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, 1998
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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.
---------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-2405059
- ---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
481 Edward H. Ross Drive, Elmwood Park, New Jersey 07407
- -------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code 201-791-2600
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on which
Title of Class registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or in any amendment to this Form 10-K. [ ]
On January 29, 1999, 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 $9,425,000 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
7,212,910 shares of Common Stock of the Issuer outstanding.
PART I
Item. 1 - Business
--------
Bio-Reference Laboratories, Inc., "Bio-Reference" or the "Company,"
operates a clinical laboratory servicing the greater New York metropolitan
area. Bio-Reference offers a comprehensive list of chemical diagnostic tests
including blood and urine analysis, blood chemistry, hematology services,
serology, radioimmuno analysis, toxicology (including drug screening), pap
smears, tissue pathology (biopsies) and other tissue analyses. Bio-Reference
holds the required Federal and state licenses necessary to permit its
operation of its processing facilities in New Jersey and New York State and
to permit its servicing of its clients in Connecticut, Florida, Louisiana,
Maryland, New Jersey, New York, Pennsylvania, Texas and Virginia. Bio-
Reference markets its services directly to physicians, hospitals, clinics,
and other health facilities.
The United States market for clinical laboratory testing is estimated to
generate approximately $30 billion in annual revenues.
- 50% of these revenues are generated by hospital laboratories
- 50% of these revenues are generated by independent laboratories
and physician office laboratories.
Bio-Reference was incorporated under the laws of the State of New Jersey in
December 1981 under the name "Med-Mobile, Inc." Its initial primary business
was to provide mobile medical examinations. This business was discontinued in
June 1989. Since February 1987, the Company's primary business has been the
operation of a clinical laboratory located in northern New Jersey servicing the
greater New York metropolitan area. The Company expanded its laboratory
services through the March 1988 acquisition of Cytology and Pathology
Associates, Inc. and relocated all of its laboratory operations to its facility
in Elmwood Park, New Jersey. The Company changed its name to Bio-Reference
Laboratories, Inc. in November 1989. Bio-Reference has expanded its laboratory
testing capabilities and its customer base through internal growth as well as
through the completion of a series of acquisitions of the businesses of other
testing laboratories.
Bio-Reference's most recent acquisition occurred in April, 1998 when it
acquired Medilabs, Inc. ("MLI" or "Medilabs") from its parent company LTC
Services and Holdings, Inc., a wholly-owned subsidiary of Long-Term Care
Services, Inc. The operations of MLI are included in the Company's operating
results, commencing April 9, 1998. MLI is located in Rockland County, New York
and incurred a net loss of approximately $120,000 for the fiscal year ended
October 31, 1998.
The Company's executive offices are located at 481 Edward H. Ross Drive,
Elmwood Park, New Jersey 07407. Its telephone number is (201) 791-2600.
Developments Since the Beginning of Fiscal 1998
- -----------------------------------------------
On March 31, 1998, the Company's board of directors adopted a Shareholder
Rights Plan and declared a dividend distribution of one Right for each
outstanding share of Common Stock and each outstanding share of Series A Senior
Preferred Stock. Each Right entitles the registered holder to purchase one one-
ten-thousandth of a Junior Preferred Share from the Company at a price of $4.00.
Because of the nature of the Junior Preferred Shares' dividend, liquidation and
voting rights, the value of each one-ten-thousandth of a Junior Preferred Share
is intended to approximate the value of one share of Common Stock. The Rights
are not exercisable unless any one of certain triggering events occur including
the acquisition by an individual or entity and their associates of 25% or more
of the outstanding shares of Common Stock. The Shareholder Rights Plan is
designed to protect the Company and its shareholders from coercive, unfair and
inadequate takeover bids and practices. The plan is designed to strengthen the
board of directors' ability to deter a person or group from attempting to gain
control of the Company without offering a fair price and equal treatment to all
shareholders.
In April 1998, 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) $14,000,000 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 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 consent, thereafter. The terms of this agreement contain,
among other provisions, requirements for maintaining defined levels of capital
expenditures and net worth, various financial ratios and insurance coverage.
Bio-Reference's most recent acquisition occurred in April, 1998 when it
acquired MLI from its parent company LTC Services and Holdings, Inc., a wholly-
owned subsidiary of Long-Term Care Services, Inc. The operations of MLI are
included in the Company's operating results, commencing April 9, 1998. MLI is
located in Rockland County, New York and incurred a net loss of approximately
$120,000 for the fiscal year ended October 31, 1998.
The purchase price was $5,500,000 consisting of cash payments of $4,000,000
delivered by BRLI at the closing (including $50,000 of payments for non-
competition agreements with LTC Holdings, two affiliated corporations and an
employee of LTC and $200,000 of payments for access and use through April 8,
1999 of a laboratory hardware and software system of significant importance to
the MLI business) and delivery by BRLI of its $1,500,000 promissory note payable
without interest in three semi-annual installments commencing one year after the
closing. In addition, BRLI paid an MLI obligation of $122,366 at the closing to
an MLI affiliated entity for MLI's use through the closing date of a piece of
analytical equipment which was continued to be used by MLI after the closing.
The Stock Purchase Agreement also provides for a maximum of $1,500,000 in
additional payments to be made by BRLI if certain revenues are realized by MLI
after the closing. LTC and Holdings represented that MLI achieved revenues of
approximately $14,700,000 in calendar year 1997 on which it realized a loss
before taxes, depreciation and amortization of approximately $275,000. BRLI
financed the purchase with a $4,000,000 loan from its principal lender, PNC
Bank.
At October 31, 1998, the Company is being represented by counsel in
connection with various reviews being conducted by the Company's Medicare
carrier. One review involved overpayments that occur in the normal course of
business. The Company believes the overpayments will be determined to
approximate $150,000, of which approximately $75,000 has already been remitted
by the Company to Medicare. Counsel representing the Company in this matter has
advised that he cannot offer any opinion or projection at this time as to
whether the anticipated liability will be resolved at $150,000 or whether it
will be increased. Counsel has advised that based upon his review of documents,
many of the claims that Medicare thought were duplicate payments were not in
fact duplicates, but rather were properly billed. Counsel also advised that in
view of the complexity of this issue, he believes the final overpayment will be
an amount negotiated between the Company and Medicare.
On November 23, 1998, the Company's outstanding publicly owned Class A
Redeemable Warrants and Class B Redeemable Warrants expired.
CLINICAL LABORATORY OPERATIONS
------------------------------
The Clinical Laboratory Industry
- --------------------------------
The United States market for clinical laboratory testing is estimated to
generate approximately $30 billion in annual revenues.
- 50% of these revenues are generated by hospital laboratories
- 50% of these revenues are generated by independent laboratories
and physician office laboratories.
History
- -------
Bio-Reference was incorporated in December 1981 to provide mobile medical
examination services but discontinued that business in June 1989. Bio-Reference
commenced clinical laboratory operations in 1987 with the belief that a strong
business opportunity existed for a medium-sized clinical laboratory that
produced high quality test results in a timely manner to practicing physicians.
The current competition may be primarily categorized in two groups:
- businesses that are national in scope performing millions of
tests per month but impersonal in nature
- smaller laboratories that attempt to compete in terms of quality
and service but are limited in resources and scope of
capabilities.
Consequently, management believed that there existed a definite place for a
medium-sized commercial laboratory in the greater New York metropolitan area.
The Company did not realize income from operations from the time it
commenced clinical laboratory operations in 1987 until fiscal 1994. However, net
revenues have continually increased. The Company realized income from
operations of $1,885,059 in fiscal 1997. In addition, the Company realized a
$2,025,689 non-recurring gain attributable to the sale of the GenCare assets.
Bio-Reference realized income from operations of $1,064,963 in fiscal 1998. In
addition, the Company realized a $333,900 non-recurring gain in fiscal 1998
attributable to the sale of the Gencare assets.
In 1988, the Company consolidated and relocated all of its laboratory
operations into a 35,000 sq. ft. space in Elmwood Park, New Jersey,
approximately 10 miles from mid-town Manhattan. The new location was carefully
chosen to offer easy access to the greater New York metropolitan area. This move
afforded the Company an excellent geographical location to expand into newer
markets in southern New York State, including Westchester, Rockland and Nassau
Counties, southern and western New Jersey and southern Connecticut.
Bio-Reference proceeded to develop esoteric testing, while maintaining its
routine tests. It was found that by emphasizing the more difficult esoteric
tests, routine tests also increased, particularly profile testing in chemistry
and hematology. The Company hopes to continue its growth by aggressive
marketing, entry into additional markets, primarily in the greater New York
metropolitan area through acquisitions and the development of specialty niche
markets to complement its routine business. Over the years, the Company has
expanded its specialty testing services to include:
- anatomic pathology (biopsies and pap smears)
- cellular immunology (principally geared to the AIDS testing
market)
- male infertility
- tumor markers
Operations
- ----------
The efficiency of a medical laboratory depends on three items:
- Quantity of tests
- Selection of tests performed
- Ability to automate the process
It is axiomatic that the initial fixed costs of testing a small number of
patients are high. Such costs include:
- cost of maintaining highly sophisticated equipment
- cost of a full support facility
- marketing
- logistical
- billing
- other administrative costs
As the patient volume increases, automated tests become progressively less
expensive as the fixed costs are already in place, making the laboratory more
cost efficient.
Most medical laboratory tests can be divided into three principal
categories:
- those that are highly automated and computer driven,
- those that are semi-automated requiring the use of sophisticated
equipment,
- those that are subjective and basically manually determined.
The Company considers itself a highly automated and computer driven laboratory.
The Company's couriers pick up patient specimens from physician offices,
nursing homes and hospitals in the metropolitan New York area and test results
are generally delivered back to the physician within 24 hours. Larger volume
clients receive test results by way of printers placed in their offices, thereby
accelerating test reporting. Bio-Reference furnishes its physician clients with
periodic newsletters detailing:
- advances in laboratory medicine
- new tests
- clinical commentaries
- laboratory interpretation of test results.
In addition, the Company provides an annual Test Compendium to all physician
clients listing:
- all tests offered
- normal ranges
- correct collection of samples
- patient preparation
- up to date billing information
The Company utilizes the services of fifteen full-time Client Service
Coordinators, all of whom are fully trained in medical and laboratory
terminology. This staff is used as an interface with physicians and nurses and
augments the client support provided by the Company's sales staff. Highly
abnormal and life threatening results are immediately telephoned to the
physician in order to provide speedy medical resolution of any patient problem.
Sales and Marketing
- -------------------
The Company presently employs 38 full and part-time sales and marketing
personnel. The sales and marketing department works closely with the Technical
Director to:
- plan new tests
- pricing
- general client support.
All sales and marketing personnel operate in a dual capacity; both in selling
and as client support representatives. This ensures that all salespersons are
intimately involved with the client, not only in selling, but in servicing the
account that they sell. Bio-Reference believes that this is unique in the
industry and is extremely helpful in client retention, providing a strong link
between the physician and the Company's staff.
Quality Assurance
- -----------------
Medical testing is essentially one of communication and data transfer. In
order to provide accurate and precise information to the physician, it is
essential to maintain a well structured and vigorous quality assurance program.
Bio-Reference holds the required Federal and state licenses necessary to permit
its operation of a clinical laboratory at both its New Jersey and New York
facilities and to permit the servicing of its clients in Connecticut, Florida,
Louisiana, Maryland, New Jersey, New York, Pennsylvania and Virginia. To fully
maintain these licenses, the laboratory must submit to vigorous sets of
proficiency tests, or surveys, in all test procedures which are performed. Such
proficiency tests or surveys may be performed as many as four to five times a
year, depending upon the procedure, and results in hundreds of proficiency tests
throughout the year. In addition, the Company performs thousands of quality
control and quality assurance tests per year. The Company is also subjected to
unannounced inspections by inspectors from some of the jurisdictions noted above
who review past records, operating manuals, quality assurance records and safety
regulations.
In 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
- -----------------------------------------
Although the laboratory's clients are primarily physicians, it is usually
the individual patient, his or her commercial insurance carrier, or a
governmental agency such as Medicare or Medicaid that pays the laboratory
charges. These third parties pay health care providers according to allowable
costs or a predetermined contractual rate rather than according to the
provider's established rates; the difference between what is paid and what is
billed is the contractual allowance. Therefore, the Company has adopted the
practice of reducing its revenues by these allowances or contractual
adjustments.
Over the past years there has been an increase in the number of patients
that are covered by managed care health plans. These plans will often negotiate
with a limited number of clinical laboratories at discounted rates. Some of
these managed care health plans will contract with only a single laboratory and
pay for services on a capitation basis (meaning one price per enrollee,
regardless of how much laboratory work is performed). The effect of managed care
health plans to the laboratory industry equates to lower reimbursement rates for
laboratory services. If the laboratory is not a provider of services to the
managed care health plan, it will not be reimbursed for providing the service
and overall patient volume may be reduced. Therefore, this change has reduced
the potential market for a clinical laboratory's services if it is not a
provider to a particular managed care health plan.
In addition, Medicare as well as an increasing number of commercial
programs are requiring physicians to document the medical necessity when
ordering specific laboratory tests. Since the laboratory has a responsibility to
test a specimen when it first arrives in the laboratory, it may not be able to
wait until all applicable information is provided and there is a possibility
that a test can be performed and results provided before appropriate medical
necessity is documented. In these cases, the laboratory may not receive
reimbursement for the tests.(See "Developments Since the Beginning of Fiscal
1998" as to the status of a review concerning overpayments being conducted by
the Company's Medicare carrier).
The following table reflects the Company's breakdown of revenue by payor
for the 12 months ended October 31, 1996, 1997 and 1998.
<TABLE>
Years Ended October 31,
--------------------
1996 1997 1998
---- ---- ----
<S> . . . . . . . . . . . . . . . . .<C> <C> <C>
Direct Patient Billing. . . . . . . . . . .17% 17% 16%
Commercial Insurance. . . . . . . . . . . .36% 31% 30%
Professional Billing. . . . . . . . . . . .19% 23% 28%
Medicare. . . . . . . . . . . . . . . . . 22% 25% 22%
Medicaid. . . . . . . . . . . . . . . . . 6% 4% 4%
---- ---- ----
100% 100% 100%
</TABLE>
Competition
- -----------
Bio-Reference's competition derives primarily from other laboratories
located in the New York metropolitan area. On a national basis, approximately
30% of this market is made up of the three largest national laboratories:
- Smith-Kline Beecham Clinical Laboratories, a Division of Smith-Kline
Beecham PLC
- Laboratory Corporation of America, Inc.
- Quest Clinical Laboratory, formerly a Division of Corning, Inc.
Although the Company is significantly smaller than the national
laboratories and has modest financial resources, management believes it can
compete successfully because it has;
- fewer layers of staff
- more responsive business atmosphere
- customized service.
The Company believes its response to medical consultation is faster and more
personalized than in the national laboratories. Client service staff only deal
with basic technical questions and those that have medical or scientific
significance are referred directly to other senior scientists and staff.
Government Regulation
- ---------------------
Laboratory operations require licensure in each jurisdiction in which they
operate. Bio-Reference holds the required Federal and state licenses necessary
to permit its operation of a clinical laboratory at both its New Jersey and New
York facilities and to permit its servicing of its clients in those states where
it presently operates. Laboratory technicians and technologists must also
qualify under state regulations in order to be employed by the laboratory. All
of these licensing and certification programs set standards in areas such as
quality control, record keeping and personnel qualifications, including, in
varying measures from state to state, educational experience and licensure for
various levels of personnel responsible for testing. Compliance with these
standards is by periodic inspections by the appropriate Federal, state or local
agency. In addition, licensing and certification entail proficiency testing
which involves actual testing of specimens that have been specifically prepared
by the regulatory authority or designated agencies for testing by the
laboratory. There can be no assurance the laboratory will maintain all
necessary licenses and in the event the laboratory loses its license in a
particular jurisdiction, it will be required to cease all activities in such
jurisdiction. There also cannot be any assurance the Company will obtain the
licenses required in a proposed jurisdiction of operation.
The Company is also subject to Federal and state regulations governing the
transportation and disposal of medical waste including bodily fluids. Federal
regulations require licensure of interstate transporters of medical waste. In
New Jersey, the Company is subject to the Comprehensive Medical Waste Management
Act, "CMWMA," which requires the Company to register as a generator of special
medical waste. CMWMA mandates the sterilization of certain medical waste and
provides a tracking system to insure disposal in an approved facility. All of
the Company's medical waste is disposed of by a licensed interstate hauler. The
hauler provides a manifest of the disposition of the waste products as well as a
certificate of incineration which is retained by the Company.
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 to limit the number of tests a physician can order in a
particular grouping 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 a material adverse effect
on the Company. The Company is unable to predict, however, the extent to which
any such actions will be taken.
Federal and state health care and related regulations are subject to
constant change. The Company cannot now predict what changes may be enacted
which may affect its business or the manner in which its business would be
affected by such changes. Two legislative changes have occurred which portend
significant changes in the clinical laboratory market. Two Omnibus Budget
Reconciliation Acts have severely restricted physician referrals of Medicare
covered services to clinical laboratories in which the referring physician or
his immediate family has a financial relationship. The Clinical Laboratory
Improvement Amendments of 1988, "CLIA-88," acted to strengthen Federal control
of medical laboratories by regulating stricter quality assurance practices,
licensing requirements and staff qualifications.
CLIA-88 extended Federal licensing requirements to all clinical
laboratories (regardless of the location, size or type of laboratory), including
those operated by physicians in their offices, based on the complexity of the
tests they perform. The legislation also substantially increased regulation of
cytology screening, most notably by requiring the Secretary of Health and Human
Services, ("HHS,") to implement regulations placing a limit on the number of
slides that a cytotechnologist may review in a twenty-four hour period. CLIA-88
also established a more stringent proficiency testing program for laboratories
and increased the range and severity of sanctions for violating Federal
licensing requirements. A number of these provisions, including those that
imposed stricter cytology standard and increased proficiency testing, have been
implemented by regulations applicable only to laboratories subject to Medicare
certification adopted under the Clinical Laboratory Improvement Act of 1967,
"CLIA-67." On February 28, 1992, HHS published three sets of regulations
implementing CLIA-88, including quality standard regulations establishing
Federal quality standard for all clinical laboratories; application and user fee
regulations applicable to most laboratories in the United States which became
effective on March 30 1993; and enforcement procedure regulations applicable to
laboratories that are found not to meet CLIA-88 requirements. The quality
standard regulations establish varying levels of regulatory scrutiny depending
upon the complexity of testing performed. Under these regulations, a laboratory
that performs only one or more of eight routine "waived" tests may apply for a
waiver from most requirements of CLIA-88. The Company believes that most tests
performed by physician office laboratories will fall into either the "waived" or
the "moderately complex" category. The latter category applies to simple or
automated tests and generally permits existing personnel in physicians' offices
to continue to perform testing under the implementation of systems that insure
the integrity and accurate reporting of results, establishment of quality
control systems, proficiency testing by approved agencies, and biannual
inspection. The quality standard and enforcement procedure regulations became
effective on September 1, 1992, although certain personnel, quality control and
proficiency testing requirements will be phased-in over a number of years. The
laboratory has completed its first CLIA inspection under CLIA-88 guidelines and
received its certificate of compliance effective February 7, 1996.
In 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 has published a Model Compliance Program
for the clinical laboratory industry. This is a voluntary program for
laboratories to demonstrate to the Federal government that they are responsible
providers. Bio-Reference Laboratories has written and implemented a compliance
program adhering to the standards set forth in the Model Compliance Program.
Insurance
- ---------
The Company maintains professional liability insurance of $1,000,000 per
occurrence, $3,000,000 in the aggregate. In addition, the Company maintains
excess commercial insurance of $2,000,000 per occurrence. A determination of
Company liability for uninsured or underinsured acts or omissions would have a
material adverse effect on the Company's operations.
Employees
- ---------
At December 31, 1998, the Company had 400 full-time employees and 272 part-
time employees. This includes:
- three executive officers
- Vice President of Technical Operations
- Marketing Vice-President,
- 86 full-time and 41 part-time technicians, and/or technologists
(including physicians, pathologists and Ph.D.'s)
- 203 full and part-time semi-technical employees
- 38 full and part-time marketing representatives
- 195 full and part-time clerical employees
- 104 full and part-time drivers.
None of the Company's employees are represented by a labor union. The Company
regards relations with its employees as satisfactory.
Item 2 - Properties
----------
The Company's executive offices and New Jersey processing facility occupy
approximately 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 this
facility, which expires in February 2004, provides for a monthly rental of
$18,391. Bio-Reference's New York processing facility occupies approximately
22,000 square feet of leased space in a two-story brick facility at 140 Route
303, Valley Cottage, New York. The lease for this facility, which expires in
August 1999, provides for a monthly rental of $20,000. The Company's testing
equipment maintained at both of its processing facilities are in good condition
and in working order. Management believes that these facilities, as presently
equipped, have the capacity to generate up to approximately $75,000,000 in
nnual 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 48
additional relatively small draw stations throughout the New York metropolitan
area to collect specimens from physician-referred patients for testing at both
of its processing facilities.
Item 3 - Legal Proceedings
-----------------
In July 1996, the Company purchased certain assets and rights including the
Customer List related to the Renal Dialysis Testing Business conducted by
SmithKline Beecham Clinical Laboratories, Inc. ("SBCL"), from SBCL, for
$1,800,000 including a $1,200,000 down payment pursuant to an Asset
Sale/Purchase Agreement (the "Asset Agreement"). In the Asset Agreement, SBCL
represented and warranted that its Renal Dialysis Testing Business was servicing
at least 60 active accounts, was conducting testing for not less than 4,600
active dialysis patients and was generating at least $3,600,00 in net revenues
on an annual basis. The parties also executed a Non-Competition Agreement (the
"Non-Competition Agreement") pursuant to which SBCL agreed to cease performing
all renal dialysis clinical laboratory testing services for a three year period
(after conclusion of a limited Transition Period).
After completion of the acquisition, the Company's management determined
that SBCL's representations and warranties concerning the Renal Dialysis Testing
Business were materially false and that the Company might only realize
approximately $1,000,000 in annual net revenues from the acquired business.
Management also determined that SBCL had fraudulently concealed that its Renal
Dialysis Testing Business had suffered certain material adverse changes and that
SBCL had breached the Non-Competition Agreement by continuing to perform renal
dialysis testing on the transferred accounts after the Transition Period despite
its assurances that it had ceased all such testing. Based upon SBCL's alleged
breaches of the Asset Agreement and the Non-Competition Agreement, the Company
did not pay any portion of the $600,000 balance of the purchase price (which was
due in 24 consecutive monthly installments of $25,000 commencing January 1,
1997).
As a result of the foregoing, the Company filed a lawsuit against SBCL in
December 1996. The lawsuit, filed in the United States District Court for the
District of New Jersey, alleged that SBCL materially and repeatedly breached its
obligations and its representations and warranties made in the Asset Agreement
and the Non-Competition Agreement and claimed unspecified amounts of
compensatory and punitive damages and related costs. In response to the
Company's lawsuit, SBCL asserted counterclaims for the $600,000 unpaid portion
of the purchase price.
During fiscal 1998, agreement was reached between the Company and SBCL to
settle and compromise all aspects of the lawsuit including the SBCL
counterclaims. Pursuant to the agreement, the Company released SBCL from any
claims pursuant to the Asset Agreement and the Non-Competition Agreement and
SBCL released the Company from any claims pursuant to such agreements including
the Company's obligation to pay the $600,000 balance of the purchase price. The
settlement was subject to the consent of the Company's principal lending bank
which consent was received in January 1999.
Item 4 - Submission of Matters to a Vote of Security holders
---------------------------------------------------
There were no matters submitted by the Company to a vote of its security
holders during the quarter ended October 31, 1998.
PART II
PRICE RANGE OF SECURITIES
-------------------------
Item 5. - Market for Common Stock and Related Shareholder Matters
-------------------------------------------------------
The Company's Common Stock was traded on the National Association of
Securities Dealers Automated Quotation ("NASDAQ") Small Cap System through July
13, 1992 after which it was delisted from trading on NASDAQ due to the Company's
failure to maintain shareholders' equity of at least $1,000,000. Commencing
July 14, 1992, the Common Stock was quoted in the over-the-counter market on the
NASD OTC Bulletin Board. As a result of the improvement in the Company's
financial condition based upon its November 1993 public offering, the Common
Stock was readmitted for trading on the NASDAQ Small Cap System under the symbol
"BRLI" on November 24, 1993.
The following table sets forth the range of high and low bid prices for the
Common Stock for the periods indicated, as derived from reports furnished by
NASDAQ. Such quotations represent prices between dealers, do not include mark-
ups, mark-downs or commissions and may not necessarily represent actual
transactions.
<TABLE>
Fiscal Year Bid Prices
- ----------- High Low
---- ---
<S>. . . . . . . . . . . . . . . . . . . . <C> <C>
1997
First Quarter . . . . . . . . . . . . . . . $1.4375 $ .90625
Second Quarter. . . . . . . . . . . . . . .$1.09375 $ .8125
Third Quarter . . . . . . . . . . . . . . . .$1.625 $ .71875
Fourth Quarter. . . . . . . . . . . . . . .$2.03125 $1.34375
1998
First Quarter . . . . . . . . . . . . . . .$1.65625 $1.25
Second Quarter. . . . . . . . . . . . . . . . .1.75 1.25
Third Quarter . . . . . . . . . . . . . . . . .2.00 1.15625
Fourth Quarter. . . . . . . . . . . . . . . . .1.25 .875
</TABLE>
At January 29, 1999, the closing sales price for the Common Stock on NASDAQ
was $1.5625 per share.
At January 11, 1999 the number of record holders of the Common Stock was
636. Such number of record owners was determined from the Company's shareholder
records and does not include beneficial owners whose shares are held in nominee
accounts with brokers, dealers, banks and clearing agencies.
Dividends
- ---------
The Company has not paid any dividends upon its Common Stock since its
inception and, does not contemplate or anticipate paying any dividends in the
foreseeable future. Furthermore, the Company's loan agreement with PNC Bank
prohibits the Company from paying dividends or making any distributions with
respect to any shares of its stock without the prior written consent of the
Bank.
Item 6. Selected Financial Data
<TABLE>
[In thousands, except per share data]
Years Ended
---------------
October 31,
--------------
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
<S> <C> <C> <C>
Operating Data:
Net Revenues $46,554 $38,660 $35,126
Cost of Services $25,058 $19,339 $18,136
Gross Profit $21,496 $19,321 $16,989
General and Administrative
Expenses $20,231 $17,436 $15,793
Income [Loss] from
Operation $1,065 $1,885 $1,196
Non-Recurring Gain on Sale of
Intangible Assets $334 $2.026 $--
Other Expenses - Net $841 $850 $552
Extraordinary Item- Gain on
Extinguishment of
Debt $- $- $-
Provision for Income Tax Expense
[Benefit] $(38) $(139) $52
Net income [Loss] $597 $3,200 $592
Net [Loss] Income Per Common
Share $.08 $.48 $.10
Cash Dividends Per Common
Share $- $- $-
Balance Sheet Data:
Total Assets $40,778 $29,095 $28,231
Total Long-Term
Liabilities $3,708 $921 $1,533
Total Liabilities $24,555 $13,570 $16,128
Working Capital
[Deficit] $8,364 $9,415 $4,072
Stockholders' Equity
[Deficit] $16,223 $15,525 $12,103
[In thousands, except per share data]
Years Ended
October 31,
1 9 9 5 1 9 9 4
------- -------
Operating Data:
Net Revenues $31,521 $22,946
Cost of Services $15,036 $11,396
Gross Profit $16,485 $11,550
General and Administrative
Expenses $14,702 $10,550
Income [Loss] from
Operations $1,783 $1,000
Non-Recurring Gain on Sale of
Intangible Assets $-- $--
Other Expenses -
Net $332 $307
Extraordinary Item- Gain on
Extinguishment of
Debt $- 447
Provision for Income Tax
Expense [Benefit] $- $49
Net income [Loss] $1,402 $1,140
Net [Loss] Income Per Common
Share $.23 $.23
Cash Dividends Per Common
Share $- $-
Balance Sheet Data:
Total Assets $24,201 $17,381
Total Long-Term
Liabilities $843 $708
Total Liabilities $12,945 $9,134
Working Capital
[Deficit] $4,552 $3,604
Stockholders' Equity
[Deficit] $11,256 $8,246
</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
---------------------------------------------
OVERVIEW
- --------
Bio-Reference has expanded its laboratory testing capabilities and its customer
base through internal growth as well as through the completion of a series of
acquisitions of the businesses of other testing laboratories.
In April 1998, the Company acquired the assets and certain liabilities of
Medilabs, Inc. ("MLI") for a purchase price of $4,000,000 cash plus a promissory
note of $1,500,000, payable without interest, in three semi-annual installments
commencing April of 1999. Also in April, the Company entered into a note
agreement to borrow the $4,000,000 to fund this acquisition. The note is in
accordance with the Company's revolving loan agreement with the same lending
bank. The operations of Medilabs are included in the Company's operations
commencing April 9, 1998 and incurred a net loss of approximately $120,000 for
the seven month period ended October 31, 1998 (See Notes 3a and 16).
Results of Operations
Net Income
- ----------
The Company's net income for the years ended October 31, 1998 and 1997 was
$596,583 and $3,199,915, respectively. The main reasons for the $2,600,000
decrease in net income is the reduction in nonrecurring gain of approximately
$1,700,000. The nonrecurring gain represents the gain in the sale of certain
assets of the Company's GenCare Division. The reduction in income from
operations resulted from a reduced gross profit percentage of approximately 4%
and an increase in general and administrative expenses.
Net Revenues
- ------------
On September 30, 1997, the Company completed the sale of certain assets of its
GenCare Division ("GenCare") to an unrelated third party. GenCare provided
largely cancer diagnostic testing services with relatively high revenues per
patient. The 1997 financial statements included eleven months of revenues
attributable to the GenCare division or $2,116,523. There were no revenues
realized by the GenCare Division in 1998.
Net revenues for the year ended October 31, 1998 were $46,553,730 as compared to
$38,660,184 for the year ended October 31, 1997; this represents a 20% increase
in net revenues. The Company acquired MLI in April of 1998. Since this
acquisition, for the seven month period ended October 31, 1998, MLI had net
revenues of $7,773,570 or 17% of the Company's net revenues for the year. There
were no revenues from MLI in fiscal 1997. MLI provides routine laboratory
services to physician offices, clinics, nursing homes and correctional
institutions, associated with lower revenues per patient.
The number of patients serviced during the year ended October 31, 1998 was
984,432 which was 35% greater when compared to the prior fiscal year. MLI
accounted for 24% of the patient count for the year ended October 31, 1998. Net
revenue per patient for the year ended October 31, 1997 was $53.08 compared to
net revenue per patient for the year ended October 31, 1998 of $47.29; a
reduction of $5.79 or 11%. MLI's net revenue per patient was $33.04 for the
seven month period ended October 31, 1998.
The Company anticipates increasing its revenues in its next fiscal year through
internal growth and development of new marketing initiatives in laboratory
testing services outside the traditional physician market. In April 1998, the
Company acquired MLI and was awarded, as of November, 1998, a contract to
provide laboratory testing by the New York State Department of Corrections for
inmates in its facilities. The Company is seeking to market its services to
other correctional institutions. In addition, the Company is attempting to
expand its marketing efforts in the drug testing market and has hired new
marketing representatives to specialize in this initiative.
COST OF SERVICES:
- ----------------
Cost of sales increased from $19,339,274 for the year ended October 31, 1997 to
$25,058,008 for the year ended October 31, 1998, an increase of $5,718,734 or
30%. This increase is the result of the MLI acquisition. MLI's direct operating
costs were $5,639,627 for the seven month period ended October 31, 1998. The
optimum consolidation of laboratory operations has not been completed and will
impact the Company's cost structure until, at least, the third quarter of fiscal
year 1999.
GROSS PROFITS:
- -------------
Gross profit on net revenues increased from $19,320,910 for the year ended
October 31, 1997 to $21,495,722 for the year ended October 31, 1998; an increase
of $2,174,812, primarily attributable to the increase in revenues. Gross profit
margins decreased from 50% for the year ended October 31, 1997 to 46% for the
year ended October 31, 1998. This decrease in gross profit margins is primarily
attributable to the lower net revenues per patient, the increase in direct costs
associated with MLI and the duplication of direct costs that had not been
eliminated as of October 31, 1998 by an optimum consolidation of laboratory
operations.GENERAL AND ADMINISTRATIVE EXPENSES:
- -----------------------------------
General and administrative expenses for the year ended October 31, 1998 were
$20,430,757 as compared to $17,435,879 for the year ended October 31, 1997, an
increase of approximately $3,000,000 or 16%. Most of this increase was due to
the incurring of additional costs related to the MLI acquisition (approximately
$1,858,000). In addition, bad debt increased by 11%, or approximately $793,000
over the prior comparable period and was caused primarily by an increase in the
self-pay patients of Bio-Reference Laboratories resulting from legislation
passed in New Jersey which prohibited physician billing for diagnostic
laboratory services. Self pay patients have an historical higher bad debt rate
than that of physician billing.
INTEREST EXPENSE:
- ----------------
Interest expense increased from $1,124,432 for the year ended October 31, 1998
to $1,280,737 for the year ended October 31, 1998, resulting from the Company's
increase in asset based borrowing of approximately $4,400,000 and acquisition
debt of $4,000,000 offset by payments on existing debt of $1,000,000.
NET INCOME:
- ----------
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.
Approximately three quarters 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).Liquidity and Capital Resources
- -------------------------------
For the Fiscal Year Ended October 31, 1998
The Company's working capital at October 31, 1998 was approximately $8,400,000
as compared to approximately $9,400,000 at October 31, 1997, a decrease of
$1,100,000. This change is primarily the result of an increase in accounts
receivable of approximately $7,000,000 an increase in accounts payable and
accrued expenses of approximately $2,600,000 and an increase in short-term debt
of approximately $5,600,000. The increase of $7,000,000 of accounts receivable
is mainly attributable to the acquired accounts receivable of Medilabs. The
increase in accounts payable and accrued expenses is attributable to the
acquired liabilities of Medilabs. The Company has been utilizing a slower
payment plan with respect to these liabilities. The Company also incurred
additional debt obligations of approximately $5,500,000 for the Medilabs
acquisition in April of 1998.
During the year ended October 31, 1998, the Company utilized $3,227,601 in cash
for operations, an increase of approximately $3,000,000 as compared to the year
ended October 31 1997. This usage of cash is primarily the result of the
increase in accounts receivable of approximately $7,200,000 offset by the
increase in accrued expenses and payables of approximately $2,600,000.
Management anticipates being able to generate cash from operations in fiscal
1999 as a result of a projected increased gross profit offset in part, by
projected increased operating costs.
Credit risk with respect to accounts receivable is generally diversified due to
the large number of patients comprising the client base. The Company does have
significant receivable balances with government payors and various insurance
carriers. Generally, the Company does not require collateral or other security
to support customer receivables, however, the Company continually monitors and
evaluates its client acceptance and collection procedures to minimize potential
credit risks associated with its accounts receivable. The Company establishes an
allowance for uncollectible accounts and as a consequence, believes that it
accounts receivable credit risk exposure beyond such allowance is not material
to the financial statements.
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 take. (See "Developments Since the Beginning of Fiscal 1998" as
to the status of a review concerning overpayments being conducted by the
Company's Medicare carrier).
For the year ended October 31, 1998, the Company utilized $4,237,998 of cash for
investing activities. This consisted primarily of $4,000,000 of cash paid for
Medilabs. For the year ended October 31, 1997, the Company generated $4,439,719
in cash from investing activities. This was primarily attributable to the
proceeds from the sale of certain assets of the GenCare Division in fiscal 1997.
The capital spending requirements for the Company during 1999 is expected to be
approximately $1,200,000. For the year ended October 31, 1998, the Company
generated cash primarily from debt financing of $8,087,921, of which $4,000,000
was used for the Medilabs acquisition in April of 1998 and the balance in
increasing its revolving line of credit by approximately $4,400,000.
In April 1998, the Company amended its revolving loan agreement with PNC Bank.
The maximum amount of the credit line available to the Company is the lesser of
(1) $14,000,000 or (ii) 50% of the Company's qualified accounts receivable [as
defined in the agreement] plus 1 00% 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 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 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 2001 and may be extended for annual periods by
mutual consent thereafter. The terms of this agreement contain, among other
provisions, requirements for maintaining defined levels of capital expenditures
and net worth, various financial ratios and insurance coverage. As of October
31, 1998 and 1997, the Company was in compliance with the covenant provisions of
this agreement. As of October 31, 1997, the Company was utilizing $6,761,710 of
this credit facility. As of October 31, 1998, the Company was utilizing
$12,000,000 of this credit facility.
For the year ended October 31, 1997, the Company utilized $3,507,764 in
repayment of debt obligations.
The Company intends to expand its laboratory operations through acquisitions and
aggressive marketing while also diversifying into related medical fields through
acquisitions. These acquisitions may involve cash, notes, common stock, and/or
combinations thereof
The Company has various employment and consulting agreements of up to seven
years with commitments totaling approximately $4,900,000 [See Notes 10 and 12]
and operating leases with commitments totaling approximately $4,000,000 [See
Note 12].
The Company's cash balances at October 31, 1998 was $2,784,147 as compared to
$2,161,825 at October 31, 1997. The Company believes that its cash position,
the anticipated cash generated from operations, the expanded use of its credit
line with PNC Bank, the utilization of certificates of deposits maturing during
the second quarter of fiscal year 1999 and the interest due thereupon, will meet
its future cash needs.
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 borrowing by $2,317,031 and repaid approximately
$1,190,733 in existing debt.
The capital spending requirements for the Company during fiscal 1998 was
expected not to exceed $600,000. During fiscal 1997, approximately $143,600 has
been spent on capital improvements and approximately $252,300 on capital leases.
The Company had current liabilities of $12,649,814 at October 31, 1997. The
three largest items in this category were notes payable of $7,613,710, accounts
payable of $2,231,693 and accrued salaries and commissions of $1,065,339
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. Management estimates that
the laboratory operations and billing systems will require changes that
translate into approximately $50,000 in costs. The general accounting systems
(which are supplied by an outside vendor) will cost the Company approximately
$25,000 to upgrade and are scheduled for conversion during the first quarter of
fiscal 1999. 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 Company had not received notification from New Jersey Medicaid as
of January 26, 1999. Once the general accounting systems are converted to
accommodate the year 2000, the Company is confident that it will accept the
input of all vendor invoices. During May 1998, the General Accounting Office
("GAO") warned the House Ways and Means Oversight Panel, "If progress is not
made faster to assure correct and prompt claims processing and payment when the
year 2000 dawns, the potential impact on the revenue and cash flow of
pathologists, radiologists, laboratories and other providers could be
catastrophic, including improper denials and payments that are late or
incorrect." In the "National Intelligence Report" issue of January 12, 1999 it
was disclosed that the Health Care Financing Administration ("HCFA") has posted
some Y2K-related websites, a table of Medicare claims processing changes
required for billing compliance, and more. HCFA stresses that every piece of
hardware or software that is dependent on a microchip or date entry may be
affected. In terms of HCFA's Y2K readiness, the agency stated that work has been
completed to renovate, test, and validate all internal mission-critical systems
and progress has been made with its carriers and intermediaries. The final
systems to be considered by the Company are those of its vendors. Once the
general accounting systems are 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 cause 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 ["SFAS"] No. 130, "Reporting Comprehensive Income. " SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The adoption of SFAS No. 130 is not expected
to have a material 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 required to be restated.
SFAS No. 131 need not be applied to interim financial statements in the initial
year of its application. The adoption of SFAS No. 131 is not expected to have a
material impact on the Company's consolidated results of operations, financial
position or cash flows.
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosure about
Pension and Other Postretirement Benefits, " which is effective for fiscal years
after December 15,1997. The modified disclosure requirements are not expected
to have a material impact on the Company's results of operations, financial
position or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15,1999. The Company will evaluate the new standard to
determine any required new disclosures or accounting.
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.
<TABLE>
Name Age Position
---- --- --------
<S>. . . . . . . . . . . . . . . . . . . . . . <C> <C>
Marc D. Grodman, M.D.. . . . . . . . . . . . . .47 Chairman of the
Board, President,
Chief Executive
Officer and Director
Howard Dubinett. . . . . . . . . . . . . . . . .47 Executive Vice
President, Chief
Operating Officer
and Director
Sam Singer . . . . . . . . . . . . . . . . . . .56 Vice President,
Chief Financial
Officer, Chief
Accounting Officer
and Director
Frank DeVito . . . . . . . . . . . . . . . . . .57 Director
John Roglieri, M.D.. . . . . . . . . . . . . . .57 Director
Gary Lederman, Esq.. . . . . . . . . . . . . . .64 Director
</TABLE>
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 until 1971, he
was a Senior Assistant Surgeon in the U.S. Public Health Service in Washington.
From 1971 until 1973 he was a Clinical and Research Fellow at Massachusetts
General Hospital. From 1973 until 1975, he was Director of the Robert Wood
Johnson Clinical Scholars program at Columbia University. In 1975 he was
appointed Vice-President Ambulatory Services at Presbyterian Hospital, a
position which he held until 1980. Since 1980, he has maintained a private
practice of internal medicine at Columbia-Presbyterian Medical Center. From
1988 until 1992, he was also Director of the Employee Health Service at
Presbyterian Hospital. Since 1992, he has been Corporate Medical Director of
NYLCare, a managed care subsidiary of New York Life. He is a member of advisory
boards to several pharmaceutical companies, a member of the Editorial Advisory
Board of the journal Managed Care and a biographee of Who's Who in America.
Gary Lederman, Esq. became a director of the Company in May 1997. He
received his B.A. from Brooklyn College in 1954 and his J.D. from NYU Law School
in 1957. He was manager of Locals 370, 491 and 662 of the U.F.C.W.
International Union from 1961 to 1985. He is retired from the unions and has
been a lecturer at Queensboro Community College in the field of insurance. He
currently serves on an institutional review board for RTL, a pharmaceutical drug
testing laboratory.
There are no family relationships between or among any directors or
executive officers of the Company. The Company's Certificate of Incorporation
provides for a staggered Board of Directors (the "Board") pursuant to which the
Board is divided into three classes of directors and the members of only one
class or one-third of the Board) are elected each year to serve a three-year
term. Officers are elected by and hold office at the discretion of the Board of
Directors.
Key Personnel and Consultants
- -----------------------------
The following key personnel and consultants make significant contributions
to the Company's operations.
Robert Rush, Ph.D (Age 58) has been employed by the Company since July 1993
as Vice President of Technical Operations. From 1989 to 1993, Dr. Rush was a
Technical Director for National Health Laboratories, Inc., a national clinical
laboratory. From 1988 to 1989 he was the Technical Director of Maryland Medical
Laboratory and from 1975 to 1988 he was the Technical Director of Smith-Kline
Beecham Clinical Laboratories, another national clinical testing laboratory, in
Atlanta, Georgia. Dr. Rush also worked for the Technicon Instruments
Corporation, a Tarrytown, New York manufacturer of laboratory equipment, from
1969 to 1972, as a Section Head in Clinical Chemistry. Dr. Rush is a registered
Clinical Laboratory Director in the states of New Jersey, New York and
Connecticut. He is board certified by the American Board of Clinical Chemistry.
Dr. Rush received a B.A. degree in Chemistry from Hunter College in 1962 and
M.S. and Ph.D. degrees in Biochemistry in 1964 and 1966 from Pennsylvania State
University.
Benita Ponda, M.D. (Age 53) has been employed by the Company since
February, 1994 as Medical Director. She is certified by the American Board of
Pathology in Clinical Pathology and Anatomical Pathology with a special
qualification in Cytopathology. She holds a New York State Department of Health
Certificate of Qualification for Laboratory Director. Dr. Ponda's professional
appointments include Chief of Cytopathology and Associate Pathologist at New
York Methodist Hospital, Brooklyn, New York (January 1992 to February, 1994);
Associate Pathologist at Flushing Hospital and Medical Center, Flushing, New
York (1981 to 1991) and Director of Laboratory at St. Mary's Hospital for
Children (1985 - to date). She received M.B.B.S. degree (equivalent to M.D. in
U.S.A.) from Bombay University, Bombay, India in 1970.
Ayad Mudarris, Ph.D. (Age 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 1998, 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, 1998 to its Chief
Executive Officer and its other executive officers who were serving as executive
officers of the Company on October 31, 1998. 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>
SUMMARY COMPENSATION TABLE
Annual Compensation
----------------------------
Other
Year Annual
Ended Compen-
Name and Principal Position October 31, Salary Bonus ation
- --------------------------- ---------- --------- ---------- -------
<S> . . . . . . .<C> <C> <C> <C>
Marc D. Grodman M.D. . . . . .1998 $305,653 $125,000 $-0-
President and Chie 1997 $265,697 $90,000 $-0-
Executive Officer 1996 $264,196 $95,000 $-0-
Howard Dubinett 1998 $157,622 $57,750 $-0-
Executive Vice 1997 $148,417 $43,000 $-0-
President and Chief 1996 $154,188 $45,000 $-0-
Operating Officer
Sam Singer 1998 $156,333 $57,750 $-0-
Vice President and 1997 $147,455 $43,000 $-0-
Chief Financial and 1996 $153,326 $45,000 $-0-
Accounting Officer
Long-Term
Compensation
All
Year Restricted LTIP Other
Ended Stock Options Pay- Compen-
Name and Principal Position October 31, Awards(1) (SARs) outs sation
- --------------------------- ---------- ---------- ------- ---- ------
Marc D. Grodman M.D. 1998 -0- -0- $-0- $-0-
President and Chief 1997 300,000 300,000(2) $-0- $-0-
Executive Officer 1996 -0- -0- $-0- $-0-
Howard Dubinett 1998 -0- -0- $-0- $-0-
Executive Vice 1997 240,000 213,334 $-0- $-0-
President and Chief 1996 -0- -0- $-0- $-0-
Operating Officer
Sam Singer 1998 -0- -0- $-0- $-0-
Vice President and 1997 200,000 116,667 $-0- $-0-
Chief Financial and 1996 -0- -0- $-0- $-0-
Accounting Officer
</TABLE>
(1) In connection with their acceptance of the terms of new employment
agreements, the Company's board of directors on May 13, 1997 authorized the
issuance to Dr. Grodman, Mr. Dubinett and Mr. Singer of 300,000, 240,000 and
200,000 shares of Common Stock respectively. The shares are forfeitable in part
in various amounts if the employee's employment is terminated "for cause" or at
his option "without good reason" prior to May 1, 2000. See "Employment
Agreements with Executive Officers" herein.
(2) Does not include 604,078 shares of Common Stock issuable upon conversion of
604,078 shares of Senior Preferred Stock owned by Dr. Grodman, his wife and a
corporation controlled by her (collectively the "Grodman Group"). On May 13,
1997 pursuant to a recapitalization, the previously outstanding Senior Preferred
Stock owned by the Grodman Group convertible into an aggregate 604,078 shares of
Common Stock on or before April 20, 2003 at a conversion price of $1.50 per
share was retired in exchange for a new class of Senior Preferred Stock
convertible into an aggregate 604,078 shares of Common Stock on or before May 1,
2007 at a conversion price of $.75 per share. See Item 13 herein.
Employment Agreements with Executive Officers
- ---------------------------------------------
On May 13, 1997, Dr. Grodman agreed to the terms of a new employment
agreement pursuant to which he will serve as president and chief executive
officer devoting at least 90% of his working time to the business of the
Company. The agreement provides (i) for a seven-year term commencing November 1,
1997; (ii) a minimum annual Base Compensation consisting of salary and bonus in
the aggregate amount of $395,000 subject to increases based on increases in the
Consumer Price Index as well as increases at the discretion of the board of
directors; (iii) typical health insurance coverage and an initial $2,000,000
face amount of "split dollar" life insurance insuring Dr. Grodman's life and
payable to his estate (excluding benefits required to be paid to the Company
pursuant to the split dollar plan) with $2,000,000 of additional coverage to be
applied for 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>
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>
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>
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 first become exercisable in any calendar year may not exceed
$100,000.
As described above, on May 13, 1997, the Board of Directors granted five-
year ISOs under the Plan to Dr. Grodman, exercisable to purchase 100,000 shares
of the Company's Common Stock at an exercise price of $.790625 per share (equal
to 110% of the last sale price for the Common Stock on NASDAQ on May 12, 1997).
The board also granted ten-year ISOs under the Plan to Mr. Dubinett and Mr.
Singer exercisable to purchase 60,000 shares and 50,000 shares of Common Stock
respectively at an exercise price of $.71875 per share (equal to the last sale
price for the Common Stock on NASDAQ on May 12, 1997). In addition, the board
granted ten-year NQOs to Dr. Grodman, exercisable to purchase 200,000 shares of
Common Stock at an exercise price of $.71875 per share.
At the same May 3, 1997 directors' meeting, in order to improve employee
morale, the board canceled all other outstanding ISOs exercisable to purchase an
aggregate 448,710 shares of Common Stock at exercise prices ranging from $1.3434
to $3.00 per share, and granted new ten-year ISOs under the Plan to 23 employees
exercisable to purchase an aggregate 448,710 shares of Common Stock at an
exercise price of $.71875 per share. Included in this grant were ISOs issued to
Mr. Dubinett and Mr. Singer exercisable to purchase 153,334 shares and 116,667
shares respectively. (These ISOs replaced ISOs previously granted to said two
individuals to purchase 153,334 shares and 116,667 shares respectively at
exercise prices ranging from $1.3125 to $1.50 per share.)
Also on May 13, 1997, the Board of Directors granted five-year NQOs to 31
employees, exercisable to purchase an aggregate 136,100 shares of Common Stock
at $.71875 per share but only while the optionee was employed by the Company.
On May 13, 1997, the board also issued five-year warrants to each of its
three outside directors, exercisable to purchase 10,000 shares (30,000 in the
aggregate) of Common Stock at an exercise price of $.71875 per share, but only
while serving as a director. At the same time, the board reduced the exercise
price on warrants held by one outside director, John Roglieri, exercisable to
purchase 23,334 shares ranging from $3.00 per share to $3.75 per share to
$.71875 per share and issued five-year warrants to another outside director,
Gary Lederman, exercisable to purchase 5,200 shares at $.71875 per share.
See Note 9 of Notes to the Consolidated Financial Statements.
No stock options were granted during fiscal 1998 to any executive officer.
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 1998.
<TABLE>
1998 Fiscal Year-End Option Values
-----------------------------------
Value of
Number of Unexercised Options Unexercised
At 1998 Fiscal Year-End In-The-Money
Name Exercisable Unexercisable Options at 10/31/98
- ---- ----------- ------------- -------------------
<S> <C> <C> <C>
Marc D. Grodman 200,000 -0- $ 68,750
100,000 -0- $ 27,188
Howard Dubinett 213,334 -0- $73,334
Sam Singer 166,667 -0- $57,292
</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>
Shares of
Name and Address of Common Stock Percentage
Beneficial Owner Beneficially Owned(1) Ownership
---------------- ---------------- ---------
<S> <C> <C>
Directors and Executive Officers*
Marc D. Grodman(2) . . . . . . . . . 1,521,845 18.7%
Howard Dubinett (3). . . . . . . . . . 475,001 6.4%
Sam Singer(4). . . . . . . . . . . . 377,667 5.1%
Frank DeVito(5). . . . . . . . . . . . .10,202 -
John Roglieri(6) . . . . . . . . . . . .35,001 -
Gary Lederman (7). . . . . . . . . . . .15,200 -
Executive Officers and director . . .2,434,916 28.5%
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 ofCommon 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 owned directly.
Item 13. - Certain Relationships and Related Transactions
----------------------------------------------
In July 1989, the Company discontinued the operation of its Med-Mobile
Division. At such time, Dr. Grodman, as the Associated Physician, was
indebted to the Company in the amount of $235,354 in connection with the
operation of this division. Pursuant to an October 1, 1989 Settlement
Agreement, Dr. Grodman issued a $235,354 promissory note to the Company
bearing interest at 10% per annum and payable at the rate of $50,000 per
annum in payment of this indebtedness. On April 30, 1992, the Board of
Directors amended this agreement, in consideration for Dr. Grodman's personal
guarantee of the Company's $2,500,000 financing arrangement with Towers
Financial Corporation, suspending all rental and interest charges for periods
subsequent to November 1, 1991. As of October 31, 1998, $187,117 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, 1998 and 1997 F-2 ... F-3
Statement of Operations-
Years ended October 31, 1998, 1997 and 1996 F-4 ... F-4
Statement of Shareholders' Equity
Years ended October 31, 1998, 1997 and 1996 F-5 ... F-5
Statement of Cash Flows -
Years ended October 31, 1998, 1997 and 1996 F-6 ... F-7
Notes to Financial Statements- F-8 ... F-26
Schedule II -
Years ended October 31, 1998, 1997 and 1996 F-7 ... F-28
2. Reports on Form 8-K
-------------------
No reports on Form 8-K have been filed during the Quarter ended October
31, 1998.
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 9, 1999
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 9, 1999
/S/ Howard Dubinett
- -------------------
Howard Dubinett
Executive Vice President,
Chief Operating Officer and Director
February 9, 1999
/S/ Sam Singer
- --------------
Sam Singer
Vice President, Chief Financial Officer,
Chief Accounting Officer and Director
February 9, 1999
/S/ Frank DeVito
- ----------------
Frank DeVito
Director
February 9, 1999
/S/ John Roglieri
- -----------------
John Roglieri
Director
February 9, 1999
/S/ Gary Lederman
- -----------------
Gary Lederman
Director
February 9, 1999
EXHIBIT INDEX
--------------
Incorporated by
Exhibit No. Item Reference to
- ----------- ---- --------
3.1* Amended and Restated Certificate of Incorporation dated (A)
November 15, 1989
3.1.1* Amendment to Certificate of Incorporation dated (B)
October 4, 1993 (authorizing one-for-10 reverse stock split)
3.1.2* Amendment to Certificate of Incorporation dated
August 23, 1993 (creating Senior Preferred Stock) (C)
3.1.3* Amendment to Certificate of Incorporation dated
August 23, 1993 (authorizing one-for-three reverse stock
split) (C)
3.2* By-laws (D)
4.1* Form of Common Stock Certificate, $.01 par value (C)
4.2* Form of Warrant Agreement between the Company and (C)
American Stock Transfer & Trust Company as Warrant Agent
4.3* Form of Redeemable Warrant (attached to Exhibit 4.2) (C)
4.4* Form of Underwriter's Warrant Agreement (C)
4.5* Form of Underwriter's Warrant (attached to Exhibit 4.4) (C)
10.1* Lease Agreement for Elmwood Park, New Jersey Premises (E)
March 23, 1988
10.2* Employment Agreement between the Company and (F)
Marc Grodman M.D. dated as of January 1, 1991
10.3* Employment Agreement between the Company and (B)
Howard Dubinett dated as of November 1, 1989
10.4* Employment Agreement between the Company and (B)
Sam Singer dated as of November 1, 1989
10.5* Healthcare Purchase Contract between the (B)
Company and Towers Financial Corporation
dated as of January 29, 1992
10.6* Asset/Sale Purchase Agreement dated December 31, (G)
1991 between the Company and Pathology Services
of Long Island, Inc.
10.7* Asset/Sale Purchase Agreement dated December 31, (G)
1991 between the Company and North Shore
Diagnostic Associates
10.8* Consultation Agreement dated December 31, 1991 (G)
1991 between the Company and Advanced Healthcare
Resources, Inc.
10.9* Asset/Sale Purchase and Restrictive Covenant Agreement (B)
dated June 19, 1992 between the Company and
Andre Mencz d/b/a/ MMC Management Company
10.10* The Company's 1986 Stock Option Plan (D)
10.11* The Company's 1989 Stock Option Plan (B)
10.12* Form of Bridge Warrant (B)
10.13* Form of Bridge Note (B)
10.14* Acquisition Agreement made as of October 31, 1994 for the
acquisition by the Company of all of the outstanding
capital stock of GenCare (H)
10.15* Employment Agreement between the Company and Charles T. Todd,
Jr. dated January 4, 1995. (H)
10.16* Agreement and Bill of Sale dated September 30,1997 between the
Company and IMPATH concerning the sale of the GenCare
assets. (I)
10.17* Non-Competition and Confidentiality 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. (I)
10.18* Acquisition Agreement made as of April 9, 1998 for the
acquisition by the Company of all of the outstanding capital
stock of Medilabs, Inc. (J)
10.19* Rights Agreement dated as of March 31, 1998 including Exhibits
thereto between the Company and American Stock Transfer &
Trust Company as Rights Agent. (K)
- ---------------
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 report
on Form 8-K for October 14, 1997.
(J) Incorporated by reference to exhibit filed with the Company's report
on Form 8-K for April 22, 1998.
(K) Incorporated by reference to exhibit filed with the Company's report
on Form 8-A dated March 3, 1998.
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, 1998 and 1997, 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,
1998. 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, 1998
and 1997, and the consolidated results of their operations and their cash
flows for each of the three fiscal years in the period ended October 31,
1998, in conformity with generally accepted accounting principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
January 22, 1999
Item 8.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
October 31,
------------
1 9 9 8 1 9 9 7
------- -------
<S> <C> <C>
Assets:
Current Assets:
Cash and Cash Equivalents$ 2,784,147 $ 2,161,825
Cash - Restricted -- 852,000
Accounts Receivable - Net 20,749,696 13,737,881
Inventory 587,101 453,870
Certificates of Deposit -
Restricted 3,646,250 3,601,250
Other Current Assets 1,100,867 1,000,428
Deferred Tax Asset 344,000 258,000
----------------- ----------------
Total Current Assets 29,212,061 22,065,254
----------------- ----------------
Property and Equipment:
Automobiles 41,740 57,656
Medical Equipment 3,263,101 2,146,896
Leasehold Improvements 429,993 370,283
Furniture and Fixtures 508,630 398,187
----------------- ----------------
Totals - At Cost 4,243,464 2,973,022
Less: Accumulated
Depreciation 2,022,928 1,685,298
----------------- ----------------
Property and
Equipment - Net 2,220,536 1,287,724
---------------- ----------------
Other:
Certificate of
Deposit -
Restricted 33,750 78,750
Due from Related Party 187,118 214,118
Deposits 303,354 213,347
Goodwill [Net of
Accumulated Amortization
of $1,248,029 and $994,015,
Respectively] 5,746,601 1,406,570
Intangible Assets
[Net of Accumulated
Amortization of$2,173,034
and $1,891,970,
Respectively] 2,507,149 3,382,393
Other Assets 567,769 446,903
----------------- ----------------
Total Other 9,345,741 5,742,081
------------ ----------------
Total Assets $ 40,778,338 $ 29,095,059
================= =================
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
October 31,
-----------
1 9 9 8 1 9 9 7
------- -------
<S> <C> <C>
Liabilities and Shareholders'
Equity:
Current Liabilities:
Accounts Payable $ 4,379,961 $ 2,231,693
Accrued Salaries and Commissions 1,367,785 1,065,339
Accrued Expenses 625,814 511,386
Current Maturities of
Long-Term Debt
[Net of Discount] 2,071,058 864,266
Notes Payable - Banks 12,000,000 7,613,710
Capitalized Lease Obligation
- Short-Term Portion 229,232 84,970
Other Current Liabilities -- 1,339
Taxes Payable 173,962 277,111
----------------- -----------
Total Current Liabilities 20,847,812 12,649,814
----------- -----------
Long-Term Liabilities:
Long-Term Debt Less Current Maturities
[Net of Discount] 3,306,617 668,030
Capitalized Lease Obligations -
Long-Term Portion 400,975 252,572
----------------- -----------
Total Long-Term Liabilities 3,707,592 920,602
---------- -----------
Commitments and Contingencies -- --
----------------- -----------
Shareholders' Equity:
Preferred Stock, Par Value
$.10 Per Share, Authorized
1,062,589 Shares; None Issued -- --
Series A - Senior Preferred Stock,
Par Value $.10 Per Share,
Authorized, Issued and
Outstanding 604,078 Shares 60,408 60,408
Series A - Junior Participating
Preferred Stock, Par Value
$.10 Per Share, Authorized 3,000
Shares; None Issued -- --
Common Stock, Par Value $.01 Per
Share, Authorized 18,333,333
Shares; Issued and Outstanding
7,212,910 and 7,169,376 Shares
at October 31, 1998 and 1997,
Respectively 72,129 71,694
Additional Paid-in
Capital 22,998,015 22,967,160
Accumulated [Deficit] (6,634,985) (7,231,568)
---------------- -----------
Totals 16,495,567 15,867,694
Deferred Compensation (272,633) (343,051)
Total Shareholders'
Equity 16,222,934 15,524,643
Total Liabilities
and Shareholders'
Equity $ 40,778,338 $29,095,059
================= ===========
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Y e a r s e n d e d
---------------------------------------------------------
O c t o b e r 3 1,
---------------------------------------------------------
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
<S> <C> <C> <C>
Net Revenues $ 46,553,730 $ 38,660,184 $ 35,125,878
---------------- ---------------- --------------
Cost of Services:
Depreciation and Amortization 704,293 390,953 378,694
Employee Related Expenses 11,675,839 8,595,078 8,503,156
Reagents and Laboratory
Supplies 5,567,394 4,777,325 4,430,381
Other Cost of Services 7,110,482 5,575,918 4,824,164
---------------- ---------------- --------------
Total Cost of Services 25,058,008 19,339,274 18,136,395
------------ ---------------- --------------
Gross Profit 21,495,722 19,320,910 16,989,483
---------------- ---------------- --------------
General and Administrative Expenses:
Depreciation and Amortization 935,370 798,365 655,192
Other General and Administrative
Expenses 13,410,446 11,346,007 10,761,548
Provision for Doubtful
Accounts 6,084,941 5,291,507 4,285,807
Expenses of Abandoned
Acquisition -- -- 90,700
---------------- ---------------- --------------
Total General and Administrative
Expenses 20,430,757 17,435,879 15,793,247
---------------- ---------------- --------------
Income from Operations 1,064,965 1,885,031 1,196,236
---------------- ---------------- --------------
Non-Recurring Gain on Sale of Intangible
Assets 333,900 2,025,689 --
---------- ---------------- --------------
Other [Income] Expense:
Interest and Other
Expense 1,280,737 1,124,432 840,811
Interest Income (440,155) (274,887) (288,395)
---------------- ---------------- --------------
Total Other Expense
- Net 840,582 849,545 552,416
---------------- ---------------- --------------
Income Before Income Taxes 558,283 3,061,175 643,820
Provision for Income Tax
Expense [Benefit] (38,300) (138,740) 51,862
---------------- ---------------- --------------
Net Income $ 596,583 $ 3,199,915 $ 591,958
================ ================ ==============
Net Income Per
Share $ .08 $ .48 $ .10
================ ================ ==============
Net Income Per Share
- Assuming Dilution $ .07 $ .43 $.09
============== ================ ==============
</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> Series A
--------
Senior Preferred Stock
----------------------
Shares Amount
------ ------
<S> <C> <C>
Balance - October 31, 1995 604,078 $ 60,408
Shares Issued in Connection with
an Acquisition -- --
Shares Issued in Connection with an Acquisition
[Including Shares Remaining in Escrow] -- --
Shares Issued in Lieu of Payment for
Service -- --
Shares issued in Lieu of an Invoice Payment -- --
Shares Issued in Connection with an Acquisition
Agreement [Including Shares Remaining in
Escrow] -- --
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 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
Amortization of Deferred Compensation -- --
Shares Issued on Exercise of Warrants -- --
Net Income for the Year -- --
--------- -------
Balance - October 31, 1998 604,078 $ 60,408
========= =========
Common Stock
------------
Shares Amount
------ ------
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 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 -- -
Shares Released from Escrow -- --
Amortization of Deferred Compensation -- --
Net Income for the Year -- --
--------- ---------
Balance - October 31, 1997 7,169,376 71,694
Amortization of Deferred Compensation -- --
Shares Issued on Exercise of Warrants 43,534 435
Net Income for the Year -- --
--------- ---------
Balance - October 31, 1998 7,212,910 $ 72,129
========= =========
Additional
Paid-in Accumulated
------- ----------
Capital [Deficit]
------- --------
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 --
Amortization of Deferred Compensation -- --
Unrealized Loss on Securities Available
for Sale -- --
Net Income for the Year -- 591,958
---------- -----------
Balance - October 31, 1996 22,433,297 (10,431,483)
Shares Issued for Deferred Compensation 337,919 --
Warrants Issued for Deferred Compensation 13,423 --
Shares Issued in Connection with an
Acquisition Agreement 127,320 --
Shares Released from Escrow 55,201 --
Amortization of Deferred Compensation -- --
Net Income for the Year -- 3,199,915
--------- ---------
Balance - October 31, 1997 22,967,160 (7,231,568)
Amortization of Deferred Compensation -- --
Shares Issued on Exercise of Warrants 30,855 --
Net Income for the Year -- --
------- ---------
Balance - October 31, 1998 $ 22,998,015 $ (6,634,985)
========= =========
Unrealized Loss
----------------
on Securities Total
------------- -----
Available Shareholders'
--------- ------------
for Sale Equity
-------- ------
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 -- 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
Amortization of Deferred Compensation -- 70,418
Shares Issued on Exercise of Warrants -- 31,290
Net Income for the Year -- 596,583
--------- -----------
Balance - October 31, 1998 -- $ 16,222,934
========= ===========
</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>
Y e a r s e n d e d
---------------------------------------------------------
O c t o b e r 3 1,
---------------------------------------------------------
1 9 9 8 1 9 9 7
------- -------
<S> <C> <C>
Operating Activities:
Net Income $ 596,583 $ 3,199,915
---------------- --------------
Adjustments to Reconcile Net Income to Net
Cash [Used for] Operating Activities:
Depreciation and Amortization 1,639,663 1,189,318
Amortization of Deferred Compensatio 70,418 38,658
Amortization of Deferred Interest 53,667 --
Amortization Reversal Due to Legal Settlement (56,859 --
Expenses of Abandoned Acquisition -- --
Provision for Doubtful Accounts 5,884,941 5,291,507
Other -- --
Gain from Sale of Marketable Securities -- --
Gain on Sale of Assets -- --
Nonrecurring Gain on Sale of Intangible Assets (333,900) (2,025,689)
Deferred Income Taxes (86,000) (258,000)
Changes in Assets and Liabilities
[Net of Effects from Acquisitions]:
[Increase] Decrease in:
Accounts Receivabl (10,790,642) (7,509,627)
Other (120,866) (105,866)
Inventory 117,625 (59,493)
Other Current Assets 636,478 142,504
Increase [Decrease] in:
Accounts Payable and
Accrued Expenses (642,123) (210,861)
Taxes Payable (196,586) 136,030
---------------- ---------------
Total Adjustments (3,824,184) (3,371,519)
---------------- ---------------
Net Cash - Operating
Activities - Forward (3,227,601) (171,604)
---------------- --------------
Investing Activities:
Acquisition of Property
and Equipment (194,558) (143,613)
Proceeds from Sale of
Property and Equipment -- --
Proceed from Sale of Marketable
Securities -- --
Purchase of Certificate of
Deposit - Restricted (3,680,000) (3,680,000)
Maturities of Certificate
of Deposit - Restricted 3,680,000 3,680,000
Cash Paid for Medilabs, Inc.
Acquisition (4,000,000) --
Cash Acquired During
Acquisition 86,412 --
Cash Overdraft of Acquired
Company -- --
Reduction [Additions] of
Deposits (3,985) 6,907
Repayment of Related Party
Receivable 27,000 20,800
Payment for Acquisition of
Intangible Assets (152,867) (44,375)
Proceeds from Sale of
Intangible Assets -- 4,600,000
---------------- -----------------
Net Cash - Investing
Activities - Forward$ (4,237,998) $ 4,439,719
Y e a r s e n d e d
---------------------
O c t o b e r 3 1,
-------------------
1 9 9 6
-------
Operating Activities:
Net Income $ 591,958
----------------
Adjustments to Reconcile Net Income to Net
Cash [Used for] Operating Activities:
Depreciation and Amortization 1,033,886
Amortization of Deferred Compensation 22,483
Amortization of Deferred Interest --
Amortization Reversal Due to Legal Settlement --
Expenses of Abandoned Acquisition 90,700
Provision for Doubtful Accounts 4,285,807
Other 20,242
Gain from Sale of Marketable Securities (9,336)
Gain on Sale of Assets (1,546)
Nonrecurring Gain on Sale of Intangible Assets --
Deferred Income Taxes --
Changes in Assets and Liabilities
[Net of Effects from Acquisitions]:
[Increase] Decrease in:
Accounts Receivable (7,672,430)
Other Assets (81,868)
Inventory 60,931
Other Current Assets 12,046
Increase [Decrease] in:
Accounts Payable and Accrued Expenses (126,411)
Taxes Payable (121,927)
----------
Total Adjustments (2,487,423)
------------
Net Cash - Operating Activities - Forward (1,895,465)
-----------
Investing Activities:
Acquisition of Property and Equipment (451,576)
Proceeds from Sale of Property and Equipment 29,652
Proceed from Sale of Marketable Securities 501,955
Purchase of Certificate of Deposit - Restricted (180,000)
Maturities of Certificate of Deposit - Restricted 165,650
Cash Paid for Medilabs, Inc. Acquisition --
Cash Acquired During Acquisition --
Cash Overdraft of Acquired Company (3,797)
Reduction [Additions] of Deposits 63,146
Repayment of Related Party Receivable 15,800
Payment for Acquisition of Intangible Assets (1,564,363)
Proceeds from Sale of Intangible Assets --
---------------
Net Cash - Investing Activities - Forward $ (1,423,533)
</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>
Y e a r s e n d e d
----------------------------------------------------
O c t o b e r 3 1,
-----------------------------------------------------
1 9 9 8 1 9 9 7
<S> <C> <C>
------- -------
Net Cash - Operating Activities - Forwarded $ (3,227,601) $ (171,604)
---------------- -----------
Net Cash - Investing Activities - Forwarded (4,237,998) $ 4,439,719
---------------- -------------
Financing Activities:
Proceeds from Long-Term Debt 4,000,000 --
Payments of Long-Term Debt 1,001,368) (739,895)
Payments of Capital Lease Obligations (178,954) (216,448)
Payments of Subordinated Notes Payable (1,339) (234,390)
[Decrease] Increase in Revolving Line of
Credit 4,386,292 (2,317,031)
Decrease in Restricted Cash 852,000 --
Proceeds from Exercise of Warrants 31,290 --
---------------- --------------
Net Cash - Financing Activities 8,087,921 (3,507,764)
---------------- --------------
Net Increase in Cash and Cash Equivalents 622,322 760,351
Cash and Cash Equivalents -
Beginning of Years 2,161,825 1,401,474
---------------- --------------
Cash and Cash Equivalents - End of Years $ 2,784,147 $ 2,161,825
================ ==============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 1,179,533 $ 1,118,540
Income Taxes $ 120,407 $ 44,136
Y e a r s e n d e d
--------------------
O c t o b e r 3 1,
--------------------
1 9 9 6
-------
Net Cash - Operating Activities - Forwarded $ (1,895,465)
---------------
Net Cash - Investing Activities - Forwarded (1,423,533)
---------------
Financing Activities:
Proceeds from Long-Term Debt 1,180,000
Payments of Long-Term Debt (2,083,476)
Payments of Capital Lease Obligations (236,472)
Payments of Subordinated Notes Payable (7,920)
[Decrease] Increase in Revolving Line of
Credit 3,687,448
Decrease in Restricted Cash 1,544,646
Proceeds from Exercise of Warrants --
----------
Net Cash - Financing Activities 4,084,226
---------
Net Increase in Cash and Cash Equivalents 765,228
Cash and Cash Equivalents -
Beginning of Years 636,246
-------
Cash and Cash Equivalents -
End of Years $ 1,401,474
===============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 815,521
Income Taxes $ 86,331
</TABLE>
Supplemental Schedule of Non-Cash Investing and Financing Activities:
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.
In July and August 1998, the Company incurred two capital leases
obligations totaling $93,143 in connection with the acquisition of medical
equipment.
[See Notes 7, 13, 16 and 21 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. was incorporated on December 21, 1981 to
initially engage in the business of developing and marketing on-site medical
screening examinations. Since February 1987, its emphasis has been in clinical
laboratory operations, principally servicing the greater New York metropolitan
area and providing specialty services throughout the United States. Bio-
Reference Laboratories, Inc. and its wholly-owned subsidiary [the "Company"]
markets its services directly to physicians, hospitals, clinics, and other
health facilities.
[2] Summary of Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary. All significant
intercompany accounts and transactions have been eliminated. The operations of
GenCare Biomedical Research Corporation are included in operations from January
1, 1995 through September 30, 1997. The operations of Medilabs are included
from April 9, 1998 onward.
Revenue Recognition - Revenues are recognized at the time the services are
performed. Revenues on the statements of operations are as follows:
<TABLE> Y e a r s e n d e d
---------------------
O c t o b e r 3 1,
---------------------
1 9 9 8 1 9 9 7 1 9 9 6
------ ------- -------
<S> <C> <C> <C>
Gross Revenues $ 102,351,588 $ 80,462,096 $66,768,717
--------------- -------------- ---------------
Contractual Adjustments
and Discounts:
Medicare/Medicaid Portion 33,064,535 23,090,659 18,620,485
Other 22,733,323 18,711,253 13,022,354
--------------- -------------- ---------------
Total Contractual Adjustments
and Discounts 55,797,858 41,801,912 31,642,839
--------------- -------------- ---------------
Net Revenues $ 46,553,730 $ 38,660,184 $ 35,125,878
=============== ============== ===============
</TABLE>
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 $13,494,475, $8,564,436 and $5,357,096 as of October 31, 1998,
1997 and 1996, respectively.
Inventory - Inventory is stated at the lower of cost [on a first-in, first-out
basis] or market. Inventory consists primarily of clinical supplies.
Stock Options Issued to Employees - The Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," for
financial note disclosure purposes and continues to apply the intrinsic value
method of Accounting Principles Board ["APB"] Opinion No. 25, "Accounting for
Stock Issued to Employees," for financial reporting purposes.
Deferred Income Taxes - Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[2] Summary of Significant Accounting Policies [Continued]
Deferred Income Taxes [Continued] - Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable or refundable for the period plus or minus
the change during the period in deferred tax assets and liabilities.
Net Income Per Share - Earning per share amounts for the years ended October 31,
1997 and 1996 have been restated to give effect to the application of Statement
of Financial Accounting Standards No. 128 which was adopted by the Company in
the current year. Basic EPS is based on average common shares outstanding and
diluted EPS includes the effects of potential common stock, such as, options and
warrants, if dilutive.
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, 1998, 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 $820,226, $419,462 and $404,248 for the years ended October 31,
1998, 1997 and 1996, 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.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
[2] Summary of Significant Accounting Policies [Continued]
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, 1998, 1997 and 1996 of $254,022, $203,490 and $209,211,
respectively.
Intangible Assets - Intangible assets are amortized using the straight-line
method. The statements of operations reflect amortization expense related to
intangible assets of $565,415, $566,366 and $420,427 for the years ended
October 31, 1998, 1997 and 1996, respectively.
A summary is as follows:
<TABLE>
Intangible Asset Life in Years Cost
- ---------------- ------------- ----
<S> <C> <C>
Customer Lists 20 $2,469,202
Covenants Not-to-
Compete 3 - 7.5 1,200,000
Employment
Agreement 5 400,000
Costs Related
to Acquisitions 1 - 20 454,976
Patent 17 156,005
----------------
Totals $4,680,183
------ ================
Intangible Asset Life in Years Cost
- --------------- ------------- ----
Customer Lists 20 $3,065,042
Covenants Not-to-
Compete 5 - 7.5 1,420,206
Employment
Agreement 5 400,000
Costs Related to
Acquisitions 2 - 17 236,178
Patent 17 144,375
Other 17 - 20 8,562
-----
Totals $5,274,363
------ ================
Accumulated Net of
----------- ------
Amortization Amortization
------------ ------------
October 31, October 31,
----------- -----------
Intangible Asset 1 9 9 8 1 9 9 8
-------- -------
Customer Lists $ 620,143 $1,849,059
Covenants Not-to-Compete 965,279 234,721
Employment Agreement 366,669 33,331
Costs Related to Acquisitions 205,260 249,716
Patent 15,683 140,322
---------------- ----------------
Totals $ 2,173,034 $ 2,507,149
------ ================ ================
Accumulated Net of
----------- ------
Amortization Amortization
------------ ------------
October 31, October 31,
----------- -----------
Intangible Asset 1 9 9 7 1 9 9 7
-------- -------
Customer Lists $ 518,731 $2,546,311
Covenants Not-to-Compete 958,738 461,468
Employment Agreement 286,666 113,334
Costs Related to Acquisitions 120,579 115,599
Patent 5,882 138,493
Other 1,374 7,188
---- ----------------
Totals $ 1,891,870 $ 3,382,393
</TABLE>
Advertising Costs -Advertising costs are expensed when incurred. Advertising
costs amounted to approximately $819,000, $467,000 and , $344,000 and for the
years ended October 31, 1998, 1997 and 1996, 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 $1,843,186 and $1,307,278 in cash equivalents at October 31, 1998
and 1997, respectively.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
[3] Note Payables - Banks
[A] In April 1998, the Company amended its revolving loan agreement with PNC
Bank. The maximum amount of the credit line available to the Company is the
lesser of (i) $14,000,000 or (ii) 50% of the Company's qualified accounts
receivable [as defined in the agreement] plus 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 certificate of deposit interest rate was 5% at October
31, 1998. 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 2001 and may be extended
for annual periods by mutual consent, thereafter. The terms of this agreement
contain, among other provisions, requirements for maintaining defined levels of
capital expenditures and net worth, various financial ratios and insurance
coverage. As of October 31, 1998 and 1997, the Company was in compliance with
the covenant provisions of this agreement. As of October 31, 1997, the Company
utilized $6,761,710 of this credit facility. As of October 31, 1998, the
Company utilized $12,000,000 of this credit facility [See Note 13].
[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, 1998 and 1997, $-0- and
$852,000 were outstanding on this note.
Prime rate at October 31, 1998 and 1997 was 8.0% and 8.5%, respectively.
The weighted average interest rate on short-term borrowings outstanding as of
October 31, 1998 and 1997 was 8.75% and 8.64%, respectively.
[4] Long-Term Debt
<TABLE> October 31,
-----------
1 9 9 8 1 9 9 7
------- -------
<S> <C> <C>
[A] Note Payable to PNC Bank. Due October 1999.
Interest at prime plus 1.00%. $ 86,424 $ 194,761
[B] Notes Payable to PNC Bank. Due July 2000.
Interest at prime plus 1.00% and certificate
of deposit rate plus 2%.. 315,259 610,255
[C] Note Payable to SmithKline Beecham Clinical
Laboratories, Inc. Due January 1, 1999.
Interest imputed at 8.25%. -- 551,373
[D] Notes Payable to PNC Bank. Due April 2002.
Interest at prime plus 2% for the unsecured
portion and prime plus 1.6% for the secured
portion 3,600,000 --
Note Payable to LTC Service and Holdings, Inc.
Due April 2000.
Interest imputed at 11.6%, unsecured. 1,323,667 --
Notes Payable to Ford Motor Credit.
Due October 1999.
Interest ranging from 8.9% to 9.9% secured by
vehicles. 23,890 --
Various unsecured notes payables.
Due November 1998.
Interest ranging from 6% to 10.75%. 15,057 95,175
Sclavo, Inc. Payments dependent on collections
received from customer list. Interest at 10%,
unsecured. 13,378 80,732
------------- ------------
Totals 5,377,675 1,532,296
Less: Current Maturities 2,071,058 864,266
------------- ------------
Long-Term Debt $ 3,306,617 $ 668,030
-------------- ============= ============
</TABLE>
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
[4] Long-Term Debt [Continued]
[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. In April 1998, the bank
changed the rate of interest to prime plus 1.00%.
[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. In April 1998, the bank changed the rate of interest on the balance not
collateralized to prime plus 1.00%.
[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. In October
1998, the Company settled a lawsuit with SmithKline and as a result the $600,000
of debt was canceled as was the related goodwill of approximately $550,000 was
reversed.
[D] On April 9, 1998, the Company acquired the assets and certain liabilities of
Medilabs, Inc. from LTC Service and Holdings, Inc. The purchase price consisted
of $4,000,000 cash plus a $1,500,000 promissory note payable without interest in
three semi-annual installments commencing April 1999. Interest was imputed at a
rate of 11.6% on this note.
Also, in April 1998, the Company entered into an agreement to borrow the
$4,000,000 deposit for this acquisition [See Note 16E]. The note is payable in
forty-seven principal installments of $66,667 commencing May 1, 1998 and one
final balloon payment. The unsecured portion of $2,000,000 bears interest at an
annual rate of 10.25% to 10.5%. The secured portion of $2,000,000 bears
interest at an annual rate of 9.85% to 10.10%. This note is in accordance with
the provisions of the Company's revolving loan agreement [See Note 3A] with the
same lender.
Maturities of long-term debt at October 31, 1998 in each of the next five years
are as follows:
<TABLE>
<S> <C>
1999 $ 2,071,058
2000 1,306,617
2001 800,000
2002 1,200,000
2003 --
----------
Total $ 5,377,675
- ----- ==========
</TABLE>
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
[5] Related Party Transactions
On October 1, 1989, an unsecured promissory note was received from Dr. Marc
Grodman ["Dr. Grodman"], president of the Company, in exchange for a receivable
in the amount of $235,354. As of October 31, 1998 and 1997, $187,118 and
$214,118 was remaining on the note. This note is non-interest bearing and has
no fixed terms.
[6] Income Taxes
The reconciliation of income tax from continuing operations computed at the U.S.
federal statutory tax rate to the Company's effective income tax rate is as
follows:
<TABLE>
October 31,
---------------------------------------
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
<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 9.0 % 10.0 % 8.0 %
Other (11.1) % (7.5) % 3.1 %
Utilization of Net Operating Loss
Carryforwards (37.0) % (41.0) % (37.0)%
-------- --------- ---------
Actual Rate (5.1) % (4.5) % 8.1%
----------- ======== ========= =========
</TABLE>
The provision for income taxes shown in the consolidated statements of
operations consist of the following:
<TABLE>
October 31,
-------------------------------------------------
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ 16,200 $ 79,947 $ 14,228
State and Local 31,500 39,313 37,634
Deferred:
Federal (68,000) (204,000) --
State and Local (18,000) (54,000) --
-------------- -------------- --------------
Total Provision for
Income Taxes $ (38,300) $ (138,740) $ 51,862
=========== ============== =============
</TABLE>
For the year ended October 31, 1998, the Company utilized approximately $800,000
of net operating loss carryforwards which resulted in a tax benefit for federal
and state purposes of approximately $300,000. For the year ended October 31,
1997, the Company utilized approximately $3,600,000 of net operating loss
carryforwards which resulted in a tax benefit for federal and state purposes of
approximately $1,450,000. For the year ended October 31, 1996, the Company
utilized approximately $1,000,000 of net operating loss carryforwards which
resulted in a tax benefit for federal and state purposes of approximately
$350,000.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
[6] Income Taxes [Continued]
At October 31, 1998, the Company had net operating loss carryforwards of
approximately $4,550,000 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>
Federal New Jersey New York
------- ---------- --------
Expiration Date Amount Amount Amount
- --------------- ------ ------ ------
<S> <C> <C> <C>
2000 $ -- $ 2,120,000 $ --
2006 450,000 -- 20,000
2007 1,300,000 -- 1,300,000
2008 2,400,000 -- 2,400,000
2009 400,000 -- --
--------------- --------------- ---------------
Total $ 4,550,000 $ 2,120,000 $ 3,720,000
---- =============== =============== ===============
</TABLE>
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, 1998, the Company has a deferred tax asset of approximately
$2,000,000 and a valuation allowance of approximately $1,656,000 related to the
asset, a decrease of $286,000 since October 31, 1997. The deferred tax asset
primarily relates to net operating loss carryforwards.
[7] Capital Transactions
[A] Preferred Stock and Common Stock - 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 #8
[7] Capital Transactions [Continued]
[A] Preferred Stock and Common Stock [Continued] - In March 1998, the Board of
Directors of the Company authorized the creation of Series A Junior
Participating Preferred Stock. Holders of each share of this Junior Preferred
Stock will be entitled to 10,000 votes on all matters submitted to a vote of the
stockholders of the Company. Holders are also entitled to receive dividends
immediately after dividends are declared on common stock of the Company. Upon
any liquidation dissolution or winding up of the Company, no distribution shall
be made to the holders of Series A Junior Participating Preferred Stock unless,
the holders of shares of Series A Junior Participating Preferred Stock shall
have received $10,000 per share, plus an amount equal to accrued and unpaid
dividends and distributions whether or not declared, to the date of such
payment. Following the payment of the full amount of the Series A Liquidation
Preference, no additional distributions shall be made to the holders of shares
of Series A Junior Participating Preferred Stock unless the holders of shares of
Common Stock shall have received an amount per share as defined in the 1998
Rights Agreement. In the event, however, that there are not sufficient assets
available to permit payment in full of the Series A Liquidation Preference and
the liquidation preferences of all other series of preferred stock, if any,
which rank on a parity with the Series A Junior Participating Preferred Stock,
then such remaining assets shall be distributed ratably to the holders of such
parity shares in proportion to their respective liquidation preferences.
[B] Acquisition Transactions - (i) 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. An aggregate 133,333 shares were
being held in escrow pending certain required collections from GenCare
customers. The fair market value of the 311,252 shares 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 21].
(ii) 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.
(iii) 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 were 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
1998 and 1997, an aggregate 23,611 and 21,944 shares respectively were released
from escrow when collection requirements were met. The remaining shares of
27,133 are to be canceled.
[C] Equity Transactions for Services - 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. 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 9]. 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.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
[8] Income Per Share
<TABLE>
For the Year Ended October 31, 1998
----------------------------------------------------
Per Share
-------
Income Shares Amount
------ ------ ------
<S> <C> <C> <C>
Basic EPS:
- ----------
Income Available to Common
Stockholders $ 596,583 7,196,299 $.08
Effect of Dilutive Securities:
- ------------------------------
Convertible Preferred Stock -- 278,137
Warrants/Options -- 492,568
----- -------------- ----
Diluted EPS:
- ------------
Income Available to Common Stockholders
Plus Assumed Conversions $ 596,583 7,967,004 $ .07
-------------- -------------- -----
</TABLE>
Warrants and options to purchase 5,448,339 shares of common stock at $3.00 to
$6.75 per share were outstanding at October 31, 1998 but were not included in
the computation of diluted EPS because the exercise price of these items was
greater than the average market price of the common shares. These securities
could potentially dilute earnings per share in the future. Warrants to purchase
5,253,339 shares of common stock expire in November 1998.
<TABLE>
For the Year Ended October 31, 1997
------------------------------------------------
Per Share
---------
Income Shares Amount
------ ------ ------
<S> <C> <C> <C>
Basic EPS:
- ----------
Income Available to Common
Stockholders $ 3,199,915 6,685,155 $ .48
Effect of Dilutive Securities:
- ------------------------------
Convertible Preferred Stock -- 244,108
Warrants/Options -- 450,650
-------------- -------------- ---------
Diluted EPS:
- ------------
Income Available to Common
Stockholders
Plus Assumed Conversions $ 3,199,915 7,379,913 $ .43
-------------- -------------- --------------
</TABLE>
Warrants and options to purchase 5,651,673 shares of common stock at $1.50 to
$6.75 per share were outstanding at October 31, 1997 but were not included in
the computation of diluted EPS because the exercise price of these items was
greater than the average market price of the common shares. These securities
could potentially dilute earnings per share in the future.
<TABLE>
For the Year Ended October 31, 1996
----------------------------------------------------
Per Share
---------
Income Shares Amount
------ ------ ------
<S> <C> <C> <C>
Basic EPS:
- ----------
Income Available to Common
Stockholders $ 591,958 6,166,156 $.10
Effect of Dilutive Securities:
- ------------------------------
Convertible Preferred Stock -- 255,572
Warrants/Options -- 461,196
-------------- -------------- ----------
Diluted EPS:
- ------------
Income Available to Common
Stockholders
Plus Assumed Conversions $ 591,958 6,882,924 $ .09
-------------- -------------- ----------
</TABLE>
Warrants and options to purchase 5,712,675 shares of common stock at $2.63 to
$6.75 per share were outstanding at October 31, 1996 but were not included in
the computation of diluted EPS because the exercise price of these items was
greater than the average market price of the common shares. In addition,
convertible debt which is convertible into 44,901 shares of common stock for an
exercise price of $5.25 per share was not included in the computation of diluted
EPS because the exercise price was greater than the average market price of the
common stock. These securities could potentially dilute earnings per share in
the future.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
[9] Stock Options and Warrants
[A] Employment Incentive Stock Options - In November 1989, the shareholders
approved and the Company adopted the 1989 Employee Stock Option Plan ["1989
Plan"] which provides for the granting of 666,667 shares of common stock. Under
the terms of its stock option plans, incentive stock options to purchase shares
of the Company's common stock are granted at a price not less than the fair
market value of the common stock at the date of grant. These stock options are
exercisable up to ten years from the date of grant. At October 31, 1998 and
1997, there were 12,291 and 8,957 shares reserved for future grants under the
plan. No stock appreciation rights have been granted. In May 1997, the
Company's board of directors approved the cancellation of all of outstanding
employee stock options for new options at an exercise price of $.71875 which
reflected fair market value. Following is a summary of transactions:
<TABLE>
Weighted Average
----------------
Shares Under Exercise Price
------------ ---------------
Options Per Share
------- ---------
<S> <C> <C>
Outstanding at October 31, 1995 482,004 $ .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
---------------------------------------------------------
Granted During the Year -- --
Expired During the Year (3,334) .72
Exercised During the Year (8,334) .72
------------ --------
Outstanding and Eligible for Exercise
at October 31, 1998 646,042 $ .73
============= ========
</TABLE>
<TABLE>
Outstanding and Exercisable Options
----------------------------------------------
Weighted
--------
Average
-------
Number of Remaining Weighted Average
--------- --------- ----------------
Shares Under Contractual Exercise Price
----------- ----------- --------------
Exercise Price Range Option Life Per Share
- -------------------- ------ ---- ---------
<S> <C> <C> <C>
$.71875 to $.790625 Per Share 646,042 9 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, 1998, 1997 and 1996.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
[9] Stock Options and Warrants [Continued]
[B] Non Incentive Stock Options and Warrants - 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
which expired in 1998. The following is a summary of transactions:
<TABLE>
Weighted
--------
Shares Under Average
------------ -------
Options Exercise Price
------- --------------
and Warrants Per Share
------------ ---------
<S> <C> <C>
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
-----------------------------
Granted During the Year -- --
Expired During the Year (206,668) 5.00
Exercised During the Year (35,200) .72
-------------- --------
Outstanding and Eligible for
Exercise at October 31, 1998 5,576,941 $ 4.73
- ------------------------------ ============== ========
</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, $5,440 and $4,983,
respectively for the years ended October 31, 1998, 1997 and 1996.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
[9] Stock Options and Warrants [Continued]
[B] Non Incentive Stock Options and Warrants [Continued] - During the year ended
October 31, 1997, 35,200 shares under warrants were granted to three non-
employees and 23,334 shares under warrants were canceled for new warrants at a
price of $.71875 which represents fair market value at the time of grant. The
fair value of each warrant granted was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: a weighted
average risk-free interest rate of 6%, a weighted average expected life of 1
year based on Company expectations and the required minimum two year holding
period, and a weighted average expected volatility of 84.09%. Dividends are not
expected to be available to shareholders during the expected life of the
warrants. The fair value of these options issued in May of 1997 of $13,423
[$.2486 per share] has been accounted for as deferred compensation for the year
ended October 31, 1997 and is being expensed over the term of the agreements.
Total compensation expense recognized against income for this deferred
compensation was $2,848 and $2,254, respectively, for the years ended
October 31, 1998 and 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, 1998, 1997 and 1996.
<TABLE>
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 Expires 11/98 $4.50
Warrants - $6.75 Per Share 1,226,666 Expires 11/98 $6.75
Options - $.71875 Per Share 366,100 6 Years $ .72
Options - $3.00 Per Share 20,000 2 Years $ 3.00
Options - $4.125 to $4.75
Per Share 175,000 1 Year $ 4.21
-------------
5,576,941
=============
</TABLE>
These warrants and options have weighted average remaining contractual lives of
less than one year. The weighted average grant date fair value of options
granted during the year ended October 31, 1997 was $.2486 per share.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
[9] Stock Options and Warrants [Continued]
[A] and [B] Pro Forma - Had compensation cost been determined on the basis of
fair value pursuant to SFAS No. 123, for the 646,042 shares under employee
incentive stock options and 346,100 shares under employee nonincentive stock
options and warrants for the years ended October 31, 1998 and 1997, net income
and earnings per share would have been as follows:
<TABLE>
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
<S> <C> <C> <C>
Net Income:
As Reported $ 596,583 $ 3,199,915 $ 591,958
============== ============= ===============
Pro Forma $ 596,583 $ 2,950,000 $ 591,958
============== ============= ===============
Basic Earnings Per Share:
As Reported $ .08 $ .48 $ .10
============== ============= ===============
Pro Forma $ .08 $ .44 $ .10
============== ============= ===============
Diluted Earnings Per Share:
As Reported $ .07 $ .43 $ .09
============== ============= ===============
Pro Forma $ .07 $ .40 $ .09
============== ============= ===============
</TABLE>
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>
Risk-Free Expected Expected
--------- -------- --------
Interest Rate Expected Life Volatility Dividends
------------- ------------- ---------- ---------
<S> <C> <C> <C>
6% 1 Year 84.09% None
</TABLE>
[10] Employment Contracts and Consulting Agreements
The Company has entered into various employment contracts and consulting
agreements for periods ranging from one to seven years. At October 31, 1998,
the aggregate minimum commitment under these contracts and agreements, excluding
commissions, was approximately as follows:
<TABLE>
October 31,
- -----------
<S> <C>
1999 $ 1,013,333
2000 943,333
2001 880,000
2002 859,000
2003 395,000
Thereafter 395,000
---------------
Total $ 4,485,666
----- ===============
</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, four employment agreements which provide for annual
aggregate minimum commitments of approximately $436,000 have no termination
dates.BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14
[10] Employment Contracts and Consulting Agreements [Continued]
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, 1998 and 1997, $567,769
and $446,903 is included in other assets which represents the amount of premiums
paid to date. At October 31, 1998 and 1997, cash surrender values on these
policies were in excess of amounts receivable.
[11] Capitalized Lease Obligations
The Company leases various assets under capital leases expiring in 2002 as
follows:
<TABLE>
October 31,
-----------
1 9 9 8 1 9 9 7
------- -------
<S> <C> <C>
Medical Equipment $ 1,168,027 $654,479
Furniture and Fixtures 11,565 11,565
------------- --------------
Totals 1,179,592 666,044
Less: Accumulated Depreciation 461,259 262,979
------------- --------------
Net $ 718,333 $ 403,065
--- ============= ==============
</TABLE>
Depreciation expense on assets under capital leases was $198,280, $83,853 and
$106,191 for the years ended October 31, 1998, 1997 and 1996, respectively.
Aggregate future minimum rentals under capital leases are:
<TABLE>
Years ended
- -----------
October 31,
- -----------
<C> <C>
1999 $286,090
2000 221,212
2001 156,707
2002 57,376
2003 17,509
Thereafter --
---------------
Total 738,894
Less: Interest 108,687
---------------
Present Value of Minimum
Lease Payments $630,207
------------------------ ===============
</TABLE>
[12] Commitments and Contingencies
The Company leases various office and laboratory facilities and equipment under
operating leases expiring from 1998 to 2004. 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,
1998, 1997 and 1996 was $2,180,112, $1,796,839 and $1,850,085, respectively.
There were no contingent rental amounts due through October 31, 1998.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #15
[12] Commitments and Contingencies [Continued]
Aggregate future minimum rental payments on noncancelable operating leases are
as follows:
<TABLE>
Property Equipment
-------- ---------
October 31,
- -----------
<S> <C> <C>
1999 $ 629,018 $639,965
2000 524,590 527,709
2001 423,665 317,631
2002 401,226 106,356
2003 380,389 16,528
Thereafter 137,280 --
--------------- -----------
Totals $ 2,496,168 $ 1,608,189
------ =============== ============
</TABLE>
[13] Litigation
In the normal course of business, the Company is exposed to a number of asserted
and unasserted potential claims. I,400n 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.
The Company is being represented by counsel in connection with various reviews
being conducted by the Company's Medicare carrier. One review involved
overpayments that occur in the normal course of business. The Company believes
the overpayment will be approximately $150,000, of which approximately $75,000
has already been remitted to Medicare. Counsel representing the Company in this
matter has advised that he cannot offer any opinion or projection at this time
as to whether the anticipated liability will be resolved at $150,000 or whether
it will be increased. Counsel has advised that based upon his review of
documents, many of the claims that Medicare thought were duplicate payments were
not in fact duplicates, but rather were properly billed. Counsel also advised
that in view of the complexity of the issue, he believes the final overpayment
will be an amount negotiated between the Company and Medicare.
On December 30, 1996, the Company commenced a lawsuit against SmithKline Beecham
Clinical Laboratories ["SBCL"] alleging that SBCL materially and repeatedly
breached its obligations and its representations and warranties made in the
Asset Agreement and the Non-Competition Agreement pursuant to which the Company
purchased certain assets from SBCL and claims unspecified amounts of
compensatory and punitive damages and related costs. As a result of its
allegations against SBCL, the Company did not make any payments with respect to
the $600,000 note payable. In October 1998, the Company and SBCL exchanged
general releases for this lawsuit and no executory obligations were imposed upon
the Company by the settlement agreement. Therefore, the Company canceled the
$600,000 note payable as well as the related goodwill of approximately $550,000.
The settlement was subject to the consent of the Company's principal lending
bank which consent was received in January 1999.
[14] Insurance
The Company maintains professional liability insurance of $3,000,000 in the
aggregate, with a per occurrence limit of $1,000,000 . In addition, the Company
maintains excess commercial insurance of $2,000,000 per occurrence. The Company
believes, but cannot assure, that its insurance coverage is adequate for its
current business needs. A determination of Company liability for uninsured or
underinsured acts or omissions could have a material adverse affect on the
Company's operations.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #16
[15] Significant Risks and Uncertainties
[A] Concentrations of Credit Risk - Cash - At October 31, 1998, the Company had
approximately $6,545,000 in cash and certificate of deposit balances at
financial institutions which were in excess of the federally insured limits.
Approximately $3,680,000 of this amount represents collateral for demand loans
with the same financial institution. [See restricted certificates of deposit on
consolidated balance sheet].
At October 31, 1997, the Company had approximately $6,320,000 in cash and
certificate 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].
[B] Concentration of Credit Risk - Accounts Receivable - Credit risk with
respect to accounts receivable is generally diversified due to the large number
of patients comprising the client base. The Company does have significant
receivable balances with government payors and various insurance carriers.
Generally, the Company does not require collateral or other security to support
customer receivables, however, the Company continually monitors and evaluates
its client acceptance and collection procedures to minimize potential credit
risks associated with its accounts receivable and establishes an allowance for
uncollectible accounts and as a consequence, believes that its accounts
receivable credit risk exposure beyond such allowance is not material to the
financial statements.
A number of proposals for legislation 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.
[16] Acquisitions
[A] 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. As of October 31, 1998, no additional shares have been issued.
During 1996, Oncodec Labs, Inc. was dissolved and is now part of the operations
of the Company.
[B] 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
were 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.
[C] 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.
[D] 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 [See Notes 4C and 13]. BIO-REFERENCE LABORATORIES, INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #17
[16] Acquisitions [Continued]
[E] On April 9, 1998, the Company acquired the assets and certain liabilities of
Medilabs, Inc. ["MLI"] from LTC Service and Holdings, Inc. ["Holdings"], a
wholly-owned subsidiary of Long-Term Care Services, Inc. ["LTC"]. The
acquisition was effective April 9, 1998 for accounting purposes and is being
accounted for under the purchase method. The operations of Medilabs, Inc. are
included in the Company's results of operations commencing April 9, 1998. In
connection with the acquisition of MLI, certain key employees signed employment
agreements with the Company for an unspecified period which included a six month
non-competition clause. In addition, LTC, Holdings, two affiliated corporations
and an employee of LTC signed non-competition agreements.
The purchase price was $5,500,000 consisting of cash payments of $4,000,000
delivered by the Company at the closing [including $50,000 of payments for non-
competition agreements with LTC, Holdings, two affiliated corporations and an
employee of LTC and $200,000 of payments for access and use through April 8,
1999 of a laboratory hardware and software system of significant importance to
the MLI business] and delivery by the Company of its $1,500,000 promissory note
payable without interest in three semi-annual installments commencing one year
after the closing. In addition, the Company paid MLI obligations of $122,366 at
the closing to an MLI affiliated entity for MLI's use through the closing date
of a piece of analytical equipment which will continue to be used by MLI after
the closing. The Stock Purchase Agreement also provides for a maximum of
$1,500,000 in additional payments to be made by the Company if certain revenues
are realized by MLI after the closing which may result in the recording of
additional goodwill. Goodwill of approximately $4,600,000 will be amortized
over 20 years under the straight line method.
<TABLE>
Assets Acquired and Liabilities Assumed
---------------------------------------
<S> <C>
Cash in Banks $ 86,400
Accounts Receivable [Net] 2,306,100
Other Assets 393,800
Fixed Assets 1,465,300
Accounts Payable (2,632,100)
Accrued Expenses (629,700)
Debt (452,927)
---------------
Net Assets $ 536,873
---------- ===============
</TABLE>
The unaudited pro-forma results of operations of the Company for the year ended
October 31, 1998 and 1997 assumes the acquisition had occurred at the beginning
of the periods.
<TABLE>
Years Ended
-----------
October 31,
------------
1 9 9 8 1 9 9 7
------- -------
<S> <C> <C>
Net Revenue $ 52,106,280 $ 53,419,105
Net Income [Loss] $ 559,475 $(7,533,864)
Net Income [Loss] Per Common Share $ .08 $ (1.13)
Net Income [Loss] Per Common Share -
Assuming Dilution $ .07 $ --
</TABLE>
The pro-forma results reflect amortization of goodwill and other intangible
assets. The unaudited pro forma information is not necessary indicative of the
actual results of operations, had the transaction occurred at the beginning of
the periods indicated, nor should it be used to project the Company's results of
operations for any future dates or periods.BIO-REFERENCE LABORATORIES, INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #18
[17] Fair Value of Financial Instruments
For certain financial instruments, including cash and cash equivalents, trade
receivables, trade payables, and short-term debt, it was estimated that the
carrying amount approximated fair value for the majority of these items because
of their short maturities. The fair value of the Company's long-term debt is
estimated based on the quoted market prices for similar issues or by discounting
expected cash flows at the rates currently offered to the Company for debt of
the same remaining maturities.
<TABLE>
O c t o b e r 3 1,
------------------------------------------------------
1 9 9 8 1 9 9 7
------------------------------------------------------
Carrying Fair Carrying Fair
-------- ---- -------- ----
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Long-Term Debt $ 3,306,617 $ 3,306,617 $ 668,030 $666,755
Capitalized Lease
Obligations $ 400,975 $ 381,637 $ 252,572 $248,942
</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 5].
[18] Health Insurance Plan
The Company has a limited self-funded health insurance plan for its employees
under which the Company pays the initial $35,000 of covered medical expenses per
person per year. The Company has a contract with an insurance carrier for any
excess.
[19] Employee Benefit Plan
The Company sponsors the Bio-Reference Laboratories, Inc. 401(k) Profit-Sharing
Plan. Employees become eligible for participation after attaining the age of
eighteen and completing one year of service. Participants may elect to
contribute up to ten percent of their compensation, as defined in the Plan
Adoption Agreement, to a maximum allowed by the Internal Revenue Service. The
Company may choose to make a matching contribution to the plan for each
participant who has elected to make tax-deferred contributions for the plan
year, at a percentage determined each year by the Company. For the year ended
October 31, 1998, 1997 and 1996, the Company elected not to make matching
contributions to the plan. If the Company elects to match participant
contributions in the future, the employer contribution will be fully vested
after the fifth year of service.
[20] Certificates of Deposit-Restricted
At October 31, 1998 and 1997, the Company had $3,680,000 of restricted
certificates of deposit, which represent collateral for the revolving loan
agreement and a long-term debt agreement. At October 31, 1997, the Company also
had $852,000 of restricted cash related to a long term debt agreement [See Notes
3 and 4].
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #19
[21] 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 noncompletion
agreement with the purchaser as part of this agreement. The Company recorded a
non-recurring gain of $2,025,689 and $333,900 during October 31, 1997 and 1998,
respectively, related to this sale. The $700,000 in contingent receivables were
included in the calculation of gain on this sale for the year ended October 31,
1998 when target revenues were reached [See Note 7B].
[22] New Authoritative Accounting Pronouncements
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.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The adoption of SFAS No. 130 is not expected
to have a material 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 adoption of SFAS No. 131 is not expected to have a
material impact on the Company's consolidated results of operations, financial
position or cash flows.
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosure about
Pension and Other Postretirement Benefits," which is effective for fiscal years
beginning after December 15,1997. The modified disclosure requirements are not
expected to have a material impact on the Company's results of operations,
financial position or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15,1999. The Company will evaluate the new standard to
determine any required new disclosures or accounting.
[23] Subsequent Events
On November 23, 1998, the Company's outstanding publicly owned Class A
Redeemable Warrants and Class B Redeemable Warrants expired [See Note 9].
. . . . . . . . . .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 22, 1999
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED OCTOBER 31,
1998, 1997 AND 1996.
<TABLE>
(a) (b) (c) (d) (e)
Balance at Charged to Deductions Balance
---------- ---------- ---------- -------
Beginning Cost and To Valuation at End
--------- --------- ------------ ------
Description of Period Expenses Accounts of Period
- ----------- --------- -------- -------- ---------
<S> <C> <C> <C> <C>
Year Ended October 31, 1998
Allowance for
Doubtful Accounts
and Contractual
Credits $ 8,564,436 $ 72,137,649 $ (67,207,610) $13,494,475
============== =============== ============= ==========
Year Ended October 31, 1997
Allowance for
Doubtful Accounts
and Contractual
Credits $ 5,357,096 $ 47,593,419 $ (44,386,079) $8,564,436
============== ============= ============== ==========
Year Ended October 31, 1996
Allowance for Doubtful
Accounts and Contractual
Credits $ 2,569,125 $ 35,928,646 $(33,140,675) $5,357,096
============== =============== ============= ==========
</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-31-1998
<PERIOD-END> OCT-31-1998
<CASH> 2,784,147
<SECURITIES> 0
<RECEIVABLES> 20,749,696
<ALLOWANCES> 8,564,436
<INVENTORY> 587,101
<CURRENT-ASSETS> 29,212,061
<PP&E> 4,243,646
<DEPRECIATION> 2,022,928
<TOTAL-ASSETS> 40,778,338
<CURRENT-LIABILITIES> 20,847,812
<BONDS> 18,007,882
0
60,408
<COMMON> 72,129
<OTHER-SE> 22,998,015
<TOTAL-LIABILITY-AND-EQUITY> 40,778,338
<SALES> 46,553,730
<TOTAL-REVENUES> 46,553,730
<CGS> 25,058,008
<TOTAL-COSTS> 45,488,765
<OTHER-EXPENSES> 840,582
<LOSS-PROVISION> 6,084,941
<INTEREST-EXPENSE> 1,280,737
<INCOME-PRETAX> 558,283
<INCOME-TAX> (38,300)
<INCOME-CONTINUING> 596,583
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 596,583
<EPS-PRIMARY> .08
<EPS-DILUTED> .07
</TABLE>
