BIOMERICA, INC. AND SUBSIDIARIES
CONTENTS
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS,
BDO XXXXXXX, LLP FS-2
INDEPENDENT AUDITORS' REPORT, XXXXXX & XXXXX XX-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
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 XXXXXXX, LLP
Costa Mesa, California
July 29, 1999
FS-2
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.
XXXXXX & XXXXX
Irvine, California
July 24, 1998
FS-3
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May 31, 1999
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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 $199,628 1,603,257
Inventories 3,055,095
Notes receivable 44,485
Prepaid expenses and other 296,740
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Total current assets 6,794,532
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INVENTORIES, non-current 25,000
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LAND HELD FOR INVESTMENT 46,000
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PROPERTY AND EQUIPMENT, at cost
Equipment 2,446,527
Furniture, fixtures and leasehold improvements
743,626
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3,190,153
ACCUMULATED DEPRECIATION AND AMORTIZATION
(2,785,614)
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Net property and equipment 404,539
INTANGIBLE ASSETS, net of accumulated amortization
448,667
OTHER ASSETS 130,829
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$ 7,849,567
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BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
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May 31, 1999
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 180,000
Accounts payable and accrued expenses 1,014,851
Accrued compensation 399,336
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Total current liabilities 1,594,187
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MINORITY INTERESTS 2,437,660
SHAREHOLDERS' EQUITY
Common stock, $.08 par value; 10,000,000 shares
authorized; 4,110,445 shares issued and outstanding 328,835
Additional paid in capital 12,703,339
Accumulated other comprehensive loss (8,779)
Shareholder loan (1,000)
Accumulated deficit (9,204,675)
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Total shareholders' equity 3,817,720
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$ 7,849,567
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See accompanying notes to consolidated financial statements.
FS-4
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
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Years Ended May 31, 1999 1998
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NET SALES $ 8,688,106 $ 9,376,498
Cost of sales 5,416,720 5,484,046
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GROSS PROFIT 3,271,386 3,892,452
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Operating expenses
Selling, general and administrative 3,123,740 3,108,149
Research and development 458,610 553,740
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Total operating expenses 3,582,350 3,661,889
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OPERATING (LOSS) PROFIT (310,964) 230,563
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OTHER INCOME (EXPENSE)
Interest expense (15,607) (25,360)
Other income 292,667 152,623
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(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)
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(LOSS) INCOME, before income taxes (67,144) 161,657
INCOME TAX EXPENSE 5,404 20,225
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NET (LOSS) INCOME (72,548) 141,432
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FS-5
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
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Years Ended May 31, 1999 1998
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OTHER COMPREHENSIVE LOSS, net of tax
Unrealized loss on available-for-sale securities (66,681) (40,022)
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COMPREHENSIVE LOSS $ (139,229) $ (181,854)
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PER SHARE DATA:
Net (loss) income (basic) $ (0.01) $ 0.04
Net (loss) income (diluted) $ (0.01) $ 0.03
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WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES
Basic 4,001,755 3,951,552
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Diluted 4,001,755 4,061,235
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See accompanying notes to consolidated financial statements.
FS-6
BIOMERICA, INC. AND SUBSIDIEARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
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Common Stock Additional Accumulated Other
--------------------- Paid-in Comprehensive Shareholder Accumulated
Shares Amount Capital Income (Loss) Loan Deficit Total
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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
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Balance, May 31, 1998 3,978,302 318,264 12,513,000 57,902 (71,000) (9,132,127) 3,686,039
FS-7
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
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Common Stock Additional Accumulated Other
--------------------- Paid-in Comprehensive Shareholder Accumulated
Shares Amount Capital Income (Loss) Loan Deficit Total
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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)
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Balance, May 31, 1999 4,110,445 $ 328,835 $ 12,703,339 $ (8,779) $ (1,000) $ (9,204,675) $ 3,817,720
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See accompanying notes to consolidated financial statements.
FS-8
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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For the Years Ended May 31, 1999 1998
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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)
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Net cash (used in) provided by operating activities (358,366) 430,914
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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)
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Net cash (used in) provided by investing activities (43,286) 26,009
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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)
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Net cash provided by (used in) financing activities 230,282 (322,499)
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FS-9
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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For the Years Ended May 31, 1999 1998
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Net change in cash and cash equivalents (171,370) 134,424
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,840,575 1,706,151
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CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,669,205 $ 1,840,575
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SUPPLEMENTAL DISCLOSURE OF CASH-FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
Interest $ 15,607 $ 25,761
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Income taxes $ 2,400 $ 2,840
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SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Change in unrealized holding gain on available-for-sale
securities $ (66,681) $ (40,022)
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Reduction in taxes payable and increase in additional
paid-in capital for exercise of non-qualified stock
options $ 25,039 $ 12,818
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See accompanying notes to consolidated financial statements.
FS-10
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
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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
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
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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
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
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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
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
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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
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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
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
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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 Xxxxxx 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
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
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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
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
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2. SUMMARY OF Xxxxxx'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
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
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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
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
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2. SUMMARY OF Minority interest of Xxxxxx 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
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
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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
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)
For the Year Ended May 31, 1999
----------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
--------------------------------------------------------------
BASIC EPS -
Loss available
to common
shareholders $ (72,548) 4,001,755 $ (0.01)
----------------------------------------------------------------
----------------------------------------------------------------
EFFECT OF DILUTIVE
SECURITIES -
Options - -
----------------------------------------------------------------
DILUTED EPS -
Loss available
to common
shareholders plus
assumed conversions $ (72,548) 4,001,755 $ (0.01)
----------------------------------------------------------------
----------------------------------------------------------------
As of May 31, 1999, there was a total of 454,050 potential
dilutive shares of common stock.
FS-21
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
2. SUMMARY OF
SIGNIFICANT For the Year Ended May 31, 1999
ACCOUNTING ------------------------------------------
POLICIES Loss Shares Per Share
(CONTINUED) (Numerator) (Denominator) Amount
----------------------------------------------------------------
BASIC EPS -
Income available to
common
shareholders $ 141,432 3,951,552 $ 0.04
----------------------------------------------------------------
----------------------------------------------------------------
EFFECT OF DILUTIVE
SECURITIES -
Options - 109,683
----------------------------------------------------------------
DILUTED EPS -
Income available to
common
shareholders plus
assumed conversions $ 141,432 4,061,235 $ 0.03
----------------------------------------------------------------
----------------------------------------------------------------
SEGMENT REPORTING
The Financial Accounting Standards Board has issued Statement
of Financial Accounting Standards No. 131 "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 requires public companies to report
information about segments of their business in their annual
financial statements and requires them to report selected
segment information in their quarterly reports issued to
shareholders. It also requires entity-wide disclosures about
the product, services an entity provides, the material
countries in which it holds assets and reports revenues, and
its major customers. The Company adopted the provisions of
this statement for 1999 annual reporting. These disclosure
requirements had no impact on the Company's financial
position or results of operations, or the Company's existing
segment disclosures.
FS-22
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, Xxxxxx 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, Xxxxxx
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 Xxxxxx 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
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
3. CONSOLIDATED Operating results for Xxxxxx 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
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, Xxxxxx purchased certain assets and
technology which is being amortized over the estimated
useful life of eighteen years. Xxxxxx 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
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
5. LINE OF At May 31, 1999, Xxxxxx 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
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
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:
Weighted
Number Average
of Stock Price Range Exercise
Options Per Share Price
--------------------------------------------------------------
Options outstanding at
June 1, 1997 332,600 $ .80 - $3.00 $ 1.48
Options granted 154,000 $ 1.85 - $1.91 $ 1.83
Options exercised (93,500) $ .85 - $1.90 $ .86
Options canceled or
expired (36,750) $1.90 - $3.00 $ 2.56
--------------------------------------------------------------
Options outstanding at
May 31, 1998 356,350 $ .80 - $3.00 $ 1.69
Options granted 218,750 $ .85 - $ .90 $ .86
Options exercised (115,800) $ .80 - $3.00 $ 1.33
Options canceled or
expired (5,250) $ .85 - $1.85 $ 1.80
--------------------------------------------------------------
Options outstanding at
May 31, 1999 454,050 $ .80 - $3.00 $ 1.38
--------------------------------------------------------------
--------------------------------------------------------------
Options exercisable at
May 31, 1999 237,749 $ .80 - $3.00 $ 1.38
--------------------------------------------------------------
--------------------------------------------------------------
The weighted average fair value of options granted during
1999 and 1998 was $0.68 and $1.18, respectively.
FS-28
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)
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
--------------------------------------------------------------------------
$ .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
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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
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
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, Xxxxxx 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
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
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
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, Xxxxxx 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
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
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
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
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, Xxxxxx 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
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, Xxxxxx 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. Xxxxxx 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,
Xxxxxx 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, Xxxxxx again renegotiated the Manufacturing Agreement
reducing the administrative fee and extending the
Manufacturing Agreement through June 1998. In March 1996,
Xxxxxx agreed to extend the manufacturing agreement through
October 1998, to coincide with the building lease. Effective
April 1, 1996, Xxxxxx leased the Mexicali facility under a
separate agreement, as discussed above. During 1999, Xxxxxx
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
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999 AND 1998
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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.
Xxxxxx 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
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 "XxxXxxXX.xxx" 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.
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