<PAGE>
Biomerica, Inc. and Subsidiaries
EXHIBIT 99.1
Contents
Report of Independent Certified Public Accountants,
BDO Seidman, LLP FS-2
Consolidated Financial Statements
Consolidated Balance Sheet as of May 31, 2000 FS-3 - FS-4
Consolidated Statements of Operations and
Comprehensive (Loss) Income for the Years Ended
May 31, 2000 and 1999, respectively FS-5 - FS-6
Consolidated Statements of Shareholders' Equity
for the Years Ended May 31, 2000 and 1999 FS-7 - FS-8
Consolidated Statements of Cash Flows for the
Years Ended May 31, 2000 and 1999 FS-9 - FS-10
Notes to Consolidated Financial Statements FS-11 - FS-43
<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, 2000, and the related
consolidated statements of operations and comprehensive loss, shareholders'
equity and cash flows for the years ended May 31, 2000 and 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Biomerica, Inc. and
subsidiaries as of May 31, 2000, and the results of their operations and their
cash flows for the years ended May 31, 2000 and 1999, in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
Costa Mesa, California
August 11, 2000, except as
to Note 11, which is
as of September 12, 2000
FS-2
<PAGE>
May 31, 2000
---------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 634,210
Available for-sale securities 98,774
Accounts receivable, less allowance for doubtful accounts
and sales returns of $196,794 1,701,935
Inventories 2,860,284
Notes receivable 34,994
Prepaid expenses and other 478,526
---------------------------------------------------------------------------
Total current assets 5,808,723
---------------------------------------------------------------------------
Inventories, non-current 21,405
---------------------------------------------------------------------------
Land held for investment 46,000
---------------------------------------------------------------------------
Property and equipment, at cost
Equipment 2,876,604
Furniture, fixtures and leasehold improvements 519,956
---------------------------------------------------------------------------
3,396,560
Accumulated depreciation and amortization (2,926,110)
---------------------------------------------------------------------------
Net property and equipment 470,450
Intangible assets, net of accumulated amortization 366,814
Other assets 21,917
---------------------------------------------------------------------------
$ 6,735,309
===========================================================================
FS-3
<PAGE>
Biomerica, Inc. and Subsidiaries
Consolidated Balance Sheet
May 31, 2000
----------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities
Line of credit $ 160,000
Accounts payable and accrued expenses 1,314,047
Accrued compensation 353,515
----------------------------------------------------------------------------
Total current liabilities 1,827,562
----------------------------------------------------------------------------
Minority interests 2,112,168
Shareholders' equity
Common stock, $.08 par value; 10,000,000 shares authorized;
4,575,070 shares issued and outstanding 366,005
Additional paid in capital 15,529,421
Accumulated other comprehensive loss (4,323)
Accumulated deficit (13,095,524)
----------------------------------------------------------------------------
Total shareholders' equity 2,795,579
----------------------------------------------------------------------------
$ 6,735,309
============================================================================
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, 2000 1999
------------------------------------------------------------------------------
Net sales $ 8,033,708 $8,688,106
Cost of sales 5,624,630 5,416,720
------------------------------------------------------------------------------
Gross profit 2,409,078 3,271,386
------------------------------------------------------------------------------
Operating expenses
Selling, general and administrative 5,700,963 3,123,740
Research and development 898,122 458,610
------------------------------------------------------------------------------
Total operating expenses 6,599,085 3,582,350
------------------------------------------------------------------------------
Operating loss (4,190,007) (310,964)
Other income (expense)
Interest expense (19,562) (15,607)
Other income, net 118,398 292,667
------------------------------------------------------------------------------
Loss, before minority interest in net loss (profits) of
consolidated subsidiaries and income taxes (4,091,171) (33,904)
Minority interest in net loss (profits) of consolidated
subsidiaries 202,722 (33,240)
------------------------------------------------------------------------------
Loss, before income taxes (3,888,449) (67,144)
Income tax expense 2,400 5,404
------------------------------------------------------------------------------
Net loss (3,890,849) (72,548)
------------------------------------------------------------------------------
FS-5
<PAGE>
Biomerica, Inc. and Subsidiaries
Consolidated Statements of Operations and
Comprehensive Loss
Years Ended May 31, 2000 1999
-------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax
Unrealized gain (loss) on available-for-sale securities 4,456 (66,681)
-------------------------------------------------------------------------------
Comprehensive loss $(3,886,393) $ (139,229)
===============================================================================
Per share data:
Net loss (basic) $ (0.86) $ (0.02)
Net loss (diluted) $ (0.86) $ (0.02)
===============================================================================
Weighted average number of common and common
equivalent shares
Basic 4,542,820 4,001,755
===============================================================================
Diluted 4,542,820 4,001,755
===============================================================================
See accompanying notes to consolidates financial statements.
FS-6
<PAGE>
<TABLE>
<CAPTION>
Biomerica, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Common Stock Additional Accumulated Other
----------------------- Paid-in Comprehensive Shareholder Accumulated
Shares Amount Capital Income (Loss) Loan Deficit Total
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1998 3,978,302 $ 318,264 $ 12,513,000 $ 57,902 $ (71,000) $ (9,132,127) $ 3,686,039
Change in unrealized gain
(loss) on available-for
sale securities - - - (66,681) - - (66,681)
Payment received on
shareholder loan - - - - 70,000 - 70,000
Exercise of stock options 115,800 9,264 144,602 - - - 153,866
Stock repurchase (15,450) (1,236) (19,340) - - - (20,576)
Common stock issued in
satisfaction of payables 31,793 2,543 35,457 - - - 38,000
Compensation expense in
connection with options
granted - - 4,581 - - - 4,581
Tax benefit from exercise
of stock options - - 25,039 - - - 25,039
Net loss - - - - - (72,548) (72,548)
------------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1999 4,110,445 328,835 12,703,339 (8,779) (1,000) (9,204,675) 3,817,720
</TABLE>
FS-7
<PAGE>
Biomerica, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity - Continued
================================================================================
<TABLE>
<CAPTION>
Additional Accumulated Other
Common Stock Paid-in Comprehensive Shareholder Accumulated
---------------------------
Shares Amount Capital Income (Loss) Loan Deficit Total
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Private placement, net of
offering costs of $34,443 400,000 32,000 1,933,557 -- -- -- 1,965,557
Change in unrealized gain
(loss) on available-for-
sale securities -- -- -- 4,456 -- -- 4,456
Payment received on
shareholder loan -- -- -- -- 1,000 -- 1,000
Exercise of stock options 56,625 4,530 56,122 -- -- -- 60,652
Shares issued for services
rendered 8,000 640 15,360 -- -- -- 16,000
Compensation expense in
connection with options
and warrants granted -- -- 821,043 -- -- -- 821,043
Net loss (3,890,849) (3,890,849)
------------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 2000 4,575,070 $ 366,005 $ 15,529,421 $ (4,323) $ -- $(13,095,524) $ 2,795,579
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
FS-8
<PAGE>
Biomerica, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended May 31, 2000 1999
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (3,890,849) $ (72,548)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 222,325 250,596
Provision for losses on accounts receivable (2,834) 55,569
Loss on disposal of assets - 2,309
Realized loss (gain) on sale of available-for-sale securities 13,241 (111,885)
Warrants and options issued for services rendered 821,043 4,581
Common stock of subsidiary issued for services 50,631 -
Gain on conversion of subsidiary preferred stock (55,487) -
Common stock issued for rent - 38,000
Common stock issued for services rendered 16,000
Minority interest in net profits of consolidated subsidiaries (202,722) 33,240
Changes in current liabilities and assets
Accounts receivable (95,844) (52,138)
Inventories 198,406 (521,543)
Prepaid expenses and other 108,912 (147,204)
Accounts payable and other accrued liabilities 299,196 208,367
Accrued compensation (45,821) (45,710)
----------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (2,563,803) (358,366)
----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Sales of available-for-sale securities 18,191 254,313
Decrease (increase) in notes receivable 9,491 (16,000)
Purchases of property and equipment (206,383) (100,824)
Increase in intangible assets - (73,860)
Other assets (181,786) (106,915)
----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (360,487) (43,286)
----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net (decrease) increase under line of credit agreement (20,000) 80,000
Repurchase of minority interests (117,914) (53,008)
Decrease in shareholder receivable 1,000 70,000
Exercise of stock options 60,652 153,866
Sale of common stock, net of offering expenses 1,965,557 -
Stock repurchase - (20,576)
----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,889,295 230,282
----------------------------------------------------------------------------------------------------------------
</TABLE>
FS-9
<PAGE>
Biomerica, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(continued) 6
<TABLE>
<CAPTION>
For the Years Ended May 31, 2000 1999
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net change in cash and cash equivalents (1,034,995) (171,370)
Cash and cash equivalents, beginning of year 1,669,205 1,840,575
-----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 634,210 $ 1,669,205
=================================================================================================================
Supplemental disclosure of cash-flow information
Cash paid during the year for:
Interest $ 19,562 $ 15,607
=================================================================================================================
Income taxes $ 2,400 $ 2,400
=================================================================================================================
Supplemental disclosure of non-cash investing and
financing activities
Change in unrealized holding gain on available-for-sale
securities $ 4,456 $ (66,681)
=================================================================================================================
Reduction in taxes payable and increase in additional
paid-in capital for exercise of non-qualified stock
options $ - $ 25,039
=================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
FS-10
<PAGE>
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
================================================================================
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, the
performance of specialized diagnostic testing
services and the development of wireless handheld
point-of-care systems for physicians.
Liquidity
The Company's fiscal 2000 losses were
substantially the result of its investment in
ReadyScript. The Company's ReadyScript subsidiary
is a development-stage enterprise and will
require the raising of a significant amount of
capital to fund its short-term and longer-term
working capital needs until it can support itself
through its planned operations. The Board of
Directors of the Company have decided that the
ReadyScript subsidiary will no longer be funded
in any way by Biomerica, Inc. or its other
subsidiaries. ReadyScript currently is trying to
raise additional capital through a private
placement memorandum and through the issuance of
convertible debt. ReadyScript has raised $715,000
in convertible debt since May 31, 2000 (See Note
11). Management of the Company expects these
funds to sustain ReadyScript through October 31,
2000. There can be no assurances that ReadyScript
will be successful in its plans to raise
additional capital to meet its short-term and/or
future working capital needs. Biomerica, Inc. and
its subsidiaries, with the exception of
ReadyScript, are expected to fund their
operations for at least the next twelve months
through their existing available financing,
working capital, and its shareholder line of
credit (See Note 11).
2. Summary of Principles of Consolidation
Significant
Accounting The consolidated financial statements for the
Policies years ended May 31, 2000 and 1999 Policies (see
Note 3) include the accounts of Biomerica, Inc.
("Biomerica"), Lancer Orthodontics, Inc.
("Lancer"), Allergy Immuno Technologies, Inc.
("AIT") and ReadyScript, Inc. 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, 2000.
Concentration of Credit Risk
The Company, on occasion, maintains cash balances
at certain financial institutions in excess of
amounts insured by federal agencies.
FS-11
<PAGE>
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
================================================================================
2. Summary of Significant The Company provides credit in the normal course
Accounting of business to customers throughout the United
Policies States and foreign markets. The Company's sales
(Continued) 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,
2000 no one customer accounted for more than 10%
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.
Available-for-Sale Securities
The Company accounts for investments in
accordance with Statement of Financial Accounting
Standards No. 115 (SFAS 115), "Accounting for
Certain Investments in Debt and Equity
Securities." This statement addresses the
accounting and reporting for investments in
equity securities which have readily determinable
fair values and all investments in debt
securities. The Company's marketable equity
securities are classified as available-for-sale
under SFAS 115 and reported at fair value, with
changes in the unrealized holding gain or loss
included in shareholders' equity. Available-for-
sale securities consist of common stock of
unrelated publicly-traded companies and are
stated at market value in accordance with SFAS
115. Cost for purposes of computing realized
gains and losses is computed on a specific
identification basis. The proceeds from the sale
of available-for-sale securities during fiscal
2000 and 1999 totaled $18,191 and $254,313,
respectively (see Note 8). The change in the net
unrealized holding gain (loss) on available-for-
sale securities that has been included as a
separate component of shareholders' equity
totaled $4,456 and $(66,681) for the years ended
May 31, 2000 and 1999, respectively.
FS-12
<PAGE>
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
================================================================================
2. Summary of Inventories
Significant
Accounting Inventories are stated at the lower of cost
Policies (first-in, first-out method) or market and
(Continued) consist primarily of orthodontic products and
biological chemicals. Cost includes raw
materials, labor, manufacturing overhead and
purchased products. Market is determined by
comparison with recent purchases or net
realizable value. Such net realizable value is
based on forecasts for sales of the Company's
products in the ensuing years. The industries in
which the Company operates are characterized by
technological advancement and change. Should
demand for the Company's products prove to be
significantly less than anticipated, the ultimate
realizable value of the Company's inventories
could be substantially less than the amount shown
on the accompanying consolidated balance sheet.
Inventories consist of the following:
<TABLE>
<CAPTION>
May 31, 2000
--------------------------------------------------------------------------------
<S> <C>
Raw materials $ 935,903
Work in progress 425,557
Finished products 1,715,626
Inventory reserve (195,397)
--------------------------------------------------------------------------------
$ 2,881,689
================================================================================
</TABLE>
Approximately $1,510,000 of Lancer's inventory is
located at its manufacturing facility in Mexico
as of May 31, 2000.
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.
FS-13
<PAGE>
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
================================================================================
2. Summary of Property and Equipment
Significant
Accounting Property and equipment are stated at cost.
Policies Expenditures for additions and major improvements
(Continued) 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
$140,472 and $170,803 for the years ended May 31,
2000 and 1999, respectively. At May 31, 2000,
approximately $70,000 of property and equipment,
net of accumulated depreciation and amortization,
is located at Lancer's manufacturing facility in
Mexico.
Management of the Company assesses the
recoverability of property and equipment by
determining whether the depreciation and
amortization of such assets over their remaining
lives can be recovered through projected
undiscounted cash flows. The amount of
impairment, if any, is measured based on fair
value (projected discounted cash flows) and is
charged to operations in the period in which such
impairment is determined by management.
Management has determined that there is no
impairment of property and equipment at May 31,
2000.
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
FS-14
<PAGE>
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
================================================================================
2. Summary of (the "Purchase") by Lancer of the manufacturing
Significant assets and technology of Titan Research
Accounting Associates, Ltd. ("Titan"). Prior to the
Policies Purchase, certain former officers of Lancer and
(Continued) 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 $81,853 and $79,793 for the years
ended May 31, 2000 and 1999, 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,
2000.
Risks and Uncertainties
Licenses - Certain of the Company's sales of
products are governed by license agreements with
outside third parties. All of such license
agreements to which the Company currently is a
party are for fixed terms which will expire after
ten years or upon the expiration of the
underlying patents. After the expiration of the
agreements or the patents, the Company is free to
use the technology that had been licensed. There
can be no assurance that the Company will be able
to obtain future license agreements as deemed
necessary by management. The loss of some of the
current licenses or the inability to obtain
future licenses could have an adverse affect on
the Company's financial position and operations.
Historically, the Company has successfully
obtained all the licenses it believed necessary
to conduct its business.
Government Regulation - Biomerica's
immunodiagnostic products are regulated in the
United States as medical devices primarily by the
FDA and as such, require regulatory clearance or
approval prior to commercialization in the United
States. Pursuant to the
FS-15
<PAGE>
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
================================================================================
2. Summary of Federal Food, Drug and Cosmetic Act, and the
Significant regulations promulgated thereunder, the FDA
Accounting regulates, among other things, the clinical
Policies testing, manufacture, labeling, promotion,
(Continued) distribution, sale and use of medical devices in
the United States. Failure of Biomerica to comply
with applicable regulatory requirements can
result in, among other things, warning letters,
fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension
of production, the government's refusal to grant
premarket clearance or premarket approval of
devices, withdrawal of marketing approvals, and
criminal prosecution.
Sales of medical devices outside the United
States are subject to foreign regulatory
requirements that vary widely from country to
country. The time required to obtain
registrations or approvals required by foreign
countries may be longer or shorter than that
required for FDA clearance or approval, and
requirements for licensing may differ
significantly from FDA requirements. There can be
no assurance that Biomerica will be able to
obtain regulatory clearances for its current or
any future products in the United States or in
foreign markets.
Lancer's products are subject to regulation by
the FDA under the Medical Device Amendments of
1976 (the "Amendments"). Lancer has registered
with the FDA as required by the Amendments. There
can be no assurance that Lancer will be able to
obtain regulatory clearances for its current or
any future products in the United States or in
foreign markets.
Risk of Product Liability - Testing,
manufacturing and marketing of Biomerica's
products entail risk of product liability.
Biomerica currently has product liability
insurance. There can be no assurance, however,
that Biomerica will be able to maintain such
insurance at a reasonable cost or in sufficient
amounts to protect Biomerica against losses due
to product liability. An inability could prevent
or inhibit the commercialization of Biomerica's
products. In addition, a product liability claim
or recall could have a material adverse effect on
the business or financial condition of the
Company.
FS-16
<PAGE>
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
================================================================================
2. Summary of Lancer is subject to the same risks of product
Significant liability. Lancer currently has product liability
Accounting insurance. Lancer also is subject to the risk of
Policies loss of its product liability insurance and the
(Continued) consequent exposure to liability.
Hazardous Materials - Biomerica's research and
development involves the controlled use of
hazardous materials and chemicals. Although
Biomerica believes that safety procedures for
handling and disposing of such materials comply
with the standards prescribed by state and
Federal regulations, the risk of accidental
contamination or injury from these materials
cannot be completely eliminated. In the event of
such an accident, the Company could be held
liable for any damages that result and any such
liability could exceed the resources of the
Company. The Company may incur substantial costs
to comply with environmental regulations.
Stock-Based Compensation
During 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation," which defines a fair
value based method of accounting for stock-based
compensation. However, SFAS 123 allows an entity
to continue to measure compensation cost related
to stock and stock 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, 2000, Biomerica
owned 30.78% of Lancer (see Note 3), 74.6% of AIT
and 100% of Readyscript (see Note 3).
FS-17
<PAGE>
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
================================================================================
2. Summary of Revenue Recognition
Significant
Accounting Revenues from product sales are recognized at the time
Policies the product is shipped. Revenues from specialized
(Continued) diagnostic testing service are recognized when the
related services are performed.
Income Taxes
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Under the asset and
liability method of Statement No. 109, deferred tax
assets and liabilities are recognized for the future tax
consequences attributable to differences between the
financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in
which those temporary differences are expected to be
recovered or settled. Under Statement No. 109, the effect
on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes
the enactment date. A valuation allowance is provided for
certain deferred tax assets if it is more likely than not
that the Company will not realize tax assets through
future operations.
Biomerica, Lancer and AIT file separate income tax
returns for Federal and state income tax purposes.
Advertising Costs
The Company reports the cost of all advertising as
expense in the period in which those costs are incurred.
Advertising costs were approximately $69,000 and $105,000
for the years ended May 31, 2000 and 1999, respectively.
FS-18
<PAGE>
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
================================================================================
2. Summary of (Loss) Earnings Per Share
Significant
Accounting
Policies In February 1997, the Financial Accounting Standards Board
(Continued) ("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.
The following table illustrates the required disclosure of
the reconciliation of the numerators and denominators of
the basic and diluted EPS computations.
<TABLE>
<CAPTION>
For the Year Ended May 31, 2000
---------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
-------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS -
Loss available
to common
shareholders $ (3,890,849) 4,542,820 $ (0.86)
===================================================================
Effect of dilutive
securities -
Options and Warrants - - --
--------------------------------------------------------------------
Diluted EPS -
Loss available
to common
shareholders plus
assumed conversions $ (3,890,849) 4,542,820 $ (0.86)
===================================================================
</TABLE>
FS-19
<PAGE>
2. Summary of
Significant
Accounting
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 $ (0.02)
========================================================================
Effect of dilutive
securities -
Options and Warrants -
------------------------------------------------------------------------
Diluted EPS -
Loss available to
common
shareholders plus
assumed conversions $ (72,548) 4,001,755 $ (0.02)
===========================================================================
</TABLE>
The computation of diluted loss per share excludes the
effect of incremental common shares attributable to the
exercise of outstanding common stock options and
warrants because their effect was antidilutive due to
losses incurred by the Company. See summary of
outstanding stock options and warrants in Note 10.
As of May 31, 2000, there was a total of 3,557,300
potential dilutive shares of common stock.
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
FS-20
<PAGE>
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
================================================================================
2. Summary of requires them to report selected segment information in
Significant their quarterly reports issued to shareholders. It also
Accounting requires entity-wide disclosures about the product,
Policies services an entity provides, the material countries in
(Continued) which it holds assets and reports revenues, and its major
customers. The Company adopted the provisions of this
statement for 1999 annual reporting. These disclosure
requirements had no impact on the Company's financial
position or results of operations, or the Company's
existing segment disclosures.
Reporting Comprehensive Income
In June 1997, the FASB issued Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." This statement establishes standards
for reporting the components of comprehensive income and
requires that all items that are required to be recognized
under accounting standards as components of comprehensive
income be included in a financial statement that is
displayed with the same prominence as other financial
statements. Comprehensive income includes net income as
well as certain items that are reported directly within a
separate component of stockholders' equity. The Company
adopted the provisions of this statement in 1998.
3. Consolidated Lancer is engaged in the design, manufacture and
Subsidiaries distribution of orthodontic products. 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.
During 2000, Lancer repurchased 114,998 shares of its
common stock for aggregate consideration of $117,914.
During 2000, Lancer issued 54,725 shares of its common
stock valued at $50,631 for certain management and
consulting services. In May 2000, all 370,483 shares issued
and outstanding of Lancer's Redeemable Convertible
Preferred Stock-Series C were converted into 52,926 shares
of Lancer's common stock. The result of these transactions
increased Biomerica's direct ownership percentage of Lancer
to 30.78% and increased its direct and indirect (via
agreements with certain shareholders) voting control over
Lancer to 53.23% as of May 31, 2000.
FS-21
<PAGE>
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
================================================================================
3. Consolidated AIT provides immune allergy testing and product to
Subsidiaries physicians and medical institutions. During 1998,
(Continued) 1,916,429 shares of AIT were subscribed to Biomerica in
exchange for debt (see Note 6) and 35,000 shares of AIT
were issued to two AIT employees. The net effect of these
issues increased Biomerica's interest in AIT to 74.6%.
Operating results for Lancer and AIT in the aggregate for
the years ended May 31, 2000 and 1999, which are included
in the consolidated operating results of the Company, are
as follows:
<TABLE>
<CAPTION>
2000 1999
--------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 5,730,488 $ 6,229,847
Cost of sales 3,960,362 3,868,141
--------------------------------------------------------------------------
Gross profit 1,770,126 2,361,706
--------------------------------------------------------------------------
Operating expenses:
Selling, general and
administrative 2,268,090 2,206,839
Research and development 184,849 178,393
--------------------------------------------------------------------------
Total operating expenses 2,452,939 2,385,232
--------------------------------------------------------------------------
Other income (expense):
Interest expense (19,526) (15,607)
Other income, net 228,368 104,329
--------------------------------------------------------------------------
208,842 88,722
--------------------------------------------------------------------------
(Loss) income before income taxes (473,171) 65,196
Income tax expense 1,600 5,404
--------------------------------------------------------------------------
Net (loss) income $ (474,771) $ 59,792
==========================================================================
</TABLE>
FS-22
<PAGE>
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
4. Intangible Intangible assets, net of accumulated amortization, consist of
Assets the following:
<TABLE>
<CAPTION>
May 31, 2000
--------------------------------------------------------------
<S> <C>
Marketing and distribution rights $ 442,750
Technology use rights 858,328
Patents and other intangibles 152,080
--------------------------------------------------------------
1,453,158
Less accumulated amortization (1,086,344)
--------------------------------------------------------------
$ 366,814
==============================================================
</TABLE>
Included in marketing and distribution rights are repurchased
sales territories by Lancer which are being amortized over the
estimated useful life of eighteen years. In each of the fiscal
years 2000 and 1999, 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, 2000 and 1999
related to these assets.
Amortization expense related to patents and other intangibles
which is included in the accompanying consolidated statements
of operations amounted to $8,257 and $6,197 for the years
ended May 31, 2000 and 1999, respectively.
5. Line of At May 31, 2000, Lancer had a $500,000 line of credit with a
Credit bank. Borrowings are made at prime plus 1.25% (10.75% at May
31, 2000) and are limited to specified percentages of eligible
accounts receivable. The unused portion available to Lancer
under the line of credit at May 31, 2000 was $172,707. The
line of credit expires on November 3, 2000. As of May 31,
2000, there was $160,000 outstanding under the line of credit.
Lancer was in compliance with its bank covenants as of May 31,
2000. Lancer was in violation of certain of its debt covenants
at July 31, 2000, Lancer has not obtained a waiver.
FS-23
<PAGE>
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
5. Line of The following summarizes information on short-
Credit term borrowings for the year ended May 31, 2000:
(Continued)
<TABLE>
<CAPTION>
May 31, 2000
--------------------------------------------------------------------------------
<S> <C>
Average month end balance $ 203,333
Maximum balance outstanding at any month
end $ 220,000
Weighted average interest rate (computed by
dividing interest expense by average monthly
balance) 9.62%
Interest rate at year end 10.75%
===============================================================================
</TABLE>
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.
During 2000, the remaining $1,000 was repaid.
1991, 1995 and 1999 Stock Option and Restricted
Stock Plans
In December 1991, the Company adopted a stock
option and restricted stock plan (the "1991
Plan") which provides that non-qualified options
and incentive stock options and restricted stock
covering an aggregate of 350,000 of the Company's
unissued common stock may be granted to officers,
employees or consultants of the Company. Options
granted under the 1991 Plan may be granted at
prices not less than 85% of the then fair market
value of the common stock, vest at not less than
20% per year and expire not more than 10 years
after the date of grant.
FS-24
<PAGE>
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
6. Shareholders' In January 1996, the Company adopted a stock
Equity option and restricted stock plan (the "1995
(Continued) 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 non-
employees, as such was immaterial.
During 1999, the Company granted options to
purchase 2,000, 179,850 and 27,900 shares of its
common stock at an exercise prices of $0.90,
$0.86 and $0.85, respectively, to employees and
2,000 and 7,000 shares to non-employees, at
exercise prices of $0.90 and $0.86, respectively.
The Company recorded $4,581 in compensation
expense related to the options issued to non-
employees, calculated using the Black Scholes
option model.
On June 3, 1999, the Company, issued 8,000 shares
of common stock to a consultant for services
provided. The Company valued these shares at
$16,000.
FS-25
<PAGE>
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
6. Shareholders' On June 11, 1999, the Company issued 1,150,000
Equity and 50,000 options to purchase shares of the
(Continued) Company's stock to employees and non-employees,
respectively. The purchase price of the options
is $3.00 per share. The options are exercisable
for a period of ten years. The Company recorded
$58,806 related to the fair value of options
granted to non-employees. In addition, the
Company issued 1,000,000 stock purchase warrants
to unaffiliated entities for consulting and fund-
raising services rendered. The holder is granted
the right to purchase common stock at an exercise
price of $3.00 per share through the year 2005.
The Company valued these warrants at $1,176,126.
Of this, $588,063 was expensed for consulting
services and $588,063 was recorded as a reduction
of paid-in-capital in connection with the private
placement as discussed below.
On June 11, 1999, the Company entered into a Five
Year Back-End Processing Agreement with an
unaffiliated entity. The unaffiliated entity was
to 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. The
Company issued 410,000 stock purchase warrants
for these services. The holder was granted the
right to purchase common stock at an exercise
price of $5.00. The Company valued these warrants
at approximately $333,000 and initially was
expensing them over sixty months ($66,493 of
expense was recorded during the year ended May
31, 2000). Subsequent to year-end, the
unaffiliated entity stopped providing services to
the Company. The Company does not intend to issue
any common stock if the aforementioned warrants
are presented for exercise because of the breach
in performance. The Company stopped amortizing
the warrant expense subsequent to year-end.
FS-26
<PAGE>
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
6. Shareholders' On June 11, 1999, the Company entered into a Five
Equity Year Strategic Marketing Agreement with
(Continued) TheBigHub.com whereby TheBigHub.com will provide
strategic placement of advertising and marketing
for Biomerica's BigRX.com on its website. The
Company issued 250,000 stock purchase warrants
for these services. The holder was granted the
right to purchase common stock at an exercise
price of $5.00. The Company valued these warrants
at approximately $203,000 and initially was
expensing them over sixty months ($40,545 of
expense was recorded during the year ended May
31, 2000). Subsequent to year-end, the
TheBigHub.com stopped providing services to the
Company. The Company does not intend to issue any
common stock if the aforementioned warrants are
presented for exercise because of the breach in
performance. The Company stopped amortizing the
warrant expense subsequent to year-end.
During the year ended May 31, 2000, the Company
recorded compensation expense of $2,625 related
to the amortization of the fair value of options
to purchase common stock previously issued.
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 incurred
$34,443 in offering costs related thereto. The
shares have piggyback registration rights.
In August 1999, the Company adopted a stock
option and restricted stock plan (the "1999
Plan") which provides that non-qualified options
and incentive stock options and restricted stock
covering an aggregate of 1,000,000 of the
Company's unissued common stock may be granted to
affiliates, employees or consultants of the
Company. As of January 1, of each calendar year,
commencing January 1, 2000, this amount is
subject to automatic annual increases equal to
the lessor of 1.5% of the total number of
outstanding common shares assuming conversion of
convertible securities or 500,000. Options
granted under the 1999 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.
FS-27
<PAGE>
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
6. Shareholders' Additionally, during 2000, the Company granted an
Equity additional 726,000 and 50,000 options to purchase
(Continued) shares of the Company's stock to employees and
non-employees, respectively. The purchase price
of the options range from $1.38 to $3.88 per
share. Management recorded $25,135 during the
year ended May 31, 2000 of expense related to the
granting of options to employees. Management
recorded $22,004 during the year ended May 31,
2000 of expense related to the granting of
options to non-employees.
During 2000, the Company agreed to grant warrants
to three medical groups in exchange for services.
The Company was committed to, but had not yet
issued, 15,000 warrants at exercise prices of
$2.00 to $3.25 as of May 31, 2000. The Company
recorded $17,372 of expense related to these
warrants. These warrants are not included in the
table below.
FS-28
<PAGE>
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
6. Shareholders' Activity as to stock options and warrants under
Equity the 1991, 1995 and 1999 plans are as follows:
(Continued)
<TABLE>
<CAPTION>
Weighted
Number Average
of Stock Price Range Exercise
Options Per share Price
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding at
June 1, 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
June 1, 1999 454,050 $ .80 - $3.00 $ 1.38
Options and warrants granted 3,636,000 $ 1.38 - $5.00 $ 3.27
Options exercised (56,625) $ .80 - $1.90 $ 1.07
Options canceled or
expired (476,125) $ .86 - $3.88 $ 2.63
--------------------------------------------------------------------------------
Options and warrants
outstanding at
May 31, 2000 3,557,300 $ .85 - $5.00 $ 3.15
--------------------------------------------------------------------------------
Options and warrants
exercisable at
May 31, 2000 338,125 $ .85 - $3.00 $ 1.76
================================================================================
</TABLE>
FS-29
<PAGE>
Biomerica, Inc. and subsidiaries
Notes to Consolidated financial Statements
Years Ended May 31, 2000 and 1999
6. Shareholders' Equity The weighted average fair value of
(Continued) options and warrants granted during 2000 and
1999 was $1.25 and $0.68, respectively.
The following summarizes information about
the Company's stock options and warrants
outstanding at May 31, 2000:
<TABLE>
<CAPTION>
Weighted
Average Weighted Number Weighted
Range of Number Remaining Average Exercisable Average
Exercise Outstanding Contractual Exercise at May 31, Exercise
Prices May 31, 2000 Life Price 2000 Price
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ .85 - $ .90 177,175 3.68 $ .86 83,750 $ .86
$ 1.38 - $1.92 307,375 2.98 $ 1.47 199,125 $ 1.82
$ 2.06 - $3.10 2,412,750 5.63 $ 2.99 55,250 $ 2.88
$ $5.00 660,000 2.00 $ 5.00 - $ 5.00
===================================================================================
</TABLE>
SFAS 123 Pro Forma Information
Pro forma information regarding (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, 2000 and 1999;
risk free interest rates ranging from 5.62% to
6.65% and 4.9%, respectively; dividend yield
of 0%; expected life of the options of 1
years; and volatility factors of the expected
market price of the Company's common stock of
120% and 112%, 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-30
<PAGE>
Biomerica, Inc. and subsidiaries
Notes to Consolidated financial Statements
Years Ended May 31, 2000 and 1999
6. Shareholders' Equity For purposes of pro forma disclosures, the estimated
fair value of the options is amortized to expense over
the option vesting period. Adjustments are made for
options forfeited prior to vesting. The effect on
compensation expense, net (loss) income, and net
(loss) income per share (basic and diluted) had
compensation costs for the Company's stock option
plans been determined based on fair value on the date
of grant consistent with the provisions of SFAS 123
are as follows:
<TABLE>
<CAPTION>
May 31, 2000 1999
---------------------------------------------------------------------------
<S> <C> <C>
Net loss, as reported $ (3,890,849) $ (72,548)
Adjustment to compensation
expense under SFAS 123 (1,600,464) (213,436)
---------------------------------------------------------------------------
Net loss, pro forma $ (5,491,313) $ (285,984)
===========================================================================
Pro forma net loss
per share - basic $ (1.21) $ (0.07)
===========================================================================
Pro forma net loss
per share - diluted $ (1.21) $ (0.07)
===========================================================================
</TABLE>
Stock Activity
During 1998, the Company incurred an additional $4,771
of offering costs related to a 1997 stock issuance.
During 1999, the Company repurchased 15,540 shares of
its common stock at an aggregate cost of $20,576.
During 1999, the Company issued 31,793 shares of its
common stock valued at $38,000 in satisfaction of
accrued rent.
FS-31
<PAGE>
Biomerica, Inc. and subsidiaries
Notes to Consolidated financial Statements
Years Ended May 31, 2000 and 1999
6. Shareholders' Equity Subsidiary Options and Warrants
(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.
During 2000, Lancer granted options to
purchase 15,000 shares of its common stock at
an exercise price of $0.85 to employees.
7. Income Taxes Income tax expense for the years ended May
31, 2000 and 1999 consists of the following
current provisions:
May 31, 2000 1999
---------------------------------------------
U.S. Federal $ - $ -
State and local 2,400 5,404
---------------------------------------------
$ 2,400 $ 5,404
---------------------------------------------
FS-32
<PAGE>
Biomerica, Inc. and subsidiaries
Notes to Consolidated financial Statements
Years Ended May 31, 2000 and 1999
7. Income Taxes Income tax expense differs from the amounts computed by
(Continued) applying the U.S. (Continued) Federal income tax rate of
35 percent to pretax (loss) income as a result of the
following:
May 31, 2000 1999
---------------------------------------------------------------
Computed "expected" tax
benefit $ (1,360,957) $ (22,829)
Increase (reduction) in income
taxes resulting from:
Meals and entertainment 20,312 9,945
Change in net operating
loss carryforwards 1,261,093 22,829
Other, net - (917)
Equity in earnings of affiliates
not subject to taxation
because of dividends-
received deduction for tax
purposes 79,552 (9,028)
State income taxes 2,400 5,404
---------------------------------------------------------------
$ 2,400 $ 5,404
===============================================================
FS-33
<PAGE>
Biomerica, Inc. and subsidiaries
Notes to Consolidated financial Statements
Years Ended May 31, 2000 and 1999
7. Income Taxes The tax effect of temporary differences that
(Continued) give rise to significant portions of
liabilities are presented below.
<TABLE>
<CAPTION>
May 31, 2000
-------------------------------------------------------------------
<S> <C>
Deferred tax assets:
Accounts receivable, principally
due to allowance for doubtful
accounts and sales returns $ 78,392
Inventories, principally due to
additional costs inventoried for
tax purposes pursuant to the Tax
Reform Act of 1986 and
allowance for inventory
obsolescence 77,835
Compensated absences and
deferred payroll, principally due
to accrual for financial reporting
purposes 91,403
State net operating loss
carryforwards 173,490
Federal net operating loss
carryforwards 3,550,167
Tax credit carryforwards 190,259
Investment in affiliates 479,185
-------------------------------------------------------------------
4,640,731
Less valuation allowance (4,596,923)
-------------------------------------------------------------------
Net deferred tax asset 43,808
Deferred tax liability:
Marketing rights, principally due to
amortization (43,808)
-------------------------------------------------------------------
Net deferred tax liability $ -
===================================================================
</TABLE>
FS-34
<PAGE>
Biomerica, Inc. and subsidiaries
Notes to Consolidated financial Statements
Years Ended May 31, 2000 and 1999
7. Income Taxes The Company has provided a valuation
(Continued) allowance with respect to substantially
all of its deferred tax assets as of May 31,
2000 and 1999. 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, 2000, Biomerica had net tax
operating loss carryforwards of approximately
$6,648,158 and investment tax and research
and development credits of approximately
$23,000, which are available to offset future
Federal tax liabilities. The carryforwards
expire at varying dates from 2000 to 2020. As
of May 31, 2000, Biomerica has net operations
tax loss carryforwards of approximately
$1,318,000 available to offset future state
income tax liabilities.
As of May 31, 2000, Lancer had net tax
operating loss carryforwards of approximately
$2,101,000 and business tax credits of
approximately $115,000 available to offset
future Federal tax liabilities. As of May 31,
2000, Lancer has net tax operations loss
carryforwards of approximately $250,000 and
business tax credits of approximately $23,000
available to offset future state income tax
liabilities. The carryforwards expire in
2005. The carryforwards expire at varying
dates from 2000 to 2020.
As of May 31, 2000, AIT had net tax operating
loss carryforwards of approximately
$1,866,000 and business tax credits of
approximately $29,000 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 $395,000
to offset future California taxable income,
expiring at varying dates between 2000 and
2005.
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-35
<PAGE>
Biomerica, Inc. and subsidiaries
Notes to Consolidated financial Statements
Years Ended May 31, 2000 and 1999
8. Other Income Other income consists of the following for the
years ending May 31:
<TABLE>
<CAPTION>
May 31, 2000 1999
-------------------------------------------------------------------------------
<S> <C> <C>
Realized (loss) gains on
available-for-sale securities $ (13,241) $ 111,885
Dividend and interest income 99,358 76,453
Tax reversal 50,000 -
Insurance proceeds 170,000 -
Offering expenses (251,574) -
Consulting - 100,000
Other 63,855 4,329
-------------------------------------------------------------------------------
$ 118,398 $ 292,667
===============================================================================
</TABLE>
During 1999, AIT earned $100,000 as a
non-recurring consulting fee from an
unrelated entity.
Management of Lancer completed an assessment
of a theft of inventory located at its
facility in Mexicali Mexico on April 6, 1999.
The carrying value of the inventory stolen
approximated $110,000, valued at standard
cost, which has been reflected in the
accompanying financial statements as of May
31, 1999 as a reduction in inventories and an
addition to insurance claim receivable.
During the year ended May 31, 2000, Lancer
settled the claim with the insurance carrier
and received approximately $280,000. This
amount represents the value of the stolen
inventory at net average selling price, less
commissions and royalties. The $170,000
received in excess of the $110,000 estimated
carrying value was recognized as other income
for the year ended May 31, 2000.
During 1999, Lancer was assessed $64,724 in
pass through net assets taxes by their
subcontractor under their Manufacturing
Agreement. During 2000, legal counsel
determined that Lancer was not liable for
portions of the assessment. Accordingly,
approximately $50,000 of the prior year
accrual was reversed and recognized as other
income during the year ended May 31, 2000.
FS-36
<PAGE>
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
8. Other Income During 2000, $251,574 of amounts incurred in connection
(Continued) with a registration of securities that was cancelled were
written-off.
9. Business Segments Reportable business segments for the years ended May 31,
2000 and 1999 are as follows:
2000 1999
-----------------------------------------------------------
Domestic sales:
Orthodontic products $ 3,133,000 $ 3,413,000
===========================================================
Medical diagnostic products $ 1,318,000 $ 868,000
===========================================================
Foreign sales:
Orthodontic products $ 2,518,000 $ 2,746,000
===========================================================
Medical diagnostic products $ 1,065,000 $ 1,661,000
===========================================================
Net sales:
Orthodontic products $ 5,651,000 $ 6,159,000
Medical diagnostic products 2,383,000 2,529,000
-----------------------------------------------------------
Total $ 8,034,000 $ 8,688,000
===========================================================
Operating (loss) profit:
Orthodontic products $ (504,000) $ 60,000
Medical diagnostic products (3,686,000) (371,000)
-----------------------------------------------------------
Total (4,190,000) $ (311,000)
===========================================================
Identifiable assets:
Orthodontic products $ 3,520,000 $ 4,018,000
Medical diagnostic products 2,848,000 3,383,000
-----------------------------------------------------------
Total 6,368,000 $ 7,401,000
===========================================================
Total assets:
Orthodontic products $ 3,755,000 $ 4,327,000
Medical diagnostic products 2,980,000 3,523,000
-----------------------------------------------------------
Total $ 6,735,000 $ 7,850,000
===========================================================
FS-37
<PAGE>
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
9. Business Segments 2000 1999
-----------------------------------------------------------
(Continued)
Depreciation and amortization expense:
Orthodontic products $ 151,000 $ 172,000
Medical diagnostic products 71,000 79,000
-----------------------------------------------------------
Total $ 222,000 $ 251,000
===========================================================
Capital expenditures:
Orthodontic products $ 10,000 $ 71,000
Medical diagnostic products 196,000 30,000
-----------------------------------------------------------
Total $ 206,000 $ 101,000
===========================================================
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 2000 and 1999.
Geographic information regarding net sales and operating
profits is as follows:
2000 1999
-----------------------------------------------------------
Net sales:
United States $4,451,000 $4,638,000
Europe 1,683,000 1,710,000
South America 543,000 749,000
Asia 349,000 426,000
Other foreign 1,008,000 1,165,000
-----------------------------------------------------------
Total net sales $8,034,000 $8,688,000
===========================================================
FS-38
<PAGE>
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
9. Business Segments Geographic information regarding net sales and operating
(Continued) profits is as follows:
2000 1999
----------------------------------------------------------
Operating profit (loss):
United States $ (3,756,000) $ (267,000)
Europe (176,000) 35,000
South America (37,000) 26,000
Asia (66,000) (69,000)
Other foreign (155,000) (36,000)
----------------------------------------------------------
Total operating loss $ (4,190,000) $ (311,000)
==========================================================
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.
10. Commitments and Operating Leases
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.
FS-39
<PAGE>
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
10. Commitments and Effective November 1, 1998, Lancer entered into a
Contingencies non-cancelable operating lease for its Mexico
(Continued) 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 $312,000 and $294,000 for the
years ended May 31, 2000 and 1999, respectively.
The future annual minimum payments are as follows:
Years ending May 31, Amount
--------------------------------------------------
2001 $ 145,547
2002 148,547
2003 75,505
--------------------------------------------------
Minimum lease payments $ 369,599
==================================================
Manufacturing Agreement
In May 1990, Lancer entered into a manufacturing
subcontractor agreement (the "Manufacturing
Agreement"), whereby the subcontractor agreed to
provide manufacturing services to Lancer through
its affiliated entities located in Mexicali, B.C.,
Mexico. Lancer moved the majority of its
manufacturing operations to Mexico during fiscal
1992 and 1991. Under the terms of the original
agreement, the subcontractor manufactured Lancer's
products based on an hourly rate per employee
based on the number of employees in the
subcontractor's workforce. As the number of
employees increase, the hourly rate decreases. In
December 1992, Lancer renegotiated the
Manufacturing Agreement changing from an hourly
rate per employee cost to a pass through of actual
costs plus a weekly administrative fee. The
amended Manufacturing Agreement gives Lancer
greater control over all costs associated with the
manufacturing operation. In July
FS-40
<PAGE>
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
10. Commitments and 1994, Lancer again renegotiated the Manufacturing
Contingencies Agreement reducing the administrative fee and
(Continued) 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, 2000, this obligation was
approximately $256,000. Such obligation is
contingent in nature and accordingly has not been
accrued in the accompanying consolidated balance
sheet.
Employment Agreement
In June 1986, the Company entered into an
employment agreement with its then chief executive
officer. In May 1996, the agreement was extended
for an additional three years expiring in May 1999.
This agreement was cancelled in April 1997. This
agreement required minimum annual compensation
payments of $169,000 and provided for periodic cost
of living increases. The chief executive officer
was paid approximately $81,000 during the year
ended May 31, 1996. The chief executive officer and
the Company agreed to amend the employment
agreement for fiscal year 1995, whereby the chief
executive officer would not receive any deferred
compensation for the period June 1994 through
November 1994 of approximately $54,500 and instead
received 60,000 stock options (see Note 6).
Approximately $ 204,000 of the total accrued
compensation included in the 2000 consolidated
balance sheet is due to the chief executive
officer's estate.
FS-41
<PAGE>
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
10. Commitments and License and Royalty Agreement
Contingencies
(Continued) Lancer has entered into a number of license and/or
royalty agreements pursuant to which it has
obtained rights to manufacture and market certain
products. The agreements are for various durations
expiring through 2007 and they require the Company
to make payments based on the sales of the
individual licensed products.
Lancer has entered into license agreements expiring
in 2006 whereby, for cash consideration, the
counter party has obtained the rights to
manufacture and market certain products patented by
Lancer.
Retirement Savings Plan
Effective September 1, 1986, the Company
established a 401(k) plan for the benefit of its
employees. The plan permits eligible employees to
contribute to the plan up to the maximum percentage
of total annual compensation allowable under the
limits of Internal Revenue Code Sections 415,
401(k) and 404. The Company, at the discretion of
its Board of Directors, may make contributions to
the plan in amounts determined by the Board each
year. No contributions by the Company have been
made since the plan's inception.
11. Subsequent Events Subsequent to year-end, ReadyScript, Inc., a wholly
owned subsidiary of the Company, entered into
convertible promissory notes totaling $715,000. The
notes mature between July 3 and July 31, 2001. The notes
do not bear interest, provided they are converted. If
not converted, the notes bear interest at 8.0%. Upon
conversion, each note holder shall receive the number of
shares of common stock that is equal to the principal
amount divided by 60% of the then per share purchase
price of the common stock, as defined.
Between June 15, 2000 and August 3, 2000, the
Company granted 87,000 options to purchase shares
of the Company's stock to employees. The exercise
prices of the options range from $1.38 to $3.25.
FS-42
<PAGE>
Biomerica, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended May 31, 2000 and 1999
Between August 4, 2000 and September 8, 2000, the
Company issued 111,174 shares of the Companys common
stock with a total market value of $152 864 to
unaffiliated entities for services rendered and to be
rendered.
The Company has entered into an agreement to issue
50,000 shares of the Company's common stock on
September 15, 2000 to an unaffiliated entity for
services rendered and to be rendered.
11. Subsequent Events Biomerica, Inc. entered into an Agreement, in
(Continued) substance, for a line of credit agreement on
September 12, 2000, with a shareholder whereby the
shareholder will loan to the Company, as needed, up
to $500,000 for working capital needs. The line of
credit bears interest at 8%, is secured by
Biomerica's accounts receivable and inventory, and
expires September 12, 2001. Biomerica and the
shareholder are in the process of formalizing this
line of credit.
12. Condensed Financial Biomerica, Inc. sold 79,375 shares of common stock
Information of Parent between September 11 and 12, 2000 for aggregate
Company proceeds of approximately $106,000. Each shareholder
also received one warrant to purchase common stock
for every four shares of common stock acquired. The
warrants are for a term of five years and have an
exercise price of $2.00.
NOTE 12- CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
-----------------------------------------------------------
Lancer's line-of-credit prohibits the transfer or dividend of funds to
Biomerica, Inc. As a result, the following condensed unconsolidated balance
sheet for Biomerica, Inc. as of May 31, 2000, and the condensed unconsolidated
statements of operations and cash flows for the years ended May 31, 2000 and
1999 have been provided. No cash dividends were paid by the consolidated
subsidiaries (see Note 3) during the years ended May 31, 2000 and 1999.
Condensed Unconsolidated Balance Sheet
May 31, 2000
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 509,247
Available-for-sale securities 98,774
Accounts receivable, net 457,161
Inventories 842,663
Notes receivable 34,994
Prepaid expenses and other 87,531
-----------------
Total current assets 2,035,370
Investment in and advances to unconsolidated subsidiary, restricted 945,572
Investment in and advances to unconsolidated subsidiaries, unrestricted 100,567
Inventory, non-current 21,405
Property and equipment, net 260,378
Intangible assets 118,862
Other 13,532
-----------------
$ 3,490,686
=================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 463,724
Accrued compensation 229,457
-----------------
Total current liabilities 693,181
-----------------
Shareholders' equity:
Common stock 366,005
Additional paid-in capital 15,529,421
Accumulated other comprehensive loss (4,323)
Accumulated deficit (13,093,598)
-----------------
Total shareholders' equity 2,797,505
-----------------
$ 3,490,686
=================
</TABLE>
Condensed Unconsolidated Statements of Operations
May 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
------------------ ------------------
<S> <C> <C>
Net revenues $ 2,283,433 $ 2,458,259
Cost of sales 1,643,290 1,548,579
--------------- ----------------
Gross profit 640,143 909,680
--------------- ----------------
Operating expenses:
Selling, general and administrative 1,867,520 903,046
Research and development 279,788 293,272
--------------- ----------------
Total operating expenses 2,147,308 1,196,318
--------------- ----------------
Operating loss (1,507,165) (286,638)
Other income 86,081 188,338
--------------- ----------------
Loss before interest in net income of consolidated
subsidiaries and income taxes (1,421,084) (98,300)
Interest in net (loss) income of consolidated subsidiaries (2,468,965) 26,552
--------------- ----------------
Loss before income taxes (3,890,049) (71,748)
Income tax expense 800 800
--------------- ----------------
Net loss $ (3,890,849) $ (72,548)
=============== ================
<CAPTION>
Condensed Unconsolidated Statements of Cash Flows
May 31, 2000 and 1999
2000 1999
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,890,849) $ (72,548)
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 93,187 65,959
Realized loss (gain) on sale of available-for-sale securities 13,241 (111,885)
Provision for losses on accounts receivable - 6,377
Loss (income) of subsidiaries 2,468,965 (26,552)
Options and warrants issued for services rendered 821,043 4,581
Common stock is for rent 16,000 38,000
Deferred compensation (77,231) (138,358)
Loss on disposal of assets - 6,518
Net change in other current assets and current liabilities (89,171) 94,259
--------------- ---------------
Net cash used in provided by operating activities (644,815) (133,649)
--------------- ---------------
Cash flows from investing activities:
Sales of available-for-sale securities 18,191 254,313
Purchases of available-for-sale securities - -
Principal payments received on notes receivable 9,491 -
Additional notes receivable - (16,000)
Increase in investment in and advances to
affiliates and consolidated subsidiaries (2,336,205) (159,768)
Purchases of property and equipment (125,335) (103,452)
--------------- ---------------
Net cash used in investing activities (2,433,858) (24,907)
---------------- ---------------
Cash flows from financing activities:
Exercise of stock options 60,652 -
Proceeds from sale of stock 1,965,557 133,290
Decrease in shareholder receivable 1,000 70,000
--------------- ---------------
Net cash provided by financing activities 2,027,209 203,290
--------------- ---------------
Net change in cash and cash equivalents (1,051,464) 44,734
Cash and cash equivalents at beginning of year 1,560,711 1,515,977
--------------- ---------------
Cash and cash equivalents at end of year $ 509,247 $ 1,560,711
=============== ===============
Supplemental disclosure of cash flow information -
Cash paid during the year for:
Interest $ - $ -
=============== ===============
Income taxes $ 800 $ 800
=============== ===============
Supplemental schedule of non-cash investing and financing
activities:
Change in unrealized holding gain on available-for-sale
securities $ 4,456 $ (66,681)
Reduction in taxes payable and increase in additional
paid-in capital for exercise of non-qualified stock options $ - $ 25,039
</TABLE>
FS-43
