Item 2 - Properties - -------------------
The Company's executive offices and New Jersey processing facility occupy approximately 56,000 square feet of leased space in two one-story brick facilities at 481-487 Edward H. Ross Drive, Elmwood Park, New Jersey. The lease for these facilities, which expires in February 2004, provides for a monthly rental of $31,391. Bio-Reference's New York processing facility occupies approximately 11,000 square feet of leased space in a two-story brick facility at 140 Route 303, Valley Cottage, New York. The lease for this facility, which expires in April 2002, provides for a monthly rental of $12,177. The Company's testing equipment maintained at both of its processing facilities are in good condition and in working order. Management believes that these facilities, as presently equipped, have the capacity to generate up to approximately $75,000,000 in annual revenues based on the type of testing now being performed by the Company. The Company maintains fire, theft and liability insurance coverage for this facility in what it believes are adequate amounts. The Company also leases 55 additional relatively small draw stations throughout the New York metropolitan area to collect specimens from physician-referred patients for testing at both of its processing facilities.
Item 3
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
Item 4 - Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------
The Company's Annual Meeting of Stockholders was held on October 21, 1999. At the meeting, the following two individuals were elected by the following vote to serve as Class II directors, each for a term of three years and until his successor is duly elected and qualified.
For Withheld --- --------
Sam Singer 6,362,497 152,972
Frank DeVito 6,362,497 152,972
The other directors of the Company whose term continued are as follows:
Marc D. Grodman Class I director
Howard Dubinett Class I director
John Roglieri Class III director
Gary Lederman Class III director
PART II
PRICE RANGE OF SECURITIES -------------------------
Item 5.
Item 5. - Market for Common Stock and Related Shareholder Matters - --------- -------------------------------------------------------
The Company's Common Stock was traded on the National Association of Securities Dealers Automated Quotation ("NASDAQ") Small Cap System through July 13, 1992 after which it was delisted from trading on NASDAQ due to the Company's failure to maintain shareholders' equity of at least $1,000,000. Commencing July 14, 1992, the Common Stock was quoted in the over-the-counter market on the NASD OTC Bulletin Board. As a result of the improvement in the Company's financial condition based upon its November 1993 public offering, the Common Stock was readmitted for trading on the NASDAQ Small Cap System under the symbol "BRLI" on November 24, 1993.
The following table sets forth the range of high and low bid prices for the Common Stock for the periods indicated, as derived from reports furnished by NASDAQ. Such quotations represent prices between dealers, do not include mark-ups, mark-downs or commissions and may not necessarily represent actual transactions.
Fiscal Year Bid Prices ----------- ----------
High Low ---- ---
First Quarter $1.65625 $1.25 Second Quarter 1.75 1.25 Third Quarter 2.00 1.15625 Fourth Quarter 1.25 .875 First Quarter $1.875 $ .96875 Second Quarter $1.5625 .75 Third Quarter $1.03125 .4375 Fourth Quarter $1.0625 .78125
At December 31, 1999 the closing sales price for the Common Stock on NASDAQ was $3.75 per share.
At December 31, 1999 the number of record holders of the Common Stock was 630. Such number of record owners was determined from the Company's shareholder records and does not include beneficial owners whose shares are held in nominee accounts with brokers, dealers, banks and clearing agencies.
Dividends
The Company has not paid any dividends upon its Common Stock since its inception and, does not contemplate or anticipate paying any dividends in the foreseeable future. Furthermore, the Company's loan agreement with PNC Bank prohibits the Company from paying dividends or making any distributions with respect to any shares of its stock without the prior written consent of the Bank.
Item 6.
Item 6. Selected Financial Data [In thousands, except per share data] Y e a r s e n d e d -------------------------------------------- O c t o b e r 3 1, -------------------------------------------- 1 9 9 9 1 9 9 8 1 9 9 7 1 9 9 6 1 9 9 5 ------- ------- ------- ------- ------- Operating Data: Net Revenues $ 53,856 $ 46,554 $38,660 $ 35,126 $ 31,521 Cost of Services $ 30,850 $ 25,058 $19,339 $ 18,136 $ 15,036 Gross Profit $ 23,006 $ 21,496 $19,321 $ 16,989 $ 16,485 General and Administrative Expenses$ 26,432 $ 20,231 $17,436 $ 15,793 $ 14,702 Income [Loss] from Operations $ (3,426)$ 1,065 $ 1,885 $ 1,196 $ 1,783 Non-Recurring Gain on Sale of Intangible Assets $ -- $ 334 $ 2,026 $ -- $ -- Other Expenses - Net $ 1,185 $ 841 $ 850 $ 552 $ 332 Provision for Income Tax Expense [Benefit] $ 367 $ (38)$ (139)$ 52 $ 49 Net income [Loss] $ (4,978)$ 597 $ 3,200 $ 592 $ 1,402 Net [Loss] Income Per Common Share $ (.68)$ .08 $ .48 $ .10 $ .23 Cash Dividends Per Common Share $ -- $ -- $ -- $ -- $ --
Balance Sheet Data: Total Assets $ 32,318 $ 40,778 $29,095 $ 28,231 $ 24,201 Total Long-Term Liabilities $ 2,681 $ 3,708 $ 921 $ 1,533 $ 843 Total Liabilities $ 20,948 $ 24,555 $13,570 $ 16,128 $ 12,945 Working Capital $ 3,452 $ 8,364 $ 9,415 $ 4,072 $ 4,552 Stockholders' Equity [Deficit] $ 11,369 $ 16,223 $15,525 $ 12,103 $ 11,256
A number of proposals for legislation continue to be under discussion which could substantially reduce Medicare and Medicaid reimbursements to clinical laboratories. Depending upon the nature of regulatory action and the content of legislation, the Company could experience a significant decrease in revenues from Medicare and Medicaid, which could have material adverse effect on the Company. The Company is unable to predict, however, the extent to which such actions will be taken.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -----------------------------------------------------------------------
Note Regarding Forward-Looking Statements - -----------------------------------------
This Annual Report on Form 10-K contains historical information as well as forward-looking statements. Statements looking forward in time are included in this Annual Report pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks and uncertainties that may cause the Company's actual results in future periods to be materially different from any future performance suggested herein.
OVERVIEW - --------
Bio-Reference has expanded its laboratory testing capabilities and its customer base through internal growth as well as through the completion of a series of acquisitions of the businesses of other testing laboratories.
In April 1998, the Company acquired the assets and certain liabilities of Medilabs, Inc. ("MLI") for a purchase price of $4,000,000 cash plus a promissory note of $1,500,000, payable without interest, in three semi-annual installments commencing April of 1999. Also in April, the Company entered into a note agreement to borrow the $4,000,000 to fund this acquisition. The note is in accordance with the Company's revolving loan agreement with the same lending bank. The operations of MLI are included in the Company's operations commencing April 9, 1998. MLI incurred a net loss of approximately $120,000 for the seven month period ended October 31, 1998 and had net income of approximately $880,000 for the twelve month period ended October 31, 1999.
In December of 1999, the Company entered into agreements to acquire the businesses of two companies. One company is involved in website designs and the other company is involved in the manufacturing of health care foods.
Results of Operations
Net Income - ----------
The Company's net income (loss) for the years ended October 31, 1999 and 1998 was $(4,978,448) and $596,583, respectively. The main reasons for the $5,575,031 decrease in net income is the write-down of approximately $2,900,000 for impaired assets including the additional allowance for accounts receivable relating to the Company's end stage renal dialysis business acquired from SmithKline Beecham of approximately $2,000,000 and an increase in general and administrative expenses of approximately $2,000,000 in fiscal 1999. . In addition, net revenue per patient decreased 8% during the current twelve month period ended October 31, 1999, as compared to the twelve month period ended October 31, 1998. Gross profit margins decreased from 46% for the twelve month period ended October 31, 1998 to 43% for the twelve month period ended October 31, 1999. Based upon anticipated increases in patient volume, anticipated increased testing to be performed, reimbursement rate improvements, and anticipated decreases in operating costs, the bulk of the effects of which are expected to be realized in the second half of fiscal 2000, the Company projects net income for fiscal 2000.
Net Revenues - ------------
Net revenues for the year ended October 31, 1999 were $53,856,414 as compared to $46,553,730 for the year ended October 31, 1998; this represents a 16% increase in net revenues. MLI had net revenues of $13,706,743 or 25% of the Company's net revenues for the fiscal year. The Company acquired MLI in April of 1998, for the seven month period ended October 31, 1998, MLI had net revenues of $7,773,570 or 17% of the Company's net revenue for the twelve month period ended October 31, 1998.
The number of patients serviced during the fiscal year ended October 31, 1999 was 1,235,514 which was 25% greater when compared to the prior fiscal year. MLI accounted for 35% of the patient count for the year ended October 31, 1999. Net revenue per patient for the year ended October 31, 1998 was $47.29 compared to net revenue per patient for the year ended October 31, 1999 of $43.59; a reduction of $3.70 or 8%. This decrease is due to the inclusion of a full twelve months of MLI's revenues with its associated lower revenue per patient in fiscal year 1999. MLI's net revenue per patient was $31.71 for the twelve month period ended October 31, 1999 compared to net revenue per patient of $33.04 in fiscal year 1998. The Company expects an increase in net revenues in fiscal year 2000 due to a number of factors: internal growth, an estimated increase in the contract with the New York State Department of Corrections, Medicare reimbursement for tests previously not covered, an increase in Medicare reimbursement for other selected tests, as well as new marketing initiatives in newer testing areas, such as drugs of abuse testing, and complimentary and alternative medicine. In addition, the Company has identified three new business initiatives (See Below), all of which seek to leverage off existing capabilities the Company possesses.
The Company anticipates increasing its revenues in its next fiscal year through internal growth and development of new marketing initiatives in laboratory testing services outside the traditional physician market. In November 1999, the contract to provide laboratory testing by the New York State Department of Corrections for inmates in its facilities was renewed. This contract is valued at approximately $6,300,000 for fiscal year 2000, an estimated increase of approximately 10% from fiscal year 1999. The Company is seeking to market its services to other correctional institutions.
In June 1999, the Company announced the signing of a letter of intent with General Prescription Programs, Inc., a prescription benefit manager ("GPP") and others, to form a new company, called PSIMedica, which will provide population health management and medical claims processing services to third-party payors of health related claims and benefits. The new company, principally funded by BRLI, is expected to obtain a license to market medical management services to GPP customers representing approximately one million lives. The license will also provide the new company with access to GPP's claims information and analytical software. The Company believes, through the analytical process of interrelating laboratory, prescription and medical claims data, it can provide critical strategies and solutions to promote population health management primarily to ERISA funds and other payors. No
assurances can be given that the Company will be able to successfully market these strategies and solutions.
In 1999, the Company licensed software to allow for the grouping of the analysis of medical claims data and has proceeded to develop its own proprietary algorithms and enhancements to the licensed software so as to include laboratory and prescription data. The Company is currently negotiating with two ERISA funds which total over 60,000 lives as beta sites for its analytical tools and programs. The Company expects to seek customers for its services by mid fiscal year 2000.
In December 1999, the Company announced the acquisition of DoctorNY.com (www.doctorny.com), a health portal which, with its associated domain sites and existing physician websites, includes website development capabilities for health care providers, together with a search engine which allows consumers to locate physicians by region, credentials, specialty or other parameters. The Company announced the consumer view represented by DoctorNY.com was part of its entry into the e-health marketplace. The Company plans to further develop the physician services offered by the system to enhance physician- patient and physician-payor electronic communications on a secure basis (i.e., preserving confidentiality), including communicating laboratory results, e-mail prescriptions, refills, payor verification and eligibility, etc. The offering of physician CME credits through the system is also contemplated. The Company intends to market these services to its existing physician network as well as to other individual physicians and groups of physicians.
In December 1999, the Company acquired Right Body Foods, Inc., a manufacturer and distributor of freshly prepared, starch free, low-calorie, low carbohydrate, food products, located in Syosset, New York. Its products are sold through health professionals, dieticians, nutritionists and physicians. The Company expects to use its marketing staff and physician network to increase the distribution of these products.
COST OF SERVICES: - -----------------
Cost of sales increased from $25,058,008 for the year ended October 31, 1998 to $30,850,357 for the year ended October 31, 1999, an increase of $5,792,329 or 19%. This increase is primarily the result of the MLI acquisition. MLI's direct operating costs were $9,347,850 for the twelve month period ended October 31, 1999, as compared to $5,639,627 for the seven month period ended October 31, 1998, an increase of $3,708,223. The optimum consolidation of laboratory operations has not been completed and will marginally impact the Company's cost structure until, at least, the second quarter of fiscal year 2000 when the automated laboratory upgrade and expansion is expected to be completed. While the automated laboratory will have a marginal impact on cost structure, the reduction of the Company's dependence on reference laboratories is expected to have a more favorable impact during the second half of fiscal 2000.
GROSS PROFITS: - -------------
Gross profit on net revenues increased from $21,495,722 for the year ended October 31, 1998 to $23,006,077 for the year ended October 31, 1999; an increase of $1,510,355 primarily attributable to the increase in revenues. Gross profit margins decreased from 46% for the year ended October 31, 1998 to 43% for the year ended October 31, 1999. Management believes that the Company's gross profit margin will increase in fiscal 2000, due to increased revenues from internal growth, Medicare reimbursement for tests not previously covered, increases in reimbursement rates from Medicare on certain tests, the completion of the automated chemistry laboratory and decrease in direct operating expenses. The decrease in gross profit margins in fiscal 1999 is primarily attributable to the lower net revenues per patient, the increase in direct costs associated with MLI and the duplication of direct costs that had not been eliminated as of October 31, 1999 by an optimum consolidation of laboratory operations. The Company has invested a large amount of time and money during fiscal 1999 to increase its processing capacity. Management believes, that its capacity once the automated chemistry laboratory is completed, for approximately $250,000, will be more than adequate to handle the projected increase in patient volume.
- ------------------------------------------------------------------------------
Note Regarding Forward-Looking Statements - -----------------------------------------
This Annual Report on Form 10-K contains historical information as well as forward-looking statements. Statements looking forward in time are included in this Annual Report pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks and uncertainties that may cause the Company's actual results in future periods to be materially different from any future performance suggested herein.
GENERAL AND ADMINISTRATIVE EXPENSES: - -----------------------------------
General and administrative expenses for the year ended October 31, 1999 were $26,431,909 as compared to $20,430,757 for the year ended October 31, 1998, an increase of approximately $6,000,000 or 29%. Approximately 48% of this increase is the impairment charge of approximately $2,900,000 associated with the Company's end stage renal dialysis business acquired from SmithKline Beecham. In addition, occupancy expenses, telephone, data processing and marketing expenses increased approximately $1,900,000 over the prior twelve month period. The Company recorded a $227,000 expense associated with a New Jersey Medicaid overpayment claim. Management believes that general and administrative expenses in 2000 will increase but not at a higher percentage than the projected increase in revenues.
INTEREST EXPENSE: - ----------------
Interest expense increased from $1,280,737 for the year ended October 31, 1998 to $1,465,765 for the year ended October 31, 1999, resulting from the Company's continuing use of its revolving line of credit with PNC Bank.
Fiscal Year 1998 Compared to Fiscal Year 1997
Net Income - ----------
The Company's net income for the years ended October 31, 1998 and 1997 was $596,583 and $3,199,915, respectively. The main reasons for the $2,600,000 decrease in net income is the reduction in nonrecurring gain of approximately $1,700,000. The nonrecurring gain represents the gain in the sale of certain assets of the Company's GenCare Division. The reduction in income from operations resulted from a reduced gross profit percentage of approximately 4% and an increase in general and administrative expenses.
Net Revenues - ------------
On September 30, 1997, the Company completed the sale of certain assets of its GenCare Division ("GenCare") to an unrelated third party. GenCare provided largely cancer diagnostic testing services with relatively high revenues per patient. The 1997 financial statements included eleven months of revenues attributable to the GenCare division or $2,116,523. There were no revenues realized by the GenCare Division in 1998.
Net revenues for the year ended October 31, 1998 were $46,553,730 as compared to $38,660,184 for the year ended October 31, 1997; this represents a 20% increase in net revenues. The Company acquired MLI in April of 1998. Since this acquisition, for the seven month period ended October 31, 1998, MLI had net revenues of $7,773,570 or 17% of the Company's net revenues for the year. There were no revenues from MLI in fiscal 1997. MLI provides routine laboratory services to physician offices, clinics, nursing homes and correctional institutions, associated with lower revenues per patient.
The number of patients serviced during the year ended October 31, 1998 was 984,432 which was 35% greater when compared to the prior fiscal year. MLI accounted for 24% of the patient count for the year ended October 31, 1998. Net revenue per patient for the year ended October 31, 1997 was $53.08 compared to net revenue per patient for the year ended October 31, 1998 of $47.29; a reduction of $5.79 or 11%. MLI's net revenue per patient was $33.04 for the seven month period ended October 31, 1998.
The Company anticipated increasing its revenues in its next fiscal year through internal growth and development of new marketing initiatives in laboratory testing services outside the traditional physician market. In April 1998, the Company acquired MLI and was awarded, as of November, 1998, a contract to provide laboratory testing by the New York State Department of Corrections for inmates in its
- ------------------------------------------------------------------------------
Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains historical information as well as forward-looking statements. Statements looking forward in time are included in this Annual Report pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks and uncertainties that may cause the Company's actual results in future periods to be materially different from any future performance suggested herein.
facilities. The Company is seeking to market its services to other correctional institutions. In addition, the Company is attempting to expand its marketing efforts in the drug testing market and has hired new marketing representatives to specialize in this initiative.
COST OF SERVICES: - ----------------
Cost of sales increased from $19,339,274 for the year ended October 31, 1997 to $25,058,008 for the year ended October 31, 1998, an increase of $5,718,734 or 30%. This increase is the result of the MLI acquisition. MLI's direct operating costs were $5,639,627 for the seven month period ended October 31, 1998. The optimum consolidation of laboratory operations has not been completed and will impact the Company's cost structure until completed.
GROSS PROFITS: - -------------
Gross profit on net revenues increased from $19,320,910 for the year ended October 31, 1997 to $21,495,722 for the year ended October 31, 1998; an increase of $2,174,812, primarily attributable to the increase in revenues. Gross profit margins decreased from 50% for the year ended October 31, 1997 to 46% for the year ended October 31, 1998. This decrease in gross profit margins is primarily attributable to the lower net revenues per patient, the increase in direct costs associated with MLI and the duplication of direct costs that had not been eliminated as of October 31, 1998 by an optimum consolidation of laboratory operations.
GENERAL AND ADMINISTRATIVE EXPENSES: - -----------------------------------
General and administrative expenses for the year ended October 31, 1998 were $20,430,757 as compared to $17,435,879 for the year ended October 31, 1997, an increase of approximately $3,000,000 or 16%. Most of this increase was due to the incurring of additional costs related to the MLI acquisition (approximately $1,858,000). In addition, bad debt increased by 11%, or approximately $793,000 over the prior comparable period and was caused primarily by an increase in the self-pay patients of Bio- Reference Laboratories resulting from legislation passed in New Jersey which prohibited physician billing for diagnostic laboratory services. Self pay patients have an historical higher bad debt rate than that of physician billing.
INTEREST EXPENSE: - ----------------
Interest expense increased from $1,124,432 for the year ended October 31, 1997 to $1,280,737 for the year ended October 31, 1998, resulting from the Company's increase in asset based borrowing of approximately $4,400,000 and acquisition debt of $4,000,000 offset by payments on existing debt of $1,000,000.
Liquidity and Capital Resources - -------------------------------
For the Fiscal Year Ended October 31, 1999 - ------------------------------------------
The Company's working capital at October 31, 1999 was approximately $3,700,000 as compared to approximately $8,400,000 at October 31, 1998, a decrease of $4,700,000. This change is primarily the result of a decrease in accounts receivable of approximately $2,000,000, an increase in accounts payable and accrued expenses of approximately $600,000 and the utilization of cash to decrease long term debt of approximately $2,200,000. The Company reduced its debt through the utilization of its restricted certificates of deposit. This allowed the Company to realize a cost savings on the spread between the interest earned on these certificates of deposit and the interest expense on the monies borrowed.
During the year ended October 31, 1999, the Company generated approximately $1,800,000 in cash from operations, an increase of approximately $5,000,000 as compared to the year ended October 31 1998. Each operating unit of clinical laboratory testing services generated cash flow during the period ended
- ------------------------------------------------------------------------------
Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains historical information as well as forward-looking statements. Statements looking forward in time are included in this Annual Report pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks and uncertainties that may cause the Company's actual results in future periods to be materially different from any future performance suggested herein.
October 31, 1999. MLI, the Company's most recent laboratory acquisition generated approximately $600,000 in cash from operating activities and Bio-Reference generated approximately $7,000,000. Corporate activities (General and Administrative Expenses) utilized approximately $6,000,000 in cash during the twelve month period ended October 31, 1999. The Company expects cash flow from operations to continue to improve during fiscal 2000. Overall, Management anticipates being able to generate cash from operations in fiscal 2000 as a result of a projected increased gross profit resulting from increased revenues and a projected decrease in operating costs. Management believes operating costs will be lower due to cost savings generated by the automated laboratory and cost reductions generated by doing certain large volume laboratory tests in-house rather than referring them to another laboratory.
Credit risk with respect to accounts receivable is generally diversified due to the large number of patients comprising the client base. The Company does have significant receivable balances with government payors and various insurance carriers. Generally, the Company does not require collateral or other security to support customer receivables, however, the Company continually monitors and evaluates its client acceptance and collection procedures to minimize potential credit risks associated with its accounts receivable. The Company establishes and maintains an allowance for uncollectible accounts based upon collection history and anticipated collection, and as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is not material to the financial statements.
A number of proposals for legislation continue to be under discussion which could substantially reduce Medicare and Medicaid reimbursements to clinical laboratories. Depending upon the nature of regulatory action, and the content of legislation, the Company could experience a significant decrease in revenues from Medicare and Medicaid, which could have a material adverse effect on the Company. Medicare has announced that it will more than double the reimbursement rate for Pap tests (from $7.15 to $14.60) and reimburse for PSA tests starting January 1, 2000. The Company is unable to predict, however, the extent to which other such actions will be taken. (See "Developments Since the Beginning of Fiscal 1999" as to the status of a review concerning overpayments being conducted by the Company's Medicare carrier and New Jersey Medicaid).
In January 2000, the Company commenced negotiations with New Jersey Medicaid regarding a claim (the "Claim") made by the State in December 1999 that with respect to certain clinical laboratory tests for which reimbursements were made by the State to the Company, although such tests were authorized by the physician, the underlying laboratory test requisitions did not bear the actual signature of the physician ordering the test.
The Company believes it has been compliant with all requirements regarding claims submitted for payment by New Jersey Medicaid and in fact require actual physician signatures before it bills New Jersey Medicaid. However, the Company and New Jersey Medicaid have entered into an oral agreement in January 2000 to a settlement of approximately $227,000 to cover the claim and the Company has accrued this settlement amount in its October 31, 1999 financial statements. The settlement is subject to the parties' execution of a written agreement setting forth its terms and to the approval of the Director of the Division of Medical Assistance. Approval of the settlement is being recommended to the Director.
New Jersey Medicaid is the only payor the Company does business with that requires an actual physician signature on every laboratory requisition. In the fiscal year ending October 31, 1999, New Jersey Medicaid represented approximately 3% of the Company's total net revenues.
In April 1998, the Company amended its revolving loan agreement with PNC Bank. The maximum amount of the credit line available to the Company is the lesser of (1) $14,000,000 or (ii) 50% of the Company's qualified accounts receivable [as defined in the agreement] plus 1% of any face amount of the certificates of deposit, if any, pledged as collateral for this loan minus the amount of any portion of the outstanding principal balance of the term loan which is deemed to be collateralized by the certificates of deposit. Interest on advances which are collateralized by certificates of deposit will be at 2% above the certificate of deposit interest rate. Interest on other advances will be at prime plus 1.25%. The credit line
- ------------------------------------------------------------------------------
Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains historical information as well as forward-looking statements. Statements looking forward in time are included in this Annual Report pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks and uncertainties that may cause the Company's actual results in future periods to be materially different from any future performance suggested herein.
is collateralized by substantially all of the Company's assets and the assignment of a $4,000,000 insurance policy on the life of the president of the Company. The line of credit is available through March 2001 and may be extended for annual periods by mutual consent thereafter. The terms of this agreement contain, among other provisions, requirements for maintaining defined levels of capital expenditures and net worth, various financial ratios and insurance coverage. As of October 31, 1998, the Company was in compliance with the covenant provisions of this agreement and was utilizing $12,000,000 of this credit facility. As of October 31, 1999, the Company was in default of certain covenants, however, the Company subsequently received waivers for these defaults on January 20, 2000. As of October 31, 1999, the Company was utilizing $8,700,905 of this credit facility.
The Company generated approximately $5,000,000 of positive cash flow from operating and investing activities for the year ended October 31, 1999, which was applied toward payments totaling approximately $5,800,000 to reduce short and long term debt and capital lease obligations.
The Company intends to expand its laboratory operations through acquisitions and aggressive marketing while also diversifying into related medical fields through acquisitions. These acquisitions may involve cash, notes, common stock, and/or combinations thereof
The Company has various employment and consulting agreements of up to seven years with commitments totaling approximately $5,700,000 [See Notes 10 and 12] and operating leases with commitments totaling approximately $4,500,000 (of which approximately $1,5600,000 and $1,600,000 are due during fiscal 2000) [See Note 12].
The Company's cash balances at October 31, 1999 totaled approximately $2,100,000 as compared to $2,800,000 at October 31, 1998. The Company believes that its cash position, the anticipated cash generated from future operations, the availability of its credit line with PNC Bank, the utilization of certificates of deposits maturing during the second quarter of fiscal year 2000 and the interest due thereupon, will meet its future cash needs.
For the Fiscal Year Ended October 31, 1998
Working capital at October 31, 1998 was approximately $8,400,000 as compared to approximately $9,400,000 at October 31, 1997, a decrease of $1,100,000 during the twelve month period.
In fiscal year 1998, the Company utilized $3,227,601 in cash for operating activities. This use of cash for operating activities resulted in an increase in accounts receivable of approximately $7,200,000 offset by the increase in accrued expenses and payables of approximately $2,600,000.
The Company utilized $4,237,998 of cash for investing activities during fiscal year 1998. This consisted primarily of $4,000,000 of cash paid for Medilabs.
Impact of Inflation - -------------------
To date, inflation has not had a material effect on the Company's operations.
New Authoritative Pronouncements - --------------------------------
The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of Effective Date of FASB Statements No. 133." The Statement defers for one year the effective date of FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." The rule now will apply to all fiscal quarters of all fiscal years beginning after June 15, 2000. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other
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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.
comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The adoption of SFAS No. 137 is not expected to have a material impact on the Company's consolidated results of operation, financial position or cash flows.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk ---------------------------------------------------------
Not applicable.
Item 8.
Item 8. - Financial Statements and Supplementary Data -------------------------------------------
Financial Statements are annexed hereto
Item 9.
Item 9. - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ---------------------------------------------------------------------
None
PART III
Item 10.
Item 10.- Directors and Executive Officers of the Registrant --------------------------------------------------
The following table sets forth certain information with respect to each of the directors and executive officers of the Company.
Name Age Position
Marc D. Grodman, M.D.............48 Chairman of the Board, President, Chief Executive Officer and Director
Howard Dubinett..................48 Executive Vice President, Chief Operating Officer and Director
Sam Singer.......................57 Vice President, Chief Financial Officer, Chief Accounting Officer and Director
Frank DeVito.....................77 Director
John Roglieri, M.D...............60 Director
Gary Lederman, Esq...............65 Director
Marc D. Grodman, M.D. founded the Company in December 1981 and has been its Chairman of the Board, President, Chief Executive Officer and a Director since its formation. Dr. Grodman is an Assistant Professor of Clinical Medicine at Columbia University College of Physicians and Surgeons and Assistant Attending Physician at Presbyterian Hospital, New York City. From 1980 to 1983, Dr. Grodman attended the Kennedy School of Government at Harvard University and was a Primary Care Clinical Fellow at Massachusetts General Hospital. From 1982 to 1984, he was a medical consultant to the Metal Trades Department of the AFL-CIO. Dr. Grodman received a B.A. degree from the University of Pennsylvania in 1973 and an M.D. degree from Columbia University College of Physicians and Surgeons in 1977. Except for approximately 20 hours per month spent as Assistant Professor of Clinical Medicine and Assistant Attending Physician at Columbia University and Presbyterian Hospital and rendering medical services to the Uniformed Firefighters Association of New York City, Dr. Grodman devotes all of his working time to the business of the Company.
Howard Dubinett has been the Executive Vice-President and Chief Operating Officer of the Company since its formation. He became a Director of the Company in April 1986. Prior to joining the Company, Mr. Dubinett was general manager of Union Prescription Service, Inc., a company which administered prescription drug plans. Mr. Dubinett attended Rutgers University. Mr. Dubinett devotes all of his working time to the business of the Company.
Sam Singer has been the Company's Vice President and Chief Financial Officer since October 1987 and a Director since November 1989. He is responsible for all financial activities of the Company. Prior to joining the Company, he was Controller for Sycomm Systems Corporation, a data processing and management consulting company, from 1981 to 1987. He received a B.A. degree from Strayer College and an M.B.A. from Rutgers University. Mr. Singer devotes all of his working time to the business of the Company.
Frank DeVito became a Director of the Company in April 1986. Since 1970, Mr. DeVito has been Vice President of the New Jersey State AFL-CIO and from 1960 until December 1985 was President of AFL-CIO United Food and Commercial Workers, Local 1245. From 1981 through December 1985 Mr. DeVito was also President of United Food and Commercial Workers District Council of Metropolitan New York and Northern New Jersey, which was comprised of 35 local unions with approximately 150,000 members.
John Roglieri, M.D. became a Director of the Company in September 1995. He is an Assistant Professor of Clinical Medicine at Columbia University's College of Physicians and Surgeons and an Assistant Attending Physician at Presbyterian Hospital, New York City. Dr. Roglieri received a B.S.
degree in Chemical Engineering and a B.A. degree in Applied Sciences from Lehigh University in 1960, an M.D. degree from Harvard Medical School in 1966, and a Master's degree from Columbia University School of Business in 1978. From 1969 until 1971, he was a Senior Assistant Surgeon in the U.S. Public Health Service in Washington. From 1971 until 1973 he was a Clinical and Research Fellow at Massachusetts General Hospital. From 1973 until 1975, he was Director of the Robert Wood Johnson Clinical Scholars program at Columbia University. In 1975 he was appointed Vice-President Ambulatory Services at Presbyterian Hospital, a position which he held until 1980. Since 1980, he has maintained a private practice of internal medicine at Columbia-Presbyterian Medical Center. From 1988 until 1992, he was also Director of the Employee Health Service at Presbyterian Hospital. Since 1992, he has been Corporate Medical Director of NYLCare, a managed care subsidiary of New York Life. He is a member of advisory boards to several pharmaceutical companies, a member of the Editorial Advisory Board of the journal Managed Care and a biographee of Who's Who in America.
Gary Lederman, Esq. became a director of the Company in May 1997. He received his B.A. from Brooklyn College in 1954 and his J.D. from NYU Law School in 1957. He was manager of Locals 370, 491 and 662 of the U.F.C.W. International Union from 1961 to 1985. He is retired from the unions and has been a lecturer at Queensboro Community College in the field of insurance. He currently serves on an institutional review board for RTL, a pharmaceutical drug testing laboratory.
There are no family relationships between or among any directors or executive officers of the Company. The Company's Certificate of Incorporation provides for a staggered Board of Directors (the "Board") pursuant to which the Board is divided into three classes of directors and the members of only one class or one-third of the Board) are elected each year to serve a three-year term. Officers are elected by and hold office at the discretion of the Board of Directors.
Key Personnel and Consultants - -----------------------------
The following key personnel and consultants make significant contributions to the Company's operations.
Robert Rush, Ph.D (Age 59) has been employed by the Company since July 1993 as Vice President of Technical Operations. From 1989 to 1993, Dr. Rush was a Technical Director for National Health Laboratories, Inc., a national clinical laboratory. From 1988 to 1989 he was the Technical Director of Maryland Medical Laboratory and from 1975 to 1988 he was the Technical Director of Smith-Kline Beecham Clinical Laboratories, another national clinical testing laboratory, in Atlanta, Georgia. Dr. Rush also worked for the Technicon Instruments Corporation, a Tarrytown, New York manufacturer of laboratory equipment, from 1969 to 1972, as a Section Head in Clinical Chemistry. Dr. Rush is a registered Clinical Laboratory Director in the states of New Jersey, New York and Connecticut. He is board certified by the American Board of Clinical Chemistry. Dr. Rush received a B.A. degree in Chemistry from Hunter College in 1962 and M.S. and Ph.D. degrees in Biochemistry in 1964 and 1966 from Pennsylvania State University.
Benita Ponda, M.D. (Age 54) has been employed by the Company since February, 1994 as Medical Director. She is certified by the American Board of Pathology in Clinical Pathology and Anatomical Pathology with a special qualification in Cytopathology. She holds a New York State Department of Health Certificate of Qualification for Laboratory Director. Dr. Ponda's professional appointments include Chief of Cytopathology and Associate Pathologist at New York Methodist Hospital, Brooklyn, New York (January 1992 to February, 1994); Associate Pathologist at Flushing Hospital and Medical Center, Flushing, New York (1981 to 1991) and Director of Laboratory at St. Mary's Hospital for Children (1985 - to date). She received M.B.B.S. degree (equivalent to M.D. in U.S.A.) from Bombay University, Bombay, India in 1970.
Ayad Mudarris, Ph.D. (Age 48) has been employed by the Company since February 1996 as an Assistant Director of Technical Operation and Director of Toxicology. Dr. Mudarris has been a consultant to the Company since October 1994. From 1992 to 1994, Dr. Mudarris was a Technical Director for National Health Laboratories, a national clinical laboratory located in Cranford, New Jersey. From 1988 to 1992 he was Vice President and Director of Columbia Biomedical Laboratory, A SAMHSA (NIDA) certified forensic drug testing laboratory in Columbia, South Carolina, and from 1987 to 1988 as Scientific and Managing Director of Keystone Laboratory, a toxicology laboratory in Asheville, North Carolina. Dr. Mudarris is a registered Clinical Laboratory Director in the State of New
York. He is certified by the American Board of Bioanalysis as a Clinical Laboratory Director and by the National Registry of Clinical chemistry as a Clinical chemist. He received his B.S. degree in Pharmacy from Damascus University in 1975 and M.S. degree in Medical Technology from Long Island University in 1980 and Ph.D. degree in Biochemistry from the University of Arkansas for Medical Sciences in 1986.
Compliance with Section 16(a) of the Exchange Act - -------------------------------------------------
Based solely on a review of Forms 3 and 4 and any amendments thereto furnished to the Company pursuant to Rule 16a-3(e) under the Securities Exchange Act of 1934, or representations that no Forms 5 were required, the Company believes that with respect to fiscal 1999, its officers, directors and beneficial owners of more than 10% of its equity timely complied with all applicable Section 16(a) filing requirements.
Item 11.
Item 11. - Executive Compensation ----------------------
The following table sets forth information concerning the compensation paid or accrued by the Company during the year ended on October 31, 1999 to its Chief Executive Officer and its other executive officers who were serving as executive officers of the Company on October 31, 1999. All of the Company's group life, health, hospitalization or medical reimbursement plans, if any, do not discriminate in scope, terms or operation, in favor of the executive officers or directors of the Company and are generally available to all salaried employees.
(1) In connection with their acceptance of the terms of new employment agreements, the Company's board of directors on May 13, 1997 authorized the issuance to Dr. Grodman, Mr. Dubinett and Mr. Singer of 300,000, 240,000 and 200,000 shares of Common Stock respectively. The shares are forfeitable in part in various amounts if the employee's employment is terminated "for cause" or at his option "without good reason" prior to May 1, 2000. See "Employment Agreements with Executive Officers" herein.
(2) Does not include 604,078 shares of Common Stock issuable upon conversion of 604,078 shares of Senior Preferred Stock owned by Dr. Grodman, his wife and a corporation controlled by her (collectively the "Grodman Group"). On May 13, 1997 pursuant to a recapitalization, the previously outstanding Senior Preferred Stock owned by the Grodman Group convertible into an aggregate 604,078 shares of Common Stock on or before April 20, 2003 at a conversion price of $1.50 per share was retired in exchange for a new class of Senior Preferred Stock convertible into an aggregate 604,078 shares of Common Stock on or before May 1, 2007 at a conversion price of $.75 per share. See Item 13 herein.
Employment Agreements with Executive Officers - ---------------------------------------------
On May 13, 1997, Dr. Grodman agreed to the terms of a new employment agreement pursuant to which he will serve as president and chief executive officer devoting at least 90% of his working time to the business of the Company. The agreement provides (I) for a seven-year term commencing November 1, 1997; (ii) a minimum annual Base Compensation consisting of salary and bonus in the aggregate amount of $395,000 subject to increases based on increases in the Consumer Price Index as well as increases at the discretion of the board of directors; (iii) typical health insurance coverage and an initial $2,000,000 face amount of "split dollar" life insurance insuring Dr. Grodman's life and payable to his estate (excluding benefits required to be paid to the Company pursuant to the split dollar plan) with $2,000,000 of additional coverage to be applied for, which was obtained during fiscal 1999; (iv) the
leasing of an automobile for his use; (v) participation in fringe benefit, bonus, pension, profit sharing, and similar plans maintained for the Company's employees; (vi) disability benefits; (vii) certain termination benefits; and (viii) in the event of termination due to a change in control of the Company, a severance payment equal to 2.99 times Dr. Grodman's average annual compensation during the preceding five years.
In consideration for Dr. Grodman's acceptance of the terms of the employment agreement, the board of directors authorized the issuance to Dr. Grodman of (a) 300,000 shares of the Company's Common Stock, partially subject to forfeiture, (b) five-year incentive stock options ("ISOs") exercisable to purchase 100,000 shares of Common Stock at $.790625 per share, and (C) ten-year non-qualified stock options ("NQOs") exercisable to purchase 200,000 shares of Common Stock at $.71875 per share. The ISOs are only exercisable while Dr. Grodman is employed by the Company. The NQOs expire if Dr. Grodman's employment agreement is terminated by the Company "For Cause" or at his option, "Without Good Reason." See "Employee Incentive Stock Option Plan."
The 300,000 shares of Common Stock issued to Dr. Grodman are forfeitable in part on the following basis if his employment agreement is terminated by the Company "For Cause" or at Dr. Grodman's option "Without Good Reason."
If Termination "For Cause" or "Without Good Reason" Occurs During the Following Number of Shares Periods Forfeited - --------------------------------- -----------------
May 1, 1997 through April 30, 1998 225,000 shs. May 1, 1998 through April 30, 1999 150,000 shs. May 1, 1999 through April 30, 2000 75,000 shs.
Also on May 13, 1997, Mr. Dubinett agreed to the terms of a new employment agreement pursuant to which he will serve as executive vice president and chief operating officer of the Company. The agreement provides (I) for a five and one-half year term commencing May 1, 1997; (ii) a minimum annual Base Compensation commencing November 1, 1997 consisting of salary and bonus in the aggregate amount of $220,000 subject to increases based on increases in the Consumer Price Index as well as increases at the discretion of the board of directors; (iii) typical health insurance coverage and $500,000 face amount of "split dollar" life insurance insuring Mr. Dubinett's life and payable to his estate (excluding benefits required to be paid to the Company pursuant to the split dollar plan)which amount was increased to $1,000,000 during fiscal 1999; (iv) the leasing of an automobile for his use; (v) participation in fringe benefit, bonus, pension, profit sharing, and similar plans maintained for the Company's employees; (vi) disability benefits; (vii) certain termination benefits; and (viii) in the event of termination due to a change in control of the Company, a severance payment equal to 2.99 times Mr. Dubinett's average annual compensation during the preceding five years.
In consideration for Mr. Dubinett's acceptance of the terms of the employment agreement, the board of directors authorized the issuance to Mr. Dubinett of (a) 240,000 shares of the Company's Common Stock, partially subject to forfeiture and (b) ten-year ISOs exercisable to purchase 60,000 shares of Common Stock at $.71875 per share. The ISOs are only exercisable while Mr. Dubinett is employed by the Company.
The 240,000 shares of Common Stock issued to Mr. Dubinett. are forfeitable in part on the following basis if his employment agreement is terminated by the Company "For Cause" or at Mr. Dubinett's option "Without Good Reason."
If Termination "For Cause" or "Without Good Reason" Occurs During the Following Number of Shares Periods Forfeited - ---------------------------------- ---------------------
May 1, 1997 through April 30, 1998 180,000 shs. May 1, 1998 through April 30, 1999 120,000 shs. May 1, 1999 through April 30, 2000 60,000 shs.
Also on May 13, 1997, Mr. Singer agreed to the terms of a new employment agreement pursuant to which he will serve as vice president and chief financial officer of the Company. The agreement provides (I) for a five and one-half year term commencing May 1, 1997; (ii) a minimum annual Base Compensation commencing November 1, 1997 consisting of salary and bonus in the aggregate amount of $220,000 subject to increases based on increases in the Consumer Price Index as well as increases at the discretion of the board of directors; (iii) typical health insurance coverage and $400,000 face amount of "split dollar" life insurance insuring Mr. Singer's life and payable to his estate (excluding benefits required to be paid to the Company pursuant to the split dollar plan) which amount was increased to $800,000 in November 1999; (iv) the leasing of an automobile for his use; (v) participation in fringe benefit, bonus, pension, profit sharing, and similar plans maintained for the Company's employees; (vi) disability benefits; (vii) certain termination benefits; and (viii) in the event of termination due to a change in control of the Company, a severance payment equal to 2.99 times Mr. Singer's average annual compensation during the preceding five years.
In consideration for Mr. Singer's acceptance of the terms of the employment agreement, the board of directors authorized the issuance to Mr. Singer of (a) 200,000 shares of the Company's Common Stock, partially subject to forfeiture and (b) ten-year ISOs exercisable to purchase 50,000 shares of Common Stock at $.71875 per share. The ISOs are only exercisable while Mr. Singer is employed by the Company.
The 200,000 shares of Common Stock issued to Mr. Singer are forfeitable in part on the following basis if his employment agreement is terminated by the Company "For Cause" or at Mr. Singer's option "Without Good Reason."
If Termination "For Cause" or "Without Good Reason" Occurs During the Following Number of Shares Periods Forfeited - -------------------------------------- --------------------
May 1, 1997 through April 30, 1998 150,000 shs. May 1, 1998 through April 30, 1999 100,000 shs. May 1, 1999 through April 30, 2000 50,000 shs.
Employee Stock Option Plan - --------------------------
In July 1989, the Company's Board of Directors adopted the 1989 Employees Stock Option Plan (the "1989 Plan") which was approved by shareholders in November 1989. The 1989 Plan provides for the grant of options to purchase up to 666,667 shares of Common Stock. Under the terms of the 1989 Plan, options granted thereunder may be designated as options which qualify for incentive stock option treatment ("ISOs") under Section 422 of the Code, or options which do not so qualify ("NQOs").
The 1989 Plan also grants the Board or a Stock Option Committee designated by the Board, the discretion to grant stock appreciation rights ("SARs") in connection with, or independent of, any grant of options under the 1989 Plan. SARs give the holder the right to receive from the Company upon exercise an amount equal to the excess of the aggregate fair market value on the date of exercise of the number of shares of Common Stock as to which SARs are being exercised over the aggregate exercise price for those shares payable either in cash or Common Stock in the discretion of the Board or the Stock Option Committee.
The 1989 Plan is administered by the Board or by a Stock Option Committee designated by the Board of Directors. The Board or the Stock Option Committee, as the case may be, has the discretion to determine the eligible employees to whom, and the times and the price at which, options will be granted; whether such options shall be ISOs or NQOs; the periods during which options will be exercisable; and the number of shares subject to each option. The Board or Committee shall have full authority to interpret the 1989 Plan and to establish and amend rules and regulations relating thereto.
Under the 1989 Plan, the exercise price of an option designated as an ISO shall not be less than the fair market value of the Common Stock on the date the option is granted. However, in the event an option designated as an ISO is granted to a 10% shareholder (as defined in the 1989 Plan) such exercise price shall be at least 110% of such fair market value. Exercise prices of NQOs options may be less than such fair market value. The aggregate fair market value of shares subject to options granted to a participant which are designated as ISOs which first become exercisable in any calendar year may not exceed $100,000.
As described above, on May 13, 1997, the Board of Directors granted five-year ISOs under the Plan to Dr. Grodman, exercisable to purchase 100,000 shares of the Company's Common Stock at an exercise price of $.790625 per share (equal to 110% of the last sale price for the Common Stock on NASDAQ on May 12, 1997). The board also granted ten-year ISOs under the Plan to Mr. Dubinett and Mr. Singer exercisable to purchase 60,000 shares and 50,000 shares of Common Stock respectively at an exercise price of $.71875 per share (equal to the last sale price for the Common Stock on NASDAQ on May 12, 1997). In addition, the board granted ten-year NQOs to Dr. Grodman, exercisable to purchase 200,000 shares of Common Stock at an exercise price of $.71875 per share.
At the same May 3, 1997 directors' meeting, in order to improve employee morale, the board canceled all other outstanding ISOs exercisable to purchase an aggregate 448,710 shares of Common Stock at exercise prices ranging from $1.3434 to $3.00 per share, and granted new ten-year ISOs under the Plan to 23 employees exercisable to purchase an aggregate 448,710 shares of Common Stock at an exercise price of $.71875 per share. Included in this grant were ISOs issued to Mr. Dubinett and Mr. Singer exercisable to purchase 153,334 shares and 116,667 shares respectively. (These ISOs replaced ISOs previously granted to said two individuals to purchase 153,334 shares and 116,667 shares respectively at exercise prices ranging from $1.3125 to $1.50 per share.)
Also on May 13, 1997, the Board of Directors granted five-year NQOs to 31 employees, exercisable to purchase an aggregate 136,100 shares of Common Stock at $.71875 per share but only while the optionee was employed by the Company.
On May 13, 1997, the board also issued five-year warrants to each of its three outside directors, exercisable to purchase 10,000 shares (30,000 in the aggregate) of Common Stock at an exercise price of $.71875 per share, but only while serving as a director. At the same time, the board reduced the exercise price on warrants held by one outside director, John Roglieri, exercisable to purchase 23,334 shares ranging from $3.00 per share to $3.75 per share to $.71875 per share and issued five-year warrants to another outside director, Gary Lederman, exercisable to purchase 5,200 shares at $.71875 per share.
No stock options were granted during fiscal 1998. On January 19, 1999, the Board of Directors granted five-year NQOs to 15 employees exercisable to purchase an aggregate 286,000 shares of Common Stock at an exercise price of $1.00 per share (the last sale price for the Common Stock on NASDAQ on the trading day immediately preceding the meeting) but only while the optionee was employed by the Company. On June 30, 1999, the Board ratified the grant of five-year NQOs to three employees, exercisable to purchase an aggregate 150,000 shares of Common Stock at prices ranging from $.594 to $.719 per share but only while the optionee was employed by the Company. The option prices were based on the market prices for the Common Stock on the respective dates when employment commenced for each of the three employees.
See Note 9 of Notes to the Consolidated Financial Statements.
The following table sets forth certain information concerning unexercised options for each of the executive officers named in the "Summary Compensation Table." No options were exercised by any of such individuals in fiscal 1999.
1999 Fiscal Year-End Option Values ----------------------------------
Number of Unexercised Options Value of At 1999 Fiscal Year-End Unexercised In-The-Money Name Exercisable Options at 10/31/99 - ---- ----------- ------------------- Unexercisable ------------- Marc D. Grodman 200,000 -0- $ 50,000 100,000 -0- $ 17,813
Howard Dubinett 213,334 -0- $ 53,333 Sam Singer 166,667 -0- $ 41,667
Directors' Compensation - -----------------------
Directors who are not employees of the Company are also paid a $1,000 per quarter director's fee.
Item 12.
Item 12. - Security Ownership of Certain Beneficial Owners and Management --------------------------------------------------------------
The following table sets forth information as of January 21, 1999 with respect to the ownership of Common Stock by (I) each person known by the Company to be the beneficial owner of more than 5% of its outstanding Common Stock, (ii) each director of the Company, (iii) each executive officer of the Company, and (iv) all directors and executive officers as a group. The percentages have been calculated on the basis of treating as outstanding for a particular holder, all shares of Common Stock outstanding on said date owned by such holders and all shares of Common Stock issuable to such holder in the event of exercise or conversion of outstanding options, warrants and convertible securities owned by such holder at said date which are exercisable or convertible within 60 days of such date.
Shares of Name and Address of Common Stock Percentage Beneficial Owner Beneficially Owned(1) Ownership ---------------- --------------------- ---------
Directors and Executive Officers* Marc D. Grodman(2)...........................1,673,845 18.6% Howard Dubinett (3)............................477,001 5.7% Sam Singer(4)..................................377,667 4.6% Frank DeVito(5)................................ 10,202 - John Roglieri(6)............................... 31,667 - Gary Lederman (7).............................. 25,200 -
Executive Officers and directors.............2,595,582 27.5% as a group (six persons)(2)(3)(4)(5)(6)(7)
* The address of all of the Company's directors and ex ecutive officers is c/o the Company, 481 Edward H. Ross Drive, Elmwood Par k, New Jersey 07407.
(1) Except otherwise noted, each holder named in the table has sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned.
(2) Includes 608,100 shares owned directly by Dr. Grodman, 549,678 shares issuable upon conversion of Senior Preferred Stock and 300,000 shares issuable upon exercise of options. Also includes 121,667 shares owned directly and 54,400 shares issuable upon conversion of Senior Preferred Stock held by Dr. Grodman's wife, Pam Grodman, and a Company controlled by her and 40,000 shares owned by their minor children. Dr. Grodman disclaims beneficial ownership of these 236,067 shares.
(3) Includes 263,667shares owned directly, and 213,334 shares issuable upon exercise of options.
(4) Includes 211,000 shares owned directly, and 166,667 shares issuable upon exercise of options.
(5) Includes 202 shares owned directly and 10,000 shares issuable upon exercise of warrants.
(6) Includes 1,667 shares owned directly and 30,000 shares issuable upon exercise of warrants.
(7) Includes 25,200 shares owned directly.
Item 13.
Item 13. - Certain Relationships and Related Transactions -----------------------------------------------
In July 1989, the Company discontinued the operation of its Med-Mobile Division. At such time, Dr. Grodman, as the Associated Physician, was indebted to the Company in the amount of $235,354 in connection with the operation of this division. Pursuant to an October 1, 1989 Settlement Agreement, Dr. Grodman issued a $235,354 promissory note to the Company bearing interest at 10% per annum and payable at the rate of $50,000 per annum in payment of this indebtedness. On April 30, 1992, the Board of Directors amended this agreement, in consideration for Dr. Grodman's personal guarantee of the Company's $2,500,000 financing arrangement with Towers Financial Corporation, suspending all rental and interest charges for periods subsequent to November 1, 1991. As of October 31, 1999, $138,518 in outstanding principal, interest and van rentals was due from Dr. Grodman.
On April 20, 1993, in order to facilitate the Company's 1993 proposed public offering, Dr. Grodman canceled his pro-rata option contained in his employment contract and all other outstanding options and warrants to purchase shares of Common Stock held by Dr. Grodman, his wife and an affiliated entity (the "Grodman Group") exercisable to purchase an aggregate 604,078 shares of Common Stock at prices ranging from $1.4438 to $1.50 or an average price of $1.47 per share, in consideration for the issuance to the Grodman Group of 604,078 shares of a new class of senior preferred stock, $.10 par value per share ("Senior Preferred Stock"). Each share of Senior Preferred Stock had the same voting rights (one vote per share), dividend rights and liquidation rights as each share of Common Stock and for a period of 10 years after issuance, was convertible into one share of Common Stock upon payment of a conversion price of $1.50 per share. The 604,078 shares of Senior Preferred Stock were issued to the Grodman Group on August 23, 1993.
On May 13, 1997 pursuant to a recapitalization, the Senior Preferred was retired in exchange for a new class of Senior Preferred Stock issued to the Grodman Group. The new Senior Preferred Stock is convertible into an aggregate 604,078 shares of Common Stock on or before May 1, 2007 at a conversion price of $.75 per share and has the same voting rights (one vote per share), dividend rights and liquidation rights as each share of Common Stock.
Item 14.
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
Balance Sheet - October 31, 1999 and 1998 ..F-3
Statement of Operations- Years ended October 31, 1999, 1998 and 1997
Statement of Shareholders' Equity Years ended October 31, 1999, 1998 and 1997
Statement of Cash Flows - Years ended October 31, 1999, 1998 and 1997 ..F-7
Notes to Financial Statements- ..F-23
Schedule II - Years ended October 31, 1999, 1998 and 1997 .F-25
2. Reports on Form 8-K
No reports on Form 8-K have been filed during the Quarter ended October 31, 1999.
3. Exhibits Exhibit Incorporated by No. Item Reference to
3.1* Amended and Restated Certificate of Incorporation dated (A) November 15, 1989
3.1.1* Amendment to Certificate of Incorporation dated (B) October 4, 1991 (authorizing one-for-10 reverse stock split)
3.1.2* Amendment to Certificate of Incorporation dated (C) August 23, 1993 (authorizing one-for-three reverse stock split)
3.1.3 Amendment to Certificate of Incorporation dated March 23, 1998 (creating Series A Senior Preferred Stock)
3.1.4 Amendment to Certificate of Incorporation dated March 31, 1998 (creating Series A Junior Participating Preferred Stock)
3.2* By-laws (D)
4.1* Form of Common Stock Certificate, $.01 par value (C)
10.1 Lease Agreement for Elmwood Park, New Jersey Premises, as in effect at October 31, 1999
10.2 Employment Agreement between the Company and Marc Grodman as in effect at December 31, 1999
10.3 Employment Agreement between the Company and Howard Dubinett as in effect at December 31, 1999
10.4 Employment Agreement between the Company and Sam Singer as in effect at December 31, 1999
10.5* The Company's 1989 Stock Option Plan (B)
10.6* Acquisition Agreement made as of April 9, 1998 for the (E) acquisition by the Company of all of the outstanding capital stock of Medilabs, Inc.
10.7* Rights Agreement dated as of March 31, 1998 including (F) Exhibits thereto between the Company and American Stock Transfer & Trust Company as Rights Agent
10.8 Asset Sale/Purchase Agreement made as of December 2, 1999 for the acquisition by the Company of the WEB Business of the Medical Marketing Group, Inc.
10.9 Asset/Sale Purchase Agreement made as of December 14, 1999 for the acquisition by the Company's wholly-owned BRLI No. 1 Acquisition Corp. subsidiary of the Health Ford Business of Right Body Foods, Inc.
10.10 Employment Agreement between the Company and Rebecca Klafter, chief executive officer of Right Body Foods, Inc., dated December 14, 1999
21 Subsidiaries of the Company
The following are the Company's two wholly-owned subsidiaries:
Name under which it Name State of Incorporation Conducts Business - ---- ---------------------- -----------------
Medilabs, Inc. New York Medilabs BRLI No. 1 Acquisition Corp. New Jersey Right Body Foods
The exhibits designated above with an asterisk (*) have previously been filed with the Commission and, pursuant to 17 C.F.R. Secs. 201.24 and 240.12b-32, are incorporated by reference to the documents as indicated below.
(A) Incorporated by reference to exhibit filed with the Company's Registration Statement on Form S-1 (File No. 33-31360).
(B) Incorporated by reference to exhibit filed with the Company's annual report on Form 10KSB for the year ended October 31, 1992.
(C) Incorporated by reference to exhibit filed with the Company's Registration Statement on Form SB-2 (File No. 33-68678).
(D) Incorporated by reference to exhibit filed with the Company's Registration Statement on Form S-18 (File No. 33-5048-NY).
(E) Incorporated by reference to exhibit filed with the Company's report on Form 8-K for April 22, 1998.
(F) Incorporated by reference to exhibit filed with the Company's report on Form 8-A dated March 31, 1998.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BIO-REFERENCE LABORATORIES, INC.
By: /S/ Marc D. Grodman - ------------------------ Marc D. Grodman Chairman of the Board, President, Chief Executive Officer and Director
Dated:January 31, 2000
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/S/ Marc D. Grodman - ------------------------ Marc D. Grodman Chairman of the Board, President, Chief Executive Officer and Director January 31, 2000
/S/ Howard Dubinett - ------------------------ Howard Dubinett Executive Vice President, Chief Operating Officer and Director January 31, 2000
/S/ Sam Singer - ------------------------ Sam Singer Vice President, Chief Financial Officer, Chief Accounting Officer and Director January 31, 2000
/S/ Frank DeVito - ------------------------ Frank DeVito Director January 31, 2000
/S/ John Roglieri - ------------------------ John Roglieri Director January 31, 2000
/S/ Gary Lederman - ------------------------ Gary Lederman Director January 31, 2000
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of Bio-Reference Laboratories, Inc. Elmwood Park, New Jersey
We have audited the accompanying consolidated balance sheets of Bio-Reference Laboratories, Inc. and its subsidiary as of October 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three fiscal years in the period ended October 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bio-Reference Laboratories, Inc. and its subsidiary as of October 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended October 31, 1999, in conformity with generally accepted accounting principles.
MOORE STEPHENS, P. C. Certified Public Accountants.
Cranford, New Jersey January 7, 2000 [Except for Note 22B as to which the date is January 26, 2000 and Note 22C as to which the date is January 19, 2000]
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY - ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------
October 31, ----------- 1 9 9 9 1 9 9 8 ------- ------- Assets: Current Assets: Cash and Cash Equivalents $ 2,128,474 $ 2,784,147 Accounts Receivable - Net 18,615,496 20,749,696 Inventory 572,279 587,101 Certificates of Deposit - Restricted -- 3,646,250 Other Current Assets 404,124 1,100,867 Deferred Tax Asset -- 344,000 ------------ -----------
Total Current Assets 21,720,373 29,212,061 ------------ -----------
Property and Equipment: Automobiles 41,740 41,740 Medical Equipment 3,466,574 3,263,101 Leasehold Improvements 1,152,599 429,993 Furniture and Fixtures 550,554 508,630 ------------ -----------
Totals - At Cost 5,211,467 4,243,464 Less: Accumulated Depreciation 3,039,128 2,022,928 ------------ -----------
Property and Equipment - Net 2,172,339 2,220,536 ------------ -----------
Other: Certificate of Deposit - Restricted -- 33,750 Due from Related Party 138,518 187,118 Deposits 278,619 303,354 Goodwill 5,396,863 5,746,601 Intangible Assets 1,764,740 2,507,149 Other Assets 846,546 567,769 ------------ -----------
Total Other 8,425,286 9,345,741 ------------ -----------
Total Assets $ 32,317,998 $40,778,338 ============ ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY - ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY - ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS - ------------------------------------------------------------------------------
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY - ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY - ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY - ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------
Supplemental Schedule of Non-Cash Investing and Financing Activities: During 1997, the Company incurred four capital lease obligations totaling $252,279 in connection with the acquisition of medical equipment.
In fiscal 1997, the Company issued debt in the amount of $108,000 in connection with the acquisition of a customer list related to a 1994 agreement.
During 1998, the Company incurred two capital lease obligations totaling $93,143 in connection with the acquisition of medical equipment.
During 1999, the Company incurred seven capital lease obligations totaling $598,122 in connection with the acquisition of medical equipment and leasehold improvements.
In May 1999, the Company recorded $625,000 in intangible assets and accrued expenses related to an employment agreement.
[See Notes 7, 13, 16 and 22] for additional non-cash transactions]
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
[1] Organization and Business
Bio-Reference Laboratories, Inc. was incorporated on December 21, 1981 to initially engage in the business of developing and marketing on-site medical screening examinations. Since February 1987, its emphasis has been in clinical laboratory operations, principally servicing the greater New York metropolitan area and providing specialty services throughout the United States. Bio-Reference Laboratories, Inc. and its wholly-owned subsidiary [the "Company"] markets its clinical laboratory testing services directly to physicians, hospitals, clinics, and other health facilities.
[2] Summary of Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated. The operations of GenCare Biomedical Research Corporation are included in operations from January 1, 1995 through September 30, 1997 [See Note 20]. The operations of Medilabs, Inc. are included in operations commencing April 9, 1998 [See Note 16].
Revenue Recognition - Revenues are recognized at the time the services are performed. Revenues on the statements of operations are as follows: Y e a r s e n d e d ---------------------------------- O c t o b e r 3 1, ---------------------------------- 1 9 9 9 1 9 9 8 1 9 9 7 ------- ------- -------
Gross Revenues $125,958,897 $102,351,588 $80,462,096 ------------ ------------ ----------- Contractual Adjustments and Discounts: Medicare/Medicaid Portion 38,779,145 33,064,535 23,090,659 Other 33,323,338 22,733,323 18,711,253 ------------ ------------ ----------
Total Contractual Adjustments and Discounts 72,102,483 55,797,858 41,801,912 ------------ ------------ ----------
Net Revenues $ 53,856,414 $ 46,553,730 $38,660,184 ------------ ============ ============ ===========
Contractual Credits and Provision for Doubtful Accounts - An allowance for contractual credits is determined based upon a review of the reimbursement policies and subsequent collections for the different types of receivables. An allowance for doubtful accounts is determined based upon a percentage of total receivables. The aggregate allowance, which is shown net against accounts receivable, was $15,312,935, $13,494,475 and $8,564,436 as of October 31, 1999, 1998 and 1997, respectively.
Inventory - Inventory is stated at the lower of cost [on a first-in, first-out basis] or market. Inventory consists primarily of clinical supplies.
Stock Options Issued to Employees - The Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," for financial note disclosure purposes and continues to apply the intrinsic value method of Accounting Principles Board ["APB"] Opinion No. 25, "Accounting for Stock Issued to Employees," for financial reporting purposes.
Deferred Income Taxes - Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2 - ------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
Deferred Income Taxes [Continued] - Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
Net Income Per Share - Basic EPS is based on average common shares outstanding and diluted EPS includes the effects of potential common stock, such as, options and warrants, if dilutive. Securities that could potentially dilute earnings in the future are listed in Notes 9 and 22.
Impairment - Certain long-term assets of the Company including goodwill are reviewed at least annually as to whether their carrying value has become impaired, pursuant to guidance established in Statement of Financial Accounting Standards ["SFAS"] No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Management considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations [undiscounted and without interest charges]. If impairment is deemed to exist, the assets will be written down to fair value. Management also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. During the year ended October 31, 1999, an impairment of $2,924,371 was recorded in connection with assets acquired for the hemo-dialysis business. The breakdown of this expense was an increase in the allowance for related accounts receivable of approximately $2,000,000 and the write down of goodwill of approximately $900,000 as a result of management's intent to no longer pursue the hemo-dialysis business. Accordingly, the Company has made revisions to future endeavors in this area.
Property and Equipment - Property and equipment are carried at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the respective assets which range from 2 to 15 years. Leasehold improvements are amortized over the life of the lease, which is approximately five years.
The statements of operations reflect depreciation expense related to property and equipment of $1,038,421, $820,226 and $419,462 for the years ended October 31, 1999, 1998 and 1997, respectively.
On sale or retirement, the asset cost and related accumulated depreciation or amortization are removed from the accounts, and any related gain or loss is reflected in income. Repairs and maintenance are charged to expense when incurred.
Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Goodwill - Goodwill represents the excess of the cost of companies acquired over the fair value of their net assets at dates of acquisition and is being amortized on the straight-line method over 20 years. The statements of operations reflect amortization expense related to goodwill for the years ended October 31, 1999, 1998 and 1997 of $349,738, $254,022 and $203,490, respectively. The balance sheet reflects accumulated amortization of $1,597,767 and $1,248,029 as of October 31, 1999 and 1998, respectively.
Intangible Assets - Intangible assets are amortized using the straight-line method. The statements of operations reflect amortization expense related to intangible assets of $443,038, $565,415 and $566,366 for the years ended October 31, 1999, 1998 and 1997, respectively. The balance sheet reflects accumulated amortization of $2,271,436 and $2,173,034 as of October 31, 1999 and 1998, respectively.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3 - ------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
Intangible Assets [Continued] - A summary is as follows: Accumulated Net of Accumulated Amortization Amortization October 31, October 31, Intangible Asset Life in Years Cost 1 9 9 9 1 9 9 9 ---------------- ------------- ---- ------- -------
Customer Lists 20 $ 1,449,202 $ 578,736 $ 870,466 Covenants Not-to-Compete 3 - 7.5 1,020,000 977,574 42,426 Employment Agreement 5 - 7 1,025,000 444,643 580,357 Costs Related to Acquisitions 1 - 20 385,969 245,426 140,543 Patent 17 156,005 25,057 130,948 ----------- ----------- -----------
Totals $ 4,036,176 $ 2,271,436 $ 1,764,740 ------ =========== =========== ===========
Accumulated Net of Accumulated Amortization Amortization October 31, October 31, Intangible Asset Life in Years Cost 1 9 9 8 1 9 9 8 ---------------- ------------- ---- ------- -------
Customer Lists 20 $ 2,469,202 $ 620,143 $ 1,849,059 Covenants Not-to-Compete 3 - 7.5 1,200,000 965,279 234,721 Employment Agreement 5 400,000 366,669 33,331 Costs Related to Acquisitions 1 - 20 454,976 205,260 249,716 Patent 17 156,005 15,683 140,322 ----------- ----------- -----------
Totals $ 4,680,183 $ 2,173,034 $ 2,507,149 ------ =========== =========== ===========
Advertising Costs -Advertising costs are expensed when incurred. Advertising costs amounted to approximately $548,000, $819,000 and, $467,000 and for the years ended October 31, 1999, 1998 and 1997, respectively.
Cash and Cash Equivalents - Cash equivalents are comprised of certain highly liquid investments with a maturity of three months or less when purchased. The Company had $1,113,418 and $1,843,186 in cash equivalents at October 31, 1999 and 1998, respectively.
[3] Note Payables - Banks
In April 1998, the Company amended its revolving loan agreement with PNC Bank. The maximum amount of the credit line available to the Company is the lesser of (i) $14,000,000 or (ii) 50% of the Company's qualified accounts receivable [as defined in the agreement] plus the face amount of any certificates of deposit pledged as collateral for this loan minus the amount of the outstanding principal balance of any term loans with the same bank. Interest on advances which are collateralized by certificates of deposit will be at 2% above the certificate of deposit interest rate. Interest on other advances will be at prime plus 1.25%. The certificate of deposit interest rate was 5% through March 25, 1999. The credit line is collateralized by substantially all of the Company's assets and the assignment of a $4,000,000 life insurance policy on the president of the Company. The line of credit is available through March 2001 and may be extended for annual periods by mutual consent, thereafter. The terms of this agreement contain, among other provisions, requirements for maintaining defined levels of capital expenditures and net worth, various financial ratios and insurance coverage. As of October 31, 1999 and 1998, the Company was in default of certain covenants, however, the Company subsequently received bank waivers for these defaults [See Note 22B]. As of October 31, 1998, the Company utilized $12,000,000 of this credit facility. As of October 31, 1999, the Company utilized $8,700,905 of this credit facility.
Prime rate at October 31, 1999 and 1998 was 8.25% and 8.0%, respectively.
The weighted average interest rate on short-term borrowings outstanding as of October 31, 1999 and 1998 was 9.22% and 8.75%, respectively.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4 - ------------------------------------------------------------------------------
[4] Long-Term Debt October 31, ----------- 1 9 9 9 1 9 9 8 ------- -------
[A] Note Payable to LTC Service and Holdings, Inc. Due April 2000. Interest imputed at 11.6%, unsecured. $ 415,671 $ 1,323,667
[B] Notes Payable to PNC Bank. Due April 2002. Interest at prime plus 2% for the unsecured portion and prime plus 1.6% for the secured portion. 2,800,000 3,600,000
Note Payable to PNC Bank. Due October 1999. Interest at prime plus 1.00%. -- 86,424
Notes Payable to PNC Bank. Due July 2000. Interest at prime plus 1.00% and certificate of deposit rate plus 2%. -- 315,259
Other -- 52,325 ---------- -----------
Totals 3,215,671 5,377,675 Less: Current Maturities 1,215,671 2,071,058 ---------- -----------
Long-Term Debt $2,000,000 $ 3,306,617 -------------- ========== ===========
[A] On April 9, 1998, the Company acquired the assets and certain liabilities of Medilabs, Inc. from LTC Service and Holdings, Inc. The purchase price consisted of $4,000,000 cash plus a $1,500,000 promissory note payable without interest in three semi-annual installments commencing April 1999. Interest was imputed at a rate of 11.6% on this note.
[B] In April 1998, the Company entered into an agreement to borrow $4,000,000 from PNC Bank. The note is payable in forty-seven principal installments of $66,667 commencing May 1, 1998 and one final balloon payment. The unsecured portion of $2,000,000 bears interest at an annual rate of 10.25% to 10.5%. The secured portion of $2,000,000 bears interest at an annual rate of 9.85% to 10.10%. This note is in accordance with the provisions of the Company's revolving loan agreement [See Note 3] with the same lender.
Maturities of debt at October 31, 1999 in each of the next five years are as follows:
2000 $ 1,215,671 2001 800,000 2002 1,200,000 2003 -- 2004 -- -----------
Total $ 3,215,671 ----- ===========
[5] Related Party Transactions
On October 1, 1989, an unsecured promissory note was received from Dr. Marc Grodman ["Dr. Grodman"], president of the Company, in exchange for a receivable in the amount of $235,354. As of October 31, 1999 and 1998, $138,518 and $187,118 was remaining on the note. This note is non-interest bearing and has no fixed terms.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5 - ------------------------------------------------------------------------------
[6] Income Taxes
The reconciliation of income tax from continuing operations computed at the U.S. federal statutory tax rate to the Company's effective income tax rate is as follows:
October 31, ----------------------------- 1 9 9 9 1 9 9 8 1 9 9 7 ------- ------- -------
U.S. Federal Statutory Rate (34.0)% 34.0 % 34.0% State and Local Income Taxes, Net of U.S. Federal Income Tax Benefit -- % 9.0 % 10.0% Other -- % (11.1)% (7.5)% Utilization of Net Operating Loss Carryforwards -- % (38.8)% (41.0)% Change in Valuation Allowance 42.0 % --% -- % ------ ------ -------
Actual Rate 8.0 % (6.9)% (4.5)% ----------- ====== ====== =======
The provision for income taxes shown in the consolidated statements of operations consist of the following: October 31, ------------------------------------- 1 9 9 9 1 9 9 8 1 9 9 7 ------- ------- ------- Current: Federal $ -- $ 16,200 $ 79,947 State and Local 23,300 31,500 39,313
Deferred: Federal 272,000[1] (68,000) (204,000) State and Local 72,000[1] (18,000) (54,000) ---------- ---------- ----------
Total Provision for Income Taxes $ 367,300 $ (38,300) $ (138,740) -------------------------------- ========== ========== ==========
[1] Increase in deferred tax valuation allowance.
For the year ended October 31, 1998, the Company utilized approximately $500,000 of net operating loss carryforwards which resulted in a tax benefit for federal and state purposes of approximately $200,000. For the year ended October 31, 1997, the Company utilized approximately $3,600,000 of net operating loss carryforwards which resulted in a tax benefit for federal and state purposes of approximately $1,450,000.
At October 31, 1999, the Company had net operating loss carryforwards of approximately $9,345,000 for federal income tax purposes, which expire in years 2006 through 2014. In addition, the Company had net operating losses for state purposes. The Company operates in several states, however, most of its business is conducted in the New Jersey and New York area. The following summarizes the operating loss carryforwards by year of expiration:
Federal New Jersey New York Expiration Date Amount Amount Amount
2000 $ -- $ 2,375,000 $ -- 2006 825,000 -- 383,000 2007 1,255,000 -- 1,253,000 2008 2,375,000 -- 2,373,000 2009 390,000 -- -- 2014 4,500,000 4,500,000 4,500,000 ---------- ----------- ----------
Total $9,345,000 $ 6,875,000 $8,509,000 ----- ========== =========== ==========
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6 - ------------------------------------------------------------------------------
[6] Income Taxes [Continued]
At October 31, 1998, the Company had a deferred tax asset of approximately $2,000,000 and a valuation allowance of approximately $1,656,000 related to the asset, a decrease of $286,000 since October 31, 1997. The deferred tax asset primarily relates to net operating loss carryforwards.
At October 31, 1999, the Company had a deferred tax asset of approximately $4,000,000 and a valuation allowance of approximately $4,000,000 related to the asset, an increase of $2,344,000 since October 31, 1998. The deferred tax asset primarily relates to net operating loss carryforwards.
[7] Capital Transactions
[A] Preferred Stock and Common Stock - The Company is authorized to issue an aggregate of 1,669,667 shares of preferred stock, $.10 par value. On April 20, 1993, in order to facilitate the Company's 1993 proposed public offering, Dr. Grodman canceled his pro-rata option contained in his employment contract and all other outstanding options and warrants to purchase shares of Common Stock held by Dr. Grodman, his wife and an affiliated entity (the "Grodman Group") exercisable to purchase an aggregate 604,078 shares of Common Stock at prices ranging from $1.4438 to $1.50 or an average price of $1.47 per share, in consideration for the issuance to the Grodman Group of 604,078 shares of a new class of senior preferred stock, $.10 par value per share ("Senior Preferred Stock"). Each share of Senior Preferred Stock had the same voting rights (one vote per share), dividend rights and liquidation rights as each share of Common Stock and for a period of 10 years after issuance, was convertible into one share of Common Stock upon payment of a conversion price of $1.50 per share. The 604,078 shares of Senior Preferred Stock were issued to the Grodman Group on August 23, 1993. On May 13, 1997, pursuant to a recapitalization, the Senior Preferred Stock was retired in exchange for a new class of Series A Senior Preferred Stock issued to the Grodman Group. The new Series A Senior Preferred Stock is convertible into an aggregate 604,078 shares of Common Stock on or before May 1, 2007 at a conversion price of $.75 per share and has the same voting rights [one vote per share], dividend rights and liquidation rights as each share of Common Stock.
Holders of the Company's Common Stock are entitled to one vote per share on matters submitted for shareholder vote. Holders are also entitled to receive dividends ratably, if declared. In the event of dissolution or liquidation, holders are entitled to share ratably in all assets remaining after payment of liabilities.
On March 31, 1998, the Company's Board of Directors adopted a Shareholder Rights Plan and declared a dividend distribution of one Right for each outstanding share of Common Stock and each outstanding share of Series A Senior Preferred Stock. Each Right entitles the registered holder to purchase one one- ten-thousandth of a share of Series A Junior Participating Preferred Stock [the "Junior Preferred Stock"] from the Company at a price of $4.00. Because of the nature of the dividend, liquidation and voting rights of the Junior Preferred Stock, the value of each one-ten-thousandth of a share of Junior Preferred Stock is intended to approximate the value of one share of Common Stock. Junior Preferred Stock purchasable upon exercise of the Rights will not be redeemable. Each outstanding share of Junior Preferred Stock will be entitled to a minimum preferential quarterly dividend of $.05 per share and will be entitled to an aggregate dividend of 10,000 times the dividend declared per share of Common Stock. In the event of liquidation, the holders of the Junior Preferred Stock will be entitled to a minimum preferential liquidation payment of $10,000 per share and will be entitled to an aggregate payment of 10,000 times the payment made per share of Common Stock. Each share of Junior Preferred Stock will have 10,000 votes, voting together with the Common Stock and the Series A Senior Preferred Stock. In the event of any merger, consolidation or other transaction in which the Common Stock is exchanged, each share of Junior Preferred Stock will be entitled to receive 10,000 times the amount received per share of Common Stock. The Rights are protected by customary anti-dilution provisions. The Rights are not exercisable unless any one of certain triggering events occur including the acquisition by an individual or entity and their associates of 25% or more of the outstanding shares of Common Stock. The Shareholder Rights Plan is designed to protect the Company and its shareholders from coercive, unfair and inadequate takeover bids and practices. The Plan is designed to strengthen the Board of Directors' ability to deter a person or group from attempting to gain control of the Company without offering a fair price and equal treatment to all shareholders.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7 - ------------------------------------------------------------------------------
[7] Capital Transactions [Continued]
[B] Equity Transactions for Services - In May 1997, the Company issued 815,000 shares of common stock and warrants to purchase 58,534 shares of the Company's common stock at a price of $.71875 in connection with employment and consulting agreements and a two year extension on a loan agreement. Included in the 815,000 shares issued were 740,000 shares to three officers of the Company. The shares are forfeitable in part in various amounts if the employee's employment is terminated "for cause" or at his option "without good reason" prior to May 1, 2000.
In fiscal 1999, the Company issued 515,000 shares of common stock and options to purchase 436,000 shares of the Company's common stock at prices ranging between $.594 and $.719 in connection with employment and consulting agreements.
[8] Income Per Share
For the Year Ended October 31, 1999 ------------------------------------- Per Share Income Shares Amount Basic EPS: [Loss] Income Available to Common Stockholders $(4,978,448) 7,357,235 $ (.68)
Effect of Dilutive Securities: Convertible Preferred Stock -- -- Warrants/Options -- -- ----------- ----------
Diluted EPS: [Loss] Income Available to Common Stockholders Plus Assumed Conversions $(4,978,448) 7,357,235 $ (.68) ----------- ---------- ---------
Incentive stock options to purchase 612,041 shares of common stock and non-incentive stock options and warrants to purchase 954,100 shares of common stock were outstanding at October 31, 1999 but were not included in the computation of diluted EPS because they were antidilutive. These securities could potentially dilute earnings per share in the future.
For the Year Ended October 31, 1998 -------------------------------------- Per Share Income Shares Amount Basic EPS: Income Available to Common Stockholders $ 596,583 7,196,299 $ .08
Effect of Dilutive Securities: Convertible Preferred Stock -- 278,137 Warrants/Options -- 492,568 ----------- ----------
Diluted EPS: Income Available to Common Stockholders Plus Assumed Conversions $ 596,583 7,967,004 $ .07 ----------- ---------- ----------
Warrants and options to purchase 5,448,339 shares of common stock at $3.00 to $6.75 per share were outstanding at October 31, 1998 but were not included in the computation of diluted EPS because the exercise price of these items was greater than the average market price of the common shares. These securities could potentially dilute earnings per share in the future. Warrants to purchase 5,253,339 shares of common stock expired in November 1998.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8 - ------------------------------------------------------------------------------
[8] Income Per Share [Continued]
For the Year Ended October 31, 1997 ------------------------------------ Per Share Income Shares Amount Basic EPS: Income Available to Common Stockholders $3,199,915 6,685,155 $ .48
Effect of Dilutive Securities: Convertible Preferred Stock -- 244,108 Warrants/Options -- 450,650 ---------- ----------
Diluted EPS: Income Available to Common Stockholders Plus Assumed Conversions $3,199,915 7,379,913 $ .43 ---------- ---------- -----------
Warrants and options to purchase 5,651,673 shares of common stock at $1.50 to $6.75 per share were outstanding at October 31, 1997 but were not included in the computation of diluted EPS because the exercise price of these items was greater than the average market price of the common shares. These securities could potentially dilute earnings per share in the future.
[9] Stock Options and Warrants
[A] Employment Incentive Stock Options - In November 1989, the shareholders approved and the Company adopted the 1989 Employee Stock Option Plan ["1989 Plan"] which provides for the granting of 666,667 shares of common stock. Under the terms of its stock option plans, incentive stock options to purchase shares of the Company's common stock are granted at a price not less than the fair market value of the common stock at the date of grant. These stock options are exercisable up to ten years from the date of grant. At October 31, 1999 and 1998, there were 12,291 shares reserved for future grants under the plan. No stock appreciation rights have been granted. In May 1997, the Company's board of directors approved the cancellation of all of the outstanding employee incentive stock options for new options at an exercise price of $.71875 which reflected fair market value. Following is a summary of transactions: Weighted Average Shares Under Exercise Price Options Per Share
Outstanding at October 31, 1996 482,044 $ .72 Granted During the Year 210,000 .76 Expired During the Year (34,334) .72 Exercised During the Year -- -- --------- ------
Outstanding and Eligible for Exercise at October 31, 1997 657,710 .73 ------------------
Granted During the Year -- -- Expired During the Year (3,334) .72 Exercised During the Year (8,334) .72 --------- ------
Outstanding and Eligible for Exercise at October 31, 1998 646,042 .73 -----------------
Granted During the Year -- -- Expired During the Year (34,001) .72 Exercised During the Year -- -- --------- ------
Outstanding and Eligible for Exercise at October 31, 1999 612,041 $ .73 ------------------ ======= ======
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9 - ------------------------------------------------------------------------------
[9] Stock Options and Warrants [Continued]
Outstanding and Exercisable Options ----------------------------------- Weighted Average Number of Remaining Weighted Average Shares Under Contractual Exercise Price Exercise Price Range Option Life Per Share - -------------------- ------ ---- ---------
$.71875 to $.790625 Per Share 612,041 8 Years $ .73
The weighted average grant date fair value of options granted during the year ended October 31, 1997 was $.2486 per share.
The Company accounts for these stock-based compensation awards to employees under the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees." Total compensation cost recognized against income for stock-based employee compensation awards was $-0- for the years ended October 31, 1999, 1998 and 1997.
[B] Non Incentive Stock Options and Warrants - Non-incentive stock options and warrants may be granted to employees or non-employees at fair market value or at a price less than fair market value of the common stock at the date of grant. The following is a summary of transactions:
Weighted Shares Under Average Options Exercise Price and Warrants Per Share ------------ ---------
Outstanding and Eligible for Exercise at October 31, 1996 6,022,380 $ 4.63 -----------------
Granted During the Year 381,300 .72 Expired During the Year (584,871) 1.45 Exercised During the Year -- -- ---------- ------
Outstanding and Eligible for Exercise at October 31, 1997 5,818,809 4.71 ------------------
Granted During the Year -- -- Expired During the Year (206,668) 5.00 Exercised During the Year (35,200) .72 ---------- ------
Outstanding and Eligible for Exercise at October 31, 1998 5,576,941 4.73 -------------------
Granted During the Year 436,000 .87 Expired During the Year (5,058,841) 5.03 Exercised During the Year -- -- ---------- ------
Outstanding and Eligible for Exercise at October 31, 1999 954,100 $ 1.37 ------------------- ========== ======
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10 - ------------------------------------------------------------------------------
[9] Stock Options and Warrants [Continued]
During the year ended October 31, 1997, 35,200 shares under warrants were granted to three non- employees and 23,334 shares under warrants were canceled for new warrants at a price of $.71875 which represents fair market value at the time of grant. The fair value of each warrant granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: a weighted average risk-free interest rate of 6%, a weighted average expected life of 1 year based on Company expectations and the required minimum two year holding period, and a weighted average expected volatility of 84.09%. Dividends are not expected to be available to shareholders during the expected life of the warrants. The fair value of these options issued in May of 1997 of $13,423 [$.2486 per share] has been accounted for as deferred compensation for the year ended October 31, 1997 and is being expensed over the term of the agreements. Total compensation expense recognized against income for this deferred compensation was $2,848, $2,848 and $2,254, respectively, for the years ended October 31, 1999, 1998 and 1997.
During the years ended October 31, 1999 and 1997, 436,000 and 346,100 shares, respectively, under options were granted to employees. The Company accounts for these options under the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees." Total compensation cost recognized against income for employee nonincentive stock option and warrants was $-0- for the years ended October 31, 1999, 1998 and 1997.
Outstanding and Exercisable Options and Warrants ------------------------------------------------ Weighted Number of Average Shares Under Remaining Weighted Average Options and Contractual Exercise Price Exercise Price Range Warrants Life Per Share - -------------------- -------- ---- ---------
Options - $.594 to $.719 Per Share 498,100 5 Years $ .69 Options - $1.00 Per Share 286,000 4 Years $ 1.00 Options - $3.00 Per Share 20,000 1 Year $ 3.00 Options - $4.125 Per Share 150,000 Expires 4/00 $ 4.125 ----------
954,100
These options have weighted average remaining contractual lives of three years. The weighted average grant date fair value of options granted during the year ended October 31, 1997 was $.2486 per share. The weighted average grant date fair value of options granted during the year ended October 31, 1999 was $.3485 per share.
[A] and [B] Pro Forma - Had compensation cost been determined on the basis of fair value pursuant to SFAS No. 123, for the 612,041 shares under employee incentive stock options and the 436,000 and 346,100 shares under employee nonincentive stock options and warrants for the years ended October 31, 1999, 1998 and 1997, net income and earnings per share would have been as follows:
1 9 9 9 1 9 9 8 1 9 9 7 ------- ------- ------- Net [Loss] Income: As Reported $(4,978,448) $ 596,583 $3,199,915 =========== =========== ========== Pro Forma $(5,130,411) $ 596,583 $2,950,000 =========== =========== ==========
Basic [Loss] Earnings Per Share: As Reported $ (.68) $ .08 $ .48 ========== =========== ========== Pro Forma $ (.70) $ .08 $ .44 ========== =========== ==========
Diluted [Loss] Earnings Per Share: As Reported $ (.68) $ .07 $ .43 ========== =========== ========== Pro Forma $ (.70) $ .07 $ .40 ========== =========== ==========
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11 - ------------------------------------------------------------------------------
[9] Stock Options and Warrants [Continued]
[B] Non Incentive Stock Options and Warrants [Continued]
The fair value used in the pro forma data was estimated by using an option pricing model which took into account as of the grant date, the exercise price and the expected life of the option, the current price of the underlying stock and its expected volatility, expected dividends on the stock and the risk-free interest rate for the expected term of the option. The following is the average of the data used for the following items.
Risk-Free Expected Expected Year Ended Interest Rate Expected Life Volatility Dividends
October 31, 1997 6% 1 Year 84.09% None October 31, 1999 6% 1 Year 97.89% -104.28% None
[10] Employment Contracts and Consulting Agreements
The Company has entered into various employment contracts and consulting agreements for periods ranging from one to seven years. At October 31, 1999, the aggregate minimum commitment under these contracts and agreements, excluding commissions or consumer price index increases, was approximately as follows:
October 31, 2000 $ 1,526,000 2001 1,345,000 2002 1,174,000 2003 710,000 2004 683,000 Thereafter 277,000 -----------
Total $ 5,715,000 ----- ===========
Some of these agreements provide bonuses and commissions based on a percentage of collected revenues ranging from 1% to 10% on accounts referred by or serviced by the employee or consultant.
In addition to the above, eight employment agreements which provide for annual aggregate minimum commitments of approximately $630,000 have no termination dates.
The Company pays premiums on life insurance policies for three key officers. In the event that any of these officers leave the Company, they are required to pay the Company back for premiums paid on their policies. In the event of death, the benefit paid to the beneficiary is reduced by the amount of premiums paid on behalf of the individual by the Company. At October 31, 1999 and 1998, $695,726 and $567,769 is included in other assets which represents the amount of premiums paid to date. At October 31, 1999 and 1998, cash surrender values on these policies were in excess of amounts receivable.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12 - ------------------------------------------------------------------------------
[11] Capitalized Lease Obligations
The Company leases various assets under capital leases expiring in 2004 as follows:
October 31, ----------- 1 9 9 9 1 9 9 8 ------- -------
Medical Equipment $1,325,238 $1,168,027 Furniture and Fixtures -- 11,565 --------- ---------
Totals 1,325,238 1,179,592 Less: Accumulated Depreciation 385,032 461,259 --------- ---------
Net $ 940,206 $ 718,333 --- ========= ==========
Depreciation expense on assets under capital leases was $202,589, $198,280 and $83,853 for the years ended October 31, 1999, 1998 and 1997, respectively.
Aggregate future minimum rentals under capital leases are:
Years ended October 31, 2000 $ 430,580 2001 331,333 2002 232,001 2003 185,164 2004 87,771 Thereafter -- ----------
Total 1,266,849 Less: Interest 278,060 ----------
Present Value of Minimum Lease Payments $ 988,789 --------------------------------------- ==========
[12] Commitments and Contingencies
The Company leases various office and laboratory facilities and equipment under operating leases expiring from 1999 to 2006. Several of these leases contain renewal options for three to five year periods.
Total expense for property and equipment rental for the years ended October 31, 1999, 1998 and 1997 was $2,848,225, $2,180,112 and $1,796,839, respectively. There were no contingent rental amounts due through October 31, 1999.
Aggregate future minimum rental payments on noncancelable operating leases (exclusive of several month to month leases aggregating approximately $1,000,000 annually) are as follows:
Property Equipment October 31, 2000 $ 789,619 $ 770,065 2001 613,292 556,647 2002 470,400 325,690 2003 442,789 230,479 2004 166,463 121,171 Thereafter 8,017 -- ---------- -----------
Totals $2,490,580 $ 2,004,052 ------ ========== ===========
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13 - ------------------------------------------------------------------------------
[13] Litigation
In the normal course of business, the Company is exposed to a number of asserted and unasserted potential claims. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations [See Note 22C].
The Company is being represented by counsel in connection with various reviews being conducted by the Company's Medicare carrier. One review involved overpayments that occur in the normal course of business. The Company believes the overpayment will be approximately $150,000, of which approximately $75,000 has been remitted to Medicare. Counsel representing the Company in this matter has advised that he cannot offer any opinion or projection at this time as to whether the anticipated liability will be resolved at $150,000 or whether it will be increased. Counsel has advised that based upon his review of documents, many of the claims that Medicare thought were duplicate payments were not in fact duplicates, but rather were properly billed. Counsel also advised that in view of the complexity of the issue, he believes the final overpayment will be an amount negotiated between the Company and Medicare.
On December 30, 1996, the Company commenced a lawsuit against SmithKline Beecham Clinical Laboratories ["SBCL"] alleging that SBCL materially and repeatedly breached its obligations and its representations and warranties made in the Asset Agreement and the Non-Competition Agreement pursuant to which the Company purchased certain assets from SBCL and claims unspecified amounts of compensatory and punitive damages and related costs. As a result of its allegations against SBCL, the Company did not make any payments with respect to the $600,000 note payable. In October 1998, the Company and SBCL exchanged general releases for this lawsuit and no executory obligations were imposed upon the Company by the settlement agreement. Therefore, the Company cancelled the $600,000 note payable as well as the related goodwill of approximately $550,000. The settlement was subject to the consent of the Company's principal lending bank which consent was received in January 1999. In addition, management decided to no longer pursue the hemo-dialysis business and accordingly made revisions to its future business endeavors. Accordingly, the Company recorded an impairment of approximately $2,900,000 on related hemo-dialysis assets in fiscal 1999 of which $2,000,000 was for related accounts receivable and $900,000 was for goodwill [See Note 2].
[14] Insurance
The Company maintains professional liability insurance of $3,000,000 in the aggregate, with a per occurrence limit of $1,000,000 . In addition, the Company maintains excess commercial insurance of $2,000,000 per occurrence. The Company believes, but cannot assure, that its insurance coverage is adequate for its current business needs. A determination of Company liability for uninsured or underinsured acts or omissions could have a material adverse affect on the Company's operations.
[15] Significant Risks and Uncertainties
[A] Concentrations of Credit Risk - Cash - At October 31, 1999, the Company had approximately $1,846,000 in cash and certificate of deposit balances at financial institutions which were in excess of the federally insured limits.
At October 31, 1998, the Company had approximately $6,545,000 in cash and certificate of deposit balances at financial institutions which were in excess of the federally insured limits. Approximately $3,680,000 of this amount represented collateral for demand loans with the same financial institution. [See restricted certificates of deposit on consolidated balance sheet].
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14 - ------------------------------------------------------------------------------
[15] Significant Risks and Uncertainties [Continued]
[B] Concentration of Credit Risk - Accounts Receivable - Credit risk with respect to accounts receivable is generally diversified due to the large number of patients comprising the client base. The Company does have significant receivable balances with government payors and various insurance carriers. Generally, the Company does not require collateral or other security to support customer receivables, however, the Company continually monitors and evaluates its client acceptance and collection procedures to minimize potential credit risks associated with its accounts receivable and establishes an allowance for uncollectible accounts and as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is not material to the financial statements.
A number of proposals for legislation continue to be under discussion which could substantially reduce Medicare and Medicaid reimbursements to clinical laboratories. Depending upon the nature of regulatory action, and the content of legislation, the Company could experience a significant decrease in revenues from Medicare and Medicaid, which could have a material adverse effect on the Company. The Company is unable to predict, however, the extent to which such actions will be taken.
[16] Acquisitions
On April 9, 1998, the Company acquired the assets and certain liabilities of Medilabs, Inc. ["MLI"] from LTC Service and Holdings, Inc. ["Holdings"], a wholly-owned subsidiary of Long-Term Care Services, Inc. ["LTC"]. The acquisition was effective April 9, 1998 for accounting purposes and is being accounted for under the purchase method. The operations of Medilabs, Inc. are included in the Company's results of operations commencing April 9, 1998. In connection with the acquisition of MLI, certain key employees signed employment agreements with the Company for an unspecified period which included a six month non-competition clause. In addition, LTC, Holdings, two affiliated corporations and an employee of LTC signed non-competition agreements.
[17] Fair Value of Financial Instruments
For certain financial instruments, including cash and cash equivalents, trade receivables, trade payables, and short-term debt, it was estimated that the carrying amount approximated fair value for the majority of these items because of their short maturities. The fair value of the Company's long-term debt is estimated based on the quoted market prices for similar issues or by discounting expected cash flows at the rates currently offered to the Company for debt of the same remaining maturities.
O c t o b e r 3 1, ----------------------------------------- 1 9 9 9 1 9 9 8 -------------------- ------------------- Carrying Fair Carrying Fair Amount Value Amount Value
Long-Term Debt $2,000,000 $2,000,000 $3,306,617 $3,306,617 Capitalized Lease Obligations $ 680,538 $ 654,764 $ 400,975 $ 381,637
Due to the non-interest bearing nature and unspecified payment terms, it was not practicable to estimate the fair value of amounts due from related parties [See also Note 5].
[18] Health Insurance Plan
The Company has a limited self-funded health insurance plan for its employees under which the Company pays the initial $50,000 of covered medical expenses per person per year. The Company has a contract with an insurance carrier for any excess. Health insurance expense for the years ended October 31, 1999, 1998 and 1997, totaled approximately $287,000, $279,000 and $232,000, respectively.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #15 - ------------------------------------------------------------------------------
[19] Employee Benefit Plan
The Company sponsors the Bio-Reference Laboratories, Inc. 401(k) Profit-Sharing Plan. Employees become eligible for participation after attaining the age of eighteen and completing one year of service. Participants may elect to contribute up to ten percent of their compensation, as defined in the Plan Adoption Agreement, to a maximum allowed by the Internal Revenue Service. The Company may choose to make a matching contribution to the plan for each participant who has elected to make tax- deferred contributions for the plan year, at a percentage determined each year by the Company. For the year ended October 31, 1999, 1998 and 1997, the Company elected not to make matching contributions to the plan. If the Company elects to match participant contributions in the future, the employer contribution will be fully vested after the fifth year of service.
[20] Non-recurring Gain on Sale of Intangible Assets
On September 30, 1997, the Company entered into an agreement to sell certain customer lists, its "GenCare" tradename and rights under two GenCare contracts to another laboratory for $4,600,000 in cash and $1,400,000 payable in four equal installments every six months beginning April 1, 1998, provided however that certain target revenues are reached. If target revenues are not reached amounts payable under the contract will be decreased up to a maximum of $700,000. The Company and certain of its officers entered into a noncompetion agreement with the purchaser as part of this agreement. The Company recorded a non-recurring gain of $2,025,689 and $333,900 during October 31, 1997 and 1998, respectively, related to this sale. The $700,000 in contingent receivables were included in the calculation of gain on this sale for the year ended October 31, 1998 when target revenues were reached. This receivable was collected in fiscal 1999.
[21] New Authoritative Accounting Pronouncements
The Financial Accounting Standards Board ["FASB"] issued Statement of Financial Accounting Standards ["SFAS"] No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of Effective Date of FASB Statements No. 133." The Statement defers for one year the effective date of FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." The rule now will apply to all fiscal quarters of all fiscal years beginning after June 15, 2000. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The adoption of SFAS No. 137 is not expected to have a material impact on the Company's consolidated results of operation, financial position or cash flows.
[22] Subsequent Events
[A] Asset Purchase Agreements - On December 2, 1999, the Company entered into an agreement to purchase certain assets utilized by a company that is engaged in selling Internet website design and other Internet-oriented services to medical professionals and other healthcare professionals. Bio-Reference Laboratories, Inc. delivered 140,000 shares of its common stock in payment for the web business along with 60,000 shares of its common stock in consideration for related non-competition agreements. The fair value of the 200,000 shares of common stock is approximately $200,000. The Company has also paid $10,000 to a former executive officer of the website company and executed a one year consulting agreement with the website company for $40,000 in the initial year and $50,000 in any subsequent year. The Company granted the website business an option to purchase a maximum of 100,000 shares of the Company's common stock exercisable at $3.00 per share with certain vesting restrictions.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #16 - ------------------------------------------------------------------------------
[22] Subsequent Events [Continued]
[A] Asset Purchase Agreements [Continued] - On December 14, 1999, the Company entered into an agreement to purchase certain assets utilized by a company that is engaged in the manufacture of certain health food products. The Company delivered 180,000 shares of its common stock in payment for the health food business along with 20,000 shares of its common stock in consideration for a related non- competition agreement. The Company entered into an employment agreement in connection with this purchase. The fair value of the 200,000 shares of common stock is approximately $200,000. The Company also entered in an employment agreement for an annual salary of $150,000 plus commissions and a signing bonus of $100,000 in 24 monthly installments.
[B] Bank Waivers - On January 26, 2000, the Company obtained from PNC Bank a waiver for the Company's October 31, 1999 default on its tangible net worth, net worth and capital expenditure covenants.
[C] NJ Medicaid Pending Settlement - In January 2000, the Company commenced negotiations with New Jersey Medicaid regarding a claim made against the Company by the State of New Jersey. The alleged claim was received by the Company on December 28, 1999. The claim alleged that the Company was reimbursed by the State for claims submitted which, although authorized by the physician, did not bear the physician's actual signature. The Company immediately disputed the claim.
The Company believes it has been compliant with all requirements regarding claims submitted for payment by New Jersey Medicaid and in fact requires actual physician signatures before it bills New Jersey Medicaid. However, the Company and New Jersey Medicaid entered into a compromise agreement on January 19, 2000 to a full settlement for this claim in the amount of $227,000. The Company has accrued this settlement amount in its October 31, 1999 financials. The settlement is subject to the parties' execution of a written agreement setting forth its terms and to the approval of the Director of the Division of Medical Assistance. Approval of the settlement is being recommended to the Director.
. . . . . . . . . .
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. That audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule II is presented for purposes of complying with the Securities and Exchange Commissions Rules and Regulations under the Securities Exchange Act of 1934 and is not otherwise a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements, and in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
MOORE STEPHENS, P. C. Certified Public Accountants. Cranford, New Jersey January 7, 2000
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY - ------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997. - ------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Balance at Charged to Deductions Balance Beginning Cost and To Valuation at End Description of Period Expenses Accounts of Period ----------- --------- -------- -------- ---------
Year Ended October 31, 1999 Allowance for Doubtful Accounts and Contractual Credits $13,494,475 $85,674,430 $(83,855,970) $15,312,935 =========== =========== ============ ===========
Year Ended October 31, 1998 Allowance for Doubtful Accounts and Contractual Credits $ 8,564,436 $72,137,649 $(67,207,610) $13,494,475 =========== =========== ============ ===========
Year Ended October 31, 1997 Allowance for Doubtful Accounts and Contractual Credits $ 5,357,096 $47,593,419 $(44,386,079) $8,564,436 =========== =========== ============ ==========