
diagnostic kits being used.
LANCER ORTHODONTICS, INC.
- -------------------------
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 1998 fiscal year, Lancer had eight 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 and currently
employs three people.
Most of Lancer's manufacturing and shipping operations are located in
Mexicali, Mexico, in order to reduce the cost of manufacturing and compete more
effectively worldwide. Lancer maintains its headquarters in San Marcos,
California where it houses the administration, the engineering, the sales and
marketing, and customer services.
ALLERGY IMMUNO TECHNOLOGIES, INC.
- ---------------------------------
AIT and its predecessors commenced development activities in allergy and
immune 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.
<PAGE>
As a result of its research activities, AIT has discovered new methods for
treating allergies. AIT has succeeded in obtaining four patents pertaining to
its discoveries for allergy treatment. These are:
- - Immunotherapy agents for treatment of IgE mediated allergies: U.S. Patent
#5,116,612 (issued May 6, 1992).
- - Liposome containing immunotherapy agents for treatment of IgE mediated
allergies: U.S. Patent #5,049,390 (issued September 17, 1991).
- - Immunotherapy agents for treatment of IgE mediated allergies: U.S. Patent
#4,946,945 (issued August 7, 1990).
- - Allergen-thymic hormone conjugates for treatment of IgE mediated allergies:
U.S. Patent #5,275,814 (issued January 4, 1994).
AIT 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 the above
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. With help from Biomerica, AIT has begun preclinical animal
studies utilizing the technology covered in some of these patents.
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 (administering liposome encapsulated house dust mite by both injection
and mouth) indicate a dramatic increase in the densensitization process. This
new type of therapy may revolutionize allergy treatment for reasons indicated
below:
- -------------------------------------------------------------------------------
FEATURES BENEFIT
- -------------------------------------------------------------------------------
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 currently 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 74.6% 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.
<PAGE>
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 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.
All manufacturing production is regulated by the FDA Good Manufacturing
Practices for medical devices. Biomerica has an internal quality control unit
that monitors and evaluates product quality and output. In addition, the
Company employs a qualified external quality assurance consultant who monitors
procedures and provides guidance in conforming to the Good Manufacturing
Practices regulations. The Company either produces its own antibodies and
antigens or purchases these materials from qualified vendors. The Company has
alternate, approved sources for raw materials procurement and it is surmised
that material availability into the foreseeable future does not pose a primary
constraint for us in our relevant ranges of production.
Lancer currently utilizes a manufacturing subcontractor to provide
manufacturing services to Lancer through its affiliated entities located in
Mexicali, B.C., Mexico. The current agreement, which expires in October 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. Effective
April 1, 1996, Lancer leased the Mexicali facility under a separate agreement.
Lancer has retained the option to convert the manufacturing operation to a
wholly owned subsidiary at any time without penalty. Should Lancer discontinue
operations in Mexico, it is responsible for accumulated employee seniority
obligations as prescribed by Mexican law. At May 31, 1998, this obligation was
approximately $226,000. Such obligation is contingent in nature and accordingly
has not been accrued in the financial statements.
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. Lancer is engaged
in development programs to improve and expand its orthodontic products and
production techniques. Lancer consults frequently with practicing
orthodontists. Research and development expenses incurred by the Company for
the years ended May 31, 1998 and 1997 aggregated $554,000 and $283,000,
respectively. These expenses included approximately $188,000 and $93,000 for
fiscal 1998 and 1997, respectively, for Lancer's product development.
MARKETS AND METHODS OF DISTRIBUTION
- ----------------------------------
Biomerica has approximately 320 current customers, of which approximately 60
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. The Company entered into the OTC market segment
during 1985. 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 directly to chain stores.
<PAGE>
Lancer sells its products directly or indirectly through its sales
representatives, to a relative large number of customers. At the end of its
1998 fiscal year, Lancer had eight sales representatives, all in the United
States, all of whom are employees of Lancer. Three additional employees work in
the international marketing division. No customer of Lancer's accounted for 10%
or more of Lancer's sales in the fiscal years ended May 31, 1998 and 1997.
The loss of any one or a few customers would not have a material adverse
effect upon the revenues of the Company.
BACKLOG
- -------
Biomerica has no backlog. As of May 31, 1998 and 1997, Lancer had a
backlog of $268,000 and $237,000, 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.
The Company maintains inventories of antibodies and antigens as components
for its diagnostic test kits. Due to a limited shelf life on some products such
as the RIA kits (which averages 60 days) finished kits are prepared as required
for immediate delivery of pending and anticipated orders. Sales orders are
normally processed on the day of receipt.
The principal raw materials used by Lancer in the manufacture of its 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
1998 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 over five competitors, and there are
approximately the same number 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, patent position, 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 through strategic cooperations with larger
companies and distributors.
<PAGE>
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 has not been subject to
significant seasonal fluctuations.
EMPLOYEES
- ---------
As of August 15, 1997, the Company and its subsidiaries employed 75 full-time
employees and 5 part-time employees, including one Ph.D. Lancer, through its
Mexican subcontractor, employs approximately 202 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,
---------------------------------------------
1998 1997
--------------------- ----------------------
Revenues from sales to:
United States customers....... $5,041,000 /53.8% $5,208,000 /56.3%
Asia.......................... 878,000 /9.4% 822,000 /8.8%
Europe........................ 1,798,000 /19.2% 1,660,000 /18.0%
South America................. 810,000 /8.6% 745,000 /8.1%
Other foreign................. 849,000 /9.0% 809,000 /8.9%
-------------------- --------------------
Total revenues................ $9,376,000 /100% $9,244,000 /100%
==================== ====================
The Company recognizes that its foreign sales could be subject to some
special or unusual risks which are not present in the ordinary course of
business in the United States. Changes in economic factors, government
regulations and import restrictions all could impact sales within certain
foreign countries. Foreign countries have licensing requirements applicable to
the sale of diagnostic products which vary substantially from domestic
requirements; depending upon the product and the foreign country, these may be
more or less restrictive than requirements within the United States.
Foreign sales are made primarily through a network of over 30 independent
distributors in approximately 20 countries.
YEAR 2000 COMPLIANCE
- --------------------
The Company currently operates a Novell-based LAN system put in place in
November 1994. At least sixty percent of the workstations have been up-graded
<PAGE>
with contemporary equipment in the last twelve months. The remaining stations
and server are scheduled to be replaced or updated during calendar year 1999.
This will effectively eliminate any Bios-chip hardware issues. Additionally,
the accounting and record-keeping software that is employed is actively
supported by the developer/vendor and is in wide currency in varied commercial
milieus. The vendor has indicated that the 2000 issue has been addressed and
that it is not a problem with the current version in use.
The Company does not place orders electronically nor does it make
disbursements to vendors or employees in that medium. The Company has no way of
knowing how the Year 2000 may affect its various vendors in their ability to
ship raw materials or its customers in their ability to purchase products. The
Company believes that the 2000 issue will not have a material impact on its
internal data record keeping or the authorized disposition of Company assets.
Lancer has begun the process of upgrading its hardware and software in
order to obtain year 2000 compliance in 1999 and does not anticipate incurring
significant additional costs to be year 2000 compliant.
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. Many 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 two radioactive materials licenses from the State of
California (both licenses expire on June 20, 1999), a permit from the U.S. Drug
Enforcement Administration (which expires on June 30, 1999) and a permit from
the U.S.D.A. (which expires January 28, 1999). The Company also holds a Device
Manufacturing License from the State of California, Department of Health
Services, which expires March 16, 1999, and is registered with the Department of
Health and Human Services, Public Health Service of the FDA as a Device
Establishment (this registration expires February 28, 1999). All of the licenses
and permits 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.
Biomerica, Inc.'s products are regulated by the Food & Drug Administration
("FDA") as "devices", under the purview of the Food, Drug and Cosmetic Act (the
"FDCA"). Under the FDCA, medical devices are classified into one of three
classes - Class I and II devices are not expressly approved by the FDA, but
instead, are "cleared" for marketing. Class III generally must receive "pre-
market approval" from the FDA with regards to safety and effectiveness.
A 510(k) clearance will be granted if the submitted data establishes that
the proposed device is "substantially equivalent" to an existing Class I or
Class II medical device or to a Class III medical device for which the FDA has
not required pre-market approval. The 510(k) clearance process for
"substantially equivalent" devices allows product sales to be made after the
filing of an application and acknowledgement by FDA. If there are no existing
FDA-approved products by which to measure "substantially equivalent" for a
particular product, approval by the FDA may entail more lengthy pre-market
approval procedures. We believe that most of the products under development
will be classified as Class I or Class II medical devices and will be eligible
for 510(k) clearance.
<PAGE>
Sales of the company's products in foreign countries are subject to foreign
government regulations, which vary substantially and are particular to the
foreign venue. The rigor and gestation of foreign approval procedures may also
differ from the FDA.
Biomerica, Inc. has been in the business of making Immunoassay Controls for
the last twenty-six years. Some of these controls are used by the laboratories
for therapeutic monitoring of various chemicals given to the patients which can
be bought from vendors only with a DEA license. Biomerica also is actively
engaged in the development of laboratory and/or physicians office test kits for
drugs of abuse. Those chemicals, even though needed in small quantities, can
only be obtained if the company has a DEA license.
In order to make a test for any analyte the same analyte has to be attached
to a measurable, chemical or biochemical signal. These signals depend on the
methodology used. In a test using enzymatic methodology, the signal would be an
enzyme. If a test utilizes radioimmunoassay (RIA) methodology, the signal is a
radioactive chemical. Biomerica uses Iodine-125 and tritium (H3) radioactive
signals for some of its test kits which use RIA methodology.
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".
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. As a
medical device manufacturer, Lancer is licensed to design, manufacture, and sell
orthodontic appliances. As the manufacturer, the Company is required to follow
the Code of Federal Regulations, Section 21, parts 800-1299. Lancer's last
assessment by the FDA was in November 1997. Lancer is registered and licensed
with the state of California's Department of Health Services.
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.
<PAGE>
ITEM 2. PROPERTIES
----------
During fiscal 1998 Biomerica leased approximately 21,000 square feet of
space in Newport Beach, California for a term which expired May 31, 1993 (and
which was renewed until May 31, 1998) at a base rental payment of $12,720 per
month, plus taxes and insurance, of which $2,000 per month has been accruing
since April 1997 and will be paid in the form of Biomerica common stock. These
facilities are used for diagnostic test kit research and development,
manufacturing, marketing and administration.
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 can not 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.
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 initial lease was for five years commencing January
1, 1994 and ending December 31, 1998. In 1998, Lancer renegotiated the lease
and extended the terms to December 31, 2003. The Mexicali facility consists of
a 16,000 square foot manufacturing and office building. The term of the lease
is for thirty-one months commencing April 1, 1996 and ending October 31, 1998.
The future aggregate minimum annual lease payments for 1999 and 2000 are,
respectively, $76,031 and $65,800. Management believes that the properties are
currently suitable and adequate for Lancer's operations.
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.
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".
<PAGE>
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, 1998............. $2.875 $1.25
February 28, 1998........ $3.125 $2.188
November 30, 1997........ $2.643 $2.164
August 31, 1997.......... $3.104 $2.607
May 31, 1997............. $3.625 $2.125
February 29, 1997........ $4.375 $2.875
November 30, 1996........ $6.75 $3.25
August 31, 1996.......... $9.875 $2.1875
As of August 2, 1998, the number of holders of record of the Company's
common stock was approximately 1,805, 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 1998 COMPARED TO FISCAL 1997
- -----------------------------------
Consolidated net sales for the Company were $9,376,498 for fiscal 1998
compared to $9,243,510 for fiscal 1997. This represents an increase of
$132,988, or 1.4% for fiscal 1998. Lancer's sales decreased by $139,615.
Biomerica showed a sales increase of $322,916, an 11.6% increase for Biomerica.
AIT had a decrease of $52,091. This decrease at Lancer was attributable to
increased discounting and a general reduction in domestic sales. While the
trend in increased discounting at Lancer continues, it has slowed, partially the
result of orthodontic industry consolidation. Lancer continues to search for
new sales representatives, distributors, private label customers, products, and
product ideas, all of which, if successful, will result in increasing sales.
Lancer has incorporated a subsidiary in Mexico which will allow Lancer to
distribute its products through Mexico and other parts of Latin America at much
more competitive prices. This subsidiary may also assume the duties of the
subcontractor, which is expected to reduce costs. The increase in sales at
Biomerica 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 1998 as compared to fiscal 1997 increased by
$106,439 (2.0%). Lancer's cost of sales as a percentage of sales decreased
from 60.6% to 58.6% in fiscal 1998 as compared to fiscal 1997. The decrease
was primarily attributable to (1) manufacturing problems that were resolved in
fiscal 1997, (2) changes in plant management and (3) the implementation of
procedures resulting in reduced expenditures. Biomerica had an increase in
cost of goods as a percentage of sales from 51.6% to 57.1% in fiscal 1998 as
compared to fiscal 1997 due to more discounting of products in the foreign
market, higher labor and other costs. AIT had an increase in cost of goods as
a percentage of sales of 84.6% to 107% due to declining revenues offset by
higher materials costs and wages.
Selling, general and administrative costs increased in fiscal 1998 as
compared to fiscal 1997 by $158,875 (5.4%). Lancer had a decrease of $31,541 in
these costs due to decreased payroll and related expenses and decreased
professional fees. These were partially offset by increased payroll and related
expenses and advertising in the selling area. Biomerica had an increase in
fiscal 1998 as compared to fiscal 1997 of $159,900 due primarily to increased
personnel, consulting and advertising costs. AIT had increased costs of
$30,516 due to higher personnel costs.
<PAGE>
Research and development expense increased in fiscal 1998 as compared to
fiscal 1997 by $270,377 (95.4%). Of this, Lancer had an increase of $95,163,
as a result of increased payroll and supplies. Biomerica had an increase in
research and development expenses of $188,108, and AIT had a decrease of
$12,933. Biomerica and Lancer have been investing more in research and
development in an effort to develop new products in order to increase their
competitive positions in the marketplace. AIT decreased research expenses due
to the current lack of funds.
Interest expense, which was incurred by Lancer, decreased in fiscal 1998 as
compared to fiscal 1997 by $33,299 (57%) due to the payoff of certain term debt
and capital lease obligations.
Other income increased by $91,962 (152%) in fiscal 1998 as compared to
fiscal 1997. A decrease of $5,383 is attributable to Lancer, and an increase of
$104,637 was attributable primarily to Biomerica. Biomerica had greater
dividend and interest income due to the funds that were raised in January 1998.
Biomerica also had gains on the sale of marketable securities in fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of May 31, 1998, the Company had cash and available for sale securities
of $2,175,434 (see Note 1 to the Financial Statements) and current working
capital of $5,118,126 as opposed to $2,220,528 and $4,705,139, respectively, for
the previous year. During fiscal 1998, Lancer paid off the remaining $200,000,
plus all accrued interest it owed on its term bank loan. Lancer's management
negotiated a renewal of Lancer's line of credit through October 1, 1998. The
line of credit allows for borrowing up to $300,000 and is limited to specified
percentages of eligible accounts receivable. The unused portion available under
the line of credit at May 31, 1998, was $200,000. Borrowings bear interest at
prime plus 1% per annum (9.5% at May 31, 1998). 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.
In May 1998, Biomerica's Board of Directors approved the repurchase of up to
1% of Biomerica's outstanding common stock over the next twelve months. Such
repurchases will be made from time to time on the open market subject to market
pricing and conditions. Repurchases will be made out of current cash flow and
all repurchased shares will be retired. Through September 10, 1998, a total of
12,950 shares had been repurchased for an aggregate purchase price of $20,976.
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. 1998 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 1998 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,
1998.
ITEM 10. EXECUTIVE COMPENSATION
----------------------
This information is incorporated by reference to the Company's proxy
statement for its 1998 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,
1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
This information is incorporated by reference to the Company's proxy
statement for its 1998 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,
1998.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
This information is incorporated by reference to the Company's proxy
statement for its 1998 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,
1998.
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).
10.5 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, 1998 and 1996 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).
<PAGE>
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: September 10, 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: 9/ 10 /98
- ------------------------------ --------------
Zackary S. Irani
President, Director, Chief Executive
Officer
/S/ P. B. Kaplan Date: 9/10/98
- ------------------------------ -------------
P. B. Kaplan, M.D.
Director
/S/ Robert Orlando Date: 9/10/98
- ------------------------------ ------------
Robert Orlando, M.D., Ph.D.
Director
/S/ Janet Moore Date: 9/10/98
- ------------------------------ ------------
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 74.6%
Lancer Orthodontics, Inc. California 29.9%
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> MAY-31-1998
<CASH> 1,840,575
<SECURITIES> 334,859
<RECEIVABLES> 1,750,747
<ALLOWANCES> 144,059
<INVENTORY> 2,534,552
<CURRENT-ASSETS> 6,469,656
<PP&E> 3,124,854
<DEPRECIATION> 2,648,027
<TOTAL-ASSETS> 7,494,997
<CURRENT-LIABILITIES> 1,351,530
<BONDS> 0
0
0
<COMMON> 318,264
<OTHER-SE> 3,667,775
<TOTAL-LIABILITY-AND-EQUITY> 7,494,997
<SALES> 9,376,498
<TOTAL-REVENUES> 9,376,498
<CGS> 5,484,046
<TOTAL-COSTS> 5,484,046
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,360
<INCOME-PRETAX> 161,657
<INCOME-TAX> 20,225
<INCOME-CONTINUING> 141,432
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 141,432
<EPS-PRIMARY> .04
<EPS-DILUTED> .03
</TABLE>
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 shareholder loan (71,000) -
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 29.9% 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 29.9% 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) 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
-------
<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
- ----------------------------------------
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 over five years. The exercise price will
be the fair market value of 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) -
Additional shareholder loan (71,000) -
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 26,922 (346,918)
----------- -----------
Cash flows from financing activities:
Exercise of stock options 80,550 -
Proceeds from sale of stock - 1,092,680
Offering expenses (4,771) -
Stock repurchase (8,661) -
----------- -----------
Net cash provided by financing activities 67,118 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
