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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1999 COMMISSION FILE NUMBER: 0-8765
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BIOMERICA, INC.
(Small Business Issuer in its Charter)
DELAWARE 95-2645573
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1533 MONROVIA AVENUE, NEWPORT BEACH, CA 92663
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(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: (949) 645-2111
Securities registered under Section 12(b) of the Exchange Act:
(Title of each class) (Name of each exchange on which registered)
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NONE NASDAQ
Securities registered under Section 12(g) of the Exchange Act:
(Title of each class)
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COMMON STOCK, PAR VALUE $.08
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES(x) NO( )
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained herein, and will not be contained, to the best of issuer's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
(X)
State issuer's revenues for its most recent fiscal year: $8,688,106.
State the aggregate market value of the voting stock held by non-affiliates of
the issuer (based upon 3,619,487 shares held by non-affiliates and the closing
price of $2.0625 per share for Common Stock in the over-the-counter market as of
August 15, 1999):
$7,949,415.
Number of shares of the issuer's common stock, par value $.08, outstanding as of
August 15, 1999: 4,520,945 shares.
DOCUMENTS INCORPORATED BY REFERENCE: The issuer's proxy statement for its 1999
Annual Meeting of Stockholders is incorporated into Part III hereof. Also
incorporated by reference are the Annual Reports on Form 10-KSB for the fiscal
year ended May 31, 1999, for Lancer Orthodontics, Inc. and Allergy Immuno
Technologies, Inc.
Transitional Small Business Disclosure Format YES ( ) NO (X)
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PART I*
ITEM 1. DESCRIPTION OF BUSINESS
-----------------------
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 PROVIDES A "SAFE HARBOR"
FOR FORWARD-LOOKING STATEMENTS. CERTAIN INFORMATION CONTAINED HEREIN (AS WELL AS
INFORMATION INCLUDED IN ORAL STATEMENTS OR OTHER WRITTEN STATEMENTS MADE OR TO
BE MADE BY BIOMERICA) CONTAINS STATEMENTS THAT ARE FORWARD-LOOKING, SUCH AS
STATEMENTS RELATING TO CONSUMMATION OF THE TRANSACTION, ANTICIPATED FUTURE
REVENUES OF THE COMPANY AND SUCCESS OF CURRENT PRODUCT OFFERINGS. SUCH
FORWARD-LOOKING INFORMATION INVOLVES IMPORTANT RISKS AND UNCERTAINTIES THAT
COULD SIGNIFICANTLY AFFECT ANTICIPATED RESULTS IN THE FUTURE, AND ACCORDINGLY,
SUCH RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING
STATEMENTS MADE BY OR ON BEHALF OF BIOMERICA. THE POTENTIAL RISKS AND
UNCERTAINTIES INCLUDE, AMONG OTHERS, FLUCTUATIONS IN THE COMPANY'S OPERATING
RESULTS DUE TO ITS NEW BUSINESS MODEL AND EXPANSION PLANS AND THE COMPETITIVE
ENVIRONMENT IN WHICH THE COMPANY WILL BE COMPETING. THESE RISKS AND
UNCERTAINTIES ALSO INCLUDE THE CONTINUAL DEMAND FOR THE COMPANY'S PRODUCTS,
COMPETITIVE AND ECONOMIC FACTORS OF THE MARKETPLACE, AVAILABILITY OF RAW
MATERIALS, YEAR 2000 ISSUES, HEALTH CARE REGULATIONS AND THE STATE OF THE
ECONOMY.
INTRODUCTION
THE COMPANY
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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 Novmeber 1987 to Biomerica, Inc. Our vision is
to improve the lives of people with chronic medical conditions while lowering
the overall cost of healthcare and improving medical outcomes.
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, drug stores and individual customers. We also
derive revenues and other benefits from two subsidiaries, Lancer Orthodontics,
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 firms 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 of equity to develop the infrastructure of our new Internet Division.
While we will continue to develop products for our existing business, we project
the majority of future growth will come from our new e-commerce operations.
OUR EXISTING BUSINESS
- ---------------------
We develop, manufacture and sell advanced immunoassay diagnostic test
products designed to detect medical conditions and diseases in the areas of
heart disease, fertility, certain cancers, gastritis, ulcers, diabetes and
Candida. We offer clinical laboratory diagnostic products marketed to large
laboratories, hospitals, and researchers; and rapid diagnostic office-based and
home-test kits marketed to physician's offices, smaller laboratories, pharmacies
and consumers. We also develop, manufacture and sell ceramic brackets, bands,
wires, lingual attachments and other orthodontic products through Lancer
Orthodontics Inc. We develop and provide allergy-related clinical testing
services to healthcare providers and drug firms through Allergy Immuno
Technologies, Inc.
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Our existing businesses include:
o BIOMERICA DIAGNOSTICS
---------------------
Biomerica develops, manufactures, and sells unique medical diagnostic
products designed to detect certain medical conditions and diseases in the areas
of certain cancers, heart attack, fertility, gastritis and ulcers, diabetes and
candida.
We have developed, produced and sold immunoassay diagnostic test kits
since the early 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. We have used
advances in biotechnology to produce tests which could be used in the
physician's office and by the patient at home.
We target three distinct markets in our core business of diagnostic
products. These markets are: (1) clinical laboratories, hospitals and
researchers that perform immunoassays; (2) physicians offices and smaller
laboratories which could benefit from in-office or rapid diagnostic tests; and
(3) pharmacies and consumers who are interested in performing/marketing tests
for home use (over-the-counter products).
CLINICAL LABORATORY DIAGNOSTIC PRODUCTS
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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. Our clinical products include tests for
thyroid conditions, diabetes, H. pylori and others.
PHYSICIANS' OFFICE AND OVER-THE-COUNTER PRODUCTS
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The over-the-counter and professional markets for rapid diagnostic
products are expanding as a result of significant economic pressures affecting
the health care industry. These types of products are important for the
following reasons: (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 tests 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. Our 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. Some of these
tests are currently being sold over our website, testathome.com. and will be
available for sale at theBigRx.com.
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 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 Walgreen's, CVS, Osco/Sav-On, etc.
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o ORTHODONTIC PRODUCTS, VIA LANCER ORTHODONTICS, INC.*
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Lancer is engaged in developing, manufacturing, and selling 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.
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. Lancer sells its products directly to orthodontists through company-paid
sales representatives in the United States. At the end of its 1999 fiscal year,
Lancer had seven sales representatives all in the United States, all of whom are
employees of Lancer.
In selected foreign countries, Lancer sells its products directly to
orthodontists through its international marketing division. Lancer also sells
its products through distributors in certain foreign countries and to other
companies on a "private label" basis. Lancer has entered into a number of
distributor agreements whereby it sold or granted the marketing rights to its
products in certain sales territories in Mexico, Central America, South America,
Europe, Canada, Australia and Japan. The distributors complement the
international marketing division which was established in 1982 and currently
employs three people.
Most of Lancer's manufacturing and shipping operations are located in
Mexicali, Mexico, in order to reduce the cost of manufacturing and compete more
effectively worldwide. Lancer maintains its headquarters in San Marcos,
California where it houses the administration, the engineering, the sales and
marketing, and customer services.
o ALLERGY, VIA ALLERGY IMMUNO TECHNOLOGIES, INC. (AIT)
----------------------------------------------------
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 and its predecessors commenced development activities in allergy
and immune research, diagnostic reagents and services in 1980. AIT currently
operates a clinical reference laboratory in Newport Beach, California, for
allergy and other esoteric diagnostic testing services for physicians, other
laboratories and pharmaceutical companies. AIT employs one medical technologist
and two technicians and receives substantial assistance from Biomerica whose
laboratory is contiguous to AIT.
SUBSIDIARY COMPANY BIOMERICA PERCENT OWNERSHIP
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Lancer Orthodontics, Inc. ("Lancer") 30.76%
Allergy Immuno Technologies, Inc. ("AIT") 74.6%
*Incorporated by reference are the Annual Reports on Form 10-KSB for
the year ended May 31, 1999 for Lancer Orthodontics, Inc. and Allergy Immuno
Technologies, Inc.
Biomerica controls an additional 20.56% through voting agreements with
shareholders of the outstanding Lancer common stock and three Biomerica
directors serve on Lancer's board of directors. As a result, Biomerica continues
to exercise effective control of Lancer. Therefore, Lancer's financial
statements are consolidated with those of Biomerica.
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PRODUCTION
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Our diagnostic kits include reagents, antibodies, labeled antigens,
buffers, standards, and reference controls. We supply each customer with
detailed written instructions for the use of its diagnostic products.
All of the our diagnostic test kits are processed and assembled at our
facilities in Newport Beach, California. Production of diagnostic tests involve
formulating component antibodies and antigens in specified concentrations,
attaching a tracer to the antigen, filling components into vials, packaging and
labeling. We continually engage in quality control procedures to assure the
consistency and quality of our products and to comply with applicable FDA
regulations.
All manufacturing production is regulated by the FDA Good Manufacturing
Practices for medical devices. We have an internal quality control unit that
monitors and evaluates product quality and output. In addition, we employ a
qualified external quality assurance consultant who monitors procedures and
provides guidance in conforming with the Good Manufacturing Practices and
Quality Systems 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 into the foreseeable future does not pose a primary constraint for
us in our relevant ranges of production.
Lancer currently utilizes a manufacturing subcontractor to provide
manufacturing services to Lancer through its affiliated entities located in
Mexicali, B.C., Mexico. The current agreement 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. During 1999, Lancer extended the Manufacturing Agreement
through December, 2003. 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, 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
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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.
In fiscal 1999, development costs of $47,000 and equipment and leasehold costs
of $32,000 were incurred by Lancer in the development of PARAGONTM, a dental
amalgam, which will be the world's first shperical dispersion system that
expands when set. 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.
MARKETS AND METHODS OF DISTRIBUTION
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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, drug stores 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 (OTC)
drug stores. Separate sales forces and marketing plans are utilized to expand
sales in each of the three markets. Our newest market is the OTC segment. We
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entered into the OTC market segment during 1985. This market is divided into
independent drugstores and chain drugstores. Biomerica has been aggressively
targeting both the chain and independent stores. The independents are widely
dispersed and therefore require wholesalers (e.g. Bergen Brunswig, Foxmeyer,
etc.) to promote our products. We sell to chain stores through manufacturers'
representatives and directly to chain stores.
In the third quarter of fiscal 1999, we launched our e-commerce
website, testathome.com, for the purpose of selling home tests through the
Internet. We intend to launch our internet home drugstore through our BigRX
division during Calendar 1999.
Lancer sells its products directly to orthodontists through
company-paid sales representatives in the United States. At the end of its
fiscal year, Lancer had seven sales representatives, all in the United States,
all of whom are employees of Lancer.
In selected foreign countries, Lancer sells its products directly to
orthodontists through its international marketing division. Lancer also sells
its products through distributors in certain foreign countries and to other
companies on a private label basis. Lancer has entered into a number of
distributor agreements whereby it granted the marketing rights to its products
in certain sales territories in Mexico, Central America, South America, Europe,
Canada, Australia, and Japan. The distributors complement the international
marketing department which was established in 1982 and currently employs three
people.
The loss of any one or a few customers would not have a material
adverse effect upon our revenues.
BACKLOG
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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
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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
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Immunodiagnostic products are currently produced by more than 100
companies, a majority of which are located within the United States. Biomerica
and its subsidiaries are not a significant factor in the market. Allergy
diagnostic products are currently produced by over five competitors, and there
are approximately the same number producing allergy therapeutics.
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Our competitors vary greatly in size. Many are divisions or
subsidiaries of well-established medical and pharmaceutical concerns which are
much larger than Biomerica and expend substantially greater amounts than we do
for research and development, manufacturing, advertising and marketing.
The primary competitive factors affecting the sale of diagnostic
products are uniqueness, quality of product performance, price, service and
marketing. The prices for our products compare favorably with those charged by
most of our competitors.
We believe we compete primarily on the basis of our reputation for the
quality of our products, the speed of our test results, the unique niches in the
market, patent position, and our prompt shipment of orders. We offer a broader
range of products than many competitors of comparable size, but to date have had
limited marketing capability. We are working on expanding this capability
through strategic cooperations with larger companies and distributors.
Lancer encounters intense competition in the sale of orthodontic
products. Lancer's management believes that Lancer's seven major competitors
are: Unitek, a subsidiary or division of 3M; "A" Company, a private company;
Ormco, a subsidiary or division of Sybron; RMO Inc., a private company; American
Orthodontics, a private company; GAC, a foreign company; and Dentaurum, a
foreign company. Lancer estimates that these seven competitors account for
approximately 80% of the orthodontic products manufactured and sold in the
United States. Lancer's management also believes that each of these seven
competitors is larger than Lancer, has more diversified product lines and has
financial resources exceeding those of Lancer. While there is no assurance that
Lancer will be successful in meeting the competition of these seven major
competitors or other competitors, Lancer has, in the past, successfully competed
in the orthodontic market and has achieved wide recognition of both its name and
its products.
GOVERNMENT REGULATION
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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
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years to be approved after they are filed. In addition to requiring clearance or
approval for new medical devices, FDA rules also require a new 510(k) filing and
review period, prior to marketing a changed or modified version of an existing
legally marketed device, if such changes or modifications could significantly
affect the safety or effectiveness of that device. The FDA prohibits the
advertisement or promotion or any approved or cleared device for uses other than
those that are stated in the device's approved or cleared application.
Pursuant to FDCA requirement, we have registered our manufacturing
facility with the FDA as a medical device manufacturer, and listed the medical
devices we manufacture. We are also subject to inspection on a routine basis for
compliance with FDA regulations. This includes the QSR, which, unless the device
is a Class I exempt device, require 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> <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.
OUR NEW BUSINESS
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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 an alliance
with an Internet and technology partner, TheBigStore.com, and have 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 these products 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 hand held or desktop computer that allows
immediate online access to formulary and preferred drug therapy options based on
insurer, best practice guidelines for medication by chronic disease state, and,
as available, patient medication history. Ultimately, ReadyScript will
automatically transmit these prescriptions to an online pharmacy, traditional
neighborhood pharmacy, or pharmacy designated by the participating insurer or
pharmacy benefit manager. The automatic process will substantially reduce the
potential for medication errors inherent in the current system of handwritten
and oral prescriptions. Additionally, 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, with all products delivered within a few
days to the customer's home, reducing the need to visit a brick-and-mortar
drugstore.
DIFFERENTIATION THROUGH MEDICATION MANAGEMENT
- ---------------------------------------------
We believe medication management, the basis of ReadyScript, will
differentiate TheBigRX.com 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)
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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 are 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 technnology intends to use medication management at the point of
care to provide physicians, pharmacists, insurers and customers 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 drugstores were developed as attempts to make the
process more convenient. However, neither of these attempts to increase
convenience has significantly changed the prevailing prescribing practice. The
fundamental flaws inherent in the system are the inefficiencies and costs of
handling handwritten and/or verbal prescriptions, and the sub-optimal drug
therapies many patients are receiving.
Handwritten and verbal prescriptions are inefficient and costly
because:
o Verbal and illegible handwritten prescriptions can be misinterpreted,
leading to dispensing errors.
o Illegible prescriptions require physicians to use their time inefficiently
in clarifying orders to pharmacists trying to decipher the handwriting.
o Dispensing errors can produce adverse drug reactions that can seriously
jeopardize a patient's health and be costly to treat.
o Patients are inconvenienced by having to travel to a pharmacy or other
dispensing location to get the prescription filled, or go through a series
of steps to have the prescription processed by a mail-order fulfillment
source or online pharmacy.
Sub-optimal drug therapy is the result of significant variations in
physician practices. Because it is virtually impossible to keep abreast of all
new medical developments and treatment standards, physicians' treatment
decisions often deviate from the established best practices. This can compromise
a patient's health and lead to higher healthcare costs. For example, national
medical organizations recommend that beta-blockers be given to heart attack
survivors to improve in-hospital and post-discharge mortality. However,
beta-blockers are only prescribed about one-third of the time, leaving the other
two-thirds at higher risk of suffering a second heart attack. To address the
sizeable impact of sub-optimal drug therapy and escalating healthcare costs,
physicians are increasingly turning to disease management. Disease management is
a comprehensive solution that combines clinically proven best practices with
non-clinical interventions to improve patient outcomes and lower costs.
The key to addressing the inefficiency of the prescribing process and
the risks of sub-optimal drug therapy is to effect change at the beginning of
the process, namely when the physician writes a prescription. We believe our
ReadyScript automated prescription technology is unique in that it focuses on
the physician at this pivotal point, and creates efficiencies and enhancements
throughout the prescribing and dispensing process. Automated prescriptions
through ReadyScript will be accurate and legible, minimizing the potential for
misinterpretation and dispensing errors, thereby reducing time spent by
pharmacists and physicians clarifying orders. We anticipate that because the
physician will be able to electronically route the prescription directly to a
participating drugstore, including an online pharmacy such as TheBigRX.com, the
patient can receive his/her prescription without any inconvenience, delays or
misinterpretations.
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THE PHARMACY BENEFIT MANAGER DILEMMA
In addition to the smaller market for cash-paying retail prescriptions,
the first generation of online pharmacies assumed they would have ready access
to insurer- and pharmacy benefit manager (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 pharmacy benefit
managers.
MARKET CONDITIONS
- -----------------
THE HEALTHCARE ENVIRONMENT
- --------------------------
CHRONIC MEDICAL CONDITIONS
According to Advanstar Communications, approximately 73% of the $102
billion annual U.S. prescription drug market is spent on chronic medical
conditions. These include, among others, hypertension, diabetes, allergy,
arthritis, asthma, chronic obstructive pulmonary disease, osteoporosis,
congestive heart failure and depression. This expenditure is expected to grow as
the baby boom population ages and as the importance of pharmaceuticals in
disease state management increases.
Pharmaceuticals for chronic medical conditions are primarily dispensed
through traditional retail pharmacy outlets. Since many chronic conditions
require the recurring, long-term use of medications, mail-order pharmacies are
becoming an increasingly important source of pharmaceutical fulfillment.
ESCALATING HEALTHCARE COSTS
According to the Health Care Financing Administration (HCFA),
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
One of the fastest growing components of healthcare expenditures is
pharmaceutical cost, which increased $42.7 billion or 84% over the past 5 years,
according to the National Institute for Health Care Management's Research and
Education Foundation. The projected increases in drug spending will be fueled by
an aging population, a faster FDA drug approval process, direct-to-consumer
advertising, greater reliance on pharmaceuticals as a substitute for other
therapies, and potential for expanded insurance coverage for drugs.
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Insurers are seeing prescription drug outlays rising 15% to 20% a year,
with prescription drugs accounting for as much as 15% of their total medical
costs. The inability to manage these costs successfully and the errors
associated with an inefficient manual prescription process make it exceedingly
difficult for insurers to maintain profitability without raising premiums.
Physicians have also been affected by rising drug costs as insurers continue to
transfer to them a significant portion of the financial risk for this cost
without a corresponding increase in reimbursement.
Contributing to the continued increase in pharmaceutical costs is the
prescribing process, which has remained largely unchanged over the past 50
years. Virtually all of the 2.8 billion prescriptions written in this country
each year are handwritten or verbally transmitted to the dispensing pharmacy.
These modes of prescription transmission are inherently inefficient, and prone
to misinterpretation and potentially harmful or fatal medication errors.
PHARMACEUTICAL FULFILLMENT CHANNELS
- -----------------------------------
RETAIL DRUGSTORE MARKET
The retail drugstore market, consisting of prescription drugs, personal
care and beauty products, non-prescription drugs, vitamins and nutrition
products, totaled $165 billion in 1998, according to estimates by Information
Resources, Inc. and Frost & Sullivan. The majority of drugstore products are
sold through highly fragmented traditional distribution channels such as chain
drugstores (e.g., CVS, Eckerd, RiteAid and Walgreen's), mass market retailers
(e.g., Kmart, Target and Wal-Mart), supermarkets, warehouse clubs, mail-order
companies, and independent drugstores and pharmacies. These distribution sources
offer limited selection, impersonal and limited service, lack of privacy, and
insufficient information and access to pharmacists.
ONLINE PHARMACIES
The unique capabilities of the Internet helped make possible the
creation of online pharmacies in 1999. The first-generation entrants to the
market include Soma.com, drugstore.com and planetRx.com, among others. These
first-generation online pharmacies are all based on the business-to-consumer
e-commerce model, which in our opinion has limited potential for prescription
drug fulfillment.
First-generation online pharmacies allow customers to receive products
delivered through the mail, but we believe they ignore the key issues causing
customer inconvenience inherent in the traditional fulfillment system. To use
these online pharmacies, customers must have Internet access and must fax or
mail their prescriptions to the online pharmacy. Physicians are also
inconvenienced because they receive calls from pharmacists once the online
request is processed. Additionally, these first-generation online systems have
not eliminated the potential for errors or misinterpretation of handwritten
prescriptions, nor have they addressed any insurer formulary and prescription
approval issues. Instead, these first-generation systems perpetuate the same
inaccuracies and cost.
MAIL-ORDER PRESCRIPTION FULFILLMENT
Mail-order prescription dispensing currently represents about 11% of
the prescription fulfillment market and is primarily used to provide medication
for chronic medical conditions. Yet, medication for chronic illnesses represents
over 73% of prescriptions dispensed. We believe this indicates a vastly
underutilized fulfillment opportunity.
EMERGING TECHNOLOGIES
- ---------------------
THE INTERNET
International Data Corporation estimates there were 142 million
worldwide Internet users 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
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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.
BUSINESS-TO-BUSINESS E-COMMERCE
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
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 by requiring its students to have a handheld
computer since 1995. With technology becoming more powerful and more affordable,
we believe physicians will increasingly use these tools in their practices.
THE NEXT-GENERATION ONLINE PHARMACY
- -----------------------------------
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.
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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 will
include:
o PROMOTING RATIONAL, COST-EFFECTIVE AND OPTIMAL DRUG THERAPIES.
We plan to give physicians immediate access to up-to-date best
practice guidelines for medications and formulary preferred
drug information when making their prescribing decisions. This
should save physicians and insurers money on overall
healthcare costs, and save patients money spent out-of-pocket
for non-preferred drugs.
o STREAMLINING THE PRESCRIBING PROCESs. Electronically
transmitted prescriptions do not need to be handwritten,
phoned or faxed into the pharmacy. Likewise, pharmacists do
not need to phone physician offices to verify prescriptions.
This should save time and increase productivity for physicians
and pharmacies alike.
o EMPOWERS PHYSICIANs. Physicians should have confidence in
their patient management decisions, as they will have
immediate access to pertinent patient information and current
best practice standards. They will also be able to reference
up-to-date chronic disease management information amassed from
various health information sources to help educate their
patients and increase patient compliance.
o INCREASING PATIENT SATISFACTION. Physicians should be able to
build patient satisfaction by providing patients the
convenience of having prescriptions ready for pick up or
mailed directly to them.
o MINIMIZING DANGEROUS AND COSTLY ADVERSE DRUG REACTIONs. Online
patient medication histories should allow physicians to make
the best prescribing decisions. This should 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 are planned
to be many of the same ones that should be realized by physicians. Additional
benefits should include:
o IMPROVED FORMULARY COMPLIANCE. Physicians should be able to
make more compliant prescribing decisions with the benefit of
immediate online access to the insurer's formulary
preferences.
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o REDUCED ADMINISTRATIVE BURDEN AND IMPROVED CUSTOMER
SATISFACTION. Insurers should realize a reduction in phone
calls to their customer service departments regarding
formulary guidelines and prescription approvals. This should
result in increased physician and patient satisfaction, which
can help reduce the number of patients who may consider
changing insurance plans.
o INCREASED MAIL-ORDER PHARMACEUTICAL FULFILLMENT. Electronic
prescriptions routed directly to the insurer's designated
mail-order pharmacy should contribute to lower overall
pharmacy costs.
o IMPROVED CLINICAL OUTCOMES. Insurers should benefit from lower
overall healthcare costs associated with following best
practice guidelines for medication, improving clinical
outcomes, and minimizing adverse drug reactions.
We anticipate insurers will support our technology to address their
escalating healthcare and pharmacy costs, improve their medical-loss ratios, and
assure their financial viability.
THE PATIENT
For patients, our next-generation online pharmacy is planned to provide
many value-added services and benefits, including:
o IMPROVED CLINICAL OUTCOMEs. Patients should benefit from the
improved health and reduced adverse reactions resulting from
their physicians' appropriate and optimal drug prescribing
practices.
o GREATER CONVENIENCE. Patients will be able to have their
prescriptions automatically filled and mailed to their homes.
There will be no need to wait at a neighborhood pharmacy to
have the prescription filled, to fill out paperwork to use an
insurer's mail-order pharmacy, or to fax or phone in the
prescription to a first-generation online pharmacy. Even
patients without Internet access will be able to enjoy the
benefit of our services.
o CHRONIC DISEASE MANAGEMENT INFORMATIOn. TheBigRX.com online
web site will offer useful tools and information to empower
patients to better understand and manage their chronic medical
conditions.
o CONVENIENT, QUALITY SHOPPINg. Patients will have 24-hour
shopping access to TheBigRX.com, our retail online pharmacy,
and its wide selection of products at everyday low prices.
Patients will also enjoy additional discounts for repeat
purchases.
We believe patients will be empowered to be more active in managing
their health, and to be more secure in the care they are receiving.
COMPETITIVE ADVANTAGES
- ----------------------
We believe our innovative ReadyScript medication management technology,
working in concert with TheBigRX.com online pharmacy, is a superior business
model compared to other online pharmacies. Our competitive advantages will be
designed to include:
o NON-EXCLUSIVE INSURER AND PHARMACY BENEFIT MANAGER (PBM)
RELATIONSHIPS. Our next-generation online pharmacy solution is
planned to provide benefits not available through
first-generation online pharmacies. Many first-generation
online pharmacies that have aligned exclusively with insurers
or pharmacy benefit managers 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.
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o DIRECT INTEGRATION WITH PHYSICIANS. We plan to work directly
with physicians to capture the prescription at the point of
care. Our medication-management influence at the beginning of
the prescribing process is not available with first-generation
online pharmacies.
o PRESCRIPTION CAPTURED AT THE POINT OF CARE PRODUCING TOTAL
CUSTOMER SATISFACTION. Capturing the prescription at the point
of care creates conveniences, enhanced efficiency and improved
outcomes for physicians and patients. The increased patient
satisfaction should help physicians in their patient retention
efforts.
o BROAD AND DIVERSIFED REVENUE BASE. Due to the comprehensive
nature of our business model, and our non-competitive business
design, we plan to derive revenue from a broad and diversified
client base comprising all benefactors of the system:
physician groups, health maintenance organizations, pharmacy
benefit managers, insurers, traditional neighborhood
pharmacies, and hospitals. Our multi-source revenue model
should allow us to generate earnings from sales and service
agreements for our ReadyScript software, transaction fees for
electronic prescription routing, prescriptions filled through
our retail online pharmacy, and consumer product sales from
our retail online pharmacy.
o FOCUS ON PATIENTS WITH CHRONIC MEDICAL CONDITIONS. Our
integrated solution is intended to go beyond other online
pharmacies in providing useful information and tools designed
specifically to help physicians and patients manage chronic
medical conditions.
o STRATEGIC TECHNOLOGY PARTNEr. We have formed a strategic
relationship with a technology partner, TheBigStore.com, and
an Internet portal, TheBigHub.com. This alliance will provide
back-end processing and increase future Internet traffic to
TheBigRX.com.
o EXPERIENCED MANAGEMENT TEAm. Our newly recruited 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:
o ENHANCE AND FORM KEY RELATIONSHIPS TO FURTHER REVENUE
OPPORTUNITIES. We plan to target strategic relationships in
order to increase our revenue opportunities and build our
reputation as a leading online healthcare destination. We will
emphasize the non-competitive nature of our technology as a
cost-savings complement to insurers' and pharmacy benefit
managers' dispensing networks. We intend to seek to enhance
existing relationships and develop new relationships with:
o pharmacy benefit managers;
o managed care organizations;
o insurance companies;
o pharmaceutical manufacturers;
o content and commerce portals; and
o medical groups and physicians.
o TARGET-MARKET OUR READYSCRIPT MEDICATION MANAGEMENT SOLUTION.
We plan to target, penetrate and rapidly expand the market for
our ReadyScript medication management solution through aa
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.
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o DEVELOP A UNIVERSAL INSURER-SAVINGS REIMBURSEMENT MODEL. We
intend to develop fee-based and drug cost-savings sharing
models for insurers. We intend to create demand for products
by demonstrating to insurers the universal benefit of lower
costs associated with prescriptions ordered through our
ReadyScript technology and filled at TheBigRX.com online
pharmacy or their designated mail-order pharmacies, if
applicable.
o BUILD PREMIER CONTENT TO FOCUS ON CHRONIC MEDICAL CONDITION.
We plan to build TheBigRX.com as a trusted resource for
individuals seeking a wide product selection and helpful
expert information about chronic conditions. We plan to
establish relationships with leading online healthcare
information providers to enhance the information provided on
our web site. We intend to aggressively implement marketing
strategies that target and reach these chronic disease
patients using traditional media and the Internet.
o BUILD CONCURRENT ONLINE BEST PRACTICE DATABANK. We plan to
continuously provide up-to-date best practice information as
it relates to pharmaceutical use in chronic disease management
in an easy-to-use format for physicians to integrate the
highest standard of care into their prescribing decisions. We
intend to establish relationships with leading online
healthcare information providers to ensure the integrity of
the information provided on our web site.
o PROVIDE EXCELLENT CUSTOMER SUPPORT TO BUILD LOYALTY. We intend
to maximize repeat purchases by our customers by providing
excellent customer service; convenient, secure and easy
ordering; helpful information; and reliable delivery that
exceeds our customers' expectations. We believe that our focus
on catering to those with chronic conditions requiring
regularly-replenished products will allow us to benefit from
repeat-purchase patterns (e.g., vitamins, diabetic supplies,
incontinence products).
o UTILIZE TECHNOLOGY TO IMPROVE THE CUSTOMER SHOPPING
EXPERIENCE. We plan to leverage and continue to enhance the
scalable architecture, transaction processing and fulfillment
verification of our technology partner's systems. Our aim is
to utilize technology to continually enhance, simplify and
personalize the consumers' experience in using our site.
PRODUCTS AND SERVICES
- ---------------------
READYSCRIPT MEDICATION MANAGEMENT SYSTEM
- ----------------------------------------
Our ReadyScript medication management system is being designed to
integrate client/server and Internet-enabled technology. It is intended to
enable physicians to prescribe online, and either print the prescription or
electronically route it to a participating pharmacy of the patient's choice,
including TheBigRX.com. ReadyScript is being developed to give physicians
immediate access to drug interaction review, optimal disease-specific drug
preferences, formulary drug preference matching, and ultimately patient
medication history. With this information, physicians will be able to make the
best prescribing decisions.
Prescriptions generated with ReadyScript will be accurate and legible,
substantially reducing unnecessary time and energy spent by pharmacists,
physician's offices and health plans verifying plan coverage and deciphering
illegible prescriptions.
We plan to provide comprehensive and up-to-date drug and disease state
management information through a dynamic link between ReadyScript and our web
site. This capability will promote optimal drug therapy decisions within the
context of the diseases for which the drugs are being used.
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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 incorporate the
following features:
o industry standard prescription transmission specifications;
o Internet enabled;
o desktop or handheld technology platform;
o eligibility interface;
o insurer formulary management;
o insurer drugs of choice;
o automated drug utilization review and prior authorization; and
o immediate access to drug information and disease state
knowledge tools.
THEBIGRX.COM ONLINE PHARMACY SERVICES
- -------------------------------------
When the physicians using ReadyScript can generate an electronic
prescription at the point of care, consumers will not need to own or use a
computer to benefit from our online pharmacy services. However, those consumers
who do use the Internet will be able to take full advantage of our convenient
online retail pharmacy, TheBigRX.com.
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
will likely take the opportunity to combine their non-prescription product
orders with their prescriptions. They will be able to do so by visiting our web
site directly at http://www.thebigrx.com or accessing our site through
TheBigHub.com, a dedicated Internet portal and search engine.
Our technology partner's exclusive "one-checkout" Universal Shopping
Cart is planned 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. By delivering the
lowest possible prices, a large selection of merchandise, the convenience of a
Universal Shopping Cart, shopping 24 hours a day, useful product information,
merchandising to fit the interests and needs of the customer, and superior
customer service, every time, our online customers should never need to shop
anywhere else.
Our pharmacy will only accept prescriptions that can be verified as
being written by duly licensed healthcare providers.
RELATIONSHIP WITH THE BIGSTORE.com
- ----------------------------------
We have acquired the online domain name of "TheBigRX.com," and entered
into a strategic alliance with TheBigStore.com, Inc. and 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.
This strategic alliance allows 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.
The back-end processing technology and functionality anticipated to be
provided by TheBigStore.com includes: web site hosting, web site design and
development, customer order processing, debit/credit card validation, fraud
detection, data encryption, order tracking, transaction
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accounting and record retention. TheBigStore will provide a back-end system that
is comprehensive in software and hardware capability, user-friendly and easily
navigated, and the system is fully scalable to meet the needs of transactional
growth. The transactional system will fully integrate the user site, our web
sites, credit card approval and payment process, manufacturer, shipper, customer
notification and tracking and the accounting functions. In exchange for these
back-end services, TheBigStore.com has an option to buy 410,000 shares of our
commmon stock at an exercise price of $5.00 per share.
We will maintain exclusive control over our business operations,
development of our web sites, and content found on our sites. 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, pharmacy benefit managers and
hospital networks. We intend to use a variety of marketing tools--including
direct mail, editorials, articles, professional seminars, and advertisements in
trade and medical journals---to build brand awareness for the ReadyScript
solution and its link to TheBigRX.com retail online pharmacy.
At the same time, we intend to drive customer traffic to TheBigRX.com
by targeting consumers with chronic medical conditions. We plan to use
traditional and Internet media, promote our affiliation with the "Big" stores,
develop online alliances with leading healthcare information providers, and
place ads in magazines read by targeted chronic disease patients.
RETAIL MERCHANDISING
- --------------------
For TheBigRX.com retail online pharmacy, we believe that the depth and
breadth of our product selection, focus on chronic medical conditions, and range
of helpful and useful shopping services, will enable us to establish an
effective merchandising strategy. Key elements of our strategy include:
o easy access to a wide variety of products;
o specific product orientation for individuals with chronic
medical conditions;
o useful product information;
o targeted promotions; and
o product samples including diagnostic screening tests.
RETAIL DISTRIBUTION AND ORDER FULFILLMENT
- -----------------------------------------
We intend to outsource our distribution and order fulfillment
operations through one or more vendors. The designated vendors will package for
shipment all consumer non-prescription orders, including any of our inventory
purchased directly from other vendors. We plan to carry minimal inventory and
rely to a large extent on rapid shipping from our distributors.
For TheBigRX.com, 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 U.S. Postal Service. Priority orders will be flagged and expedited
through our fulfillment processes.
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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 client 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. The implementation process is flexible to meet the diverse needs of
our client base. Once ReadyScript is developed and installed, our client support
services staff will work closely with clients 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 developed, 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 will
include a perpetual inventory system, order tracking system and decision support
information system. The use of multiple web servers, application servers and
database servers will allow the systems to be resilient and redundant. Our
Internet servers will use SSL to help conduct secure communications and
transactions over the Internet.
Our systems infrastructure will be hosted at TheBigStore.com, Inc. in
Newport Beach, California.
COMPETITION
- -----------
The online commerce market is new, rapidly evolving and intensely
competitive. In particular, the health and personal care categories are
intensely competitive and highly fragmented, with no clear dominant leader in
any of our market segments. Our competitors can be divided into several groups:
Medication Management
o companies that market e-commerce based medication management
systems to physicians and insurers, such as Allscripts and
Healtheon.
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Retail
o online pharmacy product retailers, such as planetRx.com,
drugstore.com/RiteAid and Soma.com/CVS;
o chain drugstores, such as Walgreen's, RiteAid, CVS and Eckerd;
o mass market retailers, such as Wal-mart, Kmart and Target;
o supermarkets, such as Safeway, Albertson's and Vons;
o warehouse clubs;
o cosmetic departments at major department stores, such as
Nordstrom and Macy's;
o pharmacy benefit managers and mail-order pharmacies, such as
PCS, RiteAid, Express Scripts and Merck-Medco; and
o Internet portals and online service providers that feature
shopping services, such as AOL, Yahoo!, MSN.com and Lycos.
Most of these competitors operate within one or more of our market
segments. We believe the principal competitive factors in our market:
o establishment of market awareness and trust;
o ease of accessibility for customers to reach us and use our site;
o ability of physician practices to easily transmit electronic
prescriptions;
o ability to accept mail-order prescriptions and be reimbursed
by insurers;
o product selection, personalized service, convenience and ease
of use;
o price;
o quality and layout of content; and
o reliability and speed of fulfillment.
GOVERNMENT REGULATION
- ---------------------
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
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an assessment of mechanisms to ensure that online pharmacies are obeying the
various state and federal regulations for the industry. Because we will be
making every effort only to fulfill valid prescriptions written by duly licensed
providers and we will not prescribe drugs, we believe that our business will not
be negatively affected by any regulations that result from the investigations.
However, we believe that any regulations resulting from the investigations will
likely result in increased reporting and monitoring requirements.
The National Association of Boards of Pharmacy, a coalition of state
pharmacy boards, is in the process of developing the Verified Internet Pharmacy
Practice Sites program as a model for self-regulation for online pharmacies. We
intend to comply with its criteria for certification.
Legislation and regulations currently being considered at the federal
and state level could affect our business, including legislation or regulations
relating to confidentiality of patient records, electronic access and storage.
In addition, various state legislatures are considering new legislation related
to the regulation of nonresident pharmacies. The Health Insurance Portability
and Accountability Act of 1996 mandates the use of standard transactions,
standard identifiers, security and other provisions by the year 2000.
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.
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.
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BRANDS, TRADEMARKS, PATENTS
- ---------------------------
We use the trademarks "ReadyScript" and "TheBigRX.com" as
identification of our automated medication management prescribing system and
online drugstore. 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 applications for the registration of some of our
trademarks and service marks in the United States and in some other countries,
including ReadyScript(TM) and TheBigRx.com(TM), although we have not secured
registration of any of our marks to date. We 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
TheBigRX.com(TM).
We registered the tradenames "Fortel," "Isletest," "Nimbus" and "GAP"
with the Office of Patents and Trademarks on December 31, 1985. Our unregistered
tradenames are "EZDetect," "CAST," "COT," "EquistiK," "FelistiK," "Tri-Level
Controls," "Tru-Level Controls," "T-Marker Controls," "AllerHalt," "Candiquant,"
"Candigen," "EZ-H.P." and "EZ-PSA."
Allergy Immuno Technologies, Inc. has four patents pertaining to its
discoveries for allergy treatment. These are:
1. Immunotherapy agents for treatment of IgE mediated allergies;
U.S. Patent #5,116,612, issued May 6, 1992.
2. Liposome containing immunotherapy agents for treatment of IgE
mediated 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 seventeen years. Lancer
has entered into a number of license and/or royalty agreements pursuant to which
it has obtained rights to certain of the products which it manufactures and/or
markets. The patents and agreements have had a favorable effect on Lancer's
image in the orthodontic marketplace and Lancer's sales. Lancer has entered into
a number of license and/or royalty agreements pursuant to which it has obtained
rights to certain of the products which it manufactures and/or markets.
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, employs 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.
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ITEM 2. DESCRIPTION OF PROPERTY
-----------------------
During fiscal 1999 Biomerica leased approximately 21,000 square feet of
space in Newport Beach, California for a term which expired May 31, 1998 at a
base rental payment of $12,720 per month, plus taxes and insurance. The lease is
currently month-to-month. These facilities are used for diagnostic test kit
research and development, manufacturing, marketing and administration, as well
as for the BigRx.
The facilities are leased from Mrs. Ilse Sultanian and JSJ Management
(a partner of which is an officer and director of Biomerica). The terms of such
leases cannot be considered to have been negotiated at arms-length, but in the
opinion of management are no less favorable to Biomerica than would be available
from an unaffiliated party.
AIT currently leases approximately 1,600 square feet at the above
facility for $1,400 per month. These properties are leased by AIT on a month to
month basis from Mrs. Ilse Sultanian and 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 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 sixty months commencing November 1, 1998 and ending October 1, 2003. The
future aggregate minimum annual lease payments for 2000 and 2001 are,
respectively, $138,362 and $140,994. 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 our requirements and those of our subsidiaries at
this time. Additional facilities may be needed in the near future for the
Internet operations.
ITEM 3. LEGAL PROCEEDINGS
-----------------
Inapplicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
-------------------------------------------------
Inapplicable.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------
Biomerica's common stock is traded on the NASDAQ SmallCap Stock Market
under the symbol "BMRA".
The following table shows the high and low bid prices for Biomerica's
common stock over the last two years based upon data reported by NASDAQ. Prices
shown represent quotations by dealers, and do not reflect markups, markdowns or
commissions.
Bid Prices
------------------------------
High Low
------------ -------------
Quarter ended:
May 31, 1999........................... $5.00 $0.969
February 28, 1999...................... $1.75 $0.9375
November 30, 1998...................... $2.25 $0.875
August 31, 1998........................ $2.125 $1.125
May 31, 1999........................... $2.875 $1.25
February 28, 1998...................... $3.125 $2.188
November 30, 1997...................... $2.643 $2.164
August 31, 1997........................ $3.104 $2.607
May 31, 1997.......................... $3.625 $2.125
As of August 16, 1999, the number of holders of record of Biomerica's
common stock was approximately 1,741, excluding stock held in street name.
No dividends have been declared or paid by Biomerica. We intend to employ
all available funds for development of our business and, accordingly, do not
intend to pay cash dividends in the foreseeable future.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
The following discussion of our financial condition and results of
operations should be read in conjunction with our Consolidated Statements and
related Notes contained elsewhere in this Form 10-KSB. This Form 10-KSB contains
forward-looking statements that involve risks and uncertainties. Our actual
results may differ significantly from the results discussed in the
forward-looking statements.
RESULTS OF OPERATIONS
- ---------------------
We currently have tow subsidiaries, Lance Orthodontics, Inc.
("Lancer"), which is engaged in manufacturing, sales and evelopment of high
technology orthodontic products, and Allegry Immuno technologies, Inc. ("AIT"),
which is engaged in the development and commercialization of novel
bio-pharmaceutical products for the treatment of allergies. We won 30.75% of the
outstanding stock of Lancer and 74.6% of the outstanding stock of AIT. We
exercixe 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 consoldiated with those of Lancer and AIT. Both Lancer and AIT
are public companies. Lancer is trading on the Nasdaq Small Cap 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.
Selling, general and administrative costs increased in fiscal 1999 as
compared to fiscal 1998 by $15,591 (.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. AIT had decreased costs of $61,029 due to
lower personnel costs.
Research and development expense decreased in fiscal 1999 as compared
to fiscal 1998 by $95,130 (17.2%). Of this, Lancer had a decrease of $23,282, as
a result of decreased payroll costs partially offset by development costs of new
products. Biomerica had a decrease in research and development expenses of
$72,109, and AIT had an increase of $261. On an overall basis, AIT decreased
research expenses due to the current lack of funds.
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 is attributable to Biomerica. AIT had an increase of $101,830 due to
a $100,000 fee paid to it for consulting services.
In fiscal 1999 the Company had a net decrease in cash and cash
equivalents of $171,370 compared to an increase in fiscal 1998 of $134,424. In
fiscal 1999 some of the main items that affected the cash flow were (1) an
increase in inventories of $521,543, of which $410,360 was attributable to
Lancer; (2) prepaid expenses increased $147,204 due to higher prepaid expenses
at Biomerica. This was primarily attributable to higher prepaid insurance due to
increased insurance coverage; (3) other assets increased $106,915 due to a
receivable for consulting service of $100,000 at AIT; (4) more exercises of
employee stock options at Biomerica, which increased cash by $153,866; (5)
repayment of $70,000 to the Company for a shareholder loan; and (6) borrowing by
Lancer of $80,000 on its line of credit.
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LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of May 31, 1999, we had cash and available for sale securities of
$1,794,955 (see Note 1 to the Consolidated Financial Statements) and current
working capital of $5,200,345 as opposed to $2,175,434 and $5,118,126,
respectively, for the previous year. 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). Biomerica and its subsidiaries
are currently able to meet their costs of operations through the collection of
trade accounts receivable generated by sales and its working capital position.
In May 1998, Biomerica's Board of Directors approved the repurchase of
up to 1% of Biomerica's outstanding common stock. Such repurchase will be made
from time to time on the open market subject to market pricing and conditions.
Repurchases will be made out of current cash flow and all repurchased shares
will be retired. Through September 10, 1999, a total of 15,450 shares had been
repurchased for an aggregate purchase price of $20,976.
On June 11, 1999, we sold 400,000 shares of our common stock in a
private placement for $5 per share to management and an outside investor. This
increased our cash position by $2,000,000 and is primarily being utilized to
increase the number of personnel for our Internet division to launch our online
pharmacy.
We intend to make significant investments in the Internet division to
complete development of and establish a market for our ReadyScript System. We
are in the process of trying to raise additional funds through a secondary
offering. The proceeds from that offering will be used to launch our on-line
drugstore. If we are successful in raising that amount of capital, we
anticipate those funds will be sufficient to maintain our current and planned
operations for at least the next 24 months.
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 1999 to 2012.
(Refer to Lancer Orthodontics' and Allergy Immuno Technologies' Reports on Form
10-KSB for the year ended May 31, 1999 for information on their loss
carryforwards.)
Biomerica and AIT have no material capital commitments. Please refer to
Exhibit 99.2, Lancer Orthodontics, Inc. 1999 Form 10-KSB for Lancer's capital
commitments.
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 causing
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 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 Biomerica 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 the Biomerica.
Biomerica currently operates a Novell-based LAN system put in place in
November 1994. At least 90% of the workstations, the server and the accounting
software have been up-graded to be year 2000 compliant in the last twelve
months. 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.
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<PAGE>
We have no way of knowing how the Year 2000 may affect our various
vendors in their ability to ship raw materials 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 keeping. We do not anticipate
incurring additional costs to the year 2000 compliant.
We have conducted a vendors and service providers 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.
If the necessary providers of power, communications and other such
providers of important services are not fully prepared for the year 2000, the
Year 2000 could have a material impact on the Biomerica. We have no way of
knowing how the Year 2000 will affect Internet functions.
Lancer has begun the process of upgrading its hardware and software in
order to obtain year 2000 compliance in 1999 and does not anticipate incurring
significant additional costs to be year 2000 compliant.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Exhibit 99.1, "Biomerica, Inc. and Subsidiaries Consolidated Financial
Statements" is incorporated herein by this reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
---------------------------------------------------------------
Inapplicable.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
-------------------------------------------------------------------
This information is incorporated by reference to the Company's proxy
statement for its 1999 Annual Meeting of Stockholders which will be filed not
later than 120 days after the end of the Company's fiscal year ended May 31,
1999.
ITEM 10. EXECUTIVE COMPENSATION
----------------------
This information is incorporated by reference to the Company's proxy
statement for its 1999 Annual Meeting of Stockholders which will be filed not
later than 120 days after the end of the Company's fiscal year ended May 31,
1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
This information is incorporated by reference to the Company's proxy
statement for its 1999 Annual Meeting of Stockholders which will be filed not
later than 120 days after the end of the Company's fiscal year ended May 31,
1999.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
This information is incorporated by reference to the Company's proxy
statement for its 1999 Annual Meeting of Stockholders which will be filed not
later than 120 days after the end of the Company's fiscal year ended May 31,
1999.
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
-------------------------------------
(a) EXHIBITS
--------
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Certificate of Incorporation of Registrant filed with the
Secretary of the State of Delaware on September 22, 1971
(incorporated by reference to Exhibit 3.1 filed with Amendment
No. 1 to Registration Statement on Form S-1, Commission File No.
2-83308).
3.2 Certificate of Amendment to Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware on
February 6, 1978 (incorporated by reference to Exhibit 3.1 filed
with Amendment No. 1 to Registration Statement on Form S-1,
Commission File No. 2-83308).
3.3 Certificate of Amendment to Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware on
February 4, 1983 (incorporated by reference to Exhibit 3.1 filed
with Amendment No. 1 to Registration Statement on Form S-1,
Commission File No. 2-83308).
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<PAGE>
3.4 Certificate of Amendment to Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware on
January 19, 1987 (incorporated by reference to Exhibit 3.4 filed
with Form 8 Amendment No. 1 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended May 31, 1987).
3.5 Certificate of Amendment of Certificate of Incorporation of
Registrant filed November 4, 1987 with the Secretary of State of
the State of Delaware (incorporated by reference to Exhibit 3.1
filed with Amendment No. 1 to Registration Statement on Form S-1,
Commission File No. 2-83308).
3.6 Bylaws of the Registrant (incorporated by reference to Exhibit
3.2 filed with Amendment No. 1 to Registration Statement on
Form S-1, Commission File No. 2-83308).
3.7 Certificate of Amendment of Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware on
December 20, 1994 (incorporated by reference to Exhibit 3.7 filed
with Registrant's Annual Report or Form 10-KSB for the fiscal
year ended May 31, 1995).
4.1 Specimen Stock Certificate of Common Stock of Registrant.
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 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).
10.4 1991 Stock Option and Restricted Stock Plan of Registrant
(incorporated by reference to Exhibit 4.1 to Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on April 6, 1992).
10.5 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.
10.6 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.
10.7 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.
10.8 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.
10.9 Agreement between Lancer Orthodontics, Inc. and Gary Weikel,
an individual, incorporating by reference that certain Product
Development and Marketing Agreement of even date between
Lancer Orthodontics, Inc. and AG Metals, Inc.
10.10 Sublease Agreement between Eagleson de California S.A. de C.V.
and Lancer Orthodontics, Inc. commencing on November 1, 1998.
-30-
<PAGE>
16 Letter on Change of Certifying Accountant (incorporated by
reference to Exhibit A to Form 8-K filed with the Securities
and Exchange Commission on May 24, 1993).
16.1 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 Subsidiaries of Registrant.
27.1 Financial Data Schedule.
99.1 Biomerica, Inc. and Subsidiaries Consolidated Financial
Statements For The Years Ended May 31, 1999 and 1998 and
Independent Auditors' Report.
99.2 Lancer Orthodontics, Inc. Annual Report on Form 10-KSB for
Fiscal Year Ended May 31, 1999 (incorporated by reference to
Lancer's Form 10-KSB dated September, 1999).
99.3 Allergy Immuno Technologies, Inc. Annual Report on Form 10-KSB
for Fiscal Year Ended May 31, 1999 (Incorporated by reference
to AIT's Form 10-KSB dated September 14, 1999).
99.4 Biomerica's report on Form 10-C filed with the Securities and
Exchange Commission November 8, 1994 (incorporated by
reference to Exhibit 99.3 filed with Form 10-KSB for the
fiscal year ended May 31, 1996).
(b) Reports on Form 8-K
-------------------
Biomerica filed a report on Form 8-K with the Securities and Exchange
Commission on July 7, 1999.
-31-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BIOMERICA, INC.
Registrant
By /s/ Zackary S. Irani
------------------------------
Zackary S. Irani, President
Dated: 9/13/99
-----------
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated:
Signature and Capacity
----------------------
/s/ Zackary S. Irani Date: 9/13/99
- ----------------------------- --------------
Zackary S. Irani
President, Director, Chief Executive
Officer
/s/ P.B. Kaplan Date: 9/13/99
- ----------------------------- --------------
P. B. Kaplan, M.D.
Director
/s/ Robert Orlando Date: 9/13/99
- ----------------------------- --------------
Robert Orlando, M.D., Ph.D.
Director
/s/ Janet Moore Date: 9/13/99
- ----------------------------- --------------
Janet Moore, Secretary
Controller, Director,
Chief Accounting Officer
-32-
Exhibit 21
Subsidiaries of Registrant
Name State of Incorporation dba
- ---- ---------------------- ---
Allergy Immuno Technologies, Inc. Delaware n/a
Lancer Orthodontics, Inc. Delware n/a
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-END> MAY-31-1999
<CASH> 1,669,205
<SECURITIES> 125,750
<RECEIVABLES> 1,802,885
<ALLOWANCES> 199,628
<INVENTORY> 3,055,095
<CURRENT-ASSETS> 6,794,532
<PP&E> 3,190,153
<DEPRECIATION> 2,785,614
<TOTAL-ASSETS> 7,849,567
<CURRENT-LIABILITIES> 7,849,567
<BONDS> 0
0
0
<COMMON> 328,835
<OTHER-SE> 3,488,885
<TOTAL-LIABILITY-AND-EQUITY> 7,849,567
<SALES> 8,688,106
<TOTAL-REVENUES> 8,688,106
<CGS> 5,416,720
<TOTAL-COSTS> 5,416,720
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,607
<INCOME-PRETAX> (67,144)
<INCOME-TAX> 5,404
<INCOME-CONTINUING> (72,548)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (72,548)
<EPS-BASIC> (.01)
<EPS-DILUTED> (.01)
</TABLE>
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
CONTENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS,
BDO SEIDMAN, LLP FS-2
INDEPENDENT AUDITORS' REPORT, CORBIN & WERTZ FS-3
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet as of May 31, 1999 FS-4
Consolidated Statements of Operations and
Comprehensive Loss for the Years Ended
May 31, 1999 and 1998 FS-5 - FS-6
Consolidated Statements of Shareholders' Equity
for the Years Ended May 31, 1999 and 1998 FS-7 - FS-8
Consolidated Statements of Cash Flows for the
Years Ended May 31, 1999 and 1998 FS-9 - FS-10
Notes to Consolidated Financial Statements FS-11 - FS-47
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Biomerica, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Biomerica, Inc.
and Subsidiaries (the "Company") as of May 31, 1999, and the related
consolidated statements of operations and comprehensive loss, shareholders'
equity and cash flows for the year ended May 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Biomerica, Inc. and
subsidiaries as of May 31, 1999, and the results of their operations and their
cash flows for the year ended May 31, 1999, in conformity with generally
accepted accounting principles.
BDO SEIDMAN, LLP
Costa Mesa, California
July 29, 1999
FS-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Biomerica, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of operations and
comprehensive loss, 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
FS-3
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
May 31, 1999
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,669,205
Available for-sale securities 125,750
Accounts receivable, less allowance for doubtful accounts
and sales returns of $199,628 1,603,257
Inventories 3,055,095
Notes receivable 44,485
Prepaid expenses and other 296,740
- --------------------------------------------------------------------------------
Total current assets 6,794,532
- --------------------------------------------------------------------------------
INVENTORIES, non-current 25,000
- --------------------------------------------------------------------------------
LAND HELD FOR INVESTMENT 46,000
- --------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, at cost
Equipment 2,446,527
Furniture, fixtures and leasehold improvements
743,626
- --------------------------------------------------------------------------------
3,190,153
ACCUMULATED DEPRECIATION AND AMORTIZATION
(2,785,614)
- --------------------------------------------------------------------------------
Net property and equipment 404,539
INTANGIBLE ASSETS, net of accumulated amortization
448,667
OTHER ASSETS 130,829
- --------------------------------------------------------------------------------
$ 7,849,567
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
May 31, 1999
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 180,000
Accounts payable and accrued expenses 1,014,851
Accrued compensation 399,336
- --------------------------------------------------------------------------------
Total current liabilities 1,594,187
- --------------------------------------------------------------------------------
MINORITY INTERESTS 2,437,660
SHAREHOLDERS' EQUITY
Common stock, $.08 par value; 10,000,000 shares
authorized; 4,110,445 shares issued and outstanding 328,835
Additional paid in capital 12,703,339
Accumulated other comprehensive loss (8,779)
Shareholder loan (1,000)
Accumulated deficit (9,204,675)
- --------------------------------------------------------------------------------
Total shareholders' equity 3,817,720
- --------------------------------------------------------------------------------
$ 7,849,567
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
FS-4
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Years Ended May 31, 1999 1998
- --------------------------------------------------------------------------------
NET SALES $ 8,688,106 $ 9,376,498
Cost of sales 5,416,720 5,484,046
- --------------------------------------------------------------------------------
GROSS PROFIT 3,271,386 3,892,452
- --------------------------------------------------------------------------------
Operating expenses
Selling, general and administrative 3,123,740 3,108,149
Research and development 458,610 553,740
- --------------------------------------------------------------------------------
Total operating expenses 3,582,350 3,661,889
- --------------------------------------------------------------------------------
OPERATING (LOSS) PROFIT (310,964) 230,563
- --------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (15,607) (25,360)
Other income 292,667 152,623
- --------------------------------------------------------------------------------
(LOSS) INCOME, before minority interest in net profits of
consolidated subsidiaries and income taxes (33,904) 357,826
MINORITY INTEREST IN NET PROFITS OF CONSOLIDATED
SUBSIDIARIES (33,240) (196,169)
- --------------------------------------------------------------------------------
(LOSS) INCOME, before income taxes (67,144) 161,657
INCOME TAX EXPENSE 5,404 20,225
- --------------------------------------------------------------------------------
NET (LOSS) INCOME (72,548) 141,432
- --------------------------------------------------------------------------------
FS-5
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
- --------------------------------------------------------------------------------
Years Ended May 31, 1999 1998
- --------------------------------------------------------------------------------
OTHER COMPREHENSIVE LOSS, net of tax
Unrealized loss on available-for-sale securities (66,681) (40,022)
- --------------------------------------------------------------------------------
COMPREHENSIVE LOSS $ (139,229) $ (181,854)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PER SHARE DATA:
Net (loss) income (basic) $ (0.01) $ 0.04
Net (loss) income (diluted) $ (0.01) $ 0.03
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES
Basic 4,001,755 3,951,552
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Diluted 4,001,755 4,061,235
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
FS-6
<PAGE>
<TABLE>
<CAPTION>
BIOMERICA, INC. AND SUBSIDIEARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock Additional Accumulated Other
--------------------- Paid-in Comprehensive Shareholder Accumulated
Shares Amount Capital Income (Loss) Loan Deficit Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 1, 1997 3,889,802 $ 311,184 $ 12,429,673 $ 97,924 $ - $ (9,273,559) $ 3,565,222
Change in unrealized gain
on available-for-sale
securities - - - (40,022) - - (40,022)
Exercise of stock options 93,500 7,480 73,070 - (71,000) - 9,550
Stock repurchase (5,000) (400) (8,261) - - - (8,661)
Offering expenses - - (4,771) - - - (4,771)
Compensation expense - - 10,471 - - - 10,471
Tax benefit from exercise of
stock options - - 12,818 - - - 12,818
Net income - - - - - 141,432 141,432
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1998 3,978,302 318,264 12,513,000 57,902 (71,000) (9,132,127) 3,686,039
FS-7
<PAGE>
<CAPTION>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock Additional Accumulated Other
--------------------- Paid-in Comprehensive Shareholder Accumulated
Shares Amount Capital Income (Loss) Loan Deficit Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Change in unrealized gain
(loss) on available-for-
sale securities - - - (66,681) - - (66,681)
Payment received on
shareholder loan - - - - 70,000 - 70,000
Exercise of stock options 115,800 9,264 144,602 - - - 153,866
Stock repurchase (15,450) (1,236) (19,340) - - - (20,576)
Common stock issued in
satisfaction of payables 31,793 2,543 35,457 - - - 38,000
Compensation expense - - 4,581 - - - 4,581
Tax benefit from exercise
of stock options - - 25,039 - - - 25,039
Net loss - - - - - (72,548) (72,548)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1999 4,110,445 $ 328,835 $ 12,703,339 $ (8,779) $ (1,000) $ (9,204,675) $ 3,817,720
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
FS-8
<PAGE>
<TABLE>
<CAPTION>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
For the Years Ended May 31, 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (72,548) $ 141,432
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 250,596 248,933
Provision for losses on accounts receivable 55,569 6,649
Loss on disposal of assets 2,309 7,763
Realized gain onsale of avilable-for-sale securities (111,885) (66,339)
Options issued for services rendered 4,581 10,471
Common stock issued for rent 38,000 -
Miority interst in net pofits of cosolidated 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)
- ----------------------------------------------------------------------------------------------
FS-9
<PAGE>
<CAPTION>
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
For the Years Ended May 31, 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Net change in cash and cash equivalents (171,370) 134,424
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,840,575 1,706,151
- ----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,669,205 $ 1,840,575
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH-FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
Interest $ 15,607 $ 25,761
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
Income taxes $ 2,400 $ 2,840
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Change in unrealized holding gain on available-for-sale
securities $ (66,681) $ (40,022)
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
Reduction in taxes payable and increase in additional
paid-in capital for exercise of non-qualified stock
options $ 25,039 $ 12,818
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
FS-10
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1. ORGANIZATION Biomerica, Inc. and subsidiaries (collectively "the
Company") are primarily engaged in the development,
manufacture and marketing of medical diagnostic kits, the
design, manufacture and distribution of various orthodontic
products, and the performance of specialized diagnostic
testing services.
2. SUMMARY OF PRINCIPLES OF CONSOLIDATION
SIGNIFICANT
ACCOUNTING The consolidated financial statements for the years ended May
31, POLICIES 31, 1999 and 1998 (see Note 3) include the accounts of
Biomerica, Inc. ("Biomerica"), Lancer Orthodontics, Inc.
("Lancer") and Allergy Immuno Technologies, Inc. ("AIT").
All significant intercompany accounts and transactions have
been eliminated in consolidation.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues
and expenses during the reported period. Actual results could
materially differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has financial instruments whereby the fair market
value of the financial instruments could be different than
that recorded on a historical basis. The Company's financial
instruments consist of its cash and cash equivalents,
accounts receivable, notes receivable, line of credit and
accounts payable. The carrying amounts of the Company's
financial instruments approximate their fair values at May 31,
1999.
FS-11
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2. SUMMARY OF CONCENTRATION OF CREDIT RISK
SIGNIFICANT
ACCOUNTING The Company, on occasion, maintains cash balances at certain
POLICIES financial institutions in excess of amounts insured by federal
(CONTINUED) agencies.
The Company provides credit in the normal course of business
to customers throughout the United States and foreign
markets. The Company's sales are not materially dependent on
a single customer or a small group of customers. The Company
performs ongoing credit evaluations of its customers. The
Company does not obtain collateral with which to secure its
accounts receivable. The Company maintains reserves for
potential credit losses based upon the Company's historical
experience related to credit losses. At May 31, 1999 one
customer accounted for approximately 14% of accounts
receivable.
CASH EQUIVALENTS
Cash and cash equivalents consists of demand deposits, money
market accounts and mutual funds with remaining maturities of
three months or less when purchased.
FS-12
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2. SUMMARY OF AVAILABLE-FOR-SALE SECURITIES
SIGNIFICANT
ACCOUNTING The Company accounts for investments in accordance with
POLICIES Statement of Financial Accounting Standards No. 115 (SFAS
(CONTINUED) 115), "Accounting for Certain Investments in Debt and Equity
Securities." This statement addresses the accounting and
reporting for investments in equity securities which have
readily determinable fair values and all investments in debt
securities. The Company's marketable equity securities are
classified as available-for-sale under SFAS 115 and reported
at fair value, with changes in the unrealized holding gain or
loss included in shareholders' equity. Available-for-sale
securities consist of common stock of unrelated publicly-
traded companies and are stated at market value in accordance
with SFAS 115. Cost for purposes of computing realized gains
and losses is computed on a specific identification basis.
The proceeds from the sale of available-for-sale securities
during fiscal 1999 and 1998 totaled $254,313 and $205,835,
respectively (see Note 8). The change in the net unrealized
holding (loss) gain on available-for-sale securities that has
been included as a separate component of shareholders' equity
totaled $(66,681) and $(40,022) for the years ended May 31,
1999 and 1998, respectively.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-
out method) or market and consist primarily of orthodontic
products and biological chemicals. Cost includes raw
materials, labor, manufacturing overhead and purchased
products. Market is determined by comparison with recent
purchases or net realizable value. Such net realizable value
is based on forecasts for sales of the Company's products in
the ensuing years. The industries in which the Company
operates are characterized by technological advancement and
change. Should demand for the Company's products prove to be
significantly less than anticipated, the ultimate realizable
value of the Company's inventories could be substantially
less than the amount shown on the accompanying consolidated
balance sheet.
FS-13
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2. SUMMARY OF Inventories consist of the following:
SIGNIFICANT
ACCOUNTING May 31, 1999
POLICIES --------------------------------------------------------------
(CONTINUED) Raw materials $ 746,386
Work in progress 500,805
Finished products 1,807,904
$ 3,055,095
--------------------------------------------------------------
--------------------------------------------------------------
Approximately $1,649,126 of Lancer's inventory is located at
its manufacturing facility in Mexico as of May 31, 1999.
LAND HELD FOR INVESTMENT
Land held for investment consists of a parcel of land
located in the state of Utah, and is stated at the lower of
cost or fair value less costs to sell.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for
additions and major improvements are capitalized. Repairs and
maintenance costs are charged to operations as incurred. When
property and equipment are retired or otherwise disposed of,
the related cost and accumulated depreciation are removed
from the accounts, and gains or losses from retirements and
dispositions are credited or charged to income.
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.
FS-14
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2. SUMMARY OF Management of the Company assesses the recoverability of
SIGNIFICANT property and equipment by determining whether the depreciation
ACCOUNTING and amortization of such assets over their remaining lives can
POLICIES be recovered through projected undiscounted cash flows. The
(CONTINUED) 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.
FS-15
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2. SUMMARY OF RISKS AND UNCERTAINTIES
SIGNIFICANT
ACCOUNTING Licenses - Certain of the Company's sales of products are
POLICIES governed by license agreements with outside third parties.
(CONTINUED) All of such license agreements to which the Company currently
is a party are for fixed terms which will expire after ten
years or upon the expiration of the underlying patents. After
the expiration of the agreements or the patents, the Company
is free to use the technology that had been licensed. There
can be no assurance that the Company will be able to obtain
future license agreements as deemed necessary by management.
The loss of some of the current licenses or the inability to
obtain future licenses could have an adverse affect on the
Company's financial position and operations. Historically,
the Company has successfully obtained all the licenses it
believed necessary to conduct its business.
Government Regulation - Biomerica's immunodiagnostic products
are regulated in the United States as medical devices
primarily by the FDA and as such, require regulatory
clearance or approval prior to commercialization in the
United States. Pursuant to the Federal Food, Drug and
Cosmetic Act, and the regulations promulgated thereunder, the
FDA regulates, among other things, the clinical testing,
manufacture, labeling, promotion, distribution, sale and use
of medical devices in the United States. Failure of Biomerica
to comply with applicable regulatory requirements can result
in, among other things, warning letters, fines, injunctions,
civil penalties, recall or seizure of products, total or
partial suspension of production, the government's refusal to
grant premarket clearance or premarket approval of devices,
withdrawal of marketing approvals, and criminal prosecution.
Sales of medical devices outside the United States are
subject to foreign regulatory requirements that vary widely
from country to country. The time required to obtain
registrations or approvals required by foreign countries may
be longer or shorter than that required for FDA clearance or
approval, and requirements for licensing may differ
significantly from FDA requirements. There can be no
assurance that Biomerica will be able to obtain regulatory
clearances for its current or any future products in the
United States or in foreign markets.
FS-16
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2. SUMMARY OF Lancer's products are subject to regulation by the FDA under
SIGNIFICANT the Medical Device Amendments of 1976 (the "Amendments").
ACCOUNTING Lancer has registered with the FDA as required by the
POLICIES Amendments. There can be no assurance that Lancer will be able
(CONTINUED) 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.
FS-17
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2. SUMMARY OF STOCK-BASED COMPENSATION
SIGNIFICANT
ACCOUNTING During 1995, the Financial Accounting Standards Board issued
POLICIES Statement of Financial Accounting Standards No. 123 ("SFAS
(CONTINUED) 123"), "Accounting for Stock-Based Compensation," which
defines a fair value based method of accounting for stock-
based compensation. However, SFAS 123 allows an entity to
continue to measure compensation cost related to stock and
stock options issued to employees using the intrinsic method
of accounting prescribed by Accounting Principles Board
Opinion No. 25 ("APB 25"), ''Accounting for Stock Issued to
Employees." Entities electing to remain with the accounting
method of APB 25 must make pro forma disclosures of net
(loss) income and (loss) earnings per share, as if the fair
value method of accounting defined in SFAS 123 had been
applied (see Note 6). The Company has elected to account for
its stock-based compensation to employees under APB 25.
MINORITY INTEREST
Minority interest represents the minority shareholders'
proportionate share of the equity of Lancer and AIT. At May
31, 1999, Biomerica owned 30.76% of Lancer (see Note 3) and
74.6% of AIT (see Note 3).
FS-18
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2. SUMMARY OF Minority interest of Lancer includes $185,242, represented by
SIGNIFICANT 370,483 shares of Series D redeemable convertible preferred
ACCOUNTING stock. Each share of Series D preferred stock is entitled to
POLICIES a $.04 non-cumulative dividend and is convertible at the
(CONTINUED) option of the holder into common stock at the rate of seven
shares of preferred stock for one share of common stock of
Lancer. Lancer, at its option, can redeem outstanding shares
of the preferred stock for $.50 per share after December 31,
1994. There were no dividends declared or paid in 1999 or
1998.
REVENUE RECOGNITION
Revenues from product sales are recognized at the time the
product is shipped. Revenues from specialized diagnostic
testing services are recognized when the related services are
performed.
INCOME TAXES
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Under the asset and liability
method of Statement No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under
Statement No. 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date. A valuation
allowance is provided for certain deferred tax assets if it
is more likely than not that the Company will not realize tax
assets through future operations.
FS-19
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2. SUMMARY OF Biomerica, Lancer and AIT file separate income tax returns for
SIGNIFICANT Federal and state income tax purposes.
ACCOUNTING
POLICIES ADVERTISING COSTS
(CONTINUED)
The Company reports the cost of all advertising as expense in
the period in which those costs are incurred. Advertising
costs were approximately $105,000 and $77,000 for the years
ended May 31, 1999 and 1998, respectively.
(LOSS) EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
No. 128 ("SFAS 128"), "Earnings Per Share" ("EPS"). SFAS 128
requires dual presentation of basic EPS and diluted EPS on
the face of all income statements issued after December 15,
1997 for all entities with complex capital structures. Basic
EPS is computed as net (loss) income divided by the weighted
average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur
from common shares issuable through stock options, warrants
and other convertible securities.
RECLASSIFICATIONS
Certain amounts in the 1998 consolidated financial statements
have been reclassified to conform to the 1999 presentation.
FS-20
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2. SUMMARY OF The following table illustrates the required disclosure of the
SIGNIFICANT reconciliation of the numerators and denominators of the basic
ACCOUNTING and diluted EPS computations.
POLICIES
(CONTINUED)
<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 $ (0.01)
----------------------------------------------------------------
----------------------------------------------------------------
EFFECT OF DILUTIVE
SECURITIES -
Options - -
----------------------------------------------------------------
DILUTED EPS -
Loss available
to common
shareholders plus
assumed conversions $ (72,548) 4,001,755 $ (0.01)
----------------------------------------------------------------
----------------------------------------------------------------
</TABLE>
As of May 31, 1999, there was a total of 454,050 potential
dilutive shares of common stock.
FS-21
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2. SUMMARY OF
SIGNIFICANT For the Year Ended May 31, 1999
ACCOUNTING ------------------------------------------
POLICIES Loss Shares Per Share
(CONTINUED) (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" ("SFAS
131"). SFAS 131 requires public companies to report
information about segments of their business in their annual
financial statements and requires them to report selected
segment information in their quarterly reports issued to
shareholders. It also requires entity-wide disclosures about
the product, services an entity provides, the material
countries in which it holds assets and reports revenues, and
its major customers. The Company adopted the provisions of
this statement for 1999 annual reporting. These disclosure
requirements had no impact on the Company's financial
position or results of operations, or the Company's existing
segment disclosures.
FS-22
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2. SUMMARY OF REPORTING COMPREHENSIVE INCOME
SIGNIFICANT
ACCOUNTING In June 1997, the FASB issued Statement of Financial
POLICIES Accounting Standards ("SFAS") No. 130, "Reporting
(CONTINUED) 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 Lancer is engaged in the design, manufacture and distribution
SUBSIDIARIES 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%.
FS-23
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3. CONSOLIDATED Operating results for Lancer and AIT in the aggregate for the
SUBSIDIARIES years ended May 31, 1999 and 1998, which are included in the
(CONTINUED) consolidated operating results of the Company, are as
follows:
1999 1998
--------------------------------------------------------------
Net sales $ 6,229,847 $ 6,293,254
Cost of sales 3,868,141 3,734,537
--------------------------------------------------------------
Gross profit 2,361,706 2,558,717
-------------------------------------------------------------
Operating expenses:
Selling, general and
administrative 2,206,839 2,218,890
Research and development 178,393 188,359
-------------------------------------------------------------
Total operating expenses 2,385,232 2,407,249
-------------------------------------------------------------
Other income (expense):
Interest expense (15,607) (25,360)
Other income, net 104,329 1,943
-------------------------------------------------------------
88,722 (23,417)
-------------------------------------------------------------
Income before income taxes 65,196 128,051
Income tax expense 5,404 1,600
-------------------------------------------------------------
Net income $ 59,792 $ 126,451
-------------------------------------------------------------
-------------------------------------------------------------
FS-24
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4. INTANGIBLE Intangible assets, net of accumulated amortization, consist of
ASSETS the following:
May 31, 1999
-------------------------------------------------------------
Marketing and distribution rights $ 442,750
Technology use rights 858,328
Patents and other 152,080
-------------------------------------------------------------
1,453,158
Less accumulated amortization (1,004,491)
-------------------------------------------------------------
$ 448,667
-------------------------------------------------------------
-------------------------------------------------------------
Included in marketing and distribution rights are
repurchased sales territories by Lancer which are being
amortized over the estimated useful life of eighteen years.
In each of the fiscal years 1999 and 1998, the Company
recorded amortization expense of $24,900 related to
repurchased sales territories.
During fiscal 1985, Lancer purchased certain assets and
technology which is being amortized over the estimated
useful life of eighteen years. Lancer recorded amortization
expense of $48,696 for each of the years ended May 31, 1999
and 1998 related to these assets.
Amortization expense related to patents and other which is
included in the accompanying consolidated statements of
operations amounted to $6,197 and $945 for the years ended
May 31, 1999 and 1998, respectively.
FS-25
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5. LINE OF At May 31, 1999, Lancer had a $1,000,000 line of credit with
CREDIT a bank. Borrowings are made at prime plus .75% (8.5% at May
31, 1999) and are limited to specified percentages of
eligible accounts receivable. The unused portion available
to Lancer under the line of credit at May 31, 1999 was
$239,213. The line of credit expires on November 3, 1999.
As of May 31, 1999, there was $180,000 outstanding under the
line of credit. Lancer was in compliance with its bank
covenants as of May 31, 1999.
The following summarizes information on short-term
borrowings for the year ended May 31, 1999:
May 31, 1999
-------------------------------------------------------------
Average month end balance $ 173,333
Maximum balance outstanding at any month
end $ 200,000
Weighted average interest rate (computed by
dividing interest expense by average monthly
balance) 9.0%
Interest rate at year end 8.5%
-------------------------------------------------------------
-------------------------------------------------------------
6. SHAREHOLDERS' SHAREHOLDER LOAN
EQUITY
During fiscal 1998, the estate of the chief executive officer
exercised a stock option to purchase 25,000 common shares at
$0.80 per share and 60,000 common shares at $0.85 per share
for a total of $71,000 via a shareholder loan. During 1999,
$70,000 of the shareholder loan was repaid. The unpaid
balance has been reflected as a shareholder loan in the
accompanying consolidated financial statements. The loan is
interest free and is due on demand. The loan is secured by
the unpaid compensation due to the estate (see Note 10) which
is also non-interest bearing.
FS-26
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6. SHAREHOLDERS' 1995 AND 1991 STOCK OPTION AND RESTRICTED STOCK PLANS
EQUITY
(CONTINUED) In December 1991, the Company adopted a stock option and
restricted stock plan (the "1991 Plan") which provides that
non-qualified options and incentive stock options and
restricted stock covering an aggregate of 350,000 of the
Company's unissued common stock may be granted to officers,
employees or consultants of the Company. Options granted
under the 1991 Plan may be granted at prices not less than
85% of the then fair market value of the common stock, vest
at not less than 20% per year and expire not more than 10
years after the date of grant.
In January 1996, the Company adopted a stock option and
restricted stock plan (the "1995 Plan") which provides that
non-qualified options and incentive stock options and
restricted stock covering an aggregate of 500,000 of the
Company's unissued common stock may be granted to affiliates,
employees or consultants of the Company. Options granted
under the 1995 Plan may be granted at prices not less than
85% of the then fair market value of the common stock and
expire not more than 10 years after the date of grant.
During 1997, the Company granted options to purchase 72,000
and 45,000 shares of common stock at exercise prices of $1.90
and $1.92 per share, respectively, to various employees of
the Company. The options vest over a period ranging from four
to five years. During 1997, the Company granted options to
purchase 18,000 and 5,000 shares of common stock at exercise
prices of $1.90 and $3.00 per share respectively, to various
consultants of the Company. Management recorded $10,471
during the year ended May 31, 1998 of expense related to the
granting of these options.
During 1998, the Company granted options to purchase 152,500
shares at an exercise price of $1.85 to employees and a total
of 1,500 shares to non-employees, at an exercise price of
$1.91. Management elected not to record any compensation
expense related to the options issued to nonemployees, as
such was immaterial.
FS-27
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6. SHAREHOLDERS' During 1999, the Company granted options to purchase 2,000,
EQUITY 179,850 and 27,900 shares of its common stock at an exercise
(CONTINUED) 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
valuation 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.
FS-28
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6. SHAREHOLDERS' The following summarizes information about the Company's stock
EQUITY options outstanding at May 31, 1999:
(CONTINUED)
<TABLE>
<CAPTION>
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise May 31, Contractual Exercise at May 31, Exercise
Prices 1999 Life Price 1999 Price
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ .80 - $.90 224,300 4.20 $ .85 116,174 $ .84
$1.85 - $1.92 227,000 3.25 $ 1.88 120,075 $ 1.88
$ 3.00 2,750 2.13 $ 3.00 1,500 $ 3.00
--------------------------------------------------------------------------
--------------------------------------------------------------------------
</TABLE>
SFAS 123 PRO FORMA INFORMATION
Pro forma information regarding net (loss) income and (loss)
earnings per share is required by SFAS 123, and has been
determined as if the Company had accounted for its employee
stock options under the fair value method of SFAS 123. The
fair value for these options was estimated at the date of
grant using the Black Scholes option pricing model with the
following assumptions for the years ended May 31, 1999 and
1998; risk free interest rates of 4.9% and 5.74%,
respectively; dividend yield of 0%; expected life of the
options of 3 years; and volatility factors of the expected
market price of the Company's common stock of 112% and 73%,
respectively.
The Black Scholes option valuation model was developed for
use in estimating the fair value of traded options which
have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of
highly subjective assumptions including the expected stock
price volatility. Because the Company's employee stock
options have characteristics significantly different from
those of traded options, and because changes in the
subjective input assumptions can materially affect the fair
value estimate, in management's opinion, the existing models
do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
FS-29
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6. SHAREHOLDERS' For purposes of pro forma disclosures, the estimated fair
EQUITY value of the options is amortized to expense over the option
(CONTINUED) vesting period. Adjustments are made for options forfeited
prior to vesting. The effect on compensation expense, net
(loss) income, and net (loss) income per share (basic and
diluted) had compensation costs for the Company's stock option
plans been determined based on fair value on the date of grant
consistent with the provisions of SFAS 123 are as follows:
May 31, 1999 1998
--------------------------------------------------------------
Net (loss) income, as reported $ (72,548) $ 141,432
Adjustment to compensation
expense under SFAS 123 (213,436) (24,688)
--------------------------------------------------------------
Net (loss) income, pro forma $ (285,984) $ 116,744
-------------------------------------------------------------
-------------------------------------------------------------
Pro forma net (loss) income
per share - basic $ (0.07) $ 0.03
-------------------------------------------------------------
-------------------------------------------------------------
Pro forma net (loss) income
per share - diluted $ (0.07) $ 0.03
-------------------------------------------------------------
-------------------------------------------------------------
STOCK ACTIVITY
During 1998, the Company incurred an additional $4,771 of
offering costs related to a 1997 stock issuance.
During 1999, the Company repurchased 15,540 shares of its
common stock at an aggregate cost of $20,576.
During 1999, the Company issued 31,793 shares of its common
stock valued at $38,000 in satisfaction of accrued rent.
FS-30
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6. SHAREHOLDERS' SUBSIDIARY OPTIONS AND WARRANTS
EQUITY
(CONTINUED) During fiscal 1998, AIT granted options to purchase
1,185,000 shares of common stock to various employees and
directors of AIT, including an option to purchase 250,000
shares granted to Biomerica, Inc., the parent company. The
exercise price will be the fair market value AIT's common
stock on the date when certain conditions are met, as
defined. The options will vest 50% per year and expire over
five years.
During 1998, intercompany advances outstanding of $134,150
were retired by the Company, in exchange for 1,916,429
shares of AIT's previously unissued common stock.
During 1999, Lancer granted options to purchase 138,500
shares of its common stock at an exercise price of $1.00 to
employees and options to purchase 29,000 shares of its
common stock to non-employees, at an exercise price of
$1.00.
7. INCOME TAXES Income tax expense for the years ended May 31, 1999 and 1998
consists of the following current provisions:
May 31, 1999 1998
-------------------------------------------------------------
U.S. Federal $ - $ -
State and local 5,404 20,225
-------------------------------------------------------------
$ 5,404 $ 20,225
-------------------------------------------------------------
-------------------------------------------------------------
FS-31
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7. INCOME TAXES Income tax expense differs from the amounts computed by
(CONTINUED) applying the U.S. Federal income tax rate of 34 percent to
pretax (loss) income as a result of the following:
May 31, 1999 1998
--------------------------------------------------------------
Computed "expected" tax
(benefit) expense $ (22,829) $ 54,963
Increase (reduction) in income
taxes resulting from:
Meals and entertainment 9,945 4,864
Change in net operating
loss carryforwards 22,829 (54,963)
Other, net (917) 18,840
Equity in earnings of affiliates
not subject to taxation
because of dividends-
received deduction for tax
purposes (9,028) (23,704)
State income taxes 5,404 20,225
--------------------------------------------------------------
$ 5,404 $ 20,225
--------------------------------------------------------------
--------------------------------------------------------------
FS-32
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7. INCOME TAXES The tax effect of temporary differences that give rise to
(CONTINUED) significant portions of liabilities are presented below.
May 31, 1999
--------------------------------------------------------------
Deferred tax assets:
Accounts receivable, principally
due to allowance for doubtful
accounts and sales returns $ 79,898
Inventories, principally due to
additional costs inventoried for
tax purposes pursuant to the Tax
Reform Act of 1986 and
allowance for inventory
obsolescence 116,632
Compensated absences and
deferred payroll, principally due
to accrual for financial reporting
purposes 141,985
State net operating loss
carryforwards 19,643
Federal net operating loss
carryforwards 2,653,495
Tax credit carryforwards 230,094
Investment in affiliates 396,748
-------------------------------------------------------------
3,638,495
Less valuation allowance (3,584,545)
-------------------------------------------------------------
Net deferred tax asset 53,950
Deferred tax liability:
Marketing rights, principally due to
amortization (53,950)
Net deferred tax liability $ -
-------------------------------------------------------------
-------------------------------------------------------------
FS-33
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7. INCOME TAXES The Company has provided a valuation allowance with respect to
(CONTINUED) substantially all of its deferred tax assets as of May 31,
1999 and 1998. Management provided such allowance as it is
currently more likely than not that tax-planning strategies
will not generate taxable income sufficient to realize such
assets in foreseeable future reporting periods.
As of May 31, 1999, Biomerica had net tax operating loss
carryforwards of approximately $4,236,000 and investment tax
and research and development credits of approximately
$27,525, which are available to offset future Federal tax
liabilities. The carryforwards expire at varying dates from
2000 to 2012.
As of May 31, 1999, Lancer had net tax operating loss
carryforwards of approximately $1,848,000 and business tax
credits of approximately $173,174 available to offset future
Federal tax liabilities. The carryforwards expire at varying
dates from 2000 to 2012.
As of May 31, 1999, AIT had net tax operating loss
carryforwards of approximately $1,719,000 and business tax
credits of approximately $29,395 available to offset future
Federal tax liabilities. The carryforwards expire at varying
dates from 2000 to 2012. AIT also had net tax operating loss
carryforwards of approximately $337,000 to offset future
California taxable income, expiring at varying dates between
1997 and 2001.
The Tax Reform Act of 1986 includes provisions which limit
the Federal net operating loss carryforwards available for
use in any given year if certain events, including a
significant change in stock ownership, occur.
FS-34
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8. OTHER INCOME Other income consists of the following for the years ending
May 31:
May 31, 1999 1998
-------------------------------------------------------------
Realized gains on available-for-
sale securities $ 111,885 $ 66,339
Dividend and interest income 76,453 84,341
Consulting 100,000 -
Other 4,329 1,943
-------------------------------------------------------------
$ 292,667 $ 152,623
-------------------------------------------------------------
-------------------------------------------------------------
During 1999, AIT earned $100,000 as a non-recurring
consulting fee from an unrelated entity.
9. BUSINESS Reportable business segments for the
SEGMENTS years ended May 31, 1999 and 1998 are as follows:
1999 1998
-------------------------------------------------------------
Domestic sales:
Orthodontic products $ 3,413,000 $ 3,456,000
-------------------------------------------------------------
-------------------------------------------------------------
Medical diagnostic products $ 868,000 $ 1,585,000
-------------------------------------------------------------
-------------------------------------------------------------
Foreign sales:
Orthodontic products $ 2,746,000 $ 2,738,000
-------------------------------------------------------------
-------------------------------------------------------------
Medical diagnostic products $ 1,661,000 $ 1,597,000
-------------------------------------------------------------
-------------------------------------------------------------
Net sales:
Orthodontic products $ 6,159,000 $ 6,194,000
Medical diagnostic products 2,529,000 3,182,000
-------------------------------------------------------------
Total $ 8,688,000 $ 9,376,000
-------------------------------------------------------------
-------------------------------------------------------------
FS-35
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
9. BUSINESS SEGMENTS 1999 1998
(CONTINUED) --------------------------------------------------------------
Operating profit (loss):
Orthodontic products $ 60,000 $ 284,000
Medical diagnostic products (371,000) (53,000)
-------------------------------------------------------------
Total $ (311,000) $ 231,000
-------------------------------------------------------------
-------------------------------------------------------------
Identifiable assets:
Orthodontic products $ 4,018,000 $ 3,706,000
Medical diagnostic products 3,383,000 3,334,000
-------------------------------------------------------------
Total $ 7,401,000 $ 7,040,000
-------------------------------------------------------------
-------------------------------------------------------------
Total assets:
Orthodontic products $ 4,327,000 $ 4,089,000
Medical diagnostic products 3,523,000 3,406,000
-------------------------------------------------------------
Total $ 7,850,000 $ 7,495,000
-------------------------------------------------------------
-------------------------------------------------------------
Depreciation and amortization
expense:
Orthodontic products $ 172,000 $ 180,000
Medical diagnostic products 79,000 69,000
-------------------------------------------------------------
Total $ 251,000 $ 249,000
-------------------------------------------------------------
-------------------------------------------------------------
Capital expenditures:
Orthodontic products $ 71,000 $ 45,000
Medical diagnostic products 30,000 65,000
-------------------------------------------------------------
Total $ 101,000 $ 110,000
-------------------------------------------------------------
-------------------------------------------------------------
The net sales as reflected above consist of sales to
unaffiliated customers only as there were no significant
intersegment sales during fiscal years 1999 and 1998. No
customer accounted for more than 10% of net sales during
fiscal years 1999 and 1998.
FS-36
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
9. BUSINESS Geographic information regarding net sales and operating
SEGMENTS profits is as follows:
(CONTINUED)
1999 1998
-------------------------------------------------------------
Net sales:
United States $4,638,000 $5,041,000
Europe 1,710,000 1,798,000
South America 749,000 810,000
Asia 426,000 878,000
Other foreign 1,165,000 849,000
-------------------------------------------------------------
Total net sales $8,688,000 $9,376,000
-------------------------------------------------------------
-------------------------------------------------------------
Operating profit (loss):
United States $ (267,000) $ (9,000)
Europe 35,000 114,000
South America 26,000 59,000
Asia (69,000) 14,000
Other foreign (36,000) 53,000
-------------------------------------------------------------
Total operating profit $ (311,000) $ 231,000
-------------------------------------------------------------
-------------------------------------------------------------
Identifiable assets by business segment are those assets
that are used in the Company's operations in each industry.
Identifiable assets are held primarily in the United States.
The Company's interests in AIT, whose operations are in the
United States, are vertically integrated with the Company's
operations in the medical diagnostic products industry.
FS-37
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10. COMMITMENTS OPERATING LEASES
AND
CONTINGENCIES Biomerica leases its primary facility under a non-cancelable
operating lease which expired on May 31, 1998. The lease is
currently month-to-month. AIT leases its primary facility
under a month-to-month operating lease. These facilities
are owned and operated by four of the Company's
shareholders. The lease rate is $12,720 and $1,400 per
month, respectively.
Lancer leases its main facility under a non-cancelable
operating lease expiring December 31, 2003, as extended,
which requires monthly rentals that increase annually, from
$2,900 per month (1994) to $6,317 per month (2003). The
lease expense is being recognized on a straight-line basis
over the term of the lease.
Effective November 1, 1998, Lancer entered into a non-
cancelable operating lease for its Mexico facility expiring
October 31, 2003, which requires average monthly rentals of
approximately $5,500. The rentals are subject to annual
increases based on the United States Consumer Price Index.
Prior to April 1, 1996, such was included in amounts paid
under the terms of the manufacturing agreement as discussed
below.
Rental expense for all operating leases amounted to
approximately $294,000 and $263,000 for the years ended May
31, 1999 and 1998, respectively. The future annual minimum
payments are as follows:
Years ending May 31, Amount
------------------------------------------------------------
2000 $ 307,802
2001 140,994
2002 143,733
2003 146,587
2004 74,884
-------------------------------------------------------------
Minimum lease payments $ 814,000
-------------------------------------------------------------
-------------------------------------------------------------
FS-38
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10. COMMITMENTS MANUFACTURING AGREEMENT
AND
CONTINGENCIES In May 1990, Lancer entered into a manufacturing
subcontractor agreement (the "Manufacturing Agreement"),
whereby the subcontractor agreed to provide manufacturing
services to Lancer through its affiliated entities located in
Mexicali, B.C., Mexico. Lancer moved the majority of its
manufacturing operations to Mexico during fiscal 1992 and
1991. Under the terms of the original agreement, the
subcontractor manufactured Lancer's products based on an
hourly rate per employee based on the number of employees
in the subcontractor's workforce. As the number of employees
increase, the hourly rate decreases. In December 1992,
Lancer renegotiated the Manufacturing Agreement changing from
an hourly rate per employee cost to a pass through of actual
costs plus a weekly administrative fee. The amended
Manufacturing Agreement gives Lancer greater control over all
costs associated with the manufacturing operation. In July
1994, Lancer again renegotiated the Manufacturing Agreement
reducing the administrative fee and extending the
Manufacturing Agreement through June 1998. In March 1996,
Lancer agreed to extend the manufacturing agreement through
October 1998, to coincide with the building lease. Effective
April 1, 1996, Lancer leased the Mexicali facility under a
separate agreement, as discussed above. During 1999, Lancer
agreed to extend the Manufacturing Agreement through October
2003. After June 1996, either party may cancel the agreement
with three months notice. Lancer has retained the option to
convert the manufacturing operation to a wholly-owned
subsidiary of Lancer at any time without penalty. Should
Lancer discontinue operations in Mexico, it is responsible
for the accumulated employee seniority obligation as
prescribed by Mexican law. At May 31, 1999, this obligation
was approximately $287,000. Such obligation is contingent in
nature and accordingly has not been accrued in the
accompanying consolidated balance sheet.
FS-39
<PAGE>
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.COMMITMENTS EMPLOYMENT AGREEMENT
AND
CONTINGENCIES In June 1986, the Company entered into an employment
(CONTINUED) agreement with its then chief executive officer. In May 1996,
the agreement was extended for an additional three years
expiring in May 1999. This agreement was cancelled in April
1997. This agreement required minimum annual compensation
payments of $169,000 and provided for periodic cost of living
increases. The chief executive officer was paid approximately
$81,000 during the year ended May 31, 1996. The chief
executive officer and the Company agreed to amend the
employment agreement for fiscal year 1995, whereby the chief
executive officer would not receive any deferred compensation
for the period June 1994 through November 1994 of
approximately $54,500 and instead received 60,000 stock
options (see Note 6). Approximately $289,000 of the total
accrued compensation included in the 1999 consolidated
balance sheet is due to the chief executive officer's estate.
LICENSE AND ROYALTY AGREEMENT
Lancer has entered into a number of license and/or royalty
agreements pursuant to which it has obtained rights to
manufacture and market certain products. The agreements are
for various durations expiring through 2007 and they require
the Company to make payments based on the sales of the
individual licensed products.
Lancer has entered into license agreements expiring in 2006
whereby, for cash consideration, the counter party has
obtained the rights to manufacture and market certain
products patented by Lancer.
RETIREMENT SAVINGS PLAN
Effective September 1, 1986, the Company established a 401(k)
plan for the benefit of its employees. The plan permits
eligible employees to contribute to the plan up to the
maximum percentage of total annual compensation allowable
under the limits of Internal Revenue Code Sections 415,
401(k) and 404. The Company, at the discretion of its Board
of Directors, may make contributions to the plan in amounts
determined by the Board each year. No contributions by the
Company have been made since the plan's inception.
FS-40
<PAGE>
11. SUBSEQUENT On June 11, 1999, the Company issued 1,200,000 options to
EVENTS 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 June 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 $2.50 per share.
On June 16, 1999, the Company entered into a Letter of Intent
with an underwriter respect to a secondary public offering.
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.
Subsequent to May 31, 1999, the Company entered into various
one year employment agreeements.
FS-41
