FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended July 31, 1997
AND
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-15266
BIO-REFERENCE LABORATORIES, INC.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2405059
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
481 Edward H. Ross Drive, Elmwood Park, NJ 07407
(Address of principal executive offices) (Zip Code)
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(Registrant's telephone number, including area code) (201) 791-2600
-------------------
- ------------------------------------------------------------------------------
(Former name,former address and former fiscal year,if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Securities and Exchange Act of 1934
after the distribution of securities under a plan confirmed by a court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 7,115,280 ($.01 par value) at
September 11, 1997.
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BIO-REFERENCE, LABORATORIES, INC.
FORM 10-Q
JULY 31, 1997
I N D E X
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet as of July 31, 1997 (unaudited) 1
Statements of Operations for the
three months and nine months ended July 31, 1997
and July 31, 1996 (unaudited) 3
Statements of Cash Flows for the
nine months ended July 31, 1997 and July 31,
1996 (unaudited) 4
Notes to financial statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 11
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BIO-REFERENCE LABORATORIES, INC.
BALANCE SHEETS
ASSETS
CURRENT ASSETS:
July 31, October 31,
1997 1996
---- ----
(Unaudited)
<S> <C> <C>
Cash $ 1,218,498 $ 1,401,474
Cash- Restricted 852,000 852,000
Accounts Receivable (Net) 13,952,434 12,019,761
Inventory 501,726 394,377
Other Current Assets 465,708 442,932
Certificates of Deposit- Restricted 3,556,250 3,556,250
----------- ---------
TOTAL CURRENT ASSETS $ 20,546,616 $ 18,666,794
-------------------- ----------- ----------
PROPERTY, PLANT AND EQUIPMENT $ 2,981,559 $ 2,577,130
-----------------------------
LESS: Accumulated Depreciation 1,573,117 1,265,836
- ---- ---------- ---------
TOTAL PROPERTY,
PLANT AND EQUIPMENT - NET $ 1,408,442 $ 1,311,294
------------------------- ---------- ---------
OTHER ASSETS:
Certificates of Deposit- Restricted $ 123,750 $ --
Due from Related Party 219,318 234,918
Deposits 187,574 234,918
Goodwill (Net of Accumulated
Amortization of $1,210,330 at July 31,
1997 and 1,052,038 at October 31, 1996) 3,010,112 3,168,403
Deferred Charges (Net of Accumulated
Amortization of $1,814,297at July 31,
1997 and 1,444,265 at October 31, 1996) 3,942,254 4,164,286
Other Assets 341,037 341,037
------------- ------------
TOTAL OTHER ASSETS $ 7,824,045 $ 8,252,648
------------------ ------------- ---------
TOTAL ASSETS $ 29,779,103 $ 28,230,736
------------ ========== ==========
The Accompanying Notes are an Integral Part of These Financial Statements.
1
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BIO-REFERENCE LABORATORIES, INC.
BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
July 31, October 31,
1997 1996
---- ----
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts Payable $ 2,362,907 $ 2,139,303
Salaries and Commissions Payable 811,368 878,996
Accrued Expenses 324,790 327,876
Current Portion of Long-Term Debt 796,867 730,374
Current Portion of Leases Payable 144,417 202,147
Current Portion of Subordinated Notes 130,329 243,829
Notes Payable 10,852,000 9,930,741
Taxes Payable 176,757 141,081
----------- -------
TOTAL CURRENT LIABILITIES $15,599,435 $14,594,347
------------------------- ---------- ----------
LONG-TERM LIABILITIES:
Long-Term Portion of Long-Term Debt 880,207 1,433,817
Long-Term Portion of Leases Payable 284,956 99,564
----------- ------
TOTAL LONG-TERM LIABILITIES $ 1,165,163 99,564
--------------------------- ----------- ------
SHAREHOLDERS' EQUITY:
Preferred Stock $.10 Par Value;
Authorized 1,062,589 shares,
None Issued $ -- $ --
Senior Preferred Stock, $.10 Par Value;
Authorized 604,078 shares,
Issued and Outstanding 604,078 shares -- --
Common Stock, $.01 Par Value;
Authorized 18,333,333 shares,
Issued and Outstanding 7,115,280shares
in July 31, 1997and Issued and Outstanding
6,300,280 shares in October 31, 1996. 71,153 63,003
Additional Paid-In Capital 22,845,046 22,493,705
Accumulated [Deficit] (9,541,117) (10,431,483)
--------- ----------
Totals $13,375,082 $12,125,225
Deferred Compensation (360,577) (22,217)
----------- ------
TOTAL SHAREHOLDERS' EQUITY $13,014,505 $12,103,008
-------------------------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $29,779,103 $28,230,736
-------------------- ========== ==========
The Accompanying Notes are an Integral Part of These Financial Statements.
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BIO-REFERENCE LABORATORIES, INC.
STATEMENTS OF OPERATIONS
[UNAUDITED]
Three months ended Nine months ended
July 31, July 31,
------- -------
1 9 9 7 1 9 9 6 1 9 9 7 1 9 9 6
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET REVENUES: $9,814,415 $8,928,529 $29,064,409 $25,912,800
- ------------ ---------- ---------- ----------- -----------
COST OF SERVICES:
Depreciation $ 101,094 $ 94,292 $ 286,370 $ 276,379
Employee Related Expenses 2,130,195 2,154,055 6,467,929 6,386,869
Reagents and Lab Supplies 1,118,741 1,131,878 3,513,617 3,270,054
Other Cost of Services 1,468,769 1,239,405 4,180,300 3,536,421
---------- ---------- ----------- -----------
TOTAL COST OF SERVICES $4,818,799 $4,619,630 $14,448,216 $13,469,723
---------------------- ---------- ---------- ----------- -----------
GROSS PROFIT ON REVENUES $4,995,616 $4,308,899 $14,616,193 $12,443,077
- ------------------------
General and Administrative Expenses:
Depreciation and Amortization $ 184,459 $ 156,485 $ 549,235 468,113
Other General and Admin. Expenses 2,851,933 2,708,364 8,505,267 8,068,547
Bad Debt Expense 1,339,457 1,032,021 3,986,739 3,161,054
---------- ---------- ----------- -----------
TOTAL GENERAL AND ADMIN. EXPENSES $4,375,849 $3,896,870 $13,041,241 $11,697,714
--------------------------------- ---------- ---------- ----------- -----------
OPERATING INCOME $ 619,767 $ 412,029 $ 1,574,952 $ 745,363
----------------
OTHER (INCOME) EXPENSES:
Interest Expense $ 275,715 $ 201,501 $ 834,145 $ 590,870
Interest Income (68,664) (69,890) (202,191) (221,248)
--------- --------- ----------- -----------
TOTAL OTHER EXPENSES - NET $ 207,051 $ 131,611 $ 631,954 $ 369,622
-------------------------- ---------- --------- ----------- -----------
INCOME BEFORE TAX $ 412,716 $ 280,418 $ 942,998 $ 375,741
- -----------------
Provision for Income Taxes 45,849 -- 52,632 48,501
---------- ----------- ----------- -----------
NET INCOME $ 366,867 $ 280,418 $ 890,366 $ 327,240
- ---------- ========= ========= =========== ===========
NET INCOME PER SHARE $ .05 $ .06 $ .14 $ .06
-------------------- =========== ========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 7,115,280 6,094,259 6,571,947 6,093,205
--------------------------------------------- ========== ========== =========== ==========
The Accompanying Notes are an Integral Part of These Financial Statements.
3
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BIO-REFERENCE LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
[UNAUDITED]
Nine months ended
July 31,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 890,366 $ 327,240
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities:
Deferred Compensation 14,924 33,125
Depreciation and Amortization 835,854 744,492
Provision for Bad Debts 3,986,739 3,161,054
Gain on Sale of Marketable Securities -- (9,274)
Write-down of Impaired Assets -- 29,458
Amortized expenses related to Dianon acquisition -- 65,700
Change in Assets and Liabilities, net of
effects of acquisitions
(Increase) Decrease in:
Accounts Receivable (5,919,412) (5,533,833)
Other Assets (130,125) (35,556)
Prepaid Expenses and Other Current Assets 48,280 48,355
Deferred Charges and Goodwill (148,000) (2,167,606)
Increase (Decrease) in:
Accounts Payable and Accrued Liabilities 194,523 (87,589)
------------ ------------
NET CASH - OPERATING ACTIVITIES $ (226,851) $(3,444,434)
-------------------------------
INVESTING ACTIVITIES:
Acquisition of Equipment and
Leasehold Improvements $ (181,568) $ (481,365)
Cash overdraft assumed in
connection with acquisition -- (3,797)
Investment in Certificate of Deposit -- 192,650
----------- -----------
NET CASH - INVESTING ACTIVITIES $ (181,568) $ (382,512)
-------------------------------
FINANCING ACTIVITIES:
Proceeds from Sales of Marketable Securities -- 501,893
Payments of Long-Term Debt (595,117) (1,930,457)
Increase in Long-Term Debt 173,758 1,945,148
Payments of Capital Lease Obligations (160,957) (210,820)
Payments of Subordinated Notes Payable (113,500) (7,920)
(Increase) Decrease in Restricted Cash -- 1,427,646
Increase in Revolving Line of Credit 921,259 2,806,000
----------- -----------
NET CASH - FINANCING ACTIVITIES $ 225,443 $ 4,531,490
------------------------------- ----------- -----------
NET INCREASE (DECREASE) IN CASH $ (182,976) $ 704,544
-------------------------------
CASH AT BEGINNING OF PERIODS 1,401,474 636,246
---------------------------- ----------- -----------
CASH AT END OF PERIODS $ 1,218,498 $ 1,340,790
---------------------- =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 860,140 $ 572,908
Income Taxes $ 52,632 $ 48,501
The Accompanying Notes are an Integral Part of These Financial Statements.
4
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SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In December, 1995, the Company issued 4,745 shares of common stock in payment of
a $17,198.45 invoice due to a vendor.
In January, 1996, the Company issued debt in the amount of $108,000 in
connection with the acquisition of a customer list.
In April, 1996, 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.
In July, 1996, management wrote-off an intangible asset with a carrying value of
$90,700 in connection with an abandoned acquisition.
In October, 1996, the Company incurred a capital lease obligation of $69,812 in
connection with the acquisition of medical equipment.
In March, 1997, the Company incurred capital lease obligations (2) of $112,861
in connection with the acquisition of medical equipment.
In May, 1997, the Company issued 815,000 shares of common stock ($313,725 of
Deferred Compensation) and 35,200 non-employee stock options exercisable to
purchase 35,200 shares of the Company's common stock at $.71875 per share for
employment and consulting agreements and director fees.
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
5
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BIO-REFERENCE LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
[1] In the opinion of management, the accompanying unaudited condensed financial
statements reflect all adjustments [consisting only of normal adjustments and
recurring accruals] which are necessary to present a fair statement of the
results for the interim periods presented. [2] The results of operations for the
nine month period ended July 31, 1997 are not necessarily indicative of the
results to be expected for the entire year. [3] The financial statements and
notes thereto should be read in conjunction with the financial statements and
notes for the year ended October 31, 1996 as filed with the Securities and
Exchange Commission in the Company's Annual Report on Form 10-KSB. [4] Revenues
are recognized at the time the services are performed. Revenues on the statement
of operations is net of the following amounts for allowances and discounts.
Three Months Ended Nine Months Ended
July 31 July 31
1997 1996 1997 1996
---- ---- ---- ----
$ 11,249,406 $ 8,340,479 $ 30,833,282 $23,469,329
A number of proposals for legislation or regulation are under discussion which
could have the effect of substantially reducing Medicare reimbursements for
clinical laboratories. Depending upon the nature of regulatory action, if any,
which is taken and the content of legislation, if any, which is adopted, the
Company could experience a significant decrease in revenues from Medicare and
Medicaid, which could have a material adverse effect on the Company. The Company
is unable to predict, however, the extent to which such actions will be taken.
[5] An allowance for contractual credits and uncollectible accounts is
determined based upon a review of the reimbursement policies and subsequent
collections for the different types of receivables. This allowance, which is net
against accounts receivable was $7,882,140 at July 31, 1997. [6] Inventory,
consisting primarily of purchased clinical supplies, is valued at the lower of
cost (first-in, first-out) or market.
[7] Property and equipment are carried at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the respective assets
which range from 2 to 8 years. Leasehold improvements are amortized over the
life of the lease, which is approximately five years. On sale or retirement, the
asset cost and related accumulated depreciation or amortization are removed from
the accounts, and any related gain or loss is reflected in income. Repairs and
maintenance are charged to expense when incurred.
[8] The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
[9] Cash equivalents are comprised of certain highly liquid investments with a
maturity of three months or less when purchased.
[10] Income per share is based on the weighted average number of shares of
common stock outstanding during each period.
[11] The Company, at times, issues shares of common stock in payment for
services rendered to the Company. The estimated fair value of the shares issued
approximates the value of the services provided.
[12] At July 31, 1997, the Company had $4,532,000 of restricted cash which
represents collateral for two demand notes issued pursuant to bank
loans.
[13] At July 31, 1997, the Company had $5,409,052 in cash in excess of the
federally insured limits, however $4,532,000 of this amount represents
collateral for demand loans with the same banks.
[14] The Company had net operating loss carry forwards at October 31, 1996 of
approximately $8,900,000 which begin to expire in 1997. As a result of these
carry forwards, the Company has a deferred tax asset of approximately $3,600,000
which has been offset by a valuation account of $3,600,000, resulting in a net
deferred asset of $-0-.
[15] In January, 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. The Company deposited a similar sum in a savings
account with this bank as collateral for the loan. As of January 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.
6
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[16] In March, 1995, the Company consummated a $6,500,000 line of credit with
PNC Bank, N.A.-Asset Based Lending Department. The credit line is secured by the
Company's accounts receivable, is for a two-year term and may be extended for
annual periods by mutual consents, thereafter. In July, 1996, this line of
credit was increased to $9,000,000. In March,1997, PNC Bank amended its
agreement with the Company to increase this line to $10,000,000.
[17] In November, 1995, the Company acquired Oncodec Labs, Inc. 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, the
stockholders of 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.
[18] In November, 1995, the Company acquired Community Medical Laboratories
("CML"). 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, certain
CML noteholders delivered CML promissory notes totaling an aggregate $399,958 in
indebtedness 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 with CML's chief executive providing for an
annual salary of $60,000.
[19] 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. In
the quarter ended April 30, 1996, certain intangible assets were deemed to be
impaired. As a result, a charge of $29,458 was recorded for the write-down of
these assets.
[20] 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. AML had revenues of approximately $900,000 in
the twelve months preceding the acquisition. This acquisition was not
significant to the Company.
[21] On July 19, 1996, BRLI completed the purchase from SmithKline Beecham
Clinical Laboratories, Inc. ("SBCL") of certain assets, rights and 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 was payable in 24 consecutive
monthly installments of $25,000 commencing January 1, 1997. Interest was imputed
at the prime rate. At April 30, 1997, the Outstanding debt balance as reflected
on Bio-Reference Laboratories, Inc.'s Balance Sheet was $551,573. 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 $1,200,00 down
payment made by BRLI at the Closing was provided pursuant to its term loan and
credit line facilities with the predecessor of PNC Bank, N.A. The Company
estimates that approximately $1,000,000 in annual revenues could be generated by
this acquisition. (See Note 22).
[22] 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 Sale/Purchase Agreement and the Non- Competition Agreement between
the parties and claimed 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 issued in connection with the
purchase. In the normal course of its business, the Company is exposed to a
number of other 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.
[23] On May 13, 1997 the Board of Directors approved an employment agreement
effective November 1, 1997 with Marc Grodman to serve as chief executive officer
and President. The agreement provides (i) for a term through October 31, 2004
(ii) a minimum annual base compensation of $395,000 per year with annual
increases to the extent authorized by the Board, based upon the corporation and
Dr. Grodman's performance; (iii) normal health and life insurance benefits as
well as a minimum of $2,000,000 face amount of "Split Dollar" life insurance;
(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) twelve months of disability
benefits at his then current compensation, 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) 300,000 shares of the Company's Common Stock subject to forfeiture,
(b) five-year incentive stock options exercisable to purchase 100,000 shares of
the Company's Common Stock at $.790625 per share, and (c) ten-year non-qualified
options exercisable to purchase 200,000 shares of the Company's Common Stock at
$.71875 per share. In addition, the Company agreed to effect a recapitalization
of its 604,078 outstanding shares of Senior Preferred Stock owned by Dr. Grodman
and his family and convertible into an aggregate 604,078 shares of Common Stock
at a conversion price of $1.50 per share, by issuing in exchange therefor
pursuant to a Plan of Recapitalization, an aggregate 604,078 shares of Series A
Senior Preferred Stock convertible during the approximately ten-year term ending
May 1, 2007 into an aggregate 604,078 shares of Common Stock at a conversion
price of $.75 per share.
On May 13, 1997 the Board of Directors approved an employment agreement
effective May 1, 1997 with Howard Dubinett to serve as chief operating officer
and Executive Vice President. The agreement provides (i) for a term through
October 31, 2002 (ii) a minimum annual base compensation of $220,000 per year
with annual increases based on increases in the CPI as well as increases to the
extent authorized by the Board; (iii) normal health and life insurance benefits
as well as a minimum of $550,000 face amount of "Split Dollar" life insurance;
(iv) for the leasing of an automobile for Mr. Dubinett's use; (v) participation
in fringe benefit,
7
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bonus, pension, profit sharing, stock option and similar plans maintained for
the Company's employees; (vi) twelve months of disability benefits at his then
current compensation, 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 Mr. Dubinett's average annual compensation during the preceding
five years. The agreement also granted Mr. Dubinett (a) 240,000 shares of the
Company's Common Stock subject to forfeiture and, (b) ten-year incentive stock
options exercisable to purchase 60,000 shares of the Company's Common Stock at
$.71875 per share.
On May 13, 1997 the Board of Directors approved an employment agreement
effective May 1, 1997 with Sam Singer to serve as chief financial officer and
Vice President. The agreement provides (i) for a term through October 31, 2002
(ii) a minimum annual base compensation of $220,000 per year with annual
increases based on increases in the CPI as well as increases to the extent
authorized by the Board; (iii) normal health and life insurance benefits as well
as a minimum of $400,000 face amount of "Split Dollar" life insurance; (iv) for
the leasing of an automobile for Mr. Singer's use; (v) participation in fringe
benefit, bonus, pension, profit sharing, stock option and similar plans
maintained for the Company's employees; (vi) twelve months of disability
benefits at his then current compensation, 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 Mr. Singer's average annual
compensation during the preceding five years. The agreement also granted Mr.
Singer (a) 200,000 shares of the Company's Common Stock subject to forfeiture
and, (b) ten-year incentive stock options exercisable to purchase 50,000 shares
of the Company's Common Stock at $.71875 per share.
Deferred compensation of $313,725 was record because of the above transactions.
Amortization is over approximately 6 years under the straight line method.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THIRD QUARTER 1997 VS THIRD QUARTER 1996
NET REVENUES:
Net Revenues for the three month period ended July 31, 1997 were $9,814,415 as
compared to $8,928,529 for the prior three month period ended July 31, 1996;
this represents a 10% increase in net revenues. The number of patients processed
during the quarter ended July 31, 1997 increased 4% over the prior comparable
period. Net revenue per patient increased from $48.99 for the period ended July
31, 1996 to $51.85 for the period ended July 31, 1997. This represents a 6%
increase in net revenues per patient. Management can not project if these
increases will continue, or if they do, at what rate.
COST OF SERVICES:
Cost of services increased from $4,619,630 for the three months ended July 31,
1996 to $4,818,799 for the comparable three months ended July 31, 1997. This
represents a 4% increase in direct expenses, which is in line with a 10%
increase in net revenues.
GROSS PROFITS:
Gross profits on net revenues increased from $ 4,308,899, or 48% of net reveues
for the three month period ended July 31, 1996 to $4,995,616, or 51% of net
revenues, for the three month period ended July 31, 1997; an increase of 3%.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses for the three month period ending July 31,
1997 were $4,375,849 as compared to $3,896,870 for the quarter ending July 31,
1996, an increase of $478,979 or 12%. The Company's reserve for bad debts
accounted for $307,436 or 64% of this increase. When the increase in the reserve
for bad debts is factored out, indirect expenses increased only 4% compared to a
10% increase in net revenues for the period.
INTEREST EXPENSE:
Interest expense increased from $201,501 during the three months ended July 31,
1996 to $275,715 for the three months ended July 31, 1997 and is due to the
Company's increase in asset based borrowings and equipment leases..
INCOME:
The Company had net income of $366,867 for the three months ended July 31, 1997
as compared to $280,418 for the three months ended July 31, 1996. This
represents a 31% increase in net income and compares favorably with the 10%
increase in net revenues.
NINE MONTHS 1997 COMPARED TO NINE MONTHS 1996
NET REVENUES:
- ------------
Net revenues for the nine month period ended July 31, 1997 were $29,064,409 as
compared to $25,912,800 for the prior comparable period ended July 31, 1996;
this represents an 12% increase in net revenues. The number of patients serviced
for the nine month period ended July 31, 1997 was 544,814, which was
8
<PAGE>
an increase of 4% over the same period in 1997. Part of this increase in net
revenues per patient may be attributable to the Company's emphasis on specialty
testing. Revenues in the Company's Renal Reference (dialysis testing unit),
Fertility Reference Laboratory (a business unit specializing in male fertility)
and GenCare Biomedical Research (the Company's oncology and tumor tissue testing
unit) have all increased in the current nine month period versus the
corresponding period in the prior fiscal year. These units are all associated
with higher net revenue per patient than the rest of Bio- Reference's testing
segments. In particular, GenCare experienced an increase in net revenues per
patient; to $143.73 for the nine month period ended July 31, 1997 from $94.79
during the previous corresponding period. This represents an increase of net
revenue per patient for this business unit of 52%. Management can not project if
these increases will continue, or if they do, at what rate.
COST OF SERVICES:
Cost of services increased from $13,469,723 for the nine month period ended July
31, 1996 to $14,448,216 for the nine month period ended July 31, 1997. This
represents a 7% increase in direct operating costs and is in line with the 12%
increase in net revenues.
GROSS PROFITS:
Gross revenues increased from $12,443,077 or 48% of net revenues for the nine
month period ended July 31, 1996 to $14,616,193 or 50% of net revenues for the
nine month period ended July 31, 1997; an increase of 2%.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses for the nine month period ended July 31,
1997 were $13,041,241 as compared to $11,697,714 for the nine month period ended
July 31, 1996, an increase of $1,343,527 (12%). The reserve for bad debt was
increased by $825,685 in the period ended July 31, 1997, compared to the period
ended July 31, 1996. When the increase in reserve for bad debt is factored out,
General and Administrative Expenses would have increased by 4%. This compares
favorably to an increase in net revenues for the period of 12%.
INTEREST EXPENSE:
Interest expense increased from $590,870 during the nine month period ending
July 31, 1996 to $834,145 during the nine month period ending July 31, 1997.
This increase was caused by the Company's increase in asset based borrowings and
equipment leases.
INCOME:
The Company had net income of $890,366 for the nine months ended July 31, 1997
as compared to $327,240 for the nine months ended July 31, 1996. Management
believes the increase in net income of $563,126 for the period ended July 31,
1997 was attributable to (1) the mild winter weather that the Northeast
experienced during December, January and February and (2) the cost reduction
program implemented during January of 1997.
LIQUIDITY AND CAPITAL RESOURCES FOR THE NINE MONTHS ENDED JULY 31, 1997
Working capital as of July 31, 1997 was $4,947,181 as compared to $4,072,447 at
October 31, 1996 an increase of $874,734 during the nine month period. The
Company decreased its cash position by approximately $183,000 during the current
period. The Company utilized $226,851 in cash for operating activities. To
offset this use of cash the Company raised $173,758 in long-term debt, $921,259
in credit line borrowings and repaid approximately $870,000 in existing debt.
The capital spending requirements for the Company during 1997 is expected not to
exceed $595,000. To date, approximately $182,000 has been spent on capital
improvements and approximately $222,900 in capital leases.
The Company had current liabilities of $15,599,435 at July 31, 1997. The three
largest items in this category are note payable of $10,852,000, accounts payable
of $2,154,165 and current portion of long-term debt of $1,071,613.
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 Balanced Budget Act of 1997 reduced Medicare's fee schedule "CAPS" from 76
to 74 percent of the
9
<PAGE>
median of all fee schedules effective January 1, 1998. In addition, Medicare's
annual cost of living increase was eliminated for the next five years, through
fiscal year 2002. 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 $10,000,000.
As of July 31, 1997, $10,000,000 of this facility has been utilized. 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.
On May 13, 1997, the Board of Directors approved new employment agreements with
the three Executive Officers of the Company (See footnote 23). The agreements
provide for a minimum annual base salary totaling $835,000 for approximately six
years.
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. 128, "Earnings Per Share," and SFAS No. 129,
"Disclosure of Information about Capital Structure" in February 1997. SFAS No.
128 simplifies the earnings per share ("EPS") calculations required by
Accounting Principles Board "("AFB") Opinion No. 15, and related
interpretations, by replacing the presentation of primary EPS with a
presentation of basic EPS. SFAS No. 128 requires dual presentation of basic and
diluted EPS by entities with complex capital structures by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in the earnings of an entity,
similar to the fully diluted EPS of APB Opinion No. 15. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. When
adopted, SFAS No. 128 will require restatement of all prior-period EPS data
presented; however, the Company has not sufficiently analyzed SFAS no. 128 to
determine what effect SFAS No. 128 will have on its historically reported EPS
amounts.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997.
Earlier application is permitted. Reclassification of financial statements
for earlier periods provided for comparative purposes is required.
SFAS No. 130 is not
expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after December 15,
1997, and comparative information for earlier years is to be restated. SFAS No.
131 need not be applied to interim financial statements in the initial year of
its application. SFAS No. 131 is not expected to have a material impact on the
Company.
10
<PAGE>
PART II
Item 6
EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the quarter ended July 31, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BIO-REFERENCE LABORATORIES, INC.
(Registrant)
/S/ Marc D. Grodman
Marc D. Grodman, M.D.
President
/S/ Sam Singer
Sam Singer
Chief Financial and Accounting Officer
Date: September 12, 1997
11
<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 QUARTERLY
REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
(B) REPORT ON FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> JUL-31-1997
<CASH> 2,070,498
<SECURITIES> 0
<RECEIVABLES> 13,952,434
<ALLOWANCES> 7,882,140
<INVENTORY> 501,726
<CURRENT-ASSETS> 20,546,616
<PP&E> 2,981,559
<DEPRECIATION> 1,573,117
<TOTAL-ASSETS> 29,779,103
<CURRENT-LIABILITIES> 15,599,435
<BONDS> 13,088,776
0
0
<COMMON> 71,153
<OTHER-SE> 22,845,046
<TOTAL-LIABILITY-AND-EQUITY> 29,779,103
<SALES> 29,064,409
<TOTAL-REVENUES> 29,064,409
<CGS> 14,448,216
<TOTAL-COSTS> 27,489,457
<OTHER-EXPENSES> 890,366
<LOSS-PROVISION> 3,986,739
<INTEREST-EXPENSE> 834,145
<INCOME-PRETAX> 942,998
<INCOME-TAX> 52,632
<INCOME-CONTINUING> 890,366
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 890,366
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
