SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X|ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1999
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OR
|_|TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
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Commission file number 0-15266
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BIO-REFERENCE LABORATORIES, INC.
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(Exact name of registrant as specified in its charter)
New Jersey 22-2405059
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
481 Edward H. Ross Drive, Elmwood Park, New Jersey 07407
- -------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code 201-791-2600
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on which
Title of Class registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or in any amendment to
this Form 10-K. [ ]
On January 21, 2000, the aggregate market value of the voting stock of
Bio-Reference Laboratories, Inc. (consisting of Common Stock, $.01 par value)
held by non-affiliates of the Issuer was approximately $ 18,354,000 based upon
the last sales price for such Common Stock on said date in the over-the-counter
market as reported by the NASDAQ Small Cap System. On such date, there were
8,100,920 shares of Common Stock of the Issuer outstanding.
PART I
Item. 1 - Business
- ------------------
Bio-Reference Laboratories, Inc., "Bio-Reference" or the "Company,"
operates a clinical laboratory servicing the greater New York metropolitan area.
Bio-Reference offers a comprehensive list of chemical diagnostic tests including
blood and urine analysis, blood chemistry, hematology services, serology,
radioimmuno analysis, toxicology (including drug screening), pap smears, tissue
pathology (biopsies) and other tissue analyses. Bio-Reference holds the required
Federal and state licenses necessary to permit its operation of its processing
facilities in New Jersey and New York State and to permit its servicing of its
clients in Connecticut, Florida, Louisiana, Maryland, New Jersey, New York,
Pennsylvania, Texas and Virginia. Bio-Reference markets its services directly to
physicians, hospitals, clinics, and other health facilities.
Subsequent to the close of fiscal 1998, the Company commenced the
expansion of its business from an almost exclusively transaction processing
operation (i.e. clinical laboratory testing) into health information and
connectivity areas by seeking to expand its business base through utilization of
its physician network and marketing staff. During fiscal 1999, the Company
entered into the e-health marketplace through the opening of its own drug screen
website, "DRUGSCREENLAB.com" and subsequently acquired an Internet website
"DoctorNY.com" serving the New York metropolitan area and hosting a number of
existing physician websites. To date, virtually all of the Company's revenues
have been derived from its clinical laboratory testing.
The United States market for clinical laboratory testing is estimated to
generate approximately $30 billion in annual revenues.
- 50% of these revenues are generated by hospital laboratories
- 50% of these revenues are generated by independent laboratories and
physician office laboratories.
Bio-Reference was incorporated under the laws of the State of New Jersey
in December 1981 under the name "Med-Mobile, Inc." Its initial primary business
was to provide mobile medical examinations. This business was discontinued in
June 1989. Since February 1987, the Company's primary business has been the
operation of a clinical laboratory located in northern New Jersey servicing the
greater New York metropolitan area. The Company expanded its laboratory services
through the March 1988 acquisition of Cytology and Pathology Associates, Inc.
and relocated all of its laboratory operations to its facility in Elmwood Park,
New Jersey. The Company changed its name to Bio-Reference Laboratories, Inc. in
November 1989. Bio-Reference has expanded its laboratory testing capabilities
and its customer base through internal growth as well as through the completion
of a series of acquisitions of the businesses of other testing laboratories.
The Company's executive offices are located at 481 Edward H. Ross Drive,
Elmwood Park, New Jersey 07407. Its telephone number is (201) 791-2600.
Developments Since the Beginning of Fiscal 1999
On November 23, 1998, the Company's outstanding publicly owned Class A
Redeemable Warrants and Class B Redeemable Warrants expired by their terms.
In June 1999, the Company acquired a software license enabling the
grouping of medical claims data analysis and has proceeded to develop its own
proprietary algorithms and enhancements to the licensed software so as to
include laboratory and prescription data. The Company is currently negotiating
with two ERISA funds which cover more than 60,000 lives for access to certain of
their claims information in order to conduct beta site testing of its analytical
tools and programs. In the event such beta site testing is successful, the
Company anticipates offering such software tools and programs to customers.
In June 1999, in connection with the release of its second quarter
operating results, Bio-Reference announced the write-off of an approximate
$900,000 balance of unamortized goodwill related to its 1997 purchase of Smith
Kline Beecham's end stage renal dialysis business and the increase in the
allowance of approximately $2,000,000 for accounts receivable, all of which were
attributable to renal dialysis testing.
2
In June 1999, the Company announced the signing of a letter of intent with
General Prescription Programs, Inc., a prescription benefit manager ("GPP") and
others, to form a new company called PsiMedica, to provide population health
management and medical claims processing services to third- party payors of
health related claims and benefits. The new company, which will be principally
funded by Bio-Reference, is expected to obtain a license to market medical
management services to GPP customers representing approximately one million
lives. The license will also provide the new company with access to GPP's claims
information and analytical software. The Company believes that through the
analytical process of interrelating laboratory, prescription and medical claims
data, it can provide critical strategies and solutions to promote population
health management primarily to ERISA funds and other payors.No assurances can be
given that the Company will be able to successfully market these strategies and
solutions.
In September 1999, Bio-Reference announced the opening of its Internet
drug screen website, "DRUGSCREENLAB.COM" to provide drug-related medical and
technical information for both professionals and non-professionals. The site was
established to answer questions or concerns about drug testing procedures and
services rendered by Bio-Reference as well as about drug testing laws and
requirements.
In November 1999, the New York State Department of Corrections renewed its
contract with Bio-Reference's wholly-owned Medilabs subsidiary retaining
Medilabs to perform all laboratory testing for the Department's seventy
correctional institutions in the state encompassing over 70,000 prisoners from
maximum security prisons to rehabilitation centers. Bio-Reference estimates that
revenues from this contract will aggregate approximately $6.3 million in fiscal
year 2000, an increase of more than 10% over fiscal year 1999.
On December 2, 1999, the Company acquired the WEB Business of Medical
Marketing Group, Inc. ("MMGI") including its Internet website "DoctorNY.com" as
well as certain website-based agreements and arrangements with MMGI's physician
clients in the New York metropolitan area for an aggregate 140,000 shares of
Bio-Reference's authorized but unissued common stock. MMGI also agreed during
the period that its Advertising Consulting Agreement with the Company
(hereinafter described) is in effect, to market Internet -oriented services to
healthcare and healthcare related businesses for linking to and participation in
the WEB Business conducted by the Company. The Company has agreed to pay a
commission to MMGI equal to 15% of the recurring Internet access and website
fees received by the Company from additional customers produced by MMGI through
its sales efforts but solely with respect to those customers produced after
production of the 1,000th additional customer.
The "DoctorNY.com" website, with its associated domain sites and existing
physician websites, includes website development capabilities for subscribing
physicians as well as a search engine allowing consumers to locate physicians by
region, credentials, specialty or other parameters. The Company plans to further
develop the physician services offered by the system to enhance
physician-patient and physician-payor electronic communications on a secure
basis (i.e., preserving confidentiality), including communicating laboratory
results, e-mail prescriptions, refills, payor verification and eligibility, etc.
The offering of physician CME credits through the system is also contemplated.
The Company intends to market these services to its existing physician network
as well as to other individual physicians and groups of physicians.
Pursuant to non-competition agreements executed in connection with the
acquisition, the Company issued an additional 20,000 shares of Bio-Reference's
authorized but unissued common stock to MMGI, an additional 40,000 of such
shares to MMGI's principal stockholder and chief executive officer, and paid
$10,000 to a former MMGI executive officer. The Company also executed a one-year
Advertising Consulting Agreement (renewable by the Company for a maximum of
three additional one- year terms), pursuant to which MMGI agreed to render
advertising consulting, advisory and public relations services for the WEB
Business operated by Bio-Reference, on a project by project basis. For such
services, MMGI will be paid a minimum consulting fee of $40,000 in the Initial
Year and of $50,000 in any subsequent year, the minimum consulting fee to be
credited against a Consulting Fee calculated based upon mutually agreed rates
with respect to each project performed under the Advertising Consulting
Agreement. As an additional inducement to MMGI to market Internet oriented
services to healthcare and healthcare related businesses for linkage to and
participation in the WEB Business conducted by the Company, the Company granted
an option to MMGI exercisable to purchase a maximum 100,000 shares of
Bio-Reference's authorized but unissued common stock at an exercise price
3
of $3.00 per share (equal to the last reported per share sales price for
Bio-Reference common stock on The Nasdaq Stock Market on December 1, 1999, the
day immediately preceding the acquisition). The option is only exercisable with
respect to those shares as to which it becomes "vested," from the date of
vesting until one year after completion of the term of the Advertising
Consulting Agreement. The option becomes vested as to each 25,000 shares upon
delivery by MMGI of 500 additional customers for the WEB Business conducted by
the Company.
On December 14, 1999, the Company acquired the Health Food Business of
Right Body Foods, inc. ("RBF"), a manufacturer of starch free, low carbohydrate,
low caloric food products distributed in Long Island, New York, through health
professionals, dieticians, nutritionists and physicians. The acquisition was
effected through a newly formed, wholly-owned Company subsidiary. The Health
Food Business was acquired for an aggregate 180,000 shares of Bio-Reference's
authorized but unissued common stock. The Company intends to attempt to expand
the market for the Health Food Business products through its current physician
accounts utilizing its existing sales force and distribution network.
The Company also executed an employment agreement with RBF's chief
executive officer, employing her through October 31, 2004 to perform executive
and marketing duties in connection with the establishment, supervision of
manufacturing and marketing of products for the Health Food Business. Pursuant
to the employment agreement, the executive will be paid a minimum annual salary
of $150,000 and commissions equal to varying percentages (from 5% to 1%) of net
cash receipts of the Health Food Business in each fiscal year to the extent such
net cash receipts exceed $1,000,000 in such fiscal year. The commissions earned
will be credited against a guaranteed $50,000 commission bonus (effective only
for the first year). The executive is also being paid a $100,000 signing bonus
in 24 monthly installments. The executive was issued an additional 20,000 shares
of Bio-Reference's authorized but unissued common stock in consideration of her
executing a non-competition agreement.
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 believes the overpayments will be determined to
approximate $150,000, of which approximately $75,000 has already been remitted
by the Company to Medicare. 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
1999, there was no change in the status of this matter. At October 31, 1999, the
Company had reserved the sum of $150,000 on its October 31, 1999 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 has
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 has accrued the
estimated settlement of $227,000 on its October 31, 1999 financial statements.
The settlement is subject to the parties' execution of a written agreement
setting forth its terms and to the approval of the Director of the Division of
Medical Assistance. Approval of the settlement is being recommended to the
Director.
New Jersey Medicaid is the only payor with which the Company conducts
business that requires a physician signature on each laboratory requisition. In
the fiscal year ended October 31, 1999, New Jersey Medicaid accounted for
approximately 3% of the Company's total net revenues.
4
CLINICAL LABORATORY OPERATIONS
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The Clinical Laboratory Industry
- --------------------------------
The United States market for clinical laboratory testing is estimated to
generate approximately $30 billion in annual revenues.
- 50% of these revenues are generated by hospital laboratories
- 50% of these revenues are generated by independent laboratories and
physician office laboratories.
History
- -------
Bio-Reference was incorporated in December 1981 to provide mobile medical
examination services but discontinued that business in June 1989. Bio-Reference
commenced clinical laboratory operations in 1987 with the belief that a strong
business opportunity existed for a medium-sized clinical laboratory that
produced high quality test results in a timely manner to practicing physicians.
The current competition may be primarily categorized in two groups:
- businesses that are national in scope performing millions of tests
per month but impersonal in nature
- smaller laboratories that attempt to compete in terms of quality and
service but are limited in resources and scope of capabilities.
Consequently, management believed that there existed a definite place for a
medium-sized commercial laboratory in the greater New York metropolitan area.
The Company did not realize income from operations from the time it
commenced clinical laboratory operations in 1987 until fiscal 1994. The Company
realized net income in each of the succeeding years until fiscal 1999. During
fiscal 1999, the Company had a loss of approximately $4,900,000 which included a
write-down of approximately $2.9 million for an impaired asset of $900,000 and
its associated additional reserve of $2,000,000 for accounts receivable
attributable to the Company's end stage renal dialysis business acquired from
Smith Kline Beecham.
In 1988, the Company consolidated and relocated all of its laboratory
operations into a 35,000 sq. ft. space in Elmwood Park, New Jersey,
approximately 10 miles from mid-town Manhattan. The new location was carefully
chosen to offer easy access to the greater New York metropolitan area. This move
afforded the Company an excellent geographical location to expand into newer
markets in southern New York State, including Westchester, Rockland and Nassau
Counties, southern and western New Jersey and southern Connecticut.
Bio-Reference proceeded to develop esoteric testing, while maintaining its
routine tests. It was found that by emphasizing the more difficult esoteric
tests, routine tests also increased, particularly profile testing in chemistry
and hematology. The Company hopes to continue its growth by aggressive
marketing, entry into additional markets, primarily in the greater New York
metropolitan area through acquisitions and the development of specialty niche
markets to complement its routine business. Over the years, the Company has
expanded its specialty testing services to include:
- anatomic pathology (biopsies and pap smears)
- cellular immunology (principally geared to the AIDS testing market)
- male infertility
- tumor markers
Operations
- ----------
The efficiency of a medical laboratory depends on three items:
- Quantity of tests
- Selection of tests performed
- Ability to automate the process
5
It is axiomatic that the initial fixed costs of testing a small number
of patients are high. Such costs include:
- cost of maintaining highly sophisticated equipment
- cost of a full support facility
- marketing
- logistical
- billing
- other administrative costs
As the patient volume increases, automated tests become progressively less
expensive as the fixed costs are already in place, making the laboratory more
cost efficient.
Most medical laboratory tests can be divided into three principal
categories:
- those that are highly automated and computer driven,
- those that are semi-automated requiring the use of sophisticated
equipment,
- those that are subjective and basically manually determined.
The Company considers itself a highly automated and computer driven laboratory.
The Company's couriers pick up patient specimens from physician offices,
nursing homes and hospitals in the metropolitan New York area and test results
are generally delivered back to the physician within 24 hours. Larger volume
clients receive test results by way of printers placed in their offices, thereby
accelerating test reporting. Bio-Reference furnishes its physician clients with
periodic newsletters detailing:
- advances in laboratory medicine
- new tests
- clinical commentaries
- aboratory interpretation of test results.
In addition, the Company provides an annual Test Compendium to all physician
clients listing:
- all tests offered
- normal ranges
- correct collection of samples
- patient preparation
- up to date billing information
The Company utilizes the services of eighteen full-time Client Service
Coordinators, all of whom are fully trained in medical and laboratory
terminology. This staff is used as an interface with physicians and nurses and
augments the client support provided by the Company's sales staff. Highly
abnormal and life threatening results are immediately telephoned to the
physician in order to provide speedy medical resolution of any patient problem.
Sales and Marketing
- -------------------
The Company presently employs 47 full and part-time sales and marketing
personnel. The sales and marketing department works closely with the Technical
Director to:
- plan new tests
- pricing
- general client support.
All sales and marketing personnel operate in a dual capacity; both in selling
and as client support representatives. This ensures that all salespersons are
intimately involved with the client, not only in selling, but in servicing the
account that they sell. Bio-Reference believes that this is unique in the
industry and is extremely helpful in client retention, providing a strong link
between the physician and the Company's staff.
Quality Assurance
- -----------------
Medical testing is essentially one of communication and data transfer. In
order to provide accurate and precise information to the physician, it is
essential to maintain a well structured and vigorous quality assurance program.
Bio-Reference holds the required Federal and state licenses necessary to permit
its operation of a clinical laboratory at both its New Jersey and New York
facilities and to permit the servicing of its clients in Connecticut, Florida,
Louisiana, Maryland, New Jersey, New York,
6
Pennsylvania and Virginia. To fully maintain these licenses, the laboratory must
submit to vigorous sets of proficiency tests, or surveys, in all test procedures
which are performed. Such proficiency tests or surveys may be performed as many
as four to five times a year, depending upon the procedure, and results in
hundreds of proficiency tests throughout the year. In addition, the Company
performs thousands of quality control and quality assurance tests per year. The
Company is also subjected to unannounced inspections by inspectors from some of
the jurisdictions noted above who review past records, operating manuals,
quality assurance records and safety regulations.
In October 1998, the Company was notified that it had been re-accredited
by the College of American Pathologists "CAP" in its Elmwood Park, New Jersey
and Park Avenue, New York facilities. In September 1998, the Company was
notified that it had been re-accredited in its Valley Cottage, New York
facility. This accreditation by CAP, a peer review organization, involves an
intensive review by numerous experts in their specific fields, who review
technical, quality assurance, health and safety and computer documentation in
order to bestow accreditation, which is one of the most prestigious approvals
available to clinical laboratories.
The Company's Quality Assurance Committee, headed by a Quality Assurance
Coordinator and composed of supervisors from all departments, meets daily to
assess and evaluate the laboratory's quality. Based on the information received
from the committee, recommendations are made to correct conditions which have
led to errors. Management, department supervisors and members of the assurance
committee continually monitor the laboratory's quality. Depending on the test,
two or three sets of Quality Control materials are run in each analytical assay
to assure precision and accuracy. Patient population statistics are evaluated
each day. Highly abnormal samples are repeated to assure their accuracy.
It is the Company's position that all of these procedures are necessary,
not only in assuring a quality product, but also in maintaining Federal and
state licensing. The Company believes these high standards of quality are an
important factor in what management regards as an excellent rate of client
retention.
Revenue Recognition and Business Strategy
- -----------------------------------------
Although the laboratory's clients are primarily physicians, it is usually
the individual patient, his or her commercial insurance carrier, or a
governmental agency such as Medicare or Medicaid that pays the laboratory
charges. These third parties pay health care providers according to allowable
costs or a predetermined contractual rate rather than according to the
provider's established rates; the difference between what is paid and what is
billed is the contractual allowance. Therefore, the Company has adopted the
practice of reducing its revenues by these allowances or contractual
adjustments.
Over the past years there has been an increase in the number of patients
that are covered by managed care health plans. These plans will often negotiate
with a limited number of clinical laboratories at discounted rates. Some of
these managed care health plans will contract with only a single laboratory and
pay for services on a capitation basis (meaning one price per enrollee,
regardless of how much laboratory work is performed). The effect of managed care
health plans to the laboratory industry equates to lower reimbursement rates for
laboratory services. If the laboratory is not a provider of services to the
managed care health plan, it will not be reimbursed for providing the service
and overall patient volume may be reduced. Therefore, this change has reduced
the potential market for a clinical laboratory's services if it is not a
provider to a particular managed care health plan.
In addition, Medicare as well as an increasing number of commercial
programs are requiring physicians to document the medical necessity when
ordering specific laboratory tests. Since the laboratory has a responsibility to
test a specimen when it first arrives in the laboratory, it may not be able to
wait until all applicable information is provided and there is a possibility
that a test can be performed and results provided before appropriate medical
necessity is documented. In these cases, the laboratory may not receive
reimbursement for the tests.(See "Developments Since the Beginning of Fiscal
1999" as to the status of a review concerning overpayments being conducted by
the Company's Medicare carrier) and a recent settlement of a claim against the
Company asserted by New Jersey Medicaid.
7
The following table reflects the Company's breakdown of revenue by payor
for the 12 months ended October 31, 1997, 1998 and 1999.
Years Ended October 31,
1997 1998 1999
---- ---- ----
Direct Patient Billing........... 17% 16% 14%
Commercial Insurance............. 31% 30% 27%
Professional Billing............. 23% 28% 34%
Medicare......................... 25% 22% 22%
Medicaid......................... 4% 4% 3%
------ --- ----
100% 100% 100%
Competition
- -----------
Bio-Reference's competition derives primarily from other laboratories
located in the New York metropolitan area. On a national basis, approximately
30% of this market is made up of the two largest national laboratories:
- Quest Clinical Laboratory, formerly a Division of Corning, Inc.
- Laboratory Corporation of America, Inc.
Although the Company is significantly smaller than the national
laboratories and has modest financial resources, management believes it can
compete successfully because it has;
- fewer layers of staff
- a more responsive business atmosphere
- customized service.
The Company believes its response to medical consultation is faster and more
personalized than in the national laboratories. Client service staff only deal
with basic technical questions and those that have medical or scientific
significance are referred directly to other senior scientists and staff.
Government Regulation
- ---------------------
Laboratory operations require licensure in each jurisdiction in which they
operate. Bio-Reference holds the required Federal and state licenses necessary
to permit its operation of a clinical laboratory at both its New Jersey and New
York facilities and to permit its servicing of its clients in those states where
it presently operates. Laboratory technicians and technologists must also
qualify under state regulations in order to be employed by the laboratory. All
of these licensing and certification programs set standards in areas such as
quality control, record keeping and personnel qualifications, including, in
varying measures from state to state, educational experience and licensure for
various levels of personnel responsible for testing. Compliance with these
standards is by periodic inspections by the appropriate Federal, state or local
agency. In addition, licensing and certification entail proficiency testing
which involves actual testing of specimens that have been specifically prepared
by the regulatory authority or designated agencies for testing by the
laboratory. There can be no assurance the laboratory will maintain all necessary
licenses and in the event the laboratory loses its license in a particular
jurisdiction, it will be required to cease all activities in such jurisdiction.
There also cannot be any assurance the Company will obtain the licenses required
in a proposed jurisdiction of operation.
The Company is also subject to Federal and state regulations governing the
transportation and disposal of medical waste including bodily fluids. Federal
regulations require licensure of interstate transporters of medical waste. In
New Jersey, the Company is subject to the Comprehensive Medical Waste Management
Act, "CMWMA," which requires the Company to register as a generator of special
medical waste. CMWMA mandates the sterilization of certain medical waste and
provides a tracking system to insure disposal in an approved facility. All of
the Company's medical waste is disposed of by a licensed interstate hauler. The
hauler provides a manifest of the disposition of the waste products as well as a
certificate of incineration which is retained by the Company. These records are
audited by the State of New Jersey on a yearly basis.
Containment of health-care costs, including reimbursement for clinical
laboratory services, has been a focus of ongoing governmental activity. Omnibus
budget reconciliation legislation, designed to "reconcile" existing laws with
reductions and reimbursement required by enactment of a Congressional budget can
adversely affect clinical laboratories by reducing Medicare reimbursement for
laboratory
8
services. Although in the past, legislation has been enacted which reduced the
permitted Medicare reimbursement for clinical laboratory services from
previously authorized levels, none of the reductions enacted to date has had a
material adverse effect on the Company. For many of the tests performed for
Medicare beneficiaries or Medicaid recipients, laboratories are required to bill
Medicare or Medicaid directly, and to accept Medicare or Medicaid reimbursement
as payment in full.
The Clinton Administration, Congress and various Federal agencies have
examined the rapid growth of Federal expenditures for clinical laboratory
services, and the use by the major clinical laboratories (including the Company)
of dual fee schedules ("client" fees charged to physicians, hospitals,
institutions and companies with whom a laboratory deals on a bulk basis and
which involve relatively low administrative costs, and "patient" fees charged to
individual patients and third party payors, including Medicare, who generally
require separate bills or claims for each patient encounter and which involve
relatively high administrative costs). The permitted Medicare reimbursement rate
for clinical laboratory services has been reduced by the Federal government in a
number of instances over the past several years to a present level equal to 74%
of the national median of laboratory charges. A number of proposals for
legislation or regulation are under discussion which could have the effect of
substantially reducing Medicare reimbursements to clinical laboratories through
reduction of the present allowable percentage or through other means. In
addition, the structure and nature of Medicare reimbursement for laboratory
services is also under discussion and management is unable to predict the
outcome of these discussions or its effect on the Company. Depending upon the
nature of congressional and/or 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 any such actions will be taken.
Federal and state health care and related regulations are subject to
constant change. The Company cannot now predict what changes may be enacted
which may affect its business or the manner in which its business would be
affected by such changes. Two legislative changes have occurred which portend
significant changes in the clinical laboratory market. Two Omnibus Budget
Reconciliation Acts have severely restricted physician referrals of Medicare
covered services to clinical laboratories in which the referring physician or
his immediate family has a financial relationship. The Clinical Laboratory
Improvement Amendments of 1988, "CLIA-88," acted to strengthen Federal control
of medical laboratories by regulating stricter quality assurance practices,
licensing requirements and staff qualifications.
CLIA-88 extended Federal licensing requirements to all clinical
laboratories (regardless of the location, size or type of laboratory), including
those operated by physicians in their offices, based on the complexity of the
tests they perform. The legislation also substantially increased regulation of
cytology screening, most notably by requiring the Secretary of Health and Human
Services, ("HHS,") to implement regulations placing a limit on the number of
slides that a cytotechnologist may review in a twenty-four hour period. CLIA-88
also established a more stringent proficiency testing program for laboratories
and increased the range and severity of sanctions for violating Federal
licensing requirements. A number of these provisions, including those that
imposed stricter cytology standards and increased proficiency testing, have been
implemented by regulations applicable only to laboratories subject to Medicare
certification adopted under the Clinical Laboratory Improvement Act of 1967,
"CLIA-67." On February 28, 1992, HHS published three sets of regulations
implementing CLIA-88, including quality standard regulations establishing
Federal quality standard for all clinical laboratories; application and user fee
regulations applicable to most laboratories in the United States which became
effective on March 30 1993; and enforcement procedure regulations applicable to
laboratories that are found not to meet CLIA- 88 requirements. The quality
standard regulations establish varying levels of regulatory scrutiny depending
upon the complexity of testing performed. Under these regulations, a laboratory
that performs only one or more of eight routine "waived" tests may apply for a
waiver from most requirements of CLIA-88. The Company believes that most tests
performed by physician office laboratories will fall into either the "waived" or
the "moderately complex" category. The latter category applies to simple or
automated tests and generally permits existing personnel in physicians' offices
to continue to perform testing under the implementation of systems that insure
the integrity and accurate reporting of results, establishment of quality
control systems, proficiency testing by approved agencies, and biannual
inspection. The quality standard and enforcement procedure regulations became
effective on September 1, 1992, although certain personnel, quality control and
proficiency testing requirements will
9
be phased-in over a number of years. The laboratory has completed its first CLIA
inspection under CLIA-88 guidelines and received its certificate of compliance
effective February 7, 1996.
In October 1998, the Company was notified that it had been re-accredited
by the College of American Pathologists "CAP" in its Elmwood Park, New Jersey
and Park Avenue, New York facilities. In September 1998, the Company was
notified that it had been re-accredited in its Valley Cottage, New York
facility. This accreditation by CAP, a peer review organization, involves an
intensive review by numerous experts in their specific field, who review
technical, quality assurance, health and safety and computer documentation in
order to bestow accreditation, which is one of the most prestigious approvals
available to clinical laboratories.
The Office of Inspector General has published a Model Compliance Program
for the clinical laboratory industry. This is a voluntary program for
laboratories to demonstrate to the Federal government that they are responsible
providers. Bio-Reference Laboratories has written and implemented a compliance
program adhering to the standards set forth in the Model Compliance Program.
Insurance
- ---------
The Company maintains professional liability insurance of $1,000,000 per
occurrence, $3,000,000 in the aggregate. In addition, the Company maintains
excess commercial insurance of $2,000,000 per occurrence. A determination of
Company liability for uninsured or underinsured acts or omissions would have a
material adverse effect on the Company's operations.
Employees
- ---------
At December 31, 1999, the Company had 378 full-time employees and 368
part-time employees. This includes:
- three executive officers
- Vice President of Technical Operations
- Marketing Vice-President,
- 74 full-time and 41 part-time technicians, and/or technologists
(including physicians, pathologists and Ph.D.'s)
- 260 full and part-time semi-technical employees
- 46 full and part-time marketing representatives
- 194 full and part-time clerical employees
- 107 full and part-time drivers.
None of the Company's employees are represented by a labor union. The Company
regards relations with its employees as satisfactory.
Item 2 - Properties
- -------------------
The Company's executive offices and New Jersey processing facility occupy
approximately 56,000 square feet of leased space in two one-story brick
facilities at 481-487 Edward H. Ross Drive, Elmwood Park, New Jersey. The lease
for these facilities, which expires in February 2004, provides for a monthly
rental of $31,391. Bio-Reference's New York processing facility occupies
approximately 11,000 square feet of leased space in a two-story brick facility
at 140 Route 303, Valley Cottage, New York. The lease for this facility, which
expires in April 2002, provides for a monthly rental of $12,177. The Company's
testing equipment maintained at both of its processing facilities are in good
condition and in working order. Management believes that these facilities, as
presently equipped, have the capacity to generate up to approximately
$75,000,000 in annual revenues based on the type of testing now being performed
by the Company. The Company maintains fire, theft and liability insurance
coverage for this facility in what it believes are adequate amounts. The Company
also leases 55 additional relatively small draw stations throughout the New York
metropolitan area to collect specimens from physician-referred patients for
testing at both of its processing facilities.
Item 3 - Legal Proceedings
- --------------------------
In July 1996, the Company purchased certain assets and rights including
the Customer List related to the Renal Dialysis Testing Business conducted by
SmithKline Beecham Clinical Laboratories, Inc. ("SBCL"), from SBCL, for
$1,800,000 including a $1,200,000 down payment pursuant to an Asset
10
Sale/Purchase Agreement (the "Asset Agreement"). In the Asset Agreement, SBCL
represented and warranted that its Renal Dialysis Testing Business was servicing
at least 60 active accounts, was conducting testing for not less than 4,600
active dialysis patients and was generating at least $3,600,00 in net revenues
on an annual basis. The parties also executed a Non-Competition Agreement (the
"Non- Competition Agreement") pursuant to which SBCL agreed to cease performing
all renal dialysis clinical laboratory testing services for a three year period
(after conclusion of a limited Transition Period).
After completion of the acquisition, the Company's management determined
that SBCL's representations and warranties concerning the Renal Dialysis Testing
Business were materially false and that the Company might only realize
approximately $1,000,000 in annual net revenues from the acquired business.
Management also determined that SBCL had fraudulently concealed that its Renal
Dialysis Testing Business had suffered certain material adverse changes and that
SBCL had breached the Non- Competition Agreement by continuing to perform renal
dialysis testing on the transferred accounts after the Transition Period despite
its assurances that it had ceased all such testing. Based upon SBCL's alleged
breaches of the Asset Agreement and the Non-Competition Agreement, the Company
did not pay any portion of the $600,000 balance of the purchase price (which was
due in 24 consecutive monthly installments of $25,000 commencing January 1,
1997).
As a result of the foregoing, the Company filed a lawsuit against SBCL in
December 1996. The lawsuit, filed in the United States District Court for the
District of New Jersey, alleged that SBCL materially and repeatedly breached its
obligations and its representations and warranties made in the Asset Agreement
and the Non-Competition Agreement and claimed unspecified amounts of
compensatory and punitive damages and related costs. In response to the
Company's lawsuit, SBCL asserted counterclaims for the $600,000 unpaid portion
of the purchase price.
During fiscal 1998, agreement was reached between the Company and SBCL to
settle and compromise all aspects of the lawsuit including the SBCL
counterclaims. Pursuant to the agreement, the Company released SBCL from any
claims pursuant to the Asset Agreement and the Non-Competition Agreement and
SBCL released the Company from any claims pursuant to such agreements including
the Company's obligation to pay the $600,000 balance of the purchase price. The
settlement was subject to the consent of the Company's principal lending bank
which consent was received in January 1999.
Item 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The Company's Annual Meeting of Stockholders was held on October 21, 1999.
At the meeting, the following two individuals were elected by the following vote
to serve as Class II directors, each for a term of three years and until his
successor is duly elected and qualified.
For Withheld
--- --------
Sam Singer 6,362,497 152,972
Frank DeVito 6,362,497 152,972
The other directors of the Company whose term continued are as follows:
Marc D. Grodman Class I director
Howard Dubinett Class I director
John Roglieri Class III director
Gary Lederman Class III director
11
PART II
PRICE RANGE OF SECURITIES
-------------------------
Item 5. - Market for Common Stock and Related Shareholder Matters
- --------- -------------------------------------------------------
The Company's Common Stock was traded on the National Association of
Securities Dealers Automated Quotation ("NASDAQ") Small Cap System through July
13, 1992 after which it was delisted from trading on NASDAQ due to the Company's
failure to maintain shareholders' equity of at least $1,000,000. Commencing July
14, 1992, the Common Stock was quoted in the over-the-counter market on the NASD
OTC Bulletin Board. As a result of the improvement in the Company's financial
condition based upon its November 1993 public offering, the Common Stock was
readmitted for trading on the NASDAQ Small Cap System under the symbol "BRLI" on
November 24, 1993.
The following table sets forth the range of high and low bid prices for
the Common Stock for the periods indicated, as derived from reports furnished by
NASDAQ. Such quotations represent prices between dealers, do not include
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions.
Fiscal Year Bid Prices
----------- ----------
High Low
---- ---
1998
First Quarter $1.65625 $1.25
Second Quarter 1.75 1.25
Third Quarter 2.00 1.15625
Fourth Quarter 1.25 .875
1999
First Quarter $1.875 $ .96875
Second Quarter $1.5625 .75
Third Quarter $1.03125 .4375
Fourth Quarter $1.0625 .78125
At December 31, 1999 the closing sales price for the Common Stock on
NASDAQ was $3.75 per share.
At December 31, 1999 the number of record holders of the Common Stock was
630. Such number of record owners was determined from the Company's shareholder
records and does not include beneficial owners whose shares are held in nominee
accounts with brokers, dealers, banks and clearing agencies.
Dividends
The Company has not paid any dividends upon its Common Stock since its
inception and, does not contemplate or anticipate paying any dividends in the
foreseeable future. Furthermore, the Company's loan agreement with PNC Bank
prohibits the Company from paying dividends or making any distributions with
respect to any shares of its stock without the prior written consent of the
Bank.
12
Item 6. Selected Financial Data
[In thousands, except per share data]
Y e a r s e n d e d
--------------------------------------------
O c t o b e r 3 1,
--------------------------------------------
1 9 9 9 1 9 9 8 1 9 9 7 1 9 9 6 1 9 9 5
------- ------- ------- ------- -------
Operating Data:
Net Revenues $ 53,856 $ 46,554 $38,660 $ 35,126 $ 31,521
Cost of Services $ 30,850 $ 25,058 $19,339 $ 18,136 $ 15,036
Gross Profit $ 23,006 $ 21,496 $19,321 $ 16,989 $ 16,485
General and Administrative Expenses$ 26,432 $ 20,231 $17,436 $ 15,793 $ 14,702
Income [Loss] from Operations $ (3,426)$ 1,065 $ 1,885 $ 1,196 $ 1,783
Non-Recurring Gain on Sale of
Intangible Assets $ -- $ 334 $ 2,026 $ -- $ --
Other Expenses - Net $ 1,185 $ 841 $ 850 $ 552 $ 332
Provision for Income Tax Expense
[Benefit] $ 367 $ (38)$ (139)$ 52 $ 49
Net income [Loss] $ (4,978)$ 597 $ 3,200 $ 592 $ 1,402
Net [Loss] Income Per Common Share $ (.68)$ .08 $ .48 $ .10 $ .23
Cash Dividends Per Common Share $ -- $ -- $ -- $ -- $ --
Balance Sheet Data:
Total Assets $ 32,318 $ 40,778 $29,095 $ 28,231 $ 24,201
Total Long-Term Liabilities $ 2,681 $ 3,708 $ 921 $ 1,533 $ 843
Total Liabilities $ 20,948 $ 24,555 $13,570 $ 16,128 $ 12,945
Working Capital $ 3,452 $ 8,364 $ 9,415 $ 4,072 $ 4,552
Stockholders' Equity [Deficit] $ 11,369 $ 16,223 $15,525 $ 12,103 $ 11,256
A number of proposals for legislation continue to be under discussion
which could substantially reduce Medicare and Medicaid reimbursements to
clinical laboratories. Depending upon the nature of regulatory action and the
content of legislation, the Company could experience a significant decrease in
revenues from Medicare and Medicaid, which could have material adverse effect on
the Company. The Company is unable to predict, however, the extent to which such
actions will be taken.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
-----------------------------------------------------------------------
Note Regarding Forward-Looking Statements
- -----------------------------------------
This Annual Report on Form 10-K contains historical information as well as
forward-looking statements. Statements looking forward in time are included in
this Annual 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.
OVERVIEW
- --------
Bio-Reference has expanded its laboratory testing capabilities and its customer
base through internal growth as well as through the completion of a series of
acquisitions of the businesses of other testing laboratories.
In April 1998, the Company acquired the assets and certain liabilities of
Medilabs, Inc. ("MLI") for a purchase price of $4,000,000 cash plus a promissory
note of $1,500,000, payable without interest, in three semi-annual installments
commencing April of 1999. Also in April, the Company entered into a note
agreement to borrow the $4,000,000 to fund this acquisition. The note is in
accordance with the Company's revolving loan agreement with the same lending
bank. The operations of MLI are included in the Company's operations commencing
April 9, 1998. MLI incurred a net loss of approximately $120,000 for the seven
month period ended October 31, 1998 and had net income of approximately $880,000
for the twelve month period ended October 31, 1999.
13
In December of 1999, the Company entered into agreements to acquire the
businesses of two companies. One company is involved in website designs and the
other company is involved in the manufacturing of health care foods.
Results of Operations
Net Income
- ----------
The Company's net income (loss) for the years ended October 31, 1999 and 1998
was $(4,978,448) and $596,583, respectively. The main reasons for the $5,575,031
decrease in net income is the write-down of approximately $2,900,000 for
impaired assets including the additional allowance for accounts receivable
relating to the Company's end stage renal dialysis business acquired from
SmithKline Beecham of approximately $2,000,000 and an increase in general and
administrative expenses of approximately $2,000,000 in fiscal 1999. . In
addition, net revenue per patient decreased 8% during the current twelve month
period ended October 31, 1999, as compared to the twelve month period ended
October 31, 1998. Gross profit margins decreased from 46% for the twelve month
period ended October 31, 1998 to 43% for the twelve month period ended October
31, 1999. Based upon anticipated increases in patient volume, anticipated
increased testing to be performed, reimbursement rate improvements, and
anticipated decreases in operating costs, the bulk of the effects of which are
expected to be realized in the second half of fiscal 2000, the Company projects
net income for fiscal 2000.
Net Revenues
- ------------
Net revenues for the year ended October 31, 1999 were $53,856,414 as compared to
$46,553,730 for the year ended October 31, 1998; this represents a 16% increase
in net revenues. MLI had net revenues of $13,706,743 or 25% of the Company's net
revenues for the fiscal year. The Company acquired MLI in April of 1998, for the
seven month period ended October 31, 1998, MLI had net revenues of $7,773,570 or
17% of the Company's net revenue for the twelve month period ended October 31,
1998.
The number of patients serviced during the fiscal year ended October 31, 1999
was 1,235,514 which was 25% greater when compared to the prior fiscal year. MLI
accounted for 35% of the patient count for the year ended October 31, 1999. Net
revenue per patient for the year ended October 31, 1998 was $47.29 compared to
net revenue per patient for the year ended October 31, 1999 of $43.59; a
reduction of $3.70 or 8%. This decrease is due to the inclusion of a full twelve
months of MLI's revenues with its associated lower revenue per patient in fiscal
year 1999. MLI's net revenue per patient was $31.71 for the twelve month period
ended October 31, 1999 compared to net revenue per patient of $33.04 in fiscal
year 1998. The Company expects an increase in net revenues in fiscal year 2000
due to a number of factors: internal growth, an estimated increase in the
contract with the New York State Department of Corrections, Medicare
reimbursement for tests previously not covered, an increase in Medicare
reimbursement for other selected tests, as well as new marketing initiatives in
newer testing areas, such as drugs of abuse testing, and complimentary and
alternative medicine. In addition, the Company has identified three new business
initiatives (See Below), all of which seek to leverage off existing capabilities
the Company possesses.
The Company anticipates increasing its revenues in its next fiscal year through
internal growth and development of new marketing initiatives in laboratory
testing services outside the traditional physician market. In November 1999, the
contract to provide laboratory testing by the New York State Department of
Corrections for inmates in its facilities was renewed. This contract is valued
at approximately $6,300,000 for fiscal year 2000, an estimated increase of
approximately 10% from fiscal year 1999. The Company is seeking to market its
services to other correctional institutions.
In June 1999, the Company announced the signing of a letter of intent with
General Prescription Programs, Inc., a prescription benefit manager ("GPP") and
others, to form a new company, called PSIMedica, which will provide population
health management and medical claims processing services to third-party payors
of health related claims and benefits. The new company, principally funded by
BRLI, is expected to obtain a license to market medical management services to
GPP customers representing approximately one million lives. The license will
also provide the new company with access to GPP's claims information and
analytical software. The Company believes, through the analytical process of
interrelating laboratory, prescription and medical claims data, it can provide
critical strategies and solutions to promote population health management
primarily to ERISA funds and other payors. No
14
assurances can be given that the Company will be able to successfully market
these strategies and solutions.
In 1999, the Company licensed software to allow for the grouping of the analysis
of medical claims data and has proceeded to develop its own proprietary
algorithms and enhancements to the licensed software so as to include laboratory
and prescription data. The Company is currently negotiating with two ERISA funds
which total over 60,000 lives as beta sites for its analytical tools and
programs. The Company expects to seek customers for its services by mid fiscal
year 2000.
In December 1999, the Company announced the acquisition of DoctorNY.com
(www.doctorny.com), a health portal which, with its associated domain sites and
existing physician websites, includes website development capabilities for
health care providers, together with a search engine which allows consumers to
locate physicians by region, credentials, specialty or other parameters. The
Company announced the consumer view represented by DoctorNY.com was part of its
entry into the e-health marketplace. The Company plans to further develop the
physician services offered by the system to enhance physician- patient and
physician-payor electronic communications on a secure basis (i.e., preserving
confidentiality), including communicating laboratory results, e-mail
prescriptions, refills, payor verification and eligibility, etc. The offering of
physician CME credits through the system is also contemplated. The Company
intends to market these services to its existing physician network as well as to
other individual physicians and groups of physicians.
In December 1999, the Company acquired Right Body Foods, Inc., a manufacturer
and distributor of freshly prepared, starch free, low-calorie, low carbohydrate,
food products, located in Syosset, New York. Its products are sold through
health professionals, dieticians, nutritionists and physicians. The Company
expects to use its marketing staff and physician network to increase the
distribution of these products.
COST OF SERVICES:
- -----------------
Cost of sales increased from $25,058,008 for the year ended October 31, 1998 to
$30,850,357 for the year ended October 31, 1999, an increase of $5,792,329 or
19%. This increase is primarily the result of the MLI acquisition. MLI's direct
operating costs were $9,347,850 for the twelve month period ended October 31,
1999, as compared to $5,639,627 for the seven month period ended October 31,
1998, an increase of $3,708,223. The optimum consolidation of laboratory
operations has not been completed and will marginally impact the Company's cost
structure until, at least, the second quarter of fiscal year 2000 when the
automated laboratory upgrade and expansion is expected to be completed. While
the automated laboratory will have a marginal impact on cost structure, the
reduction of the Company's dependence on reference laboratories is expected to
have a more favorable impact during the second half of fiscal 2000.
GROSS PROFITS:
- -------------
Gross profit on net revenues increased from $21,495,722 for the year ended
October 31, 1998 to $23,006,077 for the year ended October 31, 1999; an increase
of $1,510,355 primarily attributable to the increase in revenues. Gross profit
margins decreased from 46% for the year ended October 31, 1998 to 43% for the
year ended October 31, 1999. Management believes that the Company's gross profit
margin will increase in fiscal 2000, due to increased revenues from internal
growth, Medicare reimbursement for tests not previously covered, increases in
reimbursement rates from Medicare on certain tests, the completion of the
automated chemistry laboratory and decrease in direct operating expenses. The
decrease in gross profit margins in fiscal 1999 is primarily attributable to the
lower net revenues per patient, the increase in direct costs associated with MLI
and the duplication of direct costs that had not been eliminated as of October
31, 1999 by an optimum consolidation of laboratory operations. The Company has
invested a large amount of time and money during fiscal 1999 to increase its
processing capacity. Management believes, that its capacity once the automated
chemistry laboratory is completed, for approximately $250,000, will be more than
adequate to handle the projected increase in patient volume.
- ------------------------------------------------------------------------------
Note Regarding Forward-Looking Statements
- -----------------------------------------
This Annual Report on Form 10-K contains historical information as well as
forward-looking statements. Statements looking forward in time are included in
this Annual 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.
15
GENERAL AND ADMINISTRATIVE EXPENSES:
- -----------------------------------
General and administrative expenses for the year ended October 31, 1999 were
$26,431,909 as compared to $20,430,757 for the year ended October 31, 1998, an
increase of approximately $6,000,000 or 29%. Approximately 48% of this increase
is the impairment charge of approximately $2,900,000 associated with the
Company's end stage renal dialysis business acquired from SmithKline Beecham. In
addition, occupancy expenses, telephone, data processing and marketing expenses
increased approximately $1,900,000 over the prior twelve month period. The
Company recorded a $227,000 expense associated with a New Jersey Medicaid
overpayment claim. Management believes that general and administrative expenses
in 2000 will increase but not at a higher percentage than the projected increase
in revenues.
INTEREST EXPENSE:
- ----------------
Interest expense increased from $1,280,737 for the year ended October 31, 1998
to $1,465,765 for the year ended October 31, 1999, resulting from the Company's
continuing use of its revolving line of credit with PNC Bank.
Fiscal Year 1998 Compared to Fiscal Year 1997
Net Income
- ----------
The Company's net income for the years ended October 31, 1998 and 1997 was
$596,583 and $3,199,915, respectively. The main reasons for the $2,600,000
decrease in net income is the reduction in nonrecurring gain of approximately
$1,700,000. The nonrecurring gain represents the gain in the sale of certain
assets of the Company's GenCare Division. The reduction in income from
operations resulted from a reduced gross profit percentage of approximately 4%
and an increase in general and administrative expenses.
Net Revenues
- ------------
On September 30, 1997, the Company completed the sale of certain assets of its
GenCare Division ("GenCare") to an unrelated third party. GenCare provided
largely cancer diagnostic testing services with relatively high revenues per
patient. The 1997 financial statements included eleven months of revenues
attributable to the GenCare division or $2,116,523. There were no revenues
realized by the GenCare Division in 1998.
Net revenues for the year ended October 31, 1998 were $46,553,730 as compared to
$38,660,184 for the year ended October 31, 1997; this represents a 20% increase
in net revenues. The Company acquired MLI in April of 1998. Since this
acquisition, for the seven month period ended October 31, 1998, MLI had net
revenues of $7,773,570 or 17% of the Company's net revenues for the year. There
were no revenues from MLI in fiscal 1997. MLI provides routine laboratory
services to physician offices, clinics, nursing homes and correctional
institutions, associated with lower revenues per patient.
The number of patients serviced during the year ended October 31, 1998 was
984,432 which was 35% greater when compared to the prior fiscal year. MLI
accounted for 24% of the patient count for the year ended October 31, 1998. Net
revenue per patient for the year ended October 31, 1997 was $53.08 compared to
net revenue per patient for the year ended October 31, 1998 of $47.29; a
reduction of $5.79 or 11%. MLI's net revenue per patient was $33.04 for the
seven month period ended October 31, 1998.
The Company anticipated increasing its revenues in its next fiscal year through
internal growth and development of new marketing initiatives in laboratory
testing services outside the traditional physician market. In April 1998, the
Company acquired MLI and was awarded, as of November, 1998, a contract to
provide laboratory testing by the New York State Department of Corrections for
inmates in its
- ------------------------------------------------------------------------------
Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains historical information as well as
forward-looking statements. Statements looking forward in time are included in
this Annual 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.
16
facilities. The Company is seeking to market its services to other correctional
institutions. In addition, the Company is attempting to expand its marketing
efforts in the drug testing market and has hired new marketing representatives
to specialize in this initiative.
COST OF SERVICES:
- ----------------
Cost of sales increased from $19,339,274 for the year ended October 31, 1997 to
$25,058,008 for the year ended October 31, 1998, an increase of $5,718,734 or
30%. This increase is the result of the MLI acquisition. MLI's direct operating
costs were $5,639,627 for the seven month period ended October 31, 1998. The
optimum consolidation of laboratory operations has not been completed and will
impact the Company's cost structure until completed.
GROSS PROFITS:
- -------------
Gross profit on net revenues increased from $19,320,910 for the year ended
October 31, 1997 to $21,495,722 for the year ended October 31, 1998; an increase
of $2,174,812, primarily attributable to the increase in revenues. Gross profit
margins decreased from 50% for the year ended October 31, 1997 to 46% for the
year ended October 31, 1998. This decrease in gross profit margins is primarily
attributable to the lower net revenues per patient, the increase in direct costs
associated with MLI and the duplication of direct costs that had not been
eliminated as of October 31, 1998 by an optimum consolidation of laboratory
operations.
GENERAL AND ADMINISTRATIVE EXPENSES:
- -----------------------------------
General and administrative expenses for the year ended October 31, 1998 were
$20,430,757 as compared to $17,435,879 for the year ended October 31, 1997, an
increase of approximately $3,000,000 or 16%. Most of this increase was due to
the incurring of additional costs related to the MLI acquisition (approximately
$1,858,000). In addition, bad debt increased by 11%, or approximately $793,000
over the prior comparable period and was caused primarily by an increase in the
self-pay patients of Bio- Reference Laboratories resulting from legislation
passed in New Jersey which prohibited physician billing for diagnostic
laboratory services. Self pay patients have an historical higher bad debt rate
than that of physician billing.
INTEREST EXPENSE:
- ----------------
Interest expense increased from $1,124,432 for the year ended October 31, 1997
to $1,280,737 for the year ended October 31, 1998, resulting from the Company's
increase in asset based borrowing of approximately $4,400,000 and acquisition
debt of $4,000,000 offset by payments on existing debt of $1,000,000.
Liquidity and Capital Resources
- -------------------------------
For the Fiscal Year Ended October 31, 1999
- ------------------------------------------
The Company's working capital at October 31, 1999 was approximately $3,700,000
as compared to approximately $8,400,000 at October 31, 1998, a decrease of
$4,700,000. This change is primarily the result of a decrease in accounts
receivable of approximately $2,000,000, an increase in accounts payable and
accrued expenses of approximately $600,000 and the utilization of cash to
decrease long term debt of approximately $2,200,000. The Company reduced its
debt through the utilization of its restricted certificates of deposit. This
allowed the Company to realize a cost savings on the spread between the interest
earned on these certificates of deposit and the interest expense on the monies
borrowed.
During the year ended October 31, 1999, the Company generated approximately
$1,800,000 in cash from operations, an increase of approximately $5,000,000 as
compared to the year ended October 31 1998. Each operating unit of clinical
laboratory testing services generated cash flow during the period ended
- ------------------------------------------------------------------------------
Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains historical information as well as
forward-looking statements. Statements looking forward in time are included in
this Annual 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.
17
October 31, 1999. MLI, the Company's most recent laboratory acquisition
generated approximately $600,000 in cash from operating activities and
Bio-Reference generated approximately $7,000,000. Corporate activities (General
and Administrative Expenses) utilized approximately $6,000,000 in cash during
the twelve month period ended October 31, 1999. The Company expects cash flow
from operations to continue to improve during fiscal 2000. Overall, Management
anticipates being able to generate cash from operations in fiscal 2000 as a
result of a projected increased gross profit resulting from increased revenues
and a projected decrease in operating costs. Management believes operating costs
will be lower due to cost savings generated by the automated laboratory and cost
reductions generated by doing certain large volume laboratory tests in-house
rather than referring them to another laboratory.
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.
A number of proposals for legislation continue to be under discussion which
could substantially reduce Medicare and Medicaid reimbursements to clinical
laboratories. Depending upon the nature of regulatory action, and the content of
legislation, the Company could experience a significant decrease in revenues
from Medicare and Medicaid, which could have a material adverse effect on the
Company. Medicare has announced that it will more than double the reimbursement
rate for Pap tests (from $7.15 to $14.60) and reimburse for PSA tests starting
January 1, 2000. The Company is unable to predict, however, the extent to which
other such actions will be taken. (See "Developments Since the Beginning of
Fiscal 1999" as to the status of a review concerning overpayments being
conducted by the Company's Medicare carrier and New Jersey Medicaid).
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 it has been compliant with all requirements regarding
claims submitted for payment by New Jersey Medicaid and in fact require actual
physician signatures before it bills New Jersey Medicaid. However, the Company
and New Jersey Medicaid have entered into an oral agreement in January 2000 to a
settlement of approximately $227,000 to cover the claim and the Company has
accrued this settlement amount in its October 31, 1999 financial statements. The
settlement is subject to the parties' execution of a written agreement setting
forth its terms and to the approval of the Director of the Division of Medical
Assistance. Approval of the settlement is being recommended to the Director.
New Jersey Medicaid is the only payor the Company does business with that
requires an actual physician signature on every laboratory requisition. In the
fiscal year ending October 31, 1999, New Jersey Medicaid represented
approximately 3% of the Company's total net revenues.
In April 1998, the Company amended its revolving loan agreement with PNC Bank.
The maximum amount of the credit line available to the Company is the lesser of
(1) $14,000,000 or (ii) 50% of the Company's qualified accounts receivable [as
defined in the agreement] plus 1% of any face amount of the certificates of
deposit, if any, pledged as collateral for this loan minus the amount of any
portion of the outstanding principal balance of the term loan which is deemed to
be collateralized by the certificates of deposit. Interest on advances which are
collateralized by certificates of deposit will be at 2% above the certificate of
deposit interest rate. Interest on other advances will be at prime plus 1.25%.
The credit line
- ------------------------------------------------------------------------------
Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains historical information as well as
forward-looking statements. Statements looking forward in time are included in
this Annual 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.
18
is collateralized by substantially all of the Company's assets and the
assignment of a $4,000,000 insurance policy on the life of the president of the
Company. The line of credit is available through March 2001 and may be extended
for annual periods by mutual consent thereafter. The terms of this agreement
contain, among other provisions, requirements for maintaining defined levels of
capital expenditures and net worth, various financial ratios and insurance
coverage. As of October 31, 1998, the Company was in compliance with the
covenant provisions of this agreement and was utilizing $12,000,000 of this
credit facility. As of October 31, 1999, the Company was in default of certain
covenants, however, the Company subsequently received waivers for these defaults
on January 20, 2000. As of October 31, 1999, the Company was utilizing
$8,700,905 of this credit facility.
The Company generated approximately $5,000,000 of positive cash flow from
operating and investing activities for the year ended October 31, 1999, which
was applied toward payments totaling approximately $5,800,000 to reduce short
and long term debt and capital lease obligations.
The Company intends to expand its laboratory operations through acquisitions and
aggressive marketing while also diversifying into related medical fields through
acquisitions. These acquisitions may involve cash, notes, common stock, and/or
combinations thereof
The Company has various employment and consulting agreements of up to seven
years with commitments totaling approximately $5,700,000 [See Notes 10 and 12]
and operating leases with commitments totaling approximately $4,500,000 (of
which approximately $1,5600,000 and $1,600,000 are due during fiscal 2000) [See
Note 12].
The Company's cash balances at October 31, 1999 totaled approximately $2,100,000
as compared to $2,800,000 at October 31, 1998. The Company believes that its
cash position, the anticipated cash generated from future operations, the
availability of its credit line with PNC Bank, the utilization of certificates
of deposits maturing during the second quarter of fiscal year 2000 and the
interest due thereupon, will meet its future cash needs.
For the Fiscal Year Ended October 31, 1998
Working capital at October 31, 1998 was approximately $8,400,000 as compared to
approximately $9,400,000 at October 31, 1997, a decrease of $1,100,000 during
the twelve month period.
In fiscal year 1998, the Company utilized $3,227,601 in cash for operating
activities. This use of cash for operating activities resulted in an increase in
accounts receivable of approximately $7,200,000 offset by the increase in
accrued expenses and payables of approximately $2,600,000.
The Company utilized $4,237,998 of cash for investing activities during fiscal
year 1998. This consisted primarily of $4,000,000 of cash paid for Medilabs.
Impact of Inflation
- -------------------
To date, inflation has not had a material effect on the Company's operations.
New Authoritative Pronouncements
- --------------------------------
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 137, "Accounting for Derivative Instruments
and Hedging Activities-Deferral of Effective Date of FASB Statements No. 133."
The Statement defers for one year the effective date of FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The rule now
will apply to all fiscal quarters of all fiscal years beginning after June 15,
2000. The Statement will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the value
of the hedged assets, liabilities, or firm commitments through earnings or
recognized in other
- ------------------------------------------------------------------------------
Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains historical information as well as
forward-looking statements. Statements looking forward in time are included in
this Annual 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.
19
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The adoption of SFAS No. 137 is not expected to have a
material impact on the Company's consolidated results of operation, financial
position or cash flows.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
---------------------------------------------------------
Not applicable.
Item 8. - Financial Statements and Supplementary Data
-------------------------------------------
Financial Statements are annexed hereto
Item 9. - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
---------------------------------------------------------------------
None
20
PART III
Item 10.- Directors and Executive Officers of the Registrant
--------------------------------------------------
The following table sets forth certain information with respect to each of
the directors and executive officers of the Company.
Name Age Position
Marc D. Grodman, M.D.............48 Chairman of the Board, President, Chief
Executive Officer and Director
Howard Dubinett..................48 Executive Vice President, Chief Operating
Officer and Director
Sam Singer.......................57 Vice President, Chief Financial Officer,
Chief Accounting Officer and Director
Frank DeVito.....................77 Director
John Roglieri, M.D...............60 Director
Gary Lederman, Esq...............65 Director
Marc D. Grodman, M.D. founded the Company in December 1981 and has been
its Chairman of the Board, President, Chief Executive Officer and a Director
since its formation. Dr. Grodman is an Assistant Professor of Clinical Medicine
at Columbia University College of Physicians and Surgeons and Assistant
Attending Physician at Presbyterian Hospital, New York City. From 1980 to 1983,
Dr. Grodman attended the Kennedy School of Government at Harvard University and
was a Primary Care Clinical Fellow at Massachusetts General Hospital. From 1982
to 1984, he was a medical consultant to the Metal Trades Department of the
AFL-CIO. Dr. Grodman received a B.A. degree from the University of Pennsylvania
in 1973 and an M.D. degree from Columbia University College of Physicians and
Surgeons in 1977. Except for approximately 20 hours per month spent as Assistant
Professor of Clinical Medicine and Assistant Attending Physician at Columbia
University and Presbyterian Hospital and rendering medical services to the
Uniformed Firefighters Association of New York City, Dr. Grodman devotes all of
his working time to the business of the Company.
Howard Dubinett has been the Executive Vice-President and Chief Operating
Officer of the Company since its formation. He became a Director of the Company
in April 1986. Prior to joining the Company, Mr. Dubinett was general manager of
Union Prescription Service, Inc., a company which administered prescription drug
plans. Mr. Dubinett attended Rutgers University. Mr. Dubinett devotes all of his
working time to the business of the Company.
Sam Singer has been the Company's Vice President and Chief Financial
Officer since October 1987 and a Director since November 1989. He is responsible
for all financial activities of the Company. Prior to joining the Company, he
was Controller for Sycomm Systems Corporation, a data processing and management
consulting company, from 1981 to 1987. He received a B.A. degree from Strayer
College and an M.B.A. from Rutgers University. Mr. Singer devotes all of his
working time to the business of the Company.
Frank DeVito became a Director of the Company in April 1986. Since 1970,
Mr. DeVito has been Vice President of the New Jersey State AFL-CIO and from 1960
until December 1985 was President of AFL-CIO United Food and Commercial Workers,
Local 1245. From 1981 through December 1985 Mr. DeVito was also President of
United Food and Commercial Workers District Council of Metropolitan New York and
Northern New Jersey, which was comprised of 35 local unions with approximately
150,000 members.
John Roglieri, M.D. became a Director of the Company in September 1995. He
is an Assistant Professor of Clinical Medicine at Columbia University's College
of Physicians and Surgeons and an Assistant Attending Physician at Presbyterian
Hospital, New York City. Dr. Roglieri received a B.S.
21
degree in Chemical Engineering and a B.A. degree in Applied Sciences from Lehigh
University in 1960, an M.D. degree from Harvard Medical School in 1966, and a
Master's degree from Columbia University School of Business in 1978. From 1969
until 1971, he was a Senior Assistant Surgeon in the U.S. Public Health Service
in Washington. From 1971 until 1973 he was a Clinical and Research Fellow at
Massachusetts General Hospital. From 1973 until 1975, he was Director of the
Robert Wood Johnson Clinical Scholars program at Columbia University. In 1975 he
was appointed Vice-President Ambulatory Services at Presbyterian Hospital, a
position which he held until 1980. Since 1980, he has maintained a private
practice of internal medicine at Columbia-Presbyterian Medical Center. From 1988
until 1992, he was also Director of the Employee Health Service at Presbyterian
Hospital. Since 1992, he has been Corporate Medical Director of NYLCare, a
managed care subsidiary of New York Life. He is a member of advisory boards to
several pharmaceutical companies, a member of the Editorial Advisory Board of
the journal Managed Care and a biographee of Who's Who in America.
Gary Lederman, Esq. became a director of the Company in May 1997. He
received his B.A. from Brooklyn College in 1954 and his J.D. from NYU Law School
in 1957. He was manager of Locals 370, 491 and 662 of the U.F.C.W. International
Union from 1961 to 1985. He is retired from the unions and has been a lecturer
at Queensboro Community College in the field of insurance. He currently serves
on an institutional review board for RTL, a pharmaceutical drug testing
laboratory.
There are no family relationships between or among any directors or
executive officers of the Company. The Company's Certificate of Incorporation
provides for a staggered Board of Directors (the "Board") pursuant to which the
Board is divided into three classes of directors and the members of only one
class or one-third of the Board) are elected each year to serve a three-year
term. Officers are elected by and hold office at the discretion of the Board of
Directors.
Key Personnel and Consultants
- -----------------------------
The following key personnel and consultants make significant contributions
to the Company's operations.
Robert Rush, Ph.D (Age 59) has been employed by the Company since July
1993 as Vice President of Technical Operations. From 1989 to 1993, Dr. Rush was
a Technical Director for National Health Laboratories, Inc., a national clinical
laboratory. From 1988 to 1989 he was the Technical Director of Maryland Medical
Laboratory and from 1975 to 1988 he was the Technical Director of Smith-Kline
Beecham Clinical Laboratories, another national clinical testing laboratory, in
Atlanta, Georgia. Dr. Rush also worked for the Technicon Instruments
Corporation, a Tarrytown, New York manufacturer of laboratory equipment, from
1969 to 1972, as a Section Head in Clinical Chemistry. Dr. Rush is a registered
Clinical Laboratory Director in the states of New Jersey, New York and
Connecticut. He is board certified by the American Board of Clinical Chemistry.
Dr. Rush received a B.A. degree in Chemistry from Hunter College in 1962 and
M.S. and Ph.D. degrees in Biochemistry in 1964 and 1966 from Pennsylvania State
University.
Benita Ponda, M.D. (Age 54) has been employed by the Company since
February, 1994 as Medical Director. She is certified by the American Board of
Pathology in Clinical Pathology and Anatomical Pathology with a special
qualification in Cytopathology. She holds a New York State Department of Health
Certificate of Qualification for Laboratory Director. Dr. Ponda's professional
appointments include Chief of Cytopathology and Associate Pathologist at New
York Methodist Hospital, Brooklyn, New York (January 1992 to February, 1994);
Associate Pathologist at Flushing Hospital and Medical Center, Flushing, New
York (1981 to 1991) and Director of Laboratory at St. Mary's Hospital for
Children (1985 - to date). She received M.B.B.S. degree (equivalent to M.D. in
U.S.A.) from Bombay University, Bombay, India in 1970.
Ayad Mudarris, Ph.D. (Age 48) has been employed by the Company since
February 1996 as an Assistant Director of Technical Operation and Director of
Toxicology. Dr. Mudarris has been a consultant to the Company since October
1994. From 1992 to 1994, Dr. Mudarris was a Technical Director for National
Health Laboratories, a national clinical laboratory located in Cranford, New
Jersey. From 1988 to 1992 he was Vice President and Director of Columbia
Biomedical Laboratory, A SAMHSA (NIDA) certified forensic drug testing
laboratory in Columbia, South Carolina, and from 1987 to 1988 as Scientific and
Managing Director of Keystone Laboratory, a toxicology laboratory in Asheville,
North Carolina. Dr. Mudarris is a registered Clinical Laboratory Director in the
State of New
22
York. He is certified by the American Board of Bioanalysis as a Clinical
Laboratory Director and by the National Registry of Clinical chemistry as a
Clinical chemist. He received his B.S. degree in Pharmacy from Damascus
University in 1975 and M.S. degree in Medical Technology from Long Island
University in 1980 and Ph.D. degree in Biochemistry from the University of
Arkansas for Medical Sciences in 1986.
Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------
Based solely on a review of Forms 3 and 4 and any amendments thereto
furnished to the Company pursuant to Rule 16a-3(e) under the Securities Exchange
Act of 1934, or representations that no Forms 5 were required, the Company
believes that with respect to fiscal 1999, its officers, directors and
beneficial owners of more than 10% of its equity timely complied with all
applicable Section 16(a) filing requirements.
Item 11. - Executive Compensation
----------------------
The following table sets forth information concerning the compensation
paid or accrued by the Company during the year ended on October 31, 1999 to its
Chief Executive Officer and its other executive officers who were serving as
executive officers of the Company on October 31, 1999. All of the Company's
group life, health, hospitalization or medical reimbursement plans, if any, do
not discriminate in scope, terms or operation, in favor of the executive
officers or directors of the Company and are generally available to all salaried
employees.
SUMMARY COMPENSATION TABLE
Long-Term
---------
Annual Compensation Compensation
------------------- ------------
Other All
Year Annual Restricted LTIP Other
Ended Compen- Stock Options Pay- Compen-
Name and Principal Position October 31, Salary Bonus sation Awards(1) (SARs) outs sation
- ---------------------------------------------------------------------------------------------------
Marc D. Grodman M.D. 1999 $306,557 $125,000 $-0- -0- -0- $-0- $-0-
President and Chief 1998 $305,653 $125,000 $-0- -0- -0- $-0- $-0-
Executive Officer 1997 $265,697 $90,000 $-0- 300,000 300,000(2) $-0- $-0-
Howard Dubinett 1999 $160,004 $60,000 $-0- -0- -0- $-0- $-0-
Executive Vice 1998 $157,622 $57,750 $-0- -0- -0- $-0- $-0-
President and Chief 1997 $148,417 $43,000 $-0- 240,000 213,334 $-0- $-0-
Operating Officer
Sam Singer 1999 $158,002 $60,000 $-0- -0- -0- $-0- $-0-
Vice President and 1998 $156,333 $57,750 $-0- -0- -0- $-0- $-0-
Chief Financial and 1997 $147,455 $43,000 $-0- 200,000 116,667 $-0- $-0-
Accounting Officer
(1) In connection with their acceptance of the terms of new employment
agreements, the Company's board of directors on May 13, 1997 authorized the
issuance to Dr. Grodman, Mr. Dubinett and Mr. Singer of 300,000, 240,000 and
200,000 shares of Common Stock respectively. The shares are forfeitable in part
in various amounts if the employee's employment is terminated "for cause" or at
his option "without good reason" prior to May 1, 2000. See "Employment
Agreements with Executive Officers" herein.
(2) Does not include 604,078 shares of Common Stock issuable upon conversion of
604,078 shares of Senior Preferred Stock owned by Dr. Grodman, his wife and a
corporation controlled by her (collectively the "Grodman Group"). On May 13,
1997 pursuant to a recapitalization, the previously outstanding Senior Preferred
Stock owned by the Grodman Group convertible into an aggregate 604,078 shares of
Common Stock on or before April 20, 2003 at a conversion price of $1.50 per
share was retired in exchange for a new class of Senior Preferred Stock
convertible into an aggregate 604,078 shares of Common Stock on or before May 1,
2007 at a conversion price of $.75 per share. See Item 13 herein.
Employment Agreements with Executive Officers
- ---------------------------------------------
On May 13, 1997, Dr. Grodman agreed to the terms of a new employment
agreement pursuant to which he will serve as president and chief executive
officer devoting at least 90% of his working time to the business of the
Company. The agreement provides (I) for a seven-year term commencing November 1,
1997; (ii) a minimum annual Base Compensation consisting of salary and bonus in
the aggregate amount of $395,000 subject to increases based on increases in the
Consumer Price Index as well as increases at the discretion of the board of
directors; (iii) typical health insurance coverage and an initial $2,000,000
face amount of "split dollar" life insurance insuring Dr. Grodman's life and
payable to his estate (excluding benefits required to be paid to the Company
pursuant to the split dollar plan) with $2,000,000 of additional coverage to be
applied for, which was obtained during fiscal 1999; (iv) the
23
leasing of an automobile for his use; (v) participation in fringe benefit,
bonus, pension, profit sharing, and similar plans maintained for the Company's
employees; (vi) disability benefits; (vii) certain termination benefits; and
(viii) in the event of termination due to a change in control of the Company, a
severance payment equal to 2.99 times Dr. Grodman's average annual compensation
during the preceding five years.
In consideration for Dr. Grodman's acceptance of the terms of the
employment agreement, the board of directors authorized the issuance to Dr.
Grodman of (a) 300,000 shares of the Company's Common Stock, partially subject
to forfeiture, (b) five-year incentive stock options ("ISOs") exercisable to
purchase 100,000 shares of Common Stock at $.790625 per share, and (C) ten-year
non-qualified stock options ("NQOs") exercisable to purchase 200,000 shares of
Common Stock at $.71875 per share. The ISOs are only exercisable while Dr.
Grodman is employed by the Company. The NQOs expire if Dr. Grodman's employment
agreement is terminated by the Company "For Cause" or at his option, "Without
Good Reason." See "Employee Incentive Stock Option Plan."
The 300,000 shares of Common Stock issued to Dr. Grodman are forfeitable
in part on the following basis if his employment agreement is terminated by the
Company "For Cause" or at Dr.
Grodman's option "Without Good Reason."
If Termination "For Cause"
or "Without Good Reason"
Occurs During the Following Number of Shares
Periods Forfeited
- --------------------------------- -----------------
May 1, 1997 through April 30, 1998 225,000 shs.
May 1, 1998 through April 30, 1999 150,000 shs.
May 1, 1999 through April 30, 2000 75,000 shs.
Also on May 13, 1997, Mr. Dubinett agreed to the terms of a new employment
agreement pursuant to which he will serve as executive vice president and chief
operating officer of the Company. The agreement provides (I) for a five and
one-half year term commencing May 1, 1997; (ii) a minimum annual Base
Compensation commencing November 1, 1997 consisting of salary and bonus in the
aggregate amount of $220,000 subject to increases based on increases in the
Consumer Price Index as well as increases at the discretion of the board of
directors; (iii) typical health insurance coverage and $500,000 face amount of
"split dollar" life insurance insuring Mr. Dubinett's life and payable to his
estate (excluding benefits required to be paid to the Company pursuant to the
split dollar plan)which amount was increased to $1,000,000 during fiscal 1999;
(iv) the leasing of an automobile for his use; (v) participation in fringe
benefit, bonus, pension, profit sharing, and similar plans maintained for the
Company's employees; (vi) disability benefits; (vii) certain termination
benefits; and (viii) in the event of termination due to a change in control of
the Company, a severance payment equal to 2.99 times Mr. Dubinett's average
annual compensation during the preceding five years.
In consideration for Mr. Dubinett's acceptance of the terms of the
employment agreement, the board of directors authorized the issuance to Mr.
Dubinett of (a) 240,000 shares of the Company's Common Stock, partially subject
to forfeiture and (b) ten-year ISOs exercisable to purchase 60,000 shares of
Common Stock at $.71875 per share. The ISOs are only exercisable while Mr.
Dubinett is employed by the Company.
The 240,000 shares of Common Stock issued to Mr. Dubinett. are forfeitable
in part on the following basis if his employment agreement is terminated by the
Company "For Cause" or at Mr. Dubinett's option "Without Good Reason."
24
If Termination "For Cause"
or "Without Good Reason"
Occurs During the Following Number of Shares
Periods Forfeited
- ---------------------------------- ---------------------
May 1, 1997 through April 30, 1998 180,000 shs.
May 1, 1998 through April 30, 1999 120,000 shs.
May 1, 1999 through April 30, 2000 60,000 shs.
Also on May 13, 1997, Mr. Singer agreed to the terms of a new employment
agreement pursuant to which he will serve as vice president and chief financial
officer of the Company. The agreement provides (I) for a five and one-half year
term commencing May 1, 1997; (ii) a minimum annual Base Compensation commencing
November 1, 1997 consisting of salary and bonus in the aggregate amount of
$220,000 subject to increases based on increases in the Consumer Price Index as
well as increases at the discretion of the board of directors; (iii) typical
health insurance coverage and $400,000 face amount of "split dollar" life
insurance insuring Mr. Singer's life and payable to his estate (excluding
benefits required to be paid to the Company pursuant to the split dollar plan)
which amount was increased to $800,000 in November 1999; (iv) the leasing of an
automobile for his use; (v) participation in fringe benefit, bonus, pension,
profit sharing, and similar plans maintained for the Company's employees; (vi)
disability benefits; (vii) certain termination benefits; and (viii) in the event
of termination due to a change in control of the Company, a severance payment
equal to 2.99 times Mr. Singer's average annual compensation during the
preceding five years.
In consideration for Mr. Singer's acceptance of the terms of the
employment agreement, the board of directors authorized the issuance to Mr.
Singer of (a) 200,000 shares of the Company's Common Stock, partially subject to
forfeiture and (b) ten-year ISOs exercisable to purchase 50,000 shares of Common
Stock at $.71875 per share. The ISOs are only exercisable while Mr. Singer is
employed by the Company.
The 200,000 shares of Common Stock issued to Mr. Singer are forfeitable in
part on the following basis if his employment agreement is terminated by the
Company "For Cause" or at Mr. Singer's option "Without Good Reason."
If Termination "For Cause"
or "Without Good Reason"
Occurs During the Following Number of Shares
Periods Forfeited
- -------------------------------------- --------------------
May 1, 1997 through April 30, 1998 150,000 shs.
May 1, 1998 through April 30, 1999 100,000 shs.
May 1, 1999 through April 30, 2000 50,000 shs.
Employee Stock Option Plan
- --------------------------
In July 1989, the Company's Board of Directors adopted the 1989 Employees
Stock Option Plan (the "1989 Plan") which was approved by shareholders in
November 1989. The 1989 Plan provides for the grant of options to purchase up to
666,667 shares of Common Stock. Under the terms of the 1989 Plan, options
granted thereunder may be designated as options which qualify for incentive
stock option treatment ("ISOs") under Section 422 of the Code, or options which
do not so qualify ("NQOs").
The 1989 Plan also grants the Board or a Stock Option Committee designated
by the Board, the discretion to grant stock appreciation rights ("SARs") in
connection with, or independent of, any grant of options under the 1989 Plan.
SARs give the holder the right to receive from the Company upon exercise an
amount equal to the excess of the aggregate fair market value on the date of
exercise of the number of shares of Common Stock as to which SARs are being
exercised over the aggregate exercise price for those shares payable either in
cash or Common Stock in the discretion of the Board or the Stock Option
Committee.
25
The 1989 Plan is administered by the Board or by a Stock Option Committee
designated by the Board of Directors. The Board or the Stock Option Committee,
as the case may be, has the discretion to determine the eligible employees to
whom, and the times and the price at which, options will be granted; whether
such options shall be ISOs or NQOs; the periods during which options will be
exercisable; and the number of shares subject to each option. The Board or
Committee shall have full authority to interpret the 1989 Plan and to establish
and amend rules and regulations relating thereto.
Under the 1989 Plan, the exercise price of an option designated as an ISO
shall not be less than the fair market value of the Common Stock on the date the
option is granted. However, in the event an option designated as an ISO is
granted to a 10% shareholder (as defined in the 1989 Plan) such exercise price
shall be at least 110% of such fair market value. Exercise prices of NQOs
options may be less than such fair market value. The aggregate fair market value
of shares subject to options granted to a participant which are designated as
ISOs which first become exercisable in any calendar year may not exceed
$100,000.
As described above, on May 13, 1997, the Board of Directors granted
five-year ISOs under the Plan to Dr. Grodman, exercisable to purchase 100,000
shares of the Company's Common Stock at an exercise price of $.790625 per share
(equal to 110% of the last sale price for the Common Stock on NASDAQ on May 12,
1997). The board also granted ten-year ISOs under the Plan to Mr. Dubinett and
Mr. Singer exercisable to purchase 60,000 shares and 50,000 shares of Common
Stock respectively at an exercise price of $.71875 per share (equal to the last
sale price for the Common Stock on NASDAQ on May 12, 1997). In addition, the
board granted ten-year NQOs to Dr. Grodman, exercisable to purchase 200,000
shares of Common Stock at an exercise price of $.71875 per share.
At the same May 3, 1997 directors' meeting, in order to improve employee
morale, the board canceled all other outstanding ISOs exercisable to purchase an
aggregate 448,710 shares of Common Stock at exercise prices ranging from $1.3434
to $3.00 per share, and granted new ten-year ISOs under the Plan to 23 employees
exercisable to purchase an aggregate 448,710 shares of Common Stock at an
exercise price of $.71875 per share. Included in this grant were ISOs issued to
Mr. Dubinett and Mr. Singer exercisable to purchase 153,334 shares and 116,667
shares respectively. (These ISOs replaced ISOs previously granted to said two
individuals to purchase 153,334 shares and 116,667 shares respectively at
exercise prices ranging from $1.3125 to $1.50 per share.)
Also on May 13, 1997, the Board of Directors granted five-year NQOs to 31
employees, exercisable to purchase an aggregate 136,100 shares of Common Stock
at $.71875 per share but only while the optionee was employed by the Company.
On May 13, 1997, the board also issued five-year warrants to each of its
three outside directors, exercisable to purchase 10,000 shares (30,000 in the
aggregate) of Common Stock at an exercise price of $.71875 per share, but only
while serving as a director. At the same time, the board reduced the exercise
price on warrants held by one outside director, John Roglieri, exercisable to
purchase 23,334 shares ranging from $3.00 per share to $3.75 per share to
$.71875 per share and issued five-year warrants to another outside director,
Gary Lederman, exercisable to purchase 5,200 shares at $.71875 per share.
No stock options were granted during fiscal 1998. On January 19, 1999, the
Board of Directors granted five-year NQOs to 15 employees exercisable to
purchase an aggregate 286,000 shares of Common Stock at an exercise price of
$1.00 per share (the last sale price for the Common Stock on NASDAQ on the
trading day immediately preceding the meeting) but only while the optionee was
employed by the Company. On June 30, 1999, the Board ratified the grant of
five-year NQOs to three employees, exercisable to purchase an aggregate 150,000
shares of Common Stock at prices ranging from $.594 to $.719 per share but only
while the optionee was employed by the Company. The option prices were based on
the market prices for the Common Stock on the respective dates when employment
commenced for each of the three employees.
See Note 9 of Notes to the Consolidated Financial Statements.
The following table sets forth certain information concerning unexercised
options for each of the executive officers named in the "Summary Compensation
Table." No options were exercised by any of such individuals in fiscal 1999.
26
1999 Fiscal Year-End Option Values
----------------------------------
Number of Unexercised Options Value of
At 1999 Fiscal Year-End Unexercised
In-The-Money
Name Exercisable Options at 10/31/99
- ---- ----------- -------------------
Unexercisable
-------------
Marc D. Grodman 200,000 -0- $ 50,000
100,000 -0- $ 17,813
Howard Dubinett 213,334 -0- $ 53,333
Sam Singer 166,667 -0- $ 41,667
Directors' Compensation
- -----------------------
Directors who are not employees of the Company are also paid a $1,000 per
quarter director's fee.
Item 12. - Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The following table sets forth information as of January 21, 1999 with
respect to the ownership of Common Stock by (I) each person known by the Company
to be the beneficial owner of more than 5% of its outstanding Common Stock, (ii)
each director of the Company, (iii) each executive officer of the Company, and
(iv) all directors and executive officers as a group. The percentages have been
calculated on the basis of treating as outstanding for a particular holder, all
shares of Common Stock outstanding on said date owned by such holders and all
shares of Common Stock issuable to such holder in the event of exercise or
conversion of outstanding options, warrants and convertible securities owned by
such holder at said date which are exercisable or convertible within 60 days of
such date.
Shares of
Name and Address of Common Stock Percentage
Beneficial Owner Beneficially Owned(1) Ownership
---------------- --------------------- ---------
Directors and Executive Officers*
Marc D. Grodman(2)...........................1,673,845 18.6%
Howard Dubinett (3)............................477,001 5.7%
Sam Singer(4)..................................377,667 4.6%
Frank DeVito(5)................................ 10,202 -
John Roglieri(6)............................... 31,667 -
Gary Lederman (7).............................. 25,200 -
Executive Officers and directors.............2,595,582 27.5%
as a group (six persons)(2)(3)(4)(5)(6)(7)
* The address of all of the Company's directors and ex ecutive officers is
c/o the Company, 481 Edward H. Ross Drive, Elmwood Par k, New Jersey
07407.
27
(1) Except otherwise noted, each holder named in the table has sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned.
(2) Includes 608,100 shares owned directly by Dr. Grodman, 549,678 shares
issuable upon conversion of Senior Preferred Stock and 300,000 shares
issuable upon exercise of options. Also includes 121,667 shares owned
directly and 54,400 shares issuable upon conversion of Senior Preferred
Stock held by Dr. Grodman's wife, Pam Grodman, and a Company controlled by
her and 40,000 shares owned by their minor children. Dr. Grodman disclaims
beneficial ownership of these 236,067 shares.
(3) Includes 263,667shares owned directly, and 213,334 shares issuable upon
exercise of options.
(4) Includes 211,000 shares owned directly, and 166,667 shares issuable upon
exercise of options.
(5) Includes 202 shares owned directly and 10,000 shares issuable upon
exercise of warrants.
(6) Includes 1,667 shares owned directly and 30,000 shares issuable upon
exercise of warrants.
(7) Includes 25,200 shares owned directly.
Item 13. - Certain Relationships and Related Transactions
-----------------------------------------------
In July 1989, the Company discontinued the operation of its Med-Mobile
Division. At such time, Dr. Grodman, as the Associated Physician, was indebted
to the Company in the amount of $235,354 in connection with the operation of
this division. Pursuant to an October 1, 1989 Settlement Agreement, Dr. Grodman
issued a $235,354 promissory note to the Company bearing interest at 10% per
annum and payable at the rate of $50,000 per annum in payment of this
indebtedness. On April 30, 1992, the Board of Directors amended this agreement,
in consideration for Dr. Grodman's personal guarantee of the Company's
$2,500,000 financing arrangement with Towers Financial Corporation, suspending
all rental and interest charges for periods subsequent to November 1, 1991. As
of October 31, 1999, $138,518 in outstanding principal, interest and van rentals
was due from Dr. Grodman.
On April 20, 1993, in order to facilitate the Company's 1993 proposed
public offering, Dr. Grodman canceled his pro-rata option contained in his
employment contract and all other outstanding options and warrants to purchase
shares of Common Stock held by Dr. Grodman, his wife and an affiliated entity
(the "Grodman Group") exercisable to purchase an aggregate 604,078 shares of
Common Stock at prices ranging from $1.4438 to $1.50 or an average price of
$1.47 per share, in consideration for the issuance to the Grodman Group of
604,078 shares of a new class of senior preferred stock, $.10 par value per
share ("Senior Preferred Stock"). Each share of Senior Preferred Stock had the
same voting rights (one vote per share), dividend rights and liquidation rights
as each share of Common Stock and for a period of 10 years after issuance, was
convertible into one share of Common Stock upon payment of a conversion price of
$1.50 per share. The 604,078 shares of Senior Preferred Stock were issued to the
Grodman Group on August 23, 1993.
On May 13, 1997 pursuant to a recapitalization, the Senior Preferred was
retired in exchange for a new class of Senior Preferred Stock issued to the
Grodman Group. The new Senior Preferred Stock is convertible into an aggregate
604,078 shares of Common Stock on or before May 1, 2007 at a conversion price of
$.75 per share and has the same voting rights (one vote per share), dividend
rights and liquidation rights as each share of Common Stock.
28
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 10-KSB
------------------------------------------------------------------
1. Financial Statements
The following financial statements of the Company are included in
Part II, Item 7
Page to Page
------------
Report of Independent Certified Public Accountants F-1
Balance Sheet - October 31, 1999 and 1998 F-2..F-3
Statement of Operations-
Years ended October 31, 1999, 1998 and 1997 F-4
Statement of Shareholders' Equity
Years ended October 31, 1999, 1998 and 1997 F-5
Statement of Cash Flows -
Years ended October 31, 1999, 1998 and 1997 F-6..F-7
Notes to Financial Statements- F-8..F-23
Schedule II -
Years ended October 31, 1999, 1998 and 1997 F-24.F-25
2. Reports on Form 8-K
No reports on Form 8-K have been filed during the Quarter ended October
31, 1999.
3. Exhibits
Exhibit Incorporated by
No. Item Reference to
3.1* Amended and Restated Certificate of Incorporation dated (A)
November 15, 1989
3.1.1* Amendment to Certificate of Incorporation dated (B)
October 4, 1991 (authorizing one-for-10 reverse stock split)
3.1.2* Amendment to Certificate of Incorporation dated (C)
August 23, 1993 (authorizing one-for-three reverse stock split)
3.1.3 Amendment to Certificate of Incorporation dated March 23, 1998
(creating Series A Senior Preferred Stock)
3.1.4 Amendment to Certificate of Incorporation dated March 31, 1998
(creating Series A Junior Participating Preferred Stock)
3.2* By-laws (D)
4.1* Form of Common Stock Certificate, $.01 par value (C)
10.1 Lease Agreement for Elmwood Park, New Jersey Premises,
as in effect at October 31, 1999
10.2 Employment Agreement between the Company and
Marc Grodman as in effect at December 31, 1999
29
10.3 Employment Agreement between the Company and
Howard Dubinett as in effect at December 31, 1999
10.4 Employment Agreement between the Company and
Sam Singer as in effect at December 31, 1999
10.5* The Company's 1989 Stock Option Plan (B)
10.6* Acquisition Agreement made as of April 9, 1998 for the (E)
acquisition by the Company of all of the outstanding capital
stock of Medilabs, Inc.
10.7* Rights Agreement dated as of March 31, 1998 including (F)
Exhibits thereto between the Company and American Stock
Transfer & Trust Company as Rights Agent
10.8 Asset Sale/Purchase Agreement made as of December 2, 1999
for the acquisition by the Company of the WEB Business
of the Medical Marketing Group, Inc.
10.9 Asset/Sale Purchase Agreement made as of December 14, 1999
for the acquisition by the Company's wholly-owned BRLI No. 1
Acquisition Corp. subsidiary of the Health Ford Business of
Right Body Foods, Inc.
10.10 Employment Agreement between the Company and Rebecca
Klafter, chief executive officer of Right Body Foods, Inc.,
dated December 14, 1999
21 Subsidiaries of the Company
The following are the Company's two wholly-owned subsidiaries:
Name under which it
Name State of Incorporation Conducts Business
- ---- ---------------------- -----------------
Medilabs, Inc. New York Medilabs
BRLI No. 1 Acquisition Corp. New Jersey Right Body Foods
The exhibits designated above with an asterisk (*) have previously been
filed with the Commission and, pursuant to 17 C.F.R. Secs. 201.24 and
240.12b-32, are incorporated by reference to the documents as indicated below.
(A) Incorporated by reference to exhibit filed with the Company's Registration
Statement on Form S-1 (File No. 33-31360).
(B) Incorporated by reference to exhibit filed with the Company's annual
report on Form 10KSB for the year ended October 31, 1992.
(C) Incorporated by reference to exhibit filed with the Company's Registration
Statement on Form SB-2 (File No. 33-68678).
(D) Incorporated by reference to exhibit filed with the Company's Registration
Statement on Form S-18 (File No. 33-5048-NY).
(E) Incorporated by reference to exhibit filed with the Company's report on
Form 8-K for April 22, 1998.
(F) Incorporated by reference to exhibit filed with the Company's report on
Form 8-A dated March 31, 1998.
30
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BIO-REFERENCE LABORATORIES, INC.
By: /S/ Marc D. Grodman
- ------------------------
Marc D. Grodman
Chairman of the Board, President,
Chief Executive Officer and Director
Dated:January 31, 2000
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.
/S/ Marc D. Grodman
- ------------------------
Marc D. Grodman
Chairman of the Board, President,
Chief Executive Officer and Director
January 31, 2000
/S/ Howard Dubinett
- ------------------------
Howard Dubinett
Executive Vice President,
Chief Operating Officer and Director
January 31, 2000
/S/ Sam Singer
- ------------------------
Sam Singer
Vice President, Chief Financial Officer,
Chief Accounting Officer and Director
January 31, 2000
/S/ Frank DeVito
- ------------------------
Frank DeVito
Director
January 31, 2000
/S/ John Roglieri
- ------------------------
John Roglieri
Director
January 31, 2000
/S/ Gary Lederman
- ------------------------
Gary Lederman
Director
January 31, 2000
31
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Bio-Reference Laboratories, Inc.
Elmwood Park, New Jersey
We have audited the accompanying consolidated balance sheets of
Bio-Reference Laboratories, Inc. and its subsidiary as of October 31, 1999 and
1998, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three fiscal years in the period ended
October 31, 1999. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated 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 consolidated financial
position of Bio-Reference Laboratories, Inc. and its subsidiary as of October
31, 1999 and 1998, and the consolidated results of their operations and their
cash flows for each of the three fiscal years in the period ended October 31,
1999, in conformity with generally accepted accounting principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
January 7, 2000
[Except for Note 22B as to
which the date is January 26, 2000
and Note 22C as to which the date
is January 19, 2000]
F-1
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
October 31,
-----------
1 9 9 9 1 9 9 8
------- -------
Assets:
Current Assets:
Cash and Cash Equivalents $ 2,128,474 $ 2,784,147
Accounts Receivable - Net 18,615,496 20,749,696
Inventory 572,279 587,101
Certificates of Deposit - Restricted -- 3,646,250
Other Current Assets 404,124 1,100,867
Deferred Tax Asset -- 344,000
------------ -----------
Total Current Assets 21,720,373 29,212,061
------------ -----------
Property and Equipment:
Automobiles 41,740 41,740
Medical Equipment 3,466,574 3,263,101
Leasehold Improvements 1,152,599 429,993
Furniture and Fixtures 550,554 508,630
------------ -----------
Totals - At Cost 5,211,467 4,243,464
Less: Accumulated Depreciation 3,039,128 2,022,928
------------ -----------
Property and Equipment - Net 2,172,339 2,220,536
------------ -----------
Other:
Certificate of Deposit - Restricted -- 33,750
Due from Related Party 138,518 187,118
Deposits 278,619 303,354
Goodwill 5,396,863 5,746,601
Intangible Assets 1,764,740 2,507,149
Other Assets 846,546 567,769
------------ -----------
Total Other 8,425,286 9,345,741
------------ -----------
Total Assets $ 32,317,998 $40,778,338
============ ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-2
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
October 31,
-----------
1 9 9 9 1 9 9 8
------- -------
Liabilities and Shareholders' Equity:
Current Liabilities:
Accounts Payable $ 5,540,787 $ 4,379,961
Accrued Salaries and Commissions 1,349,175 1,367,785
Accrued Expenses 849,463 625,814
Current Maturities of Long-Term Debt [Net of Discount] 1,215,671 2,071,058
Notes Payable - Banks 8,700,905 12,000,000
Capitalized Lease Obligation - Short-Term Portion 308,251 229,232
Taxes Payable 304,098 173,962
------------ -----------
Total Current Liabilities 18,268,350 20,847,812
------------ -----------
Long-Term Liabilities:
Long-Term Debt Less Current Maturities 2,000,000 3,306,617
Capitalized Lease Obligations - Long-Term Portion 680,538 400,975
------------ -----------
Total Long-Term Liabilities 2,680,538 3,707,592
------------ -----------
Commitments and Contingencies -- --
------------ -----------
Shareholders' Equity:
Preferred Stock, Par Value $.10 Per Share,
Authorized 1,062,589 Shares; None Issued -- --
Series A - Senior Preferred Stock, Par Value $.10 Per
Share, Authorized, Issued and Outstanding 604,078 Shares 60,408 60,408
Series A - Junior Participating Preferred Stock, Par Value
$.10 Per Share, Authorized 3,000 Shares; None Issued -- --
Common Stock, Par Value $.01 Per Share, Authorized
18,333,333 Shares; Issued and Outstanding 7,700,777 and
7,212,910 Shares at October 31, 1999 and 1998,
Respectively 77,008 72,129
Additional Paid-in Capital 23,294,673 22,998,015
Accumulated [Deficit] (11,613,433) (6,634,985)
------------ -----------
Totals 11,818,656 16,495,567
Deferred Compensation (449,546) (272,633)
------------ -----------
Total Shareholders' Equity 11,369,110 16,222,934
------------ -----------
Total Liabilities and Shareholders' Equity $ 32,317,998 $40,778,338
============ ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-3
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------
Y e a r s e n d e d
-----------------------------------------
O c t o b e r 3 1,
-----------------------------------------
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
Net Revenues $ 53,856,414 $ 46,553,730 $38,660,184
------------ ------------ -----------
Cost of Services:
Depreciation and Amortization 856,668 704,293 390,953
Employee Related Expenses 14,096,914 11,675,839 8,595,078
Reagents and Laboratory Supplies 6,974,857 5,567,394 4,777,325
Other Cost of Services 8,921,898 7,110,482 5,575,918
------------ ------------ ----------
Total Cost of Services 30,850,337 25,058,008 19,339,274
------------ ------------ ----------
Gross Profit 23,006,077 21,495,722 19,320,910
------------ ------------ ----------
General and Administrative Expenses:
Depreciation and Amortization 974,529 935,370 798,365
Other General and Administrative Expenses 15,677,788 13,410,446 11,346,007
Provision for Doubtful Accounts 6,855,221 6,084,941 5,291,507
Expenses of Impaired Assets 2,924,371 -- --
------------ ------------ ----------
Total General and Administrative Expenses 26,431,909 20,430,757 17,435,879
------------ ------------ ----------
[Loss] Income from Operations (3,425,832) 1,064,965 1,885,031
------------ ------------ ----------
Non-Recurring Gain on Sale of Intangible
Assets -- 333,900 2,025,689
------------ ------------ ----------
Other [Income] Expense:
Interest Expense 1,465,765 1,280,737 1,124,432
Interest Income (265,069) (440,155) (274,887)
Other Income (15,380) -- --
------------ ------------ ----------
Total Other Expense - Net 1,185,316 840,582 849,545
------------ ------------ ----------
[Loss] Income Before Income Taxes (4,611,148) 558,283 3,061,175
Provision for Income Tax Expense [Benefit] 367,300 (38,300) (138,740)
------------ ------------ ----------
Net [Loss] Income $ (4,978,448) $ 596,583 $3,199,915
============ ============ ==========
Net [Loss] Income Per Share $ (.68) $ .08 $ .48
============ ============ ==========
Net [Loss] Income Per Share - Assuming
Dilution $ (.68) $ .07 $ .43
============ ============ ==========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-4
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------
Series A Additional Total
Senior Preferred Stock Common Stock Paid-in Accumulated Deferred Shareholders'
Shares Amount Shares Amount Capital [Deficit]Compensation Equity
Balance - October 31, 1996 604,078 $60,408 6,300,280 $63,003 $22,433,297 $(10,431,483) $ (22,217) $12,103,008
Shares Issued for Deferred Compensation -- -- 815,000 8,150 337,919 -- (346,069) --
Warrants Issued for Deferred Compensation -- -- -- -- 13,423 -- (13,423) --
Shares Issued in Connection with an
Acquisition Agreement -- -- 54,096 541 127,320 -- -- 127,861
Shares Released from Escrow -- -- -- -- 55,201 -- -- 55,201
Amortization of Deferred Compensation -- -- -- -- -- -- 38,658 38,658
Net Income for the Year -- -- -- -- -- 3,199,915 -- 3,199,915
-------- ------- --------- ------- ---------- ------------ --------- -----------
Balance - October 31, 1997 604,078 60,408 7,169,376 71,694 22,967,160 (7,231,568) (343,051) 15,524,643
Amortization of Deferred Compensation -- -- -- -- -- -- 70,418 70,418
Shares Issued on Exercise of Warrants -- -- 43,534 435 30,855 -- -- 31,290
Net Income for the Year -- -- -- -- -- 596,583 -- 596,583
-------- ------- --------- ------- ---------- ------------ --------- -----------
Balance - October 31, 1998 604,078 60,408 7,212,910 72,129 22,998,015 (6,634,985) (272,633) 16,222,934
Shares Issued in Lieu of Compensation -- -- 25,000 250 25,688 -- -- 25,938
Shares Issued for Deferred Compensation -- -- 490,000 4,900 270,970 -- (275,870) --
Escrow Shares Cancelled -- -- (27,133) (271) -- -- -- (271)
Amortization of Deferred Compensation -- -- -- -- -- -- 98,957 98,957
Net [Loss] for the Year -- -- -- -- -- (4,978,448) -- (4,978,448)
-------- ------- --------- ------- ---------- ------------ --------- -----------
Balance - October 31, 1999 604,078 $60,408 7,700,777 $77,008 $23,294,673 $(11,613,433) $(449,546) $11,369,110
======== ======= ========= ======= =========== ============ ========= ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-5
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
Y e a r s e n d e d
O c t o b e r 3 1,
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
Operating Activities:
Net [Loss] Income $ (4,978,448) $ 596,583 $3,199,915
------------ ------------ ----------
Adjustments to Reconcile Net [Loss] Income to
Net Cash Provided by [Used for]
Operating Activities:
Depreciation and Amortization 1,831,197 1,639,663 1,189,318
Amortization of Deferred Compensation 98,957 70,418 38,658
Amortization of Deferred Interest 92,000 53,667 --
Amortization Reversal Due to Legal Settlement -- (56,859) --
Expenses of Impaired Assets 2,924,371 -- --
Provision for Doubtful Accounts 6,855,221 6,084,941 5,291,507
Other 25,667 -- --
Nonrecurring Gain on Sale of Intangible Assets -- (333,900) (2,025,689)
Deferred Income Taxes 344,000 (86,000) (258,000)
Changes in Assets and Liabilities
[Net of Effects from Acquisitions]:
[Increase] Decrease in:
Accounts Receivable (6,721,021) (10,990,642) (7,509,627)
Other Assets (278,777) (120,866) (105,866)
Inventory 14,822 117,625 (59,493)
Other Current Assets 696,743 636,478 142,504
Increase [Decrease] in:
Accounts Payable and Accrued Expenses 740,865 (642,123) (210,861)
Taxes Payable 130,136 (196,586) 136,030
------------ ------------ ----------
Total Adjustments 6,754,181 (3,824,184) (3,371,519)
------------ ------------ ----------
Net Cash - Operating Activities - Forward 1,775,733 (3,227,601) (171,604)
------------ ------------ ----------
Investing Activities:
Acquisition of Property and Equipment (392,102) (194,558) (143,613)
Purchase of Certificate of Deposit - Restricted -- (3,680,000) (3,680,000)
Maturities of Certificate of Deposit - Restricted 3,680,000 3,680,000 3,680,000
Cash Paid for Medilabs, Inc. Acquisition -- (4,000,000) --
Cash Acquired During Acquisition -- 86,412 --
Reduction [Additions] of Deposits 24,735 (3,985) 6,907
Repayment of Related Party Receivable 48,600 27,000 20,800
Payment for Acquisition of Intangible Assets -- (152,867) (44,375)
Proceeds from Sale of Intangible Assets -- -- 4,600,000
------------ ------------ ----------
Net Cash - Investing Activities - Forward $ 3,361,233 $ (4,237,998) $4,439,719
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-6
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
Y e a r s e n d e d
O c t o b e r 3 1,
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
Net Cash - Operating Activities - Forwarded $ 1,775,733 $ (3,227,601) $ (171,604)
------------ ------------ ----------
Net Cash - Investing Activities - Forwarded 3,361,233 (4,237,998) $4,439,719
------------ ------------ ----------
Financing Activities:
Proceeds from Long-Term Debt -- 4,000,000 --
Payments of Long-Term Debt (2,254,004) (1,001,368) (739,895)
Payments of Capital Lease Obligations (239,540) (178,954) (216,448)
Payments of Subordinated Notes Payable -- (1,339) (234,390)
[Decrease] Increase in Revolving Line of Credit (3,299,095) 4,386,292 (2,317,031)
Decrease in Restricted Cash -- 852,000 --
Proceeds from Exercise of Warrants -- 31,290 --
------------ ------------ ----------
Net Cash - Financing Activities (5,792,639) 8,087,921 (3,507,764)
------------ ------------ ----------
Net [Decrease] Increase in Cash and Cash
Equivalents (655,673) 622,322 760,351
Cash and Cash Equivalents - Beginning of Years 2,784,147 2,161,825 1,401,474
------------ ------------ ----------
Cash and Cash Equivalents - End of Years $ 2,128,474 $ 2,784,147 $2,161,825
============ ============ ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 1,437,602 $ 1,179,533 $1,118,540
Income Taxes $ 33,736 $ 120,407 $ 44,136
Supplemental Schedule of Non-Cash Investing and Financing Activities:
During 1997, the Company incurred four capital lease obligations totaling
$252,279 in connection with the acquisition of medical equipment.
In fiscal 1997, the Company issued debt in the amount of $108,000 in
connection with the acquisition of a customer list related to a 1994 agreement.
During 1998, the Company incurred two capital lease obligations totaling
$93,143 in connection with the acquisition of medical equipment.
During 1999, the Company incurred seven capital lease obligations totaling
$598,122 in connection with the acquisition of medical equipment and leasehold
improvements.
In May 1999, the Company recorded $625,000 in intangible assets and accrued
expenses related to an employment agreement.
[See Notes 7, 13, 16 and 22] for additional non-cash transactions]
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-7
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
[1] Organization and Business
Bio-Reference Laboratories, Inc. was incorporated on December 21, 1981 to
initially engage in the business of developing and marketing on-site medical
screening examinations. Since February 1987, its emphasis has been in clinical
laboratory operations, principally servicing the greater New York metropolitan
area and providing specialty services throughout the United States.
Bio-Reference Laboratories, Inc. and its wholly-owned subsidiary [the "Company"]
markets its clinical laboratory testing services directly to physicians,
hospitals, clinics, and other health facilities.
[2] Summary of Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary. All significant
intercompany accounts and transactions have been eliminated. The operations of
GenCare Biomedical Research Corporation are included in operations from January
1, 1995 through September 30, 1997 [See Note 20]. The operations of Medilabs,
Inc. are included in operations commencing April 9, 1998 [See Note 16].
Revenue Recognition - Revenues are recognized at the time the services are
performed. Revenues on the statements of operations are as follows:
Y e a r s e n d e d
----------------------------------
O c t o b e r 3 1,
----------------------------------
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
Gross Revenues $125,958,897 $102,351,588 $80,462,096
------------ ------------ -----------
Contractual Adjustments and Discounts:
Medicare/Medicaid Portion 38,779,145 33,064,535 23,090,659
Other 33,323,338 22,733,323 18,711,253
------------ ------------ ----------
Total Contractual Adjustments and
Discounts 72,102,483 55,797,858 41,801,912
------------ ------------ ----------
Net Revenues $ 53,856,414 $ 46,553,730 $38,660,184
------------ ============ ============ ===========
Contractual Credits and Provision for Doubtful Accounts - An allowance for
contractual credits is determined based upon a review of the reimbursement
policies and subsequent collections for the different types of receivables. An
allowance for doubtful accounts is determined based upon a percentage of total
receivables. The aggregate allowance, which is shown net against accounts
receivable, was $15,312,935, $13,494,475 and $8,564,436 as of October 31, 1999,
1998 and 1997, respectively.
Inventory - Inventory is stated at the lower of cost [on a first-in, first-out
basis] or market. Inventory consists primarily of clinical supplies.
Stock Options Issued to Employees - The Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," for
financial note disclosure purposes and continues to apply the intrinsic value
method of Accounting Principles Board ["APB"] Opinion No. 25, "Accounting for
Stock Issued to Employees," for financial reporting purposes.
Deferred Income Taxes - 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.
F-8
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- ------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
Deferred Income Taxes [Continued] - 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.
Net Income Per Share - Basic EPS is based on average common shares outstanding
and diluted EPS includes the effects of potential common stock, such as, options
and warrants, if dilutive. Securities that could potentially dilute earnings in
the future are listed in Notes 9 and 22.
Impairment - Certain long-term assets of the Company including goodwill are
reviewed at least annually as to whether their carrying value has become
impaired, pursuant to guidance established in Statement of Financial Accounting
Standards ["SFAS"] No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." 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 is
deemed to exist, the assets will be written down to fair value. Management also
re-evaluates the periods of amortization to determine whether subsequent events
and circumstances warrant revised estimates of useful lives. During the year
ended October 31, 1999, an impairment of $2,924,371 was recorded in connection
with assets acquired for the hemo-dialysis business. The breakdown of this
expense was an increase in the allowance for related accounts receivable of
approximately $2,000,000 and the write down of goodwill of approximately
$900,000 as a result of management's intent to no longer pursue the
hemo-dialysis business. Accordingly, the Company has made revisions to future
endeavors in this area.
Property and Equipment - 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.
The statements of operations reflect depreciation expense related to property
and equipment of $1,038,421, $820,226 and $419,462 for the years ended October
31, 1999, 1998 and 1997, respectively.
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.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Goodwill - Goodwill represents the excess of the cost of companies acquired over
the fair value of their net assets at dates of acquisition and is being
amortized on the straight-line method over 20 years. The statements of
operations reflect amortization expense related to goodwill for the years ended
October 31, 1999, 1998 and 1997 of $349,738, $254,022 and $203,490,
respectively. The balance sheet reflects accumulated amortization of $1,597,767
and $1,248,029 as of October 31, 1999 and 1998, respectively.
Intangible Assets - Intangible assets are amortized using the straight-line
method. The statements of operations reflect amortization expense related to
intangible assets of $443,038, $565,415 and $566,366 for the years ended October
31, 1999, 1998 and 1997, respectively. The balance sheet reflects accumulated
amortization of $2,271,436 and $2,173,034 as of October 31, 1999 and 1998,
respectively.
F-9
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- ------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
Intangible Assets [Continued] - A summary is as follows:
Accumulated Net of Accumulated
Amortization Amortization
October 31, October 31,
Intangible Asset Life in Years Cost 1 9 9 9 1 9 9 9
---------------- ------------- ---- ------- -------
Customer Lists 20 $ 1,449,202 $ 578,736 $ 870,466
Covenants Not-to-Compete 3 - 7.5 1,020,000 977,574 42,426
Employment Agreement 5 - 7 1,025,000 444,643 580,357
Costs Related to
Acquisitions 1 - 20 385,969 245,426 140,543
Patent 17 156,005 25,057 130,948
----------- ----------- -----------
Totals $ 4,036,176 $ 2,271,436 $ 1,764,740
------ =========== =========== ===========
Accumulated Net of Accumulated
Amortization Amortization
October 31, October 31,
Intangible Asset Life in Years Cost 1 9 9 8 1 9 9 8
---------------- ------------- ---- ------- -------
Customer Lists 20 $ 2,469,202 $ 620,143 $ 1,849,059
Covenants Not-to-Compete 3 - 7.5 1,200,000 965,279 234,721
Employment Agreement 5 400,000 366,669 33,331
Costs Related to
Acquisitions 1 - 20 454,976 205,260 249,716
Patent 17 156,005 15,683 140,322
----------- ----------- -----------
Totals $ 4,680,183 $ 2,173,034 $ 2,507,149
------ =========== =========== ===========
Advertising Costs -Advertising costs are expensed when incurred. Advertising
costs amounted to approximately $548,000, $819,000 and, $467,000 and for the
years ended October 31, 1999, 1998 and 1997, respectively.
Cash and Cash Equivalents - Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased. The
Company had $1,113,418 and $1,843,186 in cash equivalents at October 31, 1999
and 1998, respectively.
[3] Note Payables - Banks
In April 1998, the Company amended its revolving loan agreement with PNC Bank.
The maximum amount of the credit line available to the Company is the lesser of
(i) $14,000,000 or (ii) 50% of the Company's qualified accounts receivable [as
defined in the agreement] plus the face amount of any certificates of deposit
pledged as collateral for this loan minus the amount of the outstanding
principal balance of any term loans with the same bank. Interest on advances
which are collateralized by certificates of deposit will be at 2% above the
certificate of deposit interest rate. Interest on other advances will be at
prime plus 1.25%. The certificate of deposit interest rate was 5% through March
25, 1999. The credit line is collateralized by substantially all of the
Company's assets and the assignment of a $4,000,000 life insurance policy on the
president of the Company. The line of credit is available through March 2001 and
may be extended for annual periods by mutual consent, thereafter. The terms of
this agreement contain, among other provisions, requirements for maintaining
defined levels of capital expenditures and net worth, various financial ratios
and insurance coverage. As of October 31, 1999 and 1998, the Company was in
default of certain covenants, however, the Company subsequently received bank
waivers for these defaults [See Note 22B]. As of October 31, 1998, the Company
utilized $12,000,000 of this credit facility. As of October 31, 1999, the
Company utilized $8,700,905 of this credit facility.
Prime rate at October 31, 1999 and 1998 was 8.25% and 8.0%, respectively.
The weighted average interest rate on short-term borrowings outstanding as of
October 31, 1999 and 1998 was 9.22% and 8.75%, respectively.
F-10
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- ------------------------------------------------------------------------------
[4] Long-Term Debt
October 31,
-----------
1 9 9 9 1 9 9 8
------- -------
[A] Note Payable to LTC Service and Holdings, Inc.
Due April 2000. Interest imputed at 11.6%,
unsecured. $ 415,671 $ 1,323,667
[B] Notes Payable to PNC Bank. Due April 2002.
Interest at prime plus 2% for the unsecured portion
and prime plus 1.6% for the secured portion. 2,800,000 3,600,000
Note Payable to PNC Bank. Due October 1999.
Interest at prime plus 1.00%. -- 86,424
Notes Payable to PNC Bank. Due July 2000.
Interest at prime plus 1.00% and certificate of
deposit rate plus 2%. -- 315,259
Other -- 52,325
---------- -----------
Totals 3,215,671 5,377,675
Less: Current Maturities 1,215,671 2,071,058
---------- -----------
Long-Term Debt $2,000,000 $ 3,306,617
-------------- ========== ===========
[A] On April 9, 1998, the Company acquired the assets and certain liabilities of
Medilabs, Inc. from LTC Service and Holdings, Inc. The purchase price consisted
of $4,000,000 cash plus a $1,500,000 promissory note payable without interest in
three semi-annual installments commencing April 1999. Interest was imputed at a
rate of 11.6% on this note.
[B] In April 1998, the Company entered into an agreement to borrow $4,000,000
from PNC Bank. The note is payable in forty-seven principal installments of
$66,667 commencing May 1, 1998 and one final balloon payment. The unsecured
portion of $2,000,000 bears interest at an annual rate of 10.25% to 10.5%. The
secured portion of $2,000,000 bears interest at an annual rate of 9.85% to
10.10%. This note is in accordance with the provisions of the Company's
revolving loan agreement [See Note 3] with the same lender.
Maturities of debt at October 31, 1999 in each of the next five years are as
follows:
2000 $ 1,215,671
2001 800,000
2002 1,200,000
2003 --
2004 --
-----------
Total $ 3,215,671
----- ===========
[5] Related Party Transactions
On October 1, 1989, an unsecured promissory note was received from Dr. Marc
Grodman ["Dr. Grodman"], president of the Company, in exchange for a receivable
in the amount of $235,354. As of October 31, 1999 and 1998, $138,518 and
$187,118 was remaining on the note. This note is non-interest bearing and has no
fixed terms.
F-11
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- ------------------------------------------------------------------------------
[6] Income Taxes
The reconciliation of income tax from continuing operations computed at the U.S.
federal statutory tax rate to the Company's effective income tax rate is as
follows:
October 31,
-----------------------------
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
U.S. Federal Statutory Rate (34.0)% 34.0 % 34.0%
State and Local Income Taxes, Net of U.S.
Federal Income Tax Benefit -- % 9.0 % 10.0%
Other -- % (11.1)% (7.5)%
Utilization of Net Operating Loss Carryforwards -- % (38.8)% (41.0)%
Change in Valuation Allowance 42.0 % --% -- %
------ ------ -------
Actual Rate 8.0 % (6.9)% (4.5)%
----------- ====== ====== =======
The provision for income taxes shown in the consolidated statements of
operations consist of the following:
October 31,
-------------------------------------
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
Current:
Federal $ -- $ 16,200 $ 79,947
State and Local 23,300 31,500 39,313
Deferred:
Federal 272,000[1] (68,000) (204,000)
State and Local 72,000[1] (18,000) (54,000)
---------- ---------- ----------
Total Provision for Income Taxes $ 367,300 $ (38,300) $ (138,740)
-------------------------------- ========== ========== ==========
[1] Increase in deferred tax valuation allowance.
For the year ended October 31, 1998, the Company utilized approximately $500,000
of net operating loss carryforwards which resulted in a tax benefit for federal
and state purposes of approximately $200,000. For the year ended October 31,
1997, the Company utilized approximately $3,600,000 of net operating loss
carryforwards which resulted in a tax benefit for federal and state purposes of
approximately $1,450,000.
At October 31, 1999, the Company had net operating loss carryforwards of
approximately $9,345,000 for federal income tax purposes, which expire in years
2006 through 2014. In addition, the Company had net operating losses for state
purposes. The Company operates in several states, however, most of its business
is conducted in the New Jersey and New York area. The following summarizes the
operating loss carryforwards by year of expiration:
Federal New Jersey New York
Expiration Date Amount Amount Amount
2000 $ -- $ 2,375,000 $ --
2006 825,000 -- 383,000
2007 1,255,000 -- 1,253,000
2008 2,375,000 -- 2,373,000
2009 390,000 -- --
2014 4,500,000 4,500,000 4,500,000
---------- ----------- ----------
Total $9,345,000 $ 6,875,000 $8,509,000
----- ========== =========== ==========
F-12
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- ------------------------------------------------------------------------------
[6] Income Taxes [Continued]
At October 31, 1998, the Company had a deferred tax asset of approximately
$2,000,000 and a valuation allowance of approximately $1,656,000 related to the
asset, a decrease of $286,000 since October 31, 1997. The deferred tax asset
primarily relates to net operating loss carryforwards.
At October 31, 1999, the Company had a deferred tax asset of approximately
$4,000,000 and a valuation allowance of approximately $4,000,000 related to the
asset, an increase of $2,344,000 since October 31, 1998. The deferred tax asset
primarily relates to net operating loss carryforwards.
[7] Capital Transactions
[A] Preferred Stock and Common Stock - The Company is authorized to issue an
aggregate of 1,669,667 shares of preferred stock, $.10 par value. On April 20,
1993, in order to facilitate the Company's 1993 proposed public offering, Dr.
Grodman canceled his pro-rata option contained in his employment contract and
all other outstanding options and warrants to purchase shares of Common Stock
held by Dr. Grodman, his wife and an affiliated entity (the "Grodman Group")
exercisable to purchase an aggregate 604,078 shares of Common Stock at prices
ranging from $1.4438 to $1.50 or an average price of $1.47 per share, in
consideration for the issuance to the Grodman Group of 604,078 shares of a new
class of senior preferred stock, $.10 par value per share ("Senior Preferred
Stock"). Each share of Senior Preferred Stock had the same voting rights (one
vote per share), dividend rights and liquidation rights as each share of Common
Stock and for a period of 10 years after issuance, was convertible into one
share of Common Stock upon payment of a conversion price of $1.50 per share. The
604,078 shares of Senior Preferred Stock were issued to the Grodman Group on
August 23, 1993. On May 13, 1997, pursuant to a recapitalization, the Senior
Preferred Stock was retired in exchange for a new class of Series A Senior
Preferred Stock issued to the Grodman Group. The new Series A Senior Preferred
Stock is convertible into an aggregate 604,078 shares of Common Stock on or
before May 1, 2007 at a conversion price of $.75 per share and has the same
voting rights [one vote per share], dividend rights and liquidation rights as
each share of Common Stock.
Holders of the Company's Common Stock are entitled to one vote per share on
matters submitted for shareholder vote. Holders are also entitled to receive
dividends ratably, if declared. In the event of dissolution or liquidation,
holders are entitled to share ratably in all assets remaining after payment of
liabilities.
On March 31, 1998, the Company's Board of Directors adopted a Shareholder Rights
Plan and declared a dividend distribution of one Right for each outstanding
share of Common Stock and each outstanding share of Series A Senior Preferred
Stock. Each Right entitles the registered holder to purchase one one-
ten-thousandth of a share of Series A Junior Participating Preferred Stock [the
"Junior Preferred Stock"] from the Company at a price of $4.00. Because of the
nature of the dividend, liquidation and voting rights of the Junior Preferred
Stock, the value of each one-ten-thousandth of a share of Junior Preferred Stock
is intended to approximate the value of one share of Common Stock. Junior
Preferred Stock purchasable upon exercise of the Rights will not be redeemable.
Each outstanding share of Junior Preferred Stock will be entitled to a minimum
preferential quarterly dividend of $.05 per share and will be entitled to an
aggregate dividend of 10,000 times the dividend declared per share of Common
Stock. In the event of liquidation, the holders of the Junior Preferred Stock
will be entitled to a minimum preferential liquidation payment of $10,000 per
share and will be entitled to an aggregate payment of 10,000 times the payment
made per share of Common Stock. Each share of Junior Preferred Stock will have
10,000 votes, voting together with the Common Stock and the Series A Senior
Preferred Stock. In the event of any merger, consolidation or other transaction
in which the Common Stock is exchanged, each share of Junior Preferred Stock
will be entitled to receive 10,000 times the amount received per share of Common
Stock. The Rights are protected by customary anti-dilution provisions. The
Rights are not exercisable unless any one of certain triggering events occur
including the acquisition by an individual or entity and their associates of 25%
or more of the outstanding shares of Common Stock. The Shareholder Rights Plan
is designed to protect the Company and its shareholders from coercive, unfair
and inadequate takeover bids and practices. The Plan is designed to strengthen
the Board of Directors' ability to deter a person or group from attempting to
gain control of the Company without offering a fair price and equal treatment to
all shareholders.
F-13
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- ------------------------------------------------------------------------------
[7] Capital Transactions [Continued]
[B] Equity Transactions for Services - In May 1997, the Company issued 815,000
shares of common stock and warrants to purchase 58,534 shares of the Company's
common stock at a price of $.71875 in connection with employment and consulting
agreements and a two year extension on a loan agreement. Included in the 815,000
shares issued were 740,000 shares to three officers of the Company. The shares
are forfeitable in part in various amounts if the employee's employment is
terminated "for cause" or at his option "without good reason" prior to May 1,
2000.
In fiscal 1999, the Company issued 515,000 shares of common stock and options to
purchase 436,000 shares of the Company's common stock at prices ranging between
$.594 and $.719 in connection with employment and consulting agreements.
[8] Income Per Share
For the Year Ended October 31, 1999
-------------------------------------
Per Share
Income Shares Amount
Basic EPS:
[Loss] Income Available to Common
Stockholders $(4,978,448) 7,357,235 $ (.68)
Effect of Dilutive Securities:
Convertible Preferred Stock -- --
Warrants/Options -- --
----------- ----------
Diluted EPS:
[Loss] Income Available to Common
Stockholders Plus Assumed Conversions $(4,978,448) 7,357,235 $ (.68)
----------- ---------- ---------
Incentive stock options to purchase 612,041 shares of common stock and
non-incentive stock options and warrants to purchase 954,100 shares of common
stock were outstanding at October 31, 1999 but were not included in the
computation of diluted EPS because they were antidilutive. These securities
could potentially dilute earnings per share in the future.
For the Year Ended October 31, 1998
--------------------------------------
Per Share
Income Shares Amount
Basic EPS:
Income Available to Common Stockholders $ 596,583 7,196,299 $ .08
Effect of Dilutive Securities:
Convertible Preferred Stock -- 278,137
Warrants/Options -- 492,568
----------- ----------
Diluted EPS:
Income Available to Common Stockholders
Plus Assumed Conversions $ 596,583 7,967,004 $ .07
----------- ---------- ----------
Warrants and options to purchase 5,448,339 shares of common stock at $3.00 to
$6.75 per share were outstanding at October 31, 1998 but were not included in
the computation of diluted EPS because the exercise price of these items was
greater than the average market price of the common shares. These securities
could potentially dilute earnings per share in the future. Warrants to purchase
5,253,339 shares of common stock expired in November 1998.
F-14
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
- ------------------------------------------------------------------------------
[8] Income Per Share [Continued]
For the Year Ended October 31, 1997
------------------------------------
Per Share
Income Shares Amount
Basic EPS:
Income Available to Common Stockholders $3,199,915 6,685,155 $ .48
Effect of Dilutive Securities:
Convertible Preferred Stock -- 244,108
Warrants/Options -- 450,650
---------- ----------
Diluted EPS:
Income Available to Common Stockholders
Plus Assumed Conversions $3,199,915 7,379,913 $ .43
---------- ---------- -----------
Warrants and options to purchase 5,651,673 shares of common stock at $1.50 to
$6.75 per share were outstanding at October 31, 1997 but were not included in
the computation of diluted EPS because the exercise price of these items was
greater than the average market price of the common shares. These securities
could potentially dilute earnings per share in the future.
[9] Stock Options and Warrants
[A] Employment Incentive Stock Options - In November 1989, the shareholders
approved and the Company adopted the 1989 Employee Stock Option Plan ["1989
Plan"] which provides for the granting of 666,667 shares of common stock. Under
the terms of its stock option plans, incentive stock options to purchase shares
of the Company's common stock are granted at a price not less than the fair
market value of the common stock at the date of grant. These stock options are
exercisable up to ten years from the date of grant. At October 31, 1999 and
1998, there were 12,291 shares reserved for future grants under the plan. No
stock appreciation rights have been granted. In May 1997, the Company's board of
directors approved the cancellation of all of the outstanding employee incentive
stock options for new options at an exercise price of $.71875 which reflected
fair market value. Following is a summary of transactions:
Weighted Average
Shares Under Exercise Price
Options Per Share
Outstanding at October 31, 1996 482,044 $ .72
Granted During the Year 210,000 .76
Expired During the Year (34,334) .72
Exercised During the Year -- --
--------- ------
Outstanding and Eligible for Exercise at
October 31, 1997 657,710 .73
------------------
Granted During the Year -- --
Expired During the Year (3,334) .72
Exercised During the Year (8,334) .72
--------- ------
Outstanding and Eligible for Exercise at
October 31, 1998 646,042 .73
-----------------
Granted During the Year -- --
Expired During the Year (34,001) .72
Exercised During the Year -- --
--------- ------
Outstanding and Eligible for Exercise at
October 31, 1999 612,041 $ .73
------------------ ======= ======
F-15
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- ------------------------------------------------------------------------------
[9] Stock Options and Warrants [Continued]
Outstanding and Exercisable Options
-----------------------------------
Weighted
Average
Number of Remaining Weighted Average
Shares Under Contractual Exercise Price
Exercise Price Range Option Life Per Share
- -------------------- ------ ---- ---------
$.71875 to $.790625 Per Share 612,041 8 Years $ .73
The weighted average grant date fair value of options granted during the year
ended October 31, 1997 was $.2486 per share.
The Company accounts for these stock-based compensation awards to employees
under the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees." Total compensation
cost recognized against income for stock-based employee compensation awards was
$-0- for the years ended October 31, 1999, 1998 and 1997.
[B] Non Incentive Stock Options and Warrants - Non-incentive stock options and
warrants may be granted to employees or non-employees at fair market value or at
a price less than fair market value of the common stock at the date of grant.
The following is a summary of transactions:
Weighted
Shares Under Average
Options Exercise Price
and Warrants Per Share
------------ ---------
Outstanding and Eligible for Exercise at
October 31, 1996 6,022,380 $ 4.63
-----------------
Granted During the Year 381,300 .72
Expired During the Year (584,871) 1.45
Exercised During the Year -- --
---------- ------
Outstanding and Eligible for Exercise at
October 31, 1997 5,818,809 4.71
------------------
Granted During the Year -- --
Expired During the Year (206,668) 5.00
Exercised During the Year (35,200) .72
---------- ------
Outstanding and Eligible for Exercise at
October 31, 1998 5,576,941 4.73
-------------------
Granted During the Year 436,000 .87
Expired During the Year (5,058,841) 5.03
Exercised During the Year -- --
---------- ------
Outstanding and Eligible for Exercise at
October 31, 1999 954,100 $ 1.37
------------------- ========== ======
F-16
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
- ------------------------------------------------------------------------------
[9] Stock Options and Warrants [Continued]
During the year ended October 31, 1997, 35,200 shares under warrants were
granted to three non- employees and 23,334 shares under warrants were canceled
for new warrants at a price of $.71875 which represents fair market value at the
time of grant. The fair value of each warrant granted was estimated on the date
of grant using the Black-Scholes option-pricing model with the following
assumptions: a weighted average risk-free interest rate of 6%, a weighted
average expected life of 1 year based on Company expectations and the required
minimum two year holding period, and a weighted average expected volatility of
84.09%. Dividends are not expected to be available to shareholders during the
expected life of the warrants. The fair value of these options issued in May of
1997 of $13,423 [$.2486 per share] has been accounted for as deferred
compensation for the year ended October 31, 1997 and is being expensed over the
term of the agreements. Total compensation expense recognized against income for
this deferred compensation was $2,848, $2,848 and $2,254, respectively, for the
years ended October 31, 1999, 1998 and 1997.
During the years ended October 31, 1999 and 1997, 436,000 and 346,100 shares,
respectively, under options were granted to employees. The Company accounts for
these options under the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees."
Total compensation cost recognized against income for employee nonincentive
stock option and warrants was $-0- for the years ended October 31, 1999, 1998
and 1997.
Outstanding and Exercisable Options and Warrants
------------------------------------------------
Weighted
Number of Average
Shares Under Remaining Weighted Average
Options and Contractual Exercise Price
Exercise Price Range Warrants Life Per Share
- -------------------- -------- ---- ---------
Options - $.594 to $.719 Per Share 498,100 5 Years $ .69
Options - $1.00 Per Share 286,000 4 Years $ 1.00
Options - $3.00 Per Share 20,000 1 Year $ 3.00
Options - $4.125 Per Share 150,000 Expires 4/00 $ 4.125
----------
954,100
These options have weighted average remaining contractual lives of three years.
The weighted average grant date fair value of options granted during the year
ended October 31, 1997 was $.2486 per share. The weighted average grant date
fair value of options granted during the year ended October 31, 1999 was $.3485
per share.
[A] and [B] Pro Forma - Had compensation cost been determined on the basis of
fair value pursuant to SFAS No. 123, for the 612,041 shares under employee
incentive stock options and the 436,000 and 346,100 shares under employee
nonincentive stock options and warrants for the years ended October 31, 1999,
1998 and 1997, net income and earnings per share would have been as follows:
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
Net [Loss] Income:
As Reported $(4,978,448) $ 596,583 $3,199,915
=========== =========== ==========
Pro Forma $(5,130,411) $ 596,583 $2,950,000
=========== =========== ==========
Basic [Loss] Earnings Per Share:
As Reported $ (.68) $ .08 $ .48
========== =========== ==========
Pro Forma $ (.70) $ .08 $ .44
========== =========== ==========
Diluted [Loss] Earnings Per Share:
As Reported $ (.68) $ .07 $ .43
========== =========== ==========
Pro Forma $ (.70) $ .07 $ .40
========== =========== ==========
F-17
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
- ------------------------------------------------------------------------------
[9] Stock Options and Warrants [Continued]
[B] Non Incentive Stock Options and Warrants [Continued]
The fair value used in the pro forma data was estimated by using an option
pricing model which took into account as of the grant date, the exercise price
and the expected life of the option, the current price of the underlying stock
and its expected volatility, expected dividends on the stock and the risk-free
interest rate for the expected term of the option. The following is the average
of the data used for the following items.
Risk-Free Expected Expected
Year Ended Interest Rate Expected Life Volatility Dividends
October 31, 1997 6% 1 Year 84.09% None
October 31, 1999 6% 1 Year 97.89% -104.28% None
[10] Employment Contracts and Consulting Agreements
The Company has entered into various employment contracts and consulting
agreements for periods ranging from one to seven years. At October 31, 1999, the
aggregate minimum commitment under these contracts and agreements, excluding
commissions or consumer price index increases, was approximately as follows:
October 31,
2000 $ 1,526,000
2001 1,345,000
2002 1,174,000
2003 710,000
2004 683,000
Thereafter 277,000
-----------
Total $ 5,715,000
----- ===========
Some of these agreements provide bonuses and commissions based on a percentage
of collected revenues ranging from 1% to 10% on accounts referred by or serviced
by the employee or consultant.
In addition to the above, eight employment agreements which provide for annual
aggregate minimum commitments of approximately $630,000 have no termination
dates.
The Company pays premiums on life insurance policies for three key officers. In
the event that any of these officers leave the Company, they are required to pay
the Company back for premiums paid on their policies. In the event of death, the
benefit paid to the beneficiary is reduced by the amount of premiums paid on
behalf of the individual by the Company. At October 31, 1999 and 1998, $695,726
and $567,769 is included in other assets which represents the amount of premiums
paid to date. At October 31, 1999 and 1998, cash surrender values on these
policies were in excess of amounts receivable.
F-18
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
- ------------------------------------------------------------------------------
[11] Capitalized Lease Obligations
The Company leases various assets under capital leases expiring in 2004 as
follows:
October 31,
-----------
1 9 9 9 1 9 9 8
------- -------
Medical Equipment $1,325,238 $1,168,027
Furniture and Fixtures -- 11,565
--------- ---------
Totals 1,325,238 1,179,592
Less: Accumulated Depreciation 385,032 461,259
--------- ---------
Net $ 940,206 $ 718,333
--- ========= ==========
Depreciation expense on assets under capital leases was $202,589, $198,280 and
$83,853 for the years ended October 31, 1999, 1998 and 1997, respectively.
Aggregate future minimum rentals under capital leases are:
Years ended
October 31,
2000 $ 430,580
2001 331,333
2002 232,001
2003 185,164
2004 87,771
Thereafter --
----------
Total 1,266,849
Less: Interest 278,060
----------
Present Value of Minimum Lease Payments $ 988,789
--------------------------------------- ==========
[12] Commitments and Contingencies
The Company leases various office and laboratory facilities and equipment under
operating leases expiring from 1999 to 2006. Several of these leases contain
renewal options for three to five year periods.
Total expense for property and equipment rental for the years ended October 31,
1999, 1998 and 1997 was $2,848,225, $2,180,112 and $1,796,839, respectively.
There were no contingent rental amounts due through October 31, 1999.
Aggregate future minimum rental payments on noncancelable operating leases
(exclusive of several month to month leases aggregating approximately $1,000,000
annually) are as follows:
Property Equipment
October 31,
2000 $ 789,619 $ 770,065
2001 613,292 556,647
2002 470,400 325,690
2003 442,789 230,479
2004 166,463 121,171
Thereafter 8,017 --
---------- -----------
Totals $2,490,580 $ 2,004,052
------ ========== ===========
F-19
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
- ------------------------------------------------------------------------------
[13] Litigation
In the normal course of 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 [See Note 22C].
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 believes
the overpayment will be approximately $150,000, of which approximately $75,000
has been remitted to Medicare. 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.
On December 30, 1996, the Company commenced a lawsuit against SmithKline Beecham
Clinical Laboratories ["SBCL"] alleging that SBCL materially and repeatedly
breached its obligations and its representations and warranties made in the
Asset Agreement and the Non-Competition Agreement pursuant to which the Company
purchased certain assets from SBCL and claims unspecified amounts of
compensatory and punitive damages and related costs. As a result of its
allegations against SBCL, the Company did not make any payments with respect to
the $600,000 note payable. In October 1998, the Company and SBCL exchanged
general releases for this lawsuit and no executory obligations were imposed upon
the Company by the settlement agreement. Therefore, the Company cancelled the
$600,000 note payable as well as the related goodwill of approximately $550,000.
The settlement was subject to the consent of the Company's principal lending
bank which consent was received in January 1999. In addition, management decided
to no longer pursue the hemo-dialysis business and accordingly made revisions to
its future business endeavors. Accordingly, the Company recorded an impairment
of approximately $2,900,000 on related hemo-dialysis assets in fiscal 1999 of
which $2,000,000 was for related accounts receivable and $900,000 was for
goodwill [See Note 2].
[14] Insurance
The Company maintains professional liability insurance of $3,000,000 in the
aggregate, with a per occurrence limit of $1,000,000 . In addition, the Company
maintains excess commercial insurance of $2,000,000 per occurrence. The Company
believes, but cannot assure, that its insurance coverage is adequate for its
current business needs. A determination of Company liability for uninsured or
underinsured acts or omissions could have a material adverse affect on the
Company's operations.
[15] Significant Risks and Uncertainties
[A] Concentrations of Credit Risk - Cash - At October 31, 1999, the Company had
approximately $1,846,000 in cash and certificate of deposit balances at
financial institutions which were in excess of the federally insured limits.
At October 31, 1998, the Company had approximately $6,545,000 in cash and
certificate of deposit balances at financial institutions which were in excess
of the federally insured limits. Approximately $3,680,000 of this amount
represented collateral for demand loans with the same financial institution.
[See restricted certificates of deposit on consolidated balance sheet].
F-20
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14
- ------------------------------------------------------------------------------
[15] Significant Risks and Uncertainties [Continued]
[B] Concentration of Credit Risk - Accounts Receivable - 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 and establishes an allowance for
uncollectible accounts and as a consequence, believes that its accounts
receivable credit risk exposure beyond such allowance is not material to the
financial statements.
A number of proposals for legislation continue to be under discussion which
could substantially reduce Medicare and Medicaid reimbursements to clinical
laboratories. Depending upon the nature of regulatory action, and the content of
legislation, 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.
[16] Acquisitions
On April 9, 1998, the Company acquired the assets and certain liabilities of
Medilabs, Inc. ["MLI"] from LTC Service and Holdings, Inc. ["Holdings"], a
wholly-owned subsidiary of Long-Term Care Services, Inc. ["LTC"]. The
acquisition was effective April 9, 1998 for accounting purposes and is being
accounted for under the purchase method. The operations of Medilabs, Inc. are
included in the Company's results of operations commencing April 9, 1998. In
connection with the acquisition of MLI, certain key employees signed employment
agreements with the Company for an unspecified period which included a six month
non-competition clause. In addition, LTC, Holdings, two affiliated corporations
and an employee of LTC signed non-competition agreements.
[17] Fair Value of Financial Instruments
For certain financial instruments, including cash and cash equivalents, trade
receivables, trade payables, and short-term debt, it was estimated that the
carrying amount approximated fair value for the majority of these items because
of their short maturities. The fair value of the Company's long-term debt is
estimated based on the quoted market prices for similar issues or by discounting
expected cash flows at the rates currently offered to the Company for debt of
the same remaining maturities.
O c t o b e r 3 1,
-----------------------------------------
1 9 9 9 1 9 9 8
-------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Long-Term Debt $2,000,000 $2,000,000 $3,306,617 $3,306,617
Capitalized Lease Obligations $ 680,538 $ 654,764 $ 400,975 $ 381,637
Due to the non-interest bearing nature and unspecified payment terms, it was not
practicable to estimate the fair value of amounts due from related parties [See
also Note 5].
[18] Health Insurance Plan
The Company has a limited self-funded health insurance plan for its employees
under which the Company pays the initial $50,000 of covered medical expenses per
person per year. The Company has a contract with an insurance carrier for any
excess. Health insurance expense for the years ended October 31, 1999, 1998 and
1997, totaled approximately $287,000, $279,000 and $232,000, respectively.
F-21
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #15
- ------------------------------------------------------------------------------
[19] Employee Benefit Plan
The Company sponsors the Bio-Reference Laboratories, Inc. 401(k) Profit-Sharing
Plan. Employees become eligible for participation after attaining the age of
eighteen and completing one year of service. Participants may elect to
contribute up to ten percent of their compensation, as defined in the Plan
Adoption Agreement, to a maximum allowed by the Internal Revenue Service. The
Company may choose to make a matching contribution to the plan for each
participant who has elected to make tax- deferred contributions for the plan
year, at a percentage determined each year by the Company. For the year ended
October 31, 1999, 1998 and 1997, the Company elected not to make matching
contributions to the plan. If the Company elects to match participant
contributions in the future, the employer contribution will be fully vested
after the fifth year of service.
[20] Non-recurring Gain on Sale of Intangible Assets
On September 30, 1997, the Company entered into an agreement to sell certain
customer lists, its "GenCare" tradename and rights under two GenCare contracts
to another laboratory for $4,600,000 in cash and $1,400,000 payable in four
equal installments every six months beginning April 1, 1998, provided however
that certain target revenues are reached. If target revenues are not reached
amounts payable under the contract will be decreased up to a maximum of
$700,000. The Company and certain of its officers entered into a noncompetion
agreement with the purchaser as part of this agreement. The Company recorded a
non-recurring gain of $2,025,689 and $333,900 during October 31, 1997 and 1998,
respectively, related to this sale. The $700,000 in contingent receivables were
included in the calculation of gain on this sale for the year ended October 31,
1998 when target revenues were reached. This receivable was collected in fiscal
1999.
[21] New Authoritative Accounting Pronouncements
The Financial Accounting Standards Board ["FASB"] issued Statement of Financial
Accounting Standards ["SFAS"] No. 137, "Accounting for Derivative Instruments
and Hedging Activities-Deferral of Effective Date of FASB Statements No. 133."
The Statement defers for one year the effective date of FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The rule now
will apply to all fiscal quarters of all fiscal years beginning after June 15,
2000. The Statement will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The adoption of SFAS No. 137 is not expected to have a material impact on the
Company's consolidated results of operation, financial position or cash flows.
[22] Subsequent Events
[A] Asset Purchase Agreements - On December 2, 1999, the Company entered into an
agreement to purchase certain assets utilized by a company that is engaged in
selling Internet website design and other Internet-oriented services to medical
professionals and other healthcare professionals. Bio-Reference Laboratories,
Inc. 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 is approximately $200,000. The Company has 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 $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.
F-22
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #16
- ------------------------------------------------------------------------------
[22] Subsequent Events [Continued]
[A] Asset Purchase Agreements [Continued] - On December 14, 1999, the Company
entered into an agreement to purchase certain assets utilized by a company that
is 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 Company entered into an employment
agreement in connection with this purchase. The fair value of the 200,000 shares
of common stock is approximately $200,000. The Company also entered in an
employment agreement for an annual salary of $150,000 plus commissions and a
signing bonus of $100,000 in 24 monthly installments.
[B] Bank Waivers - On January 26, 2000, the Company obtained from PNC Bank a
waiver for the Company's October 31, 1999 default on its tangible net worth, net
worth and capital expenditure covenants.
[C] NJ Medicaid Pending Settlement - In January 2000, the Company commenced
negotiations with New Jersey Medicaid regarding a claim made against the Company
by the State of New Jersey. The alleged claim was received by the Company on
December 28, 1999. The claim alleged that the Company was reimbursed by the
State for claims submitted which, although authorized by the physician, did not
bear the physician's actual signature. The Company immediately disputed the
claim.
The Company believes it has been compliant with all requirements regarding
claims submitted for payment by New Jersey Medicaid and in fact requires actual
physician signatures before it bills New Jersey Medicaid. However, the Company
and New Jersey Medicaid entered into a compromise agreement on January 19, 2000
to a full settlement for this claim in the amount of $227,000. The Company has
accrued this settlement amount in its October 31, 1999 financials. The
settlement is subject to the parties' execution of a written agreement setting
forth its terms and to the approval of the Director of the Division of Medical
Assistance. Approval of the settlement is being recommended to the Director.
. . . . . . . . . .
F-23
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Bio-Reference Laboratories, Inc.
Elmwood Park, New Jersey
Our report on our audit of the basic financial statements of
Bio-Reference Laboratories, Inc. and its subsidiary appears on page F-1. That
audit was conducted for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supplemental schedule II is presented for
purposes of complying with the Securities and Exchange Commissions Rules and
Regulations under the Securities Exchange Act of 1934 and is not otherwise a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements, and in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
January 7, 2000
F-24
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED OCTOBER 31,
1999, 1998 AND 1997.
- ------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Balance at Charged to Deductions Balance
Beginning Cost and To Valuation at End
Description of Period Expenses Accounts of Period
----------- --------- -------- -------- ---------
Year Ended October 31, 1999
Allowance for Doubtful
Accounts and Contractual
Credits $13,494,475 $85,674,430 $(83,855,970) $15,312,935
=========== =========== ============ ===========
Year Ended October 31, 1998
Allowance for Doubtful
Accounts and Contractual
Credits $ 8,564,436 $72,137,649 $(67,207,610) $13,494,475
=========== =========== ============ ===========
Year Ended October 31, 1997
Allowance for Doubtful
Accounts and Contractual
Credits $ 5,357,096 $47,593,419 $(44,386,079) $8,564,436
=========== =========== ============ ==========
F-25