In December 1999, the Company entered into an agreement with one of its vendors to convert approximately $670,000 of accounts payable obligations into a three year long-term debt. In addition, the Company issued 400,000 shares of its common stock and options to purchase an additional 100,000 shares of its common stock for purchasing certain assets of two unrelated companies. (See Note 18).
During the nine month period ended July 2001, the Company entered into three capital leases totaling approximately $151,000 with two leasing companies.
During the nine month period ended July 2001, the Company issued 479,000 shares of its common stock to employees and consultants for services rendered. The Company issued 22,000 shares to employees, and 457,000 shares for consulting services.
On May 14, 2001, the Company completed the sale of 1,500,000 shares of its common stock for an aggregate $1,500,000. For accounting purposes, the shares were treated as issued and outstanding as of April 11, 2001, the date such issuance was approved by the Company’s Board of Directors. The shares were sold to Castletop Investments, L.P., a Texas limited partnership whose General Partner is Topfer Holdings I, Inc. a Texas corporation (“Holdings”). Morton L. Topfer is the president and the managing director of Holdings. Mr. Topfer has agreed to serve as a member of the Company’s board of directors. He was elected to the Company’s board on May 23, 2001 replacing Frank DeVito who had resigned. Morton L. Topfer is the former Co-CEO and former Vice Chairman of Dell Computer Corp. (“Dell”). He currently serves as Counselor to Dell’s Chief Executive Officer and as a member of Dell’s board of directors. Prior to joining Dell in May 1994, Mr. Topfer was corporate executive vice president of Motorola, Inc. and president of Motorola’s Land Mobile Products Sector.
During the three month period ended July 31, 2001, the Company converted a receivable of approximately $876,000 into a deferred asset to be amortized over future periods.
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
BIO-REFERENCE LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
[1] In the opinion of management, the accompanying unaudited condensed financial statements reflect all adjustments [consisting only of normal adjustments and recurring accruals] which are necessary to present a fair statement of the results for the interim periods presented and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
[2] The results of operations for the nine months ended July 31, 2001 are not necessarily indicative of the results to be expected for the entire year.
[3] The financial statements and notes thereto should be read in conjunction with the financial statements and notes for the year ended October 31, 2000 as filed with the Securities and Exchange Commission in the Company's Annual Report on Form 10-K.
[4] Revenues are recognized at the time the services are performed. Revenues on the statement of operations are net of the following amounts for allowances and discounts.
Three Months Ended
July 31 | | Nine Months Ended
July 31 | |
| |
| |
| 2001 | | 2000 | | 2001 | | 2000 | |
| |
| |
| |
| |
| $32,177,800 | | $23,197,950 | | $85,047,128 | | $61,311,788 | |
A number of proposals for legislation or regulation continue to be under discussion which could have the effect of substantially reducing Medicare reimbursements for clinical laboratories. Depending upon the nature of regulatory action, if any, which is taken and the content of legislation, if any, which is adopted, the Company could experience a significant decrease in revenues from Medicare and Medicaid, which could have a material adverse effect on the Company. The Company is unable to predict, however, the extent to which such actions will be taken.
[5] An allowance for contractual credits and uncollectible accounts is determined based upon a review of the reimbursement policies and subsequent collections for the different types of receivables. This allowance, which is net against accounts receivable was $30,295,318 at July 31, 2001.
[6] Inventory, consisting primarily of purchased clinical supplies, is valued at the lower of cost (first-in, first-out) or market.
[7] Property and equipment are carried at cost. Depreciation is computed by the straight–line method over the estimated useful lives of the respective assets which range from 2 to 15 years. Leasehold improvements are amortized over the life of the lease, which is approximately five years. On sale or retirement, the asset cost and related accumulated depreciation or amortization are removed from the accounts, and any related gain or loss is reflected in income. Repairs and maintenance are charged to expense when incurred.
[8] The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
[9] Cash equivalents are comprised of certain highly liquid investments with a maturity of three months or less when purchased.
[10] In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ["SAB 101"], "Revenue Recognition in Financial Statements." SAB 101 provides guidance on applying accounting principles generally accepted in the United States to revenue recognition in financial statements and became effective in the fourth fiscal quarter of the first fiscal year beginning after December 15, 1999. The Company's accounting policies are consistent with the requirements of SAB 101, so the implementation of SAB 101 is not expected to have an impact on the Company's operating results.
The FASB has issued Statement No. 141, “Business Combination,” and Statement No. 142 “Goodwill and Other Intangible Assets” in July 2001. These statements will change the accounting for business combinations and goodwill in two significant ways. First, Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method will be prohibited. Second, Statement 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Thus, amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of that Statement, which for the Company will be November 1, 2001. It is not possible to quantify the impact until the newly issued statements have been studied.
[11] The Company, at times, issues shares of common stock in payment for services rendered to the Company. The estimated fair value of the shares issued approximates the value of the services provided.
[12] Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. No tax expense is provided for the current periods due to the availability of operating loss carryforwards.
[13] At October 31, 2000, the Company had a deferred tax asset of approximately $3,148,000 and a valuation allowance of approximately $3,082,000 related to the asset, a decrease of $918,000 from October 31, 1999. The deferred tax asset primarily relates to net operating loss carry forwards.
[14] The Company funds its operations through a revolving loan agreement (the “Loan Agreement”) with PNC Bank. At July 31, 2001, the Company was utilizing $14,429,325 of this credit facility. This loan was due on March 31, 2001 and has been extended to September 30, 2001. If the Company is unable to obtain a renewal or an extension of the loan beyond its September 30, 2001 due date, it will be forced to seek replacement funding for its operations which may not be available on acceptable terms. The Loan Agreement requires the Company to be in compliance with various affirmative and negative covenants concerning its operations and financial condition. Failure to comply could result in PNC Bank declaring the Company to be in default thereby rendering all outstanding indebtedness under the Loan Agreement immediately due and payable. One covenant requires the Company to have at least $2,800,000 of working capital at the end of each fiscal quarter. The Company was in compliance with this covenant at the end of the current quarter. Another covenant requires the Company to have a minimum Tangible Net Worth at fiscal year end; $5,500,000 at October 31, 2000 and $6,000,000 at October 31, 2001. At the end of one quarter in fiscal 2000 (but not at October 31, 2000), the Company’s working capital was less than $2,800,000. In addition, at October 31, 2000, the Company’s Tangible Net Worth was approximately $1,720,000 less than the minimum required $5,500,000. PNC Bank has waived the Company’s failure to be in compliance during or at the conclusion of fiscal 2000 with these two covenants as well as a third covenant limiting the Company’s ability to lend funds. Assuming the loan is extended to October 31, 2001 or beyond said date, the Company will be required to be in compliance with the minimum Tangible Net Worth requirement of $6,000,000 at October 31, 2001. Therefore, the Company must increase its Tangible Net Worth during fiscal 2001 by at least $2,220,000, through earnings and/or sales of equity. No assurance can be given that the Company will be able to effect such an increase. If it is unable to increase its Tangible Net Worth to $6,000,000 at October 31, 2001, (or is not in compliance with any other covenant) the Company will be required to obtain a waiver from PNC Bank, the availability of which cannot be assured. A failure to obtain a renewal or an extension of the loan, or to obtain a waiver, if required, would have a material adverse effect on the Company’s business and financial condition.
[15] Management of the Company evaluates the period of amortization for its intangible assets to determine whether later events and circumstances warrant revised estimates of useful lives. On an annual basis, management evaluates whether the carrying value of these intangible assets has become impaired. Management considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations (undiscounted and without interest charges). If impairment does exist, the assets will be written down to fair value.
[16] In the normal course of its business, the Company is exposed to a number of asserted and unasserted potential claims. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations.
At November 1, 1998, the Company was being represented by counsel in connection with various reviews being conducted by the Company's Medicare carrier. One review involved overpayments that occur in the normal course of business. The Company has remitted approximately $75,000 to Medicare in connection with this matter. Counsel representing the Company in this matter advised at such time that he could not offer any opinion or projection as to whether the anticipated liability will be resolved at $150,000 or whether it will be increased. Counsel further advised that based upon his review of documents, many of the claims that Medicare thought were duplicate payments were not in fact duplicates, but rather were properly billed. Counsel also advised that in view of the complexity of this issue, he believed the final overpayment would be an amount negotiated between the Company and Medicare. During fiscal 2000, there was no change in the status of this matter. The Company continued to reserve the sum of $150,000 on its October 31, 2000 and July 31, 2001 financial statements as the estimated liability in connection therewith.
In January 2000, the Company commenced negotiations with New Jersey Medicaid regarding a claim (the "Claim") made by the State in December 1999 that with respect to certain clinical laboratory tests for which reimbursements were made by the State to the Company, although such tests were authorized by the physician, the underlying laboratory test requisitions did not bear the actual signature of the physician ordering the test. The Company believes that it had been in compliance with all requirements regarding bills submitted for payment by New Jersey Medicaid and requires actual physician signatures before it bills New Jersey Medicaid. However, in order to dispose of the issue, the Company entered into an oral agreement with New Jersey Medicaid in January 2000 to settle the Claim for approximately $227,000. The Company accrued the estimated settlement of $227,000 on its October 31, 1999 financial statements. The settlement was approved by the Director of the New Jersey Division of Medical Assistance. The Company paid the settlement amount during fiscal 2000 and the Claim was extinguished.
On December 19, 2000, the Company and its wholly owned BRLI No.1 Acquisition Corp. subsidiary, as plaintiffs, instituted a lawsuit in the United States District Court for the District of New Jersey against Rebecca Klafter, her husband Mitchell Klafter and Right Body Foods, Inc. (“RBF”) as defendants. In its complaint, the plaintiffs alleged that in connection with their December 1999 purchase of the health food business of RBF and the simultaneous employment of Rebecca Klafter as the Director of the business purchased, the defendants made material misrepresentations and misleading statements to the plaintiffs regarding the business being purchased. In its lawsuit, the plaintiffs are seeking rescission of the acquisition and all of the agreements entered into in connection therewith, together with restitution, with interest, of all monies paid and consideration given (including 200,000 shares of Bio-Reference Common Stock) to any of the defendants in connection therewith, or in the alternative, damages in excess of $1 million plus interest and costs.
The defendants filed an answer and counterclaims in this lawsuit on January 22, 2001 naming the plaintiffs as well as the Company’s chief executive officer and its chief operating officer as counterclaim defendants. In addition to denying the substantive allegations of the complaint and stating various affirmative defenses, the defendants demanded that Rebecca Klafter be rehired, that all payments required to be made to her under her agreements with the plaintiffs be made and that the plaintiffs be required to remove all restrictions against her ability to sell the shares received by her in the acquisition. In addition, the defendants asserted a claim of sexual harassment on behalf of Rebecca Klafter against the Company and BRLI No.1 Acquisition Corp. and alleged that the two officers aided and abetted the two corporations in discriminating and in retaliating against Ms. Klafter. In addition to seeking the removal of restrictions against the shares, the defendants are seeking an indeterminate amount of compensatory damages including back pay, “front” pay, bonuses, incentive pay and overtime, punitive damages, interest and costs.
The litigation is in its initial stages so that no prediction can be made as to probable outcome of this lawsuit.
[17] On April 9, 1998, the Company acquired the assets and certain liabilities of Medilabs, Inc. (“MLI”) from LTC Service and Holdings, Inc. (“Holdings”) and a wholly-owned subsidiary of Long-Term Care Services, Inc. (“LTC”). The acquisition was effective April 9, 1998 for accounting purposes. The operations of MLI were included in the Company’s results of operations commencing April 9, 1998. In connection with the acquisition of MLI, certain key MLI employees signed employment agreements with the Company which included a six month non-competition clause. In addition, LTC, Holdings, two affiliated corporations and an employee of LTC signed non-competition agreements.
The purchase price was $5,500,000 consisting of cash payments of $4,000,000 delivered by the Company at the closing (including $50,000 of payments for non-competition agreements with LTC, Holdings, two affiliated corporations and an employee of LTC and $200,000 of payments for access and use through April 8, 1999 of a laboratory hardware and software system of significant importance to the MLI business) and delivery by the Company of its $1,500,000 promissory note payable without interest in three semi-annual installments commencing one year after the closing. In addition, the Company paid an MLI obligation of $122,366 at the closing to an MLI affiliated entity for MLI’s use through the closing date of a piece of analytical equipment which was continued to be used by MLI after the closing. The Stock Purchase Agreement also provided for a maximum of $1,250,000 in additional payments to be made by the Company if certain revenues were realized by MLI after closing. On April 1, 2000, the Company made its final payment on the $1,500,000 promissory note. On May 17, 2000, LTC was notified that MLI had achieved its revenue goals so that $1,250,000 in additional payments were required to be made by the Company in three installments through May 1, 2001. The Company has paid the entire amount of these additional payments.
[18] On December 2, 1999, the Company entered into an agreement to purchase certain assets utilized by a company engaged in selling Internet website design and other Internet-oriented services to medical professionals and other healthcare professionals. The Company delivered 140,000 shares of its common stock in payment for the web business along with 60,000 shares of its common stock in consideration for related non-competition agreements. The fair value of the 200,000 shares of common stock was approximately $200,000. The Company also paid $10,000 to a former executive officer of the website company and executed a one year consulting agreement with the website company for a minimum consulting fee of $40,000 in the initial year and $50,000 in any subsequent year. The Company granted the website business an option to purchase a maximum of 100,000 shares of the Company's common stock exercisable at $3.00 per share with certain vesting restrictions based upon meeting certain milestones within a predetermined measuring period in the future. The consulting agreement and the option were subsequently canceled.
On December 14, 1999, the Company entered into an agreement to purchase certain assets utilized by Right Body Foods, Inc. (“RBF”), a company engaged in the manufacture of certain health food products. The Company delivered 180,000 shares of its common stock in payment for the health food business along with 20,000 shares of its common stock in consideration for a related non-competition agreement. The fair value of the 200,000 shares of common stock was approximately $200,0000. The Company also entered into an employment’ agreement in connection with the purchase providing for an annual salary of $150,000 plus commissions and a signing bonus of $100,000 payable in 24 monthly installments. See the above description of the Company’s December 19, 2000 lawsuit against RBF, Rebecca Klafter, and her husband Mitchell Klafter seeking to rescind the acquisition.
[19] Effective January 10, 2001, the Company executed an agreement with one of its vendors, GALT Corporation (“GALT”) which had been providing data base design, maintenance and other related web-based Internet solution services to the Company’s CareEvolve subsidiary. Pursuant to the Agreement, GALT agreed to provide the Company with a maximum $800,000 worth of services at agreed hourly rates over a maximum five year period. In full payment for the initial $400,000 worth of services, the Company issued five-year warrants to GALT exercisable to purchase an aggregate 200,000 shares of the Company’s common stock at $2.00 per share (such warrants are fully vested) and also agreed to issue 200,000 shares of its common stock (the “Shares”) to GALT. The Shares were initially held in escrow. The Company charged approximately $400,000 to deferred compensation which is amortized as services are rendered. At the end of each Company fiscal quarter commencing with the quarter ended April 30, 2001, such number of the Shares is required to be released to GALT from escrow (valued at $2.00 per share) as shall be equal in value to the dollar amount of the billed and accepted services rendered by GALT to the Company during the quarter. Through July 31, 2001, an aggregate 137,602 of the Shares had been released to GALT from escrow, which represent approximately $275,000 charged to expense of the amortizable $400,000 of deferred compensation noted above.
The Agreement does not require the Company to exclusively use GALT’s services for its systems and programming needs (web-based or otherwise). If the Agreement terminates before GALT has provided the initial $400,000 of billed and accepted services to the Company, GALT, as its option, may purchase any of the Shares still held in escrow at a purchase price of $2.00 per share. In addition, if the dollar amount of billed and accepted services provided by GALT to the Company exceeds $400,000, the Company, at its option, may pay for such services exceeding the initial $400,000 of services with cash or with shares of its common stock valued at $2.00 per shares.
[20] On March 27, 2001, the Company entered into a joint marketing agreement with General Prescription Programs, Inc. (“GPP”), a New Jersey based provider of prescription benefit management services to more than 100 Health and Welfare funds. GPP had been providing data to the Company’s PSIMedica Division since July 1999 to assist PSIMedica in its development of proprietary healthcare information software (the “PSIMedica Programs”) for marketing to the group and institutional markets. Pursuant to the joint marketing agreement, GPP agreed to co-market the PSIMedica Programs jointly with PSIMedica personnel to GPP customers over a five-year term. The Company agreed to issue 220,000 shares of its common stock to GPP in full payment for GPP’s prior and anticipated services under the joint marketing agreement. Approximately $245,000 was charged to deferred acquisition costs.
[21] On May 14, 2001, the Company completed the sale of 1,500,000 shares of its common stock for an aggregate $1,500,000. For accounting purposes, the shares were treated as issued and outstanding as of April 11, 2001, the date such issuance was approved by the Company’s Board of Directors. The shares were sold to Castletop Investments, L.P., a Texas limited partnership whose General Partner is Topfer Holdings I, Inc. a Texas corporation (“Holdings”). Morton L. Topfer is the president and the managing director of Holdings. Mr. Topfer has agreed to serve as a member of the Company’s board of directors. He was elected to the Company’s board on May 23, 2001 replacing Frank DeVito who had resigned. Morton L. Topfer is the former Co-CEO and former Vice Chairman of Dell Computer Corp. (“Dell”). He currently serves as Counselor to Dell’s Chief Executive Officer and as a member of Dell’s board of directors. Prior to joining Dell in May 1994, Mr. Topfer was corporate executive vice president of Motorola, Inc. and president of Motorola’s Land Mobile Products Sector.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THIRD QUARTER 2001 VS THIRD QUARTER 2000
Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains historical information as well as forward-looking statements. Statements looking forward in time are included in this Quarterly Report pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks and uncertainties that may cause the Company’s actual results in future periods to be materially different from any future performance suggested herein. For a further discussion concerning risks to the Company’s business, the results of its operations and its financial condition, reference is made to the Company’s Annual Report on Form 10-K for the year ended October 31, 2000.
NET REVENUES:
Net revenues for the three month period ended July 31, 2001 were $21,168,044 as compared to $17,171,598 for the three month period ended July 31, 2000; which represents a 23% increase in net revenues. This increase is due to a 27% increase in patient counts offset by a 3% decrease in net revenues per patient. The Company’s other subsidiaries had combined net revenues of approximately $24,000 for the three month period ended July 31, 2001.
The number of patients serviced during the three month period ended July 31, 2001 was 456,362 which was 27% greater when compared to the prior fiscal year’s three month period. Net revenue per patient for the three month period ended July 31, 2000 was $47.58 compared to net revenue per patient of $46.33 for the three month period ended July 31, 2001, a decrease of $1.25 or 3%. This decrease in net revenues per patient is related in part to the increase in correctional facility business.
COST OF SALES:
Cost of Services increased to $11,626,322 for the three month period ended July 31, 2001 from $9,444,094 for the three month period ended July 31, 2000, an increase of $2,182,228 or 23%. The Company’s subsidiaries contributed approximately $256,000 to this increase. This increase is in line with the increase in net revenues of 23%. The increase in cost of sales for laboratory operations was $2,069,463 or 22%.
GROSS PROFITS:
Gross profits, increased to $9,541,722 for the three month period ended July 31, 2001 from $7,727,504 for the three month period ended July 31, 2000; an increase of $1,814,218 or 23%. This is primarily attributable to the increase in net revenues. Profit margins remained constant over the two comparable period at 45%. Gross profits margins for laboratory operations were 46% for the quarter ended July 31, 2001 as compared to 45% for the quarter ended July 31, 2000. Management believes that since the completion of its automated chemistry laboratory during the last quarter of the fiscal year 2000, the Company has increased its capacity by 40%. The Company’s subsidiaries had a combined gross loss of approximately $232,000.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses for the three month period ending July 31, 2001 was $8,488,104 as compared to $7,257,742 for the three month period ending July 31, 2000, an increase of $1,230,362 or 17%. General and administrative expenses, excluding bad debt expense, for the three month period ended July 31, 2001 was $5,569,321 as compared to $4,809,901 for the three month period ending July 31, 2000, an increase of $759,420 or 16%. The Company’s subsidiaries contributed approximately $90,000 to this increase. This increase is in line with the increase in net revenues of 23%. Laboratory operations general and administrative expenses for the three month period ended July 31, 2001 were $8,397,935 as compared to $7,077,131 for the three month period ended July 31, 2000, an increase of $1,320,804 (19%); excluding Bad Debt Expense, the increase was $849,862 (18%).
INTEREST EXPENSE:
Interest expense increased to $442,952 during the three month period ending July 31, 2001 from $440,480 during the three month period ended July 31, 2000 and is due to the Company’s increase in asset based borrowing.
INCOME (LOSS):
The Company’s laboratory operations realized net income of $941,878 for the three month period ended July 31, 2001, as compared to $339,362 for the three month period ended July 31, 2000. This turnaround is related to an increase in net revenues and expense controls implemented during the second quarter of the current fiscal year. The Company’s subsidiaries had a combined net loss of approximately $322,000. On a consolidated basis, the Company had an income of $619,835 for the three month period ended July 31, 2001 as compared to $44,429 for the period ended July 31, 2000.
NINE MONTHS 2000 COMPARED TO NINE MONTHS 2001
NET REVENUES:
Net Revenues for the nine month period ended July 31, 2001 were $59,386,447 as compared to $48,487,299 for the nine month period ended July 31, 2000; this represents a 22% increase in net revenues. This increase is due to a 24% increase in patient counts. The Company’s subsidiaries had combined net revenues of approximately $77,000 during the current nine month period.
The number of patients serviced during the nine month period ended July 31, 2001 was 1,253,445 which was 24% greater when compared to the prior fiscal year’s nine month period. Net revenue per patient for the nine month period ended July 31, 2000 was $47.80, compared to net revenue per patient for the nine month period ended July 31, 2001 of $47.32, a decrease of $.48. This decrease is related in part to the increase in correctional facility business.
The Company was awarded a contract to provide services to New York City’s Riker’s Island prison system, and an extension of its contract for New York State Prisons. The Riker’s Island contract for overall healthcare services was awarded to PHS, one of the nation’s largest private correctional healthcare service businesses. PHS, in turn, has sub-contracted with Bio-Reference to provide the laboratory services component of the contract. In addition, the Company was awarded the contract to provide laboratory services to the Eastern Pennsylvania prison system administered by PHS.
Through its MediLabs division, Bio-Reference has also received renewal of the New York State Prisons contract. This renewal represents the third year the contract has been awarded to MediLabs. The aggregate value of the PHS contracts and the New York State Prisons contract is estimated at approximately $10,000,000 annually.
COST OF SALES:
Cost of Sales increased to $32,789,935 for the nine month period ended July 31, 2001 from $27,073,690 for the nine month period ended July 31, 2000. This represents a 21% increase in direct operating costs. The Company’s subsidiaries had a combined cost of sales of approximately $527,000 for the current nine month period. This increase is related to the increase in net revenues of 22%. The increase in cost of sales for laboratory operations was $5,494,168 or 21%.
GROSS PROFITS:
Gross profits on net revenues, increased to $26,596,512 for the nine month period ended July 31, 2001 from $21,413,609 for the nine month period ended July 31, 2000; an increase of $5,182,903 (24%), primarily attributable to the increase in net revenues. Gross profit margins increased to 45% from 44%, primarily attributable to the operating efficiencies realized with regard to the increase in net revenues. Management believes that since the completion of the Company’s automated chemistry laboratory, it has increased its capacity to render clinical laboratory testing services by approximately 40%. The Company’s subsidiaries had a combined gross loss of approximately $450,000 for the current nine month period.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses for the nine month period ended July 31, 2001 were $24,034,239 as compared to $20,460,229 for the nine month period ended July 31, 2000, an increase of $3,574,010 or 17%. This increase is in line with the increase in net revenues. General and administrative expenses, excluding bad debt expense for the nine month period ended July 31, 2001 was $16,478,811 as compared to $13,965,989 for the nine month period ended July 31, 2000, an increase of $2,512,822 or 18%. The Company’s subsidiaries had combined general and administrative expenses of approximately $277,000 for the current nine month period.
INTEREST EXPENSE:
Interest expense increased to $1,332,233 during the nine month period ending July 31, 2001 as compared to $1,184,060 during the nine month period ending July 31, 2000 an increase of $148,173 and is due to the Company’s increase in asset based borrowing.
INCOME:
The Company’s laboratory operations realized net income of $1,971,727 for the nine months ended July 31, 2001 as compared to a loss of $291,452 for the nine month period ended July 31, 2000, an increase of $1,680,275. This turnaround is related to the increase in net revenues and cost controls implemented during the second quarter of the current fiscal year. The Company’s subsidiaries had a combined loss of approximately $727,000 for the current nine month period. On a consolidated basis, the Company had income of $1,244,366 for the nine month period ended July 31, 2001 as compared to a loss of $172,920 for the period ended July 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES:
Working capital as of July 31, 2001 was approximately $5,800,000 as compared to approximately $2,800,000 at October 31, 2000. The Company’s cash position increased by approximately $1,500,000 during the current period, primarily attributable to the investment of Castletop Investments, L.P. The Company utilized approximately $1,200,000 in cash for operating activities in the most recent period. To offset this use of cash, the Company borrowed $2,429,325 in short-term debt and repaid approximately $1,037,000 in existing debt. The Company had current liabilities of approximately $25,000,000 at July 31, 2001. The three largest items in this category are notes payable of approximately $14,400,000 accounts payable of approximately $6,700,000 and salaries and commissions payable of approximately $1,500,000.
Credit risk with respect to accounts receivable is generally diversified due to the large number of patients comprising the client base. The Company does have significant receivable balances with government payors and various insurance carriers. Generally, the Company does not require collateral or other security to support customer receivables, however, the Company continually monitors and evaluates its client acceptance and collection procedures to minimize potential credit risks associated with its accounts receivable. The Company establishes and maintains an allowance for uncollectible accounts based upon collection history and anticipated collection, and as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is not material to the financial statements.
The Company is being represented by counsel in connection with various reviews being conducted by the Company's Medicare carrier. One review involved overpayments that occur in the normal course of business. The Company has remitted approximately $75,000 to Medicare in connection with the matter. Counsel representing the Company in this matter has advised that he cannot offer any opinion or projection at this time as to whether the anticipated liability will be resolved at $150,000 or whether it will be increased. Counsel has advised that based upon his review of documents, many of the claims that Medicare thought were duplicate payments were not in fact duplicates, but rather were properly billed. Counsel also advised that in view of the complexity of the issue, he believes the final overpayment will be an amount negotiated between the Company and Medicare. The Company has accrued this amount ($150,000) in its July 31, 2001 financial statements.
The Company funds its operations through a revolving loan agreement (the “Loan Agreement”) with PNC Bank. At July 31, 2001, the Company was utilizing $14,400,000 of this credit facility. This loan was due on March 31, 2001 and has been extended to September 30, 2001. If the Company is unable to obtain a renewal or an extension of the loan beyond its September 30, 2001 due date, it will be forced to seek replacement funding for its operations which may not be available on acceptable terms. The Loan Agreement requires the Company to be in compliance with various affirmative and negative covenants concerning its operations and financial condition. Failure to comply could result in PNC Bank declaring the Company to be in default thereby rendering all outstanding indebtedness under the Loan Agreement immediately due and payable. One covenant requires the Company to have at least $2,800,000 of working capital at the end of each fiscal quarter. Another covenant requires the Company to have a minimum Tangible Net Worth at fiscal year end; $5,500,000 at October 31, 2000 and $6,000,000 at October 31, 2001. At the end of one quarter in fiscal 2000 (but not at October 31, 2000), the Company’s working capital was less than $2,800,000. In addition, at October 31, 2000, the Company’s Tangible Net Worth was approximately $1,720,000 less than the minimum required $5,500,000. PNC Bank has waived the Company’s failure to be in compliance during or at the conclusion of fiscal 2000 with these two covenants as well as a third covenant limiting the Company’s ability to lend funds. Assuming the loan is extended to October 31, 2001 or beyond said date, the Company will be required to be in compliance with the minimum Tangible Net Worth requirement of $6,000,000 at October 31, 2001. Therefore, the Company must increase its Tangible Net Worth during fiscal 2001 by at least $2,220,000, through earnings and/or sales of equity. No assurance can be given that the Company will be able to effect such an increase. If it is unable to increase its Tangible Net Worth to $6,000,000 at October 31, 2001, (or is not in compliance with any other covenant) the Company will be required to obtain a waiver from PNC Bank, the availability of which cannot be assured. A failure to obtain a renewal or an extension of the loan, or to obtain a waiver, if required, would have a material adverse effect on the Company’s business and financial condition.
On May 14, 2001, the Company completed the sale of 1,500,000 shares of its common stock for an aggregate $1,500,000. For accounting purposes, the shares were treated as issued and outstanding as of April 11, 2001, the date such issuance was approved by the Company’s Board of Directors. The shares were sold to Castletop Investments, L.P., a Texas limited partnership whose General Partner is Topfer Holdings I, Inc. a Texas corporation (“Holdings”). Morton L. Topfer is the president and the managing director of Holdings. Mr. Topfer has agreed to serve as a member of the Company’s board of directors. He was elected to the Company’s board on May 23, 2001 replacing Frank DeVito who had resigned. Morton L. Topfer is the former Co-CEO and former Vice Chairman of Dell Computer Corp. (“Dell”). He currently serves as Counselor to Dell’s Chief Executive Officer and as a member of Dell’s board of directors. Prior to joining Dell in May 1994, Mr. Topfer was corporate executive vice president of Motorola, Inc. and president of Motorola’s Land Mobile Products Sector.
The Company has various employment and consulting agreements for terms of up to seven years with commitments totaling approximately $5,500,000 and operating leases with commitments totaling approximately $3,800,000 (of which approximately $1,670,000 and $1,070,000 are due during fiscal 2001).
Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains historical information as well as forward-looking statements. Statements looking forward in time are included in this Quarterly Report pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks and uncertainties that may cause the Company’s actual results in future periods to be materially different from any future performance suggested herein. For a further discussion concerning risks to the Company’s business, the results of its operations and its financial condition, reference is made to the Company’s Annual Report on Form 10-K for the year ended October 31, 2000.
Impact of Inflation
To date, inflation has not had a material effect on the Company's operations.
New Authoritative Pronouncements
The FASB has issued Statement No. 141, “Business Combination,” and Statement No. 142 “Goodwill and Other Intangible Assets” in July 2001. These statements will change the accounting for business combinations and goodwill in two significant ways. First, Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method will be prohibited. Second, Statement 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Thus, amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of that Statement, which for the Company will be November 1, 2001. It is not possible to quantify the impact until the newly issued statements have been studied.
PART II - OTHER INFORMATION
Item 6
EXHIBITS AND REPORTS ON FORM 8-K
The Company has filed one report on Form 8-K during the quarter ended July 31, 2001 as of May 14, 2001 reporting in Item 5 its sale of 1,500,000 shares of its Common Stock to Castletop Investments, L.P., the resignation of Frank DeVito as a Director of the Company and his replacement by Morton L. Topfer.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | BIO-REFERENCE LABORATORIES, INC. |
| | (Registrant) |
| | |
| | /S/ Marc D. Grodman |
| |
|
| | Marc D. Grodman, M.D. |
| | President and Chief Executive Officer |
| | |
| | /S/ Sam Singer |
| |
|
| | Sam Singer |
| | Chief Financial and Accounting Officer |
Date: September 10, 2001.
