SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
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Commission file number 0-15266
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BIO-REFERENCE LABORATORIES, INC.
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(Exact name of registrant as specified in its charter)
New Jersey 22-2405059
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
481 Edward H. Ross Drive, Elmwood Park, New Jersey 07407
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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
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X
No .
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-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-K or in any amendment to this Form 10-K.
[ ]
For the year ended October 31, 1997 the issuer's revenues were $38,660,184
On January 14, 1998, 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 $7,975,000
based upon the last sales price for such Common Stock on said date in the
over-the-counter market as reported by the NASDAQ Small Cap System. On
such date, there were 7,169,376 shares of Common Stock of the Issuer
outstanding.
PART I
Item. 1 - Business
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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 November 1, 1994),
the Company expanded its testing capabilities through the acquisition of
GenCare Biomedical Research Corporation ("GenCare") which operated a
cancer specialty testing laboratory in Mountainside, New Jersey. See
"Developments Since the Beginning of Fiscal 1997" as to the Company's sale
in September 1997 of certain assets of its GenCare business to an
unrelated third party.
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 fiscal 1996
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 1997
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In March 1997, 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) $10,000,000 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 two years 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 September 30, 1997, pursuant to an Agreement and Bill of Sale, the
Company sold certain assets of its GenCare Division to an unrelated third
party, Impath, Inc. At the time of sale, GenCare was providing oncology
and hematology laboratory services to hospitals, hematologists and
oncologists in the New York metropolitan area and in Florida. The assets
sold included GenCare customer lists, any Company rights to the "GenCare"
Tradename, certain patient records and rights under a Reagent Purchase and
Equipment Rental Contract and under a Laboratory Testing Service
Agreement. The Company retained the rights to the Tradename "GenPath."
In addition, the Company, certain of its officers and key employees
agreed for a 30-month period not to compete with Impath with respect to
certain defined areas of the GenCare business. The Company is continuing
to market tumor pathology testing services under the name "GenPath" to
urology, gastroenterology and obstetric and gynecology physician clients.
The GenCare business sold accounted for less than 8% of the Company's
annual net revenues for fiscal 1997.
The $6 million purchase price was determied in arms-length
negotiations between the parties based in part on GenCare's billings to
Restricted Customers for Restricted Tests (as defined in the Agreement and
Bill of Sale) during the three-month period ended June 30, 1997. The
purchase price included a $4.6 million cash payment made at the closing
with an additional $700,000 to $1.4 million payable in semi-annual
installments over a two-year period subject to certain conditions. The
Company purchased GenCare in January 1995 for an aggregate 473,145 shares
of its common stock and approximately $235,000 in principal amount of its
debentures.
CLINICAL LABORATORY OPERATIONS
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The Clinical Laboratory Industry
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The United States market for clinical laboratory testing is estimated
at approximately $26 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
that may not operate as efficiently as the larger independent
laboratories.
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. The Company
realized income from operations of $1,196,236 in fiscal 1996, and income
from operations in fiscal 1997 of $1,885,059. In addition, the Company
realized a $2,025,689 non-recurring gain attributable to the sale of the
GenCare assets. 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.
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
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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. The Company presently employs 35 full and
part-time 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 Technical 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
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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. In addition, the Company performs
thousands of quality control and quality assurance tests per year. The
Company is also subjected to unannounced inspections by inspectors from
some of the jurisdictions noted above who review past records, operating
manuals, quality assurance records and safety regulations. In 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.
The Company's Quality Assurance Committee, headed by a Quality
Assurance Coordinator and composed of supervisors from all departments,
meets daily to assess and evaluate the laboratory's quality. Based on the
information received from the committee, recommendations are made to
correct conditions which have led to errors. Management, department
supervisors and members of the assurance committee continually monitor the
laboratory's quality. Depending on the test, two or three sets of Quality
Control materials are run in each analytical assay to assure precision and
accuracy. Patient population statistics are evaluated each day. Highly
abnormal samples are repeated to assure their accuracy.
It is the Company's position that all of these procedures are
necessary, not only in assuring a quality product, but also in maintaining
Federal and state licensing. The Company believes these high standards of
quality are an important factor in what management regards as an excellent
rate of client retention.
Revenue Recognition and Business Strategy
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Although the laboratory's clients are primarily physicians, it is
usually the individual patient, his or her commercial insurance carrier,
or a governmental agency such as Medicare or Medicaid that pays the
laboratory charges. These third parties pay health care providers
according to allowable costs or a predetermined contractual rate rather
than according to the provider's established rates; the difference between
what is paid and what is billed is the contractual allowance. Therefore,
the Company has adopted the practice of reducing its revenues by these
allowances or contractual adjustments.
Over the past years there has been an increase in the number of
patients that are covered by managed health care plans. These plans will
often negotiate with a limited number of clinical laboratories at
discounted rates. Some of these managed health care health plans will
contract with only a single laboratory and pay for services on a
capitation basis (meaning one price per enrollee, regardless of how much
laboratory work is performed). The effect of managed health care plans to
the laboratory industry equates to lower reimbursement rates for
laboratory services. If the laboratory is not a provider of services to
the managed health care plan, it will not be reimbursed for providing the
service and overall patient volume may be reduced. Therefore, this change
has often necessitated physician offices to utilize more than one
laboratory, and to generally lower reimbursement rates within the
laboratory industry.
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. The following table
reflects the Company's breakdown of revenue by payor for the 12 months
ended October 31, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
Years Ended October 31,
----------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Direct Patient Billing 28% 17% 17%
Commercial Insurance 27% 36% 31%
Professional Billing 18% 19% 23%
Medicare 21% 22% 25%
Medicaid 6% 6% 4%
--- --- ---
100% 100% 100%
</TABLE>
Competition
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The Company's competition derives primarily from other laboratories
located in the New York metropolitan area. On a national basis,
approximately 30% of this market is made up of the 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 74% of
the national median of laboratory charges. A number of proposals for
legislation or regulation are under discussion which could have the effect
of substantially reducing Medicare reimbursements to clinical laboratories
through reduction of the present allowable percentage or through other
means. In addition, the structure and nature of Medicare reimbursement
for laboratory services is also under discussion and management is unable
to predict the outcome of these discussions or its effect on the Company.
One outcome of these discussions has been profiles that contain a smaller
number of tests. 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 any such actions will be taken.
Federal and state health care and related regulations are subject to
constant change. The Company cannot now predict what changes may be
enacted which may affect its business or the manner in which its business
would be affected by such changes. Two legislative changes have occurred
which portend significant changes in the clinical laboratory market. Two
Omnibus Budget Reconciliation Acts ("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.
The Office of Inspector General ("OIG") has published a Model Compliance
Program for the clinical laboratory industry. This is a voluntary program
for laboratories to demonstrate to the Federal government that they are
responsible providers. Bio-Reference Laboratories is currently in the
process of writing and implementing a compliance program adhering to the
standards set forth in the Model Compliance Program.
Insurance
- ---------
The Company maintains professional liability insurance of $1,000,000 per
occurrence, $3,000,000 in the aggregate. In addition, the Company
maintains excess commercial insurance of $2,000,000 per occurrence. 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, 1997, the Company had 248 full-time employees and 182
part-time employees. This includes three executive officers, a Vice
President of Technical Operations, a Marketing Vice-President, 62full-time
and 38 part-time technicians, and/or technologists (including physicians,
pathologists and Ph.D.'s), 112 full and part-time semi-technical
employees, 35 full and part-time marketing representatives, 98 full and
part-time clerical employees, and 80 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 $50,000,000 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, for
$1,800,000 including a $1,200,000 down payment 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, 1997.
PART II
PRICE RANGE OF SECURITIES
------------------------
Item 5. - Market for Common Stock and Related Shareholder Matters
-------------------------------------------------------
The Company's Common Stock was traded on the National Association of
Securities Dealers Automated Quotation ("NASDAQ") Small Cap System through
July 13, 1992 after which it was delisted from trading on NASDAQ due to
the Company's failure to maintain 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 improvement in the Company's financial condition based upon its
November 1993 public offering, the Common Stock was readmitted for trading
on the NASDAQ Small Cap System under the symbol "BRLI" on November 24,
1993.
The following table sets forth the range of high and low bid prices for
the Common Stock for the periods indicated, as derived from reports
furnished by NASDAQ. Such quotations represent prices between dealers, do
not include mark-ups, mark-downs or commissions and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
Fiscal Year Bid Prices
- ----------- ----------
1996 High Low
<S> <C> <C>
First Quarter $3.50 $ 2.75
Second Quarter 2.75 2.125
Third Quarter 2.8125 1.9375
Fourth Quarter 1.9375 1.4375
1997
First Quarter $1.4375 $ .90625
Second Quarter $1.09375 $ .8125
Third Quarter $1.625 $ .71875
Fourth Quarter $2.03125 $ 1.34375
</TABLE>
At January 14, 1997, the closing sales price for the Common Stock on
NASDAQ was $1.3125 per share.
At January 14, 1997 the number of record holders of the Common Stock was
approximately 650. 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. Furthermore, the
Company's loan agreement with PNC Bank prohibits the Company from paying
dividends or making any distributions with respect to any shares of its
stock without the prior written consent of the Bank.
Item 6. Selected Financial Data
-----------------------
The selected consolidated financial data set forth below for the years
ended October 31, 1997, 1996, 1995, 1994 and 1993 were derived from the
audited consolidated financial statements of the Company. The data set
forth below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and related Notes appearing elsewhere.
<TABLE>
<CAPTION>
(In thousands, except per share data)
Years Ended
-----------
October 31,
------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating Data:
Net Revenues $ 38,660 $ 35,126 $ 31,521
Cost of Services $ 19,339 $ 13,136 $ 15,036
Gross Profit $ 19,321 $ 16,989 $ 16,485
General and
Administrative
Expenses $ 17,436 $ 15,793 $ 14,702
Income (Loss) from
Operations $ 1,885 $ 1,196 $ 1,783
Non-Recurring Gain
on Sale of Intangible
Assets $ 2,026 $ -- $ --
Other Expenses - Net $ 850 $ 552 $ 332
Extraordinary Item -
Gain on Extinguishment
of Debt $ -- $ -- $ --
Provision for Income
Tax Expense (Benefit) $ (139) $ 52 $ 49
Net Income (Loss) $ 3,200 $ 592 $ 1,402
Net (Loss) Income
Per Common Share $ .36 $ .10 $ .23
Cash Dividends
Per Common Share $ -- $ -- $ --
Balance Sheet Data:
Total Assets $ 29,095 $ 28,231 $ 24,201
Total Long- Term
Liabilities $ 921 $ 1,533 $ 843
Working Capital
(Deficit) $ 13,570 $ 16,128 $ 12,945
Stockholders' Equity
(Deficit) $ 15,525 $ 12,103 $ 11,256
Years Ended
-----------
October 31,
------------
1994 1993
---- ----
Operating Data:
Net Revenues $ 22,946 $ 18,783
Cost of Services 11,396 10,469
Gross Profit 11,550 8,314
General and
Administrative
Expenses 10,550 9,154
Income (Loss) from
Operations 1,000 (840)
Non-Recurring Gain
on Sale of Intangible
Assets $ -- $ --
Other Expenses - Net $ 307 $ 1,474
Extraordinary Item -
Gain on Extinguishment
of Debt $ 447 $ --
Provision for Income
Tax Expense
(Benefit) $ -- $ --
Net Income (Loss) $ 1,140 $ (2,314)
Net (Loss) Income
Per Common Share $ .23 $ (1.07)
Cash Dividends
Per Common Share $ -- $ --
Balance Sheet Data:
Total Assets $ 17,381 $ 9,105
Total Long- Term
Liabilities $ 708 $ 478
Working Capital
(Deficit) $ 9,134 $ 11,290
Stockholders' Equity
(Deficit) $ 8,246 $ (2,185)
</TABLE>
A number of proposals for legislation are under discussion which could
substantially reduce Medicare and Medicaid reimbursements to clinical
laboratories. Depending upon the nature of regulatory action and the
content of legislation, the Company could experience a significant
decrease in revenues from Medicare and Medicaid, which could have material
adverse effect on the Company. The Company is unable to predict, however,
the extent to which such actions will be taken.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Fiscal Year 1997 Compared to Fiscal Year 1996
- ---------------------------------------------
NET REVENUES:
- ------------
Net revenues for the twelve month period ended October 31, 1997 were
$38,660,184 as compared to $35,125,878 for the prior comparable period
ended October 31, 1996; this represents a 10% increase in net revenues.
On September 30, 1997, the Company completed the sale of certain assets of
its GenCare Division ("GenCare") to an unrelated third party. During the
eleven month period ending September 30, 1997, net revenues related to
GenCare was $2,116,523 or 5.5% of the Company's net revenues. The number
of patients serviced for the twelve month period ended October 31, 1997
was 728,321 which was an increase of 5% over the same period in 1996. The
number of patients processed by GenCare during this same twelve month
period was 21,268. Net revenue per patient including GenCare was $53.08
for the period ending October 31, 1997 as compared to $50.46 an increase
of 5.2%. Net revenue per patient excluding GenCare was $51.68 or a 2.6%
decrease in per patient revenues for the current twelve month period.
Management can not project if these increases will continue, or if they
do, at what rate. However, management believes but cannot assure, that the
fastest growing portion of the GenCare assets were retained by the
Company.
COST OF SERVICES:
- ----------------
Cost of services increased from $18,136,395 for the twelve month period
ended October 31, 1996 to $19,339,274 for the twelve month period ended
October 31, 1997. This represents a 7% increase in direct operating costs
and is in line with the 10% increase in net revenues.
GROSS PROFITS:
- -------------
Gross revenues increased from $16,989,483 or 48% of net revenues for the
twelve month period ended October 31, 1996 to $19,320,910 or 50% of net
revenues for the twelve month period ended October 31, 1997; an increase
of 2%.
GENERAL AND ADMINISTRATIVE EXPENSES:
- -----------------------------------
General and administrative expenses for the twelve month period ended
October 31, 1997 were $17,435,879 as compared to $15,793,247 for the
twelve month period ended October 31, 1996, an increase of $1,642,632
(10%). The reserve for bad debt was increased by $1,005,700 in the period
ended October 31, 1997, compared to the period ended October 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 10%.
INTEREST EXPENSE:
- ----------------
Interest expense increased from $840,811 during the twelve month period
ending October 31, 1996 to $1,084,347 during the twelve month period
ending October 31, 1997. This increase was caused by the Company's
increase in asset based borrowings and equipment leases for the eleven
months ending September 30, 1997. On October 1, 1997, the Company utilized
$3,500,000 of the cash payment received upon closing the GenCare sale to
reduce its credit line with PNC Bank.
NET INCOME:
- ----------
The Company had net income of $3,199,915 for the twelve months ended
October 31, 1997 as compared to $591,958 for the twelve months ended
October 31, 1996. Two thirds of the increase in net income is attributable
to the non-recurring gain on the sale of certain assets of the Company's
GenCare Division ($2,025,689).
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
fiscal 1996; 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 PROFITS:
- -------------
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, 1997
Working capital as of October 31, 1997 was $9,415,440 as compared to
$4,072,447 at October 31, 1996 an increase of $5,342,993 during the
twelve month period.
The Company had $6,693,825 in cash and certificates of deposits at October
31, 1997. However, $4,532,000 represented restricted deposits. The
Company utilized $171,064 in cash for operating activities. To offset
this use of cash the Company raised $4,600,000 from the divestiture of its
GenCare product line, reduced its credit line borowing by $2,317,031 and
repaid approximately $1,190,733 in existing debt.
The capital spending requirements for the Company during 1998 is expected
not to exceed $600,000. During fiscal 1997, approximately $143,600 has
been spent on capital improvements and approximately $252,300 in capital
leases.
The Company had current liabilities of $12,649,814 at October 31, 1997.
The three largest items in this category are notes payable of $7,613,710,
accounts payable of $2,231,693 and accrued salaries and commissions of
$1,065,339
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 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.
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 October 31, 1997,
$6,761,710 of this facility was being utilized. In addition, the Company
had 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 were fully paid in
November, 1997.
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.
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 $2,147,403 and current portion of long-term debt of
$730,374.
Project 2000
- ------------
The Company is in the process of identifying those systems that require
changes to accommodate the year 2000. It has identified four areas of
concern. They are the laboratory's operations and billing systems, the
general accounting systems and the two systems outside of its control; one
being the payor systems and the other being the vendor systems. At the
present time, it appears that the laboratory systems will require changes
that translate into approximately $50,000.00 in costs. The general
accounting systems (which are supplied by an outside vendor) will cost the
Company less than $2,000.00 to convert and are scheduled for conversion
during the second quarter of the current fiscal year. The payor systems
are being converted per instructions on the part of each payor (i.e.
Medicare, Medicaid, insurance companies, etc.). For example, electronic
claims filing for Medicare has been completed, while the Company has been
told not to make any changes for New Jersey medicaid until it is notified
to do so. The final system of concern to the Company is its suppliers.
Once its general accounting is converted to accommodate the year 2000, the
Company is confident that it will accept the input of all vendor invoices.
Note Regarding Forward-Looking Statements
- -----------------------------------------
This Annual Report on Form 10-K contains historical information as well
as forward-looking statements. Statements looking forward in time are
included in this Annual Report pursuant to the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995. Such statements
involve known and unknown risks and uncertainties that may cuase the
Company's actual results in future periods to be materially different from
any future performance suggested herein.
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 No. 128, Earnings Per Share ("EPS"), 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 ("APB") Opinion O.
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. Basic EPS includes no dilution and is computed by dividing
income available to common stockholders 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 al
prior-period EPS data presented. Basic EPS will be based on average common
shares outstanding and diluted EPS will include the effects of potential
common stock, such as, options and warrants. The Company's basic EPS as
calculated under SFAS No. 128 would have been $.43 for the year ended
October 31, 1997. The Company's diluted EPS as calculated under SFAS No.
128 would have been $.40 for the year ended October 31, 1997.
SFAS No. 129 does not change any previous disclosure requirements, but
rather consolidates existing disclosure requirements for each of
retrieval.
The Financial Accounting Standards Board ("FASB) issued Statement of
Financial Accounting Standards ("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. The Company is in the process of determining its preferred
format. The adoption of SFAS No. 130 will have no impact on the Company's
consolidated results of operations, financial position or cash flows.
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 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. The Company is in the process of
evaluating the disclosure requirements. The adoption of SFAS No. 131 will
have no impact on the Company's consolidated results of operations,
financial position or cash flows.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
---------------------------------------------------------
Not applicable.
Item 8. - Financial Statements and Supplementary Data
-------------------------------------------
Financial Statements are annexed hereto
Item 9. - Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
- ---------------------
None
PART III
Item 10.- Directors and Executive Officers of the Registrant
--------------------------------------------------
The following table sets forth certain information with respect to each
of the directors and executive officers of the Company.
Name Age Position
- ----
Marc D. Grodman, M.D. 46 Chairman of the Board, President, Chief
Executive Officer and Director
Howard Dubinett 46 Executive Vice President, Chief
Operating Officer and Director
Sam Singer 5 Vice President, Chief Financial Officer,
Chief Accounting Officer and Director
Frank DeVito 56 Director
John Roglieri, M.D. 56 Director
Gary Lederman, Esq. 63 Director
Marc D. Grodman, M.D. founded the Company in December 1981 and has been
its Chairman of the Board, President, Chief Executive Officer and a
Director since its formation. Dr. Grodman is an Assistant Professor of
Clinical Medicine at Columbia University College of Physicians and
Surgeons and Assistant Attending Physician at Presbyterian Hospital, New
York City. From 1980 to 1983, Dr. Grodman attended the Kennedy School of
Government at Harvard University and was a Primary Care Clinical Fellow at
Massachusetts General Hospital. From 1982 to 1984, he was a medical
consultant to the Metal Trades Department of the AFL-CIO. Dr. Grodman
received a B.A. degree from the University of Pennsylvania in 1973 and an
M.D. degree from Columbia University College of Physicians and Surgeons in
1977. Except for approximately 20 hours per month spent as Assistant
Professor of Clinical Medicine and Assistant Attending Physician at
Columbia University and Presbyterian Hospital and rendering medical
services to the Uniformed Firefighters Association of New York City, Dr.
Grodman devotes all of his working time to the business of the Company.
Howard Dubinett has been the Executive Vice-President and Chief
Operating Officer of the Company since its formation. He became a
Director of the Company in April 1986. Prior to joining the Company, Mr.
Dubinett was general manager of Union Prescription Service, Inc., a
company which administered prescription drug plans. Mr. Dubinett attended
Rutgers University. Mr. Dubinett devotes all of his working time to the
business of the Company.
Sam Singer has been the Company's Vice President and Chief Financial
Officer since October 1987 and a Director since November 1989. He is
responsible for all financial activities of the Company. Prior to joining
the Company, he was Controller for Sycomm Systems Corporation, a data
processing and management consulting company, from 1981 to 1987. He
received a B.A. degree from Strayer College and an M.B.A. from Rutgers
University. Mr. Singer devotes all of his working time to the business of
the Company.
Frank DeVito became a Director of the Company in April 1986. Since
1970, Mr. DeVito has been Vice President of the New Jersey State AFL-CIO
and from 1960 until December 1985 was President of AFL-CIO United Food and
Commercial Workers, Local 1245. From 1981 through December 1985 Mr.
DeVito was also President of United Food and Commercial Workers District
Council of Metropolitan New York and Northern New Jersey, which was
comprised of 35 local unions with approximately 150,000 members.
John Roglieri, M.D. became a Director of the Company in September 1995.
He is an Assistant Professor of Clinical Medicine at Columbia University's
College of Physicians and Surgeons and an Assistant Attending Physician at
Presbyterian Hospital, New York City. Dr. Roglieri received a B.S. 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.
Gary Lederman, Esq. became a director of the Company in May 1997. He
received his B.A. from Brooklyn College in 1954 and his J.D. from NYU Law
School in 1957. He was manager of Locals 370, 491 and 662 of the U.F.C.W.
International Union from 1961 to 1985. He is retired from the unions and
has been a lecturer at Queensboro Community College in the field of
insurance. He currently serves on an institutional review board for RTL, a
pharmaceutical drug testing laboratory.
There are no family relationships between or among any directors or
executive officers of the Company. The Company's Certificate of
Incorporation provides for a staggered Board of Directors (the "Board")
pursuant to which the Board is divided into three classes of directors and
the members of only one class or one-third of the Board) are elected each
year to serve a three-year term. Officers are elected by and hold office
at the discretion of the Board of Directors.
Key Personnel and Consultants
- -----------------------------
The following key personnel and consultants make significant
contributions to the Company's operations.
Robert Rush, Ph.D (Age 57) has been employed by the Company since July
1993 as Vice President of Technical Operations. From 1989 to 1993, Dr.
Rush was a Technical Director for National Health Laboratories, Inc., a
national clinical laboratory. From 1988 to 1989 he was the Technical
Director of Maryland Medical Laboratory and from 1975 to 1988 he was the
Technical Director of Smith-Kline Beecham Clinical Laboratories, another
national clinical testing laboratory, in Atlanta, Georgia. Dr. Rush also
worked for the Technicon Instruments Corporation, a Tarrytown, New York
manufacturer of laboratory equipment, from 1969 to 1972, as a Section Head
in Clinical Chemistry. Dr. Rush is a registered Clinical Laboratory
Director in the states of New Jersey, New York and Connecticut. He is
board certified by the American Board of Clinical Chemistry. Dr. Rush
received a B.A. degree in Chemistry from Hunter College in 1962 and M.S.
and Ph.D. degrees in Biochemistry in 1964 and 1966 from Pennsylvania State
University.
William Knakal (Age 46) 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 52) 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 39) has been employed by the
Company since May, 1996 as Medical Director for GenPath 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 47) has been employed by the Company since
February 1996 as an Assistant Director of Technical Operation and Director
of Toxicology. Dr. Mudarris has been a consultant to the Company since
October 1994. From 1992 to 1994, Dr. Mudarris was a Technical Director
for National Health Laboratories, a national clinical laboratory located
in Cranford, New Jersey. From 1988 to 1992 he was Vice President and
Director of Columbia Biomedical Laboratory, A SAMHSA (NIDA) certified
forensic drug testing laboratory in Columbia, South Carolina, and from
1987 to 1988 as Scientific and Managing Director of Keystone Laboratory, a
toxicology laboratory in Asheville, North Carolina. Dr. Mudarris is a
registered Clinical Laboratory Director in the State of New 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 1997, its officers,
directors and beneficial owners of more than 10% of its equity timely
complied with all applicable Section 16(a) filing requirements.
Item 11. - Executive Compensation
----------------------
The following table sets forth information concerning the compensation
paid or accrued by the Company during the year ended on October 31, 1997
to its Chief Executive Officer and its other executive officers who were
serving as executive officers of the Company on October 31, 1997. During
the period ended October 31, 1997, the Company granted 740,000 restricted
stock awards and had no 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.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation
-------------------
Other
Year Annual
Name and Ended Compen-
Principal Position October 31, Salary Bonus sation
- ------------------ ---------- ------ ----- -------
<S> <C> <C> <C> <C>
Marc D. Grodman M.D. 1997 $265,697 $90,000 $-0-
President and Chief 1996 $264,196 $95,000 $-0-
Executive Officer 1995 $264,159 $75,000
Howard Dubinett 1997 $148,817 $43,000
Executive Vice 1996 $154,188 $45,000
President and Chief 1995 $144,024 $45,000
Operating Officer
Sam Singer 1997 $147,455 $43,000
Vice President and 1996 $153,326 $45,000
Chief Financial and 1995 $144,024 $45,000
Accounting Officer
Long-Term Compensation
----------------------
Year Restricted
Name and Ended Stock Options
Principal Position October 31, Awards(1) (SARs)
- ------------------ ---------- --------- -------
Marc D. Grodman M.D. 1997 300,000 300,000(2)
President and Chief 1996 -0- -0-
Executive Officer 1995 -0- -0-
Howard Dubinett 1997 240,000 213,334
Executive Vice 1996 -0- -0-
President and Chief 1995 -0- -0-
Operating Officer
Sam Singer 1997 200,000 116,667
Vice President and 1996 -0- -0-
Chief Financial and 1995 -0- -0-
Accounting Officer
All
Year LTIP Other
Name and Ended Pay- Compen-
Principal Position October 31, outs sation
- ------------------ ---------- ---- ------
Marc D. Grodman M.D. 1997 $-0- $-0-
President and Chief 1996 $-0- $-0-
Executive Officer 1995 $-0- $-0-
Howard Dubinett 1997 $-0- $-0-
Executive Vice 1996 $-0- $-0-
President and Chief 1995 $-0- $-0-
Operating Officer
Sam Singer 1997 $-0- $-0-
Vice President and 1996 $-0- $-0-
Chief Financial and 1995 $-0- $-0-
Accounting Officer
</TABLE>
(1) In connection with their acceptance of the terms of new employment
agreements, the Company's boardof directors on May 13, 1997 authorized the
issuance to Dr. Grodman, Mr. Dubinett and Mr. Singer of300,000, 240,000 and
200,000 shares of common stock respectively. The shares are forfeitable in
part invarious amounts if the employee's employment is terminated "for
cause" or at his option "without good reason" prior to May 1, 2000. See
"Employment Agreements with Executive Officers" herein.
(2) Does not include 604,078 shares of common stock issuable upon conversion of
604,078 shares of Senior Preferred Stock owned by Dr. Grodman, his wife and a
corporation controlled by her (collectively the "Grodman Group"). On May 13,
1997 pursuant to a recapitalization, the previously outstanding Senior
Preferred Stock owned by the Grodman Group convertible into an aggregate
604,078 shares of common stock on or before April 20, 2003 at a conversion
price of $1.50 per share was retired in exchange for a new class of Senior
Preferred Stock convertible into an aggregate 604,078 shares of common stock
on or before May 1, 2007 at a conversion price of $.75 per share. See Item
13 herein.
Employment Agreements with Executive Officers
- ---------------------------------------------
On May 13, 1997, Dr. Grodman agreed to the terms of a new employment
agreement pursuant to which he will serve as president and chief executive
officer devoting at least 90% of his working time to the business of the
Company. The agreement provides (i) for a seven-year term commencing
November 1, 1997; (ii) a minimum annual Base Compensation consisting of
salary and bonus in the aggregate amount of $395,000 subject to increases
based on increases in the Consumer Price Index as well as increases at the
discretion of the board of directors; (iii) typical health insurance
coverage and an initial $2,000,000 face amount of "split dollar" life
insurance insuring Dr. Grodman's life and payable to his estate (excluding
benefits required to be paid to the Company pursuant to the split dollar
plan) with $2,000,000 of additional coverage to be applied for in the
future; (iv) the leasing of an automobile for his use; (v) participation
in fringe benefit, bonus, pension, profit sharing, and similar plans
maintained for the Company's employees; (vi) disability benefits; (vii)
certain termination benefits; and (viii) in the event of termination due
to a change in control of the Company, a severance payment equal to 2.99
times Dr. Grodman's average annual compensation during the preceding five
years.
In consideration for Dr. Grodman's acceptance of the terms of the employment
agreement, the board of directors authorized the issuance to Dr. Grodman of
(a) 300,000 shares of the Company's common stock, partially subject to
forfeiture, (b) five-year incentive stock options ("ISOs") exercisable to
purchase 100,000 shares of common stock at $.790625 per share, and (c)
ten-year non-qualified stock options ("NQOs") exercisable to purchase
200,000 shares of common stock at $.71875 per share. The ISOs are only
exercisable while Dr. Grodman is employed by the Company. The NQOs expire if
Dr. Grodman's employment agreement is terminated by the Company "For Cause"
or at his option, "Without Good Reason." See "Employee Incentive Stock
Option Plan."
The 300,000 shares of common stock issued to Dr. Grodman are forfeitable in
part on the following basis if his employment agreement is terminated by the
Company "For Cause" or at Dr. Grodman's option "Without Good Reason."
<TABLE>
<CAPTION>
If Termination "For Cause"
or "Without Good Reason"
Occurs During the Following Number of Shares
Periods Forfeited
- --------------------------- ----------------
<S> <C>
May 1, 1997 through April 30, 1998 225,000 shs.
May 1, 1998 through April 30, 1999 150,000 shs.
May 1, 1999 through April 30, 2000 75,000 shs.
</TABLE>
Also on May 13, 1997, Mr. Dubinett agreed to the terms of a new employment
agreement pursuant to which he will serve as executive vice president and chief
operating officer of the Company. The agreement provides (i) for a five and
one-half year term commencing May 1, 1997; (ii) a minimum annual Base
Compensation commencing November 1, 1997 consisting of salary and bonus in the
aggregate amount of $220,000 subject to increases based on increases in the
Consumer Price Index as well as increases at the discretion of the board of
directors; (iii) typical health insurance coverage and $500,000 face amount of
"split dollar" life insurance insuring Mr. Dubinett's life and payable to his
estate (excluding benefits required to be paid to the Company pursuant to the
split dollar plan); (iv) the leasing of an automobile for his use; (v)
participation in fringe benefit, bonus, pension, profit sharing, and similar
plans maintained for the Company's employees; (vi) disability benefits; (vii)
certain termination benefits; and (viii) in the event of termination due to a
change in control of the Company, a severance payment equal to 2.99 times Mr.
Dubinett's average annual compensation during the preceding five years.
In consideration for Mr. Dubinett's acceptance of the terms of the employment
agreement, the board of directors authorized the issuance to Mr. Dubinett of
(a) 240,000 shares of the Company's common stock, partially subject to
forfeiture and (b) ten-year ISOs exercisable to purchase 60,000 shares of
common stock at $.71875 per share. The ISOs are only exercisable while Mr.
Dubinett is employed by the Company.
The 240,000 shares of common stock issued to Mr. Dubinett. are forfeitable
in part on the following basis if his employment agreement is terminated by the
Company "For Cause" or at Mr. Dubinett's option "Without Good Reason."
<TABLE>
<CAPTION>
If Termination "For Cause"
or "Without Good Reason"
Occurs During the Following Number of Shares
Periods Forfeited
- --------------------------- ----------------
<S> <C>
May 1, 1997 through April 30, 1998 180,000 shs.
May 1, 1998 through April 30, 1999 120,000 shs.
May 1, 1999 through April 30, 2000 60,000 shs.
</TABLE>
Also on May 13, 1997, Mr. Singer agreed to the terms of a new employment
agreement pursuant to which he will serve as vice president and chief
financial officer of the Company. The agreement provides (i) for a five
and one-half year term commencing May 1, 1997; (ii) a minimum annual Base
Compensation commencing November 1, 1997 consisting of salary and bonus in
the aggregate amount of $220,000 subject to increases based on increases
in the Consumer Price Index as well as increases at the discretion of the
board of directors; (iii) typical health insurance coverage and $400,000
face amount of "split dollar" life insurance insuring Mr. Singer's life
and payable to his estate (excluding benefits required to be paid to the
Company pursuant to the split dollar plan); (iv) the leasing of an
automobile for his use; (v) participation in fringe benefit, bonus,
pension, profit sharing, and similar plans maintained for the Company's
employees; (vi) disability benefits; (vii) certain termination benefits;
and (viii) in the event of termination due to a change in control of the
Company, a severance payment equal to 2.99 times Mr. Singer's average
annual compensation during the preceding five years.
In consideration for Mr. Singer's acceptance of the terms of the
employment agreement, the board of directors authorized the issuance to
Mr. Singer of (a) 200,000 shares of the Company's common stock, partially
subject to forfeiture and (b) ten-year ISOs exercisable to purchase 50,000
shares of common stock at $.71875 per share. The ISOs are only exercisable
while Mr. Singer is employed by the Company.
The 200,000 shares of common stock issued to Mr. Singer are forfeitable
in part on the following basis if his employment agreement is terminated
by the Company "For Cause" or at Mr. Singer's option "Without Good
Reason."
<TABLE>
<CAPTION>
If Termination "For Cause"
or "Without Good Reason"
Occurs During the Following Number of Shares
Periods Forfeited
- --------------------------- ----------------
<S> <C>
May 1, 1997 through April 30, 1998 150,000 shs.
May 1, 1998 through April 30, 1999 100,000 shs.
May 1, 1999 through April 30, 2000 50,000 shs.
</TABLE>
Employee Incentive Stock Option Plan
- ------------------------------------
In July 1989, the Company's Board of Directors adopted the 1989
Employees Stock Option Plan (the "1989 Plan") which was approved by
shareholders in November 1989. The 1989 Plan provides for the grant of
options to purchase up to 666,667 shares of Common Stock. Under the terms
of the 1989 Plan, options granted thereunder may be designated as options
which qualify for incentive stock option treatment ("ISOs") under Section
422 of the Code, or options which do not so qualify ("NQOs").
The 1989 Plan also grants the Board or a Stock Option Committee
designated by the Board, the discretion to grant stock appreciation rights
("SARs") in connection with, or independent of, any grant of options under
the 1989 Plan. SARs give the holder the right to receive from the Company
upon exercise an amount equal to the excess of the aggregate fair market
value on the date of exercise of the number of shares of Common Stock as
to which SARs are being exercised over the aggregate exercise price for
those shares payable either in cash or Common Stock in the discretion of
the Board or the Stock Option Committee.
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.
As described above, on May 13, 1997, the board of directors granted
five-year ISOs under the Plan to Dr. Grodman, exercisable to purchase
100,000 shares of the Company's common stock at an exercise price of
$.790625 per share (equal to 110% of the last sale price for the common
stock on NASDAQ on May 12, 1997). The board also granted ten-year ISOs
under the Plan to Mr. Dubinett and Mr. Singer exercisable to purchase
60,000 shares and 50,000 shares of common stock respectively at an
exercise price of $.71875 per share (equal to the last sale price for the
common stock on NASDAQ on May 12, 1997). In addition, the board granted
ten-year NQOs to Dr. Grodman, exercisable to purchase 200,000 shares of
common stock at an exercise price of $.71875 per share.
At the same May 3, 1997 directors' meeting, in order to improve employee
morale, the board canceled all other outstanding ISOs exercisable to
purchase an aggregate 448,710 shares of common stock at exercise prices
ranging from $1.3434 to $3.00 per share, and granted new ten-year ISOs
under the Plan to 23 employees exercisable to purchase an aggregate
448,710 shares of common stock at an exercise price of $.71875 per share.
Included in this grant were ISOs issued to Mr. Dubinett and Mr. Singer
exercisable to purchase 153,334 shares and 116,667 shares respectively.
(These ISOs replaced ISOs previously granted to said two individuals to
purchase 153,334 shares and 116,667 shares respectively at exercise prices
ranging from $1.3125 to $1.50 per share.)
Also on May 13, 1997, the board of Directors granted five-year NQOs to
31 employees, exercisable to purchase an aggregate 136,100 shares of
common stock at $.71875 per share but only while the optionee was employed
by the Company.
On May 13, 1997, the board also issued five-year warrants to each of its
three outside directors, exercisable to purchase 10,000 shares (30,000 in
the aggregate) of common stock at an exercise price of $.71875 per share,
but only while serving as a director. At the same time, the board reduced
the exercise price on warrants held by one outside director, John
Roglieri, exercisable to purchase 23,334 shares ranging from $3.00 per
share to $3.75 per share to $.71875 per share and issued five-year
warrants to another outside director, Gary Lederman, exercisable to
purchase 5,200 shares at $.71875 per share.
See Note 10 of Notes to the Consolidated Financial Statements.
The following table illustrates information concerning stock option
grants made during fiscal 1997 to each of the executive officers named in
the "Summary Compensation Table."
<TABLE>
<CAPTION>
Option Grants in Fiscal 1997
----------------------------
Number of Percent of
Shares Total Options
of Common Granted to
Stock Employees and
Underlying Consultants"
Name Options Granted in Fiscal Year
- ---- --------------- --------------
<S> <C> <C>
Marc D. Grodman 200,000 19.4
100,000 9.7
Howard Dubinett 213,334 20.7
Sam Singer 166,667 16.2
Exercise Expir-
Price ation
Name Per Share Date
- ---- --------- ----
Marc D. Grodman $.71875 5/12/07
$.790625 5/12/02
Howard Dubinett $.71875 5/12/07
Sam Singer $.71875 5/12/97
Potential Realizable
Value at Assumed Annual
Rates of Stock Price
Appreciation for
Option Term (1)
---------------
Name 5% 10%
- ---- -- ---
Marc D. Grodman $263,064 $369,600
$124,345 $177,613
Howard Dubinett $280,602 $394,241
Sam Singer $219,220 $308,000
</TABLE>
- ------------------------------------
(1) Assumes appreciation at the stated rates in the market price for
Bio-Reference common stock. The option will have no value unless, and only
to the extent that the market price for Bio-Reference common stock
appreciates from the grant date to the exercise date.
The following table sets forth certain information concerning
unexercised options for each of the executive officers named in the
"Summary Compensation Table." No options were exercised by any of such
individuals in fiscal 1997.
<TABLE>
<CAPTION>
1997 Fiscal Year-End Option Values
----------------------------------
Number of Unexercised Options
At 1997 Fiscal Year-End
-----------------------
Value of
Unexercised
In-The-Money
Name Exercisable Unexercisable Options at 10/30/97
- ---- ----------- ------------- -------------------
<S> <C> <C> <C>
Marc D. Grodman 200,000 -0- $175,000
100,000 -0- $ 80,313
Howard Dubinett 213,334 -0- $186,667
Sam Singer 166,667 -0- $145,835
</TABLE>
Directors' Compensation
Directors who are not employees of the Company are also paid a $1,000
per quarter director's fee.Item 12. - Security Ownership of Certain
Beneficial Owners and Management
--------------------------------------------------------------
The following table sets forth information as of January 16, 1998 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 Beneficially Owned(1) Ownership
- ---------------- --------------------- ---------
Directors and
Executive Officers*
<S> <C> <C>
Marc D. Grodman(2) 1,521,845 18.9%
Howard Dubinett (3) 475,001 6.4%
Sam Singer(4) 377,667 5.2%
Frank DeVito(5) 10,202 -
John Roglieri(6) 35,001 -
Gary Lederman (7) 15,200 -
Executive Officers
and directors 2,434,916 28.6%
as a group (six
persons) (2)(3)
(4)(5)(6)(7)
</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 476,100 shares owned directly by Dr. Grodman, 549,678
shares issuable upon conversion of Senior Preferred Stock and
300,000 shares issuable upon exercise of options. Also includes
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 261,667 shares owned directly, and 213,334 shares issuable
upon exercise of options.
(4) Includes 211,000 shares owned directly, and 166,667 shares issuable
upon exercise of options.
(5) Includes 202 shares owned directly and 10,000 shares issuable upon
exercise of warrants.
(6) Includes 1,667 shares owned directly and 33,334 shares issuable
upon exercise of warrants.
(7) Includes 15,200 shares issuable upon exercise of warrants.
Item 13. - Certain Relationships and Related Transactions
---------------------------------------------
In July 1989, the Company discontinued the operation of its Med-Mobile
Division. At such time, Dr. Grodman, as the Associated Physician, was
indebted to the Company in the amount of $235,354 in connection with the
operation of this division. Pursuant to an October 1, 1989 Settlement
Agreement, Dr. Grodman issued a $235,354 promissory note to the Company
bearing interest at 10% per annum and payable at the rate of $50,000 per
annum in payment of this indebtedness. On April 30, 1992, the Board of
Directors amended this agreement, in consideration for Dr. Grodman's
personal guarantee of the Company's $2,500,000 financing arrangement with
Towers Financial Corporation, suspending all rental and interest charges
for periods subsequent to November 1, 1991. As of October 31, 1997,
$214,118 in outstanding principal, interest and van rentals was due from
Dr. Grodman.
On April 20, 1993, in order to facilitate the Company's 1993 proposed
public offering, Dr. Grodman canceled his pro-rata option contained in his
employment contract and all other outstanding options and warrants to
purchase shares of common stock held by Dr. Grodman, his wife and an
affiliated entity (the "Grodman Group") exercisable to purchase an
aggregate 604,078 shares of Common Stock at prices ranging from $1.4438 to
$1.50 or an average price of $1.47 per share, in consideration for the
issuance to the Grodman Group of 604,078 shares of a new class of senior
preferred stock, $.10 par value per share ("Senior Preferred Stock").
Each share of Senior Preferred Stock had the same voting rights (one vote
per share), dividend rights and liquidation rights as each share of common
stock and for a period of 10 years after issuance, was convertible into
one share of common stock upon payment of a conversion price of $1.50 per
share. The 604,078 shares of Senior Preferred Stock were issued to the
Grodman Group on August 23, 1993. On May 13, 1997 pursuant to a
recapitalization, the Senior Preferred was retired in exchange for a new
class of Senior Preferred Stock issued to the Grodman Group. The new
Senior Preferred Stock is convertible into an aggregate 604,078 shares of
common stock on or before May 1, 2007 at a conversion price of $.75 per
share and has the same voting rights (one vote per share), dividend rights
and liquidation rights as each share of common stock.
Item 14. Exhibits, Financial Statement Schedules
---------------------------------------
and Reports on Form 10-KSB
--------------------------
1. Financial Statements
--------------------
The following financial statements of the Company are included in Part
II, Item 7 Page to Page
------------
Report of Independent Certified Public Accountants F-1
Balance Sheet - October 31, 1997 and 1996 F-2 ... F-3
Statement of Operations-
Years ended October 31, 1997, 1996 and 1995 F-4 ... F-4
Statement of Shareholders' Equity
Years ended October 31, 1997, 1996 and 1995 F-5 ... F-6
Statement of Cash Flows -
Years ended October 31, 1997, 1996 and 1995 F-7 ... F-9
Notes to Financial Statements- F-10... F-25
Schedule II -
Years ended October 31, 1997, 1996 and 1995 F-26... F-27
2. Reports on Form 8-K
-------------------
During the Quarter ended October 31, 1997, the Company filed one report
on Form 8-K in Item 2., the disposition of certain assets of its GenCare
Division to an unrelated third party, IMPATH, Inc.
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: February 11, 1998
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
February 11, 1998
/S/ Howard Dubinett
- ----------------------------------------
Howard Dubinett
Executive Vice President,
Chief Operating Officer and Director
February 11, 1998
/S/ Sam Singer
- ----------------------------------------
Sam Singer
Vice President, Chief Financial Officer,
Chief Accounting Officer and Director
February 11, 1998
/S/ Frank DeVito
- ---------------------------------------
Frank DeVito
Director
February 11, 1998
/S/ John Roglieri
- ---------------------------------------
John Roglieri
Director
February 11, 1998
/S/ Gary Lederman
- -----------------
Gary Lederman
Director
February 11, 1998
EXHIBIT INDEX
------------- Incorporated
by
Exhibit No. Item Reference to
- ----------- ---- ------------
3.1* Amended and Restated Certificate of Incorporation (A)
dated 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 (C)
August 23, 1993 (creating Senior Preferred Stock)
3.1.3* Amendment to Certificate of Incorporation dated (C)
August 23, 1993 (authorizing one-for-three reverse
stock split)
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 (C)
Exhibit 4.4)
10.1* Lease Agreement for Elmwood Park, New (E)
Jersey Premises
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, (H)
1994 for the acquisition by the Company of
all of the outstanding capital stock of GenCare
10.15* Employment Agreement between the Company (H)
and Charles T. Todd, Jr. dated January 4, 1995.
10.16* Agreement and Bill of Sale dated September (I)
30,1997 between the Company and IMPATH
concerning the sale of the GenCare assets.
10.17* Non-Competition and Confidentiality (I)
Agreement dated September 30, 1997 between
the Company, three officers and a fourth
key employee on the one hand and IMPATH on the other
hand.
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
report on Form 8-K for January 4, 1995.
(I) Incorporated by reference to exhibit filed with the Company's
current report on Form 8-K for October 14, 1997.
Item 6. Selected Consolidated Financial Data
The selected consolidated financial data set forth below for the years
ended October 31, 1997, 1996, 1995 1994, and 1993 were derived from the
audited consolidated financial statements of the Company. The data set
forth below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and related Notes appearing elsewhere in
the Prospectus.
<TABLE>
<CAPTION>
[In thousands, except per share data]
-------------------------------------
Years ended
-----------
October 31,
-----------
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
<S> <C> <C> <C>
Operating Data:
Net Revenues $ 38,660 $ 35,126 $ 31,521
Cost of Services $ 19,339 $ 18,136 $ 15,036
Gross Profit $ 19,321 $ 16,989 $ 16,485
General and Administrative Expenses $ 17,436 $ 15,793 $ 14,702
Income [Loss] from Operations $ 1,885 $ 1,196 $ 1,783
Non-Recurring Gain on Sale of
Intangible Assets $ 2,026 $ -- $ --
Other Expenses - Net $ 850 $ 552 $ 332
Extraordinary Item - Gain on
Extinguishment of Debt $ -- $ -- $ --
Provision for Income Tax Expense
[Benefit] $ (139) $ 52 $ 49
Net Income [Loss] $ 3,200 $ 592 $ 1,402
Net [Loss] Income Per Common Share $ .36 $ .10 $ .23
Cash Dividends Per Common Share $ -- $ -- $ --
Balance Sheet Data:
Total Assets $ 29,095 $ 28,231 $ 24,201
Total Long-Term Liabilities $ 921 $ 1,533 $ 843
Total Liabilities $ 13,570 $ 16,128 $ 12,945
Working Capital [Deficit] $ 9,415 $ 4,072 $ 4,552
Stockholders' Equity [Deficit] $ 15,525 $ 12,103 $ 11,256
1 9 9 4 1 9 9 3
------- -------
Operating Data:
Net Revenues $ 22,946 $ 18,783
Cost of Services $ 11,396 $ 10,469
Gross Profit $ 11,550 $ 8,314
General and Administrative Expenses $ 10,550 $ 9,154
Income [Loss] from Operations $ 1,000 $ (840)
Non-Recurring Gain on Sale of
Intangible Assets $ -- $ --
Other Expenses - Net $ 307 $ 1,474
Extraordinary Item - Gain on
Extinguishment of Debt $ 447 $ --
Provision for Income Tax Expense
[Benefit] $ -- $ --
Net Income [Loss] $ 1,140 $ (2,314)
Net [Loss] Income Per Common Share $ .23 $ (1.07)
Cash Dividends Per Common Share $ -- $ --
Balance Sheet Data:
Total Assets $ 17,381 $ 9,105
Total Long-Term Liabilities $ 708 $ 478
Total Liabilities $ 9,134 $ 11,290
Working Capital [Deficit] $ 3,604 $ (5,987)
Stockholders' Equity [Deficit] $ 8,246 $ (2,185)
</TABLE>
A number of proposals for legislation are under discussion which could
substantially reduce Medicare and Medicaid reimbursements to clinical
laboratories. Depending upon the nature of regulatory action, and the
content of legislation, the Company could experience a significant
decrease in revenues from Medicare and Medicaid, which could have a
material adverse effect on the Company. The Company is unable to predict,
however, the extent to which such actions will be taken.
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Bio-Reference Laboratories, Inc.
Elmwood Park, New Jersey
We have audited the accompanying
consolidated balance sheets of Bio-Reference Laboratories, Inc. and its
subsidiary as of October 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of
the three fiscal years in the period ended October 31, 1997. 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, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each
of the three fiscal years in the period ended October 31, 1997, in
conformity with generally accepted accounting principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
January 9, 1998
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
- -----------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ---------------------------
<TABLE>
<CAPTION>
October 31,
1 9 9 7 1 9 9 6
<S> <C> <C>
Assets:
Current Assets:
Cash and Cash Equivalents $ 2,161,825 $ 1,401,474
Cash - Restricted 852,000 852,000
Accounts Receivable - Net 13,737,881 12,019,761
Inventory 453,870 394,377
Certificates of Deposit -
Restricted 3,601,250 3,556,250
Other Current Assets 1,000,428 442,932
Deferred Tax Asset 258,000 --
----------- -----------
Total Current Assets 22,065,254 18,666,794
----------- -----------
Property and Equipment:
Automobiles 57,656 57,656
Medical Equipment and Vans 2,146,896 1,806,082
Leasehold Improvements 370,283 350,557
Furniture and Fixtures 398,187 362,835
----------- -----------
Totals - At Cost 2,973,022 2,577,130
Less: Accumulated Depreciation 1,685,298 1,265,836
----------- -----------
Property and Equipment - Net 1,287,724 1,311,294
----------- -----------
Other:
Certificate of Deposit -
Restricted 78,750 123,750
Due from Related Party [6] 214,118 234,918
Deposits 213,347 220,254
Goodwill [Net of
Accumulated Amortization
of $994,015 and $1,052,038,
Respectively] 1,406,570 3,168,403
Intangible Assets [Net of
Accumulated Amortization
of $1,891,970 and $1,444,265,
Respectively] 3,382,393 4,164,286
Other Assets 446,903 341,037
----------- -----------
Total Other 5,742,081 8,252,648
----------- -----------
Total Assets $29,095,059 $28,230,736
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated
Financial Statements.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
- -----------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ---------------------------
<TABLE>
<CAPTION>
October 31,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
Liabilities and Shareholders' Equity:
Current Liabilities:
Accounts Payable $ 2,231,693 $ 2,147,403
Accrued Salaries and Commissions 1,065,339 878,996
Accrued Expenses 511,386 327,876
Current Maturities of
Long-Term Debt [Net of
Discount] [4] 864,266 730,374
Notes Payable - Banks [3] 7,613,710 9,930,741
Capitalized Lease Obligation
- Short-Term Portion [12] 84,970 202,147
Current Maturities of
Convertible Subordinated
Debt [5] 1,339 235,729
Taxes Payable 277,111 141,081
------------ ------------
Total Current Liabilities 12,649,814 14,594,347
------------ ------------
Long-Term Liabilities:
Long-Term Debt Less
Current Maturities [4] 668,030 1,433,817
Capitalized Lease
Obligations - Long-Term
Portion [12] 252,572 99,564
------------ ------------
Total Long-Term Liabilities 920,602 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 -- --
Series A - Senior Preferred
Stock, Par Value $.10
Per Share, Authorized,
Issued and Outstanding
604,078 Shares 60,408 60,408
Common Stock, Par Value $.01
Per Share, Authorized 18,333,333
Shares; Issued and Outstanding
7,169,376 and 6,300,280
Shares at October 31,
1997 and 1996, Respectively 71,694 63,003
Additional Paid-in Capital 22,967,160 22,433,297
Accumulated [Deficit] (7,231,568) (10,431,483)
------------ ------------
Totals 15,867,694 12,125,225
Deferred Compensation (343,051) (22,217)
------------ ------------
Total Shareholders' Equity 15,524,643 12,103,008
------------ ------------
Total Liabilities and
Shareholders' Equity $ 29,095,059 $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>
Y e a r s e n d e d
---------------------
O c t o b e r 3 1,
--------------------
1 9 9 7 1 9 9 6 1 9 9 5
------- -------
<S> <C> <C>
Net Revenues $ 38,660,184 $ 35,125,878 $ 31,521,118
------------ ------------ ------------
Cost of Services:
Depreciation and Amortization 390,953 378,694 337,802
Employee Related Expenses 8,595,078 8,503,156 7,140,830
Reagents and Laboratory
Supplies 4,777,325 4,430,381 3,723,867
Other Cost of Services 5,575,918 4,824,164 3,833,535
------------ ------------ ------------
Total Cost of Services 19,339,274 18,136,395 15,036,034
------------ ------------ ------------
Gross Profit 19,320,910 16,989,483 16,485,084
------------ ------------ ------------
General and Administrative Expenses:
Depreciation and Amortization 798,365 655,192 621,929
Other General and Administrative
Expenses 11,346,007 10,761,548 10,050,229
Provision for
Doubtful Accounts 5,291,507 4,285,807 4,030,030
Expenses of Abandoned
Acquisition -- 90,700 --
------------ ------------ ------------
Total General and Administrative
Expenses 17,435,879 15,793,247 14,702,188
------------ ------------ ------------
Income from Operations 1,885,031 1,196,236 1,782,896
------------ ------------ ------------
Non-Recurring Gain on Sale
of Intangible Assets [22] 2,025,689 -- --
------------ ------------ ------------
Other [Income] Expense:
Interest and Other Expense 1,124,432 840,811 605,405
Interest Income (274,887) (288,395) (273,903)
------------ ------------ ------------
Total Other Expense - Net 849,545 552,416 331,502
------------ ------------ ------------
Income Before Income Taxes 3,061,175 643,820 1,451,394
Provision for Income Tax
Expense [Benefit] [7] (138,740) 51,862 49,225
------------ ------------ ------------
Net Income $ 3,199,915 $ 591,958 $ 1,402,169
============ ============ ============
Net Income Per Share [9] $ .36 $ .10 $ .23
============ ============ ============
</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>
Series A
Senior Preferred Stock
Shares Amount
<S> <C> <C>
Balance - October 31, 1994 $ 604,078 $ 60,408
Shares Issued from Exercise
of Warrants -- --
Shares Issued in Connection with an
Acquisition -- --
Shares Issued in Lieu of Payment
for Service -- --
Expenses Associated with Public Offering
Amortization of Deferred Compensation -- --
Unrealized Loss on Securities Available for
Sale -- --
Net Income for the Year -- --
---------- --------
Balance - October 31, 1995 604,078 60,408
Shares Issued in Connection with
an Acquisition 10,000 100
Shares Issued in Connection with
an Acquisition [Including Shares
Remaining in Escrow] 72,688 727
Shares Issued in Lieu of Payment
for Service 4,000 40
Shares issued in Lieu of an Invoice
Payment 4,745 48
Shares Issued in Connection with an
Acquisition Agreement [Including
Shares Remaining in Escrow] 133,333 1,333
Options Issued for Deferred
Compensation 27,200 --
Amortization of Deferred Compensation -- --
Unrealized Loss on Securities Available
for Sale -- --
Net Income for the Year -- --
---------- --------
Balance - October 31, 1996 -
Forward $ 604,078 $ 60,408
Balance - October 31, 1996 -
Forwarded 604,078 $ 60,408
Shares Issued for Deferred
Compensation -- --
Warrants Issued for Deferred
Compensation -- --
Shares Issued in Connection with an
Acquisition Agreement -- --
Shares Released from Escrow -- --
Amortization of Deferred Compensation -- --
Net Income for the Year -- --
----------- ---------
Balance - October 31, 1997 604,078 $ 60,408
=========== =========
Common Stock
Shares Amount
Balance - October 31, 1994 $ 5,740,162 $ 57,402
Shares Issued from Exercise
of Warrants 12,100 121
Shares Issued in Connection with an
Acquisition 311,252 3,112
Shares Issued in Lieu of Payment for
Service 12,000 120
Expenses Associated with Public
Offering -- --
Amortization of Deferred Compensation -- --
Unrealized Loss on Securities Available for
Sale -- --
Net Income for the Year -- --
----------- --------
Balance - October 31, 1995 6,075,514 60,755
Shares Issued in Connection with
an Acquisition 10,000 100
Shares Issued in Connection with
an Acquisition [Including Shares
Remaining in Escrow] 72,688 727
Shares Issued in Lieu of Payment
for Service 4,000 40
Shares issued in Lieu of an
Invoice Payment 4,745 48
Shares Issued in Connection with an
Acquisition Agreement [Including
Shares Remaining in Escrow] 133,333 1,333
Options Issued for Deferred
Compensation -- --
Amortization of Deferred Compensation -- --
Unrealized Loss on Securities Available
for Sale -- --
Net Income for the Year -- --
----------- --------
Balance - October 31, 1996 -
Forward 6,300,280 $ 63,003
Balance - October 31, 1996 -
Forwarded 6,300,280 $ 63,003
Shares Issued for Deferred
Compensation 815,000 8,150
Warrants Issued for Deferred
Compensation -- --
Shares Issued in Connection with an
Acquisition Agreement 54,096 541
Shares Released from Escrow -- --
Amortization of Deferred Compensation -- --
Net Income for the Year -- --
----------- --------
Balance - October 31, 1997 7,169,376 $ 71,694
Additional
----------
Paid-in Accumulated Deferred
------- ----------- --------
Capital [Deficit] Compensation
------- --------- ------------
Balance - October 31, 1994 $ 20,619,399 $(12,425,610) $ (65,135)
Shares Issued from Exercise
of Warrants 18,029 --
Shares Issued in Connection with an
Acquisition 1,630,962 -- --
Shares Issued in Lieu of Payment for
Service 25,380 -- --
Expenses Associated with Public
Offering (70,240) -- --
Amortization of Deferred
Compensation -- -- 47,635
Unrealized Loss on Securities
Available for Sale -- -- --
Net Income for the Year -- 1,402,169 --
----------- ------------ ------------
Balance - October 31, 1995 22,223,530 (11,023,441)
Shares Issued in Connection with
an Acquisition 23,900 -- --
Shares Issued in Connection with
an Acquisition [Including Shares
Remaining in Escrow] 94,208 -- --
Shares Issued in Lieu of Payment
for Service 9,560 -- --
Shares issued in Lieu of an
Invoice Payment 17,151 -- --
Shares Issued in Connection with an
Acquisition Agreement [Including
Shares Remaining in Escrow] 37,748 -- --
Options Issued for Deferred
Compensation 27,200 -- (27,200)
Amortization of Deferred
Compensation -- -- 22,483
Unrealized Loss on Securities Available
for Sale -- -- --
Net Income for the Year -- 591,958 --
----------- ------------ ------------
Balance - October 31, 1996 -
Forward $22,433,297 $(10,431,483) $ (22,217)
Balance - October 31, 1996 -
Forwarded $22,433,297 $(10,431,483)
Shares Issued for Deferred
Compensation 337,919 --
Warrants Issued for Deferred
Compensation 13,423 -- (13,423)
Shares Issued in Connection with an
Acquisition Agreement 127,320 -- --
Shares Released from Escrow 55,201 -- --
Amortization of Deferred
Compensation -- -- 38,658
Net Income for the Year -- 3,199,915 --
----------- ------------ ------------
Balance - October 31, 1997 $22,967,160 $ (7,231,568)
Unrealized Loss
on Securities Total
Available Shareholders'
for Sale Equity
Balance - October 31, 1994 $ -- $ 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 (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 -- --
Amortization of Deferred
Compensation -- 22,483
Unrealized Loss on Securities Available
for Sale 47,998 47,998
Net Income for the Year -- 591,958
----------- ------------
Balance - October 31, 1996 -
Forward $ -- $ 12,103,008
Balance - October 31, 1996 -
Forwarded $ -- $ 12,103,008
Shares Issued for Deferred
Compensation -- --
Warrants Issued for Deferred
Compensation -- --
Shares Issued in Connection with an
Acquisition Agreement -- 127,861
Shares Released from Escrow -- 55,201
Amortization of Deferred
Compensation -- 38,658
Net Income for the Year -- 3,199,915
----------- ------------
Balance - October 31, 1997 $ -- $ 15,524,643
=========== ============
</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>
Y e a r s e n d e d
---------------------
O c t o b e r 3 1,
-------------------
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
<S> <C> <C> <C>
Operating Activities:
Net Income $ 3,199,915 $ 591,958 $ 1,402,169
----------- ------------- -----------
Adjustments to Reconcile Net
Income to Net Cash [Used for]
Operating Activities:
Depreciation and Amortization 1,189,318 1,033,886 959,731
Amortization of Deferred
Compensation 38,658 22,483 47,635
Expenses of Abandoned
Acquisition -- 90,700 --
Shares Issued for Services -- -- 25,500
Provision for Doubtful
Accounts 5,291,507 4,285,807 4,030,030
Other -- 20,242 (9,285)
Gain from Sale of Marketable
Securities -- (9,336) --
Gain on Sale of Assets -- (1,546) --
Nonrecurring Gain on Sale of
Intangible Assets (2,025,689) -- --
Deferred Income Taxes (258,000) -- --
Changes in Assets and Liabilities
[Net of Effects from Acquisitions]:
[Increase] Decrease in:
Accounts Receivable (7,509,627) (7,672,430) (6,442,884)
Other Assets (105,866) (81,868) (63,230)
Inventory (59,493) 60,931 (141,940)
Other Current Assets 142,504 12,046 (271,111)
Increase [Decrease] in:
Accounts Payable and Accrued
Expenses (210,861) (126,411) (299,189)
Taxes Payable 136,030 (121,927) (6,986)
----------- ------------- ------------
Total Adjustments (3,371,519) (2,487,423) (2,171,729)
----------- ------------ ------------
Net Cash - Operating
Activities - Forward (171,604) (1,895,465) (769,560)
---------- ------------- ------------
Investing Activities:
Acquisition of Property and
Equipment (143,613) (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
- Restricted (3,680,000) (180,000) (3,665,650)
Maturities of Certificate of Deposit
- Restricted 3,680,000 165,650 --
Cash Acquired During
Acquisition -- -- 42,338
Cash Overdraft of Acquired
Company -- (3,797) --
Reduction of Deposits 6,907 63,146 22,649
Repayment of Related Party
Receivable 20,800 15,800 10,400
Payment for Acquisition of
Intangible Assets (44,375) (1,564,363) (290,081)
Proceeds from Sale of
Intangible Assets 4,600,000 -- --
---------- ------------ -----------
Net Cash - Investing Activities -
Forward $4,439,719 $ (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>
Y e a r s e n d e d
O c t o b e r 3 1,
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
<S> <C> <C> <C>
Net Cash - Operating Activities
- Forwarded $ (171,604) $ (1,895,465) $ (769,560)
Net Cash - Investing Activities
- Forwarded $4,439,719 (1,423,533) (4,751,182)
---------- ------------- -----------
Financing Activities:
Proceeds from Long-Term Debt -- 1,180,000 394,756
Payments of Long-Term Debt (739,895) (2,083,476) (2,679,620)
Payments of Capital Lease
Obligations (216,448) (236,472) (297,642)
Payments of Subordinated Notes
Payable (234,390) (7,920) (51,039)
[Decrease] Increase in Revolving
Line of Credit (2,317,031) 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 (3,507,764) 4,084,226 4,761,015
Net Increase [Decrease] in Cash and
Cash Equivalents 760,351 765,228 (759,727)
Cash and Cash Equivalents -
Beginning of Years 1,401,474 636,246 1,395,973
Cash and Cash Equivalents -
End of Years $ 2,161,825 $ 1,401,474 $ 636,246
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 1,118,540 $ 815,521 $ 531,381
Income Taxes $ 44,136 $ 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- 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 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 April 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 Fiscal 1996, the Company issued debt in the amount of $108,000 in
connection with the acquisition of a customer list related to a 1994
agreement.
From March to July 1997, the Company incurred four capital leases
obligations totaling $252,279 in connection with the acquisition of
various medical equipment.
In fiscal 1997, the Company issued debt in the amount of $108,000 in
connection with the acquisition of a customer list related to a 1994
agreement.
[See Notes 8, 17 and 22 for additional non-cash transactions]
The Accompanying Notes are an Integral Part of These Consolidated
Financial Statements.
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 in 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>
Y e a r s e n d e d
O c t o b e r 3 1,
1 9 9 7 1 9 9 6 1 9 9 5
<S> <C> <C> <C>
Gross Revenues $ 80,462,096 $ 66,768,717 $ 56,097,026
Contractual Adjustments and
Discounts:
Medicare/Medicaid Portion 23,090,659 18,620,485 15,560,866
Other 18,711,253 13,022,354 9,015,042
Total Contractual Adjustments
and Discounts 41,801,912 31,642,839 24,575,908
</TABLE>
Net Revenues $38,660,184 $ 35,125,878 $ 31,521,118
A number of proposals for legislation are under discussion which could
substantially reduce Medicare and Medicaid reimbursements to clinical
laboratories. Depending upon the nature of regulatory action, and the
content of legislation, the Company could experience a significant
decrease in revenues from Medicare and Medicaid, which could have a
material adverse effect on the Company. The Company is unable to predict,
however, the extent to which such actions will be taken.
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 $8,564,436, $5,357,096 and
$2,569,125 as of October 31, 1997, 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.
Stock Options Issued to Employees - The Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," on November 1, 1996 for financial note disclosure purposes
and continues to apply the intrinsic value method of Accounting Principles
Board ["APB"] Opinion No. 25, "Accounting for Stock Issued to Employees,"
for financial reporting purposes.
Deferred Income Taxes - Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax
bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to
the periods in which the differences are expected to affect taxable
income.
Reclassification - Certain fiscal 1996 and 1995 items have been
reclassified to conform to the current years presentation.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[2] Summary of Significant Accounting Policies [Continued]
Deferred Income Taxes [Continued] - Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets
and liabilities.
Impairment - Certain long-term assets of the Company including goodwill
are reviewed at least annually as to whether their carrying value has
become impaired, pursuant to guidance established in Statement of
Financial Accounting Standards ["SFAS"] No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." Management considers assets to be impaired if the carrying value
exceeds the future projected cash flows from related operations
[undiscounted and without interest charges]. If impairment is deemed to
exist, the assets will be written down to fair value or projected
discounted cash flows from related operations. Management also
re-evaluates the periods of amortization to determine whether subsequent
events and circumstances warrant revised estimates of useful lives. As of
October 31, 1997, management expects these assets to be fully recoverable.
Property and Equipment - Property and equipment are carried at cost.
Depreciation is computed by the straight-line method over the estimated
useful lives of the respective assets which range from 2 to 15 years.
Leasehold improvements are amortized over the life of the lease, which is
approximately five years.
The statements of operations reflect depreciation expense related to
property and equipment of $419,462, $404,248 and $368,478 for the years
ended October 31, 1997, 1996 and 1995, respectively.
On sale or retirement, the asset cost and related accumulated depreciation
or amortization are removed from the accounts, and any related gain or
loss is reflected in income. Repairs and maintenance are charged to
expense when incurred.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Goodwill - Goodwill represents the excess of the cost of companies
acquired over the fair value of their net assets at dates of acquisition
and is being amortized on the straight-line method over 20 years. The
statements of operations reflect amortization expense related to goodwill
for the years ended October 31, 1997, 1996 and 1995 of $203,490, $209,211
and $187,936, respectively.
Intangible Assets - Intangible assets are amortized using the
straight-line method. The statements of operations reflect amortization
expense related to intangible assets of $566,366, $420,427 and $403,317
for the years ended October 31, 1997, 1996 and 1995, respectively.
A summary is as follows:
<TABLE>
<CAPTION>
Accumulated Net of
Amortization Amortization
October 31, October 31,
Intangible Asset Life in Years Cost 1 9 9 7 1 9 9 7
- ---------------- ------------- ---- ------- -------
<S> <C> <C> <C> <C>
Customer Lists 20 $ 3,065,042 $ 518,731 $ 2,546,311
Covenants Not-to-Compete 5-7.5 1,420,206 958,738 461,468
Employment Agreement 5 400,000 286,666 113,334
Costs Related to
Acquisitions 2-17 236,178 120,579 115,599
Patent 17 144,375 5,882 138,493
Other 17-20 8,562 1,374 7,188
----------- ---------- -----------
Totals $ 5,274,363 $1,891,970 $ 3,382,393
=========== ========== ===========
</TABLE>
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
[2] Summary of Significant Accounting Policies [Continued]
Intangible Assets [Continued]
<TABLE>
<CAPTION>
Accumulated Net of
Amortization Amortization
October 31, October 31,
Intangible Asset Life in Years Cost 1 9 9 6 1 9 9 6
- ---------------- ------------- ---- ------- -------
<S> <C> <C> <C>
Customer Lists 20 $3,377,042 $ 410,111 $2,966,931
Covenants
Not-to-Compete 5-20 1,420,206 720,250 699,956
Employment
Agreement 5 400,000 206,666 193,334
Costs Related
to Acquisitions 2-17 302,741 106,356 196,385
Patent 17 100,000 -- 100,000
Other 17-20 8,562 882 7,680
---------- ----------- ----------
Totals $5,608,551 $ 1,444,265 $4,164,286
========== =========== ==========
</TABLE>
Advertising Costs -Advertising costs are expensed when incurred.
Advertising costs amounted to $467,000, $344,000 and $256,000 for the
years ended October 31, 1997, 1996 and 1995, respectively.
Cash and Cash Equivalents - Cash equivalents are comprised of certain
highly liquid investments with a maturity of three months or less when
purchased. The Company had $1,307,278 and $717,484 in cash equivalents at
October 31, 1997 and 1996, respectively.
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 March 1997, 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) $10,000,000 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 through March 1999 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, 1997 and 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. As of October 31, 1997, the Company utilized $6,761,710 of this
credit facility.
[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, 1997 and 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.
Prime rate at October 31, 1997 and 1996 was $8.5% and 8.25%, respectively.
The weighted average interest rate on short-term borrowings outstanding as
of October 31, 1997 and 1996 was 8.64% and 8.7%, respectively.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
[4] Long-Term Debt
<TABLE>
<CAPTION>
October 31,
1 9 9 7 1 9 9 6
<S> <C> <C>
[A] Note Payable to PNC Bank. Due October
1999. Interest at prime plus 1.25%. $ 194,761 $ 294,760
[B] Notes Payable to PNC Bank. Due July
2000. Interest at prime plus 1.75%
and certificate of deposit rate
plus 2%. 610,255 1,106,251
[C] Note Payable to SmithKline Beecham
Clinical Laboratories, Inc. Due
January 1, 1999. Interest imputed
at 8.25%. 551,373 551,373
[D] Various note payables to prior CML
owners. Due November 1998. Interest
ranging from 6% to 10.75%. 95,175 175,238
[E] Sclavo, Inc. Payments dependent on
collections received from customer list.
Interest at 10%. 80,732 36,569
----------- ------------
Totals 1,532,296 2,164,191
Less: Current Maturities 864,266 730,374
----------- ------------
Long-Term Debt $ 668,030 $ 1,433,817
=========== ============
</TABLE>
[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.
[B] In July 1996, the Company entered into an agreement to borrow
$1,180,000. The original principal balance of $1,000,000 was not
collateralized and has an interest rate of prime + 1.75%. The remaining
original principal balance of $180,000 is collateralized by a certificate
of deposit and 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.
[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 [See Note 14].
[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.
Maturities of long-term debt at October 31, 1997 in each of the next five
years are as follows:
<TABLE>
<S> <C>
1998 $ 864,266
1999 446,773
2000 221,257
2001 --
2002 --
---------
Total $1,532,296
</TABLE>
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
[5] Convertible Subordinated Debt
In January 1995, the Company issued two 8% convertible subordinated
debentures for $206,956 and $31,732 in connection with the Company's
acquisition of GenCare. As of October 31, 1997 and 1996, $237,349 and
$2,959, respectively, has been repaid.
[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. As of October 31, 1997 and 1996, $214,118 and
$234,918 in outstanding principal and interest were due from the officer.
The Company pays premiums on life insurance policies for three key
officers. In the event that any of these officers leave the Company, they
are required to pay the Company back for premiums paid on their policies.
In the event of death, the benefit paid to the beneficiary is reduced by
the amount of premiums paid on behalf of the individual by the Company.
At October 31, 1997 and 1996, $446,903 and $336,037 is included in other
assets which represents the amount of premiums paid to date. At October
31, 1997 and 1996, cash surrender values on these policies were in excess
of amounts receivable.
[7] Income Taxes
The reconciliation of income tax from continuing operations computed at
the U.S. federal statutory tax rate to the Company's effective income tax
rate is as follows:
<TABLE>
<CAPTION>
October 31,
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
<S> <C> <C> <C>
U.S. Federal Statutory Rate 34.0% 34.0% 34.0%
State and Local Income Taxes,
Net of U.S. Federal Income
Tax Benefit 10.0% 8.0% 8.0%
Other (7.5)% 3.1% --%
Utilization of Net Operating
Loss Carryforwards (41.0)% (37.0)% (38.6)%
------- ------- -------
Actual Rate (4.5)% 8.1% 3.4%
====== ==== ====
</TABLE>
The provision for income taxes shown in the consolidated statements of
operations consist of the following:
<TABLE>
<CAPTION>
October 31,
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ 79,947 $14,228 $28,029
State and Local 39,313 37,634 21,196
Deferred:
Federal (204,000) -- --
State and Local (54,000) -- --
--------- -------- -------
Total Provision for Income Taxes $(138,740) $51,862 $49,225
========= ======= =======
</TABLE>
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
[7] Income Taxes [Continued]
At October 31, 1997, the Company had net operating loss carryforwards of
approximately $5,150,000 for federal income tax purposes, which expire in years
2006 through 2009. In addition, the Company had net operating losses for state
purposes. The Company operates in several states, however, most of its
business is conducted in the New Jersey and New York area. The following
summarizes the operating loss carryforwards by year of expiration:
<TABLE>
<CAPTION>
Federal New Jersey New York
Expiration Date Amount Amount Amount
- --------------- ------ ------ ------
<S> <C> <C> <C>
1999 $ -- $ 400,000 $ --
2000 -- 2,400,000 --
2006 1,050,000 -- --
2007 1,300,000 -- --
2008 2,400,000 -- --
2009 400,000 -- 1,400,000
2010 -- -- 1,100,000
2011 -- -- 1,800,000
---------- ---------- ---------
Total $5,150,000 $2,800,000 $4,300,000
========== ========== ==========
</TABLE>
Investment tax credit carryforwards of approximately $32,161 are available
to reduce future income taxes. These credits expire from 1998 to 2002.
At October 31, 1997, the Company has a deferred tax asset of approximately
$2,200,000 and a valuation allowance of approximately $1,942,000 related
to the asset, a decrease of $1,658,000 since October 31, 1996. The
deferred tax asset primarily relates to net operating loss carryforwards.
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
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 May 13, 1997, pursuant to a recapitalization, the Senior Preferred
Stock was retired in exchange for a new class of Series A Senior Preferred
Stock. The new Series A Senior Preferred Stock is convertible into an
aggregate 604,078 shares of common stock on or before May 1, 2007 at a
conversion price of $.75 per share and has the same voting rights [one
vote per share], dividend rights and liquidation as each share of common
stock.
Holders of the Company's common stock are entitled to one vote per share
on matters submitted for shareholder vote. Holders are also entitled to
receive dividends ratably, if declared. In the event of dissolution or
liquidation, holders are entitled to share ratably in all assets remaining
after payment of liabilities.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
[8] Capital Transactions [Continued]
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. During 1997, the remaining 90,920 shares held in
escrow were released and an additional 54,096 shares were issued due to a
decrease in the market price of the common stock [See Note 22].
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.
On July 27, 1995, an aggregate of 10,000 shares of the Company's 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, 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.
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. During 1997 and 1996,
an aggregate 21,944 and 23,611 shares respectively were released from
escrow when collection requirements were met.
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.
In May 1997, the Company issued 815,000 shares of common stock and
warrants to purchase 58,534 shares of the Company's common stock at a
price of $.71875 in connection with employment and consulting agreements
and a two year extension on a loan agreement [See Note 10]. Included in
the 815,000 shares issued were 740,000 shares to three officers of the
Company. The shares are forfeitable in part in various amounts if the
employee's employment is terminated "for cause" or at his option "without
good reason" prior to May 1, 2000.
[9] Income Per Share
Income per share is based on the weighted average number of shares of
common stock outstanding of 6,166,156 and 6,010,964 during fiscal 1996 and
1995, respectively. Equity equivalents are assumed exercised or converted
if dilutive. For fiscal 1997, the modified treasury stock method was
utilized. Net income and number of shares used under the modified
treasury stock method were $4,592,860 and 12,757,946 shares, respectively,
for fiscal 1997.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
[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. At October 31, 1997 and 1996, there were
12,624 and 188,290 shares reserved for future grants under the 1986 and
1989 plans. No stock appreciation rights have been granted. In May 1997,
the Company's board of directors approved the cancellation of all of
outstanding employee stock options for new options at an exercise price of
$.71875 which reflects current fair market value. Following is a summary
of transactions:
<TABLE>
<CAPTION>
Weighted
Average
Shares Exercise
Under Price
Options Per Share
------- ---------
<S> <C> <C>
Outstanding at October 31, 1994 514,709
Granted During the Year 1,000
Expired During the Year (33,665)
Exercised During the Year --
--------
Outstanding and Eligible for Exercise
at October 31, 1995 482,044 $ .72
Granted During the Year -- --
Expired During the Year -- --
Exercised During the Year -- --
-------- -------
Outstanding and Eligible for Exercise
at October 31, 1996 482,044 $ .72
Granted During the Year 210,000 .76
Expired During the Year (34,334) .72
Exercised During the Year -- --
-------- -------
Outstanding and Eligible for Exercise
at October 31, 1997 657,710 $ .73
======== =======
</TABLE>
<TABLE>
<CAPTION>
Outstanding and Exercisable Options
Weighted
Average
Number of Remaining Weighted Average
Shares Under Contractual Exercise Price
<S> <C> <C>
Exercise Price Range Option Life Per Share
$.71875 to $.790625 Per Share 657,710 10 Years $ .73
</TABLE>
The weighted average grant date fair value of options granted during the
year ended October 31, 1997 was $.2486 per share.
The Company accounts for these stock-based compensation awards to
employees under the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees." Total compensation cost recognized against income for
stock-based employee compensation awards was $-0- for the years ended
October 31, 1997, 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-incentive stock options
and warrants may be granted to employees or non-employees at fair market
value or at a price less than fair market value of the common stock at the
date of grant. Included in the outstanding warrants are publicly-owned
warrants to purchase 5,015,841 shares of common stock sold in the
Company's 1993 public offering. The following is a summary of
transactions as of October 31, 1997 and 1996:
<TABLE>
<CAPTION>
Weighted
Shares Under Average
Options Exercise Price
and Warrants Per Share
------------ ---------
<S> <C> <C>
Outstanding - October 31, 1994 5,735,481
Granted During the Year 370,000 $ 4.7
Canceled During the Year (4,334)
Exercised During the Year (12,100)
---------- --------
Outstanding and eligible for Exercise
at October 31, 1995 6,089,047 $ 4.65
Granted During the Year 40,000 3.00
Expired During the Year (106,667) 1.79
Exercised During the Year -- --
--------- --------
Outstanding and Eligible for Exercise
at October 31, 1996 6,022,380 $ 4.63
Granted During the Year 381,300 .72
Expired During the Year (584,871) 1.45
Exercised During the Year -- --
--------- --------
Outstanding and Eligible for Exercise
at October 31, 1997 5,818,809 $ 4.71
========= ========
</TABLE>
During the year ended October 31, 1996, 40,000 shares under warrants were
granted to two non-employees. 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 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 $5,440 and $4,983, respectively for the years ended
October 31, 1997 and 1996.
During the year ended October 31, 1997, 35,200 shares under warrants were
granted to three non-employees and 23,334 shares under warrants were
canceled for new warrants at a price of $.71875 which represents fair
market value at the time of grant. The fair value of each warrant granted
was estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions: a weighted average risk-free
interest rate of 6%, a weighted average expected life of 1 year based on
Company expectations and the required minimum two year holding period, and
a weighted average expected volatility of 84.09%. Dividends are not
expected to be available to shareholders during the expected life of the
warrants.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
[10] Stock Options and Warrants [Continued]
[B] Non Incentive Stock Options and Warrants [Continued] - The fair value
of these options issued in May of 1997 of $13,423 [$.2486 per share] has
been accounted for as deferred compensation for the year ended October 31,
1997 and is being expensed over the term of the agreements. Total
compensation expense recognized against income for this deferred
compensation was $2,254 for the year ended October 31, 1997.
During the year ended October 31, 1997, 346,100 shares under options were
granted to employees. The Company accounts for these options under the
intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees." Total
compensation cost recognized against income for employee nonincentive
stock option and warrants was $-0- for the years ended October 31, 1997,
1996 and 1995.
<TABLE>
<CAPTION>
Outstanding and Exercisable Options and Warrants
Weighted
Number of Average
Shares Under Remaining Weighted Average
Options and Contractual Exercise Price
Exercise Price Range Warrants Life Per Share
- -------------------- -------- ---- ---------
<S> <C> <C> <C>
Warrants -$4.50 Per Share 3,789,175 1 Year $ 4.50
Warrants - $6.75 Per Share 1,226,666 1 Year $ 6.75
Options - $.71875 Per Share 404,634 7 Years $ .72
Options - $1.50 to $3.00
Per Share 23,334 3 Years $ 2.79
Options - $4.125 to $5.125
Per Share 375,000 1 Year $ 4.70
---------
5,818,809
=========
</TABLE>
These warrants and options have weighted average remaining contractual
lives of approximately two years. The weighted average grant date fair
value of options granted during the years ended October 31, 1997 and 1996
was $.2486 and $.68 per share, respectively.
[A] and [B] Pro Forma - Had compensation cost been determined on the basis
of fair value pursuant to SFAS No. 123, for the 657,710 shares under
employee incentive stock options and 346,100 shares under employee
nonincentive stock options and warrants for the years ended October 31,
1997 and 1996, net income and earnings per share would have been as
follows:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
Net Income:
As Reported $ 3,199,915 $ 591,958
=========== ==========
Pro Forma $ 2,950,000 $ 591,958
=========== ==========
Earnings Per Share:
As Reported $ .36 $ .10
=========== ==========
Pro Forma $ .34 $ .10
=========== ==========
</TABLE>
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
[10] Stock Options and Warrants [Continued]
[A] and [B] Pro Forma [Continued] - The fair value used in the pro forma
data was estimated by using an option pricing model which took into
account as of the grant date, the exercise price and the expected life of
the option, the current price of the underlying stock and its expected
volatility, expected dividends on the stock and the risk-free interest
rate for the expected term of the option. The following is the average of
the data used for the following items.
<TABLE>
<CAPTION>
Risk-Free Expected Expected Expected
Interest Rate Expected Life Volatility Dividends
- ------------- ------------- ---------- ---------
<S> <C> <C> <C>
6% 1 Year 84.09% None
</TABLE>
[11] Employment Contracts and Consulting Agreements
The Company has entered into various employment contracts and consulting
agreements for periods ranging from one to seven years. At October 31,
1997, the aggregate minimum commitment under these contracts and
agreements, excluding commissions, was approximately as follows:
<TABLE>
<CAPTION>
October 31,
- ----------
<S> <C>
1998 $1,091,250
1999 1,013,333
2000 943,333
2001 880,000
2002 and Thereafter 1,649,000
----------
Total $5,576,916
- ----- ==========
</TABLE>
Some of these agreements provide bonuses and commissions based on a
percentage of collected revenues ranging from 1% to 10% on accounts
referred by or serviced by the employee or consultant.
In addition to the above, two employment agreements which provide for
annual aggregate minimum commitments of $186,700 have no termination
dates.
[12] Capitalized Lease Obligations
The Company leases various assets under capital leases expiring in 2002 as
follows:
<TABLE>
<CAPTION>
October 31,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
Medical Equipment $ 654,479 $ 650,690
Furniture and Fixtures 11,565 11,565
Leasehold Improvements -- 12,130
Totals 666,044 674,385
Less: Accumulated
Depreciation 262,979 274,704
Net $ 403,065 $ 399,681
</TABLE>
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
[12] Capitalized Lease Obligations [Continued]
Depreciation expense on assets under capital leases was $83,853, $106,191
and $170,601 for the years ended October 31, 1997, 1996 and 1995,
respectively.
Aggregate future minimum rentals under capital leases are:
<TABLE>
<CAPTION>
Years ended
October 31,
- -----------
<S> <C>
1998 $ 120,442
1999 109,331
2000 104,888
2001 62,750
2002 22,681
Thereafter --
----------
Total 420,092
Less:
Interest 82,550
----------
Present Value
of Minimum
Lease
Payments $ 337,542
=========
</TABLE>
[13] Commitments and Contingencies
The Company leases various office and laboratory facilities and equipment
under operating leases expiring from 1997 to 2002. 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, 1997, 1996 and 1995 was $1,796,839, $1,850,085 and $1,640,360,
respectively. There were no contingent rental amounts due through October
31, 1997.
Aggregate future minimum rental payments on noncancelable operating leases
are as follows:
<TABLE>
<CAPTION>
Property Equipment
-------- ---------
October 31,
- -----------
<S> <C> <C>
1998 $ 499,734 $ 515,236
1999 137,280 420,854
2000 -- 294,417
2001 -- 149,229
2002 -- 19,120
Thereafter -- --
---------- ----------
Totals $ 637,014 $1,398,856
------ ========== ==========
</TABLE>
[14] Litigation
In the normal course of business, the Company is exposed to a number of
asserted and unasserted potential claims. In the opinion of management,
the resolution of these matters will not have a material adverse effect on
the Company's financial position or results of operations.
On December 30, 1996, the Company commenced a lawsuit against SmithKline
Beecham Clinical Laboratories ["SBCL"] alleging that SBCL materially and
repeatedly breached its obligations and its representations and warranties
made in the Asset Agreement and the Non-Competition Agreement pursuant to
which the Company purchased certain assets from SBCL and claims
unspecified amounts of compensatory and punitive damages and related
costs. 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].
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
[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, 1997, the Company had approximately $6,320,000 in cash and
certificates of deposit balances at financial institutions which were in
excess of the federally insured limits. Approximately $4,532,000 of this
amount represents collateral for demand loans with the same financial
institutions [See restricted cash and certificates of deposit on
consolidated balance sheet].
At October 31, 1996, the Company had approximately $5,300,000 in cash and
certificate of deposit 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. [See restricted cash and certificates of deposit on
consolidated balance sheet].
Credit risk with respect to accounts receivable is generally diversified
due to the large number of patients comprising the client base. The
Company does have significant receivable balances with government payors
and various insurance carriers. Generally, the Company does not require
collateral or other security to support customer receivables, however, the
Company continually monitors and evaluates its client acceptance and
collection procedures to minimize potential credit risks associated with
its accounts receivable and establishes an allowance for uncollectible
accounts and as a consequence, believes that its accounts receivable
credit risk exposure beyond such allowance is not material to the
financial statements.
[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 [See Notes 8 and
22].
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14
[17] Acquisitions [Continued]
[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, 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. During 1996,
Oncodec Labs, Inc. was dissolved and is now part of the operations of the
Company.
[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.
During 1996, CML was dissolved and is now part of the operations of the
Company [See Note 8].
[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.
[F] On July 19, 1996, the Company 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 the Company at the closing
was provided pursuant to its term loan and credit line facilities with PNC
Bank [formerly Midlantic Bank, N.A.] [See Note 14].
[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.
<TABLE>
<CAPTION>
O c t o b e r 3 1,
1 9 9 7 1 9 9 6
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C>
Long-Term Debt $668,030 $666,755 $1,433,817 $1,430,140
Capitalized
Lease
Obligations $252,572 $248,942 $ 99,564 $ 96,016
</TABLE>
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].BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #15
[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.
[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 1997 and 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, 1997, 1996 and 1995, 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] Certificates of Deposit-Restricted
At October 31, 1997 and 1996, the Company had $852,000 of restricted cash
and $3,680,000 of restricted certificates of deposit, which represents
collateral for two demand notes and a long-term debt agreement [See Notes
3 and 4].
[22] Non-recurring Gain on Sale of Intangible Assets
On September 30, 1997, the Company entered into an agreement to sell
certain customer lists, its "GenCare" tradename and rights under two
GenCare contracts to another laboratory for $4,600,000 in cash and
$1,400,000 payable in four equal installments every six months beginning
April 1, 1998, provided however that certain target revenues are reached.
If target revenues are not reached amounts payable under the contract will
be decreased up to a maximum of $700,000. The Company and certain of its
officers entered into a noncompetion agreement with the purchaser as part
of this agreement. The Company recorded a non-recurring gain of
$2,025,689 related to this sale. The $700,000 in contingent receivables
were not included in the calculation of gain on this sale as of October
31, 1997.
[23] New Authoritative Accounting Pronouncements
The Financial Accounting Standards Board ["FASB"] issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ["EPS"], 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 ["APB"] 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. Basic EPS includes no dilution and is computed by dividing
income available to common stockholders 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. Basic EPS will be based on average
common shares outstanding and diluted EPS will include the effects of
potential common stock, such as, options and warrants. The Company's
basic EPS as calculated under SFAS No. 128 would have been $.43 for the
year ended October 31, 1997. The Company's diluted EPS as calculated
under SFAS No. 128 would have been $.39 for the year ended October 31,
1997.BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #16
[23] New Authoritative Accounting Pronouncements [Continued]
SFAS No. 129 does not change any previous disclosure requirements, but
rather consolidates existing disclosure requirements for ease of
retrieval.
The Financial Accounting Standards Board ["FASB"] issued Statement of
Financial Accounting Standards ["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. The Company is in the process of determining its preferred
format. The adoption of SFAS No. 130 will have no impact on the Company's
consolidated results of operations, financial position or cash flows.
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. The
Company is in the process of evaluating the disclosure requirements. The
adoption of SFAS No. 131 will have no impact on the Company's consolidated
results of operations, financial position or cash flows.
. . . . . . . . . .
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Bio-Reference Laboratories, Inc.
Elmwood Park, New Jersey
Our report on our audit of the basic
financial statements of Bio-Reference Laboratories, Inc. and its
subsidiary appears on page F-1. That audit was conducted for the purpose
of forming an opinion on the basic financial statements taken as a whole.
The supplemental schedule II is presented for purposes of complying with
the Securities and Exchange Commissions Rules and Regulations under the
Securities Exchange Act of 1934 and is not otherwise a required part of
the basic financial statements. Such information has been subjected to
the auditing procedures applied in the audit of the basic financial
statements, and in our opinion, is fairly stated in all material respects
in relation to the basic financial statements taken as a whole.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
January 9, 1998BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED
OCTOBER 31, 1997, 1996 AND 1995.
<TABLE>
<CAPTION:
Balance at Charged to Deductions Balance
Beginning Cost and To Valuation at End
of Period Expenses Accounts of Period
<S> <C> <C> <C> <C>
Year Ended October 31, 1997
Allowance for Doubtful
Accounts and Contractual
Credits $ 5,357,096 $ 47,593,419 $(44,386,079) $ 8,564,436
============ ============= ============= ===========
Year Ended October 31, 1996
Allowance for Doubtful
Accounts and Contractual
Credits $ 2,569,125 $ 35,928,646 $(33,140,675) $ 5,357,096
============ ============= ============= ===========
Year Ended October 31, 1995
Allowance for Doubtful
Accounts and Contractual
Credits $ 1,224,806 $ 28,605,938 $(27,261,619) $2,569,125
============ ============= ============= ===========
</TABLE>
<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-K and is qualified in its entirety by reference to such (b) Report on
Form 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<CASH> 3,013,825
<SECURITIES> 0
<RECEIVABLES> 13,737,881
<ALLOWANCES> 8,564,436
<INVENTORY> 453,870
<CURRENT-ASSETS> 22,065,254
<PP&E> 2,973,022
<DEPRECIATION> 1,685,298
<TOTAL-ASSETS> 29,095,059
<CURRENT-LIABILITIES> 12,649,814
<BONDS> 9,484,887
0
60,408
<COMMON> 71,694
<OTHER-SE> 22,967,160
<TOTAL-LIABILITY-AND-EQUITY> 29,095,059
<SALES> 38,660,184
<TOTAL-REVENUES> 38,660,184
<CGS> 19,339,274
<TOTAL-COSTS> 36,775,153
<OTHER-EXPENSES> (1,176,144)
<LOSS-PROVISION> 5,291,507
<INTEREST-EXPENSE> 1,124,432
<INCOME-PRETAX> 3,061,175
<INCOME-TAX> (138,740)
<INCOME-CONTINUING> 3,199,915
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,199,915
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
</TABLE>
