UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB/A
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 2002 COMMISSION FILE NUMBER: 0-8765
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BIOMERICA, INC.
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(Small Business Issuer in its Charter)
DELAWARE 95-2645573
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1533 MONROVIA AVENUE, NEWPORT BEACH, CA 92663
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(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: (949) 645-2111
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Securities registered under Section 12(b) of the Exchange Act:
(Title of each class) (Name of each exchange on which registered)
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NONE OTC-Bulletin Board
Securities registered under Section 12(g) of the Exchange Act:
(Title of each class)
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COMMON STOCK, PAR VALUE $0.08
Check whether the issuer (1) filed all reports required to be filed by
Section13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES x NO
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the
best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment
to this Form 10-KSB.
[X]
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State issuer's revenues for its most recent fiscal year: $8,598,000.
State the aggregate market value of the voting and non-voting stock held
by non-affiliates of the issuer (based upon 4,337,437 shares held by non-
affiliates and the closing price of $.56 per share for Common Stock in the
over-the-counter market as of May 31, 2002): $2,428,965.
Number of shares of the issuer's common stock, par value $0.08, outstanding
as of August 27 2002: 5,172,364.
DOCUMENTS INCORPORATED BY REFERENCE: The issuer's proxy statement for its
2002 Annual Meeting of Stockholders is incorporated into Part III hereof.
Transitional Small Business Disclosure Format YES NO X
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2
PART I*
ITEM 1. DESCRIPTION OF BUSINESS
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BUSINESS
OVERVIEW
THE COMPANY
Biomerica, Inc. ("Biomerica", the "Company", "we" or "our") was
incorporated in Delaware in September 1971 as Nuclear Medical Systems, Inc.
We changed our corporate name in February 1983 to NMS Pharmaceuticals, Inc.,
and in November 1987 to Biomerica, Inc. During fiscal 2002 we had three
subsidiaries, Lancer Orthodontics, Inc. ("Lancer"), an international
manufacturer of orthodontics products, Allergy Immuno Technologies, Inc.
("AIT"), which is engaged in providing specialized laboratory testing
services and ReadyScript, Inc. ("ReadyScript"), which developed a wireless
handheld point of care system for physicians, but which operations were
discontinued during fiscal 2001. On May 30, 2002, Biomerica sold its
controlling interest in AIT. All subsidiaries are majority-controlled
subsidiaries.
Lancer is engaged in the design, manufacture and distribution of
orthodontic products. During 2002, Lancer issued 37,595 additional shares
to Biomerica as reimbursement for expenses paid on Lancer's behalf. The
Company valued these shares at $8,271. Biomerica's direct ownership
percentage of Lancer is 31.63% and its direct and indirect (via agreements
with certain shareholders) voting control over Lancer is greater than 50%
as of May 31, 2002. The parties to the voting agreements are Lancer
shareholder, Dr. William Thompson and the Biomerica directors.
In June 1999, we raised $2 million in equity to develop the
Infrastructure of our e-health business, now incorporated as ReadyScript,
Inc. From June 1999 until April 2001 we used the proceeds for developing
an on-line drugstore and ReadyScript's infrastructure (a wireless
medication management system that enables physicians to wirelessly
transmit legible, pre-qualified formulary-compliant prescription orders
directly to the patient's choice of pharmacy).
The Company adopted a formal plan in April 2001 to discontinue
Operations of its ReadyScript subsidiary. Management is currently responding
to any inquiries about the possible purchase of the ReadyScript technology,
but does not have a buyer at the current time. Management has been, and is,
presenting the ReadyScript technology to technology companies operating in
the healthcare field or companies that could possibly benefit from the
ReadyScript technology. Management will work to dispose of this technology,
if possible, within the next year, however there is no assurance that a buyer
for the technology can be found. As time goes on it may make it harder to
sell these assets due to technological changes in the marketplace. These
assets have not been valued on the balance sheet since they were obtained
through research and development, which was expensed at the time it was
incurred. Biomerica has not recognized any losses in revenues as a result
of the decision to discontinue the ReadyScript operation because it was a
development-stage company with no resources. Certain assets were written
off during the closure and these were recorded as losses in the consolidated
financial statements. The subsidiary is being reported in the financial
statements as a discontinued operation because it is no longer an operating
entity.
The Company adopted a formal plan in March, 2002, to discontinue
operations of AIT. Biomerica was issued 808,558 shares of AIT common stock
in April of 2002 for liabilities it assumed from AIT. The shares were valued
at $.015 per share since the stock had been trading at that time between
$.01 and $.02 per share. On May 30, 2002, we sold 13,350,000 shares of AIT
common stock held by us, representing 98.1% of the shares we owned in AIT,
to a third party in exchange for $212,500, which management believes
approximated fair market value at the time of the sale. A non-interest
bearing loan was transferred to the purchaser of the AIT shares as part of
the sale. Biomerica assumed the assets and liabilities of AIT with the
exception of the note evidencing the loan. The amount of the transferred
loan to the purchaser of AIT was $225,282. The note was due on demand
and no payments were made on the note. The operations of AIT are being
reported in the financial statements as discontinued operations. We retained
255,575 shares, or 1.4%, of AIT common stock and sold 13,350,000 shares
since that was the amount of shares that the purchaser wanted to buy.
Prior to the transaction Biomerica assumed all assets and liabilities
of AIT, which included cash ($803), inventory ($2,600), patents ($9,608),
accounts payable ($27,463),net receivables ($1,375), prepaids ($747) and
net fixed assets ($213). There were no other terms in the agreement which
were material. AIT was the holder of a 10,000 share option in Hollister-
Stier, a privately held company. Based on information received from
Hollister-Stier regarding valuation of the options, these options were
transferred to Biomerica in exchange for the reduction of a note payable
to Biomerica by $108,100.
3
OUR MEDICAL DEVICE BUSINESS
Our existing medical device business is conducted through two companies:
(1) Biomerica, Inc., engaged in the diagnostic products market and (2) Lancer
Orthodontics, Inc., engaged in the orthodontic products market.
BIOMERICA - DIAGNOSTIC PRODUCTS
Biomerica develops, manufactures, and markets medical diagnostic
Products designed for the early detection and monitoring of chronic diseases
and medical conditions. The Company's medical diagnostic products are sold in
three markets: 1) clinical laboratories, 2) physicians offices and 3) over-
the-counter (drugstores). Our diagnostic test kits are used to analyze blood
or urine from patients in the diagnosis of various diseases and other medical
complications, or to measure the level of specific hormones, antibodies,
antigens or other substances which may exist in the human body in extremely
small concentrations.
Technological advances in medical diagnostics have made it possible to
perform diagnostic tests within the home and the physician's office, rather
than in the clinical laboratory. One of our main objectives has been to
develop and market rapid diagnostic tests that are accurate, employ easily
obtained specimens, and are simple to perform without instrumentation. Our
over-the-counter and professional rapid diagnostic products help to manage
existing medical conditions and may save lives through prompt diagnosis and
early detection. Until recently, tests of this kind required the services of
medical technologists and sophisticated instrumentation. Frequently, results
were not available until at least the following day. We believe that rapid
point of care tests are as accurate as laboratory tests when used properly,
require no instrumentation, give reliable results in minutes and can be
performed with confidence in the home or the physician's office. The
majority of our over-the-counter rapid tests are FDA cleared.
Our clinical laboratory diagnostic products include tests for thyroid
conditions, yeast infections, H. pylori, and others. These diagnostic test
kits utilize enzyme immunoassay or radioimmunoassay technology. Some of these
products have not yet been submitted for clearance by the FDA for diagnostic
use, but can be sold in various foreign countries.
During fiscal 2002 we introduced the Aware Breast Self-Examination Pad,
Which is a patented, FDA-cleared polyurethane pad containing a silicone oil
lubricant. The pad is designed to enhance the sense of touch by reducing
friction between the fingers and the skin. The pad is packaged with an
instructional video which teaches the proper techniques for performing
breast self-examination. The target markets for the product include retail,
catalog, multi-level marketing channels, and the medical community.
LANCER ORTHODONTICS, INC. -- ORTHODONTIC PRODUCTS
Lancer is engaged in developing, manufacturing, and selling orthodontic
products. Its products are sold worldwide through a direct sales force and
distributors.
Lancer's product line includes preformed bands, direct bonding pads,
various brackets, buccal tubes, arch wires, lingual attachments and related
accessories. The foregoing are assembled to standard prescriptions or the
specifications of private label customers. Lancer also markets products
which are purchased and resold to orthodontists, including sealants,
adhesives, elastomerics, headgear cases, retainer cases, and orthodontic
wire.
4
Most of Lancer's manufacturing and shipping operations are located in
Mexicali, Mexico, in order to reduce the cost of manufacturing and compete
more effectively worldwide. Lancer maintains its headquarters in San Marcos,
California where it houses administration, engineering, sales and marketing,
and customer services.
DISCONTINUED OPERATIONS
The Company's fiscal 2002 and 2001 losses were partially the result of
its investment in ReadyScript. The ReadyScript subsidiary was a development-
stage enterprise and required the raising of a significant amount of capital
to fund its short-term working capital needs. The ReadyScript operations
were discontinued in May 2001. The net assets and operating results of
ReadyScript are shown separately in the accompanying consolidated financial
statements as discontinued operations and are held for sale.
On May 30, 2002, Biomerica received $212,500 for its interest in AIT
and recorded a gain of $224,481 on the sale. The gain from sale and loss
from operations are included in discontinued operations in the accompanying
statement of operations for the year ended May 31, 2002. Certain
reclassifications have been made to the 2001 balances to conform to the
2002 presentation for discontinued operations.
PRODUCTION
All of our diagnostic test kits are processed and assembled at our
facilities in Newport Beach, California. Production of diagnostic tests can
involve formulating component antibodies and antigens in specified
concentrations, attaching a tracer to the antigen, filling components into
vials, packaging and labeling. We continually engage in quality control
procedures to assure the consistency and quality of our products and to
comply with applicable FDA regulations.
All manufacturing production is regulated by the FDA Good Manufacturing
Practices for medical devices. We have an internal quality control unit that
monitors and evaluates product quality and output. In addition, we employ a
qualified external quality assurance consultant who monitors procedures and
provides guidance in conforming with the Good Manufacturing Practices
regulations. We either produce our own antibodies and antigens or purchase
these materials from qualified vendors. We have alternate, approved sources
for raw materials procurement and we do not believe that material
availability in the foreseeable future will be a problem.
5
During fiscal 2002 Lancer converted its Mexican assets and obligations
to its own division, a Mexican corporation named Lancer Orthodontics de
Mexico (Lancer de Mexico). This division administers services previously
provided by an independent manufacturing contractor. A new lease was
negotiated effective April 1, 2001, for the 16,000 square foot facility used
for Lancer's Mexican operations. Utility and Mexican vendor obligations have
been converted to the Lancer de Mexico name. This conversion will eliminate
the expense of an administrative fee and is expected to provide better
control in meeting obligations. The potential impact for the use of Lancer's
own facility, in terms of a corporation entity with legal standing in Mexico,
is that over a fiscal year Lancer would save approximately $100,000 in
service fees over a Mexican contracted corporate entity.
Should Lancer discontinue operations in Mexico, it is responsible for
accumulated employee seniority obligations as prescribed by Mexican law. At
May 31, 2002, this obligation was approximately $365,000. Such obligation is
contingent in nature and accordingly has not been accrued in Lancer's
financial statements.
RESEARCH AND DEVELOPMENT
Biomerica is engaged in research and development to broaden its
Diagnostic product line in specific areas. Research and development expenses
include the costs of materials, supplies, personnel, facilities and equipment.
Lancer is engaged in development programs to improve and expand its
orthodontic products and production techniques. Lancer consults frequently
with practicing orthodontists. The dental amalgam development was terminated
because of poor sales. This termination did not impact other expenses or
revenues.
Research and development expenses incurred by Biomerica for the years
Ended May 31, 2002 and 2001 aggregated approximately $160,000 and $322,000,
respectively. These expenses included approximately $4,000 and $72,000 for
fiscal 2002 and 2001, respectively, for Lancer's product development.
MARKETS AND METHODS OF DISTRIBUTION
Biomerica has approximately 300 current customers for its diagnostic
business, of which approximately 60 are distributors and the balance are
hospital and clinical laboratories, medical research institutions, medical
schools, pharmaceutical companies, chain drugstores, wholesalers and
physicians' offices.
We rely on unaffiliated distributors, advertising in medical and trade
journals, exhibitions at trade conventions, direct mailings and an internal
sales staff to market our diagnostic products. We target three main markets:
(a) clinical laboratories, (b) physicians' offices, and (c) over-the-counter
drug stores. Separate marketing plans are utilized in targeting each of the
three markets.
6
Lancer sells its products directly to orthodontists through company-paid
sales representatives in the United States. At the end of its fiscal year,
Lancer had seven sales representatives, all in the United States, all of whom
are employees of Lancer.
In selected foreign countries, Lancer sells its products directly to
orthodontists through its international marketing division. Lancer also sells
its products through distributors in certain foreign countries and to other
companies on a private label basis. Lancer has entered into a number of
distributor agreements whereby it granted the marketing rights to its
products in certain sales territories in Mexico, Central America, South
America, Europe, Canada, Australia, and Japan. The distributors complement
the international marketing department which was established in 1982 and
currently employs three people.
Lancer also markets products which are purchased and resold to
orthodontists, including sealants, adhesives, elastomerics, headgear cases,
retainer cases and orthodontic wire.
No customer accounted for 10% or more of Lancer's or Biomerica's sales
in the fiscal years ended May 31, 2002 and 2001.
BACKLOG
At May 31, 2002 and 2001 Biomerica had a backlog of $122,000 and $80,000
respectively. As of May 31, 2002 and 2001, Lancer had a backlog of $84,000
and $167,000, respectively. Lancer had decreased backorders in fiscal 2002
compared to fiscal 2001 because had increased efficiencies in planning (thus
better forecasting of demand) and softened summer demand that allowed them to
catch up their back orders from one year to another. Biomerica had increased
backlog due to the initial order for the breast self-examination pad.
RAW MATERIALS
The principal raw materials utilized by us consist of various chemicals,
serums, reagents, radioactive isotopes and packaging supplies. Almost all of
our raw materials are available from several sources, and we are not
dependent upon any single source of supply or a few suppliers. At May 31,
2002, one company accounted for 17.3% of accounts payable. No company
accounted for more than 10% of purchases for the years ended May 31, 2002
and 2001.
We maintain inventories of antibodies and antigens as components for our
diagnostic test kits. Due to a limited shelf life on some products such as
the RIA kits, finished kits are prepared as required for immediate delivery
of pending and anticipated orders. Sales orders are normally processed on the
day of receipt.
The principal raw materials used by Lancer in the manufacture of its
products include: stainless steel, which is available from several commercial
sources; nickel titanium, which is available from three sources; and lucolux
translucent ceramic, which is currently only available from one source,
General Electric, and is purchased on open account. Ceramic material similar
to General Electric's lucolux translucent ceramic is available from other
sources. Lancer had no difficulty in obtaining an adequate supply of raw
materials during its 2002 fiscal year, and does not anticipate that there
will be any interruption or cessation of supply in the future.
7
COMPETITION
Immunodiagnostic products are currently produced by more than 100
companies, a majority of which are located within the United States.
Biomerica and its subsidiaries are not a significant factor in the market.
Our competitors vary greatly in size. Many are divisions or subsidiaries
of well-established medical and pharmaceutical concerns which are much larger
than Biomerica and expend substantially greater amounts than we do for
research and development, manufacturing, advertising and marketing.
The primary competitive factors affecting the sale of diagnostic
products are uniqueness, quality of product performance, price, service and
marketing. The prices for our products compare favorably with those charged
by most of our competitors.
We believe we compete primarily on the basis of our reputation for the
quality of our products, the speed of our test results, the unique niches we
fill in the market, our patent position, and our prompt shipment of orders.
We offer a broader range of products than many competitors of comparable
size, but to date have had limited marketing capability. We are working on
expanding this capability through strategic cooperations with larger
companies and distributors.
Lancer encounters intense competition in the sale of orthodontic
products. Lancer's management believes that Lancer's seven major competitors
are: Unitek, a subsidiary or division of 3M; "A" Company and Ormco,
subsidiaries or divisions of Sybron Dental Specialities; RMO Inc., a private
company; American Orthodontics, a private company; GAC, a private company;
and Dentaurum, a foreign company. Lancer estimates that these seven
competitors account for approximately 80% of the orthodontic products
manufactured and sold in the United States. Lancer's management also
believes that each of these seven competitors is larger than Lancer, has
more diversified product lines and has financial resources exceeding those
of Lancer. While there is no assurance that Lancer will be successful in
meeting the competition of these seven major competitors or other
competitors, Lancer has, in the past, successfully competed in the
orthodontic market and has achieved recognition of both its name and its
products.
GOVERNMENT REGULATION OF OUR DIAGNOSTIC BUSINESS
As part of our diagnostic business, we sell products that are legally
defined to be medical devices. As a result, we are considered to be a
medical device manufacturer, and as such are subject to the regulations of
numerous governmental entities. These agencies include the Food and Drug
Administration (the "FDA"), the United States Drug Enforcement Agency (the
"DEA"), Environmental Protection Agency, Federal Trade Commission,
Occupational Safety and Health Administration, U.S. Department of
Agriculture ("USDA"), and Consumer Product Safety Commission. These
activities are also regulated by various agencies of the states and
localities in which our products are sold. These regulations govern the
introduction of new medical devices, the observance of certain standards
with respect to the manufacture and labeling of medical devices, the
maintenance of certain records and the reporting of potential product
problems and other matters.
8
The Food, Drug & Cosmetic Act of 1938 (the "FDCA") regulates medical
devices in the United States by classifying them into one of three classes
based on the extent of regulation believed necessary to ensure safety and
effectiveness. Class I devices are those devices for which safety and
effectiveness can reasonably be ensured through general controls, such as
device listing, adequate labeling, pre-market notification and adherence to
the Quality System Regulation ("QSR") as well as Medical Device Reporting
(MDR), labeling and other regulatory requirements. Some Class I medical
devices are exempt from the requirement of Pre-Market Approval ("PMA") or
clearance. Class II devices are those devices for which safety and
effectiveness can reasonably be ensured through the use of special controls,
such as performance standards, post-market surveillance and patient
registries, as well as adherence to the general controls provisions
applicable to Class I devices. Class III devices are devices that generally
must receive pre-market approval by the FDA pursuant to a pre-market
approval application to ensure their safety and effectiveness. Generally,
Class III devices are limited to life-sustaining, life-supporting or
implantable devices. However, this classification can also apply to novel
technology or new intended uses or applications for existing devices. The
Company's products are primarily either Class I or Class II medical devices.
The following is a breakdown of the Biomerica products by class:
Class I - FortelT Ultra Midstream Pregnancy Test, FortelT Ovulation test,
EZ-LHT Rapid Ovulation test, Strep A Rapid Test
Class II - GAP(tm) IgG H. Pylori ELISA kit, IgG , T3 EIA kit, T4 EIA kit,
TSH ELISA kit, Anti-thyroglobulin ELISA kit, anti-TPO ELISA kit, Free T4
ELISA kit, Neo-TSH RIA kit, PTH (intact) ELISA kit, Calcitonin ELISA kit,
Erythropoietin ELISA kit, ACTH ELISA kit, Fortel Ultra Midstream (OTC and
plastic stick), EZ-HCG(tm) Rapid Pregnancy test (professional and dipstick),
EZ Detect(tm) Fecal Occult Blood test (Physician's dispenser pack),
EZ-PSA Rapid test (professional), Aware(tm) Breast Self-Examination, drugs
of abuse rapid tests, EZ-HP Professional, PTH (intact) IRMA kit
Class III - GAP(tm) IgM H. Pylori ELISA kit, GAP(tm) IgA H. Pylori ELISA kit,
Isletest(tm) GAD ELISA kit, Isletest(tm) ICA ELISA kit, Isletest(tm) IAA
ELISA kit, Allerquant(tm) IgG Food Allergy ELISA kit, Allerquant(tm) Med90G,
Allerquant(tm) 14 Foods, Custom Food Allergy Kit, Candiquant(tm) IgG ELISA
kit, Candiquant(tm) IgM ELISA kit, Candiquant(tm) IgA ELISA kit, Candigen(tm)
Candida Albicans antigen ELISA kit, Free Alpha Subunit RIA kit, EZ-HP OTC.
If the FDA finds that the device is not substantially equivalent to a
predicate device, the device is deemed a Class III device, and a manufacturer
or seller is required to file a PMA application. Approval of a PMA
application for a new medical device usually requires, among other things,
extensive clinical data on the safety and effectiveness of the device. PMA
applications may take years to be approved after they are filed. In addition
to requiring clearance or approval for new medical devices, FDA rules also
require a new 510(k) filing and review period, prior to marketing a changed
or modified version of an existing legally marketed device, if such changes
or modifications could significantly affect the safety or effectiveness of
that device. The FDA prohibits the advertisement or promotion or any approved
or cleared device for uses other than those that are stated in the device's
approved or cleared application.
Pursuant to FDA requirement, we have registered our manufacturing
Facility with the FDA as a medical device manufacturer, and listed the
medical devices we manufacture. We are also subject to inspection on a
routine basis for compliance with FDA regulations. This includes the QSR,
which, unless the device is a Class I exempt device, requires that we
manufacture our products and maintain our documents in a prescribed manner
with respect to issues such as design controls, manufacturing, testing and
validation activities. Further, we are required to comply with other FDA
requirements with respect to labeling, and the MDR regulation which requires
that we provide information to the FDA on deaths or serious injuries alleged
to have been associated with the use of our products, as well as product
malfunctions that are likely to cause or contribute to death or serious
injury if the malfunction were to recur. We believe that we are
currently in material compliance with all relevant QSR and MDR requirements.
In addition, our facility is required to have a California Medical
Device Manufacturing License. The license is not transferable and must be
Renewed annually. Approval of the license requires that we be in compliance
with QSR, labeling and MDR regulations. Our license expires on March 16,
2003. We are also registered with the Department of Health and Human
Services, Public Health Service of the FDA as a Device establishment. This
registration expires on February 28, 2003. We also hold two radioactive
materials licenses from the State of California (both expiring on June 20,
2003), and two permits from the USDA, one expiring on January 28, 2003 and
the other expiring on June 30, 2003. These licenses are renewed periodically,
and to date we have never failed to obtain a renewal.
9
Through compliance with FDA and California regulations, we can market
our medical devices throughout the United States. International sales of
medical devices are also subject to the regulatory requirements of each
country. In Europe, the regulations of the European Union require that a
device have a "CE Mark" in order to be sold in EU countries. The directive
goes into effect beginning December 2003. The Company has begun the process
of complying with the "CE Mark" directives and believes it will be in full
compliance by the time the directive becomes effective. At present the
regulatory international review process varies from country to country. We,
in general, rely upon our distributors and sales representatives in the
foreign countries in which we market our products to ensure that we comply
with the regulatory laws of such countries. We believe that our international
sales to date have been in compliance with the laws of the foreign countries
in which we have made sales. Exports of most medical devices are also subject
to certain FDA regulatory controls.
The following products are FDA-cleared and may be sold to clinical
laboratories, physician laboratories and/or retail outlets in the United
States as well as internationally:
T3 EIA KIT
T4 EIA KIT
TSH ELISA KIT
Anti-thyroglobulin ELISA kit
Anti-TPO ELISA Kit
Free T4 EIA Kit
Neo TSH RIA Kit
GAP IgG H. Pylori ELISA Kit
PTH (Intact) ELISA Kit
Calcitonin ELISA Kit
Erythropoietin ELISA Kit
ACTH ELISA Kit
Midstream Pregnancy Test
EZ-HCG Rapid Pregnancy Test
EZ-LH(tm) Rapid Ovulation Test
EZ Detect(tm) Fecal Occult Blood Test (Physician's package, OTC package)
Strep A Rapid Test
AWARE(tm) Breast Self-Examination Kit
Drugs-of-Abuse Rapid Tests
The following products are not FDA-cleared. These are sold internationally
and can be sold in the U.S. "FOR RESEARCH ONLY":
GAP(tm) IgM H. Pylori ELISA Kit
GAP(tm) IgA H. Pylori ELISA Kit
PTH (intact) RIA Kit
Isletest(tm) GAD ELISA Kit
Isletest(tm) ICA ELISA Kit
Isletest(tm) IAA ELISA Kit
Allerquant(tm) IgG Food Allergy ELISA Kit (90-foods, 14-foods, custom kits)
Candiquant(tm) IgG, IgM, and IgA ELISA Kits for Candida Albicans antibodies
Candigen Candida Albicans antigen ELISA KIT
Free Alpha Subunit RIA kit
Fortel(tm) Ultra Midstream Pregnancy Test
Fortel(tm) Ovulation Test
EZ-PSA Rapid Test
Lancer is licensed to design, manufacture, and sell orthodontic
appliances and is subject to the Code of Federal Regulations, Section 21,
parts 800-1299. The FDA is the governing body that assesses and issues
Lancer's license to assure that it complies with these regulations. Lancer
is currently licensed, and its last assessment was in November 1997. Also,
Lancer is registered and licensed with the state of California's Department
of Health Services. The Company believes that all Lancer products sold in
the U.S. comply with FDA regulations.
Effective June 18, 1998, fifteen major European countries are requiring
a CE (European Community) certification to sell products within their
countries. In order to obtain this CE certification Lancer retained British
Standards Institution (BSI) to evaluate Lancer's quality system. Lancer's
quality system is imaged under International Standards Organization (ISO)
9002. ISO 9002 is an internationally recognized standard in which companies
establish their methods of operation and commitment to quality. There are 20
clauses for which Lancer has developed standard operating procedures in
accordance with these ISO 9002 requirements.
EN 46002 is the medical device directive (MDD) for the European
Community. Strict standards and clauses within the MDD are required to be
implemented to sell within the European Community. In order for Lancer's
medical devices to be sold within the European Community with the CE Mark,
Lancer must fully comply with the EN 46002 requirements. Lancer has also
constructed a technical file that gives all certifications and risk
assessments for Lancer's products as a medical device (the "Product
Technical Files").
With ISO 9002, EN 46002, and the Product Technical Files, Lancer
applied for and was granted certification under ISO 9002, EN 46002, and CE.
With the CE certification, Lancer is now permitted to sell its products
within the European Community. The international ISO 9002 and EN 46002
standards will become
10
obsolete in December 2003. As a result, Lancer is currently in the process of
updating its Quality Management System for conformance to the new ISO 9000:
2000 international quality system standards, as well as the ISO 13485
standard for medical devices. Compliance with and certification to both ISO
9000:2000 and ISO 13485 is expected in the Spring of 2003.
Biomerica has begun the process of obtaining CE certification and
expects to have it completed by the December 2003 deadline.
SEASONALITY OF BUSINESS
The business of the Company and its subsidiaries has not been subject
to significant seasonal fluctuations.
FOREIGN BUSINESS
All of our fixed assets, excluding some of Lancer's assets, are located
within southern California. The following table sets forth the dollar volume
of revenue attributable to sales to domestic customers and foreign customers
during the last two fiscal years for the Biomerica and its consolidated
subsidiaries:
Year Ended May 31,
------------------
2002 2001
---- ----
U.S. Customers $4,254,000/49.5% $4,599,000/52.0%
Asia 199,000/ 2.3% 221,000/ 2.5%
Europe 2,313,000/26.9% 2,207,000/25.0%
Middle East 449,000/ 5.2% 445,000/ 5.0%
Oceania 393,000/ 4.6% 318,000/ 3.6%
S. America 498,000/ 5.8% 558,000/ 6.3%
Other foreign 492,000/ 5.7% 491,000/ 5.6%
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Total Revenues $8,598,000/100% $8,839,000/100%
We recognize that our foreign sales could be subject to some special or
unusual risks which are not present in the ordinary course of business in the
United States. Changes in economic factors, government regulations and import
restrictions all could impact sales within certain foreign countries. Foreign
countries have licensing requirements applicable to the sale of diagnostic
products which vary substantially from domestic requirements; depending upon
the product and the foreign country, these may be more or less restrictive
than requirements within the United States. We cannot predict the impact that
conversion to the Euro in the European countries may have on Biomerica or
Lancer, if any.
Foreign diagnostic sales are made primarily through a network of over 60
independent distributors in approximately 40 countries.
INTELLECTUAL PROPERTY
We regard the protection of our copyrights, service marks, trademarks
and trade secrets as critical to our future success. We rely on a combination
of copyright, trademark, service mark and trade secret laws and contractual
restrictions to establish and protect our proprietary rights in products and
services. We have entered into confidentiality and invention assignment
agreements with our employees and contractors, and nondisclosure agreements
with most of our vendors, fulfillment partners and strategic partners to
limit access to and disclosure of proprietary information. We cannot be
certain that these contractual arrangements or the other steps taken by us
to protect our intellectual property will prevent misappropriation of our
technology. We have
11
licensed in the past, and expect that we may license in the future, certain
of our proprietary rights, such as trademarks or copyrighted material, to
third parties. While we attempt to ensure that the quality of our product
brands is maintained by such licensees, we cannot be certain that such
licensees will not take actions that might hurt the value of our proprietary
rights or reputation.
Lancer has certain license agreements as a licensee for three products.
These licenses expire at varying dates from 4/21/04 until 10/12/10. As a
licensor they have licensees on the design of a nickel titanium orthodontic
archwire. These licenses expire on 4/4/06. All but one of the agreements
requires royalty payment on a percentage of net sales dollars sold over a
specified period. One specific license specifies a royalty payment based
upon the number of units sold. All of such license agreements to which Lancer
currently is a party, are for fixed terms which will expire after ten years
from the commencement of the agreement or upon the expiration of the
underlying patents. After the expiration of the agreements of the patents,
Lancer is free to use the technology that had been licensed.
BRANDS, TRADEMARKS, PATENTS
We registered the tradenames "Fortel," "Isletest," "Nimbus" and "GAP"
with the Office of Patents and Trademarks on December 31, 1985. Our
unregistered tradenames are "EZ-Detect," "CAST," "COT," "EquistiK,"
"FelistiK," "Tri-Level Controls," "Tru-Level Controls," "T-Marker Controls,"
"AllerHalt," "Candiquant," "Candigen," "EZ-H.P." and "EZ-PSA." A trademark
for "Aware" was issued and assigned in January, 2002.
The Company held a license for a diagnostic test for CAG-A as of May 31,
2001. Since that time, the Company decided not to market the product. At May
31, 2002, the Company recorded an impairment expense for the unamortized
balance of the license in the amount of $100,320, which was reflected in the
cost of sales in the year ended May 31, 2002.
On April 4, 1989, Lancer was granted a patent on its CounterForce
design of a nickel titanium orthodontic archwire. On August 1, 1989, Lancer
was granted a patent on its bracket design used in the manufacturing of
interline and Intrigue orthodontic brackets. On September 17, 1996, Lancer
was granted a patent on its method of laser annealing marking of orthodontic
appliances. On March 4, 1997, Lancer was granted a patent on an orthodontic
bracket and method of mounting. All of the patents are for a duration of 17
years. Lancer has entered into 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. Lancer has also
entered into a number of license and/or royalty agreements pursuant to which
it has obtained rights to certain of the products which it manufactures
and/or markets. The patents and agreements have had a favorable effect on
Lancer's image in the orthodontic marketplace and Lancer's sales.
Lancer has made a practice of selling its products under trademarks and
of obtaining protection for those trademarks in the United States and certain
foreign countries. Lancer considers these trademarks to be of importance in
the operation of its business.
The laws of some foreign countries do not protect our proprietary rights
to the same extent as do the laws of the U.S. Effective copyright, trademark
and trade secret protection may not be available in such jurisdictions. Our
efforts to protect our intellectual property rights may not prevent
misappropriation of our content.
12
EMPLOYEES
As of August 14, 2002, the Company and its subsidiaries employed 63
full-time employees and 2 part-time employees in the United States. The
number of employees between the two companies decreased over the previous
year according to the following breakdown between departments:
Total
2002 2001
---- ----
Administrative 11 11
Marketing & sales 19 22
Research & development 1 3
Production and operations 32 37
-- --
Total 63 73
In addition, Lancer, through its Mexican subsidiary, employees
approximately 97 people. The decrease in employees at the Lancer facility in
Mexico from 129 in the prior year was due to attrition of direct labor
personnel and certain management whose tasks were assumed by other personnel.
We also engage the services of various outside Ph.D. and M.D. consultants
as well as medical institutions for technical support on a regular basis.
We are not a party to any collective bargaining agreement and have never
experienced a work stoppage. We consider our employee relations to be good.
ITEM 2. DESCRIPTION OF PROPERTY
-----------------------
During fiscal 2002 the company entered into a lease of the existing
facilities of approximately 21,000 square feet of space in Newport Beach,
California for a four year term which expires October 31, 2005. Pursuant to
the lease we pay an annual base rent of $180,000 plus all real estate taxes
and insurance costs. During fiscal 2002 the Company paid a total of
approximately $179,000 in rent for approximately 21,000 square feet of space.
The rent shall escalate by 3% on September 1, 2003. These facilities were
used for diagnostic test kit research and development, manufacturing,
marketing and administration. Management believes that the rent for the
facilities in Newport Beach, CA is consistent with current market values for
comparable property in the area. Management believes that the lease terms are
the same as could be obtained in an arm's length transaction.
The facilities are leased from Mrs. Ilse Sultanian and JSJ Management.
Ms. Janet Moore, an officer, director and shareholder of our Company, is a
Partner in JSJ Management.
At May 31, 2002, future aggregate minimum lease payments for Biomerica
are as follows:
Years ending May 31
-------------------
2003 $163,248
2004 187,398
2005 188,748
2006 80,598
2007 1,674
--------
$621,666
On May 16, 2002, the Company signed a one-year sub-lease agreement for
1,392 square foot of office space, included in the above-described lease,
for the sum of $1,642 per month.
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 in 1994 to $6,317 per month in 2004.
The lease expense is being recognized on a straight-line basis over the term
of the lease. The excess of the expense recognized over the cash paid
aggregates $8,894 at May 31, 2002, and is included in accrued liabilities in
the accompanying balance sheet. Total rental expense for this facility for
each of the years ended May 31, 2002 and 2001 was approximately $69,000.
Lancer entered into a non-cancelable operating lease for its Mexico
facility which expires in March 2006 and requires average monthly rentals
of approximately $6,000. Total expense for this facility for the years ended
May 31, 2002 and 2001, was approximately $69,000 and $74,000.
At May 31, 2002, future aggregate minimum lease payments for Lancer are
as follows:
Years ending May 31
-------------------
2003 $144,545
2004 114,659
2005 70,440
Thereafter 58,700
--------
Total $388,344
13
We believe that our facilities and equipment are in suitable condition
and are adequate to satisfy the current requirements of our Company and our
subsidiaries.
ITEM 3. LEGAL PROCEEDINGS
-----------------
Inapplicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
-------------------------------------------------
Inapplicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------
During fiscal 2002 Biomerica's common stock was traded on the Nasdaq
Small Cap system under the symbol "BMRA". Since June 20, 2002, the Company's
stock has been traded on the OTC Bulletin Board under the symbol "BMRA.OB".
On January 15, 2002, the Company had received a Nasdaq Staff
Determination Indicating that the Company failed to comply with the net
tangible assets or Shareholders' equity requirements for continued listing
set forth in Marketplace Rule 4310(c)(2)(B), and that its securities were,
therefore, subject to delisting from the Nasdaq SmallCap Market effective
January 23, 2002. The Company requested a hearing before a Nasdaq Listing
Qualifications Panel to review the Staff Determination. The request for a
hearing stayed the delisting of the Company's securities pending the Panel's
decision. On February 21, 2002, the hearing took place. In response to the
hearing, on March 25, 2002, the Company received a Nasdaq Staff Determination
Letter stating their decision with respect to the continued listing of the
Company's securities. The Panel determined to continue the listing of the
Company's securities on the Nasdaq SmallCap Market via an exception from the
net tangible assets requirement. While the Company failed to meet this
requirement, the Company was granted a temporary exception from the standard
subject to the Company meeting certain conditions by specified deadlines.
The Company was unable to satisfy the conditions within the deadlines
Established by the Panel. Pursuant to a decision by the Nasdaq Listing
Qualifications Panel, the Company's common stock was delisted from the Nasdaq
Stock Market effective June 20, 2002, for failure to comply with the net
tangible assets or shareholders' Equity requirements as set forth in
Marketplace Rule 4310(c)(2)(B). The Company's securities were immediately
eligible to trade on the OTC Bulletin Board and are traded under the symbol
BMRA.OB.
On February 14, 2002, the Company received a Nasdaq Staff Determination
Letter indicating that the Company failed to comply with the minimum $1.00
per share requirement for continued inclusion of its common stock under
Marketplace Rule 4310(c)(4), and therefore was subject to delisting from the
Nasdaq SmallCap Market. In accordance with Marketplace Rule 4310(c)(8)(D),
the Company would have been provided 180 calendar days, or until August 13,
2002, to regain compliance. However, prior to that time, the Company was
delisted according to the above mentioned reasons.
Shares traded on the OTC Bulletin Board are not as liquid as those
traded on Nasdaq National market or the Nasdaq SmallCap market.
The following table shows the high and low bid prices for Biomerica's
common stock over the last two years based upon data reported by NASDAQ.
Bid Prices
---------------------------
High Low
-------------- -----------
Quarter ended:
May 31, 2002............................. $0.70 $0.41
February 28, 2002........................ $0.74 $0.45
November 30, 2001........................ $1.13 $0.35
August 31, 2001.......................... $0.95 $0.52
May 31, 2001............................. $1.25 $0.656
February 29, 2001........................ $0.969 $0.313
November 30, 2000........................ $1.75 $0.75
August 31, 2000.......................... $1.875 $1.25
As of August 21, 2002, the number of holders of record of Biomerica's
common stock was approximately 1,019, excluding stock held in street name.
On April 10, 2002, the Company filed a Form S-4 for the proposed
registration of between 488,200 and 984,274 shares of Biomerica common
stock. The shares were to be issued for the purchase of the assets of the
subsidiary Lancer Orthodontics, Inc. Due to market conditions, both boards
of directors have agreed not to proceed with the proposed purchase and
Biomerica requested in July 2002 that the registration statement be withdrawn.
In addition, since Biomerica was unable to remain on the Nasdaq Small Cap
Market, Lancer shareholders would not have had increased liquidity. This
request was filed by EDGAR on September 27, 2002. The Company has seen no
affect on operations as a result of the announcement that we would not be
proceeding with the purchase. Fees associated with the proposed asset
purchase were approximately $57,500.
14
No dividends have been declared or paid by Biomerica. We intend to
employ all available funds for development of our business and, accordingly,
do not intend to pay cash dividends in the foreseeable future.
With respect to the one-for-three reverse stock split that was approved
at the last shareholders' meeting, the purpose of the reverse stock split
would have been to try to meet the minimum bid price as required by Nasdaq
in order to maintain listing. Therefore, the board will not effect the
one-for-three reverse stock split.
The following is information on issuances of securities during the past
three fiscal years:
Class or Persons Price per
Date Title Amount Sold To Share Total
9/00 common 113,375 insiders & qualified
investors $1.34 $151,438
5/01 common 34,643 qualified investors $1.11 $38,615
4/01 common 126,075 insiders & qualified
investors $0.72 $90,774
6/01 common 14,166 insiders & qualified
investors $0.72 $10,200
3/02 common 17,000 insiders & qualified $0.50 $8,500
investors
3/02 common 6,250 qualified investor $0.61 $3,813
The exemption relied upon for the issuance of the unregistered shares
was that the shares were issued to accredited investors within the meaning
of Securities and Exchange Commission Rule 501 of Regulation D.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
RESULTS OF OPERATIONS
We currently have one active subsidiary, Lancer Orthodontics, Inc.
("Lancer"), which is engaged in manufacturing, sales and development of
orthodontic products. We own approximately 31.63% of the outstanding stock
of Lancer. We exercise effective control of 50.1% over Lancer via voting
agreements with certain shareholders. As a result of our control and
ownership, our financial statements are consolidated with those of Lancer.
Lancer is a public company whose common stock is traded on the bulletin
board system under the symbol "LANZ,". On May 30, 2002, Biomerica sold its
controlling interest in Allergy Immuno Technologies, Inc. The operations of
AIT for fiscal 2002 and 2001 are being reported as discontinued operations
as a result of this sale.
The ReadyScript subsidiary was a development-stage enterprise and
Required the raising of a significant amount of capital to fund its short-
term working capital needs. The ReadyScript operations were discontinued in
May 2001. The sale of some of the ReadyScript intangible assets is being
discussed with various parties, however at this time there is not purchaser
for these assets. The subsidiary is being reported in the financial
statements as a discontinued operation because it is no longer an operating
entity.
15
Fiscal 2002 Compared to Fiscal 2001
Our consolidated net sales were $8,598,054 for fiscal 2002 compared to
$8,839,252 for fiscal 2001. This represents a decrease of $241,198, or 2.7%
for fiscal 2002. Of the total consolidated net sales for fiscal 2002,
$6,022,331 is attributable to Lancer, and $2,575,723 to Biomerica. Lancer's
sales increased by $94,728 while Biomerica showed a sales decrease of
$335,926. The increase at Lancer was primarily attributable to increased
sales in the Middle East and Mexico. The decrease in sales at Biomerica was
due to the loss of a large customer from fiscal 2001 as compared to fiscal
2002 (approximately $113,000-however less than 10% of revenues) however,
most of the rest of the loss was attributable to lower sales with respect
to screening programs.
Cost of sales in fiscal 2002 as compared to fiscal 2001 increased by
$19,544 or 0.3%. Lancer's cost of sales as a percentage of sales increased
from 67.4% to 69.1% in fiscal 2002 as compared to fiscal 2001. The increase
was primarily attributable to increased sales to distributors and managed
care facilities which have a smaller gross margin. Biomerica had an increase
in cost of sales as a percentage of sales from 70.4% to 73.9% in fiscal 2002
as compared to fiscal 2001. The increase was due to the Company recording an
impairment expense for the unamortized balance of a license in the amount of
$100,320 which is reflected in cost of sales in the accompanying statement
of operations for the year ended May 31, 2002. Both companies had decreased
number of employees in the production area in fiscal 2002 as compared to
fiscal 2001.
Selling, general and administrative costs decreased in fiscal 2002 as
compared to fiscal 2001 by $250,804 or 8.1%. Lancer had a decrease of
$199,619 in these costs due to decreases in labor costs, travel expenses and
show costs. Biomerica had a decrease in fiscal 2002 as compared to fiscal
2001 of $51,185, primarily due to lower wages and related costs. Biomerica
had decreased salaries and related expenses due to fewer personnel as well
as decreased commission expense due to lower commissionable sales at
Biomerica. In fiscal 2002, Lancer had costs associated with financing their
line of credit. Approximately $29,000 of the financing cost was for legal,
document, and audit fees paid to the asset-based lender that extended
a new line of credit to Lancer. Approximately $15,000 of the financing costs
was related to searching for investors and obtaining an opinion on the
feasibility of the acquisition by Biomerica.
Research and development expense decreased in fiscal 2002 as compared to
fiscal 2001 by $162,363 or 50.4%. Of this, Lancer had a decrease of $67,663,
as a result of the transfer of personnel from product development to
operations. In the prior year, Lancer had incurred research and development
expenses on the amalgam product. This product was discontinued due to poor
sales. The termination of this product did not impact other expenses or
revenues. Biomerica had a decrease in research and development expenses of
$94,700 primarily due to the lower wages and related costs due to less
personnel in the research and development department.
Interest expense net of interest income, increased in fiscal 2002 as
compared to fiscal 2001 by $14,928 or 58.7% due to borrowings against the
line of credit at Biomerica which was offset by a decrease in interest at
Lancer of $2,749.
Other expense, increased by $80,429 or 168.4% in fiscal 2002 as compared
to fiscal 2001. Of this, Lancer had an increase in other expense of $44,287
due to investor relations costs and financing costs expensed associated with
the line of credit and exploring other financing options. Biomerica had
decreases in other income due to lower cash balances and therefore less
interest income.
As of May 31, 2002, Biomerica had net tax operating loss carryforwards
of approximately $5,171,000 and investment tax and research and development
credits of approximately $62,000, which are available to offset future
federal tax liabilities. These carryforwards expire at varying dates from
2002 to 2022. As of May 31, 2002, Biomerica had net operating tax loss
carryforwards of approximately $1,152,000 available to offset future state
income tax liabilities, which expire through 2012. As of May 31, 2002,
Lancer had net
16
operating loss carryforwards of approximately $2,037,000 and business tax
credits of approximately $80,000 available to offset future Federal tax
liabilities. The Lancer federal carryforwards expire through 2021. As of
May 31, 2002, Lancer had net tax operating loss carryforwards of
approximately $185,000 and business tax credits of approximately $24,000
available to offset future state income tax liabilities. The state
carryforwards expire through the year 2011.
Liquidity and Capital Resources
As of May 31, 2002, we had cash and available for sale securities of
$331,809 (see Note 1 of Notes to Consolidated Financial Statements) and
current working capital of $3,246,030. Of the current working capital,
$2,840,291 is attributable to the Lancer subsidiary, which is restricted
from distribution of any assets (except for reimbursement of expenses on
behalf of Lancer or for services rendered to Biomerica as a result of
Lancer's line of credit agreement. The Company's fiscal 2001 losses were
substantially the result of its investment in ReadyScript, which has been
reported as a discontinued operation. During 2001, cash provided by
operations was $165,576. During 2002, the Company used cash flows from
operations of $131,073. During fiscal 2002, cash provided by investing
activities was $219,452, primarily due to the sale of stock of a subsidiary.
The Company generated cash flow from financing activities of $339,662 during
fiscal 2001, primarily due to two private placements and a shareholder loan
at Biomerica and $228,779 during fiscal 2002 primarily due to the increase
in shareholder loan.
On an unconsolidated basis, the Company used cash in operating
Activities of $313,475 in fiscal 2002 as compared to $935,492 in fiscal
2001. Net cash provided by investing activities for the years ended May 31,
2002 and 2001 were $222,839 and $82,265, respectively. Net cash provided by
financing activities was $291,328 for fiscal 2002 and $343,980 for fiscal
2001. See Note 12 to the Notes to Consolidated Financial Statements.
The Company has suffered substantial recurring losses from operations
over the last couple of years. The Company has funded its operations through
debt and equity Financings, and may have to do so in the future. ReadyScript
operations were discontinued in May 2001 and Allergy Immuno Technologies,
Inc. was sold in May 2002 (see Notes 2 and 13). ReadyScript and Allergy
Immuno Technologies, Inc. were contributors to the Company's losses. The
Company has also obtained a line of credit from a shareholder/officer which
it has and will continue to rely on to help fund operations. The Company has
reduced operating costs through certain cost reduction efforts and plans to
concentrate on its core business in Lancer and Biomerica to increase sales.
Management believes that cash flows from operations and its available credit
coupled with reduced costs and anticipated sales will enable the company to
fund operations for at least the next twelve months. In the long term the
Company will require either additional sales or funding in order to become
profitable or withstand further losses. There can be no assurances that the
Company will be able to become profitable, generate positive cash flow from
operations or obtain the necessary equity or debt financing to fund
operations in the future.
During fiscal 2002 Lancer management negotiated a new line of credit
with GE Capital Healthcare Financial Services through October 24, 2003. The
line of credit allows for borrowings up to $400,000 and is limited to 80% of
accounts receivable less than 90 days old with a liquidity factor of 94%.
The outstanding balance at May 31, 2002 was $65,669. The unused portion
available under the line of credit at May 31, 2002, was approximately
$229,000. Borrowings bear interest at prime plus 2.00% per annum, but not
lower than 8% (8.00% at May 31, 2002). The debt covenant violations that
existed at May 31, 2001 did not affect the bank line of credit that was
replaced by the GE Capital Line in October 2001. There was no covenant
violation at May 31, 2002.
The line of credit is collateralized by substantially all the assets of
Lancer, including inventories, receivables, and equipment. The lending
Agreement for the line of credit requires, among other things, that Lancer
maintain a tangible net worth ratio of $2,100,000, which was met, and that
receivables' payments be sent to a controlled lockbox. In addition to
interest, a management fee of .25% of the average monthly outstanding loan
balance and an unused balance fee of .0425% on the average monthly unused
portion available are required. Lancer is not required to maintain
compensating balances in connection with this lending agreement. Lancer is
restricted from distribution of any assets to Biomerica except for
reimbursement of expenses on behalf of Lancer or for services rendered.
Lancer's management believes that it will be able to finance Lancer's
operations through cash flow and available borrowings through the current
fiscal year and ensuing fiscal years based upon a level of demand for their
products approximately consistent or in excess of prior years.
17
Biomerica, Inc. entered into an agreement for a line of credit agreement
on September 12, 2000 with Janet Moore, an officer/director who will loan to
the Company, as needed, up to $500,000 for working capital needs. The line of
credit bears interest at 8% and is secured by Biomerica accounts receivable
and inventory. There was $365,000 outstanding under this line of credit at
May 31, 2002. The line of credit has been extended until September 12, 2003.
During 2002 and 2001, the Company incurred $19,661 and $1,051, respectively,
in interest expense related to the shareholder line of credit, all of which
is accrued as of May 31, 2002. The unused portion available under the line of
credit at May 31,2002, was approximately $135,000. As of August 29, 2002, the
unused portion available was $169,900. The shareholder loan received in
fiscal year 2001 was $95,000. During fiscal 2002 the Company borrowed an
additional $280,000, of which $270,000 was on the line of credit and $10,000
was from Zackary Irani, another officer/director. As of May 31, 2002,
$19,661 in accrued interest was due.
Pursuant to a decision by the Nasdaq Listing Qualifications Panel, the
Company's common stock was delisted from the Nasdaq Stock Market effective
June 20, 2002, for failure to comply with the net tangible assets or
shareholders' equity requirements as set forth in Marketplace Rule
310(c)(2)(B). The Company's securities were immediately eligible to trade
on The OTC Bulletin Board and are traded under the symbol BMRA.OB.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based on the consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. Note 2 of the Notes to Consolidated Financial Statements
describes the significant accounting policies essential to the consolidated
financial statements. The preparation of these financial statements requires
estimates and assumptions that affect the reported amounts and disclosures.
We believe the following to be critical accounting policies as they
require more significant judgments and estimates used in the preparation of
our consolidated financial statements. Although we believe that our
judgments and estimates are appropriate and correct, actual future results
may differ from our estimates.
In general the critical accounting policies that may require judgments
or estimates relate specifically to the Allowance for Doubtful Accounts,
Inventory Reserves for Obsolescence and Declines in Market Value, Impairment
of Long-Lived Assets, Stock Based Compensation, and Income Tax Accruals.
We recognize product revenues when an arrangement exists, delivery has
occurred, the price is determinable and collection is reasonably assured.
The Allowance for Doubtful Accounts is established for estimated losses
resulting from the inability of our customers to make required payments. The
assessment of specific receivable balances and required reserves is performed
by management and discussed with the audit committee. We have identified
specific customers where collection is probable and have established specific
reserves, but to the extent collection is made, the allowance will be
released. Additionally, if the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Reserves are provided for excess and obsolete inventory, which are
estimated based on a comparison of the quantity and cost of inventory on
hand to management's forecast of customer demand. Customer demand is
dependent on many factors and requires us to use significant judgment in our
forecasting process. We must also make assumptions regarding the rate at
which new products will be accepted in the marketplace and at which
customers will transition from older products to newer products. Once a
reserve is established, it is maintained until the product to which it
relates is sold or otherwise disposed of, even if in subsequent periods we
forecast demand for the product.
In general, we are in a loss position for tax purposes, and have
established a valuation allowance against deferred tax assets, as we do not
believe it is likely that we will generate sufficient taxable income in
future periods to realize the benefit of our deferred tax assets. Predicting
future taxable income is difficult, and requires the use of significant
judgment. At May 31, 2002, all of our deferred tax assets were reserved.
Accruals are made for specific tax exposures and are generally not material
to our operating results or financial position, nor do we anticipate
material changes to these reserves in the near future.
18
POTENTIAL CONSEQUENCES OF ALLERGY IMMUNO TECHNOLOGY, INC.'S FAILURE TO
CONDUCT A FORMAL STOCKHOLDER VOTE IN CONNECTION WITH OUR PURCHASE OF ASSETS
FROM IT AND ASSUMPTION OF ITS LIABILITIES
During not less than the preceding three years, AIT, a former majority-owned
subsidiary of ours, had been unprofitable and, for financial statement
reporting purposes, its losses were consolidated into our financial
statements. In March of 2002, AIT ceased its clinical testing services.
Thereafter, in late April of 2002, we entered into a transaction, pursuant
to which, at the end of May of 2002, AIT transferred its remaining assets to
us (valued on its financial statements at approximately $8,000), issued to
us approximately 808,500 shares of its restricted common stock (valued as of
the date of the transaction at approximately $19,000), and we assumed its
remaining liabilities (recorded on its financial statements at approximately
$27,000) (the "Asset/Liability Transaction"). The Asset/Liability
Transaction was approved by our board on April 22, 2002. Approval by our
stockholders was not required under Delaware corporate law. We understand
that AIT's board approved the Asset/Liability Transaction in April of 2002
and that, rather than calling a formal meeting of AIT's stockholders, our
consent to that transaction was deemed to constitute the approval of the
holders of a majority of AIT's capital stock, as permitted by Delaware
corporate law.
The Company's substantial recurring losses from operations during the
preceding years and its lack of readily available capital, other than a line
of credit from a stockholder and officer, to help fund operations were the
major factors in its decision to stop lending funds to AIT. Both
ReadyScript and AIT contributed to the Company's losses. Accordingly, the
Company discontinued operations of ReadyScript in May of 2001 and ceased
funding of AIT one year later. (See Notes 2 and 13 to the Company's Audited
Financial Statements for the year ended May 31, 2002).
At the time of the approval of the Asset/Liability Transaction, our seven
directors were Allen Barbieri, David Barrows, Carlos Beharie, M.D., Francis
R. Cano, Ph.D., Zackary S. Irani, Janet Moore, and Robert A. Orlando, M.D.,
Ph.D., three of whom (Mr. Irani, Ms. Moore, and Dr. Orlando) were also
directors of AIT. AIT's fourth director at such time was Susan Irani, whom
AIT deemed to be an affiliate of ours. Further, at such time, Mr. Irani
served as the Chief Executive Officer and Ms. Moore served as the Chief
Financial Officer and Secretary of both AIT and us. The Asset/Liability
Transaction was negotiated by management common to AIT and us and was
approved by all of our directors (including the directors constituting a
majority of our board, who did not serve in common with AIT). We were
advised that the Asset/Liability Transaction was approved by all of the AIT
directors (each of whom also served as one of our directors or was deemed
to be an affiliate of ours).
Notwithstanding the approval of the Asset/Liability Transaction by AIT's
board and its majority stockholder, AIT may not have provided prompt notice
of that approval to all of its stockholders in a manner fully consistent
with Delaware corporate law. That failure could have certain potential
consequences. Although AIT did not solicit proxies from its stockholders,
it also did not file a Schedule 14C with the Securities and Exchange
Commission in connection with the approval of the Asset/Liability
Transaction by its majority stockholder. Further, the potential exists that
one of AIT's stockholders could bring a legal action under Delaware state
law against AIT either to rescind the Asset/Liability Transaction, or to seek
damages against AIT. Because of our status as an affiliate of AIT at the
time of the Asset/Liability Transaction, such failure to file a Schedule 14C
or a potential action could also name us, our directors, and our officers.
As of the date of this amended filing, no action has been filed, and no
proceeding has been commenced, against us or any of our directors or
officers, and no person or agency has contacted us or our directors or
officers announcing an intention to bring any action or to commence any
proceeding.
We have been advised by counsel to AIT that, as of the date of this amended
filing, no action has been filed, and no proceeding has been commenced,
against AIT or any of its directors or officers, and no person or agency has
contacted AIT or its directors or officers announcing an intention to bring
any action or to commence any proceeding. AIT has informed us that its
present attorney has advised it that the likelihood of such an action or
proceeding is minimal, the possibility of its success on the merits is
remote, and the scope of any potential damages award is nominal for a
variety of reasons. For example,
No AIT stockholder or other person with potential standing to sue has
announced dissatisfaction with the Asset/Liability Transaction, although
it was announced publicly in June of 2002.
The assets that were the subject of the Asset/Liability Transaction had
historically yielded only unprofitable operations, which operations had
ceased prior to the approval of the Asset/Liability Transaction, as well
as the closing of that transaction.
The value of the assets that were the subject of the Asset/Liability
Transaction was small and less than the amount of liabilities that we
concurrently assumed; thus, any award the compensation due to any potential
plaintiffs upon a successful claim would be correspondingly small.
Any potential liability under such a claim would be incapable of precise
determination because the measure of damages under such a claim would depend
upon a subjective valuation of the assets and liabilities that were the
subject of the Asset/Liability Transaction.
We do not believe that such an action is probable, nor that a liability for
such an action, if any, could be estimated. Accordingly, we have not accrued
a liability in the accompanying consolidated financial statements related to
the aforementioned matter.
FACTORS THAT MAY AFFECT FUTURE RESULTS
You should read the following factors in conjunction with the factors
discussed elsewhere in this and our other filings with the SEC and in
materials incorporated by reference in these filings. The following is
intended to highlight certain factors that may affect the financial
condition and results of operations of Biomerica, Inc. and are not meant to
be an exhaustive discussion of risks that apply to companies such as
Biomerica, Inc. Like other businesses, Biomerica, Inc. is susceptible to
macroeconomic downturns in the United States or abroad, as were experienced
in fiscal year 2002, that may affect the general economic climate and
performance of Biomerica, Inc. or its customers.
Aside from general macroeconomic downturns, the additional material
factors that could affect future financial results include, but are not
limited to: Terrorist attacks and the impact of such events; diminished
access to raw materials that directly enter into our manufacturing process;
shipping labor disruption or other major degradation of the ability to ship
out products to end users; inability to successfully control our margins
which are affected by many factors including competition and product mix;
protracted shutdown of the U.S. border due to an escalation of terrorist or
counter terrorist activity; the operating and financial covenants contained
in our credit line and Lancer's which could limit our operating flexibility;
any changes in our business relationships with international distributors or
the economic climate they operate in; any event that has a material adverse
impact on our foreign manufacturing operations may adversely affect our
operations as a whole; failure to manage the future expansion of our
business could have a material adverse affect on our revenues and
profitability; possible costs in complying with government regulations and
the delays in receiving required regulatory approvals or the enactment of
new adverse regulations or regulatory requirements; numerous competitors,
some of which have substantially greater financial and other resources than
we do; potential claims and litigation brought by patients or dental or
medical professionals alleging harm caused by the use of or exposure to our
products; quarterly variations in operating results caused by a number of
factors, including business and industry conditions and other factors
beyond our control. All these factors make it difficult to predict
operating results for any particular period.
INSURANCE COVERAGE
Biomerica currently carries various insurance policies including products
Liability ($2,000,000), general liability ($2,000,000), property insurance
(premises-$2,294,000, personal property-$1,500,000), business income
insurance ($800,000), employee benefit liability insurance ($1,000,000),
commercial crime insurance ($100,000), crime insurance (pension plan)
($300,000), umbrella liability insurance ($1,000,000), workman's
compensation insurance ($1,000,000), directors and officers' insurance
($2,000,000), group health, disability and life insurance. Lancer currently
has coverage for personal property ($450,000), business income (($1,200,000),
general liability ($2,000,000), employee benefit liability ($1,000,000),
products liability ($7,000,000), auto ($1,000,000, commercial fidelity
($100,000), difference in conditions and Mexico required coverage
($2,500,000-personal property; $2,495,000-business income), workman's
compensation insurance ($1,000,000); directors and officers' insurance
(shared with Biomerica) ($2,000,000); group health and dental. Both Lancer's
and Biomerica's workman's compensation policies cover injuries to employees
as a result of accidental contamination of hazardous materials. The
companies do not have a separate policy for contamination of hazardous
materials.
RECENT ACCOUNTING PRONOUNCEMENTS:
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations", which eliminates the pooling method of accounting for business
combinations initiated after June 30, 2001. In addition, SFAS 141 addresses
the accounting for intangible assets and goodwill acquired in a business
combination. This portion of SFAS 141 is effective for business combinations
completed after June 30, 2001. The Company adopted SFAS 141 effective July 1,
2001.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Intangible Assets", which
revises the accounting for purchased goodwill and intangible assets. Under
SFAS 142, goodwill and intangible assets with indefinite lives will no longer
be amortized and will be tested for impairment annually. SFAS 142 is
effective for fiscal years beginning after December 15, 2001, with earlier
adoption permitted. The Company has not yet determined the impact on the
Company's financial position or results of operations as a result of the
future adoption of SFAS 142.
In August 2001, the FASB issued FAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-
lived assets and the associated asset retirement costs. It applies to all
entities and legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development and/or
normal operation of long-lived assets, except for certain obligations of
lessees. This statement is effective for financial statements issued for
fiscal years beginning after June 15, 2002. Management has not yet
determined the impact of the adoption of FAS No. 143 on the Company's
financial position or results of operations.
19
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal
of Long-Lived Assets," or SFAS 144. SFAS No. 144 requires that those long-
lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured
at net realizable value or include amounts for operating losses that have
not yet occurred. SFAS No. 144 is effective for financial statements issued
for fiscal years beginning after December 15, 2001 and, generally, is to be
applied prospectively. The Company does not expect SFAS 144 will have a
material impact on the Company's financial position or results of operations.
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," to update,
clarify and simplify existing accounting pronouncements. FASB Statement No. 4,
which required all gains and losses from debt extinguishment to be aggregated
and, if material, classified as an extraordinary item, net of related tax
effect, was rescinded. Consequently, FASB Statement No. 64, which amended
FASB Statement No.4, was rescinded because it was no longer necessary. We do
not expect the adoption of this statement to have a material effect on our
financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."
SFAS 146 addresses accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized and measured initially at
fair value when the liability is incurred. SFAS No. 146 is effective for exit
or disposal activities that are initiated after December 31, 2002, with early
application encouraged. We do not expect the adoption of this statement to
have a material effect on our financial statements. 18
20
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Exhibit 99.3, "Biomerica, Inc. and Subsidiaries Consolidated Financial
Statements" is incorporated herein by this reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
---------------------------------------------------------------
Inapplicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF
THE REGISTRANT; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
---------------------------------------------------------------
This information is incorporated by reference to the Company's proxy
statement for its 2002 Annual Meeting of Stockholders which will be filed
not later than 120 days after the end of the Company's fiscal year ended
May 31, 2002.
ITEM 10. EXECUTIVE COMPENSATION
----------------------
This information is incorporated by reference to the Company's proxy
statement for its 2002 Annual Meeting of Stockholders which will be filed
not later than 120 days after the end of the Company's fiscal year ended
May 31, 2002.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
This information is incorporated by reference to the Company's proxy
statement for its 2002 Annual Meeting of Stockholders which will be filed
not later than 120 days after the end of the Company's fiscal year ended
May 31, 2002.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
This information is incorporated by reference to the Company's proxy
statement for its 2002 Annual Meeting of Stockholders which will be filed
not later than 120 days after the end of the Company's fiscal year ended
May 31, 2002.
21
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
-------------------------------------
(a) EXHIBITS
--------
EXHIBIT NO. DESCRIPTION
3.1 Certificate of Incorporation of Registrant filed with the
Secretary of the State of Delaware on September 22, 1971
(incorporated by reference to Exhibit 3.1 filed with
Amendment No. 1 to Registration Statement on Form S-1,
Commission File No. 2-83308).
3.2 Certificate of Amendment to Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware
on February 6, 1978 (incorporated by reference to Exhibit
3.1 filed with Amendment No. 1 to Registration Statement on
Form S-1, Commission File No. 2-83308).
3.3 Certificate of Amendment to Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware
on February 4, 1983 (incorporated by reference to Exhibit
3.1 filed with Amendment No. 1 to Registration Statement on
Form S-1, Commission File No. 2-83308).
3.4 Certificate of Amendment to Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware
on January 19, 1987 (incorporated by reference to Exhibit 3.4
filed with Form 8 Amendment No. 1 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended May 31, 1987).
3.5 Certificate of Amendment of Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware
on November 4, 1987 (incorporated by reference to Exhibit 3.1
filed with Amendment No. 1 to Registration Statement on Form
S-1, Commission File No. 2-83308).
3.6 Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 filed with Amendment No. 1 to Registration
Statement on Form S-1, Commission File No. 2-83308).
3.7 Certificate of Amendment of Certificate of Incorporation of
Registrant filed with the Secretary of the State of Delaware
on December 20, 1994 (incorporated by reference to Exhibit
3.7 filed with Registrant's Annual Report on Form 10-KSB for
the fiscal year ended May 31, 1995).
3.8 First Amended and Restated Certificate of Incorporation of
Biomerica, Inc. filed with the Secretary of State of
Delaware on August 1, 2000 (incorporated by reference to
Exhibit 3.8 filed with the Registrant's Annual Report on
Form 10-KSB for the fiscal year ended May 31, 2000).
4.1 Specimen Stock Certificate of Common Stock of Registrant
(incorporated by reference to Exhibit 4.1 filed with
Registrant's Registration Statement on Form SB-2,
Commission No. 333-87231 filed on September 16, 1999).
22
10.2 Lancer purchase agreement and warrants (incorporated by
reference to Exhibit 10.10 filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended May 31, 1989).
10.3 1999 Stock Incentive Plan of Registrant (incorporated by
reference to Exhibit 10.1 to Registration Statement on
Form S-8 filed with the Securities and Exchange Commission
on March 29, 2000).
10.4 1995 Stock Option and Common Stock Plan of Registrant
(incorporated by reference to Exhibit 4.3 to Registration
Statement on Form S-8 filed with the Securities and
Exchange Commission on January 20, 1996).
10.5 1991 Stock Option and Restricted Stock Plan of Registrant
(incorporated by reference to Exhibit 4.1 to Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on April 6, 1992).
10.6 Stock Purchase Agreement by and between Biomerica, Inc.,
RidgeRose Capital Partners, LLC and Zackary Irani and Janet
Moore dated June 11, 1999 (incorporated by reference to
Exhibit 10.10 filed with Form 8-K on July 7, 1999).
10.7 Stock Purchase Agreement by and between Biomerica, Inc. and
Zackary Irani and Janet Moore dated June 11, 1999
(incorporated by reference to Exhibit 10.11 filed with
Form 8-K on July 7, 1999).
10.8 Back-end Processing Agreement by and between TheBigStore.
com, Inc. and Biomerica, Inc. and dated June 11, 1999
(incorporated by reference to Exhibit 10.12 filed with
Form 8-K on July 7, 1999).
10.9 Common Stock Purchase Warrant granted to TheBigStore.com,
Inc. dated June 11, 1999 (incorporated by reference to
Exhibit 10.13 filed with Form 8-K on July 7, 1999).
10.10 Common Stock Purchase Warrant granted to RJM Consulting,
LLC dated June 11, 1999 (incorporated by reference to
Exhibit 10.14 filed with Form 8-K on July 7, 1999).
10.11 Non-Qualified Option Agreement by and between Zackary
Irani and the Company dated June 10, 1999 (incorporated
by reference to Exhibit 10.15 filed with Form 8-K on
July 7, 1999).
10.12 Non-Qualified Option Agreement by and between Janet
Moore and the Company dated June 10, 1999 (incorporated
by reference to Exhibit 10.16 filed with Form 8-K on
July 7, 1999).
10.13 Non-Qualified Option Agreement by and between Philip
Kaplan, M.D. and the Company dated June 10, 1999
(incorporated by reference to Exhibit 10.17 filed with
Form 8-K on July 7, 1999).
10.14 Non-Qualified Option Agreement by and between Robert A.
Orlando, M.D., Ph.D. and the Company dated June 10, 1999
(incorporated by reference to Exhibit 10.18 filed Form
8-K on July 7, 1999).
23
10.15 Strategic Marketing Agreement entered into as of the 2nd day
of September, 1999 by and between TheBigHub.com, Inc., a
Florida corporation and Biomerica, Inc. (incorporated by
reference to Exhibit 10.16 filed with Registrant's
Registration Statement on Form SB-2, Commission No.
333-87231 filed on September 16, 1999).
10.16 First Amendment to Back-End Processing Agreement entered
into as of September 2, 1999 whereby TheBigStore.com, Inc.,
a Delaware corporation and Biomerica amend the Back-End
Agreement dated June 11, 1999 (incorporated by reference to
Exhibit 10.17 filed with Registrant's Registration Statement
on Form SB-2, Commission No. 333-87231 filed on September 16,
1999).
10.17 Private Placement Memorandum of Biomerica, Inc. dated June 9,
1999 offering 400,000 shares of its Common Stock at $5.00 per
share (incorporated by reference to Exhibit 10.18 filed with
Registrant's Registration Statement on Form SB-2, Commission
No. 333-87231 filed on September 16, 1999).
10.18 Employment Agreement entered into as of August 30, 1999 by
and between the Internet division of Biomerica, Inc. and
Steven J. Goto (incorporated by reference to Exhibit 10.19
filed with Registrant's Registration Statement on Form SB-2,
Commission No. 333-87231 filed on September 16, 1999).
10.19 Employment Offer Letter dated August 12, 1999 from Biomerica,
Inc. to Pete McKinley to join the Internet division of
Biomerica, Inc. (incorporated by reference to Exhibit 10.20
filed with Registrant's Registration Statement on Form SB-2,
Commission No. 333-87231 filed on September 16, 1999).
10.20 Employment Offer Letter dated August 12, 1999 from Biomerica,
Inc. to Richard Jay, Pharm.D. to join the Internet division
of Biomerica, Inc. (incorporated by reference to Exhibit
10.21 filed with Registrant's Registration Statement on Form
SB-2, Commission No. 333-87231 filed on September 16, 1999).
10.21 Amendment to Lease Extension/Lease Term effective January 1,
1999, whereby Lancer Orthodontics, Inc. and L&T Corporation,
a California corporation entered into an amendment and
extension to the terms of that certain lease agreement dated
November 4, 1993 for the premises located at 253 Pawnee
Street, Suite A, San Marcos, California 92069 (incorporated
by reference to Exhibit 10.22 filed with Registrant's
Registration Statement on Form SB-2, Commission No. 333-87231
filed on September 16, 1999).
10.22 Sublease Agreement entered into by and between Eagleson de
California S.A. de C.V. and Lancer Orthodontics, Inc.
commencing on November 1, 1998 covering approximately 16,000
square feet located in the Industrial Park at Ave. Saturno
No. 20 and of certain improvements constructed on the land as
detailed in that certain sublease between the parties dated
April 1, 1996 (incorporated by reference to Exhibit 10.23
filed with Registrant's Registration Statement on Form SB-2,
Commission No. 333-87231 filed on September 16, 1999).
24
10.23 Fifth Revision to Manufacturing Shelter Agreement effective
November 1, 1998, whereby Lancer Orthodontics, Inc. and
Eagleson Industries, Inc. revised and amended that certain
Manufacturing Shelter Agreement entered into on May 11, 1990,
revised on June 20, 1991, December 2, 1992, July 1, 1994 and
April 1, 1996 (incorporated by reference to Exhibit 10.24
Filed with Registrant's Registration Statement on Form SB-2,
Commission No. 333-87231 filed on September 16, 1999).
10.24 Technical Skills Consulting Agreement entered into on
January 1, 1999 by and between Lancer Orthodontics, Inc.
and Alejandro Carnero, a non-resident alien, independent
contractor and citizen of the Republic of Mexico
(incorporated by reference to Exhibit 10.25 filed with
Registrant's Registration Statement on Form SB-2,
Commission No. 333-87231 filed on September 16, 1999).
10.25 Product Development and Marketing Agreement entered into as
of August 3, 1998 by and between Lancer Orthodontics, Inc.
and AG Metals, Inc., a Nevada corporation (incorporated by
reference to Exhibit 10.26 filed with Registrant's
Registration Statement on Form SB-2, Commission No.
333-87231 filed on September 16, 1999).
10.26 Agreement between Lancer Orthodontics, Inc. and Gary Weikel,
an individual, incorporating by reference that certain
Product Development and Marketing Agreement of even date
between Lancer Orthodontics, Inc. and AG Metals, Inc.
(incorporated by reference to Exhibit 10.27 filed with
Registrant's Registration Statement on Form SB-2, Commission
No. 333-87231 filed on September 16, 1999).
10.27 Lease between Biomerica, Inc., JSJ Management and Ilse
Sultanian dated September 1, 2001.
10.28 Agreement between Biomerica, Inc. and Lancer Orthodontics,
Inc. for the acquisition of the remaining outstanding shares
of Lancer Orthodontics, Inc., common stock by Biomerica
(incorporated by reference to an exhibit filed with the S-4
filed on April 10, 2002).
10.29 General Assignment of Assets Agreement with Allergy Immuno
Technologies, Inc.
16.1 Letter on Change of Certifying Accountant (incorporated by
reference to Exhibit A to Form 8-K filed with the Securities
and Exchange Commission on May 24, 1993).
16.2 Letter on change of certifying accountant (incorporated by
reference to Exhibit A to Form 10-QSB/A filed with the
Securities and Exchange Commission on April 14, 1999).
21.1 Subsidiaries of Registrant (incorporated by reference to
Exhibit 21.1 to Form 10-KSB filed with the Securities and
Exchange Commission on September 14, 1999).
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbarnes-Oxley Act of 2002
signed by Zackary S. Irani, Chief Executive Officer.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
P0ursuant to Section 906 of the Sarbanes-Oxley Act of 2002
signed by Janet Moore, Chief Financial Officer.
99.3 Biomerica, Inc. and Subsidiaries Consolidated Financial
Statements For The Years Ended May 31, 2002 and 2001 and
Independent Auditors' Report.
(b) Reports on Form 8-K
-------------------
Biomerica filed a report on Form 8-K with the Securities and Exchange
Commission on June 6, 2002.
25
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BIOMERICA, INC.
Registrant
By /s/ Zackary S. Irani
-----------------------------
Zackary S. Irani, Chief Executive
Officer
Dated: 6/05/03
-------
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities
and on the dates indicated:
Signature and Capacity
/s/ Zackary S. Irani Date: 6/05/03
------------------------------------
Zackary S. Irani
President, Director, Chief Executive
Officer
/s/ Janet Moore Date: 6/05/03
------------------------------------
Janet Moore, Secretary
Director, Chief Financial Officer
/s/ Robert Orlando Date: 6/05/03
------------------------------------
Robert Orlando, M.D., Ph.D.
Director
/s/ Carlos St. Aubyn Beharie Date: 6/05/03
------------------------------------
Carlos St. Aubyn Beharie
Director
/s/ David Burrows Date: 6/05/03
------------------------------------
David Burrows
Director
/s/ Francis R. Cano
----------------------------------- Date: 6/05/03
Francis R. Cano
Director
/s/ Allen Barbieri Date: 6/05/03
------------------------------------
Allen Barbieri
Director, Vice President Finance
26
Exhibit 10.27
STANDARD OFFICE LEASE - NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. BASIC LEASE PROVISIONS ("Basic Lease Provisions")
1.1 PARTIES: This Lease, dated, for reference purposes only, October 1,
2001, is made by and between ILSE SULTANIAN & JSJ MANAGEMENT, (herein called
"Lessor") and BIOMERICA, INC., A DELAWARE CORPORATION, doing business under
the name of same (herein called "Lessee").
1.2 PREMISES: Suite Numbers(s) A, B, D, H, I, J, K, L, M, plus, the
second floor of L, M and the 2nd floor of 1527 - first building floors,
consisting of approximately 21,000 square feet, more or less, as defined in
paragraph 2 and as shown on Exhibit "A" hereto (the "Premises").
1.3 BUILDING: Commonly described as being located at 1527 & 1531-1533
Monrovia Avenue in the City of Newport Beach, County of Orange, State of CA,
as more particularly described in Exhibit A hereto, and as defined in
paragraph 2.
1.4 USE: general office, R & D and Laboratory, subject to paragraph 6.
1.5 TERM: Four (4) years commencing November 1, 2001 ("Commencement
Date") and ending October 31, 2005, as defined in paragraph 3.
1.6 BASE RENT: 15,000 per month, payable on the first day of each month,
per paragraph 4.1 and Paragraph 50 in the Addendum to Lease.
1.7 BASE RENT INCREASE: On See Paragraph 50 in Addendum to Lease the
monthly Base Rent payable under paragraph 1.6 above shall be adjusted as
provided in paragraph 4.3 below.
1.8 RENT PAID UPON EXECUTION: 15,000 for Not applicable.
1.9 SECURITY DEPOSIT None
1.10 LESSEE'S SHARE OF OPERATING EXPENSES: N/A % as defined in paragraph
4.2.
2. PREMISES, PARKING AND COMMON AREAS.
2.1 PREMISES: The Premises are a portion of a building, herein sometimes
referred to as the "Building" identified in paragraph 1.3 of the Basic Lease
Provisions. "Building" shall include adjacent parking structures used in
connection therewith. The Premises, the Building, the Common Areas, the land
upon which the same are located, along with all other buildings and
improvements thereon or thereunder, are herein collectively referred to as
the "Office Building Project." Lessor hereby leases to Lessee and Lessee
leases from Lessor for the term, at the rental, and upon all of the
conditions set forth herein, the real property referred to the Basic Lease
Provisions, paragraph 1.2, as the "Premises", including rights to the Common
Areas as hereinafter specified.
2.2 VEHICLE PARKING: So long as Lessee is not in default, and subject
to the rules and regulations attached hereto, and as established by Lessor
from time to time, Lessee shall be entitled to rent and use of approximately
thirty (30) in common parking spaces in the Office Building Project at the
monthly rate applicable from time to time for monthly parking as set by
Lessor and/or its licensee.
2.2.1 If Lessee commits, permits or allows any of the prohibited
activities described in the Lease or the rules then in effect, then Lessor
shall have the right, without notice, in addition to such other rights and
remedies that it may have, to remove or tow away the vehicle involved and
charge the cost to Lessee, which coat shall be immediately payable upon
demand by Lessor.
2.2.2 The monthly parking rate per parking space will be $_________
per month at the commencement of the term of this Lease, and is subject to
change upon five (5) days prior written notice to Lessee. Monthly parking
fees shall be payable one month in advance prior to the first day of each
calendar
month.
2.3 COMMON AREAS - DEFINITION. The term "Common Areas" is defined as all
areas and facilities outside the Premises and within the exterior boundary
line of the Office Building Project that are provided and designated by the
Lessor from time to time for the general non-exclusive use of Lessor, Lessee
and of other lessees of the Office Building Project and their respective
employees, suppliers, shippers, customers and invitees, including but not
limited to common entrances, lobbies, corridors, stairways and stairwells,
public restrooms, elevators, escalators, parking areas to the extent not
otherwise prohibited by this Lease, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, ramps, driveways, landscaped areas
and decorative walls.
2.4 COMMON AREAS - RULES AND REGULATIONS. Lessee agrees to abide by and
conform to the rules and regulations attached hereto as Exhibit B with
respect to the Office Building Project and Common Areas, and to cause its
employees, suppliers, shippers, customers, and invitees to so abide and
conform. Lessor or such other person(s) as Lessor may appoint shall have the
exclusive control and management of the Common Areas and shall have the
right, from time to time, to modify, amend and enforce said rules and
regulations. Lessor shall not be responsible to Lessee for the non-
compliance with said rules and regulations by other lessees, their agents,
employees and invitees of the Office Building Project.
2.5 COMMON AREAS - CHANGES. Lessor shall have the right, in Lessors sole
discretion, from time to time:
(a) To make changes to the Building interior and exterior and
Common Areas, including, without limitation, changes in the location, size,
shape, number, and appearance thereof, including but not limited to the
lobbies, windows, stairways, air shafts, elevators, escalators, restrooms,
driveways, entrances, parking spaces, parking areas, loading and unloading
areas, ingress, egress, direction of traffic, decorative walls, landscaped
areas and walkways; provided, however, Lessor shall at all times provide the
parking facilities required by applicable law;
(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
(c) To designate other land and improvements outside the boundaries
of the Office Building Project to be a part of the Common Areas, provided
that such other land and improvements have a reasonable and functional
relationship to the Office Building Project;
(d) To add additional buildings and improvements to the Common
Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Office Building Project, or any
portion thereof;
(f) To do and perform such other acts and make such other changes
in, to or with respect to the Common Areas and Office Building Project as
Lessor may, in the exercise of sound business judgment deem to be appropriate.
3. TERM
3.1 TERM. The term and Commencement Date of this Lease shall be as
specified in paragraph 1.5 of the Basic Lease Provisions.
3.2 DELAY IN POSSESSION. Notwithstanding said Commencement Date, if
for any reason Lessor cannot deliver possession of the Premises to Lessee on
said date and subject to paragraph 3.2.2, Lessor shall not be subject to any
liability therefore, nor shall such failure affect the validity of this
Lease or the
Page 1 of 12
obligations of Lessee hereunder or extend the term hereof; but in such case,
Lessee shall not be obligated to pay rent or perform any other obligation of
Lessee under the terms of this Lease, except as may be otherwise provided in
this Lease, until possession of the Premises is tendered to Lessee, as
hereinafter defined; provided, however, that if Lessor shall not have
delivered possession of the Premises within sixty (60) days following said
Commencement Date, as the same may be extended under the terms of a Work
Letter executed by Lessor and Lessee, Lessee may, at Lessee's option, by
notice in writing to Lessor within ten (10) days thereafter, cancel this
Lease, in which event the parties shall be discharged from all obligations
hereunder; provided, however, that, as to Lessee's obligations, Lessee first
reimburses Lessor for all costs incurred for Non-Standard Improvements and,
as to Lessor's obligations, Lessor shall return any money previously
deposited by Lessee (less any offsets due Lessor for Non-Standard
Improvements); and provided further, that if such written notice by Lessee
is not received by Lessor within said ten (10) day period, Lessee's right to
cancel this Lease hereunder shall terminate and be of no further force or
effect.
3.2.1 POSSESSION TENDERED - DEFINED. Possession of the Premises
shall be deemed tendered to Lessee ("Tender of Possession") when (1) the
improvements to be provided by Lessor under this Lease are substantially
completed, (2) the Building utilities are ready for use in the Premises,
(3) Lessee has reasonable access to the Premises, and (4) ten (10) days
shall have expired following advance written notice to Lessee of the
occurrence of the matters described in (1), (2) and (3), above of this
paragraph 3.2.1.
3.2.2 DELEYS CAUSED BY LESSEE. There shall be no abatement of rent,
and the sixty (60) day period following the Commencement Date before which
Lessee's right to cancel this Lease accrues under paragraph 3.2, shall be
deemed extended to the extent of any delays caused by acts or omissions of
Lessee, its agents, employees and contractors.
3.3 EARLY POSSESSION. If Lessee occupies the Premises prior to said
Commencement Date, such occupancy shall be subject to all provisions of this
Lease, such occupancy shall not change the termination date, and Lessee
shall pay rent for such occupancy.
3.4 UNCERTAIN COMMENCEMENT. In the event commencement of the Lease term
is defined as the completion of the improvements, Lessee and Lessor shall
execute an amendment to this Lease establishing the date of Tender of
Possession (as defined in paragraph 3.2.1) or the actual taking of possession
by Lessee, whichever first occurs, as the Commencement Date.
4. RENT.
4.1 BASE RENT. Subject to adjustment as hereinafter provided in
paragraph 4.3, and except as may be otherwise expressly provided in this
Lease, Lessee shall pay to Lessor the Base Rent for the Premises set forth
in paragraph 1.6 of the Basic Lease Provisions, without offset or deduction.
Lessee shall pay Lessor upon execution hereof the advance Base Rent described
in paragraph 1.8 of the Basic Lease Provisions. Rent for any period during
the term hereof which is for less than one month shall be prorated based upon
the actual number of days of the calendar month involved. Rent shall be
payable in lawful money of the United States to Lessor at the address stated
herein or to such other persons or at such other places as Lessor may
designate in writing.
4.2 OPERATING EXPENSES. Lessee shall pay to Lessor during the term
hereof, in addition to the Base Rent, Lessee's Share, as hereinafter defined,
of all Operating Expenses, as hereinafter defined, during each calendar year
of the term of this Lease, in accordance with the following provisions:
(a) "Lessee's Share" is defined, for purposes of this Lease, as
the percentage set forth In paragraph 1.10 of the Basic Lease Provisions,
which percentage has been determined by dividing the approximate square
footage of the premises by the total approximate square footage of the
rentable space contained in the Office Building Project. It is understood
and agreed that the square footage figures set forth in the Basic Lease
Provisions are approximations which Lessor and Lessee agree are reasonable
and shall not be subject to revision except in connection with an actual
change In the size of the Premises or a change In the space available for
lease In the Office Building Project.
(b) "Operating Expenses" is defined, for purposes of this Lease
to include all costs, if any, incurred by Lessor in the exercise of its
reasonable discretion, for:
(i) The operation, repair, maintenance, and replacement, in
neat, clean, safe, good order and condition, of the Office Building Project,
including but not limited to, the following:
(aa) The Common Areas, including their surfaces,
coverings, decorative items, carpets, drapes and window coverings, and
including parking areas, loading and unloading areas, trash areas, roadways,
sidewalks, walkways, stairways, parkways, driveways, landscaped areas,
striping, bumpers, irrigation systems, Common Area lighting facilities,
building exteriors and roofs, fences and gates;
(bb) All heating, air conditioning, plumbing, electrical
systems, life safety equipment, telecommunication and other equipment used in
common by, or for the benefit of, lessees or occupants of the Office Building
Project, including elevators and escalators, tenant directories, fire
detection systems including sprinkler system maintenance and repair.
(ii) Trash disposal, janitorial and security services;
(iii) Any other service to be provided by Lessor that is
elsewhere in this Lease stated to be an "Operating Expense";
(iv) The cost of the premiums for the liability and property
insurance policies to be maintained by Lessor under paragraph 8 hereof;
(v) The amount of the real properly taxes to be paid by Lessor
under paragraph 10.1 hereof;
(vi) The cost of water, sewer, gas, electricity, and other
publicly mandated services to the Office Building Project;
(vii) Labor, salaries, end applicable fringe benefits and
costs, materials, supplies and tools, used in maintaining and/or cleaning
the Office Building Project and accounting and a management fee attributable
to the operation of the Office Building Project;
(viii) Replacing and/or adding improvements mandated by any
governmental agency and any repairs or removals necessitated thereby
amortized over its useful life according to Federal income tax regulations
or guidelines for depreciation thereof (including interest on the unamortized
balance as is then reasonable in the judgment of Lessors accountants);
(ix) Replacements of equipment or improvements that have a
useful life for depreciation purposes according to Federal Income tax
guidelines of five (5) years or less, as amortized over such life.
(c) Operating Expenses shall not include the costs of replacements
of equipment or improvements that have a useful life for Federal income tax
purposes in excess of five (5) years unless it is of the type described in
paragraph 4.2(b)(viii), in which case their cost shall be included as above
provided.
(d) Operating Expenses shall not include any expenses paid by any
lessee directly to third parties, or as to which Lessor is otherwise
reimbursed by any third party, other tenant, or by insurance proceeds.
(e) Lessee's Share of Operating Expenses shall be payable by Lessee
within ten (10) days after a reasonably detailed statement of actual expenses
is presented to Lessee by Lessor. At Lessors option, however, an amount may
be estimated by Lessor from time to time of Lessee's Share of annual
Operating Expenses and the same shall be payable monthly or quarterly, as
Lessor shall designate, during each calendar year of the Lease term, on the
same day as the Base Rent is due hereunder. In the event that Lessee pays
Lessor's estimate of Lessee's Share of Operating Expenses as aforesaid,
Lessor shall deliver to Lessee within sixty (60) days after the expiration of
each calendar year a reasonably detailed statement showing Lessee's Share of
the actual Operating Expenses incurred during the preceding year. If Lessee's
payments under this paragraph 4.2(e) during said preceding calendar year
exceed Lessee's Share as indicated on said statement, Lessee shall be
entitled to credit the amount of such overpayment against Lessee's Share of
Operating Expenses next falling due. If Lessee's payments under this
paragraph during said preceding calendar year were less than Lessee's Share
as indicated on said statement, Lessee shall pay to Lessor the amount of the
deficiency within ten (10) days after delivery by Lessor to Lessee of said
statement.
4.3 RENT INCREASE. SEE PARAGRAPH 50 IN ADDENDUM TO LEASE.
4.3.1 At the times set forth in paragraph 1.7 of the Basic Lease
Provisions, the monthly Base Rent payable under paragraph 4.1 of this Lease
shall be adjusted by the increase, if any, in the Consumer Price Index of
the Bureau of Labor Statistics of the Department of Labor for All Urban
Consumers, (1967 = 100), "All Items," for the city nearest the location of
the Building, herein referred to as "C.P.I.," since the date of this Lease.
4.2.2 The monthly Base Rent payable pursuant to paragraph 4.3.1
shall be calculated as follows: the Base Rent payable for the first month of
the term of this Lease, as set forth in paragraph 4.1 of this Lease, shall
be multiplied by a fraction the numerator of which shall be the C.P.I. of
the calendar month during which the adjustment is to take effect, and the
denominator of which shall be the C.P.I. for the calendar month in which the
original Lease term commences. The sum so calculated shall constitute the
new monthly Base Rent hereunder, but, in no event, shall such new monthly
Base Rent be less than the Base Rent payable for the month immediately
preceding the date for the rent adjustment.
4.3.3 In the event the compilation and/or publication of the C.P.I.
shall be transferred to any other governmental department or bureau or agency
or shall be discontinued, then the index most nearly the same as the C.P.I.
shall be used to make such calculations. In the event that Lessor and Lessee
cannot agree on such alternative index, then the matter shall be submitted
for decision to the American Arbitration Association in the county in which
the Premises are located, in accordance with the then rules of said
association and the decision of the arbitrators shall be binding upon the
parties, notwithstanding one party failing to appear after due notice of the
proceeding. The cost of said Arbitrators shall be paid equally by Lessor and
Lessee.
4.3.4 Lessee shall continue to pay the rent at the rate previously
in effect until the increase, if any, is determined. Within five (5) days
following
Page 2 of 12
the date on which the increase is determined, Lessee shall make such payment
to Lessor as will bring the increased rental current, commencing with the
effective date of such increase through the date of any rental installments
then due. Thereafter the rental shall be paid at the increased rate.
4.3.5 At such time as the amount of any change in the rental
required by this Lease is known or determined, Lessor and Lessee shall
execute an amendment to this Lease setting forth such change.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
the security deposit set forth in paragraph 1.9 of the Basic Lease Provisions
as security for Lessee's faithful performance of Lessee's obligations
hereunder. If Lessee fails to pay rent or other charges due hereunder, or
otherwise defaults with respect to any provision of this Lease, Lessor may
use, apply or retain all or any portion of said deposit for the payment of
any rent or other charge in default for the payment of any other sum to which
Lessor may become obligated by reason of Lessee's default, or to compensate
Lessor for any loss or damage which Lesser may suffer thereby. If Lessor so
uses or applies all or any portion of said deposit, Lessee shall within ten
(10) days after written demand therefore deposit cash with Lessor in an
amount sufficient to restore said deposit to the full amount then required
of Lessee. If the monthly Base Rent shall, from time to time, increase
during the term of this Lease, Lessee shall, at the time of such increase,
deposit with Lessor additional money as a security deposit so that the total
amount of the security deposit held by Lessor shall at all times bear the
same proportion to the then current Base Rent as the initial security
deposit bears to the initial Base Rent set forth in paragraph 1.6 of the
Basic Lease Provisions. Lessor shall not be required to keep said security
Deposit separate from its general accounts, if Lessee performs all of
Lessee's obligations hereunder, said deposit, or so much thereof as has not
Heretofore been applied by Lessor, shall be returned, without payment of
interest or other increment for its use, to Lessee (or, at Lessors option,
to the last assignee, if any, of Lessee's interest hereunder) at the
expiration of the term hereof, and after Lessee has vacated the Premises.
No trust relationship is created herein between Lessor and Lessee with
respect to said Security Deposit.
6. USE.
6.1 USE. The Premises shall be used and occupied only for the purposes
set forth in paragraph 1.4 of the Basic Lease Provisions or any other use
which is reasonably comparable to that use and for no other purpose.
6.2 COMPLIANCE WITH LAW.
(a) Lessor warrants to Lessee that the Premises, in the state
existing on the date that the Lease term commences, but without regard to
alterations or improvements made by Lessee or the use for which Lessee will
occupy the Premises, does not violate any covenants or restrictions of
record, or any applicable building code, regulation or ordinance in effect
on such Lease term Commencement Date. In the event it is determined that
this warranty has been violated, then it shall be the obligation of the
Lessor, after written notice from Lessee, to promptly, at Lessors sole cost
and expense, rectify any such violation.
(b) Except as provided in paragraph 6.2(a) Lessee shall, at
Lessee's expense, promptly comply with all applicable statutes, ordinances,
rules, regulations, orders, covenants end restrictions of record, and
requirements of any fire insurance underwriters or rating bureaus, now in
effect or which may hereafter come into effect, whether or not they reflect
a change in policy from that now existing, during the term or any part of
the term hereof, relating in any manner to the Premises and the occupation
and use by Lessee of the Premises. Lessee shall conduct its business in a
lawful manner and shall not use or permit the use of the Premises or the
Common Areas in any manner that will tend to create waste or a nuisance or
shall tend to disturb other occupants of the Office Building Project.
6.3 CONDITION OF PREMISES.
(a) Lessor shall deliver the Premises to Lessee in a clean
condition on the Lease Commencement Date (unless Lessee is already in
possession) and Lessor warrants to Lessee that the plumbing, lighting, air
conditioning, and heating system in the Premises shall be in good operating
condition. In the event that it is determined that this warranty has been
violated, then it shall be the obligation of Lessor, after receipt of
written notice from Lessee setting forth with specificity the nature of the
violation, to promptly, at Lessor's sole cost, rectify such violation.
(b) Except as otherwise provided in this Lease, Lessee hereby
accepts the Premises and the Office Building Project in their condition
existing as of the Lease Commencement Data or the date that Lessee takes
possession of the Premises, whichever is earlier, subject to all applicable
zoning, municipal, county and state laws, ordinances and regulations
governing and regulating the use of the Premises, and any easements,
covenants or restrictions of record, and accepts this Lease subject thereto
and to all matters disclosed thereby and by any exhibits attached hereto.
Lessee acknowledges that it has satisfied itself by its own independent
investigation that the Premises are suitable for its intended use, and that
neither Lessor nor Lessors agent or agents has made any representation or
warranty as to the present or future suitability of the Premises, Common
Areas, or Office Building Project for the conduct of Lessee's business.
7. MAINTENANCE, REPAIRS, ALTERATIONS AND COMMON AREA SERVICES.
7.1 LESSOR'S OBLIGATIONS. Lessor shall keep the Office Building Project,
including the Premises, interior and exterior walls, roof, and common areas,
and the equipment whether used exclusively for the Premises or in common with
other premises, in good condition and repair; provided, however, Lessor shall
not be obligated to paint, repair or replace wall coverings, or to repair or
replace any improvements that are not ordinarily a part of the Building or
are above then Building standards, Except as provided in paragraph 9.2, there
shall be no abatement of rent or liability of Lessee on account of any injury
or interference with Lessee's business with respect to any improvements,
alterations or repairs made by Lessor to the Office Building Project or any
part thereof. Lessee expressly waives the benefits of any statute now or
hereafter in effect which would otherwise afford Lessee the right to make
repairs at Lessor's expense or to terminate this Lease because of Lessor's
failure to keep the Premises in good order, condition and repair.
7.2 LESSEE'S OBLIGATIONS.
(a) Notwithstanding Lessor's obligation to keep the Premises in
good condition and repair, Lessee shall be responsible for payment of the
cost thereof to Lessor as additional rent for that portion of the cost of
any maintenance and repair of the Premises, or any equipment (wherever
located) that serves only Lessee or the Premises, to the extent such cost is
attributable to causes beyond normal wear and tear. Lessee shall be
responsible for the cost of painting, repairing or replacing wail coverings,
and to repair or replace any Premises improvements that are not ordinarily a
part of the Building or that are above then Building standards. Lessor may,
at its option, upon reasonable notice, elect to have Lessee perform any
particular such maintenance or repairs the cost of which is otherwise
Lessee's responsibility hereunder.
(b) On the last day of the term hereof, or on any sooner
termination, Lessee shall surrender the Premises to Lessor in the same
condition as received, ordinary wear and tear excepted, clean and free of
debris. Any damage or deterioration of the Premises shall not be deemed
ordinary wear and tear if the same could have been prevented by good
maintenance practices by Lessee. Lessee shall repair any damage to the
Premises occasioned by the installation or removal of Lessee's trade
fixtures, alterations, furnishings and equipment. Except as otherwise stated
in this Lease, Lessee shall leave the air lines, power panels, electrical
distribution systems, lighting fixtures, air conditioning, window coverings,
wall coverings, carpets, wall paneling, ceilings and plumbing on the
Premises and in good operating condition.
7.3 ALTERATIONS END ADDITIONS.
(a) Lessee shall not, without Lessor's prior written consent make
any alterations, improvements, additions, Utility Installations or repairs
in, on or about the Premises or the Office Building Project. As used in this
paragraph 7.3 the term "utility Installation" shall mean carpeting, window
and wall coverings, power panels, electrical distribution systems, lighting
fixtures, air conditioning, plumbing, and telephone and telecommunication
wiring and equipment. At the expiration of the term, Lessor may require the
removal of any or all of said alterations, improvements, additions or
Utility Installations, and the restoration of the Premises and the Office
Building Project to their prior condition, at Lessee's expense. Should
Lessor permit Lessee to make its own alterations, improvements, additions
or Utility Installations, Lessee shall use only such contractor as has been
expressly approved by Lessor, and Lessor may require Lessee to provide
Lessor, at Lessee's sole cost and expense, a lien and completion bond in an
amount equal to one and one-half times the estimated cost of such
improvements, to insure Lessor against any liability for mechanic's and
materialmen's liens and to insure completion of the work. Should Lessee make
any alterations, improvements, additions or Utility Installations without the
prior approval of Lessor, or use a contractor not expressly approved by
Lessor, Lessor may, at any time during the term of this Lease, require that
Lessee remove any part or all of the same.
(b) Any alterations, improvements, additions or Utility
Installations in or about the Premises or the Office Building Project that
Lessee shall desire to make shall be presented to Lessor in written form,
with proposed detailed plans. If Lessor shall give its consent to Lessee's
making such alteration, improvement, addition or Utility Installation, the
consent shall be deemed conditioned upon Lessee acquiring a permit to do so
from the applicable governmental agencies, furnishing a copy thereof to
Lessor prior to the commencement of the work, and compliance by Lessee with
all conditions of said permit in a prompt and expeditious manner.
(c) Lessee shall pay, when due, all claims for labor or materials
furnished or alleged to have been furnished to or for Lessee at or for use
in the
Page 3 of 12
Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises, the Building or the Office Building
Project, or any Interest therein.
(d) Lessee shall give Lessor not less than ten (10) days' notice
prior to the commencement of any work in the Premises by Lessee, and Lessor
shall have the right to post notices of non-responsibility in or on the
Premises or the Building as provided by law, if Lessee shall, in good faith,
contest the validity of any such lien, claim or demand, then Lessee shall,
at its sole expense defend itself and Lessor against the same and shall pay
and satisfy any such adverse judgment that may be rendered thereon before
the enforcement thereof against the Lessor or the Premises, the Building or
the Office Building Project, upon the condition that if Lessor shall require,
Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an
amount equal to such contested lien claim or demand indemnifying Lessor
against liability for the same and holding the Premises, the Building and the
Office Building Project free from the effect of such lien or claim. In
addition, Lessor may require Lessee to pay Lessor's reasonable attorneys'
fees and costs in participating in such action if Lessor shall decide it is
to Lessors best interest so to do.
(e) All alterations, improvements, additions and Utility
installations (whether or not such Utility Installations constitute trade
fixtures of Lessee), which may be made to the Premises by Lessee, including
but not limited to, floor coverings, panelings, doors, drapes, built-ins,
moldings, sound attenuation, and lighting and telephone or communication
systems, conduit, wiring and outlets, shall be made and done in a good and
workmanlike manner end of good and sufficient quality and materials and
shall be the property of Lessor and remain upon and be surrendered with the
Premises at the expiration of the Lease term, unless Lesser requires their
removal pursuant to paragraph 7.3(a). Provided Lessee is not in default,
notwithstanding the provisions of this paragraph 7.3(e), Lessee's personal
property and equipment, other than that which is affixed to the Premises so
that it cannot be removed without material damage to the Premises or the
Building, and other than Utility Installations, shall remain the property
of Lessee and may be removed by Lessee subject to the provisions of
paragraph 7.2.
(f) Lessee shall provide Lessor with as-built plans and
specifications for any alterations, improvements, additions or Utility
Installations.
7.4 UTILITY ADDITIONS. Lessor reserves the right to install new or
additional utility facilities throughout the Office Building Project for
the benefit of Lessor or Lessee, or any other lessee of the Office Building
Project, including, but net by way of limitation, such utilities as plumbing,
Electrical systems, security systems, communication systems, and fire
protection and detection systems, so long as such installations do not
unreasonably interfere with Lessee's use of the Premises.
8. INSURANCE; INDEMNITY.
8.1 LIABILITY INSURANCE - LESSEE. Lessee shall, at Lessee's expense,
obtain and keep in force during the term of this Lease a policy of
Comprehensive General Liability Insurance utilizing an insurance Services
Office standard form with Broad Form General Liability Endorsement (GL0404),
or equivalent, in an amount of not less than $1,000,000 per occurrence of
bodily injury and property damage combined or in a greater amount as
reasonably determined by Lessor and shall insure Lessee with Lessor as an
additional insured against liability arising out of the use, occupancy or
maintenance of the Premises. Compliance with the above requirement shall
not, however, limit the liability of Lessee hereunder.
8.2 LIABILITY INSURANCE - LESSER. Lessor shall obtain and keep in
force during the term of this Lease a policy of Combined Single Limit
Bodily Injury and Broad Form Property Damage insurance, plus coverage
against such other risks Lessor deems advisable from time to time, insuring
Lessor, but not Lessee, against liability arising out of the ownership, use,
occupancy nr maintenance of the Office Building Project in an amount not
less than $5,000,000.00 per occurrence. $2,000,000.00
8.3 PROPERTY INSURANCE - LESSEE. Lessee shall, at Lessee's expense,
obtain and keep in force during the term of this Lease for the benefit of
Lessee, replacement cost fire and extended coverage insurance, with
vandalism and malicious mischief, sprinkler leakage and earthquake
sprinkler leakage endorsements, in an amount sufficient to cover not less
than 100% of the full replacement cost, as the same may exist from time to
time, of all of Lessee's personal property, fixtures, equipment and tenant
improvements.
8.4 PROPERTY INSURANCE - LESSOR. Lessor shall obtain and keep in force
during the term of this Lease a policy or policies of insurance covering loss
or damage to the Office Building Project improvements, but not Lessee's
personal property, fixtures, equipment or tenant improvements, in the amount
of the full replacement cost thereof, as the same may exist from time to time,
utilizing Insurance Services Office standard form, or equivalent, providing
protection against all perils included within the classification of fire,
extended coverage, vandalism, malicious mischief, plate glass, and such
other perils as Lessor deems advisable or may be required by a lender having
a lien on the Office Building Project. In addition, Lessor shall obtain and
keep in force, during the term of this Lease, a policy of rental value
insurance covering a period of one year, with loss payable to Lessor, which
insurance shall also cover all Operating Expenses for said period. Lessee
will not be named in any such policies carried by Lessor and shall have no
right to any proceeds therefrom. The policies required by these paragraphs
8.2 and 8.4 shall contain such deductibles as Lessor or the aforesaid lender
may determine. In the event that the Premises shall suffer an Insured loss
as defined in paragraph 9.1 (f) hereof, the deductible amounts under the
applicable insurance policies shall be deemed an Operating Expense. Lessee
shall not do or permit to be done anything which shall invalidate the
insurance policies carried by Lessor. Lessee shall pay the entirety of any
increase in the property insurance premium for the Office Building Project
over what it was immediately prior to the commencement of the term of this
Lease if the increase is specified by Lessor's insurance carrier as being
caused by the nature of Lessee's occupancy or any act or omission of Lessee.
8.5 INSURANCE POLICIES. Lessee shall deliver to Lessor copies of
liability insurance policies required under paragraph 8.1 or certificates
evidencing the existence and amounts of such insurance within seven (7) days
after the Commencement Date of this Lease. No such policy shall be
cancellable or subject to reduction of coverage or other modification except
after thirty (30) days prior written notice to Lessor. Lessee shall, at
least thirty, (30) days prior to the expiration of such policies, furnish
lessor with renewals thereof.
8.6 WAIVER OF SUBROGATION. Lessee and Lessor each hereby release and
relieve the other, and waive their entire right of recovery against the
other, for direct or consequential loss or damage arising out of or incident
to the perils covered by property insurance carried by such party, whether
due to the negligence of Lessor or Lessee or their agents, employees,
contractors and/or invitees. If necessary all property insurance policies
required under this Lease shall be endorsed to so provide.
8.7 INDEMNITY. Lessee shall indemnify and hold harmless Lessor and its
agents, Lessor's master or ground lessor, partners and lenders, from and
against any and all claims for damage to the person or property of anyone or
any entity arising from Lessee's use of the Office Building Project, or from
the conduct of Lessee's business or from any activity, work or things done,
permitted or suffered by Lessee in or about the Premises or elsewhere and
shall further indemnify and hold harmless Lessor from and against any and
all claims, costs and expenses arising from any breach or default in the
performance of any obligation on Lessee's part to be performed under the
terms of this Lease, or arising from any act or omission of Lessee, or any
of Lessee's agents, contractors, employees or invitees and from and against
all costs, attorney's fees, expenses and liabilities incurred by Lessor as
the result of any such use, conduct, activity, work, things done, permitted
or suffered, breach, default or negligence, and in dealing reasonably
therewith, Including but not limited to the defense or pursuit of any claim
or any action or proceeding involved therein; and in case any action or
proceeding be brought against Lessor by reason of any such matter, Lessee
upon notice from Lessor shall defend the same at Lessee's expense by counsel
reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in
such defense. Lessor need not have first paid any such claim in order to be
so indemnified. Lessee, as a material part of the consideration to Lessor,
hereby assumes all risk of damage to property of Lessee or injury to persons,
in, upon or about the Office Building Project arising from any cause and
Lessee hereby waives all claims in respect thereof against Lessor.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that
Lessor shall not be liable for injury to Lessee's business or any loss of
Income therefrom or for loss of or damage to the goods, wares, merchandise
or other property of Lessee, Lessee's employees, invitees, customers, or any
other person in or about the Premises or the Office Building Project, nor
shall Lessor be liable for injury to the person of Lessee, Lessee's
employees, agents or contractors, whether such damage or injury is caused by
or results from theft, fire, steam, electricity, gas water or rain, or from
the breakage, leakage, obstruction or other defects of pipes, sprinklers,
wires, appliances, plumbing, air conditioning or lighting fixtures, or from
any other cause, whether said damage or injury results from conditions
arising upon the Premises or upon other portions of the Office Building
Project, or from other sources or places, or from new construction or the
repair, alteration or improvement of any part of the Office Building Project,
or of the equipment, fixtures or appurtenances applicable thereto, and
regardless of whether the cause of such damage or injury or the means of
repairing the same is inaccessible, Lessor shall not be liable for any
damages arising from any act or neglect of any other lessee, occupant or
user of the Office Building Project, nor from the failure of Lessor to
enforce the provisions of any other lease of any other lessee of the
Office Building Project.
8.9 NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no
representation that the limits or forms of coverage of insurance specified
in this paragraph 8 are adequate to cover Lessee's property or obligations
under this Lease.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
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(a) "Premises Damage" shall mean if the Premises are damaged or
destroyed to any extent.
(b) "Premises Building Partial Damage" shall mean if the Building
of which the Premises are a part is damaged or destroyed to the extent that
the cost of repair is less than fifty percent (50%) of the then Replacement
Cost of the Building.
(c) "Premises Building Total Destruction shall mean if the Building
of which the Premises are a part is damaged or destroyed to the extent that
the cost of repair if fifty percent (50%) or more of the then Replacement
Cost of the Building.
(d) "Office Building Project Buildings" shall mean all of the
buildings on the Office Building Project site.
(e) "Office Building Project Buildings Total Destruction" shall
mean if the Office Building Project Buildings are damaged or destroyed to
the extent that the cost of repair is fifty percent (50%) or more of the
then Replacement Cost of the Office Building Project Buildings.
(f) "Insured Loss" shall mean damage or destruction which was
caused by an event required to be covered by the insurance described in
paragraph 8. The fact that an Insured Loss has a deductible amount shall
not make the loss an uninsured loss.
(g) "Replacement Cost" shall mean the amount of money necessary to
be spent in order to repair or rebuild the damaged area to the condition that
existed immediately prior to the damage occurring, excluding all improvements
made by lessees, other than those installed by Lessor at Lessee's expense.
9.2 PREMISES DAMAGE; PREMISES BUILDING PARTIAL DAMAGE.
(a) Insured Loss: Subject to the provisions of paragraphs 9.4 and
9.5, if at any time during the term of this Lease there is damage which is an
Insured Loss and which falls into the classification of either Premises
Damage or Premises Building Partial Damage, then Lessor shall, as soon as
reasonably possible and to the extent the required materials and labor are
readily available through usual commercial channels, at Lessor's expense,
repair such damage (but not Lessee's fixtures, equipment or tenant
improvements originally paid for by Lessee) to its condition existing at the
time of the damage, and this Lease shall continue in full force and effect.
(b) Uninsured Loss: Subject to the provisions of paragraphs 9.4
and 9.5, if at any time during the term of this Lease there is damage which
is not an Insured Loss and which falls within the classification of Premises
Damage or Premises Building Partial Damage, unless caused by a negligent or
willful act of Lessee (in which event Lessee shall make the repairs at
Lessee's expense), which damage prevents Lessee from making any substantial
use of the Premises, Lessor may at Lessor's option either (i) repair such
damage as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) give written
notice to Lessee within thirty (30) days after the date of the occurrence
of such damage of Lessor's intention to cancel and terminate this Lease as
of the date of the occurrence of such damage, in which event this Lease
shall terminate as of the date of the occurrence of such damage.
9.3 PREMISES BUILDING TOTAL DESTRUCTION; OFFICE BUILDING PROJECT TOTAL
DESTRUCTION. Subject to the provisions of paragraphs 9.4 and 9.5, if at any
time during the term of this Lease there is damage, whether or not it is an
Insured Loss, which falls into the classifications of either (i) Premises
Building Total Destruction, or (ii) Office Building Project Total Destruction,
then Lessor may at Lessor's option either (1) repair such damage or
destruction as soon as reasonably possible at Lessor's expense (to the
extent the required materials are readily available through usual commercial
channels) to its condition existing at the time of the damage, but not
Lessee's fixtures, equipment or tenant improvements, and this Lease shall
continue in full force and effect, or (ii) give written notice to Lessee
within thirty (30) days after the date of occurrence of such damage of
Lessor's intention to cancel and terminate this Lease, in which case this
Lease shall terminate as of the date of the occurrence of such damage.
9.4 DAMAGE NEAR END OF TERM.
(a) Subject to paragraph 9.4(b), if at any time during the last
twelve (12) months of the term of this Lease there is substantial damage to
the Premises, Lessor may at Lessor's option cancel and terminate this Lease
as of the date of occurrence of such damage by giving written notice to
Lessee of Lessor's election to do so within 30 days after the date of
occurrence of such damage.
(b) Notwithstanding paragraph 9.4(a), in the event that Lessee has
an option to extend or renew this Lease, and the time within which said
option may be exercised has not yet expired, Lessee shall exercise such
option, if it is to be exercised at all, no later than twenty (20) days
after the occurrence of an Insured Loss falling within the classification
of Premises Damage during the last twelve (12) months of the term of this
Lease. If Lessee duly exercises such option during said twenty (20) day
period, Lessor shall, at Lessor's expense, repair such damage, but not
Lessee's fixtures, equipment or tenant improvements, as soon as reasonably
possible and this Lease shall continue in full force and effect. If Lessee
fails to exercise such option during said twenty (20) day period, then
Lessor may at Lessor's option terminate and cancel this Lease as of the
expiration of said twenty (20) day period by giving written notice to Lessee
of Lessor's election to do so within ten (10) days after the expiration of
said twenty (20) day period, notwithstanding any term or provision in the
grant of option to the contrary.
9.5 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event Lessor repairs or restores the Building or
Premises pursuant to the provisions of this paragraph 9, and any part of
the Premises are not usable (including loss of use due to loss of access or
essential services), the rent payable hereunder (including Lessee's Share
of Operating Expense) for the period during which such damage, repair or
restoration continues shall be abated, provided (1) the damage was not the
result of the negligence of Lessee, and (2) such abatement shall only be to
the extent the operation and profitability of Lessee's business as operated
from the Premises is adversely affected. Except for said abatement of rent,
if any, Lessee shall have no claim against Lessor for any damage suffered
by reason of any such damage, destruction, repair or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
or the Building under the provisions of this Paragraph 9 and shall not
commence such repair or restoration within ninety (90) days after such
occurrence, or if Lessor shall not complete the restoration and repair
within six (6) months after such occurrence, Lessee may at Lessee's option
cancel and terminate this Lease by giving Lessor written notice of Lessee's
election to do so at any time prior to the commencement or completion,
respectively, of such repair or restoration. In such event this Lease shall
terminate as of the date of such notice.
(c) Lessee agrees to cooperate with Lessor in connection with
any such restoration and repair, including but not limited to the approval
and/or execution of plans and specifications required.
9.6 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this paragraph 9, an equitable adjustment shall be made
concerning advance rent and any advance payments made by Lessee to Lessor.
Lessor shall, in addition, return to Lessee so much of Lessee's security
deposit as has not theretofore been applied by Lessor.
9.7 WAIVER. Lessor and Lessee waive the provisions of any statute
which relate to termination of leases when leased property is destroyed and
agree that such event shall be governed by the terms of this Lease.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES. Lessor shall pay the real property tax, as
defined in paragraph 10.3, applicable to the Office Building Project subject
to reimbursement by Lessee of Lessee's Share of such taxes in accordance
with the provisions of paragraph 4.2, except as otherwise provided in
paragraph 10.2.
10.2 ADDITIONAL IMPROVEMENTS. Lessee shall not be responsible for
paying any increase in real property tax specified in the tax assessor's
records and work sheets as being caused by additional improvements placed
upon the Office Building Project by other lessees or by Lessor for the
exclusive enjoyment of any other lessee. Lessee shall, however, pay to
Lessor at the time that Operating Expenses are payable under paragraph
4.2(c) the entirety of any increase in real property tax if assessed solely
by reason of additional improvements placed upon the Premises by Lessee or
at Lessee's request.
10.3 DEFINITION OF "REAL PROPERTY TAX". As used herein, the term "real
property tax" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed on the Office Building Project or
any portion thereof by any authority having the direct or indirect power to
tax, including any city, county, state or federal government, or any school,
agricultural, sanitary, fire, street, drainage or other improvement district
thereof, as against any legal or equitable interest of Lessor in the Office
Building Project or in any portion thereof, as against Lessor's right to rent
or other income therefrom, and as against Lessor's business of leasing the
Office Building Project. The term "real property tax" shall also include any
tax, fee, levy, assessment or charge (i) in substitution of, partially or
totally, any tax, fee, levy, assessment or charge hereinabove included within
the definition of "real property tax", or (ii) the nature of which was
hereinbefore included within the definition of "real property tax", or (iii)
which is imposed for a service or right not charged prior to June 1, 1978 or,
if previously charged, has been increased since June 1, 1978, or (iv) which
is imposed as a result of a change in ownership, as defined by applicable
local statutes for property tax purposes, of the Office Building Project or
which is added to a tax or charge herein before included within the
definition of real property tax by reason of such change of ownership, or
(v) which is imposed by reason of this transaction, any modifications or
changes hereto, or any transfers hereof.
10.4 JOINT ASSESSMENT. If the improvements or property, the taxes for
which are to be paid separately by Lessee under paragraph 10.2 or 10.5 are
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not separately assessed, Lessee's portion of that tax shall be equitably
determined by Lessor from the respective valuations assigned in the
assessors work sheets or such other information (which may include the cost
of construction) as may be reasonably available. Lessors reasonable
determination thereof, in good faith, shall be conclusive.
10.5 PERSONAL PROPERTY TAXES.
(a) Lessee shall pay prior to delinquency all taxes assessed
against and levied upon trade fixtures, furnishings, equipment and all other
personal property of Lessee contained in the Premises or elsewhere.
(b) If any of Lessee's said personal property shall be assessed
with Lessor's real property, Lessee shall pay to Lessor the taxes
attributable to Lessee within ten (10) days after receipt of a written
statement setting forth the taxes applicable to Lessee's property.
11. UTILITIES.
11.1 SERVICES PROVIDED BY LESSER. Lessor shall provide heating,
ventilation, air conditioning, and janitorial service as reasonably
required, reasonable amounts of electricity for normal lighting and office
machines, water for reasonable and normal drinking and lavatory use, and
replacement light bulbs and/or fluorescent tubes and ballasts for standard
overhead fixtures.
11.2 SERVICES EXCLUSIVE TO LESSEE. Lessee shall play for all water, gas,
heat, light, power, telephone and other utilities and services specially or
exclusively supplied and/or metered exclusively to the Premises or to Lessee,
together with any taxes thereon. If any such services are not separately
metered to the Premises, Lessee shall pay at Lessors option, either Lessee's
Share or a reasonable proportion to be determined by Lessor of all charges
jointly metered with other premises in the Building.
11.3 HOURS OF SERVICE. Said services and utilities shall be provided
during generally accepted business days and hours or such other days or hours
as may hereafter be set forth. Utilities and services required at other times
shall be subject to advance request and reimbursement by Lessee to Lessor of
the cost thereof.
11.4 EXCESS USAGE BY LESSEE. Lessee shall not make connection to the
utilities except by or through existing outlets and shall not install or use
machinery or equipment in or about the Premises that uses excess water,
lighting or power, or suffer or permit any act that causes extra burden upon
the utilities or services, including but not limited to security services,
over standard office usage for the Office Building Project. Lesser shall
require Lessee to reimburse Lessor for any excess expenses or costs that may
arise out of a breath of this subparagraph by Lessee. Lessor may, in its
sole discretion, install at Lessee's expense supplemental equipment and/or
separate metering applicable to Lessee's excess usage or loading.
11.5 INTERRUPTIONS. There shah be no abatement of rent and Lessor shall
not be liable in any respect whatsoever for the inadequacy, stoppage,
interruption or discontinuance of any utility or service due to riot, strike,
labor dispute, breakdown, accident, repair or other cause beyond Lessor's
reasonable control or in cooperation with governmental request or directions.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSORS CONSENT REQUIRED. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet, or otherwise transfer
or encumber all or any part of Lessee's interest in the Lease or in the
Premises, without Lessor's prior written consent, which Lessor shall not
unreasonably withhold. Lessor shall respond to Lessee's request for consent
hereunder in a timely manner and any attempted assignment, transfer,
mortgage, encumbrance or subletting without such consent shall be void, and
shall constitute a material default and breach of this Lease without the
need for notice to Lessee under paragraph 13.1. "Transfer" within the meaning
of this paragraph 12 shall include the transfer or transfers aggregating:
(a) If Lessee is a corporation, more than twenty-five percent (25%) of the
voting stock of such corporation, or (b) if Lessee is a partnership, more
than twenty-five percent (25%) of the profit and loss participation in such
partnership.
12.2 LESSEE AFFILIATE. Notwithstanding the provisions of paragraph 12.1
hereof, Lessee may assign or sublet the Premises, or any portion thereof,
without Lessors consent, to any corporation which controls, is controlled by
or is under common control with Lessee, or to any corporation resulting from
the merger or consolidation with Lessee, or to any person or entity which
acquires all the assets of Lessee as a going concern of the business that is
being conducted on the Premises, all of which are referred to as "Lessee
Affiliate"; provided that before such assignment shall be effective, (a)
said assignee shall assume, in full, the obligations of Lessee under this
Lease, and (b) Lessor shall be given written notice of such assignment and
assumption. Any such assignment shall not, in any way, affect or limit the
liability of Lessee under the terms of this Lease even if after such
assignment or subletting the terms of this Lease are materially changed or
altered without the consent of Lessee, the consent of whom shall not be
necessary.
12.3 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessors consent, no assignment or subletting
shall release Lessee of Lessee's obligations hereunder or alter the primary
liability of Lessee to pay the rent and other sums due Lessor hereunder
including Lessee's Share of Operating Expenses, and to perform all other
obligations to be performed by Lessee hereunder.
(b) Lessor may accept rent from any person other than Lessee
pending approval or disapproval of such assignment.
(c) Neither a delay in the approval or disapproval of such
assignment or subletting, nor the acceptance of rent, shall constitute a
waiver or estoppel of Lessors right to exercise its remedies for the breach
of any of the terms or conditions of this paragraph 12 or this Lease.
(d) If Lessee's obligations under this Lease have been guaranteed
by third parties, then an assignment or sublease, and Lessors consent thereto,
shall not be effective unless said guarantors give their written consent to
such sublease and the terms thereof.
(e) The consent by Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or
to any subsequent or successive assignment or subletting by the sublessee.
However, Lessor may consent to subsequent sublettings and assignments of the
sublease or any amendments or modifications thereto without notifying Lessee
or anyone else liable on the Lease or sublease and without obtaining their
consent and such action shall not relieve such persons from liability under
this Lease or said sublease; provided, however, such persons shall not be
responsible to the extent any such amendment or modification enlarges or
increases the obligations of the Lessee or sublessee under this Lease or
such sublease.
(f) In the event of any default under this Lease, Lessor may
proceed directly against Lessee, any guarantors or anyone else responsible
for the performance of this Lease, including the sublessee, without first
exhausting Lessors remedies against any other person or entity responsible
therefore to Lessor, or any security held by Lessor or Lessee.
(g) Lessors written consent to any assignment or subletting of the
Premises by Lessee shall not constitute an acknowledgment that no default
then exists under this Lease of the obligations to be performed by Lessee
nor shall such consent be deemed a waiver of any then existing default,
except as may be otherwise stated by Lessor at the time.
(h) The discovery of the fact that any financial statement relied
upon by Lessor in giving its consent to an assignment or subletting was
materially false shall, at Lessors election, render Lessors said consent
null and void.
12.4 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING.
Regardless of Lessors consent, the following terms and conditions shall apply
to any subletting by Lessee of all or any part of the Premises and shall be
deemed included in all subleases under this Lease whether or not expressly
incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from sublease heretofore or
hereafter made by Lessee, and Lessor may collect such rent and income and
apply same toward Lessee's obligations under this Lease; provided, however,
that until a default shall occur in the performance of Lessee's obligations
under this Lease, Lessee may receive, collect and enjoy the rents accruing
under such sublease. Lessor shall not, be reason of this or any other
assignment of such sublease to Lessor nor by reason of the collection of the
rents from a sublessee, be deemed liable to the sublessee for any failure of
Lessee to perform and comply with any of Lessee's obligations to such
sublessee under such sublease. Lessee hereby irrevocably authorizes and
directs any such sublessee, upon receipt of a written notice from Lessor
stating that a default exists in the performance of Lessee's obligations
under this Lease, to pay to Lessor the rents due and to become due under the
sublease. Lessee agrees that such sublessee shall have the right torely upon
any such statement and request from Lessor, and that such sublessee shall
pay such rents to Lessor without any obligation or right to inquire as to
whether such default exists and notwithstanding any notice from or claim
from Lessee to the contrary, Lessee shall have no right or claim against
said sublessee or Lessor for any such rents so paid by said sublessee to
Lessor.
(b) No sublease entered into by Lessee shall be effective unless
and until it has been approved in writing by Lessor. In entering into any
sublease, Lessee shall use only such form of sublease as is satisfactory to
Lessor, and once approved by Lessor, such sublease shall not be changed or
modified without Lessor's prior written consent. Any sublessee shall, by
reason of entering into a sublease under this Lease, be deemed, for the
benefit of Lessor, to have assumed and agreed to conform and comply with
each and every obligation herein to be performed by Lessee other than such
obligations as are contrary to or inconsistent with provisions contained in
a sublease to which Lessor has expressly consented in writing.
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(c) In the event Lessee shall default in the performance of its
obligations under this Lease, Lessor, at its option and without any
obligation to do so, may require any sublessee to attorn to Lessor, in which
event Lessor shall undertake the obligations of Lessee under such sublease
from the time of the exercise of said option to the termination of such
sublease; provided, however, Lessor shall not be liable for any prepaid
rents or security deposit paid by such sublessee to Lessee or for any other
prior defaults of Lessee under such sublease.
(d) No sublessee shall further assign or sublet all or any part of
the Premises without Lessor's prior written consent.
(e) With respect to any subletting to which Lessor has consented,
Lessor agrees to deliver a copy of any notice of default by Lessee to the
sublessee. Such sublessee shall have the right to cure a default of Lessee
within three (3) days after service of said notice of default upon such
sublessee, and the sublessee shall have a right of reimbursement and offset
from and against Lessee for any such defaults cured by the sublessee.
12.5 LESSOR'S EXPENSES. In the event Lessee shall assign or sublet the
Premises or request the consent of Lessor to any assignment or subletting or
if Lessee shall request the consent of Lessor for any act Lessee proposes to
do then Lessee shall pay Lessor's reasonable costs and expenses incurred in
connection therewith, including attorneys', architects', engineers' or other
consultants' fees.
12.6 CONDITIONS TO CONSENT. Lessor reserves the right to condition any
approval to assign or sublet upon Lessors determination that (a) the
proposed assignee or sublessee shall conduct a business on the Premise of a
quality substantially equal to that of Lessee and consistent with the
general character of the other occupants of the Office Building Project and
not in violation of any exclusives or rights then held by other tenants, and
(b) the proposed assignee or sublessee be at least as financially responsible
as Lessee was expected to be at the time of the execution of this Lease or
of such assignment or subletting, whichever is greater.
13. DEFAULT; REMEDIES.
13.1 DEFAULT. The occurrence of any one or more of the following events
shall constitute a material default of this Lease by Lessee:
(a) The vacation or abandonment of the Premises by Lessee. Vacation
of the Premises shall include the failure to occupy the Premises for a
continuous period of sixty (60) days or more, whether or not the rent is paid.
(b) The breach by Lessee of any of the covenants, conditions or
provisions of paragraphs 7.3(a), (b) or (d) (alterations), 12.1 (assignment
or subletting), 13.1(a) (vacation or abandonment), 13.1(e) (insolvency),
13.1(f) (false statement), 16(a)(estoppel certificate), 30(b) (subordination),
33 (auctions), or 41.1 (easements), all of which are hereby deemed to be
material, non-curable defaults without the necessity of any notice by Lessor
to Lessee thereof.
(c) The failure by Lessee to make any payment of rent or any other
payment required to be made by Lessee hereunder, as and when due, where such
failure shall continue for a period of three (3) days after written notice
thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a
Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes
such Notice to Pay Rent or Quit shall also constitute the notice required by
this subparagraph.
(d) The failure by Lessee to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed
by Lessee other than those referenced in subparagraphs (b) and (c), above,
where such failure shall continue for a period of thirty (30) days after
written notice thereof from Lessor to Lessee; provided, however, that if the
nature of Lessee's noncompliance is such that more than thirty (30) days are
reasonably required for its cure, then Lessee shall not be deemed to be in
default if Lessee commenced such cure within said thirty (30) day period and
thereafter diligently pursues such cure to completion. To the extent
permitted by law, such thirty (30) day notice shall constitute the sole and
exclusive notice required to be given to Lessee under applicable Unlawful
Detainer statutes.
(e)(i) The making by Lessee of any general arrangement or general
assignment for the benefit of creditors; (ii) Lessee becoming a "debtor" as
defined in 11 U.S.C. ss. 101 or any successor statute thereto (unless, in
the case of a petition filed against Lessee, the same is dismissed within
sixty (60) days; (iii) the appointment of a trustee or receiver to take
possession of substantially all of Lessee's assets located at the Premises
or of Lessee's interest in this Lease, where possession is not restored to
Lessee within thirty (30) days; or (iv) the attachment, execution or other
judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease, where such seizure is not
discharged within thirty (30) days. In the event that any provision of this
paragraph 13.1(e) is contrary to any applicable law, such provision shall
be of no force or effect.
(f) The discovery by Lessor that any financial statement given to
Lessor by Lessee, or its successor in interest or by any guarantor of
Lessee's obligation hereunder, was materially false.
13.2 REMEDIES. In the event of any material default or breach of this
Lease by Lessee, Lessor may at any time thereafter, with or without notice
or demand and without limiting Lessor in the exercise of any right or remedy
which Lessor may have by reason of such default:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate
and Lessee shall immediately surrender possession of the Premises to Lessor.
In such event Lessor shall be entitled to recover from Lessee all damages
incurred by Lessor by reason of Lessee's default including, but not limited
to, the cost of recovering possession of the Premises; expenses of reletting,
including necessary renovation and alteration of the Premises, reasonable
attorneys' fees, and any real estate commission actually paid; the worth at
the time of award by the court having jurisdiction thereof the amount by
which the unpaid rent for the balance of the term after the time of such
award exceeds the amount of such rental loss for the same period that Lessee
proves could be reasonably avoided; that portion of the leasing commission
paid by Lessor pursuant to paragraph 15 applicable to the unexpired term of
this Lease.
(b) Maintain Lessee's right to possession in which case this Lease
shall continue in effect whether or not Lessee shall have vacated or
abandoned the Premises. In such event Lessor shall be entitled to enforce all
of Lessor's rights and remedies under this Lease, including the right to
recover the rent as it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located. Unpaid installments of rent and other unpaid monetary obligations
of Lessee under the terms of this Lease shall bear interest from the date due
at the maximum rate then allowable by law.
13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor
fails to perform obligations required of Lessor within a reasonable time, but
in no event later than thirty (30) days after written notice by Lessee to
Lessor and to the holder of any first mortgage or deed of trust covering the
Premises whose name and address shall have theretofore been furnished to
Lessee in writing, specifying wherein Lessor has failed to perform such
obligation; provided, however, that if the nature of Lessors obligation is
such that more than thirty (30) days are required for performance than
Lessor shall not be in default if Lessor commences performance within such
30-day period and thereafter diligently pursues the same to completion.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of Base Rent, Lessee's Share of Operating Expenses or other
sums due hereunder will cause Lessor to incur costs not contemplated by this
Lease, the exact amount of which will be extremely difficult to ascertain.
Such costs include, but are not limited to, processing end accounting
charges, and late charges which may be imposed on Lessor by the terms of any
mortgage or trust deed covering the Office Building Project. Accordingly, if
any installment of Base Rent, Operating Expenses, or any other sum due from
Lessee shall not be received by Lessor or Lessees designee within ten (10)
days after such amount shall be due, then without any requirement for notice
to Lessee, Lessee shall pay to Lessor a late charge equal to 3% of such
overdue amount. The parties hereby agree that such late charge represents a
fair and reasonable estimate of the costs Lessor will incur by reason of
late payment by Lessee. Acceptance of such late charge by Lessor shall in no
event constitute a waiver of Lessee's default with respect to such overdue
amount, nor prevent Lessor from exercising any of the other rights and
remedies granted hereunder.
14. CONDEMNATION. If the Premises or any portion thereof or the Office
Building project are taken under the power of eminent domain, or sold under
the threat of the exercise of said power (all of which are herein called
"condemnation"), this Lease shall terminate as to the part so taken as of the
date the condemning authority takes title or possession, whichever first
occurs; provided that if so much of the Premises or the Office Building
Project are taken by such condemnation as would substantially and adversely
affect the operation and profitability of Lessee's business conducted from
the Premises, Lessee shall have the option, to be exercised only in writing
within thirty (30) days after Lessor shall have given Lessee written notice
of such taking (or in the absence of such notice, within thirty (30) days
after the condemning authority shall have taken possession), to terminate
this Lease as of the date the condemning authority takes such possession.
If Lessee does not terminate this Lease in accordance with the foregoing,
this Lease shall remain in full force and effect as to the portion of the
Premises remaining, except that the rent and Lessee's Share of Operating
Expenses shall be reduced in the proportion that the floor area of the
premises taken bears to the total floor area of the Premises. Common
Areas taken shall be excluded from the Common Areas usable by Lessee and
no reduction of rent shall occur with respect thereto or by reason thereof.
Lessor shall have the option in its sole discretion to terminate this Lease
as of the taking of possession by the condemning authority, by giving
written notice to Lessee of such election within thirty (30) days after
receipt of notice of a taking by condemnation of any part of the Premises
or the Office Building Project. Any award for the taking of all or any part
of the Premises or the Office Building Project under the power of eminent
domain or any payment made under threat of the exercise of such power hall
be the property of
Page 7 of 12
Lessor, whether such award shall be made as compensation for diminution in
value of the leasehold or for the taking of the fee, or as severance damages;
provided, however, that Lessee shall be entitled to any separate award for
loss of the damage to Lessee's trade fixtures, removable personal property
and unamortized tenant improvements that have been paid for by Lessee. For
that purpose the cost of such improvements shall be amortized over the
original term of this Lease excluding any options. In the event that this
lease is not terminated by reason of such condemnation, Lessor shall to the
extent of severance damages received by Lessor in connection with such
condemnation, repair any damage to the Premises caused by such condemnation
except to the extent that Lessee has been reimbursed therefore by the
condemning authority. Lessee shall pay any amount in excess of such
severance damages required to complete such repair.
15. BROKER'S FEE.
(a) The brokers involved in this transaction are NOT applicable as
"listing broker" and Not applicable as "cooperating broker", licensed real
estate broker(s). A "cooperating broker" is defined as any broker other than
the listing broker entitled to a share of any commission arising under this
Lease. Upon execution of this Lease by both parties, Lessor shall pay to
said brokers jointly, or in such separate shares as they may mutually
designate in writing, a fee as set forth in a separate agreement between
Lessor and said broker(s), or in the event there is no separate agreement
between Lessor and said broker(s), the sum of $Not applicable, for
brokerage services rendered by said broker(s) to Lessor in this transaction.
(b) Lessor further agrees that (i) if Lessee exercises any Option, as
defined in paragraph 39.1 of this Lease, which is granted to Lessee under
this Lease, or any subsequently granted option which is substantially similar
to an Option granted to Lessee under this Lease, or (ii) if Lessee acquires
any rights to the Premises or other premises described in this Lease which
are substantially similar to what Lessee would have acquired had an Option
herein granted to Lessee been exercised, or (iii) if Lessee remains in
possession of the Premises after the expiration of the term of this Lease
after having failed to exercise an Option, or (iv) if said broker(s) are the
procuring cause of any other lease or sale entered into between the parties
pertaining to the Premises and/or any adjacent property in which Lessor has
an interest, or (v) if the Base Rent is increased, whether by agreement or
operation of an escalation clause contained herein, then as to any of said
transactions or rent increases, Lessor shall pay said broker(s) a fee in
accordance with the schedule of said broker(s) in effect at the time of
execution of this Lease. Said fee shall be paid at the time of such
increased rental is determined.
(c) Lessor agrees to pay said fee not only on behalf of Lessor but also
on behalf of any person, corporation, association, or other entity having an
ownership interest in said real property or any part thereof, when such fee
is due hereunder. Any transferee of Lessor's interest in this Lease, whether
such transfer is by agreement or by operation of law, shall be deemed to
have assumed Lessors obligation under this paragraph 15. Each listing and
cooperating broker shall be a third party beneficiary of the provisions of
this paragraph 15 to the extent of their interest in any commission arising
under this Lease and may enforce that right directly against Lessor;
provided, however, that all brokers having a right to any part of such total
commission shall be a necessary party to any suit with respect thereto.
(d) Lessee and Lessor each represent and warrant to the other that
neither has had any dealings with any person, firm, broker or finder (other
than the persons(s), if any, whose names are set forth in paragraph 15(a),
above) in connection with the negotiation of this Lease and/or the
consummation of the transaction contemplated hereby, and no other broker or
other person, firm or entity is entitled to any commission or finders fee
in connection with said transaction and Lessee and Lessor do each hereby
indemnify and hold the other harmless from and against any costs, expenses,
attorneys' fees or liability for compensation or charges which may be
claimed by any such unnamed broker, finder or other similar party by reason
of any dealings or actions of the indemnifying party.
16. ESTOPPEL CERTIFICATE.
(a) Each party (as "responding party") shall at any time upon not less
than ten (10) days' prior written notice from the other party ("requesting
party") execute, acknowledge and deliver to the requesting party a statement
in writing (i) certifying that this Lease is unmodified and in full force
and effect (or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect) and
the date to which the rent and other charges are paid in advance, if any,
and (ii) acknowledging that there are not, to the responding party's
knowledge, any uncured defaults on the part of the requesting party, or
specifying such defaults if any are claimed. Any such statement may be
conclusively relied upon by any prospective purchaser or encumbrancer of the
Office Building Project or of the business of Lessee.
(b) At the requesting party's option, the failure to deliver such
statement within such time shall be a material default of this Lease by the
party who is to respond, without any further notice to such party, or it
shall be conclusive upon such party that (i) this Lease is in full force and
affect, without modification except as may be represented by the requesting
party, (ii) there are no uncured defaults in the requesting party's
performance, and (iii) if Lessor is the requesting party, not more than one
month's rent has been paid in advance.
(c) if Lessor desires to finance, refinance, or sell the Office Building
Project, or any part thereof, Lessee hereby agrees to deliver to any lender
or purchaser designated by Lessor such financial statements of Lessee as may
be reasonably required by such lender or purchaser. Such statements shall
include the past three (3) years' financial statements of Lessee. All such
financial statements shall be received by Lessor and such lender or purchaser
in confidence and shall be used only for the purposes herein set forth.
17. LESSER'S LIABILITY. The term "Lessor" as used herein shall mean only the
owner or owners, at the time in question, of the fee title or a lessee's
interest in a ground lease of the Office Building Project, and except as
expressly provided in paragraph 15, in the event of any transfer of such
title or interest, Lessor herein named (and in case of any subsequent
transfers then the grantor) shall be relieved from and after the date of
such transfer of all liability as respects Lessors obligations thereafter to
be performed, provided that any funds in the hands of Lessor or the then
grantor at the time of such transfer, in which Lessee has an interest, shall
be delivered to the grantee. The obligations contained in this Lease to be
performed by Lessor shall, subject as aforesaid, be binding on Lessors
successors and assigns, only during their respective periods of ownership.
18. SEVERABILITY. The invalidity of any provision of this Lease as
determined by a court of competent jurisdiction shall in no way affect the
validity of any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided,
any amount due to Lessor not paid when due shall bear interest at the 8%
APR which shall commence after sixty (60) days from the due date. Payment
of such interest shall not excuse or cure any default by Lessee under this
Lease; provided, however, that Interest shall not be payable on late charges
incurred by Lessee nor on any amounts upon which late charges are paid by
Lessee.
20. TIME OF ESSENCE. Time is of the essence with respect to the obligations
to be performed under this Lease.
21. ADDITIONAL RENT. All monetary obligations of Lessee to Lessor under the
terms of this Lease, including but not limited to Lessee's Share of
Operating Expenses and any other expenses payable by Lessee hereunder shall
be deemed to be rent.
22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all
agreements of the parties with respect to any matter mention herein. No prior
or contemporaneous agreement or understanding pertaining to any such matter
shall be effective. This Lease may be modified in writing only, signed by the
parties in interest at the time of the modification. Except as otherwise
stated in this Lease, Lessee hereby acknowledges that neither the real estate
broker listed in paragraph 15 hereof nor any cooperating broker on this
transaction nor the Lessor or any employee or agents of any of said persons
has made any oral or written warranties or representations to Lessee relative
to the condition or use by Lessee of the Premises or the Office Building
Project and Lessee acknowledges that Lessee assumes all responsibility
regarding the Occupational Safety Health Act, the legal use and adaptability
of the Premises and the compliance thereof with all applicable laws and
regulations in effect during the term of this Lease.
23. NOTICES. Any notice required or permitted to be given hereunder shall be
in writing and may be given by personal delivery or by certified or registered
mail, and shall be deemed sufficiently given if delivered or addressed to
Lessee or to Lessor at the address noted below or adjacent to the signature
of the respective parties, as the case may be. Mailed notices shall be deemed
given upon actual receipt at the address required, or forty-eight hours
following
Page 8 of 12
deposit in the mall, postage prepaid, whichever first occurs. Either party
may by notice to the other specify a different address for notice purposes
except that upon Lessee's taking possession of the Premises, the Premises
shall constitute Lessee's address for notice purposes. A copy of all
notices required or permitted to be given to Lessor hereunder shall be
concurrently transmitted to such party or parties at such addresses as
Lessor may from time to time hereafter designate by notice to Lessee.
24. WAIVERS. No waiver by Lessor of any provision hereof shall be deemed
a waiver of any other provision hereof or of any subsequent breach by Lessee
of the same or any other provision. Lessors consent to, or approval of, any
act shall not be deemed to render unnecessary the obtaining of Lessor's
consent to or approval of any subsequent act by Lessee. The acceptance of
rent hereunder by Lessor shall not be a waiver of any preceding breach by
Lessee of any provision hereof, other than the failure of Lessee to pay the
particular rent so accepted, regardless of Lessor's knowledge of such
preceding breach at the time of acceptance of such rent.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a "short form" memorandum of
this Lease for recording purposes.
26. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession of
the Premises or any part thereof after the expiration of the term hereof,
such occupancy shall be a tenancy from month to month upon all the provisions
of this Lease pertaining to the obligations of Lessee, except that the rent
payable shall be two hundred percent (200%) of the rent payable immediately
lately preceding the termination date of this Lease, and all Options, if any,
granted under the terms of this Lease shall be deemed terminated and be of
no further effect during said month to month tenancy.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other
remedies at law or in equity.
28. COVENANTS END CONDITIONS. Each provision of this Lease performable by
Lessee shall be deemed both a covenant and a condition.
29. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof
restricting assignment or subletting by Lessee and subject to the provisions
of paragraph 17, this Lease shall bind the parties, their personal
representatives, successors and assigns. This Lease shall be governed by the
laws of the State where the Office Building Project is located and any
litigation concerning this Lease between the parties hereto shall be
initiated in the county in which the Office Building Project is located.
30. SUBORDINATION.
(a) This Lease, and any Option or right of first refusal granted
hereby, at Lessors option, shall be subordinate to any ground lease,
mortgage, deed of trust, or any other hypothecation or security now or
hereafter placed upon the Office Building Project and to any and all
advances made on the security thereof and to all renewals, modifications,
consolidations, replacements and extensions thereof. Notwithstanding such
subordination, Lessee's right to quiet possession of the Premises shall
not be disturbed if Lessee is not in default and so long as Lessee shall
pay the rent and observe and perform all of the provisions of this Lease,
unless this Lease is otherwise terminated pursuant to its terms. If any
mortgagee, trustee or ground lessor shall elect to have this Lease and any
Options granted hereby prior to the lien of its mortgage, deed of trust or
ground lease, and shall give written notice thereof to Lessee, this Lease
and such Options shall be deemed prior to such mortgage, deed of trust or
ground lease, whether this Lease or such Options are dated prior or
subsequent to the date of said mortgage, deed of trust or ground lease or
the date of recording thereof.
(b) Lessee agrees to execute any documents required to effectuate an
attornment, a subordination, or to make this Lease or any Option granted
herein prior to the lien of any mortgage, deed of trust or ground lease,
as the case may be. Lessee's failure to execute such documents within ten
(10) days after written demand shall constitute a material default by Lessee
hereunder without further notice to Lessee or, at Lessor's option, Lessor
shall execute such documents on behalf of Lessee as Lessee's attorney-in-
fact Lessee does hereby make, constitute and irrevocably appoint Lessor as
Lessee's attorney-in-fact and in Lessee's name, place and stead, to execute
such documents in accordance with this paragraph 30(b).
31. ATTORNEYS' FEES.
31.1 If either party or the broker(s) named herein bring an action to
enforce the terms hereof or declare rights hereunder, the prevailing party
in any such action, trial, or appeal thereon, shall be entitled to his
reasonable attorneys' fees to be paid by the losing party as fixed by the
court in the same or separate suit, and whether or not such action is
pursued to decision or judgment. The provision of this paragraph shall inure
to the benefit of the broker named herein who seeks to enforce a right
hereunder.
31.2 The attorneys' fee award shall not be computed in accordance with
any court fee schedule, but shall be such as to fully reimburse all
attorneys' fees reasonably incurred in good faith.
31.3 Lessor shall be entitled to reasonable attorneys' fees and all
other costs and expenses incurred in the preparation and service of notices
of default and consultations in connection therewith, whether or not a legal
action is subsequently commenced in connection with such default.
32. LESSORS ACCESS.
32.1 Lessor and Lessors agents shall have the right to enter the
Premises at reasonable times for the purposes of inspecting the same,
performing any services required of Lessor, showing the same to prospective
purchasers, lenders, or lessees, taking such safety measures, erecting such
scaffolding or other necessary structures, making such alterations, repairs,
improvements or additions to the Premises or to the Office Building Project
as Lessor may reasonably deem necessary or desirable and the erecting, using
and maintaining of utilities, services, pipes and conduits through the
Premises and/or other premises as long as there is no material adverse
effect to Lessee's use of the Premises. Lessor may at any time place on or
about the Premises or the Building any ordinary "For Sale" signs and Lessor
may at any time during the last 120 days of the term hereof place on or
about the Premises any ordinary "For Lease" signs.
32.2 All activities of Lessor pursuant to this paragraph shall be
without abatement of rent, nor shall Lessor have any liability to Lessee
for the same.
32.3 Lessor shall have the right to retain keys to the Premises and to
unlock all doors in or upon the Premises other than to files, vaults and
safes, and in the case of emergency to enter the Premises by any reasonably
appropriate means, and any such entry shall not be deemed a forcible or
unlawful entry or detainer of the Premises or an eviction. Lessee waives
any charges for damages or injuries or interference with Lessee's property
or business in connection therewith.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises or the Common
Areas without first having obtained Lessor's prior written consent.
Notwithstanding anything to the contrary in this Lease, Lessor shall not be
obligated to exercise any standard of reasonableness in determining whether
to grant such consent. The holding of any auction on the Premises or Common
Areas in violation of this paragraph shall constitute a material default of
this Lease.
34. SIGNS. Lessee shall not place any sign upon the Premises or the Office
Building Project without Lessor's prior written consent. Under no
circumstances shall Lessee place a sign on any roof of the Office Building
Project.
35. MERGER. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to
Lessor of any or all of such subtenancies.
36. CONSENTS. Except for paragraphs 33 (auctions) and 34 (signs) hereof,
wherever in this Lease the consent of one party is required to an act of
the other party such consent shall not be unreasonably withheld or delayed.
37. GUARANTOR. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease.
Page 9 of 12
38. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and
observing and performing all of the covenants, conditions and provisions on
Lessee's part to be observed and performed hereunder, Lessee shall have
quiet possession of the Premises for the entire term hereof subject to all
of the provisions of this Lease. The individuals executing this Lease on
behalf of Lessor represent and warrant to Lessee that they are fully
authorized and legally capable of executing this Lease on behalf of Lessor
and that such execution is binding upon all parties holding an ownership
interest in the Office Building Project.
39. OPTIONS. NOT APPLICABLE
39.1 DEFINITION. As used in this paragraph the word "Option" has the
following meaning: (1) the right or option to extend the term of this Lease
or to renew this Lease or to extend or renew any lease that Lessee has on
other property of Lessor; (2) the option or right of first refusal to lease
the Premises or the right of first offer to lease the Premises or the right
of first refusal to lease other space within the Office Building Project or
other property of Lessor or the right of first offer to lease other space
within the Office Building Project or other property of Lessor, (3) the right
or option to purchase the Premises or the Office Building Project, or the
right of first refusal to purchase the Premises or the Office Building
Project or the right of first offer to purchase the Premises or the Office
Building Project, or the right or option to purchase other property of
Lessor, or the right of first refusal to purchase other property of Lessor
or the right of first offer to purchase other property of Lessor.
39.2 OPTIONS PERSONAL. Each Option granted to Lessee in this Lease is
personal to the original Lessee and may be exercised only by the original
Lessee while occupying the Premises who does so without the intent of
thereafter assigning this Lease or subletting the Premises or any portion
thereof, and may not be exercised or be assigned, voluntarily or
involuntarily, by or to any person or entity other than Lessee; provided,
however, that an Option may be exercised by or assigned to any Lessee
Affiliate as defined in paragraph 12.2 of this Lease. The Options, if any,
herein granted to Lessee are not assignable separate and apart from this
Lease, nor may any Option be separated from this Lease in any manner, either
by reservation or otherwise.
39.3 MUITIPLE OPTIONS. in the event that Lessee has any multiple
options to extend or renew this Lease a later option cannot be exercised
unless the prior option to extend or renew this Lease has been so exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary,
(i) during the time commencing from the date Lessor gives to Lessee a notice
of default pursuant to paragraph 13.1(c) or 13.1(d) and continuing until the
noncompliance alleged in said notice of default is cured, or (ii) during the
period of time commencing on the day after a monetary obligation to Lessor
is due from Lessee and unpaid (without any necessity for notice thereof to
Lessee) and continuing until the obligation is paid, or (iii) in the event
that Lessor has given to Lessee three or more notices of default under
paragraph 13.1(c), or paragraph 13.1(d), whether or not the defaults are
cured, during the 12 month period of time immediately prior to the time that
Lessee attempts to exercise the subject Option, (iv) if Lessee has committed
any non-curable breach, including without limitation those described in
paragraph 13.1(b), or is otherwise in default of any of the terms, covenants
or conditions of this Lease.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to
exercise an Option because of the provisions of paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due
and timely exercise of the Option, if, after such exercise and during the
term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation
of Lessee for a period of thirty (30) days after such obligation becomes due
(without any necessity of Lessor to give notice thereof to Lessee), or (ii)
Lessee fails to commence to cure a default specified in paragraph 13.1(d)
within thirty (30) days after the date that Lesser gives notice to Lessee of
such default and/or Lessee fails thereafter to diligently prosecute said cure
to completion, (iii) Lessor gives to Lessee three or more notices of default
under paragraph 13.1(c), or paragraph 13.1(d), whether or not the defaults
are cured, or (iv) if Lessee has committed any, non-curable breach, including
without limitation those described in paragraph 13.1(b), or is otherwise in
default of any of the terms, covenants and conditions of this Lease.
40. SECURITY MEASURES - LESSORS RESERVATIONS.
40.1 Lessee hereby acknowledges that Lessor shall have no obligation
whatsoever to provide guard service or other security measures for the
benefit of the Premises or the Office Building Project. Lessee assumes all
responsibility for the protection of Lessee, its agents, and invitees and
the property of Lessee and of Lessee's agents and invitees from acts of
third parties. Nothing herein contained shall prevent Lessor, at Lessor's
sole option, from providing security protection for the Office Building
Project or any part thereof, in which event the cost thereof shall be
included within the definition of Operating Expenses, as set forth in
paragraph 4.2(b).
40.2 Lessor shall have the following rights:
(a) To change the name, address or title of the Office Building
Project or building in which the Premises are located upon not less than 90
Days prior written notice;
(b) To, at Lessee's expense, provide and install Building standard
graphics on the door of the Premises and such portions of the Common Areas
as Lessor shall reasonably deem appropriate;
(c) to permit any lessee the exclusive right to conduct any
business as long as such exclusive does not conflict with any rights
expressly given herein;
(d) To place such signs, notices or displays as Lessor reasonably
deems necessary or advisable upon the roof, exterior of the buildings or the
Office Building Project or on pole signs in the Common Areas;
40.3 Lessee shall not:
(a) Use a representation (photographic or otherwise) of the
Building or the Office Building Project or their name(s) in connection with
Lessee's business;
(b) Suffer or permit anyone, except in emergency, to go upon the
roof of the Building.
41. EASEMENTS.
41.1 Lessor reserves to itself the right, from time to time, to grant
such easements, rights and dedications that Lessor deems necessary or
desirable, and to cause the recordation of Parcel Maps and restrictions, so
long as such easements, rights, dedications, Maps and restrictions do not
unreasonably interfere with the use of the Premises by Lessee. Lessee shall
sign any of the aforementioned documents upon request of Lessor and failure
to do so shall constitute a material default of this Lease by Lessee without
the need for further notice to Lessee.
41.2 The obstruction of Lessee's view, air, or light by any structure
erected in the vicinity of the Building, whether by Lessor or third parties,
shall in no way affect this Lease or impose any liability upon Lessor.
42. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one party to the other under the
provisions hereof, the party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such
payment shall not be regarded as a voluntary payment, and there shall
survive the right on the part of said party to institute suit for recovery
of such sum. If it shall be adjudged that there was no legal obligation on
the part of said party to pay such sum or any part thereof, said party shall
be entitled to recover such sum or so much thereof as it was not legally
required to pay under the provisions of this Lease.
43. AUTHORITY. If Lessee is a corporation, trust, or general or limited
partnership, Lessee, and each individual executing this Lease on behalf of
such entity, represent and warrant that such individual is duly authorized
to execute and deliver this Lease on behalf of said entity. If Lessee is a
corporation, trust or partnership, Lessee shall, within thirty (30) days
after execution of this Lease, deliver to Lessor evidence of such authority
satisfactory to Lessor.
44. CONFLICT. Any conflict between the printed provisions, Exhibits or
Addenda of this Lease and the typewritten or handwritten provisions, if any,
shall be controlled by the typewritten or handwritten provisions.
45. NO OFFER. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to Lessee to
lease. This Lease shall become binding upon Lessor and Lessee only when
fully executed by both parties.
46. LENDER MODIFICATION. Lessee agrees to make such reasonable modifications
to this Lease as may be reasonably required by an institutional lender in
connection with the obtaining of normal financing or refinancing of the
Office Building Project.
Page 10 of 12
47. MULTIPLE PARTIES. if more than one person or entity is named as either
Lessor or Lessee herein, except as otherwise expressly provided herein, the
obligations of the Lessor or Lessee herein shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or
Lessee, respectively.
48. WORK LETTER. This Lease is supplemented by that certain Work Letter of
even date executed by Lessor and Lessee attached hereto as Exhibit C and
incorporated herein by this reference.
49. ATTACHMENTS. Attached hereto are the following documents which
constitute a part of this Lease:
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM
AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT
THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY
REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH
RESPECT TO THE PREMISES.
IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR
SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION
OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS AGENTS OR
EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX
CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO;
THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL
COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
LESSOR LESSEE
ILSE SULTANIMT & JSJ MANAGEMENT BIOMERICA, INC.,
-------------------------------- --------------------------------
A DELAWARE CORPORATION
By /s/ Janet Moore Irani By /s/ Francis Capitanio
-------------------------------- --------------------------------
Janet Irani Francis Capitanio
Its Principal Its President
-------------------------------- --------------------------------
By /s/Jennifer Irani /s/Susan H. Irani By
-------------------------------- --------------------------------
Jennifer Irani Susan H. Irani
Its Principal Its
-------------------------------- --------------------------------
By /s/ Ilse Sultanian
--------------------------------
Ilse Sultanian
Its Co-owner
--------------------------------
Executed at Executed at
-------------------------------- --------------------------------
on on
-------------------------------- --------------------------------
Address Address
-------------------------------- --------------------------------
Page 11 of 12
NOTE: These forms are often modified to meet changing requirements of law
and needs of the Industry. Always write or call to make sure you are
utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION, 100 South Flower Street, Suite 600, Los Angeles, CA
90017. (213) 687-8777.
Page 12 of 12
ADDENDUM TO LEASE
-----------------
THE FOLLOWING SHALL BE DEEMED ADDED TO THE LEASE DATED OCTOBER 1,
2001, BY AND BETWEEN ILSE SUJTANTIAN & JSJ MANAGEMENT, JOINTLY
REFERRED TO AS "LESSOR", AND BIOMERICA, INC., A DELAWARE
CORPORATION, AS "LESSEE".
50. Base rent schedule and escalations.
-----------------------------------
The Base Rent shall be escalated on September 1, 2003 by the amount
equating to 3% of the Base Rent.
Management allows Biomerica, Inc. to sublet approximately 1/2 of the
2nd story of front Building commonly known as 1527 Monrovia Avenue,
however any proceeds collected from such activity will first be applied
to any back rents due, if any.
51. Security deposit.
-----------------
The Security deposit amount shall remain at zero.
52. Real Estate Brokers.
--------------------
No real estate brokers are a part of this transaction.
53. Operating Expenses.
-------------------
In addition to Paragraph 4.2, Lessee agrees to pay all Operating
Expenses associated with its occupancy of the Premises ("NNN" lease"),
including its own utility costs and janitorial services associated with
Lessee's use, building liability and hazard insurance, and property
taxes, with the exception of the space associated with the 1527
building which will be on a "gross" basis excluding electricity.
Due to the 1527 building's shared electrical metering (and therefore
one utility bill), the monthly invoice will be divided on a prorata
basis per the Lessee's electrical usage. The Lessee's prorata amount
will be determined in comparison to previous periods during which the
Premises was occupied only by Lessee; the differential between the
invoice amount during the period of the third floor vacancy and the
period of Lessee's occupancy will be paid by the Lessee. Once invoiced
by Lessor, the subject electrical payments will be made in a timely
manner by Lessee. (Only if applicable)
54. Property Tax Reassessment.
--------------------------
Lessor agrees to pay the assessed differential in any adjustment in the
annual Property Tax bill associated with a change in ownership due to
the sale of all or any part the Premises.
55. Lease Termination.
------------------
At the end of 18 months of occupancy after commencement of lease or
thereafter, lessee has the option of providing lessor a LETTER OF
INTENT TO VACATE with a minimum of a six (6) month notice delivered to
lessor of this intent. Upon notice, Lessor will then grant lessee to
vacate premises without penalty given all rents/misc. Lease expenses
are paid current at time of delivery of notice.
56. Trash.
------
Disposal service fees to be split between lessor and lessee - each
entity responsible for 50% of total billing when it comes due.
57. Common area maintenance.
------------------------
Lessor will be responsible for the common area maintenance with respect
to the following improvements: roofing, air conditioning units and
elevators in front building, walkways, stairwells and roadways.
CONFIRMED AND ACCEPTED:
LESSOR: LESSEE:
ILSE SULTANIAN & JSJ MANAGEMENT BIOMERICA, INC.,
A DELAWARE CORPORATION
By: /s/ Janet Irani By: /s/ Francis Capitanio
------------------------------------- ---------------------------------
Janet Irani Francis Capitanio
Its: Principal, JSJ Management Its: President
------------------------------------- ---------------------------------
By: /s/ Jennifer Irani
-------------------------------------
Jennifer Irani
Its: Principal, JSJ Management
-------------------------------------
By: /s/ Ilse Sultanian
-------------------------------------
Ilse Sultanian
Its" Co-owner
-------------------------------------
Date: 10/20/01 Date: October 17, 2001
------------------------------------- ---------------------------------
/s/ Susan H. Irani
Susan H. Irani
Principal, JSJ Management
STANDARD OFFICE LEASE
FLOOR PLAN
EXHIBIT A
RULES AND REGULATIONS FOR
STANDARD OFFICE LEASE
Dated: October 1, 2001
By and Between Ilse Sultanian & JSJ Management and Biomerica. Inc., a
Delaware Corporation
GENERAL RULES
1. Lessee shall not suffer or permit the obstruction of any Common
Areas, including driveways, walkways and stairways.
2. Lessor reserve the right to refuse access to any persons Lessor in
good faith judges to be a threat to the safety, reputation, or property of
the Office Building Project and its occupants.
3. Lessee shall not make or permit any noise or odors that annoy or
interfere with other lessees or persons having business within the Office
Building Project.
4. Lessee shall not keep animals or birds within the Office Building
Project, and shall not bring bicycles, motorcycles or other vehicles into
areas not designated as authorized for same.
5. Lessee shall not make, suffer or permit litter except in
appropriate receptacles for that purpose.
6. Lessee shall not alter any lock or install new or additional locks
or bolts.
7. Lessee shall be responsible for the inappropriate use of any toilet
rooms, plumbing or other utilities. No foreign substances of any kind are to
be inserted therein.
8. Lessee shall not deface the walls, partitions or other surfaces of
the Premises or Office Building Project.
9. Lessee shall not suffer or permit anything in or around the Premises
or Building that causes excessive vibration or floor loading in any part of
the Office Building Project.
10. Furniture, significant freight and equipment shall be moved into or
out of the building only with the Lessor's knowledge end consent, and subject
to such reasonable limitations, techniques and timing, as may be designated
by Lessor. Lessee shah be responsible for any damage to the Office Building
Project arising from any such activity.
11. Lessee shall not employ any service or contractor for services or
work to be performed in the Building, except as approved by Lessor.
12. Lessor reserves the right to close and lock the Building on
Saturdays, Sundays and legal holidays, and on other days between the hours
of 7:00 P.M. and 7:00 A.M. of the following day. If Lessee uses the Premises
during such periods, Lessee shall be responsible for securely locking any
doors it may have opened for entry.
13. Lessee shall return all keys at the termination of its tenancy and
shall be responsible for the cost of replacing any keys that are lost.
14. No window coverings, shades or awnings shall be installed or used
by Lessee.
15. No Lessee, employee or invitee shall go upon the roof of the
Building.
16. Lessee shall not suffer or permit smoking or carrying of lighted
cigars or cigarettes in areas reasonably designated by Lessor or by
applicable governmental agencies as non-smoking areas.
17. Lessee shall not use any method of heating or air conditioning
other than as provided by Lessor.
18. Lessee shall not install, maintain or operate any vending machines
upon the Premises without Lessors written consent.
19. The Premises shall not be used for lodging or manufacturing,
cooking or food preparation.
20. Lessee shall comply with at safety, fire protection and evacuation
regulations established by Lessor or any applicable governmental agency.
21. Lessor reserves the right to waive any one of these rules or
regulations, and/or as to any particular Lessee, and any such waiver shall
not constitute a waiver of any other rule or regulation or any subsequent
application thereof to such Lessee.
22. Lessee assumes all risks from theft or vandalism and agrees to keep
its Premises locked as may be required.
23. Lessor reserves the right to make such other reasonable rules and
regulations as it may from time to time deem necessary for the appropriate
operation and safety of the Office Building Project and its occupants. Lessee
agrees to abide by these and such rules and regulations.
PARKING RULES
1. Parking areas shall be used only for parking by vehicles no longer
than full size, passenger automobiles herein called "Permitted Size
Vehicles." Vehicles other than Permitted Size Vehicles are herein referred
to as "Oversized Vehicles."
2. Lessee shall not permit or allow any vehicles that belong to or are
controlled by Lessee or Lessee's employees, suppliers, shippers, customers,
or invitees to be loaded, unloaded, or parked in areas other than those
designated by Lessor for such activities.
3. Parking stickers or identification devices shall be the property of
Lessor and be returned to Lessor by the holder thereof upon termination of
the holder's parking privileges. Lessee will pay such replacement charge as
is reasonably established by Lessor for the loss of such devices.
4. Lessor reserves the right to refuse the sale of monthly
identification devices to any person or entity that willfully refuses to
comply with the applicable rules, regulations, laws and/or agreements.
5. Lessor reserves the right to relocate all or a part of parking
spaces from floor to floor, within one floor, and/or to reasonably adjacent
offsite location(s), and to reasonably allocate them between compact and
standard size spaces, as long as the same complies with applicable laws,
ordinances and regulations.
6. Users of the parking area will obey all posted signs and park only
in the areas designated for vehicle parking.
7. Unless otherwise instructed, every person using the parking area is
required to park and lock his own vehicle. Lessor will not be responsible
for any damage to vehicles, injury to persons or loss of property, all of
which risks are assumed by the party using the parking area.
8. Validation, if established, will be permissible only by such method
or methods as Lesser and/or its licensee may establish at rates generally
applicable to visitor parking.
9. The maintenance, washing, waxing or cleaning of vehicles in the
parking structure or Common Areas is prohibited.
10. Lessee shall be responsible for seeing that all of its employees,
agents and invitees comply with the applicable parking rules, regulations,
laws and agreements.
11. Lessor reserves the right to modify these rules and/or adopt such
other reasonable and non-discriminatory rules and regulations as it may deem
necessary for the proper operation of the parking area.
12. Such parking use as is herein provided is intended merely as a
license only and no bailment is intended or shall be created hereby.
EXHIBIT B
Page 1 of 1
WORK LETTER TO STANDARD OFFICE LEASE
Dated: ___________________________________
By and between: ___________________________________________________________
The premises shall be constructed in accordance with Lessor's Standard
Improvements, as follows:
1. PARTITIONS
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
2. WALL SURFACES
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
3. DRAPERIES
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
4. CARPETING
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
5. DOORS
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
6. ELECTRICAL AND TELEPHONE OUTLETS
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
7. CEILING
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
8. LIGHTING
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
9. HEATING AND AIR CONDITIONING DUCTS
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
10. SOUND PROOFING
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
11. PLUMBING
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
12. ENTRANCE DOORS
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
13. COMPLETION OF IMPROVEMENTS
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
cannot in good faith be modified within ten (10) days after such rejection
to be acceptable to Lessor and Lessee, this Lease shall terminate and
neither party shall thereafter be obligated to the other party for any
reason whatsoever having to do with this Lease, except that Lessee shall be
refunded any security deposit or prepaid rent. The plans and specifications,
when approved by Lessee, shall supersede any prior agreement concerning the
improvements.
15. CONSTRUCTION.
If Lessor's cost of constructing the improvements in the Premises
exceeds Lessor's Standard improvements, Lessee shall pay to Lessor in cash
before the commencement of such construction a sum equal to such excess.
If the final plans and specifications are approved by Lessor and
Lessee and Lessee pays Lessor for such excess, then Lessor shall, at its
sole cost and expense, construct the Improvements substantially in
accordance with said approved final plans and specifications and all
applicable rules, regulations, laws or ordinances.
16. COMPLETION.
16.1 Lessor shall obtain a building permit to construct the
improvements as soon as possible.
16.2 Lessor shall complete the construction of the improvements as
soon as reasonably possible after the obtaining of necessary building
permits.
16.3 The term "Completion", as used in this Work Letter, is hereby
defined to mean the date the building department of the municipality having
jurisdiction of the Premises shall have made a final Inspection of the
Improvements and authorized a final release of restrictions on the use of
public utilities in connection therewith and the same are in a broom-clean
condition.
16.4 Lessor shall use its best efforts to achieve Completion of the
improvements on or before the Commencement Date set forth in paragraph 1.5
of the Basic Lease Provisions or within one hundred eight (180) days after
Lessor obtains the building permit from the applicable building department,
Whichever is later.
16.5 In the event that the improvements or any portion thereof have not
reached Completion by the Commencement Date, this Lease shall not be invalid,
but rather Lessor shall complete the same as soon thereafter as is possible
and Lessor shall not be liable to Lessee for damages in any respect
whatsoever.
16.6 If Lessor shall be delayed at any time in the progress of the
construction of the Improvements or any portion thereof by extra work,
changes in construction ordered by Lessee, or by strikes, lockouts, fire,
delay in transportation, unavoidable casualties, rain or weather conditions,
governmental procedures or delay, or by any other cause beyond Lessor's
control, then the Commencement Date established in paragraph 1.5 of the
Lease shall be extended by the period of such delay.
17. TERM
Upon Completion of the Improvements as defined in paragraph 16.3 above,
Lessor and Lessee shall execute an amendment to the Lease selling forth the
date of tender of possession as defined in paragraph 3.2.1 of the Lease or
of actual taking of possession, whichever first occurs, as the Commencement
Date of this Lease.
18. WORK DONE BY LESSEE.
Any work done by Lessee shall be done only with Lessor's prior written
consent and in conformity with a valid building permit and all applicable
rules, regulations, laws and ordinances, and be done in a good and
workmanlike manner of good and sufficient materials. All work shall be done
only with union labor and only by contractors approved by Lessor, it being
understood that all plumbing, mechanical, electrical wiring and coiling work
are to be done only by contractors designated by Lessor.
19. TAKING OF POSSESSION OF PREMISES.
Lessor shall notify Lessee of the Estimated Completion Date at least
ten (10) days before said date. Lessee shall thereafter have the right to
enter the Premises to commence construction of any Improvements Lessee is
to construct and to equip and fixturize the Premises, as long as such entry
does net interfere with Lessor's work. Lessee shall take possession of the
Premises upon the tender thereof as provided in paragraph 3.2.1 of the
Lease to which this Work Letter is attached. Any entry by Lessee of the
Premises under this paragraph shall be under all of the terms and
provisions of the Lease to which this Work Letter is attached.
20. ACCEPTANCE OF PREMISES
Lessee shall notify Lessor in writing of any items that Lessee deems
incomplete or incorrect in order for the Premises to be acceptable to Lessee
within ten (10) days following Tender of Possession as set forth in paragraph
3.2.1 of the Lease to which this Work Letter is attached. Lessee shall be
deemed to have accepted the Premises and approved construction if Lessee does
not deliver such a list to Lessor within said number of days.
Exhibit 10.29
GENERAL ASSIGNMENT
THIS GENERAL ASSIGNMENT (this "Assignment") is made as of April 30,2002, by
and between Allergy Immuno Technologies, Inc., a Delaware corporation
("Assignor"), and Biomerica, Inc., a Delaware corporation ("Assignee").
Recitals
WHEREAS Biomerica has indicated that it will no longer financially support
AIT;
WHEREAS Biomerica has indicated that it will be selling its interest in AIT;
WHEREAS Biomerica is the principal creditor to AIT, holding a note dated
April 19, 2002 in the amount of $333,382; and
WHEREAS AIT has liabilities exclusive of said Biomerica note in excess of
its assets in the amount of $12,127;
WHEREAS AIT is the holder of 10,000 Class A Unit Options of Hollister-Stier,
LLC dated June 18, 1999, which have been valued at 0 (zero) dollars. This
valuation was proposed by AIT's auditors, BDO Seidman, on AIT's balance
sheet; and the Securities and Exchange Commission questioned the "zero
valuation" of said warrants and accepted the "zero valuation" in the initial
filing with the SEC;
WHEREAS AIT and Biomerica have agreed to value said warrants using the
valuation established by Hollister-Stier, LLC, in order to fairly value the
warrants at the current market price;
NOW THEREFORE, for other goods and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
NOW, THEREFORE, for other goods and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Assignment. Assignor hereby transfers, grants, conveys and assigns to
Assignee all of Assignor's right, title and interest in and to the
following:
(a) Assignor assigns, transfers and conveys all of the Property set
forth on Exhibits A, B, C, D, E, & F;
(b) Assignor assigns, transfers and conveys the assets set forth in
Exhibit G;
(c) Assignor assigns, and Assignee accepts, all of the liabilities set
forth on Exhibit H.
2. Consideration to Biomerica: For the assignment of assets and liabilities
referenced in Article I a and I c of this Agreement, within seven days of
signing of this agreement, Assignor will deliver a stock certificate for
808,467 shares of Assignor's common stock in Assignee's name for payment
in full of the excess liabilities being assumed by Assignee.
3. Consideration to AIT: For the assignment of assets referenced in Article
Ib of this Agreement (Hollister-Stier options), Biomerica agrees to
reduce the Note dated April 19, 2002 by the amount of $108,100. The
revised note will have a remaining balance of $225,282.
4. Limitations of Liabilities.
a. Assignor shall have no recourse against any of the past, present, or
future, direct or indirect, shareholders, partners, members, managers,
principals, directors, officers, agents, incorporators, affiliates or
representatives of Assignee, or against any of the assets or property
of any of the foregoing for the payment or collection of any amount,
judgment, judicial process, arbitral award, fee or cost or for any
other obligation or claim arising out of or based upon this Assignment
and requiring the payment of money by Assignee.
b. Assignee shall have no recourse against any of the past, present or
future, direct or indirect, shareholders, members, managers,
principals, directors, officers, agents, incorporators, affiliates or
representatives of Assignor or against any of the assets or property
of any of the foregoing for the payment or collection of any amount,
judgment, judicial process, arbitral award, fee or cost or for any
other obligation or claim arising out of or based upon this Assignment
and requiring the payment or money by Assignor.
5. Approval of Boards of Directors. Assignor and Assignee have taken all
corporate and other action necessary to approve and effect the
transactions contemplated hereby, and authorize execution of this
Agreement by the individuals whose signatures appear below.
6. Miscellaneous. This Assignment and the obligations of Assignor and
Assignee hereunder shall be binding upon and inure to the benefit of
Assignor and Assignee and their respective successors and assigns, shall
be governed by and construed in accordance with the laws of the State of
California and may not be modified or amended in any manner other than
by a written agreement signed by the party to be charged therewith.
7. Counterparts. This Assignment may be executed in counterparts, each of
which shall be deemed a duplicate original and all of which taken
together shall constitute one document.
8. Severability. Each provision of this Agreement is severable, and should
any provision of this Agreement be or become legally invalid or
unenforceable, this shall in no way be deemed to affect or prejudice the
validity of the remaining provisions.
IN WITNESS WHEREOF, the parties have executed this Assignment as of the date
first set forth above
ASSIGNOR:
ALLERGY IMMUNO TECHNOLOGIES, INC.
By: /s/ Janet Moore
Name: Janet Moore
Title: Secretary
ASSIGNEE:
BIOMERICA, INC.
By: /s/ Francis Capitanio
Name: Francis Capitanio
Title: President
EXHIBIT INDEX TO GENERAL ASSIGNMENT
Assets:
Cash $803
Accounts receivable Exhibit B
Inventory Exhibit C
Fixed assets Exhibit D
Patents (4) Exhibit E
Prepaids Exhibit F
Hollister-Stier options Exhibit G
Liabilities:
Accounts payable Exhibit H
Accounts Receivable
Exhibit B
Customer Balance
Esoterix Allergy and Asthma $399.50
Complimentary Medical Lab 228.00
House Account 282.00
Lab Corp of America (45.00)
Tristate Laboratory 395.00
Insurance Billing 3,845.21
--------
Total $5,104.71
Exhibit C
ALLERGY IMMUNO TECHNOLOGIES, INC.
SUBMITTED INVENTORY
YTD February 28, 2002
UNIT OF UNIT EXTENDED
DESCRIPTION MEASURE QUANTITY PRICE VALUE
CANDIQUANT IGG KIT 1 140.00 $140.00
CANDIQUANT IGM KIT 1 140.00 140.00
CANDIQUANT IGA KIT 1 140.00 140.00
90 FOOD KIT KIT 1 130.00 130.00
ALA TOP KIT KIT 0 250.00 .00
ALASTAT UNIVERSAL KIT KIT 0 180.00 0.00
TUBES
ALASTAT UNIVERSAL KIT KIT 0 238.67 .00
MICROPLATE
ALASTAT TOTAL IGE KIT KIT 0 85.44 0.00
ALASTAT UNIVERSAL IGG KIT 0 0.00 0.00
KIT-MP I
I IGE SPECIFIC LIQUID
ALLERGEN VIALS VIAL 9 35.00 (A) 315.00
BLOOD COLLECTION TUBES:
HEPARIN BOX 1 41.30 41.30
REDTOP BOX 1 22.70 22.70
VACUTAINER NEEDLES BOX 3 19.00 57.00
REGULAR NEEDLES BOX 5 11.97 59.85
SYRINGE:
5cc BOX 0 15.00 0.00
l0cc BOX 0 25.00 0.00
2OCC BOX 0 28.00 0.00
MASKS BOX 1 25.50 25.50
THERMOMETERS EACH 5 15.00 75.00
TEST TUBES:
12X75 BOX 2 16.21 32.42
13XI00 BOX 5 16.21 81.05
16xl00 BOX 0 16.21 0.00
GLOVES BOX 2 5.00 10.00
PARAFILM PACKAGE 2 15.00 30.00
LABELING TAPE ROLLS 1 2.75 2.75
RIA TUBES CASE 1 60.00 60.00
RIA CAPS PACKAGE 1 10.00 10.00
PIPETTE TIPS
SMALL PACKAGE 1 4.00 4.00
LARGE PACKAGE 1 8.00 8.00
PASTEUR PIPETTES BOX 1 4.00 4.00
PLASTIC PIPETTES BOX 1 15.00 15.00
FOAM BOX MAILERS CASE 1 345.60 345.60
SMALL SPECIMEN MAILER BAG 0 10.00 0.00
TUBES BAG 1 10.00 10.00
SM SPEC MAILER TUBE CAPS BAG 1 5.00 5.00
CANDIGEN KIT KIT 0 245.00 0.00
CIC KIT KIT 1 250.00 250.00
Page I
ALLERGY IMMUNO TECHNOLOGIES, INC.
SUBMITTED INVENTORY
YTD February 28, 2002
UNIT OF UNIT EXTENDED
DESCRIPTION MEASURE QUANTITY PRICE VALUE
HISTAMIN -- KITS KIT 1 100.00 100.00
MICROSCOPE SLIDES BOX 2 10.00 20.00
ALASTAT STANDARD
EXTENDED CURVE I BOX 1 80.00 80.00
ALASTAT MICRO PLATE 0 80.00 0.00
IGE CURVE BOX 0 80.00 0.00
ALASTAT MICROPLATE
IgG CURVE BOX 0 80.00 0.00
BLEACH(NAOCL) GALLON 1 1.17 1.17
CONICAL TUBES EACH 1 0.14 0.14
TONGUE DEPRESSORS EACH 0 0.01 0.00
EPPENDORF COMBITIPS:
25OUL BOX 1 90.00 90.00
5OUL BOX 1 90.00 90.00
25ULI BOX 1 90.00 90.00
ALCOHOL SWABS BOX 1 3.00 3.00
LENS PAPER PACKAGE 2 3.00 6.00
COVER SLIPS PACKAGE 2 3.00 6.00
EPPENDORF TUBES BAG 0 35.00 0.00
GLASS MICROPIPETTES BOX 0 5.00 0.00
WOODS APPLICATORS BOX 0 3.00 0.00
MIRCOTITER PLATES CASE 0 120.00 0.00
DISPOSABLE PIPETTES
1.00CC PACKAGE 0 60.00 0.00
5.OOCC PACKAGE 0 60.00 0.00
10.00CC PACKAGE 0 60.00 0.00
CYTOSCINT GALLON 2 50.00 100.00
HCI LITER 0 15.00 0.00
SULFURIC ACID LITER 0 15.00 0.00
DHEA-SO4 KIT 0 97.00 0.00
--------
UNADJUSTED TOTAL INVENTORY 2,600.48
--------
TOTAL ADJUSTED SUBMITTED INVENTORY $2,600.48
========
Page 2
Exhibit D
Allergy Immuno Technologies
Fixed Assets Schedule
description location asset yrs vendor place in total cost
class life service
Thomas Sci Autoclave MAIN 28.0 50 06/22/87 $382.67
Incubator MAIN 28.0 50 06/25/87 $2,930.93
12ch Digit Pip 50-200ul MAIN 28.0 50 05/29/87 $612.50
Nikon Tms Microscope MAIN 28.0 50 Heinze 09/27/87 $3,731.20
12ch Digital Pip,50-200ul MAIN 28.0 50 Flow Labs 09/30/87 $553.23
Refrigerator MAIN 28.0 1 Sears 04/21/88 $475.79
Diet Software MAIN 28.0 1 Nicholas
Bachynaky 04/04/88 $3,000.00
Mine Trans-blot Module MAIN 28.0 50 Bio Rad 04/04/88 $240.29
Autoclave MAIN 28.0 50 11/30/88 $3,694.75
Shaker MAIN 28.0 50 Baxter 01/17/89 $7,898.00
Platform For 2 Edenmyer MAIN 28.0 50 01/17/89 $469.25
Rotor For Rc-3 MAIN 28.0 50 11/10/88 1,537.00
8 Channel Dispenser MAIN 28.0 1 $535.19
Test Calibrator MAIN 28.0 1 $400.25
Hp Lasedet III W/Toner MAIN .11 50 $1,516.65
Refrigerator MAIN .11 50 Circuit City 09/29/99 $591.90
---------
$28,569.60
---------
Booth, Radius Component MAIN .11 2 08/04/87 $929.49
Pc Trends Computers MAIN .12 2 12/15/87 $5,247.00
Dr. Irene Haydik MAIN .11 2 05/31/94 $3,947.00
Computer MAIN .11 2 01/01/95 $3,194.00
Printer MAIN .11 2 Office Depot 11/21/95 $429.93
Act Program MAIN .11 2 Egghead Discount
Software 11/21/95 $279.41
Computer 486 DX MAIN .11 2 L.A.Tronics 02/01/96 $1,240.00
Panasonic Pi 150 Printer MAIN .11 2 CDW Computer
Centers, Inc 04/11/96 $159.88
A/C UNIT MAIN .11 2 Biomerica, Inc 07/31/97 $299.89
Okidata Printer MAIN .11 2 Fry's Electronics 08/01/97 $235.19
Diet Program Pac Comm
Technologies 08/31/99 $1,700.00
NEC Super Script MAIN .11 2 lnsight 09/13/99 $351.00
---------
$18,012.79
---------
$46,582.39
=========
EXHIBIT E
PATENTS
1. Immunotherapy agents for treatment of IgE mediated allergies: U.S. Patent
#5,116,612 (issued May 6,1992).
2. Liposome containing immunotherapy agents for treatment of IgE mediated
allergies: U.S. Patent #5,049,3 90 (issued September 17, 199 1).
3. Immunotherapy agents for treatment of IgE mediated allergies: U.S. Patent
#4,946,945 (issued August 7, 1990).
4. Allergen-thymic hormone conjugates for treatment of IgE mediated
allergies: U.S. Patent #5,275,814 (issued January 4,1994).
Exhibit F
Allergy Immuno Technologies
Prepaid Expenses
FY 2002
Description Bal 5/31/02
CLF $ 515.73
OC.Tax Collector $ 0.00
Property Tax $ 66.58
Sorvall, Inc $ -
--------
Total $ 582.31
========
EXHIBIT G
Options
10,000 Class A Unit Options of Hollister-Stier dated June 18, 1999,
expiration date June 19, 2009, exercise price $10 per unit.
The option agreement is attached as part of Exhibit G.
Exhibit H
Allergy Immuno Technologies
Accounts Payable
Name Balance
US Stock Transfer Corp $962.05
Beach Medical 35.56
Medical Billing Assoc 105.92
Pathology and Laboratory 9,600.00
Coast to Coast 750.00
Foley & Lardner (180.19)
Jeffers, Wilson Shaff & Falk 175.00
Airborne Express 1,688.47
College of American Pathologis (326.00)
EndoDynamics 866.80
PublicEase, Inc. 330.00
Seashore Apts 9,800.00
BDO Seidman 3,500.00
---------
$27,307.61
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Amended Annual Report on Form 10-KSB of Biomerica
Inc. for the annual period ended May 31, 2002 (the Report) as filed with
the Securities and Exchange Commission on the date hereof, I, Janet Moore,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ Janet Moore
--------------------------
Janet Moore
Chief Financial Officer
STATEMENT PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 BY
PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER REGARDING FACTS
AND CIRCUMSTANCES RELATING TO EXCHANGE ACT FILINGS
I, Janet Moore, certify that:
1. I have reviewed this amendment to the annual report on Form 10-KSB/A
of Biomerica, Inc.
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this amended annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this amended annual report, fairly present in
all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the period presented
in this amended annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14 for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this amended annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
amended annual report (the "Evaluation Date"); and;
c) presented in this amended annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
amended annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: June 5, 2003
/s/ Janet Moore
Chief Financial Officer
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Amended Annual Report on Form 10-KSB/A of Biomerica
Inc. for the annual period ended May 31, 2002 (the Report) as filed with the
Securities and Exchange Commission on the date hereof, I, Zackary S. Irani,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ Zackary S. Irani
-------------------------
Zackary S. Irani
Chief Executive Officer
19
STATEMENT PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 BY
PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER REGARDING FACTS
AND CIRCUMSTANCES RELATING TO EXCHANGE ACT FILINGS
I, Zackary Irani, certify that:
1. I have reviewed this amended annual report on Form 10-QSB/A of
Biomerica, Inc.
2. Based on my knowledge, this amended annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this amended annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this amended annual report, fairly present in
all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the period presented
in this amended annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
amended annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
amended annual report (the "Evaluation Date"); and;
c) presented in this amended annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
amended annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: June 5, 2003
/s/ Zackary S. Irani
Chief Executive Officer
EXHIBIT 99.3
BIOMERICA, INC. AND SUBSIDIARIES
CONTENTS
============================================================================
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS FS-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet as of May 31, 2002 FS-3
Consolidated Statements of Operations and
Comprehensive Loss for the Years Ended
May 31, 2002 and 2001, respectively FS-4 - FS-5
Consolidated Statements of Shareholders' Equity
for the Years Ended May 31, 2002 and 2001 FS-6 - FS-7
Consolidated Statements of Cash Flows for the
Years Ended May 31, 2002 and 2001 FS-8 - FS-9
Notes to Consolidated Financial Statements FS-10 - FS-51
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, 2002, and the related
consolidated statements of operations and comprehensive loss, shareholders'
equity and cash flows for the years ended May 31, 2002 and 2001. 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 auditing standards generally
accepted in the United States of America. 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, 2002, and the results of
their operations and their cash flows for the years ended May 31, 2002 and
2001, in conformity with accounting principles generally accepted in the
United States of America.
/a/ BDO SEIDMAN, LLP
Costa Mesa, California
August 9, 2002
FS-2
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
============================================================================
MAY 31, 2002
---------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 329,277
Available for-sale securities 2,532
Accounts receivable, less allowance for doubtful
accounts and sales returns of $196,452 1,504,344
Inventories, net 2,921,012
Notes receivable 2,419
Prepaid expenses and other 122,474
---------------------------------------------------------------------------
Total current assets 4,882,058
---------------------------------------------------------------------------
INVENTORIES, non-current 15,000
---------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, at cost
Equipment 2,895,169
Construction in progress 7,400
Furniture, fixtures and leasehold improvements 407,683
---------------------------------------------------------------------------
3,310,252
ACCUMULATED DEPRECIATION AND AMORTIZATION (3,082,411)
---------------------------------------------------------------------------
Net property and equipment 227,841
INTANGIBLE ASSETS, net of accumulated amortization 116,181
OTHER ASSETS 35,546
---------------------------------------------------------------------------
$ 5,276,626
===========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 65,669
Accounts payable and accrued expenses 906,190
Accrued compensation 307,982
Current portion of shareholder loans 30,000
Net liabilities from discontinued operations 326,187
---------------------------------------------------------------------------
Total current liabilities 1,636,028
---------------------------------------------------------------------------
SHAREHOLDER LOANS, net of current portion 345,000
MINORITY INTEREST 2,084,892
---------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, $.08 par value; 25,000,000 shares
authorized; 5,172,364 shares issued and
outstanding and 28,333 shares subscribed 437,538
Additional paid in capital 16,981,982
Accumulated other comprehensive loss (20,237)
Accumulated deficit (16,188,577)
---------------------------------------------------------------------------
Total shareholders' equity 1,210,706
---------------------------------------------------------------------------
$ 5,276,626
===========================================================================
See accompanying notes to consolidated financial statements.
FS-3
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
============================================================================
YEARS ENDED MAY 31, 2002 2001
----------------------------------------------------------------------------
NET SALES $ 8,598,054 $ 8,839,252
Cost of sales 6,062,462 6,042,918
----------------------------------------------------------------------------
GROSS PROFIT 2,535,592 2,796,334
----------------------------------------------------------------------------
OPERATING EXPENSES
Selling, general and administrative 2,841,255 3,092,059
Research and development 159,758 322,121
----------------------------------------------------------------------------
Total operating expenses 3,001,013 3,414,180
----------------------------------------------------------------------------
OPERATING LOSS FROM CONTINUING OPERATIONS (465,421) (617,846)
OTHER INCOME (EXPENSE)
Interest expense, net of interest income (40,370) (25,442)
Other income (expense), net (32,667) 47,762
----------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS, before
minority interest in net loss of
consolidated subsidiaries and income taxes (538,458) (595,526)
MINORITY INTEREST IN NET (INCOME) LOSS OF
CONSOLIDATED SUBSIDIARIES (26,154) 80,894
----------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS, before income taxes (564,612) (514,632)
INCOME TAX EXPENSE 2,060 1,600
----------------------------------------------------------------------------
NET LOSS FROM CONTINUING OPERATIONS (566,672) (516,232)
DISCONTINUED OPERATIONS
Income (loss) from discontinued operations, net (78,544) (2,156,086)
Gain on sale, net of tax of $0 224,481 --
----------------------------------------------------------------------------
NET LOSS (420,735) (2,672,318)
FS-4
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS (CONTINUED)
=============================================================================
YEARS ENDED MAY 31, 2002 2001
----------------------------------------------------------------------------
OTHER COMPREHENSIVE LOSS, net of tax
Unrealized loss on available-for-sale securities (9,948) (5,966)
----------------------------------------------------------------------------
COMPREHENSIVE LOSS $ (430,683) $(2,678,284)
=============================================================================
BASIC NET LOSS PER COMMON SHARE:
Net loss from continuing operations $ (0.11) $ (0.11)
Net income (loss) from discontinued operations 0.03 (0.44)
-----------------------------------------------------------------------------
Basic net loss per common share $ (0.08) $ (0.55)
=============================================================================
DILUTED NET LOSS PER COMMON SHARE:
Net loss from continuing operations $ (0.11) $ (0.11)
Net income (loss) from discontinued operations 0.03 (0.44)
-----------------------------------------------------------------------------
Diluted net loss per common share $ (0.08) $ (0.55)
=============================================================================
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES
Basic 5,100,719 4,814,790
============================================================================
Diluted 5,100,719 4,814,790
============================================================================
See accompanying notes to consolidated financial statements.
FS-5
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
============================================================================
COMMON STOCK ACCUMULATED
COMMON STOCK ADDITIONAL SUBSCRIBED OTHER
------------ PAID-IN ---------- COMPREHENSIVE ACCUMULATED
SHARES AMOUNT CAPITAL SHARES AMOUNT INCOME(LOSS) DEFICIT TOTAL
---------------------------------------------------------------------------------------------------------
Balances,
May 31, 2000 4,575,070 $366,005 $15,529,421 -- $ -- $ (4,323) $(13,095,524) $ 2,795,579
Private
placement,
net of
offering
costs of
$1,140 113,375 9,070 142,368 126,075 90,774 -- -- 242,212
Change in
unrealized
gain (loss)
on available-
for-sale
securities -- -- -- -- -- (5,966) -- (5,966)
Common stock
issued in
satisfaction
of payables 34,643 2,772 35,843 -- -- -- -- 38,615
Exercise of
stock options 8,500 680 6,088 -- -- -- -- 6,768
Common stock
issued for
services
rendered 159,091 12,727 232,898 -- -- -- -- 245,625
Compensation
expense in
connection
with options
and warrants
granted -- -- 89,336 -- -- -- -- 89,336
Common stock
subscribed
for services
rendered -- -- -- 20,000 20,000 -- -- 20,000
Conversion
of subsidiary
debt into
common stock
of subsidiary -- -- 713,014 -- -- -- -- 713,014
Net loss -- -- -- -- -- -- (2,672,318) (2,672,318)
----------------------------------------------------------------------------------------------------------
Balances,
May 31, 2001 4,890,679 391,254 16,748,968 146,075 110,774 (10,289) (15,767,842) 1,472,865
FS-6
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
============================================================================
COMMON STOCK ACCUMULATED
COMMON STOCK ADDITIONAL SUBSCRIBED OTHER
--------------- PAID-IN ----------------- COMPREHENSIVE ACCUMULATED
SHARES AMOUNT CAPITAL SHARES AMOUNT INCOME(LOSS) DEFICIT TOTAL
----------------------------------------------------------------------------------------------------------
Issuance of
subscribed
shares 126,075 10,086 80,688 (126,075) (90,774) -- -- --
Private
placement 14,166 1,133 9,067 -- -- -- -- 10,200
Change in
unrealized
gain (loss)
on available-
for-sale
securities -- -- -- -- -- (9,948) -- (9,948)
Common stock
issued for
compensation 31,819 2,545 15,194 -- -- -- -- 17,739
Exercise of
stock options 1,625 130 998 -- -- -- -- 1,128
Common stock
issued for
consulting
services
rendered 108,000 8,640 55,560 -- -- -- -- 64,200
Compensation
expense in
connection
with options
and warrants
granted -- -- 71,507 -- -- -- -- 71,507
Common stock
subscribed
for services
rendered -- -- -- 8,333 3,750 -- -- 3,750
Net loss -- -- -- -- -- -- (420,735) (420,735)
----------------------------------------------------------------------------------------------------------
Balances,
May 31, 2002 5,172,364 $ 413,788 $16,981,982 28,333 $ 23,750 $(20,237) $(16,188,577)$ 1,210,706
==========================================================================================================
See accompanying notes to consolidated financial statements.
FS-7
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
============================================================================
FOR THE YEARS ENDED MAY 31, 2002 2001
----------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations $(566,672) $(516,232)
Adjustments to reconcile net loss to net cash
(used in) provided by continuing operating
activities:
Depreciation and amortization 192,418 207,510
Provision for losses on accounts receivable 3,893 (4,235)
Provision for losses on inventory 32,683 129,034
Realized gain on sale of available-for-sale
securities (10,026) (34,427)
Write-off of intangibles 100,320 --
Write-off of notes receivable 7,800 --
Warrants and options issued for services rendered 71,507 89,336
Common stock issued or subscribed for services
rendered 85,689 265,625
Net loss on sale of property and equipment -- 2,000
Minority interest in net profits (loss) of
consolidated subsidiaries 26,154 (80,894)
Changes in current liabilities and assets
Accounts receivable 9,544 176,385
Inventories (91,508) (128,909)
Prepaid expenses and other (36,705) 53,807
Accounts payable and other accrued liabilities (13,042) 74,319
Accrued compensation 52,880 (67,743)
Other assets 3,992 --
----------------------------------------------------------------------------
Net cash (used in) provided by operating activities (131,073) 165,576
----------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales of available-for-sale securities 39,116 85,665
Decrease in notes receivable -- 16,600
Purchases of property and equipment (11,728) (61,858)
Increase in intangible assets (20,436) (20,090)
Other assets -- (19,446)
Proceeds from sale of subsidiary 212,500 --
----------------------------------------------------------------------------
Net cash provided by investing activities 219,452 871
----------------------------------------------------------------------------
FS-8
BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
============================================================================
FOR THE YEARS ENDED MAY 31, 2002 2001
----------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease under line of credit agreement (74,331) (20,000)
Increase in shareholder loan 280,000 95,000
Change in of minority interests 11,782 15,682
Exercise of stock options 1,128 6,768
Sale of common stock, net of offering expenses 10,200 242,212
----------------------------------------------------------------------------
Net cash provided by financing activities 228,779 339,662
----------------------------------------------------------------------------
Net cash used in discontinued operations (114,725) (991,719)
----------------------------------------------------------------------------
Net change in cash and cash equivalents 202,433 (485,610)
CASH AND CASH EQUIVALENTS, beginning of year 126,844 612,454
----------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 329,277 $ 126,844
============================================================================
SUPPLEMENTAL DISCLOSURE OF CASH-FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
Interest $ 17,539 $ 19,931
============================================================================
Income taxes $ 2,060 $ 1,600
============================================================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Change in unrealized holding gain (loss) on
available-for-sale securities $ (9,948) $ 5,966
============================================================================
See accompanying notes to consolidated financial statements.
FS-9
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
1. ORGANIZATION ORGANIZATION
AND
LIQUIDITY Biomerica, Inc. and subsidiaries (collectively "the
Company") are primarily engaged in the development,
manufacture and marketing of medical diagnostic kits
and the design, manufacture and distribution of various
orthodontic products.
LIQUIDITY
The Company has suffered substantial recurring losses
from operations over the last couple of years. The
Company has funded its operations through debt and
equity financings, and may have to do so in the future.
ReadyScript operations were discontinued in May 2001 and
Allergy Immuno Technologies, Inc. was sold in May 2002
(see Notes 2 and 13). ReadyScript and Allergy Immuno
Technologies, Inc. were contributors to the Company's
losses. The Company has also obtained a line of credit
from a shareholder/officer (Note 6) which it has and
will continue to rely on to help fund operations. The
Company has reduced operating costs through certain cost
reduction efforts and plans to concentrate on its core
business in Lancer and Biomerica to increase sales.
Management believes that cash flows from operations and
its available credit coupled with reduced costs and
anticipated increased sales will enable the Company to
fund operations for at least the next twelve months.
There can be no assurances that the Company will be able
to become profitable, generate positive cash flows from
operations or obtain the necessary equity or debt
financing to fund and sustain operations in the future.
2. SUMMARY OF PRINCIPLES OF CONSOLIDATION
SIGNIFICANT
ACCOUNTING The consolidated financial statements for the years
POLICIES ended May 31, 2002 and 2001 (see Note 3) include the
accounts of Biomerica, Inc. ("Biomerica"), Lancer
Orthodontics, Inc. ("Lancer"), Allergy Immuno
Technologies, Inc. ("AIT") (as discontinued operations)
and ReadyScript, Inc. (as discontinued operations). All
significant intercompany accounts and transactions have
been eliminated in consolidation.
FS-10
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
2. SUMMARY OF ACCOUNTING ESTIMATES
SIGNIFICANT
ACCOUNTING The preparation of financial statements in conformity
POLICIES with accounting principles generally accepted in the
(CONTINUED) United States of America 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, 2002.
CONCENTRATION OF CREDIT RISK
The Company, on occasion, maintains cash balances at
certain financial institutions in excess of amounts
insured by federal agencies.
The Company provides credit in the normal course of
business to customers throughout the United States and
foreign markets. The Company's sales are not materially
dependent on a single customer or a small group of
customers. The Company performs ongoing credit
evaluations of its customers. The Company does not
obtain collateral with which to secure its accounts
receivable. The Company maintains reserves for
potential credit losses based upon the Company's
historical experience related to credit losses. No one
customer accounted for 10% or more of gross accounts
receivable for the year ended May 31, 2002. No one
customer accounted for 10% or more of revenues for the
years ended May 31, 2002 and 2001.
FS-11
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
2. SUMMARY OF At May 31, 2002, one company accounted for 17.3% of
SIGNIFICANT accounts payable. No company accounted for more than 10%
ACCOUNTING of purchases for the years ended May 31, 2002 and 2001.
POLICIES
(CONTINUED)
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 2002 and 2001 totaled $39,116
and $85,665, respectively (see Note 9). 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 $(9,948) and $(5,966) for
the years ended May 31, 2002 and 2001, respectively.
FS-12
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
=============================================================================
2. SUMMARY OF INVENTORIES
SIGNIFICANT
ACCOUNTING Inventories are stated at the lower of cost (first-in,
POLICIES first-out method) or market and consist primarily of
(CONTINUED) 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:
MAY 31, 2002
-------------------------------------------------------
Raw materials $ 797,210
Work in progress 437,217
Finished products 1,988,469
Inventory reserve (286,884)
-------------------------------------------------------
2,936,012
Long-term (15,000)
-------------------------------------------------------
$ 2,921,012
=======================================================
Approximately $1,858,000 of Lancer's gross inventory is
located at its manufacturing facility in Mexico as of
May 31, 2002.
Allowances for inventory obsolescence are recorded as
necessary to reduce obsolete inventory to estimated net
realizable value or to specifically reserve for obsolete
inventory that the Company intends to dispose of. The
inventory items identified for disposal at each year-end
are generally discarded during the following year.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures
for additions and major improvements are capitalized.
Repairs and maintenance costs are charged to operations
as incurred. When property and equipment are retired or
otherwise disposed of, the related cost and accumulated
depreciation are removed from the accounts, and gains or
losses from retirements and dispositions are credited or
charged to income.
FS-13
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
2. SUMMARY OF Depreciation and amortization are provided over the
SIGNIFICANT estimated useful lives of the related assets, ranging
ACCOUNTING from 3 to 12 years, using straight-line and declining-
POLICIES balance methods. Leasehold improvements are amortized
(CONTINUED) over the lesser of the estimated useful life of the
asset or the term of the lease. Depreciation expense
amounted to $101,968 and $119,325 for the years ended
May 31, 2002 and 2001, respectively. At May 31, 2002,
approximately $26,500 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, 2002.
INTANGIBLE ASSETS
Intangible assets are being amortized using the
straight-line method over the useful life, not to exceed
18 years for marketing and distribution rights and
purchased technology use rights, and 17 years for
patents. Marketing and distribution rights include
repurchased sales territories. Technology use rights
consists of the purchase of manufacturing assets and
technology. Amortization amounted to $90,450 and $88,463
for the years ended May 31, 2002 and 2001, 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. During the year ended May 31, 2002,
management determined that a license had been impaired
as Biomerica no longer manufactured the product covered
by the license. The Company recorded an impairment
expense for the unamortized balance of the license in
the amount of $100,320 which is reflected in cost of
sales in the accompanying statement of operations for
the year ended May 31, 2002.
FS-14
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
2. SUMMARY OF RISKS AND UNCERTAINTIES
SIGNIFICANT
ACCOUNTING LICENSES - Certain of the Company's sales of products
POLICIES are governed by license agreements with outside third
(CONTINUED) 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.
DISTRIBUTION - Lancer has entered into various exclusive
and non-exclusive distribution agreements (the
"Agreements") which generally specify territories of
distribution, none of which are material. The Agreements
range in term from one to five years. Lancer may be
dependent upon such distributors for the marketing and
selling of its products worldwide during the terms of
these agreements. Such distributors are generally not
not obligated to sell any specified minimum quantities of
the Company's product. There can be no assurance of the
volume of product sales that may be achieved by such
distributors.
GOVERNMENT REGULATION - Biomerica's immunodiagnostic
products are regulated in the United States as medical
devices primarily by the FDA and as such, require
regulatory clearance or approval prior to
commercialization in the United States. Pursuant to the
Federal Food, Drug and Cosmetic Act, and the regulations
promulgated thereunder, the FDA regulates, among other
things, the clinical testing, manufacture, labeling,
promotion, distribution, sale and use of medical devices
in the United States. Failure of Biomerica to comply with
applicable regulatory requirements can result in, among
other things, warning letters, fines, injunctions, civil
penalties, recall or seizure of products, total or
partial suspension of production, the government's
refusal to grant premarket clearance or premarket
approval of devices, withdrawal of marketing approvals,
and criminal prosecution.
FS-15
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
2. SUMMARY OF Sales of medical devices outside the United States are
SIGNIFICANT subject to foreign regulatory requirements that vary
ACCOUNTING widely from country to country. The time required to
POLICIES obtain registrations or approvals required by foreign
(CONTINUED) countries maybe 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.
EUROPEAN COMMUNITY - Lancer is required to obtain
certification in the European community to sell products
in those countries. The certification requires Lancer to
maintain certain quality standards. Lancer has been
granted certification. However, there is no assurance
that Lancer will be able to retain its certification in
the future.
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
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
2. SUMMARY OF Lancer is subject to the same risks of product liability.
SIGNIFICANT Lancer currently has product liability insurance. Lancer
ACCOUNTING also is subject to the risk of loss of its product
POLICIES liability insurance and the consequent exposure to
(CONTINUED) liability.
HAZARDOUS MATERIALS - Biomerica's manufacturing and
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 7). 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. At May 31,
2002, Biomerica owned 31.63% of Lancer and 88.9% of
ReadyScript. Biomerica sold its interest in AIT on May
30, 2002 (see Notes 3 and 13).
FS-17
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
2. SUMMARY OF REVENUE RECOGNITION
SIGNIFICANT
ACCOUNTING Revenues from product sales are recognized at the time
POLICIES the product is shipped, customarily FOB shipping point,
(CONTINUED) at which point title passes. An allowance is established
for estimated returns as revenue is recognized.
RESEARCH AND DEVELOPMENT
Research and development expenses are expensed as
incurred. The Company expensed approximately $160,000
and $322,000 of research and development expenses during
the years ended May 31, 2002 and 2001, respectively.
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 and Lancer file separate income tax returns for
Federal and state income tax purposes.
FS-18
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
2. SUMMARY OF ADVERTISING COSTS
SIGNIFICANT
ACCOUNTING The Company reports the cost of all advertising as
POLICIES expense in the period in which those costs are incurred.
(CONTINUED) Advertising costs were approximately $27,000 and $50,000
for the years ended May 31, 2002 and 2001, respectively.
LOSS 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 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.
For the Years Ended May 31,
----------------------------
2002 2001
--------------------------------------------------------
Numerator:
Loss from continuing
operations $ (566,672) $ (516,232)
Gain (loss) from
discontinued operations 145,937 (2,156,086)
-------------------------------------------------------
Numerator for basic and diluted
net loss per common share $ (420,735) $ (2,672,318)
=======================================================
FS-19
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
2. SUMMARY OF For the Years Ended May 31,
SIGNIFICANT ----------------------------
ACCOUNTING 2002 2001
POLICIES ------------------------------------------------------------
(CONTINUED) Denominator for basic net loss
per common share 5,100,719 4,814,790
Effect of dilutive securities:
Options and warrants -- --
--------------------------------------------------------
Denominator for diluted net
loss per common share 5,100,719 4,814,790
========================================================
Basic net loss per common share:
Loss from continuing
operations $ (0.11) $ (0.11)
Gain (loss) from
discontinued operations 0.03 (0.44)
--------------------------------------------------------
Basic net loss per common
share $ (0.08) $ (0.55)
========================================================
Diluted net loss per common share:
Loss from continuing
operations $ (0.11) $ (0.11)
Gain (loss) from
discontinued operations 0.03 (0.44)
--------------------------------------------------------
Diluted net loss per common
share $ (0.08) $ (0.55)
========================================================
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 7.
As of May 31, 2002, there was a total of 3,084,886
potential dilutive shares of common stock.
FS-20
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
2. SUMMARY OF SEGMENT REPORTING
SIGNIFICANT
ACCOUNTING The Financial Accounting Standards Board has issued
POLICIES Statement of Financial Accounting Standards No. 131
(CONTINUED) "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.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No.
141 ("SFAS 141"), "Business Combinations", which
eliminates the pooling method of accounting for business
combinations initiated after June 30, 2001. In addition,
SFAS 141 addresses the accounting for intangible assets
and goodwill acquired in a business combination. This
portion of SFAS 141 is effective for business
combinations completed after June 30, 2001. The Company
adopted SFAS 141 effective July 1, 2002.
FS-21
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
2. SUMMARY OF In July 2001, the FASB issued Statement of Financial
SIGNIFICANT Accounting Standards No. 142 ("SFAS 142"), "Goodwill and
ACCOUNTING Intangible Assets", which revises the accounting for
POLICIES purchased goodwill and intangible assets. Under SFAS 142,
(CONTINUED) goodwill and intangible assets with indefinite lives will
no longer be amortized and will be tested for impairment
annually. SFAS 142 is effective for fiscal years
beginning after December 15, 2001, with earlier adoption
permitted. The Company has not yet determined the impact
on the Company's financial position or results of
operations as a result of the future adoption of SFAS
142.
In August 2001, the FASB issued Statement of Financial
Accounting Standards FAS No. 143 ("SFAS 143"),
"Accounting for Asset Retirement Obligations." This
statement addresses financial accounting and reporting
for obligations associated with the retirement of
tangible long-lived assets and the associated asset
retirement costs. It applies to all entities and legal
obligations associated with the retirement of long-lived
assets that result from the acquisition, construction,
development and/or normal operation of long-lived assets,
except for certain obligations of lessees. This statement
is effective for financial statements issued for fiscal
years beginning after June 15, 2002. Management has not
yet determined the impact of the adoption of SFAS No. 143
on the Company's financial position or results of
operations.
In October 2001, the FASB issued Statement of Financial
Accounting Standards No. 144 ("SFAS 144"), "Accounting
for the Impairment or Disposal of Long-Lived Assets," or
SFAS 144. SFAS No. 144 requires that those long-lived
assets be measured at the lower of carrying amount or
fair value less cost to sell, whether reported in
continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be
measured at net realizable value or include amounts for
operating losses that have not yet occurred. SFAS No. 144
is effective for financial statements issued for fiscal
years beginning after December 15, 2001 and, generally,
is to be applied prospectively. The Company does not
expect SFAS 144 will have a material impact on the
Company's financial position or results of operations.
FS-22
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
2. SUMMARY OF In April 2002, the FASB issued Statement of Financial
SIGNIFICANT Accounting Standards No. 145 ("SFAS 145"), "Rescission
ACCOUNTING of SFAS No. 44 and 64, Amendment of SFAS No. 13, and
POLICIES Technical Corrections," to update, clarify and simplify
(CONTINUED) existing accounting pronouncements. SFAS No. 4, which
required all gains and losses from debt extinguishment
to be aggregated and, if material, classified as an
extraordinary item, net of related tax effect, was
rescinded. Consequently, SFAS No. 64, which amended
SFAS No. 4, was rescinded because it was no longer
necessary. We do not expect the adoption of this
statement to have a material effect on the Company's
financial statements.
In June 2002, the FASB issued Statement of Financial
Accounting Standards No. 146 ("SFAS 146"), "Accounting
for Costs Associated with Exit or Disposal Activities."
SFAS 146 addresses accounting and reporting for costs
associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (Including Certain Costs
Incurred in a Restructuring)." SFAS No. 146 requires that
a liability for a cost associated with an exit or
disposal activity be recognized and measured initially at
fair value when the liability is incurred. SFAS No. 146
is effective for exit or disposal activities that are
initiated after December 31, 2002, with early application
encouraged. We do not expect the adoption of this
statement to have a material effect on the Company's
financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2001
consolidated balances to conform to the 2002
presentation.
3. CONSOLIDATED Lancer is engaged in the design, manufacture and
SUBSIDIARIES distribution of orthodontic products. During 2002, Lancer
issued 37,595 shares to Biomerica as reimbursement for
expenses paid on Lancer's behalf. The Company valued
these shares at $8,271. Biomerica's direct ownership
percentage of Lancer is 31.63% and its direct and
indirect (via agreements with certain shareholders)
voting control over Lancer is greater than 50% as of
May 31, 2002.
FS-23
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
3. CONSOLIDATED AIT provided immune allergy testing and products to
SUBSIDIARIES physicians and medical institutions. On May 30, 2002,
(CONTINUED) Biomerica received $212,500 for primarily all its
interest in AIT and recorded a gain of $224,481 on the
sale. Subsequent to the sale, Biomerica held 1.4% of the
outstanding shares of AIT. The gain and loss from
operations are included in discontinued operations in the
accompanying consolidated statement of operations for the
year ended May 31, 2002 (See Note 13).
The Company's fiscal 2001 losses were partially the
result of its investment in ReadyScript. The ReadyScript
subsidiary was a development-stage enterprise and
required the raising of a significant amount of capital
to fund its short-term working capital needs. The
ReadyScript operations were discontinued in May 2001
(see Note 13). The net assets and operating results of
ReadyScript are included in the accompanying consolidated
financial statements as discontinued operations and are
held for sale.
FS-24
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
3. CONSOLIDATED Operating results for Lancer, AIT and ReadyScript in the
SUBSIDIARIES aggregate for the years ended May 31, 2002 and 2001,
(CONTINUED) which are included in the consolidated operating results
of the Company, are as follows:
2002 2001
--------------------------------------------------------
Net sales $ 6,022,331 $ 5,927,603
Cost of sales 4,159,048 3,994,161
--------------------------------------------------------
Gross profit 1,863,283 1,933,442
--------------------------------------------------------
Operating expenses:
Selling, general and
administrative 1,759,920 1,959,539
Research and development 3,842 71,505
--------------------------------------------------------
Total operating expenses 1,763,762 2,031,044
--------------------------------------------------------
Other income (expense):
Interest expense, net (17,182) (19,931)
Other income, net (43,295) 1,474
--------------------------------------------------------
(60,477) (18,457)
--------------------------------------------------------
Income (loss) from continuing
operations before income
taxes 39,044 (116,059)
Income tax expense 1,260 800
--------------------------------------------------------
Net income (loss) from
continuing operations 37,784 (116,859)
Discontinued operations of AIT
and ReadyScript:
Income (loss) from discontinued
operations, net (78,544) (2,156,086)
--------------------------------------------------------
Net income (loss) $ 40,760 $(2,272,945)
========================================================
FS-25
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
4. INTANGIBLE Intangible assets, net of accumulated amortization,
ASSETS consist of the following:
MAY 31, 2002
-------------------------------------------------------
Marketing and distribution rights $ 442,750
Technology use rights 858,328
Patents and other intangibles 33,225
-------------------------------------------------------
1,334,303
Less accumulated amortization (1,218,122)
-------------------------------------------------------
$ 116,181
========================================================
Included in marketing and distribution rights
are repurchased sales territories by Lancer
which are being amortized straight-line over
the estimated useful life of eighteen years.
In each of the fiscal years 2002 and 2001,
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 straight-line over
the estimated useful life of eighteen years. Lancer
recorded amortization expense of $48,696 for each of the
years ended May 31, 2002 and 2001 related to these
assets.
During the year ended May 31, 2002, management determined
that a license had been impaired as Biomerica no longer
manufactured the product covered by the license. The
Company recorded an impairment expense for the
unamortized balance of the license in the amount of
$100,320 which is reflected in cost of sales in the
accompanying statement of operations for the year ended
May 31, 2002. Amortization expense related to licenses
and other intangibles which is included in the
accompanying consolidated statements of operations
amounted to $16,854 and $14,867 for the years ended
May 31, 2002 and 2001, respectively.
FS-26
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
5. LINE OF At May 31, 2001, Lancer had a line of credit with a bank
CREDIT for borrowings up to $300,000. The line of credit bore
interest at prime plus 1.25% per annum (8.25% at May 31,
2001). Allowable borrowings were limited to specified
percentages of eligible accounts receivable. The line of
credit terminated on October 24, 2001.
Effective October 24, 2001, Lancer obtained a new line of
credit with a new lender for borrowing up to $400,000
which is limited to specified percentages of eligible
accounts receivable. The outstanding balance at May 31,
2002 was $65,669. The initial drawings were used to pay
off in full the outstanding balance on the previous line
of credit. The unused portion available under the line of
credit at May 31, 2002, was approximately $229,000. The
new line of credit bears interest at prime plus 2% per
annum, but in no event shall it be lower than 8% (8.00%
at May 31, 2002). In addition to interest, a management
fee of 0.25% on the average monthly outstanding loan
balance and an unused balance fee of 0.0425% on the
average monthly unused portion available are required.
The line of credit expires on October 24, 2003.
The line of credit is collateralized by substantially all
the assets of Lancer, including inventories, receivables,
and equipment. The lending agreement for the line of
credit requires, among other things, that Lancer maintain
a tangible net worth of $2,100,000, and prohibits the
advancing of funds to Biomerica. Lancer is not required
to maintain compensating balances in connection with this
lending agreement. The Company was in compliance with its
debt covenants at May 31, 2002.
FS-27
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
5. LINE OF The following summarizes information on short-term
CREDIT borrowings for the year ended May 31, 2002:
MAY 31, 2002
-------------------------------------------------------
Average month end balance $ 165,125
Maximum balance outstanding at any
month end $ 223,103
Weighted average interest rate (computed
by dividing interest expense by average
monthly balance) 10.6%
Interest rate at year end 8.0%
=======================================================
6. RELATED PARTY SHAREHOLDER LINE OF CREDIT
TRANSACTIONS
Biomerica, Inc. entered into an agreement 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
accounts receivable and inventory, and expires September
13, 2003. There was $365,000 outstanding under this line
of credit at May 31, 2002, of which $30,000 was repaid
subsequent to May 31, 2002.
SHAREHOLDER LOAN
During 2002 a shareholder advanced the Company $10,000.
The loan bears interest at 8%.
During 2002 and 2001, the Company incurred $19,661 and
$1,051, respectively, in interest expense related to the
shareholder line of credit and loan, all of which is
accrued as of May 31, 2002.
FS-28
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
6. RELATED PARTY ACCRUED COMPENSATION
TRANSACTIONS
Two officers, who are also shareholders of the Company
agreed to defer a portion of their salaries. At May 31,
2002 approximately $63,000 of deferred officer's salary
is included in accrued compensation in the accompanying
consolidated financial statements. Approximately $121,000
of the total accrued compensation is due to the former
chief executive officer's estate.
See additional related party transactions in Note 11.
7. SHAREHOLDERS' 1991, 1995 AND 1999 STOCK OPTION AND RESTRICTED STOCK
EQUITY PLANS
In December 1991, the Company adopted a stock option and
restricted stock plan (the "1991 Plan") which provides
that non-qualified options and incentive stock options
and restricted stock covering an aggregate of 350,000 of
the Company's unissued common stock may be granted to
officers, employees or consultants of the Company.
Options granted under the 1991 Plan may be granted at
prices not less than 85% of the then fair market value of
the common stock, vest at not less than 20% per year and
expire not more than 10 years after the date of grant.
In January 1996, the Company adopted a stock option and
restricted stock plan (the "1995 Plan") which provides
that non-qualified options and incentive stock options
and restricted stock covering an aggregate of 500,000 of
the Company's unissued common stock may be granted to
affiliates, employees or consultants of the Company.
Options granted under the 1995 Plan may be granted at
prices not less than 85% of the then fair market value of
the common stock and expire not more than 10 years after
the date of grant.
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 the lesser 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.
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 intrinsic value of the options issued
to employees was $0, and the fair value of options
issued to non-employees was $4,826 and will be amortized
over the service period of four years.
FS-29
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
7. SHAREHOLDERS' On June 3, 1999, the Company, issued 8,000 shares of
EQUITY common stock to a consultant for services provided. The
(CONTINUED) Company valued these shares at $16,000.
On June 11, 1999, the Company issued 1,150,000 and 50,000
options to purchase shares of the Company's stock to
employees and non-employees, respectively, for services
provided. The purchase price of the options is $3.00 per
share. The options vest immediately and are exercisable
for a period of ten years. The intrinsic value of the
options issued to employees was $0. 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 fair value of these warrants was $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.
During 2000, the Company granted 726,000 options, of
which 564,000 options were subsequently cancelled during
2000, and 50,000 options to purchase 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. The options issued to
employees were valued at $25,135 using the intrinsic
method and will be amortized to expense over the vesting
period of one year. The options issued to non-employees
were valued at $80,810 under the fair value method and
will be amortized to expense over the vesting period of
one year.
FS-30
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
7. SHAREHOLDERS' During 2000, the Company agreed to grant warrants to
EQUITY three medical groups in exchange for services. During
(CONTINUED) 2001, the Company issued 5,000 of these warrants at an
exercise price of $3.25. The Company recorded $17,372 of
expense related to the fair value of these warrants in
2000. These warrants were canceled during the year ended
May 31, 2002.
During each of the years ended May 31, 2002 and 2001, the
Company recorded compensation expense of $1,207 related
to the amortization of the fair value of options to
purchase common stock issued prior to June 1, 1999.
During 2001, the Company granted 257,000 and 6,000
options to purchase shares of the Company's stock to
employees and non-employees, respectively. The purchase
price of the options range from $0.50 to $1.50 per share.
Management recorded $0 and $18,720, respectively, during
the years ended May 31, 2002 and 2001 of expense related
to the granting of options to employees. Management
recorded $1,386 during each of the years ended May 31,
2002 and 2001 of expense related to the granting of
options to non-employees.
During 2001, the Company issued 57,424 warrants to
purchase shares of the Company's stock to various
employees. The warrants have an exercise price of $2.00.
Management assigned a value of $0 to these options.
During 2001, the Company, agreed to extend the expiration
date of 33,875 expiring options issued to employees.
Management assigned a value of $0 to these options.
During 2002, the Company granted approximately 229,000
options to purchase shares of the Company's stock to
employees for services rendered. The purchase price of
the options ranges from $0.42 to $0.90 per share.
Management recorded $1,612 during the year ended May 31,
2002 of expense related to the granting of options to
employees.
FS-31
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
7. SHAREHOLDERS' Activity as to stock options and warrants under the 1991,
EQUITY 1995 and 1999 plans are as follows:
(CONTINUED)
WEIGHTED
NUMBER AVERAGE
OF STOCK PRICE RANGE EXERCISE
OPTIONS PER SHARE PRICE
-------------------------------------------------------
Options outstanding
at May 31, 2000 3,557,300 $.85 - $5.00 $ 3.15
Options granted 268,000 $.50 - $3.25 $ .91
Warrants granted 57,434 $ 2.00 $ 2.00
Options exercised (8,500) $.50 - $ .86 $ .77
Options canceled
or expired (730,000) $.50 - $5.00 $ 4.75
-------------------------------------------------------
Options outstanding
at May 31, 2001 3,144,234 $.50 - $3.25 $ 2.58
Options granted 229,254 $.42 - $ .90 $ .59
Warrants granted - $ - $ -
Options exercised (1,625) $.50 - $. 86 $ .69
Options canceled
or expired (286,977) $.50 - $3.25 $ 1.49
-------------------------------------------------------
Options and warrants
outstanding at
May 31, 2002 3,084,886 $.42 - $3.00 $ 2.53
=======================================================
Options and warrants
exercisable at
May 31, 2002 2,198,755 $.42 - $3.00 $ 2.43
======================================================
The weighted average fair value of options and warrants
granted during 2002 and 2001 was $0.40 and $0.93,
respectively.
FS-32
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
7. SHAREHOLDERS' The following summarizes information about the Company's
EQUITY stock options and warrants outstanding at May 31, 2002:
(CONTINUED)
WEIGHTED
AVERAGE
REMAINING WEIGHTED NUMBER WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE EXERCISABLE AVERAGE
EXERCISE OUTSTANDING LIFE IN EXERCISE AT MAY 31, EXERCISE
PRICES MAY 31, 2002 YEARS PRICE 2000 PRICE
-------------------------------------------------------------
$ .42-$ .90 469,511 3.55 $ .65 421,354 $ .66
$1.09-$1.91 267,375 2.19 $ 1.63 192,625 $ 1.71
$2.62-$3.00 2,348,000 2.06 $ 2.99 1,584,776 $ 2.99
=============================================================
SFAS 123 PRO FORMA INFORMATION
Pro forma information regarding loss 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, 2002
and 2001; risk free interest rates ranging from 3.14% to
6.65%; dividend yield of 0%; expected life of the options
ranging from one to three years; and volatility factors
of the expected market price of the Company's common
stock ranging from 105% to 200%.
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-33
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
7. SHAREHOLDERS' For purposes of pro forma disclosures, the estimated fair
EQUITY value of the options is amortized to expense over the
(CONTINUED) option vesting period. Adjustments are made for options
forfeited prior to vesting. The effect on compensation
expense, net loss, and net loss 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, 2002 2001
---------------------------------------------------------
Net loss from continuing
operations, as reported $ (566,672) $ (516,232)
Adjustment to compensation
expense under SFAS 123 (629,098) (1,094,095)
---------------------------------------------------------
Net loss from continuing
operations, pro forma $(1,195,770) $(1,610,327)
=========================================================
Pro forma net loss from
continuing operations
per share - basic $ (0.23) $ (0.33)
==========================================================
Pro forma net loss from
continuing operations
per share - diluted $ (0.23) $ (0.33)
=========================================================
MAY 31, 2002 2001
---------------------------------------------------------
Net income (loss) from
discontinued operations,
as reported $ 145,937 $(2,156,086)
Adjustment to compensation
expense under SFAS 123 -- --
---------------------------------------------------------
Net loss from discontinued
operations, pro forma $ 145,937 $(2,156,086)
=========================================================
Pro forma net loss from
discontinued operations
per share - basic $ .03 $ (0.45)
=========================================================
Pro forma net loss from
discontinued operations
per share - diluted $ .03 $ (0.45)
=========================================================
FS-34
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
=============================================================================
7. SHAREHOLDERS' STOCK ACTIVITY
EQUITY
(CONTINUED) During 2001, the Company, agreed to issue 20,000 shares
of common stock to a consultant for services provided.
The Company valued these subscribed shares at $20,000. As
of May 31, 2002, the shares have not been issued and
accordingly have been classified as common stock
subscribed.
During 2001, the Company sold 239,450 shares of its
common stock at an average selling price of $1.016 per
share. Proceeds to the Company were $242,212, net of
offering costs of $1,140. At May 31, 2001, 113,375 of the
shares had been issued. The remaining 126,075 shares
valued at $90,774 were issued during 2002.
During 2001, the Company, issued 34,643 (on August 4,
2000 as to 2,083 and May 18, 2001 as to 32,560) and
159,091 (on September 8, 2000 as to 109,091 and September
22, 2000 as to 50,000)shares of common stock to various
vendors and consultants for satisfaction of payables and
services provided, respectively. The Company valued these
shares at $38,615 and $245,625, respectively.
During 2002, the Company sold 14,166 shares of its common
stock at a selling price of $0.72 per share. Proceeds to
the Company were $10,200.
During 2002, the Company, issued 108,000 (on November 20,
2001 as to 68,750, April 25, 2002 as to 8,680, February
14, 2002 as to 22,320, March 22, 2002 as to 6,250 and
April 23, 2002 as to 2,000) shares of common stock to
various consultants for services provided. The Company
valued these shares at $64,200.
During 2002, the Company, issued 31,819 shares of common
stock to employees as compensation. The Company valued
these shares at $17,739.
During 2002, the Company agreed to issue 8,333 shares of
common stock to an employee as compensation. The Company
valued these subscribed shares at $3,750. As of May 31,
2002, the shares have not been issued and accordingly
have been classified as common stock subscribed.
FS-35
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
7. SHAREHOLDERS' SUBSIDIARY OPTIONS AND WARRANTS
EQUITY
(CONTINUED) 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 for services rendered. During 1999, management
recorded $0 and $9,171 of expense related to the granting
of these options issued to employees and non-employees,
respectively.
During 2000, Lancer granted options to purchase 15,000
shares of its common stock at an exercise price of $0.85
to employees for services rendered. Management assigned
a value of $0 to these options.
During 2001, Lancer granted options to purchase 177,000
shares of its common stock at an exercise prices of $0.25
to $0.875 to employees.
During the year ended May 31, 2002, Lancer granted 20,000
options to purchase shares of the Lancer's common stock
at an exercise price of $0.40 to an employee of the
Lancer, which have a term of one year. Management assigned
A value of $0 to these options.
There were 239,000 options outstanding and exercisable
(at a weighted average exercise price of $.83) to acquire
Lancer common stock at May 31, 2002.
During 2001, ReadyScript granted options to purchase
1,574,287 shares of its common stock at an exercise price
of $0.25 to employees. Management assigned a value of $0
to these options.
During 2001, ReadyScript entered into convertible
Promissory Notes totaling $835,000. As of May 31, 2001,
$782,000 of that debt had been converted into 1,500,175
shares of ReadyScript common stock. The Company recorded
an increase to additional paid-in-capital of $713,014 as
a result of this conversion.
FS-36
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
8. INCOME TAXES Income tax expense from continuing operations for the
years ended May 31, 2002 and 2001 consists of the
following current provisions:
MAY 31, 2002 2001
--------------------------------------------------------
U.S. Federal $ -- $ --
State and local 2,060 1,600
--------------------------------------------------------
$ 2,060 $ 1,600
=========================================================
Income tax expense from continuing operations differs
from the amounts computed by applying the U.S. Federal
income tax rate of 35 percent to pretax loss as a result
of the following:
MAY 31, 2002 2001
--------------------------------------------------------
Computed "expected" tax
benefit $ (197,614) $ (180,121)
Increase (reduction) in income
taxes resulting from:
Meals and entertainment 5,363 8,684
Change in valuation allowance 168,831 131,868
Equity in earnings of affiliates
not subject to taxation
because of dividends-
received deduction
for tax purposes 23,420 39,569
State income taxes 2,060 1,600
--------------------------------------------------------
$ 2,060 $ 1,600
=========================================================
FS-37
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
8. INCOME TAXES The tax effect of temporary differences that give rise to
(CONTINUED) significant portions of liabilities are presented below.
MAY 31, 2002
--------------------------------------------------------
Deferred tax assets:
Accounts receivable, principally
due to allowance for doubtful
accounts and sales returns $ 79,000
Inventories, principally due to
additional costs inventoried for
tax purposes pursuant to the Tax
Reform Act of 1986 and
allowance for inventory
obsolescence 143,000
Compensated absences and
deferred payroll, principally due
to accrual for financial reporting
purposes 101,000
Net operating loss
carryforwards 2,593,000
Tax credit carryforwards 166,000
Investment in affiliates 390,000
--------------------------------------------------------
3,472,000
Less valuation allowance (3,398,000)
--------------------------------------------------------
Net deferred tax asset 74,000
Deferred tax liability:
Marketing rights, principally due
to amortization (74,000)
--------------------------------------------------------
Net deferred tax liability $ --
=========================================================
FS-38
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
8. INCOME TAXES The Company has provided a valuation allowance with
(CONTINUED) respect to substantially all of its deferred tax assets
as of May 31, 2002 and 2001. 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, 2002, Biomerica had net tax operating loss
carryforwards of approximately $5,171,000 and investment
tax and research and development credits of approximately
$62,000, which are available to offset future Federal tax
liabilities. The carryforwards expire at varying dates
from 2002 to 2022. As of May 31, 2002, Biomerica has net
operating tax loss carryforwards of approximately
$1,152,000 available to offset future state income tax
liabilities, which expire through 2012.
As of May 31, 2002, Lancer had net tax operating loss
carryforwards of approximately $2,037,000 and business
tax credits of approximately $80,000 available to offset
future Federal tax liabilities. The carryforwards expire
through 2021. As of May 31, 2002, Lancer has net tax
operating loss carryforwards of approximately $185,000
and business tax credits of approximately $24,000
available to offset future state income tax liabilities.
The state carryforwards expire at varying dates through
2011.
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-39
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
9. INSURANCE Management of Lancer completed an assessment of two
CLAIM occurrences of theft of inventory located at its
RECEIVABLE wholly-owned and consolidated subsidiary, Lancer De
Mexico, in January and April of 2002. The carrying value
of the inventory stolen approximated $82,000, valued at
standard cost, which has been reflected in the
accompanying financial statements as a reduction in
inventories and an addition to insurance claim
receivable. Subsequent to year-end, the Company received
$51,000 as an initial payment on the claim. The Company
expects to receive an aggregate amount above cost
representing the value of the stolen inventory at net
average selling price, less commissions and royalties.
10. BUSINESS Reportable business segments are identified by product
SEGMENTS line and for the years ended May 31, 2002 and 2001 are
as follows:
2002 2001
--------------------------------------------------------
Domestic sales:
Orthodontic products $ 3,031,000 $ 3,018,000
========================================================
Medical diagnostic products $ 1,223,000 $ 1,581,000
========================================================
Foreign sales:
Orthodontic products $ 2,991,000 $ 2,910,000
========================================================
Medical diagnostic products $ 1,353,000 $ 1,330,000
========================================================
Net sales:
Orthodontic products $ 6,022,000 $ 5,928,000
Medical diagnostic products 2,576,000 2,911,000
--------------------------------------------------------
Total $ 8,598,000 $ 8,839,000
========================================================
Operating profit (loss):
Orthodontic products $ 99,000 $ (98,000)
Medical diagnostic products (565,000) (520,000)
--------------------------------------------------------
Total $ (466,000) $ (618,000)
========================================================
Operating loss from discontinued
segment:
AIT $ (75,790) $ (62,654)
ReadyScript (2,754) (2,093,432)
--------------------------------------------------------
Total $ (78,544) $(2,156,086)
========================================================
FS-40
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
10. BUSINESS SEGMENTS
(CONTINUED) 2002 2002
==========================
Domestic long-lived assets:
Orthodontic products $ 110,000 $ 196,000
Medical diagnostic products 208,000 364,000
--------------------------------------------------------
Total $ 318,000 $ 560,000
========================================================
Foreign long-lived assets:
Orthodontic products $ 27,000 $ 45,000
Medical diagnostic products -- --
--------------------------------------------------------
Total $ 27,000 $ 45,000
========================================================
Total assets:
Orthodontic products $ 3,646,000 $ 3,737,000
Medical diagnostic products 1,631,000 1,575,000
--------------------------------------------------------
Total $ 5,277,000 $ 5,312,000
========================================================
Depreciation and amortization
expense:
Orthodontic products $ 85,000 $ 122,000
Medical diagnostic products 107,000 86,000
--------------------------------------------------------
Total $ 192,000 $ 208,000
========================================================
Capital expenditures:
Orthodontic products $ 4,000 $ 9,000
Medical diagnostic products 8,000 53,000
--------------------------------------------------------
Total $ 12,000 $ 62,000
========================================================
The net sales as reflected above consist of sales to
unaffiliated customers only as there were no significant
intersegment sales during fiscal years 2002 and 2001. No
customer accounted for more than 10% of net sales during
fiscal years 2002 and 2001.
FS-41
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
10. BUSINESS Geographic information regarding net sales and operating
SEGMENTS loss is as follows:
2002 2001
--------------------------------------------------------
Net sales:
United States $ 4,254,000 $ 4,599,000
Europe 2,313,000 2,207,000
South America 498,000 558,000
Asia 199,000 221,000
Other foreign 1,334,000 1,254,000
--------------------------------------------------------
Total net sales $ 8,598,000 $ 8,839,000
========================================================
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.
11. COMMITMENTS OPERATING LEASES
AND
CONTINGENCIES Biomerica leases its primary facility under a non-
cancelable operating lease expiring October 31, 2005,
with monthly base rent of $15,000 with a 3% increase
effective September 1, 2003. These facilities are owned
and operated by four of the Company's shareholders.
Management believes there would be no significant
difference in the value of the leases if they were with
a third party. Total rent expense for this facility was
approximately $179,000 and $169,000 during the years
ended May 31, 2002 and 2001, respectively.
Biomerica subleased a portion of the facility under a
non-cancelable operating lease expiring May 16, 2003,
with monthly base rental income of $1,642.
Biomerica entered into a non-cancelable operating lease
for a copier in November 2001 which expires November
2006, which requires monthly rentals of $279. Total
expense for the copier was approximately $2,000 during
the year ended May 31, 2002.
FS-42
11. COMMITMENTS Lancer leases its main facility under a non-cancelable
AND operating lease expiring December 31, 2003, as extended,
CONTINGENCIES which requires monthly rentals that increase annually,
from $2,900 per month in 1994 to $6,317 per month in
2004. The lease expense is being recognized on a
straight-line basis over the term of the lease. The
excess of the expense recognized over the cash paid
aggregates $8,894 at May 31, 2002, and is included in
accrued liabilities in the accompanying consolidated
balance sheet. Total rental expense for this facility for
each of the years ended May 31, 2002 and 2001 was
approximately $69,000.
Lancer entered into a non-cancelable operating lease for
its Mexico subsidiary which expires March 2006, which
requires average monthly rentals of approximately $6,000.
Total expense for this facility was approximately $69,000
and $74,000 during the years ended May 31, 2002 and 2001,
respectively.
Lancer entered into a non-cancelable operating lease for
a copier in February 2002 which expires February 2006,
which requires monthly rentals of $189. Total expense for
the copier was approximately $2,000 during the year ended
May 31, 2002.
Rental expense for all operating leases amounted to
approximately $321,000 and $332,000 for the years ended
May 31, 2002 and 2001, respectively. The future annual
minimum payments, net of sublease income, are as follows:
YEARS ENDING MAY 31, Amount
--------------------------------------------------------
2003 $ 307,793
2004 302,057
2005 259,188
2006 139,298
2007 1,674
--------------------------------------------------------
Minimum lease payments, net $ 1,010,010
--------------------------------------------------------
FS-43
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
11. COMMITMENTS MANUFACTURING AGREEMENT
AND
CONTINGENCIES In May 1990, the Company entered into a manufacturing
(CONTINUED) subcontractor agreement (the "Manufacturing Agreement"),
whereby the subcontractor agreed to provide manufacturing
services to the Company through its affiliated entities
located in Mexicali, B.C., Mexico. Effective April 1,
1996, the Company leased the Mexicali facility under a
separate arrangement, as discussed in above under LEASES.
Since October 2000, the manufacturing agreement was
operated on a month-to-month basis. During fiscal 2002,
the operations in Mexico were transferred into a newly
created Mexican corporation (Lancer de Mexico) and became
a wholly-owned and consolidated subsidiary of the
Company. This subsidiary now also administers services
previously provided by an independent manufacturing
contractor. Should the company discontinue operations in
Mexico, it is responsible for the accumulated employee
seniority obligation as prescribed by Mexican law. At May
31, 2002, this obligation was approximately $365,000.
Such obligation is contingent in nature and accordingly
has not been accrued in the accompanying consolidated
balance sheet.
LICENSE AND ROYALTY AGREEMENT
Lancer has entered into various 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.
FS-44
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
11. COMMITMENTS RETIREMENT SAVINGS PLAN
AND
CONTINGENCIES Effective September 1, 1986, the Company established a
(CONTINUED) 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.
LITIGATION
The Company is, from time to time, involved in legal
proceedings, claims and litigation arising in the
ordinary course of business. While the amounts claimed
may be substantial, the ultimate liability cannot
presently be determined because of considerable
uncertainties that exist. Therefore, it is possible the
outcome of such legal proceedings, claims and litigation
could have a material effect on quarterly or annual
operating results or cash flows when resolved in a future
period. However, based on facts currently available,
management believes such matters will not have a material
adverse affect on the Company's consolidated financial
position, results of operations or cash flows.
NASDAQ SMALL CAP MARKET LISTING REQUIREMENTS
The Company was notified by NASDAQ that it was no longer
in compliance with either the minimum $2,000,000 net
tangible assets or $2,500,000 stockholders' equity
requirement for continued listing on the NASDAQ Small Cap
Market under Marketplace rule 4310(c)(2)(B). Effective
June 20, 2002, the Company was delisted. The Company's
securities were immediately eligible for trade on the OTC
Bulletin Board.
FS-45
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
12. CONDENSED Lancer's line-of-credit prohibits the transfer or
FINANCIAL dividend of funds to Biomerica, Inc. As a result, the
INFORMATION following condensed unconsolidated balance sheet for
OF PARENT Biomerica, Inc. as of May 31, 2002, and the condensed
COMPANY unconsolidated statements of operations and cash flows
for the years ended May 31, 2002 and 2001 have been
provided. No cash dividends were paid by the consolidated
subsidiaries (see Note 3) during the years ended May 31,
2002 and 2001.
CONDENSED UNCONSOLIDATED BALANCE SHEET
MAY 31, 2002
--------------------------------------------------------
ASSETS
CURRENT ASSETS:
CASH $ 200,692
AVAILABLE-FOR-SALE SECURITIES 2,532
ACCOUNTS RECEIVABLE, NET 300,651
INVENTORIES 833,253
NOTES RECEIVABLE 2,419
PREPAID EXPENSES AND OTHER 68,199
--------------------------------------------------------
TOTAL CURRENT ASSETS 1,407,746
INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED
SUBSIDIARY, RESTRICTED 960,763
INVENTORY, NON-CURRENT 15,000
PROPERTY AND EQUIPMENT, NET 180,255
INTANGIBLE ASSETS 27,625
OTHER --
--------------------------------------------------------
$ 2,591,389
========================================================
FS-46
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
12. CONDENSED CONDENSED UNCONSOLIDATED BALANCE SHEET (CONTINUED)
FINANCIAL
INFORMATION MAY 31, 2002
OF PARENT --------------------------------------------------------
COMPANY
(CONTINUED) LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES $ 466,507
ACCRUED COMPENSATION 212,989
CURRENT PORTION OF SHAREHOLDERS LOANS 30,000
--------------------------------------------------------
TOTAL CURRENT LIABILITIES 709,496
--------------------------------------------------------
SHAREHOLDER LOANS, NET OF CURRENT PORTION 345,000
EQUITY IN LOSSES OF UNCONSOLIDATED
SUBSIDIARIES, NET OF ADVANCES,
UNRESTRICTED 326,187
--------------------------------------------------------
SHAREHOLDERS' EQUITY:
COMMON STOCK 437,538
ADDITIONAL PAID-IN CAPITAL 16,981,982
ACCUMULATED OTHER COMPREHENSIVE LOSS (20,237)
ACCUMULATED DEFICIT (16,188,577)
--------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 1,210,706
--------------------------------------------------------
$ 2,591,389
=========================================================
FS-47
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
12. CONDENSED CONDENSED UNCONSOLIDATED STATEMENTS OF OPERATIONS
FINANCIAL
INFORMATION MAY 31, 2002 2001
OF PARENT --------------------------------------------------------
COMPANY
(CONTINUED) NET REVENUES $ 2,575,723 $ 2,911,649
COST OF SALES 1,903,414 2,048,757
--------------------------------------------------------
GROSS PROFIT 672,309 862,892
--------------------------------------------------------
OPERATING EXPENSES:
SELLING, GENERAL AND
ADMINISTRATIVE 1,081,335 1,132,519
RESEARCH AND DEVELOPMENT 155,916 250,616
--------------------------------------------------------
TOTAL OPERATING EXPENSES 1,237,251 1,383,135
--------------------------------------------------------
OPERATING LOSS (564,942) (520,243)
OTHER INCOME/(EXPENSE) (12,560) 40,776
--------------------------------------------------------
LOSS FROM OPERATIONS BEFORE INTEREST
IN NET INCOME OF CONSOLIDATED
SUBSIDIARIES AND INCOME TAXES (577,502) (479,467)
INTEREST IN NET INCOME (LOSS) OF
CONSOLIDATED SUBSIDIARIES 11,630 (35,965)
INTEREST IN NET LOSS OF CONSOLIDATED
SUBSIDIARIES - DISCONTINUED
OPERATIONS (78,544) (2,156,086)
GAIN ON SALE OF SUBSIDIARY 224,481 --
--------------------------------------------------------
LOSS FROM OPERATIONS BEFORE INCOME
TAXES (419,935) (2,671,518)
INCOME TAX EXPENSE 800 800
--------------------------------------------------------
NET LOSS $ (420,735) $(2,672,318)
========================================================
FS-48
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
12. CONDENSED CONDENSED UNCONSOLIDATED STATEMENTS OF CASH FLOWS
FINANCIAL
INFORMATION FOR THE YEARS ENDED MAY 31, 2002 2001
OF PARENT ---------------------------------------------------
COMPANY
(CONTINUED) CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS FROM CONTINUING
OPERATIONS $(420,735) $(2,672,318)
ADJUSTMENTS TO RECONCILE NET
INCOME TO NET CASH (USED IN)
PROVIDED BY OPERATING
ACTIVITIES:
DEPRECIATION AND AMORTIZATION 84,648 76,311
REALIZED (GAIN) LOSS ON
SALE OF AVAILABLE-FOR-SALE
SECURITIES (10,026) (34,427)
LOSS OF SUBSIDIARIES 66,914 2,192,051
OPTIONS AND WARRANTS ISSUED
FOR SERVICES RENDERED 71,507 89,336
COMMON STOCK ISSUED OR
SUBSCRIBED FOR SERVICES
RENDERED 85,689 265,625
LOSS ON DISPOSAL OF ASSETS -- 2,000
GAIN ON SALE OF SUBSIDIARY (224,481) --
INCREASE IN INVESTMENT IN
AND ADVANCES TO
CONSOLIDATED SUBSIDIARIES (153,637) (1,020,476)
WRITE-OFF OF INTANGIBLES 100,320 --
WRITE-OFF OF NOTES RECEIVABLE 7,800 --
NET CHANGE IN OTHER CURRENT
ASSETS AND CURRENT
LIABILITIES 78,526 166,406
---------------------------------------------------
NET CASH USED IN OPERATING
ACTIVITIES (313,475) (935,492)
-----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
SALES OF AVAILABLE-FOR-SALE
SECURITIES 39,116 85,665
PRINCIPAL PAYMENTS RECEIVED
ON NOTES RECEIVABLE -- 16,600
INCREASE IN INTANGIBLE ASSETS (20,436) (20,000)
PROCEEDS FROM SALE OF
SUBSIDIARY 212,500 --
PURCHASE OF PROPERTY AND
EQUIPMENT (8,341) --
--------------------------------------------------
NET CASH PROVIDED BY INVESTING
ACTIVITIES 222,839 82,265
---------------------------------------------------
FS-49
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
12. CONDENSED CONDENSED UNCONSOLIDATED STATEMENTS OF CASH FLOWS,
FINANCIAL CONTINUED
INFORMATION
OF PARENT FOR THE YEARS ENDED MAY 31, 2002 2001
COMPANY --------------------------------------------------------
(CONTINUED)
CASH FLOWS FROM FINANCING ACTIVITIES:
EXERCISE OF STOCK OPTIONS 1,128 6,768
PROCEEDS FROM SALE OF STOCK 10,200 242,212
INCREASE IN SHAREHOLDER LOAN 280,000 95,000
-------------------------------------------------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 291,328 343,980
--------------------------------------------------------
NET CHANGE IN CASH AND CASH
EQUIVALENTS 200,692 (509,247)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR -- 509,247
--------------------------------------------------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 200,692 $ --
--------------------------------------------------------
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 $ (9,948) $ 5,966
========================================================
F-50
BIOMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
============================================================================
13. DISCONTINUED The following summarizes the net liabilities of the
OPERATIONS discontinued operations ReadyScript and AIT as of May 31,
2002 and the results of its operations for each of the
years in the two-year period ended May 31, 2002.
Balance sheet items:
MAY 31, 2002
--------------------------------------------------------
Assets:
Prepaid expenses and other $ 2,436
Other assets 43,508
--------------------------------------------------------
45,944
Less liabilities:
Accrued liabilities (372,131)
--------------------------------------------------------
Net liabilities $ 326,187
========================================================
Results of its operations items:
YEARS ENDED MAY 31, 2002 2001
--------------------------------------------------------
Revenues $ 46,417 $ 100,270
Cost and expenses:
Cost of Sales (63,434) 86,982
General and administrative (61,527) 1,913,129)
Research and development -- (256,245)
--------------------------------------------------------
Total costs (124,961) (2,156,086)
--------------------------------------------------------
Loss from operations $ (78,544) $(2,156,086)
========================================================
FS-51