| NYER MEDICAL GROUP INC Item 1A RISK FACTORS Item lB UNRESOLVED STAFF COMMENTS ITEM 1A Risk Factors The Company Has A Limited Amount of Cash to Fund Operating Needs We had approximately dlra1cmam130cmam000 in cash at September 26, 2006, as compared to dlra814cmam119 in cash at June 30, 2006 |
| The cash balances of the Company and subsidiaries were as follows at September 26, 2006: pharmacies - dlra1cmam097cmam900, medical - dlra23cmam100 and the Company dlra9cmam000 |
| Because the pharmacies are not a wholly-owned subsidiary of the Company and the Company does not have operating control, it cannot unilaterally cause the pharmacies to loan funds to the Company should the Company require a loan |
| The pharmacies owed the Company approximately dlra27cmam000 |
| This is being repaid monthly |
| In October 2004, the Companyapstas medical segment obtained a dlra300cmam000 line of credit which is collateralized by property owned by the subsidiary and guaranteed by the Company |
| The Company cannot draw on the line without approval from a committee of the board of directors, specifically established for this purpose |
| The interest rate for the line of credit is the Wall Street Journal Prime Rate |
| Repayment of the line of credit would be in monthly payments of interests only, with the principal being due at maturity, unless renewed |
| Restricted Assets and Uncertainties In August of 1996, the Company and the shareholders of DAW entered into a stock exchange Agreement and plan of reorganization whereby the Company acquired by exchange with the sellers 80prca of the issued and outstanding stock of DAW The Board of Directors of DAW is comprised of five members, two from the minority shareholders ( "e Shareholders "e ) and two from the Company and a fifth director not affiliated with the Shareholders or the Company |
| As part of an associated shareholders &apos agreement, the Company and the Shareholders will not vote any of their shares in favor of, or consent to any merger of DAW with another entity or any sale of all or substantially all of the assets of DAW unless 80prca of the DAWapstas Board of Directors vote in favor of the transaction |
| The agreement also provides for the operations of the subsidiary, including cash management, to be managed by the Shareholders |
| The Shareholders of DAW have employment agreements which expired in August 2006 |
| Since the agreements expired, these employees had the right to require the Company to purchase all or any portion of their shares of DAW In August 2006, the Company entered into an Agreement with the Shareholders which stated/accomplished the following: The Company acknowledges that 100prca of the shares of the subsidiaries of the Company ( "e Subsidiaries "e ) held by each Shareholder (the "e Put Shares "e ) have been offered to the Company for purchase |
| The Shareholders agree to refrain from requiring the Company to immediately pay the fair market value of the Put Shares until the earlier of (i) the closing of the transaction(s) among the Company, the Shareholders and the Subsidiaries with respect to the potential purchase by the Company of all of the shares held by the Shareholders in the Subsidiaries (the "e Purchase "e ), which may be accomplished by payment in full of immediately available funds, and (ii) July 15, 2007 |
| The Company agrees to pay dlra16cmam665 per month in total to the Shareholders from the first business day of August 2006 until the earlier of (i) the closing of the Purchase, and (ii) December 15, 2006; and - dlra33cmam335 per month from and after December 16, 2006 - until the closing of the Purchase |
| DAW agrees to advance to the Company the amounts necessary to make the monthly payments, which amounts will be repaid by the Company to DAW, (with interest at the applicable federal rate) upon the earlier of (i) the closing of the Purchase, and (ii) July 15, 2007 |
| The Company pledges 2dtta5prca of its holdings in DAW as collateral for the monies advanced to the Company by DAW to make the monthly payments noted above |
| The parties to the Forbearance Agreement agreed that the fair market value of all of the shares of the Subsidiaries held by the Shareholders is dlra4 million |
| The arbitration clause of the Forbearance Agreement was deleted in its entirety and replaced with a provision agreeing to jurisdiction and venue in the Business Litigation Session of the Superior Court for the Commonwealth of Massachusetts |
| The Company and the Shareholders are presently attempting to negotiate employment agreements and/or a buy out agreeable to all parties |
| There is no assurance that the Company will be able to successfully negotiate employment agreements and/or raise the capital necessary to buy out the Shareholders |
| Should an agreement not be reached and/or capital not be raised, the Company will be faced with a number of uncertainties: If an agreement has not been finalized by July 15, 2007, the Shareholders could seek employment elsewhere and this would, in the short run, leave no management team for the pharmacies and cause the Company to have to assemble an entire new management team |
| Three of the store leases are expiring in fiscal year 2007, including the largest and most profitable one, which is owned by the mother of DAWapstas president |
| If an agreement is not negotiated, this lease may not be renewed |
| If capital cannot be raised before the required date for the Put Shares to be purchased by the Company, then the DAW minority shareholders may enforce their rights to have the Put Shares purchased |
| At this time, the Company does not have an alternative plan to satisfy the DAW Shareholders, and the DAW Shareholders may then seek to enforce their rights in a manner which would be material adverse to the Company and its shareholders |
| We Do Not Possess Depth in Our Management Team The success of Nyer is principally dependent upon the efforts of the President and Chief Executive Officer, Karen L Wright and the management team of the pharmacies |
| With the exception of its medical products distribution companies, Nyer does not provide any operating support to its subsidiaries and limits its services principally to supplying accounting services to its subsidiaries |
| For this reason, Nyer has not needed the services of additional management, beyond its executive officer and the minority shareholders of Eaton |
| As Nyer continues to grow, it may require the services of additional executives |
| The loss of certain other key employees could have a material effect upon the business of Nyer |
| At the present time, Nyer has key-man insurance on the lives of the minority shareholders and does not have any on its executive officer nor does it intend to do so |
| No assurances can be given that Nyer can recruit suitable qualified executives, if necessary |
| Control of Nyer Is Held By a Few Shareholders Nyerapstas principal shareholder, Nyle International Corp |
| (Nyle), a corporation controlled by Mr |
| Samuel Nyer, owns 781cmam000 shares of common stock of Nyer |
| In addition, Nyle owns 2cmam000 shares of Class A preferred stock which has voting rights equal to 2cmam000cmam000 shares of common stock of Nyer on all matters that come before the common shareholders for vote |
| Nyer personally owns 101cmam400 shares of common stock of Nyer and 1cmam000 shares of Class B preferred stock of Nyer which has voting rights equal to 2cmam000cmam000 shares of common stock of Nyer on all matters that come before the common shareholders to vote |
| As a result, Nyle and Mr |
| Nyer effectively control the voting power of Nyer |
| Accordingly, Nyle and Mr |
| Nyer are in the position to elect a majority of Nyerapstas directors and control the policies and operations of Nyer |
| Many of Our Competitors Have Advantages Over Us All aspects of our business are subject to significant competition |
| Many of our competitors generally have substantially greater financial resources and other competitive advantages |
| Such greater resources and advantages may reduce our chance for economic success |
| Volatility in the Stock Market May Have a Negative Impact on the Price of Our Stock The stock market has from time to time experienced significant price and volume fluctuations that may be unrelated to the operating performance of any particular company |
| This as well as other factors which are directly related to our businesses, could impact the market price of our common stock |
| Further because of the small volume of trading in our common stock, the market price of the common stock can be affected by increases in trading volume |
| Our common stock is listed on the NASDAQ Stock Market LLC NASDAQ rules provide that if the market price of a common stock is less than dlra1 for thirty consecutive trading days, it can be delisted upon the happening of certain events |
| If our common stock is delisted by NASDAQ, the market price of the common stock may be negatively impacted |
| Risks related to ownership of our common stock The exercise of our outstanding stock options could adversely affect our outstanding common stock Our stock option plans are an important component of our compensation program for our employees, directors and consultants |
| As of June 30, 2006, we have issued and outstanding options to purchase approximately 1cmam682cmam600 shares of common stock withexercise prices ranging from dlra1dtta29 to dlra16dtta75 per share |
| The existence of such rights to acquire common stock at fixed prices may prove a hindrance to our efforts to raise future funding by the sale of equity |
| The exercise of such options will dilute the percentage ownership interest of our existing stockholders and may dilute the value of their ownership |
| The possible future sale of shares issuable on the exercise of outstanding options could adversely affect the prevailing market price for our common stock |
| Further, the holders of the outstanding rights may exercise them at a time when we would otherwise be able to obtain additional equity capital on terms more favorable to us |
| Investors Should Not Expect Dividends Nyer intends to retain future earnings, if any, to finance its growth |
| The Companies Which Comprise Nyer Have Not Historically Operated as a Combined Business The subsidiaries that comprise Nyer have been historically managed or operated as individual, stand-alone businesses |
| Although we believe that we have and can continue to successfully manage and operate these separate and individual businesses, we cannot be certain of this |
| Certain risks are inherent in providing pharmacy services; our insurance may not be adequate to cover any claims against us Our pharmacies are exposed to risks inherent in the packaging and distribution of pharmaceuticals and other healthcare products, such as improper filling of prescriptions, labeling of prescriptions and adequacy of warnings |
| Although we maintain professional liability and errors and omissions liability insurance, from time to time, claims result in the payment of significant amounts, some portions of which are not funded by insurance |
| We can offer no assurance that the coverage limits under our insurance programs will be adequate to protect us against future claims, or that we will maintain this insurance on acceptable terms in the future |
| Our results of operations, financial condition or cash flows may adversely be affected if in the future our insurance coverage proves to be inadequate or unavailable or we may suffer harm to our reputation as a result of an error or omission |
| Product Liability Claims May Arise in the Future of Medical Products The sale of medical products entails the risk that users will pursue product liability claims |
| Although we are a distributor and not a manufacturer of medical products and are therefore less likely to be ultimately liable in a product liability suit, a product liability claim could be made against us and could be expensive for us |
| Our insurance may not provide adequate coverage against these claims |
| Our Success May Vary With Regulation of and Changes in the Practice of Medicine The health care industry is subject to extensive government regulation, licensure and operating procedures |
| We cannot predict the impact that present or future regulations may have on operations of Eaton and ADCO Eatonapstas pharmacists also may have a duty to warn customers regarding potential negative effects of a prescription drug if the warning could reduce or negate these effects |
| Additionally, Eaton is subject to federal Drug Enforcement Agency and state regulations relating to pharmacy operations,purchasing, storing and dispensing of controlled substances |
| Eaton is also subject to other federal regulations such as The Health Insurance Portability and Accountability Act of 1996 (HIPAA) |
| Moreover, as consolidation among physician provider groups, long-term care facilities and other alternate-site providers continues and provider networks are created, purchasing decisions may shift to individuals with whom Eaton and ADCO have not had prior selling relationships |
| There can be no assurance that Eaton and ADCO will be able to maintain its customer relationships in such circumstances or that such provider consolidation will not result in reduced operating margins |
| Also, national health care reform has been the subject of a number of legislative initiatives by Congress |
| Due to uncertainties regarding the ultimate features of health care reform initiatives and their enactment and implementation, Eaton and ADCO cannot predict which, if any, of such reform proposals will be adopted, when they may be adopted or what impact they may have on Eaton and ADCO or their customers |
| The actual announcement of reform proposals and the investment communityapstas reaction to such proposals, announcements by competitors of their strategies to respond to reform initiatives and general industry conditions could produce volatility in the trading and market price of Nyer common stock |
| Pricing Pressures From Health Care Providers and Third-Party Payors Exists for Us The cost of a significant portion of medical care in the United States is funded by government and private insurance programs, such as Medicare, Medicaid and corporate health insurance plans |
| In recent years, government-imposed limits on reimbursement of hospitals and other health care providers have significantly impacted spending budgets in certain markets within the medical products industry |
| Private third-party reimbursement plans are also developing increasingly sophisticated methods of controlling health care costs through redesign of benefits and exploration of more cost-effective methods of delivering health care |
| Accordingly, there can be no assurance that reimbursement for purchase and use of medical products will not be limited or reduced and thereby adversely affect future sales by Eaton and ADCO In addition, any substantial delays in reimbursement, significant reduction in coverage or payment rates from third party payors can have a material adverse effect on our retail pharmacy business |
| Pharmacy sales to third party plans accounted for 90prca of our total pharmacy sales for the fiscal year ended 2006, 81prca for the fiscal year ended 2005 and 83prca for the fiscal year ended 2004 |
| Eaton is Dependent on Relationships with Vendors Eaton is dependent on vendors to manufacture and supply products |
| During the 12-month period ended June 30, 2006, Eaton had one vendor whose relationship accounts for 88dtta2prca of their inventory purchases |
| We believe if necessary, we can replace the vendor with no adverse cost effect |
| Eatonapstas ability to maintain good relations with vendors will affect the profitability of its business |
| Currently, Eaton relies on its vendors to provide: (i) agreeable purchasing and delivery terms; (ii) sales performance incentives; (iii) financial support of sales and marketing programs; and (iv) promotional materials |
| There can be no assurance that Eaton will maintain good relations with its vendors |
| Eaton is Dependent on Employees Eaton depends on the continued service of, and on the ability to attract, motivate and retain, a sufficient number of pharmacists for our stores |
| We believe that our success depends in part on our continued ability to attract and retain qualified and skilled pharmacists |
| Over the years, a significant shortage of pharmacists has developed due to industry competition as well as competition from other industries |
| This has resulted in continued upward pressure on pharmacist compensation packages |
| There can be no assurance that we will be able to attract, hire and retain sufficient numbers of pharmacists necessary to continue to develop and grow our business |
| The inability to attract and retain a sufficient number of pharmacists could limit our ability to increase revenue and impact our ability to deliver high levels of customer care |
| ADCO Is Dependent on Relationships with Vendors ADCO distributes from its stock over 4cmam000 medical products manufactured by approximately 135 vendors and is dependent on these vendors for the manufacture and supply of products |
| During the 12-month period ended June 30, 2006, ADCO had one vendor, a buying group, whose relationship accounted for 20prca of ADCOapstas inventory purchases |
| If the relationship with this buying group was disrupted, management believes it has at least two competitive buying groups who could fulfill their inventory needs but it may be at additional expense |
| ADCOapstas ability to maintain good relations with these vendors will affect the profitability of its business |
| Currently, ADCO relies on vendors to provide: (i) field sales representatives &apos technical and selling support; (ii) agreeable purchasing and delivery terms; (iii) sales performance incentives; (iv) financial support of sales and marketing programs; and (v) promotional materials |
| The Success of ADCO Is Dependent on Qualified Sales Representatives ADCO believes that to be successful it must continue to hire, train and retain highly qualified sales representatives |
| Due to the relationships developed between ADCOapstas sales representatives and its customers, upon the departure of a sales representative, ADCO faces the risk of losing the representativeapstas customers, especially if the representative were to act as a representative of ADCOapstas competitors |
| ADCO generally requires its sales representatives to execute a non-competition agreement as a condition of their employment |
| Although courts have generally upheld the terms of non-competition agreements similar to ADCOapstas in the past, there can be no assurance that such agreements will be upheld in the future |
| ADCO Relies on Third-Party Shippers Because ADCO believes that its success to date is dependent in part upon its ability to provide prompt, accurate and complete service to its customers on a price-competitive basis, any material increases in its costs of procuring and delivering products could have an adverse effect on its results of operations |
| Strikes or other service interruptions affecting United Parcel Service or other common carriers used by ADCO to ship its products could impair ADCOapstas ability to deliver products on a timely and cost-effective basis |
| In addition, because ADCO typically bears the cost of shipment to its customers, any increase in shipping rates could have an adverse effect on ADCOapstas operating results |
| Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new Securities and Exchange Commission, or SEC, regulations and NASDAQ Stock Market LLC rules, are creating uncertainty for companies such as ours |
| These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices |
| As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities |
| In particular, our ongoing efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our managementapstas required assessment of our internal control over financial reporting and our independent registered public accounting firmapstas attestation of that assessment will require the commitment of financial and managerial resources |
| We expect these efforts to require the continued commitment of resources |
| In addition, Executive Compensation and Related Party Disclosure, which will soon be required of us, will also require commitment of financial and managerial resources |
| If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may be harmed |
| While we believe that we currently have adequate internal control over financial reporting, we are exposed to risks from legislation requiring companies to evaluate those internal controls |
| Section 404 of the Sarbanes-Oxley Act of 2004 requires our management to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control structure and procedures for financial reporting |
| Under the new compliance schedule, we will be required to comply with the Section 404 requirements for our fiscal year ending on June 30, 2008 |
| In the event that our chief executive officer or independent registered public accounting firm determines that our internal control over financial reporting is not effective as defined under Section 404, investor perceptions and the reputation of our company may be adversely affected and could cause a decline in the market price of our stock |
| We are subject to additional rules and regulations as a public company, which will increase our administration costs which in turn could harm our operating results |
| As a public company, we incur significant legal, accounting and other expenses |
| In addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the SEC, have required changes in corporate governance practices of public companies |
| n addition to final rules and rule proposals already made by the SEC, NASDAQ adopted revisions to its requirements for companies that are NASDAQ-listed |
| These rules and regulations have increased our legal and financial compliance costs, and made some activities more time consuming or costly |
| We also expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage |
| These rules and regulations could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers |
| Changes to financial accounting standards may affect our results of operations and cause us to change our business practices |
| We prepare our financial statements to conform to generally accepted accounting principles, or GAAP These accounting principles are subject to interpretation by the Public Company Accounting Oversight Board, Financial Accounting Standards Board, American Institute of Certified Public Accountants, the SEC and various bodies formed to interpret and create appropriate accounting policies |
| A change in those policies can have a significant effect on our reported results and may affect our reporting of transactions completed before a change is announced |
| Changes to those rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business |
| For example, accounting policies affecting many aspects of our business, including rules relating to employee stock option grants, have recently been revised |
| The FASB and other agencies finalized changes to GAAP that required us, in our quarter ending September 30, 2005, to record a charge to earnings for employee stock option grants |
| We may have significant and ongoing accounting charges resulting from option grant that we expect will reduce our overall net income |
| In addition, since we historically have used equity-related compensation as a component of our total employee compensation program, the accounting change could make the use of equity-related compensation less attractive to us and therefore make it more difficult to attract and retain employees and directors |