SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended October 31, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 small business issuer as specified in its charter)
New Jersey 22-2405059
- ---------- ----------
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.)
481 Edward H. Ross Drive, Elmwood Park, New Jersey 07407
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(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
----------------------------
(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-B 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-KSB or in any amendment to
this Form 10-KSB.
[ ]
For the year ended October 31, 1996 the issuer's revenues were $35,125,878
On January 17, 1997, 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 $7,875,350 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
6,300,280 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 located in northern New Jersey, principally
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 a clinical laboratory at its
Elmwood Park, New Jersey facility 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. The Company picks up test
specimens directly from the physician and test results are generally transmitted
by computerized telephone connections or courier. The Company intends to
continue to expand and develop its laboratory operations through acquisitions,
on-going marketing efforts and expansion of its specialty testing areas.
The United States market for clinical laboratory testing is estimated to
generate approximately $30 billion in annual revenues. Approximately one-half
of these revenues are accounted for by hospital laboratories and the balance by
independent commercial laboratories and tests performed by physicians in their
own offices and laboratories. The clinical laboratory market has been
undergoing significant consolidation in recent years due to the cost
efficiencies of large-scale, highly-automated testing and increasingly stringent
regulatory requirements. The Company is actively seeking to take advantage of
these trends by pursuing acquisitions which will provide revenues to utilize
more fully the Bio-Reference facility. The Company is also pursuing growth
through aggressive marketing to physicians whose patients are likely to have
good reimbursement and collectability profiles. Strategically, Bio-Reference
intends to continue to establish additional specialty areas to provide esoteric
testing services not generally provided by its competition, such as fertility
testing and cancer testing including tumor markers.
The Company 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 examination services. The Company discontinued
this business 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., a clinical laboratory formerly located in Englewood, New
Jersey. The Company consolidated and relocated all of its laboratory operations
to its modern laboratory facility in Elmwood Park, New Jersey and in June 1989,
changed the name of the Company to Bio-Reference Laboratories, Inc. (effective
November 1989) and the name of the laboratory to Bio-Reference Laboratories.
Since 1990, the Company 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. On
January 4, 1995 (as of October 31, 1994), the Company expanded its testing
capabilities through the acquisition of GenCare Biomedical Research Corporation
("GenCare") which operates a cancer specialty testing laboratory in
Mountainside, New Jersey.
In November, 1995, the Company made two acquisitions. Through its
acquisition of Oncodec Laboratories, Inc., the Company acquired the exclusive
worldwide right to a Quantitative Enriched PCR methodology for detecting certain
gene mutations, developed by the American Health Foundation in Valhalla, New
York. This methodology improves the ability to detect early genetic changes
which may lead to the development of various cancers. In addition, the Company
expanded its market penetration into central New Jersey through its acquisition
of Community Medical Laboratories (CML). In May, 1996, the Company acquired
certain assets and rights of Advanced Medical Laboratories (AML) which
increased its presence in eastern Long Island. The last acquisition of the year
occurred in July, 1996. The Company purchased from SmithKline Beecham Clinical
Laboratories, Inc. (SBCL) certain assets and rights including the Customer
List related to SBCL's operation of its Renal Dialysis Testing Business. This
acquisition will allow the Company to expand its presence in this
market.Although SBCL represented that its renal dialysis business was realizing
approximately $3,600,000 in annual net revenues, the Company may realize only
approximately $1,000,000 in annual net revenues directly as a result of this
acquisition. In December, 1996, the Company commenced a lawsuit against SBCL
alleging breach of contract and fraud (See Item 3 - Legal Proceedings).
The Company's executive offices and laboratory 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 1996
- -----------------------------------------------
On November 7, 1995 through its acquisition of Oncodec Laboratories, Inc.
for an aggregate 10,000 shares of its Common Stock (subject to possible increase
to a maximum aggregate 40,000 shares based on future receipts), the Company
acquired the exclusive worldwide right to a Quantitative Enriched PCR
methodology for detecting certain gene mutations, developed by the American
Health Foundation in Valhalla, New York. This methodology improves the ability
to detect early genetic changes which may lead to the development of various
cancers.
On November 10, 1995, the Company acquired CML in a business combination
accounted for under the purchase method of accounting. All of the issued and
outstanding common stock of CML was acquired for an aggregate 72,688 shares of
the Company's Common Stock. In addition, CML delivered CML notes totaling an
aggregate $399,958 including accrued interest through October 31, 1995 to the
Company in exchange for an aggregate $200,174 in principal amount of the
Company's debentures. The 72,688 shares of the Company's Common Stock will be
held in escrow pending certain required collections from CML customers. In
addition, the Company entered into a five year employment agreement with CML's
Chief Executive Officer providing for an annual salary of $60,000 contingent on
receipt of specified revenues from specified draw stations. This acquisition
was not significant to the Company. As of October 31, 1996, 23,611 of the
shares held in escrow were released to the sellers.
In May 1996, the Company acquired certain assets and rights of AML for a
maximum purchase price of $612,000 of which $180,000 was paid at closing. The
remaining maximum balance of $432,000 is payable over a three year period
contingent upon receipt of certain required collections from AML customers. AML
had revenues of approximately $900,000 in the most recent fiscal year. This
acquisition was not significant to the Company.
On July 19, 1996, BRLI completed the purchase from SBCL of certain assets,
rights and its associated goodwill including the Customer List related to SBCL's
operation of its Renal Dialysis Testing Business. The purchase price was
$1,800,000 of which $1,200,000 was paid at the closing. The $600,000 balance is
payable in 24 consecutive monthly installments of $25,000 commencing January 1,
1997. At the closing, SBCL agreed for a three year period commencing no more
than 120 days after the closing, to cease performing renal dialysis clinical
laboratory testing services for renal dialysis centers or other entities which
provide diagnosis and/or treatment to dialysis patients. Funding for the
$1,200,000 down payment made by BRLI at the closing was provided pursuant to its
term loan and credit line facilities with PNC Bank (formerly Midlantic Bank,
N.A.). Although SBCL represented that its renal dialysis business was realizing
approximately $3,600,000 in annual net revenues, the Company may realize only
approximately $1,000,000 in annual net revenues directly as a result of this
acquisition. On December 30, 1996, the Company commenced a lawsuit against SBCL
alleging breach of contract and fraud. As a result of its allegations against
SBCL, the Company has not made any payments with respect to the $600,000
balance.
In July 1996, the Company amended its revolving loan agreement with PNC
Bank. The maximum amount of the credit line available to the Company was
increased to the lesser of (I) $9,000,000 or (ii) 50% of the Company's qualified
accounts receivable (as defined in the agreement) plus 100% of the face amount
of the Company's certificates of deposit pledged as collateral for this loan
minus the amount of any portion of the outstanding principal balance of the
Company's term loan which is deemed secured 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 is secured by
substantially all of the Company's assets (including $3,680,000 in certificates
of deposit) and the assignment of $4,000,000 face amount of life insurance on
the life of the president of the Company. The line of credit is available for a
period of one year and may be extended for annual periods by mutual consents,
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. On December 23, 1996,
PNC Bank amended and restated its agreement with the Company to increase the
secured revolving note to $9,500,000 until February 28, 1997, at which time it
will revert back to $9,000,000.
CLINICAL LABORATORY OPERATIONS
------------------------------
The Clinical Laboratory Industry
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The United States market for clinical laboratory testing is estimated at
approximately $30 billion in annual revenues, of which approximately 50% results
from tests performed by hospitals and the balance from tests performed by
independent commercial laboratories and tests performed by physicians in their
own office laboratories. Revenues in the clinical laboratory testing market
grew over the past decade at an annual rate of approximately 10% due, the
Company believes, to several factors, including: an increase in the number and
types of routine tests; the development of more sophisticated esoteric tests,
such as tests for AIDS, heart disease, elevated cholesterol levels, infertility
and prostate cancer; increased awareness among physicians of the value of
laboratory testing as a cost-effective means of prevention, early detection of
disease and monitoring of treatment; fear by physicians of malpractice
litigation; expanded substance abuse testing; the general aging of the United
States population; development of highly automated laboratory testing equipment
which has increased laboratory testing operating efficiencies; and price
increases for such services. The Company believes that larger independent
laboratories have been able to increase their share of the overall clinical
laboratory testing market by taking advantage of opportunities for cost
efficiencies afforded by large-scale automated testing operations, and by
acquisition of smaller laboratories which may not be in compliance with current
government licensing or safety standards and may not operate as efficiently as
the larger independent laboratories.
Recent regulatory developments are also expected by the Company to
contribute to the continuing consolidation of the industry. These developments
include regulations that deny Medicare reimbursement to so-called "shell
laboratories" that refer a substantial amount of their tests to other
laboratories and impose new quality assurance requirements on physician-office
laboratories. In addition, as of January 1, 1992, a physician is severely
restricted from referring Medicare-reimbursed testing to a laboratory in which
the physician has an economic interest. The Company believes that these
developments are likely to have a more significant impact on smaller
laboratories since most of the national and regional clinical laboratories,
including the Company, are already in compliance with such regulations.
History
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The Company 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: those
businesses that are national in scope performing millions of tests per month but
impersonal in nature and those 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. Besides producing fast, accurate data, a large regional
facility could afford to employ sufficient senior staff including laboratory
scientists to act as client consultants, an enhancement unavailable in small
laboratories, and not readily available in the large national commercial
laboratories. In addition, the Company believed that by complementing the
regional facility with specialized areas of testing, concentrating on esoteric
tests, it could favorably compete with other laboratories.
Although the Company did not realize income from operations from the time
it commenced clinical laboratory operations in 1987 until fiscal 1994, the
Company's net revenues have continually increased, notwithstanding the fact that
starting in 1991, the Company has become more selective in accepting physician
clients and patients. In fiscal 1995, the Company realized net income from
operations of $1,782,896 and in fiscal 1996, net income from operations was
$1,196,236. In March 1988, the Company acquired Cytology and Pathology
Associates, Inc., a small specialized clinical testing laboratory located in
Englewood, New Jersey and in June of that year 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 allowed for further expansion of the Company's esoteric service
concept and 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.
With the completion of the relocation to Elmwood Park in 1988, the Company
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. In
1991, the Company changed its emphasis to a sustained selective growth,
discontinuing the servicing of more than 5,000 patients per month from accounts
considered unprofitable and only taking on business that would yield high
reimbursement and collectability. 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, and tumor markers. See "Developments Since
the Beginning of Fiscal 1996" as to the Company's November 7, 1995 acquisition
of the exclusive worldwide right to Enriched PCR methodology and renal dialysis
testing.
The Company makes extensive use of direct mailings to physicians that
emphasize its specialized testing and personalized service. Targeted physicians
are principally those that frequently utilize laboratory services, including
obstetricians, internists, and primary care physicians. This direct mailing
technique is selective in nature, being targeted to concentrate on profitable
accounts.
Operations
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The efficiency of a medical laboratory depends on the quantity and
selection of tests performed and on its ability to automate the process. It is
axiomatic that the initial fixed costs of testing a small number of patients are
high. Such costs include the cost of maintaining highly sophisticated equipment
which is inefficient to operate if only a small number of patients are tested,
as well as the cost of a full support facility and marketing, logistical,
billing, and 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, and those that are
subjective and basically manually determined. The Company considers itself a
highly automated and computer driven laboratory.
Bio-Reference is capable of performing highly sophisticated testing in
addition to high volume routine testing. Already established are a wide range
of tests in clinical chemistry, special chemistry, endocrinology, serology,
diagnostic immunology, microbiology, rheumatology, parasitology, cellular
immunology, radioimmunoassay, hematology, immunohematology, cytology, anatomic
pathology, and urinalysis. 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. Additionally, the larger volume clients receive test results by way of
printers provided by the Company and placed directly in their offices, thereby
accelerating test reporting. The Company furnishes its physician clients with
periodic newsletters detailing advances in laboratory medicine, new tests,
clinical commentaries and laboratory interpretation of test results. In
addition, an annual Test Compendium is sent to all physician clients listing all
tests offered, normal ranges, correct collection of samples, patient
preparation, and up to date billing information. This, together with the
periodic clinical update newsletters, allows the Company to be in constant
contact with all of its physician clients.
The Company utilizes the services of nine 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.
The Scientific Director, Daytime Technical Manager, supervisors and medical
staff also are in frequent communication with clients and are available to
answer questions and provide support and consultation.
Sales and Marketing
- -------------------
Management believes that the Company's laboratory, by virtue of its
geographic location and area of sales penetration, is well positioned to expand
into new areas. It is believed that a substantial market share can be achieved
in Westchester, Rockland and Nassau counties in New York, southern and western
New Jersey, and southern Connecticut. The Company presently employs 35 sales
and marketing personnel headed by a Vice President of Sales and Marketing with
more than 10 years of experience with one of the largest commercial medical
laboratories in the country, Smith-Kline Beecham Clinical Laboratories. The
sales and marketing department works closely with the Scientific Director in
planning new tests, pricing, and 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. The Company feels 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
- -----------------
The business of 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 its Elmwood Park,
New Jersey facility and to permit its servicing of its clients in Connecticut,
Florida, Louisiana, Maryland, New Jersey, New York, Pennsylvania, Texas and
Virginia. To fully maintain these licenses, the laboratory must submit to
vigorous sets of proficiency tests, or surveys, in all 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. 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 addition, Bio-Reference voluntarily enrolls in the College of
American Pathologists Proficiency program, which provides additional proficiency
surveys.
In January 1997, the Company was notified that it had been accredited by
the College of American Pathologists (CAP). 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.
A Quality Assurance Committee, headed by a Quality Assurance Coordinator
and composed of supervisors from all departments, meets each month 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.
All major accounts are reviewed monthly as to collectability by types of
payor and evaluated for effectiveness of collection procedures, and based upon
the review, corrective action is taken. Currently, the average reimbursement
per patient is approximately 5% lower than the previous year. The following
table reflects the Company's breakdown of revenue by payor for the 12 months
ended October 31, 1994, 1995 and 1996.<PAGE>
<TABLE>
<CAPTION>
Years Ended October 31,
----------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Direct Patient Billing 33% 28% 17%
Commercial Insurance 23% 27% 36%
Professional Billing 18% 18% 19%
Medicare 20% 21% 22%
Medicaid 6% 6% 6%
--- --- ---
100% 100% 100%
</TABLE>
Competition
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The Company's competition derives primarily from other laboratories
locatedin the New York metropolitan area. On a national basis, approximately
30% ofthis market is made up of the three largest national laboratories
(Smith-Kline Beecham Clinical Laboratories, a Division of Smith-Kline Beecham
PLC, Laboratory Corporation of America, Inc. and Quest Clinical Laboratory,
formerly a Division of Corning, Inc.). The Company is competing with these
national laboratories which have been in existence for a long period of time,
have products which are already established in the marketplace, have broader
public and industry recognition, have financial resources substantially
greater than the Company and have far more extensive facilities, larger
sales forces and more established customer and supplier relationships than
those which now or in the foreseeable future are, or will become, available
to the Company. These factors will place the Company at a competitive
disadvantage. However, Bio-Reference has certain capabilities similar to
these national laboratories and shares similar advantages with them over
the smaller laboratories. Bio-Reference and the major laboratories all have
the capability of specialized testing profiles, 24-hour turn-around time for
most test results, computer transmission into physician offices, and
comprehensive courier pick-up and delivery service in the greater New York
metropolitan area.
Although the Company is significantly smaller than the national
laboratories and has modest financial resources, management believes it can
compete successfully because there are fewer layers of staff thus enabling
decisions to be made at a top management level more quickly and resulting in a
more responsive business atmosphere and customized service. The Company
believes its response to medical consultation is faster and more personalized
than in the national laboratories. At Bio-Reference, 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
- ---------------------
The Company's laboratory operations require licensure in each jurisdiction
in which the Company operates. Bio-Reference holds the required federal and
state licenses necessary to permit its operation of a clinical laboratory at its
Elmwood Park, New Jersey facility 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 (the "CMWMA") which requires the Company to register as a generator of
special medical waste. The 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.
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 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
76% 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
material adverse effect on the Company. The Company is unable to predict,
however, the extent to which 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 ("OBRA") 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 standards regulations establishing
Federal quality standards 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 standards 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 standards and enforcement
procedure regulations became effective on September 1, 1992, although certain
personnel, quality control and proficiency testing requirements will be phased-
in over a number of years. The laboratory has completed its first CLIA
inspection under CLIA-88 guidelines and has received its certificate of
compliance effective February 7, 1996.
In January 1997, the Company was notified that it had been accredited by
the College of American Pathologists (CAP). 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.
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. The Company
believes, but cannot assure, that its insurance coverage is customary in the
industry for laboratories of its size and is adequate for its current business
needs. 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, 1996, the Company had 260 full-time employees and 160
part- time employees. This includes three executive officers, a Vice
President of Technical Operations, a Marketing Vice-President, 67 full-time
and 27 part-time technicians, and/or technologists (including physicians,
pathologists and Ph.D.'s), 98 full and part-time semi-technical employees,
34 full and part-time marketing representatives, 99 full and part-time
clerical employees, and 90 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 laboratory facility occupy
approximately 35,000 square feet of leased space in a one-story brick facility
at 481 Edward H. Ross Drive, Elmwood Park, New Jersey. The lease for the
facility, which expires in February 1999, provides for a monthly rental of
$17,077. The Company's testing equipment maintained at this facility is in
good condition and in working order. Management believes that this facility, as
presently equipped, has the capacity to generate up to approximately $40,000,000
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
39 additional relatively small draw stations through the New York metropolitan
area to collect specimens from physician-referred patients for testing at its
Elmwood Park, New Jersey laboratory.
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, pursuant to
an Asset Sale/Purchase Agreement (the Asset Agreement). In the Asset
Agreement, SBCL represented and warrantied 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 may 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
has not paid 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, alleges that SBCL materially and repeatedly breached its
obligations and its representations and warranties made in the Asset Agreement
and the Non-Competition Agreement and claims unspecified amounts of compensatory
and punitive damages and related costs. This lawsuit is in its initial stages
and no assurances can be given at this time that it will be concluded in the
Company's favor.
Item 4 - Submission of Matters to a Vote of Security holders
---------------------------------------------------
There were no matters submitted by the Company to a vote of its security
holders during the quarter ended October 31, 1996.
PART II
PRICE RANGE OF SECURITIES
-------------------------
Item 5. - Market for Common Stock and Related Shareholder Matters
------------------------------------------------------
The 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 shareholder's 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 Company's 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 the NASDAQ. Such quotations represent prices between dealers, do not
include mark-ups, mark-downs or commissions and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
Fiscal Year Bid Prices
----------- ----------
<S> <C> <C>
1995 High Low
---- ---
First Quarter . . . $6.125 $4.00
Second Quarter. . . 5.25 3.75
Third Quarter . . . 6.00 3.75
Fourth Quarter. . . 6.25 4.00
1996
First Quarter . . . $3.50 $2.75
Second Quarter. . . 2.75 2.125
Third Quarter . . . 2.8125 1.9375
Fourth Quarter. . . 1.9375 1.4375
</TABLE>
At January 17, 1997, the closing sales price for the Common Stock on
NASDAQ was $1.25 per share.
At January 20, 1997 the number of record holders of the Common Stock was
657. 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, by reason of its contemplated future financial requirements and
business plans, does not contemplate or anticipate paying any dividends upon its
Common Stock in the foreseeable future. The Company presently plans to retain
earnings, to the extent that there are any, to finance the development and
expansion of its business.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------
Results of Operations
- ---------------------
Fiscal Year 1996 Compared to Fiscal Year 1995
- ---------------------------------------------
NET REVENUES:
- ------------
Net revenues for the twelve month period ended October 31, 1996 were $35,125,878
as compared to $31,521,118 for the prior comparable period ended October 31,
1995; this represents an 11% increase in net revenues. However, due to record
snowfalls in the New York metropolitan area and based on volume on non-weather
affected days; management estimates net revenues would have been $800,000
greater if the Northeast had not experienced such severe weather. The
laboratory's patient count for the twelve month period ending October 31, 1996
increased by 17% over the same period in 1995. Net revenues per patient
decreased from $52.98 for the period ending October 31, 1995 to $50.47 for the
period ending October 31, 1996. This represents a 5% reduction in reimbursement
levels. The Company processed 695,983 patients during the period ended October
31, 1996 and estimates that revenues were reduced by approximately $1,700,000
due to the reduction of reimbursement levels from the prior period. Management
cannot project if these decreases will continue, or if they do, at what rate.
During July 1996, the Company acquired certain assets and rights including the
Customer List related to SBCL's Renal Dialysis Testing Business. While no
revenues were generated by this acquisition during this current fiscal period;
and SBCL represented that its renal dialysis business was realizing
approximately $3,600,000 in annual net revenues, management believes that the
Company may realize only approximately $1,000,000 in annual net revenues
directly as a result of this acquisition.
COST OF SERVICES:
- ----------------
Cost of services increased from $15,036,034 for the twelve month period ended
October 31, 1995 to $18,136,395 for the period ended October 31, 1996. This
represents a 21% increase in direct operating costs. Employee costs increased
19% and represents 44% of the overall increase in direct operating expenses.
During this period, direct staffing, increased by 49 employees. Reagents and
laboratory supplies increased by 19% over the prior comparable period and is in
line with the overall increase in the number of patients processed. Other cost
of services for the twelve month period ended October 31, 1996 increased by 26%
over the comparable period ended October 31, 1995. This increase is
attributable primarily to two factors, (1) a 26% increase in pick-up and
delivery expenses and (2) a 35% increase in reference laboratory fees, which is
reflective of the complexity of the tests and the geographical area in which
these patients are serviced.
Gross profit increased from $16,485,084 for the twelve month period ended
October 31, 1995 to $16,989,483 for the period ended October 31, 1996; an
increase of $504,399. The Company's gross profit margin decreased to 48% for'
the twelve month period ended October 31, 1996 compared to 52% for the period
ended October 31, 1995. This decrease resulted from an increase in net revenues
of only 11%, which was impacted by a 5% decrease in reimbursement levels, while
direct expenses increased by 21%. The Company believes this decrease was
attributable to the adverse effect on revenues due to severe winter weather and
a decrease in net revenues per patient.
GENERAL AND ADMINISTRATIVE EXPENSES:
- -----------------------------------
General and administrative expenses for the twelve month period ended October
31, 1996 were $15,793,247 as compared to $14,702,188 for the period ended
October 31, 1995, an increase of $1,091,059 (7%). This increase is in line with
the 11% increase in net revenues.
INTEREST EXPENSE:
- ----------------
Interest expense increased from $605,405 during the twelve month period ending
October 31, 1995 as compared to $840,811 during the twelve month period ending
October 31, 1996. This increase was caused by the Company's increase in asset
based borrowings and equipment leases.
NET INCOME:
- ----------
The Company had net income of $1,402,169 for the twelve months ended October 31,
1995 as compared to $591,958 for the twelve months ended October 31, 1996.
Management believes the decrease in net income was attributable to the extreme
winter weather and record snowfalls that the northeast experienced in December,
January and February and the 5% reduction in reimbursement rates experienced
during the current twelve month period.
Liquidity and Capital Resources
- -------------------------------
For the Fiscal Year Ended October 31, 1995
Working capital for the year ended October 31, 1995 was $4,551,855 as compared
to $3,603,803 at October 31, 1994, an increase of $948,052 during the twelve
month year.
The Company had $6,698,542 in cash and certificates of deposits at October 31,
1995. However, $5,959,646 represented restricted items. The Company utilized
$769,560 in cash for operating activities. To offset this use of cash the
Company borrowed $5,391,296 pursuant to a revolving line of credit and repaid
approximately $5,959,646 in existing debt. The Company anticipated utilizing
this credit line for working capital.
The capital spending requirements for the Company during 1996 was expected not
to exceed $550,000. During fiscal 1996, approximately $660,000 was spent on
capital improvements.
The Company had current liabilities of $12,102,578 at October 31, 1995. The
three largest items in this category were note payable-bank of $5,391,296,
current portion of long-term debt of $2,699,211 and accounts payable of
$2,091,890. The Company continued to pay its payables at 90 to 120 days.
Management does not intend to shorten this period. All tax liabilities
including penalties and interest have been accrued. At October 31, 1995, the
Company owed $16,415 in past due local withholding taxes, which were being paid
in accordance with an installment agreement. At December 31, 1995 this amount
was paid.
For the Fiscal Year Ended October 31, 1996
Working capital as of October 31, 1996 was $4,072,447 as compared to $4,551,855
at October 31, 1995 a decrease of $479,408 during the twelve month period.
The Company had $5,933,474 in cash and certificates of deposits at October 31,
1996. However, $4,532,000 represented restricted deposits. The Company
utilized $1,895,465 in cash for operating activities. To offset this use of
cash the Company raised $1,180,000 in long-term debt, $3,687,448 in credit line
borrowings and repaid approximately $2,327,868 in existing debt.
The capital spending requirements for the Company during 1997 is expected not to
exceed $600,000. During fiscal 1996, approximately $660,000 has been spent on
capital improvements.
The Company had current liabilities of $14,594,347 at October 31, 1996. The
three largest items in this category are notes payable of $9,930,741, accounts
payable of $2,139,303 and current portion of long-term debt of $730,374.
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 services. In each of the omnibus budget reconciliation laws enacted
in 1987, 1989 and 1990, Medicare reimbursement of clinical laboratories was
reduced 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.
A number of proposals for legislation or regulation are under discussion which
could have the effect of substantially reducing Medicare reimbursements to
clinical laboratories. For example, the House Energy and Commerce Subcommittee
on Oversight and Investigation introduced legislation in 1987 and 1989 that
would require clinical laboratories to charge Medicare the lowest prices charged
to any client. In October 1990, the Office of the Inspector General ("OIG") of
the Department of Health and Human Services ("HHS") proposed a so-called
"laboratory roll-in" reimbursement methodology, whereby physicians would be
reimbursed a flat fee per office visit for clinical laboratory testing, thereby
forcing clinical laboratories to bid to provide those services to physicians.
The administration's budget package for fiscal 1993 recommended adoption of a
proposal of the U.S. General Accounting Office issued in connection with a study
of clinical laboratory costs made in June 1991 calling for a reduction in the
Medicare national limitation amounts, from 88% of the national median to 76% of
the national median. The Health Care Financing Administration ("HCFA") has
announced that it is developing a proposal to provide for reimbursement of
clinical laboratories on a competitive bid basis. In addition, a number of
states, HHS and Medicare carriers (insurance companies that administer Medicare)
have imposed reductions and other limitations on Medicare and Medicaid
reimbursement for laboratory testing and one state has imposed, and other states
are considering, new taxes on health care providers, including clinical
laboratories. Depending upon the nature of regulatory action, if any, which is
taken and the content of legislation, if any, which is adopted, the Company
could experience a significant decrease in revenues from Medicare and Medicaid,
which could have a material adverse effect on the Company. The Company is
unable to predict, however, the extent to which such actions will be taken.
The Company intends to capitalize on the current trend of consolidation in the
clinical laboratory industry through acquisitions of other laboratories in its
geographical region with significant customer lists. Purchase prices to acquire
other laboratories may involve cash, notes, Common Stock, and/or combinations
thereof. The Company has a credit facility with PNC Bank, N.A. for $9,000,000.
As of October 31, 1996, $9,078,741 of this facility has been utilized. However,
on December 23, 1996, the Bank amended and restated its agreement with the
Company to increase the secured revolving note to $9,500,000 until February 28,
1997, at which time it will revert back to $9,000,000. In addition, the Company
has verbally renegotiated the convertible debt due to certain former owners of
GenCare that were due and payable on January 4, 1997 in the amount of
approximately $235,729. These notes are now expected to be paid in full during
the first quarter of calendar 1999.
Cash on hand, equity financing and additional borrowing capabilities are
expected to be sufficient to meet anticipated operating requirements, debt
repayments and provide funds for capital expenditures, excluding acquisitions
for the foreseeable future.
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. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in March
1995. SFAS No. 121 establishes accounting standards for the impairment of long-
lived assets, certain identifiable intangibles, and goodwill related to those
assets to be held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. SFAS No. 121 is effective for financial
statements issued for fiscal years beginning after December 15, 1995. Adoption
of SFAS No. 121 is not expected to have a material impact on the Company's
financial statements.
The FASB has also issued SFAS No. 125 Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities. SFAS No. 125
is effective for transfers and servicing of financial assets and extinguishment
of liabilities occurring after December 31, 1996. Earlier application is not
allowed. The provisions of SFAS No. 125 must be applied prospectively;
retroactive application is prohibited. Adoption on January 1, 1997 is not
expected to have a material impact on the Company. Some provisions of SFAS No.
125, which are unlikely to apply to the Company, have been deferred by the FASB.
Item 7. - Financial Statements
-------------------
Financial Statements are annexed hereto
Item 8. - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
------------------------
None
PART III
Item 9.- Directors, Executive Officers, Promoters and Control Persons:
Compliance with Section 16(a) of the Exchange Act
---------------------------------------------------
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.. . . . . . 46 Chairman of the Board, President,
Chief Executive Officer and
Director
Howard Dubinett. . . . . . . . . 46 Executive Vice President, Chief
Operating Officer and Director
Sam Singer . . . . . . . . . . . 54 Vice President, Chief Financial
Officer, Chief Accounting
Officer and Director
Frank DeVito . . . . . . . . . . 56 Director
John Roglieri, M.D.. . . . . . . 56 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 and an Assistant Attending Physician at Columbia University College
of Physicians and Surgeons and Assistant Attending at Presbyterian Hospital,
New York City. From 1980 to 1983, Dr. Grodman attended the Kennedy School of
Government at Harvard University and was a 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 is 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. 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 till 1971, he was a Senior Assistant Surgeon in the U.S. Public Health
Service in Washington. From 1971 till 1973 he was a Clinical and Research
Fellow at Massachusetts General Hospital. From 1973 to 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 till 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.
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 56) 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
he 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.
William Knakal (Age 45) has been employed by the Company as Vice President
of Sales and Marketing since March 1990. He has over 15 years of experience in
the laboratory testing industry. Mr. Knakal has held various sales and sales
management positions at Smith-Kline Beecham Clinical Laboratories, where he
worked for 11 years. He started employment with Smith-Kline Beecham Clinical
Laboratories in 1978 and his last position (in 1989) was Director, National
Accounts. He received a B.S. degree in Biochemistry from Fordham University in
1974.
Benita Ponda, M.D. (Age 51) has been employed by the Company since
February, 1994 as Medical Director. She is certified by the American Board of
Pathology in Clinical Pathology, Anatomical Pathology and 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.
Bader Maria Pedemonte-Coira, M.D. (Age 38) has been employed by the Company
since May, 1996 as Medical Director for GenCare, a Bio-Reference laboratory.
Formerly, she was with Corning Clinical Laboratories as Director, Cellular
Immunology Department and Associate Director, Molecular Tissue Pathology
Department, She is certified by the American Board of Pathology in Clinical
Pathology and Hematopathology. She holds New York State and New Jersey
Departments of Health Certificate of Qualification for Laboratory Director. Dr.
Pedemonte-Coira's professional appointments include Adjunct Assistant Professor
of Pathology, Columbia University, College of Physicians and Surgeons, New York;
Associate Attending Pathologist, Harlem Hospital Center, New York; and
Consultant in Immunopathology Bronx-Lebanon Hospital Center, New York. Dr.
Pedemonte received her Doctorate of Medicine, Cum Laude, from Autonomous
University of Santo Domingo, Santo Domingo, Dominican Republic in 1983.
Ayad Mudarris, Ph.D. (Age 46) 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. From 1988 to 1992 he was
Vice President and Director of Columbia Biomedical Laboratory, A SAMHSA (NIDA)
certified forensic drug testing laboratory, 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 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 1996, its officers, directors and
beneficial owners of more than 10% of its equity timely complied with all
applicable Section 16(a) filing requirements.
Item 10. - Executive Compensation
---------------------
The following table sets forth information concerning the compensation paid
or accrued by the Company during the year ended on October 31, 1996 to its Chief
Executive Officer and its other executive officers who were serving as executive
officers of the Company on October 31, 1996. During the period ended October
31, 1996, the Company did not grant any restricted stock awards or have any
long-term incentive plan in effect. 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
<TABLE>
<CAPTION>
Long-
Term
Compen-
Annual Compensation sation
------------------------------------------ ------
<S> <C> <C> <C> <C> <C>
Other
Year Annual
Ended Compen- Options
Name and Principal Position October 31, Salary Bonus sation SARs(1)
- --------------------------- ---------- --------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
Marc D. Grodman M.D.. . . . . . . 1996 $264,196 $95,000 $-0- -0-
President and Chief 1995 $248,159 $75,000 $-0- -0-
Executive Officer 1994 $206,337 $-0- $-0- -0-
Howard Dubinett . . . . . . . . . 1996 $154,188 $45,000 $-0- -0-
Executive Vice 1995 $144,024 $45,000 $-0- -0-
President andChief 1994 $126,870 $20,000 $-0- -0-
Operating Officer
Sam Singer. . . . . . . . . 1996 $153,326 $45,000 $-0- -0-
Vice President and 1995 $144,024 $45,000 $-0- -0-
Chief Financial and 1994 $125,624 $20,000 $-0- -0-
Accounting Officer
Long-Term
Compensation
--------------------------------------
All
Restricted LTIP Other
Stock Pay Compen-
Name and Principal Position Awards outs sation
- --------------------------- ---------- ---- ------
<S> <C> <C> <C>
Marc D. Grodman, M.D. . . . . . . -0- $-0- $-0-
President and Chief -0- $-0- $-0-
Executive Officer -0- $-0- $-0-
Howard Dubinett . . . . . . . . . -0- $-0- $-0-
Executive Vice -0- $-0- $-0-
President and Chief -0- $-0- $-0-
Operating Officer -0- $-0- $-0-
Sam Singer. . . . . . . . . . . . -0- $-0- $-0-
Vice President and -0- $-0- $-0-
Chief Financial and -0- $-0- $-0-
Accounting Officer -0- $-0- $-0-
</TABLE>
See Item 12 herein as to the cancellation by Dr. Grodman on April 20, 1993
of his pro-rata option contained in his employment contract and all other
outstanding options and warrants to purchase Common Stock held by Dr. Grodman,
his wife and an affiliated entity (the "Grodman Group") in consideration for the
issuance to the Grodman Group of Senior Preferred Stock.
Employment Agreement with Executive Officers
- --------------------------------------------
The Company signed an employment agreement effective January 1, 1991 with
Marc Grodman to serve as chief executive officer and President. The agreement
provides (i) for a term through October 31, 1997, (ii) a base salary of $165,000
per year with annual increases based upon the percentage increase in the
Consumer Price Index as well as increases at the discretion of the Board of
Directors; (iii) normal health and life insurance benefits as well as the right
of Dr. Grodman's heirs to one-half of the proceeds of $4,000,000 of "key-man"
life insurance on his life (although the $4,000,000 face amount of life
insurance currently in force of which the Company is the sole beneficiary has
been pledged as collateral under the Company's credit line with PNC Bank); (iv)
for the leasing of an automobile for Dr. Grodman's use; (v) participation in
fringe benefit, bonus, pension, profit sharing, stock option and similar plans
maintained for the Company's employees; (vi) disability benefits, and (vii)
certain termination benefits and 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. The agreement also
granted Dr. Grodman a pro-rata option exercisable to purchase additional shares
of Common Stock in the event of the sale or issuance by the Company of Common
Stock or securities exercisable to purchase or convertible into Common Stock, so
as to preserve his and his affiliates' percentage ownership in the Company. In
April 1993, Dr. Grodman and his affiliates agreed to cancellation of the pro-
rata option and various options and warrants to purchase Common Stock in
exchange for the right to 604,078 shares of Senior Preferred Stock. See "Item
12" herein.
The Company signed an employment agreement with Howard Dubinett to serve as
Chief Operating Officer and Executive Vice President. The employment agreement
provided (i) a five year term commencing November 1, 1989 (extended to October
31, 1996); (ii) base salary of $90,000 per year subject to minimum 10% annual
increases; (iii) normal health and life insurance benefits; (iv) a minimum bonus
of $20,000 per year payable quarterly (partially waived in fiscal 1991 and
fiscal 1992) and participation in the bonus pool of the Company to be
established by the Board of Directors; (v) eligibility to receive stock options
as determined by the Board of Directors; and (vi) a termination benefit equal to
three times his annual salary. Upon Mr. Dubinett's termination, the Company
would be required to relieve him of all guarantees of Company obligations.
The Company signed an employment agreement with Sam Singer to serve as
Chief Financial Officer. The employment agreement provided (i) a five year
term commencing November 1, 1989 (extended to October 31, 1996); (ii) a base
salary of $90,000 per year subject to minimum 10% annual increases; (iii) normal
health and life insurance benefits; (iv) a minimum bonus of $20,000 per year
payable quarterly (partially waived in fiscal 1991 and fiscal 1992) and
participation in the bonus pool of the Company to be established by the Board of
Directors (v) eligibility to receive stock options as determined by the Board of
Directors; and (vi) a termination benefit equal to three times his annual
salary. Upon Mr. Singer's termination, the Company would be required to relive
him of all guarantees of Company obligations.
Employee Incentive Stock Option Plan
- ------------------------------------
In April, 1986, the Company adopted a 1986 Employee Stock Option Plan (the
"1986 Plan"). The 1986 Plan provided for the issuance of up to 3,667 shares of
the Company's Common Stock upon the exercise of options granted thereunder which
would be designated as options which qualify for incentive stock option
treatment ("ISO's") under Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), or options which do not so qualify ("Non-ISO's"). The
1986 Plan expired in April 1996.
In July 1989, the Board 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
("Non-ISOs").
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.
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, option will be granted; whether such
options shall be ISOs or NonISOs; 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 Non-ISO
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 become exercisable in any calendar year shall not exceed $100,000.
The Board or the Stock Option Committee, as the case may be, may, in its
sole discretion, grant bonuses or authorize loans to or guarantee loans obtained
by an optionee to enable such optionee to pay upon exercise of an option.
See Note 10 to Notes to Financial Statements as to ISOs granted pursuant to
the 1986 Plan and the 1989 Plan.
No options were granted to or exercised by any of the Company's executive
officers in fiscal 1996. The following table sets forth certain information
concerning outstanding options held by the Company's executive officers at
October 31, 1996.<PAGE>
1996 Fiscal Year-End Options
<TABLE>
<CAPTION>
Value of Unexercised
Number of unexercised ISOs In-the-Money ISOs at
Name at 1996 Fiscal Year End 10/31/96(1)
- ---- ----------------------- -----------
Exercisable Unexercisable
----------- -------------
<S> <C> <C> <C>
Howard Dubinett . 153,334 -0- $18,750
Sam Singer. . . 116,667 -0- $12,500
</TABLE>
- ---------------
(1) Based on the difference between the last sales price for the Common
Stock on October 31, 1996 and the ISO exercise prices.
Item 11. - Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The following table sets forth information as of January 17, 1997 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.
<TABLE>
<CAPTION>
Shares of
Name and Address of Common Stock Percentage
Beneficial Owner Beneficial Owned(1) Ownership
- ---------------- ---------------- ---------
<S> <C> <C>
Directors and Executive Officers*
Marc D. Grodman(2) . . . . 921,845 13.4%
Howard Dubinett (3). . . . 186,001 2.9%
Sam Singer(4). . . . 132,667 2.1%
Frank DeVito(5). . . . . . 202 -
John Roglieri(6) . . . . . 25,001 -
Executive Officers and directors . . . . . . . 1,265,716 17.5%
as a group (five persons)(2)(3)(4)(5)(6)
</TABLE>
- ---------------
* The address of all of the Company's directors and executive
officers is c/o the Company, 481 Edward H. Ross Drive, Elmwood
Park, New Jersey 07407.
(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 176,100 shares owned directly by Dr. Grodman and 549,678
shares issuable upon conversion of Senior Preferred Stock. Also
includes 141,667 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. Dr. Grodman
disclaims beneficial ownership of these 196,067 shares.
(3) Includes 21,667 shares owned directly, 11,000 shares issuable
upon exercise of warrants and 153,334 shares issuable upon
exercise of options.
(4) Includes 11,000 shares owned directly, 5,000 shares issuable upon
exercise of warrants and 116,667 shares issuable upon exercise of
options.
(5) Includes 202 shares owned directly.
(6) Includes 1,667 shares owned directly and 23,334 shares issuable
upon exercise of warrants.
Item 12. - 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 $2,500,000
financing arrangement with Towers Financial Corporation ("Towers Financial"),
suspending all rental and interest charges for periods subsequent to November 1,
1991. As of October 31, 1996, $234,918 in outstanding principal, interest and
van rentals was due from Dr. Grodman.
Effective January 30, 1992, the Company completed an accounts receivable
financing with Towers Financial pursuant to which it obtained a $2,500,000
credit line secured by receivables. The Company was obligated to pay Towers
Financial a two percent per month financing fee on the Average Outstanding Daily
Balance borrowed under the line. Towers Financial was granted a security
interest in all of the Company's assets to secure the indebtedness and repayment
of the indebtedness to Towers Financial was personally guaranteed by Dr.
Grodman. Of the initial funds advanced by Towers Financial, approximately
$1,400,000 was applied to the payment of outstanding federal and state tax
liabilities and an additional $500,000 was paid to reduce an outstanding secured
bank loan from KOP Bank to $1,000,000. In January 1994, the Company used a
portion of the net offering proceeds from its public offering completed in such
month, to pay its outstanding credit line indebtedness to Towers Financial by
payment of approximately $2,100,000 (after which the Towers Financial credit
line was terminated).
On April 20, 1993, in order to facilitate a 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 has 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, is 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.
The pro-rata option, granted to Dr. Grodman in 1991, allowed Dr. Grodman in
the event of the sale or issuance by the Company during the term of his
employment agreement of Common Stock or warrants or options exercisable to
purchase Common Stock or securities convertible into Common Stock, to purchase
such additional number of shares of Common Stock, which when added to the shares
of Common Stock beneficially owned by the "Grodman Group," would result in such
Group being the beneficial owner of the same percentage of the outstanding
Common Stock (computed on a fully diluted basis) immediately after such sale or
issuance, as they owned immediately prior thereto. The pro-rata option exercise
price was the lesser of (a) the total consideration paid and payable to purchase
the Common Stock comprising the "New Issue," or (b) the market price for the
Common Stock at the time of such sale or issuance. The Grodman Group was
comprised of Dr. Grodman, his wife and any entity at least 50% beneficially
owned by either or both of them.
Also on April 20, 1993, the Board of Directors voted to reduce the exercise
price of ISOs held by various employees and exercisable to purchase an aggregate
499,367 shares of Common Stock at $2.625 per share to $1.50 per share. Messrs.
Dubinett and Singer were the owners of an aggregate 103,334 of such ISOs.
In connection with the Company's November 1993 public offering, the
Underwriter required the Company to obtain "lock-up" letters from the holders of
certain of the Company's securities including certain principal shareholders
pursuant to which such individuals agreed not to sell or assign any of the
Company's securities prior to December 1, 1994 without the Company's prior
written consent. The "lock-up" agreement would lapse after December 1, 1993 if
the Company had not completed a public offering of its securities prior to said
date. In June 1993, the Company obtained "lock-up" letters from the bulk of its
warrantholders and large shareholders, including 43 of the 47 individuals and
entities which held warrants purchased in the Company's April 1990 private
placement exercisable to purchase an aggregate 182,150 shares of Common Stock at
an exercise price of $4.6875 per share. In order to induce such individuals and
entities to execute and deliver such "lock-up" letters, the Company extended the
warrant term until April 1, 1997, reduced the warrant exercise price to $1.50
per share and issued identical modified warrants thereby doubling the number of
warrants owned by each consenting holder. Certain executive officers and
directors of the Company participated in the transaction to the following
extent:
<TABLE>
<CAPTION>
Additional
Name Warrants Received
---- -----------------
<S> <C>
Marc D. Grodman, M.D. 49,500(1)
Howard Dubinett 5,500
Sam Singer 2,500
</TABLE>
- ---------------
(1) Includes warrants issued to Dr. Grodman's wife, Pam Grodman, and
a Company controlled by her. All of these warrants were canceled
in consideration for the issuance to the Grodman Group of the
Senior Preferred Stock.<PAGE>
Item 13.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, 1996 F-2 ... F-3
Statement of Operations-
Years ended October 31, 1996 and 1995 F-4 ... F-4
Statement of Shareholders' Equity
Years ended October 31, 1996 and 1995 F-5 ... F-5
Statement of Cash Flows -
Years ended October 31, 1996 and 1995 F-6 ... F-8
Notes to Financial Statements- F-9 ... F-21
2. Reports on Form 8-K
-------------------
During the Quarter ended October 31, 1996, the Company filed no reports on
Form 8-K.
3. Exhibits
--------
None 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 28, 1997
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 28, 1997
/S/ Howard Dubinett
- ----------------------------------------
Howard Dubinett
Executive Vice President,
Chief Operating Officer and Director
January 28, 1997
/S/ Sam Singer
- ----------------------------------------
Sam Singer
Vice President, Chief Financial Officer,
Chief Accounting Officer and Director
January 28, 1997
/S/ Frank DeVito
- ---------------------------------------
Frank DeVito
Director
January 28, 1997
/S/ John Roglieri
- ---------------------------------------
John Roglieri
Director
January 28, 1997
EXHIBIT INDEX
-------------
Incorporated by
Exhibit 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, 1993 (authorizing one-for-10 reverse
stock split)
3.1.2* Amendment to Certificate of Incorporation dated
August 23, 1993 (creating Senior Preferred Stock) (C)
3.1.3* Amendment to Certificate of Incorporation dated
August 23, 1993 (authorizing one-for-three reverse
stock split) (C)
3.2* By-laws (D)
4.1* Form of Common Stock Certificate, $.01 par value (C)
4.2* Form of Warrant Agreement between the Company and (C)
American Stock Transfer & Trust Company as Warrant Agent
4.3* Form of Redeemable Warrant (attached to Exhibit 4.2) (C)
4.4* Form of Underwriter's Warrant Agreement (C)
4.5* Form of Underwriter's Warrant (attached to Exhibit 4.4) (C)
10.1* Lease Agreement for Elmwood Park, New Jersey Premises (E)
March 23, 1988
10.2* Employment Agreement between the Company and (F)
Marc Grodman M.D. dated as of January 1, 1991
10.3* Employment Agreement between the Company and (B)
Howard Dubinett dated as of November 1, 1989
10.4* Employment Agreement between the Company and (B)
Sam Singer dated as of November 1, 1989
10.5* Healthcare Purchase Contract between the (B)
Company and Towers Financial Corporation
dated as of January 29, 1992
10.6* Asset/Sale Purchase Agreement dated December 31, (G)
1991 between the Company and Pathology Services
of Long Island, Inc.
10.7* Asset/Sale Purchase Agreement dated December 31, (G)
1991 between the Company and North Shore
Diagnostic Associates
10.8* Consultation Agreement dated December 31, 1991 (G)
1991 between the Company and Advanced Healthcare
Resources, Inc.
10.9* Asset/Sale Purchase and Restrictive Covenant Agreement (B)
dated June 19, 1992 between the Company and
Andre Mencz d/b/a/ MMC Management Company
10.10* The Company's 1986 Stock Option Plan (D)
10.11* The Company's 1989 Stock Option Plan (B)
10.12* Form of Bridge Warrant (B)
10.13* Form of Bridge Note (B)
10.14* Acquisition Agreement made as of October 31, 1994 for the
acquisition by the Company of all of the outstanding
capital stock of GenCare (H)
10.15* Employment Agreement between the Company and Charles
T. Todd, Jr. dated January 4, 1995. (H)
- ---------------
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 Registration
Statement on Form S-1 (File No. 33-22721).
(F) Incorporated by reference to exhibit filed with the Company's annual
report on Form 10-K for the year ended October 31, 1990.
(G) Incorporated by reference to exhibit filed with the Company's report on
Form 8-K for December 31, 1991.
(H) Incorporated by reference to exhibit filed with the Company's current
report on Form 8-K for January 4, 1995.
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Bio-Reference Laboratories, Inc. and Subsidiary
Elmwood Park, New Jersey
We have audited the accompanying consolidated balance sheet of
Bio-Reference Laboratories, Inc. and Subsidiary as of October 31, 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the two fiscal years in the period ended October 31, 1996.
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, 1996, and the consolidated results of their operations and their cash flows
for each of the two fiscal years in the period ended October 31, 1996, in
conformity with generally accepted accounting principles.
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
January 3, 1997<PAGE>
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
- -----------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF OCTOBER 31, 1996.
- -------------------------------------------------
<TABLE>
<CAPTION>
Assets:
Current Assets:
<S> <C>
Cash $ 1,401,474
Cash - Restricted 852,000
Accounts Receivable - Net 12,019,761
Inventory 394,377
Certificates of Deposit - Restricted 3,556,250
Other Current Assets 442,932
--------
Total Current Assets 18,666,794
----------
Property and Equipment:
Automobiles 57,656
Medical Equipment and Vans 1,806,082
Leasehold Improvements 350,557
Furniture and Fixtures 362,835
--------
Total - At Cost 2,577,130
Less: Accumulated Depreciation 1,265,836
---------
Property and Equipment - Net 1,311,294
---------
Other:
Certificate of Deposit - Restricted 123,750
Due from Related Party [6] 234,918
Deposits 220,254
Goodwill [Net of Accumulated Amortization
of $1,052,038] 3,168,403
Intangible Assets [Net of Accumulated Amortization
of $1,444,265] 4,164,286
Other Assets 341,037
--------
Total Other 8,252,648
---------
Total Assets $ 28,230,736
==========
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
- -----------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF OCTOBER 31, 1996.
- -------------------------------------------------
<TABLE>
<CAPTION>
Liabilities and Shareholders' Equity:
Current Liabilities:
<S> <C>
Accounts Payable $ 2,139,303
Accrued Salaries and Commissions 878,996
Accrued Expenses 327,876
Current Maturities of Long-Term Debt [Net of
Discount] [4] 730,374
Notes Payable - Banks [3] 9,930,741
Capitalized Lease Obligation -
Short-Term Portion [12] 202,147
Current Maturities of Convertible Subordinated
Debt [5] 243,829
Taxes Payable 141,081
--------
Total Current Liabilities 14,594,347
----------
Long-Term Liabilities:
Long-Term Debt Less Current Maturities [4] 1,433,817
Capitalized Lease Obligations - Long-Term
Portion [12] 99,564
--------
Total Long-Term Liabilities 1,533,381
---------
Commitments and Contingencies [13] --
--------
Shareholders' Equity: [8 and 10]
Preferred Stock, Par Value $.10 Per Share,
Authorized 1,062,589 Shares; None Issued --
Senior Preferred Stock, Par Value $.10 Per Share,
Authorized, Issued and Outstanding 604,078 Shares --
Common Stock, Par Value $.01 Per Share,
Authorized 18,333,333 Shares; Issued
and Outstanding 6,300,280 Shares 63,003
Additional Paid-in Capital 22,493,705
Accumulated [Deficit] (10,431,483)
-----------
Total 12,125,225
Deferred Compensation (22,217)
--------
Total Shareholders' Equity 12,103,008
----------
Total Liabilities and Shareholders' Equity $ 28,230,736
==========
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
- -----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------
<TABLE>
<CAPTION>
Years ended
-----------
October 31,
-----------
1 9 9 6 1 9 9 5
------- ---------
<S> <C> <C>
Net Revenues $35,125,878 $31,521,118
---------- -----------
Cost of Services:
Depreciation and Amortization 378,694 337,802
Employee Related Expenses 8,503,156 7,140,830
Reagents and Laboratory Supplies 4,430,381 3,723,867
Other Cost of Services 4,824,164 3,833,535
---------- --------------
Total Cost of Services 18,136,395 15,036,034
---------- ---------------
Gross Profit 16,989,483 16,485,084
---------- --------------
General and Administrative Expenses:
Depreciation and Amortization 655,192 621,929
Other General and Administrative Expenses 10,761,548 10,050,229
Provision for Doubtful Accounts 4,285,807 4,030,030
Expenses of Abandoned Acquisition 90,700 --
---------- ------------
Total General and Administrative Expenses 15,793,247 14,702,188
---------- ---------------
Income from Operations 1,196,236 1,782,896
---------- --------------
Other [Income] Expense:
Interest Expense 840,811 605,405
Interest and Other Income (288,395) (273,903)
---------- --------------
Total Other Expense - Net 552,416 331,502
---------- --------------
Income Before Income Taxes 643,820 1,451,394
Provision for Income Taxes [7] 51,862 49,225
---------- --------------
Net Income $ 591,958 $ 1,402,169
========== ==============
Net Income Per Share [9] $ .10 $ .23
========== =================
Average Number of Shares Outstanding 6,166,156 6,010,964
========== ==============
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
- -----------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -----------------------------------------------
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated
------------ ------- -----------
Shares Amount Capital [Deficit]
------ ------ ------- --------
<S> <C> <C> <C> <C>
Balance - October 31, 1994 5,740,162 $57,402 $20,679,807 $(12,425,610)
Shares Issued
from Exercise of Warrants 12,100 121 18,029 --
Shares Issued in Connection
with an Acquisition 311,252 3,112 1,630,962 --
Shares Issued in Lieu of
Payment for Service 12,000 120 25,380 --
Expenses Associated with
Public Offering -- -- (70,240) --
Amortization of
Deferred Compensation -- -- -- --
Unrealized Loss on Securities
Available for Sale -- -- -- --
Net Income for the Year -- -- -- 1,402,169
-------- ------ ---------- ---------
Balance - October 31, 1995 6,075,514 60,755 22,283,938 (11,023,441)
Shares Issued in Connection
with an Acquisition 10,000 100 23,900 --
Shares Issued in Connection
with an Acquisition [Including
Shares Remaining in Escrow] 72,688 727 94,208 --
Shares Issued in Lieu
of Payment for Service 4,000 40 9,560 --
Shares issued in Lieu
of an Invoice Payment 4,745 48 17,151 --
Shares Issued in Connection
with an Acquisition Agreement
[Including Shares Remaining in
Escrow] 133,333 1,333 37,748 --
Options Issued for
Deferred Compensation -- -- 27,200 --
Amortization of
Deferred Compensation -- -- -- --
Unrealized Loss on Securities
Available for Sale -- -- -- --
Net Income for the Year -- -- -- 591,958
--------- ------- ---------- ---------
Balance - October 31, 1996 6,300,280 $63,003 $22,493,705 $(10,431,483)
========= ======= =========== ==========
Unrealized Loss
---------------
on Securities Total
------------- -----
Deferred Available Shareholders'
Compen- --------- ------------
sation for Sale Equity
-------- -------- ------
<S> <C> <C> <C>
Balance - October 31, 1994 $(65,135) $ -- $8,246,464
Shares Issued from
Exercise of Warrants -- -- 18,150
Shares Issued in Connection
with an Acquisition -- -- 1,634,074
Shares Issued in Lieu
of Payment for Service -- -- 25,500
Expenses Associated
with Public Offering -- -- (70,240)
Amortization of
Deferred Compensation -- -- 47,635
Unrealized Loss on Securities
Available for Sale -- (47,998) (47,998)
Net Income for the Year -- -- 1,402,169
-------- ------- ----------
Balance - October 31, 1995 (17,500) (47,998) 11,255,754
Shares Issued in Connection
with an Acquisition -- -- 24,000
Shares Issued in Connection
with an Acquisition [Including
Shares Remaining in Escrow] -- -- 94,935
Shares Issued in Lieu of
Payment for Service -- -- 9,600
Shares issued in Lieu of
an Invoice Payment -- -- 17,199
Shares Issued in Connection
with an Acquisition Agreement
[Including Shares Remaining in
Escrow] -- -- 39,081
Options Issued for
Deferred Compensation (27,200) -- --
Amortization of Deferred
Compensation 22,483 -- 22,483
Unrealized Loss on Securities
Available for Sale -- 47,998 47,998
Net Income for the Year -- -- 591,958
------ ------ -------
Balance - October 31, 1996 $(22,217) $ -- $12,103,008
====== ======== ==========
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.<PAGE>
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
- -----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
<TABLE>
<CAPTION>
Years ended
-----------
October 31,
-----------
1 9 9 6 1 9 9 5
------- -------
<S> <C> <C>
Operating Activities:
Net Income $ 591,958 $ 1,402,169
---------- --------
Adjustments to Reconcile Net Income to Net
Cash [Used for] Operating Activities:
Depreciation and Amortization 1,033,886 959,731
Amortization of Deferred Compensation 22,483 47,635
Expenses of Abandoned Acquisition 90,700 --
Shares Issued for Services -- 25,500
Provision for Doubtful Accounts 4,285,807 4,030,030
Other 20,242 (9,285)
Gain from Sale of Marketable Securiti (9,336) --
Gain on Sale of Assets (1,546) --
Changes in Assets and Liabilities
[Net of Effects from Acquisitions]:
[Increase] Decrease in:
Accounts Receivable (7,672,430) (6,442,884)
Other Assets (81,868) (63,230)
Inventory 60,931 (141,940)
Prepaid Expenses and Other Current Assets 12,046 (271,111)
Increase [Decrease] in:
Accounts Payable and Accrued Liabilities (126,411) (299,189)
Taxes Payable (121,927) (6,986)
---------- --------
Total Adjustments (2,487,423) (2,171,729)
---------- --------
Net Cash - Operating Activities - Forward (1,895,465) (769,560)
---------- --------
Investing Activities:
Acquisition of Property and Equipment (451,576) (424,180)
Proceeds from Sale of Property and Equipment 29,652 45,961
Purchase of Marketable Securities -- (492,619)
Proceed from Sale of Marketable Securities 501,955 --
Purchase of Certificate of Deposit (180,000) (3,665,650)
Maturities of Certificate of Deposit 165,650 --
Cash Acquired During Acquisition -- 42,338
Cash Overdraft of Acquired Company (3,797) --
Reduction of Deposits 63,146 22,649
Repayment of Related Party Receivable 15,800 10,400
Payment for Acquisition of Intangible Assets (1,564,363) (290,081)
---------- --------
Net Cash - Investing Activities - Forward $ (1,423,533) $ (4,751,182)
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
- -----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
<TABLE>
<CAPTION>
Years ended
-----------
October 31,
-----------
1 9 9 6 1 9 9 5
------- -------
<S> <C> <C>
Net Cash - Operating Activities - Forwarded $ (1,895,465) $ (769,560)
---------- --------
Net Cash - Investing Activities - Forwarded (1,423,533) (4,751,182)
---------- --------
Financing Activities:
Proceeds from Long-Term Debt 1,180,000 394,756
Payments of Long-Term Debt (2,083,476) (2,679,620)
Payments of Capital Lease Obligations (236,472) (297,642)
Payments of Subordinated Notes Payable (7,920) (51,039)
Increase in Revolving Line of Credit 3,687,448 5,391,296
Increase in Restricted Cash 1,544,646 2,055,354
Proceeds from Exercise of Warrants -- 18,150
Expenses of Public Offering of Stock -- (70,240)
---------- --------
Net Cash - Financing Activities 4,084,226 4,761,015
---------- --------
Net Increase [Decrease] in Cash 765,228 (759,727)
Cash - Beginning of Years 636,246 1,395,973
---------- --------
Cash - End of Years $ 1,401,474 $ 636,246
========== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 815,521 $ 531,381
Income Taxes $ 86,331 $ 81,686
</TABLE>
Supplemental Schedule of Non-Cash Investing and Financing Activities:
In November 1994, the Company purchased a customer list from a non-
affiliated party. As consideration for the customer list, the seller received
$120,000 of which $30,000 was paid at the closing and the remainder is to be
paid over 5 1/2 years based on the cash collected from customer list revenues.
In December 1994, the Company incurred capital lease obligations of
$13,713 in connection with the acquisition of office furniture and $12,130 in
connection with the acquisition of leasehold improvements.
In January 1995, the Company incurred a capital lease obligation of
$58,994 in connection with the acquisition of a computer imaging system.
In January 1995, $44,119 of trade accounts payable was converted
into debt.
In January 1995, the Company assumed capital lease obligations of
$31,793 for four automobiles in connection with an acquisition.
In October 1995, the Company incurred a capital lease obligation of
$54,117 in connection with the acquisition of medical equipment.
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
- -----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
Supplemental Schedule of Non-Cash Investing and Financing Activities
[Continued]:
In October 1996, the Company incurred a capital lease obligation of
$69,812 in connection with the acquisition of medical equipment.
Management wrote-off an intangible asset with a carrying value of
$197,986 and related debt in the amount of $168,528 in connection with an
impaired contract.
The Company issued debt in the amount of $108,000 in connection with
the acquisition of a customer list.
Management wrote-off an intangible asset with a carrying value of
$90,700 in connection with an abandoned acquisition.
[See Notes 8 and 17 for additional non-cash transactions]
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
<PAGE>
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
[1] Organization and Business
Bio-Reference Laboratories, Inc. [the "Company"] 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 the
clinical laboratory segment of its operations, principally servicing the greater
New York metropolitan area.
[2] Summary of Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary [See Note 17B]. All
significant intercompany accounts and transactions have been eliminated.
Revenue Recognition - Revenues are recognized at the time the services are
performed. Revenues on the statements of operations are as follows:
<TABLE>
<CAPTION>
Years ended
-----------
October 31,
-----------
1 9 9 6 1 9 9 5
------- -------
<S> <C> <C>
Gross Revenues $ 66,768,717 $ 56,097,026
---------- ----------
Contractual Adjustments and Discounts:
Medicare/Medicaid Portion 18,620,485 15,560,866
Other 13,022,354 9,015,042
---------- ---------
Total Contractual Adjustments and Discounts 31,642,839 24,575,908
---------- ----------
Net Revenues $ 35,125,878 $ 31,521,118
========== ============
</TABLE>
A number of proposals for legislation or regulation are under discussion which
could have the effect of substantially reducing Medicare reimbursements to
clinical laboratories. Depending upon the nature of regulatory action, if any,
which is taken and the content of legislation, if any, which is adopted, the
Company could experience a significant decrease in revenues from Medicare and
Medicaid, which could have a material adverse effect on the Company. The
Company is unable to predict, however, the extent to which such actions will be
taken.
Restricted Cash and Certificates of Deposit - At October 31, 1996, the Company
had $852,000 and $3,680,000 of restricted cash and certificates of deposit,
respectively, which represents collateral for two demand notes and a long-term
debt agreement.
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 $5,357,096 and $2,569,125 as of October 31, 1996 and 1995,
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.
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 8 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 $404,248 and $368,478 for the years ended October 31, 1996 and
1995, respectively.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- ----------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
Property and Equipment [Continued] - 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, 1996 and 1995 of $209,211 and $187,936, respectively.
Management of the Company evaluates the period of goodwill amortization to
determine whether later events and circumstances warrant revised estimates of
useful lives. On a quarterly basis, management evaluates whether the carrying
value of goodwill has become impaired. This evaluation is done by comparing the
carrying value of goodwill to the value of projected discounted net cash flow
from related operations. Impairment is recognized if the carrying value of
goodwill is greater than the projected discounted net cash flow from related
operations.
Intangible Assets - Intangible assets primarily include customer lists and
covenants not-to-compete. These costs are generally amortized over a 20 and 5
year life, respectively, using the straight-line method, however, one covenant
not-to-compete has a 7-1/2 year life. Also included in intangible assets are
costs related to an employment agreement and costs related to acquisitions,
which are being amortized over the lives of the agreements which are from 2 to 5
years. Also included is a patent which is being amortized over 17 years. The
statements of operations reflect amortization expense related to intangible
assets of $420,427 and $403,317 for the years ended October 31, 1996 and 1995,
respectively.
A summary is as follows:
<TABLE>
<CAPTION>
Accumulated Net of
----------- ------
Amortization Amortization
------------ ------------
October 31, October 31,
---------- ----------
Cost 1 9 9 6 1 9 9 6
---- ------- -------
<C> <C> <C> <C>
Customer Lists $ 3,377,042 $ 410,111 $ 2,966,931
Covenants Not-to-Compete 1,420,206 720,250 699,956
Employment Agreement 400,000 206,666 193,334
Costs Related to Acquisitions 302,741 106,356 196,385
Patent 100,000 -- 100,000
Other 8,562 882 7,680
----------- ------------ -------------
Totals $ 5,608,551 $ 1,444,265 $ 4,164,286
========= ========= =========
</TABLE>
Management of the Company evaluates the period of amortization for its
intangible assets to determine whether later events and circumstances warrant
revised estimates of useful lives. On a quarterly basis, management evaluates
whether the carrying value of these intangible assets has become impaired. This
evaluation is done by comparing the carrying value of these intangible assets to
the value of projected discounted net cash flow from related operations.
Impairment is recognized if the carrying value of these intangible assets is
greater than the projected discounted net cash flow from related operations.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
- -----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- ----------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
Cash and Cash Equivalents - Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased.
Nonmonetary Stock Issuances - The Company issues shares of common stock in
payment for services rendered to the Company. The estimated fair value of the
shares issued approximates the value of the services provided.
[3] Note Payables - Banks
[A] In July 1996, 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) $9,000,000 or (ii) 50% of the Company's qualified accounts
receivable [as defined in the agreement] plus 100% of the face amount of the
certificates of deposit 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 certificate 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 is collateralized by substantially all of the
Company's assets [including $3,680,000 in certificates of deposit with PNC] and
the assignment of a $4,000,000 life insurance policy on the president of the
Company. The line of credit is available for a period of one year and may be
extended for annual periods by mutual consents, 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, 1996, the Company was in compliance with
the covenant provisions of this agreement. As of October 31, 1996, the Company
had utilized all of this credit facility, plus an additional $78,741 due to cash
overdrafts [See Note 22A].
[B] On January 26, 1994, $3,352,000 was received for a demand note payable to
Gotham Bank of New York. Interest is due at three percent above the bank's
corporate savings account rate. As of October 31, 1996, $2,500,000 was paid
against the principal on this note. The Company has $852,000 in a savings
account with this bank restricted as collateral for the loan.
[4] Long-Term Debt
<TABLE>
<CAPTION>
October 31,
----------
1 9 9 6
-------
<S> <C>
[A] Note Payable to PNC Bank. Due October 1999.
Interest at prime plus 1.25%. $294,760
[B] Note Payable to PNC Bank. Due July 2000.
Interest at certificate of deposit rate plus 2%. 168,750
[B] Note Payable to PNC Bank. Due July 2000.
Interest at prime plus 1.75%. 937,501
[C] Note Payable to SmithKline Beecham Clinical
Laboratories, Inc. Due January 1, 1999.
Interest imputed at 8.25%. 551,373
[D] Various note payables to prior CML owners.
Maturities ranging from February 1997 to November 1998.
Interest ranging from 6% to 10.75%. 175,238
Sclavo, Inc. Payments dependent on collections received from
customer list. Interest at 10%. 36,569
------
Total 2,164,191
Less: Current Maturities 730,374
-------
Long-Term Debt $1,433,817
--------------
</TABLE>
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
- -----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- ----------------------------------------------------
[4] Long-Term Debt [Continued]
Prime rate at October 31, 1996 was 8.25%.
The weighted average interest rate on short-term borrowings outstanding as of
October 31, 1996 was 8.7%.
[A] In June 1995, the Company entered into an agreement to borrow up to $400,000
to purchase equipment. During October 1995, the Company borrowed $394,756 under
this agreement. The loan, which bears interest at an annual rate of prime +
1.25%, is due in monthly installments of $8,333 plus interest through October
1999. This note is in accordance with the provisions of the Company's revolving
loan agreement [See Note 3A] with the same lender. At October 31, 1996, the
outstanding balance remaining is $294,760.
[B] In July 1996, the Company entered into an agreement to borrow $1,180,000.
The original principal balance of $1,000,000 is not collateralized by a
certificate of deposit and bears an interest rate of prime + 1.75%. The
remaining original principal balance of $180,000 that is collateralized by a
certificate of deposit bears interest at the certificate of deposit rate + 2%.
This note is in accordance with the provisions of the Company's revolving loan
agreement [See Note 3A] with the same lender. At October 31, 1996, the
outstanding balance remaining on the uncollateralized note is $937,501 and the
collaterized note has a balance of $168,750.
[C] In July 1996, the Company purchased certain assets and rights from
SmithKline Beecham Clinical Laboratories, Inc. for a total purchase price of
$1,800,000. At the closing, $1,200,000 was paid in cash and the $600,000
remaining balance is due in 24 consecutive monthly installments of $25,000
commencing January 1, 1997. Interest was imputed at the prime rate. At October
31, 1996, the outstanding debt balance is $551,373 [See Note 22B].
[D] In connection with the acquisition of Community Medical Laboratories
["CML"], the Company assumed the promissory notes of prior CML noteholders by
issuing Company's debentures in the principal amount of $200,174. At October
31, 1996, the outstanding balance remaining is $175,238.
Maturities of long-term debt at October 31, 1996 in each of the next five years
are as follows:
<TABLE>
<CAPTION
<S> <C>
1997 $730,374
1998 765,752
1999 446,808
2000 221,257
2001 --
-------
Total $2,164,191
- ----- ==========
</TABLE>
[5] Convertible Subordinated Debt
The following is a summary of the convertible subordinated debt as of October
31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Note
----
5[A] $ 8,100
5[B] 235,729
--------
Total $ 243,829
----- ========
</TABLE>
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
- -----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- ----------------------------------------------------
[5] Convertible Subordinated Debt [Continued]
[A] During August and September of 1989, through a private offering, the Company
sold 12% convertible subordinated promissory notes. As of October 31, 1996,
$8,100 is in default on these notes.
[B] In January 1995, the Company issued two 8% convertible subordinated
debentures, which are due in January 1997, for $206,956 and $31,732 in
connection with the Company's acquisition of GenCare. Through October 31, 1996,
$2,959 have been repaid [See Note 23].
[6] Related Party Transactions
On October 1, 1989, a 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. Also, on October 1, 1989, this officer agreed to rent one mobile
van from the Company at an annual rental of $24,000. In consideration for a
personal guarantee for a $2,500,000 line of credit, as of November 1, 1991, the
Company stopped charging rent on the van and suspended interest on the note.
The Company also accepted $400 per week in principal payments on the note as of
November 1, 1992. As of October 31, 1996, $234,918 in outstanding principal,
interest and van rentals are due from the officer.
The Company pays premiums on life insurance policies for its key officers which
are to be reimbursed by the officers if one or all leave the Company. 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, 1996,
$336,037 is included in other assets which represents the amount of premiums
paid to date.
[7] Income Taxes
The reconciliation of the provision for income taxes is as follows:
<TABLE>
<CAPTION>
October 31,
-----------
1 9 9 6 1 9 9 5
------- -------
<S> <C> <C>
U.S. Federal Statutory Rate 34.0 % 34.0 %
Utilization of Net Operating
Loss Carryforward (25.9)% (30.6)%
----- -----
Actual Rate 8.1 % 3.4 %
------------ === =====
</TABLE>
<TABLE>
<CAPTION>
The provision for income taxes shown in the consolidated statements of
operations consist of the following:
October 31,
-----------
1 9 9 6 1 9 9 5
------- -------
<S> <C> <C>
Federal $340,428 $ 547,815
State 92,836 143,355
Benefit of Operating Loss Carryforward (381,402) (641,945)
-------- --------
Total Provision for Income Taxes $ 51,862 $ 49,225
-------------------------------- ======== ========
</TABLE>
Generally accepted accounting principles require deferred tax assets and
liabilities to be determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
Temporary differences between financial reporting and tax bases of assets and
liabilities are related to depreciation, vacation and sick pay accruals and
amortization of intangibles.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
- -----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- ----------------------------------------------------
[7] Income Taxes [Continued]
At October 31, 1996, the Company had net operating loss carryforwards of
approximately $8,900,000 for income tax purposes. The carryforwards expire in
years from 2004 through 2009. The following summarizes the operating loss
carryforwards by year of expiration:
<TABLE>
<CAPTION>
Expiration Date Amount
- --------------- ------
<S> <C>
2004 $ 1,600,000
2005 1,400,000
2006 1,800,000
2007 1,300,000
2008 2,400,000
2009 400,000
----------
Total $ 8,900,000
----- ==========
</TABLE>
Investment tax credit carryforwards of approximately $32,161 are available to
reduce future income taxes. These credits expire from 1997 to 2002.
At October 31, 1996, the Company has a deferred tax asset of approximately
$3,600,000 and a valuation allowance of approximately $3,600,000 related to the
asset, a decrease of $100,000 since October 31, 1995. The deferred tax asset
primarily relates to net operating loss carryforwards.
[8] Capital Transactions
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.
The Company is authorized to issue an aggregate of 1,666,667 shares of preferred
stock, $.10 par value. In April 1993, the Board of Directors of the Company
authorized the change of 604,078 shares from the preferred stock to a new class
of Preferred Stock, called "Senior Preferred Stock" which has the same voting
rights [one vote per share], dividend rights and liquidation rights as each
share of common stock and for a period of ten years after issuance is
convertible into one share of common stock upon payment of a conversion price of
$1.50 per share. In April 1993, in order to facilitate a public offering
contemplated by the Company, Dr. Grodman agreed to cancel his pro-rata option
contained in his employment contract and to cancel other outstanding options and
warrants to purchase 604,078 shares of Common Stock at prices ranging from $1.45
to $1.50 per share, in consideration for the issuance of 604,078 shares of
Senior Preferred Stock. These shares of Senior Preferred Stock were issued in
August 1993.
On January 1, 1995, the Company acquired GenCare Biomedical Research Corporation
["GenCare"] in a business combination accounted for under the purchase method of
accounting. All of the issued and outstanding common and preferred stock of
GenCare was acquired for an aggregate 444,585 shares of the Company's common
stock [subject to possible increase in the event of a future decrease in the
market price of the common stock]. An aggregate 133,333 shares are being held
in escrow pending certain required collections from GenCare customers. The fair
market value of the 311,252 shares to be issued immediately was $1,634,074 on
the date of the closing. During 1996, 42,413 shares held in escrow were
released when collection requirements were met.
In April 1995, the Company issued 12,000 shares of common stock in payment of a
$25,500 fee to a public relations firm pursuant to a one year renewable
contract.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
- -----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- ----------------------------------------------------
[8] Capital Transactions [Continued]
On July 27, 1995, an aggregate of 10,000 shares of the Company's $.01 par value
common stock was issued upon exercise of a private placement warrant.
On November 7, 1995, the Company acquired Oncodec Labs, Inc. in a business
combination accounted for under the purchase method of accounting. All of the
issued and outstanding common stock of Oncodec Labs, Inc. was acquired for a
maximum of 40,000 shares of the Company's common stock. At the closing, Oncodec
Labs, Inc. received 10,000 shares and the additional 30,000 shares will be
issued contingent upon receipts obtained through December 31, 1998.
On November 10, 1995, the Company acquired Community Medical Laboratories
["CML"] in a business combination accounted for under the purchase method of
accounting. All of the issued and outstanding common stock of CML was acquired
for an aggregate 72,688 shares of the Company's common stock. In addition, CML
delivered CML notes, totaling $399,958 including accrued interest through
October 31, 1995 in exchange for an aggregate $200,174 in principal amount of
the Company's debentures. The 72,688 shares of the Company's stock will be held
in escrow pending certain required collections from CML customers. In addition,
the Company entered into a five year employment agreement for an annual salary
of $60,000 contingent on revenue received from specified draw stations. This
acquisition was not significant to the Company.
In November 1995, the Company issued 4,000 shares of common stock in payment of
a finders fee.
In December 1995, the Company issued 4,745 shares of common stock in lieu of
payment of an invoice for $17,199.
[9] Income Per Share
Income per share is based on the weighted average number of shares of common
stock outstanding during each period. Equity equivalents are assumed exercised
or converted if dilutive.
[10] Stock Options and Warrants
[A] Employment Incentive Stock Options - In April 1986, the shareholders
approved and the Company adopted the 1986 Employee Stock Option Plan ["1986
Plan"] under which 3,667 shares of common stock have been reserved for issuance
to persons rendering services to the Company. 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. Weighted
average remaining contractual lives are five years for these options. At
October 31, 1996, there were 188,290 shares reserved for future grants under the
1986 and 1989 plans. No stock appreciation rights have been granted. Following
is a summary of transactions as of October 31, 1996:
<TABLE>
<CAPTION>
Shares Under
------------
Options
-------
<S> <C>
Outstanding - Beginning of Year 482,044
Granted During the Year --
Expired During the Year --
Exercised During the Year --
--------
Outstanding and Eligible at end of
----------------------------------
Year for Exercise 482,044
---------------- =======
</TABLE>
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
- -----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
- ----------------------------------------------------
[10] Stock Options and Warrants [Continued]
<TABLE>
<CAPTION>
Weighted Average
----------------
Shares Under Exercise Price
--------------- ------------
Option Per Share
------ ---------
<S> <C> <C>
Exercise Prices $1.3125 to $2.025 Per Share 447,710 $ 1.44
Exercise Prices $3 to $4.625 Per Share 34,334 3.05
-- 482,044
======= =============
</TABLE>
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." The excess of the
current market value for the stock at the date of grant over the option price
has been accounted for as deferred compensation and is being expensed over their
respective exercise period.
Total compensation cost recognized against income for stock-based employee
compensation awards was $-0- for both of the years ended October 31, 1996 and
1995.
[B] Non Incentive Stock Options and Warrants [Non-Employees] - The Financial
Accounting Standards Board ["FASB"] issued Statement of Financial Accounting
Standards ["SFAS"] No. 123, "Accounting for Stock-Based Compensation," in
October 1995. SFAS No. 123 uses a fair value based method of accounting for
stock options and similar equity instruments as contrasted to the intrinsic
value based method of accounting prescribed by Accounting Principles Board
["APB"] Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No.
123 was adopted for financial note disclosure purposes for nonemployee stock
options granted after December 15, 1995. The accounting requirements of SFAS
No. 123 are effective for transactions entered into in fiscal years that begin
after December 15, 1995; the disclosure requirements of SFAS No. 123 are
effective for financial statements for fiscal years beginning after December 15,
1995.
Non-incentive stock options and warrants may be granted at fair market value or
at a price less than fair market value. Following is a summary of transactions
as of October 31, 1996:
<TABLE>
<CAPTION>
Shares Under Options
-------------------
and Warrants
------------
<S> <C>
Outstanding - Beginning of Year 6,089,047
Granted During the Year 40,000
Expired During the Year (106,667)
Exercised During the Year --
--------
Outstanding and Eligible at End of Year for Exercise 6,022,380
- ---------------------------------------------------- =========
</TABLE>
During the year ended October 31, 1996, 40,000 shares under options were granted
to two non-employees. Since these warrants were issued after December 15, 1995,
the Company accounts for these non-employee warrants using a fair value
methodology in accordance with Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation". 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 6.8%, 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 50.75%. Dividends are not expected to
be available to shareholders during the expected life of the warrants.
The fair value of these warrants issued in December of 1995 of $27,200 [$.68 per
share] has been accounted for as deferred compensation for the year ended
October 31, 1996 and is being expensed over the term of the agreement, 5 years.
Total compensation expense recognized against income for this deferred
compensation was $4,983 and $-0-, respectively for the years ended October 31,
1996 and 1995.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
- -----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- ----------------------------------------------------
[10] Stock Options and Warrants [Continued]
[B] Non Incentive Stock Options and Warrants [Non-Employees] [Continued] - The
weighted average exercise price on these options was $3 per share and the
weighted average grant date fair value was determined to be $13,600.
<TABLE>
<CAPTION>
Shares Under Weighted Average
------------ ---------------
Options and Exercise Price
----------- ---------------
Warrants Per Share
--------- ---------
<S> <C> <C>
Warrants with an Exercise Price
of $1.50 Per Share 253,200 $ 1.5
Warrants with an Exercise Price of
$4.50 Per Share 3,789,175 4.5
Warrants with an Exercise Price of
$6.75 Per Share 1,226,666 6.75
Options with an Exercise Price of
$1.3125 to $1.50 Per Share 328,337 1.4
Options with an Exercise Price
of $2.625 to $3.75 Per Share 50,002 3
Options with an Exercise Price of
$4.125 to $5.125 Per Share 375,000 4.7
--------
6,022,380
=========
</TABLE>
These warrants and options have weighted average remaining contractual lives of
two years.
[11] Employment Contracts and Consulting Agreements
The Company has entered into various employment contracts and consulting
agreements for periods ranging from one to six years. At October 31, 1996, the
aggregate minimum commitment under these contracts and agreements, excluding
bonuses and commissions, was approximately as follows:
<TABLE>
<CAPTION>
October 31,
- -----------
<S> <C>
1997 $ 592,333
1998 211,250
1999 133,333
2000 63,333
2001 and Thereafter --
--------
Total $ 1,000,249
------ =========
</TABLE>
Most 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, two employment agreements are for indefinite periods
and provide for annual aggregate minimum commitments of $186,700.
[12] Capitalized Lease Obligations
The Company leases various assets under capital leases expiring in 2000 as
follows:
<TABLE>
<CAPTION>
October 31,
-----------
1 9 9 6
--------
<S> <C>
Medical Equipment $ 650,690
Furniture and Fixtures 11,565
Leasehold Improvements 12,130
-------
Total 674,385
Less: Accumulated Depreciation 274,704
-------
Net $ 399,681
--- =======
</TABLE>
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
- -----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
- -----------------------------------------------------
[12] Capitalized Lease Obligations [Continued]
Depreciation and amortization expense was $106,191 and $170,601 for the years
ended October 31, 1996 and 1995, respectively. Approximately $80,000 of
capitalized lease obligations have not been paid when due.
Aggregate future minimum rentals under capital leases are:
<TABLE>
<CAPTION>
Years ended
- -----------
October 31,
- -----------
<S> <C>
1997 $ 229,995
1998 44,268
1999 39,709
2000 33,382
2001 --
Thereafter --
---------
Total 347,354
Less: Interest 45,643
---------
Present Value of Minimum Lease Payments $ 301,711
- --------------------------------------- =========
</TABLE>
[13] Commitments and Contingencies
The Company leases various office and laboratory facilities and equipment under
operating leases expiring from 1996 to 2001. 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,
1996 and 1995 was $1,850,085 and $1,640,360, respectively. There were no
contingent rental amounts due through October 31, 1996.
Aggregate future minimum rental payments on noncancelable operating leases are
as follows:
<TABLE>
<CAPTION>
Property Equipment
-------- ---------
October 31,
- -----------
<S> <C> <C>
1997 $ 645,717 $ 605,358
1998 462,023 511,172
1999 142,750 393,530
2000 -- 249,382
2001 -- 114,620
Thereafter -- --
--------- ---------
Totals $ 1,250,490 $ 1,874,062
------- ========= ========
</TABLE>
[14] Litigation
In the normal course of its business, the Company is exposed to a number of
asserted and unasserted potential claims. In the opinion of management, the
resolution of these matters will not have a material adverse effect on the
Company's financial position or results of operations [See Note 22B].
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
- -----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
- -----------------------------------------------------
[15] 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.
[16] Concentrations of Credit Risk
At October 31, 1996, the Company had approximately $5,300,000 in cash balances
at financial institutions which were in excess of the federally insured limits.
Substantially all of this amount represents collateral for demand loans with the
same financial institutions.
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. 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 limited.
[17] Acquisitions
[A] On November 16, 1994, the Company purchased a customer list and two leased
draw stations from a clinical laboratory. As consideration, the Company assumed
the sellers obligations under the draw station leases and entered into an
agreement to pay up to $600,000 over a five and one-half year period based on
cash collected on customer list revenues. The minimum liability for these
payments is $120,000, of which $30,000 was paid at the closing. In addition,
the Company entered into a five year employment agreement with a senior
marketing representative for an annual base salary of $40,000 plus commissions
based on sales.
[B] On January 4, 1995 [effective as of November 1, 1994], the Company acquired
GenCare Biomedical Research Corporation ["GenCare"] in a business combination
accounted for under the purchase method of accounting. GenCare provides
clinical testing services for the detection, differentiation and staging of
cancer, genetic and infectious diseases. Their customers include hospitals,
medical centers, reference laboratories and large medical practices. All of the
issued and outstanding common and preferred stock of GenCare was acquired for an
aggregate 444,585 shares of the Company's common stock [subject to possible
increase in the event of a future decrease in the market price of the common
stock]. An aggregate 133,333 shares are to be held in escrow pending certain
required collections from GenCare customers. The fair market value of the
311,252 shares to be issued immediately was $1,634,074 on the date of the
closing. The total cost of the acquisition was $1,634,074 which exceeded the
fair value of the net assets of GenCare by $2,119,213. The excess is being
amortized using the straight-line method over 20 years. In addition, if the
specific collection levels are achieved, the 133,333 shares in escrow will be
recorded as an additional cost of the acquisition at the fair market value of
the shares at the time they are issued. As of October 31, 1996, 42,413 shares
held in escrow were issued due to specific collection levels being achieved.
[C] On November 7, 1995, the Company acquired Oncodec Labs, Inc. in a business
combination accounted for under the purchase method of accounting. All of the
issued and outstanding common stock of Oncodec Labs, Inc. was acquired for a
maximum of 40,000 shares of the Company's common stock. At the closing, Oncodec
Labs, Inc. received 10,000 shares and the additional 30,000 shares will be
issued contingent upon receipts obtained through December 31, 1998. This
acquisition was not significant to the Company. During 1996, Oncodec Labs, Inc.
was dissolved and is now part of the operations of the Company.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
- -----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
- -----------------------------------------------------
[17] Acquisitions [Continued]
[D] On November 10, 1995, the Company acquired Community Medical Laboratories
["CML"] in a business combination accounted for under the purchase method of
accounting. All of the issued and outstanding common stock of CML was acquired
for an aggregate 72,688 shares of the Company's common stock. In addition, CML
delivered CML notes totaling an aggregate $399,958 including accrued interest
through October 31, 1995 in exchange for an aggregate $200,174 in principal
amount of the Company's debentures. The 72,688 shares of the Company's stock
will be held in escrow pending certain required collections from CML customers.
In addition, the Company entered into a five year employment agreement for an
annual salary of $60,000 contingent on revenue received from specified draw
stations. This acquisition was not significant to the Company. As of October
31, 1996, 23,611 shares were released from escrow. During 1996, CML was
dissolved and is now part of the operations of the Company.
[E] In May 1996, the Company acquired certain assets and rights of Advanced
Medical Laboratory, Inc. ["AML"] for a maximum amount of $612,000 of which
$180,000 was paid at closing. The remaining maximum balance of $432,000 is
payable over a three year period solely out of cash collected on customer list
revenues. AML has revenues of approximately $900,000 in the most recent fiscal
year. This acquisition was not significant to the Company.
[F] On July 19, 1996, BRLI completed the purchase from SmithKline Beecham
Clinical Laboratories, Inc. ["SBCL"] of certain assets and rights, including the
Customer List related to SBCL's operation of its Renal Dialysis Testing
Business. The purchase price was $1,800,000 of which $1,200,000 was paid at the
closing. The $600,000 balance is payable in 24 consecutive monthly installments
of $25,000 commencing January 1, 1997. At the closing, SBCL agreed for a three
year period commencing no more than 120 days after the closing, to cease
performing renal dialysis clinical laboratory testing services for renal
dialysis centers or other entities which provide diagnosis and/or treatment to
dialysis patients. Funding for the $1,200,000 down payment made by BRLI at the
closing was provided pursuant to its term loan and credit line facilities with
PNC Bank [formerly Midlantic Bank, N.A.]. The Company estimates that
approximately $1,000,000 in annual revenues could be generated by this
acquisition [See Note 22B].
[18] 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.
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 6].
<TABLE>
<CAPTION>
October 31, 1996
----------------
Carrying Fair
-------- ----
Amount Value
------ -----
<S> <C> <C>
Long-Term Debt $ 1,433,817 $ 1,430,140
</TABLE>
[19] Health Insurance Plan
The Company has a limited self-funded health insurance plan for its employees
under which the Company pays the initial $35,000 of covered medical expenses per
person per year. The Company has a contract with an insurance carrier for any
excess.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
- -----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
- -----------------------------------------------------
[20] Employee Benefit Plan
In June 1994, the Company began sponsoring 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 of $9,500 in 1996 as adjusted for
inflation. 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, 1996, 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.
[21] New Authoritative Accounting Pronouncements
The Financial Accounting Standards Board ["FASB"] issued 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," in March 1995. SFAS
No. 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. SFAS No. 121 is effective for financial
statements issued for fiscal years beginning after December 15, 1995. Adoption
of SFAS No. 121 is not expected to have a material impact on the Company's
financial statements.
The FASB has also issued SFAS No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities". SFAS No. 125 is effective
for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996. Earlier application is not
allowed. The provisions of SFAS No. 125 must be applied prospectively;
retroactive application is prohibited. Adoption on January 1, 1997 is not
expected to have a material impact on the Company. Some provisions of SFAS No.
125, which are unlikely to apply to the Company, have been deferred by the FASB.
[22] Subsequent Events
[A] Increase in Revolving Note - On December 23, 1996, PNC Bank amended and
restated its agreement with the Company to increase the secured revolving note
to $9,500,000 until February 28, 1997, at which time it will revert back to
$9,000,000 [See Note 3A].
[B] Litigation - 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 and claims
unspecified amounts of compensatory and punitive damages and related costs.
This lawsuit is in its initial stages and no assurances can be given at this
time that it will be concluded in the Company's favor. As a result of its
allegations against SBCL, the Company has not made any payments with respect to
the $600,000 note payable [See Notes 4C and 17F].
[23] Subsequent Events [Unaudited]
Payment on Convertible Subordinated Debentures - In January 1997, the Company
reached a verbal agreement with the former owners of GenCare to extend payment
of approximately $235,000 in convertible subordinated debentures.
. . . . . . . . . .
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from (a) the
Balance Sheet and Statement of Operations filed as part of the Annual Report on
Form 10-KSB and is qualified in its entirety by reference to such (b) Report on
Form 10-KSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<CASH> 2,253,474
<SECURITIES> 0
<RECEIVABLES> 12,019,761
<ALLOWANCES> 5,357,096
<INVENTORY> 394,377
<CURRENT-ASSETS> 18,666,794
<PP&E> 2,577,130
<DEPRECIATION> 1,265,836
<TOTAL-ASSETS> 28,230,736
<CURRENT-LIABILITIES> 14,594,347
<BONDS> 12,640,472
0
0
<COMMON> 63,003
<OTHER-SE> 22,493,705
<TOTAL-LIABILITY-AND-EQUITY> 28,230,736
<SALES> 35,125,878
<TOTAL-REVENUES> 35,125,878
<CGS> 18,136,395
<TOTAL-COSTS> 33,929,642
<OTHER-EXPENSES> 552,416
<LOSS-PROVISION> 4,285,807
<INTEREST-EXPENSE> 840,811
<INCOME-PRETAX> 591,958
<INCOME-TAX> 51,862
<INCOME-CONTINUING> 591,958
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 591,858
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
