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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 16, 1999
REGISTRATION 333-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(AMENDMENT NO. )
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BIOMERICA, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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<S> <C>
DELAWARE 5912
(STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
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<S> <C>
DELAWARE 95-2545573
(STATE OR JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
1533 MONROVIA AVENUE
NEWPORT BEACH, CA 92663
(949) 645-2111
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
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ZACKARY S. IRANI
PRESIDENT
BIOMERICA, INC.
1533 MONROVIA AVENUE
NEWPORT BEACH, CA 92663
(949) 645-2111
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
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COPIES TO:
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<S> <C>
BARRY D. FALK, ESQ. YVONNE WONG CHESTER, ESQ.
SANFORD T. SHERMAN, ESQ. CHARLES L. MENZIES, ESQ.
JEFFERS, SHAFF & FALK, LLP TROY & GOULD
18881 VON KARMAN, SUITE 1400 A PROFESSIONAL CORPORATION
IRVINE, CA 92612 1801 CENTURY PARK EAST, 16TH FL.
(949) 660-7700 LOS ANGELES, CA 90067
(310) 553-4441
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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<S> <C> <C>
Common Stock, par value $0.08............................... $20,000,000 $5,560
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(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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EXPLANATORY NOTE
This Registration Statement covers the registration of shares
of our common stock pursuant to an underwritten public offering, including
shares issuable upon exercise of the underwriters' over-allotment option.
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
SUBJECT TO COMPLETION, ISSUED SEPTEMBER 16, 1999
SHARES
[THE BIG RX.COM LOGO]
COMMON STOCK
------------------------
Biomerica, Inc. is offering shares of its common stock. This is a
follow-on public offering and a public market currently exists for our shares.
We anticipate that the public offering price will be $ per share.
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Our stock is listed on the Nasdaq SmallCap Market under the symbol "BMRA."
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INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON P. 8.
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PRICE $ PER SHARE
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS BIOMERICA
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<S> <C> <C> <C>
Per Share........................................ $ $ $
Total............................................ $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Solely to cover any over-allotments, we have granted the representative of
the underwriters a 30-day option to purchase up to additional
shares of common stock on these same terms. This is a firm commitment offering.
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EBI SECURITIES CORPORATION
The date of this prospectus is , 1999
<PAGE> 3
[INSIDE FRONT COVER OF PROSPECTUS]
TITLE: THEBIGRX.COM, THE NEXT-GENERATION ONLINE PHARMACY
SCREEN SHOT OF THEBIGRX.COM HOME PAGE
BOX CONTAINING TEXT TO LEFT OF SCREEN SHOT
[THE BIG RX.COM LOGO]
[INSIDE GATEFOLD]
TITLE: ReadyScript proprietary software and TheBigRX.com retail online pharmacy,
a comprehensive end-to-end automated prescribing and dispensing solution
Graphic depicting our business-to-business e-commerce approach to automate
prescriptions at the point of care.
<PAGE> 4
Biomerica Inc. was incorporated in Delaware in September 1971 under the
name Nuclear Medical Systems, Inc. We changed our corporate name in February
1983 to NMS Pharmaceuticals, Inc., and in November 1987 to Biomerica, Inc. Our
principal executive offices are located at 1533 Monrovia Avenue, Newport Beach,
California 92663. Our telephone number is (949) 645-2111 and our fax number is
(949) 722-6674. Our World Wide web sites are www.biomerica.com,
www.readyscript.com and www.thebigrx.com. Inquiries can be sent by e-mail to
[email protected]. The information contained on our web sites is not part of
this prospectus.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of the
prospectus or of any sale of the common stock.
Except as otherwise noted, all information in this prospectus: (1) assumes
no exercise of the underwriters' over-allotment option, (2) assumes the sale of
a number of shares of common stock equal to $ divided by the public
offering price, (3) assumes no exercise of outstanding warrants to purchase
1,660,000 shares of our common stock, and (4) assumes no exercise of outstanding
options to purchase 2,021,800 shares of our common stock.
TheBigRX.com, TheBigRX.com logo, ReadyScript.com, the ReadyScript logo,
Biomerica, Biomerica.com and the Biomerica logo are our trademarks. This
prospectus also includes trade names, trademarks and service marks of other
companies. Use or display by us of other parties' trademarks or products is not
intended to and does not imply a relationship with, or endorsement or
sponsorship of our Company by the trademark owners.
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our Company and the common stock being sold in this
offering and our Consolidated Financial Statements and Notes to Consolidated
Financial Statements appearing elsewhere in this prospectus.
BUSINESS
Since 1971, Biomerica ("Biomerica", the "Company", "we" or "our") has
primarily been engaged in developing, manufacturing, and distributing medical
diagnostic products for the early detection and monitoring of chronic diseases
before they become catastrophic and incurable. Our gastroenterology, cardiology,
endocrinology, allergy, and diabetes products are sold to medical schools,
pharmaceutical companies, health maintenance organizations, hospitals, clinics,
commercial laboratories, physicians, drugstores, and individual consumers. We
also derive revenues and other benefits from two subsidiaries, Lancer
Orthodontics, Inc., an international manufacturer of orthodontics products, and
Allergy Immuno Technologies, Inc., which is engaged in developing allergy
treatment therapies and providing specialized services to pharmaceutical
companies and physicians.
THE NEXT-GENERATION ONLINE PHARMACY
With a 1997 change in Company management, 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 both automate the prescribing and facilitate the dispensing
of pharmaceuticals. To further this goal, in June 1999 we raised $2 million in
equity to develop the infrastructure for our Internet division.
Our products and services will 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. Our integrated system is being designed to increase efficiency,
reduce the potential for dispensing errors, and help improve clinical outcomes.
It will also address the problems associated with the prevailing manual process
of prescribing and dispensing pharmaceuticals. In addition to being inconvenient
for physicians, insurers and patients, the current process contributes to rising
healthcare costs by perpetuating:
- inefficient prescribing patterns; and
- inappropriate and sub-optimal drug use.
The first-generation online pharmacy model relies on a business-to-consumer
e-commerce model. We believe that model has limited potential in the reimbursed
prescription drug market because the first-generation online pharmacies find
themselves excluded from multiple insurers' and pharmacy benefit managers'
pharmacy networks. Consequently, we believe several of the first-generation
online pharmacies have been compelled to form an alliance with a single pharmacy
benefit manager. We believe these alliances may significantly limit the revenue
potential of these first-generation online pharmacies. Additional limitations to
the first-generation model include the following:
- It adds no economic or clinical value to physicians, insurers or patients
in terms of increased efficiency, improved clinical outcomes, or
decreased overall healthcare costs.
- It relies on error-prone handwritten prescriptions.
- The patient must fax or mail in the prescription.
- The patient must have a computer with Internet access.
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Our next-generation online pharmacy uses a business-to-business e-commerce
model to solve the prescription problem where it begins -- at the point of care.
We believe our solution addresses all of the elements of the pharmaceutical
prescribing and dispensing process in one comprehensive, cost-effective
solution, thereby better meeting the needs of the physician, insurer and
patient.
We are designing our ReadyScript technology to be an easy-to-use medication
management and automatic prescribing system that utilizes proprietary software
and readily available computer hardware. We plan to work with physicians through
direct contracts with medical groups, pharmacy benefit managers and/or insurers
representing large patient populations. When fully implemented, ReadyScript will
be designed to allow physicians online access to: (1) formulary and preferred
drug therapy options based on insurer; (2) best-practice guidelines by chronic
disease state; and (3) patient medication history. It will be designed to also
allow physicians to automatically transmit prescriptions through electronic
links to online pharmacies, traditional neighborhood pharmacies, or pharmacies
designated by the participating insurer or pharmacy benefit manager. The
automated process will reduce the potential for medication errors inherent in
the current system of handwritten and verbal prescriptions, and by integrating
formulary and best practice guidelines, help to improve clinical outcomes and
lower healthcare costs.
With ReadyScript, a patient will not need a computer or fax machine to
benefit from the convenience and cost savings made possible by our technology.
However, for those patients and consumers who have access to the Internet or a
telephone, our retail online pharmacy, TheBigRX.com, will be available 24 hours
a day, 7 days a week to fulfill their drugstore product needs.
We have acquired the online domain name "TheBigRX.com" and entered into a
strategic alliance with TheBigStore.com, Inc.,our technology partner, and
TheBigHub.com, an Internet portal. TheBigHub.com will provide us continuous
advertising on its site. The BigStore.com will provide us back-end processing
technology and functionality including 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. This has accelerated our developmental timeline and is intended to
minimize our required capital outlay. TheBigStore.com has agreed to provide a
back-end system that is comprehensive in software and hardware capability,
user-friendly, easily navigated, and fully scalable to accommodate transactional
growth.
STRATEGY
We plan to implement our next-generation online pharmacy, consisting of our
proprietary ReadyScript technology on the front-end and our retail online site,
TheBigRX.com, at the back-end, in two phases. The first phase includes
development and implementation of the retail online pharmacy site 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. Participating physicians will access ReadyScript
using off-the-shelf handheld or desktop computing platforms that create improved
prescribing capabilities, and will then electronically transmit prescriptions to
the pharmacy of the patient's choice, such as TheBigRX.com. We are designing our
system to work with multiple insurers and pharmacy benefit managers to: (1)
improve compliance with formulary guidelines, and (2) direct prescriptions to
their designated mail-order pharmacies. We plan to complete this phase during
the year 2000.
In subsequent phases, we intend to integrate patient-based management tools
into our solution. These tools will be designed to allow physicians to
automatically retrieve critical
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concurrent patient health information, helping physicians make optimal medical
and pharmaceutical treatment decisions to further improve clinical outcomes.
Our multi-source revenue model will be designed to allow us to generate
earnings from product sales and service agreements for our ReadyScript
technology, transaction fees for electronic prescription routing, prescriptions
filled through our retail online pharmacy, and consumer product sales from our
retail online pharmacy.
Our goal is to establish ReadyScript and TheBigRX.com as well-known, highly
trusted brands in the minds of chronically ill patients, their physicians and
insurers. To do so, we plan to:
- Focus our initial marketing efforts on establishing strategic
relationships with physician groups, pharmacy benefit managers, hospital
systems, health maintenance organizations, and healthcare insurers
representing large patient populations. Our integrated solution is
intended to increase penetration of pharmacy benefit managers' mail-order
opportunities by working with, not against, multiple pharmacy benefit
managers, online pharmacies and neighborhood pharmacies.
- Leverage our management team's healthcare industry experience with large
healthcare organizations and insurers when marketing our medication
management solutions.
- Target patients with chronic diseases and recurring medical needs through
traditional media sources and our affiliation with TheBigHub.com, an
Internet portal.
- Create a convenient and superior customer experience, thereby building
customer loyalty and generating repeat business.
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THE OFFERING
Common stock offered............ shares
Common stock to be outstanding
after the offering.............. shares
Use of proceeds................. We intend to use the proceeds to launch our
online pharmacy, to develop, beta-test and
launch our ReadyScript technology, to expand
sales and marketing, and for working capital
and general corporate purposes. See "Use of
Proceeds."
Nasdaq SmallCap Market Symbol... BMRA
The number of shares of our common stock to be outstanding immediately
after the offering is based on 4,530,695 shares outstanding at September 14,
1999. This number does not include 2,021,800 shares of our common stock subject
to options and 1,660,000 warrants outstanding at September 14, 1999.
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SUMMARY CONSOLIDATED FINANCIAL DATA
The "as adjusted" column reflects our capitalization as of May 31, 1999
with adjustments to give effect to the receipt of the estimated proceeds from
the sale of shares of our common stock at an assumed public offering
price of $ per share, after deducting the underwriting discount and
estimated offering expenses.
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<CAPTION>
YEAR ENDED MAY 31,1999
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ACTUAL AS ADJUSTED
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................................. $8,688,106
Gross profit.............................................. $3,271,386
Total operating expenses.................................. $3,582,350
Operating loss............................................ $ (310,964)
Net loss.................................................. $ (72,548)
Basic and diluted net loss per share...................... $ (0.01)
Weighted average shares outstanding used to compute basic
and diluted net loss per shares......................... $4,001,755
</TABLE>
<TABLE>
<CAPTION>
AT MAY 31, 1999
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ACTUAL AS ADJUSTED
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $1,669,205
Working capital........................................... $5,200,345
Total assets.............................................. $7,849,567
Minority interest......................................... $2,437,660
Total stockholders' equity................................ $3,817,720
</TABLE>
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RISK FACTORS
You should carefully consider the risks described below, together with all
other information in this prospectus before making an investment decision.
Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also impair our business operations. If any of the
following risks actually occurs, our business, financial condition or operating
results could be materially adversely affected. In such case, the trading price
of our common stock could decline, and you may lose all or part of your
investment.
RISKS RELATED TO OUR BUSINESS
WE ARE SIGNIFICANTLY CHANGING THE FOCUS OF OUR BUSINESS.
We are transitioning from our established operating history as a developer,
manufacturer and distributor of advanced diagnostic test products to an Internet
business. The potential risks and uncertainties include, among others,
fluctuations in our operating results from implementing our new business model
and expansion plans, dilution of management's attention to our current business,
the highly competitive environment in which we will be competing, the early
stage of the Internet as an electronic commerce medium, our dependence on
strategic relationships to drive traffic to our web sites, and our dependence on
increased use of the Internet for commerce.
WE EXPECT SIGNIFICANT INCREASES IN OUR OPERATING EXPENSES AND CONTINUING LOSSES
FOR THE NEXT SEVERAL YEARS.
We expect that our operating expenses will increase significantly during
the next several years as we:
- develop enhanced technologies and features to improve our prescription
automation tools and web sites;
- increase our sales and marketing activities;
- increase our general and administrative functions to support our growing
operations, and expand our customer and pharmacist support organizations
to better serve customer needs; and
- enhance our distribution fulfillment processes and buy or build our own
distribution facilities.
With increased expenses, we will need to generate significant additional
revenues to achieve profitability. We cannot be certain that we will obtain
enough physician participation and customer traffic or a high enough volume of
purchases to generate sufficient revenues and achieve profitability.
WE EXPECT OUR FINANCIAL RESULTS WILL FLUCTUATE.
Our annual and quarterly operating results may fluctuate significantly in
the future due to a variety of factors, many of which are outside of our
control. Factors that may harm our business or cause our operating results to
fluctuate include:
- the inability to obtain or maintain our status as an approved member of
reimbursed insurance networks for prescription drugs;
- slow adaptation and integration of handheld computers into medical
practice environments;
- changes in the growth rate of Internet usage;
- fluctuations in demand for our products and services;
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- shifts in the nature and amount of publicity about us or our competitors;
- the inability to obtain physician participation and new customers at a
reasonable cost, retain existing physician participation and customers,
or encourage repeat use and purchases;
- decreases in the number of visitors to our web site or our inability to
convert visitors to our web site into customers;
- government regulations related to use of the Internet for commerce, sales
and distribution of our products, prescription services and patient
information; and
- costs related to potential acquisitions of technology or businesses.
The volume and timing of orders of pharmaceuticals and other drugstore
products on our web site are difficult to predict because the online market for
such products is in its infancy and our medication management model has not been
employed by other online pharmacies. Since we are in the early implementation
stage of our web site and the developmental stage of our online medication
management system, we do not have sufficient historical data to demonstrate how
successful this strategy will be. We cannot currently forecast revenue from
regular and repeat customers or anticipated revenue trends.
OUR E-COMMERCE BUSINESS HAS A LIMITED OPERATING HISTORY.
Our e-commerce business strategy was established in November 1998, and we
plan to begin selling products through the online pharmacy by the end of 1999.
We will not begin to operate under our business-to-business e-commerce model
until sometime in the year 2000. Accordingly, our e-commerce division has a
limited operating history, which makes it more difficult to evaluate its current
business and prospects, or accurately predict our future revenues or results of
operations. This may result in one or more future quarters where our financial
results may fall below the expectation of analysts and investors. As a result,
the trading price of our common stock might decline. Before investing, you
should evaluate the risks, uncertainties, expenses and difficulties frequently
encountered by companies in the new and rapidly evolving Internet markets. These
risks include:
- competition and relatively low barriers to entry;
- ability to gain market acceptance of online service from physicians,
insurers or consumers;
- ability to maintain and expand physician participation and our customer
base;
- need to manage growth and changing operations;
- need to continue to develop and upgrade software, web site, transaction
processing systems and network infrastructure;
- ability to scale systems and fulfillment capabilities to accommodate
business growth;
- ability to develop and renew strategic relationships;
- dependence upon key personnel; and
- dependence on the reliability and growing use of the Internet for
commerce and communication.
We cannot be certain that our business strategy will be successful or that
we will successfully address these risks.
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WE NEED TO MANAGE GROWTH IN OPERATIONS TO MAXIMIZE OUR POTENTIAL GROWTH AND
ACHIEVE OUR EXPECTED REVENUES.
In order to maximize potential growth in our market opportunities, we
believe that we must expand rapidly and significantly upon our entrance into the
e-commerce marketplace. This expansion will place a significant strain on our
management, information systems, and operational and financial resources. We
expect that we will need to continue to improve our financial and managerial
controls and reporting systems and procedures. In addition, we will need to
continue to expand, train and manage our workforce. Furthermore, we expect that
we will be required to manage multiple relationships with various vendors and
other third-parties. Our failure to manage growth could disrupt our operations
and ultimately prevent us from generating the revenues we expect.
OUR BUSINESS-TO-BUSINESS E-COMMERCE MODEL IS DEPENDENT ON THE ADOPTION OF OUR
SYSTEM BY PHYSICIANS, INSURERS AND PHARMACY BENEFIT MANAGERS.
Our ReadyScript software is being developed based on a business-to-business
e-commerce model that will require the participation of three primary groups:
physicians, insurers and pharmacy benefit managers. If we are unable to
successfully attract and retain a high volume of participation by these groups
at a reasonable cost, we will not be able to increase our revenues or achieve
profitability.
ADOPTION OF OUR READYSCRIPT SYSTEM BY PHYSICIANS IS CRITICAL TO OUR SUCCESS.
Since our medication management approach is intended to start at the point
of care, it is essential that we enlist the support and participation of large
numbers of physicians. Critical to our ability to attract and retain physician
participants is the acceptance of our ReadyScript system and physician use of
handheld computers. Getting physicians to use computers has been very difficult.
Handheld computers are better suited toward the physician practice than
traditional desktop or laptop computers. Yet the cost, small screens,
inconvenient input methods and limited memory and software capabilities compared
to desktop computers have also hampered wide acceptance of these devices. While
we believe that off-the-shelf handheld technology has advanced to the point that
handheld computers are suitable for electronic prescription pads, we cannot be
certain that a broad base of physicians will accept electronic prescribing as an
effective way of accessing and transmitting information. If our ReadyScript
prescribing solutions do not gain market acceptance, our new Internet business
will not be successful and our business, results of operations and financial
condition could suffer harm.
Other factors that could prevent widespread physician acceptance include:
- lack of physician awareness of our ReadyScript system and TheBigRX.com
online pharmacy;
- physician concerns about the security of online prescription transmission
and the privacy of their patient's health information;
- product damage from shipping or shipments of wrong or expired products
from our fulfillment partners or other vendors, resulting in a failure to
establish physician trust; and
- delays in responses to physician inquiries or in deliveries to their
patients.
LIMITED INSURER PARTICIPATION MAY REDUCE OUR ABILITY TO SELL PHARMACY PRODUCTS
ONLINE, WHICH WOULD REDUCE OUR REVENUES.
We expect that pharmacy sales will account for a significant percentage of
our total sales. Sales of our products will depend in part on the availability
of reimbursement from third-party
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payors such as government health administration authorities, private health
insurers, health maintenance organizations, pharmacy benefit managers and other
organizations. Accordingly, we must devote time and resources to develop
third-party payor confidence in our approach.
To obtain reimbursement on behalf of patients for the prescription products
purchased on our web site, we need to obtain contracts with numerous insurance
companies and pharmacy benefit managers. Our ability to obtain these contracts
is uncertain. These companies are in the early stages of evaluating the impact
of the Internet and online pharmacies on their businesses. Many of these
companies may delay their decisions to contract with online pharmacies or may
decide to develop their own Internet capabilities that may compete with us. In
addition, many insurers have existing contracts with chain drugstores and
pharmacy benefit managers that have announced their intentions to establish
online pharmacies. It is likely that some insurers and pharmacy benefit managers
will contract with only one or a limited number of online pharmacies. If our
online competitors obtain these contracts and we do not, we would be at a
competitive disadvantage.
In addition, we must process each insurance application individually, which
may raise the costs of processing prescription orders and delay our order
processing time. Customers may not initially embrace our online insurance
coverage procedure. As a result, we may remain dependent on customers who are
willing to pay cash for their prescriptions. In addition, the cash market as a
percentage of the overall prescription market has declined. A disproportionate
dependence on cash purchases may limit the amount of the prescription drug
market that we can service, and thus may have an adverse impact on our business.
Moreover, third-party payors are increasingly challenging the price and
cost-effectiveness of medical products and services. The efforts of third-party
payors to contain costs will place downward pressures on gross margins from
prescription drug sales. Our revenues from prescription drug sales may also be
affected by federal and state governments' healthcare reform initiatives,
including proposals designed to significantly reduce spending on Medicare,
Medicaid and other government programs; changes in programs providing for
reimbursement prescription drug costs by third-party payors; and regulatory
changes related to the approval process for prescription drugs. Such initiatives
could lead to the enactment of federal and state regulations that harm our
results of operations.
We cannot be certain that our products or services will be considered
cost-effective or that adequate third-party reimbursement will be available to
enable us to maintain price levels sufficient to realize adequate profit
margins. Any such event would harm our business.
CONSUMERS OF DRUGSTORE PRODUCTS MAY NOT ACCEPT OUR INTERNET APPROACH, WHICH MAY
IMPACT OUR REVENUE AND PROFITABILITY.
If we do not attract and retain a sufficient volume of retail customers at
a reasonable cost, our revenue and profitability may be impacted. We may not be
able to convert a large number of consumers from traditional shopping methods to
online shopping for drugstore products. Even if we are successful at attracting
customers, we expect it will take several years to build a critical mass of such
customers. Specific factors that could prevent widespread customer acceptance
include:
- shipping charges, which do not apply to shopping at traditional
drugstores;
- pricing that does not meet customer expectations;
- lack of consumer awareness of our retail online pharmacy;
- customers' concerns about the security of online transactions and the
privacy of their personal health information;
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- product damage from shipping or shipments of wrong or expired products
from our fulfillment partners or other vendors, resulting in a failure to
establish customers' trust in buying drugstore items online;
- delays in responses to customer inquiries or in deliveries to customers;
and
- difficulties in returning or exchanging orders.
UNLESS WE DEVELOP A STRONG BRAND IDENTITY, OUR BUSINESS MAY NOT GROW AND OUR
FINANCIAL RESULTS MAY SUFFER.
We believe that establishing and maintaining the "ReadyScript" and
"TheBigRX.com" brands is a critical aspect of our efforts to attract and expand
our audience. Also, the importance of brand recognition will increase due to a
growing number of Internet sites. Promotion and enhancement of the "ReadyScript"
and "TheBigRX.com" brands will depend largely on our success in providing high
quality products and services, which cannot be assured. To promote our brands,
we will incur substantial expense in our marketing and advertising efforts. If
these brand promotion activities do not yield increased revenues, we will incur
losses.
WE EXPECT COMPETITION TO INCREASE SIGNIFICANTLY IN THE FUTURE, WHICH COULD
REDUCE OUR REVENUES, POTENTIAL PROFITS AND OVERALL MARKET SHARE.
The online commerce market is new, rapidly evolving and intensely
competitive. We expect competition to intensify in the future. Barriers to entry
are minimal, and current and new competitors can launch new web sites and
develop programs at a relatively low cost. Our current competitors include:
- online retailers of drugstore products, such as planetRx.com,
drugstore.com/RiteAid, and Soma.com/CVS;
- online physician practice management systems, such as Allscripts and
Healtheon;
- chain drugstores, such as Walgreen's, RiteAid, CVS and Eckerd;
- mass market retailers, such as Wal-Mart, Kmart and Target;
- supermarkets, such as Safeway, Albertson's and Vons;
- cosmetic departments at major department stores, such as Nordstrom and
Macy's;
- pharmacy benefit managers and mail-order pharmacies, such as PCS, Express
Scripts and Merck-Medco; and
- Internet portals and online service providers that feature shopping
services, such as AOL, Yahoo!, MSN.com and Lycos.
Many of our current and potential traditional store-based and online
competitors have longer operating histories, larger customer or user bases,
greater brand recognition and significantly greater financial, marketing and
other resources than we do. Many of these current and potential competitors can
devote substantially more resources to web site and systems development than we
can. Increased competition may result in reduced operating margins, loss of
market share and a diminished brand franchise. We cannot assure you that we will
compete successfully against future competitors.
OUR E-COMMERCE BUSINESS WILL DEPEND ON A LIMITED NUMBER OF FULFILLMENT AND
TECHNOLOGY PARTNERS.
We plan to rely to a large extent on rapid distribution by third-parties.
We intend to distribute all of our pharmaceutical products from one or a limited
number of vendors. We also intend to distribute the majority of our
non-pharmaceutical products from one or a limited
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number of vendors. We intend to carry no or minimal inventory and will rely to a
large extent on rapid fulfillment from our vendor(s). Our business could also be
significantly disrupted if any of our vendors were to breach their contracts or
were to suffer adverse developments that affect their ability to supply products
for us. If for any reason any of our vendors are unable or unwilling to supply
products for us in sufficient quantities and in a timely manner, we may not be
able to secure alternative fulfillment partners on acceptable terms in a timely
manner, or at all.
Because we plan to rely on third-parties to fulfill orders, we depend on
their systems for tracking inventory and financial data. In addition, our order
fulfillment and distribution process will require us to cooperate extensively
with our fulfillment partners to coordinate separate information technology
systems. If our fulfillment partners' systems fail or are unable to scale or
adapt to changing needs, or if we cannot integrate information systems with new
distributors, we may not have adequate, accurate or timely inventory or
financial information.
We also plan to rely on third-party carriers for product shipments,
including shipments to and from distribution facilities. We are therefore
subject to the risks, including employee strikes and inclement weather,
associated with our fulfillment partners, and of our carriers' ability to
provide product fulfillment and delivery services to meet our fulfillment and
shipping needs. Failure to deliver products to our customers in a timely and
accurate manner would harm our reputation, our ReadyScript and TheBigRX.com
brands, and the results of our operations.
We are relying upon TheBigStore.com for use of their back-end processing
technology to ultimately process e-commerce transactions and track customer
orders from the time the order is placed until delivery. TheBigStore.com is
currently developing retail store sites (Internet storefronts), establishing its
retail site and transactional processing software, and installing and testing
its hardware and communications platform. We will utilize the server farm and
software functionality of TheBigStore.com, but will directly manage all
merchandising and marketing. Our agreement with TheBigStore.com is for an
initial term of 5 years. If for any reason TheBigStore.com is unable or
unwilling to provide us with back-end processing, we may not be able to secure
an alternative back-end partner on acceptable terms in a timely manner, or at
all.
OUR BUSINESS-TO-CONSUMER E-COMMERCE SALES COULD BE NEGATIVELY AFFECTED IF WE ARE
REQUIRED TO CHARGE TAXES ON PURCHASES.
We do not intend to collect sales or other similar taxes in respect of
consumer goods sold by us through our retail web site, except from purchasers
located in states in which our fulfillment centers are located. However, one or
more states or the federal government may seek to impose sales tax collection
obligations on out-of-state companies (such as our Company), which engage in or
facilitate online commerce. A number of proposals have been made at the state
and local level that would impose additional taxes on the sale of goods and
services through the Internet. Such proposals, if adopted, could substantially
impair the growth of electronic commerce and could adversely affect our
opportunity to derive financial benefit from such activities. Moreover, a
successful assertion by one or more states or the federal government that we
should collect further sales or other taxes on the sales of products through our
web site could negatively affect the business-to-consumer portion of our
revenues and business.
RAPID TECHNOLOGICAL CHANGE MAY ADVERSELY AFFECT US.
To be competitive, we will need to enhance and improve the functionality
and features of our ReadyScript system and TheBigRX.com retail online pharmacy.
The Internet, online commerce industry, pharmacy industry and software industry
are rapidly changing. If competitors introduce new products and services
embodying new technologies, or if new
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industry standards and practices emerge, our existing software, web site and
proprietary technology and systems may become obsolete. Our future success may
depend on our ability to:
- license and internally develop leading technologies useful in our
business;
- enhance our existing services and software;
- develop new services and technologies that address the increasingly
sophisticated and varied needs of our prospective customers; and
- respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
Developing our software, web site and other proprietary technology entails
significant technical and business risks. We may use new technologies
ineffectively or we may fail to adapt our software, web site,
transaction-processing systems and network infrastructure to customer
requirements or emerging industry standards. If we face material delays in
introducing new services, products and enhancements, our customers may forgo the
use of our services and use those of our competitors.
WE WILL DEPEND ON THE GROWTH OF INTERNET TRAFFIC, WHICH COULD IN TURN OVERTAX
THE INTERNET INFRASTRUCTURE.
Our success will also depend largely on continued growth in, and the use
of, the Internet, particularly for commerce. Our dependence on the Internet
infrastructure may prove problematic due to:
- inadequate development of the necessary infrastructure for communication
speed, access and server reliability;
- ease-of-access issues;
- security and confidentiality concerns;
- lack of development of complementary products, such as high-speed modems
and high-speed communication lines;
- implementation of competing technologies; and
- delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity.
We expect Internet use to grow in number of users and traffic volume. The
Internet infrastructure may be unable to support the demands placed on it by
this continued growth. If these factors limit the acceptance or effectiveness of
Internet products, our business could be harmed.
WE WILL FACE THE RISKS OF SYSTEM FAILURES.
Our success will depend substantially on our ability to deliver high
quality, uninterrupted service to our customers. This requires that we protect
the computer equipment and the information stored on the servers we intend to
utilize. Substantially all of the computer and communications hardware systems
we intend to utilize are located at a third-party facility in Newport Beach,
California. The systems and operations are vulnerable to damage or interruption
from fire, flood, power loss, telecommunications failure, break-ins, earthquake
and similar events. We have no formal disaster recovery plan and our business
interruption insurance may not adequately compensate us for losses that may
occur. The occurrence of a natural disaster or unanticipated problems at our
leased facilities in Southern California or at the third-party facilities in
Newport Beach, California could cause interruptions or delays in our business,
loss of data or render us unable to accept and fulfill customer orders. In
addition, the
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failure of the third-party facility to provide the data-communications capacity
required by us, as a result of human error, natural disaster or other
operational disruptions, could result in interruptions in our service. The
occurrence of any or all of these events could adversely affect our reputation,
brand name(s) and business.
WE WILL BE EXPOSED TO RISKS ASSOCIATED WITH ONLINE COMMERCE SECURITY, PATIENT
CONFIDENTIALITY AND CREDIT CARD FRAUD.
A significant barrier to online commerce is the secure transmission of
confidential information over public networks. We will rely on encryption and
authentication technology to provide the security and authentication necessary
to effect secure transmission of confidential information. We cannot be certain
that advances in computer capabilities, new discoveries in the field of
cryptography or other developments will not result in a compromise or breach of
the algorithms we use to protect consumers' transaction data. If any such
compromise of our security were to occur, it could harm our business, prospects,
financial conditions and results of operations. A party who is able to
circumvent our security measures could misappropriate proprietary information or
cause interruptions in our operations. We may have to expend significant capital
and other resources to prevent such security breaches or alleviate problems
caused by such breaches.
Concerns over the security of transactions conducted on the Internet and
the privacy of users may also hinder the growth of online services generally,
especially as a means of conducting commercial transactions. To the extent that
our activities or those of third-party contractors will involve the storage and
transmission of proprietary information, such as confidential patient
information, credit card numbers, security breaches could damage our reputation
and expose us to a risk of loss or litigation and possible liability. We cannot
be certain that our security measures will prevent security breaches or that
failure to prevent such security breaches will not harm our business, prospects,
financial condition and results of operations.
WE FACE YEAR 2000 RISKS.
Many existing computer programs cannot distinguish between a year beginning
with "20" and a year beginning with "19" because they use only the last two
digits to refer to a year. For example, these programs cannot tell the
difference between the year 2000 and the year 1900. As a result, these programs
may malfunction or fail completely. If we or any third-party with whom we have a
material relationship fail to achieve Year 2000 readiness, our business may be
seriously harmed. In particular, Year 2000 problems could temporarily prevent us
from offering our goods and services.
PHARMACY OR PRESCRIPTION PROCESSING ERRORS MAY EXPOSE US TO LIABILITY CLAIMS AND
ADVERSE PUBLICITY.
Pharmacy errors relating to prescriptions, dosage, medication management
and other aspects of the medication dispensing process can produce liability
claims for us that our insurance may not cover. Because we will distribute these
products directly to the consumer, we are the most visible participant in the
medication distribution chain, and therefore have more exposure to liability
claims.
Our pharmacists or our vendor(s)'s pharmacists are required by law to offer
counseling, without additional charge, to our customers about medication,
dosage, delivery systems, common side effects and other information deemed
significant by the pharmacists. Our pharmacists or our vendor(s)'s pharmacists
may have a duty to warn customers regarding any potential adverse effects of a
prescription drug if the warning could reduce or negate such effects. This
counseling will be accomplished in part through e-mail and inserts included with
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the prescription, which may increase the risk of miscommunication because the
customer is not personally present or may not have provided all relevant
information. We also intend to post product information on our web site. This
will create the potential for claims to be made against us for negligence,
personal injury, wrongful death, product liability, malpractice, invasion of
privacy or other legal theories based on our product or service offerings.
Although we carry general liability and product liability insurance, our
insurance may not cover potential claims of this type or may not be adequate to
protect us from all liability that may be imposed.
Pharmacy errors either by us or our competitors may produce significant
adverse publicity either for us or the entire online pharmacy industry. Because
of the significant amount of recent press coverage on Internet retailing, we
believe that we will be subject to a higher level of media scrutiny than other
pharmacy product channels. The amount of negative publicity that we or the
online pharmacy industry receive as a result of pharmacy or prescription
processing errors could be disproportionate in relation to the negative
publicity received by other pharmacies making similar mistakes. We have no
control over the pharmacy practices of our competitors, and we cannot ensure
that our pharmacists or our prescription-processing department will be able to
operate without error. We believe customer acceptance of our online shopping
experience is largely based on consumer trust, and negative publicity could
erode such trust, or prevent it from growing. This could result in an immediate
reduction in the amount of orders we receive and adversely affect our revenue
growth.
WE MAY FACE LIABILITY CLAIMS FOR CONTENT ON OUR WEB SITE.
Because we plan to post product information and other content on our web
site, we will face potential liability claims for negligence, copyright, patent,
trademark, defamation, indecency and other claims based on the nature and
content of the materials that we post. Such claims have been brought, and
sometimes successfully pursued, against Internet content distributors. In
addition, we could be exposed to liability claims with respect to the
unauthorized duplication of content or unauthorized use of other parties'
proprietary technology. Although we maintain general liability insurance, our
insurance may not cover potential claims of this type or may not be adequate to
indemnify us for all liability that may be imposed. Any imposition of liability
that is not covered by insurance or is in excess of insurance coverage could
harm our business.
OUR EXISTING DIAGNOSTIC TEST BUSINESS DEPENDS PARTLY ON RESEARCH AND DEVELOPMENT
PROJECTS THAT INVOLVE THE USE OF HAZARDOUS MATERIALS AND CHEMICALS AND COULD
RESULT IN SUBSTANTIAL ENVIRONMENTAL LIABILITY CLAIMS.
Our research and development involves the controlled use of hazardous
materials and chemicals. As a result, we may incur substantial costs to comply
with environmental regulations. Moreover, although we believe 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, we could be held liable for any damages that
result and any such liability claims could exceed our total resources.
OUR EXISTING DIAGNOSTIC TEST BUSINESS DEPENDS PARTLY ON THE DEVELOPMENT,
INTRODUCTION AND MARKET ACCEPTANCE OF NEW PRODUCTS.
We are in various stages of developing new products in our diagnostic test
business. We believe our diagnostic revenue growth and future operating results
will depend, in part, on our
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ability to complete development of these products and successfully introduce
them. In order to successfully introduce and sell these products, we must, among
other things:
- undertake time-consuming and costly development and manufacturing;
- establish and maintain reliable, cost-efficient manufacturing capacity
for these products;
- obtain necessary regulatory clearance or approvals in a timely manner;
and
- ensure that our products comply with government and regulatory testing
guidelines.
Each stage of this process involves inherent difficulties. We may not be
able to successfully develop, introduce, cost-effectively manufacture or achieve
market acceptance for new products or enhancements to existing products.
OUR EXISTING DIAGNOSTIC TEST BUSINESS DEPENDS PARTLY ON THIRD-PARTY
DISTRIBUTORS.
Third-party distributors represent a significant portion of our existing
customer base. If we lose one or more of these distributors and cannot arrange
suitable alternatives, our business could be harmed. We may not be able to enter
into new distribution or marketing agreements on satisfactory terms, or at all.
We cannot be certain that our distributors will devote sufficient resources to
effectively market and sell the products manufactured by us or any new products
manufactured by us in the future, or that they will market these products at
prices that can achieve market acceptance. In addition, our distributors may
give higher priority to the products of similar suppliers or to their own
products, thus reducing their efforts to sell products manufactured by us. If
any of our larger distributors become unwilling or unable to promote, market and
sell products manufactured by us, our business could be adversely affected.
WE WILL RELY ON OUR KEY MANAGEMENT PERSONNEL AND ON OUR ABILITY TO ATTRACT
HIGHLY QUALIFIED PERSONNEL IN THE FUTURE.
We will depend on the continued services and performance of our senior
management and other key personnel and our ability to retain and motivate them.
The loss of the services of any of our officers or senior managers could harm
our business.
Our future success will also depend on our ability to attract, retain and
motivate other highly skilled technical, managerial, marketing and customer
support personnel. Competition for qualified personnel is intense, especially
for programmers, engineers, web designers and marketing personnel. Our inability
to hire, integrate and retain qualified personnel in sufficient numbers may
reduce the quality of our programs, products and services.
PROTECTION OF OUR TRADEMARKS AND PROPRIETARY RIGHTS IS UNCERTAIN.
We regard our copyrights, service marks, trademarks, trade secrets and
similar intellectual property as critical to our success. We rely on trademark,
copyright and trade secret law, as well as confidentiality and license
agreements with our employees, customers, partners and others to protect our
proprietary rights. Effective trademark, service mark, copyright and trade
secret protection may not be available in every country in which we sell our
products and services online. Therefore, the steps we take to protect our
proprietary rights may be inadequate.
WE FACE RISKS ASSOCIATED WITH DOMAIN NAMES.
We currently hold the Internet domain names "Biomerica.com",
"ReadyScript.com", "TheBigRX.com" and various other related names. Domain names
generally are regulated by Internet regulatory bodies. The regulation of domain
names in the United States and in foreign countries is subject to change.
Regulatory bodies could establish additional top-level domains,
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appoint additional domain name registrars or modify the requirements for holding
domain names. As a result, we may not acquire or maintain our domain names in
all of the countries in which we plan to conduct business.
The relationship between regulations governing domain names and laws
protecting trademarks and similar proprietary rights is unclear. Therefore, we
could be unable to prevent third-parties from acquiring domain names that
infringe or otherwise decrease the value of our trademarks and other proprietary
rights.
INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND RESULT IN THE LOSS OF
SIGNIFICANT RIGHTS.
Other parties may assert infringement or unfair competition claims against
us. We cannot predict whether third parties will assert claims of infringement
against us, or whether any past or future assertion or prosecutions will
adversely affect our business. If we are forced to defend against any such
claims, whether they are with or without merit or are determined in our favor,
we may face costly litigation, diversion of technical and management personnel,
or product development delays. As a result of such a dispute, we may have to
develop non-infringing technology or enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may be unavailable on terms
acceptable to us, or at all. If there is a successful claim of product
infringement against us and we are unable to develop non-infringing technology
or license the infringed or similar technology on a timely basis, it could
adversely affect our business.
Lancer Orthodontics, Inc. holds four patents and licenses to patents held
by third parties, and our Allergy Immuno Technologies subsidiary holds an
additional four patents. Our success depends, at least in part, on maintaining
these patents and obtaining future patent protection for new products, defending
patents once obtained, preserving our trade secrets and operating without
infringing upon patents and proprietary rights held by third-parties, both in
the United States and in foreign countries. We cannot be certain that any
patents issued to or licensed by our subsidiaries or us will not be challenged,
invalidated, infringed or circumvented or that the rights granted thereunder
will provide competitive advantages for our business or products or that of our
subsidiaries. We may be subject to further risks as we expand our operations in
countries where intellectual property laws are not well developed or are
difficult to enforce. Legal protection of our proprietary rights may be
ineffective in those countries. In such event, our business, results of
operations and financial condition may be harmed.
GOVERNMENT REGULATION OF THE E-COMMERCE, HEALTHCARE AND PHARMACY INDUSTRIES
COULD AFFECT OUR BUSINESS.
Although we will not be subject to direct regulation by any governmental
agency relating to the Internet, and currently few laws and regulations directly
apply to web access, we will be subject to various laws and regulations
applicable to consumer credit and consumer insurance. It is possible, however,
that a number of laws and regulations may be adopted with respect to the web,
covering issues such as user privacy, pricing and characteristics and quality of
products and services. The adoption of any such laws or regulations may decrease
the growth of the Internet, which in turn could decrease the demand for our
services and increase our cost of doing business. Any new legislation or
regulation that is directed at the Internet, or the application of existing laws
and regulations to the Internet or other online services could harm our
business, prospects, financial condition and results of operation.
Our online pharmacy business will be subject to extensive federal, state
and local regulations, many of which are specific to pharmacies and the sale of
over-the-counter drugs. We will also be subject to federal, state and local
licensing and registration regulations with respect to, among other things, our
pharmacy operations. Regulations in this area often require subjective
interpretation, and we cannot be certain that our attempts to comply with these
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regulations will be deemed sufficient by the appropriate regulatory agencies.
Violations of any regulations could result in various civil and criminal
penalties, including suspension or revocation of our licenses or registrations,
seizure of our inventory, or monetary fines.
Automated prescribing and the electronic routing of prescriptions to
pharmacies are governed by state and federal law. States have varying
prescription format requirements, which may be incorporated into ReadyScript.
All states permit electronic, faxed and/or written prescriptions. Many existing
laws and enacted regulations 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.
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. However,
until these regulations become final, they could change, which could cause us to
use additional resources and lead to delays in order to revise our web site and
operations. In addition our success depends on other healthcare industry
participants complying with these regulations.
Although the U.S. Food and Drug Administration ("FDA") does not regulate
the practice of pharmacy, other than pharmacy compounding(which we currently do
not plan to engage in), FDA regulations impact some of our planned 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. Complying with FDA
regulations is time-consuming, burdensome and expensive and could delay our
introduction of new products or services.
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. It may
be expensive to implement security or other measures designed to comply with any
new legislation. Moreover we may be restricted or prevented from delivering
patient records electronically. Such added expense or restrictions could have a
material adverse effect on our business, prospects, financial condition and
results of operation.
For our existing diagnostic products business, we are 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 Quality System Regulations, labeling and Medical Device
Reporting 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
U.S. Department of Agriculture, one expiring on January 28, 2000 and the other
expiring on June 30, 2000. There can be no assurance that such permits can be
renewed, or renewed on a timely basis, which could harm us.
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RISKS RELATED TO THIS OFFERING
WE WILL NEED ADDITIONAL CAPITAL IN THE FUTURE.
The proceedings of this offering are expected to be sufficient to meet our
cash requirements for at least the next 12 months. However, we may need to raise
additional funds in the future to:
- develop and/or enhance existing services or products;
- respond to competitive relationships; or
- acquire complementary businesses, technologies, content or product.
We cannot assure you that additional financing will be available on terms
favorable to us, or at all. If adequate funds are not available or are not
available on acceptable terms, our ability to fund our expansion, take advantage
of unanticipated opportunities, develop or enhance services or products or
otherwise respond to competitive pressures would be significantly limited. If we
raise additional funds by issuing equity or convertible debt securities, the
percentage ownership of our stockholders will be reduced, and these securities
may have rights, preferences or privileges senior to those of our stockholders.
OUR STOCK PRICE WILL FLUCTUATE AFTER THIS OFFERING, WHICH COULD RESULT IN
SUBSTANTIAL LOSSES FOR INVESTORS.
Although the offering price will be determined based upon several factors,
the market price for our common stock will vary from the offering price after
this offering. This could result in substantial losses for investors. The market
price of our common stock may fluctuate significantly in response to a number of
factors, some of which are beyond our control. The factors include:
- quarterly variations in operating results;
- changes in financial estimates by securities analysts;
- announcements by us or our competitors of new products, significant
contracts, acquisitions or strategic relationships;
- publicity about our Company, our products and services, our competitors,
or e-commerce in general;
- additions or departures of key personnel;
- any future sales of our common stock or other securities; and
- stock market price and volume fluctuations of publicly-traded companies
in general and Internet-related companies in particular.
The trading prices of Internet-related companies and e-commerce companies
in particular have been especially volatile and many are at or near historical
highs. Investors may be unable to resell their shares of our common stock at or
above the offering price. In the past, securities class action litigation has
often been brought against a company following periods of volatility in the
market price of its securities. We may be the target of similar litigation in
the future. Securities litigation could result in substantial costs and divert
management's attention and resources, which could seriously harm our business
and operating results
WE HAVE DISCRETION TO USE THE OFFERING PROCEEDS AND HOW WE INVEST THESE PROCEEDS
MAY NOT YIELD A FAVORABLE RETURN.
Most of the net proceeds of this offering are not allocated for specific
uses. Our management has broad discretion to spend the proceeds from this
offering in ways with which
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stockholders may not agree. The failure of our management to apply these funds
effectively could result in unfavorable returns. This could have significant
adverse effects on our financial condition and could cause the price of our
stock to decline.
OUR EXECUTIVE OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS WILL CONTROL % OF
OUR COMMON STOCK AFTER THIS OFFERING.
After this offering, executive officers, directors and holders of 5% or
more of our common stock will, in the aggregate, beneficially own % of our
outstanding common stock. These stockholders would be able to significantly
influence all matters requiring approval by our stockholders, including the
election of directors and the approval of significant corporate transactions.
This concentration in ownership may make some transactions more difficult or
impossible to complete without the support of these stockholders.
IT MAY BE DIFFICULT FOR A THIRD-PARTY TO ACQUIRE OUR COMPANY, AND THIS COULD
DEPRESS OUR STOCK PRICE.
Delaware corporate law, our amended and restated certificate of
incorporation, which has been approved by our board of directors but is subject
to the approval of our stockholders at our annual meeting on October 25, 1999,
and our bylaws contain provisions that could delay, defer or prevent a change in
control of our Company or our management. These provisions could also discourage
proxy contests and make it more difficult for you and other stockholders to
elect directors and take other corporate actions. As a result, these provisions
could limit the price that investors are willing to pay in the future for shares
of our common stock. These provisions, if approved by our stockholders, will:
- authorize us to issue "blank check" preferred stock, which is preferred
stock that can be created and issued by the board of directors without
prior stockholder approval, with rights senior to those of common stock;
- prohibit stockholder action by written consent; and
- establish advance notice requirements for submitting nominations for
election to the board of directors and for proposing matters that can be
acted upon by stockholders at a meeting.
WE ARE LISTED ON THE NASDAQ SMALLCAP MARKET AND ARE SUBJECT TO DELISTING UNDER
CERTAIN CIRCUMSTANCES.
We must maintain a minimum bid price and certain capitalization levels as
required by NASD Marketplace Rule 4310(c). We may not be able to comply with
these requirements in the future and this could impair our ability to remain
listed on the Nasdaq SmallCap Market. If our common stock is delisted from the
Nasdaq SmallCap Market, this could adversely affect the market price of our
common stock and would make it more difficult to trade our common stock.
THE BOOK VALUE OF THE SHARES YOU PURCHASE WILL BE SUBSTANTIALLY LESS THAN THE
PRICE YOU PAY FOR THE SHARES, AND IF A LIQUIDATION WERE TO OCCUR YOU MAY RECEIVE
SIGNIFICANTLY LESS THAN YOUR FULL PURCHASE PRICE FOR THE SHARES.
The offering price of the shares is substantially higher than the net
tangible book value of each outstanding share of our common stock. As a result,
purchasers of common stock in this offering will suffer immediate and
substantial dilution. This dilution will reduce the net tangible book value of
your shares, since your investment will be at a substantially higher price per
share than they were for our existing stockholders. The dilution will be
$ per share in the net tangible book value of the common stock from the
offering price. As a result of this
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dilution, stockholders purchasing stock in this offering may receive
significantly less than the full purchase price that they paid for the shares
purchased in this offering in the event of a liquidation.
SHARES ELIGIBLE FOR FUTURE SALE.
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall. Such sales also might make it more difficult for us to sell equity
or equity-related securities in the future at a time and price that we deem
appropriate. Upon completion of this offering, we will have outstanding
shares of common stock, assuming no exercise of the underwriters'
over-allotment. Other than the shares of common stock sold in this offering, and
the shares that are currently freely tradable, no shares will be
eligible for sale in the public market immediately. Certain securityholders will
be subject to agreements with the underwriters or our Company that restrict
their ability to transfer their stock for 12 months from the date of the closing
of this offering. After these agreements expire, an additional shares
will be eligible for sale in the public market, assuming no exercise of options.
In addition, shares and 1,660,000 shares underlying certain warrants
are subject to piggyback registration rights.
WE DO NOT INTEND TO PAY DIVIDENDS.
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings for funding growth and therefore,
do not expect to pay any dividends in the foreseeable future.
YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS.
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology including "could," "may," "will," "should," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "potential," or "continue," the
negative of these terms or other comparable terminology. These statements are
only predictions. Actual events or results may differ materially. In evaluating
these statements, you should specifically consider various factors, including
the risks described above and in other parts of this prospectus. These factors
may cause our actual results to differ materially from any forward-looking
statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of the
forward-looking statements after the date of this prospectus to conform them to
actual results or to changes in our expectations.
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<PAGE> 25
USE OF PROCEEDS
If all shares of common stock we are offering are sold, we
will receive net proceeds of approximately $ (assuming the public
offering price is $ , and assuming the over-allotment option is not
exercised). If the underwriters exercise their over-allotment option, we would
receive an additional $ . Net proceeds are determined after deduction
of all commissions, discounts and expenses paid to the underwriters (estimated
to be $ ) and after deducting all expenses of the offering (estimated
to be $ ).
We have not allocated the proceeds from this offering for specific
purposes. However, we intend to use the net proceeds from this offering to
launch our online pharmacy; to develop, beta-test and launch our ReadyScript
service; to expand sales and marketing; and for working capital and general
corporate purposes.
We may also use a portion of the net proceeds of the offering to acquire
businesses, technologies, or products complementary to our business. We do not
currently have any commitments or agreements for, and are not involved in any
negotiations for, any such acquisition.
The amount and timing of working capital expenditures may vary
significantly depending upon numerous factors, including the progress and
development of our web site, the costs involved in implementing and expanding
our business to business model, competing technological and market developments,
the development of marketing and sales capabilities, the cost and availability
of third-party financing, and administrative and legal expenses.
We believe that our available cash and existing sources of funding,
together with the proceeds of this offering and interest earned thereon, will be
adequate to maintain our current and planned operations for at least the next 12
months.
Until used, we intend to invest the net proceeds of this offering in
interest-bearing, investment-grade securities. While the net proceeds are so
invested, the interest earned by us on such proceeds will be limited by
available market rates. We intend to invest and use such proceeds so as not to
be considered an "investment company" under the Investment Company Act of 1940,
as amended.
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<PAGE> 26
PRICE RANGE OF COMMON STOCK
Our common stock is currently traded on the Nasdaq SmallCap Market under
the symbol "BMRA." The following table sets forth, for the periods indicated,
the range of the high and low closing bid prices of our common stock on the
Nasdaq SmallCap Market as reported by Nasdaq Trading and Market Services. These
quotations reflect inter-dealer prices, without mark-up, mark-down or
commission, and may not represent actual transactions.
<TABLE>
<CAPTION>
BID PRICES
-----------------
HIGH LOW
------ -------
<S> <C> <C>
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, 1998.............................................. $2.875 $1.25
February 28, 1998......................................... $3.125 $2.188
November 30, 1997......................................... $2.643 $2.164
August 31, 1997........................................... $3.104 $2.607
</TABLE>
On September 14, 1999, the closing bid price for our common stock was $2.75
and there were approximately 1,739 stockholders of record, excluding stock held
in street name.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all available funds and any future earnings for use
in the operation and expansion of our business and do not anticipate paying any
cash dividends in the foreseeable future.
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<PAGE> 27
CAPITALIZATION
The following table sets forth our capitalization as of May 31, 1999 on an
actual and as adjusted basis:
- The "actual" column reflects our capitalization as of May 31, 1999,
without any adjustments to reflect the effects of this offering.
- The "as adjusted" column reflects our capitalization as of May 31, 1999,
with adjustments to give effect to the receipt of the estimated proceeds
from the sale of our common stock offered hereby (after deducting the
estimated offering expenses and underwriting discounts and commissions).
This table should be read in conjunction with "Management's Discussion and
Analysis" and the Consolidated Financial Statements and related Notes thereto
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AT MAY 31, 1999
--------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Minority interests........................................ $ 2,437,660
----------- --------
Common stock, $0.08 par value; authorized 10,000,000
shares, 4,110,445 issued and outstanding actual,
issued and outstanding pro forma as adjusted(1)......... $ 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
----------- --------
Total capitalization...................................... $ 6,255,380 $
=========== ========
</TABLE>
- ---------------
(1) Excludes 2,021,800 shares subject to outstanding options and 1,660,000
shares of common stock issuable upon exercise of outstanding warrants as of
September 14, 1999. See "Stock Options,"Description of Securities" and Note
6 and 11 of the Notes to Consolidated Financial Statements.
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<PAGE> 28
SELECTED CONSOLIDATED FINANCIAL DATA
Our selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis" and our Consolidated
Financial Statements and related Notes thereto included elsewhere in this
prospectus. The consolidated statement of operations data set forth below for
the year ended May 31, 1998 have been derived from our Consolidated Financial
Statements, which have been audited by Corbin & Wertz, Independent Auditors. The
consolidated statement of operations data set forth below for the year ended May
31, 1999 and the selected consolidated balance sheet data as of May 31, 1999
have been derived from our Consolidated Financial Statements, which have been
audited by BDO Seidman, LLP, Independent Auditors.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MAY 31, 1999 MAY 31, 1998
(AUDITED) (AUDITED)
------------ ------------
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
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
Expenses:
Selling, general and administrative.................... $3,123,740 $3,108,149
Research and development............................... 458,610 553,740
---------- ----------
Total expenses................................. $3,582,350 $3,661,889
---------- ----------
Operating (loss) income.................................. $ (310,964) $ 230,563
Other income, net........................................ 277,060 127,263
Minority Interest........................................ (33,240) (196,169)
Provision for income taxes............................... (5,404) (20,225)
---------- ----------
Net (loss) income........................................ $ (72,548) $ 141,432
========== ==========
(Loss) earnings per share (basic)........................ $ (0.02) $ 0.04
(Loss) earnings per share (diluted)...................... $ (0.02) $ 0.03
========== ==========
Shares used in computing (loss) earnings per share:
Basic.................................................. 4,001,755 3,951,552
Diluted................................................ 4,001,755 4,061,235
========== ==========
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1999
------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................ $1,669,205
Working capital.......................................... $5,200,345
Total assets............................................. $7,849,567
Minority interest........................................ $2,437,660
Total shareholders' equity............................... $3,817,720
</TABLE>
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<PAGE> 29
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.
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<PAGE> 30
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 an 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).
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
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<PAGE> 31
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.
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
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<PAGE> 32
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.
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<PAGE> 33
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 new 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.
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,
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<PAGE> 34
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 -- improved healthcare outcomes and decreased costs.
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:
- Verbal and illegible handwritten prescriptions can be misinterpreted,
leading to dispensing errors.
- Illegible prescriptions require physicians to use their time
inefficiently in clarifying orders to pharmacists trying to decipher the
handwriting.
- Dispensing errors can produce adverse drug reactions that can seriously
jeopardize a patient's health and be costly to treat.
- 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.
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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.
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.
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<PAGE> 36
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.
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.
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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.
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
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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
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:
- 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.
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- 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.
- 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.
- 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.
- 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.
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:
- 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.
- 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.
- Increased Mail-order Pharmaceutical Fulfillment. Electronic
prescriptions routed directly to the insurer's designated mail-order
pharmacy should contribute to lower overall pharmacy costs.
- 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.
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The Patient
For patients, our next-generation online pharmacy is planned to provide
many value-added services and benefits, including:
- 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.
- 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.
- 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.
- 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.
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:
- 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.
- 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.
- 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.
- 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
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fees for electronic prescription routing, prescriptions filled through our
retail online pharmacy, and consumer product sales from our retail online
pharmacy.
- 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.
- 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.
- Experienced Management Team. Our management team has extensive medical
management, pharmacy management, healthcare administration, retail sales
and technology applications experience.
KEY STRATEGIES
To most effectively capitalize on our competitive advantages and the
revenue opportunities, we intend to:
- 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:
- PBMs;
- managed care organizations;
- insurance companies;
- pharmaceutical manufacturers;
- content and commerce portals; and
- medical groups and physicians.
- 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.
- 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.
- 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
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strategies that target and reach these chronic disease patients using
traditional media and the Internet.
- 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.
- 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).
- 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:
- industry standard prescription transmission specifications;
- Internet enabled;
- desktop or handheld technology platform;
- eligibility interface;
- insurer formulary management;
- insurer drugs of choice;
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- automated drug utilization review and prior authorization; and
- 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.
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.
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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.
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:
- easy access to a wide variety of products;
- specific product orientation for individuals with chronic medical
conditions;
- useful product information;
- targeted promotions; and
- 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
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installed, our client support services staff will work closely with physicians
to assure maximum benefit from the system.
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
- companies that market e-commerce based medication management systems to
physicians and insurers, such as Allscripts and Healtheon.
Retail
- online pharmacy product retailers, such as planetRx.com,
drugstore.com/RiteAid and Soma.com/CVS;
- chain drugstores, such as Walgreen's, RiteAid, CVS and Eckerd;
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- mass market retailers, such as Wal-mart, Kmart and Target;
- supermarkets, such as Safeway, Albertson's and Vons;
- warehouse clubs;
- cosmetic departments at major department stores, such as Nordstrom and
Macy's;
- PBMs and mail-order pharmacies, such as PCS, RiteAid, Express Scripts and
Merck-Medco; and
- 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:
- establishment of market awareness and trust;
- ease of accessibility for customers to reach us and use our site;
- ability of physician practices to easily transmit electronic
prescriptions;
- ability to accept mail-order prescriptions and be reimbursed by insurers;
- product selection, personalized service, convenience and ease of use;
- price;
- quality and layout of content; and
- 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.
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
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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.
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.
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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.
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.
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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.
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
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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.
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.
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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.
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
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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.
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>
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>
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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.
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."
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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.
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.
FACILITIES
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.
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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.
LEGAL PROCEEDINGS
We are not a party to, nor is our property the subject of, any legal
proceeding.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information with respect to our executive
officers and directors as of September 14, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- -------------------------------------
<S> <C> <C>
Zackary S. Irani, MBA................ 33 President, Chairman of the Board and
Chief Executive Officer
Peter W. McKinley, MBA............... 40 Executive Vice President of
Operations and Business Development
Jagdish Sandhu....................... 49 Chief Operating Officer, Diagnostics
Janet Moore(1)....................... 48 Secretary, Controller, Interim CFO
and Director
Philip B. Kaplan, M.D................ 67 Director
Robert A. Orlando, M.D., 60 Director
Ph.D.(1)(2)........................
David Burrows........................ 41 Director
Francis R. Cano, Ph.D.(2)............ 55 Director
Carlos St. Aubyn Beharie, M.D., 46 Director
MBA................................
</TABLE>
- ---------------
(1) Member of compensation committee
(2) Member of audit committee
Our board of directors currently consists of seven members. Until the
closing of this offering, RidgeRose Capital Partners has the right to appoint
another director to our board.
Each director is elected for a period of one year at our annual meeting of
stockholders and serves until the next annual meeting or until his successor is
duly elected and qualified. The board of directors elects executive officers on
an annual basis. Executive officers serve until their successor has been duly
elected and qualified. There are no family relationships among any of the
directors, officers or key employees of our Company except that Ms. Moore was
married to Mr. Irani's uncle, who is deceased and who previously was a
stockholder, executive officer and director of our Company.
Executive officers are appointed and serve at the discretion of the board
of directors, subject to any applicable employment contracts.
ZACKARY S. IRANI, PRESIDENT, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
Mr. Irani was appointed our President, Chairman of the Board and Chief
Executive Officer in 1997. From 1994 to 1997, as Vice President of Business
Development, he was instrumental in expanding the Company's product line and
identifying corporate opportunities to complement Biomerica's core diagnostic
test business. Mr. Irani has served as a director of Lancer Orthodontics, Inc.
since 1992, and is currently its chairman. Mr. Irani is also a director and
serving as chairman of Allergy Immuno Technologies, Inc. He serves on the board
of directors for the Irvine Institute of Medical Research, a non-profit medical
foundation. Mr. Irani earned an MBA from the University of California, Irvine in
1994 and graduated from Chapman University with a B.S. in Business in 1988.
PETER W. MCKINLEY, EXECUTIVE VICE PRESIDENT OF OPERATIONS AND BUSINESS
DEVELOPMENT
Mr. McKinley was appointed our Executive Vice President of Operations and
Business Development in 1999. From 1998 to 1999, Mr. McKinley was President and
Chief Executive Officer of IntensiCare Corporation, a specialty health services
company focused on providing
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inpatient professional services to large managed patient care populations. From
1997 to 1998, Mr. McKinley was Vice President of Business Development for
Talbert Medical Management Corporation, one of the nation's largest physician
practice management companies. From 1995 to 1997, Mr. McKinley served as Vice
President of Network Development and Provider Services at FHP Healthcare, Inc.,
a health maintenance organization. From 1990 to 1995, he held the position of
Associate Vice President at FHP. Mr. McKinley earned an MBA degree from
Pepperdine University in 1986 and a B.S. in Marketing and Finance from the
University of Southern California in 1981.
JAGDISH SANDHU, CHIEF OPERATING OFFICER, DIAGNOSTICS
Mr. Sandhu was appointed our Chief Operating Officer, Diagnostics in 1999.
From 1985 to 1990 he was the Company's General Manager. From 1990 to 1999 he
served as the Company's Production Manager. From 1978 to 1985, he worked for
Nichols Institute, Bio Rad Laboratories and Diagnostic Products. Mr. Sandhu
holds a master's degree in Biology and Chemistry.
JANET MOORE, SECRETARY, CONTROLLER, INTERIM CFO AND DIRECTOR
Ms. Moore was appointed our interim CFO in 1999. She is also our Secretary
and Controller, and has held these positions since 1985. Ms. Moore has also
served as a director since 1997. She has also served as a director for the
boards of Lancer Orthodontics, Inc. since 1997 and Allergy Immuno Technologies,
Inc. since 1986. She has a B.S. in Business Management from Pepperdine
University.
PHILIP B. KAPLAN, M.D., DIRECTOR
Dr. Kaplan was appointed to our board in 1971. He maintained a private
medical practice in Huntington Beach, California from 1966 to 1998. He is
presently semi-retired.
ROBERT A. ORLANDO, M.D., PH.D., DIRECTOR
Dr. Orlando was appointed to our board in 1986. He has served as Chief
Pathologist and Director of Laboratories for Beverly Hospital in Montebello,
California since 1991. He is a professor of pathology at Southern California
College of Optometry, and has also held faculty positions at the University of
California, Irvine, the University of Chicago, and College of Osteopathic
Medicine of the Pacific. Dr. Orlando has also served as a director for Lancer
Orthodontics, Inc. since 1989 and Allergy Immuno Technologies, Inc. since 1986.
Dr. Orlando earned his Ph.D. in Pathology from the University of Chicago and his
M.D. from New Jersey University of Medicine. He is a fellow of the College of
American Pathologists and a Fellow of the American Society of Clinical
Pathologists.
DAVID BURROWS, DIRECTOR
Mr. Burrows was appointed to our board in 1999. He is presently the Chief
Technology Officer at TheBigStore.com. Mr. Burrows is the former Director of
Information Services for the Orange County Register, one of the largest
newspapers in the country, and served as Director, IS Information Services for
FHP Healthcare, Inc., a health maintenance organization.
FRANCIS R. CANO, PH.D., DIRECTOR
Dr. Cano was appointed to our board in 1999. From 1996 to 1997 Dr. Cano
served as Senior Vice President of Biotech BDM. Prior to that time, Dr. Cano
served as President and Chief Operating Officer of Aviron, from 1992 to 1996. He
is Director of the Albert Sabin Vaccine Foundation, and is a member of various
scientific societies. He is also an accomplished author and co-author of
numerous scientific publications and holds four patents. Dr. Cano
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earned his Ph.D. in microbiology from Penn State University and a M.S. degree in
microbiology from St. John's University.
CARLOS ST. AUBYN BEHARIE, M.D., MBA, DIRECTOR
Dr. Beharie was appointed to our board in 1999. Since 1998, he has served
as Senior Vice President and Medical Director for Health Insurance Plan of New
York, one of the largest managed care companies in that state. From 1997 to
1998, Dr. Beharie served as Chief Medical Officer and Executive Vice President
of Physicians Health Services, Inc., a subsidiary of Foundation Health Systems.
From 1995 to 1997, Dr. Beharie served as acting President and Chief Executive
Officer of Physician Health Care Plan of New Jersey. Prior to 1995, he was
employed for 13 years in various positions at FHP, Inc. Dr. Beharie earned his
undergraduate and medical degrees from Boston University and an MBA degree from
the University of Phoenix. He is a fellow of the American College of OB/GYN, a
diplomat of the American Board of Medical Management, and a senior member of the
American College of Physician Executives.
KEY MANAGEMENT
RICHARD JAY, PHARM.D., VICE PRESIDENT OF PHARMACY
Dr. Jay was appointed our Vice President of Pharmacy in 1999. From 1998 to
1999, Dr. Jay held the position of Vice President, Managed Care Pharmacy for
Premier, Inc., a pharmaceutical purchasing cooperative of over 200 leading
hospitals and health systems throughout the nation. He was active in creating
and implementing a wide array of managed care pharmacy programs, including the
development of a group purchasing core formulary introduced throughout the
Premier membership. In 1997, he designed and implemented Talbert's central
pharmacy administrative support system. He worked for various divisions of FHP
Healthcare from 1971 until 1997, where he ultimately assumed the position of
senior pharmacy executive for the corporation. Dr. Jay comes to our Company with
almost 30 years of expertise in the pharmacy and healthcare services fields. Dr.
Jay earned his Pharm.D. from the University of Southern California in 1971.
STEVEN J. GOTO, CHIEF TECHNOLOGY OFFICER
Mr. Goto was appointed our Chief Technology Officer in 1999. Previously,
Mr. Goto served as Director of Information Technology of autobytel.com, Inc.,
where he directed software development and deployment, web site performance,
technology acquisition initiatives and business partnerships for the
organization. From 1996 to 1998, Mr. Goto managed the IT network and
architecture functions for Sprint PCS/Cox Communications PCS. Mr. Goto pioneered
the architecture blueprint of the Sprint PCS business applications used in
integrating 13 major IT systems for PCS service in San Diego, Orange and Los
Angeles counties. He had lead responsibility for constructing a computer data
center and multiple call centers, launching a new wireless telesales channel
provider, and designing and integrating 23 PBX systems for companywide dial
plans, paging/faxing and voicemail. From 1994 to 1996, Mr. Goto was IT Network
Manager and Business Systems Manager for Autotech Cellular. Prior to 1996, he
was employed for 15 years in project management and technical roles at General
Motors and Hughes Aircraft. His professional experience also includes Internet
design and development, strategic planning and partnerships, web site
management, data center operations, logistics systems engineering, sales
automation, and software development. Mr. Goto holds a B.S. in Industrial
Technology, Digital Electronics from California State University, Fresno.
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ADVISORY BOARD
We have enlisted the following team of advisors for our Company:
JACK D. MASSIMINO
Mr. Massimino was appointed to our advisory board in 1999. From 1996 to
1997 he was President and Chief Executive Officer of Talbert Medical Management
Corporation, one of the nation's largest physician practice management
companies. He was previously the Executive Vice President and Chief Operating
Officer of FHP International, which reorganized its medical centers in five
states and created Talbert as a separate physician practice management
organization in 1995. Mr. Massimino joined FHP in 1975 as a medical center
manager. In 1977, he oversaw all regional activities and operations relating to
the corporation's Utah expansion. In 1998, he was named Vice President of
Corporate Development. He subsequently was promoted to Senior Vice President in
1990, and Executive Vice President and Chief Operating Officer in 1991. Mr.
Massimino is a director of the American Managed Care and Review Association, a
director of the Thunderbird World Business Advisory Council, and president of
the Art Institute of Southern California Presidents Club.
JENNIFER GUTZMORE, M.D.
Dr. Gutzmore was appointed to our advisory board in 1999. Since 1997, Dr.
Gutzmore has been working as an independent healthcare consultant in Southern
California. From 1996 to 1997, she was the Chief Medical Officer and Vice
President of Healthcare Services for Talbert Medical Management Corporation, a
physician practice management company. Dr. Gutzmore was responsible for the
oversight of financial and operational performance for utilization management,
disease management, quality management, pharmacy administration, hospice, home
health, social services, claims and other functions. From 1985 to 1996, Dr.
Gutzmore held various medical and management positions at FHP Healthcare, Inc.
She was Senior Medical Director for Healthcare Delivery from 1990-1992; Senior
Medical Director for Medicare Risk from 1992-1994; and Associate Vice President
of Medical Affairs from 1994-1996. Dr. Gutzmore possesses more than 20 years of
experience as a physician and medical executive. She is an internist who
received her M.D. from George Washington University and completed her residency
training at the Henry Ford Health System. Dr. Gutzmore is a member of the
American College of Physician Executives.
SANDY T. SHERWOOD, PH.D.
Dr. Sherwood was appointed to our advisory board in 1999. She is a
Naturopathic Doctor, Homeopathic doctor, and a Master Herbalist. She is a
Certified Nutritional Specialist, certified in both Traditional Chinese Medicine
and Ayurvedic Medicine. She works with multiple nutritional supplement
companies, representing them in both national and international negotiations.
She is past Regional Executive Director for the National Nutrition Food
Association, and the former Director of the Center for Advancement of Health and
Fitness. Dr. Sherwood was recognized by the Indian Board of Alternative
Medicines, Calcutta, India with an award for her contribution to the field of
holistic health and education. She is also listed in "Yearbook of Experts,
Authorities and Spokespersons," and in "Who's Who in the World." Dr. Sherwood
holds Ph.D.s in Nutrition and Psychology.
DAVID A. SHIER
Mr. Shier was appointed to our advisory board in 1999. He is Chairman and
President of Shier Systems & Software, Inc., a company engaged in the
development of software and custom hardware solutions for the handheld computer
market. Prior to establishing SS&S, Inc. in 1994, Mr. Shier worked for 16 years
in software engineering, developing and marketing
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<PAGE> 60
electronic test equipment for the aerospace industry. Major clients have
included Boeing and Northrop/Grumman. Mr. Shier is also a contributing editor to
Handheld PC Magazine, a leading publication for Windows CE users, and has been
published in numerous technical trade publications for the electronic testing
industry.
CARL N. MERKLE, CPA
Mr. Merkle was appointed to our advisory board in 1999. He is a CPA in the
state of California. From 1997 to 1999, he was the Director of Corporate
Projects for Shier Systems & Software, Inc. where he was responsible for
managing delivery of mobile computing and communications business solutions to
corporate accounts. Prior to 1997, Mr. Merkle served as an accountant and
consultant with Ernst & Young, LLP. He brings extensive experience in financial
and operational analysis, cash flow modeling, needs assessment, network cost
estimation, competitive multi-vendor bid package negotiations, and project
drafting and monitoring. While there, he was as senior manager responsible as
the primary lead manager for large-scale multi-disciplinary projects. Mr. Merkle
has also been an editor for the HP Palmtop Paper and the Handheld PC Magazine.
WILLIAM J. VAN ETTEN, PH.D.
Dr. Van Etten was appointed to our advisory board in 1999. He is a
Bioinformaticist at the Massachusetts Institute of Technology/Whitehead
Institute, Center for Genomic Research. Since 1998, he has held positions as a
scientific programmer and senior software engineer, responsible for providing
informatics support for the generation of rat, mouse and human whole genome
maps, developing high-throughput workflows for data management and analysis.
Prior to MIT, Dr. Van Etten taught biology and genetics at Indiana University
and Miami University of Ohio. He also worked as a systems administrator, network
administrator and webmaster, and has been a software developer for numerous
e-commerce web sites. He holds a Ph.D. in Genetics, and has one patent pending.
BOARD COMMITTEES
Our board of directors has a compensation committee and an audit committee.
Compensation Committee
The compensation committee of our board of directors reviews and makes
recommendations to the board regarding all forms of compensation and benefits
provided to our officers. In addition, the compensation committee establishes
and reviews general policies relating to the compensation and benefits of all of
our employees. Our compensation committee comprises Dr. Robert A. Orlando and
Ms. Janet Moore.
Audit Committee
The audit committee of our board of directors reviews and monitors our
internal accounting procedures, corporate financial reporting, external and
internal audits, the results and scope of the annual audit and other services
provided by our independent auditors, and our compliance with legal matters that
have a significant impact on our financial reports. Our audit committee
comprises Dr. Robert A. Orlando and Dr. Francis R. Cano.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our board of directors established our compensation committee in 1999.
Prior to establishing the compensation committee, the board of directors as a
whole performed the functions delegated to the compensation committee. No
interlocking relationship exists between our board of directors or our
compensation committee and the board of directors or
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compensation committee of any other company, and no interlocking relationship
existed in the past.
DIRECTOR COMPENSATION
We currently do not provide any cash compensation to our directors for
their service as members of the board of directors, although we do reimburse the
directors for certain expenses in connection with attendance at board and
committee meetings. Under our stock plan, non-employee directors are eligible to
receive stock option grants at the discretion of the board or any other
administrator of the plan.
EXECUTIVE COMPENSATION
The following table sets forth the compensation received for services
rendered to our Company for the fiscal year ended May 31, 1999 by our Chief
Executive Officer, and each of the other executive officers of our Company who
made in excess of $100,000 for each of the last three fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------ ---------------------------------
AWARDS
----------------------- PAYOUTS
RESTRICTED SECURITIES -------
OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARD(S) OPTIONS/ PAYOUTS COMPENSATION
POSITION YEAR ($)(1) ($) ($) ($) SARS(#) ($) ($)
- ------------------ ---- ------ ----- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Zackary S. Irani..... 1999 69,452 -0- -0- -0- 25,700 -0- -0-
Chairman of the
Board, 1998 64,352 -0- -0- -0- 64,000 -0- -0-
CEO and President 1997 41,948(2) -0- -0- -0- 40,000 -0- -0-
</TABLE>
- ---------------
(1) The amounts described in the Summary Compensation Table above do not include
other compensation and benefits provided to Mr. Irani during the fiscal year
ended May 31, 1999. The aggregate did not exceed the lesser of $50,000 or
10% of his annual salary and bonus.
(2) Includes $4,000 cash compensation paid to Mr. Irani for services rendered as
our CEO and Treasurer.
EMPLOYMENT AGREEMENTS
On August 12, 1999, we entered into a letter agreement with Mr. Peter W.
McKinley, our Executive Vice President of Operations and Business Development,
regarding the terms of his employment. This agreement provides for an annual
base salary of $120,000 and a bonus of $50,000 upon reaching specific
performance milestones. The agreement also provides for the grant of a
non-qualified option to purchase 72,000 shares of our restricted common stock,
and an additional option grant to purchase 10,000 shares of our restricted
common stock upon reaching specific performance milestones.
On July 2, 1999, we entered into a letter agreement with Richard Jay,
Pharm.D., our Vice President of Pharmacy, regarding the terms of his employment.
This agreement has a one-year term commencing on July 26, 1999. It provides for
an annual base salary of $156,000. This agreement also provides for the grant of
an option to purchase 72,000 shares of our restricted common stock, and an
additional option grant to purchase 18,000 shares of our restricted common stock
upon reaching specific performance milestones.
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On August 30, 1999, we entered into an employment agreement with Mr. Steven
J. Goto, our Chief Technology Officer, regarding the terms of his employment.
This agreement has a one-year term commencing on September 14, 1999. It provides
for an annual base salary of $150,000 and for an incentive bonus of up to
$30,000 upon reaching specific performance milestones. This agreement also
provides for the grant of an option to purchase 62,000 shares of our restricted
common stock. The agreement also provides that we will pay Mr. Goto a lump-sum
cash payment equal to the amount of the remaining base salary and benefits to be
paid to Mr. Goto through the remainder of the term of this agreement in the
event that he is terminated without cause as defined in the agreement.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning stock options granted
in the fiscal year ended May 31, 1999, to our Chief Executive Officer.
INDIVIDUAL GRANTS(1)
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE EXPIRATION
NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) DATE
- ---- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Zackary S. Irani............... 700 0.38% $0.85 11/01/03
25,000 13.62% $0.86 02/28/04
</TABLE>
- ---------------
(1) All options granted during the fiscal year ended May 31, 1999 vest in
accordance with our standard vesting schedule.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table presents information for the named officer in the
Summary Compensation Table with respect to options exercised during fiscal 1999
and unexercised options held as of the end of the fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
SHARES AT FISCAL YEAR-END FISCAL YEAR-END
ACQUIRED ON VALUE (#) EXERCISABLE/ ($) EXERCISABLE/
NAME EXERCISE (#) REALIZED(1)($) UNEXERCISABLE UNEXERCISABLE
- ---- ------------ -------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Zackary S. Irani..... -0- -0- 78,950/60,750 $66,755/$57,400
</TABLE>
- ---------------
(1) Based on the closing price of $2.50 for the last business day of the fiscal
year ended May 31, 1999.
STOCK OPTIONS
Under the 1991 Stock Option and Common Stock Plan (the "1991 Plan"), we are
authorized to grant stock options and issue restricted stock to employees,
consultants, advisors, independent contractors and agents of our Company or any
of our subsidiaries, through December 3, 2001. Under the plan 350,000 shares
have been authorized for grant or issuance. Stock options granted under the 1991
Plan shall be granted at an option price not less than 100%, in the case of
incentive stock options, and not less than 85%, in the case of non-qualified
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stock options, of the fair market value of our stock on the date of the award of
the stock option. Most options granted under the 1991 Plan to date expire five
years from the date of their respective grant and all were granted at fair
market value on the date of grant. As of September 14, 1999, options to purchase
36,550 shares of our common stock were outstanding, at exercise prices ranging
from $0.80 to $0.86 per share with an average exercise price of $0.83 per share.
Under the 1995 Stock Option and Restricted Stock Plan (the "1995 Plan"),
which expires November 9, 2005, and is a plan similar in format to the 1991
Plan, 500,000 shares may be authorized for grant or issuance. As of September
14, 1999, options to purchase 405,250 shares of our common stock were
outstanding under the 1995 Plan at exercise prices ranging from $0.85 to $3.00
per share with an average exercise price of $1.44 per share.
The Board of Directors has approved for adoption a 1999 Stock Incentive
Plan covering 1,000,000 shares of common stock, which is subject to stockholder
approval at the annual meeting in October 1999.
In June, 1999, Zackary Irani was granted options to purchase 1,000,000
shares at $3.00 per share. In addition, 580,000 stock options have been granted
to officers, directors, employees and non-employees at exercise prices ranging
from $2.06 to $3.00 per share.
the market price.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We leased approximately 21,000 square feet of office and laboratory space
located at 1531-1533 Monrovia Avenue, Newport Beach, California, pursuant to a
written lease 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. During the year ended May 31, 1999, and May 31, 1998
we paid $142,640 and $128,640, respectively, in rent under the terms of the
lease, and issued in 1999 to Mrs. Ilse Sultanian and JSJ Management an aggregate
of 31,793 shares of our restricted common stock in lieu of paying accrued and
unpaid rent of $38,000. The shares were issued at quoted market prices. The
facilities are leased from Mrs. Sultanian and JSJ Management. Ms. Janet Moore,
an officer, director and shareholder of our Company, is a partner in JSJ
Management.
On June 11, 1999, pursuant to a stock purchase agreement, we sold 50,000
shares of our restricted common stock to Mr. Zackary Irani and Ms. Janet Moore
at a purchase price of $5.00 per share. Both Mr. Irani and Ms. Moore are
officers, directors, and shareholders of our Company.
On June 11, 1999, we entered into a five-year agreement with
TheBigStore.com. Pursuant to the terms of the agreement, as amended,
TheBigStore.com will provide us with back-end processing services for our web
site in exchange for a warrant to purchase 410,000 shares of our common stock at
an exercise price of $5.00 per share. The warrants vest immediately prior to a
public offering of our common stock. The agreement also provides that
TheBigStore.com will transfer and assign to us its right, title and interest in
and to the Internet domain name "TheBigRX.com" and all rights to any trademark
related thereto.
On June 10, 1999, we granted to RJM Consulting, LLC a warrant to purchase
1,000,000 shares of our common stock at an exercise price of $3.00 per share.
The warrant was granted as consideration for its services in helping us raise
equity capital and for introducing us to
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TheBigStore.com. The warrants vest immediately prior to a public offering of our
common stock.
On September 2, 1999, we entered into a five-year agreement with
TheBigHub.com. Pursuant to the terms of the agreement, TheBigHub.com will
provide us with strategic placement of advertising and marketing on its web site
in exchange for a warrant to purchase 250,000 shares of our common stock at an
exercise price of $5.00 per share. The warrants vest immediately prior to a
public offering of our common stock.
In the opinion of the disinterested members of our board of directors, the
above transactions were fair and were made upon terms which were no less
favorable to us than would have been obtained if negotiated with unaffiliated
third-parties.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 14, 1999, certain
information as to shares of common stock owned by (i) each person known to
beneficially own more than 5% of the outstanding common stock, (ii) each
director, including nominees for director, and each executive officer of the
Company, and (iii) all executive officers and directors of the Company as a
group. Unless otherwise indicated, each person listed has sole voting and
investment power over the shares beneficially owned by him or her. Unless
otherwise indicated, the address of each named beneficial owner is the same as
that of the Company's principal executive offices located at 1533 Monrovia
Avenue, Newport Beach, California 92663.
<TABLE>
<CAPTION>
SHARES OF PERCENTAGE PERCENTAGE
COMMON STOCK BENEFICIALLY BENEFICIALLY
NAME (AND ADDRESS) OF BENEFICIALLY OWNED OWNED
BENEFICIAL OWNER(1)(2) OWNED(3) BEFORE OFFERING AFTER OFFERING
- ---------------------- ------------ --------------- --------------
<S> <C> <C> <C>
Janet Moore(4)................................ 523,158 11.5% --%
Zackary S. Irani(5)........................... 109,950 2.4% --%
Dr. Robert A. Orlando(1)(6)................... 22,000 * *
Jagdish Sandhu(1)(7).......................... 6,825 * *
Philip B. Kaplan, M.D.(1)(8).................. 4,750 * *
Carlos St. Aubyn Beharie M.D., MBA(1)(11)..... 5,600 * *
Francis R. Cano, Ph.D.(1)..................... 0 0 0
David Burrows(1)(11).......................... 0 0 0
Peter W. McKinley............................. 0 0 0
RidgeRose Capital Partners, LLC(1)(9)......... 760,000 15.4% --%
Stilden Co., Inc.(1)(10)...................... 1,150,000 20.2% --%
All executive officers and directors as a
group (9 persons)........................... 672,283 14.5% --%
</TABLE>
- ---------------
* Less than one percent (1%) of the outstanding shares of common stock.
(1) Dr. Orlando's address is 947 West 30th Street, Los Angeles, CA 92034; Dr.
Kaplan's address is 1613 Chaparral Summit Drive, Las Vegas, NV 89117; Mr.
Sandhu's address is 25441 Champlain, Laguna Hills, CA 92653; Dr. Beharie's
address is 583 Cherry Hill Road, Princeton, NJ 08540; Dr. Cano's address is
11 Acorn Lane, Los Altos, CA 94022; Mr. Burrows' address is 3388 Via Lido,
Newport Beach, CA 92663; RidgeRose Capital Partners, LLC's address is 3388
Via Lido, Newport Beach, CA 92663; and Stilden Co., Inc.'s address is 2939
Moss Rock, Suite 100, San Antonio, TX 78230.
(2) Beneficial ownership has been determined in accordance with Rule 13d-3
under the Securities and Exchange Act of 1934. Pursuant to the rules of the
Securities and Exchange Commission, shares of common stock that each named
person and group has the right to acquire within 60 days pursuant to
options, warrants, conversion privileges or other rights, are deemed
outstanding for purposes of computing shares beneficially owned by and the
percentage ownership of each such person and group. However, such shares
are not deemed outstanding for purposes of computing the shares
beneficially owned by or percentage ownership of any other person or group.
(3) Unless otherwise noted, all shares listed are owned of record and the
record owner has sole voting and investment power, subject to community
property laws where applicable and the information contained in the
footnotes to this table.
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(4) Includes 6,200 shares underlying options exercisable by Ms. Moore at or
within 60 days after the date hereof and 8,250 shares owned by Ms. Moore's
minor children.
(5) Includes 81,450 shares underlying options exercisable by Mr. Irani at or
within 60 days after the date hereof.
(6) Includes 8,000 shares underlying options exercisable by Dr. Orlando at or
within 60 days after the date hereof.
(7) Includes 6,825 shares underlying options exercisable by Mr. Sandhu at or
within 60 days after the date hereof.
(8) Includes 2,750 shares underlying options exercisable by Dr. Kaplan at or
within 60 days after the date hereof.
(9) Includes 410,000 shares underlying warrants exercisable by TheBigStore.com
at or within 60 days after the date hereof. RidgeRose is deemed to be the
beneficial owner of the shares owned by TheBigStore.com by virtue of its
status as a controlling shareholder of that entity. Mr. Robert J. McNulty
is deemed to be the beneficial owner of the shares owned by RidgeRose
Capital Partners, LLC by virtue of his status as its sole manager.
(10) Includes 410,000 shares underlying warrants exercisable by TheBigStore.com
and 250,000 shares underlying warrants exercisable by TheBigHub.com.
Stilden Co., Inc. is deemed to be the beneficial owner of the shares owned
by both TheBigStore.com and TheBigHub.com by virtue of its status as a
controlling shareholder of both entities. Frank Denny is deemed to be the
beneficial owner of the shares owned by Stilden Co., Inc. by virtue of his
status as its controlling shareholder. Also includes 490,000 shares
underlying warrants exercisable within 60 days of the date hereof. These
warrants were assigned to Stilden Co., Inc. by RJM Consulting, LLC, an
entity controlled by Mr. Robert J. McNulty, pursuant to their agreement.
(11) Dr. Beharie and Mr. Burrows were nominated to our board of directors by
RidgeRose Capital Partners, LLC pursuant to the terms of a Stock Purchase
Agreement.
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DESCRIPTION OF SECURITIES
The following description of our capital stock does not purport to be
complete and is subject to, and qualified in its entirety by, our certificate of
incorporation and bylaws and by the provisions of applicable law. Upon closing
of this offering and subject to stockholder approval of our amended and restated
certificate of incorporation at our annual meeting to be held in October 1999,
our authorized capital stock will consist of 25,000,000 shares of common stock,
$0.08 par value per share, and 5,000,000 shares of preferred stock, $0.08 par
value per share.
COMMON STOCK
As of September 14, 1999, there were 4,530,695 shares of our common stock
outstanding held by 1,739 holders of record. The holders of common stock are
entitled to one vote for each share held of record on all matters submitted to a
vote of the stockholders. The holders of common stock are not entitled to
cumulative voting rights with respect to the election of directors, and as a
consequence, minority stockholders will not be able to elect directors on the
basis of their votes alone. Subject to preferences that may be applicable to any
shares of preferred stock issued in the future, holders of common stock are
entitled to receive ratably dividends as may be declared by our board out of
funds legally available therefor. In the event of a liquidation, dissolution or
winding up of our Company holders of the common stock are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preference of any then outstanding preferred stock. Holders of common stock have
no preemptive rights and no right to convert their common stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
common stock. All outstanding shares of common stock are, and all shares of
common stock to be outstanding upon completion of this offering will be, fully
paid and nonassessable.
PREFERRED STOCK
Upon the completion of this offering, and subject to the approval of our
stockholders at our annual meeting to be held in October 1999, the board of
directors will have the authority, without further action by the stockholders,
to issue up to 5,000,000 shares of preferred stock in one or more series and to
fix the rights, preferences, privileges and restrictions of these shares of
preferred stock without any further vote or action by stockholders. These rights
and preferences include dividend rights, conversion rights, voting rights, terms
of redemption, liquidation preferences, sinking fund terms and the number of
shares constituting any series or the designation of the series. The issuance of
preferred stock could adversely affect the voting power of holders of common
stock and the likelihood that the holders will receive dividend payments and
payments upon liquidation and could have the effect of delaying, deferring or
preventing a change in control. We have no present plan to issue any shares of
preferred stock.
OPTIONS AND WARRANTS
As of September 14, 1999, options to purchase a total of 2,021,800 shares
of our common stock were outstanding.
Subject to approval of our stockholders at our annual meeting in October,
the total number of shares of our common stock that may be subject to the
granting of options under the 1999 Stock Incentive Plan shall be equal to
1,000,000 shares of common stock.
As of September 14, 1999, there was a warrant outstanding to purchase
410,000 shares of our common stock at $5.00 per share, which expires on June 11,
2004; one warrant outstanding to purchase 250,000 shares of our common stock at
$5.00 per share, which expires on September 2, 2004; and one warrant outstanding
to purchase 1,000,000 shares of our common stock at $3.00 per share, which
expires on June 10, 2004. These warrants become vested
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immediately prior to a public offering, and the holders thereof have piggyback
registration rights as to the shares underlying the warrants.
DELAWARE ANTI-TAKEOVER LAW AND CHARTER PROVISIONS
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law, an anti-takeover law. In general, the statute prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of Section
203 of the Delaware General Corporation Law, a "business combination" includes a
merger, asset sale or other transaction resulting in a financial benefit to the
interested stockholder. An "interested stockholder" is a person who, together
with affiliates and associates, owns (or within three years prior, did own) 15%
or more of the corporation's voting stock.
Effective upon the closing of this offering, our certificate of
incorporation and bylaws, among other things, require that any action required
or permitted to be taken by stockholders be effected at a duly called annual or
special meeting of the stockholders and may not be effected by a consent in
writing, require that advance notice be given on stockholder proposals and
director nominations and prohibit cumulative voting in the election of
directors. The certificate of incorporation authorizes the board of directors to
issue up to 5,000,000 shares of preferred stock and to determine the rights,
preferences and privileges of these shares of preferred stock without any
further vote or action by the stockholders, specifies that the authorized number
of directors may be changed only by a resolution of the board of directors.
Special meetings of the stockholders may be called only by the board of
directors, the chairman of the board of directors or the Chief Executive
Officer. The provisions described above could have the effect of making it more
difficult for a third-party to acquire a majority of our outstanding voting
stock, or delay, prevent or deter a merger, acquisition or tender offer in which
our stockholders could receive a premium for their shares, a proxy contest or
other change in our management.
TRANSFER AGENT AND REGISTRAR
U.S. Stock Transfer Corporation acts as transfer agent and registrar for
our common stock.
UNDERWRITING
Certain persons who participate in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the shares, including
purchases of shares to maintain their market price or purchases to cover some or
all of the underwriters' short position in the shares.
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement"), we have agreed to sell to the underwriters named
below, and they agreed to purchase, the number of shares of our common stock set
forth opposite their name.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
<S> <C>
EBI Securities Corporation.......................
Total..................................
</TABLE>
The Underwriting Agreement provides that the obligations of the
underwriters is subject to approval of certain legal matters by counsel and to
various other conditions. The nature of the underwriters' obligations is such
that it is committed to purchase and pay for all of the above shares of our
common stock if any are purchased. The underwriters propose to offer the shares
66
<PAGE> 69
of our common stock directly to the public at the public offering price set
forth on the cover page of this Registration Statement.
We have granted to the underwriters a 30-day over-allotment option to
purchase up to additional shares of our common stock at the
public offering price less the underwriting discount. The underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of the shares of common stock offered hereby.
We have also agreed to sell to the representative of the underwriters, for
nominal consideration, warrants (the "Representative's Warrants") to purchase
the number of shares of our common stock equal to percent
( %) of the total number of shares of our common stock registered at a price
per share equal to [ ]. The Representative's Warrants will be exercisable
for a period of ( ) years commencing one (1) year from the
effective date of this Registration Statement and will contain certain demand
and "piggyback" registration rights with respect to the common stock issuable
upon the exercise of the Representative's Warrants. The Representative's
Warrants are not transferable (except to members of the syndicate and their
affiliates). The exercise price and the number of shares issuable upon exercise
may, under certain circumstances, be subject to adjustment pursuant to
antidilution provisions.
We have agreed to allow the underwriters a commission of percent
( %) of the public offering price of the shares of common stock.
Additionally, we will be paying the underwriters, following the closing of this
offering, a nonaccountable expense allowance equal to three percent (3%) of the
aggregate public offering price of the shares of common stock, less any
applicable deposits.
We have further agreed to indemnify the underwriters against certain
liabilities, losses and expenses, including liabilities under the Securities
Act, or to contribute to payments that the underwriters may be required to make
in respect thereof. We also have agreed to reimburse the underwriters for
certain out-of-pocket expenses incurred in connection with the offering.
The underwriters have advised us that they do not intend to make sales to
discretionary accounts.
Our officers, directors and other security holders who in the aggregate
beneficially own [ ] shares of our common stock have agreed not to, directly
or indirectly, sell, offer, contract to sell, make any short sale, pledge or
otherwise dispose of such shares for a period of twelve (12) months after the
date of the closing of this offering.
In connection with this offering certain underwriters may engage in passive
market making transactions in the shares in accordance with Rule 103 of
Regulation M. Further, the underwriters' selling group members and their
respective affiliates may engage in transactions that stabilize, maintain or
otherwise affect the market price of our shares. These transactions may include
stabilization transactions permitted by Rule 104 of Regulation M, under which
persons may bid for or purchase shares to stabilize the market price. The
underwriters may also create a "short position" for their own account by selling
more shares in the offering than they are committed to purchase, and in that
case they may purchase shares in the open market after this offering is
completed to cover all or a part of their short position.
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of our
common stock offered hereby will be passed upon for us by Jeffers, Shaff & Falk,
LLP, Irvine, California. Certain legal matters in connection with the offering
will be passed upon for the underwriters by Troy & Gould, a Professional
Corporation, Los Angeles, California. Mr. Barry D. Falk, a
67
<PAGE> 70
partner in Jeffers, Shaff & Falk, LLP, holds options and warrants to purchase up
to an aggregate of 100,000 shares of our common stock.
CHANGE IN CERTIFYING ACCOUNTANTS
Effective April 13, 1999, our Company's board of directors approved the
engagement of BDO Seidman, LLP to serve as our independent public accountants
and to conduct the audit of our financial statements for the ensuing fiscal year
ending May 31, 1999. In connection with the engagement of BDO Seidman, LLP, we
dismissed Corbin & Wertz, who had been engaged to audit our financial statements
for the prior fiscal years. The audit reports provided by Corbin & Wertz for the
fiscal years ended May 31, 1998 and 1997 did not contain any adverse opinion or
a disclaimer of opinion nor was any report modified as to uncertainty, audit
scope, or accounting principles. There were no disagreements between management
and Corbin & Wertz on any matter of accounting principles or practices,
financial statement disclosure or auditing, scope, or procedure. Prior to the
engagement of BDO Seidman, LLP there were no consultations by us and BDO
Seidman, LLP relating to disclosable disagreements with Corbin & Wertz, how
accounting principles would be applied by BDO Seidman, LLP to a specific
transaction, or the type of an opinion BDO Seidman, LLP might render.
EXPERTS
Our audited Consolidated Financial Statements included in this prospectus
and elsewhere in the Registration Statement have been audited by BDO Seidman,
LLP, Certified Independent Public Accountants, or Corbin & Wertz, Irvine,
California, Independent Public Accountants, to the extent and for the periods
set forth in their reports appearing elsewhere herein and in the Registration
Statement, and are included in reliance upon such reports given upon the
authority of said firms as experts in auditing and accounting.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (the "Registration Statement") under the
Securities Act with respect to the securities offered hereby. This prospectus
does not contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. For further information with respect to us and this offering,
reference is made to the Registration Statement, including the exhibits and
schedules filed therewith, copies of which may be obtained at prescribed rates
from the Commission at its principal office at 450 Fifth Street N.W.,
Washington, D.C. 20549, and at the following regional offices of the Commission:
75 Park Place, New York, New York 10007, and Northwestern Atrium Center, 500
West Madison Street, Suite 1400 Chicago, Illinois, 60604. In addition, the
Commission maintains a World Wide Web site on the Internet at http://www.sec.gov
that contains reports, proxy and information statements and other documents
filed electronically with the Commission, including the Registration Statement.
Descriptions contained in this prospectus as to the contents of any agreement or
other documents filed as an exhibit to the Registration Statement are not
necessarily complete and each such description is qualified by reference to such
agreement or document.
We intend to furnish to our stockholders annual reports containing
financial statements audited and reported upon by our independent public
accountants.
68
<PAGE> 71
BIOMERICA, INC. AND SUBSIDIARIES
CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Certified Public Accountants, BDO
Seidman, LLP.............................................. F-2
Independent Auditors' Report, Corbin & Wertz................ F-3
Consolidated Financial Statements
Consolidated Balance Sheet as of May 31, 1999............. F-4
Consolidated Statements of Operations and Comprehensive
(Loss) Income for the Years Ended May 31, 1999 and
1998, respectively..................................... F-5
Consolidated Statements of Shareholders' Equity for the
Years Ended May 31, 1999 and 1998...................... F-6
Consolidated Statements of Cash Flows for the Years Ended
May 31, 1999 and 1998.................................. F-7
Notes to Consolidated Financial Statements................ F-8
</TABLE>
F-1
<PAGE> 72
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.
BDO SEIDMAN, LLP
Costa Mesa, California
July 29, 1999
F-2
<PAGE> 73
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.
CORBIN & WERTZ
Irvine, California
July 24, 1998
F-3
<PAGE> 74
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
MAY 31,
1999
-----------
<S> <C>
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
===========
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
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 75
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS) INCOME
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
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
---------- ----------
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
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 76
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
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
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
========= ======== =========== ======== ======== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 77
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
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)
---------- ----------
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
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 78
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.
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.
F-8
<PAGE> 79
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Inventories consist of the following:
<TABLE>
<CAPTION>
MAY 31,
1999
----------
<S> <C>
Raw materials............................................... $ 746,386
Work in progress............................................ 500,805
Finished products........................................... 1,807,904
----------
$3,055,095
==========
</TABLE>
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
F-9
<PAGE> 80
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MAY 31, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
incurred. When property and equipment are retired or otherwise disposed of, the
related cost and accumulated depreciation are removed from the accounts, and
gains or losses from retirements and dispositions are credited or charged to
income.
Depreciation and amortization are provided over the estimated useful lives
of the related assets, ranging from 3 to 12 years, using straight-line and
declining-balance methods. Leasehold improvements are amortized over the lesser
of the estimated useful life of the asset or the term of the lease. Depreciation
expense amounted to $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).
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.
F-10
<PAGE> 81
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MAY 31, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Government Regulation -- Biomerica's immunodiagnostic products are
regulated in the United States as medical devices primarily by the FDA and as
such, require regulatory clearance or approval prior to commercialization in the
United States. Pursuant to the Federal Food, Drug and Cosmetic Act, and the
regulations promulgated thereunder, the FDA regulates, among other things, the
clinical testing, manufacture, labeling, promotion, distribution, sale and use
of medical devices in the United States. Failure of Biomerica to comply with
applicable regulatory requirements can result in, among other things, warning
letters, fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, the government's refusal to grant
premarket clearance or premarket approval of devices, withdrawal of marketing
approvals, and criminal prosecution.
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain registrations or approvals required by foreign countries may
be longer or shorter than that required for FDA clearance or approval, and
requirements for licensing may differ significantly from FDA requirements. There
can be no assurance that Biomerica will be able to obtain regulatory clearances
for its current or any future products in the United States or in foreign
markets.
Lancer's products are 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.
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
F-11
<PAGE> 82
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MAY 31, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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).
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.
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.
F-12
<PAGE> 83
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MAY 31, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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.
The following table illustrates the required disclosure of the
reconciliation of the numerators and denominators of the basic and diluted EPS
computations.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31, 1999
-----------------------------------------
LOSS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
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)
======== ========= ======
</TABLE>
As of May 31, 1999, there was a total of 454,050 potential dilutive shares
of common stock.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31, 1998
-----------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS --
Income available to common
shareholders..................... $141,432 3,951,552 $0.04
======== ========= =====
EFFECT OF DILUTIVE SECURITIES --
Options............................. -- 109,683
-------- --------- -----
DILUTED EPS --
Income available to common
shareholders plus assumed
conversions...................... $141,432 4,061,235 $0.03
======== ========= =====
</TABLE>
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"
F-13
<PAGE> 84
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MAY 31, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
("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.
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.
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%.
F-14
<PAGE> 85
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MAY 31, 1999 AND 1998
3. CONSOLIDATED SUBSIDIARIES (CONTINUED)
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:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
4. INTANGIBLE ASSETS
Intangible assets, net of accumulated amortization, consist of the
following:
<TABLE>
<CAPTION>
MAY 31,
1999
-----------
<S> <C>
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
===========
</TABLE>
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.
F-15
<PAGE> 86
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
<TABLE>
<CAPTION>
MAY 31,
1999
--------
<S> <C>
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%
</TABLE>
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.
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.
F-16
<PAGE> 87
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MAY 31, 1999 AND 1998
6. SHAREHOLDERS' EQUITY (CONTINUED)
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.
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:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF STOCK PRICE RANGE EXERCISE
OPTIONS PER SHARE PRICE
-------- ------------- --------
<S> <C> <C> <C>
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
============= =====
</TABLE>
The weighted average fair value of options granted during 1999 and 1998 was
$0.68 and $1.18, respectively.
The following summarizes information about the Company's stock options
outstanding at May 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF MAY 31, CONTRACTUAL EXERCISE AT MAY 31, EXERCISE
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>
F-17
<PAGE> 88
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MAY 31, 1999 AND 1998
6. SHAREHOLDERS' EQUITY (CONTINUED)
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.
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:
<TABLE>
<CAPTION>
MAY 31,
---------------------
1999 1998
--------- --------
<S> <C> <C>
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
========= ========
</TABLE>
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.
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
F-18
<PAGE> 89
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MAY 31, 1999 AND 1998
6. SHAREHOLDERS' EQUITY (CONTINUED)
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:
<TABLE>
<CAPTION>
MAY 31,
-----------------
1999 1998
------ -------
<S> <C> <C>
U.S. Federal............................................ $ -- $ --
State and local......................................... 5,404 20,225
------ -------
$5,404 $20,225
====== =======
</TABLE>
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:
<TABLE>
<CAPTION>
MAY 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
F-19
<PAGE> 90
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
<TABLE>
<CAPTION>
MAY 31,
1999
-----------
<S> <C>
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.................................. $ --
===========
</TABLE>
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.
F-20
<PAGE> 91
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MAY 31, 1999 AND 1998
8. OTHER INCOME
Other income consists of the following for the years ending May 31:
<TABLE>
<CAPTION>
MAY 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
During 1999, AIT earned $100,000 as a non-recurring consulting fee from an
unrelated entity.
F-21
<PAGE> 92
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MAY 31, 1999 AND 1998
9. BUSINESS SEGMENTS
Reportable business segments for the years ended May 31, 1999 and 1998 are
as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
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
========== ==========
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
========== ==========
</TABLE>
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.
F-22
<PAGE> 93
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MAY 31, 1999 AND 1998
9. BUSINESS SEGMENTS (CONTINUED)
Geographic information regarding net sales and operating profits is as
follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
Identifiable assets by business segment are those assets that are used in
the Company's operations in each industry. Identifiable assets are held
primarily in the United States. The Company's interests in AIT, whose operations
are in the United States, are vertically integrated with the Company's
operations in the medical diagnostic products industry.
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.
F-23
<PAGE> 94
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MAY 31, 1999 AND 1998
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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:
<TABLE>
<CAPTION>
YEARS ENDING MAY 31, AMOUNT
-------------------- --------
<S> <C>
2000..................................................... $307,802
2001..................................................... 140,994
2002..................................................... 143,733
2003..................................................... 146,587
2004..................................................... 74,884
--------
Minimum lease payments................................... $814,000
========
</TABLE>
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.
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
F-24
<PAGE> 95
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MAY 31, 1999 AND 1998
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
$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.
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.
F-25
<PAGE> 96
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MAY 31, 1999 AND 1998
11. SUBSEQUENT EVENTS (CONTINUED)
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.
F-26
<PAGE> 97
- ------------------------------------------------------
- ------------------------------------------------------
YOU SHOULD RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO GIVE YOU INFORMATION DIFFERENT THAN THAT CONTAINED IN
THIS PROSPECTUS. WE ARE OFFERING TO SELL SHARES OF COMMON STOCK ONLY IN
JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN
THIS PROSPECTUS IS CURRENT ONLY AS OF ITS DATE, REGARDLESS OF THE TIME YOU
RECEIVE THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 8
Use of Proceeds...................... 23
Price Range of Common Stock.......... 24
Dividend Policy...................... 24
Capitalization....................... 25
Selected Consolidated Financial
Data............................... 26
Management's Discussion and
Analysis........................... 27
Business............................. 31
Legal Proceedings.................... 53
Management........................... 54
Certain Relationships and Related
Transactions....................... 61
Security Ownership of Certain
Beneficial Owners and Management... 63
Description of Securities............ 65
Underwriting......................... 66
Legal Matters........................ 63
Change in Certifying Accountants..... 67
Experts.............................. 68
Additional Information............... 68
Index to Financial Statements........ F-1
</TABLE>
------------------------
UNTIL , 1999, ALL DEALERS THAT EFFECT TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS NOT IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
SHARES
[THE BIG RX.COM LOGO]
COMMON STOCK
-----------------
PROSPECTUS
-----------------
, 1999
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 98
PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Company's Amended and Restated Certificate of Incorporation eliminates
the liability of directors for monetary damages for an act or omission in the
director's capacity as a director, except for: (1) a breach of a director's duty
of loyalty to our Company or our stockholders; (2) an act or omission not in
good faith that constitutes a breach of duty of that director to our Company or
an act or omission that involves intentional misconduct or a knowing violation
of the law; (3) a transaction from which a director received an improper
benefit, whether or not the benefit resulted from an action taken within the
scope of the director's office; or (4) an act or omission for which the
liability of a director is expressly provided for by an applicable statute.
If the Delaware General Corporation Law is amended to authorize action
further eliminating or limiting the personal liability of directors, then the
liability of a director of our Company shall be eliminated or limited to the
fullest extent permitted by such statutes, as so amended. Any amendment, repeal
or modification of such provision shall be prospective only and shall not
adversely affect any right or protection of a director of our Company existing
at the time of such amendment, repeal or modification.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with this
Registration Statement. All of such expenses are estimates, other than the
filing fees payable to the Securities and Exchange Commission.
<TABLE>
<S> <C>
Filing Fee -- Securities and Exchange Commission............ $5,560
Nasdaq Fee.................................................. 2,500
Exchange Listing Fee........................................
Fees and Expenses of Accountants............................
Fees and Expenses of Counsel................................
Printing and Engraving Expenses.............................
Blue Sky Fees and Expenses..................................
Transfer Agent Fees.........................................
Miscellaneous Expenses......................................
------
Total............................................. $
======
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
1. On June 11, 1999, pursuant to a stock purchase agreement, we sold
350,000 shares of our restricted common stock to RidgeRose Capital
Partners, LLC at a purchase price of $5.00 per share.
2. On June 11, 1999, pursuant to a stock purchase agreement, we sold 50,000
shares of our restricted common stock to Zackary Irani and Janet Moore
at a purchase price of $5.00 per share.
3. On June 11, 1999, pursuant to a back-end processing agreement, we issued
a warrant to purchase 410,000 shares of our restricted common stock to
TheBigStore.com. On September 2, 1999, pursuant to a strategic marketing
agreement, we issued a warrant to purchase 250,000 shares of our
restricted common stock to TheBigHub.com. The warrants are exercisable
for a period of 5 years at an exercise price of $5.00 per share.
4. On June 10, 1999, in consideration for services rendered, we issued a
warrant to purchase 1,000,000 shares of our restricted common stock to
RJM Consulting, LLC.
II-1
<PAGE> 99
The warrant is exercisable for a period of 5 years at an exercise price
of $3.00 per share.
5. On June 10, 1999, pursuant to a non-qualified option agreement, we
granted to Zackary Irani options to purchase 1,000,000 shares of our
restricted common stock. The options are exercisable for a period of 10
years at an exercise price of $3.00 per share.
6. On June 10, 1999, pursuant to non-qualified option agreements, we
granted to various of our directors, consultants and employees options
to purchase an aggregate of 200,000 shares of our restricted common
stock. The options are exercisable for a period of 10 years at an
exercise price of $3.00 per share.
7. On October 31, 1998, we issued to JSJ Management an aggregate of 11,429
shares of our restricted common stock in lieu of paying rent for the
period of June 1998 through October 1998. The shares were issued at an
agreed value of $0.875 per share.
8. On July 31, 1998, we issued to JSJ Management an aggregate of 20,364
shares of our restricted common stock in lieu of paying rent for the
period of April 1997 through May 1998. The shares were issued at an
agreed value of $1.375 per share.
9. On December 19, 1996, we sold 333,333 shares of our restricted common
stock pursuant to a private placement memorandum, at a purchase price of
$3.00 per share.
No underwriter was involved in any of the above issuances of securities.
All of the above securities were issued in reliance upon the exemptions set
forth in Section 4(2) of the Securities Act (including, in certain instances
Regulation D promulgated thereunder) on the basis that they were issued under
circumstances not involving a public offering.
II-2
<PAGE> 100
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of Registrant filed with the
Secretary of the State of Delaware on September 22, 1971
(incorporated by reference to Exhibit 3.1 filed with
Amendment No. 1 to Registration Statement on Form S-1,
Commission File No. 2-83308).
3.2 Certificate of Amendment to Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware
on February 6, 1978 (incorporated by reference to Exhibit
3.1 filed with Amendment No. 1 to Registration Statement on
Form S-1, Commission File No. 2-83308).
3.3 Certificate of Amendment to Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware
on February 4, 1983 (incorporated by reference to Exhibit
3.1 filed with Amendment No. 1 to Registration Statement on
Form S-1, Commission File No. 2-83308).
3.4 Certificate of Amendment to Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware
on January 19, 1987 (incorporated by reference to Exhibit
3.4 filed with Form 8 Amendment No. 1 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended May 31,
1987).
3.5 Certificate of Amendment of Certificate of Incorporation of
Registrant filed November 4, 1987 with the Secretary of
State of the State of Delaware (incorporated by reference to
Exhibit 3.1 filed with Amendment No. 1 to Registration
Statement on Form S-1, Commission File No. 2-83308).
3.6 Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 filed with Amendment No. 1 to Registration
Statement on Form S-1, Commission File No. 2-83308).
3.7 Certificate of Amendment of Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware
on December 20, 1994 (incorporated by reference to Exhibit
3.7 filed with Registrant's Annual Report or Form 10-KSB for
the fiscal year ended May 31, 1995).
4.1 Specimen Stock Certificate of Common Stock of Registrant.
5.1 Opinion and Consent of Jeffers, Shaff & Falk, LLP.*
10.1 Office Lease dated June 1, 1988 between Registrant and
Redington Company covering Registrant's lease of premises at
1531/1533 Monrovia Avenue, Newport Beach, California
(incorporated by reference to Exhibit 10.1 filed with
Registrant's Annual Report on Form 10-K for the fiscal year
ended May 31, 1989).
10.2 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 Restricted Stock Plan of Registrant
(incorporated by reference to Exhibit 4.3 to Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on January 20, 1996).
10.5 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).
</TABLE>
II-3
<PAGE> 101
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
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 with Form
8-K on July 7, 1999).
10.15 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).
10.16 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.
10.17 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.
10.18 Private Placement Memorandum of Biomerica, Inc. dated June
9, 1999 offering 400,000 shares of its Common Stock at $5.00
per share.
10.19 Employment Agreement entered into as of August 30, 1999 by
and between Internet division of Biomerica, Inc. and Steven
J. Goto.
10.20 Employment Offer Letter dated August 12, 1999 from
Biomerica, Inc. to Pete McKinley to join the Internet
division of Biomerica, Inc.
10.21 Employment Offer Letter dated July 2, 1999 from Biomerica,
Inc. to Richard Jay, Pharm.D. to join the Internet division
of Biomerica, Inc.
10.22 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.
</TABLE>
II-4
<PAGE> 102
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.23 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.
10.24 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.
10.25 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.
10.26 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.
10.27 Agreement entered into by and between Lancer Orthodontics,
Inc. and Gary Weikel, an individual, as of August 3, 1998
incorporating by reference that certain Product Development
and Marketing Agreement of even date between Lancer
Orthodontics, Inc. and AG Metals, Inc.
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.
23.1 Consent of Jeffers, Shaff & Falk, LLP (included in its
opinion filed as Exhibit 5.1 hereto).*
23.2 Consent of Certifying Accountant, BDO Seidman, LLP.
23.3 Consent of Certifying Accountant, Corbin & Wertz, LLP.
24.1 Power of Attorney (included in signature page).
</TABLE>
- ------------------------------
* To be filed by amendment.
II-5
<PAGE> 103
ITEM 28. UNDERTAKINGS.
The undersigned small business issuer hereby undertakes:
(1) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in
connection with the securities being registered, we will, unless in the
opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of
such issue.
(2) The undersigned registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective.
(ii) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-6
<PAGE> 104
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Newport
Beach, State of California, on September 14, 1999.
BIOMERICA, INC.
By: /s/ ZACKARY S. IRANI
--------------------------------
Zackary S. Irani, President
and Chief
Executive Officer
II-7
<PAGE> 105
POWER OF ATTORNEY
We, the undersigned directors and officers of Biomerica, Inc. do hereby
constitute and appoint Zackary S. Irani and Janet Moore, or either of them,
acting individually, our true and lawful attorneys and agents, to do any and all
acts and things in our name and behalf in our capacities as directors and
officers, and to execute any and all instruments for us and in our names in the
capacities indicated below, which said attorneys and agents, or any one of them,
may deem necessary or advisable to enable said corporation to comply with the
Securities Act of 1933, as amended, and any rules, regulations, and requirements
of the Securities and Exchange Commission, in connection with this Registration
Statement, including specifically, but without limitation, power and authority
to sign for us or any of us in our names and in the capacities indicated below,
any and all amendments (including post-effective amendments) hereof; and we do
hereby ratify and confirm all that the said attorneys and agents, or any of
them, shall do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
<TABLE>
<S> <C> <C>
/s/ ZACKARY S. IRANI President, Chief September 14, 1999
- --------------------------------------------------- Executive Officer
Zackary S. Irani, MBA and Director
/s/ JANET MOORE Secretary, September 14, 1999
- --------------------------------------------------- Controller,
Janet Moore Interim CFO, and
Director
/s/ PHILIP B. KAPLAN Director September 14, 1999
- ---------------------------------------------------
Philip B. Kaplan, M.D.
/s/ ROBERT A. ORLANDO Director September 14, 1999
- ---------------------------------------------------
Robert A. Orlando, M.D., Ph.D.
/s/ DAVID BURROWS Director September 14, 1999
- ---------------------------------------------------
David Burrows
/s/ FRANCIS R. CANO Director September 14, 1999
- ---------------------------------------------------
Francis R. Cano, Ph.D.
/s/ CARLOS ST. AUBYN BEHARIE Director September 14, 1999
- ---------------------------------------------------
Carlos St. Aubyn Beharie, M.D., MBA
</TABLE>
II-8
<PAGE> 106
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of Registrant filed with the
Secretary of the State of Delaware on September 22, 1971
(incorporated by reference to Exhibit 3.1 filed with
Amendment No. 1 to Registration Statement on Form S-1,
Commission File No. 2-83308).
3.2 Certificate of Amendment to Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware
on February 6, 1978 (incorporated by reference to Exhibit
3.1 filed with Amendment No. 1 to Registration Statement on
Form S-1, Commission File No. 2-83308).
3.3 Certificate of Amendment to Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware
on February 4, 1983 (incorporated by reference to Exhibit
3.1 filed with Amendment No. 1 to Registration Statement on
Form S-1, Commission File No. 2-83308).
3.4 Certificate of Amendment to Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware
on January 19, 1987 (incorporated by reference to Exhibit
3.4 filed with Form 8 Amendment No. 1 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended May 31,
1987).
3.5 Certificate of Amendment of Certificate of Incorporation of
Registrant filed November 4, 1987 with the Secretary of
State of the State of Delaware (incorporated by reference to
Exhibit 3.1 filed with Amendment No. 1 to Registration
Statement on Form S-1, Commission File No. 2-83308).
3.6 Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 filed with Amendment No. 1 to Registration
Statement on Form S-1, Commission File No. 2-83308).
3.7 Certificate of Amendment of Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware
on December 20, 1994 (incorporated by reference to Exhibit
3.7 filed with Registrant's Annual Report or Form 10-KSB for
the fiscal year ended May 31, 1995).
4.1 Specimen Stock Certificate of Common Stock of Registrant.
5.1 Opinion and Consent of Jeffers, Shaff & Falk, LLP.*
10.1 Office Lease dated June 1, 1988 between Registrant and
Redington Company covering Registrant's lease of premises at
1531/1533 Monrovia Avenue, Newport Beach, California
(incorporated by reference to Exhibit 10.1 filed with
Registrant's Annual Report on Form 10-K for the fiscal year
ended May 31, 1989).
10.2 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 Restricted Stock Plan of Registrant
(incorporated by reference to Exhibit 4.3 to Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on January 20, 1996).
10.5 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).
</TABLE>
<PAGE> 107
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
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 with Form
8-K on July 7, 1999).
10.15 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).
10.16 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.
10.17 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.
10.18 Private Placement Memorandum of Biomerica, Inc. dated June
9, 1999 offering 400,000 shares of its Common Stock at $
5.00 per share.
10.19 Employment Agreement entered into as of August 30, 1999 by
and between Internet division of Biomerica, Inc. and Steven
J. Goto.
10.20 Employment Offer Letter dated August 12, 1999 from
Biomerica, Inc. to Pete McKinley to join the Internet
division of Biomerica, Inc.
10.21 Employment Offer Letter dated July 2, 1999 from Biomerica,
Inc. to Richard Jay, Pharm.D. to join the Internet division
of Biomerica, Inc.
10.22 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.
</TABLE>
<PAGE> 108
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.23 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.
10.24 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.
10.25 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.
10.26 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.
10.27 Agreement entered into by and between Lancer Orthodontics,
Inc. and Gary Weikel, an individual, as of August 3, 1998
incorporating by reference that certain Product Development
and Marketing Agreement of even date between Lancer
Orthodontics, Inc. and AG Metals, Inc.
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.
23.1 Consent of Jeffers, Shaff & Falk, LLP (included in its
opinion filed as Exhibit 5.1 hereto).*
23.2 Consent of Certifying Accountant, BDO Seidman, LLP.
23.3 Consent of Certifying Accountant, Corbin & Wertz, LLP.
</TABLE>
- ------------------------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 4.1
No. [BIOMERICA LOGO] Shares-
INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN DEFINITIONS
OF THE STATE OF DELAWARE CUSIP 09061H 30 7
THIS CERTIFIES that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF THE PAR VALUE OF
$.08 PER SHARE
of BIOMERICA, INC. transferable on the books of the Corporation by the holder
hereof in person or by duly authorized attorney upon surrender of this
certificate properly endorsed. This certificate and the shares represented
hereby are issued and shall be held subject to all of the provisions of this
Certificate of Incorporation of the Corporation and any amendments thereto, to
all of which the holder, by acceptance hereof consents. This Certificate is not
valid unless countersigned by the Transfer Agent and registered by the
Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
COUNTERSIGNED AND REGISTERED:
U.S. STOCK TRANSFER CORPORATION
TRANSFER AGENT AND REGISTRAR [CORPORATE SEAL]
- ------------------------- ------------------ -------------------------
AUTHORIZED SIGNATURE SECRETARY PRESIDENT
AMERICAN BANK NOTE COMPANY
<PAGE> 1
EXHIBIT 10.16
STRATEGIC MARKETING AGREEMENT
THIS AGREEMENT is entered into as of the 2nd day of September, 1999
(the "Effective Date"), by and between The BigHub.com, Inc., a Florida
corporation (the "Company"), and Biomerica, Inc., a Delaware corporation
("Biomerica"), with reference to the following facts:
WHEREAS, the Company owns and operates a web site on the Internet at
www.thebighub.com which, among other things, is an advanced portal and contains
a metasearch engine.
WHEREAS, Biomerica desires to leverage the traffic through the
Company's website;
NOW, THEREFORE, in consideration of the covenants, agreements and
considerations herein contained, the Company and Biomerica agree as follows:
1. SERVICES. The Company agrees that, during the Term (as defined below), it
shall provide strategic placement of advertising and marketing for Biomerica on
the Company's website, which shall include permanent, perpetual and continuous
advertising on the Company's website and continuous banners on and links from
its website to Biomerica' website (the "Services"). All advertising and banners
shall be pre-approved by Biomerica.
2. COMPENSATION. In consideration for the Services, Biomerica shall issue to the
Company a common stock warrant to purchase 250,000 shares of Biomerica's
restricted common stock with an exercise price equal to $5.00 per share. The
Company's right to exercise the warrant shall vest pro rata over a period of
three (3) years with one-third of the shares vesting on the first, second and
third anniversaries of the date of grant; provided, however, that it shall fully
vest immediately prior to a public offering of the Company's common stock. The
warrant shall have an exercise period of five (5) years commencing on the date
that the Company shall begin providing the Services to Biomerica. (A form of the
Warrant is attached hereto as Exhibit A).
3. REPRESENTATIONS AND WARRANTIES. Each party to this Agreement represents and
warrants to the other party that:
(a) such party has the full corporate right, power and authority to
enter into this Agreement and to perform the acts required of it hereunder;
(b) the execution of this Agreement by such party, and the performance
by such party of its obligations and duties hereunder, do not and will not
violate such party's charter documents or any agreement to which such party is a
party or by which it is otherwise bound; and
1
<PAGE> 2
(c) when executed and delivered by such party, this Agreement will
constitute the legal, valid and binding obligation of such party, enforceable
against such party in accordance with its terms.
4. TERM AND TERMINATION.
(a) The term of this Agreement shall commence on the date that the
Services start and shall, unless sooner terminated as provided below, remain
effective for an initial term of five (5) years (the "Initial Term"). After the
Initial Term, this Agreement shall automatically be extended for successive
additional five-year periods (each an "Extension Term"), unless otherwise
terminated by either party by giving written notice to the other party of its
intent not to extend not less than thirty (30) days prior to the end of the
Initial Term or any Extension Term then in effect. As used herein, the "Term"
shall mean the Initial Term and any Extension Term(s). Within 60 days of the
prior to the expiration of the Initial Term and each Extension Term, the parties
shall negotiate in good faith the compensation to be paid to the Company for
such year.
(b) Notwithstanding the foregoing, this Agreement may be terminated at
any time by either party, effective immediately upon notice, if the other party:
(i) becomes insolvent; (ii) files a petition in bankruptcy; (iii) makes an
assignment for the benefit of its creditors; or (iv) breaches its obligations of
confidentiality set forth in Section 5 below. Either party may terminate this
Agreement, effective upon thirty (30) days notice, in the event that the other
party breaches any of its representations, warranties, covenants or agreements
contained herein which breach is not remedied within thirty (30) days following
written notice to such party.
(c) Any termination pursuant to this Section 4 shall be without any
liability or obligation of the terminating party, other than with respect to any
breach of obligations under this Agreement prior to termination. The provisions
in Sections 5 and 6 shall survive any termination or expiration of this
Agreement.
Upon any termination of this Agreement, each party shall promptly
deliver to the other party all Confidential Information (defined below) and
property belonging to the other party that is in its possession or under its
control, and neither party shall retain copies or reproductions of such
Confidential Information.
5. CONFIDENTIALITY AND NON-CIRCUMVENTION.
(a) Each party acknowledges and agrees that it will have access to or
be provided with confidential information of the other party during the term of
this Agreement. As used herein, the term "Confidential Information" shall mean
any and all proprietary or confidential information of a party, including,
without limitation such party's business plan, business presentation or related
proprietary and financial information as well as other
2
<PAGE> 3
confidential or proprietary information of such party regarding such party's
business, plans, financial results and statements, markets, projected
activities, customers and results of operations, requirements and sources,
contracts, means, methods and processes of providing services, copyrights,
patents, trademarks, trade secrets, and financial information.
(b) Each party agrees to keep the Confidential Information of the other
party in the strictest confidence, and agrees that it will not, directly or
indirectly, publish or disclose, or authorize the publication or disclosure of,
or assist any third party in publishing or disclosing, any Confidential
Information to anyone other than its employees or consultants, but only to the
extent necessary for the fulfillment of its obligations under this Agreement and
subject in each such case to the such party using its best efforts to ensure
that the persons to whom Confidential Information is disclosed keep such
information confidential and do not use such Confidential Information except for
the purposes for which the disclosure is made. Each party agrees to comply with
the other party's policies and regulations, as may be reasonably established
from time to time, for the protection of its Confidential Information.
(c) Each party's confidentiality obligations shall continue with
respect to each item of Confidential Information, including after the
termination of this Agreement, until such time as such party can show that any
such item of Confidential Information (i) has legally and properly entered the
public domain through a source other than its own and through no fault of its
own, (ii) has legally and properly been received from an unrelated third party
through no breach of any agreement with the other party and without an
obligation to keep it confidential, (iii) was known to such party or was in such
party's possession prior to the receipt of such item of Confidential Information
from the other party, (vi) was independently developed by one party without
reference to the Confidential Information received hereunder.
(d) Each party acknowledges that the other party's Confidential
Information is of a special, unique and extraordinary character and for that
reason the other party will be irreparably damaged in the event that the
confidentiality or non-circumvention obligations imposed upon it, as set forth
herein, are not specifically enforced. Accordingly, each party agrees that the
other party shall be entitled, at its election, to institute and prosecute
proceedings against it, as set forth herein, in any court of competent
jurisdiction, either at law or equity, to: (a) obtain damages for breach of the
obligations hereunder; (b) enforce specific performance of said obligations, or
both. Such remedies are cumulative and not exclusive and shall be in addition to
any and all other remedies which the other party may have, at law or in equity,
in the event the a party breaches any of its obligations hereunder. The parties
hereto confirm that the covenants in this Agreement are expressly deemed to
cover acts of negligence and any inadvertent disclosure or violation of the
terms herein.
6. INDEPENDENT CONTRACTOR RELATIONSHIP. This Agreement shall in no way be
construed to constitute either party as a partner, joint venturer, agent, or
employee of the other party, and neither party shall act or attempt to act or
represent itself, directly or by implication, as
3
<PAGE> 4
a partner, joint venturer, agent or employee of the other party. Neither party
nor any of its respective employees shall have any authority to enter into
contracts, make commitments or otherwise bind the other party to any obligations
without the other party's prior written consent.
7. MISCELLANEOUS.
(a) This Agreement contains the complete and exclusive agreement
between the parties with respect to the subject matter hereof, superseding and
replacing any and all prior agreements, communications, and understandings, both
written and oral, regarding such subject matter. This Agreement may only be
modified, or any rights under it waived, by a written document executed by both
parties.
(b) Neither this Agreement nor any of its provisions are assignable by
either of the contracting parties. This Agreement shall inure to the benefit of
and be binding upon their respective successors in interest and shall extend to
their controlled corporations, partnerships, trusts, proprietorships,
affiliates, and agents.
(c) This Agreement will be governed by and construed in accordance with
the laws of the State of California, without reference to conflicts of laws
rules, and without regard to its location of execution or performance.
(d) If any provision of this Agreement is found invalid or
unenforceable, that provision will be enforced to the maximum extent
permissible, and the other provisions of this Agreement will remain in force.
(e) All notices, requests and other communications called for by this
Agreement shall be deemed to have given upon receipt if made by mail, courier or
personal delivery, or immediately if made by telecopy or electronic (confirmed
by concurrent written notice sent first-class U.S. mail, postage prepaid):
The BigHub.com, Inc.: Biomerica, Inc.:
- --------------------- ----------------
2939 Moss Rock 1533 Monrovia Avenue
Suite 100 Newport Beach, California 92663
San Antonio, Texas 78230 Facsimile: (949) 722-6674
Facsimile: (210) 979-6336 Attn: Zachary Irani, President/CEO
Attn: Patrick J. DeMicco, President/CEO
or to such other addresses as either party shall specify to the other. Notice by
any other means shall be deemed made when actually received by the party to
which notice is provided.
(f) Except for matters covered by Section 5 above, all
disputes arising out of
4
<PAGE> 5
or in connection with this Agreement shall be finally settled under the Rules of
American Arbitration Association ("AAA") by one or more arbitrators appointed in
accordance with said Rules. The place of arbitration shall be Orange County,
California. The parties hereby renounce any right of recourse which they may
have before the court of any jurisdiction except to obtain preliminary or
injunctive relief or enforce an award of the arbitrator.
If any award rendered by AAA in accordance with this arbitration clause
would not be capable of being executed in the jurisdiction of a party against
whom a claim for payment is made or where that party resides or carries on
business, neither the award nor the said arbitration clause shall bar a party
hereto from taking action before the courts that have jurisdiction over such
other party.
(g) In the event that any party shall bring an action or arbitration in
connection with the performance, breach or interpretation hereof, then the
prevailing party in such action, as determined by the court or other body having
jurisdiction, shall be entitled to recover from the losing party in such action,
as determined by the court or other body having jurisdiction, all reasonable
costs and expenses of litigation or arbitration, including reasonable attorneys'
fees, court costs, costs of investigation and other costs reasonably related to
such proceeding, in such amounts as may be determined in the discretion of the
court or other body having jurisdiction.
(h) The various section headings are inserted for purposes of
convenience only and shall not affect the meaning or interpretation of this
Agreement or any section hereof.
(i) No failure of either party to exercise or enforce any of its rights
under this Agreement will act as a waiver of such rights.
(j) This Agreement may be executed in any number of counterparts, all
of which taken together shall constitute a single instrument. Execution and
delivery of this Agreement may be evidenced by facsimile transmission.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized representatives as of the date first written
above.
THE BIGHUB.COM, INC. BIOMERICA, INC.
By: By:
------------------------------ --------------------------------
Patrick J. DeMicco Zachary Irani
President and CEO President and CEO
5
<PAGE> 6
EXHIBIT A
COMMON STOCK WARRANT
<PAGE> 7
THESE SECURITIES AND THE SECURITIES ISSUABLE UPON THEIR EXERCISE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED UNLESS
COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT, A "NO ACTION"
LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION WITH RESPECT TO SUCH
TRANSFER, A TRANSFER MEETING THE REQUIREMENTS OF RULE 144 OF THE SECURITIES AND
EXCHANGE COMMISSION, OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER TO THE
EFFECT THAT ANY SUCH TRANSFER IS EXEMPT FROM SUCH REGISTRATION.
BIOMERICA, INC.
COMMON STOCK PURCHASE WARRANT
1. Issuance; Certain Definitions. In consideration of good and valuable
consideration, the receipt of which is hereby acknowledged by BIOMERICA, INC., a
Delaware corporation (the "Company"), THE BIGHUB.COM, INC. or registered assigns
(the "Holder") is hereby granted the right to purchase at any time until 5:00
P.M., California time, on June 10, 2004, Two Hundred Fifty Thousand (250,000)
fully paid and nonassessable shares of the Company's Common Stock, par value
$0.08 per share (the "Common Stock") at an initial exercise price per share (the
"Exercise Price") of $5.00 per share, subject to further adjustment as set forth
in Section 6 hereof. This Warrant is being issued to the Holder in consideration
for the services to be rendered by the Holder to the Company pursuant to the
terms of that certain Strategic Marketing Agreement dated ____________, 1999.
2. Exercise of Warrants. The Holder's right to exercise this Warrant
shall vest in equal increments at the first, second and third anniversaries of
the date of issuance of this Warrant; provided, however, that the Holder's right
to exercise the Warrant shall fully vest immediately prior to a public offering
of the Company's common stock. This Warrant is exercisable in whole or in part
at the Exercise Price per share of Common Stock payable hereunder, payable in
cash or by certified or official bank check. The only condition to vesting of
the Holder's right to exercise this Warrant shall be the passage of time and
Holder's right to exercise the Option shall not be terminated for any reason,
including (without limitation) by reason of death, disability, incapacity or
termination of employment. Upon surrender of this Warrant Certificate with the
annexed Notice of Exercise Form duly executed (which Notice of Exercise Form may
be submitted either by delivery to the Company or by facsimile transmission as
provided in Section 8 hereof), together with payment of the Exercise Price for
the shares of Common Stock purchased, the Holder shall be entitled to receive a
certificate or certificates for the shares of Common Stock so purchased. For the
purposes of this Section 2, "Market Value" shall be an amount equal to the
average closing bid price of a share of Common Stock, as reported by Bloomberg,
LP or, if not so reported, as reported on the over-the-counter market for the
five (5) trading days preceding the Company's receipt of the Notice of Exercise
Form duly executed, multiplied by the number of shares of Common Stock to be
issued upon surrender of this Warrant Certificate. UPON EXERCISE OF THE WARRANT
AND ISSUANCE OF THE UNDERLYING SHARES OF COMMON STOCK, THE HOLDER AND/OR ANY
AFFILIATE (AS DEFINED BY THE SECURITIES AND EXCHANGE ACT OF 1934) TO WHOM SOME
OR ALL OF THE WARRANT SHALL HAVE BEEN TRANSFERRED OR ASSIGNED SHALL GRANT TO
ZACKARY IRANI, IN ANY CAPACITY, CURRENTLY AS PRESIDENT AND CHIEF
<PAGE> 8
EXECUTIVE OFFICER OF THE COMPANY, AN IRREVOCABLE PROXY TO VOTE THE SHARES OF
COMMON STOCK UNDERLYING THE WARRANT, WHICH PROXY SHALL EXPIRE FIVE (5) YEARS
FROM THE DATE OF GRANT.
3. Reservation of Shares. The Company hereby agrees that at all times
during the term of this Warrant there shall be reserved for issuance upon
exercise of this Warrant such number of shares of its Common Stock as shall be
required for issuance upon exercise of this Warrant (the "Warrant Shares").
4. Mutilation or Loss of Warrant. Upon receipt by the Company of
evidence satisfactory to it of the loss, theft, destruction or mutilation of
this Warrant, and (in the case of loss, theft or destruction) receipt of
reasonably satisfactory indemnification, and (in the case of mutilation) upon
surrender and cancellation of this Warrant, the Company will execute and deliver
a new Warrant of like tenor and date and any such lost, stolen, destroyed or
mutilated Warrant shall thereupon become void.
5. Rights of the Holder. The Holder shall not, by virtue hereof, be
entitled to any rights of a stockholder in the Company, either at law or equity,
and the rights of the Holder are limited to those expressed in this Warrant and
are not enforceable against the Company except to the extent set forth herein.
6. Protection Against Dilution.
6.1 Adjustment Mechanism. If an adjustment of the Exercise
Price is required pursuant to this Section 6, the Holder shall be entitled to
purchase such number of additional shares of Common Stock as will cause (i) the
total number of shares of Common Stock Holder is entitled to purchase pursuant
to this Warrant, multiplied by (ii) the adjusted purchase price per share, to
equal (iii) the dollar amount of the total number of shares of Common Stock
Holder is entitled to purchase before adjustment multiplied by the total
purchase price before adjustment.
6.2 Capital Adjustments. In case of any stock split or reverse
stock split, stock dividend, reclassification of the Common Stock,
recapitalization, merger or consolidation, or like capital adjustment affecting
the Common Stock of the Company, the provisions of this Section 6 shall be
applied as if such capital adjustment event had occurred immediately prior to
the date of this Warrant and the original purchase price had been fairly
allocated to the stock resulting from such capital adjustment; and in other
respects the provisions of this Section shall be applied in a fair, equitable
and reasonable manner so as to give effect, as nearly as may be, to the purposes
hereof. A rights offering to stockholders shall be deemed a stock dividend to
the extent of the bargain purchase element of the rights.
6.3 Adjustment for Spin Off. If, for any reason, prior to the
exercise of this Warrant in full, the Company spins off or otherwise divests
itself of a part of its business or operations or disposes all or of a part of
its assets in a transaction (the "Spin Off") in which the Company does not
receive compensation for such business, operations or assets, but causes
securities of another entity (the "Spin Off Securities") to be issued to
security holders of the Company, then
2
<PAGE> 9
(a) the Company shall cause (i) to be reserved Spin
Off Securities equal to the number thereof which would have
been issued to the Holder had all of the Holder's unexercised
Warrants outstanding on the record date (the "Record Date")
for determining the amount and number of Spin Off Securities
to be issued to security holders of the Company (the
"Outstanding Warrants") been exercised as of the close of
business on the trading day immediately before the Record Date
(the "Reserved Spin Off Shares"), and (ii) to be issued to the
Holder on the exercise of all or any of the Outstanding
Warrants, such amount of the Reserved Spin Off Shares equal to
(x) the Reserved Spin Off Shares multiplied by (y) a fraction,
of which (I) the numerator is the amount of the Outstanding
Warrants then being exercised, and (II) the denominator is the
amount of the Outstanding Warrants; and
(b) the Exercise Price on the Outstanding Warrants
shall be adjusted immediately after consummation of the Spin
Off by multiplying the Exercise Price by a fraction (if, but
only if, such fraction is less than 1.0), the numerator of
which is the Average Market Price of the Common Stock for the
five (5) trading days immediately following the fifth trading
day after the Record Date, and the denominator of which is the
Average Market Price of the Common Stock on the five (5)
trading days immediately preceding the Record Date; and such
adjusted Exercise Price shall be deemed to be the Exercise
Price with respect to the Outstanding Warrants after the
Record Date.
For the purposes of this Section 6.3, the "Average Market Price of the Common
Stock" shall mean, for the relevant period, (x) the average closing bid price of
a share of Common Stock, as reported by Bloomberg, LP or, if not so reported, as
reported on the over-the-counter market or (y) if the Common Stock is listed on
a stock exchange, the closing price on such exchange on the date indicated in
the relevant provision hereof, as reported in The Wall Street Journal.
6.4 No Adjustment for Dividends. Except as provided in Section
6.2 hereof, no adjustment in respect of any dividends or distributions out of
earnings shall be made during the term of a Warrant or upon the conversion of a
Warrant.
7. Transfer to Comply with the Securities Act; Registration Rights.
(a) This Warrant has not been registered under the Securities
Act of 1933, as amended, (the "Act") and has been issued to the Holder for
investment and not with a view to the distribution of either the Warrant or the
Warrant Shares. Neither this Warrant nor any of the Warrant Shares or any other
security issued or issuable upon exercise of this Warrant may be sold,
transferred, pledged or hypothecated in the absence of an effective registration
statement under the Act relating to such security or an opinion of counsel
satisfactory to the Company that registration is not required under the Act.
Each certificate for the Warrant, the Warrant Shares and any other security
issued or issuable upon exercise of this Warrant shall contain a legend on the
face thereof, in form and substance satisfactory to counsel for the Company,
setting forth the restrictions on transfer contained in this Section.
3
<PAGE> 10
(b) The Company hereby grants to the Holder piggyback
registration rights with respect to the Warrant Shares. In the event the Company
is filing a Registration Statement for itself or on behalf of any of its
shareholders, the Company shall notify the Holder in writing reasonably in
advance of such filing (but at least five business days) and give the Holder the
opportunity to include all or any party of the Warrant Shares (whether or not
previously issued), to the extent permissible under the Act or any regulation
promulgated thereunder. Upon the Holder's notification that the Holder desires
to have all or any portion of the Warrant Shares included in such registration,
the Company shall, at no cost or expense to the Holder, include or cause to be
included in such registration statement the Warrant Shares so identified by the
Holder. Notwithstanding any other provision of this Section 7(b), in the case of
an underwritten public offering, if the managing underwriter determines that
market factors require a limitation of the number of shares to be underwritten,
the managing underwriter may limit, or exclude, the number of shares (including
those of Holder) to be included in such Piggyback Registration. If limited,
Holder's shares will be registered pro rata with any other holders of Common
Stock or Common Stock equivalents having Registration Rights.
8. Notices. Any notice or other communication required or permitted
hereunder shall be in writing and shall be delivered personally, telegraphed,
telexed, sent by facsimile transmission or sent by certified, registered or
express mail, postage pre-paid. Any such notice shall be deemed given when so
delivered personally, telegraphed, telexed or sent by facsimile transmission,
or, if mailed, two days after the date of deposit in the United States mails, as
follows:
(i) if to the Company, to:
Biomerica, Inc.
1533 Monrovia Avenue
Newport Beach, California 92663
Attn: Zackary S. Irani, President
Facsimile: (949) 722-6674
(ii) if to the Holder, to:
The BigHub.com, Inc.
3388 Via Lido
Newport Beach, California 92660
Attn: Chief Executive Officer
Facsimile: (949) 675-6954
Any party may be notice given in accordance with this Section to the other
parties designate another address or person for receipt of notices hereunder.
9. Supplements and Amendments; Whole Agreement. This Warrant may be
amended or supplemented only by an instrument in writing signed by the parties
hereto. This Warrant of even date herewith contain the full understanding of the
parties hereto with respect to
4
<PAGE> 11
the subject matter hereof and thereof and there are no representations,
warranties, agreements or understandings other than expressly contained herein
and therein.
10. Governing Law. This Warrant shall be deemed to be a contract made
under the laws of the State of California and for all purposes shall be governed
by and construed in accordance with the laws of such State applicable to
contracts to be made and performed entirely within such State.
11. Counterparts. This Warrant may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
12. Descriptive Headings. Descriptive headings of the several Sections
of this Warrant are inserted for convenience only and shall not control or
affect the meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Warrant as of
the ____ day of July, 1999.
Biomerica, Inc.
By:
----------------------------------
Name: Zackary S. Irani
----------------------------------
Its: President
----------------------------------
Attest:
- -----------------------------------------
Name:
----------------------------------
Title:
----------------------------------
5
<PAGE> 12
NOTICE OF EXERCISE OF WARRANT
The undersigned hereby irrevocably elects to exercise the right,
represented by the Warrant Certificate dated as of July ___, 1999, to purchase
shares of the Common Stock, par value $0.08 per share, of BIOMERICA, INC., and
tenders herewith payment in accordance with Section 1 of said Common Stock
Purchase Warrant.
Please deliver the stock certificate to:
Dated:
-----------------------------
[Name of Holder]
By:
CASH: $
-------------------
CASHLESS EXERCISE
6
<PAGE> 1
EXHIBIT 10.17
FIRST AMENDMENT TO BACK-END PROCESSING AGREEMENT
This First Amendment To Back-end Processing Agreement (the "Amendment")
is made this 2nd day of September, 1999, by and between The BigStore.com, Inc. a
Delaware corporation (the "Company"), and Biomerica, Inc., a Delaware
corporation ("Biomerica"), with reference to the following facts:
WHEREAS, Company and Biomerica are parties to that certain Back-end
Processing Agreement dated as of June 11, 1999 (the "Back-end Agreement"); and
WHEREAS, Company and Biomerica desire to amend the Back-end Agreement
as provided herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. Section 4 of the Back-end Agreement is deleted in its entirety and replaced
by the following:
"4. COMPENSATION. As compensation for the Back-end Processing Services
to be rendered by the Company under this Agreement and the Assignment,
Biomerica shall issue to the Company a common stock warrant to purchase
410,000 shares of Biomerica's restricted common stock with an exercise
price equal to $5.00 per share. The Company's right to exercise the
warrant shall vest pro rata over a period of three (3) years with
one-third of the shares vesting on the first, second and third
anniversaries of the date of grant (e.g., June 11, 1999); provided,
however, that it shall fully vest immediately prior to a public
offering of the Company's common stock. The warrant shall have a
exercise period of five (5) years commencing on the date that the
Company shall begin providing the Back-end Processing Services to
Biomerica. (A form of the Warrant is attached hereto as Exhibit A)."
2. Except as expressly provided herein, this Amendment shall not alter, amend,
or otherwise modify the terms and provisions of the Back-end Agreement.
3. The parties hereto may execute this Amendment simultaneously, in any number
of counterparts or by annexing signature pages hereto, or on facsimile copies,
each of which shall be deemed an original, but all of which together shall
constitute one and the same document.
4. Upon execution of this Amendment and the delivery of the Warrant attached
hereto as Exhibit A, the Company shall return to Biomerica for cancellation the
Warrant dated June 11, 1999.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date first above written.
The BigStore.com, Inc. Biomerica, Inc.
By: By:
----------------------- -------------------------
Name: Name:
----------------------- -------------------------
Title: Title:
----------------------- -------------------------
2
<PAGE> 3
EXHIBIT A
WARRANT AGREEMENT
<PAGE> 4
THESE SECURITIES AND THE SECURITIES ISSUABLE UPON THEIR EXERCISE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED UNLESS
COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT, A "NO ACTION"
LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION WITH RESPECT TO SUCH
TRANSFER, A TRANSFER MEETING THE REQUIREMENTS OF RULE 144 OF THE SECURITIES AND
EXCHANGE COMMISSION, OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER TO THE
EFFECT THAT ANY SUCH TRANSFER IS EXEMPT FROM SUCH REGISTRATION.
BIOMERICA, INC.
COMMON STOCK PURCHASE WARRANT
1. Issuance; Certain Definitions. In consideration of good and valuable
consideration, the receipt of which is hereby acknowledged by BIOMERICA, INC., a
Delaware corporation (the "Company"), THE BIGSTORE.COM, INC. or registered
assigns (the "Holder") is hereby granted the right to purchase at any time until
5:00 P.M., California time, on June 10, 2004, Four Hundred Ten Thousand
(410,000) fully paid and nonassessable shares of the Company's Common Stock, par
value $0.08 per share (the "Common Stock") at an initial exercise price per
share (the "Exercise Price") of $5.00 per share, subject to further adjustment
as set forth in Section 6 hereof. This Warrant is being issued to the Holder in
consideration for the services to be rendered by the Holder to the Company
pursuant to the terms of that certain Back-end Processing Agreement dated June
11, 1999, as amended by that certain First Amendment to Back-end Processing
Agreement of even date herewith. The effective date of the grant of this Warrant
is June 11, 1999.
2. Exercise of Warrants. The Holder's right to exercise this Warrant
shall vest in equal increments at the first, second and third anniversaries of
the date of issuance of this Warrant; provided, however, that the Holder's right
to exercise the Warrant shall fully vest immediately prior to a public offering
of the Company's common stock. This Warrant is exercisable in whole or in part
at the Exercise Price per share of Common Stock payable hereunder, payable in
cash or by certified or official bank check. The only condition to vesting of
the Holder's right to exercise this Warrant shall be the passage of time and
Holder's right to exercise the Option shall not be terminated for any reason,
including (without limitation) by reason of death, disability, incapacity or
termination of employment. Upon surrender of this Warrant Certificate with the
annexed Notice of Exercise Form duly executed (which Notice of Exercise Form may
be submitted either by delivery to the Company or by facsimile transmission as
provided in Section 8 hereof), together with payment of the Exercise Price for
the shares of Common Stock purchased, the Holder shall be entitled to receive a
certificate or certificates for the shares of Common Stock so purchased. For the
purposes of this Section 2, "Market Value" shall be an amount equal to the
average closing bid price of a share of Common Stock, as reported by Bloomberg,
LP or, if not so reported, as reported on the over-the-counter market for the
five (5) trading days preceding the Company's receipt of the Notice of Exercise
Form duly executed, multiplied by the number of shares of Common Stock to be
issued upon surrender of this Warrant Certificate. UPON EXERCISE OF THE WARRANT
AND ISSUANCE OF THE UNDERLYING SHARES OF COMMON STOCK, THE HOLDER AND/OR ANY
AFFILIATE (AS DEFINED BY THE SECURITIES AND
<PAGE> 5
EXCHANGE ACT OF 1934) TO WHOM SOME OR ALL OF THE WARRANT SHALL HAVE BEEN
TRANSFERRED OR ASSIGNED SHALL GRANT TO ZACKARY IRANI, IN ANY CAPACITY, CURRENTLY
AS PRESIDENT AND CHIEF EXECUTIVE OFFICER OF THE COMPANY, AN IRREVOCABLE PROXY TO
VOTE THE SHARES OF COMMON STOCK UNDERLYING THE WARRANT, WHICH PROXY SHALL EXPIRE
FIVE (5) YEARS FROM THE DATE OF GRANT.
3. Reservation of Shares. The Company hereby agrees that at all times
during the term of this Warrant there shall be reserved for issuance upon
exercise of this Warrant such number of shares of its Common Stock as shall be
required for issuance upon exercise of this Warrant (the "Warrant Shares").
4. Mutilation or Loss of Warrant. Upon receipt by the Company of
evidence satisfactory to it of the loss, theft, destruction or mutilation of
this Warrant, and (in the case of loss, theft or destruction) receipt of
reasonably satisfactory indemnification, and (in the case of mutilation) upon
surrender and cancellation of this Warrant, the Company will execute and deliver
a new Warrant of like tenor and date and any such lost, stolen, destroyed or
mutilated Warrant shall thereupon become void.
5. Rights of the Holder. The Holder shall not, by virtue hereof, be
entitled to any rights of a stockholder in the Company, either at law or equity,
and the rights of the Holder are limited to those expressed in this Warrant and
are not enforceable against the Company except to the extent set forth herein.
6. Protection Against Dilution.
6.1 Adjustment Mechanism. If an adjustment of the Exercise
Price is required pursuant to this Section 6, the Holder shall be entitled to
purchase such number of additional shares of Common Stock as will cause (i) the
total number of shares of Common Stock Holder is entitled to purchase pursuant
to this Warrant, multiplied by (ii) the adjusted purchase price per share, to
equal (iii) the dollar amount of the total number of shares of Common Stock
Holder is entitled to purchase before adjustment multiplied by the total
purchase price before adjustment.
6.2 Capital Adjustments. In case of any stock split or reverse
stock split, stock dividend, reclassification of the Common Stock,
recapitalization, merger or consolidation, or like capital adjustment affecting
the Common Stock of the Company, the provisions of this Section 6 shall be
applied as if such capital adjustment event had occurred immediately prior to
the date of this Warrant and the original purchase price had been fairly
allocated to the stock resulting from such capital adjustment; and in other
respects the provisions of this Section shall be applied in a fair, equitable
and reasonable manner so as to give effect, as nearly as may be, to the purposes
hereof. A rights offering to stockholders shall be deemed a stock dividend to
the extent of the bargain purchase element of the rights.
6.3 Adjustment for Spin Off. If, for any reason, prior to the
exercise of this Warrant in full, the Company spins off or otherwise divests
itself of a part of its business or operations or disposes all or of a part of
its assets in a transaction (the "Spin Off") in which the Company does not
receive compensation for such business, operations or assets, but causes
2
<PAGE> 6
securities of another entity (the "Spin Off Securities") to be issued to
security holders of the Company, then
(a) the Company shall cause (i) to be reserved Spin Off
Securities equal to the number thereof which would have been issued to
the Holder had all of the Holder's unexercised Warrants outstanding on
the record date (the "Record Date") for determining the amount and
number of Spin Off Securities to be issued to security holders of the
Company (the "Outstanding Warrants") been exercised as of the close of
business on the trading day immediately before the Record Date (the
"Reserved Spin Off Shares"), and (ii) to be issued to the Holder on the
exercise of all or any of the Outstanding Warrants, such amount of the
Reserved Spin Off Shares equal to (x) the Reserved Spin Off Shares
multiplied by (y) a fraction, of which (I) the numerator is the amount
of the Outstanding Warrants then being exercised, and (II) the
denominator is the amount of the Outstanding Warrants; and
(b) the Exercise Price on the Outstanding Warrants shall be
adjusted immediately after consummation of the Spin Off by multiplying
the Exercise Price by a fraction (if, but only if, such fraction is
less than 1.0), the numerator of which is the Average Market Price of
the Common Stock for the five (5) trading days immediately following
the fifth trading day after the Record Date, and the denominator of
which is the Average Market Price of the Common Stock on the five (5)
trading days immediately preceding the Record Date; and such adjusted
Exercise Price shall be deemed to be the Exercise Price with respect to
the Outstanding Warrants after the Record Date.
For the purposes of this Section 6.3, the "Average Market Price of the Common
Stock" shall mean, for the relevant period, (x) the average closing bid price of
a share of Common Stock, as reported by Bloomberg, LP or, if not so reported, as
reported on the over-the-counter market or (y) if the Common Stock is listed on
a stock exchange, the closing price on such exchange on the date indicated in
the relevant provision hereof, as reported in The Wall Street Journal.
6.4 No Adjustment for Dividends. Except as provided in Section
6.2 hereof, no adjustment in respect of any dividends or distributions out of
earnings shall be made during the term of a Warrant or upon the conversion of a
Warrant.
7. Transfer to Comply with the Securities Act; Registration Rights.
(a) This Warrant has not been registered under the Securities
Act of 1933, as amended, (the "Act") and has been issued to the Holder for
investment and not with a view to the distribution of either the Warrant or the
Warrant Shares. Neither this Warrant nor any of the Warrant Shares or any other
security issued or issuable upon exercise of this Warrant may be sold,
transferred, pledged or hypothecated in the absence of an effective registration
statement under the Act relating to such security or an opinion of counsel
satisfactory to the Company that registration is not required under the Act.
Each certificate for the Warrant, the Warrant Shares and any other security
issued or issuable upon exercise of this Warrant shall contain a legend
3
<PAGE> 7
on the face thereof, in form and substance satisfactory to counsel for the
Company, setting forth the restrictions on transfer contained in this Section.
(b) The Company hereby grants to the Holder piggyback
registration rights with respect to the Warrant Shares. In the event the Company
is filing a Registration Statement for itself or on behalf of any of its
shareholders, the Company shall notify the Holder in writing reasonably in
advance of such filing (but at least five business days) and give the Holder the
opportunity to include all or any party of the Warrant Shares (whether or not
previously issued), to the extent permissible under the Act or any regulation
promulgated thereunder. Upon the Holder's notification that the Holder desires
to have all or any portion of the Warrant Shares included in such registration,
the Company shall, at no cost or expense to the Holder, include or cause to be
included in such registration statement the Warrant Shares so identified by the
Holder. Notwithstanding any other provision of this Section 7(b), in the case of
an underwritten public offering, if the managing underwriter determines that
market factors require a limitation of the number of shares to be underwritten,
the managing underwriter may limit, or exclude, the number of shares (including
those of Holder) to be included in such Piggyback Registration. If limited,
Holder's shares will be registered pro rata with any other holders of Common
Stock or Common Stock equivalents having Registration Rights.
8. Notices. Any notice or other communication required or permitted
hereunder shall be in writing and shall be delivered personally, telegraphed,
telexed, sent by facsimile transmission or sent by certified, registered or
express mail, postage pre-paid. Any such notice shall be deemed given when so
delivered personally, telegraphed, telexed or sent by facsimile transmission,
or, if mailed, two days after the date of deposit in the United States mails, as
follows:
(i) if to the Company, to:
Biomerica, Inc.
1533 Monrovia Avenue
Newport Beach, California 92663
Attn: Zackary S. Irani, President
Facsimile: (949) 722-6674
(ii) if to the Holder, to:
The BigStore.com, Inc.
3388 Via Lido
Newport Beach, California 92660
Attn: Chief Executive Officer
Facsimile: (949) 675-5287
Any party may be notice given in accordance with this Section to the other
parties designate another address or person for receipt of notices hereunder.
4
<PAGE> 8
9. Supplements and Amendments; Whole Agreement. This Warrant may be
amended or supplemented only by an instrument in writing signed by the parties
hereto. This Warrant of even date herewith contain the full understanding of the
parties hereto with respect to the subject matter hereof and thereof and there
are no representations, warranties, agreements or understandings other than
expressly contained herein and therein.
10. Governing Law. This Warrant shall be deemed to be a contract made
under the laws of the State of California and for all purposes shall be governed
by and construed in accordance with the laws of such State applicable to
contracts to be made and performed entirely within such State.
11. Counterparts. This Warrant may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
12. Descriptive Headings. Descriptive headings of the several Sections
of this Warrant are inserted for convenience only and shall not control or
affect the meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Warrant as of
the ____ day of July, 1999.
Biomerica, Inc.
By:
----------------------------
Name: Zackary S. Irani
Its: President
Attest:
- ------------------------------------------
Name:
----------------------------------
Title:
----------------------------------
5
<PAGE> 9
NOTICE OF EXERCISE OF WARRANT
The undersigned hereby irrevocably elects to exercise the right,
represented by the Warrant Certificate dated as of July ___, 1999, to purchase
shares of the Common Stock, par value $0.08 per share, of BIOMERICA, INC., and
tenders herewith payment in accordance with Section 1 of said Common Stock
Purchase Warrant.
Please deliver the stock certificate to:
Dated:
------------------------------
[Name of Holder]
By:
CASH: $
----------------------------
CASHLESS EXERCISE
6
<PAGE> 1
EXHIBIT 10.18
CONFIDENTIAL COPY NO: CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM
BIOMERICA, INC.
-------------------------------------------
400,000 SHARES OF COMMON STOCK
$5.00 PER SHARE
-------------------------------------------
The Shares of Common Stock being offered
involve a high degree of risk. See Risk
Factors beginning on Page 3.
The Securities and Exchange Commission (SEC) and state securities
regulators have not approved these securities or determined if this
memorandum is truthful or complete. Any representation to the contrary is a
criminal offense.
<TABLE>
<CAPTION>
=============================================================================
Offering Price Proceeds to the Company (1)
- -----------------------------------------------------------------------------
<S> <C> <C>
Per Share $5.00 $5.00
- -----------------------------------------------------------------------------
Total Offering $2,000,000 $2,000,000
=============================================================================
</TABLE>
(1) Before deducting offering expenses estimated to be $100,000. The Shares are
being offered on a "best efforts basis" to "accredited investors" only.
JEFFERS, WILSON, SHAFF & FALK, LLP
BARRY D. FALK, ESQ.
18881 VON KARMAN AVENUE, SUITE 1400
IRVINE, CALIFORNIA 92612
TELEPHONE: 949-660-7700
COUNSEL TO BIOMERICA, INC.
----------------------------------
THE DATE OF THIS MEMORANDUM IS JUNE 9, 1999
<PAGE> 2
Information set forth in this Memorandum with respect to issuance of
the shares, pricing and other related information assumes a purchase price of
$5.00 per share of common stock (the "Shares").
The Shares are being offered and sold without registration under the
Securities Act of 1933, as amended (the "1933 Act"), or the securities laws of
any state, in reliance upon the exemption from registration afforded by Section
4(2) and/or 3(b) of the 1933 Act and Regulation D promulgated thereunder and
similar provisions of applicable state securities laws.
Certain portions of the information contained in this Memorandum are
confidential and proprietary to the Company, and is being submitted to
prospective investors solely for such investors' confidential use with the
express understanding that, without the prior express written permission of the
Company, such persons will not release this document or discuss the information
contained herein or make reproductions of or use this Memorandum for any purpose
other than evaluating a potential investment in the Shares.
This Memorandum contains certain information concerning the Company's
future plans and performance. There can be no assurance that the Company will be
able to successfully implement any of its plans or that assumptions or
expectations regarding its future plans and performance will not be materially
different from the Company's present expectations.
The Shares offered hereby are highly speculative and involve a high
degree of risk and should not be purchased by anyone who cannot afford the loss
of his or her entire investment. See "Risk Factors."
This offering is subject to withdrawal, cancellation or modification by
the Company without notice. The Company reserves the right, in its sole
discretion, to reject any subscription in whole or in part for any reason or to
allot to any subscriber less than the number of Shares subscribed for or to
waive conditions to the purchase of the Shares.
These Shares are subject to restrictions on transferability and resale
and may not be transferred or resold except as permitted under the 1933 Act, and
applicable state securities laws. Investors should be aware that they may be
required to bear the financial risks of this investment for an indefinite period
of time.
In making an investment decision investors must rely on their own
examination of the Company and the terms of the offering, including the merits
and risks involved. The purpose of this memorandum is solely to aid in such
examination and not to serve as a basis for an investment decision.
Each offeree may, if he or she so desires, make inquiries of the
Company with respect to the Company's business or any other matters relating to
the Company and an investment in the Shares offered hereunder, and may obtain
any additional information which such person deems to be necessary in connection
with making an investment decision in order to verify the accuracy of the
information contained in this Memorandum (to the extent that the Company
possesses such information or can acquire it without unreasonable effort or
expense). In connection with such inquiry, any documents which any offeree
wishes to review will be made available for inspection and copying or furnished,
upon request, subject to the offeree's agreement to maintain such information in
confidence and to return the same to the Company if the recipient does not
purchase the Shares offered hereunder. Any such inquiries or requests for
additional information or documents should be made in writing to the Company
addressed as follows: Attention: Chief Executive Officer, Biomerica, Inc., 1533
Monrovia Avenue, Newport Beach, California 92663.
<PAGE> 3
No person has been authorized to give any information or to make any
representations other than those contained in this Memorandum in connection with
the offer being made hereby, and, if given or made, such information or
representations must not be relied upon as having been authorized by the
Company.
This Memorandum does not constitute an offer to sell or the
solicitation of an offer to buy any security other than the securities offered
hereby, nor does it constitute an offer to sell or a solicitation of an offer to
buy such securities by anyone in any jurisdiction in which such offer or
solicitation is not authorized, or in which the person making such offer or
solicitation is not qualified to do so.
Neither the delivery of this Memorandum nor any sale made hereunder
shall imply that there has been no change in the affairs of the Company since
the date hereof, or that the information contained herein is correct as of any
time subsequent to its date.
Prospective investors are not to construe the contents of this
Memorandum as legal, investment or tax advice, prospective investors should
consult their advisors as to legal, investment, tax and related matters
concerning an investment by such prospective investors in the Company.
The statements contained herein are based on information believed by
the Company to be reliable. No warranty can be made that circumstances have not
changed since the date such information was supplied. This Memorandum contain
summaries of certain provisions of documents relating to the Company and the
purchase of the Shares, as well as summaries of various provisions of relevant
statutes and regulations. Such summaries do not purport to be complete and are
qualified in their entirety by reference to the texts of the original documents,
statutes and regulations, which are included herewith or available upon request.
<PAGE> 4
TABLE OF CONTENTS
PAGE
SUMMARY ...................................................... 1
RISK FACTORS ................................................. 3
USE OF PROCEEDS .............................................. 19
PRICE RANGE OF COMMON STOCK .................................. 20
DIVIDEND POLICY .............................................. 21
CAPITALIZATION ............................................... 22
DILUTION ..................................................... 23
DESCRIPTION OF BUSINESS ...................................... 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION
AND RESULTS OF OPERATION ..................................... 38
OPERATIONS ................................................... 41
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES ...... 42
REMUNERATION OF DIRECTORS AND OFFICERS ....................... 44
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 45
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS .... 46
DESCRIPTION OF SECURITIES .................................... 46
DESCRIPTION OF THE OFFERING .................................. 48
ADDITIONAL INFORMATION ....................................... 49
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PRIVATE PLACEMENT SUMMARY
The following is a summary of the more detailed information and
financial statements appearing elsewhere in this Memorandum. This summary is not
complete and may not contain all of the information that is important to you. To
understand this offering fully, you should read the entire Memorandum carefully,
including the risk factors and financial statements.
THE COMPANY
Historically the Company has operated as a global biomedical company
primarily engaged in the development, manufacture and marketing of medical
diagnostic test products. Beginning 1984, Biomerica followed a corporate
strategy of developing new business opportunities through selected investments
in companies in which synergistic benefits could be realized through sharing of
technology, corporate administration and/or capital resources. Pursuant to this
strategy, the Company acquired interest in companies involved in the application
of advanced technologies in the biomedical, pharmaceutical, dental and/or other
applied sciences. The Company now believes that its experience in the biomedical
and pharmaceutical fields, combined with the growth of the Internet as a venue
for commerce, provides the Company with an opportunity to become a leading
online retail drugstore and information site for pharmacy, health, wellness,
beauty and personal care products.
The Company has recently entered into the e-commerce market through
www.testathome.com and has been developing an online pharmacy. The Company
recently acquired the on-line domain name of "TheBigRx.com," and entered into a
strategic alliance with the "Big" group of online companies. This strategic
alliance will allow the Company to leverage the traffic and capabilities of
TheBigHub.com meta-search engine. This strategic alliance is the first step in
the Company's plan to become the online destination commerce site for drugstore
products and will enable the Company to compete with drugstore.com, PlanetRx and
Soma.com. TheBigHub.com (www.thebighub.com) is a network of branded, affiliate
sites designed to leverage the traffic and capabilities of the powerful iSleuth
(www.isleuth.com) meta-search engine.
Biomerica's current primary source of revenue and its historic core
business involves developing, manufacturing, and selling unique medical
diagnostic products designed to detect certain medical conditions and diseases
in the areas of certain cancers, heart attack, fertility, gastritis and ulcers,
diabetes and Candida. The Company has developed, produced and sold immunoassay
diagnostic test kits since the late 1970's. Immunoassay kits are used by
hospitals, clinical laboratories and medical researchers to analyze blood or
urine from patients in the diagnosis of various diseases and other medical
complications, or to measure the level of specific hormones, antibodies,
antigens or other substances which may exist in the human body in extremely
small concentrations.
Biomerica currently has two subsidiaries. Lancer Orthodontics, Inc.
("Lancer")is engaged in manufacturing, sales and development of high technology
orthodontic products including, among others, ceramic brackets and wires. Lancer
is well established in the field of orthodontics and its products are sold
worldwide through a direct sales force and distributors. Allergy Immuno
Technologies, Inc. ("AIT") is engaged in the development and commercialization
of novel bio-pharmaceutical products for the treatment of allergies. The
Company's research in the allergy field has created opportunities for new
therapeutic approaches and inventions that include the possible development of
oral type and/or an inhalant anti-allergy treatments as an alternative to
allergy shots.
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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.
THE OFFERING
The Company is offering up to 400,000 shares of its Common Stock (the
"Shares") at a price of $5.00 per share. The Company's NASDAQ Small Cap trading
symbol is BMNR. The Shares are being offered and sold without registration under
the Securities Act of 1933, as amended (the "1933 Act"), or the securities laws
of any state, in reliance upon the exemption from registration afforded by
Section 4(2) and/or 3(b) of the 1933 Act and Regulation D promulgated thereunder
and similar provisions of applicable state securities laws.
Holders of common stock are entitled to receive dividends when, as and
if declared by the Board of Directors, out of funds legally available therefor.
Dividends on any outstanding shares of preferred stock may be required to be
paid in full before payment of any dividends on the common stock. Upon
liquidation, dissolution or winding up of the Company, holders of common stock
are entitled to share ratably in assets available for distribution after payment
of all debts and other liabilities and subject to the prior rights of any
holders of any preferred stock then outstanding. Holders of common stock are
entitled to one vote per share with respect to all matters submitted to a vote
of shareholders and do not have cumulative voting rights. Accordingly, holders
of a majority of the common stock entitled to vote in any election of directors
may elect all of the directors standing for election, subject to the voting
rights (if any) of any series of preferred stock that may be outstanding from
time to time. The Company's Certificate of Incorporation and Bylaws contain no
restrictions on the repurchase by the Company of shares of the common stock or
preferred stock. All the outstanding shares of common stock are, and additional
shares of common stock will be, when, issued, validly issued, fully paid and
nonassessable. See "Description of Securities -- Common Stock".
Shares will be offered on a best efforts basis by the Company to
Accredited Investors only. The Shares will be sold pursuant to a Stock Purchase
Agreement between the Company and each participating investor accepted by the
Company. Each person will be required to complete, sign and deliver to the
Company a Prospective Investor Questionnaire, in which certain information will
be provided to the Company to enable it to determine, in its sole discretion,
whether or not the prospective investor meets the necessary suitability
standards.
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RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISKS BEFORE YOU DECIDE TO
BUY OUR COMMON STOCK. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE
ONLY ONES THAT WE FACE. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN
TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO ADVERSELY AFFECT OUR
BUSINESS OPERATIONS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, THEY COULD
SERIOUSLY HARM OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS. IN
THIS CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE.
OUR BUSINESS MODEL AND EXPANSION PLANS RELY HEAVILY ON THE INTERNET AS A MEDIUM
FOR COMMERCE, WHICH IS STILL UNPROVEN.
The market for the our Internet services, which is a critical part of
our future expansion plan, has only recently begun to develop and will continue
to evolve rapidly. As a result, demand and market acceptance of health,
pharmaceutical, and personal care products and services over the Internet remain
uncertain. Moreover, since the market for our Internet services is new and
evolving, we cannot accurately predict the size of this market or its future
growth rate, if any. The success of our Internet services will depend
substantially upon the widespread acceptance and use of the Internet as a medium
for commerce by a broad base of consumers. Rapid growth in the use of the
Internet is a recent phenomenon. For our expansion plans to succeed, consumers
who have historically used other means of commerce to buy goods and services
must accept and utilize novel ways of conducting business and exchanging
information. We cannot assure you that a broad base of consumers will accept the
Internet as an effective medium for commerce. If our on-line services do not
achieve market acceptance or if the Internet does not become a viable commercial
marketplace, our business and expansion plans would suffer a material adverse
effect, which may severely impact the market price of our common stock.
Further, the online market for drugstore products is in its infancy.
The market is significantly less developed than the online market for books,
auctions, music, software and numerous other consumer products. Even if use of
the Internet and electronic commerce continues to increase, the rate of growth,
if any, of the online drugstore market could be significantly less than the
online market for other products. Our rate of revenue growth could therefore be
significantly less than other online merchants.
OUR BUSINESS MODEL IS DEPENDENT ON THE INTERNET INFRASTRUCTURE, WHICH MAY NOT BE
ADEQUATE TO HANDLE FUTURE GROWTH.
Our business model depends heavily on the Internet infrastructure. This
dependence on the Internet infrastructure may prove problematic for a number of
reasons, including:
- inadequate development of the necessary infrastructure for
communication speed, access and server reliability;
- security and confidentiality concerns;
- lack of development of complementary products, such as high-speed
modems and high-speed communication lines;
- implementation of competing technologies;
- delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet
activity; and
- United States and foreign governmental regulation.
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The Company expects Internet use to grow in number of users and volume
of traffic. The Internet infrastructure may be unable to support the demands
placed on it by this continued growth. If these factors limit the acceptance or
effectiveness of Internet products, the Company's business could suffer
dramatically.
OUR EXPANSION PLANS MAY SIGNIFICANTLY STRAIN OUR RESOURCES.
In order to maximize potential growth in our market opportunities, we
believe that we must expand rapidly and significantly upon our entrance into the
Internet market place. This impetus for expansion will place a significant
strain on our management, operational and financial resources. In order to
manage our growth, we must implement and continually improve our operational and
financial systems, expand operations, attract and retain superior management and
train, manage and expand our employee base. Further, management will have to
maintain relationships with various merchants and other third parties. We cannot
assure you that we will effectively manage the rapid expansion of our
operations, that our systems, procedures or controls will adequately support our
operations or that our management will successfully implement our business
model. If we cannot effectively manage our growth, our business, financial
condition and results of operations could suffer a material adverse effect.
OUR BUSINESS MODEL AND EXPANSION PLANS MAY CAUSE FLUCTUATIONS IN OPERATING
RESULTS.
Although we have enjoyed a fairly stable revenue an earnings history
over the last several years, our expansion in to the electronic commerce market
and the rapidly evolving nature of that market may cause us to experience
significant fluctuations in our future operating results due to a variety of
factors, many of which are outside our control. Factors that may adversely
affect our future operating results include the following:
- the level of traffic on our Web site;
- the level of use of the Internet and on-line services and
increasing consumer acceptance of the Internet as a medium for
commerce;
- our ability to develop and upgrade our systems and infrastructure
and attract new personnel in a timely and effective manner;
- the announcement or introduction of new sites, services and
products by our competitors;
- technical difficulties and system downtime or Internet brownouts;
- the amount and timing of operating costs and capital expenditures
relating to expansion of our Internet business, operations and
infrastructure;
- general economic conditions and economic conditions specific to
the Internet and on-line commerce.
We also face unforeseeable seasonal sales fluctuations related to the
focus of our expansion on retail Internet commerce. Due to the above factors,
our operating results may fall below the expectations of management and our
business could suffer significantly.
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WE MAY NOT SUCCEED IN ESTABLISHING THEBIGRX.COM BRAND NAME.
We believe that developing and strengthening our brand is critical to
achieving widespread acceptance of TheBigRx.com, particularly because of the
early stage and competitive nature of the online market for drugstore products.
In particular, if we do not establish our brand quickly, we may lose the
opportunity to build a critical mass of customers. Promoting and positioning our
brand will depend largely on the success of our marketing efforts and our
ability to provide consistent, high quality customer experiences. To promote our
brand, we will need to commit substantial financial resources to creating and
maintaining brand loyalty among customers. We will also need to commit
significant additional financial resources to attract and train customer service
personnel in order to provide our customers with high quality customer service.
We cannot be certain that our brand promotion activities will be successful or
that any revenues generated form such activities will be sufficient to offset
the expenses incurred in building our brand.
OUR ELECTRONIC COMMERCE BUSINESS DEPENDS ON STRATEGIC RELATIONSHIPS.
We believe that our ability to attract customers, facilitate broad
market acceptance of our products and the TheBigRx.com brand and enhance our
sales and marketing capabilities depends on our ability to develop and maintain
strategic relationships with portals and distributors. If we are unable to
develop or maintain key relationships, we may have difficulty attracting
customers.
OUR ELECTRONIC COMMERCE BUSINESS MAY SUFFER IF WE ARE UNABLE TO OBTAIN AN
ADEQUATE SUPPLY OF MERCHANDISE OR VENDOR CREDIT.
Although our electronic commerce plans include establishing and
maintaining relationships with vendors that we believe will offer competitive
sources of supply, there can be no assurance that we will be able to obtain the
quantity of brand or quality of items that management believes are optimum. The
unavailability of certain product lines could adversely impact the our operating
results. Given our lack of operating history in the electronic commerce
business, certain vendors of products we will sale not be prepared to advance
normal levels of credit to us. An unwillingness to extend credit along with a
substantial product volume may require additional amounts of capital to finance
our planned on-line operations, and reduce returns, if any, on invested capital.
WE MUST KEEP UP WITH THE RAPID TECHNOLOGICAL CHANGE OF THE INTERNET AND ON-LINE
COMMERCE INDUSTRIES.
The Internet and on-line commerce industries typically experience rapid
technological change, changing market conditions and customer demands and the
emergence of new industry standards and practices that could render our Web site
and proprietary technology obsolete. Our future success will substantially
depend on our ability to enhance our services, develop new services and
proprietary technology and respond to technological advances in a timely and
cost-effective manner. The development of Web site and other proprietary
technology entails significant technical and business risk. We cannot assure you
that we will succeed in developing and using new technologies or in adapting our
proprietary technology and systems to meet emerging industry standards and
customer requirements. If we are unable, for technical, legal, financial, or
other reasons, to adapt in a timely manner in response to changing market
conditions or customer requirements, or if our new products and services do not
achieve market acceptance, our business, prospects, results of operations and
financial condition would suffer a material adverse effect.
WE WILL BE EXPOSED TO INTERNET COMMERCE SECURITY RISKS.
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A significant barrier to on-line commerce is the secure transmission of
confidential information over public networks. We will rely on encryption and
authentication technology to provide the security and authentication necessary
to effect secure transmission of confidential information. We cannot assure you
that advances in computer capabilities, new discoveries in the field of
cryptography or other developments will not result in a compromise or breach of
the algorithms we use to protect consumers' transaction data. If any such
compromise of our security were to occur, it could have a material adverse
effect on our business, prospects, financial condition and results of
operations. A party who is able to circumvent our security measures could
misappropriate proprietary information or cause interruptions in our operations.
We may have to expend significant capital and other resources to prevent such
security breaches or alleviate problems caused by such breaches.
Concerns over the security of transactions conducted on the Internet
and the privacy of users may also hinder the growth of on-line services
generally, especially as a means of conducting commercial transactions. To the
extent that our activities or those of third-party contractors involve the
storage and transmission of proprietary information, such as credit card
numbers, security breaches could damage our reputation and expose us to a risk
of loss or litigation and possible liability. We cannot assure you that our
security measures will prevent security breaches or that failure to prevent such
security breaches will not have a material adverse effect on our business,
prospects, financial condition and results of operations.
OUR BUSINESS PLAN DEPENDS PARTLY ON THE AVAILABILITY OF REIMBURSEMENT FOR THE
PHARMACEUTICAL PRODUCTS WE OFFER AND WILL OFFER.
Our ability to compete with traditional pharmacies and other on-line
pharmacies depends in part on whether health care providers, including
government authorities, private health insurers, health maintenance
organizations and managed care organizations, will provide sufficient
reimbursement for the products we offer. Third-party providers are increasingly
challenging the prices of pharmaceutical products and demanding data to justify
the inclusion of new or existing products in their formularies. Significant
uncertainty exists regarding the reimbursement status of pharmaceutical
products, and we cannot predict whether additional legislation or regulation
affecting third-party coverage and reimbursement will be enacted in the future,
or what effect such legislation or regulation would have on our future business.
Reimbursement may not be available for the products we offer and reimbursement
granted may not be maintained. Moreover, limits on reimbursement available from
third-party providers may reduce the demand for, or adversely affect the price
of, the products we will offer. Additionally, sales through our on-line pharmacy
service may be limited by pharmacy benefit management groups that restrict
participation in their networks, which could adversely affect our ability to
compete against other pharmacy services that have been approved for
participation. The unavailability or inadequacy of third-party reimbursement for
the products we offer or our denial of admission into pharmacy benefit
management networks, would have a material adverse effect on our ability to
fully execute our business plan.
THE ON-LINE COMMERCE INDUSTRY IS RAPIDLY EVOLVING AND INTENSELY COMPETITIVE.
The on-line commerce market is new, rapidly evolving and intensely
competitive. Our current or potential competitors include the following:
- On-line drugstores such as Planet(Rx), drugstore.com, Soma.com,
and the soon to be launched, (Rx).com;
- E-commerce solution providers that provide shopping cart based
transaction products
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such as: Yahoo/Viaweb, icat, Pandesic;
- Web developers that incorporate E-commerce products in their
solutions such as Mercantec, Hiway, and Simplenet;
- On-line shopping malls and auction houses such as The Internet
Mall, Branch Mall, the Yahoo Shopping Guide, Ebay; and
- Product search engines and comparison shopping sites such as
Excite's Jango, Yahoo Junglee, and Webmarket.com.
We believe that the principal competitive factors in our on-line market
are:
- Brand recognition;
- Brand selection;
- Personalized services;
- Convenience;
- Price;
- Accessibility;
- Customer service;
- Quality of search tools;
- Quality site content; and
- Reliability and speed of fulfillment.
Many of the our potential competitors have extensive Internet operating
histories, large customer bases, greater brand recognition and significantly
greater financial, marketing and other resources. Certain of our competitors may
secure merchandise from vendors on better terms, devote greater resources to
marketing and promotional campaigns, adopt more aggressive pricing or inventory
availability policies and devote substantially more resources to Web site and
systems development. Increased competition may result in reduced operating
margins, loss of market share and a diminished brand franchise. We cannot assure
you that we will compete successfully against our future competitors.
We expect that competition in on-line commerce market will intensify in
the future. For example, as various market segments obtain large, loyal customer
bases, participants in those segments may seek to leverage their market power to
the detriment of participants in other market segments. Competitive pressures
created by any one of our competitors, or by our competitors collectively, could
have a material adverse effect on our business, prospects, financial condition
and results of operations.
WE ARE SUBJECT TO RISK OF SYSTEM FAILURE.
Our success depends substantially on our ability to deliver high
quality, uninterrupted Internet hosting. This requires we protect our computer
equipment and the information stored in our servers. Our systems will be
vulnerable to damage by fire, natural disaster, power loss, telecommunications
failures, unauthorized intrusion and other catastrophic events. Any substantial
interruption in our systems would have a material adverse effect on our
business, prospects, financial condition and results of operations. Although we
intend on carrying property and business interruption insurance, our coverage
may not adequately compensate for the losses that may occur. In addition, our
systems may be vulnerable to computer viruses, physical or electronic break-ins
and other similar disruptive events. Computer viruses, break-ins or other
problems caused by third parties could lead to interruptions, delays, loss of
data or cessation in service to users of our services. The occurrence of any of
these risks could have a material adverse effect on our business, prospects,
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financial condition or results of operations.
FUTURE GOVERNMENT REGULATIONS MAY BE ADOPTED WITH RESPECT TO THE WORLD WIDE WEB
AND ELECTRONIC COMMERCE.
Currently few laws or regulations directly apply to access to or
commerce on the Web. It is possible, however, that a number of laws and
regulations may be adopted with respect to the Web, covering issues such as user
privacy, pricing and characteristics and quality of products and services. The
adoption of any such laws or regulations may decrease the growth of the
Internet, which in turn, could decrease the demand for our services and increase
our cost of doing business or otherwise have a material adverse effect on our
business, prospects, financial condition and results of operations. Moreover,
the applicability to the Internet or other on-line services of existing laws in
various local and foreign jurisdictions governing issues such as property
ownership, sales and other taxes, libel and personal privacy is uncertain and
may take years to resolve. Any such new legislation or regulation, the
application of laws and regulations from jurisdictions whose laws do not
currently apply to our business, or the application of existing laws and
regulations to the Internet or other on-line services could have a material
adverse effect on our business, prospects, financial condition and results of
operations.
WE OPERATE IN A HIGHLY REGULATED INDUSTRY AND REGULATORY MATTERS COULD AFFECT
OUR ABILITY TO CONDUCT OUR BUSINESS.
Certain of our current and planned activities are subject to extensive
regulation by one or more federal agencies including without limitation, the
Food and Drug Administration, the Drug Enforcement Administration, the
Environmental Protection Agency, and the Consumer Product Safety Commission.
These activities are also regulated by various agencies of the states and
localities in which our products are sold or manufactured.
In particular, we must obtain specific clearance from the FDA before we
can market new products or certain modified products in the United States. The
FDA administers the Federal Food, Drug, and Cosmetic Act. Diagnostic test kits,
as well as dental products manufactured by our Lancer subsidiary, are required
to comply with certain manufacturing standards of the FDA. Normally, if a
diagnostic test kit or other medical device is of a type that has already been
cleared for marketing by other companies, FDA clearance will take 90 days. If
the device is not of a type previously marketed by other companies FDA clearance
could take as much as two years. Although the Company does not anticipate any
unusual difficulties in complying with government regulations applicable to its
business, it cannot predict whether future changes in government regulation
might increase its cost of conducting business or increase the time required for
development and introduction of new products.
FDA regulations also require companies like ours to adhere to Good
Manufacturing Practices ("GMP"), which include production design controls,
testing, quality control, storage and documentation procedures. Compliance with
device GMP regulations is difficult, costly and uncertain. The FDA may at any
time inspect our facilities to determine whether adequate compliance has been
achieved. There can be no assurance that adequate compliance will be achieved or
that the FDA will not withdraw marketing clearance, require product recall or
permit marketing if there is inadequate compliance. In addition, if we make any
change or modification to a device or to its intended use, we may be required to
reassess compliance with device GMP regulations, which may cause interruptions
or delays in the marketing and sale of our products. Any such interruptions or
delays could have a material adverse effect on our business, financial condition
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and results of operations.
Sales of medical device products outside the United States are subject
to foreign regulatory requirements that vary from country to country. The time
required to obtain approvals required by foreign countries may be longer or
shorter than that required for FDA approval, and requirements for licensing may
differ from FDA requirements.
Our business model includes the operation of a pharmacy, through which
we will dispense pharmaceutical products and distribute these products
throughout the country, including compounded pharmaceutical products and other
health care products. Such pharmacy services are subject to state and federal
regulation, including regulation by state pharmacy boards and will require that
we obtain licenses from state pharmacy boards and federal agencies. The state
pharmacy boards will have the authority to inspect our pharmacy. Our failure to
comply with state board requirements could result in criminal and civil
sanctions, including fines, suspension of our licenses, and revocation of our
licenses. In addition, the DEA regulates controlled substances that are stored
or dispensed by pharmacies. The failure to comply with DEA regulations can
result in significant penalties, including criminal and civil penalties. We can
give no assurance that our applications for the required pharmacy licenses will
be approved in a timely manner or that they will be approved at all. If they are
not approved in a timely manner or if they are denied, we may not be able to
achieve certain material aspects of our business model.
We hold two radioactive materials licenses from the State of
California, a permit from the U.S. Drug Enforcement Administration and a permit
from the U.S.D.A. We also hold a Device Manufacturing License from the State of
California, Department of Health Services, and are registered with the
Department of Health and Human Services, Public Health Service of the FDA as a
Device Establishment. All of our licenses and permits are renewed periodically.
Although we have never failed to obtain renewals, our business operations would
be materially and adversely affected if we were unable to do so.
Failure to comply with applicable federal, state or foreign laws or
regulations could subject our company to enforcement actions, including, but not
limited to, product seizures, recalls, withdrawal of clearances or approvals and
civil and criminal penalties against the Company or its responsible officials,
any one or more of which could have a material adverse effect on our business,
results of operations and financial condition. Federal, state and foreign laws
and regulations regarding the manufacture and sale of medical devices and
distribution of pharmaceuticals are subject to future changes, as are
administrative interpretations of regulatory agencies. We can give no assurance
that such changes will not have a material adverse effect on our Company's
business, financial condition and results of operations.
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WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS OR PRODUCT RECALLS AND PHARMACY OR
PRESCRIPTION PROCESSING ERRORS COULD PRODUCE LIABILITY AND SIGNIFICANT ADVERSE
PUBLICITY.
Although we believe that we currently carry and intend to maintain
appropriate product liability insurance, we cannot guarantee that such insurance
will be sufficient to cover all possible liabilities. The manufacture and sale
of our products expose us to product liability claims and product recalls,
including those which may arise from misuse, malfunction or design flaws. We
cannot give assurances that our existing insurance coverage will cover the costs
of any product liability claims made against us or that we will be able to
obtain product liability insurance in the future at satisfactory rates or in
adequate amounts. Product liability claims or product recalls, regardless of
their ultimate outcome, could result in costly litigation and could have a
material adverse effect on our business, financial condition and results of
operations.
Pharmacies occasionally make mistakes relating to prescriptions, dosage
and other aspects of the medication dispensing process. For example, a study of
community pharmacies appearing in the December 1995 issue of American Pharmacy
found that 24% of prescriptions contained dispensing errors and 4% of
prescriptions contained errors that were clinically significant. We expect that
sales of pharmaceutical products will account for a significant percentage of
our revenues. Because we will distribute these products directly to the
consumer, we will be the most visible participant in the medication distribution
chain. Further, pharmacists are required by law to offer counseling, without
additional charge, to customers about medication, dosage, delivery systems,
common side effects and other information deemed significant by the pharmacists.
Our pharmacists may have a duty to warn customers regarding any potential
adverse effects of a prescription drug if the warning could reduce or negate
such effects. This counseling will be in part accomplished through e-mail and
inserts included with the prescription, which may increase the risk of
miscommunication because the customer is not personally present or may not have
provided all relevant information. We will also post product information on our
Web site. This creates the potential for claims to be made against us for
negligence, personal injury, wrongful death, product liability, malpractice,
invasion of privacy or other legal theories based on our product or service
offerings. Although we carry general liability, product liability and
professional liability insurance, our insurance may not cover potential claims
of this type or may not be adequate to protect us from all liability that may be
imposed. In addition, there could be severe negative publicity if we are sued on
these or other grounds, which could hurt TheBigRx.com brand and prevent us from
attracting and retaining customers. We cannot be certain that we will be able to
maintain general liability, products liability and professional liability
insurance in the future on acceptable terms or with adequate coverage against
potential liabilities.
In addition, because we and other online pharmacies offer a novel
shopping experience, pharmacy errors either by us or our competitors may produce
significant adverse publicity either for us or the entire online pharmacy
industry. Because of the significant amount of recent press coverage on Internet
retailing, we believe that we will be subject to a higher level of media
scrutiny than other pharmacy product channels. The amount of negative publicity
that we or the online pharmacy industry receive as a result of pharmacy or
prescription processing errors could be disproportionate in relation to the
negative publicity received by other pharmacies making similar mistakes. We have
no control over the pharmacy practices of our competitors, and we cannot ensure
that our pharmacists or our prescription processing department will be able to
operate without error. We believe customer acceptance of our online shopping
experience is based in large part on consumer trust, and negative publicity
could erode such trust, or prevent it from growing. This could result in an
immediate reduction in the amount of orders we receive and adversely affect our
revenue growth.
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OUR TRADITIONAL MARKET PLACE IS HIGHLY COMPETITIVE.
We compete with numerous other companies, and we expect competition to
increase due to the increased acceptance of diagnostic test kits and
technological advancements. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share. Any of these results
could adversely affect our current business. Currently more than 100 companies,
most of which are located in the United States, produce Immunodiagnostic
products. We typically compete principally on the basis of uniqueness and
quality of product, performance, price, service and marketing. Some of our
competitors have much greater financial, technical, research and other resources
than we have. These competitors may also:
- have larger, more established sales and marketing, distribution
and service organizations;
- offer broader product lines;
- have greater name recognition;
- offer discounts as a competitive tactic; and
- have invested in competing technologies that may be more
effective than our technologies.
In addition, our competitors may develop and market technologies or
products that are more effective or commercially attractive than our products.
As a result, we may experience increased competition, reduced sales and slower
growth in the future. These new technologies and products could render our
products obsolete. We cannot be certain that we will have the technical
expertise, or the financial, marketing or distribution resources to compete
effectively in the future.
OUR CURRENT BUSINESS DEPENDS PARTLY ON THIRD PARTY DISTRIBUTORS.
Approximately twenty percent (20%) of our existing customer base are
third party distributors. If we lose one or more of these distributors and
cannot arrange suitable alternatives, our business could be adversely affected.
We may not be able to enter into new distribution or marketing agreements on
satisfactory terms, or at all. We cannot be certain that our distributors will
devote sufficient resources to effectively market and sell the products
manufactured by us, that they will devote sufficient resources in the future to
market and sell any new products manufactured by us, or that they will market
these products at prices that can achieve market acceptance. In addition, our
distributors may give higher priority to the products of similar suppliers or
their own products, thus reducing their efforts to sell products manufactured by
us. If any of our distributors become unwilling or unable to promote, market and
sell products manufactured by us, our business could be adversely affected.
OUR CURRENT BUSINESS DEPENDS IN PART ON THE DEVELOPMENT, INTRODUCTION AND MARKET
ACCEPTANCE OF NEW PRODUCTS.
We are in various stages of development of new products. We believe our
revenue growth and future operating results will depend, in part, on our ability
to complete development of these products and successfully introduce them. In
order to successfully introduce and sell these products, we must, among other
things:
- undertake time-consuming and costly development, manufacturing
and other activities;
- establish and maintain reliable, cost-efficient manufacturing
capacity for these products;
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<PAGE> 16
- obtain necessary regulatory clearance or approvals in a timely
manner; and
- ensure that our products comply with government and regulatory
testing guidelines;
Each stage of this process involves inherent difficulties. We may not be able to
successfully develop, introduce, cost-effectively manufacture or achieve market
acceptance for new products or enhancements to existing products.
OUR RESEARCH AND DEVELOPMENT PROJECTS INVOLVE THE USE OF HAZARDOUS MATERIALS AND
CHEMICALS AND COULD RESULT IN SUBSTANTIAL ENVIRONMENTAL LIABILITY.
Our research and development involves the controlled use of hazardous
materials and chemicals. As a result we may incur substantial costs to comply
with environmental regulations. Moreover, although we believe 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, we could be held liable for any damages that
result and any such liability could exceed our total resources.
WE ARE DEPENDENT ON AND MUST PROTECT OUR PATENTS, TRADEMARKS, LICENSES AND
PROPRIETARY RIGHTS.
Our Lancer subsidiary holds four patents and licenses to patents held
by third parties, and our Allergy Immuno Technologies subsidiary holds an
additional four patents. Our success depends, at least in part, on maintaining
these patents and obtaining future patent protection for new products, defending
patents once obtained, preserving our trade secrets and operating without
infringing upon patents and proprietary rights held by third parties, both in
the United States and in foreign countries. There can be no assurance that we or
our subsidiaries will develop or obtain additional rights to products or
processes that are patentable, that patents will issue from any future patent
applications filed by us or our subsidiaries, or that claims allowed will be
sufficient to protect our technology or technology licensed to us or our
subsidiaries. In addition, no assurances can be given that any patents issued to
or licensed by us or our subsidiaries will not be challenged, invalidated,
infringed or circumvented or that the rights granted thereunder will provide
competitive advantages for our business or products or that of our subsidiaries.
We may be subject to further risks as we expand our operations in countries
where intellectual property laws are not well developed or are difficult to
enforce. Legal protections of our proprietary rights may be ineffective in those
countries. In such event, our business, results of operations and financial
condition may be materially adversely effected.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical devices industry. We have not in the
past been involved in patent litigation, however, future litigation may be
necessary to protect patents, trade secrets, copyrights or "know-how" owned by
or licensed to us or our subsidiaries or to defend against claimed infringement
of the rights of others and to determine the scope and validity of the our
proprietary rights and those of others. The validity and breadth of claims
covered in medical technology patents may involve complex legal and factual
questions for which important legal principles are unresolved. Any intellectual
property litigation could result in substantial cost to and diversion of our
efforts generally and our efforts to expand into electronic commerce in
particular. Adverse determinations in any litigation could subject us to
significant liabilities to third parties, could require us to seek licenses from
third parties with unfavorable terms, if at all, and could prevent us from
manufacturing, selling or using certain
12
<PAGE> 17
of our products, any of which could have a material adverse effect on our
business, financial condition and results of operations.
We also rely and will rely on trade secrets and proprietary technology
that we protect and will protect, in part, through confidentiality agreements
with employees, consultants and other parties. Despite our efforts to protect
our proprietary rights, unauthorized parties may attempt to copy aspects of our
products or services or obtain and use information that we regard as
proprietary. There can be no assurance that these agreements will not be
breached, that we will have adequate remedies for any breach, that others will
not independently develop substantially equivalent proprietary information or
that third parties will not otherwise gain access to our trade secrets.
We also rely upon trademarks and trade names for the development and
protection of brand loyalty and associated goodwill in connection with our
products. We will also apply to register certain additional trademarks in, or
claim certain trademark rights in, the United States and/or foreign
jurisdictions. The Company cannot assure you that it will secure significant
protection for these trademarks. There can be no assurance that any registered
or unregistered trademarks or trade names owned by or licensed by us will not be
challenged, canceled, infringed, circumvented, or be declared generic or
infringing of other third-party marks or provide any competitive advantage to
us.
WE FACE RISKS ASSOCIATED WITH DOMAIN NAMES.
We currently hold the Internet domain name "TheBigRx.com," as well as
various other related names. Domain names generally are regulated by Internet
regulatory bodies. The regulation of domain names in the U.S. and in foreign
countries is subject to change. Regulatory bodies could establish additional
top-level domains, appoint additional domain name registrars or modify the
requirements for holding domain names. As a result, we may not acquire or
maintain "TheBigRx.com" domain name in all of the countries in which we intend
to conduct business.
The relationship between regulations governing domain names and laws
protecting trademarks and similar proprietary rights is unclear. Therefore, we
could be unable to prevent third parties from acquiring domain names that
infringe or otherwise decrease the value of our trademarks and other proprietary
rights.
WE MAY REQUIRE ADDITIONAL CAPITAL AND THE AVAILABILITY OF ADDITIONAL CAPITAL IS
UNCERTAIN.
We believe that the anticipated net proceeds from this offering
together with interest thereon and our Company's existing capital resources will
be sufficient to fund our operations at least through the year 2000. However,
the Company's future liquidity and capital requirements will depend upon
numerous factors, including the resources we devote to:
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<PAGE> 18
- develop our Internet infrastructure and promote our on-line
drugstore;
- further develop our marketing and sales organization,
domestically and internationally;
- the receipt of and the time required to obtain regulatory
clearances and approvals;
- our research and development programs; and
- the expansion of our business, including through the possible
acquisition of businesses, technologies or other intellectual
property rights.
There can be no assurance that we will not require additional financing or will
not in the future seek to raise additional funds through bank facilities, debt
or equity offerings or other sources of capital. Additional funding may not be
available when needed or on terms acceptable to us, which would have a material
adverse effect on our business, financial condition and results of operations.
See "Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
WE RELY ON OUR KEY MANAGEMENT PERSONNEL AND ON OUR ABILITY TO ATTRACT HIGHLY
QUALIFIED PERSONNEL IN THE FUTURE.
Our performance depends substantially on the continued services and
performance of our senior management and other key personnel. Our performance
also depends on our ability to retain and motivate our other qualified officers
and key employees. The loss of the services of any of our executive officers or
other key employees could have a material adverse effect on our business,
prospects, financial condition and results of operations. Our future success
also depends on our ability to identify, attract, hire, train, retain and
motivate other highly skilled technical, managerial and marketing personnel,
particularly computer software engineers. Competition for such personnel is
intense, and we cannot assure you that we will succeed in attracting and
retaining such personnel. Our failure to attract and retain the necessary
technical, managerial and marketing personnel could have a material adverse
effect on our business, prospects, financial condition and results of
operations. See "Business" and "Management."
THERE ARE RISKS ASSOCIATED WITH OUR INTERNATIONAL SALES AND OPERATIONS.
With the exception of our Lancer subsidiary, which has its
manufacturing and shipping facilities located in Mexicali, Mexico, all of our
fixed assets are located in the United States. However, over forty percent (45%)
of our current sales revenue is derived from foreign markets. Our international
sales activities and operations are subject to a wide variety of general and
specific business risks, including, by way of illustration and not by way of
limitation:
- fluctuations in currency exchange rates;
- unexpected changes in legal requirements;
- political and economic instability;
- restrictions on repatriation of funds or profits from foreign
markets;
- longer payment cycles or problems in collecting accounts
receivable;
- difficulties in protecting the Company's intellectual property;
- potentially adverse tax consequences; and
- regulation by foreign regulatory authorities.
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<PAGE> 19
If the revenues resulting from international sales activities were
inadequate to offset the expense of establishing and maintaining foreign
transactions, such inadequacy could have a material adverse effect on our
business, prospects, financial condition and results of operations. In addition
to those risks mentioned above, there are additional risks inherent in doing
business on an international level, such as unexpected changes in regulatory
requirements, export and import restrictions, tariffs and other trade barriers,
difficulties in staffing and managing foreign operations, and political
instability, any of which could adversely impact the success of our
international sales activities and operations. These and other factors
associated with our international sales and operations may have a material
adverse effect on our financial condition and may substantially reduce our
income and result in operating losses.
WE ARE EXPOSED TO RISKS ASSOCIATED WITH FOREIGN EXCHANGE RATE FLUCTUATIONS AND
THE PHASE IN OF THE EURO.
We are exposed to currency transaction risk to the extent that our
sales activities and operations involve transactions in differing currencies.
Fluctuations in currency exchange rates will impact our results of operations to
the extent that there is a timing difference between the receipt of payment from
customers and our payment of vendors. Given the volatility of currency exchange
rates, there can be no assurance that we will be able effectively to manage our
currency transaction risks or that any volatility in currency exchange rates
will not have a material adverse effect on our business, financial condition or
results of operations.
Eleven participating member countries of the European Union (the
"participating countries") adopted the Euro as their common legal currency on
January 1, 1999, the existing sovereign currencies (the "legacy currencies") of
the participating countries are expected to remain legal tender as denominations
of the Euro between January 1, 1999 and January 1, 2002 (the "transition
period"). The participating countries' pursuit of a single monetary policy
through the European Central Bank may affect the economies of significant
markets that we sale into, which may in turn have a material adverse effect on
our results of operations and financial condition (e.g., by causing delays in
order processing). Moreover, increased price transparency or disruption of
activity resulting from the conversion to or from the Euro in thereupon markets
in which we operate could hurt our business in those markets, resulting in lost
revenues.
WE DO NOT PAY DIVIDENDS.
We have never declared or paid any cash dividends on our capital stock.
We currently intend to retain any future earnings for funding growth and,
therefore, do not expect to pay any dividends in the foreseeable future.
INVESTORS IN THE COMMON STOCK WE ARE OFFERING WILL EXPERIENCE IMMEDIATE AND
SUBSTANTIAL ECONOMIC DILUTION.
The purchasers of the shares of common stock we are offering will
experience immediate and substantial dilution in the net tangible book value of
their shares of common stock in the amount of $ 3.87 per share (after giving
effect to estimated underwriting discounts and commissions and offering
expenses). See "Dilution." In the event we offer additional common stock in the
future, including shares that may be issued upon exercise of stock options, the
purchasers of common stock in this offering may experience further dilution in
the net tangible book value per share of the common stock they are acquiring.
15
<PAGE> 20
A SIGNIFICANT NUMBER OF OUR SHARES ARE AVAILABLE FOR SALE AND THEIR SALE COULD
DEPRESS OUR STOCK PRICE.
Sales of substantial amounts of our common stock, including shares
issued upon the exercise of outstanding options or warrants, in the public
market after this offering, could adversely affect the market price of our
common stock. These sales also might make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we
deem appropriate. We cannot predict what impact, if any, that future sales of
shares or the availability of shares for sale will have on the market price of
our common stock.
The trading prices of Internet-related companies have been especially
volatile and many are at or near historical highs. Investors may be unable to
resell their shares of our common stock at or above the offering price. In the
past, securities class action litigation has often been brought against a
company following periods of volatility in the market price of its securities.
We may be the target of similar litigation in the future. Securities litigation
could result in substantial costs and divert management's attention and
resources, which could seriously harm our business and operating results.
OUR BOARD OF DIRECTORS HAVE BROAD DISCRETION IN THE USE OF PROCEEDS.
We expect to use the net proceeds primarily to fund our marketing and
advertising activities and for capital equipment and software development our
electronic commerce business. Consequently, our Board and management will have
broad discretion in allocating the net proceeds of this offering, which creates
uncertainty for shareholders and could adversely affect our financial condition
and future results of operations. See "Use of Proceeds."
WE ARE LISTED ON THE NASDAQ SMALL CAP MARKET AND ARE SUBJECT TO DELISTING UNDER
CERTAIN CIRCUMSTANCES.
We must maintain a minimum bid price and certain capitalization levels
as required by the NASD Marketplace Rule 4310(c). There can be no assurance that
we will continue to comply with these requirements, which could impair our
ability to remain listed on the NASDAQ Small Cap Market. If we were delisted,
the bid price of our common stock could be adversely effected and it would
become more difficult to trade our common stock.
ANTI-TAKEOVER PROVISIONS MAY AFFECT THE PRICE OF OUR COMMON STOCK.
Certain provisions of Delaware law could make it difficult for a third
party to acquire us, even though an acquisition might be beneficial to our
stockholders.
Delaware corporate law contains provisions that can affect the ability
to take over a company. With certain exceptions, we cannot engage in any
"business combination" with a person or group of persons who own 15% or more of
our common stock. This restriction is in effect for three years after the time
that the person or persons acquired 15% of our common stock. However, if we
follow certain procedures in connection with approving a proposed business
combination, the restriction does not apply. Our Board of Directors has the
power to determine if we will follow these procedures.
These provisions of Delaware law may have the effect of:
- delaying, deterring or preventing a change in control;
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<PAGE> 21
- discouraging bids for our common stock at a premium over the
market price;
- adversely affecting the market price of our common stock; and
- adversely affect voting and other rights of our stockholders.
WE FACE POTENTIAL ADVERSE EFFECTS OF THE YEAR 2000 PROBLEM.
The Year 2000 problem is the result of computer programs being written
to recognize two digits rather than four to define the applicable year causing
computer programs to interpret a date using "00" as the year 1900 rather than
the year 2000, which could result in computer failures or miscalculations. The
effects of this issue will vary from system to system and may adversely affect
an entity's operations as well as its ability to prepare financial statements.
We have undertaken certain corrective actions in an effort 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 our company by causing disruptions in the business operations of persons
with whom we do business, such as customers or suppliers. Year 2000 problems
could have a material adverse effect on our Company.
THIS MEMORANDUM CONTAINS FORWARD-LOOKING STATEMENTS.
This memorandum contains forward-looking statements that are based on
our current expectations, assumptions, estimates and projections about us, our
future plans and our industry. When used in this memorandum, the words
"expects," "anticipates," "estimates," "intends" and similar expressions are
intended to identify forward-looking statements. These statements include, but
are not limited to, statements under the captions "Risk Factors," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this memorandum and
supporting documents concerning, among other things:
- our ability to maintain and develop certain strategic
relationships;
- our ability to develop, introduce and market our web site and to
compete effectively with our on-line competitors;
- our ability to provide sufficient customer support;
- our ability to implement our business plan in a timely cost
effective manner;
- our ability to obtain required government issued licenses in a
timely manner;
- the timing and availability of products currently under
development and market acceptance such new products;
- the adequacy of our capital resources;
- our future capital expenditures and adequacy of our capital
resources;
- and the use of the net proceeds from this offering.
These forward-looking statements are subject to risks and uncertainties
that could cause actual results to differ materially from those projected. The
cautionary statements made in this memorandum should be read as being applicable
to all related forward-looking statements wherever they appear in this
memorandum. We assume no obligation to update such forward-looking statements
for any reason, or to update the reasons actual results could differ materially
from those anticipated in such forward-looking statements, even if new
information becomes available in the future.
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<PAGE> 22
USE OF PROCEEDS
The net proceeds to the Company from the sale of Shares offered hereby
(after deducting estimated offering expenses of $100,000) is estimated to be
$1,900,000. The following represents the Company's best estimate as to how the
proceeds of the offering will be expended. The Company reserves the right to
redirect any portion of the funds either amongst the items referred to below or
to such other projects of the Company as management considers being in the best
interest of the Company. The Company anticipates that the net proceeds of the
offering will be utilized over a period of 12 months approximately as follows:
<TABLE>
<CAPTION>
AMOUNT
DESCRIPTION OF USE (IN THOUSANDS) PERCENTAGE
- ------------------ -------------- ----------
<S> <C> <C>
Marketing $1,000,000 35%
Infrastructure Development 300,000 15%
Working Capital 400,000 20%
Start-up Expenses 200,000 10%
---------- ----
Net Proceeds $1,900,000 95%
---------- ----
Offering expenses (legal,
accounting, printing, etc.) $ 100,000 5%
---------- ----
Gross Proceeds $2,000,000 100%
========== ====
</TABLE>
Pending application of the net proceeds, we intend to invest the net
proceeds of this offering in short-term, investment-grade interest-bearing
investments or accounts.
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<PAGE> 23
PRICE RANGE OF COMMON STOCK
Our common stock is currently traded on the Nasdaq SmallCap Market
under the symbol "BMRA." The following table sets forth, for the periods
indicated, the range of the high and low closing bid prices of our common stock
on the Nasdaq SmallCap Market as reported by Nasdaq Trading and Market Services.
These quotations reflect inter-dealer prices, without mark-up, mark-down or
commission, and may not represent actual transactions.
<TABLE>
<CAPTION>
PERIOD ENDED HIGH LOW
- ----------------- ------- -------
<S> <C> <C>
August 31, 1996 ......... $ 9.875 $2.1875
November 30, 1996........ 6.750 3.2500
February 28, 1997........ 4.375 2.8750
May 31, 1997 ............ 3.625 2.1250
August 31, 1997 ......... $ 3.104 $2.6070
November 30, 1997........ 2.643 2.1640
February 28, 1998........ 3.125 2.1880
May 31, 1998 ............ 2.875 1.2500
August 31, 1998 ......... $1.7100 $1.1200
November 30, 1998........ 2.1200 0.8700
February 28, 1999........ 1.6800 0.9300
May 31, 1999 ............ 3.8400 0.9600
</TABLE>
On May 28, 1999, the closing bid price was $2.500 for our common stock.
As of May 28, 1999, there were approximately 1,760 stockholders of record
excluding stock held in street name.
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<PAGE> 24
DIVIDEND POLICY
We have not paid any cash dividends on our common stock and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. We believe that all our earnings, if any, should be retained for the
development of our business.
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<PAGE> 25
CAPITALIZATION
The following table sets forth our short-term debt and capitalization
as of February 28, 1999, and as adjusted as of that date to give effect to our
sale of 400,000 shares of our common stock at an assumed offering price of $5.00
per share and our application of the estimated net proceeds after deducting
underwriting fees, estimated underwriting expense allowance and estimated
offering expenses payable by us. The information in the table should be read in
conjunction with the more detailed consolidated financial statements and notes
included elsewhere in this memorandum.
<TABLE>
<CAPTION>
FEBRUARY 28, 1999
--------------------------------
ACTUAL ADJUSTED
------------ -------------
<S> <C> <C>
SHORT-TERM DEBT:
Short term borrowing ...................................... $ 200,000 $ 200,000
LONG-TERM DEBT:
Long-term debt, less current portion ...................... $ 0 $ 0
Minority Interest ......................................... $ 2,391,052 $ 2,391,052
STOCKHOLDERS' EQUITY:
Shareholder Loan .......................................... $ (15,000) $ (15,000)
Common stock, $.08 par value, 20,000,000
shares authorized, 4,000,845 shares issued
and outstanding; 4,400,845(1)(2) shares issued
and outstanding, as adjusted ............................ $ 320,067 $ 352,067
Additional paid-in capital ................................ $ 12,537,594 $ 14,505,594
Other Comprehensive Income................................. $ 10,985 $ 10,985
Accumulated deficit ....................................... $ (9,325,371) $ (9,325,371)
------------ ------------
Total stockholders' equity ......................... $ 3,528,275 $ 5,528,275
------------ ------------
Total capitalization ............................... $ 6,119,327 $ 8,119,327
============ ============
</TABLE>
- ------------------
(1) Assumes the sale of all of the shares of Common Stock offered hereby.
(2) Does not reflect the issuance of additional shares since February 28, 1999.
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<PAGE> 26
DILUTION
Purchasers of the Shares in this offering will experience an immediate
and substantial dilution in the net tangible book value of the Shares. The net
tangible book value of our common stock as of February 28, 1999, was $3,065,268
or $.76 per share. Actual net tangible book value per share represents the
amount of total actual tangible assets less total actual liabilities, divided by
the shares of common stock outstanding as of February 28, 1999. After giving
effect to the sale of 400,000 shares of common stock offered by us in this
offering and the receipt and the application of the estimated net proceeds
therefrom (at an assumed offering price of $5.00 per share, after deducting
estimated offering expenses), our adjusted net tangible book value as of
February 28, 1999 would have been approximately $4,956,268 or $1.13 per share.
This represents an immediate increase in as adjusted net tangible book value of
$.37 per share to our current stockholders and an immediate and substantial
dilution of $3.87 per share to new stockholders purchasing shares in this
offering. The following table illustrates this per share dilution:
Assumed public offering price .......................... $ 5.00
Actual net tangible book value per share as of
February 28, 1999 ................................... $ .76
Increase attributable to new stockholder ............... $ .37
As adjusted net tangible book value per share after this
offering ............................................. $ 1.13
Dilution per share to new stockholders ................. $ 3.87
The following table sets forth, at February 28, 1998, the difference
between the number of shares of common stock purchased, the total consideration
paid and the average price per share paid by the existing stockholders and the
new investors purchasing Shares in this offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
------------------------ -------------------------- PER SHARE
NUMBER PERCENT AMOUNT PERCENT -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders 4,000,845 91.1% $12,857,661 86.5% $3.21
New investors 400,000 8.9% $ 2,000,000 13.5% $5.00
---------- ----- ----------- -----
Total 4,400,845 100.0% $14,857,661 100.0%
========== ===== =========== -----
</TABLE>
The foregoing tables and calculations assume no exercise of any
outstanding options or warrants. At May 28, 1999, a total of 454,050 shares of
common stock were subject to outstanding options under our 1991 Stock Option and
Restricted Stock Plan and our 1995 Stock Option and Restricted Stock Plan, at
exercise prices ranging from $.80 to $3.00. Such options will expire at various
times during the period from April 2000 to March 2004. To the extent options are
exercised, there will be further dilution to new investors.
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<PAGE> 27
DESCRIPTION OF BUSINESS
GENERAL
Biomerica was incorporated in Delaware in September 1971 under the name
"Nuclear Medical Systems, Inc." It changed its corporate name in February 1983
to NMS Pharmaceuticals, Inc. and in November 1987 to Biomerica, Inc.
("Biomerica" or the "Company"). Historically the Company has operated as a
global biomedical company primarily engaged in the development, manufacture and
marketing of medical diagnostic test products. Beginning 1984, Biomerica
followed a corporate strategy of developing new business opportunities through
selected investments in companies in which synergistic benefits could be
realized through sharing of technology, corporate administration and/or capital
resources. Pursuant to this strategy, the Company acquired interest in companies
involved in the application of advanced technologies in the biomedical,
pharmaceutical, dental and/or other applied sciences. The Company now believes
that its experience in the biomedical and pharmaceutical fields, combined with
the growth of the Internet as a venue for commerce, provides the Company with an
opportunity to become a leading online retail drugstore and information site for
pharmacy, health, wellness, beauty and personal care products.
THEBIGRX.COM
The Company has recently entered into the e-commerce market through
www.testathome.com and has been developing an online pharmacy. The Company
recently acquired the on-line domain name of "TheBigRx.com," and entered into a
strategic alliance with the "Big" group of online companies. This strategic
alliance will allow the Company to leverage the traffic and capabilities of
TheBigHub.com meta-search engine. This strategic alliance is the first step in
the Company's plan to become the online destination commerce site for drugstore
products and will enable the Company to compete with drugstore.com, PlanetRx and
Soma.com. TheBigHub.com (www.thebighub.com) is a network of branded, affiliate
sites designed to leverage the traffic and capabilities of the powerful iSleuth
(www.isleuth.com) meta-search engine. Allowing users to simultaneously search
multiple search engines, web directories, and news databases on one site,
iSleuth 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.
Current network affiliates include TheBigPets.com, TheBigTravel.com,
TheBigCompare.com, TheBigToys.com, TheBigRx.com, TheBigBallot.com,
TheBigBiz.com, and TheBigAuction.com.
The Company will leverage off of its significant experience in the
biomedical and pharmaceutical fields to develop TheBigRx.com as a leading
on-line drugstore. Our on-line store will provide a convenient, private and
informative shopping experience that encourages consumers to purchase pharmacy,
health, wellness, beauty and personal care products. Our Web site is accessible
24 hours a day, 7 days a week from anywhere that a consumer has Internet access.
We will offer a larger selection of products than typical store-based retailers,
along with a wealth of health-related information, buying guides and other tools
designed to help consumers make more educated purchasing decisions.
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<PAGE> 28
INDUSTRY BACKGROUND.
The Internet has become an important medium for communicating and
finding information, and possesses unique and powerful characteristics that
facilitate its use as a purchasing medium for products and services and
differentiate it from traditional distribution channels. International Data
Corporation estimates that there were approximately 51 million Web users in the
United States at the end of 1998 and anticipates this number will grow to
approximately 135 million users by the end of 2002. It further estimates that
worldwide business-to-consumer sales over the Internet will increase from
approximately $11 billion in 1998 to approximately $93 billion by 2002. The
Internet provides consumers with a more information-intensive shopping
experience than a traditional retail store. Accessing the Internet from a
computer in the home or office allows a consumer to easily scroll through and
search information, related articles, pages of product data and various related
topics. Consumers are thus afforded the opportunity to make a more informative
and convenient purchase of goods and services.
Healthcare is one of the largest segments of the U.S. economy,
representing an annual expenditure of roughly $1 trillion, and health and
medical information is one of the fastest growing areas of interest on the
Internet. According to a recent research report, 31.6% of Internet users
surveyed had in the previous six months shopped for healthcare products online.
It is estimated that the number of adults in the United States searching online
for health and medical information will grow from approximately 17.1 million
during the 12 month period ended July 1998 to approximately 30.0 million during
the twelve month period ending July 2000.
THE DRUGSTORE MARKET
The drugstore market can be divided into five primary segments:
pharmacy, health, wellness, beauty and personal care products. Many products in
this market are personal (being used on a person's skin or in a person's body)
and essential, and often are purchased repeatedly. In this market, vendors
frequently introduce new products, and consumers seek comprehensive product
information. Consumers currently shop for these products primarily in chain
drugstores (such as Walgreen's, CVS, RiteAid and Eckerd), mass market retailers
(such as Wal-mart, Kmart and Target), supermarkets, warehouse clubs and
independent drugstores. However, category-specific retailers and catalogs also
serve each of these segments. Overall, distribution of products in this market
is fragmented. Following is a brief description about each of the five segments:
(1) Pharmacy. Based on estimates from Information Resources, Inc. and
Frost & Sullivan, the most important pharmacy segment in the U.S. grew from
approximately $89.2 billion in 1996 to approximately $101.2 billion in 1998.
This segment consists of prescription medication for chronic illnesses, such as
high blood pressure, diabetes, osteoporosis and depression, which represents
approximately 73% of the U.S. prescription drug market according to Advanstar
Communications. AC Nielsen and IMS Health estimate that out of the $101.7
billion of prescription sales, over 75%, or $76.4 billion are distributed
through retail channels. The number of prescriptions written for chronic
illnesses is expected to continue to grow due to an aging population and the
increasing utilization of pharmaceuticals in medical management. The principal
source of pharmaceuticals for chronic illnesses has been retail pharmacies.
However, over the past ten years, mail order pharmacies have become an
increasingly important source of pharmaceuticals for chronic illnesses.
Forrester Research estimates that as of February 1999, 13% of HMO prescriptions
will be filled by a mail-order pharmacy by the end of 1999. The Company believes
it is in a particularly good position to tap into this market, since it can
leverage off of its existing medical diagnostic business.
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(2) Health. The health segment includes over-the-counter remedies (such
as cough, cold, allergy and pain relief medications), first aid, medical devices
for home healthcare, contraceptives and other products related to the body's
health needs. Based on estimates from Information Resources, Inc. and Frost &
Sullivan, sales of health products in the U.S. appear to have grown from
approximately $15.0 billion in 1996 to approximately $16.3 billion in 1998.
Biomerica believes that this market segment will continue to grow as baby
boomers age and as a greater portion of prescription drugs become available as
over-the-counter medications. Consumers in the health segment often seek
significant amounts of product information to determine which products will meet
their health needs. Consumers generally buy health products from chain
drugstores, mass market retailers, supermarkets, and warehouse clubs as well as
from locally-owned, independent drugstores and convenience stores.
Representative brands in the health market segment include Advil, Tylenol,
Pepcid, Bausch & Lomb and Metamucil.
(3) Wellness. The wellness segment includes vitamins, nutritional
supplements, herbs, homeopathy, and other natural products. Based on estimates
from Information Resources, Inc. and Frost & Sullivan, sales of wellness
products in the U.S. grew from approximately $9.4 billion in 1996 to
approximately $11.0 billion in 1998. This growth is generally attributable to
increased consumer interest in nutritional and wellness products to improve
physical and mental well-being. Again, supplemental product information is
important to consumers of these items, because they are interested in the
intended physiological effects of these products. Consumers can obtain these
products at chain drugstores, mass market retailers, supermarkets, warehouse
clubs, and specialty stores as well as through catalogs or online vitamin and
nutrition stores. Representative brands in our wellness market segment include
Centrum, One-A-Day, Nature Made, Twinlab, Natrol and Nature's Way.
(4) Beauty. The beauty segment includes cosmetics, fragrances and a
variety of skin care products. Based on estimates from Information Resources,
Inc. and Frost & Sullivan, sales of beauty products in the U.S. that the Company
intends to offer grew from approximately $10.7 billion in 1996 to approximately
$12.8 billion in 1998. Some of the factors driving consumer demand for beauty
products include regular and seasonal new product introductions, as well as
changing fashion trends. Consumers often seek advice regarding these trends or
the functionality of new products. The beauty segment can be broadly classified
into two categories: mass market and prestige products. Consumers for mass
market beauty products typically purchase such products in mass market
retailers, drugstores and supermarkets. Consumers for prestige products
generally shop in department stores (such as Nordstrom, Macys, Bloomingdale and
Dillard's), beauty specialty stores (such as Aveda or Sally's), or spas and
salons (such as Elizabeth Grady or Elizabeth Arden). Representative brands in
the beauty market segment we will compete in include Estee Lauder, Revlon,
L'Oreal, Cover Girl, Neutrogena and Peter Thomas Roth.
(5) Personal Care. The personal care market segment includes products
related to hair, body and eye care, shaving, oral hygiene and feminine needs.
Based on estimates from Information Resources, Inc. and Frost & Sullivan, sales
of personal care products in the U.S. that we intend to offer grew from
approximately $20.7 billion in 1996 to approximately $23.5 billion in 1998. New
product introductions drive most of the growth in this market segment. The
personal care segment is comprised of a number of different product groups that
consumers typically shop for at mass market retailers, chain drugstores,
supermarkets, warehouse clubs and specialty stores. Representative brands
include Gillette, Colgate, Johnson & Johnson, Rogaine and Pampers.
DRAWBACKS FOR CONSUMERS OF TRADITIONAL CHANNELS OF DISTRIBUTION.
Traditional channels of retail distribution for pharmacy, health,
wellness, beauty and personal care products have several drawbacks to consumers
that the Company believes is overcome by
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Internet commerce. These drawbacks include inconvenience, narrow selection do to
lack of space, limited information and communication, and privacy concerns.
(1) Inconvenience. Consumers often view shopping for many of these
products as a chore. Shopping at a physical store can be highly inconvenient. It
generally involves time-consuming activities such as making a trip to the store,
finding a parking space, searching for the desired products, and waiting in line
to fill a prescription or make a purchase. This process can be especially
difficult for customers with disabilities or parents with young children. To
increase convenience for consumers, traditional store-based retailers often need
to open new stores, which involves significant investments in inventory, real
estate, building improvements and the hiring and training of personnel.
(2) Narrow Selection. Consumers value the opportunity to select items
from a broad range of products that best fit their needs. However, consumers
must often choose from a narrow product selection at traditional store-based
retailers. Stores may not carry a full range of products, especially prestige,
specialty or regional products, or carry a full assortment of sizes. Overcoming
these difficulties can be prohibitively expensive for traditional retail stores,
usually due to shelf space limitations, the cost of carrying inventory and the
resulting need to allocate inventory dollars to popular products. Product
selection in traditional store-based retailers cannot be tailored to individual
needs because it is driven by aggregate demand.
(3) Limited Information and Communication. Consumers buying pharmacy,
health, wellness, beauty and personal care products often seek information and
knowledgeable advice to assist them in making purchasing decisions. Many
traditional store-based retailers do not provide consumers with access to useful
product information or readily-available on-site experts who can provide helpful
advice. Employees at traditional store-based retailers, especially supermarkets
and mass market retailers, may have limited if any interaction with their
customers and lack any knowledge about the products offered. Customers may also
face difficulties following up with questions after a purchase. While
traditional store-based retailers could take steps to increase the availability
of customized information and on-site experts, such steps would involve
substantial investments in printing and training. In addition, it is difficult
for a traditional retail store to use information about a particular consumer to
personalize that consumer's shopping experience.
(4) Lack of Privacy. Because many pharmacy, health, wellness, beauty
and personal care products are inherently personal, consumers often desire ways
to preserve the anonymity of their purchases and the confidentiality of the
information transferred in the buying process. Many consumers may feel
uncomfortable purchasing certain drugstore products, such as birth control
devices, feminine care products, and incontinence products, in a traditional
retail store. Many consumers have encountered the unpleasant experience of
placing such a product on a checkout stand's conveyor belt in front of store
clerks and other waiting customers. Consumers may hesitate to ask store
personnel questions about which product best meets a particular need, or how to
use a product, especially if either the question or the answer is embarrassing
or may be overheard by others. Overcoming this limitation is very difficult for
traditional retail stores because the consumer must visit a physical store
frequented by other customers and must interact in person with store employees.
THE INTERNET SOLUTION.
The Internet provides a medium that overcomes all of the drawbacks of
traditional distribution channels. An on-line store can provide a convenient,
private and informative shopping experience that encourages consumers to
purchase health, beauty and personal hygiene products. Biomerica's on line drug
store, The BigRx.com, will provide customers with a superior shopping
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experience, combining convenience, a wide selection of products, information and
privacy.
(1) Convenience. Our user-friendly Internet store may be reached from
wherever the shopper has Internet access, such as the shopper's home or office.
Moreover, it is open seven days a week, 24 hours a day. Direct delivery to the
shopper's home or office avoids the need for the consumer to make a trip to a
physical store
(2) Selection. Because TheBigRx.com does not have inventory or
shelf-space limitations, it can offer a significantly greater number of products
than are available in a typical traditional chain drugstore. Not only will we
offer traditional drugstore items (prescription drugs and medicine), we will
offer a broad selection of health, beauty and wellness products.
(3) Information and Communication. Useful information is a critical
aspect of enabling consumers to make informed purchasing decisions and the
Internet has become an increasingly important tool for researching health care
topics. The BigRx.com will make available a broad array of information on our
Web site that can enable consumers to make informed purchasing decisions.
Consumers will be able to access information directly or directly from our
advisors and experts by contacting them through e-mail. Furthermore, we will be
able to communicate with customers on a regular basis through the convenience of
e-mail.
(4) Privacy. Consumers can shop in the privacy of their own homes or
offices. When shopping at a physical store, many shoppers feel embarrassed or
uncomfortable buying items that may reveal personally-sensitive aspects of their
health or lifestyle to store personnel or other shoppers. Shoppers at The
BigRx.com avoid these problems. Through our on-line information and
communication services, consumers will be able to obtain answers to questions
that they would otherwise be uncomfortable asking in public.
E-COMMERCE BUSINESS STRATEGY.
Biomerica intends to become one of the world's leading retailers of
pharmacy, health, beauty, wellness, and personal care products. To achieve this
objective, we intend to attract a growing base of customers and provide them
with a superior shopping experience. Key elements of our strategy include:
(1) Strengthen TheBigRx.com Brand. We intend to establish The BigRx.com
as a leading consumer brand for buying pharmacy, health, beauty, wellness, and
personal care products. Through our alliance with TheBigHub.com and the other
Big group of on-line companies we will promote our site. We will also promote
our site on other sites our customers are likely to visit. To further strengthen
our brand, we intend to cultivate a reputation for excellent quality of service.
(2) Continuously Improve The BigRx.com Web Store and Service. We will
combine wide product selection and helpful information with the unique aspects
of the Internet to deliver a convenient and personalized shopping experience. We
will strive to develop long-term relationships with our customers to build
loyalty and encourage repeat purchases. We will continuously improve and expand
our product selection and improve our Web site as we learn more about our
customers and their needs.
(3) Take Advantage of Repeat Purchasing Patterns. We intend to maximize
repeat purchases by our customers. To achieve this objective, TheBigRx.com will
have personalized tools and features that are designed to allow consumers to
satisfy their replenishment needs easily. We
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believe that our focus on prescriptions for chronic conditions and products that
must be regularly replenished will allow us to benefit from repeat purchase
patterns.
(4) Maintain our Technology Focus and Expertise. We intend to use
technology to enhance our product and service offerings and take advantage of
the benefits of the Internet. Our Web site architecture will be scalable and
designed to support secure and reliable online shopping in an intuitive
easy-to-navigate format. We intend to seek ways to increase the efficiency of
pharmacy transaction processing and order fulfillment activities. We also intend
to develop features to further personalize the consumer's shopping experience
and enhance the customer's ability to find products and useful information.
(5) Ensure Quick and Efficient Distribution. We intend to continuously
increase the automation and efficiency of our fulfillment and distribution
activities. For example, we will seek ways to improve the efficiency of the
prescription fulfillment process in areas such as receiving prescriptions from
doctors and billing the customer or his or her insurance company. In addition,
because we will outsource our distribution operations, we intend to work with
our distributors and vendors to find more ways to ensure prompt deliveries to
our customers.
(6) Enhance and Form Key Relationships. We will develop strategic
relationships with leading product manufacturers, content providers and
insurance and pharmacy benefit management companies. We also believe
relationships with leading insurance and pharmacy benefit management companies
will enhance customer awareness of our site and enable an even greater number of
our customers to obtain reimbursement for their prescriptions filled through
TheBigRx.com. We also believe having strong relationships with product
manufacturers will enable us to provide more and better product information to
our customers.
DISTRIBUTION AND ORDER FULFILLMENT.
We have entered into a back-end processing agreement with
TheBigStore.com to provide our back-end infrastructure, including customer order
processing, debit/credit card validation, fraud detection, vendor communication
and management, data encryption, order tracking, customer service, customer and
product database management, and transaction reporting. Management of
TheBigStore.com is very experienced in the back-end operation of retail, and in
particular retail e-commerce distribution. The term of the back-end processing
agreement is 5 years and expires in June of 2004.
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CUSTOMER SERVICE.
We believe that a high level of customer service and support is
critical to the success of TheBigRx.com. We will have customer service
representatives available who will strive to answer all customer inquiries
within 24 hours. Our customer service representatives will handle questions
about orders and how to use TheBigRx.com Web site, assist customers in finding
desired products and register customers' credit card information over the
telephone. Our customer service representatives will also provide a valuable
source of feedback regarding user satisfaction. In addition, our pharmacists
will provide advice to our customers about medication, dosage, delivery systems,
common side effects and other information about prescription drugs.
COMPETITION.
The online commerce market is new, rapidly evolving and intensely
competitive. In particular, the pharmacy, health, beauty, wellness, and personal
care categories are intensely competitive and are also highly fragmented, with
no clear dominant leader in any market segment. Competitors can be divided into
several groups: chain drugstores, such as Walgreen's, RiteAid, CVS and Eckerd;
mass market retailers such as Wal-mart, Kmart and Target; supermarkets, such as
Safeway, Albertson's and Kroger; warehouse clubs; online retailers of health,
beauty, wellness, personal care and/or pharmaceutical products; mail order
pharmacies; prescription benefits managers, such as Express Scripts and
Merck-Medco; Internet-portals and online service providers that feature shopping
services such as America Online, Yahoo!, Excite and Lycos; cosmetics departments
at major department stores, such as Nordstrom, Macy's and Bloomingdale's; and
hair salons. Each of these competitors operate within one or more of the
pharmacy, health, beauty, wellness, and personal care segments. In less than a
year three fairly well capitalized on-line drug stores have been launched,
drugstore.com, Soma.com, and PlanetRx.com.
Many of our current and potential traditional store-based and online
competitors have longer operating histories, larger customer or user bases,
greater brand recognition and significantly greater financial, marketing and
other resources than we do. Many of these current and potential competitors can
devote substantially more resources to their Web site and systems development
than we can. In addition, larger, well-established and well-financed entities
may acquire, invest in or form joint ventures with online competitors or
drugstore retailers as the use of the Internet and other online services
increases.
Some of our competitors may be able to secure products from vendors on
more favorable terms, fulfill customer orders more efficiently and adopt more
aggressive pricing or inventory availability policies than we can. Traditional
store-based retailers also enable customers to see and feel products in a manner
that is not possible over the Internet. Traditional store-based retailers can
also sell products to address immediate, acute care needs, which we and other
online sites cannot do. Some of our competitors such as Walgreen's and Wal-mart
have significantly greater experience in selling drugstore products.
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THE COMPANY'S DIAGNOSTIC PRODUCT BUSINESS
Biomerica's current primary source of revenue and its historic core
business involves developing, manufacturing, and selling unique medical
diagnostic products designed to detect certain medical conditions and diseases
in the areas of certain cancers, heart attack, fertility, gastritis and ulcers,
diabetes and Candida. The Company has developed, produced and sold immunoassay
diagnostic test kits since the late 1970's. Immunoassay kits are used by
hospitals, clinical laboratories and medical researchers to analyze blood or
urine from patients in the diagnosis of various diseases and other medical
complications, or to measure the level of specific hormones, antibodies,
antigens or other substances which may exist in the human body in extremely
small concentrations. Recently advances in this technology have led to tests
which could be used in the physicians office and by the patient at home.
TARGET MARKETS.
The Company targets three distinct markets in its core business of
diagnostic products. These markets are: (1) Clinical laboratories, hospitals and
researchers that perform immunoassay; (2) physicians offices and smaller
laboratories which could benefit from in-office or rapid diagnostic tests; and
(3) pharmacies and consumers who are interested in performing/marketing tests
for home use (over-the-counter products).
The over-the-counter and professional markets for rapid diagnostic
products are expanding as a result of significant economic pressures affecting
the health care industry. These types of products are important for the
following reasons: (1) The tests help to manage existing medical conditions and
their costs; (2) Rapid tests improve healthcare and may save lives through
prompt diagnosis and early detection; and (3) These test help health care
providers improve productivity and reduce expenses. At the same time,
technological advances in medical diagnostics have made it possible to perform
diagnostic tests within the home and the physician's office, rather than in the
clinical laboratory. The Company's objective has been to address these markets
by developing rapid diagnostic tests that are accurate, employ easily obtained
specimens, and are simple to perform without instrumentation.
Until recently, tests of this kind required the services of medical
technologists and sophisticated instrumentation; frequently, results were not
available until at least the following day. Most of the Company's
over-the-counter tests are FDA cleared. The Company believes that such tests are
as accurate as laboratory tests when used properly, require no instrumentation,
give reliable results in minutes and can be performed with confidence in the
home or the doctor's office.
The emphasis on producing easy to use tests that require no
instrumentation has led to the development of the products indicated below which
currently are marketed to physicians, clinics, hospital laboratories and the
general public through drugstores such as Walgreens, CVS, Osco/Sav-On, etc. The
Company has also been marketing these easy to use tests from its pilot web site
www.testathome.com, and will feature them on its on-line drug store,
TheBigRx.com.
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DIAGNOSTIC PRODUCTS.
Biomerica currently manufactures and sells diagnostic test kits which
utilize enzyme immunoassay (EIA) or radioimmunoassay (RIA) technology. Some of
these products have not yet been cleared by the FDA for diagnostic use, but can
be sold in various foreign countries.
<TABLE>
<CAPTION>
- ------------------------------------------- ------------------------------------------------------------------------
DIAGNOSTIC TEST KIT USE AND CLEARANCE
- ------------------------------------------- ------------------------------------------------------------------------
<S> <C>
ALPHA-SUBUNIT (RIA) For measurement of elevated blood levels of alpha subunit which are
suspected to be associated with testicular, colorectal, pituitary, and
other cancers. It is also used to measure for delayed puberty. This
product is used for research only and has not been cleared with the
FDA.
- ------------------------------------------- ------------------------------------------------------------------------
MYOGLOBIN (RIA) For measurement of myoglobin in blood as a result of skeletal
muscle injury including heart. This product is FDA cleared.
- ------------------------------------------- ------------------------------------------------------------------------
THYROID PANEL For measurement of thyroid function in manual and T3, T4, TSH
(EIA) automated systems. These products have been FDA cleared.
- ------------------------------------------- ------------------------------------------------------------------------
THYROGLOBULIN (RIA) For prognostic testing for the detection of metastasis after the
treatment or removal of thyroid tumor. This product has not been FDA
cleared and is used for research only.
- ------------------------------------------- ------------------------------------------------------------------------
THYROGLOBULIN AUTOANTIBODY TEST For measurement of autoantibodies to thyroglobulin in human blood.
(EIA & RIA) High levels of patient's Tg autoantibodies are present with
Hashimoto's disease and lymphadenoid goiter. The EIA format of this kit
has just been cleared by the FDA. THE RIA format is not cleared by the
FDA and is for research use.
- ------------------------------------------- ------------------------------------------------------------------------
NEONATAL TSH (RIA) For early detection of congenital primary hypothyroidism. (Newborn
thyroid hormone assessment). This product has been FDA cleared.
- ------------------------------------------- ------------------------------------------------------------------------
HISTAMINE (RIA) For determination of blood histamine levels that are associated with
leukemia, allergy diseases, and sensitivity determinations in animals
and humans. FDA clearance was received to market the histamine RIA
test kit for a special type of leukemia disease. For allergy
applications, the product is sold for research and investigational use
only since FDA clearance has not yet been obtained for that purpose.
</TABLE>
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<TABLE>
<CAPTION>
- ------------------------------------------- ------------------------------------------------------------------------
<S> <C>
HELICOBACTER PYLORI ANTIBODY (EIA) A non-invasive blood test for gastritis and peptic ulcer infection.
("GAP(R)") FOR GASTRITIS & ULCER The "GAP" test is amenable to screen populations for the bacterium
DETECTION (Helicobacter pylori) that causes gastritis and peptic ulcers. FDA
clearance for the GAP was received in July 1991. Since then, Biomerica
has entered into a multi-year exclusive agreement with BioRad of
Hercules, California, to distribute the GAP test worldwide with the
exception of Japan. Biomerica has entered into another exclusive
agreement with Nisshin/Fujirebio for distribution of the GAP test in
Japan. After 18 months of conducting the necessary clinical studies,
Japan's Ministry of Health has approved the GAP test kit for sale
in Japan for diagnostic purposes. The Company believes that it is the
first test of its kind to receive such clearance in Japan.
- ------------------------------------------- ------------------------------------------------------------------------
ISLET CELL- A non-invasive blood test for predisposition of Type I diabetes. It
AUTOANTIBODIES (EIA) is for detecting the onset of type I diabetes [insulin dependent
(ISLETEST(R)) diabetes mellitus (IDDM)] years before the manifestation of the
FOR DETECTION disease. IDDM is a disease characterized by abnormalities in the
OF TYPE I DIABETES regulation of blood sugar. The disease may cause serious injury to the
eyes, kidneys, blood vessels, and nervous system. Presently, this kit
is provided to medical institutions for investigational use only since
it has not been cleared by the FDA. The Company has just received a
patent for this test.
- ------------------------------------------- ------------------------------------------------------------------------
INSULIN A non-invasive blood test for assessment of status of type I
AUTOANTIBODY (EIA) diabetes. This kit has not been cleared by the FDA and is provided
for investigational use only.
- ------------------------------------------- ------------------------------------------------------------------------
GAD AUTOANTIBODY (EIA) A non-invasive blood test for individuals predisposed to Type I
diabetes. This product has not been cleared by the FDA and is for
research use only.
- ------------------------------------------- ------------------------------------------------------------------------
CANDIDA ALBICANS A non-invasive blood test for detection of IgG, IgM or IgA antibodies
ANTIBODY (CANDIQUANT(TM)) to Candida albicans. This kit is provided for investigational use
only since it has not been FDA cleared.
- ------------------------------------------- ------------------------------------------------------------------------
CANDIDA ALBICANS A non-invasive blood test for detection of Candida albicans antigen.
ANTIGEN (CANDIGEN(TM)) This kit is provided for investigational use only since it has not
been FDA cleared.
- ------------------------------------------- ------------------------------------------------------------------------
</TABLE>
The Company's diagnostic kits include reagents, antibodies, labeled
antigens, buffers, standards, and reference controls. The Company supplies each
customer with detailed written instructions for the use of its diagnostic
products. All of the Company's diagnostic test kits are processed and assembled
at its facilities in Newport Beach, California. Production of diagnostic tests
involve formulating component antibodies and antigens in specified
concentrations, attaching a tracer to the antigen, filling components into
vials, packaging and labeling. The Company continually engages in quality
control procedures to assure the consistency and quality of its products and to
comply with applicable FDA regulations.
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All manufacturing production is regulated by the FDA Good Manufacturing
Practices for medical devices. Biomerica has an internal quality control unit
that monitors and evaluates product quality and output. In addition, the Company
employs a qualified external quality assurance consultant who monitors
procedures and provides guidance in conforming to the Good Manufacturing
Practices regulations. The Company either produces its own antibodies and
antigens or purchases these materials from qualified vendors. The Company has
alternate, approved sources for raw materials procurement and believes that for
the foreseeable future material availability will not restrict production based
on our relevant ranges of production.
COMPETITION
Immunodiagnostic products are currently produced by more than 100
companies, a majority of which are located within the United States. The Company
is not a significant factor in the market. The Company's competitors vary
greatly in size. Many are divisions or subsidiaries of well-established medical
and pharmaceutical concerns which are much larger than the Company and expend
substantially greater amounts than the Company for research and development,
manufacturing, advertising and marketing.
The primary competitive factors affecting the sale of diagnostic
products are uniqueness, quality of product performance, price, service and
marketing. The prices for the Company's products compare favorably with those
charged by most of its competitors. The Company believes it competes primarily
on the basis of its reputation for the quality of its products, the speed of its
test results, the unique niches in the market, patent position, and its prompt
shipment of orders. The Company offers a broader range of products than many
competitors of comparable size, but to date has had limited marketing
capability. The Company is working on expanding this capability through
strategic cooperations with larger companies and distributors.
Biomerica has approximately 320 current customers, of which
approximately 60 are distributors and the balance are hospital and clinical
laboratories, medical research institutions, medical schools, pharmaceutical
companies, drug stores and physicians' offices. The loss of any one or a few
customers would not have a material adverse effect upon the revenues of the
Company.
THE COMPANY'S AFFILIATES
Biomerica currently holds the following percentage ownership in the
issued and outstanding common stock of two subsidiaries:
<TABLE>
<CAPTION>
Subsidiary Company Biomerica Percent Ownership
------------------ ---------------------------
<S> <C>
Lancer Orthodontics, Inc. ("Lancer") 29.9%
Allergy Immuno Technologies, Inc. ("AIT") 74.6%
</TABLE>
In addition to Biomerica's ownership of Lancer, a director of Biomerica
controls approximately 16.05% of the outstanding Lancer common stock. Two other
Biomerica directors serve on Lancer's board of directors. Biomerica's Board
controls an additional 4.33% of Lancer's common stock either through proxy or
other controlled persons. As a result, Biomerica continues to exercise effective
control of Lancer.
LANCER ORTHODONTICS, INC.
Lancer is engaged in manufacturing, sales and development of high
technology orthodontic products including, among others, ceramic brackets and
wires. Lancer is well established in the field of orthodontics and its products
are sold worldwide through a direct sales force and distributors. The Lancer
product line includes preformed bands, direct bonding pads, various brackets,
buccal tubes,
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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.
On April 4, 1989, Lancer was granted a patent on its CounterForce
design of a nickel titanium orthodontic archwire. On August 1, 1989, Lancer was
granted a patent on its bracket design used in the manufacturing of Sinterline
and Intrigue orthodontic brackets. On September 17, 1996, Lancer was granted a
patent on its method of laser annealing marking of orthodontic appliances. On
March 4, 1997, Lancer was granted a patent on an orthodontic bracket and method
of mounting. All of the patents are for a duration of seventeen years. Lancer
has entered into a number of license and/or royalty agreements pursuant to which
it has obtained rights to certain of the products which it manufactures and/or
markets. The patents and agreements have had a favorable effect on Lancer's
image in the orthodontic marketplace and Lancer's sales.
Lancer sells its products directly or indirectly through its sales
representatives, to a relative large number of customers. No customer of
Lancer's accounted for 10% or more of Lancer's sales in the fiscal years ended
May 31, 1998 and 1997. At the end of its 1998 fiscal year, Lancer had eight
sales representatives in the United States, all of whom are employees of Lancer,
who sold products directly to orthodontists. In selected foreign countries,
Lancer sells its products directly to orthodontists through its international
marketing division, which was established in 1982 and currently employs three
people. Lancer also sells its products through distributors in certain foreign
countries and to other companies on a "private label" basis. Lancer has entered
into a number of distributor agreements whereby it sold or granted the marketing
rights to its products in certain sales territories in Mexico, Central America,
South America, Europe, Canada, Australia and Japan.
Most of Lancer's manufacturing and shipping operations are located in
Mexicali, Mexico, in order to reduce the cost of manufacturing and compete more
effectively worldwide. Lancer maintains its headquarters in San Marcos,
California where it houses the administration, the engineering, the sales and
marketing, and customer services. Lancer currently utilizes a manufacturing
subcontractor to provide manufacturing services to Lancer through its affiliated
entities located in Mexicali, B.C., Mexico. The current agreement, which expires
in October 1998, allows for the pass through of actual costs plus a weekly
administrative fee. This gives Lancer greater control over all costs associated
with the manufacturing operation than did the hourly rate per employee cost.
Effective April 1, 1996, Lancer leased the Mexicali facility under a separate
agreement. Lancer has retained the option to convert the manufacturing operation
to a wholly owned subsidiary at any time without penalty. Should Lancer
discontinue operations in Mexico, it is responsible for accumulated employee
seniority obligations as prescribed by Mexican law. At May 31, 1998, this
obligation was approximately $226,000. Such obligation is contingent in nature
and accordingly has not been accrued in the financial statements.
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.
34
<PAGE> 39
ALLERGY IMMUNO TECHNOLOGIES, INC.
AIT is engaged in the development and commercialization of novel
bio-pharmaceutical products for the treatment of allergies. The Company's
research in the allergy field has created opportunities for new therapeutic
approaches and inventions that include the possible development of oral type
and/or an inhalant anti-allergy treatments as an alternative to allergy shots.
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. Allergy diagnostic
products are currently produced by approximately five competitors, and there are
approximately the same number producing allergy therapeutics.
AIT and its predecessors commenced development activities in allergy
and immune research, diagnostic reagents and services in 1980. AIT currently
operates a clinical reference laboratory in Newport Beach, California, for
allergy and other esoteric diagnostic testing services for physicians, other
laboratories and pharmaceutical companies. AIT employs one medical technologist
and two technicians and receives substantial financial and technical assistance
from Biomerica whose laboratory is contiguous to AIT.
As a result of its research activities, AIT has discovered new methods
for treating allergies. AIT has succeeded in obtaining four patents pertaining
to its discoveries for allergy treatment. These are:
- Immunotherapy agents for treatment of IgE mediated allergies:
U.S. Patent #5,116,612 (issued May 6, 1992).
- Liposome containing immunotherapy agents for treatment of IgE
mediated allergies: U.S. Patent #5,049,390 (issued September 17,
1991).
- Immunotherapy agents for treatment of IgE mediated allergies:
U.S. Patent #4,946,945 (issued August 7, 1990).
- Allergen-thymic hormone conjugates for treatment of IgE mediated
allergies: U.S. Patent #5,275,814 (issued January 4, 1994).
AIT is focused on the discovery and commercialization of novel
bio-pharmaceutical drugs for the treatment of allergies. The Company's research
has led to new therapeutic approaches and inventions which are covered by the
above patents. AIT's strategy is to utilize its proprietary technologies to
create unique drugs for the treatment of allergies, especially those that can be
taken orally avoiding the present injection therapy which is tedious, expensive
and unpredictable. With help from Biomerica, AIT has begun preclinical animal
studies utilizing the technology covered in some of these patents.
The strategic objective of AIT is to tap the estimated $6 billion
allergy market in the U.S. by developing drugs for allergy treatment based on
Liposome-Encapsulated Allergens (LEA). Liposomes are minute fatty particles in
which allergens may be enclosed (encapsulated). LEA favorably alters the
immunological response to allergens compared to the response elicited by native
allergens presently used in desensitizing immunotherapy. The results of
pre-clinical studies conducted on rodents (administering liposome encapsulated
house dust mite by both injection and mouth) indicate a dramatic increase in the
desensitization process. This new type of therapy may revolutionize allergy
treatment since oral delivery is possible as opposed to injections, thereby
35
<PAGE> 40
increasing patient compliance, and since it treats the disease as opposed to the
symptoms, unlike a histamine blocker. AIT is currently looking for a
collaborative partner to continue this effort.
The Company has also developed a Histamine Basophil Release (BHR) test
that is a surrogate to humans wherein sensitivities to allergens may be
determined in a test tube. Food sensitivity studies for large pharmaceutical and
nutritional firms such as Mead Johnson and Carnation were conducted utilizing
the BHR test. AIT intends to use the same BHR in the development of the new
drug.
AIT also provides clinical testing services to doctors, clinics and
pharmaceutical firms in specialized areas of allergy and immunology
determinations. Test samples are sent to the Company's laboratory for evaluation
and the results of the tests are reported to the customer (doctors, clinics or
other). All of the AIT's current revenues are derived from providing these
testing services. AIT's clinical reference laboratory is located in Newport
Beach, California. As a credited clinical laboratory, AIT provides specialized
testing services to large organizations such as Laboratory Corporation of
America, American Homes Products, as well as other clinics and physicians. The
laboratory accepts samples from the physicians, laboratories, clinics or
pharmaceutical companies, performs the requested test and sends a written report
of the test results to the customer. Most of the tests performed relate to
allergy or immunology.
36
<PAGE> 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The following discussion and analysis should be read together with our
consolidated financial statements and notes thereto for the nine-month periods
ended February 28, 1999 and 1998, and the fiscal year ended May 31,1999 and
1998, incorporated elsewhere in this memorandum.
PERIOD ENDED FEBRUARY 28, 1999 COMPARED TO PERIOD ENDED FEBRUARY 28, 1998
Consolidated net sales for Biomerica were $6,182,537 for the nine
months ended February 28, 1999 as compared to $6,942,738 for the same period in
the previous year. This represents a decrease of $760,201 (11%). For the quarter
then ended, sales were $1,826,214 as compared to $2,085,773 in the previous
year. This represents a decrease of $259,559 (12%). Lancer Orthodontics
("Lancer") had increased sales of $22,238 for the nine months and a decrease of
$40,992 for the quarter compared to the previous year. Lancer continues to
search for and add new distributors, private label customers, and sales
representatives. Lancer remains very active in investigating new products that
will contribute strategically to its overall product line. Biomerica had a sales
decrease for the nine month period of $765,213 and Allergy Immuno Technologies,
Inc. ("AIT") had a sales decrease of $17,226 for that period. For the quarter
then ended, Biomerica had a sales decrease of $207,749 and AIT had a sales
decrease of $10,818. The sales decrease at Biomerica was primarily attributable
to lower foreign sales.
Cost of sales decreased for the nine months by $144,763 (3.6%) and
decreased by $15,853 (1.3%) for the quarter. Lancer had increased cost of sales
as a percentage of sales of 1.9% for the nine months and of 1.9% for the quarter
due to lower selling prices in the industry. Cost of goods as a percentage of
sales for the nine months at Biomerica increased 10.1%, and 18.9% for the nine
months and three months over the prior periods. This was attributable to
increased manufacturing labor costs as well as manufacturing fixed costs
resulting in a larger percentage of sales due to the lower sales volume.
Selling, general and administrative expenses increased for the nine
months by $7,422 (.3%) and increased for the three months by $5,741 (1%).
Expenses increased at Lancer by $55,840 for the nine months and decreased for
the three month period by $8,666. The increase was due to higher marketing
salaries and commissions. Biomerica had an increase of $9,017 for the nine
months and an increase of $33,964 for the three month period. Considerable time
and resources were expended during this quarter in the effort to bring
TestatHome.com (for the sale of home tests through the internet) on line. The
increase was primarily due to higher marketing expenses in the area of travel
and advertising expenses. AIT had decreased expenses of $57,435 for the nine
months and $19,557 for the three months due to lower wages.
Research and development for the nine months decreased from $417,824 to
$336,674 or $81,150 (19%) and for the three months from $142,658 to $107,040, or
$35,618 (25%). For the nine months, Lancer had decreased product development of
$23,375 and for the three months of $5,754 due to decreased R&D wages. Biomerica
had decreased expenses of $58,075 for the nine months and $29,864 for the
quarter. Decreases at Biomerica were primarily attributable to decreased wages.
AIT had a decrease of $300 for the nine months.
Interest expense decreased by $13,735 (59%) for the nine months and by
$1,269 (20%) for the three months due to reduced debt and interest rates at
Lancer.
37
<PAGE> 42
FISCAL 1998 COMPARED TO FISCAL 1997
Consolidated net sales for the Company were $9,376,498 for fiscal 1998
compared to $9,243,510 for fiscal 1997. This represents an increase of $132,988,
or 1.4% for fiscal 1998. Lancer's sales decreased by $139,615. Biomerica showed
a sales increase of $322,916, an 11.6% increase for Biomerica. AIT had a
decrease of $52,091. This decrease at Lancer was attributable to increased
discounting and a general reduction in domestic sales. While the trend in
increased discounting at Lancer continues, it has slowed, partially the result
of orthodontic industry consolidation. Lancer continues to search for new sales
representatives, distributors, private label customers, products, and product
ideas, all of which, if successful, will result in increasing sales. Lancer has
incorporated a subsidiary in Mexico which will allow Lancer to distribute its
products through Mexico and other parts of Latin America at much more
competitive prices. This subsidiary may also assume the duties of the
subcontractor, which is expected to reduce costs. The increase in sales at
Biomerica was primarily due to an increase of sales to foreign distributors as
well as an increase in domestic sales at Biomerica.
Cost of sales in fiscal 1998 as compared to fiscal 1997 increased by
$106,439 (2.0%). Lancer's cost of sales as a percentage of sales decreased from
60.6% to 58.6% in fiscal 1998 as compared to fiscal 1997. The decrease was
primarily attributable to (1) manufacturing problems that were resolved in
fiscal 1997, (2) changes in plant management and (3) the implementation of
procedures resulting in reduced expenditures. Biomerica had an increase in cost
of goods as a percentage of sales from 51.6% to 57.1% in fiscal 1998 as compared
to fiscal 1997 due to more discounting of products in the foreign market, higher
labor and other costs. AIT had an increase in cost of goods as a percentage of
sales of 84.6% to 107% due to declining revenues offset by higher materials
costs and wages.
Selling, general and administrative costs increased in fiscal 1998 as
compared to fiscal 1997 by $158,875 (5.4%). Lancer had a decrease of $31,541 in
these costs due to decreased payroll and related expenses and decreased
professional fees. These were partially offset by increased payroll and related
expenses and advertising in the selling area. Biomerica had an increase in
fiscal 1998 as compared to fiscal 1997 of $159,900 due primarily to increased
personnel, consulting and advertising costs. AIT had increased costs of $30,516
due to higher personnel costs.
Research and development expense increased in fiscal 1998 as compared
to fiscal 1997 by $270,377 (95.4%). Of this, Lancer had an increase of $95,163,
as a result of increased payroll and supplies. Biomerica had an increase in
research and development expenses of $188,108, and AIT had a decrease of
$12,933. Biomerica and Lancer have been investing more in research and
development in an effort to develop new products in order to increase their
competitive positions in the marketplace. AIT decreased research expenses due to
the current lack of funds.
Interest expense, which was incurred by Lancer, decreased in fiscal
1998 as compared to fiscal 1997 by $33,299 (57%) due to the payoff of certain
term debt and capital lease obligations.
Other income increased by $91,962 (152%) in fiscal 1998 as compared to
fiscal 1997. A decrease of $5,383 is attributable to Lancer, and an increase of
$104,637 was attributable primarily to Biomerica. Biomerica had greater dividend
and interest income due to the funds that were raised in January 1998. Biomerica
also had gains on the sale of marketable securities in fiscal 1998.
38
<PAGE> 43
LIQUIDITY AND CAPITAL RESOURCES
As of February 28, 1999, the Company had cash and available-for-sale
securities in the amount of $1,828,891. Working capital was $4,933,119.
Biomerica is currently able to meet its costs of operations, development and
expansion through both collection of trade accounts receivable and its working
capital position. At February 28, 1999, Lancer had a $1,000,000 line of credit
with a bank. Borrowings are made at prime plus 0.75% (8.5% at February 28, 1999)
and are limited to specified percentages of eligible accounts receivable. The
unused portion available under the line of credit at February 28, 1999 was
$129,627. The line of credit expires on November 3, 1999. Lancer is not required
to maintain compensating balances in connection with this borrowing arrangement.
The line of credit is collateralized by substantially all the assets of
Lancer including inventories, receivables, and equipment. The lending agreement
for the line of credit requires, among other things, that Lancer maintain a
tangible net worth of $2,500,000 and a debt to tangible net worth ratio of no
more than 1 to 1. Lancer may draw upon its line of credit to fund future
equipment purchases.
39
<PAGE> 44
OPERATIONS
DESCRIPTION OF PROPERTY
The Company leases approximately 21,000 square feet of office and
laboratory space located at 1531-1533 Monrovia Avenue, Newport Beach,
California, pursuant to a written lease which expired May 31, 1993 (and which
was renewed until May 31, 1998). Pursuant to the lease, the Company pays 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. During
the year ended May 31, 1998, the Company paid $128,640 in rent under the terms
of the lease and accrued an additional $24,000. The accrued rent will be paid in
the form of company stock. AIT currently leases approximately 1,600 square feet
at the above facility for $1,400 per month. See "INTEREST OF MANAGEMENT AND
OTHERS IN CERTAIN TRANSACTIONS"
Lancer leases a 9,240 square foot manufacturing building in San Marcos,
California. The term of the initial lease was for five years commencing January
1, 1994 and ending December 31, 1998. In 1998, Lancer renegotiated the lease and
extended the terms to December 31, 2003. The Mexicali facility consists of a
16,000 square foot manufacturing and office building. The term of the lease is
for thirty-one months commencing April 1, 1996 and ending October 31, 1998. The
future aggregate minimum annual lease payments for 1999 and 2000 are,
respectively, $76,031 and $65,800. Management believes that the properties are
currently suitable and adequate for Lancer's operations.
The Company maintains animals at a ranch in Vista, California, which
are treated biologically to produce antibodies used in certain of the Company's
immunodiagnostic products. These facilities are utilized on a month-to-month
basis at a charge based on the number of animals maintained at the facility. The
Company believes that its facilities and equipment are in suitable condition and
are adequate to satisfy the foreseeable requirements of Biomerica and its
subsidiaries.
All of the Company's and AIT's fixed assets are located within Southern
California. Lancer has some fixed assets located in Mexicali, Mexico.
RESEARCH AND DEVELOPMENT
Biomerica is continually engaged in the research and development of
additional diagnostic tests to broaden its product line in specific areas such
as predisposition of diabetes, cancer diagnostics, and rapid testing kits for
the physician's office and the consumer market. Research and development
expenses include the costs of materials, supplies, personnel, facilities and
equipment which are devoted both to research and development. Lancer is engaged
in development programs to improve and expand its orthodontic products and
production techniques. Lancer consults frequently with practicing orthodontists.
Research and development expenses incurred by the Company for the years ended
May 31, 1998 and 1997 aggregated $554,000 and $283,000, respectively. These
expenses included approximately $188,000 and $93,000 for fiscal 1998 and 1997,
respectively, for Lancer's product development.
40
<PAGE> 45
Employees
As of August 15, 1997, the Company and its subsidiaries employed 75
full-time employees and 5 part-time employees, including one Ph.D. Lancer,
through its Mexican subcontractor, employs approximately 202 people in Mexico.
The Company also engages the services of various outside Ph.D. and M.D.
consultants as well as medical institutions for technical support on a regular
basis. The Company is not a party to any collective bargaining agreement and has
never experienced a work stoppage.
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their
respective positions are as follows:
<TABLE>
<CAPTION>
Name Age Since Position with the Company
---- --- ----- -------------------------
<S> <C> <C> <C>
Zackary S. Irani 32 1997 President, Chief Executive Officer,
Treasurer & Director
Dr. Philip B. Kaplan 66 1971 Director
Dr. Robert A. Orlando 59 1986 Director
Janet Moore 47 1997 Secretary, Controller and Director
</TABLE>
Dr. Philip B. Kaplan has been engaged in a private medical practice in
Huntington Beach, California, for more than five years. Dr. Kaplan has been a
director of the Company since 1971.
Robert A. Orlando, M.D., Ph.D., has served as a director of the Company
since 1986. Dr. Orlando is a professor of pathology as well as a biophysicist
and immunologist. Dr. Orlando, a graduate of the New Jersey University of
Medicine and the University of Chicago, the Chief Pathologist at Beverly
Hospital. Dr. Orlando has served as a Chief Pathologist of various hospitals
since 1981. Dr. Orlando also serves as a director of Lancer Orthodontics, Inc.
and Allergy Immuno Technologies, Inc.
Zackary Irani has been serving as the Company's Chairman of the Board,
Chief Executive and Treasurer since April 29, 1997. Prior to that time, Mr.
Irani served as the Company's Vice President of Business Development of
Biomerica since July 1994. He has been an employee of the Company since 1986.
Mr. Irani also serves as a director of Lancer Orthodontics, Inc., Allergy Immuno
Technologies, Inc. and RegeneMed, Inc.
Janet Moore is the Secretary and Controller of Biomerica. She has been
an employee of the Company since 1976. Ms. Moore also serves as a director of
Lancer Orthodontics, Inc. and Allergy Immuno Technologies, Inc.
Ms. Moore was married to Mr. Irani's uncle, who is deceased and who
previously was a shareholder, executive officer and director of the Company.
Other than the relationship between Ms. Moore and Mr. Irani, there is no family
relationship between any of the Company's directors and officers. There are no
arrangements or understandings between any director or executive officer and any
other person pursuant to which any person has been elected or nominated as a
director or executive officer. All directors and executive officers serve for a
term of one year until the next
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<PAGE> 46
annual meeting of stockholders.
COMMITTEES OF THE BOARD
The Company presently has a compensation committee of the Board of
Directors consisting of Drs. Philip B. Kaplan and Robert A. Orlando. The
Compensation Committee's basic function is to set the salary for employees and
promotions. The Compensation Committee met once during the fiscal year. The
Company's audit committee consists of Zackary Irani and Janet Moore. The
function of the audit committee is to review reports and recommendations made by
the auditors and review the Company's accounting procedures and financial
results. The audit committee met once during the fiscal year. The Company does
not have a standing nominating committee for the purpose of making
recommendations to the Board of Directors concerning nomination of directors.
42
<PAGE> 47
REMUNERATION OF DIRECTORS AND OFFICERS
SUMMARY COMPENSATION TABLE
The following table sets forth the annual and long-term cash and
non-cash compensation paid by the Company for services rendered in all
capacities during the fiscal years ended May 31, 1998 and 1997 to the person who
was, as of May 31, 1998, the Chief Executive Officer of the Company. No person
earned in excess of $100,000 for services rendered to the Company during the
fiscal year ended May 31, 1998.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION
-------- -------- --------------- ------------------------ ---------
AWARDS PAYOUTS
----------- ------------ ---------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARD(S) OPTIONS/ PAYOUTS COMPENSATION
POSITION YEAR ($) ($) ($) ($) SARS (#) ($) ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Zackary Irani, 1998 64,352 -0- -0- -0- 64,000 -0- -0-
Chairman of Board,
Chief Executive 1997 41,948(2 -0- -0- -0- 40,000 -0- -0-
Officer and Treasurer(1)
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The amounts described in the Summary Compensation Table above do not include
other compensation and benefits provided to Mr. Z. Irani during the fiscal year
ended May 31, 1998, that in the aggregate did not exceed the lesser of $50,000
or 10% of the executive's annual salary and bonus.
(2) Includes $4,000 cash compensation paid to Mr. Irani for services rendered as
the Company's CEO and Treasurer.
COMPENSATION OF DIRECTORS
Although not prohibited by the Company's By-laws, directors receive no
payment for their services as directors, but they have been and may in the
future be granted options to purchase the Company's securities. The compensation
of officers and directors is subject to review and adjustment from time to time
by the Board of Directors.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table set forth information concerning stock options
granted in the fiscal year ended May 31, 1998, to the Company's President.
43
<PAGE> 48
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of May 28, 1999, certain information
as to shares of the Common Stock owned by (i) each person known to beneficially
own more than 5% of the outstanding Common Stock, (ii) each director, including
the nominees for director, and each executive officer of the Company, and (iii)
all executive officers and directors of the Company as a group. Unless otherwise
indicated, each person listed has sold voting and investment power over the
shares beneficially owned by him. Unless otherwise indicated, the address of
each named beneficial owner is the same as that of the Company's principal
executive offices located at 1533 Monrovia Avenue, Newport Beach, California
92663.
<TABLE>
<CAPTION>
SHARES PERCENTAGE
NAME (AND ADDRESS) OF BENEFICIALLY BENEFICIALLY
BENEFICIAL OWNER (1) OWNED (2) OWNED (1)
- ---------------------- ------------ ------------
<S> <C> <C>
Janet Moore(3) 498,158 12.1
Zackary Irani(4) 84,950 2.0
Dr. Robert A. Orlando(5)
947 West 30th St.,
Los Angeles, CA 92034 22,000 *
Dr. Philip Kaplan(6) 4,750 *
17822 Beach Blvd.,
Huntington Beach, CA 92647
All executive officers and
directors as a group (four persons) 609,858 14.4
</TABLE>
* Less than one percent (1%) of the outstanding shares of Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Any shares of Common Stock that each named
person and group has the right to acquire within 60 days pursuant to options,
warrants, conversion privileges or other rights, are deemed outstanding for
purposes of computing shares beneficially owned by and the percentage ownership
of each such person and group. However, such shares are not deemed outstanding
for purposes of computing the shares beneficially owned by or percentage
ownership of any other person or group. Percentage ownership for each named
beneficial owner, and the beneficial ownership of the directors and executive
officers as a group, is based on (i) 4,110,195 issued and outstanding shares of
Common Stock, plus (ii) 454,050 shares of Common Stock underlying stock options
exercisable at or within 60 days after the date hereof.
(2) Unless otherwise noted, all shares listed are owned of record and the record
owner has sole voting and investment power, subject to community property laws
where applicable and the information contained in the footnotes to this table.
(3) Includes 16,200 shares underlying options exercisable by Janet Moore at or
within 60 days after the date of the proxy and 8,250 shares owned by Ms. Moore's
minor children.
(4) Includes 81,450 shares underlying options exercisable by Zackary Irani at or
within 60 days after the date of the proxy.
(5) Includes 8,000 shares underlying options exercisable by Dr. Orlando at or
within 60 days after the date of the proxy.
(6) Includes 2,750 shares underlying options exercisable by Dr. Kaplan at or
within 60 days after the date of the proxy.
44
<PAGE> 49
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
The Company leases approximately 21,000 square feet of office and
laboratory space located at 1531-1533 Monrovia Avenue, Newport Beach,
California, pursuant to a written lease which expired May 31, 1993 (and which
was renewed until May 31, 1998). Pursuant to the lease, the Company pays 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. During
the year ended May 31, 1998, the Company paid $128,640 in rent under the terms
of the lease and accrued an additional $24,000. The accrued rent will be paid in
the form of company stock. This amount constitutes all that is due per agreement
with the landlord. The facilities are leased from Mrs. Isle Sultanian and JSJ
Management. Ms. Janet Moore, and officer, director and shareholder of the
Company, is a partner in JSJ Management.
In the opinion of the disinterested members of the Board of Directors
of the Company, the above transactions were fair to the Company and were made
upon terms which were no less favorable to the Company than would have been
obtained if negotiated with unaffiliated third parties.
DESCRIPTION OF SECURITIES
Upon the closing of this Offering, the authorized capital stock of the
Company will consist of 20,000,000 shares of Common Stock, par value of $.08, of
which 4,400,845 will be outstanding (assuming no exercise of outstanding
warrants and options).
The following is a brief description of the material terms of the
Company's capital stock. This description does not purport to be complete and is
subject in all respects to applicable Delaware law and to the provisions of the
Company's Certificate of Incorporation and Bylaws, copies of which are on file
with the Commission are incorporated by reference herein.
COMMON STOCK
Holders of common stock are entitled to receive dividends when, as and if
declared by the Board of Directors, out of funds legally available therefor.
Dividends on any outstanding shares of preferred stock may be required to be
paid in full before payment of any dividends on the common stock. Upon
liquidation, dissolution or winding up of the Company, holders of common stock
are entitled to share ratably in assets available for distribution after payment
of all debts and other liabilities and subject to the prior rights of any
holders of any preferred stock then outstanding.
Holders of common stock are entitled to one vote per share with respect to
all matters submitted to a vote of shareholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the common stock entitled
to vote in any election of directors may elect all of the directors standing for
election, subject to the voting rights (if any) of any series of preferred stock
that may be outstanding from time to time. The Company's Certificate of
Incorporation and Bylaws contain no restrictions on the repurchase by the
Company of shares of the common stock or preferred stock. All the outstanding
shares of common stock are, and additional shares of common stock will be, when,
issued, validly issued, fully paid and nonassessable.
45
<PAGE> 50
WARRANTS AND OPTIONS
As of May 28, 1999, options to purchase a total of 454,050 shares of
Common Stock were outstanding under the 1991 Stock Option and Restricted Stock
Plan and the 1995 Stock Option and Restricted Stock Plan, at exercise prices
ranging from $.80 to $3.00. Such options will expire at various times during the
period from April 2000 to March 2004.
The Company has issued to RJM Consulting, Inc. ("RJM"), a warrant (the
"RJM Warrant") to purchase 1,000,000 shares of Common Stock at an exercise price
of $3.00 per share, in connection with RJM's capital raising efforts and for
introducing the Company to The BigStore.com, Inc. ("BigStore"). The Company has
also issued to BigStore a warrant (the "BigStore Warrant"; collectively with the
RJM Warrant, the "Warrants") to purchase 660,000 shares of Common Stock at an
exercise price of $5.00 per share, in connection with services to be provided to
the Company under a Back-end Processing Services Agreement relating to the
Company's planned on-line business. The Warrants are exercisable for a term of
five years commencing on the dates on which the Warrants were issued (with
respect to each, the "Warrant Issue Date"). The Warrants vest in equal
increments at the first, second and third anniversaries of their respective
Warrant Issue Date. The right to exercise the Warrants may not be terminated for
any reason, including (without limitation) by reason of death, disability,
incapacity or termination of employment. The holders are also entitled to
customary piggyback registration rights.
The Company has granted to Zachary Irani, its President and Chief
Executive Officer an option to purchase $1,000,000 Shares, and to certain key
service providers an option to purchase an aggregate of 200,000 shares, of the
Company's common stock at an exercise price of $ 3.00 per share. The option was
granted to Mr. Irani for his efforts in negotiating this Company's strategic
alliance with The BigStore, and to encourage his continued association with the
Company. The option was granted to the key service providers to encourage their
continued employment and association with the Company. The options vest in equal
increments at the first, second, and third anniversaries of their respective
grant dates.
46
<PAGE> 51
DESCRIPTION OF THE OFFERING
GENERAL
The Company is hereby offering up to 400,000 shares of its Common Stock
(the "Shares") at a price of $5.00 per share. Each prospective investor must
execute a Stock Purchase Agreement and complete an Investor Questionnaire
attached to the Stock Purchase Agreement as Exhibit A. The Company reserves the
right to determine, in its sole discretion, to whom offers of the shares will be
made and the number of shares which any prospective investor will be entitled to
purchase.
Sales of the shares will be made directly to prospective investors who
meet the suitability standards specified above by the executive officers and
directors of the Company, who will not be paid any specific compensation in
connection therewith. The executive officers and directors of the Company will
determine, in their sole discretion, to whom the shares will be sold, and the
number of shares to be sold to each prospective investor.
PROSPECTIVE INVESTOR QUESTIONNAIRE
The shares are being offered and will be sold without registration
under the Securities Act of 1933, as amended (the "Act"), and without
qualification under the California Corporate Securities Law of 1968, as amended,
or other applicable state securities or "blue sky" laws, in reliance upon
specific exemptions therefrom, the availability of which is determined by and
dependent upon, among other things, certain factors concerning the persons to
whom the shares are sold. Accordingly, shares will only be sold to investors who
meet the investor suitability standards established by the Company for this
offering. See "Investor Suitability Standards."
Each person will be required to complete, sign and deliver to the Company a
Prospective Investor Questionnaire, in which certain information will be
provided to the Company to enable it to determine, in its sole discretion,
whether or not the prospective investor meets the necessary suitability
standards.
47
<PAGE> 52
ADDITIONAL INFORMATION
Prospective investors and their professional advisors are invited to review
any materials available to the Company relating to the Company, the Company's
products and plan of operation, its management and financial condition, this
offering and any other matter relating to this offering. The Company will afford
prospective investors and their professional advisors the opportunity to ask
questions of, and receive answers from, the officers of the Company concerning
such matters and to obtain any additional information (to the extent the Company
possesses such information and can acquire it without unreasonable expense)
necessary to verify the accuracy of any information set forth in the Memorandum.
All such information and materials will be made available at the offices of the
Company at 1533 Monrovia Avenue, Newport Beach, California 92663 (or at some
other mutually convenient location) at any reasonable hour after reasonable
prior notice.
48
<PAGE> 1
EXHIBIT 10.19
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is entered into as of August 30, 1999 (the
"Effective Date") by and between TheBigRx.com division of Biomerica, Inc., (the
"Company"), and Steven J. Goto (the "Executive") under the following terms and
conditions:
RECITALS:
WHEREAS, the Company and Executive desire to set forth the terms and
conditions on which (i) the Company shall employe Executive, (ii) Executive
shall render services to the Company, and (iii) the Company shall compensate
Executive for such services; and
WHEREAS, in connection with the employment of Executive by the Company,
the Company desires to restrict Executive's rights to compete with the business
of the Company;
WHEREAS, the parties acknowledge that the Executive's abilities and
services are unique and essential to the prospects of the Company; and
WHEREAS, in light of the foregoing, the Company desires to employ the
Executive as Chief Technology Officer and the Executive desires to accept such
employment.
NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements hereinafter set forth, the parties hereto agree as follows:
1. EMPLOYMENT.
The Company hereby employs Executive and Executive hereby accepts
employment with the Company upon the terms and conditions hereinafter set forth.
2. TERM.
2.1 The term of this Agreement (the "Term") shall be for a period
commencing on the Effective Date of this Agreement and shall continue for a
period of (1) year from the date thereof, unless sooner terminated as provided
in Paragraph 6. This period, as the same may be extended hereafter by agreement
of the parties or terminated pursuant hereto, is hereinafter referred to as the
"Term"
<PAGE> 2
3. COMPENSATION.
3.1 For all services rendered by Executive under this Agreement, the
Company shall pay Executive a base salary of one hundred fifty thousand dollars
($150,000) per annum in equal monthly or semi-monthly installments (the "Base
Salary"). The amount of the Base Salary may be increased at any time and from
time to time by a unanimous vote of the Board of Directors of the Company. No
such change shall in any way abrogate, alter, terminate or otherwise effect the
other terms of this Agreement.
3.2 In addition to the Base Salary, Executive may be eligible for an
incentive bonus ("Incentive Bonus") to be based upon the criteria agreed upon
between the Board, the Chief Executive Officer and/or a Committee of the Board
and the Executive, within 60 days of the Effective Date. The Incentive Bonus
shall be paid, if earned, within 30 days after the Company's year-end operating
results have been determined by the Company's accountants or other time as
determined by the Board and/or Chief Executive Officer.
3.3 In addition to the Base Salary, the Company shall grant to
Executive an option to purchase 62,000 restricted shares of the Company's
common stock at an exercise price of fair market value per share. The option
shall vest over a period of three (3) years, with 33-1/3% on the first
anniversary of the Effective Date, and the remaining 66-2/3 vesting each month
over the next two years, and shall have a term of five (5) years.
3.4 Executive shall be reimbursed for all reasonable "out-of-pocket"
business expenses for business travel and business entertainment incurred in
connection with the performance of his or her duties under this Agreement (i)
so long as such expenses constitute business deductions from taxable income for
the Company and are excludable from taxable income to the Executive under the
governing laws and regulations of the Internal Revenue Code and (ii) to the
extent such expenses do not exceed the amounts allocable for such expenses in
budgets that are approved from time to time by the Company. The reimbursement
of Executive's business expenses shall be upon monthly presentation to and
approval by the Company of valid receipts and other appropriate documentation
for such expenses.
3.6 All compensation shall be subject to customary withholding tax
and other employment taxes as are required with respect to compensation paid by
a corporation to an employee.
4. DUTIES AND RESPONSIBILITIES.
4.1 Executive shall, during the Term of this Agreement, devote his
full attention and expend his best efforts, energies, and skills, on a
full-time basis, to the
<PAGE> 3
controlled by Executive or any member of the Executive's family or in which
Executive or any member of the Executive's family has any direct or indirect
financial interest whatsoever.
4.5 To induce the Company to enter into this agreement, the Executive
represents and warrants to the Company that except as set forth on Schedule
4.5,(a) the Executive is not a party or subject to any employment agreement or
arrangement with any other person, firm, company, corporation or other business
entity, (b) the Executive is subject to no restraint, limitation or restriction
by virtue of any agreement or arrangement, or by virtue of any law or rule of
law or otherwise which would impair the Executive's right or ability (i) to
enter the employ of the Company, or (ii) to perform fully his duties and
obligations pursuant to this Agreement, and (c) to the best of Executive's
knowledge no material litigation is pending or threatened against any business
or business entity owned or controlled or formerly owned or controlled by
Executive.
4.6 Executive shall submit to the Board of Directors of the Company for
its approval, not later than 60 days before the beginning of each calendar year,
an annual business plan for the Company (the "Annual Plan"). The Annual Plan
shall be revised by Executive and submitted to the Board of Directors for its
review (and approval in the case of material changes from the approved Annual
Plan) from time to time during each year to reflect changes in the Annual Plan
because of operations or otherwise. Each Annual Plan shall include the following
information:
(a) an annual forecast of income and expenses for the operation of the
Company;
(b) a cash flow budget, estimate of profit or losses, and source and use
of cash statements for the operation of the Company;
(c) a payroll and staffing plan and budget for the operation of the
Company; and
(d) a capitalization expense budget for the operation of the Company.
4.7 During each year, Executive in the performance of his duties under
this Agreement shall comply or cause compliance with the applicable Annual Plan
and shall not (except for emergency expenditures or special circumstances
requiring an unanticipated expenditure) deviate materially from any budget
category set forth in the Annual Plan, incur any material additional expense or
change materially the manner of operation of the Company without the approval of
the Chief Executive Officer and/or the Board of Directors.
<PAGE> 4
5. RESTRICTIVE COVENANTS.
5.1 Executive acknowledges that (i) he has a major responsibility for
the operation, administration, development and growth of the Company's
business, (ii) his work for the Company has brought him and will continue to
bring him into close contact with confidential information of the Company and
its customers, and (iii) the agreements and covenants contained in this Section
5 are essential to protect the business interest of the Company and that the
Company will not enter into this Agreement but for such agreements and
covenants. Accordingly, the Executive covenants and agrees as follows:
5.1(a) Except as otherwise provided for in this Agreement,
during the Term of this Agreement and, if this Agreement is terminated for any
reason during the Term, for six (6) months following such date of termination
(the "Termination Period"), the Executive shall not, directly or indirectly,
compete with respect to any services or products of the Company which are
either offered or are being developed by the Company; or, without limiting the
generality of the foregoing, be or become, or agree to be or become, interested
in or associated with, in any capacity (whether as a partner, shareholder,
owner, officer, director, Executive, principal, agent, creditor, trustee,
consultant, co-venturer or otherwise) with any individual, corporation, firm,
association, partnership, joint venture or other business entity, which
competes with respect to any services or products of the Company which are
either offered or are being developed by the Company; provided, however, that
the Executive may own, solely as an investment, not more than one percent (1%)
of any class of securities of any publicly held corporation in competition with
the Company whose securities are traded on any national securities exchange in
the United States of America, and may retain his ownership interest in those
entities referred to in Subparagraph 4.1.
5.1(b) During the term of this Agreement and, if applicable, during
the Termination Period, the Executive shall not, directly or indirectly, (i)
induce or attempt to influence any employee of the Company to leave its employ,
(ii) aid or agree to aid any competitor, customer or supplier of the Company in
any attempt to hire any person who shall have been employed by the Company
within the one (1) year period preceding such requested aid, or (iii) induce or
attempt to influence any person or business entity who was a customer or
supplier of the Company during any portion of said period to transact business
with a competitor of the Company in Company's business.
5.1(c) During the Term of this Agreement, the Termination Period, if
applicable, and thereafter, the Executive shall not other than in the
performance of his duties disclose to anyone any information about the affairs
of the Company, including, without limitation, trade secrets, trade "know-how",
inventions, customer lists, business plans, operational methods, pricing
policies, marketing plans, sales plans, identity of suppliers or customers,
sales, profits or other financial information, which is confidential to the
Company or is not generally known in the relevant trade, nor shall the
Executive
<PAGE> 5
such jurisdictions shall hold such Restrictive Covenants wholly unenforceable by
reason of the breadth of such scope or otherwise, it is the intention of the
parties hereto that such determination not bar or in any way affect the
Company's right to the relief provided above in the courts of any other
jurisdictions within the geographical scope of such Restrictive Covenants, as
to breaches of such covenants in such other respective jurisdictions, the above
covenants as they relate to each jurisdiction being, for this purpose,
severable into diverse and independent covenants.
6. TERMINATION.
6.1 The Company may terminate the Executive's employment under this
Agreement at any time for Cause. "Cause" shall exist for such termination if
Executive (i) is adjudicated guilty of a felony by a court of competent
jurisdiction, (ii) commits any act of fraud or intentional misrepresentation,
(iii) has, in the reasonable judgment of the Company's Board of Directors, (a)
engaged in misconduct, which conduct has, or would if generally known,
materially adversely affect the good will or reputation of the Company and
which conduct the Executive has not cured or altered to the satisfaction of the
Board of Directors within ten (10) days following notice by the Board of
Directors to the Executive regarding such conduct, or (b) willfully and
intentionally failed to perform his duties as specified to him by the Board of
Directors, or (c) negligently performs his or her duties and such negligence
adversely affects the Company or (iii) has made any material misrepresentation
to the Company under Sections 4 and 5 hereof.
6.2 If the Company terminates the Executive's employment under this
Agreement pursuant to the provisions of Section 6.1 hereof, the Executive shall
not be entitled to receive any compensation following the date of such
termination.
6.3 This Agreement shall automatically terminate on the last day of
the month in which Executive dies or becomes permanently incapacitated.
"Permanent incapacity" as used herein shall mean mental or physical incapacity,
or both, reasonably determined by the Company's Board of Directors based upon a
certification of such incapacity by, in the discretion of the Company's Board
of Directors, either Executive's regularly attending physician or a duly
licensed physician selected by the Company's Board of Directors, rendering
Executive unable to perform substantially all of his or her duties hereunder
and which appears reasonably certain to continue for at least six (6)
consecutive months without substantial improvement. Executive shall be deemed
to have "become permanently incapacitated" on the date the Company's Board of
Directors has determined that Executive is permanently incapacitated and so
notifies Executive.
6.4 Upon termination because of Permanent incapacity, the Executive
shall be entitled to receive compensation for twelve (12) months from the date
of such termination (such payments to be diminished, however, by the extent to
which the Executive receives compensation during such period from any
disability insurance or other income source) in an amount equal to the monthly
compensation paid Executive for the month prior to such termination.
<PAGE> 6
6.5 Executive's employment may be terminated by the Company "without
cause" (for any reason or no reason at all) at any time by giving Executive
sixty (60) days prior written notice of termination, which termination shall be
effective on the 60th day following such notice. If Executive's employment
under this Agreement is so terminated, the Company shall make a lump sum cash
payment to Executive within 10 days after termination of an amount equal to
(i) the amount of the remaining Base Salary and benefits to be paid to Executive
through the Term of this Agreement, (ii) a pro rata option of any agreed upon
incentive compensation, if any, earned for the year in which termination occurs
prorated to the date of termination, plus (iii) any unreimbursed expenses
accruing to the date of termination. After the Company's termination of
Executive under this provision, the Company shall not be obligated to continue
providing any benefits to Executive (except as may be required by law).
6.6 Executive may terminate his or her employment hereunder by
giving the Company sixty (60) days prior written notice, which termination
shall be effective on the 60th day following such notice. Voluntary termination
shall not entitle the Executive to receive any compensation following the date
of termination.
6.7 At the Company's option, Executive shall immediately leave the
Company's premises on the date notice of termination is given by either
Executive or the Company.
7. MISCELLANEOUS.
7.1 The Company may, from time to time, apply for and take out, in
its own name and at its own expense, life, health, accident, disability or
other insurance upon the Executive in any sum or sums that it may deem
necessary to protect its interests, and the Executive agrees to aid and
cooperate in all reasonable respects with the Company in procuring any and all
such insurance, including without limitation, submitting to the usual and
customary medical examinations, and by filling out, executing and delivering
such applications and other instruments in writing as may be reasonably
required by an insurance company or companies to which an application or
applications for such insurance may be made by or for the Company. In order to
induce the Company to enter this Agreement, the Executive represents and
warrants to the Company that to the best of his knowledge the Executive is
insurable at standard (non-rated) premiums.
7.2 This Agreement is a personal contract, and the rights and
interests of the Executive hereunder may not be sold, transferred, assigned,
pledged or hypothecated except as otherwise expressly permitted by the
provisions of this Agreement. The Executive shall not under any circumstances
have any option or right to require payment hereunder otherwise than in
accordance with the terms hereof. Except as otherwise expressly provided
herein, the Executive shall not have any power of anticipation, alienation or
assignment of payments contemplated hereunder, and all rights and benefits
<PAGE> 7
of the Executive shall be for the sole personal benefit of the Executive, and
no other person shall acquire any right, title or interest hereunder by reason
of any sale, assignment, transfer, claim or judgment or bankruptcy proceedings
against the Executive; provided, however, that in the event of the Executive's
death, the Executive's estate, legal representative or beneficiaries (as the
case may be) shall have the right to receive all of the benefit that accrued to
the Executive pursuant to, and in accordance with, the terms of this Agreement.
7.3 The Company shall have the right to assign this Agreement to any
successor of substantially all of its business or assets, and any such
successor shall be bound by all of the provisions hereof.
8. NOTICES.
All notices, requests, demands and other communications provided for
by this Agreement shall be in writing and (unless otherwise specifically
provided herein) shall be deemed to have been given at the time when mailed in
any general or branch United States Post Office, enclosed in a registered or
certified postpaid envelope, addressed to the parties stated below or to such
changed address as such party may have fixed by notice:
To the COMPANY:
Attn: Janet Moore
Executive: Sec.
9. ENTIRE AGREEMENT.
This Agreement supersedes any and all Agreements, whether oral or
written, between the parties hereto, with respect to the employment of
Executive by the Company and contains all of the covenants and Agreements
between the parties with respect to rendering of such services in any manner
whatsoever. Each party to this Agreement acknowledges that no representations,
inducements, promises or agreements, orally or otherwise, have been made by any
party, or anyone acting on behalf of any party, which are not embodied herein,
and that no other agreement, statement or promise with respect to such
employment not contained in this Agreement shall be valid or binding. Any
modification of this Agreement will be effective only if it is in writing and
signed by the parties hereto.
10. PARTIAL INVALIDITY.
<PAGE> 8
If any provision in this Agreement is held by a court of
competent jurisdiction to be invalid, void, or unenforceable, the remaining
provisions shall nevertheless continue in full force and effect without being
impaired or invalidated in any way.
11. ATTORNEYS' FEES.
Should any litigation or arbitration be commenced between the
parties hereto or their personal representative concerning any provision of this
Agreement or the rights and duties of any person in relation thereto, the party
prevailing in such litigation or arbitration shall be entitled, in addition to
such other relief as may be granted, to a reasonable sum as and for its or their
attorneys' fees in such litigation or arbitration which shall be determined by
the court or arbitration board.
12. ARBITRATION.
The parties agree to arbitrate any disputes arising under this
Agreement in as expeditious a manner as possible through the commercial rules of
the American Arbitration Association in the County of Orange, California, or
such other place which is mutually agreed upon by the parties. Further, the
parties hereby waive any objection based on personal jurisdiction, venue or
forum non conveniens in any arbitration or action brought under this section.
The decision and award rendered by the arbitrators shall be final and binding.
Judgment upon the award may be entered in any court having jurisdiction thereof.
Notwithstanding the first paragraph of this section, any dispute
involving an amount that is less than or equal to the maximum jurisdictional
amount for small claims court, as may be amended, shall be brought in the small
claims court for the County of Orange, State of California, or such other place
which is mutually agreed upon by the parties.
13. GOVERNING LAW.
This Agreement will be governed by and construed in accordance
with the laws of the State of California.
14. BINDING NATURE.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective representatives, heirs, successors and
assigns.
15. WAIVER.
No waiver of any of the provisions of this Agreement shall be
deemed, or shall constitute a waiver of any other provision, whether or not
similar, nor shall any
<PAGE> 1
EXHIBIT 10.20
[BIOMERICA LOGO]
August 12, 1999
Mr. Pete McKinley
6212 Oakbrook Cir.
Huntington Beach, CA 92648
Re: Employment Offer
Dear Pete:
I am pleased to extend to you an offer to join theBigRx.com division of
Biomerica, Inc. (the "Company"). The purpose of this letter is to set forth in
writing the terms and conditions of your new employment relationship with the
Company.
Your employment will commence as of August 16, 1999. Your job title will be
Executive Vice President of Development and Operations; your duties will be such
assignments as may be agreed upon from time to time by you and the Board of
Directors and/or the Chief Executive Officer. An incentive bonus will be
established by the board and/or CEO to include the possibility of being granted
an additional non-qualified option to purchase 10,000 restricted shares based
upon reaching specific performance milestones.
Your base salary will be one hundred twenty thousand dollars ($120,000) per
year (the "Base Salary") and will be payable at such intervals as is normal for
the payment of compensation to the Company's employees (currently semi-monthly).
Upon the Company having cash and cash equivalents over $15,000,000 the Company
shall pay you a bonus of $50,000 dollars.
In addition to the Base Salary, the Company shall grant to you a
non-qualified option to purchase 72,000 restricted shares of the Company's
common stock at an exercise price equal to the fair market value of the
Company's common stock on the date of grant, as determined by the Board of
Directors. The option (as well as the other options referred to herein) shall
vest over a period of three (3) years, with 33 1/3% vesting on the first
anniversary of the date of grant and the remaining 66 2/3 vesting as to
one-twenty fourth (1/24th) per month each month thereafter for the next two (2)
years. The option shall have a term of five (5) years; however, the option shall
terminate thirty (30) days from the date of termination of your employment with
the Company or any of its subsidiaries other than by reason of death or
disability. The option shall be subject to the terms and conditions of a
non-qualified Stock Option Plan (the "Plan") to be established by the Company's
Board of Directors within sixty (60) days of this letter and the Stock Option
Agreement to be entered into by you and the Company. Notwithstanding the
foregoing, the option shall vest in full immediately upon a change of
<PAGE> 2
Mr. Pete McKinley - Offer
August 12, 1999
Page 2 of 3
control of the Company, which shall be defined in the Plan and shall include
the consummation of a merger or the sale of all or substantially all of the
Company's assets.
Your performance and compensation will be reviewed at the end of one year,
and your compensation will be subject to modification by the Company to be
mutually agreeable.
You will also be entitled to the standard employment benefit package that
is available to all Company employees, which is subject to change from time to
time, but which initially will include group health and dental insurance for
you. Dependent coverage is also available; however, it will be at your cost
with pre-tax dollars. You may also qualify for participation in any other plans
maintained by the Company, in accordance with the terms and conditions of such
plan.
You will have time off with pay on the major holidays which are recognized
by the Company and up to 8 days of paid sick leave per year. Some limits may be
placed on the total sick leave which you may accrue with the Company. Initially
your paid vacation leave will accrue at the rate of ten (10) days per year and
increase according to company policy.
You will be entitled to such other employment benefits as the Company
generally makes available to its employees, and all benefits will be subject to
change from time to time and will be provided in accordance with the Company's
employment policies, to which you will be subject.
You also agree to execute and be bound by the terms of the Employee
Nondisclosure and Confidentiality Agreement attached hereto as Exhibit A.
This Agreement is made and entered into in the State of California, and
shall in all respects be interpreted, enforced and governed by and under the
laws of the State of California. All disputes arising under this agreement or
relating to the Company's employment of you shall be governed by the laws of
the State of California.
You agree that any dispute, disagreement, controversy or claim arising
from or relating to this agreement or the Company's employment of you, shall be
resolved by final and binding arbitration administered by the American
Arbitration Association. The venue shall be Orange County, California. The
award of the arbitrator shall be issued and transmitted to the parties, and
judgement on the award may be entered in any court having jurisdiction thereof.
You understand that acceptance of this agreement constitutes a waiver of your
right to a judicial forum in which to resolve claims relating to or arising out
of your employment or to resolve claims covered by various state and federal
statutes, including, but not limited to, such statutes as the Americans with
Disabilities Act, and various civil rights statutes.
<PAGE> 3
Mr. Pete McKinley - Offer
August 12, 1999
Page 3 of 3
This letter, together with the Employee Handbook and the Non-Disclosure
Agreement, is intended to set forth our entire agreement regarding your
employment relationship with the Company, thus it supersedes any other
agreement on this subject, including any inconsistent provisions contained in
any employee manual or policy of the Company. This agreement will not be
modifiable except by a mutual written agreement between you and the Company.
Please sign and return this letter to me to indicate your acceptance and
agreement to the terms set forth in this letter. You may keep a copy for your
own records.
Sincerely,
Biomerica, Inc.
By: /s/ ZACKARY S. IRANI
----------------------------------
Zackary S. Irani
Its: President
ACCEPTANCE
I have read the foregoing letter and agree with the terms and conditions
of my employment as set forth.
Dated: 8/16/99 /s/ PETE McKINLEY
------------------------------- -------------------------------------
Name: Mr. Pete McKinley
<PAGE> 1
EXHIBIT 10.21
[BIOMERICA LETTERHEAD]
July 2, 1999
Dr. Richard Jay
46 Mancera
Rancho Santa Margarita, CA 92688
Re: Employment Offer
Dear Dr. Jay:
I am pleased to extend to you an offer to join theBigRx.com division of
Biomerica, Inc. (the "Company"). The purpose of this letter is to set forth in
writing the terms and conditions of your new employment relationship with the
Company.
Your employment will commence as of July 26, 1999. Your job title will be
Vice-president Pharmacy, your duties will be such assignments as may be agreed
upon from time to time by you and the Board of Directors and/or the Chief
Executive Officer. An incentive bonus will be established by the board and/or
CEO to include the possibility of earning an additional 18,000 shares option
based reaching specific performance milestones.
Your base salary will be one hundred fifty-six thousand ($156,000) per year
(the "Base Salary") and will be payable at such intervals as is normal for the
payment of compensation to the Company's employees (currently semi-monthly).
In addition to the Base Salary, the Company shall grant to you
non-qualified option to purchase 72,000 shares of the Company's common stock at
an exercise price equal to the fair market value of the Company's common stock
on the date of grant, as determined by the Board of Directors. The option shall
vest over a period of three (3) years, with 33-1/3% vesting on the first
anniversary of the date of grant and the remaining 66-2/3 vesting as to
one-twenty fourth (1/24th) per month each month thereafter for the next two (2)
years. The option shall have a term of five (5) years. However, the option
shall terminate thirty (30) days from the date of termination of the Optionee's
relationship with the Company or any of its subsidiaries other than by reason
of death or disability. The option shall be subject to the terms and conditions
of a 1999 Restricted Stock and Stock Option Plan to be established by the
Company's Board of Directors within thirty (30) days of this letter and the
Stock Option Agreement to be entered into by you and the Company.
Your performance and compensation will be reviewed from time to time, and
your compensation will be subject to modification by the Company.
You will also be entitled to the standard employment benefit package that
is available to all Company employees, which is subject to change from time to
time, but which initially will include group health and dental insurance for
you. Dependent coverage is also available;
<PAGE> 2
Dr. Richard Jay - Offer
July 2, 1999
Page 2 of 3
however, it will be at your cost with pre-tax dollars. You may also qualify for
participation in any other plans maintained by the Company, in accordance with
the terms and conditions of such plan.
You will have time off with pay on the major holidays which are recognized
by the Company and up to 8 days of paid sick leave per year. Some limits may be
placed on the total sick leave which you may accrue with the Company. Initially
your paid vacation leave will accrue at the rate of ten (10) days per year and
increase according to company policy.
You will be entitled to such other employment benefits as the Company
generally makes available to its employees, and all benefits will be subject to
change from time to time and will be provided in accordance with the Company's
employment policies, to which you will be subject.
You also agree to execute and be bound by the terms of the Employee
Nondisclosure and Confidentiality Agreement attached hereto as Exhibit A.
The term of this agreement shall be for one year from the commencement of
your employment and is subject to the Company's standard employment agreement.
This Agreement is made and entered into in the State of California, and
shall in all respects be interpreted, enforced and governed by and under the
laws of the State of California. All disputes arising under this agreement or
relating to the Company's employment of you shall be governed by the laws of
the State of California.
You agree that any dispute, disagreement, controversy or claim arising from
or relating to this agreement or the Company's employment of you, shall be
resolved by final and binding arbitration administered by the American
Arbitration Association. Venue shall be Orange County, California. The award of
the arbitrator shall be issued and transmitted to the parties, and judgement on
the award may be entered in any court having jurisdiction thereof. You
understand that acceptance of this agreement constitutes a waiver of your right
to a judicial forum in which to resolve claims relating to or arising out of
your employment or to resolve claims covered by various state and federal
statutes, including, but not limited to, such statutes as the Americans with
Disabilities Act, and various civil rights statutes.
This letter, together with the Employee Handbook and the Non-Disclosure
Agreement, is intended to set forth our entire agreement regarding your
employment relationship with the Company, thus it supersedes any other
agreement on this subject including any inconsistent provisions contained in
any employee manual or policy of the Company. This agreement will not be
modifiable except by a mutual written agreement between you and the Company.
<PAGE> 3
Dr. Richard Jay - Offer
July 2, 1999
Page 3 of 3
Please sign and return this letter to me to indicate your acceptance and
agreement to the terms set forth in this letter. You may keep a copy for your
own records.
Sincerely,
Biomerica, Inc.
By: /s/ ZACK IRANI
--------------------
Zack Irani
Its: President
ACCEPTANCE
I have read the foregoing letter and agree with the terms and conditions
of my employment as set forth.
Dated: 7-3-99 /s/ RICHARD JAY
------------ -----------------------
Name: Dr. Richard Jay
<PAGE> 1
EXHIBIT 10.22
AMENDMENT TO LEASE
EXTENSION OF LEASE TERM
L & T CORPORATION, a California Corporation, as Landlord and LANCER
ORTHODONTICS, a California Corporation, as Tenant, being parties to that certain
lease agreement dated November 4, 1993, for the premises located at 253 Pawnee
Street, Suite A, San Marcos, California 92069, hereby express their mutual
desire and intent to extend the terms of the Lease Agreement and amend the
following clauses as of this 12th day of February, 1998 , solely as hereinafter
described:
EFFECTIVE THE 1st day of January, 1999, the portions of the Lease as
numbered below shall be amended to read as follows:
1. LEASE TERM: (SECTION 1.05 OF THE LEASE)
Landlord hereby extends the Term of the Initial Lease with Tenant by
sixty (60) months. The Extended Lease Term shall commence January 1, 1999 and
expire December 31, 2003.
2. BASE RENT: (SECTION 1.12 OF THE LEASE)
The Base Rent for the Extension Term shall be as follows:
<TABLE>
<CAPTION>
MONTH BASE RENT
----- ---------
<S> <C>
January 1, 1999 through January 31, 1999: Free of Base Rent
February 1, 1999 through December 31, 1999: $ 5,400.00
January 1, 2000 through December 31, 2000: $ 5,616.00
January 1, 2001 through December 31, 2001: $ 5,840.00
January 1, 2002 through December 31, 2002: $ 6,074.27
January 2, 2003 through December 31, 2003: $ 6,317.00
</TABLE>
3. UTILITIES: (ORIGINAL LEASE ADDENDUM, ARTICLE 17 OF THE LEASE)
Article 17 shall be amended as follows: "For the Extended Lease Term,
Landlord shall pay for Tenant's normal business water usage, which also includes
the landscaping. In addition to the Base Monthly Rent, Tenant shall provide an
additional $150.00 per month to Landlord for any and all other expenses in
connection with the premises. Tenant is solely responsible for trash removal
services and costs thereof."
ALL OTHER TERMS AND CONDITIONS OF THE ABOVE-DESCRIBED LEASE AGREEMENT SHALL
REMAIN IN FULL FORCE AND EFFECT. LANDLORD AND TENANT HEREBY ACKNOWLEDGE THAT CB
COMMERCIAL REAL ESTATE GROUP, INC. REPRESENTS THE LANDLORD.
LANDLORD: L & T CORPORATION, A CALIFORNIA CORPORATION
BY: /s/ LEONARD TESSLER 2/1/98
-------------------------------- ------------------------
Leonard Tessler DATE
ITS: PRESIDENT
-------------------------------
TENANT: LANCER ORTHODONTICS, INC., A CALIFORNIA CORPORATION
BY: /s/ DOUG MILLER 2/13/98
-------------------------------- ------------------------
Doug Miller DATE
ITS: PRESIDENT
-------------------------------
DATE: 2/13/98
------------------------------
CONSULT YOUR ATTORNEY/ADVISOR -- This document has been prepared for approval by
your attorney. No representation or recommendation is made by CB COMMERCIAL REAL
ESTATE GROUP, INC. or the agents or employees as to the legal sufficiency, legal
effect or the consequences of this document or the transaction to which it
relates. These are questions for your attorney.
<PAGE> 2
INDUSTRIAL REAL ESTATE LEASE
[CB LOGO] (SINGLE-TENANT FACILITY)
CB COMMERCIAL REAL ESTATE GROUP, INC.
BROKERAGE AND MANAGEMENT
LICENSED REAL ESTATE BROKER
ARTICLE ONE: BASIC TERMS
This Article One contains the Basic Terms of this Lease between the
Landlord and Tenant named below. Other Articles, Sections and Paragraphs of the
Lease referred to in this Article One explain and define the Basic Terms and are
to be read in conjunction with the Basic Terms.
Section 1.01. DATE OF LEASE: November 4, 1993
Section 1.02. LANDLORD (INCLUDE LEGAL ENTITY): L & T CORP., a California
corporation, Attn: Mr. Leonard Tessler
Address of Landlord: 700 Front Street, #1501, San Diego, CA 92101
Section 1.03. TENANT (INCLUDE LEGAL ENTITY). Lancer Orthodontics, Inc., a
California corporation
Address of Tenant: 253 Pawnee Street, #A, San Marcos, CA 92069
Section 1.04. PROPERTY: (include street address, approximate square footage
and description) Located in the Old Mill Industrial Park, consisting of
approximately 9,240 square feet of interior space, at 253 Pawnee Street, #A, San
Marcos, CA 92069 as shown on Exhibit A attached hereto and made a part hereof.
Section 1.05. LEASE TERM: 5 years 0 months BEGINNING ON January 1, 1994 or
such other date as is specified in this Lease, and ENDING ON December 31, 1998
Section 1.06. PERMITTED USES: (See Article Five) Manufacturing and storage
of dental equipment and instruments as well as administrative uses.
Section 1.07. TENANT'S GUARANTOR: (If none, so state) N/A.
Section 1.08. BROKERS: (See Article Fourteen) (If none, so state).
Landlord's Broker: CB Commercial Real Estate Group, Inc.
Tenant's Broker: Business Real Estate.
Section 1.09. COMMISSION PAYABLE TO LANDLORD'S BROKER: (See Article
Fourteen) $ See separate Agreement.
Section 1.10. INITIAL SECURITY DEPOSIT: (See Section 3.03) $4,400,00.
Section 1.11. VEHICLE PARKING SPACES ALLOCATED TO TENANT: 15 parking spaces
- - common area.
Section 1.12. RENT AND OTHER CHARGES PAYABLE BY TENANT: $2,900.00 for
first month's rent (January 1, 1994 Rent).
(a) BASE RENT: Two Thousand Nine Hundred and No/100ths DOLLARS ($2,900.00)
per month for the first 12 months, as provided in Section 3.01, and shall be
increased on the first day of the 13, 25, 37, 49 month(s) after the Commencement
Date, as provided in (ii) See First Addendum attached hereto and made a part
hereof, and revised Section 3.02 - Rent Schedule. (If (ii) is completed, then
(i) and Section 3.02 are inapplicable.
(b) OTHER PERIODIC PAYMENTS: (ii) Utilities (See Section 4.03); (v)
Maintenance, Repairs and Alterations (See Article Six).
Section 1.13. COSTS AND CHARGES PAYABLE BY LANDLORD: (a) Real Property
Taxes (See Section 4.02); (b) Insurance Premiums (See Section 4.04(c); (c)
Maintenance and Repair (See Article Six).
Section 1.14. LANDLORD'S SHARE OF PROFIT ON ASSIGNMENT OR SUBLEASE: (See
Section 9.05) Fifty percent (50%) of the Profit (the "Landlord's Share").
Section 1.15. RIDERS: The following Riders are attached to and made a part
of this Lease: (If none, so state)
First Addendum
Exhibit "A" - Site Plan
Exhibit "B" - Tenant Improvements
ARTICLE TWO: LEASE TERM
Section 2.01. LEASE OF PROPERTY FOR LEASE TERM. Landlord leases the
Property to Tenant and Tenant leases the Property from Landlord for the Lease
Term. The Lease Term is for the period stated in Section 1.05 above and shall
begin and end on the dates specified in Section 1.05 above, unless the beginning
or end of the Lease Term is changed under any provision of this Lease. The
"Commencement Date" shall be the date specified in Section 1.05 above for the
beginning of the Lease Term, unless advanced or delayed under any provision of
this Lease.
(c) 1988 Southern California 1 Initials_______
Chapter of the Society _______
of Industrial and (SINGLE-TENANT GROSS FORM)
Office Realtors,(R) Inc.
<PAGE> 3
Section 2.02. DELAY IN COMMENCEMENT. Landlord shall not be liable to Tenant
if Landlord does not deliver possession of the Property to Tenant on the
Commencement Date. Landlord's non-delivery of the Property to Tenant on that
date shall not affect this Lease or the obligations of Tenant under this Lease
except that the Commencement Date shall be delayed until Landlord delivers
possession of the Property to Tenant and the Lease Term shall be extended for a
period equal to the delay in delivery of possession of the Property to Tenant,
plus the number of days necessary to end the Lease Term on the last day of a
month. If Landlord does not deliver possession of the Property to Tenant within
sixty (60) days after the Commencement Date, Tenant may elect to cancel this
Lease by giving written notice to Landlord within ten (10) days after the sixty
(60)-day period ends. If Tenant gives such notice, the Lease shall be cancelled
and neither Landlord nor Tenant shall have any further obligations to the other.
If Tenant does not give such notice, Tenant's right to cancel the Lease shall
expire and the Lease Term shall commence upon the delivery of possession of the
Property to Tenant. If delivery of possession of the Property to Tenant is
delayed, Landlord and Tenant shall, upon such delivery, execute an amendment to
this Lease setting forth the actual Commencement Date and expiration date of the
Lease. Failure to execute such amendment shall not affect the actual
Commencement Date and expiration date of the Lease.
Section 2.03. EARLY OCCUPANCY. If Tenant occupies the Property prior to the
Commencement Date, Tenant's occupancy of the Property shall be subject to all of
the provisions of this Lease. Early occupancy of the Property shall not advance
the expiration date of this Lease. (See Article 18)
Section 2.04. HOLDING OVER. Tenant shall vacate the Property upon the
expiration or earlier termination of this Lease. If Tenant does not vacate the
Property upon the expiration or earlier termination of the Lease and Landlord
thereafter accepts rent from Tenant, Tenant's occupancy of the Property shall be
a "month-to-month" tenancy, subject to all of the terms of this Lease applicable
to a month-to-month tenancy, except that the Base Rent then in effect shall be
increased by twenty-five percent (25%).
ARTICLE THREE: BASE RENT
Section 3.01. TIME AND MANNER OF PAYMENT. Upon execution of this Lease,
Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph
1.12(a) above for the first month of the Lease Term. On the first day of the
second month of the Lease Term and each month thereafter, Tenant shall pay
Landlord the Base Rent, in advance, without offset, deduction or prior demand.
The Base Rent shall be payable at Landlord's address or at such other place as
Landlord may designate in writing.
Section 3.03. SECURITY DEPOSIT; INCREASES.
(a) Upon the execution of this Lease, Tenant shall deposit with Landlord a
cash Security Deposit in the amount set forth in Section 1.10 above. Landlord
may apply all or part of the Security Deposit to any unpaid rent or other
charges due from Tenant or to cure any other defaults of Tenant. If Landlord
uses any part of the Security Deposit, Tenant shall restore the Security Deposit
to its full amount within ten (10) days after Landlord's written request.
Tenant's failure to do so shall be a material default under this Lease. No
interest shall be paid on the Security Deposit. Landlord shall not be required
to keep the Security Deposit separate from its other accounts and no trust
relationship is created with respect to the Security Deposit.
Section 3.04. TERMINATION, ADVANCE PAYMENTS. Upon termination of this Lease
under Article Seven (Damage or Destruction), Article Eight (Condemnation) or any
other termination not resulting from Tenant's default, and after Tenant has
vacated the Property in the manner required by this Lease, Landlord shall refund
or credit to Tenant (or Tenant's successor) the unused portion of the Security
Deposit, any advance rent or other advance payments made by Tenant to Landlord,
and any amounts paid for real property taxes and other reserves which apply to
any time periods after termination of the Lease.
ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT
Section 4.01. ADDITIONAL RENT. All charges payable by Tenant other than
Base Rent are called "Additional Rent." Unless this Lease provides otherwise,
Tenant shall pay all Additional Rent then due with the next installment of Base
Rent. The term "rent" shall mean Base Rent and Additional Rent.
(c) 1988 Southern California 2 Initials_______
Chapter of the Society _______
of Industrial and (SINGLE-TENANT GROSS FORM)
Office Realtors,(R) Inc.
<PAGE> 4
Section 4.02. PROPERTY TAXES.
(a) REAL PROPERTY TAXES. Landlord shall pay the "Real Property Taxes" on
the Property during the Lease Term. Real Property Taxes are real property taxes
applicable to the Property as shown on the tax bill for the most recent tax
fiscal year ending prior to the Commencement Date. However, if the structures on
the Property are not completed by the tax lien date of such tax fiscal year, the
Real Property Taxes are the taxes shown on the first tax bill showing the full
assessed value of the Property after completion of the structures.
(b) DEFINITION OF "REAL PROPERTY TAX." "Real property tax" means: (i) any
fee, license fee, license tax, business license fee, commercial rental tax,
levy, charge, assessment, penalty or tax imposed by any taxing authority against
the Property; (ii) any tax on the Landlord's right to receive, or the receipt
of, rent or income from the Property or against Landlord's business of leasing
the Property; (iii) any tax or charge for fire protection, streets, sidewalks,
road maintenance, refuse or other services provided to the Property by any
governmental agency; (iv) any tax imposed upon this transaction or based upon a
re-assessment of the Property due to a change of ownership, as defined by
applicable law, or other transfer of all or part of Landlord's interest in the
Property; and (v) any charge or fee replacing any tax previously included within
the definition of real property tax. "Real property tax" does not, however,
include Landlord's federal or state income, franchise, inheritance or estate
taxes.
(d) PERSONAL PROPERTY TAXES.
(i) Tenant shall pay all taxes charged against trade fixtures,
furnishings, equipment or any other personal property belonging to Tenant.
Tenant shall try to have personal property taxed separately from the
Property.
(ii) If any of Tenant's personal property is taxed with the Property,
Tenant shall pay Landlord the taxes for the personal property within
fifteen (15) days after Tenant receives a written statement from Landlord
for such personal property taxes.
Section 4.03. UTILITIES. Tenant shall pay, directly to the appropriate
supplier, the cost of all natural gas, heat, light, power, telephone, refuse
disposal and other utilities and services supplied to the Property. However, if
any services, or utilities are jointly metered with other property, Landlord
shall make a reasonable determination of Tenant's proportionate share of the
cost of such utilities and services and Tenant shall pay such share to Landlord
within fifteen (15) days after receipt of Landlord's written statement. (See
Article 17)
Section 4.04. INSURANCE POLICIES.
(a) LIABILITY INSURANCE. During the Lease Term, Tenant shall maintain a
policy of commercial general liability insurance (sometimes known as broad form
comprehensive general liability insurance) insuring Tenant against liability for
bodily injury, property damage (including loss of use of property) and personal
injury arising out of the operation, use or occupancy of the Property. Tenant
shall name Landlord as an additional insured under such policy. The initial
amount of such insurance shall be One Million Dollars ($1,000,000) per
occurrence. The liability insurance obtained by Tenant under this Paragraph
4.04(a) shall (i) be primary and non-contributing; (ii) contain cross-liability
endorsements; and (iii) insure Landlord against Tenant's performance under
Section 5.05, if the matters giving rise to the indemnity under Section 5.05
result from the negligence of Tenant subject to Section 4.04 (iv) below. The
amount and coverage of such insurance shall not limit Tenant's liability nor
relieve Tenant of any other obligation under this Lease. Landlord may also
obtain comprehensive public liability insurance in an amount and with coverage
determined by Landlord insuring Landlord against liability arising out of
ownership, operation, use or occupancy of the Property. The policy obtained by
Landlord shall not be contributory and shall not provide primary insurance.
(b) PROPERTY AND RENTAL INCOME INSURANCE. During the Lease Term, Landlord
shall maintain policies of insurance covering loss of or damage to the Property
in the full amount of its replacement value. Such policy shall contain an
Inflation Guard Endorsement and shall provide protection against all perils
included within the classification of fire, extended coverage, vandalism,
malicious mischief, special extended perils (all risk), sprinkler leakage and
any other perils which Landlord deems reasonably necessary. Landlord shall have
the right to obtain flood and earthquake insurance if required by any lender
holding a security interest in the Property. Landlord shall not obtain insurance
for Tenant's fixtures or equipment or building improvements installed by Tenant
on the Property. During the Lease Term, Landlord shall also maintain a rental
income insurance policy, with loss payable to Landlord, in an amount equal to
one year's Base Rent, plus estimated real property taxes and insurance premiums.
Tenant shall be liable for the payment of any deductible amount under Tenant's
insurance policies maintained pursuant to this Section 4.04. Tenant shall not do
or permit anything to be done which invalidates any such insurance policies.
(c) PAYMENT OF PREMIUMS.
(i) Landlord shall pay the "Premiums" for the insurance policies
maintained by Landlord under Paragraph 4.04(b).
(ii) Tenant shall pay Landlord the amount, if any, by which the
insurance policies maintained by Landlord under Paragraph 4.04(b) have
increased over the Base Premiums, if such increases result from the nature
of Tenant's occupancy, any act or omission of Tenant.
(c) 1988 Southern California 3 Initials_______
Chapter of the Society _______
of Industrial and (SINGLE-TENANT GROSS FORM)
Office Realtors,(R) Inc.
<PAGE> 5
(d) GENERAL INSURANCE PROVISIONS.
(i) Any insurance which Tenant is required to maintain under this Lease
shall include a provision which requires the insurance carrier to give Landlord
not less than thirty (30) days' written notice prior to any cancellation or
modification of such coverage.
(ii) If Tenant fails to deliver any policy, certificate or renewal to
Landlord required under this Lease within the prescribed time period or if any
such policy is cancelled or modified during the Lease Term without Landlord's
consent, Landlord may obtain such insurance, in which case Tenant shall
reimburse Landlord for the cost of such insurance within fifteen (15) days after
receipt of a statement that indicates the cost of such insurance.
(iii) Tenant shall maintain all insurance required under this Lease with
companies holding a "General Policy Rating" of A-12 or better, as set forth in
the most current issue of "Best Key Rating Guide". Landlord and Tenant
acknowledge the insurance markets are rapidly changing and that insurance in the
form and amounts described in this Section 4.04 may not be available in the
future. Tenant acknowledges that the insurance described in this Section 4.04 is
for the primary benefit of Landlord. If at any time during the Lease Term,
Tenant is unable to maintain the insurance required under the Lease, Tenant
shall nevertheless maintain insurance coverage which is customary and
commercially reasonable in the insurance industry for Tenant's type of business,
as that coverage may change from time to time. Landlord makes no representation
as to the adequacy of such insurance to protect Landlord's or Tenant's
interests. Therefore, Tenant shall obtain any such additional property or
liability insurance which Tenant deems necessary to protect Landlord and Tenant.
(iv) Unless prohibited under any applicable insurance policies maintained,
Landlord and Tenant each hereby waive any and all rights of recovery against the
other, or against the officers, employees, agents or representatives of the
other, for loss of or damage to its property or the property of others under its
control, if such loss or damage is covered by any insurance policy in force
(whether or not described in this Lease) at the time of such loss or damage.
Upon obtaining the required policies of insurance, Landlord and Tenant shall
give notice to the insurance carriers of this mutual waiver of subrogation.
Section 4.05. LATE CHARGES. Tenant's failure to pay rent promptly may cause
Landlord to incur unanticipated costs. The exact amount of such costs are
impractical or extremely difficult to ascertain. Such costs may include, but are
not limited to, processing and accounting charges and late charges which may be
imposed on Landlord by any ground lease, mortgage or trust deed encumbering the
Property. Therefore, if Landlord does not receive any rent payment within ten
(10) days after it becomes due, Tenant shall pay Landlord a late charge equal to
ten percent (10%) of the overdue amount. The parties agree that such late charge
represents a fair and reasonable estimate of the costs Landlord will incur by
reason of such late payment.
Section 4.06. INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by Tenant
to Landlord which is not paid when due shall bear interest at the rate of ten
percent (10%) per annum from the due date of such amount. However, interest
shall not be payable on late charges to be paid by Tenant under this Lease. The
payment of interest on such amounts shall not excuse or cure any default by
Tenant under this Lease. If the interest rate specified in this Lease is higher
than the rate permitted by law, the interest rate is hereby decreased to the
maximum legal interest rate permitted by law.
ARTICLE FIVE: USE OF PROPERTY
Section 5.01. PERMITTED USES. Tenant may use the Property only for the
Permitted Uses set forth in Section 1.06 above.
Section 5.02. MANNER OF USE. Tenant shall not cause or permit the Property
to be used in any way which constitutes a violation of any law, ordinance, or
governmental regulation or order, which annoys or interferes with the rights of
other tenants of Landlord, or which constitutes a nuisance or waste. Tenant
shall obtain and pay for all permits, including a Certificate of Occupancy,
required for Tenant's occupancy of the Property and shall promptly take all
actions necessary to comply with all applicable statutes, ordinances, rules,
regulations, orders and requirements regulating the use by Tenant of the
Property, including the Occupational Safety and Health Act.
Section 5.03. HAZARDOUS MATERIALS. As used in this Lease, the term
"Hazardous Material" means any flammable items, explosives, radioactive
materials, hazardous or toxic substances, material or waste or related
materials, including any substances defined as or included in the definition of
"hazardous substances", "hazardous wastes", "hazardous materials" or "toxic
substances" now or subsequently regulated under any applicable federal, state or
local laws or regulations, including without limitation petroleum-based
products, paints, solvents, lead, cyanide, DDT, printing inks, acids,
pesticides, ammonia compounds and other chemical products, asbestos, PCBs and
similar compounds, and including any different products and materials which are
subsequently found to have adverse effects on the environment or the health and
safety of persons. Tenant shall not cause or permit any Hazardous Material to be
generated, produced, brought upon, used, stored, treated or disposed of in or
about the Property by Tenant, its agents, employees, contractors, sublessees or
invitees without the prior written consent
(c) 1988 Southern California 4 Initials_______
Chapter of the Society _______
of Industrial and (SINGLE-TENANT GROSS FORM)
Office Realtors,(R) Inc.
<PAGE> 6
of Landlord. Landlord shall be entitled to take into account such other factors
or facts as Landlord may reasonably determine to be relevant in determining
whether to grant or withhold consent to Tenant's proposed activity with respect
to Hazardous Material. In no event, however, shall Landlord be required to
consent to the installation or use of any storage tanks on the Property.
Section 5.04. SIGNS AND AUCTIONS. Tenant shall not place any signs on the
Property without Landlord's prior written consent. Tenant shall not conduct or
permit any auctions or sheriff's sales at the Property.
Section 5.05. INDEMNITY. Tenant shall indemnify Landlord against and hold
Landlord harmless from any and all costs, claims or liability arising from: (a)
Tenant's use of the Property; (b) the conduct of Tenant's business or anything
else done or permitted by Tenant to be done in or about the Property, including
any contamination of the Property or any other property resulting from the
presence or use of Hazardous Material caused or permitted by Tenant; (c) any
breach or default in the performance of Tenant's obligations under this Lease;
(d) any misrepresentation or breach of warranty by Tenant under this Lease; or
(e) other acts or omissions of Tenant. Tenant shall defend Landlord against any
such cost, claim or liability at Tenant's expense with counsel reasonably
acceptable to Landlord or, at Landlord's election, Tenant shall reimburse
Landlord for any legal fees or costs incurred by Landlord in connection with any
such claim. As a material part of the consideration to Landlord, Tenant assumes
all risk of damage to property or injury to persons in or about the Property
arising from any cause, and Tenant hereby waives all claims in respect thereof
against Landlord, except for any claim arising out of Landlord's gross
negligence or willful misconduct. As used in this Section, the term "Tenant"
shall include Tenant's employees, agents, contractors and invitees, if
applicable.
Section 5.06. LANDLORD'S ACCESS. Landlord or its agents may enter the
Property at all reasonable times to show the Property to potential buyers,
investors or tenants or other parties; to do any other act or to inspect and
conduct tests in order to monitor Tenant's compliance with all applicable
environmental laws and all laws governing the presence and use of Hazardous
Material; or for any other purpose Landlord deems necessary. Landlord shall give
Tenant prior notice of such entry, except in the case of an emergency. Landlord
may place customary "For Sale" or "For Lease" signs on the Property.
Section 5.07. QUIET POSSESSION. If Tenant pays the rent and complies with
all other terms of this Lease, Tenant may occupy and enjoy the Property for the
full Lease Term, subject to the provisions of this Lease.
ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS
Section 6.01. EXISTING CONDITIONS. Tenant accepts the Property in its
condition as of the execution of the Lease, subject to all recorded matters,
laws, ordinances, and governmental regulations and orders. Except as provided
herein, Tenant acknowledges that neither Landlord nor any agent of Landlord has
made any representation as to the condition of the Property or the suitability
of the Property for Tenant's intended use. Tenant represents and warrants that
Tenant has made its own inspection of and Inquiry regarding the condition of the
Property and is not relying on any representations of Landlord or any Broker
with respect thereto. If Landlord or Landlord's Broker has provided a Property
Information Sheet or other Disclosure Statement regarding the Property, a copy
is attached as an exhibit to the Lease. (See Article 19 & 24)
Section 6.02. EXEMPTION OF LAND FROM LIABILITY. Landlord shall not be
liable to or any damage or injury to the person, business (or any loss of income
therefrom), goods, wares, merchandise or other property of Tenant, Tenant's
employees, invitees, customers or any other person in or about the Property,
whether such damage or injury is caused by or results from: (a) fire, steam,
electricity, water, gas or rain; (b) the breakage, leakage, obstruction or other
defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or
lighting fixtures or any other cause; (c) conditions arising in or about the
Property, or from other sources or places; or (d) any act or omission of any
other tenant of Landlord. Landlord shall not be liable for any such damage or
injury even though the cause of or the means of repairing such damage or injury
are not accessible to Tenant. The provisions of this Section 6.02 shall not,
however, exempt Landlord from liability for Landlord's negligence or willful
misconduct.
Section 6.03. LANDLORD'S OBLIGATIONS. Subject to the provisions of Article
Seven (Damage or Destruction) and Article Eight (Condemnation), and except for
damage caused by any act or omission of Tenant, or Tenant's employees, agents,
contractors or invitees, Landlord shall keep the foundation, roof and structural
portions of exterior walls of the improvements on the Property in good order,
condition and repair. However, Landlord shall not be obligated to maintain or
repair windows, doors, plate glass or the surfaces of walls. Landlord shall not
be obligated to make any repairs under this Section 6.03 until a reasonable time
after receipt of a written notice from Tenant of the need for such repairs.
Tenant waives the benefit of any present or future law which might give Tenant
the right to repair the Property at Landlord's expense or to terminate the Lease
because of the condition of the Property. (See Article 26)
Section 6.04. TENANT'S OBLIGATIONS.
(a) Except as provided in Article Seven (Damage or Destruction) and Article
Eight (Condemnation), Tenant shall keep portions of the Property (including
nonstructural, interior, portions, systems equipment) in good order, condition
and repair (including interior repainting and refinishing, as needed). If any
portion of Property or any system or equipment in the Property which Tenant is
obligated to repair cannot be fully repaired or restored, Tenant shall promptly
replace such portion of the Property or system or equipment in the Property,
regardless of whether the benefit of such replacement extends beyond the Lease
Term; but if the benefit or useful life of such replacement extends beyond the
Lease Term (as such term may be extended by exercise of any options), the useful
life of such replacement shall be prorated over the remaining portion of the
Lease Term (as extended), and Tenant shall be liable only for that portion of
the cost which is applicable to the Lease Term (as extended). Tenant shall
maintain a preventive maintenance contract providing for the regular inspection
and maintenance of the heating and air conditioning system by a licensed heating
and air conditioning contractor. In addition, Tenant shall, at Tenant's expense,
repair any damage to the roof, foundation or structural portions of walls caused
by Tenant's acts or omissions. It is the intention of Landlord and Tenant that,
at all times during the Lease Term, Tenant shall maintain the Property in an
attractive, first-class and fully operative condition.
(b) Tenant shall fulfill all of Tenant's obligations under this Section
6.04 at Tenant's sole expense. If Tenant fails to maintain, repair or replace
the Property as required by this Section 6.04, Landlord may, upon ten (10) days'
prior notice to Tenant (except
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that no notice shall be required in the case of an emergency), enter the
Property and perform such maintenance or repair (including replacement, as
needed) on behalf of Tenant. In such case, Tenant shall reimburse Landlord for
all costs incurred in performing such maintenance or repair immediately upon
demand.
Section 6.05. ALTERATIONS, ADDITIONS, AND IMPROVEMENTS.
(a) Tenant shall not make any alterations, additions, or improvements to
the Property without Landlord's prior written consent, except for non-structural
alterations which do not exceed Ten Thousand Dollars ($10,000) in cost
cumulatively over the Lease Term and which are not visible from the outside of
any building of which the Property is part. Landlord may require Tenant to
provide demolition and/or lien and completion bonds in form and amount
satisfactory to Landlord. Tenant shall promptly remove any alterations,
additions, or improvements constructed in violation of this Paragraph 6.05(a)
upon Landlord's written request. All alterations, additions, and improvements
shall be done in a good and workmanlike manner, in conformity with all
applicable laws and regulations, and by a contractor approved by Landlord. Upon
completion of any such work, Tenant shall provide Landlord with "as built"
plans, copies of all construction contracts, and proof of payment for all labor
and materials.
(b) Tenant shall pay when due all claims for labor and material furnished
to the Property. Tenant shall give Landlord at least twenty (20) days' prior
written notice of the commencement of any work on the Property, regardless of
whether Landlord's consent to such work is required. Landlord may elect to
record and post notices of non-responsibility on the Property.
Section 6.06. CONDITION UPON TERMINATION. Upon the termination of the
Lease, Tenant shall surrender the Property to Landlord, broom clean and in the
same condition as received except for ordinary wear and tear which Tenant was
not otherwise obligated to remedy under any provision of this Lease. However,
Tenant shall not be obligated to repair any damage which Landlord is required to
repair under Article Seven (Damage or Destruction). In addition, Landlord may
require Tenant to remove any alterations, additions or improvements (whether or
not made with Landlord's consent) prior to the expiration of the Lease and to
restore the Property to its prior condition, all at Tenant's expense. All
alterations, additions and improvements which Landlord has not required Tenant
to remove shall become Landlord's property and shall be surrendered to Landlord
upon the expiration or earlier termination of the Lease, except that Tenant may
remove any of Tenant's machinery or equipment which can be removed without
material damage to the Property. Tenant shall repair, at Tenant's expense, any
damage to the Property caused by the removal of any such machinery or equipment.
In no event, however, shall Tenant remove any of the following materials or
equipment (which shall be deemed Landlord's property) without Landlord's prior
written consent: any power wiring or power panels; lighting or lighting
fixtures; wall coverings; drapes, blinds or other window coverings; carpets or
other floor coverings; heaters, air conditioners or any other heating or air
conditioning equipment; fencing or security gates; or other similar building
operating equipment and decorations.
ARTICLE SEVEN: DAMAGE OR DESTRUCTION
Section 7.01. PARTIAL DAMAGE TO PROPERTY.
(a) Tenant shall notify Landlord in writing immediately upon the occurrence
of any damage to the Property. If the Property is only partially damaged (i.e.,
less than fifty percent (50%) of the Property is untenantable as a result of
such damage or less than fifty percent (50%) of Tenant's operations are
materially impaired) and if the proceeds received by Landlord from the insurance
policies described in Paragraph 4.04(b) are sufficient to pay for the necessary
repairs, this Lease shall remain in effect and Landlord shall repair the damage
as soon as reasonably possible. Landlord may elect (but is not required) to
repair any damage to Tenant's fixtures, equipment, or improvements.
(b) If the insurance proceeds received by Landlord are not sufficient to
pay the entire cost of repair, or if the cause of the damage is not covered by
the insurance policies which Landlord maintains under Paragraph 4.04(b),
Landlord may elect either to (i) repair the damage as soon as reasonably
possible, in which case this Lease shall remain in full force and effect, or
(ii) terminate this Lease as of the date the damage occurred. Landlord shall
notify Tenant within thirty (30) days after receipt of notice of the occurrence
of the damage whether Landlord elects to repair the damage or terminate the
Lease. If Landlord elects to terminate the Lease, Tenant may elect to continue
this Lease in full force and effect, in which case Tenant shall repair any
damage to the Property and any building in which the Property is located. Tenant
shall pay the cost of such repairs, except that upon satisfactory completion of
such repairs, Landlord shall deliver to Tenant any insurance proceeds received
by Landlord for the damage repaired by Tenant. Tenant shall give Landlord
written notice of such election within ten (10) days after receiving Landlord's
termination notice.
(c) If the damage to the Property occurs during the last six (6) months of
the Lease Term and such damage will require more than thirty (30) days to
repair, either Landlord or Tenant may elect to terminate this Lease as of the
date the damage occurred, regardless of the sufficiency of any insurance
proceeds. The party electing to terminate this Lease shall give written
notification to the other party of such election within thirty (30) days after
Tenant's notice to Landlord of the occurrence of the damage.
Section 7.02. SUBSTANTIAL OR TOTAL DESTRUCTION. If the Property is
substantially or totally destroyed by any cause whatsoever (i.e., the damage to
the Property is greater than partial damage as described in Section 7.01), and
regardless whether Landlord receives any insurance proceeds, this Lease shall
terminate as of the date the destruction occurred. If Landlord so elects,
Landlord shall rebuild the Property at Landlord's sole expense, except that if
the destruction was caused by an act or omission of Tenant, Tenant shall pay
Landlord the difference between the actual cost of rebuilding and any insurance
proceeds received by Landlord.
Section 7.03. TEMPORARY REDUCTION OF RENT. If the Property is destroyed or
damaged and Landlord or Tenant repairs or restores the Property pursuant to the
provisions of this Article Seven, any rent payable during the period of such
damage, repair and/or restoration shall be reduced according to the degree, if
any, to which Tenant's use of the Property is impaired.
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for such possible reduction in Base Rent, insurance premiums and real property
taxes, Tenant shall not be entitled to any compensation, reduction, or
reimbursement from Landlord as a result of any damage, destruction, repair, or
restoration of or to the Property.
Section 7.04. WAIVER. Tenant waives the protection of any statute, code or
judicial decision which grants a tenant the right to terminate a lease in the
event of the substantial or total destruction of the leased property. Tenant
agrees that the provisions of Section 7.02 above shall govern the rights and
obligations of Landlord and Tenant in the event of any substantial or total
destruction to the Property.
ARTICLE EIGHT: CONDEMNATION
It all or any portion of the Property is taken under the power of eminent
domain or sold under the threat of that power (all of which are called
"Condemnation"), this Lease shall terminate as to the part taken or sold on the
date the condemning authority takes title or possession, whichever occurs first.
If more than twenty percent (20%) of the floor area of the building in which the
Property is located, or which is located on the Property, is taken, either
Landlord or Tenant may terminate this Lease as of the date the condemning
authority takes title or possession, by delivering written notice to the other
within ten (10) days after receipt of written notice of such taking (or in the
absence of such notice, within ten (10) days after the condemning authority
takes title or possession). If neither Landlord nor Tenant terminates this
Lease, this Lease shall remain in effect as to the portion of the Property not
taken, except that the Base Rent and Additional Rent shall be reduced in
proportion to the reduction in the floor area of the Property. Any Condemnation
award or payment shall be distributed in the following order: (a) first, to any
ground lessor, mortgagee or beneficiary under a deed of trust encumbering the
Property, the amount of its interest in the Property: (b) second, to Tenant,
only the amount of any award specifically designated for loss of or damage to
Tenant's trade fixtures or removable personal property; and (c) third, to
Landlord, the remainder of such award, whether as compensation for reduction in
the value of the leasehold, the taking of the fee, or otherwise. If this Lease
is not terminated, Landlord shall repair any damage to the Property caused by
the Condemnation, except that Landlord shall not be obligated to repair any
damage for which Tenant has been reimbursed by the condemning authority. If the
severance damages received by Landlord are not sufficient to pay for such
repair, Landlord shall have the right to either terminate this Lease or make
such repair at Landlord's expense.
ARTICLE NINE: ASSIGNMENT AND SUBLETTING
Section 9.01. LANDLORD'S CONSENT REQUIRED. No portion of the Property or of
Tenant's interest in this Lease may be acquired by any other person or entity,
whether by sale, assignment, mortgage, sublease, transfer, operation of law, or
act of Tenant, without Landlord's prior written consent, except as provided in
Section 9.02 below. Landlord has the right to grant or withhold its consent as
provided in Section 9.05 below. Any attempted transfer without consent shall be
void and shall constitute a non-curable breach of this Lease. If Tenant is a
partnership, any cumulative transfer of more than twenty percent (20% of
the partnership interests shall require Landlord's consent. If Tenant is a
corporation other than one whose stock is publicly traded, any change in the
ownership of controlling interest of the voting stock of the corporation shall
require Landlord's consent.
Section 9.02. TENANT AFFILIATE. Tenant may assign this Lease or sublease
the Property, without Landlord's consent, to any corporation which controls, is
controlled by or is under common control with Tenant, or to any corporation
resulting from the merger of or consolidation with Tenant ("Tenant's
Affiliate"). In such case, any Tenant's Affiliate shall assume in writing all of
Tenant's obligations under this Lease.
Section 9.03. NO RELEASE OF TENANT. No transfer permitted by this Article
Nine, whether with or without Landlord's consent, shall release Tenant or change
Tenant's primary liability to pay the rent and to perform all other obligations
of Tenant under this Lease. Landlord's acceptance of rent from any other person
is not a waiver of any provision of this Article Nine. Consent to one transfer
is not a consent to any subsequent transfer. If Tenant's transferee defaults
under this Lease, Landlord may proceed directly against Tenant without pursuing
remedies against the transferee. Landlord may consent to subsequent assignments
or modifications of this Lease by Tenant's transferee, without notifying Tenant
or obtaining its consent. Such action shall not relieve Tenant's liability under
this Lease.
Section 9.04. OFFER TO TERMINATE. If Tenant desires to assign the Lease or
sublease the Property, Tenant shall have the right to offer, in writing, to
terminate the Lease as of a date specified in the offer. If Landlord elects in
writing to accept the offer to terminate within twenty (20) days after notice of
the offer, the Lease shall terminate as of the date specified and all the terms
and provisions of the Lease governing termination shall apply. If Landlord does
not so elect, the Lease shall continue in effect until otherwise terminated and
the provisions of Section 9.05 with respect to any proposed transfer shall
continue to apply.
Section 9.05. LANDLORD'S CONSENT.
(a) Tenant's request for consent to any transfer described in Section 9.01
shall set forth in writing the details of the proposed transfer, including the
name, business and financial condition of the prospective transferee, financial
details of the proposed transfer (e.g., the term of and the rent and security
deposit payable under any proposed assignment or sublease), and any other
information Landlord deems relevant. Landlord shall have the right to withhold
consent, if reasonable, or to grant consent, based on the following factors: (i)
the business of the proposed assignee or subtenant and the proposed use of the
Property; (ii) the net worth and financial reputation of the proposed assignee
or subtenant; (iii) Tenant's compliance with all of its obligations under the
Lease; and (iv) such other factors as Landlord may reasonably deem relevant. If
Landlord objects to a proposed assignment solely because of the net worth and/or
financial reputation of the proposed assignee, Tenant may nonetheless sublease
(but not assign), all or a portion of the, Property to the proposed transferee,
but only on the other terms of the proposed transfer.
(b) If Tenant assigns or subleases, the following shall apply:
(i) Tenant shall pay to Landlord as Additional Rent under the Lease
the Landlord's Share (stated in Section 1.14) of the Profit (defined below)
on such transaction as and when received by Tenant, unless Landlord gives
written notice to Tenant and the assignee or subtenant that Landlord's
Share shall be paid by the assignee or subtenant to Landlord directly. The
"Profit" means (A) all amounts paid to Tenant for such assignment or
sublease, including "key" money, monthly rent in excess of the monthly rent
payable under the Lease, and all fees and other consideration paid for the
assignment or sublease, including fees under any collateral agreements,
less (B) costs and expense directly incurred by Tenant in connection with
the execution and performance of such assignment or sublease for real
estate broker's commissions and
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costs of renovation or construction of tenant improvements required under
such assignment or sublease. Tenant is entitled to recover such costs and
expenses before Tenant is obligated to pay the Landlord's Share to
Landlord. The Profit in the case of a sublease of less than all the
Property is the rent allocable to the subleased space as a percentage on a
square footage basis.
(ii) Tenant shall provide Landlord a written statement certifying all
amounts to be paid from any assignment or sublease of the Property within
thirty (30) days after the transaction documentation is signed, and
Landlord may inspect Tenant's books and records to verify the accuracy of
such statement. On written request, Tenant shall promptly furnish to
Landlord copies of all the transaction documentation, all of which shall be
certified by Tenant to be complete, true and correct. Landlord's receipt of
Landlord's Share shall not be a consent to any further assignment or
subletting. The breach of Tenant's obligation under this Paragraph 9.05(b)
shall be a material default of the Lease.
Section 9.06. NO MERGER. No merger shall result from Tenant's sublease of
the Property under this Article Nine, Tenant's surrender of this Lease or the
termination of this Lease in any other manner. In any such event, Landlord may
terminate any or all subtenancies or succeed to the interest of Tenant as
sublandlord under any or all subtenancies.
ARTICLE TEN: DEFAULTS; REMEDIES
Section 10.01. COVENANTS AND CONDITIONS. Tenant's performance of each of
Tenant's obligations under this Lease is a condition as well as a covenant.
Tenant's right to continue in possession of the Property is conditioned upon
such performance. Time is of the essence in the performance of all covenants and
conditions.
10.02. DEFAULTS. Tenant shall be in material default under this Lease:
(a) If Tenant abandons the Property or if Tenant's vacation of the Property
results in the cancellation of any insurance described in Section 4.04;
(b) If Tenant fails to pay rent or any other charge for five (5) days after
the first of the month, unless problems with the mail service, Landlord will not
be unreasonable.
(c) If Tenant fails to perform any of Tenant's non-monetary obligations
under this Lease for a period thirty (30) days after written notice from
Landlord; provided that if more than thirty (30) days are required to complete
such performance, Tenant shall not be in default if Tenant commences such
performance within the thirty (30)-day period and thereafter diligently pursues
its completion. However, Landlord shall not be required to give such notice if
Tenant's failure to perform constitutes a non-curable breach of this Lease. The
notice required by this Paragraph is intended to satisfy any and all notice
requirements imposed by law on Landlord and is not in addition to any such
requirement.
(d) (i) If Tenant makes a general assignment or general arrangement for the
benefit of creditors; (ii) if a petition for adjudication of bankruptcy or for
reorganization or rearrangement is filed by or against Tenant and is not
dismissed within thirty (30) days; (iii) if a trustee or receiver is appointed
to take possession of substantially all of Tenant's assets located at the
Property or of Tenant's interest in this Lease and possession is not restored to
Tenant within thirty (30) days; or (iv) if substantially all of Tenant's assets
located at the Property or of Tenant's interest in this Lease is subjected to
attachment, execution or other judicial seizure which is not discharged within
thirty (30) days. If a court of competent jurisdiction determines that any of
the acts described in this subparagraph (d) is not a default under this Lease,
and a trustee is appointed to take possession (or if Tenant remains a debtor in
possession) and such trustee or Tenant transfers Tenant's interest hereunder,
then Landlord shall receive, as Additional Rent, the excess, if any, of the rent
(or any other consideration) paid in connection with such assignment or sublease
over the rent payable by Tenant under this Lease.
(e) If any guarantor of the Lease revokes or otherwise terminates, or
purports to revoke or otherwise terminate, any guaranty of all or any portion of
Tenant's obligations under the Lease. Unless otherwise expressly provided, no
guaranty of the Lease is revocable.
Section 10.03. REMEDIES. On the occurrence of any material default by
Tenant, Landlord may, at any time thereafter, with or without notice or demand
and without limiting Landlord in the exercise of any right or remedy which
Landlord may have:
(a) Terminate Tenant's right to possession of the Property by any lawful
means, in which case this Lease shall terminate and Tenant shall immediately
surrender possession of the Property to Landlord. In such event, Landlord shall
be entitled to recover from Tenant all damages incurred by Landlord by reason of
Tenant's default, including (i) the worth at the time of the award of the unpaid
Base Rent, Additional Rent and other charges which Landlord had earned at the
time of the termination; (ii) the worth at the time of the award of the amount
by which the unpaid Base Rent, Additional Rent and other charges which Landlord
would have earned after termination until the time of the award exceeds the
amount of such rental loss that Tenant proves Landlord could have reasonably
avoided; (iii) the worth at the time of the award of the amount by which the
Unpaid Base Rent, Additional Rent and other charges which Tenant would have paid
for the balance of the Lease Term after the time of award exceeds the amount of
such rental loss that Tenant proves Landlord could have reasonably avoided; and
(iv) any other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant's failure to perform its obligations under the
Lease or which in the ordinary course of things would be likely to result
therefrom, including, but not limited to, any costs or expenses Landlord incurs
in maintaining or preserving the Property after such default, the cost of
recovering possession of the Property, expenses of reletting, including
necessary renovation or alteration of the Property, Landlord's reasonable
attorneys' fees incurred in connection therewith, and any real estate commission
paid or payable. As used in subparts (i) and (ii) above, the "worth at the time
of the award" is computed by allowing interest on unpaid amounts at the rate of
fifteen percent (15%) per annum, or such lesser amount as may then be the
maximum lawful rate. As used in subpart (iii) above, the "worth at the time of
the award" is computed by discounting such amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of the award, plus one percent
(1%). If Tenant has abandoned the Property, Landlord shall have the option of
(i) retaking possession of the Property and recovering from Tenant the amount
specified in this Paragraph 10.03(a), or (ii) proceeding under Paragraph
10.03(b);
(b) Maintain Tenant's right to possession, in which case this Lease shall
continue in effect whether or not Tenant has abandoned the Property. In such
event, Landlord shall be entitled to enforce all of Landlord's rights and
remedies under this Lease, including the right to recover the rent as it becomes
due;
(c) Pursue any other remedy now or hereafter available to Landlord under
the laws or judicial decisions of the state in which the Property is located.
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Section 10.04. REPAYMENT OF "FREE" RENT. If this Lease provides for a
postponement of any monthly rental payments, a period of "free" rent or other
rent concession, such postponed rent or "free" rent is called the "Abated Rent".
Tenant shall be credited with having paid all of the Abated Rent on the
expiration of the Lease Term only if Tenant has fully, faithfully, and
punctually performed all of Tenant's obligations hereunder, including the
payment of all rent (other than the Abated Rent) and all other monetary
obligations and the surrender of the Property in the physical condition required
by this Lease. Tenant acknowledges that its right to receive credit for the
Abated Rent is absolutely conditioned upon Tenant's full, faithful and punctual
performance of its obligations under this Lease. If Tenant defaults and does not
cure within any applicable grace period, the Abated Rent shall immediately
become due and payable in full and this Lease shall be enforced as if there were
no such rent abatement or other rent concession. In such case Abated Rent shall
be calculated based on the full initial rent payable under this Lease.
Section 10.05. AUTOMATIC TERMINATION. Notwithstanding any other term or
provision hereof to the contrary, the Lease shall terminate on the occurrence of
any act which affirms the Landlord's intention to terminate the Lease as
provided in Section 10.03 hereof, including the filing of an unlawful detainer
action against Tenant. On such termination, Landlord's damages for default shall
include all costs and fees, including reasonable attorneys' fees that Landlord
incurs in connection with the filing, commencement, pursuing and/or defending of
any action in any bankruptcy court or other court with respect to the Lease; the
obtaining of relief from any stay in bankruptcy restraining any action to evict
Tenant; or the pursuing of any action with respect to Landlord's right to
possession of the Property. All such damages suffered (apart from Base Rent and
other rent payable hereunder) shall constitute pecuniary damages which must be
reimbursed to Landlord prior to assumption of the Lease by Tenant or any
successor to Tenant in any bankruptcy or other proceeding.
Section 10.06. CUMULATIVE REMEDIES. Landlord's exercise of any right or
remedy shall not prevent it from exercising any other right or remedy.
ARTICLE ELEVEN: PROTECTION OF LENDERS
Section 11.01. SUBORDINATION. Landlord shall have the right to subordinate
this Lease to any ground lease, deed of trust or mortgage encumbering the
Property, any advances made on the security thereof and any renewals,
modifications, consolidations, replacements or extensions thereof, whenever made
or recorded. Tenant shall cooperate with Landlord and any lender which is
acquiring a security interest in the Property or the Lease. Tenant shall execute
such further documents and assurances as such lender may require, provided that
Tenant's obligations under this Lease shall not be increased in any material way
(the performance of ministerial acts shall not be deemed material), and Tenant
shall not be deprived of its rights under this Lease. Tenant's right to quiet
possession of the Property during the Lease Term shall not be disturbed if
Tenant pays the rent and performs all of Tenant's obligations under this Lease
and is not otherwise in default. It any ground lessor, beneficiary or mortgagee
elects to have this Lease prior to the lien of its ground lease, deed of trust
or mortgage and gives written notice thereof to Tenant, this Lease shall be
deemed prior to such ground lease, deed of trust or mortgage whether this Lease
is dated prior or subsequent to the date of said ground lease, deed of trust or
mortgage or the date of recording thereof.
Section 11.02. ATTORNMENT. If Landlord's interest in the Property is
acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or
purchaser at a foreclosure sale, Tenant shall attorn to the transferee of or
successor to Landlord's interest in the Property and recognize such transferee
or successor as Landlord under this Lease. Tenant waives the protection of any
statute or rule of law which gives or purports to give Tenant any right to
terminate this Lease or surrender possession of the Property upon the transfer
of Landlord's interest.
Section 11.03. SIGNING OF DOCUMENTS. Tenant shall sign and deliver any
instrument or documents necessary or appropriate to evidence any such attornment
or subordination or agreement to do so. If Tenant fails to do so within ten (10)
days after written request, Tenant hereby makes, constitutes and irrevocably
appoints Landlord, or any transferee or successor of Landlord, the
attorney-in-fact of Tenant to execute and deliver any such instrument or
document.
Section 11.04. ESTOPPEL CERTIFICATES.
(a) Upon Landlord's written request, Tenant shall execute, acknowledge and
deliver to Landlord a written statement certifying: (i) that none of the terms
or provisions of this Lease have been changed (or it they have been changed,
stating how they have been changed); (ii) that this Lease has not been cancelled
or terminated; (iii) the last date of payment of the Base Rent and other charges
and the time period covered by such payment; (iv) that Landlord is not in
default under this Lease (or, if Landlord is claimed to be in default, stating
why); and (v) such other representations or information with respect to Tenant
or the Lease as Landlord may reasonably request or which any prospective
purchaser or encumbrancer of the Property may require. Tenant shall deliver such
statement to Landlord within ten (10) days after Landlord's request. Landlord
may give any such statement by Tenant to any prospective purchaser or
encumbrancer of the Property. Such purchaser or encumbrancer may rely
conclusively upon such statement as true and correct.
Section 11.05. TENANT'S FINANCIAL CONDITION. Within ten (10) days after
written request from Landlord, Tenant shall deliver to Landlord such financial
statements as Landlord reasonably requires to verity the net worth of Tenant or
any assignee, subtenant, or guarantor of Tenant. In addition, Tenant shall
deliver to any lender designated by Landlord any financial statements required
by such lender to facilitate the financing or refinancing of the Property.
Tenant represents and warrants to Landlord that each such financial statement is
a true and accurate statement as of the date of such statement. All financial
statements shall be confidential and shall be used only for the purposes set
forth in this Lease.
ARTICLE TWELVE: LEGAL COSTS
Section 12.01. LEGAL PROCEEDINGS. If Tenant or Landlord shall be in breach
or default under this Lease, such, party (the "Defaulting Party") shall
reimburse the other party (the "Nondefaulting Party") upon demand for any costs
or expenses that
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the Nondefaulting Party incurs in connection with any breach or default of the
Defaulting Party under this Lease, whether or not suit is commenced or judgment
entered. Such costs shall include legal fees and costs incurred for the
negotiation of a settlement, enforcement of rights or otherwise. Furthermore, if
any action for breach of or to enforce the provisions of this Lease is
commenced, the court in such action shall award to the party in whose favor a
judgment is entered, a reasonable sum as attorneys' fees and costs. The losing
party in such action shall pay such attorneys' fees and costs. Tenant shall also
indemnify Landlord against and hold Landlord harmless from all costs, expenses,
demands and liability Landlord may incur if Landlord becomes or is made a party
to any claim or action (a) instituted by Tenant against any third party, or by
any third party against Tenant, or by or against any person holding any interest
under or using the Property by license of or agreement with Tenant; (b) for
foreclosure of any lien for labor or material furnished to or for Tenant or such
other person; (c) otherwise arising out of or resulting from any act or
transaction of Tenant or such other person; or (d) necessary to protect
Landlord's interest under this Lease in a bankruptcy proceeding, or other
proceeding under Title 11 of the United States Code, as amended. Tenant shall
defend Landlord against any such claim or action at Tenant's expense with
counsel reasonably acceptable to Landlord or, at Landlord's election, Tenant
shall reimburse Landlord for any legal fees or costs Landlord incurs in any such
claim or action.
Section 12.02. LANDLORD'S CONSENT. Tenant shall pay Landlord's reasonable
attorneys' fees incurred in connection with Tenant's request for Landlord's
consent under Article Nine (Assignment and Subletting), or in connection with
any other act which Tenant proposes to do and which requires Landlord's consent.
ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS
Section 13.01. NON-DISCRIMINATION. Tenant promises, and it is a condition
to the continuance of this Lease, that there will be no discrimination against,
or segregation of, any person or group of persons on the basis of race, color,
sex, creed, national origin or ancestry in the leasing, subleasing,
transferring, occupancy, tenure or use of the Property or any portion thereof.
Section 13.02. LANDLORD'S LIABILITY; CERTAIN DUTIES.
(a) As used in this Lease, the term "Landlord" means only the current owner
or owners of the fee title to the Property or the leasehold estate under a
ground lease of the Property at the time in question. Each Landlord is obligated
to perform the obligations of Landlord under this Lease only during the time
such Landlord owns such interest or title. Any Landlord who transfers its title
or interest is relieved of all liability with respect to the obligations of
Landlord under this Lease to be performed on or after the date of transfer.
However, each Landlord shall deliver to its transferee all funds that Tenant
previously paid if such funds have not yet been applied under the terms of this
Lease.
(b) Tenant shall give written notice of any failure by Landlord to perform
any of its obligations under this Lease to Landlord and to any ground lessor,
mortgagee or beneficiary under any deed of trust encumbering the Property whose
name and address have been furnished to Tenant in writing. Landlord shall not be
in default under this Lease unless Landlord (or such ground lessor, mortgagee or
beneficiary) fails to cure such non-performance within thirty (30) days after
receipt of Tenant's notice. However, if such non-performance reasonably requires
more than thirty (30) days to cure, Landlord shall not be in default if such
cure is commenced within such thirty (30) -day period and thereafter diligently
pursued to completion.
(c) Notwithstanding any term or provision herein to the contrary, the
liability of Landlord for the performance of its duties and obligations under
this Lease is limited to Landlord's interest in the Property, and neither the
Landlord nor its partners, shareholders, officers or other principals shall have
any personal liability under this Lease.
Section 13.03. SEVERABILITY. A determination by a court of competent
jurisdiction that any provision of this Lease or any part thereof is Illegal or
unenforceable shall not cancel or invalidate the remainder of such provision or
this Lease, which shall remain in full force and effect.
Section 13.04. INTERPRETATION. The captions of the Articles or Sections of
this Lease are to assist the parties in reading this Lease and are not a part of
the terms or provisions of this Lease. Whenever required by the context of this
Lease, the singular shall include the plural and the plural shall include the
singular. The masculine, feminine and neuter genders shall each include the
other. In any provision relating to the conduct, acts or omissions of Tenant,
the term "Tenant" shall include Tenant's agents, employees, contractors,
invitees, successors or others using the Property with Tenant's expressed or
implied permission.
Section 13.05. INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS. This Lease
is the only agreement between the parties pertaining to the lease of the
Property and no other agreements are effective. All amendments to this Lease
shall be in writing and signed by all parties. Any other attempted amendment
shall be void.
Section 13.06. NOTICES. All notices required or permitted under this Lease
shall be in writing and shall be personally delivered or sent by certified mail,
return receipt requested, postage prepaid. Notices to Tenant shall be delivered
to the address specified in Section 1.03 above, except that upon Tenant's taking
possession of the Property, the Property shall be Tenant's address for notice
purposes. Notices to Landlord shall be delivered to the address specified in
Section 1.02 above. All notices shall be effective upon delivery. Either party
may change its notice address upon written notice to the other party.
Section 13.07. WAIVERS. All waivers must be in writing and signed by the
waiving party, Landlord's failure to enforce any provision of this Lease or its
acceptance of rent shall not be a waiver and shall not prevent Landlord from
enforcing that provision or any other provision of this Lease in the future. No
statement on a payment check from Tenant or in a letter accompanying a payment
check shall be binding on Landlord. Landlord may with or without notice to
Tenant, negotiate such check without being bound to the conditions of such
statement.
Section 13.08. NO RECORDATION. Tenant shall not record this Lease without
prior written consent from Landlord. However, either Landlord or Tenant may
require that a "Short Form" memorandum of this Lease executed by both parties be
recorded. The party requiring such recording shall pay all transfer taxes and
recording fees.
Section 13.09. BINDING EFFECT; CHOICE OF LAW. This Lease binds any party
who legally acquires any rights or interest in this Lease from Landlord or
Tenant. However, Landlord shall have no obligation to Tenant's successor unless
the rights or interests of Tenant's successor are acquired in accordance with
the terms of this Lease. The laws of the state in which the Property is located
shall govern this Lease.
Section 13.10. CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY. If Tenant is a
corporation, each person signing this Lease on behalf of Tenant represents and
warrants that he has full authority to do so and that this Lease binds the
corporation. Within thirty (30) days after this Lease is signed, Tenant shall
deliver to Landlord a certified copy of a resolution of Tenant's Board of
(c) 1988 Southern California 10 Initials_______
Chapter of the Society _______
of Industrial and (SINGLE-TENANT GROSS FORM)
Office Realtors,(R) Inc.
<PAGE> 12
Directors authorizing the execution of this Lease or other evidence of such
authority reasonably acceptable to Landlord. If Tenant is a partnership, each
person or entity signing this Lease for Tenant represents and warrants that he
or it is a general partner of the partnership, that he or it has full authority
to sign for the partnership and that this Lease binds the partnership and all
general partners of the partnership. Tenant shall give written notice to
Landlord of any general partner's withdrawal or addition. Within thirty (30)
days after this Lease is signed, Tenant shall deliver to Landlord a copy of
Tenant's recorded statement of partnership or certificate of limited
partnership.
Section 13.11. JOINT AND SEVERAL LIABILITY. All parties signing this Lease
as Tenant shall be jointly and severally liable for all obligations of Tenant.
Section 13.12. FORCE MAJEURE. If Landlord cannot perform any of its
obligations due to events beyond Landlord's control, the time provided for
performing such obligations shall be extended by a period of time equal to the
duration of such events. Events beyond Landlord's control include, but are not
limited to, acts of God, war, civil commotion, labor disputes, strikes, fire,
flood or other casualty, shortages of labor or material, government regulation
or restriction and weather conditions.
Section 13.13. EXECUTION OF LEASE. This Lease may be executed in
counterparts and, when all counterpart documents are executed, the counterparts
shall constitute a single binding instrument. Landlord's delivery of this Lease
to Tenant shall not be deemed to be an offer to lease and shall not be binding
upon either party until executed and delivered by both parties.
Section 13.14. SURVIVAL. All representations and warranties of Landlord and
Tenant shall survive the termination of this Lease.
ARTICLE FOURTEEN: BROKERS
Section 14.01. BROKER'S FEE. When this Lease is signed by and delivered to
both Landlord and Tenant, Landlord shall pay a real estate commission to
Landlord's Broker named in Section 1.08 above, if any, as provided in the
written agreement between Landlord and Landlord's Broker, or the sum stated in
Section 1.09 above for services rendered to Landlord by Landlord's Broker in
this transaction. Landlord shall pay Landlord's Broker a commission if Tenant
exercises any option to extend the Lease Term or to buy the Property, or any
similar option or right which Landlord may grant to Tenant, or if Landlord's
Broker is the procuring cause of any other lease or sale entered into between
Landlord and Tenant covering the Property. Such commission shall be the amount
set forth in Landlord's Broker's commission schedule in effect as of the
execution of this Lease. If a Tenant's Broker is named in Section 1.08 above,
Landlord's Broker shall pay an appropriate portion of its commission to Tenant's
Broker if so provided in any agreement between Landlord's Broker and Tenant's
Broker. Nothing contained in this Lease shall impose any obligation on Landlord
to pay a commission or fee to any party other than Landlord's Broker.
Section 14.02. PROTECTION OF BROKERS. If Landlord sells the Property, or
assigns Landlord's interest in this Lease, the buyer or assignee shall, by
accepting such conveyance of the Property or assignment of the Lease, be
conclusively deemed to have agreed to make all payments to Landlord's Broker
thereafter required of Landlord under this Article Fourteen. Landlord's Broker
shall have the right to bring a legal action to enforce or declare rights under
this provision. The prevailing party in such action shall be entitled to
reasonable attorneys' fees to be paid by the losing party. Such attorneys' fees
shall be fixed by the court in such action. This Paragraph is included in this
Lease for the benefit of Landlord's Broker.
Section 14.03. AGENCY DISCLOSURE; NO OTHER BROKERS. Landlord and Tenant
each warrant that they have dealt with no other real estate broker(s) in
connection with this transaction except: CB COMMERCIAL REAL ESTATE GROUP, INC.,
who represents Landlord and Business Real Estate, who represents Tenant.
In the event that CB COMMERCIAL REAL ESTATE GROUP, INC. represents both
Landlord and Tenant, Landlord and Tenant hereby confirm that they were timely
advised of the dual representation and that they consent to the same, and that
they do not expect said Broker to disclose to either of them the confidential
information of the other party.
ARTICLE FIFTEEN: COMPLIANCE
The parties hereto agree to comply with all applicable federal, state and
local laws, regulations, codes, ordinances and administrative orders having
jurisdiction over the parties, property or the subject matter of this Agreement,
including, but not limited to, the 1964 Civil Rights Act and all amendments
thereto, the Foreign Investment In Real Property Tax Act, the Comprehensive
Environmental Response Compensation and Liability Act, and The Americans With
Disabilities Act.
ADDITIONAL PROVISIONS MAY BE SET FORTH IN A RIDER OR RIDERS ATTACHED HERETO
OR IN THE BLANK SPACE BELOW. IF NO ADDITIONAL PROVISIONS ARE INSERTED, PLEASE
DRAW A LINE THROUGH THE SPACE BELOW.
(c) 1988 Southern California 11 Initials_______
Chapter of the Society _______
of Industrial and (SINGLE-TENANT GROSS FORM)
Office Realtors,(R) Inc.
<PAGE> 13
Landlord and Tenant have signed this Lease at the place and on the dates
specified adjacent to their signatures below and have initialled all Riders
which are attached to or incorporated by reference in this Lease.
LANDLORD"
Signed on November 5, 1993 L & T CORPORATION,
at San Diego, CA a California Corporation
By: /s/ LEONARD TESSLER
--------------------------------
Leonard Tessler
Its: President
By:
--------------------------------
Its:
--------------------------------
"TENANT"
Signed on November 5, 1993 LANCER ORTHODONTICS, INC.,
at Carlsbad, CA a California Corporation
By: /s/ DOUGLAS D. MILLER
--------------------------------
Its: President
--------------------------------
By:
--------------------------------
Its:
--------------------------------
IN ANY REAL ESTATE TRANSACTION, IT IS RECOMMENDED THAT YOU CONSULT WITH A
PROFESSIONAL, SUCH AS A CIVIL ENGINEER, INDUSTRIAL HYGIENIST OR OTHER PERSON
WITH EXPERIENCE IN EVALUATING THE CONDITION OF THE PROPERTY, INCLUDING THE
POSSIBLE PRESENCE OF ASBESTOS, HAZARDOUS MATERIALS AND UNDERGROUND STORAGE
TANKS.
THIS PRINTED FORM LEASE HAS BEEN DRAFTED BY LEGAL COUNSEL AT THE DIRECTION
OF THE SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND OFFICE
REALTORS(R), INC. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE SOUTHERN
CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND OFFICE REALTORS, INC.(R),
ITS LEGAL COUNSEL, THE REAL ESTATE BROKERS NAMED HEREIN, OR THEIR EMPLOYEES OR
AGENTS, AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT OR TAX CONSEQUENCES OF THIS
LEASE OR OF THIS TRANSACTION. LANDLORD AND TENANT SHOULD RETAIN LEGAL COUNSEL TO
ADVISE THEM ON SUCH MATTERS AND SHOULD RELY UPON THE ADVICE OF SUCH LEGAL
COUNSEL.
(c) 1988 Southern California 12 Initials_______
Chapter of the Society _______
of Industrial and (SINGLE-TENANT GROSS FORM)
Office Realtors,(R) Inc.
<PAGE> 1
EXHIBIT 10.23
SUBLEASE AGREEMENT entered into by and between Eagleson de California S.A. de
C.V. (hereinafter referred to as "Eagleson"), herein represented by Mr. Nelson
Baxley Party of the First Part, and by Lancer Orthodontics, Inc., a California
corporation, (hereinafter referred to as "Lancer") herein represented by Mr.
Douglas D. Miller Party of the Second Part, pursuant to the following RECITALS
and CLAUSES:
RECITALS
I. Eagleson hereby declares that:
A. It is a company organized and existing under the Mexican General
Corporation Law, as per Public Instrument No. 27098 executed on November 28,
1990, before attorney Fernando Diaz Ceballos, Notary Public No. 4 of the city of
Mexicali, Baja California, Mexico.
B. Mr. Jaime Ainslie Palencia is its attorney in-fact, as it appears
in Public Instrument No. 27351 executed on June 21, 1991, before attorney
Fernando Diaz Caballos, Notary Public No. 4 of the city of Mexicali, Baja
California, Mexico.
C. Eagleson's registration number at the Federal Registry of
Taxpayers is: EAC-891220-S38.
D. The address at which it has its principal place of business is
Saturno No. 20, Parque Industrial Mexicali, Mexicali, Baja California, Mexico
E. Eagleson leases approximately 25,000 square feet of manufacturing
space from Parque Industrial Mexicali ("PIMSA") under a master lease having a
term of five years commencing November 1, 1998 and ending October 31, 2003.
Eagleson has notified PIMSA of its intention to sublease a portion of the
manufacturing space as required under the master lease.
F. The parties desire to enter into a Sublease of a portion of said
25,000 square feet (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 that certain sublease between the parties hereto dated April 1,
1996. The land and the improvements together shall hereinafter be referred to as
the Subleased Property. The Subleased Property location shall be referred to as
20C Satumo.
II. Lancer hereby declares that:
A. it Is a Company organized under the laws of the State of
California.
B. Mr. Doug Miller is the President of Lancer and has the power, as
authorized by the company's board of directors, to enter into this Sublease.
C. Lancer's principal place of business is 253 Pawnee Street, San
Marcos, California, United States of America.
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PURSUANT TO THE ABOVE, THE PARTIES AGREE AS FOLLOWS:
CLAUSES:
I. SCOPE OF SUBLEASE AGREEMENT.
On the express terms and conditions set fourth hereinafter, the
scope of this Sublease agreement is as follows: Eagleson hereby subleases to
Lancer and Lancer hereby subleases from Eagleson the land and improvements in
the Industrial Park as described in that certain sublease between the parties
hereto executed as of April 1, 1996.
II. CONSTRUCTION BY PIMSA AND EAGLESON
A. The Subleased Property has continuously been occupied by Lancer
since October, 1991 on an as is basis.
B. PIMSA and Eagleson have, at their expense, constructed on the
land certain improvements which shall hereinafter be referred to as
Improvements. Said Improvements have been constructed in accordance with plans
and specifications which were approved by PIMSA, Eagleson and Lancer and such
approval is hereby acknowledged by the parties.
C. PIMSA and Eagleson constructed all Improvements in accordance
with all laws, ordinances, regulations, and orders of governmental authorities,
and Industrial Park Regulations. The term "Lancer's Improvements" shall refer to
those improvements identified in paragraph III.A. below.
III. INSTALLATIONS BY LANCER
A. Lancer may, at its expense, install on the Subleased Property,
such trade fixtures, equipment and furniture as it may deem necessary; provided
that such items are installed and are removable without damage to the structural
integrity of the Improvements. Said trade fixtures, equipment and furniture
shall remain Lancer's property and unless Lancer is in default hereunder, shall
be removed by Lancer on or before the expiration date of the term hereof. Lancer
may also install temporary improvements in the interior of Improvements upon the
Subleased Property provided that such Company's improvements are installed and
are removable without damage to the structure of the Improvements. Such Lancer's
improvements shall remain property of Lancer and, unless Lancer is in default
hereunder, shall be removed by Lancer upon expiration of the term hereof or
earlier termination of the Sublease. Lancer shall repair, at its sole expense,
all damage caused by the installation or removal of trade fixtures, equipment,
furniture or temporary Lancer's improvements, reasonable wear and tear excepted.
B. Lancer shall perform all installations in accordance with all
laws, ordinances, regulations, orders of governmental authorities, and the
Industrial Park Regulations.
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<PAGE> 3
IV. SUBLEASE TERM AND COMMENCEMENT DATE
A. Sublease Agreement. This Sublease Agreement shall be effective
from the Commencement Date until the same is terminated as provided hereafter,
the complete period of tenancy being referred to herein as the "Sublease Term."
B. Initial Sublease Term. The initial term of this Sublease
("Initial Term") shall commence on November 1, 1998 ("Commencement Date") and
shall end on the last day of October, 2003, the total Sublease Term being two
hundred sixty five (265) weeks, or five (5) years.
C. Sublease Year. The term "Sublease Year" as used herein, shall
mean a period of twelve (12) consecutive full calendar months or fifty two
(52) consecutive full calendar weeks. The first Lease Year shall begin on the
Commencement Date of the term hereof Each succeeding Lease Year shall commence
upon the anniversary date of the first Lease Year.
D. Renewal Terms. Should Eagleson exercise its right to extend the
term of the primary lease for one additional period of five (5) years, then
Lancer shall have the right to extend the term of the Sublease upon the terms,
conditions and rentals set forth herein, for one additional period of five (5)
years, ("Renewal Term"), by giving written notice to Eagleson not less than six
months prior to the expiration of the Initial Term of this sublease (October 31,
2003), so long as Lancer is not then in default hereunder. Eagleson shall give
written notice to Lancer not less than six (6) months prior to the expiration of
the Initial Term as to whether or not it has exercised or intends to exercise
its right to so extend the term of the primary lease. Should Eagleson elect to
not exercise its option to extend the term of the primary lease, it will use its
best efforts to pass its option rights to Lancer by negotiating with PIMSA on
Lancer's behalf.
V. RENT
A. Initial Term. As minimum rent for the Sublease of the Subleased
Property during the Sublease Term hereof, Lancer Shall pay to Eagleson at the
address of Eagleson stated above, the following:
1. Equal weekly payments of One thousand three hundred seventy
six ($1,376) dollars each Friday in advance for the following week during the
initial Term.
2. During the same time frame that PIMSA increases the rent in
accordance with the master lease, the weekly rent on this Sublease shall be
increased by an amount which is equal to the product of.
a. The weekly rent as established in V.A.1. hereinabove,
multiplied by
b. The percentage increase by which the master lease is increased
by PIMSA.
3. Notwithstanding anything herein contained to the contrary, the
weekly rent for any Sublease Year shall not be increased by an amount greater
than ten percent (10%) of the annualized rent for the preceding Sublease Year.
In no event shall the weekly rent for any Sublease Year be decreased below the
weekly rent for the immediately preceding Sublease Year.
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<PAGE> 4
B. Additional Rent. Lancer will pay to Eagleson, as additional rent,
an amount equal to the sum of all taxes and assessments of every kind which are
or may be at any time during the Sublease Term, levied by any federal, state or
municipal government, or any governmental authority. Lancer shall advance funds
in sufficient time, upon presentation of bills showing amounts due for all such
taxes and assessments, for Eagleson to pay the bills by their due date.
In calculating the amount of Lancers advance, all taxes which shall
become due for the first and last years of the Sublease Term shall be
apportioned pro rata between Eagleson and Lancer in accordance with the
respective number of months during which each party shall be in possession of
the Subleased Property.
C. Renewal Terms.
1. On the first day of the First, Second, Third, Fourth and
Fifth Sublease Years of the Renewal term, and should Eagleson exercise its
option for renewal and should Lancer exercise its option for renewal, the weekly
rent for each such Sublease Year shall be increased by an amount which is equal
to the product of
a. The weekly rent as established in Clause V.A. hereinabove,
multiplied by
b. The percentage increase by which the master lease is increased
by PIMSA.
2. Notwithstanding anything herein contained to the contrary,
the weekly rent for the First, Second, Third, Fourth, and Fifth Sublease Years
of the Renewal Term shall not be increased by an amount greater than ten percent
(IO%) of the rent for the immediately preceding Sublease Year. In no event shall
the weekly rent for any Sublease Year of the Renewal Term be decreased below the
weekly rent for the immediately preceding Sublease Year Notwithstanding anything
herein contained.
D. Lancer will pay the rent provided for in the above paragraph "A"
in Pesos, Mexican Currency, at the rate of exchange effective in the free
foreign market on the date such sums are paid, or in U.S. Dollars as law and
Foreign Exchange Rules allow, as Eagleson may elect.
E. Proration. The rent for any partial week shall be prorated.
F. Liquidated Damages. In the event this Sublease Agreement is
terminated by Eagleson due to a default of Lancer prior to or during the first
six (6) months of the Sublease Term, Eagleson shall be entitled to keep and
retain as liquidated damages all sums paid or deposited by Lancer, as prepaid
rent or as a security deposit, in addition to any other rights of Eagleson
provided herein.
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<PAGE> 5
G. Setoff. The payment of any rent due under this Sublease shall not
be withheld or reduced for any reason whatsoever, and Lancer agrees to assert
any claim, demand, or other right against Eagleson only by independent
proceeding.
VI. USE The Subleased Property shall be used and occupied for any
lawful industrial purpose not in violation of the Industrial Park Regulations.
Lancer shall promptly and adequately comply with all laws, ordinances and orders
of all governmental authorities affecting the Subleased Property, and its
cleanliness, safety and labor facilities applicable to Lancer's use of the
Subleased Property. Lancer shall not perform or commit any acts that may damage
the Subleased Property, or be a nuisance, or menace to other occupants of the
Industrial Park.
VII. INSURANCE
A. Comprehensive Liability Insurance. During the Sublease Term,
Eagleson shall obtain and maintain in full force a policy of comprehensive
liability insurance including property damage, that insures Eagleson, Lancer and
PIMSA (and such other agents or employees of Eagleson, Lancer or PIMSA, their
subsidiaries or affiliates, or assignees or any nominees of them holding any
interest in the Subleased Property, including without limitation, the holder of
any mortgage encumbering the Subleased Property) against liability for injury to
persons and property and for death of any persons occurring in or about the
Subleased Property. The liability to such insurance shall be in the amount of
one hundred thousand dollars ($100,000.00), U.S. Currency.
B. Fire and Other Insurance. During the Sublease term, Eagleson
shall obtain and maintain in full force, in the amount of six hundred two
thousand dollars ($602,000.00) U.S. Currency, or as modified herein, a policy or
policies of insurance for fire, lightning, explosion, falling aircraft, smoke,
windstorm, earthquake, hail vehicle damage, volcanic eruption, strikes, civil
commotion, vandalism, riots, malicious mischief, debris removal, steam boiler or
pressure object or machinery breakage if applicable and flood insurance, on all
Subleased Property, including, but not limited to the shell building and
interior fit-up initially provided. Eagleson shall also obtain and maintain
annual rental insurance in favor of PIMSA. Lancer shall be responsible for
maintaining insurance on all of Lancer's own property. Except for insurance upon
Lancer's own property, PIMSA or its appointee shall be named Eagleson's
beneficiary of any and all proceeds from any such policy or policies, as their
interests may appear.
C. Additional Insurance. Eagleson shall obtain and maintain in
full force and effect such additional amounts of insurance as may be required by
PIMSA, from time to time, in accordance with the provisions of this Clause
"VII", and in order to adequately, and properly insure PIMSA of and for the then
current replacement value of the Subleased Property.
D. Pro rata Payment, Lancer shall pay Eagleson for its pro-rata
share of the cost of the insurance. If, as a result of including Lancer as an
insured on any policy, the policy cost is increased, Lancer will pay Eagleson
the full amount of such increase. Payment will be made to Eagleson within seven
(7) days of presentation of Eagleson's invoice evidencing obligation for policy
premium(s).
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<PAGE> 6
VIII. TAXES AND ASSESSMENTS. Lancer agrees to pay all taxes and
assessments of any kind levied upon any and all personal property of Lancer, its
successors and assigns, whether same shall be or may become a lien upon the
Subleased Property. This includes Asset taxes levied on the value of materials,
inventory, equipment and improvements or any tax in lieu of said Asset tax or
any tax based on inferred income, All such tax and assessments shall be paid to
Eagleson in time for Eagleson's payment of same to not be delinquent.
IX. REPAIRS, ALTERATIONS and IMPROVEMENTS.
1. Lancer, at its expense, shall keep and maintain in good order
and repair, except for normal use and wear, all of the Subleased Property
including but not limited to all plumbing, sewage and other Utility facilities
that are within the Subleased Property, as well as fixtures, partitions, walls,
(interior and exterior, including painting as often as necessary) floors,
ceilings, signs, all air conditioning, heating and similar equipment, doors,
windows, plate glass and all other repairs of every kind and character to the
Subleased Property. Lancer, at its expense shall repair all leaks, except those
caused by structural defect. The cost of any additions, modifications or
improvements necessary for the Subleased Property to be in compliance with any
local, state or federal laws, regulations or statutes as a result of usage by
Lancer shall be borne by Lancer. The plumbing facilities shall not be used for
any other purpose than that for which they were constructed. The expense of any
breakage, stoppage or damage resulting from a violation of this provision shall
be borne by Lancer. Lancer shall store all trash only temporarily within the
Subleased Property, and shall arrange for the regular pick up of trash at
Lancer's expense. Lancer shall not burn any trash of any kind in or about the
Subleased Property or the Industrial Park.
2. Lancer shall have requested and received written consent from
Eagleson prior to making any alteration, improvement or addition to any exterior
walls and roof of the Subleased Property with a cost exceeding seventy five
hundred dollars ($7,500.00) U.S. Currency; and Lancer shall not damage any
floors, walls, ceilings, partitions, or any wood, stone or ironwork on or about
the Subleased Property.
3. Lancer shall keep the Subleased Property free and clear of all
encumbrances and liens arising out of acts or omissions of Lancer, including
those arising out of construction done or ordered by Lancer. However, if by
reason of any work performed, materials furnished or obligations incurred by
Lancer with any third party, or any other act or omission by Lancer, Eagleson or
PIMSA is made liable or involved in litigation, Lancer shall hold harmless and
indemnify Eagleson and PIMSA including any costs and expenses Incurred by them,
and attorneys' fees incurred by reason thereof Should Lancer fail to fully
discharge any such encumbrances or liens within thirty (30) days after the date
it has been instituted, or fail to provide a bond acceptable to Eagleson in the
event of contest, Eagleson, at its option, may pay all or any part thereof If
Eagleson pays any such lien or encumbrances or any part thereof, Lancer shall,
on demand, immediately pay Eagleson the amount so paid, together with an
administrative fee of fifteen percent (15%) of the amount paid, together with
interest at the rate of twenty percent (20%) per annum from the date of payment.
No lien or encumbrance of any character whatsoever created by an act or omission
by Lancer shall in any way attach or affect the rights of Eagleson on the
Subleased Property.
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<PAGE> 7
X. UTILITY AND OTHER SHARED SERVICES
During the term of this Sublease Agreement, Lancer shall promptly
pay for its pro rate share of any and all public and other utilities and other
services furnished to the Subleased Property including but not limited to,
water, gas, electricity, telephone, guard service, landscaping, ground and
parking lot maintenance, building maintenance, building equipment maintenance,
electrical equipment maintenance, exterior painting and pest control. The term
pro rate shall have a different definition depending on the particular service
or function being pro rated. Should Lancer disagree with the pro rate charge, it
may, at its own expense, install or retain its own service or function.
XI. RIGHT-OF-WAY AND ACCESS TO SUBLEASED PROPERTY
Eagleson and its approved assigns is hereby granted a right-of-way
upon, across, under and over the Subleased Property for ingress and egress.
Eagleson agrees to cause only a minimum interference with Lancer's use and
possession of the Subleased Property.
Without undue interference to Company's operation, Eagleson or its
authorized representative shall have the right to enter the Subleased Property
during all Lancer business hours, and in emergencies at all times, to inspect
the Subleased Property and to make repairs, additions or alterations to the
Subleased Property. For a period commencing ninety (90) days prior to the
termination of this Sublease Agreement, Eagleson shall have access to the
Subleased Property for the purpose of exhibiting it to prospective clients and
may post usual for sale or for lease signs upon the Subleased Property. Except
in case of emergency, Eagleson shall give notice to Lancer before entering the
Subleased Property, and Lancer shall have the right to accompany any
representatives, of Eagleson and prospective clients.
XII. LIMITATION OF LIABILITY
Except for intentional or negligent acts or omissions of Eagleson,
its agents or employees, Eagleson shall not be liable to Lancer or to any other
person whatsoever for any loss or damage of any kind or nature caused by the
intentional or negligent acts or omissions of Lancer or other occupants of the
Industrial Park or of adjacent property, or the public, or other causes beyond
the control of Eagleson, including but not limited to, any failure to furnish or
any interruption of any utility or other contracted or shares or pro rated
services in or about the Subleased Property.
XIII INDEMNIFICATION
Lancer agrees to indemnify and save Eagleson harmless from any and
all claims for damages or losses of any nature whatsoever, arising from
negligent acts or omissions of Lancer or its contractors, licensees, agents,
invitees, or employees, or (unless caused by the intentional or negligent acts
or omissions of Eagleson) arising from any accident, injury or damage whatsoever
caused to any person or property occurring in or about the Subleased Property,
or the areas adjoining the Subleased Property and from and against all costs and
expenses, including attorneys' fees, incurred thereby.
7
<PAGE> 8
Eagleson agrees to indemnify and save Lancer harmless from any and
all claims for damages or losses of any nature whatsoever, arising from
negligent acts or omissions of Eagleson or its contractors, licensees, agents,
invitees, or employees, or (unless caused by the intentional or negligent acts
or omissions of Lancer) arising from any accident, injury or damage whatsoever
caused to any person or property occurring in or about the Subleased Property,
or the areas adjoining the Subleased Property and from and against all costs and
expenses, including attorneys' fees, incurred thereby.
XIV. NOTICES
All notices under this Sublease Agreement shall be forwarded to
the addresses mentioned in the Recitals above, or such other addresses as may
from time to time be furnished by the parties thereto. Said notices shall be in
writing and if mailed, shall be deemed given ten (10) days after the date of
mailing thereof.
XV. LANCER'S DEFAULT
A. Each of the following will be a default of Lancer
1. Vacation or abandonment of Subleased Property;
2. Failure to pay any installment of rent due and payable hereunder upon the
date when said payment is due, said failure continuing for a period of ten (10)
days;
3. Default in the performance of any of Lancer's covenants, agreements or
obligations hereunder, said default, except default in the payment of any
installment of rent, continuing for fifteen (15) days after written notice
thereof is given from Eagleson to Lancer;
4. A general assignment by Lancer for the benefit of creditors;
5. The filing of a voluntary petition in bankruptcy by Lancer or the filing of
an involuntary petition by Lancer's creditors, said petition remaining
undischarged for a period of ninety (90) days;
6. The appointment of a Receiver to take possession of substantially all of
Lancer's assets or of this subleasehold, said receivership remaining undissolved
for a period of ninety (90) days;
7. Attachment, execution or other judicial seizure of substantially all of
Lancer's assets or this subleasehold, such attachment, execution or other
seizure remaining undismissed or undischarged for a period of ninety (90) days
after the levy thereof;
8. The termination, for any reason before its expiration, of that certain
Manufacturing Shelter Agreement as amended and revised, between Lancer and
Eagleson Industries, Inc.
B. Upon occurrence of any one of the foregoing defaults, Eagleson
shall have the right, at its option, and in addition to other rights or remedies
granted by law, including the right to claim damage, and to do the following:
8
<PAGE> 9
1. Immediately rescind this Sublease Agreement and eject Company from
the Subleased Property,
2. Claim Specific performance. In the case of default as specified in
XV. A, I-3. Above, Eagleson shall, in addition to all other remedies, have the
right to declare the entire unpaid balance of rent to the end of the Sublease
then in effect, and all other sums due from Lancer, immediately due and payable,
plus interest at the rate of twenty percent (20%) per annum of said sums from
the date of such declaration until payment in full, provided that Eagleson shall
diligently proceed to sublease the Subleased Property to another tenant or
otherwise make beneficial use thereof in mitigation of damages, rent and all
other sums due or payable to Eagleson.
a. Eagleson shall promptly refund to Lancer that portion of rent and
interest paid by Lancer pursuant to this paragraph 2 which is allocable to the
period of the Sublease Term during which the Subleased Property was subleased to
another tenant or otherwise used in a beneficial manner as well as any other
allocable sums paid by Lancer to Eagleson less any loss or damage incurred by
Eagleson as a result of Lancer's default, or;
b. If such rent or other sums have not been paid by Lancer to
Eagleson, Eagleson shall credit such amount(s) to Lancer
XVI. RIGHT TO CURE DEFAULTS
In the event of Lancer's breach or default of any term or
provision herein, Eagleson may, without any obligation to do so, at any time
after ten (10) days written notice, cure such breach or default, or make repairs
to the Subleased Property, for the account and at the expense of Lancer. If
Eagleson, by reason of such breach or default, pays any money, or is compelled
to incur any expense, including attorneys' fees, the sums so paid or incurred by
Eagleson with all interest, costs, and damages, shall be paid by Lancer to
Eagleson on the first day of the month following the incurring of such expenses.
If any installment of rent or any other payment is not promptly paid when due,
it shall bear interest of twenty percent (20%) per annum from the date on which
it becomes due until paid; but this provision is not intended to relieve Lancer
from fulfilling its obligations hereunder in the time and in the manner
specified in this agreement. The foregoing interest, expenses and damages shall
be recoverable from Lancer by exercise of Eagleson's remedies hereinabove set
forth. Efforts by Eagleson to mitigate the damages caused by Lancer's breach of
this Sublease shall not be construed to be a waiver of Eagleson's right to
recover damages under this Clause XVI. Nothing in this Clause XVI affects the
right of Eagleson to indemnification by Lancer in accordance with Clause XIII
hereinabove for liability arising prior to the termination of this Sublease for
personal injuries or property damage.
XVII. WAIVER
In the event Eagleson or Lancer does not compel the other to
comply with any of the obligations hereunder, such action or omission shall not
be construed as a waiver of a subsequent breach of the same or any other
provision. Any consent or approval shall not be
9
<PAGE> 10
deemed to waive or render unnecessary the consent or approval of any subsequent
or similar act by Lancer or Eagleson.
XVIII. HOLDING OVER
If Lancer should remain in possession of the Subleased Property
after the expiration of this Sublease, Lancer shall pay a minimum weekly rent
equal to twice the then minimum weekly rent then paid in the month immediately
preceding the month in which the holdover period began until Lancer has
delivered to Eagleson the Subleased Property, or executed a new Sublease
Agreement. This provision shall not he construed as granting any right to
Company to remain in possession of the Subleased Property after the expiration
of the Lease Term. Lancer shall indemnify Eagleson against any loss or liability
resulting from delay by Lancer in surrendering the Subleased Property. If such
loss or liability is founded on said delay, less any amounts paid pursuant to
this clause. The parties agree that Lancer shall quit and surrender the
Subleased Property at the expiration of this Sublease Agreement, waiving the
right provided by law.
XIX. SURRENDER
On the last day of the term of this Sublease Agreement, or the
sooner termination thereof pursuant to other provisions hereof, Lancer shall
quit and surrender the Subleased Property, and restore the premises to a clean
and good condition (normal wear and tear excepted) together with all
alterations, additions and Lancer's improvements that may have been made in the
same, except furniture, machinery and equipment owned by Lancer. Prior to
termination of this Sublease Agreement, Lancer shall have removed all of its
property in accordance with Section III hereof and all property not removed
shall be deemed abandoned by Lancer. Lancer shall repair and restore the
Subleased Property to a good and clean condition, normal wear and tear excepted,
while removing Lancer's property.
XX. QUIET ENJOYMENT
Eagleson agrees that Lancer, upon paying the rent and all other
charges provided for herein and upon complying with all of the terms and
provisions of this Sublease Agreement, shall lawfully and quietly occupy and
enjoy the Subleased Property during the Sublease Term.
XXI. MISCELLANEOUS
A. This document contains all of the agreements and conditions made
between the parties with respect to the Subleased Property, and may not be
modified orally in any manner other than by a written agreement signed by the
authorized representative of the parties.
B. If any term, covenant, condition or provision of this Sublease,
or the application thereof to any person or circumstance, shall be to any extent
held by a court of competent jurisdiction, to be invalid, void or unenforceable,
the remainder of the terms, covenants, conditions or provisions of this
Sublease, or the application thereof to any person or circumstance, shall remain
in full force and effect and shall in no way be affected, impaired or
invalidated.
10
<PAGE> 11
C. In the event either party should bring an action against the
other party for the possession of the Subleased Property, or the recovery of any
sum due thereunder, or because of the breach or default of any covenant in the
Sublease Agreement, the prevailing party shall have the right to collect from
the other party its costs and expense, including attorneys' fees.
D. Every payment and performance required by this Sublease
Agreement, shall be paid and performed precisely on the date specified for such
payment or performance and no delay or extension thereof shall be permitted.
E. The titles and subtitles in the Clauses of this document shall
have no effect on the interpretation of the terms and provisions contained in
this Sublease Agreement.
F. The parties agree that this Sublease Agreement shall be governed
by the Laws of the State of Baja California and the Laws of the State of
California as their jurisdiction applies. For everything pertaining to the
interpretation and compliance of this Sublease Agreement the parties thereby
expressly submit to either the jurisdiction of the Civil Courts of the City of
Mexicali, State of Baja California or the Civil Courts of the County of
Imperial, State of California as their jurisdiction applies, waiving any other
jurisdiction which might be applicable by reason of their present or future
domiciles or otherwise.
G. Whenever the prior consent of either party, written or
otherwise, is required as a condition for any act by the other party under this
Sublease Agreement, such party agrees not arbitrarily to withhold such consent.
H. Each party shall execute such further documents as shall be
requested by the other party, but only to the extent that the effect of said
documents is to give legal effect to rights set forth in the Sublease Agreement.
I. Submission of this instrument for examination or signature by
Lancer does not constitute a reservation of or option to Sublease, and it is not
effective as a Sublease or otherwise until executed and delivery by both
Eagleson and Lancer.
11
<PAGE> 12
J. This Sublease and each of its covenants and conditions shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective assigns, subject to the provisions hereof. Whenever in this Sublease
a reference is made to Eagleson, such reference shall be deemed to refer to the
person in whom the interest of the sublessor hereunder shall be vested. Any
successor or assignee of Lancer who accepts an assignment or the benefit of this
Sublease and enters into possession or enjoyment hereunder shall thereby assume
and agree to perform and be bound by the covenants and conditions thereof
IN WITNESS WHEREOF, the parties have executed this Sublease
Agreement as of the first day of November, nineteen hundred ninety eight.
EAGLESON LANCER
EAGELSON DE CALIFORNIA LANCER ORTHODONTICS, INC.
S.A. DE C.V.
- --------------------------------- ---------------------------------
Jaime Ainslie Palencia Douglas D. Miller
General Manager President
EAGLESON INDUSTRIES, INC.
- ---------------------------------
Nelson C. Baxley
President
12
<PAGE> 1
EXHIBIT 10.24
FIFTH REVISION TO MANUFACTURING SHELTER AGREEMENT
Effective November 1, 1998, Lancer Orthodontics, Inc., ("LANCER") and Eagleson
Industries, Inc., ("EAGLESON") agree to revise and amend the Manufacturing
Shelter Agreement ("Agreement") entered into on May 11, 1990, revised on June
20, 1991, December 2, 1992, July 1, 1994 and April 1, 1996, between and amongst
said parties, as follows:
The Agreement is extended until October 31, 2000 and may not be canceled by
either party for any reason other than gross negligence, with ninety (90) days
following notification to rectify, prior to that date.
Eagleson will continue providing the existing level of Mexican political and
business administration service in Mexico to Lancer and to Lancer de Mexico S.A.
de C.V., Lancer's Mexican distribution subsidiary (LANSA), under the Eagleson de
California shelter.
Eagleson de California S.A de CM, EAGLESON's Mexican subsidiary ("ECSA") and
LANCER will enter into a five-year sublease effective November 1, 1998 in the
form and content specified in exhibit "A" hereto, on the portion of ECSA's main
facility in Mexicali presently occupied by LANCER and LANSA. In consideration of
the lease rate, LANCER will not be required to sign a corporate guarantee or put
up substantial cash to secure the lease.
EAGLESON will continue to prepare the U.S. customs cost submission form for the
year ending December 31, 1998 and prepare the template and provide one time
training to Lancer's personnel for the 1999 reconciliation report, all from
information provided from EAGLESON's records and from records maintained by
LANCER's personnel.
ECSA will continue to prepare the payroll and related tax returns and tax
returns required by Hacienda (Mexican IRS) for ECSA and for LANSA as required.
ECSA will continue to oversee LANSER's import/export function. ECSA will
continue to oversee LANSER's human resources function.
EAGLESON will continue to report directly to LANCER's President any irregularity
discovered that EAGLESON believes violates LANCER's policies or that may cause
LANCER significant financial harm or loss of credibility.
EAGLESON will continue to retain an independent auditor/tax assessor for it's
consolidated group and maintain it's consolidated membership in the Maquiladora
association.
EAGLESON will continue to pay and report LANCER's expenses on a pass through
basis.
<PAGE> 2
EAGLESON will continue to reimburse Lancer for 95% of the IVA related to LANCER
pass through expenses that Eagleson is able to use as an offset for Mexican
payroll taxes.
To the extent Mexican income tax and profit sharing is paid as a result of the
activity of LANCER's accounts, such tax and profit sharing will be treated as a
pass through expense. LANCER may increase the minimum amount of profit sharing
required by law as a discretionary benefit for its assigned employees if it so
chooses.
During the first year of this revision EAGLESON will work with LANCER's
facilities personnel to verify the accuracy of the listing of assets on the
Bailment Agreement between EAGLESON and LANCER.
With respect to LANSA.
EAGLESON will apply for a Maquiladora permit on behalf of LANSA using
information provided by LANSER and LANSA.
EAGLESON will do the basic Spanish language general ledger accounting and
periodic federal and state governmental financial and employee reporting on
behalf of LANSA.
EAGLESON will accumulate invoices and pay payables of LANSA as they become due
from funds made available, either from LANSA receivable collections or
contributions from LANSER.
During the second year of this REVISION, if directed by LANSER, EAGLESON will:
Activate the Maquiladora permit for LANSA. Assist LANCER in transferring
LANSER's interest in the sub-lease on the Mexican facility to LANSA. Once the
lease is transferred, Mexican value added tax (IVA) will be added to the weekly
lease cost inasmuch as LANSA will be able to apply for its refund directly from
the Mexican government.
Convert the Lancer-designated work force to LANSA. The out of pocked expenses of
hiring Mexican labor counsel will be born by LANCER.
Prepare the necessary paperwork and work with Mexican and U.S. customs to
transfer the existing fixed assets, supplies, raw materials and inventory to
LANSA. LANCER will pay the out of pocket expenses incurred by EAGLESON in this
endeavor.
Assist in establishing the Mexican and U.S. Bank accounts necessary to run
LANSA's business.
<PAGE> 3
Assist LANSA in seeking the following personnel for training and ultimate
placement into positions available in LANSA.
- Administrative (General)manager
- Controller
- Accounts payable/receivable clerks
- Payroll clerks.
As these positions are trained and filled, Eagleson will reduce its
weekly billing by the allocated cost of the positions ( $250, $100, $75, $75
respectively), to partially offset the added expense of the employees. The
reduced rate (not to be less than $1,000 per week) will be in effect until the
end on year two as a stand-by-consulting fee.
During the second year transition period, EAGLESON's personnel will continue to
be responsible for the day to day administrative activity of LANSA (excluding
the invoicing and collection of sales to countries other than the U.S.) until
the respective personnel are in position.
This fifth revision is entered into as of this 1st day of November 1998 by and
between the undersigned parties in their respective capacities.
/s/ Nelson Baxley
- ----------------------------------- ------------------------------------
Nelson Baxley Doug Miller
President, Eagleson Industries, Inc. President, Lancer Orthodontics, Inc.
<PAGE> 1
EXHIBIT 10.25
TECHNICAL SKILLS CONSULTING AGREEMENT
This agreement between LANCER ORTHODONTICS, Inc. a California corporation
("LANCER"), and ALEJANDRO CARNERO a non-resident alien, independent contractor
and a citizen of the Republic of Mexico ("PROVIDER"), is entered into this 1st
day of January, 1999 as follows:
WHEREAS: PROVIDER possesses certain skills pertaining to managing materials,
production, maintenance and/or people in the Republic of Mexico ("the technical
skills"); and,
WHEREAS: PROVIDER desires to make the technical skills exclusively available to
LANCER; and,
WHEREAS: LANCER desires to utilize the technical skills to assure that the
operations of LANCER are productive and efficient and to assure that the
start-up of new customers and maintenance of existing customers of LANCER is run
professionally.
NOW THEREFORE IT IS AGREED BETWEEN THE PARTIES HERETO:
LANCER hereby retains the technical skills of PROVIDER in Mexico.
LANCER shall pay PROVIDER the fixed equivalent amount, unless otherwise agreed,
of $860,000 U.S., net per week on a month to month basis, prorated for partial
months, from the date hereof until -this arrangement is terminated by either
party.
LANCER shall provide PROVIDER with office space, use of telephone and other
office equipment, secretarial services and basic administrative services
together with reimbursement of approved out of pocket business expenses for work
performed in Mexico. It is understood that PROVIDER may be asked, from time to
time, to cross the border into the United States for limited periods of time at
the convenience of LANCER. None of the payments for services to PROVIDER
hereunder are to be construed as being paid for such time.
LANCER shall supply PROVIDER with business cards as a matter of convenience.
PROVIDER warrants that PROVIDER not an employee of LANCER and therefore is not
entitled to any U.S. government mandated employee, benefits or employer taxes
for same or benefits provided by LANCER to its employees and that PROVIDER is
entering into this contract as an individual in a dedicated consulting capacity.
PROVIDER further agrees that PROVIDER is responsible for any taxes of any form
by any governmental or quasi-governmental agency levied against any remuneration
received or receivable by PROVIDER under this agreement.
PROVIDER agrees to provide the technical skills to LANCER exclusively and
further agrees not to willfully perform any act which would jeopardize LANCER's
business, its relationships with customers and vendors, of its reputation.
<PAGE> 2
PROVIDER agrees that PROVIDER will submit all business opportunities to LANCER
who will have the right of first refusal to act on the opportunity.
PROVIDER agrees that PROVIDER has no right, nor will PROVIDER portray the right
or attempt to enter into any contract on behalf of LANCER or to bind LANCER
without the express written consent of LANCER.
LANCER and PROVIDER admit that they each possess proprietary information not in
the possession of third parties and which, if disclosed to third parties, would
be detrimental to their respective abilities to do business in the normal
course. Each promises to consider each other's information as of vital
importance and that the information, if used by one against the other to gain an
unfair competitive edge or cause the other to lose business to a third party or
parties not a party to this agreement, could cause substantial monetary and
other damages to the other party. Each agrees to not use such information to the
detriment of the other.
Agreed and effective this 1st day of January, 1999
LANCER ORTHODONTICS, INC. ALEJANDRO CARNERO
/s/ DOUG MILLER 1/29/99 /s/ ALEJANDRO CARNERO 1/29/99
- ----------------------------------- ------------------------------------
President PROVIDER
<PAGE> 3
Wages paid for week ending:
<TABLE>
<CAPTION>
10:01 $
$ Pesos $/Peso Total Retro Pay Difference
---- ----- ------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
09-Jan-99 $378 2163 216.3 $ 594.30 $ 1,076.92 $ 482.62
16-Jan-99 $378 2163 216.3 $ 594.30 $ 1,076.92 $ 482.62
22-Jan-99 $378 2163 216.3 $ 594.30 $ 1,076.92 $ 482.62
30-Jan-99 $378 2163 216.3 $ 594.30 $ 1,076.92 $ 482.62
Amount due through week ending 1/30 $ 1,930.49
==========
Check to be paid to Mr. Camero weekly by Lancer beginning Week of February 1st $ 860.62
under Technical Skills Consulting Agreement dated 1/1/99 ==========
</TABLE>
<TABLE>
<S> <C>
Annual compensation $ 56,000.00
Weekly compensation $ 1,076.92
Pesos paid in Mexico $ 216.30
-------------
Balance to be paid in $ 860.62
=============
</TABLE>
<PAGE> 4
Lancer Mexicali B.C. January 29, 1999
<TABLE>
<CAPTION>
New Proposal
Employee Name Position Current Salary Salary Percentage
------------- -------- -------------- ------------ ----------
<S> <C> <C> <C> <C>
Marina Sagrero A. Document Control/ $ 130.00 $ 175.00 30.%
Safety Assistant
</TABLE>
<TABLE>
<CAPTION>
Employee Current New Proposal Salary Total Salary
Name Position Salary Salary in dlls. in Pesos in pesos
-------- -------- ------- --------------- -------- ------------
<S> <C> <C> <C> <C> <C>
Lupita Barba Document $ 250.00 $30.00 dlls $100.00 $400.00
Control/Safety
Dept. Head
</TABLE>
NOTES:
When Lupita Barba was hired on March 1998 we talked about 30.00 dollars
daily that was 250.00 because the peso currently was 8.20, so when the peso
falls her salary falls down to 25.00 dollars daily.
Now we propose 30.00 dollars plus 100.00 pesos a total of 400.00 pesos
daily.
/s/ Mike King /s/ Alejandro Carnero 1/29/99 /s/ Doug Miller 1/29/99
- ---------------- ------------------------------ -----------------------
Mike King Alejandro Carnero Doug Miller
<PAGE> 5
LANCER
ORTHODONTICS
MAXIMUM 523
AVERAGE 309
MINIMUM 178
MANAGERS
<TABLE>
<CAPTION>
PREVIOUS
SALARY LAST INCREASE PERFORMANCE
SENIORITY AMOUNT DATE INCREASE PERCENTAGE
--------- -------- ------------- ----------- ----------
POSITION EMPLOYEE NAME 11 MONTHS 450 12 OCT 98 523 16%
- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
GERENTE RECURSOS HUMANOS ELIZABETH SANTILLAN 2 YEARS 7 MONTHS 269 12-Oct-98 309 15%
GERENTE PRODUCCION ALEJANDRO CARNERO 3 YEARS 5 MONTHS 400 12-Oct-98 465 16%
GERENTE DE CONTROL DE CALIDAD ALEJANDRO LLAMAS 1 YEAR 156 12-Oct-98 178 14%
GERENTE INGENIERIA DE PLANTA CESAR FLORES
</TABLE>
<TABLE>
<CAPTION>
EMPLOYEE NAME CURRENT MONTHLY WAGE'S
- ------------- ----------------------
<S> <C>
ELIZABETH SANTILLAN 15,899.20
ALEJANDRO CARNERO 9,393.60
ALEJANDRO LLAMAS 14,136.00
CESAR FLORES 5,411.20
TOTAL MONTHLY AMOUNT (PESOS) 44,840.00
TOTAL MONTHLY AMOUNT (DLLS) 4,484.00
</TABLE>
<PAGE> 1
EXHIBIT 10.26
PRODUCT DEVELOPMENT AND MARKETING AGREEMENT
BETWEEN
LANCER ORTHODONTICS, INC.
AND AG METALS, INC.
DATED AS OF SEPTEMBER 1, 1998
<PAGE> 2
PRODUCT DEVELOPMENT AND MARKETING AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into as of August
3,1998 (the "Effective Date"), between LANCER ORTHODONTICS, INC., a California
corporation (hereinafter "LANCER"), and AG METALS, INC., a Nevada corporation
(hereinafter "AG METALS"), and is effective as of the date referenced above.
These parties are collectively referred to herein as the "Parties" and
individually as a "Party." Unless otherwise specified herein, capitalized terms
in this Agreement have the meanings set forth in Article XII hereof.
WHEREAS, AG METALS is the exclusive owner of all right, title and
interest in and of certain dental amalgam formulas and technology and has
certain expertise related to dental amalgams; and
WHEREAS, LANCER desires to acquire all right, title and interest in such
technology from AG METALS for the purpose of developing such technology and
manufacturing certain products for the dental market using such developed
technology; and whereas LANCER desires assurance of a continued association with
AG METALS in order to retain the experience, abilities, and knowledge of AG
METALS and its agent(s) with respect to the technology, and is therefore willing
to purchase the technology on the terms and conditions set forth herein; and
WHEREAS, AG METALS desires to transfer to LANCER all the right, title
and interest in such technology and to assist LANCER in the development of such
technology for LANCER's exclusive use upon the terms and conditions set forth
herein.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and conditions herein contained, the receipt and sufficiency of which
are hereby acknowledged, the Parties agree as follows:
ARTICLE I
PURPOSE OF AGREEMENT; EXCLUSIVE OWNERSHIP
1. PURPOSE. The purpose of this Agreement is to transfer the Product(s) and
Technology to LANCER and to develop the Product(s) and Technology for
exclusive use and sale by LANCER, in the mutual interest of the Parties
to this Agreement.
2. EXCLUSIVE Ownership. To that end, LANCER hereby acquires the existing
Product(s) and Technology and retains AG METALS, which will, through its
agents (particularly Gary Weikel), develop the Product(s) and Technology
for the exclusive benefit of LANCER.
2
<PAGE> 3
ARTICLE II
TRANSFER OF TECHNOLOGY RIGHTS
1. TRANSFER OF TECHNOLOGY RIGHTS. On and subject to the terms and
conditions set forth in this Agreement, AG METALS hereby permanently and
irrevocably assigns, sets over, and transfers to LANCER and its
successors and assigns, all right, title and interest of every kind,
nature, or description in and to the Product(s) and Technology, free and
clear of all liens, charges, security interests, claims, pledges, taxes,
options, rights, contracts, commitments, equities, demands, licenses,
restrictions on transfer, options and other encumbrances (collectively,
"Encumbrances"), including but not limited to:
a. Ownership of 100% of the Product(s) and Technology;
b. Ownership of all Documentation regarding the Product(s) and
Technology;
c. Ownership of all Rights in or to the Technology, the maintenance
of which shall be the sole responsibility of LANCER except as
set forth in this Agreement;
d. The exclusive right to use, license, enhance, reproduce, or
otherwise modify the Product(s) and Technology;
e. The exclusive right to manufacture, use, market, distribute,
sell, enhance, or otherwise modify the Product(s) and
Technology; and
f. The exclusive right to obtain Patents and Trademarks with
respect to the Product(s) and Technology.
Any Improvements, whether invented by AG METALS or its agents either
together with LANCER or in connection with the work for LANCER, shall
belong to LANCER and shall immediately and automatically be deemed to be
part of the Product(s) and Technology and subject to the terms of this
Agreement, unless LANCER advises AG METALS in writing within 30 days of
a request from AG METALS for such a writing that LANCER does not intend
to make use of such Improvements, and relinquishes any "right of first
refusal." Any Improvements invented solely by LANCER or its agents shall
belong exclusively to LANCER.
2. CONSIDERATION FOR TECHNOLOGY. The aggregate consideration to be paid by
LANCER to AG METALS for the Product(s) and Technology (the
"Consideration") shall be based on the initial payment set forth below,
the payment of any Commission due on the Net Received by LANCER on all
Product(s) during the Commission Term, and the payments for consulting
Services as set forth in Article III hereof, as those terms are defined
herein, subject to the terms and conditions set forth in this Agreement.
In addition, the Parties agree that if the average net sales price
and/or material costs for the Products increase ten percent
3
<PAGE> 4
(10%) or more) and to the point where the financial benefits of this
Agreement are negatively impacted (see Exhibit B), the Parties will
renegotiate the financial aspects of this Agreement. Any dispute between
the Parties with respect to such renegotiation shall be resolved by
binding arbitration as set forth in Section XIII. 14. hereof.
a. COMMISSION CALCULATION. AG METALS shall receive a commission on
sales of the Product(s) ("Commission") calculated as follows.
Commission is based on Net Received. For purposes of this
Agreement, Net Received means the net cash actually received by
LANCER from all sales of Product(s) paid for by customers (i.e.
sales prices collected after adjustment for allowances and
discounts), as reduced by sales returns and adjustments, and
further reduced by LANCER's costs of shipping, handling, and
packaging (both direct and indirect). The Commission due AG
METALS (if any) for any particular quarter shall be calculated
at the rate of eight and one-half percent (8.5%) of Net Received
from the sales of Product(s) by LANCER during the Commission
Term, less the payments made by LANCER for Services under
Article III below in that particular quarter, and less any
negative Commission balance (showing excess Service
payments/draw over Commission due) from prior quarters.
b. EXAMPLE OF CALCULATION. For purposes of demonstrating how the
Commission will be calculated pursuant to this Article II of the
Agreement, the Parties agree that Exhibit A (Example of
Commission Calculations) represents a model of how the
Commission calculations will be made by LANCER pursuant to this
Agreement. The Parties further agree that the dollar amounts set
forth in Exhibit A are made solely for the purpose of
demonstrating the model, and may not necessarily reflect the
actual amounts of cash received, negative draws, or adjustments
in any given period of time.
c. INITIAL PAYMENT AND PAYMENT OF COMMISSION.
i. Upon execution of this Agreement, LANCER shall pay to AG
METALS consideration in the amount of One Thousand
Dollars ($1,000.00).
ii. LANCER shall pay Commission to AG METALS during the
Commission Term as defined in Section II.2.d. below, as
such Commission becomes due pursuant to this Section
11.2., unless its obligation to do so is terminated
earlier pursuant to the terms of this Agreement.
iii. LANCER shall pay any Commission owed to AG METALS for
the preceding calendar quarter at such time as LANCER
renders to AG METALS each report required under Section
11.2f. LANCER shall make all payments by Company check
payable to AG METALS or its designee. LANCER shall make
all payments at the address specified in this Agreement
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or such other address as shall be designated by AG
METALS in writing.
iv. AG METALS' acceptance of any Commission shall not
preclude AG META-LS from later disputing the amount of
Commission owed, except that AG METALS must notify
LANCER of any dispute as to the amount of Commission
owed within thirty (30) days after the payment in
dispute is made to AG METALS. Failure to so notify
LANCER shall be deemed a waiver of any right to claim
additional Commission in connection with such payment.
d. APPLICATION OF COMMISSION PAYMENTS UPON CERTAIN EVENTS. In the
event that (1) LANCER in good faith has reason to believe there
is an actual or potential claim to the Product(s) or Technology
by a third party, and independent counsel mutually agreeable to
LANCER and AG METALS issues a legal opinion that the Product(s)
or Technology violate one or more patents or trade
secrets/confidential information held by a third party, either
foreign or domestic (an "Opinion"), or (2) a claim, lawsuit, or
other proceeding is filed or instituted alleging that AG METALS
did not have the right, title, or interest in the Product(s) or
Technology at the time it was purportedly conveyed under this
Agreement, or that the Product(s) or Technology infringe on
another's patent, trade secret/confidential information, or
other intellectual property rights (a "Proceeding"), then the
following shall occur with respect to payments to AG METALS
pursuant to this Agreement:
i. LANCER shall continue to make payments for consulting
Services provided by AG METALS pursuant to Article III
hereof, which payments shall continue to reduce the
amount of Commission otherwise owed to AG METALS under
this Agreement; and
ii. AG METALS shall not be entitled to receive any further
payments of Commission (beyond the payments for
consulting Services) pending a final resolution of the
Proceeding or issue raised by the Opinion. Any
Commission amounts that would have been paid to AG
METALS in the absence of the Opinion or Proceeding shall
be applied toward satisfaction of AG METALS' obligations
(if any) under the indemnity provisions of Article X of
this Agreement.
iii. If the issue raised in the Opinion or the Proceeding
results in LANCER being prohibited from further
production or sales of the Product(s) or use of the
Processes, then the Commission Term and term of
consulting Services shall automatically terminate, and
AG METALS will be entitled to no further payments of
Commission or for Services. In addition, if AG METALS'
indemnity obligations remain unsatisfied after the
application referenced in Section II.2.d.ii. above,
LANCER shall have the right to recover any
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previously paid Commission from AG METALS, in addition
to any other remedies it may have to obtain payment on
the indemnity obligation. Once all indemnity and other
obligations of AG METALS under this Agreement are met,
if LANCER is prohibited from further production or sales
of the Product(s) or use of the Processes, then except
where prohibited by law or court order, LANCER shall
transfer all rights it has to the Product(s) and
Processes to AG METALS upon payment of a sum determined
by LANCER. After completion of any such transfer, LANCER
shall assert no further claims to the Product(s) or
Technology.
iv. If after the issue, dispute or litigation is finally
resolved LANCER is able to continue production and sales
of the Products and use of the Processes, then payments
of Commission otherwise due pursuant to the provisions
of this Agreement shall resume to AG METALS after any
and all indemnity obligations of AG METALS under Article
X of this Agreement are satisfied.
e. COMMISSION TERM. The Commission Term shall commence upon the
Effective Date, and shall automatically and immediately
terminate when the term of consulting Services ends pursuant to
Article III.2. hereof, unless terminated earlier pursuant to the
terms of this Agreement. Regardless of the reason therefore,
termination of the Commission Term shall not affect LANCER's
rights to the Products or Technology (as set forth in Article I
of this Agreement) regardless of the reason(s) for such
termination, as the transfer of such rights to the Products and
Technology is permanent and irrevocable.
f. REPORTS.
i. As long as any Commission payments are still due under
this Agreement, LANCER shall render to AG METALS or its
designee quarterly reports on or before the last days of
January, April, July, and October of each year, showing
the Commission due and how it was calculated.
ii. LANCER shall render to AG METALS a similar report within
30 calendar days after the date the final Commission
payment has been made under this Article 11, covering
the period from the last date covered by the last
preceding report to the date when LANCER's obligation to
pay Commission hereunder ends.
iii. AG METALS shall have the right, at reasonable times
during usual business hours with prior written notice to
LANCER and at AG METALS' cost, to bring in any
consultants and personnel it deems appropriate,
including certified public accountants, to inspect
LANCER's facilities and audit LANCER's books and records
to ensure integrity and compliance with the
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Commission provisions of this Agreement.
g. RECORDS. LANCER shall at all times during the term of this
Agreement and for three years after the last payment of
Commission is made under this Agreement:
i. Maintain accurate records relating to the practice of
the Technology and the manufacture and sale of Products
under this Agreement; and
ii. Produce these records and books of accounts at the
offices of LANCER during regular business hours, from
time to time and on written request by LANCER, for
inspection by AG METALS, its duly accredited
representatives, or a mutually accepted third party.
ARTICLE III
CONSULTING SERVICES
1. SERVICES TO BE PROVIDED. AG METALS agrees to provide consulting services
to assist LANCER in:
a. using the Technology and manufacturing the Products,
b. organizing, starting, and supervising operations,
c. training LANCER's technical personnel,
d. marketing and selling the Products, and
e. providing other services related to the Technology and Products
as requested by e. providing LANCER (the "Services").
Specifically, the Services provided hereunder shall include making
recommendations to and assisting LANCER in all aspects of the foregoing,
including without limitation, the physical layout, composition and
pricing of inventory, number, position and salary of employees (as
approved by LANCER in writing), identity of suppliers, types and brand
of equipment, fixtures, and furnishings, signing, marketing,
distribution, advertising, establishment of internal financial and
operating controls, and compliance with all federal, state and local
health and safety requirements.
AG METALS' representative(s) shall report to the President of LANCER in
performing these Services, or any other LANCER representative as
designated by LANCER's President in writing.
2. TERM OF CONSULTING SERVICES. AG METALS has been providing these Services
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as of the effective date. The term of consulting Services hereunder
shall end, and AG METALS' obligations to provide Services and LANCER's
obligation to compensate AG METALS for Services hereunder shall
automatically terminate, on the earliest of the following to occur,
unless terminated earlier pursuant to the terms of this Agreement.
a. Bankruptcy or insolvency of AG METALS;
b. Inability of AG METALS to provide such Services because of the
disability or death of a key employee or agent;
c. Determination by LANCER that AG METALS or its representative(s)
has acted or failed to act in a way which LANCER believes may
have a material adverse effect upon the business, reputation,
and/or operations of LANCER (in which case, LANCER must provide
AG METALS with written notice and any available documentation of
such breach);
d. A breach by AG METALS of any of the terms of this Agreement,
including the representations and warranties herein, which is
not timely cured as set forth in Section VII.2. hereof, or
e. LANCER ceases to manufacture the Products because they are not
commercially viable or profitable, because of excessive recalls
or returns, or for any other legitimate business reason, in
which event AG METALS shall have a "right of first refusal" with
respect to the Products and Technology such that the rights to
the Products and Technology shall be transferred to AG METALS
upon payment by AG METALS to LANCER of (1) an amount equal to or
exceeding that offered by a third party for such rights, if such
an offer is received by LANCER, or, if no such offer is
received, (2) payment to LANCER of an amount to be established
by LANCER.
2. PAYMENT FOR CONSULTING SERVICES/DRAW AGAINST COMMISSION. LANCER shall
pay AG METALS for the Services as follows, subject to termination of its
obligation to do so under the provisions of this Agreement. Such
payments shall be treated as a draw against Commission due AG METALS
under Article II above.
a. AMOUNT OF PAYMENTS.
i. For the first six month period that AG METALS provides
Services to LANCER, payments totalling $27,000 shall be
made by LANCER to AG METALS.
ii. For the first 12 month period after the initial six
month period that AG METALS provides Services to LANCER,
payments totalling $63,000 shall
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be made by LANCER to AG METALS.
iii. For the second 12 month period after the initial six
month period that AG METALS provides services to LANCER,
payments totalling $75,000 shall be made by LANCER to AG
METALS.
iv. For the third 12 month period after the initial six
month period, and for all 12 month periods thereafter
that AG METALS provides services to LANCER, payments
totalling $84,000 shall be made by LANCER to AG METALS.
b. TIMING OF PAYMENTS. LANCER shall pay the amounts set forth above
in monthly installments, the first of each month. If the first
falls on a Saturday, payment shall be made on the preceding
Friday; if the first falls on a Sunday, payment shall be made on
the following Monday. If required by LANCER's accountants, AG
METALS shall provide invoices for the amounts due prior to
receiving payment from LANCER.
c. TIME DEVOTED TO SERVICES. At least until the Processes for
producing the Product(s) are in place and running smoothly and
the Product(s) are successfully launched, the Services to be
provided by AG METALS under this Agreement shall be those of
Gary Weikel exclusively and on a full time basis. Thereafter,
with the written consent of LANCER (not to be unreasonably
withheld), AG METALS may substitute another competent, trained
individual for WEIKEL, who shall devote full time efforts to the
Services and shall be supervised by WEIKEL. "Full time" means an
average of 40 hours per week, less company holidays, three weeks
of vacation, and other excused absences. Exceptions to the
requirements of this paragraph may be made in a writing signed
by both Parties to this Agreement and the AG METALS agent who
will be providing the Services.
d. ACCOUNTING. AG METALS shall be paid at least the amounts set
forth above for consulting Services as a draw against
Commission, such draw to be paid on a monthly basis as set forth
in this Agreement. The quarterly accounting of Commission
payable to AG METALS shall reflect the monthly consulting
Service payments as a draw (reduction) against Commission
otherwise due AG METALS (see example in Exhibit A hereto).
Commission amounts due AG METALS after such reduction shall be
paid according to Article II of this Agreement.
3. INDEPENDENT CONTRACTOR STATUS
a. CONTROL. AG METALS shall provide these Services as an
independent contractor. AG METALS shall determine the method,
details, and means of performing the Services, except as
otherwise provided in this Agreement. LANCER shall have final
approval of all advertising, marketing, and other materials that
will be distributed or
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disseminated outside the company.
b. EXPENSES. AG METALS and/or its representative(s) shall be
responsible for all expenses incurred in association with
performance of the Services, except as set forth in Section 7 of
this Article III.
c. NO EMPLOYMENT RELATIONSHIP. In no circumstance shall AG METALS
or any employee, representative, or agent of AG METALS or any
individual or corporation associated with them, look to LANCER
as an employer, or as a partner, an agent, or a principal.
Neither AG METALS nor any of its employees, representatives, or
agents has, nor shall they hold themselves out as having, any
right, power, or authority to create any contract or obligation,
either express or implied, on behalf of, or binding upon,
LANCER.
d. NO EMPLOYMENT BENEFITS. No employee, representative, or agent of
AG METALS shall be entitled to any benefits accorded to LANCER's
employees, including but not limited to workers' compensation,
health insurance, disability insurance, pension or profit
sharing plans (including 401K plan), or vacation or sick pay. AG
METALS shall be responsible for providing, at its expense and in
its name, disability, workers' compensation, and other insurance
as well as any licenses and permits usual or necessary for
performing the Services, unless agreed otherwise in writing by
LANCER.
e. TAXES. AG METALS (or its agents, as appropriate) shall pay, when
and as due, any and all payroll taxes incurred as a result of
any non-LANCER employee's compensation, including estimated
taxes, and shall provide LANCER with proof of payment on demand.
AG METALS indemnifies LANCER for any claims, losses, costs,
fees, liabilities, damages, or injuries suffered by LANCER
arising from any breach of this provision.
f. SERVICES ON PREMISES. AG METALS understands that the Services
must coordinate with LANCER's established quality controls,
protocols and security requirements. Therefore, AG METALS agrees
to perform all services on LANCER's premises during LANCER's
regular business hours, unless otherwise agreed in writing by
LANCER. LANCER is to provide the manufacturing space, raw
materials, and equipment needed.
g. RESPONSIBILITY. AG METALS shall be solely responsible for the
professional performance of the Services and shall receive no
assistance, direction, or control from LANCER except as set
forth in this Agreement. AG METALS shall have sole discretion
and control of the Services and the manner in which they are to
be performed, except as set forth in this Agreement.
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4. REQUIRED INSURANCE. AG METALS shall at all times maintain adequate
workers' compensation insurance for AG METALS' employees and agents.
LANCER agrees to maintain a product liability insurance policy in a
commercially reasonable amount. LANCER has been advised that its current
product liability insurance and general liability policies will cover AG
METALS and its employees and is therefore not requiring AG METALS to
obtain its own product liability or general liability policies at this
time. However, should that situation change, AG METALS agrees to obtain
and maintain liability and product liability insurance policies in a
commercially reasonable amount to cover any negligent acts committed by
AG METALS or any of its employees or agents during the performance of
the Services.
5. OTHER WORK. It is understood that, during the term of this Agreement, AG
METALS and its agents shall have the right to develop other products for
Persons other than LANCER (including itself), with the exception that,
during the term of this Agreement, neither AG METALS nor its agent(s)
shall participate in the development, production, marketing or sale of
any technology or products which are considered by LANCER to be
competitive with the Technology or the Product(s) or with the other
business of LANCER, including but not limited to Product(s) currently on
the market or to be developed in the future. Neither AG METALS nor its
agent(s) shall, without LANCER's prior written consent, render to others
services of any kind for compensation, or engage in any other business
activity, that would materially interfere with the performance of its or
his duties under this Agreement. AG METALS represents to LANCER that it
has no other outstanding commitments inconsistent with any of the terms
of this Agreement or the services to be rendered under it. With the
exception of the foregoing restrictions and any other restrictions set
forth in this Agreement, LANCER shall not place any restrictions upon
the number of other projects in which AG METALS or its agents
participate, so long as they fulfill their obligations under this
Agreement.
6. BUDGETED EXPENSES AND COSTS. Attached as Exhibit B to this Agreement is
a proposed budget that has been prepared by LANCER (after consultation
with AG METALS) for the first three and one half years of operations
related to the Product(s) and Technology. The Parties agree that the
assumptions, costs and expenses set forth in Exhibit B may change,
except as set forth herein. AG METALS agrees that neither it or its
representative(s) will make any expenditures without obtaining prior
written consent of the President of LANCER.
ARTICLE IV
DISCLOSURE OF TECHNOLOGY AND PRODUCT(S) INFORMATION TO LANCER
Directly after its execution of this Agreement, AG METALS shall provide LANCER
with all such documentation of information known to it and its agents at that
time which will enable LANCER to fully exploit the Product(s) and Technology, in
accordance with the following procedures:
1 . CORRESPONDENTS. LANCER shall select an individual(s) who shall act as
its correspondent
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in receiving documentation relating to the Product(s) and Technology and
arranging for other assistance necessary to fully exploit the Product(s)
and Technology. Initially Gary Weikel shall serve as AG METALS'
correspondent in providing such documentation and assistance. LANCER
shall indicate promptly to AG METALS the name of its correspondent. The
correspondents shall jointly establish a practicable plan to keep each
Party informed about the other's current and planned activities relating
to the use, practice, development, manufacture, and sale of the
Product(s) and Technology during the term of this Agreement.
2. ANSWERING INQUIRIES. AG METALS shall be responsible for answering all
reasonable technical inquiries received from LANCER's correspondent
relating to the Product(s) and Technology, and for providing copies of
all pertinent documentation relating to the Product(s) and Technology,
including but not limited to know how and art, applicable test reports,
other technical reports; operation and maintenance manuals; assembly and
detail drawings; parts lists; lists of ingredients and their proportions
in compositions of matter; quality control procedures; and other
information on manufacturing processes and apparatus.
3. PROVIDING INFORMATION. AG METALS shall give to LANCER's duly accredited
representatives information relating to the Product(s) and Technology
and about AG METALS' methods of practicing the Product(s) and Technology
and manufacturing the Product(s) and Technology upon request from
LANCER. LANCER shall instruct its representatives who obtain this
information to maintain the confidentiality of the Product(s) and
Technology.
AG METALS and its representative(s) shall continue to comply with the provisions
of this Article IV throughout the term of the Agreement as information is
developed or becomes available to them.
ARTICLE V
DISCLOSURE OF INFORMATION ON IMPROVEMENTS
1. AG METALS shall disclose all Improvements to LANCER as they are made. AG
METALS shall also provide LANCER with preliminary information, as it
becomes available, relative to the Improvements, and thereafter promptly
provide to LANCER whatever additional information is required to enable
LANCER to ascertain whether the Improvements are suitable for use or
manufacture by LANCER as provided in this Agreement. Such information
may consist of, but is not limited to, formulas, demonstrations, test
results, instructions, repair and service manuals, information on
materials, and parts lists.
2. AG METALS shall, within ten calendar days after receipt of a written
request from LANCER, furnish to LANCER, to the extent available: (1)
complete and detailed data to enable LANCER to make full use of the
Improvements; (2) results of technical investigations, tests, operation
analyses, and research related to the Improvements; and (3) prints of
assembly and detailed drawings of all special machines, tools, and other
equipment used to create the Improvements.
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ARTICLE VI
OWNERSHIP OF INTELLECTUAL PROPERTY
1. OWNERSHIP RIGHTS. AG METALS agrees that the following shall be and are
assigned to LANCER as its sole and exclusive property: all designs,
plans, reports, specifications, drawings, schematics, prototypes,
models, inventions, copyrightable matter, and all other information and
items pertaining to the Product(s) or Technology conceived or developed
by AG METALS and/or its agents, either alone or with others, during the
course of this Agreement which relate to the Technology, Product(s),
business of LANCER, or to LANCER's actual or demonstrably anticipated
research and development, or that result from any work performed for
LANCER, including but not limited to the right to secure copyrights
worldwide in LANCER's name or otherwise, in any medium.
2. OBTAINING PATENTS/TRADEMARKS. On LANCER's request, AG METALS agrees to
assist LANCER to obtain Patents or Trademarks related to Product(s) or
information developed pursuant to this Agreement, including the
disclosure of all pertinent information and data, the execution of all
applications, specifications, oaths, and assignments, and all other
instruments and papers that LANCER shall deem necessary to apply for and
to assign or convey to LANCER, its successors, and assigns or nominees,
the sole and exclusive right, title, and interest in such Patents or
Trademarks.
3. COPYRIGHTS. AG METALS and LANCER agree that all copyrightable subject
matter that is specially ordered or commissioned for use as a
contribution to a collective work, or is a supplementary work, a
compilation, or an instructional test, as these terms are defined by 17
United States Code Section 101, shall be considered a "work made for
hire" as this term is defined in 17 United States Code Section 101.
ARTICLE VII
TERM OF AGREEMENT AND TERMINATION
1. TERM. This Agreement is effective as of the date set forth above (the
Effective Date), and unless terminated sooner pursuant to the terms of
this Agreement, will continue in force until the date that, under the
provisions of this Agreement, both (1) AG METALS' obligation to provide,
and LANCER's obligation to pay for, the consulting Services as described
in Article III ends; and (2) LANCER's obligation to make Commission
payments as described in Article II ends.
2. CURE PERIOD. Any Party claiming a breach of or failure to perform this
Agreement shall give the other Party or Parties written notice of such
claim. If the breach or failure is curable, the Party against whom the
breach or failure is claimed shall have thirty (30) days to attempt to
cure such breach or failure. If such breach or failure is not cured
within the thirty (30) day period the other Party may then pursue any
remedies available to it as a result of such breach
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or failure.
3. REMEDIES. With respect to remedies for breach of or failure to perform
this Agreement:
a. AG METALS LIMITED TO MONETARY DAMAGES. AG METALS acknowledges
and agrees that in the event of a breach of this Agreement by
LANCER, the sole remedy available to AG METALS is a monetary
award. AG METALS agrees that it shall not have the right to
enforce its rights or LANCER's obligations hereunder by an
action for rescission, reformation, specific performance,
injunctive and/or other equitable relief. The sale provided for
in Article I of this Agreement is final and irrevocable despite
any claim of breach by AG METALS of breach or failure to perform
or otherwise.
b. INJUNCTIVE RELIEF. The Parties acknowledges and agrees that in
the event of a breach by it of this Agreement or failure to
perform under this Agreement, monetary damages shall not
constitute a sufficient remedy. Consequently, in the event of
any such breach or failure to perform, the non-breaching Party
may, in addition to other rights and remedies existing in its
favor, apply to any court of law or equity of competent
jurisdiction for specific performance and/or injunctive or other
relief in order to enforce or prevent any violation of the
provisions hereof, without having to prove actual damages to
obtain such relief.
4. SURVIVAL OF PROVISIONS. If this Agreement is terminated for any reason
whatsoever, all future and continuing rights and obligations under it
will terminate, except that:
a. LANCER shall retain its ownership rights in and to the
Technology, Product(s), and Improvements, as set forth in
Articles II and VI, after any termination of this Agreement.
b. The obligations to make reports and to pay all sums accrued
under this Agreement through the date of termination shall
survive any termination of this Agreement.
c. The obligations in Articles IV, V, X, and XI shall survive any
termination of this Agreement.
d. All obligations to return documents and other items shall
survive any termination of this Agreement.
e. Any claim or cause of action for breach or violation of this
Agreement existing as of the date of termination and the
provisions of this Agreement providing for or relating to
remedies for such breach or violation, shall survive any
termination of this Agreement and remain in full force and
effect until such rights and obligations are fully discharged.
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f. All rights and obligation of the Parties under this Article VII
shall survive any termination of this Agreement.
ARTICLE VIII
REPRESENTATIONS AND WARRANTIES BY AG METALS
As a material inducement to LANCER to enter into this Agreement and consummate
the transactions contemplated hereby, AG METALS hereby represents and warrants
to LANCER that as of the date of execution by AG METALS of this Agreement:
1 RIGHT TO TRANSFER. AG METALS is the sole owner of and possesses all
right, title and interest in and to the Technology and Intellectual
Property to be conveyed by this Agreement, free and clear of all liens,
and no claim by any third party contesting the validity, enforceability,
use or ownership of any of the Technology or Intellectual Property has
been made, is currently outstanding or to AG METALS' or its agent(s)'
knowledge is threatened, and there are no grounds for same.
2. ORGANIZATION AND CORPORATE POWER. AG METALS is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Nevada, with full corporate power and authority to enter into
this Agreement and perform its obligations hereunder.
3. ABSENCE OF UNDISCLOSED LIABILITIES RELATING TO THE TECHNOLOGY. Neither
AG METALS nor its agent(s) has any obligations or liabilities relating
or pertaining to the Technology as of the Effective Date.
4. QUALIFICATIONS. AG METALS and its agents have the qualifications and
ability to perform the Services in a professional manner, without the
advice, control, or supervision of LANCER. Performance of the Services
in a professional manner includes building an inventory of quality
alloy, and failure to do so shall constitute a material breach of this
Agreement.
5. SUCCESS AND PROFITS. AG METALS and its agent(s) will use their best
efforts toward the goal of successful and profitable manufacture of the
Product(s) for the costs set forth in Exhibit B hereto.
6. INDUSTRY STANDARDS. The Product(s) will meet the standards of the
American Dental Association and the Federal Food and Drug
Administration, and the standards set forth in ISO 9000 and EN 46,000,
and shall comply with Common European Market standards and regulations.
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7. CONTRACTS AND COMMITMENTS. Except as specifically contemplated by this
Agreement, neither AG METALS nor any of its agents is as of the
Effective Date a party to nor bound by, whether written or oral, any
agreements relating or pertaining to the Technology, the Product(s), or
the Intellectual Property, including but not limited to any license,
assignment or Commission agreements, employment or consulting agreement,
or contract which prohibits him or it from freely entering into this
Agreement.
8. SUFFICIENT TECHNOLOGY. The Technology and Intellectual Property
comprises all Technology and Intellectual Property necessary for AG
METALS' performance of this Agreement.
9. NO INFRINGEMENT. Neither AG METALS nor its agent(s) have received any
notices of, nor are they aware of, any facts which indicate a likelihood
of, any infringement or misappropriation by, or conflict with, any third
party with respect to any Intellectual Property including, without
limitation, any demand or request that AG METALS or its agents license
rights from a third party, and neither AG METALS nor any of its agents
has infringed, misappropriated or otherwise conflicted with any rights
of any third parties, and neither AG METALS nor any of its agents are
aware of any infringement, misappropriation or conflict which shall
occur as a result of the continued development of the Technology, and to
the knowledge of AG METALS and its agents, the Technology and
Intellectual Property to be conveyed under this Agreement have not been
infringed upon, misappropriated or conflicted by any third party.
10. LITIGATION; PROCEEDINGS. There are no actions, suits, proceedings,
orders, judgments, decrees or investigations pending or, to the
knowledge of AG METALS or its agents, threatened against AG METALS or
its agents or any business entity related to them relating or pertaining
to the Technology, or affecting the Technology, at law or in equity, or
before or by any federal, state, municipal or other governmental
department, commission, board, bureau agency or instrumentality,
domestic or foreign, and there is no basis known to AG METALS or its
agents for any of the foregoing.
11. BROKERAGE. There are no claims for brokerage commissions, finders' fees
or similar compensation in connection with the transactions contemplated
by this Agreement based on any arrangement or agreement made by or on
behalf of AG METALS or any of its agents.
12. COMPLIANCE WITH LAWS.
a. AG METALS and its agents have complied with all applicable laws,
regulations and ordinances of foreign, federal, state and local
governments and all agencies thereof which are applicable to the
Technology, and no claims have been filed against AG METALS or
any of its agents any business controlled by them alleging a
violation of any such laws or regulations. LANCER is aware of
prior litigation involving Gary Weikel and Johnson & Johnson.
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b. The Technology is not and has not been subject to any
inspection, recall, investigation, penalty assessment, or audit
by any U. S. federal, state or local governmental agency or any
such authority of any other country or to any other allegation
that AG METALS, its agent(s), or any business entity controlled
by them violated the regulations of any such authority or made a
material false statement or omission to any such governmental
authority relating or pertaining to the Technology.
13. POWERS OF ATTORNEY. There are no outstanding powers of attorney executed
on behalf of AG METALS, any of its agents, or any business entity
controlled by them relating or pertaining to the Technology.
14. DISCLOSURE. Neither this Agreement nor any of the exhibits hereto, nor
any information furnished by AG METALS or its agent(s) or
representatives to LANCER or any of its agents or representatives,
contain any untrue statement of a material fact or omit a material fact
necessary to make the statements contained herein or therein, in light
of the circumstances in which they were made, not misleading. There is
no material fact which has not been disclosed to LANCER of which AG
METALS or its agents is aware.
15. KNOWLEDGE; AWARE. As used in this Article VIII, the terms "knowledge" or
"aware" shall mean and include (1) the actual knowledge or awareness of
AG METALS (which shall include the actual knowledge and awareness of its
agents and representatives), and (ii) the knowledge or awareness which a
prudent business person would have obtained in the conduct of his
business after making reasonable inquiry and reasonable diligence with
respect to the particular matter in question.
ARTICLE IX
REPRESENTATIONS AND WARRANTIES OF LANCER
As a material inducement to AG METALS to enter into this Agreement, LANCER
hereby represents and warrants to AG METALS that as of the date of execution by
AG METALS of this Agreement:
1. ORGANIZATION AND CORPORATE POWER. LANCER is a corporation duly
organized, validly existing and in good standing under the laws of the
State of California, with full corporate power and authority to enter
into this Agreement and perform its obligations hereunder.
2. NO VIOLATION. LANCER is not subject to or obligated under its
certificate of incorporation, its by-laws, any applicable law, or rule
or regulation of any governmental authority, or any agreement or
instrument, or any license, franchise or permit, or subject to any
order, writ, injunction or decree, which would be breached or violated
by its execution, delivery or performance of this Agreement.
3. LITIGATION. There are no actions, suits, proceedings, orders pending or,
to LANCER's
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knowledge, threatened against or affecting LANCER at law or in equity,
or before or by any federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality,
domestic or foreign, which would adversely affect LANCER'S performance
under this Agreement or the consummation of the transactions
contemplated hereby or thereby.
4. BROKERAGE. There are no claims for brokerage commissions, finders' fees
or similar compensation in connection with the transactions contemplated
by this Agreement based on any arrangement or agreement made by or on
behalf of LANCER.
5. POWERS OF ATTORNEY. There are no outstanding powers of attorney executed
on behalf of LANCER or any business entity controlled by LANCER relating
or pertaining to the Technology.
6. DISCLOSURE. Neither this Agreement, nor the exhibits hereto, nor any
information furnished by LANCER to AG METALS or any of its agents or
representatives, contain any untrue statement of a material fact or omit
a material fact necessary to make the statements contained herein or
therein, in light of the circumstances in which they were made, not
misleading. There is no material fact which has not been disclosed to AG
METALS of which LANCER is aware.
7. KNOWLEDGE; AWARE. As used in this Article IX, the terms "knowledge" or
"aware" shall mean and include (i) the actual knowledge or awareness of
LANCER (which shall include the actual knowledge and awareness of its
agents and representatives), and (ii) the knowledge or awareness which a
prudent business person would have obtained in the conduct of his
business after making reasonable inquiry and reasonable diligence with
respect to the particular matter in question.
ARTICLE X
INDEMNIFICATION AND RELATED MATTERS
1. SURVIVAL. All representations, warranties, covenants and agreements set
forth in this Agreement or in any writing or certificate delivered in
connection with this Agreement shall survive the consummation of the
transactions contemplated hereby and shall not be affected by any
examination made for or on behalf of LANCER, the knowledge of any of its
officers, directors, stockholders, employees, agents or representatives,
or the acceptance of any certificate or opinion hereunder.
2. INDEMNIFICATION BY AG METALS. AG METALS shall and hereby does indemnify,
defend, and hold harmless LANCER and its officers, directors,
shareholders, employees, agents, representatives, affiliates,
successors, permitted assigns, and customers (collectively,
"Indemnitee") from and against, and shall pay on behalf of or reimburse
such Indemnitee in respect of, any and all losses, liability, demands,
claims, actions, causes of action, costs,
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damages, deficiencies, expenses, obligations, recoveries, and
deficiencies, including interest, fines, penalties, and reasonable
attorney fees and costs, whether or not arising out of third party
claims (including without limitation, interest, penalties, reasonable
attorneys' fees and expenses, court costs and all amounts paid in
investigation, defense, or settlement of any of the foregoing)
("Losses"), that Indemnitee may incur, suffer, sustain or become subject
to as a result of, in connection with, relating to, or incidental to or
by virtue of:
a. the actions of AG METALS or its employees, representatives,
and/or agents with respect to the Product(s) and/or Technology;
b. any breach or failure of AG METALS or its employees,
representatives, and/or agents to perform any of the
representations, warranties, or agreements in this Agreement; or
c. any lawsuit, claim or proceeding of any nature against LANCER
and/or AG METALS, and/or any of their employees,
representatives, and/or agents relating to or pertaining to the
Product(s) and/or Technology.
3. INDEMNIFICATION BY LANCER. LANCER shall and hereby does indemnify,
defend, and hold harmless AG METALS and its officers, directors,
shareholders, employees, agents, representatives, affiliates,
successors, permitted assigns, and customers (collectively,
"Indemnitee") from and against, and shall pay on behalf of or reimburse
such Indemnitee in respect of, any and all losses, liability, demands,
claims, actions, causes of action, costs, damages, deficiencies,
expenses, obligations, recoveries, and deficiencies, including interest,
fines, penalties, and reasonable attorney fees and costs, whether or not
arising out of third party claims (including without limitation,
interest, penalties, reasonable attorneys' fees and expenses, court
costs and all amounts paid in investigation, defense, or settlement of
any of the foregoing) ("Losses"), that Indemnitee may incur, suffer,
sustain or become subject to as a result of, in connection with,
relating to, or incidental to or by virtue of:
a. the actions of LANCER with respect to the Product(s) and/or
Technology; or
b. any breach or failure of LANCER to perform any of the
representations, warranties, or agreements in this Agreement.
4. LIMITS ON INDEMNIFICATION. The indemnification rights of the Parties
under this Article X shall be limited as follows:
a. Neither Party shall indemnify the other Party for amounts
claimed by the other Party as loss of business, lost income, or
lost profits.
b. It is understood that any amounts received by the Indemnified
Party from third parties, such as in settlement of a dispute or
pursuant to a judgment in a lawsuit, shall
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be used to reduce the amount of Losses sought by the Indemnified
Party from the Indemnifying Party.
5. INDEMNIFICATION PROCEDURES.
a. Any Party making a claim for indemnification under this Article
X (the "Indemnified Party") shall notify the indemnifying Party
(the "Indemnifying Party") of the claim in writing promptly
after receiving written notice of any action, lawsuit,
proceeding, investigation or other claim against it (if by a
third party) or discovering the liability, obligation or facts
giving rise to such claim for indemnification, describing the
claim, the amount thereof (if known and quantifiable), and the
basis thereof; provided that the failure to so notify the
Indemnifying Party shall not relieve the Indemnifying Party of
its obligations hereunder, except to the extent such failure
shall have prejudiced the Indemnifying Party.
b. With respect to any third party claim, the Indemnifying Party
shall be entitled to participate in the defense of such action,
lawsuit, proceeding, investigation or other claim giving rise to
the Indemnified Party's claim for indemnification at its
expense, and at its option (subject to the limitations set forth
below) shall be entitled to appoint lead counsel of such defense
acceptable to the Indemnified Party; provided that prior to the
Indemnifying Party assuming control of such defense it shall
first (i) verify to the Indemnified Party in writing that such
Indemnifying Party shall be fully (with no reservation of any
rights) for all liabilities and obligations responsible relating
to such claim for indemnification and that it shall provide full
indemnification (whether or not otherwise required hereunder) to
the Indemnified Party with respect to such action, lawsuit,
proceeding, investigation, or other claim giving rise to such
claim for indemnification hereunder, (ii) enter into an
agreement with the Indemnified Party in form and substance
satisfactory to the Indemnified Party which agreement
unconditionally guarantees the payment and performance of any
liability or obligation which may arise with respect to such
action, lawsuit, proceeding, investigation, or facts giving rise
to such claim for indemnification hereunder, and (iii) furnish
the Indemnified Party with evidence which, in the sole judgment
of the Indemnified Party, is and shall be sufficient to satisfy
any such liability and show that Indemnifying Party is able to
satisfy such liability; provided further that:
i. the Indemnified Party shall be entitled to participate
in the defense of such claim and to employ counsel of
its choice for such purpose, the fees and expenses of
such separate counsel which shall be borne by the
Indemnified Party (except that the fees and expenses of
such separate counsel incurred prior to the date the
Indemnifying Party effectively assumes control of such
defense shall be borne by the Indemnifying Party);
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ii. the Indemnifying Party shall not be entitled to assume
control of such defense and shall pay the fees and
expenses of counsel retained by the Indemnified Party if
(A) the claim for indemnification relates to or arises
in connection with any criminal proceeding, action,
indictment, allegation or investigation, (B) the
Indemnified Party reasonably believes an adverse
determination with respect to the action, lawsuit,
investigation, proceeding or other claim giving rise to
such claim for indemnification would be detrimental to
or injure the Indemnified Party's reputation or future
business prospects, (C) the claim seeks an injunction or
equitable relief against the Indemnified Party, or (D)
upon petition by the Indemnified Party, the appropriate
court rules that the Indemnifying Party failed or is
failing to vigorously prosecute or defend such claim;
and
iii if the Indemnifying Party, with the consent of the
Indemnified Party, shall control the defense of any such
claim, the Indemnifying Party shall obtain the prior
written consent of the Indemnified Party (which shall
not be unreasonably withheld) before entering into any
settlement of a claim or ceasing to defend such claim,
if pursuant to or as a result of such settlement or
cessation, injunction or other equitable relief shall be
imposed against the Indemnified Party or if such
settlement does not expressly unconditionally release
the Indemnified Party from all liabilities and
obligations with respect to such claim, without
prejudice.
c. The Indemnified Party shall be paid by the Indemnifying Party
within thirty (30) days from notification of a Loss or Losses
pursuant to this Section X. In the event AG METALS is the
Indemnifying Party, LANCER has the right to offset any such Loss
or Losses against any and all payments due to AG METALS under
this Agreement, and such sums shall be paid in full prior to AG
METALS resuming any right to payments due hereunder.
d. The Parties shall render to each other all reasonable assistance
that may be required to defend against any claims, actions, or
Losses.
ARTICLE XI
ADDITIONAL AGREEMENTS
1. CONTINUING ASSISTANCE. Subsequent to the effective date of this
Agreement, the Parties shall provide such other assistance as reasonably
requested by the other Party within the scope of this Agreement, to
further the development of the Technology and production and sale of the
Product(s).
2. BEST EFFORTS. During the term of this Agreement, WEIKEL, AG METALS and
LANCER shall, by reasonable and proper means, diligently use their best
efforts to develop the
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Technology and Product(s) consistent with the intent of this Agreement.
Such efforts shall include regular reporting to and cooperating with
each other,
3. TAX MATTERS.
a. LIABILITY OF AG METALS FOR TAXES RESULTING FROM RECEIPT OF
COMMISSION. AG METALS acknowledges that neither it not any of
its employees or agents is or will be an employee of LANCER.
LANCER shall not deduct any withholding or employment-based
taxes from any Commission or other amount paid to AG METALS, and
AG METALS acknowledges its responsibility to pay the same, and
AG METALS shall indemnify and hold LANCER harmless from and
against all liabilities, actions, costs, charges, claims and
demands of any statutory or public authority in respect thereof,
pursuant to Article X (Indemnification).
b. TRANSFER TAXES. All transfer, documentary, sales, use, stamp,
registration and other such Taxes and fees (including any
penalties and interest) incurred in connection with this
Agreement shall be paid by AG METALS when due, and AG METALS
shall, at its own expense, file all necessary documentation with
respect to all such transfer, documentary, sales, use,
registration and other Taxes and fees, and if required by
applicable law, LANCER shall, and shall cause its affiliates to,
join in the execution of any such documentation. As of the
Effective Date, LANCER is not aware that any such taxes and fees
have been incurred or are due; however, it has undertaken no
effort to make any determination on this issue and AG METALS
must investigate and make its own determination of whether any
taxes or fees will be incurred or are due.
4. PRESS RELEASES AND ANNOUNCEMENTS. No press releases related to this
Agreement and the transactions contemplated herein, or other
announcements to the employees, customers, competitors or suppliers of
LANCER shall be issued without LANCER's consent, except for any public
disclosure which any Party in good faith believes is required by law or
regulation (in which case the disclosure shall be prepared jointly by
the Parties).
5. FURTHER TRANSFERS. AG METALS and its agent(s) shall execute and deliver
such further instruments of assignment, conveyance and transfer and take
such additional action as LANCER may reasonably request to effect,
consummate, confirm or evidence the transfer to LANCER of the Technology
or Product(s) and any other transactions contemplated hereby.
6. EXPENSES. Except as otherwise provided herein, each Party shall pay all
of their own fees, costs and expenses (including without limitation,
fees, costs and expenses of legal counsel, investment bankers,
accountants, brokers or other representatives and consultants and
appraisal fees, costs and expenses) incurred in connection with the
negotiation of this Agreement, the performance of obligations hereunder
and the consummation of the
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transactions contemplated hereby.
7. FUTURE PATENT APPLICATIONS AND OTHER INTELLECTUAL PROPERTY.
Notwithstanding any other provisions of this Agreement, LANCER shall
have full responsibility for, and shall pay all of the fees, costs and
expenses related to, obtaining and maintaining patents and other
Intellectual Property related or pertaining to the Technology and
Product(s).
8. NON-COMPETITION, NON-SOLICITATION AND CONFIDENTIALITY.
a. NON-COMPETITION/NON-SOLICITATION. As a result of joint
development work with LANCER under this Agreement, WEIKEL and AG
METALS will have access to trade secrets and confidential
information about LANCER, its products, its customers, and its
methods of doing business, and will develop trade secret and
confidential information relating to the Product(s) and
Technology. Therefore, in consideration of the payment of the
Consideration and for consulting Services, as a condition
precedent to LANCER's willingness to enter into this Agreement
and perform hereunder, AG METALS hereby agrees that during the
term of this Agreement, AG METALS (i) shall not engage (whether
as an owner, operator, manager, employee, officer, director,
consultant, advisor, representative or otherwise) directly or
indirectly in any activity or other business competitive with
LANCER's business or in any manner competitive with the Products
or Technology; and (ii) shall not directly or indirectly (a)
call on, solicit, or take away any of Lancer's customers or
potential customers; or (b) solicit or take away or attempt to
solicit or take away any of Lancer's employees, contractors, or
agents, for AG METALS or any other person or entity; and (iii)
shall not undertake any activity competitive with the Product(s)
or the Technology in which the loyal and complete fulfillment of
the duties of the competitive activity would require AG METALS
to reveal, to make judgements on, or otherwise to use any
confidential business information or trade secrets of LANCER's
business to which AG METALS had access by reason of its
relationship with and/or work with LANCER. If permitted by the
laws of the state or country where AG METALS is located or where
the activities at issue are taking place, the restrictions set
forth in this paragraph shall continue for a period of three
years following termination of this Agreement (regardless of the
reason for termination), except that the restriction set forth
in item (i) of this paragraph shall, after termination of this
Agreement, be limited to activities or other business
competitive in any way with (a) the type of amalgam represented
by the Product(s), or (b) the Technology necessary to produce
the Product(s), including the spherical dispersion system and
any other systems developed in the course of the relationship
between the Parties.
b. FAILURE TO COMPLY. AG METALS' failure to comply with Section
XI.8.a. above shall give LANCER the right (in addition to all
other remedies LANCER may have) to terminate any benefits or
compensation to which AG METALS may be otherwise
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entitled pursuant to this Agreement, including Commission
payments and payments for Services.
c. SCOPE OF BUSINESS. AG METALS acknowledges that (i) the business
that LANCER currently conducts or proposes to conduct includes,
without limitation, manufacturing and selling products for use
in the orthodontic dental market, and (ii) the business of
LANCER is international and that LANCER currently sells, or
proposes to sell, the Product(s) and other products worldwide.
d. DEFINITION OF DIRECT AND INDIRECT COMPETITION. AG METALS
understands and agrees that "direct competition" means design,
development, production, promotion, marketing or sale of
products or services competitive with the Product(s) or
Technology. "Indirect competition" means employment by any
competitor or third party producing or providing products
competing with LANCER's products (including but not limited to
the Product(s)), for whom AG METALS and/or its agent(s) will
perform the same or similar function as they perform or have
performed for LANCER.
e. CONFIDENTIALITY. At all times, both during the term of this
Agreement and after the termination of this Agreement, whether
the termination is voluntary or involuntary, AG METALS agrees to
treat and hold as confidential any information concerning the
Technology, Product(s), and the business and affairs of LANCER
that is not already generally available to the public (the
"Confidential Information"), refrain from using any of the
Confidential Information except in connection with this
Agreement, and deliver promptly to LANCER all tangible
embodiments (and all copies) of the Confidential Information
which are in their possession or under their control. In the
event that AG METALS or any of its agents is requested or
required (by oral question or request for information or
documents in any legal proceeding interrogatory, subpoena, civil
investigative demand, or similar process) to disclose any
Confidential Information, they shall notify LANCER promptly of
the request or requirement so that LANCER may seek an
appropriate protective order.
f. NONDISCLOSURE. At all times, both during the term of this
Agreement and after the termination of this Agreement, whether
the termination is voluntary or involuntary AG METALS aurees
that it shall:
i. Keep in strictest confidence and trust all Confidential
and Proprietary Information;
ii. Not disclose, use, or induce or assist in the use or
disclosure of any Confidential or Proprietary
Information or Rights, or anything related to any
Confidential or Proprietary Information. or Rights,
without LANCER's prior express written consent, except
as may be necessary in the ordinary course
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of performing their duties under this Agreement; and
iii. At all times during the term of this Agreement, promptly
advise LANCER of any knowledge that they may have of any
unauthorized release or use of LANCER's Confidential or
Proprietary Information or Rights, and shall take
reasonable measures to prevent unauthorized persons or
entities from having access to, obtaining, or being
furnished with any Confidential or Proprietary
Information.
g. ACCESS TO CONFIDENTIAL AND PROPRIETARY INFORMATION OF THIRD
PARTIES. LANCER has received and in the future may receive from
third parties their confidential, proprietary, or trade secret
information, subject to LANCER's duty to maintain the
confidentiality of such information and to use it only for
certain limited purposes. In connection with this Agreement, AG
METALS and its agents may obtain access to such confidential
information pertaining to LANCER'S customers' technology,
product development, and to the relationship between LANCER's
customers and LANCER. Such information is considered secret and
is disclosed to AG METALS and its agents in confidence. AG
METALS and its agents therefore owe LANCER and such third
parties, during the term of this Agreement and thereafter, a
duty to hold all such confidential, proprietary, and trade
secret information in the strictest confidence, and neither AG
METALS nor its agents shall directly or indirectly disclose,
use, or induce or assist in the use or disclosure of any such
confidential, proprietary, or trade secret information without
LANCER's prior express written consent, except as may be
necessary in the ordinary course of performing AG METALS' duties
under this Agreement, consistent with LANCER's agreement with
such third party.
h. EMPLOYEE AGREEMENTS. AG METALS agrees that prior to employing or
otherwise involving any individual in providing the Services
hereunder, AG METALS shall require such individual to sign a
written agreement to the terms of this Section XI. 8. and
covering invention and patent ownership issues, which agreement
shall be in a form acceptable to and approved by LANCER. Gary
Weikel shall sign a copy of the agreement attached hereto as
Exhibit C concurrently with the execution of this Agreement, and
this Agreement shall not be effective until LANCER has received
such agreement signed by Gary Weikel.
ARTICLE XII
DEFINED TERMS
1. CERTAIN DEFINED TERMS. For purposes of this Agreement, the following
definitions shall apply:
"Affiliate" means any officer, shareholder, consultant,
representative,
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employee, agent, or any corporation, subsidiary or other business
entity, existing or otherwise, that either directly or indirectly,
through one or more intermediaries, is controlled by, or which maintains
a controlling interest in, a specified Party.
"Documentation" means all manuals, technical documents,
specifications, prototypes or other physical embodiments, computer
renderings, computer analyses, flow modeling videotapes, drawings,
engineering calculations, memos and other documents, plans, schematics,
blueprints, computer disks, and other technical materials encompassing
all information concerning or regarding the Technology or Product(s).
"Effective Date" means the date set forth on the first page of
this Agreement (in the preamble) as the date this Agreement was made and
entered into.
"Improvements" means any and all improvements, modifications,
adaptations, revisions, enhancements, additions, or changes to the
Technology or Product(s) which occur while AG METALS or its agents are
performing Services pursuant to this Agreement or which result from the
Services performed hereunder.
"Intellectual Property" means all of the following items, along
with all income, Commission, damages and payments due or payable as of
the Effective Date of the Agreement or thereafter, including, without
limitation, the Technology, the Product(s), the Patents, the Trademarks,
patents, patent applications, patent disclosures and inventions (whether
or not patentable and whether or not reduced to practice) and any
reissue, continuation, continuation-in-part, division, revision,
extension or reexamination thereof, trademarks, service marks, trade
dress, logos, trade names and corporate names together with all goodwill
associated therewith; registered or unregistered copyrights and
copyrightable works and mask works; and all registrations, applications
and renewals for any of the foregoing; trade secrets and confidential
information (including without limitation, ideas, formulae,
compositions, know-how, manufacturing and production processes and
techniques, research and development information, drawings,
specifications, designs, plans, proposals, technical data, financial,
business and marketing plans and customer and supplier lists and related
information); computer software and software systems (including, without
limitation, data, databases and related documentation); licenses or
other agreements to or from third parties regarding the foregoing and
all copies and tangible embodiments of the foregoing (in whatever form
or medium).
"Inventions" means all discoveries, developments, designs,
improvements, inventions, formulas, software programs, processes,
techniques, know-how, data, research, techniques, and technical data
(whether or not patentable or registrable under patent, copyright or
similar statutes and including all rights to obtain, register, perfect,
and enforce those proprietary interests) that are related to or useful
in
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LANCER's present or future business or result from use of property
owned, leased, or contracted for by LANCER. "Inventions" shall also
include anything that derives actual or potential economic value from
not being generally known to the public or to other persons who can
obtain economic value from its disclosure or use.
"Person" means an individual, a partnership, a limited liability
company, a corporation, an association, a joint stock company, a trust,
a joint venture, an unincorporated organization and a governmental
entity or any department agency or political subdivision thereof.
"Processes" means all processes and methods related to or
necessary to the manufacture of the Product(s).
"Product(s)" means all products developed and/or manufactured in
connection with the relationship between and among the Parties, and all
products manufactured using the Technology. "Product(s)" also includes
all Improvements as defined above in this Article.
"Proprietary Information" means information (a) that is not
known by actual (b) that or potential competitors or is generally
unavailable to the public, at has been created, discovered, developed,
or otherwise become known to LANCER or in which property rights have
been assigned or otherwise conveyed to LANCER, and (c) that has material
economic value or potential material economic value to LANCER's present
or future business. "Proprietary Information" shall include trade
secrets (as defined under California Civil Code Section 3426.1) and all
other discoveries, developments, designs, improvements, inventions,
formulas, software programs, processes, techniques, know-how, negative
know-how, data, research, technical data, customer and supplier lists,
and any modifications or enhancements of any of the foregoing, and all
program, marketing, sales, or other financial or business information
disclosed to AG METALS and/or its agents by LANCER, either directly or
indirectly, in writing or orally or by drawings or observation, which
has actual or potential economic value to LANCER.
"Rights" means all patents, trademarks, service marks and
copyrights, and other rights pertaining to Technology, Product(s),
Proprietary Information, and Inventions.
"Subsidiary" means, with respect to any Person, any corporation,
partnership, association or other business entity of which (i) if a
corporation, a majority of the total voting power of shares of stock
entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof is at the
time owned or controlled, directly or indirectly, by that Person or one
or more of the other Subsidiaries of that Person or a combination
thereof, or (ii) if a partnership,
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limited liability company, association or other business entity, a
majority of the partnership or other similar ownership interest thereof
is at the time owned or controlled, directly or indirectly, by any
Person or one or more Subsidiaries of that Person or a combination
thereof. For purposes hereof, a Person or Persons shall be deemed to
have a majority ownership interest in a partnership, limited liability
company, association or other business entity if such Person or Persons
shall be allocated a majority of partnership, association or other
business entity gains or losses or shall be or control the managing
director or general partner of such partnership, association or other
business entity.
"Tax" or "Taxes" means any federal, state, local of foreign
income, gross receipts, franchise, estimated, alternative minimum,
add-on minimum, sales, use, transfer, registration, value added, excise,
natural resources, severance, stamp, occupation, premium, windfall
profit, environmental, customs, duties, real property, personal
property, capital stock, social security, unemployment disability,
payroll, license, employee or other withholding, or other tax, of any
kind whatsoever, including any interest, penalties or additions to tax
or additional amounts in respect thereto.
"Technology" means that technology, including formulas and
Processes, necessary to produce the Product(s), including the Processes,
which Product(s) shall utilize a dental amalgam made of metallic metals,
which may include but is not necessarily limited to silver (Ag), copper
(Cu), tin (Sn), zinc (Zn), and mercury (Hg), which substance will expand
after mechanical trituration. "Technology" shall also mean, without
limitation, related modifications, enhancements, revisions, and upgraded
versions of the Technology, and prototypes and other physical
embodiments of the Technology. Provided, however, that the definition
specifically excludes any technology related to the technology currently
owned by LANCER or that technology which LANCER has or may acquire
through acquisition, merger, development, or otherwise.
2. OTHER DEFINED TERMS. Other capitalized terms used herein shall have the
meanings set forth in this Agreement.
ARTICLE XIII
MISCELLANEOUS
1. AMENDMENT AND WAIVER. This Agreement may be amended, and any provision
of this Agreement may be waived, provided that any such amendment or
waiver shall be binding upon a Party only if such amendment or waiver is
set forth in a writing executed by all Parties to this Agreement. No
course of dealing between or among any Persons having any interest in
this Agreement or waiver of any other breach, failure, right or remedy,
whether or not similar, shall be deemed effective to modify, amend or
discharge any part of this
28
<PAGE> 29
Agreement or any rights or obligations of any Party under or by reason
of this Agreement, or to constitute a continuing waiver.
2. NOTICES. All notices, demands and other communications given or
delivered under this Agreement shall be in writing and shall be deemed
to have been given when personally delivered, mailed by first class
mail, return receipt requested, or delivered by express courier service
or telecopied (with hard copy to follow). Notices, demands and
communications to AG METALS and LANCER shall, unless another address is
specified in writing, be sent to the address or telecopy number
indicated below:
Notices to AG METALS:
AG METALS, INC.
3020 Graves Lane
Unit B-1
Carson City, NV 89706
Notices to LANCER:
LANCER Orthodontics, Inc.
253 Pawnee Street
San Marcos, CA 92060
Attention: President
with a copy to:
Kristine P. Nesthus, Esq.
BANKHEAD NESTHUS RAVIN & SCALONE LLP
4370 La Jolla Village Drive, Suite 220
San Diego, CA 92122-1250
3. ASSIGNMENT. This Agreement shall be binding upon all heirs and
successors to the Parties except as otherwise set forth in this
Agreement.
a. UNIQUE SERVICES CONTRACT. Since AG METALS and its agents are
obligated under this Agreement to render services of a special,
unique, unusual, extraordinary, and intellectual character,
which give this Agreement peculiar value, neither AG METALS nor
its agents(s) may assign any of their obligations under this
Agreement without the express prior written consent of LANCER.
b. MERGER, DISSOLUTION, SALE. In the event of a merger in which
LANCER is not the surviving entity, a voluntary or involuntary
dissolution, a sale or other transfer of all or substantially
all of LANCER's assets or a controlling interest in its stock,
29
<PAGE> 30
LANCER may, at its sole option (1) assign this Agreement and all
rights and obligations under it to any business entity that
succeeds to all or substantially all of LANCER's business
through that merger, sale, or transfer, or to a new entity that
continues the amalgam business; (2) retain and continue the
amalgam business subject to this Agreement; or (3) on at least
thirty (30) days prior written notice to AG METALS, terminate
this Agreement, effective on the date of the merger,
dissolution, sale or transfer. The following shall occur upon
termination under the circumstances described in (3) of this
paragraph: (a) AG METALS shall have no further obligation to
provide Services hereunder, (b) LANCER shall have no further
obligation to pay Commission or fees for Services hereunder,
other than that LANCER shall pay Commission on Product(s) sold,
and shall pay for Services rendered pursuant to this Agreement,
prior to expiration of the notice period, and (c) AG METALS
shall have the option, exercisable in writing within 30 days of
the effective termination date upon merger, dissolution, sale or
transfer, to a transfer of Lancer's rights to the Product(s) and
Technology to AG METALS upon payment by AG METALS to LANCER of
(1) an amount equal to or exceeding that offered by a third
party for such rights, if such an offer is received by LANCER,
or, if no such offer is received, (2) payment to LANCER of a
reasonable amount mutually agreeable to the parties. Any dispute
as to such amount shall be resolved by binding arbitration under
Section XIII.14. of this Agreement.
4. SEVERABILITY. Whenever possible, each provision of this Agreement shall
be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity,
without invalidating the remainder of such provisions or the remaining
provisions of this Agreement.
5. NO STRICT CONSTRUCTION. The language used in this Agreement shall be
deemed to be the language chosen by the Parties to express their mutual
intent, and no rule of strict construction shall be applied against any
Person, including any rule of strict construction relating to authorship
of this Agreement.
6. HEADINGS AND CAPTIONS. The headings and captions used in this Agreement
are for convenience of reference only and do not constitute a part of
this Agreement and shall not be deemed to limit, characterize or in any
way affect any provision of this Agreement, and all provisions of this
Agreement shall be enforced and construed as if no caption had been used
in this Agreement.
7. NUMBER AND GENDER. Each number and gender shall be deemed to include
each other number and gender as the context may require.
8. ENTIRE AGREEMENT. This Agreement and the Exhibits to this Agreement,
and the documents
30
<PAGE> 31
referred to herein contain the entire agreement between the Parties and
supersede any prior or contemporaneous understandings, agreements or
representations by or between the Parties, written or oral, which may
have related to the subject matter hereof in any way.
9. AMENDMENT. No oral modifications, express or implied, may alter or vary
the terms of this Agreement. No amendments to this Agreement may be made
except by a writing signed by all Parties.
10. COUNTERPARTS; FAXES. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original but all of which
taken together shall constitute one and the same instrument. A faxed
signature by any of the Parties to this Agreement will be deemed an
original signature, and will be fully binding upon such Party.
11. GOVERNING LAW. Except as otherwise provided in this Agreement, all
questions concerning the construction, validity and interpretation of
this Agreement shall be governed by and construed in accordance with the
domestic laws of the State of California without giving effect to any
choice of law or conflict of law provision (whether of the State of
California or any other jurisdiction) that would cause the application
of the laws of any jurisdiction other than the State of California.
12. PARTIES IN INTEREST. Nothing in this Agreement, express or implied, is
intended to confer on any Person other than the Parties and their
respective, authorized successors and assigns any rights or remedies
under or by virtue of this Agreement.
13. ATTORNEYS' FEES. All reasonable attorneys' fees and costs paid by the
prevailing Party in connection with any dispute arising out of or
relating to this Agreement shall be reimbursed by the losing Party,
within sixty (60) days after a final determination has been made in such
dispute.
14. CONSENT TO BINDING ARBITRATION AND JURISDICTION. ANY DISPUTE ARISING OUT
OF OR RELATING TO THIS AGREEMENT SHALL BE SETTLED BY FINAL AND BINDING
ARBITRATION, AND THE PARTIES HERETO KNOWINGLY WAIVE ANY RIGHT TO A TRIAL
BY JURY.
a. BINDING ARBITRATION REQUIRED. Any controversy or claim arising
out of or relating to this Agreement, or breach of this
Agreement, including any dispute as to the scope of this Section
XIII4.a. or the arbitrability of any controversy or claim, shall
be settled by final and binding arbitration, to be conducted by
a three-person arbitration panel (unless the parties agree
otherwise in writing) in accordance with the Commercial
Arbitration Rules of the American Arbitration Association
("AAA"). Each Party shall pay the expenses of his or its
witnesses.
b. LOCATION OF ARBITRATION. The location of the arbitration shall
be San Diego,
31
<PAGE> 32
California, and its proceedings shall be governed by the laws of
California; except that any dispute regarding the non-compete
provisions of this Agreement which arises outside the State of
California shall be governed by the laws of the state in which
such action arises.
c. JURISDICTION AND VENUE. The Parties to this Agreement agree to
submit to the exclusive jurisdiction, both personal jurisdiction
and subject matter, of the state and federal courts of the State
of California and agree that venue is proper in the County of
San Diego.
d. DECISION AND COST. The decision of the Arbitrator(s) shall be
final and binding upon the Parties. The cost of the arbitration
shall be allocated between the Parties at the discretion of the
Arbitrator(s). The prevailing Party shall be entitled to recover
its reasonable attorneys' fees and costs from the other Party as
costs of suit and not as damages. The prevailing Party shall be
determined by the Arbitrator(s). Judgment on the award rendered
shall be entered in the state or federal courts of the State of
California, or application may be made to such courts for a
judicial acceptance of the award and an order of enforcement.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first written above.
Lancer Orthodontics, Inc.
Dated: 10/21/98 /s/ DOUGLAS MILLER
---------------- ---------------------------------
By: Douglas Miller
Its: President
AG METALS
Dated: October 21, 1998 /s/ GARY WEIKEL
---------------- ---------------------------------
By: Gary Weikel
Its: President
32
<PAGE> 33
EXHIBIT A
EXAMPLE OF COMMISSION CALCULATION
<TABLE>
<S> <C>
Cash received by Lancer
from sales (after allowances and adjustments) $329,680.00
Discounts (-) (4,945.00)
Returns (-) (422.00)
Shipping, Handling, Packaging (-) (132.00)
Total Net Received $324,181.00
Commission at 8.5% 27,555.00
Less Draws Against Commission(1)
For Current Quarter (13,500.00)
Less Excess Draw from
Prior Quarter(s) (13,500.00)
(excess of Draw over
Commission)
-----------
Amount due from
Lancer to AG $555.00
OR
Excess Draw NA on these figures
(To be carried forward
to next quarter)
</TABLE>
- ----------
(1) Monthly payments for consulting Services are treated as a draw against
Commission; this figure would show all payments made during the relevant
quarter. Dollar amount shown here is one half of the $27,000.00 to be paid over
the first six months pursuant to Section III.2.a.l.
<PAGE> 34
EXHIBIT B
[COST CHART]
<PAGE> 35
EXHIBIT B
Sheet 1
<TABLE>
<CAPTION>
FIRST FIRST PER SECOND PER THIRD PER
SIX YEAR OUNCE YEAR OUNCE YEAR OUNCE
MONTHS SALES 65,485.00 SALES 93,748.00 SALES 113,247.00
------ ---------- --------- ------ --------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
NET SALES......................... 1,318,715 20.14 1,891,485 20.18 2,255,722 19.92
MATERIAL COST OF GOODS SOLD....... 877,605 13.40 1,277,171 13.82 1,512,557 13.36
------ ---------- ------ --------- ----- --------- ------
441,110 6.74 614,314 6.55 743,165 8.56
WAGES............................. 29,000 57,000 0.87 89,000 0.95 121,000 1.07
FRINGE BENEFITS................... 5,010 9,930 0.15 17,610 0.19 25,290 0.22
RENT.............................. 3,000 6,120 0.09 6,360 0.07 6,600 0.06
UTILITIES......................... 913 1,826 0.03 1,826 0.02 1,826 0.02
LIABILITY INSURANCE............... -- 2,520 0.04 3,380 0.04 3,868 0.03
PROPERTY INSURANCE................. 90 238 0.00 310 0.00 412 0.00
SUPPLIES (OPERATING & SHIPPING)... 1,000 1,200 0.02 1,800 0.02 2,400 0.02
TELEPHONE AND FAX................. 2,400 6,000 0.09 7,200 0.08 7,800 0.07
DEPRECIATION...................... 1,250 3,750 0.06 5,000 0.05 6,250 0.06
ADVERTISING & PROMOTION........... -- 7,500 0.11 7,500 0.08 7,500 0.07
SELLING, GEN & ADMIN.............. 6,000 18,000 0.27 24,000 0.28 30,000 0.26
TRAVEL............................ 2,500 1,800 0.03 2,100 0.02 2,400 0.02
MISCELLANEOUS..................... 1,000 3,600 0.05 4,200 0.04 4,800 0.04
------ ---------- ------ --------- ----- -------- ------
TOTAL OPERATING EXPENSES.......... 52,163 119,493 1.82 170,288 1.82 220,146 1.94
------ ---------- ------ --------- ----- -------- ------
INCOME FROM OPERATIONS............ (52,163) 321,617 4.91 444,028 4.74 523,019 4.62
INTEREST.......................... 1,781 9,500 0.15
------ ---------- ------ --------- ----- -------- ------
INCOME BEFORE INCOME TAXES........ (53,944) 321,117 4.77 444,028 4.74 523,019 4.62
======== ========== ====== ========= ===== ========= ======
</TABLE>
<PAGE> 36
EXHIBIT C
[AGREEMENT BETWEEN LANCER AND GARY WEIKEL]
<PAGE> 1
EXHIBIT 10.27
AGREEMENT BETWEEN LANCER ORTHODONTICS, INC.
AND GARY WEIKEL
THIS AGREEMENT (the "Agreement") is made and entered into as of August 3,
1998 (the "Effective Date"), between LANCER ORTHODONTICS, INC., a California
corporation ("LANCER"), and Gary Weikel ("WEIKEL") individually. These parties
are collectively referred to herein as the "Parties" and individually as a
"Party."
WHEREAS, WEIKEL is the sole shareholder and employee/agent of AG METALS,
INC., a Nevada corporation ("AG METALS"), as well as the individual with
knowledge of certain technology owned by AG METALS; and
WHEREAS, AG METALS and LANCER are entering into a Product Development and
Marketing Agreement dated as of August 3, 1998 (the "LANCER/AG METALS
Agreement"), a copy of which is attached hereto as Exhibit A, and incorporated
herein by this reference (as that Agreement may be amended, restated, or
modified and in effect from time to time), which LANCER/AG METALS Agreement
contemplates a transfer of certain technology from AG METALS to LANCER, and the
provision of services by WEIKEL to LANCER as an employee of AG METALS, in return
for certain monetary payments to AG METALS; and
WHEREAS, as an employee/agent and the sole shareholder of AG METALS,
WEIKEL will benefit from the LANCER/AG METALS Agreement;
WHEREAS, LANCER is not willing to enter into the LANCER/AG METALS
Agreement without certain assurances and agreements from WEIKEL in his capacity
as an individual; and
WHEREAS, in order to induce LANCER to enter into the LANCER/AG METALS
Agreement, WEIKEL desires to enter into this Agreement to provide such
assurances and agreements in his capacity as an individual;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and conditions contained herein and in the LANCER/AG METALS Agreement, the
receipt and sufficiency of which are hereby acknowledged, the Parties agree as
follows:
1. DEFINED TERMS. Unless otherwise specified herein, capitalized terms in
this Agreement have the meanings set forth in the LANCER/AG METALS
Agreement, including but not limited to Article XII thereof.
2. REPRESENTATIONS AND WARRANTIES. WEIKEL hereby acknowledges, adopts,
affirms, and makes all of the representations and warranties set forth in
Article VIII of the LANCER/WEIKEL Agreement, as of the Effective Date of
this Agreement.
3. OWNERSHIP OF TECHNOLOGY. WEIKEL hereby disavows that as an individual he
has any
1
<PAGE> 2
right, title or interest of any kind, nature, or description in and to
the Product(s) and Technology which are the subject of the LANCER/WEIKEL
Agreement, such Product(s) and Technology being solely owned by AG
METALS.
4. CONSULTING SERVICES. WEIKEL agrees to provide Services under the
LANCER/AG METALS Agreement as set forth in Article III of such
Agreement, as an employee or other agent of AG METALS.
5. AGREEMENT TO BE INDIVIDUALLY BOUND. WEIKEL agrees to be individually
bound by, and jointly and severally responsible with AG METALS to LANCER
and its successors and assigns for, compliance with and damages
resulting from the breach of, the following provisions of the LANCER/AG
METALS Agreement, as such provisions may be amended, restated, or
modified and in effect from time to time:
a. All of the provisions set forth in Articles IV and V (which
Articles are entitled "Disclosure of Technology and Information
to Lancer" and "Disclosure of Information on Improvements");
b. All of the provisions set forth in Article VI (which Article is
entitled "Ownership of Intellectual Property");
c. The provisions set forth in Sections 1. (entitled "Continuing
Assistance"), 2. (entitled "Best Efforts"), 4. (entitled "Press
Releases and Announcements "), and 5. (entitled "Further
Transfers ") of Article XI; and
d. All of the provisions set forth in Section 8. of Article XI
(entitled "Non-Competition, Non-Solicitation, and
Confidentiality"). WEIKEL understands and agrees that his
personal activities, along with those of AG METALS, shall be
limited as set forth in Section 8. of Article XI.
6. TERM OF AGREEMENT AND TERMINATION. As to provisions set forth in Article
VII. of the LANCER/AG METALS Agreement:
a. The term of this Agreement shall be coextensive with the term
set forth in such Article VII, as that term may be amended,
restated, extended, or modified. Upon termination of the
LANCER/AG METALS Agreement for any reason, all future and
continuing rights and obligations under this Agreement shall
terminate except for those set forth in Section 4. of such
Article VII of the LANCER/AG METALS Agreement which are
incorporated into this Agreement by reference.
b. The cure period and remedies provisions set forth in Sections 2.
and 3. of such Article VII., as such provisions may be amended,
restated, or modified and in effect from time to time, are
incorporated herein and shall apply to this Agreement as
2
<PAGE> 3
though set forth herein, with WEIKEL's damages against LANCER
for breach of this Agreement limited as set forth in Section
3.a. of the LANCER/AG METALS Agreement.
7. INDEMNIFICATION. WEIKEL agrees to be jointly and severally liable with
AG METALS to LANCER under the indemnification provisions of Article X of
the LANCER/AG METALS Agreement.
8. MISCELLANEOUS. The Parties agree that each of the provisions set forth
in Article XII of the LANCER/AG METALS Agreement shall also be a part of
this Agreement, as those provisions may be amended, restated, or
modified and in effect from time to time. With respect to those
provisions:
a. Notices to Gary Weikel shall be sent to the address indicated
below:
GARY WEIKEL
3020 Graves Lane
Unit B1
Carson City, NV 89706
b. WEIKEL EXPRESSLY ACKNOWLEDGES AND. AGREES THAT THE ARBITRATION
PROVISIONS SET FORTH IN SECTION 14 OF ARTICLE XII (AS SUCH
PROVISIONS MAY BE AMENDED, RESTATED, OR MODIFIED AND IN EFFECT
FROM TIME TO TIME) REQUIRE FINAL AND BINDING ARBITRATION OF ANY
DISPUTE ARISING OUT OF OR RELATING TO THIS AGREEMENT AND/OR THE
LANCER/AG METALS AGREEMENT, AND HE KNOWINGLY AGREES CONSENTS TO
SUCH ARBITRATION AND WAIVES ANY RIGHT TO A TRIAL BY JURY.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first written above.
Lancer Orthodontics, Inc.
/s/ DOUGLAS MILLER w/start of 9/1/98
------------------------------------
By: Douglas Miller
Its: President
/s/ GARY WEIKEL
------------------------------------
Gary Weikel
3
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
Jurisdiction
Name of Incorporation dba
- ---- ---------------- ----
Allergy Immuno Technologies, Inc. Delaware none
Lancer Orthodontics, Inc. California none
<PAGE> 1
EXHIBIT 23.2
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 for the
year ended May 31, 1999, which is contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO SEIDMAN, LLP
Costa Mesa, California
September 16, 1999
<PAGE> 1
EXHIBIT 23.3
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 24, 1998, relating to the
consolidated financial statements of Biomerica, Inc. and Subsidiaries for the
year ended May 31, 1998, which is contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
CORBIN & WERTZ
Irvine, California
September 16, 1999
