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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB/A
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1999 COMMISSION FILE NUMBER: 0-8765
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BIOMERICA, INC.
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(Small Business Issuer in its Charter)
DELAWARE 95-2645573
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1533 MONROVIA AVENUE, NEWPORT BEACH, CA 92663
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(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: (949) 645-2111
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Securities registered under Section 12(b) of the Exchange Act:
(Title of each class) (Name of each exchange on which registered)
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NONE NASDAQ
Securities registered under Section 12(g) of the Exchange Act:
(Title of each class)
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COMMON STOCK, PAR VALUE $.08
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES(x) NO( )
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Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained herein, and will not be contained, to the best of issuer's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
(X)
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State issuer's revenues for its most recent fiscal year: $8,688,106.
State the aggregate market value of the voting stock held by non-affiliates of
the issuer (based upon 3,619,487 shares held by non-affiliates and the closing
price of $2.0625 per share for Common Stock in the over-the-counter market as of
August 15, 1999): $7,949,415.
Number of shares of the issuer's common stock, par value $.08, outstanding as of
August 15, 1999: 4,520,945 shares.
DOCUMENTS INCORPORATED BY REFERENCE: The issuer's proxy statement for its 1999
Annual Meeting of Stockholders is incorporated into Part III hereof. Also
incorporated by reference are the Annual Reports on Form 10-KSB for the fiscal
year ended May 31, 1999, for Lancer Orthodontics, Inc. and Allergy Immuno
Technologies, Inc.
Transitional Small Business Disclosure Format YES ( ) NO (X)
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PART I*
ITEM 1. DESCRIPTION OF BUSINESS
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THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 PROVIDES A "SAFE HARBOR"
FOR FORWARD-LOOKING STATEMENTS. CERTAIN INFORMATION CONTAINED HEREIN (AS WELL AS
INFORMATION INCLUDED IN ORAL STATEMENTS OR OTHER WRITTEN STATEMENTS MADE OR TO
BE MADE BY BIOMERICA) CONTAINS STATEMENTS THAT ARE FORWARD-LOOKING, SUCH AS
STATEMENTS RELATING TO CONSUMMATION OF THE TRANSACTION, ANTICIPATED FUTURE
REVENUES OF THE COMPANY AND SUCCESS OF CURRENT PRODUCT OFFERINGS. SUCH
FORWARD-LOOKING INFORMATION INVOLVES IMPORTANT RISKS AND UNCERTAINTIES THAT
COULD SIGNIFICANTLY AFFECT ANTICIPATED RESULTS IN THE FUTURE, AND ACCORDINGLY,
SUCH RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING
STATEMENTS MADE BY OR ON BEHALF OF BIOMERICA. THE POTENTIAL RISKS AND
UNCERTAINTIES INCLUDE, AMONG OTHERS, FLUCTUATIONS IN THE COMPANY'S OPERATING
RESULTS DUE TO ITS NEW BUSINESS MODEL AND EXPANSION PLANS AND THE COMPETITIVE
ENVIRONMENT IN WHICH THE COMPANY WILL BE COMPETING. THESE RISKS AND
UNCERTAINTIES ALSO INCLUDE THE CONTINUAL DEMAND FOR THE COMPANY'S PRODUCTS,
COMPETITIVE AND ECONOMIC FACTORS OF THE MARKETPLACE, AVAILABILITY OF RAW
MATERIALS, YEAR 2000 ISSUES, HEALTH CARE REGULATIONS AND THE STATE OF THE
ECONOMY.
BUSINESS
OVERVIEW
THE COMPANY
Biomerica ("Biomerica", the "Company", "we" or "our") was incorporated in
Delaware in September 1971. We changed our corporate name in February 1983 to
NMS Pharmaceuticals, Inc., and in November 1987 to Biomerica, Inc. Historically
we have operated as a global biomedical company primarily engaged in developing,
manufacturing and distributing medical diagnostic products for early detection
and monitoring of chronic diseases to facilitate prevention and cure. We use our
expertise to manufacture products in the areas of diabetes, allergy, cancer,
gastroenterology, cardiology and endocrinology. Our customers include medical
schools and universities, pharmaceutical companies, health maintenance
organizations, hospitals, clinics, commercial laboratories, physician's offices,
drugstores and individual customers. We also derive revenues and other benefits
from two subsidiaries, Lancer Orthodontics, Inc. ("Lancer"), an international
manufacturer of orthodontics products, and Allergy Immuno Technologies, Inc.
("AIT"), which is engaged in developing new allergy treatment therapies and
providing specialized services to pharmaceutical companies and physicians.
With a change in management of the Company in 1997, we embarked upon a
strategic commitment to e-commerce as a venue to broaden our corporate vision
and build upon our core competence in chronic diseases. We designed a
business-to-business e-commerce model to automate the prescribing and dispensing
of pharmaceuticals that will increase efficiency, reduce the potential for
dispensing errors, and help improve clinical outcomes. In June 1999, we raised
$2 million in equity to develop the infrastructure of our new Internet division.
We intend to use the net proceeds of this offering for working capital and
general corporate purposes relating to the continued development of our Internet
division. While we will continue to develop products for our existing business,
we anticipate that our future growth will depend on our new e-commerce
operations.
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OUR NEW BUSINESS
THE NEXT-GENERATION ONLINE PHARMACY
Our Internet division was established in November 1998 to capitalize on the
emerging market for online pharmacy services. We have formed alliances with
TheBigStore.com, an Internet and technology partner, and TheBigHub.com, an
Internet marketing partner. We have also fortified our management with a team of
executives possessing extensive healthcare industry and technology-based
experience.
Our products and services comprise two key components: 1) ReadyScript, a
medication management system, and 2) TheBigRX.com, a retail online pharmacy.
Together, we believe these products and services are the next generation of
online pharmacy. We will implement our next-generation online pharmacy in two
phases. The first phase includes development and implementation of the retail
online pharmacy for consumer drugstore product needs. We plan to open
TheBigRX.com by the end of 1999. In the second phase, we will beta-test and
launch our ReadyScript online medication management system. We plan to complete
this phase during the year 2000.
ReadyScript, a proprietary web-enabled system, will automate the prescribing
process at the point of care -- in the physician's office. It is intended that
physicians will be able to increase efficiency and make better prescribing
decisions using a handheld or desktop computer that allows immediate online
access to formulary and preferred drug therapy options based on insurer, best
practice guidelines for medication by chronic disease state, and, as available,
patient medication history. When fully developed, ReadyScript will automatically
transmit these prescriptions to an online pharmacy, traditional neighborhood
pharmacy, or pharmacy designated by the participating insurer or pharmacy
benefit manager ("PBM"). The automatic process will substantially reduce the
potential for medication errors inherent in the current system of handwritten
and oral prescriptions. Additionally, we believe the integration of best
practices will help to improve clinical outcomes and lower overall healthcare
costs.
TheBigRX.com will be our retail online pharmacy offering prescription drugs,
personal care and beauty products, non-prescription drugs, vitamins and
nutrition products. The site will offer individuals the convenience of shopping
for products 24 hours a day from home or office. Prescription orders can be
combined with additional purchases, all delivered to the customer's home within
a few days, reducing the need to visit a brick-and-mortar drugstore.
DIFFERENTIATION THROUGH MEDICATION MANAGEMENT
We believe medication management, the basis of ReadyScript, will
differentiate us from the first generation of online pharmacies by modernizing
the practice of prescribing and dispensing medications. We define medication
management as a series of systems and processes to improve healthcare outcomes
through: (1) the integration of scientifically-proven best practices; (2)
appropriate and optimal drug therapy; and (3) the reduction or avoidance of
adverse drug reactions. Simply stated, medication management is ensuring that
the right drug is prescribed for the right patient, in the right dose, at the
right cost, and at the right time.
The first-generation online pharmacies tout increased patient convenience,
but have been unable to deliver on this promise. In fact, they actually create
more steps in the prescription fulfillment process. Also, these first-generation
online pharmacies do not address the fundamental issues of prescribing
inefficiencies and sub-optimal drug use in their systems. Our ReadyScript
technology will be designed to utilize medication management at the point of
care to provide physicians, pharmacists, insurers and patients significant value
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THE DILEMMA
THE INEFFICIENT PRESCRIBING SYSTEM
For decades, prescriptions have been handled in basically the same way: (1)
the physician writes a prescription on a prescription pad and gives it to the
patient; (2) the patient takes the handwritten prescription to the pharmacist;
and (3) the pharmacist fills the order. Mail-order fulfillment options and
first-generation online pharmacies were developed as attempts to make the
process more convenient. However, neither of these attempts to increase
convenience has significantly changed the prevailing prescribing practice. The
fundamental flaws inherent in the system are the inefficiencies and costs of
handling handwritten and/or verbal prescriptions, and the sub-optimal drug
therapies many patients are receiving.
Handwritten and verbal prescriptions are inefficient and costly because:
o Verbal and illegible handwritten prescriptions can be misinterpreted,
leading to dispensing errors.
o Illegible prescriptions require physicians to use their time
inefficiently in clarifying orders to pharmacists trying to decipher the
handwriting.
o Dispensing errors can produce adverse drug reactions that can seriously
jeopardize a patient's health and be costly to treat.
o Patients are inconvenienced by having to travel to a pharmacy or other
dispensing location to get the prescription filled, or go through a
series of steps to have the prescription processed by a mail-order
fulfillment source or online pharmacy.
Sub-optimal drug therapy is the result of significant variations in
physician practices. Because it is virtually impossible to keep abreast of all
new medical developments and treatment standards, physicians' treatment
decisions often deviate from the established best practices. This can compromise
a patient's health and lead to higher healthcare costs. For example, national
medical organizations recommend that beta-blockers be given to heart attack
survivors to improve in-hospital and post-discharge mortality. However,
beta-blockers are only prescribed about one-third of the time, leaving the other
two-thirds at higher risk of suffering a second heart attack. To address the
sizeable impact of sub-optimal drug therapy and escalating healthcare costs,
physicians are increasingly turning to disease management. Disease management is
a comprehensive solution that combines clinically proven best practices with
non-clinical interventions to improve patient outcomes and lower costs.
The key to addressing the inefficiency of the prescribing process and the
risks of sub-optimal drug therapy is to effect change at the beginning of the
process, namely when the physician writes a prescription. We believe our
ReadyScript automated prescription technology is unique in that it focuses on
the physician at this pivotal point, and creates efficiencies and enhancements
throughout the prescribing and dispensing process. Automated prescriptions
through ReadyScript will be accurate and legible, minimizing the potential for
misinterpretation and dispensing errors, thereby reducing time spent by
pharmacists and physicians clarifying orders. We anticipate that because the
physician will be able to electronically route the prescription directly to a
participating drugstore, including an online pharmacy such as TheBigRX.com, the
patient can receive his or her prescription without any inconvenience, delays or
misinterpretations.
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THE PHARMACY BENEFIT MANAGER DILEMMA
The first generation of online pharmacies assumed they would have ready
access to insurer- and PBM-reimbursed business. In reality, however, many of the
first-generation online pharmacies found themselves excluded from insurers' and
PBMs' pharmacy networks. This has compelled several of the first-generation
online pharmacies to form exclusive alliances with a single PBM or retail
pharmacy chain, which we believe significantly limits future market opportunity
for these companies. Our solution is designed to work in concert with multiple
insurers and PBMs. Our ReadyScript software will ultimately support efficient
and appropriate formulary selection. Moreover, it is being designed to
facilitate the electronic routing of prescriptions to any pharmacy designated by
the insurer or PBM, including their own online or mail-order fulfillment sites.
Through the coupling of our ReadyScript medication management technology and
TheBigRX.com retail online pharmacy, we intend to provide an end-to-end solution
that addresses all of the elements of pharmaceutical prescribing and dispensing
in one comprehensive, cost-effective manner to benefit patients, physicians, and
participating insurers and PBMs.
MARKET CONDITIONS
THE HEALTHCARE ENVIRONMENT
CHRONIC MEDICAL CONDITIONS
According to Advanstar Communications, approximately 73% of the $102 billion
annual U.S. prescription drug market is spent on chronic medical conditions.
These include, among others, hypertension, diabetes, allergy, arthritis, asthma,
chronic obstructive pulmonary disease, osteoporosis, congestive heart failure
and depression. This expenditure is expected to grow as the baby boom population
ages and as the importance of pharmaceuticals in disease state management
increases.
Pharmaceuticals for chronic medical conditions are primarily dispensed
through traditional retail pharmacy outlets. Since many chronic conditions
require the recurring, long-term use of medications, mail-order pharmacies are
becoming an increasingly important source of pharmaceutical fulfillment.
ESCALATING HEALTHCARE COSTS
According to the Health Care Financing Administration, healthcare
expenditures in the United States totaled approximately $1 trillion in 1996, or
14% of the country's gross domestic product, making it the largest sector of the
economy. Of this $1 trillion, 60% of expenditures were related to treating
chronic conditions. Centers for Disease Control and Prevention studies have
demonstrated that proper medication use can significantly impact mortality and
morbidity in certain disease states, reducing overall healthcare costs. To
maintain profitability, managed care organizations and physicians are under
pressure to improve the process of managing physician prescribing as a means of
controlling pharmacy and other healthcare costs.
ESCALATING PHARMACEUTICAL COSTS
Pharmaceutical costs are among the fastest growing components of healthcare
expenditures, increasing $42.7 billion or 84% over the past 5 years, according
to the National Institute for Health Care Management's Research and Education
Foundation. Future increases in drug spending will be fueled by an aging
population, a faster FDA drug approval process, direct-to-consumer advertising,
greater reliance on pharmaceuticals as a substitute for other therapies, and
potential for expanded insurance coverage for drugs.
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Insurers are seeing prescription drug outlays rising 15% to 20% a year, with
prescription drugs accounting for as much as 15% of their total medical costs.
The inability to manage these costs successfully and the errors associated with
an inefficient manual prescription process make it exceedingly difficult for
insurers to maintain profitability without raising premiums. Physicians have
also been affected by rising drug costs as insurers continue to transfer to them
a significant portion of the financial risk for this cost without a
corresponding increase in reimbursement.
Contributing to the continued increase in pharmaceutical costs is the
prescribing process, which has remained largely unchanged over the past 50
years. Virtually all of the 2.8 billion prescriptions written in this country
each year are handwritten or verbally transmitted to the dispensing pharmacy.
These modes of prescription transmission are inherently inefficient, and prone
to misinterpretation and potentially harmful or fatal medication errors.
PHARMACEUTICAL FULFILLMENT CHANNELS
RETAIL DRUGSTORE MARKET
The retail drugstore market, consisting of prescription drugs, personal care
and beauty products, non-prescription drugs, vitamins and nutrition products,
totaled $165 billion in 1998, according to estimates by Information Resources,
Inc. and Frost & Sullivan. The majority of drugstore products are sold through
highly fragmented traditional distribution channels such as chain drugstores
(e.g., CVS, Eckerd, RiteAid and Walgreen's), mass market retailers (e.g., Kmart,
Target and Wal-Mart), supermarkets, warehouse clubs, mail-order companies, and
independent drugstores and pharmacies. These distribution sources offer limited
selection, impersonal and limited service, lack of privacy, and insufficient
information and access to pharmacists.
ONLINE PHARMACIES
The unique capabilities of the Internet helped make possible the creation of
online pharmacies in 1999. The first-generation entrants to the market include
Soma.com, drugstore.com and planetRx.com, among others. These first-generation
online pharmacies are all based on the business-to-consumer e-commerce model,
which in our opinion has limited potential for prescription drug fulfillment.
First-generation online pharmacies allow customers to receive products
delivered through the mail, but we believe they ignore the key issues causing
customer inconvenience inherent in the traditional fulfillment system. To use
these online pharmacies, customers must have Internet access and must fax or
mail their prescriptions to the online pharmacy. Physicians are also
inconvenienced because they receive calls from pharmacists once the online
request is processed. Additionally, these first-generation online systems have
not eliminated the potential for errors or misinterpretation of handwritten
prescriptions, nor have they addressed any insurer formulary and prescription
approval issues. Instead, these first-generation systems perpetuate the same
inaccuracies and cost.
MAIL-ORDER PRESCRIPTION FULFILLMENT
Mail-order prescription dispensing currently represents about 11% of the
prescription fulfillment market and is primarily used to provide medication for
chronic medical conditions. Yet, medication for chronic illnesses represents
over 73% of prescriptions dispensed. We believe this indicates a vastly
underutilized fulfillment opportunity.
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EMERGING TECHNOLOGIES
THE INTERNET
International Data Corporation estimates there were 142 million Internet
users worldwide at the end of 1998. This number is expected to increase to 502
million worldwide by the end of 2002. The Internet is a powerful communication
and commerce medium, enabling individuals and organizations to efficiently
interact and conduct transactions over great distances. Without the physical
constraints faced by traditional retailers, online retailers are able to carry a
larger number of products, at a lower cost, with greater merchandising
flexibility. The Internet also offers the added conveniences of privacy, 24-hour
access, readily accessible product data information, and auto-delivery to
consumers.
All of the first-generation online pharmacies are based on a
business-to-consumer e-commerce model. Total business-to-consumer e-commerce is
expected to increase from $7.8 billion in 1998 to $108 billion in 2003,
according to Forrester Research. This growth is projected to be greatly outpaced
by business-to-business e-commerce, which is expected to increase from $43
billion in 1998 to $1.3 trillion in 2003.
HEALTHCARE INFORMATION TECHNOLOGY
Though traditional desktop and laptop computers can bring enhanced
efficiencies to physician offices, handheld computers are much better suited to
meet the needs of highly mobile physicians, since they are lightweight, fit
easily into a lab coat, turn on instantly, and have long battery lives. Early
corporate users of handheld computers integrated into network environments, such
as FedEx and UPS, have seen tremendous benefits from this form of computing.
Only recently has handheld technology become advanced enough to support the
complex information needs of physician practices, and begun to experience wider
physician acceptance. Harvard Medical School, for example, began acclimatizing
physicians to handheld technology in 1995 by requiring its students to have a
handheld computer. With technology becoming more powerful and more affordable,
we believe physicians will increasingly use these tools in their practices.
OUR END-TO-END SOLUTION
We believe our next-generation online pharmacy creates a comprehensive,
compelling healthcare management solution that meets the needs of physicians,
insurers and patients. We plan to incorporate our experience with chronic
medical conditions and leverage our management team's expertise in the areas of
medical management, pharmacy management, e-commerce and Internet technology.
More than just another e-commerce venue geared toward retail merchandising, ours
will be an end-to-end solution that improves the prescribing and dispensing
process from start to finish.
THE READYSCRIPT AND THEBIGRX.COM INTEGRATED SOLUTION
We believe that the ReadyScript and TheBigRX.com integrated solution is the
only automated prescribing and dispensing system that manages a prescription
from beginning to end. Our next-generation online pharmacy will be developed to
combine a proprietary system with a retail online pharmacy to add value beyond
the first-generation online pharmacies to increase physician efficiency, improve
clinical outcomes and decrease healthcare costs.
ReadyScript's benefits are designed to begin at the point of care -- in the
physician's office. As planned, before ordering a prescription, the physician
will access ReadyScript using a handheld or desktop computer linked into our
information network. The ReadyScript web-enabled software program will be
developed to allow the physician to view electronically best practice guidelines
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for medication based on diagnosis, preferred drug recommendations, formulary
guidelines based on the patient's insurance coverage, and ultimately patient
medication history. The physician will be able to make the best prescribing
decision based on this data, and electronically transmit a prescription.
ReadyScript will be designed to route the prescription electronically to a
participating pharmacy of the patient's choice, such as an online pharmacy like
TheBigRX.com, a mail-order pharmacy offered by the patient's insurance, or a
neighborhood pharmacy.
Once the prescription is transmitted, the pharmacist should receive a
legible and accurate prescription instead of a handwritten prescription that can
be difficult to interpret. The clarity of the ReadyScript prescription should
significantly reduce the possibility of dispensing the wrong medication, and
reduce delays associated with the pharmacist having to call the physician to
verify an illegibly written order. The prescription can be processed and, when
appropriate, the medication delivered to the patient's home, eliminating a trip
to the neighborhood pharmacy. As an option, we plan to allow the patient to
choose to have the prescription routed to a neighborhood pharmacy where it will
be waiting for pick-up on their arrival.
MEETING THE NEEDS OF THREE KEY AUDIENCES
THE PHYSICIAN
We plan to develop our ReadyScript technology to streamline the prescribing
of pharmaceuticals through automation and provide physicians immediate access to
critical information. We believe ReadyScript's benefits to physicians include:
o PROMOTING RATIONAL, COST-EFFECTIVE AND OPTIMAL DRUG THERAPIES. We plan
to give physicians immediate access to up-to-date best practice
guidelines for medications and formulary preferred drug information when
making their prescribing decisions. We believe this will save physicians
and insurers money on overall healthcare costs, and save patients money
spent out-of-pocket for non-preferred drugs.
o STREAMLINING THE PRESCRIBING PROCESS. Electronically transmitted
prescriptions do not need to be handwritten, phoned or faxed into the
pharmacy. Likewise, pharmacists do not need to phone physician offices
to verify prescriptions. We believe this will save time and increase
productivity for physicians and pharmacies alike.
o EMPOWERS PHYSICIANS. We believe our ReadyScript technology will provide
physicians greater confidence in their patient management decisions, as
they will have immediate access to pertinent patient information and
current best practice standards. They will also be able to reference
up-to-date chronic disease management information amassed from various
health information sources to help educate their patients and increase
patient compliance.
o INCREASING PATIENT SATISFACTION. Physicians should be able to build
patient satisfaction by providing patients the convenience of having
prescriptions ready for pick up or mailed directly to them.
o MINIMIZING DANGEROUS AND COSTLY ADVERSE DRUG REACTIONS. Online patient
medication histories should allow physicians to make the best
prescribing decisions. We expect this will dramatically reduce the
potential for adverse reactions and lower the costs of resources and
physician time associated with treating them.
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Facing increasing economic pressures, physicians are seeking tools to help
them save time, increase productivity, lower the cost of service delivery,
manage pharmacy risk, and improve their practice of medicine. We believe our
technology solutions will help physicians achieve these benefits and maximize
their practice revenues.
THE INSURER
The benefits of our ReadyScript technology to the insurer overlap with many
of the same benefits for physicians. We believe additional benefits to insurers
include:
o IMPROVED FORMULARY COMPLIANCE. We believe physicians will be able to
make more compliant prescribing decisions with the benefit of immediate
online access to the insurer's formulary preferences.
o REDUCED ADMINISTRATIVE BURDEN AND IMPROVED CUSTOMER SATISFACTION. We
expect insurers will realize a reduction in phone calls to their
customer service departments regarding formulary guidelines and
prescription approvals. This should result in increased physician and
patient satisfaction, which can help reduce the number of patients who
may consider changing insurance plans.
o INCREASED MAIL-ORDER PHARMACEUTICAL FULFILLMENT. Electronic
prescriptions routed directly to the insurer's designated mail-order
pharmacy should contribute to lower overall pharmacy costs.
o IMPROVED CLINICAL OUTCOMES. We expect insurers will benefit from lower
overall healthcare costs associated with following best practice
guidelines for medication, improving clinical outcomes, and minimizing
adverse drug reactions.
We anticipate insurers will support our technology to address their
escalating healthcare and pharmacy costs, improve their medical-loss ratios, and
assure their financial viability.
THE PATIENT
For patients, our next-generation online pharmacy is planned to provide many
value-added services and benefits, including:
o IMPROVED CLINICAL OUTCOMES. We expect patients will benefit from the
improved health and reduced adverse reactions resulting from their
physicians' appropriate and optimal drug prescribing practices.
o GREATER CONVENIENCE. Patients will be able to have their prescriptions
for chronic conditions automatically filled and mailed to their homes.
There will be no need to wait at a neighborhood pharmacy to have the
prescription filled, to fill out paperwork to use an insurer's
mail-order pharmacy, or to fax or phone in the prescription to a
first-generation online pharmacy. Even patients without Internet access
will be able to enjoy the benefit of our services.
o CHRONIC DISEASE MANAGEMENT INFORMATION. TheBigRX.com online web site
offer useful tools and information to empower patients to better
understand and manage their chronic medical conditions.
o CONVENIENT, QUALITY SHOPPING. Patients will have 24-hour shopping access
to TheBigRX.com, our retail online pharmacy, and its wide selection of
products at everyday low prices. Patients will also enjoy additional
discounts for repeat purchases.
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We anticipate that patients will be empowered to be more active in managing
their health, and be more secure in the care they are receiving.
COMPETITIVE ADVANTAGES
We believe our innovative ReadyScript medication management technology,
working in concert with TheBigRX.com online pharmacy, is a superior business
model compared to other online pharmacies. Our competitive advantages will be
designed to include:
o NON-EXCLUSIVE INSURER AND PBM RELATIONSHIPS. Our next-generation online
pharmacy solution is being designed to provide benefits not available
through first-generation online pharmacies. Many first-generation online
pharmacies that have aligned exclusively with an insurer or PBM and are
limited to filling prescriptions for patients covered within those
plans. Our next-generation online pharmacy will not be as limited
because it will not rely on exclusive contracts. In fact, our technology
will actually help multiple insurers and PBMs promote compliance with
their formularies and direct prescriptions to their mail-order
pharmacies as appropriate.
o DIRECT INTEGRATION WITH PHYSICIANS. We plan to work directly with
physicians to capture the prescription at the point of care. Our
medication-management influence at the beginning of the prescribing
process is not available with first-generation online pharmacies.
o PRESCRIPTION CAPTURED AT THE POINT OF CARE PRODUCING TOTAL CUSTOMER
SATISFACTION. Capturing the prescription at the point of care creates
conveniences, enhanced efficiency and improved outcomes for physicians
and patients. The increased patient satisfaction should help physicians
in their patient retention efforts.
o BROAD AND DIVERSIFIED REVENUE BASE. Due to the comprehensive nature of
our business model, and our non-competitive business design, we will
seek derive revenue from a broad and diversified client base comprising
all benefactors of the system: physician groups, health maintenance
organizations, PBMs, insurers, traditional neighborhood pharmacies, and
hospitals. Our multi-source revenue model should allow us to generate
earnings from sales and service agreements for our ReadyScript software,
transaction fees for electronic prescription routing, prescriptions
filled through our retail online pharmacy, and consumer product sales
from our retail online pharmacy.
o FOCUS ON PATIENTS WITH CHRONIC MEDICAL CONDITIONS. Our integrated
solution is intended to go beyond other online pharmacies in providing
useful information and tools designed specifically to help physicians
and patients manage chronic medical conditions.
o STRATEGIC TECHNOLOGY PARTNER. We have formed a strategic relationship
with a technology partner, TheBigStore.com, and an Internet portal,
TheBigHub.com. This alliance will provide back-end processing and is
expected to increase future Internet traffic to TheBigRX.com.
o EXPERIENCED MANAGEMENT TEAM. Our management team has extensive medical
management, pharmacy management, healthcare administration, retail sales
and technology applications experience.
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KEY STRATEGIES
To most effectively capitalize on our competitive advantages and the revenue
opportunities, we intend to:
o ENHANCE AND FORM KEY RELATIONSHIPS TO FURTHER REVENUE OPPORTUNITIES. We
plan to target strategic relationships in order to increase our revenue
opportunities and build our reputation as a leading online healthcare
destination. We will emphasize the non-competitive nature of our
technology as a cost-savings complement to insurers' and PBMs'
dispensing networks. We intend to seek to enhance existing relationships
and develop new relationships with:
o PBMs;
o managed care organizations;
o insurance companies;
o pharmaceutical manufacturers;
o content and commerce portals; and
o medical groups and physicians.
o TARGET-MARKET OUR READYSCRIPT MEDICATION MANAGEMENT SOLUTION. We plan to
target, penetrate and rapidly expand the market for our ReadyScript
medication management solution through a vigorous marketing effort to
large physician groups, hospitals and health maintenance organizations.
We intend to market ReadyScript as a solution that provides secure,
authorized and instant access to insurer formulary information, drug
interaction and drug/disease incompatibility alerts at the point of
care.
o DEVELOP A UNIVERSAL INSURER-SAVINGS REIMBURSEMENT MODEL. We intend to
develop fee-based and drug cost-savings sharing models for insurers. We
intend to create demand for products by demonstrating to insurers the
universal benefit of lower costs associated with prescriptions ordered
through our ReadyScript technology and filled at TheBigRX.com online
pharmacy or their designated mail-order pharmacies, if applicable.
o BUILD PREMIER CONTENT TO FOCUS ON CHRONIC MEDICAL CONDITION. We plan to
build TheBigRX.com as a trusted resource for individuals seeking a wide
product selection and helpful expert information about chronic
conditions. We plan to establish relationships with leading online
healthcare information providers to enhance the information provided on
our web site. We intend to aggressively implement marketing strategies
that target and reach these chronic disease patients using traditional
media and the Internet.
o BUILD CONCURRENT ONLINE BEST PRACTICE DATABANK. We plan to continuously
provide up-to-date best practice information as it relates to
pharmaceutical use in chronic disease management in an easy-to-use
format for physicians to integrate the highest standard of care into
their prescribing decisions. We intend to establish relationships with
leading online healthcare information providers to ensure the integrity
of the information provided on our web site.
o PROVIDE EXCELLENT CUSTOMER SUPPORT TO BUILD LOYALTY. We intend to
maximize repeat purchases by our customers by providing excellent
customer service; convenient, secure and easy ordering; helpful
information; and reliable delivery that exceeds our customers'
expectations. We believe that our focus on catering to those with
chronic conditions requiring regularly-replenished products will allow
us to benefit from repeat-purchase patterns (e.g., vitamins, diabetic
supplies, incontinence products).
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o UTILIZE TECHNOLOGY TO IMPROVE THE CUSTOMER SHOPPING EXPERIENCE. We plan
to leverage and continue to enhance the scalable architecture,
transaction processing and fulfillment verification of our technology
partner's systems. Our aim is to utilize technology to continually
enhance, simplify and personalize the consumers' experience in using our
site.
PRODUCTS AND SERVICES
READYSCRIPT MEDICATION MANAGEMENT SYSTEM
Our ReadyScript medication management system is being designed to integrate
client/ server and Internet-enabled technology. It is intended to enable
physicians to prescribe online, and either print the prescription or
electronically route it to a participating pharmacy of the patient's choice,
including TheBigRX.com. ReadyScript is being developed to give physicians
immediate access to drug interaction review, optimal disease-specific drug
preferences, formulary drug preference matching, and ultimately patient
medication history. With this information, physicians will be able to make the
best prescribing decisions.
Prescriptions generated with ReadyScript will be accurate and legible,
substantially reducing unnecessary time and energy spent by pharmacists,
physician's offices and health plans verifying plan coverage and deciphering
illegible prescriptions.
We plan to provide comprehensive and up-to-date drug and disease state
management information through a dynamic link between ReadyScript and our web
site. This capability will promote optimal drug therapy decisions within the
context of the diseases for which the drugs are being used.
ReadyScript is being developed as a proprietary software program designed to
operate with off-the-shelf hardware utilizing various platforms such as Windows
CE, Windows 98 and Windows NT. Ultimately, we plan to incorporate the following
features:
o industry standard prescription transmission specifications;
o Internet enabled;
o desktop or handheld technology platform;
o eligibility interface;
o insurer formulary management;
o insurer drugs of choice;
o automated drug utilization review and prior authorization; and
o immediate access to drug information and disease state knowledge tools.
TheBigRX.com RETAIL ONLINE PHARMACY SERVICES
We anticipate that we will attract retail customers to TheBigRX.com retail
online pharmacy from multiple channels to purchase pharmaceuticals and/or
non-prescription health and beauty aid products. Some consumers will be drawn
from the growing population of online Internet shoppers interested in taking
full advantage of our convenient online pharmacy. Other consumers, who do not
have Internet access, may have a prescription transmitted by their physician's
office, and will call or mail their purchase orders.
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Consumers routinely shop for other products such as health and beauty aids
or vitamins while waiting at their neighborhood pharmacy for prescriptions to be
filled. We anticipate patients receiving prescriptions from TheBigRX.com may
want to combine their non-prescription product orders with their prescriptions.
We also anticipate that some consumers will utilize our retail online
pharmacy for many of their health and beauty aid product needs because of the
convenience, product selection and favorable pricing of our products.
For customers visiting our online web site at http://www.thebigrx.com,
TheBigStore.com is developing a "one-checkout" Universal Shopping Cart to
provide our online retail customers the convenience of entering their credit and
shipping information one time only for hassle-free shopping of products and
services throughout the "Big" stores. We anticipate we will attract many new and
repeat customers to our online retail pharmacy by our large selection of
merchandise, everyday low prices, the convenience of a Universal Shopping Cart,
24-hour shopping, useful product information, and merchandising tailored to the
consumer's needs.
Our pharmacy will only accept prescriptions that can be verified as being
written by duly licensed healthcare providers.
RELATIONSHIP WITH TheBigStore.com AND TheBigHub.com
We have acquired the online domain name of "TheBigRX.com," and entered into
a strategic alliance with TheBigStore.com, Inc. and a strategic marketing
agreement with TheBigHub.com. TheBigHub.com's search engine was recently named
among the web's top ten search engines by the NEW YORK TIMES and the MIAMI
HERALD. By uniting a diverse portfolio of "Big" companies within a web-based
network, TheBigHub.com seeks to create a powerful consumer destination with an
emphasis on commerce, content and community.
These agreements allow us to leverage: (1) their technical expertise, (2)
the developmental and operational cost of the transactional system, (3) the
traffic and attraction of TheBigHub.com metasearch engine, and (4) the Internet
traffic draw of the planned affiliated Internet store sites. However, we will
maintain exclusive control over our business operations, development of our web
sites, and content found on our sites.
TheBigStore.com will provide a back-end system that is comprehensive,
user-friendly, easy to navigate, and fully scalable to accommodate transactional
growth. TheBigStore.com back-end services will include web site hosting, web
site design and development, customer order processing, debit/credit card
validation, fraud detection, data encryption, order tracking, transaction
accounting and record retention. In exchange for these back-end services,
TheBigStore.com received an option to buy 410,000 shares of our common stock at
an exercise price of $5.00 per share.
Our strategic marketing agreement with TheBigHub.com provides for continuous
free advertising on TheBigHub.com. In exchange for these services, TheBigHub.com
has an option to buy 250,000 share of our common stock at an exercise price of
$5.00 per share.
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MARKETING AND PROMOTION
We are targeting the marketing of our ReadyScript technology directly to
large physician groups, integrated healthcare networks, physician practice
management organizations, managed care companies, PBMs and hospital networks. We
intend to use a variety of marketing tools -- including direct mail, editorials,
articles, professional seminars, and advertisements in trade and medical
journals -- to build brand awareness for the ReadyScript solution and its link
to TheBigRX.com retail online pharmacy.
At the same time, we intend to drive customer traffic to TheBigRX.com by
targeting consumers with chronic medical conditions. We plan to use traditional
and Internet media, promote our affiliation with the "Big" stores, develop
online alliances with leading healthcare information providers, and place ads in
magazines read by targeted chronic disease patients.
RETAIL MERCHANDISING
For TheBigRX.com retail online pharmacy, we believe that the depth and
breadth of our product selection, focus on chronic medical conditions, and range
of helpful and useful shopping services, will enable us to establish an
effective merchandising strategy. Key elements of our strategy include:
o easy access to a wide variety of products;
o specific product orientation for individuals with chronic medical
conditions;
o useful product information;
o targeted promotions; and
o product samples including diagnostic screening tests.
RETAIL DISTRIBUTION AND ORDER FULFILLMENT
We intend to outsource our distribution and order fulfillment operations
through one or more vendors. The designated vendors will package for shipment
all consumer non-prescription orders, including any of our inventory purchased
directly from other vendors. We plan to carry minimal inventory and rely to a
large extent on rapid shipping from our distributors.
We plan to offer a variety of shipping options, including next-day delivery
for orders received during the business week. We plan to ship to anywhere in the
United States served by the United Parcel Service or the U.S. Postal Service.
Priority orders will be flagged and expedited through our fulfillment processes.
CUSTOMER SERVICE
Excellent client service and customer service support are key to maintaining
physician, insurer and consumer satisfaction with the ReadyScript prescription
automation technology and TheBigRX.com retail online pharmacy.
We plan to establish physician support services to ensure smooth
implementation and on-going support of ReadyScript. We plan to provide workflow
analyses, system installation, and usage recommendations to the physicians and
their staff. Once ReadyScript is developed and installed, our client support
services staff will work closely with physicians to assure maximum benefit from
the system.
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Our customer service representatives will service customers of TheBigRX.com.
They will answer questions about orders, how to use our software and web site,
assist customers in finding desired products, and register customers' credit
card information over the telephone. Our representatives will be a valuable
source of feedback regarding user satisfaction. Our web site will also contain a
customer service page that outlines our policies and provides answers to
frequently asked questions.
We intend to have an easy-to-use Help online function on both the
TheBigRX.com and the ReadyScript.com web sites providing detailed information on
frequently asked questions, how to find information, how to order, how to pay,
our return policy, and our privacy and security policies.
OPERATIONS AND TECHNOLOGY
When completed, ReadyScript will be easy to use. It is being designed to
operate on the various Microsoft platforms including desktop and handheld
operating system environments. Like all of our Internet applications, built-in
state-of-the-art security features are planned to prevent unauthorized access to
the ReadyScript system.
In conjunction with TheBigStore.com, we intend to implement a wide range of
secure, scalable services and systems for TheBigRX.com. TheBigStore.com is
developing proprietary technologies to augment those licensed from vendors such
as Microsoft, Oracle, IBM, Sun Microsystems and EMC. To date, internal
development efforts have focused on: 1) creating and enhancing proprietary
software, and 2) our core merchandise catalog.
TheBigStore.com system is being designed to include an open
application-programming interface that provides connectivity to our distribution
center systems for both pharmacy and non-pharmacy products. These systems are
being developed to include a perpetual inventory system, order tracking system
and decision support information system. The use of multiple web servers,
application servers and database servers will allow the systems to be resilient
and redundant. Our Internet servers will use SSL to help conduct secure
communications and transactions over the Internet.
Our systems infrastructure will be hosted at TheBigStore.com, Inc. in
Newport Beach, California.
COMPETITION
The online commerce market is new, rapidly evolving and intensely
competitive. In particular, the health and personal care categories are
intensely competitive and highly fragmented, with no clear dominant leader in
any of our market segments. Our competitors can be divided into several groups:
MEDICATION MANAGEMENT
o companies that market e-commerce based medication management systems to
physicians and insurers, such as Allscripts and Healtheon.
RETAIL
o online pharmacy product retailers, such as planetRx.com,
drugstore.com/RiteAid and Soma.com/CVS;
o chain drugstores, such as Walgreen's, RiteAid, CVS and Eckerd;
o mass market retailers, such as Wal-mart, Kmart and Target;
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o supermarkets, such as Safeway, Albertson's and Vons;
o warehouse clubs;
o cosmetic departments at major department stores, such as Nordstrom and
Macy's;
o PBMs and mail-order pharmacies, such as PCS, RiteAid, Express Scripts
and Merck-Medco; and
o Internet portals and online service providers that feature shopping
services, such as AOL, Yahoo!, MSN.com and Lycos.
Most of these competitors operate within one or more of our market segments.
We believe the principal competitive factors in our market are:
o establishment of market awareness and trust;
o ease of accessibility for customers to reach us and use our site;
o ability of physician practices to easily transmit electronic
prescriptions;
o ability to accept mail-order prescriptions and be reimbursed by
insurers;
o product selection, personalized service, convenience and ease of use;
o price;
o quality and layout of content; and
o reliability and speed of fulfillment.
GOVERNMENT REGULATION OF OUR NEW BUSINESS
Our business is subject to extensive federal, state and local regulations,
many of which are specific to pharmacies and the sale of over-the-counter drugs.
For example, pursuant to the Omnibus Budget Reconciliation Act of 1990 and
related state and local regulations, pharmacists are required to offer
counseling, without additional charge, to our customers about medication,
dosage, delivery systems, common side effects, adverse effects or interactions
and therapeutic contraindications, proper storage, prescription refill, and
other information deemed significant by the pharmacists. We are also subject to
federal, state and local licensing and registration regulations with respect to,
among other things, our pharmacy operations.
Automated prescribing and the electronic routing of prescriptions to
pharmacies are governed by state and federal law. States have varying
prescription format requirements, which will be incorporated into ReadyScript.
All states permit electronic, faxed and/or written prescriptions. Many existing
laws and regulations when enacted, did not anticipate the methods of e-commerce
now being developed. The laws of several states and the U.S. Drug Enforcement
Administration ("DEA"), which governs controlled substances, neither
specifically permit nor specifically prohibit electronic transmission of
prescription orders. Given the rapid growth of the Internet, it is anticipated
that many states, as well as the DEA, will directly address these areas with
regulation in the near future.
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The U.S. House of Representatives Committee on Commerce and the General
Accounting Office are currently investigating online pharmacies and online
prescribing. Their main focus is on those who prescribe drugs online and on
pharmacies that fill invalid prescriptions, including those that are written
online. The committee requested that the General Accounting Office undertake a
formal review of a number of issues pertaining to online pharmacies, including
an assessment of mechanisms to ensure that online pharmacies are obeying the
various state and federal regulations for the industry. Because we will be
making every effort only to fulfill valid prescriptions written by duly licensed
providers and we will not prescribe drugs, we believe that our business will not
be negatively affected by any regulations that result from the investigations.
However, we believe that any regulations resulting from the investigations will
likely result in increased reporting and monitoring requirements.
The National Association of Boards of Pharmacy, a coalition of state
pharmacy boards, is in the process of developing the Verified Internet Pharmacy
Practice Sites program as a model for self-regulation for online pharmacies. We
intend to comply with its criteria for certification.
Legislation and regulations currently being considered at the federal and
state level could affect our business, including legislation or regulations
relating to confidentiality of patient records, electronic access and storage.
In addition, various state legislatures are considering new legislation related
to the regulation of nonresident pharmacies. The Health Insurance Portability
and Accountability Act of 1996 mandates the use of standard procedures with
regard to the provision of health insurance benefits. Regulations have been
proposed to implement these requirements, and we are designing our applications
to comply with the proposed regulations.
Although the FDA does not regulate the practice of pharmacy, other than
pharmacy compounding (which we do not currently plan to engage in), FDA
regulations impact some of our product and service offerings. The FDA regulates
drug advertising and promotion, including direct-to-consumer advertising, done
by or on behalf of drug manufacturers and marketers. As we expand our product
and service offerings, more of our products and services will likely be subject
to FDA regulation. We intend to ensure that our vendor(s) will dispense only
FDA-approved drugs.
The inclusion of prescription drugs as a Medicare benefit has been the
subject of numerous bills in the U.S. Congress. Should legislation on
prescription drug coverage for Medicare recipients be enacted into law, we would
be subject to compliance with any corresponding rules and regulations.
Until recently, Health Care Financing Administration guidelines prohibited
transmission of Medicare eligibility information over the Internet. We are also
subject to extensive regulation relating to the confidentiality and release of
patient records. Additional legislation governing the distribution of medical
records exists or has been proposed at both the state and federal level.
OUR EXISTING BUSINESS
Our existing business is conducted through three companies: (1) Biomerica,
engaged in the diagnostic products field; (2) Lancer Orthodontics, Inc., engaged
in orthodontic products; and (3) Allergy Immuno Technologies, Inc., engaged in
allergy-related testing services.
BIOMERICA -- DIAGNOSTIC PRODUCTS
Biomerica develops, manufactures, and sells medical diagnostic products
designed to detect certain medical conditions and diseases in the areas of
certain cancers, heart attack, fertility, gastritis and ulcers, diabetes and
candida.
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Since 1971, our immunoassay diagnostic test kits have been used by
hospitals, clinical laboratories and medical researchers to analyze blood or
urine from patients in the diagnosis of various diseases and other medical
complications, or to measure the level of specific hormones, antibodies,
antigens or other substances which may exist in the human body in extremely
small concentrations. Our over-the-counter products such as EZDetect and Fortel
are rapid diagnostic test products that are used in the physician's office and
by the patient at home.
Our clinical laboratory diagnostic products include tests for thyroid
conditions, pregnancy, H. pylori, and others. These diagnostic test kits utilize
enzyme immunoassay or radioimmunoassay technology. Some of these products have
not yet been cleared by the FDA for diagnostic use, but can be sold in various
foreign countries.
Our over-the-counter and professional rapid diagnostic products help to
manage existing medical conditions care and may save lives through prompt
diagnosis and early detection. Technological advances in medical diagnostics
have made it possible to perform diagnostic tests within the home and the
physician's office, rather than in the clinical laboratory. Our objective has
been to develop rapid diagnostic tests that are accurate, employ easily obtained
specimens, and are simple to perform without instrumentation.
Until recently, tests of this kind required the services of medical
technologists and sophisticated instrumentation. Frequently, results were not
available until at least the following day. Most of our over-the-counter tests
are FDA cleared. We believe that such tests are as accurate as laboratory tests
when used properly, require no instrumentation, give reliable results in minutes
and can be performed with confidence in the home or the physician's office.
LANCER ORTHODONTICS, INC. -- ORTHODONTIC PRODUCTS
Lancer is engaged in developing, manufacturing, and selling orthodontic
products including, among others, ceramic brackets and wires. Lancer is well
established in the field of orthodontics and its products are sold worldwide
through a direct sales force and distributors.
Lancer's product line includes preformed bands, direct bonding pads, various
brackets, buccal tubes, arch wires, lingual attachments and related accessories.
The foregoing are assembled to the orthodontists' prescriptions or the
specifications of private label customers. Lancer also markets products which
are purchased and resold to orthodontists, including sealants, adhesives,
elastomerics, headgear cases, retainer cases, orthodontic wire, and preformed
arches.
Most of Lancer's manufacturing and shipping operations are located in
Mexicali, Mexico, in order to reduce the cost of manufacturing and compete more
effectively worldwide. Lancer maintains its headquarters in San Marcos,
California where it houses administration, engineering, sales and marketing, and
customer services.
ALLERGY IMMUNO TECHNOLOGIES, INC. -- ALLERGY SERVICES
AIT has been providing clinical testing services to doctors, clinics and
drug firms in specialized areas of allergy and sensitivity determinations. AIT
is also engaged in developing therapeutic methods for treatment of allergies. 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.
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AIT employs one medical technologist and two technicians, and receives
substantial assistance from Biomerica whose laboratory is contiguous to that of
AIT.
PRODUCTION
All of our diagnostic test kits are processed and assembled at our
facilities in Newport Beach, California. Production of diagnostic tests involve
formulating component antibodies and antigens in specified concentrations,
attaching a tracer to the antigen, filling components into vials, packaging and
labeling. We continually engage in quality control procedures to assure the
consistency and quality of our products and to comply with applicable FDA
regulations.
All manufacturing production is regulated by the FDA Good Manufacturing
Practices for medical devices. We have an internal quality control unit that
monitors and evaluates product quality and output. In addition, we employ a
qualified external quality assurance consultant who monitors procedures and
provides guidance in conforming with the Good Manufacturing Practices
regulations. We either produce our own antibodies and antigens or purchase these
materials from qualified vendors. We have alternate, approved sources for raw
materials procurement and it is surmised that material availability in the
foreseeable future does not pose a primary constraint for us in our relevant
ranges of production.
Lancer currently utilizes a manufacturing subcontractor to provide
manufacturing services to Lancer through its affiliated entities located in
Mexicali, B.C., Mexico. The current agreement allows for the pass through of
actual costs plus a weekly administrative fee. This gives Lancer greater control
over all costs associated with the manufacturing operation. During 1999, Lancer
extended the Manufacturing Agreement through December, 2003. Lancer has retained
an option to convert the manufacturing operation to a wholly owned subsidiary at
any time without penalty. Should Lancer discontinue operations in Mexico, it is
responsible for accumulated employee seniority obligations as prescribed by
Mexican law. At May 31, 1999, this obligation was approximately $287,000. Such
obligation is contingent in nature and accordingly has not been accrued in the
financial statements.
RESEARCH AND DEVELOPMENT
Biomerica is engaged in research and development to broaden its product line
in specific areas. Research and development expenses include the costs of
materials, supplies, personnel, facilities and equipment. Lancer is engaged in
development programs to improve and expand its orthodontic products and
production techniques. Lancer consults frequently with practicing orthodontists.
Research and development expenses incurred by Biomerica for the years ended
May 31, 1999 and 1998 aggregated $459,000 and $554,000, respectively. These
expenses included approximately $165,000 and $188,000 for fiscal 1999 and 1998,
respectively, for Lancer's product development.
In fiscal 1999, development costs of $47,000 and equipment and leasehold
costs of $32,000 were incurred by Lancer in the development of PARAGON(TM), a
dental amalgam, which will be the world's first spherical dispersion system that
expands when set.
MARKETS AND METHODS OF DISTRIBUTION
Biomerica has approximately 320 current customers for its diagnostic
business, of which approximately 60 are distributors and the balance are
hospital and clinical laboratories, medical research institutions, medical
schools, pharmaceutical companies, chain drugstores, wholesalers and physicians'
offices.
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We rely on unaffiliated distributors, advertising in medical and trade
journals, exhibitions at trade conventions, direct mailings and an internal
sales staff to market our diagnostic products. We target three main markets: (a)
clinical laboratories, (b) physicians' offices, and (c) over-the-counter drug
stores. Separate sales forces and marketing plans are utilized in each of the
three markets.
Lancer sells its products directly to orthodontists through company-paid
sales representatives in the United States. At the end of its fiscal year,
Lancer had seven sales representatives, all in the United States, all of whom
are employees of Lancer.
In selected foreign countries, Lancer sells its products directly to
orthodontists through its international marketing division. Lancer also sells
its products through distributors in certain foreign countries and to other
companies on a private label basis. Lancer has entered into a number of
distributor agreements whereby it granted the marketing rights to its products
in certain sales territories in Mexico, Central America, South America, Europe,
Canada, Australia, and Japan. The distributors complement the international
marketing department which was established in 1982 and currently employs three
people.
The loss of any one or a few customers would not have a material adverse
effect upon our revenues.
BACKLOG
At May 31, 1999 and 1998 Biomerica and Allergy Immuno Technologies, Inc. had
no backlog. As of May 31, 1999 and 1998, Lancer had a backlog of $213,000 and
$268,000, respectively.
RAW MATERIALS
The principal raw materials utilized by us consist of various chemicals,
serums, reagents, radioactive isotopes and packaging supplies. Almost all of our
raw materials are available from several sources, and we are not dependent upon
any single source of supply or a few suppliers. Many antibodies used in our
immunoassay products are produced by us by injecting antigens into animals which
are maintained by us.
We maintain inventories of antibodies and antigens as components for our
diagnostic test kits. Due to a limited shelf life on some products such as the
RIA kits, which averages 60 days, finished kits are prepared as required for
immediate delivery of pending and anticipated orders. Sales orders are normally
processed on the day of receipt.
The principal raw materials used by Lancer in the manufacture of its
products include: stainless steel, which is available from several commercial
sources; nickel titanium, which is available from three sources; and lucolux
translucent ceramic, which is currently only available from one source, General
Electric, and is purchased on open account. Ceramic material similar to General
Electric's lucolux translucent ceramic is available from other sources. Lancer
had no difficulty in obtaining an adequate supply of raw materials during its
1999 fiscal year, and does not anticipate that there will be any interruption or
cessation of supply in the future.
COMPETITION
Immunodiagnostic products are currently produced by more than 100 companies,
a majority of which are located within the United States. Biomerica and its
subsidiaries are not a significant factor in the market. Allergy diagnostic
products are currently produced by over five competitors, and there are
approximately the same number producing allergy therapeutics.
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Our competitors vary greatly in size. Many are divisions or subsidiaries of
well-established medical and pharmaceutical concerns which are much larger than
Biomerica and expend substantially greater amounts than we do for research and
development, manufacturing, advertising and marketing.
The primary competitive factors affecting the sale of diagnostic products
are uniqueness, quality of product performance, price, service and marketing.
The prices for our products compare favorably with those charged by most of our
competitors.
We believe we compete primarily on the basis of our reputation for the
quality of our products, the speed of our test results, the unique niches we
fill in the market, our patent position, and our prompt shipment of orders. We
offer a broader range of products than many competitors of comparable size, but
to date have had limited marketing capability. We are working on expanding this
capability through strategic cooperations with larger companies and
distributors.
Lancer encounters intense competition in the sale of orthodontic products.
Lancer's management believes that Lancer's seven major competitors are: Unitek,
a subsidiary or division of 3M; "A" Company, a private company; Ormco, a
subsidiary or division of Sybron; RMO Inc., a private company; American
Orthodontics, a private company; GAC, a foreign company; and Dentaurum, a
foreign company. Lancer estimates that these seven competitors account for
approximately 80% of the orthodontic products manufactured and sold in the
United States. Lancer's management also believes that each of these seven
competitors is larger than Lancer, 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.
GOVERNMENT REGULATION OF OUR EXISTING BUSINESS
As part of our existing business, we sell products that are legally defined
to be medical devices. As a result, we are considered to be a medical device
manufacturer, and as such are subject to the regulations of numerous
governmental entities. These agencies include the FDA, DEA, Environmental
Protection Agency, Federal Trade Commission, Occupational Safety and Health
Administration, U.S. Department of Agriculture ("USDA"), and Consumer Product
Safety Commission. These activities are also regulated by various agencies of
the states and localities in which our products are sold. These regulations
govern the introduction of new medical devices, the observance of certain
standards with respect to the manufacture and labeling of medical devices, the
maintenance of certain records and the reporting of potential product problems
and other matters.
The Food, Drug & Cosmetic Act of 1938 (the "FDCA") regulates medical devices
in the United States by classifying them into one of three classes based on the
extent of regulation believed necessary to ensure safety and effectiveness.
Class I devices are those devices for which safety and effectiveness can
reasonably be ensured through general controls, such as device listing, adequate
labeling, pre-market notification and adherence to the Quality System Regulation
("QSR") as well as Medical Device Reporting (MDR), labeling and other regulatory
requirements. Some Class I medical devices are exempt from the requirement of
Pre-Market Approval ("PMA") or clearance. Class II devices are those devices for
which safety and effectiveness can reasonably be ensured through the use of
special controls, such as performance standards, post-market surveillance and
patient registries, as well as adherence to the general controls provisions
applicable to Class I devices. Class III devices are devices that generally must
receive pre-market approval by the FDA pursuant to a pre-market approval
application to ensure their safety and effectiveness. Generally, Class III
devices are limited to life-sustaining, life-supporting or implantable devices.
However, this classification can also apply to novel technology or new intended
uses or applications for existing devices.
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If the FDA finds that the device is not substantially equivalent to a
predicate device, the device is deemed a Class III device, and a manufacturer or
seller is required to file a PMA application. Approval of a PMA application for
a new medical device usually requires, among other things, extensive clinical
data on the safety and effectiveness of the device. PMA applications may take
years to be approved after they are filed. In addition to requiring clearance or
approval for new medical devices, FDA rules also require a new 510(k) filing and
review period, prior to marketing a changed or modified version of an existing
legally marketed device, if such changes or modifications could significantly
affect the safety or effectiveness of that device. The FDA prohibits the
advertisement or promotion or any approved or cleared device for uses other than
those that are stated in the device's approved or cleared application.
Pursuant to FDCA requirement, we have registered our manufacturing facility
with the FDA as a medical device manufacturer, and listed the medical devices we
manufacture. We are also subject to inspection on a routine basis for compliance
with FDA regulations. This includes the QSR, which, unless the device is a Class
I exempt device, requires that we manufacture our products and maintain our
documents in a prescribed manner with respect to issues such as design controls,
manufacturing, testing and validation activities. Further, we are required to
comply with other FDA requirements with respect to labeling, and the MDR
regulation which requires that we provide information to the FDA on deaths or
serious injuries alleged to have been associated with the use of our products,
as well as product malfunctions that are likely to cause or contribute to death
or serious injury if the malfunction were to recur. We believe that we are
currently in material compliance with all relevant QSR and MDR requirements.
In addition, our facility is required to have a California Medical Device
Manufacturing License. The license is not transferable and must be renewed
annually. Approval of the license requires that we be in compliance with QSR,
labeling and MDR regulations. Our license expires on March 16, 2000. We are also
registered with the Department of Health and Human Services, Public Health
Service of the FDA as a Device establishment. This registration expires on
February 28, 2000. We also hold two radioactive materials licenses from the
State of California (both expiring on June 20, 2000), and two permits from the
USDA, one expiring on January 28, 2000 and the other expiring on June 30, 2000.
These licenses are renewed periodically, and to date we have never failed to
obtain a renewal.
We are in compliance with FDA and California regulations, and so may market
our medical devices throughout the United States. International sales of medical
devices are also subject to the regulatory requirements of each country. In
Europe, the regulations of the European Union require that a device have a "CE
mark" before it can be sold in that market. We intend to comply with new
directives that have recently been instituted regarding the use of CE marks. The
regulatory international review process varies from country to country. We, in
general, rely upon our distributors and sales representatives in the foreign
countries in which we market our products to ensure that we comply with the
regulatory laws of such countries. We believe that our international sales to
date have been in compliance with the laws of the foreign countries in which we
have made sales. Exports of most medical devices are also subject to certain FDA
regulatory controls.
SEASONALITY OF BUSINESS
The business of the Company and its subsidiaries has not been subject to
significant seasonal fluctuations.
-22-
<PAGE>
FOREIGN BUSINESS
All of our fixed assets, excluding some of Lancer, are located within
southern California. The following table sets forth the dollar volume of revenue
attributable to sales to domestic customers and foreign customers during the
last two fiscal years for the Biomerica and its consolidated subsidiaries:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C> <C> <C>
Revenues from sales to:
United States customers................. $4,638,000/53.4% $5,041,000/53.8%
Asia.................................... 426,000/ 4.9% 878,000/ 9.4%
Europe.................................. 1,710,000/19.7% 1,798,000/19.2%
South America........................... 749,000/ 8.6% 810,000/ 8.6%
Other foreign........................... 1,165,000/13.4% 849,000/ 9.0%
---------------- ----------------
Total revenues.................. $8,688,000/ 100% $9,376,000/ 100%
================ ================
</TABLE>
We recognize that our foreign sales could be subject to some special or
unusual risks which are not present in the ordinary course of business in the
United States. Changes in economic factors, government regulations and import
restrictions all could impact sales within certain foreign countries. Foreign
countries have licensing requirements applicable to the sale of diagnostic
products which vary substantially from domestic requirements; depending upon the
product and the foreign country, these may be more or less restrictive than
requirements within the United States. We cannot predict the impact that
conversion to the Euro in the European countries may have on Biomerica, if any.
Foreign sales are made primarily through a network of over 60 independent
distributors in approximately 20 countries.
INTELLECTUAL PROPERTY
We regard the protection of our copyrights, service marks, trademarks and
trade secrets as critical to our future success. We rely on a combination of
copyright, trademark, service mark and trade secret laws and contractual
restrictions to establish and protect our proprietary rights in products and
services. We have entered into confidentiality and invention assignment
agreements with our employees and contractors, and nondisclosure agreements with
our vendors, fulfillment partners and strategic partners to limit access to and
disclosure of proprietary information. We cannot be certain that these
contractual arrangements or the other steps taken by us to protect our
intellectual property will prevent misappropriation of our technology. We have
licensed in the past, and expect that we may license in the future, certain of
our proprietary rights, such as trademarks or copyrighted material, to third
parties. While we attempt to ensure that the quality of our products brand is
maintained by such licensees, we cannot be certain that such licensees will not
take actions that might hurt the value of our proprietary rights or reputation.
We also rely on technologies that we license from third-parties, such as Oracle
and Microsoft, the suppliers of key database technology, the operating system
and specific hardware components for our service. We cannot be certain that
these third-party technology licenses will continue to be available to us on
commercially reasonable terms. The loss of such technology could require us to
obtain substitute technology of lower quality or performance standards or at
greater cost.
-23-
<PAGE>
BRANDS, TRADEMARKS, PATENTS
We use the trademarks "ReadyScript" and "TheBigRX.com" as identification of
our automated medication management prescribing system and online pharmacy. We
will use readyscript.com and thebigrx.com in small letters as our Internet site
addresses, and 1-888-LVBigRX (LoVe BigRX) as our toll-free call center number.
We have filed intent-to-use applications with the U.S. Patent and Trademark
Office for the registration of some of our trademarks and service marks,
including ReadyScript(TM) and TheBigRX.com(TM). We have not secured registration
of any of our marks to date, and may be unable to secure such registered marks.
It is also possible that our competitors or others will use marks similar to
ours, which could impede our ability to build brand identity and lead to
customer confusion. Additionally, there could be potential trade name or a
trademark infringement claim brought by owners of other registered trademarks
that incorporate variations of the term ReadyScript(TM) and/or TheBigRX.com(TM).
We registered the tradenames "Fortel," "Isletest," "Nimbus" and "GAP" with
the Office of Patents and Trademarks on December 31, 1985. Our unregistered
tradenames are "EZDetect," "CAST," "COT," "EquistiK," "FelistiK," "Tri-Level
Controls," "Tru-Level Controls," "T-Marker Controls," "AllerHalt," "Candiquant,"
"Candigen," "EZ-H.P." and "EZ-PSA."
Allergy Immuno Technologies, Inc. has four patents pertaining to its
discoveries for allergy treatment. These are:
1. Immunotherapy agents for treatment of IgE mediated allergies; U.S.
Patent #5,116,612, issued May 6, 1992.
2. Liposome containing immunotherapy agents for treatment of IgE medicated
allergies, U.S. Patent #5,049,390, issued September 17, 1991.
3. Immunotherapy agents for treatment of IgE mediated allergies, U.S.
Patent #4,946,945, issued August 7, 1990.
4. Allergen-thymic hormone conjugates for treatment of IgE mediated
allergies, U.S. Patent #5,275,814, issued January 4, 1994.
On April 4, 1989, Lancer was granted a patent on its CounterForce design of
a nickel titanium orthodontic archwire. On August 1, 1989, Lancer was granted a
patent on its bracket design used in the manufacturing of Sinterline and
Intrigue orthodontic brackets. On September 17, 1996, Lancer was granted a
patent on its method of laser annealing marking of orthodontic appliances. On
March 4, 1997, Lancer was granted a patent on an orthodontic bracket and method
of mounting. All of the patents are for a duration of 17 years. Lancer has
entered into 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.
The laws of some foreign countries do not protect our proprietary rights to
the same extent as do the laws of the U.S. Effective copyright, trademark and
trade secret protection may not be available in such jurisdictions. Our efforts
to protect our intellectual property rights may not prevent misappropriation of
our content.
-24-
<PAGE>
EMPLOYEES
As of August 31, 1999, the Company and its subsidiaries employed 80
full-time employees and 4 part-time employees. Lancer, through its Mexican
subcontractor, utilizes the services of approximately 134 people in Mexico. We
also engage the services of various outside Ph.D. and M.D. consultants as well
as medical institutions for technical support on a regular basis. We are not a
party to any collective bargaining agreement and have never experienced a work
stoppage. We consider our employee relations to be good.
ITEM 2. DESCRIPTION OF PROPERTY
-----------------------
During fiscal 1998 we leased approximately 21,000 square feet of space in
Newport Beach, California for a term which expired May 31, 1998 (and which was
renewed until May 31, 1999) and is currently being renegotiated. Pursuant to the
lease and the current month-to-month tenancy, we pay an annual base rent, set
initially at $143,880 and adjusted annually to reflect cost of living increases,
plus all real estate taxes and insurance costs. In each of the last two fiscal
years a portion of the rent was paid through the issuance of shares of our
restricted common stock to JSJ Management. During fiscal 1999, an aggregate of
31,793 shares of our restricted common stock was issued at quoted market prices
in satisfaction of accrued rent totaling $38,000. These facilities are used for
diagnostic test kit research and development, manufacturing, marketing,
administration, and our Internet operations.
The facilities are leased from Mrs. Ilse Sultanian and JSJ Management. Ms.
Janet Moore, an officer, director and shareholder of our Company, is a partner
in JSJ Management. The terms of such leases cannot be considered to have been
negotiated at arms-length, but in the opinion of our management are no less
favorable to us 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. Sultanian and JSJ Management.
Lancer leases a 9,240-square-foot manufacturing building in San Marcos,
California. The term of the initial lease was for five years commencing January
1, 1994. In 1998, Lancer renegotiated the lease and extended the terms to
December 31, 2003. The Mexicali facility consists of a 16,000-square-foot
manufacturing and office building. The lease expires in October 2003 and
requires monthly rentals of approximately $5,200. Our management believes that
the properties are currently suitable and adequate for Lancer's operations.
We maintain animals at a ranch in Vista, California, which are treated
biologically to produce antibodies used in certain of our immunodiagnostic
products. These facilities are utilized on a month-to-month basis at a charge
based on the number of animals maintained at the facility.
We believe that our facilities and equipment are in suitable condition and
are adequate to satisfy the current requirements of our Company and our
subsidiaries.
ITEM 3. LEGAL PROCEEDINGS
-----------------
Inapplicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
-------------------------------------------------
Inapplicable.
-25-
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------
Biomerica's common stock is traded on the NASDAQ SmallCap Stock Market under
the symbol "BMRA".
The following table shows the high and low bid prices for Biomerica's common
stock over the last two years based upon data reported by NASDAQ. Prices shown
represent quotations by dealers, and do not reflect markups, markdowns or
commissions.
Bid Prices
------------------------------
High Low
------------ -------------
Quarter ended:
May 31, 1999........................... $5.00 $0.969
February 28, 1999...................... $1.75 $0.9375
November 30, 1998...................... $2.25 $0.875
August 31, 1998........................ $2.125 $1.125
May 31, 1999........................... $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
As of August 16, 1999, the number of holders of record of Biomerica's
common stock was approximately 1,741, excluding stock held in street name.
No dividends have been declared or paid by Biomerica. We intend to employ
all available funds for development of our business and, accordingly, do not
intend to pay cash dividends in the foreseeable future.
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<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
The following discussion of our financial condition and results of
operations should be read in conjunction with our Consolidated Financial
Statements and related notes contained elsewhere in this prospectus. This
prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ significantly from the results
discussed in the forward-looking statements.
Operations for the past two years relate to our historic diagnostic,
orthodontic and allergy product businesses. Operations for the Internet division
began after we raised $2 million in equity in June 1999. Start-up costs for this
division are included in administrative costs. The Internet division has
generated no revenues to date.
RESULTS OF OPERATIONS
We currently have two subsidiaries, Lancer Orthodontics, Inc. ("Lancer"),
which is engaged in manufacturing, sales and development of orthodontic
products, and Allergy Immuno Technologies, Inc. ("AIT"), which is engaged in
developing allergy treatment therapies and providing specialized services to
pharmaceutical companies and physicians. We own 30.76% of the outstanding stock
of Lancer and 74.6% of the outstanding stock of AIT. We exercise effective
control of 51.32% over Lancer via voting agreements with certain shareholders.
As a result of our control and ownership, our financial statements are
consolidated with those of Lancer and AIT. Both Lancer and AIT are public
companies. Lancer is trading on the Nasdaq SmallCap market under the symbol
"LANZ," and AIT is trading in the pink sheets under the symbol "ALIM."
Fiscal 1999 Compared to Fiscal 1998
Our consolidated net sales were $8,688,106 for fiscal 1999 compared to
$9,376,498 for fiscal 1998. This represents a decrease of $688,392, or 7.3% for
fiscal 1999. Of the total consolidated net sales for fiscal 1999, $6,159,496 is
attributable to Lancer, $70,351 to AIT, and $2,458,259 to Biomerica. Lancer's
sales decreased by $34,687, while Biomerica showed a sales decrease of $624,985,
a 20% decrease for Biomerica. AIT had a decrease of $28,720. The decrease at
Lancer was attributable to increased discounting. 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. The
decrease in sales at Biomerica was in large part due to a decrease of sales to
foreign distributors as well as in domestic sales at Biomerica, in particular to
a domestic distributor which sells the products internationally.
Cost of sales in fiscal 1999 as compared to fiscal 1998 decreased by $67,326
(1.2%). Lancer's cost of sales as a percentage of sales increased from 58.6% to
61.4% in fiscal 1999 as compared to fiscal 1998. The increase was primarily
attributable to competitive pricing pressures and increased manufacturing costs.
Biomerica had an increase in cost of goods as a percentage of sales from 56.7%
to 63.0% in fiscal 1999 as compared to fiscal 1998 due to higher labor and other
costs. AIT had an increase in cost of goods as a percentage of sales of 107% to
127% primarily due to higher wages as a percentage of sales. Except for AIT,
these cost of sales trends are not expected to continue.
Selling, general and administrative costs increased in fiscal 1999 as
compared to fiscal 1998 by $15,591 (0.5%). Lancer had an increase of $62,033 in
these costs due to increased payroll and related expenses, increases in bad debt
expense, and outside commissions. Biomerica had an increase in fiscal 1999 as
compared to fiscal 1998 of $14,587 due primarily to increased personnel,
consulting and advertising costs. On an overall basis, AIT had decreased costs
of $61,029 due to lower personnel costs.
-27-
<PAGE>
Research and development expense decreased in fiscal 1999 as compared to
fiscal 1998 by $95,130 (17.2%). Of this, Lancer had a decrease of $23,282, as a
result of decreased payroll costs partially offset by development costs of new
products. Biomerica had a decrease in research and development expenses of
$72,109, and AIT had an increase of $261.
Interest expense, which was incurred by Lancer, decreased in fiscal 1999 as
compared to fiscal 1998 by $9,753 (38.5%) due to the payoff of certain term debt
in 1998.
Other income increased by $140,044 (91.8%) in fiscal 1999 as compared to
fiscal 1998. An increase of $560 is attributable to Lancer, and an increase of
$37,654 was attributable to Biomerica. Biomerica had greater dividend and
interest income due to the funds that were raised in January 1999 and greater
income from sale of marketable securities. AIT had an increase of $101,830 due
to a $100,000 fee paid to it for consulting services.
As of May 31, 1999, Biomerica had net tax operating loss carryforwards of
approximately $4,236,000 and investment tax and research and development credits
of approximately $27,525, which are available to offset future federal tax
liabilities. As of May 31, 1999, Lancer had net operating loss carryforwards of
approximately $1,848,000 and business tax credits of approximately $173,174
available to offset future Federal tax liabilities. As of May 31, 1999, AIT had
net tax operating loss carryforwards of $1,719,000 and business tax credits of
approximately $29,395 to offset future Federal tax liabilities. The
carryforwards expire at varying dates from 2000 to 2012. The Company's effective
tax rates for fiscal 1999 and fiscal 1998 were 8% and 13%, respectively. These
differ from the statutory tax rates primarily as a result of changes in the
Company's valuation allowance.
Liquidity and Capital Resources
As of May 31, 1999, we had cash and available for sale securities of
$1,794,955 (see Note 1 of Notes to Consolidated Financial Statements) and
current working capital of $5,200,345. The Company and its subsidiaries are
currently expected to meet their costs of their historic operations through the
collection of trade accounts receivable generated by sales and its working
capital position and existing available financing. The Company's Internet
division will require raising a significant amount of capital to fund its
planned operations until the business can support itself through its operations.
During 1999, the Company used cash in operations of $358,366, primarily as a
result of increased inventories. During 1998, the Company provided cash flows
from operations of $430,914, primarily from increased net income at both
Biomerica and Lancer. The Company used cash in investing activities of $42,286
during 1999 as a result of increased investments in capital equipment and other
assets, offset by the sales of available-for-sale securities. During 1998, the
Company generated cash flow from investing activities of $26,009 by selling its
available-for-sale securities, offset by investments in capital equipment and
other assets. The Company generated cash from investing activities of $230,282
during 1999, primarily as a result of the exercises of stock options, a decrease
in shareholder receivable and an increase in its line of credit. This compares
to a use of funds of $322,499 in 1998, primarily as a result of debt repayment.
During fiscal 1999, Lancer's management negotiated a renewal of Lancer's
line of credit through November 3, 1999. The line of credit allows for borrowing
up to $1,000,000 and is limited to specified percentages of eligible accounts
receivable. The unused portion available under the line of credit at May 31,
1999, was $239,000. Borrowings bear interest at prime plus .75% per annum (8.5%
at May 31, 1999).
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<PAGE>
In May 1998, Biomerica's board of directors approved the repurchase of up to
1% of Biomerica's outstanding common stock. Such repurchase 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, 1999, a total of 15,450 shares had been
repurchased for an aggregate purchase price of $20,976.
On June 11, 1999, we sold 400,000 shares of our common stock in a private
placement for $5 per share to management and an outside investor. This increased
our cash position by $2,000,000 and is primarily being utilized to increase the
number of personnel for our Internet division to launch our online pharmacy.
We intend to make significant investments in the Internet division to
complete development of and establish a market for our medication management
oriented online pharmacy and ReadyScript prescription automation software. A
portion of the proceeds from this offering will be used to launch our online
pharmacy. We anticipate those funds will be sufficient to maintain our current
and planned operations for at least the next 12 months.
YEAR 2000 COMPLIANCE
TO THE FULLEST EXTENT PERMITTED BY LAW, THE FOLLOWING DISCUSSION IS A "YEAR
2000 READINESS DISCLOSURE" WITHIN THE MEANING OF THE YEAR 2000 INFORMATION AND
READINESS DISCLOSURE ACT 105 P.L. 271. COMPLIANCE WITH THE YEAR 2000 INFORMATION
AND READINESS DISCLOSURE ACT DOES NOT PRECLUDE CLAIMS FOR VIOLATIONS OF FEDERAL
SECURITIES LAWS.
The Year 2000 problem is the result of computer programs being written to
recognize two digits rather than four to define the applicable year. This causes
computer programs to interpret a date using "00" as the year 1900 rather than
the year 2000, which could result in computer failures and miscalculations. The
effects of this issue will vary from system to system and may adversely affect
an entity's operations and its ability to prepare financial statements. We have
undertaken certain corrective actions to ensure that our hardware and software
systems used to manage our business are Year 2000 compliant and will continue to
function properly in the year 2000. However, there can be no assurance that Year
2000 problems will not be encountered or that the costs incurred to resolve such
problems will not be material. Additionally, there can be no assurance that the
Year 2000 problem will not affect the Company by causing disruptions in the
business operations of persons with whom the Company does business, such as
customers or suppliers. Year 2000 problems could have a material adverse effect
on the Company.
We currently operate a Microsoft-based LAN system upgraded in 1999. At least
90% of the workstations, the server and the accounting software have been
upgraded to be year 2000 compliant in the last 12 months. Year 2000 costs to
date have been immaterial and are not expected to be material in the future. The
remaining stations will 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 use.
Historically we have not placed orders electronically, nor do we make
disbursements to vendors or employees in that medium. However, we anticipate
establishing such orders with vendors in the future. We have no way of knowing
how the Year 2000 may affect our various vendors in their ability to ship
products or our customers in their ability to purchase products. We believe that
the Year 2000 issue will not have a material impact on our internal data record.
We have conducted a vendor and service provider compliance survey to
determine which of the companies we deal with are addressing the Year 2000 issue
and the progress they are making on it. No responses received by our vendors
and/or service providers indicate that their Year 2000 issues will adversely
affect the Company.
-29-
<PAGE>
However, if the necessary providers of power, communications and other such
providers of important services are not fully prepared for the year 2000, the
Year 2000 could have a material impact on the Company. We have no way of knowing
how the Year 2000 will affect Internet functions.
AIT outsources its computer needs to Biomerica. 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.
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.
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<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 1999 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,
1999.
ITEM 10. EXECUTIVE COMPENSATION
----------------------
This information is incorporated by reference to the Company's proxy
statement for its 1999 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,
1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
This information is incorporated by reference to the Company's proxy
statement for its 1999 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,
1999.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
This information is incorporated by reference to the Company's proxy
statement for its 1999 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,
1999.
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<PAGE>
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
-------------------------------------
(a) EXHIBITS
--------
EXHIBIT NO. DESCRIPTION
3.1 Certificate of Incorporation of Registrant filed with
the Secretary of the State of Delaware on September 22,
1971 (incorporated by reference to Exhibit 3.1 filed
with Amendment No. 1 to Registration Statement on Form
S-1, Commission File No. 2-83308).
3.2 Certificate of Amendment to Certificate of Incorporation
of Registrant filed with the Secretary of the State of
Delaware on February 6, 1978 (incorporated by reference
to Exhibit 3.1 filed with Amendment No. 1 to
Registration Statement on Form S-1, Commission File No.
2-83308).
3.3 Certificate of Amendment to Certificate of Incorporation
of Registrant filed with the Secretary of the State of
Delaware on February 4, 1983 (incorporated by reference
to Exhibit 3.1 filed with Amendment No. 1 to
Registration Statement on Form S-1, Commission File No.
2-83308).
3.4 Certificate of Amendment to Certificate of Incorporation
of Registrant filed with the Secretary of the State of
Delaware on January 19, 1987 (incorporated by reference
to Exhibit 3.4 filed with Form 8 Amendment No. 1 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended May 31, 1987).
3.5 Certificate of Amendment of Certificate of Incorporation
of Registrant filed with the Secretary of the State of
Delaware on November 4, 1987 (incorporated by reference
to Exhibit 3.1 filed with Amendment No. 1 to
Registration Statement on Form S-1, Commission File No.
2-83308).
3.6 Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 filed with Amendment No. 1 to Registration
Statement on Form S-1, Commission File No. 2-83308).
3.7 Certificate of Amendment of Certificate of Incorporation
of Registrant filed with the Secretary of the State of
Delaware on December 20, 1994 (incorporated by reference
to Exhibit 3.7 filed with Registrant's Annual Report or
Form 10-KSB for the fiscal year ended May 31, 1995).
4.1 Specimen Stock Certificate of Common Stock of Registrant
(incorporated by reference to Exhibit 4.1 filed with
Registrant's Registration Statement on Form SB-2,
Commission No. 333-87231 filed on September 16, 1999).
10.1 Office lease dated June 1, 1988 between Registrant and
Redington Company covering Registrant's lease of
premises at 1531/1533 Monrovia Avenue, Newport Beach,
California (incorporated by reference to Exhibit 10.1
filed with Registrant's Annual Report on Form 10-K for
the fiscal year ended May 31, 1989).
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<PAGE>
10.2 Lancer purchase agreement and warrants (incorporated by
reference to Exhibit 10.10 filed with Registrant's
Annual Report on Form 10-K for the fiscal year ended May
31, 1989).
10.3 1999 Stock Incentive Plan of Registrant (incorporated by
reference to Exhibit B filed with Registrant's
Preliminary Proxy Statement for the 1999 Annual Meeting
of Stockholders on September 13, 1999.)
10.4 1995 Stock Option and Common Stock Plan of Registrant
(incorporated by reference to Exhibit 4.3 to
Registration Statement on Form S-8 filed with the
Securities and Exchange Commission on January 20, 1996).
10.5 1991 Stock Option and Restricted Stock Plan of
Registrant (incorporated by reference to Exhibit 4.1 to
Registration Statement on Form S-8 filed with the
Securities and Exchange Commission on April 6, 1992).
10.6 Stock Purchase Agreement by and between Biomerica, Inc.,
RidgeRose Capital Partners, LLC and Zackary Irani and
Janet Moore dated June 11, 1999 (incorporated by
reference to Exhibit 10.10 filed with Form 8-K on July
7, 1999).
10.7 Stock Purchase Agreement by and between Biomerica, Inc.
and Zackary Irani and Janet Moore dated June 11, 1999
(incorporated by reference to Exhibit 10.11 filed with
Form 8-K on July 7, 1999).
10.8 Back-end Processing Agreement by and between
TheBigStore.com, Inc. and Biomerica, Inc. and dated June
11, 1999 (incorporated by reference to Exhibit 10.12
filed with Form 8-K on July 7, 1999).
10.9 Common Stock Purchase Warrant granted to
TheBigStore.com, Inc. dated June 11, 1999 (incorporated
by reference to Exhibit 10.13 filed with Form 8-K on
July 7, 1999).
10.10 Common Stock Purchase Warrant granted to RJM Consulting,
LLC dated June 11, 1999 (incorporated by reference to
Exhibit 10.14 filed with Form 8-K on July 7, 1999).
10.11 Non-Qualified Option Agreement by and between Zackary
Irani and the Company dated June 10, 1999 (incorporated
by reference to Exhibit 10.15 filed with Form 8-K on
July 7, 1999).
10.12 Non-Qualified Option Agreement by and between Janet
Moore and the Company dated June 10, 1999 (incorporated
by reference to Exhibit 10.16 filed with Form 8-K on
July 7, 1999).
10.13 Non-Qualified Option Agreement by and between Philip
Kaplan, M.D. and the Company dated June 10, 1999
(incorporated by reference to Exhibit 10.17 filed with
Form 8-K on July 7, 1999).
10.14 Non-Qualified Option Agreement by and between Robert A.
Orlando, M.D. , Ph.D. and the Company dated June 10,
1999 (incorporated by reference to Exhibit 10.18 filed
Form 8-K on July 7, 1999).
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<PAGE>
10.15 Strategic Marketing Agreement entered into as of the 2nd
day of September, 1999 by and between TheBigHub.com,
Inc., a Florida corporation and Biomerica, Inc.
(incorporated by reference to Exhibit 10.16 filed with
Registrant's Registration Statement on Form SB-2,
Commission No. 333-87231 filed on September 16, 1999).
10.16 First Amendment to Back-End Processing Agreement entered
into as of September 2, 1999 whereby TheBigStore.com,
Inc., a Delaware corporation and Biomerica amend the
Back-End Agreement dated June 11, 1999 (incorporated by
reference to Exhibit 10.17 filed with Registrant's
Registration Statement on Form SB-2, Commission No.
333-87231 filed on September 16, 1999).
10.17 Private Placement Memorandum of Biomerica, Inc. dated
June 9, 1999 offering 400,000 shares of its Common Stock
at $5.00 per share (incorporated by reference to Exhibit
10.18 filed with Registrant's Registration Statement on
Form SB-2, Commission No. 333-87231 filed on September
16, 1999).
10.18 Employment Agreement entered into as of August 30, 1999
by and between the Internet division of Biomerica, Inc.
and Steven J. Goto (incorporated by reference to Exhibit
10.19 filed with Registrant's Registration Statement on
Form SB-2, Commission No. 333-87231 filed on September
16, 1999).
10.19 Employment Offer Letter dated August 12, 1999 from
Biomerica, Inc. to Pete McKinley to join the Internet
division of Biomerica, Inc. (incorporated by reference
to Exhibit 10.20 filed with Registrant's Registration
Statement on Form SB-2, Commission No. 333-87231 filed
on September 16, 1999).
10.20 Employment Offer Letter dated August 12, 1999 from
Biomerica, Inc. to Richard Jay, Pharm.D. to join the
Internet division of Biomerica, Inc. (incorporated by
reference to Exhibit 10.21 filed with Registrant's
Registration Statement on Form SB-2, Commission No.
333-87231 filed on September 16, 1999).
10.21 Amendment to Lease Extension/Lease Term effective
January 1, 1999, whereby Lancer Orthodontics, Inc. and
L&T Corporation, a California corporation entered into
an amendment and extension to the terms of that certain
lease agreement dated November 4, 1993 for the premises
located at 253 Pawnee Street, Suite A, San Marcos,
California 92069 (incorporated by reference to Exhibit
10.22 filed with Registrant's Registration Statement on
Form SB-2, Commission No. 333-87231 filed on
September 16, 1999).
10.22 Sublease Agreement entered into by and between Eagleson
de California S.A. de C.V. and Lancer Orthodontics, Inc.
commencing on November 1, 1998 covering approximately
16,000 square feet located in the Industrial Park at
Ave. Saturno No. 20 and of certain improvements
constructed on the land as detailed in that certain
sublease between the parties dated April 1, 1996
(incorporated by reference to Exhibit 10.23 filed with
Registrant's Registration Statement on Form SB-2,
Commission No. 333-87231 filed on September 16, 1999).
-34-
<PAGE>
10.23 Fifth Revision to Manufacturing Shelter Agreement
effective November 1, 1998, whereby Lancer Orthodontics,
Inc. and Eagleson Industries, Inc. revised and amended
that certain Manufacturing Shelter Agreement entered
into on May 11, 1990, revised on June 20, 1991, December
2, 1992, July 1, 1994 and April 1, 1996 (incorporated by
reference to Exhibit 10.24 filed with Registrant's
Registration Statement on Form SB-2, Commission No.
333-87231 filed on September 16, 1999).
10.24 Technical Skills Consulting Agreement entered into on
January 1, 1999 by and between Lancer Orthodontics, Inc.
and Alejandro Carnero, a non-resident alien, independent
contractor and citizen of the Republic of Mexico
(incorporated by reference to Exhibit 10.25 filed with
Registrant's Registration Statement on Form SB-2,
Commission No. 333-87231 filed on September 16, 1999).
10.25 Product Development and Marketing Agreement entered into
as of August 3, 1998 by and between Lancer Orthodontics,
Inc. and AG Metals, Inc., a Nevada corporation
(incorporated by reference to Exhibit 10.26 filed with
Registrant's Registration Statement on Form SB-2,
Commission No. 333-87231 filed on September 16, 1999).
10.26 Agreement between Lancer Orthodontics, Inc. and Gary
Weikel, an individual, incorporating by reference that
certain Product Development and Marketing Agreement of
even date between Lancer Orthodontics, Inc. and AG
Metals, Inc. (incorporated by reference to Exhibit 10.27
filed with Registrant's Registration Statement on Form
SB-2, Commission No. 333-87231 filed on September 16,
1999).
16.1 Letter on Change of Certifying Accountant (incorporated
by reference to Exhibit A to Form 8-K filed with the
Securities and Exchange Commission on May 24, 1993).
16.2 Letter on change of certifying accountant (incorporated
by reference to Exhibit A to Form 10-QSB/A filed with
the Securities and Exchange Commission on April 14,
1999).
21.1 Subsidiaries of Registrant (incorporated by reference to
Exhibit 21.1 to Form 10-KSB filed with the Securities
and Exchange Commission on September 14, 1999).
27.1 Financial Data Schedule (incorporated by reference to
Exhibit 21.1 to Form 10-KSB filed with the Securities
and Exchange Commission on September 14, 1999).
99.1 Biomerica, Inc. and Subsidiaries Consolidated Financial
Statements For The Years Ended May 31, 1999 and 1998 and
Independent Auditors' Report.
(b) Reports on Form 8-K
-------------------
Biomerica filed a report on Form 8-K with the Securities and Exchange
Commission on July 7, 1999.
-35-
<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: 10/08/99
--------
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: 10/08/99
- ------------------------------------
Zackary S. Irani
President, Director, Chief Executive
Officer
/s/ Janet Moore Date: 10/08/99
- ------------------------------------
Janet Moore, Secretary
Director, Chief Financial Officer
/s/ Jagdish Sandhu Date: 10/08/99
- ------------------------------------
Jagdish Sandhu
Chief Operating Officer
/s/ Peter W. McKinley Date: 10/08/99
- ------------------------------------
Peter W. McKinley
Executive Vice President
/s/ Robert Orlando Date: 10/08/99
- ------------------------------------
Robert Orlando, M.D., Ph.D.
Director
/s/ Carlos St. Aubyn Beharie Date: 10/08/99
- ------------------------------------
Carlos St. Aubyn Beharie
Director
/s/ David Burrows Date: 10/08/99
- ------------------------------------
David Burrows
Director
/s/ Francis R. Cano Date: 10/08/99
- ------------------------------------
Francis R. Cano
Director
-36-
BIOMERICA, INC. AND SUBSIDIARIES
CONTENTS
================================================================================
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS,
BDO SEIDMAN, LLP FS-2
INDEPENDENT AUDITORS' REPORT, CORBIN & WERTZ FS-3
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet as of May 31, 1999 FS-4
Consolidated Statements of Operations and
Comprehensive (Loss) Income for the Years Ended
May 31, 1999 and 1998, respectively FS-5 - FS-6
Consolidated Statements of Shareholders' Equity
for the Years Ended May 31, 1999 and 1998 FS-7 - FS-8
Consolidated Statements of Cash Flows for the
Years Ended May 31, 1999 and 1998 FS-9 - FS-10
Notes to Consolidated Financial Statements FS-11 - FS-41
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Biomerica, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Biomerica, Inc.
and Subsidiaries (the "Company") as of May 31, 1999, and the related
consolidated statements of operations and comprehensive loss, shareholders'
equity and cash flows for the year ended May 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Biomerica, Inc. and
subsidiaries as of May 31, 1999, and the results of their operations and their
cash flows for the year ended May 31, 1999, in conformity with generally
accepted accounting principles.
/s/ BDO Seidman, LLP
BDO SEIDMAN, LLP
Costa Mesa, California
July 29, 1999
FS-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Biomerica, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of operations and
comprehensive income, shareholders' equity and cash flows for the year ended May
31, 1998 of Biomerica, Inc. and subsidiaries (the "Company"). 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated 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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of the operations and
cash flows of Biomerica, Inc. and subsidiaries for the year ended May 31, 1998,
in conformity with generally accepted accounting principles.
/s/ Corbin & Wertz
CORBIN & WERTZ
Irvine, California
July 24, 1998
FS-3
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
================================================================================
May 31, 1999
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,669,205
Available for-sale securities 125,750
Accounts receivable, less allowance for doubtful accounts
and sales returns of $199,628 1,603,257
Inventories 3,055,095
Notes receivable 44,485
Prepaid expenses and other 296,740
- --------------------------------------------------------------------------------
Total current assets 6,794,532
- --------------------------------------------------------------------------------
INVENTORIES, non-current 25,000
- --------------------------------------------------------------------------------
LAND HELD FOR INVESTMENT 46,000
- --------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, at cost
Equipment 2,446,527
Furniture, fixtures and leasehold improvements 743,626
- --------------------------------------------------------------------------------
3,190,153
ACCUMULATED DEPRECIATION AND AMORTIZATION (2,785,614)
- --------------------------------------------------------------------------------
Net property and equipment 404,539
INTANGIBLE ASSETS, net of accumulated amortization 448,667
OTHER ASSETS 130,829
- --------------------------------------------------------------------------------
$ 7,849,567
================================================================================
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
================================================================================
May 31, 1999
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 180,000
Accounts payable and accrued expenses 1,014,851
Accrued compensation 399,336
- --------------------------------------------------------------------------------
Total current liabilities 1,594,187
- --------------------------------------------------------------------------------
MINORITY INTERESTS 2,437,660
SHAREHOLDERS' EQUITY
Common stock, $.08 par value; 10,000,000 shares
authorized; 4,110,445 shares issued and outstanding 328,835
Additional paid in capital 12,703,339
Accumulated other comprehensive loss (8,779)
Shareholder loan (1,000)
Accumulated deficit (9,204,675)
- --------------------------------------------------------------------------------
Total shareholders' equity 3,817,720
- --------------------------------------------------------------------------------
$ 7,849,567
================================================================================
See accompanying notes to consolidated financial statements.
FS-4
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE (LOSS) INCOME
================================================================================
Years Ended May 31, 1999 1998
- --------------------------------------------------------------------------------
NET SALES $ 8,688,106 $ 9,376,498
Cost of sales 5,416,720 5,484,046
- --------------------------------------------------------------------------------
GROSS PROFIT 3,271,386 3,892,452
- --------------------------------------------------------------------------------
OPERATING EXPENSES
Selling, general and administrative 3,123,740 3,108,149
Research and development 458,610 553,740
- --------------------------------------------------------------------------------
Total operating expenses 3,582,350 3,661,889
- --------------------------------------------------------------------------------
OPERATING (LOSS) PROFIT (310,964) 230,563
OTHER INCOME (EXPENSE)
Interest expense (15,607) (25,360)
Other income 292,667 152,623
- --------------------------------------------------------------------------------
(LOSS) INCOME, before minority interest in net profits of
consolidated subsidiaries and income taxes (33,904) 357,826
MINORITY INTEREST IN NET PROFITS OF CONSOLIDATED
SUBSIDIARIES (33,240) (196,169)
- --------------------------------------------------------------------------------
(LOSS) INCOME, before income taxes (67,144) 161,657
INCOME TAX EXPENSE 5,404 20,225
- --------------------------------------------------------------------------------
NET (LOSS) INCOME (72,548) 141,432
- --------------------------------------------------------------------------------
FS-5
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE (LOSS) INCOME
================================================================================
Years Ended May 31, 1999 1998
- --------------------------------------------------------------------------------
OTHER COMPREHENSIVE LOSS, net of tax
Unrealized loss on available-for-sale securities (66,681) (40,022)
- --------------------------------------------------------------------------------
COMPREHENSIVE (LOSS) INCOME $ (139,229) $ 101,410
================================================================================
PER SHARE DATA:
Net (loss) income (basic) $ (0.02) $ 0.04
Net (loss) income (diluted) $ (0.02) $ 0.03
================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES
Basic 4,001,755 3,951,552
================================================================================
Diluted 4,001,755 4,061,235
================================================================================
See accompanying notes to consolidated financial statements.
FS-6
<PAGE>
<TABLE>
<CAPTION>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
==================================================================================================================================
Common Stock Additional Accumulated Other
--------------------- Paid-in Comprehensive Shareholder Accumulated
Shares Amount Capital Income (Loss) Loan Deficit Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 1, 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)
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, May 31, 1998 3,978,302 318,264 12,513,000 57,902 (71,000) (9,132,127) 3,686,039
FS-7
<PAGE>
<CAPTION>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
==================================================================================================================================
Common Stock Additional Accumulated Other
--------------------- Paid-in Comprehensive Shareholder Accumulated
Shares Amount Capital Income (Loss) Loan Deficit Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Change in unrealized gain
(loss) on available-for-
sale securities - - - (66,681) - - (66,681)
Payment received on
shareholder loan - - - - 70,000 - 70,000
Exercise of stock options 115,800 9,264 144,602 - - - 153,866
Stock repurchase (15,450) (1,236) (19,340) - - - (20,576)
Common stock issued in
satisfaction of payables 31,793 2,543 35,457 - - - 38,000
Compensation expense - - 4,581 - - - 4,581
Tax benefit from exercise
of stock options - - 25,039 - - - 25,039
Net loss - - - - - (72,548) (72,548)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1999 4,110,445 $ 328,835 $ 12,703,339 $ (8,779) $ (1,000) $ (9,204,675) $ 3,817,720
==================================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
FS-8
<PAGE>
<TABLE>
<CAPTION>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
============================================================================================
For the Years Ended May 31, 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (72,548) $ 141,432
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 250,596 248,933
Provision for losses on accounts receivable 55,569 6,649
Loss on disposal of assets 2,309 7,763
Realized gain on sale of available-for-sale securities (111,885) (66,339)
Options issued for services rendered 4,581 10,471
Common stock issued for rent 38,000 -
Minority interest in net profits of consolidated subsidiaries 33,240 196,169
Changes in current liabilities and assets
Accounts receivable (52,138) (157,690)
Inventories (521,543) (91,503)
Prepaid expenses and other (147,204) 4,662
Accounts payable and other accrued liabilities 208,367 153,109
Accrued compensation (45,710) (22,742)
- --------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (358,366) 430,914
- --------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales of available-for-sale securities 254,313 205,835
Increase in notes receivable (16,000) (18,900)
Purchases of property and equipment (100,824) (110,428)
Increase in intangible assets (73,860) (42,358)
Other assets (106,915) (8,140)
- --------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (43,286) 26,009
- --------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayments of short-term borrowings and note
payable to bank - (200,000)
Payments of long-term debt and capital lease obligations - (15,848)
Net increase (repayments) under line of credit agreement 80,000 (100,000)
Repurchase by minority interests (53,008) (2,769)
Decrease in shareholder receivable 70,000 -
Exercise of stock options 153,866 9,550
Offering expenses - (4,771)
Stock repurchase (20,576) (8,661)
- --------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 230,282 (322,499)
- --------------------------------------------------------------------------------------------
</TABLE>
FS-9
<PAGE>
<TABLE>
<CAPTION>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
=======================================================================================
For the Years Ended May 31, 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Net change in cash and cash equivalents (171,370) 134,424
CASH AND CASH EQUIVALENTS, beginning of year 1,840,575 1,706,151
- ---------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 1,669,205 $ 1,840,575
=======================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH-FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
Interest $ 15,607 $ 25,761
=======================================================================================
Income taxes $ 2,400 $ 2,840
=======================================================================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Change in unrealized holding gain on available-for-sale
securities $ (66,681) $ (40,022)
=======================================================================================
Reduction in taxes payable and increase in additional
paid-in capital for exercise of non-qualified stock
options $ 25,039 $ 12,818
=======================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
FS-10
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements for the years ended May 31, 1999 and
1998 (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 approximate their fair values at May 31, 1999.
FS-11
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 1999 one customer accounted for approximately 14% of
accounts receivable.
CASH EQUIVALENTS
Cash and cash equivalents consists of demand deposits, money market
accounts and mutual funds with remaining maturities of three months or less
when purchased.
FS-12
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
AVAILABLE-FOR-SALE SECURITIES
The Company accounts for investments in accordance with Statement of
Financial Accounting Standards No. 115 (SFAS 115), "ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES." This statement addresses the
accounting and reporting for investments in equity securities which have
readily determinable fair values and all investments in debt securities.
The Company's marketable equity securities are classified as
available-for-sale under SFAS 115 and reported at fair value, with changes
in the unrealized holding gain or loss included in shareholders' equity.
Available-for-sale securities consist of common stock of unrelated
publicly-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 1999 and 1998 totaled $254,313
and $205,835, 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 $(66,681) and
$(40,022) for the years ended May 31, 1999 and 1998, 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.
FS-13
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories consist of the following:
May 31, 1999
--------------------------------------------------------------
Raw materials $ 746,386
Work in progress 500,805
Finished products 1,807,904
--------------------------------------------------------------
$ 3,055,095
==============================================================
Approximately $1,649,126 of Lancer's inventory is located at its
manufacturing facility in Mexico as of May 31, 1999.
LAND HELD FOR INVESTMENT
Land held for investment consists of a parcel of land located in the state
of Utah, and is stated at the lower of cost or fair value less costs to
sell.
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.
FS-14
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation and amortization are provided over the estimated useful lives
of the related assets, ranging from 3 to 12 years, using straight-line and
declining-balance methods. Leasehold improvements are amortized over the
lesser of the estimated useful life of the asset or the term of the lease.
Depreciation expense amounted to $170,803 and $174,392 for the years ended
May 31, 1999 and 1998, respectively. Approximately $120,000 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, 1999.
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 technology 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 amounted to $79,793 and $74,541 for the years
ended May 31, 1999 and 1998, respectively (see Note 4).
FS-15
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
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, 1999.
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.
FS-16
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain registrations or approvals required by foreign countries
may be longer or shorter than that required for FDA clearance or approval,
and requirements for licensing may differ significantly from FDA
requirements. There can be no assurance that Biomerica will be able to
obtain regulatory clearances for its current or any future products in the
United States or in foreign markets.
Lancer's products are subject to regulation by the FDA under the Medical
Device Amendments of 1976 (the "Amendments"). Lancer has registered with
the FDA as required by the Amendments. There can be no assurance that
Lancer will be able to obtain regulatory clearances for its current or any
future products in the United States or in foreign markets.
RISK OF PRODUCT LIABILITY - Testing, manufacturing and marketing of
Biomerica's products entail risk of product liability. Biomerica currently
has product liability insurance. There can be no assurance, however, that
Biomerica will be able to maintain such insurance at a reasonable cost or
in sufficient amounts to protect Biomerica against losses due to product
liability. An inability could prevent or inhibit the commercialization of
Biomerica's products. In addition, a product liability claim or recall
could have a material adverse effect on the business or financial condition
of the Company.
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.
FS-17
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
HAZARDOUS MATERIALS - Biomerica's research and development involves the
controlled use of hazardous materials and chemicals. Although Biomerica
believes that safety procedures for handling and disposing of such
materials comply with the standards prescribed by state and Federal
regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any damages that result and
any such liability could exceed the resources of the Company. The Company
may incur substantial costs to comply with environmental regulations.
STOCK-BASED COMPENSATION
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "ACCOUNTING FOR
STOCK-BASED COMPENSATION," which defines a fair value based method of
accounting for stock-based compensation. However, SFAS 123 allows an entity
to continue to measure compensation cost related to stock and stock options
issued to employees using the intrinsic method of accounting prescribed by
Accounting Principles Board Opinion No. 25 ("APB 25"), "ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES." Entities electing to remain with the accounting
method of APB 25 must make pro forma disclosures of net (loss) income and
(loss) earnings per share, as if the fair value method of accounting
defined in SFAS 123 had been applied (see Note 6). The Company has elected
to account for its stock-based compensation to employees under APB 25.
MINORITY INTEREST
Minority interest represents the minority shareholders' proportionate share
of the equity of Lancer and AIT. At May 31, 1999, Biomerica owned 30.76% of
Lancer (see Note 3) and 74.6% of AIT (see Note 3).
FS-18
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 1999 or 1998.
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.
FS-19
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
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
$105,000 and $77,000 for the years ended May 31, 1999 and 1998,
respectively.
(LOSS) EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "EARNINGS
PER SHARE" ("EPS"). SFAS 128 requires dual presentation of basic EPS and
diluted EPS on the face of all income statements issued after December 15,
1997 for all entities with complex capital structures. Basic EPS is
computed as net (loss) income divided by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur from common shares issuable through
stock options, warrants and other convertible securities.
RECLASSIFICATIONS
Certain amounts in the 1998 consolidated financial statements have been
reclassified to conform to the 1999 presentation.
FS-20
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table illustrates the required disclosure of the
reconciliation of the numerators and denominators of the basic and diluted
EPS computations.
FOR THE YEAR ENDED MAY 31, 1999
----------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
--------------------------------------------------------------
BASIC EPS -
Loss available
to common
shareholders $ (72,548) 4,001,755 $ (0.02)
==============================================================
EFFECT OF DILUTIVE
SECURITIES -
Options - -
--------------------------------------------------------------
DILUTED EPS -
Loss available
to common
shareholders plus
assumed conversions $ (72,548) 4,001,755 $ (0.02)
==============================================================
As of May 31, 1999, there was a total of 454,050 potential dilutive shares
of common stock.
FS-21
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOR THE YEAR ENDED MAY 31, 1999
------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
--------------------------------------------------------------
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
==============================================================
SEGMENT REPORTING
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 131 "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
AND RELATED INFORMATION" ("SFAS 131"). SFAS 131 requires public companies
to report information about segments of their business in their annual
financial statements and requires them to report selected segment
information in their quarterly reports issued to shareholders. It also
requires entity-wide disclosures about the product, services an entity
provides, the material countries in which it holds assets and reports
revenues, and its major customers. The Company adopted the provisions of
this statement for 1999 annual reporting. These disclosure requirements had
no impact on the Company's financial position or results of operations, or
the Company's existing segment disclosures.
FS-22
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 130, "REPORTING COMPREHENSIVE INCOME." This statement
establishes standards for reporting the components of comprehensive income
and requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be included in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income includes net income as well as
certain items that are reported directly within a separate component of
stockholders' equity. The Company adopted the provisions of this statement
in 1998.
3. CONSOLIDATED SUBSIDIARIES
Lancer is engaged in the design, manufacture and distribution of
orthodontic products. During 1998, Lancer repurchased 5,000 shares of its
common stock for aggregate consideration of $5,220. During 1999, Lancer
issued 10,625 shares of its common stock to Biomerica for certain
management and consulting services valued at $8,500. During 1999, Lancer
repurchased 25,372 shares of its common stock for aggregate consideration
of $25,950. The result of these transactions increased Biomerica's direct
ownership percentage of Lancer to 30.76% and increased its direct and
indirect (via agreements with certain shareholders) voting control over
Lancer to 51.32% as of May 31, 1999. Biomerica's direct ownership
percentage of Lancer was 29.9% and indirect voting control over Lancer was
50.34% as of May 31, 1998.
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.
FS-23
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
3. CONSOLIDATED SUBSIDIARIES (CONTINUED)
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, 1999 and 1998, which are included in the consolidated operating
results of the Company, are as follows:
1999 1998
--------------------------------------------------------------
Net sales $ 6,229,847 $ 6,293,254
Cost of sales 3,868,141 3,734,537
--------------------------------------------------------------
Gross profit 2,361,706 2,558,717
-------------------------------------------------------------
Operating expenses:
Selling, general and
administrative 2,206,839 2,218,890
Research and development 178,393 188,359
-------------------------------------------------------------
Total operating expenses 2,385,232 2,407,249
-------------------------------------------------------------
Other income (expense):
Interest expense (15,607) (25,360)
Other income, net 104,329 1,943
-------------------------------------------------------------
88,722 (23,417)
-------------------------------------------------------------
Income before income taxes 65,196 128,051
Income tax expense 5,404 1,600
-------------------------------------------------------------
Net income $ 59,792 $ 126,451
==============================================================
FS-24
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
4. INTANGIBLE ASSETS
Intangible assets, net of accumulated amortization, consist of the
following:
May 31, 1999
-------------------------------------------------------------
Marketing and distribution rights $ 442,750
Technology use rights 858,328
Patents and other 152,080
-------------------------------------------------------------
1,453,158
Less accumulated amortization (1,004,491)
-------------------------------------------------------------
$ 448,667
==============================================================
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 1999 and 1998, the
Company recorded amortization expense of $24,900 related to repurchased
sales territories.
During fiscal 1985, Lancer purchased certain assets and technology which is
being amortized over the estimated useful life of eighteen years. Lancer
recorded amortization expense of $48,696 for each of the years ended May
31, 1999 and 1998 related to these assets.
Amortization expense related to patents and other which is included in the
accompanying consolidated statements of operations amounted to $6,197 and
$945 for the years ended May 31, 1999 and 1998, respectively.
FS-25
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
5. LINE OF CREDIT
At May 31, 1999, Lancer had a $1,000,000 line of credit with a bank.
Borrowings are made at prime plus .75% (8.5% at May 31, 1999) and are
limited to specified percentages of eligible accounts receivable. The
unused portion available to Lancer under the line of credit at May 31, 1999
was $239,213. The line of credit expires on November 3, 1999. As of May 31,
1999, there was $180,000 outstanding under the line of credit. Lancer was
in compliance with its bank covenants as of May 31, 1999.
The following summarizes information on short-term borrowings for the year
ended May 31, 1999:
May 31, 1999
-------------------------------------------------------------
Average month end balance $ 173,333
Maximum balance outstanding at any month
end $ 200,000
Weighted average interest rate (computed by
dividing interest expense by average monthly
balance) 9.0%
Interest rate at year end 8.5%
==============================================================
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 via a shareholder
loan. During 1999, $70,000 of the shareholder loan was repaid. 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.
FS-26
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
6. SHAREHOLDERS' EQUITY (CONTINUED)
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 during the year ended May 31, 1998
of expense related to the granting of these options.
During 1998, the Company granted options to purchase 152,500 shares at an
exercise price of $1.85 to employees and a total of 1,500 shares to
non-employees, at an exercise price of $1.91. Management elected not to
record any compensation expense related to the options issued to
nonemployees, as such was immaterial.
FS-27
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
6. SHAREHOLDERS' EQUITY (CONTINUED)
During 1999, the Company granted options to purchase 2,000, 179,850 and
27,900 shares of its common stock at an exercise prices of $0.90, $0.86 and
$0.85, respectively, to employees and 2,000 and 7,000 shares to
non-employees, at exercise prices of $0.90 and $0.86, respectively. The
Company recorded $4,581 in compensation expense related to the options
issued to non- employees, calculated using the Black Scholes option model.
Activity as to stock options under the 1991 and 1995 plans are as follows:
Weighted
Number Average
of Stock Price Range Exercise
Options Per Share Price
--------------------------------------------------------------
Options outstanding at
June 1, 1997 332,600 $ .80 - $3.00 $ 1.48
Options granted 154,000 $1.85 - $1.91 $ 1.83
Options exercised (93,500) $ .85 - $1.90 $ .86
Options canceled or
expired (36,750) $1.90 - $3.00 $ 2.56
--------------------------------------------------------------
Options outstanding at
May 31, 1998 356,350 $ .80 - $3.00 $ 1.69
Options granted 218,750 $ .85 - $ .90 $ .86
Options exercised (115,800) $ .80 - $3.00 $ 1.33
Options canceled or
expired (5,250) $ .85 - $1.85 $ 1.80
--------------------------------------------------------------
Options outstanding at
May 31, 1999 454,050 $ .80 - $3.00 $ 1.38
==============================================================
Options exercisable at
May 31, 1999 237,749 $ .80 - $3.00 $ 1.38
==============================================================
The weighted average fair value of options granted during 1999 and 1998 was
$0.68 and $1.18, respectively.
FS-28
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
6. SHAREHOLDERS' EQUITY (CONTINUED)
The following summarizes information about the Company's stock options
outstanding at May 31, 1999:
<TABLE>
<CAPTION>
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise May 31, Contractual Exercise at May 31, Exercise
Prices 1999 Life Price 1999 Price
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ .80 - $.90 224,300 4.20 $ .85 116,174 $ .84
$1.85 - $1.92 227,000 3.25 $ 1.88 120,075 $ 1.88
$ 3.00 2,750 2.13 $ 3.00 1,500 $ 3.00
=========================================================================
</TABLE>
SFAS 123 PRO FORMA INFORMATION
Pro forma information regarding net (loss) income and (loss) earnings per
share is required by SFAS 123, and has been determined as if the Company
had accounted for its employee stock options under the fair value method of
SFAS 123. The fair value for these options was estimated at the date of
grant using the Black Scholes option pricing model with the following
assumptions for the years ended May 31, 1999 and 1998; risk free interest
rates of 4.9% and 5.74%, respectively; dividend yield of 0%; expected life
of the options of 3 years; and volatility factors of the expected market
price of the Company's common stock of 112% and 73%, respectively.
The Black Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
FS-29
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
6. SHAREHOLDERS' EQUITY (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option vesting period. Adjustments
are made for options forfeited prior to vesting. The effect on compensation
expense, net (loss) income, and net (loss) income per share (basic and
diluted) had compensation costs for the Company's stock option plans been
determined based on fair value on the date of grant consistent with the
provisions of SFAS 123 are as follows:
May 31, 1999 1998
--------------------------------------------------------------
Net (loss) income, as reported $ (72,548) $ 141,432
Adjustment to compensation
expense under SFAS 123 (213,436) (24,688)
--------------------------------------------------------------
Net (loss) income, pro forma $ (285,984) $ 116,744
==============================================================
Pro forma net (loss) income
per share - basic $ (0.07) $ 0.03
==============================================================
Pro forma net (loss) income
per share - diluted $ (0.07) $ 0.03
==============================================================
STOCK ACTIVITY
During 1998, the Company incurred an additional $4,771 of offering costs
related to a 1997 stock issuance.
During 1999, the Company repurchased 15,540 shares of its common stock at
an aggregate cost of $20,576.
During 1999, the Company issued 31,793 shares of its common stock valued at
$38,000 in satisfaction of accrued rent.
FS-30
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
6. SHAREHOLDERS' EQUITY (CONTINUED)
SUBSIDIARY OPTIONS AND WARRANTS
During fiscal 1998, AIT granted options to purchase 1,185,000 shares of
common stock to various employees and directors of AIT, including an option
to purchase 250,000 shares granted to Biomerica, Inc., the parent company.
The exercise price will be the fair market value AIT's common stock on the
date when certain conditions are met, as defined. The options will vest 50%
per year and expire over five years.
During 1998, intercompany advances outstanding of $134,150 were retired by
the Company, in exchange for 1,916,429 shares of AIT's previously unissued
common stock.
During 1999, Lancer granted options to purchase 138,500 shares of its
common stock at an exercise price of $1.00 to employees and options to
purchase 29,000 shares of its common stock to non- employees, at an
exercise price of $1.00.
7. INCOME TAXES
Income tax expense for the years ended May 31, 1999 and 1998 consists of
the following current provisions:
May 31, 1999 1998
-------------------------------------------------------------
U.S. Federal $ - $ -
State and local 5,404 20,225
-------------------------------------------------------------
$ 5,404 $ 20,225
==============================================================
FS-31
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
7. INCOME TAXES (CONTINUED)
Income tax expense differs from the amounts computed by applying the U.S.
Federal income tax rate of 34 percent to pretax (loss) income as a result
of the following:
May 31, 1999 1998
--------------------------------------------------------------
Computed "expected" tax
(benefit) expense $ (22,829) $ 54,963
Increase (reduction) in income
taxes resulting from:
Meals and entertainment 9,945 4,864
Change in net operating
loss carryforwards 22,829 (54,963)
Other, net (917) 18,840
Equity in earnings of affiliates
not subject to taxation
because of dividends-
received deduction for tax
purposes (9,028) (23,704)
State income taxes 5,404 20,225
--------------------------------------------------------------
$ 5,404 $ 20,225
==============================================================
FS-32
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
7. INCOME TAXES (CONTINUED)
The tax effect of temporary differences that give rise to significant
portions of liabilities are presented below.
May 31, 1999
--------------------------------------------------------------
Deferred tax assets:
Accounts receivable, principally
due to allowance for doubtful
accounts and sales returns $ 79,898
Inventories, principally due to
additional costs inventoried for
tax purposes pursuant to the Tax
Reform Act of 1986 and
allowance for inventory
obsolescence 116,632
Compensated absences and
deferred payroll, principally due
to accrual for financial reporting
purposes 141,985
State net operating loss
carryforwards 19,643
Federal net operating loss
carryforwards 2,653,495
Tax credit carryforwards 230,094
Investment in affiliates 396,748
-------------------------------------------------------------
3,638,495
Less valuation allowance (3,584,545)
-------------------------------------------------------------
Net deferred tax asset 53,950
Deferred tax liability:
Marketing rights, principally due to
amortization (53,950)
Net deferred tax liability $ -
=============================================================
FS-33
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
7. INCOME TAXES (CONTINUED)
The Company has provided a valuation allowance with respect to
substantially all of its deferred tax assets as of May 31, 1999 and 1998.
Management provided such allowance as it is currently more likely than not
that tax-planning strategies will not generate taxable income sufficient to
realize such assets in foreseeable future reporting periods.
As of May 31, 1999, Biomerica had net tax operating loss carryforwards of
approximately $4,236,000 and investment tax and research and development
credits of approximately $27,525, which are available to offset future
Federal tax liabilities. The carryforwards expire at varying dates from
2000 to 2012.
As of May 31, 1999, Lancer had net tax operating loss carryforwards of
approximately $1,848,000 and business tax credits of approximately $173,174
available to offset future Federal tax liabilities. The carryforwards
expire at varying dates from 2000 to 2012.
As of May 31, 1999, AIT had net tax operating loss carryforwards of
approximately $1,719,000 and business tax credits of approximately $29,395
available to offset future Federal tax liabilities. The carryforwards
expire at varying dates from 2000 to 2012. AIT also had net tax operating
loss carryforwards of approximately $337,000 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.
FS-34
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
8. OTHER INCOME
Other income consists of the following for the years ending May 31:
May 31, 1999 1998
-------------------------------------------------------------
Realized gains on available-for-
sale securities $ 111,885 $ 66,339
Dividend and interest income 76,453 84,341
Consulting 100,000 -
Other 4,329 1,943
-------------------------------------------------------------
$ 292,667 $ 152,623
=============================================================
During 1999, AIT earned $100,000 as a non-recurring
consulting fee from an unrelated entity.
9. BUSINESS SEGMENTS
Reportable business segments for the years ended May 31, 1999 and 1998 are
as follows:
1999 1998
-------------------------------------------------------------
Domestic sales:
Orthodontic products $ 3,413,000 $ 3,456,000
=============================================================
Medical diagnostic products $ 868,000 $ 1,585,000
=============================================================
Foreign sales:
Orthodontic products $ 2,746,000 $ 2,738,000
=============================================================
Medical diagnostic products $ 1,661,000 $ 1,597,000
=============================================================
Net sales:
Orthodontic products $ 6,159,000 $ 6,194,000
Medical diagnostic products 2,529,000 3,182,000
-------------------------------------------------------------
Total $ 8,688,000 $ 9,376,000
=============================================================
FS-35
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
9. BUSINESS SEGMENTS (CONTINUED)
1999 1998
--------------------------------------------------------------
Operating profit (loss):
Orthodontic products $ 60,000 $ 284,000
Medical diagnostic products (371,000) (53,000)
--------------------------------------------------------------
Total $ (311,000) $ 231,000
==============================================================
Identifiable assets:
Orthodontic products $ 4,018,000 $ 3,706,000
Medical diagnostic products 3,383,000 3,334,000
--------------------------------------------------------------
Total $ 7,401,000 $ 7,040,000
==============================================================
Total assets:
Orthodontic products $ 4,327,000 $ 4,089,000
Medical diagnostic products 3,523,000 3,406,000
--------------------------------------------------------------
Total $ 7,850,000 $ 7,495,000
==============================================================
Depreciation and amortization
expense:
Orthodontic products $ 172,000 $ 180,000
Medical diagnostic products 79,000 69,000
--------------------------------------------------------------
Total $ 251,000 $ 249,000
==============================================================
Capital expenditures:
Orthodontic products $ 71,000 $ 45,000
Medical diagnostic products 30,000 65,000
--------------------------------------------------------------
Total $ 101,000 $ 110,000
==============================================================
The net sales as reflected above consist of sales to unaffiliated customers
only as there were no significant intersegment sales during fiscal years
1999 and 1998. No customer accounted for more than 10% of net sales during
fiscal years 1999 and 1998.
FS-36
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
9. BUSINESS SEGMENTS (CONTINUED)
Geographic information regarding net sales and operating profits is as
follows:
1999 1998
-------------------------------------------------------------
Net sales:
United States $ 4,638,000 $ 5,041,000
Europe 1,710,000 1,798,000
South America 749,000 810,000
Asia 426,000 878,000
Other foreign 1,165,000 849,000
-------------------------------------------------------------
Total net sales $ 8,688,000 $ 9,376,000
=============================================================
Operating profit (loss):
United States $ (267,000) $ (9,000)
Europe 35,000 114,000
South America 26,000 59,000
Asia (69,000) 14,000
Other foreign (36,000) 53,000
-------------------------------------------------------------
Total operating profit $ (311,000) $ 231,000
=============================================================
Identifiable assets by business segment are those assets that are used in
the Company's operations in each industry. Identifiable assets are held
primarily in the United States. The Company's interests in AIT, whose
operations are in the United States, are vertically integrated with the
Company's operations in the medical diagnostic products industry.
FS-37
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
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 and operated by four of the Company's
shareholders. The lease rate is $12,720 and $1,400 per month, respectively.
Lancer leases its main facility under a non-cancelable operating lease
expiring December 31, 2003, as extended, which requires monthly rentals
that increase annually, from $2,900 per month (1994) to $6,317 per month
(2003). The lease expense is being recognized on a straight-line basis over
the term of the lease.
Effective November 1, 1998, Lancer entered into a non-cancelable operating
lease for its Mexico facility expiring October 31, 2003, which requires
average monthly rentals of approximately $5,500. The rentals are subject to
annual increases based on the United States Consumer Price Index. Prior to
April 1, 1996, such was included in amounts paid under the terms of the
manufacturing agreement as discussed below.
Rental expense for all operating leases amounted to approximately $294,000
and $263,000 for the years ended May 31, 1999 and 1998, respectively. The
future annual minimum payments are as follows:
Years ending May 31, Amount
------------------------------------------------------------
2000 $ 307,802
2001 140,994
2002 143,733
2003 146,587
2004 74,884
-------------------------------------------------------------
Minimum lease payments $ 814,000
=============================================================
FS-38
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
MANUFACTURING AGREEMENT
In May 1990, Lancer entered into a manufacturing subcontractor agreement
(the "Manufacturing Agreement"), whereby the subcontractor agreed to
provide manufacturing services to Lancer through its affiliated entities
located in Mexicali, B.C., Mexico. Lancer moved the majority of its
manufacturing operations to Mexico during fiscal 1992 and 1991. Under the
terms of the original agreement, the subcontractor manufactured Lancer's
products based on an hourly rate per employee based on the number of
employees in the subcontractor's workforce. As the number of employees
increase, the hourly rate decreases. In December 1992, Lancer renegotiated
the Manufacturing Agreement changing from an hourly rate per employee cost
to a pass through of actual costs plus a weekly administrative fee. The
amended Manufacturing Agreement gives Lancer greater control over all costs
associated with the manufacturing operation. In July 1994, Lancer again
renegotiated the Manufacturing Agreement reducing the administrative fee
and extending the Manufacturing Agreement through June 1998. In March 1996,
Lancer agreed to extend the manufacturing agreement through October 1998,
to coincide with the building lease. Effective April 1, 1996, Lancer leased
the Mexicali facility under a separate agreement, as discussed above.
During 1999, Lancer agreed to extend the Manufacturing Agreement through
October 2003. After June 1996, either party may cancel the agreement with
three months notice. Lancer has retained the option to convert the
manufacturing operation to a wholly-owned subsidiary of Lancer at any time
without penalty. Should Lancer discontinue operations in Mexico, it is
responsible for the accumulated employee seniority obligation as prescribed
by Mexican law. At May 31, 1999, this obligation was approximately
$287,000. Such obligation is contingent in nature and accordingly has not
been accrued in the accompanying consolidated balance sheet.
FS-39
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
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). Approximately $289,000 of the total accrued compensation included in
the 1999 consolidated balance sheet is due to the chief executive officer's
estate.
LICENSE AND ROYALTY AGREEMENT
Lancer has entered into a number of license and/or royalty agreements
pursuant to which it has obtained rights to manufacture and market certain
products. The agreements are for various durations expiring through 2007
and they require the Company to make payments based on the sales of the
individual licensed products.
Lancer has entered into license agreements expiring in 2006 whereby, for
cash consideration, the counter party has obtained the rights to
manufacture and market certain products patented by Lancer.
RETIREMENT SAVINGS PLAN
Effective September 1, 1986, the Company established a 401(k) plan for the
benefit of its employees. The plan permits eligible employees to contribute
to the plan up to the maximum percentage of total annual compensation
allowable under the limits of Internal Revenue Code Sections 415, 401(k)
and 404. The Company, at the discretion of its Board of Directors, may make
contributions to the plan in amounts determined by the Board each year. No
contributions by the Company have been made since the plan's inception.
FS-40
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
================================================================================
11. SUBSEQUENT EVENTS
On June 11, 1999, the Company issued 1,200,000 options to purchase shares
of the Company's stock to employees and non- employees. The purchase price
of the options is $3.00 per share. The options are exercisable for a period
of ten years. In addition, the Company issued 1,660,000 stock purchase
warrants to unaffiliated entities for consulting and other services
rendered and to be rendered. The holder is granted the right to purchase
common stock at an exercise price of $5.00 (as to 660,000 warrants) and
$3.00 (as to 1,000,000 warrants) per share through the year 2005.
On June 11, 1999, the Company entered into a Back-End Processing Agreement
with an unaffiliated entity. The unaffiliated entity will develop
customized back-end processing to enable the Company to process customer
prescription orders on-line and insurance claims and payments. In addition,
the unaffiliated entity transferred and assigned to the Company the right,
title and interest in and to the internet domain name "TheBigRX.com" and
all rights to any trademark relating thereto.
On June 11, 1999, the Company completed two private placement agreements to
sell and issue a total of 400,000 (50,000 of which were sold to related
parties) shares of the Company's common stock at $5.00 per share. The
Company also issued 8,000 shares of common stock to a consultant for
services provided.
Between July 1, 1999 and September 14, 1999, the Company granted 380,000
options to purchase shares of the Company's stock to employees and
non-employees. The purchase price of the options range from $2.06 to $2.75
per share.
On June 16, 1999, the Company entered into a Letter of Intent with an
underwriter with respect to a secondary public offering. It is anticipated
the offering will consist of approximately 1,500,000 to 1,700,000 shares of
the Company's previously unissued common stock. The offering price per
share will be subject to market and other conditions at the time of the
offering.
FS-41
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Biomerica, Inc. and Subsidiaries
Newport Beach, California
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated July 29, 1999, relating to the
consolidated financial statements of Biomerica, Inc. and Subsidiaries, which is
contained in that Prospectus, and to the incorporation in the Prospectus by
reference of our report dated July 29, 1999, relating to the consolidated
financial statements of Biomerica, Inc. and Subsidiaries appearing in the
Company's Annual Report on Form 10-K for the year ended May 31, 1999.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/S/ BDO Seidman, LLP
BDO SEIDMAN, LLP
Costa Mesa, California
September 16, 1999
