-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F4j4b2J3TFS0RFoHLACFSird/Ct3dhmwmtxf7p2CJbC43apSS8rQN4aC1k4daJSS Vp/ubg11/AUGXHDm6pjk9A== 0000792641-98-000003.txt : 19980217 0000792641-98-000003.hdr.sgml : 19980217 ACCESSION NUMBER: 0000792641-98-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971031 FILED AS OF DATE: 19980212 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIO REFERENCE LABORATORIES INC CENTRAL INDEX KEY: 0000792641 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 222405059 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15266 FILM NUMBER: 98533672 BUSINESS ADDRESS: STREET 1: 481 EDWARD H ROSS DR CITY: ELMWOOD PARK STATE: NJ ZIP: 07407-3118 BUSINESS PHONE: 2017912186 MAIL ADDRESS: STREET 1: 481 EDWARD H ROSS DRIVE CITY: ELMWOOD PARK STATE: NJ ZIP: 07407-3118 FORMER COMPANY: FORMER CONFORMED NAME: MED MOBILE INC DATE OF NAME CHANGE: 19891115 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------- FORM 10-K (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended October 31, 1997 ---------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from to --------------- --------------- Commission file number 0-15266 ------- BIO-REFERENCE LABORATORIES, INC. --------------------------------- (Exact name of registrant as specified in its charter) New Jersey 22-2405059 - ---------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 481 Edward H. Ross Drive, Elmwood Park, New Jersey 07407 - -------------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code 201-791-2600 ------------ Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on which Title of Class registered - -------------- ------------------------------------------ None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value ---------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of the issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or in any amendment to this Form 10-K. [ ] For the year ended October 31, 1997 the issuer's revenues were $38,660,184 On January 14, 1998, the aggregate market value of the voting stock of Bio-Reference Laboratories, Inc. (consisting of Common Stock, $.01 par value) held by non-affiliates of the Issuer was approximately $7,975,000 based upon the last sales price for such Common Stock on said date in the over-the-counter market as reported by the NASDAQ Small Cap System. On such date, there were 7,169,376 shares of Common Stock of the Issuer outstanding. PART I Item. 1 - Business -------- Bio-Reference Laboratories, Inc. ("Bio-Reference" or the "Company") operates a clinical laboratory located in northern New Jersey, principally servicing the greater New York metropolitan area. Bio-Reference offers a comprehensive list of chemical diagnostic tests including blood and urine analysis, blood chemistry, hematology services, serology, radioimmuno analysis, toxicology (including drug screening), pap smears, tissue pathology (biopsies) and other tissue analyses. Bio-Reference holds the required Federal and state licenses necessary to permit its operation of a clinical laboratory at its Elmwood Park, New Jersey facility and to permit its servicing of its clients in Connecticut, Florida, Louisiana, Maryland, New Jersey, New York, Pennsylvania, Texas and Virginia. Bio-Reference markets its services directly to physicians, hospitals, clinics, and other health facilities. The Company picks up test specimens directly from the physician and test results are generally transmitted by computerized telephone connections or courier. The Company intends to continue to expand and develop its laboratory operations through acquisitions, on- going marketing efforts and expansion of its specialty testing areas. The United States market for clinical laboratory testing is estimated to generate approximately $30 billion in annual revenues. Approximately one-half of these revenues are accounted for by hospital laboratories and the balance by independent commercial laboratories and tests performed by physicians in their own offices and laboratories. The clinical laboratory market has been undergoing significant consolidation in recent years due to the cost efficiencies of large-scale, highly-automated testing and increasingly stringent regulatory requirements. The Company is actively seeking to take advantage of these trends by pursuing acquisitions which will provide revenues to utilize more fully the Bio-Reference facility. The Company is also pursuing growth through aggressive marketing to physicians whose patients are likely to have good reimbursement and collectability profiles. Strategically, Bio-Reference intends to continue to establish additional specialty areas to provide esoteric testing services not generally provided by its competition, such as fertility testing and cancer testing including tumor markers. The Company was incorporated under the laws of the State of New Jersey in December 1981 under the name "Med-Mobile, Inc." Its initial primary business was to provide mobile medical examination services. The Company discontinued this business in June 1989. Since February 1987, the Company's primary business has been the operation of a clinical laboratory located in northern New Jersey servicing the greater New York metropolitan area. The Company expanded its laboratory services through the March 1988 acquisition of Cytology and Pathology Associates, Inc., a clinical laboratory formerly located in Englewood, New Jersey. The Company consolidated and relocated all of its laboratory operations to its modern laboratory facility in Elmwood Park, New Jersey and in June 1989, changed the name of the Company to Bio-Reference Laboratories, Inc. (effective November 1989) and the name of the laboratory to Bio-Reference Laboratories. Since 1990, the Company has expanded its laboratory testing capabilities and its customer base through internal growth as well as through the completion of a series of acquisitions of the businesses of other testing laboratories. On January 4, 1995 (as of November 1, 1994), the Company expanded its testing capabilities through the acquisition of GenCare Biomedical Research Corporation ("GenCare") which operated a cancer specialty testing laboratory in Mountainside, New Jersey. See "Developments Since the Beginning of Fiscal 1997" as to the Company's sale in September 1997 of certain assets of its GenCare business to an unrelated third party. In November, 1995, the Company made two acquisitions. Through its acquisition of Oncodec Laboratories, Inc., the Company acquired the exclusive worldwide right to a Quantitative Enriched PCR methodology for detecting certain gene mutations, developed by the American Health Foundation in Valhalla, New York. This methodology improves the ability to detect early genetic changes which may lead to the development of various cancers. In addition, the Company expanded its market penetration into central New Jersey through its acquisition of Community Medical Laboratories ("CML"). In May, 1996, the Company acquired certain assets and rights of Advanced Medical Laboratories ("AML") which increased its presence in eastern Long Island. The last acquisition of fiscal 1996 occurred in July, 1996. The Company purchased from SmithKline Beecham Clinical Laboratories, Inc. ("SBCL") certain assets and rights including the Customer List related to SBCL's operation of its Renal Dialysis Testing Business. This acquisition will allow the Company to expand its presence in this market.Although SBCL represented that its renal dialysis business was realizing approximately $3,600,000 in annual net revenues, the Company may realize only approximately $1,000,000 in annual net revenues directly as a result of this acquisition. In December, 1996, the Company commenced a lawsuit against SBCL alleging breach of contract and fraud (See Item 3 - Legal Proceedings). The Company's executive offices and laboratory are located at 481 Edward H. Ross Drive, Elmwood Park, New Jersey 07407. Its telephone number is (201) 791-2600. Developments Since the Beginning of Fiscal 1997 - ----------------------------------------------- In March 1997, the Company amended its revolving loan agreement with PNC Bank. The maximum amount of the credit line available to the Company was increased to the lesser of (I) $10,000,000 or (ii) 50% of the Company's qualified accounts receivable (as defined in the agreement) plus 100% of the face amount of the Company's certificates of deposit pledged as collateral for this loan minus the amount of any portion of the outstanding principal balance of the Company's term loan which is deemed secured by the certificates of deposit. Interest on advances which are collateralized by certificates of deposit will be at 2% above the certificate of deposit interest rate. Interest on other advances will be at prime plus 1.25%. The credit line is secured by substantially all of the Company's assets (including $3,680,000 in certificates of deposit) and the assignment of $4,000,000 face amount of life insurance on the life of the president of the Company. The line of credit is available for a period of two years and may be extended for annual periods by mutual consents, thereafter. The terms of this agreement contain, among other provisions, requirements for maintaining defined levels of capital expenditures and net worth, various financial ratios and insurance coverage. On September 30, 1997, pursuant to an Agreement and Bill of Sale, the Company sold certain assets of its GenCare Division to an unrelated third party, Impath, Inc. At the time of sale, GenCare was providing oncology and hematology laboratory services to hospitals, hematologists and oncologists in the New York metropolitan area and in Florida. The assets sold included GenCare customer lists, any Company rights to the "GenCare" Tradename, certain patient records and rights under a Reagent Purchase and Equipment Rental Contract and under a Laboratory Testing Service Agreement. The Company retained the rights to the Tradename "GenPath." In addition, the Company, certain of its officers and key employees agreed for a 30-month period not to compete with Impath with respect to certain defined areas of the GenCare business. The Company is continuing to market tumor pathology testing services under the name "GenPath" to urology, gastroenterology and obstetric and gynecology physician clients. The GenCare business sold accounted for less than 8% of the Company's annual net revenues for fiscal 1997. The $6 million purchase price was determied in arms-length negotiations between the parties based in part on GenCare's billings to Restricted Customers for Restricted Tests (as defined in the Agreement and Bill of Sale) during the three-month period ended June 30, 1997. The purchase price included a $4.6 million cash payment made at the closing with an additional $700,000 to $1.4 million payable in semi-annual installments over a two-year period subject to certain conditions. The Company purchased GenCare in January 1995 for an aggregate 473,145 shares of its common stock and approximately $235,000 in principal amount of its debentures. CLINICAL LABORATORY OPERATIONS ------------------------------ The Clinical Laboratory Industry - -------------------------------- The United States market for clinical laboratory testing is estimated at approximately $26 billion in annual revenues, of which approximately 50% results from tests performed by hospitals and the balance from tests performed by independent commercial laboratories and tests performed by physicians in their own office laboratories. Revenues in the clinical laboratory testing market grew over the past decade at an annual rate of approximately 10% due, the Company believes, to several factors, including: an increase in the number and types of routine tests; the development of more sophisticated esoteric tests, such as tests for AIDS, heart disease, elevated cholesterol levels, infertility and prostate cancer; increased awareness among physicians of the value of laboratory testing as a cost-effective means of prevention, early detection of disease and monitoring of treatment; fear by physicians of malpractice litigation; expanded substance abuse testing; the general aging of the United States population; development of highly automated laboratory testing equipment which has increased laboratory testing operating efficiencies; and price increases for such services. The Company believes that larger independent laboratories have been able to increase their share of the overall clinical laboratory testing market by taking advantage of opportunities for cost efficiencies afforded by large-scale automated testing operations, and by acquisition of smaller laboratories that may not operate as efficiently as the larger independent laboratories. History - ------- The Company was incorporated in December 1981 to provide mobile medical examination services but discontinued that business in June 1989. Bio-Reference commenced clinical laboratory operations in 1987 with the belief that a strong business opportunity existed for a medium-sized clinical laboratory that produced high quality test results in a timely manner to practicing physicians. The current competition may be primarily categorized in two groups: those businesses that are national in scope performing millions of tests per month but impersonal in nature and those smaller laboratories that attempt to compete in terms of quality and service but are limited in resources and scope of capabilities. Consequently, management believed that there existed a definite place for a medium-sized commercial laboratory in the greater New York metropolitan area. Besides producing fast, accurate data, a large regional facility could afford to employ sufficient senior staff including laboratory scientists to act as client consultants- an enhancement unavailable in small laboratories, and not readily available in the large national commercial laboratories. In addition, the Company believed that by complementing the regional facility with specialized areas of testing, concentrating on esoteric tests, it could favorably compete with other laboratories. Although the Company did not realize income from operations from the time it commenced clinical laboratory operations in 1987 until fiscal 1994, the Company's net revenues have continually increased, notwithstanding the fact that starting in 1991, the Company has become more selective in accepting physician clients and patients. The Company realized income from operations of $1,196,236 in fiscal 1996, and income from operations in fiscal 1997 of $1,885,059. In addition, the Company realized a $2,025,689 non-recurring gain attributable to the sale of the GenCare assets. In March 1988, the Company acquired Cytology and Pathology Associates, Inc., a small specialized clinical testing laboratory located in Englewood, New Jersey and in June of that year consolidated and relocated all of its laboratory operations into a 35,000 sq. ft. space in Elmwood Park, New Jersey, approximately 10 miles from mid-town Manhattan. The new location was carefully chosen to offer easy access to the greater New York metropolitan area. This move allowed for further expansion of the Company's esoteric service concept and afforded the Company an excellent geographical location to expand into newer markets in southern New York State, including Westchester, Rockland and Nassau Counties, southern and western New Jersey and southern Connecticut. With the completion of the relocation to Elmwood Park in 1988, the Company proceeded to develop esoteric testing, while maintaining its routine tests. It was found that by emphasizing the more difficult esoteric tests, routine tests also increased, particularly profile testing in chemistry and hematology. In 1991, the Company changed its emphasis to a sustained selective growth, discontinuing the servicing of more than 5,000 patients per month from accounts considered unprofitable and only taking on business that would yield high reimbursement and collectability. The Company hopes to continue its growth by aggressive marketing, entry into additional markets, primarily in the greater New York metropolitan area through acquisitions and the development of specialty niche markets to complement its routine business. Over the years, the Company has expanded its specialty testing services to include anatomic pathology (biopsies and pap smears), cellular immunology (principally geared to the AIDS testing market), male infertility, and tumor markers. The Company makes extensive use of direct mailings to physicians that emphasize its specialized testing and personalized service. Targeted physicians are principally those that frequently utilize laboratory services, including obstetricians, internists, and primary care physicians. This direct mailing technique is selective in nature, being targeted to concentrate on profitable accounts. Operations - ---------- The efficiency of a medical laboratory depends on the quantity and selection of tests performed and on its ability to automate the process. It is axiomatic that the initial fixed costs of testing a small number of patients are high. Such costs include the cost of maintaining highly sophisticated equipment which is inefficient to operate if only a small number of patients are tested, as well as the cost of a full support facility and marketing, logistical, billing, and other administrative costs. As the patient volume increases, automated tests become progressively less expensive, as the fixed costs are already in place, making the laboratory more cost efficient. Most medical laboratory tests can be divided into three principal categories: those that are highly automated and computer driven, those that are semi-automated requiring the use of sophisticated equipment, and those that are subjective and basically manually determined. The Company considers itself a highly automated and computer driven laboratory. Bio-Reference is capable of performing highly sophisticated testing in addition to high volume routine testing. Already established are a wide range of tests in clinical chemistry, special chemistry, endocrinology, serology, diagnostic immunology, microbiology, rheumatology, parasitology, cellular immunology, radioimmunoassay, hematology, immunohematology, cytology, anatomic pathology, and urinalysis. The Company's couriers pick up patient specimens from physician offices, nursing homes and hospitals in the metropolitan New York area and test results are generally delivered back to the physician within 24 hours. Additionally, the larger volume clients receive test results by way of printers provided by the Company and placed directly in their offices, thereby accelerating test reporting. The Company furnishes its physician clients with periodic newsletters detailing advances in laboratory medicine, new tests, clinical commentaries and laboratory interpretation of test results. In addition, an annual Test Compendium is sent to all physician clients listing all tests offered, normal ranges, correct collection of samples, patient preparation, and up to date billing information. This, together with the periodic clinical update newsletters, allows the Company to be in constant contact with all of its physician clients. The Company utilizes the services of nine full-time Client Service Coordinators, all of whom are fully trained in medical and laboratory terminology. This staff is used as an interface with physicians and nurses and augments the client support provided by the Company's sales staff. Highly abnormal and life threatening results are immediately telephoned to the physician in order to provide speedy medical resolution of any patient problem. The Scientific Director, Daytime Technical Manager, supervisors and medical staff also are in frequent communication with clients and are available to answer questions and provide support and consultation. Sales and Marketing - ------------------- Management believes that the Company's laboratory, by virtue of its geographic location and area of sales penetration, is well positioned to expand into new areas. It is believed that a substantial market share can be achieved in Westchester, Rockland and Nassau counties in New York, southern and western New Jersey. The Company presently employs 35 full and part-time sales and marketing personnel headed by a Vice President of Sales and Marketing with more than 10 years of experience with one of the largest commercial medical laboratories in the country, Smith-Kline Beecham Clinical Laboratories. The sales and marketing department works closely with the Technical Director in planning new tests, pricing, and general client support. All sales and marketing personnel operate in a dual capacity; both in selling and as client support representatives. This ensures that all salespersons are intimately involved with the client, not only in selling, but in servicing the account that they sell. The Company feels that this is unique in the industry and is extremely helpful in client retention, providing a strong link between the physician and the Company's staff. Quality Assurance - ----------------- The business of medical testing is essentially one of communication and data transfer. In order to provide accurate and precise information to the physician, it is essential to maintain a well structured and vigorous quality assurance program. Bio-Reference holds the required Federal and state licenses necessary to permit its operation of a clinical laboratory at its Elmwood Park, New Jersey facility and to permit its servicing of its clients in Connecticut, Florida, Louisiana, Maryland, New Jersey, New York, Pennsylvania, Texas and Virginia. To fully maintain these licenses, the laboratory must submit to vigorous sets of proficiency tests, or surveys, in all procedures which are performed. Such proficiency tests or surveys may be performed as many as four to five times a year, depending upon the procedure, and results in hundreds of proficiency tests throughout the year. In addition, the Company performs thousands of quality control and quality assurance tests per year. The Company is also subjected to unannounced inspections by inspectors from some of the jurisdictions noted above who review past records, operating manuals, quality assurance records and safety regulations. In addition, Bio-Reference voluntarily enrolls in the College of American Pathologists Proficiency program, which provides additional proficiency surveys. In January 1997, the Company was notified that it had been accredited by the College of American Pathologists ("CAP"). This accreditation by CAP, a peer review organization, involves an intensive review by numerous experts in their specific fields, who review technical, quality assurance, health and safety and computer documentation in order to bestow accreditation, which is one of the most prestigious approvals available to clinical laboratories. The Company's Quality Assurance Committee, headed by a Quality Assurance Coordinator and composed of supervisors from all departments, meets daily to assess and evaluate the laboratory's quality. Based on the information received from the committee, recommendations are made to correct conditions which have led to errors. Management, department supervisors and members of the assurance committee continually monitor the laboratory's quality. Depending on the test, two or three sets of Quality Control materials are run in each analytical assay to assure precision and accuracy. Patient population statistics are evaluated each day. Highly abnormal samples are repeated to assure their accuracy. It is the Company's position that all of these procedures are necessary, not only in assuring a quality product, but also in maintaining Federal and state licensing. The Company believes these high standards of quality are an important factor in what management regards as an excellent rate of client retention. Revenue Recognition and Business Strategy - ----------------------------------------- Although the laboratory's clients are primarily physicians, it is usually the individual patient, his or her commercial insurance carrier, or a governmental agency such as Medicare or Medicaid that pays the laboratory charges. These third parties pay health care providers according to allowable costs or a predetermined contractual rate rather than according to the provider's established rates; the difference between what is paid and what is billed is the contractual allowance. Therefore, the Company has adopted the practice of reducing its revenues by these allowances or contractual adjustments. Over the past years there has been an increase in the number of patients that are covered by managed health care plans. These plans will often negotiate with a limited number of clinical laboratories at discounted rates. Some of these managed health care health plans will contract with only a single laboratory and pay for services on a capitation basis (meaning one price per enrollee, regardless of how much laboratory work is performed). The effect of managed health care plans to the laboratory industry equates to lower reimbursement rates for laboratory services. If the laboratory is not a provider of services to the managed health care plan, it will not be reimbursed for providing the service and overall patient volume may be reduced. Therefore, this change has often necessitated physician offices to utilize more than one laboratory, and to generally lower reimbursement rates within the laboratory industry. All major accounts are reviewed monthly as to collectability by types of payor and evaluated for effectiveness of collection procedures, and based upon the review, corrective action is taken. The following table reflects the Company's breakdown of revenue by payor for the 12 months ended October 31, 1995, 1996 and 1997.
Years Ended October 31, ---------------------- 1995 1996 1997 ---- ---- ---- Direct Patient Billing 28% 17% 17% Commercial Insurance 27% 36% 31% Professional Billing 18% 19% 23% Medicare 21% 22% 25% Medicaid 6% 6% 4% --- --- --- 100% 100% 100%
Competition - ----------- The Company's competition derives primarily from other laboratories located in the New York metropolitan area. On a national basis, approximately 30% of this market is made up of the three largest national laboratories (Smith-Kline Beecham Clinical Laboratories, a Division of Smith-Kline Beecham PLC, Laboratory Corporation of America, Inc. and Quest Clinical Laboratory, formerly a Division of Corning, Inc.). The Company is competing with these national laboratories which have been in existence for a long period of time, have products which are already established in the marketplace, have broader public and industry recognition, have financial resources substantially greater than the Company and have far more extensive facilities, larger sales forces and more established customer and supplier relationships than those which now or in the foreseeable future are, or will become, available to the Company. These factors will place the Company at a competitive disadvantage. However, Bio-Reference has certain capabilities similar to these national laboratories and shares similar advantages with them over the smaller laboratories. Bio-Reference and the major laboratories all have the capability of specialized testing profiles, 24-hour turn-around time for most test results, computer transmission into physician offices, and comprehensive courier pick-up and delivery service in the greater New York metropolitan area. Although the Company is significantly smaller than the national laboratories and has modest financial resources, management believes it can compete successfully because there are fewer layers of staff thus enabling decisions to be made at a top management level more quickly and resulting in a more responsive business atmosphere and customized service. The Company believes its response to medical consultation is faster and more personalized than in the national laboratories. At Bio-Reference, client service staff only deal with basic technical questions and those that have medical or scientific significance are referred directly to other senior scientists and staff. Government Regulation - --------------------- The Company's laboratory operations require licensure in each jurisdiction in which the Company operates. Bio-Reference holds the required Federal and state licenses necessary to permit its operation of a clinical laboratory at its Elmwood Park, New Jersey facility and to permit its servicing of its clients in those states where it presently operates. Laboratory technicians and technologists must also qualify under state regulations in order to be employed by the laboratory. All of these licensing and certification programs set standards in areas such as quality control, record keeping and personnel qualifications, including, in varying measures from state to state, educational experience and licensure for various levels of personnel responsible for testing. Compliance with these standards is by periodic inspections by the appropriate Federal, state or local agency. In addition, licensing and certification entail proficiency testing which involves actual testing of specimens that have been specifically prepared by the regulatory authority or designated agencies for testing by the laboratory. There can be no assurance the laboratory will maintain all necessary licenses and in the event the laboratory loses its license in a particular jurisdiction, it will be required to cease all activities in such jurisdiction. There also cannot be any assurance the Company will obtain the licenses required in a proposed jurisdiction of operation. The Company is also subject to Federal and state regulations governing the transportation and disposal of medical waste including bodily fluids. Federal regulations require licensure of interstate transporters of medical waste. In New Jersey, the Company is subject to the Comprehensive Medical Waste Management Act (the "CMWMA") which requires the Company to register as a generator of special medical waste. The CMWMA mandates the sterilization of certain medical waste and provides a tracking system to insure disposal in an approved facility. All of the Company's medical waste is disposed of by a licensed interstate hauler. The hauler provides a manifest of the disposition of the waste products as well as a certificate of incineration which is retained by the Company. Containment of health-care costs, including reimbursement for clinical laboratory services, has been a focus of ongoing governmental activity. Omnibus budget reconciliation legislation, designed to "reconcile" existing laws with reductions and reimbursement required by enactment of a Congressional budget can adversely affect clinical laboratories by reducing Medicare reimbursement for laboratory services. Although in the past, legislation has been enacted which reduced the permitted Medicare reimbursement for clinical laboratory services from previously authorized levels, none of the reductions enacted to date has had a material adverse effect on the Company. For many of the tests performed for Medicare beneficiaries or Medicaid recipients, laboratories are required to bill Medicare or Medicaid directly, and to accept Medicare or Medicaid reimbursement as payment in full. The Clinton Administration, Congress and various Federal agencies have examined the rapid growth of Federal expenditures for clinical laboratory services, and the use by the major clinical laboratories (including the Company) of dual fee schedules ("client" fees charged to physicians, hospitals, institutions and companies with whom a laboratory deals on a bulk basis and which involve relatively low administrative costs, and "patient" fees charged to individual patients and third party payors, including Medicare, who generally require separate bills or claims for each patient encounter and which involve relatively high administrative costs). The permitted Medicare reimbursement rate for clinical laboratory services has been reduced by the Federal government in a number of instances over the past several years to a present level equal to 74% of the national median of laboratory charges. A number of proposals for legislation or regulation are under discussion which could have the effect of substantially reducing Medicare reimbursements to clinical laboratories through reduction of the present allowable percentage or through other means. In addition, the structure and nature of Medicare reimbursement for laboratory services is also under discussion and management is unable to predict the outcome of these discussions or its effect on the Company. One outcome of these discussions has been profiles that contain a smaller number of tests. Depending upon the nature of congressional and/or regulatory action, if any, which is taken and the content of legislation, if any, which is adopted, the Company could experience a significant decrease in revenues from Medicare and Medicaid, which could have material adverse effect on the Company. The Company is unable to predict, however, the extent to which any such actions will be taken. Federal and state health care and related regulations are subject to constant change. The Company cannot now predict what changes may be enacted which may affect its business or the manner in which its business would be affected by such changes. Two legislative changes have occurred which portend significant changes in the clinical laboratory market. Two Omnibus Budget Reconciliation Acts ("OBRA") have severely restricted physician referrals of Medicare covered services to clinical laboratories in which the referring physician or his immediate family has a financial relationship. The Clinical Laboratory Improvement Amendments of 1988 ("CLIA-88") acted to strengthen Federal control of medical laboratories by regulating stricter quality assurance practices, licensing requirements and staff qualifications. CLIA-88 extended Federal licensing requirements to all clinical laboratories (regardless of the location, size or type of laboratory), including those operated by physicians in their offices, based on the complexity of the tests they perform. The legislation also substantially increased regulation of cytology screening, most notably by requiring the Secretary of Health and Human Services ("HHS") to implement regulations placing a limit on the number of slides that a cytotechnologist may review in a twenty-four hour period. CLIA-88 also established a more stringent proficiency testing program for laboratories and increased the range and severity of sanctions for violating Federal licensing requirements. A number of these provisions, including those that imposed stricter cytology standards and increased proficiency testing, have been implemented by regulations applicable only to laboratories subject to Medicare certification adopted under the Clinical Laboratory Improvement Act of 1967 ("CLIA-67"). On February 28, 1992, HHS published three sets of regulations implementing CLIA-88, including quality standards regulations establishing Federal quality standards for all clinical laboratories; application and user fee regulations applicable to most laboratories in the United States which became effective on March 30 1993; and enforcement procedure regulations applicable to laboratories that are found not to meet CLIA-88 requirements. The quality standards regulations establish varying levels of regulatory scrutiny depending upon the complexity of testing performed. Under these regulations, a laboratory that performs only one or more of eight routine "waived" tests may apply for a waiver from most requirements of CLIA-88. The Company believes that most tests performed by physician office laboratories will fall into either the "waived" or the "moderately complex" category. The latter category applies to simple or automated tests and generally permits existing personnel in physicians' offices to continue to perform testing under the implementation of systems that insure the integrity and accurate reporting of results, establishment of quality control systems, proficiency testing by approved agencies, and biannual inspection. The quality standards and enforcement procedure regulations became effective on September 1, 1992, although certain personnel, quality control and proficiency testing requirements will be phased-in over a number of years. The laboratory has completed its first CLIA inspection under CLIA-88 guidelines and has received its certificate of compliance effective February 7, 1996. In January 1997, the Company was notified that it had been accredited by the College of American Pathologists ("CAP"). This accreditation by CAP, a peer review organization, involves an intensive review by numerous experts in their specific fields, who review technical, quality assurance, health and safety and computer documentation in order to bestow accreditation, which is one of the most prestigious approvals available to clinical laboratories. The Office of Inspector General ("OIG") has published a Model Compliance Program for the clinical laboratory industry. This is a voluntary program for laboratories to demonstrate to the Federal government that they are responsible providers. Bio-Reference Laboratories is currently in the process of writing and implementing a compliance program adhering to the standards set forth in the Model Compliance Program. Insurance - --------- The Company maintains professional liability insurance of $1,000,000 per occurrence, $3,000,000 in the aggregate. In addition, the Company maintains excess commercial insurance of $2,000,000 per occurrence. The Company believes, but cannot assure, that its insurance coverage is customary in the industry for laboratories of its size and is adequate for its current business needs. A determination of Company liability for uninsured or underinsured acts or omissions would have a material adverse effect on the Company's operations. Employees - --------- At December 31, 1997, the Company had 248 full-time employees and 182 part-time employees. This includes three executive officers, a Vice President of Technical Operations, a Marketing Vice-President, 62full-time and 38 part-time technicians, and/or technologists (including physicians, pathologists and Ph.D.'s), 112 full and part-time semi-technical employees, 35 full and part-time marketing representatives, 98 full and part-time clerical employees, and 80 full and part-time drivers. None of the Company's employees are represented by a labor union. The Company regards relations with its employees as satisfactory. Item 2 - Properties ---------- The Company's executive offices and laboratory facility occupy approximately 35,000 square feet of leased space in a one-story brick facility at 481 Edward H. Ross Drive, Elmwood Park, New Jersey. The lease for the facility, which expires in February 1999, provides for a monthly rental of $17,077. The Company's testing equipment maintained at this facility is in good condition and in working order. Management believes that this facility, as presently equipped, has the capacity to generate up to approximately $50,000,000 in annual revenues based on the type of testing now being performed by the Company. The Company maintains fire, theft and liability insurance coverage for this facility in what it believes are adequate amounts. The Company also leases 39 additional relatively small draw stations through the New York metropolitan area to collect specimens from physician-referred patients for testing at its Elmwood Park, New Jersey laboratory. Item 3 - Legal Proceedings ----------------- In July 1996, the Company purchased certain assets and rights including the Customer List related to the Renal Dialysis Testing Business conducted by SmithKline Beecham Clinical Laboratories, Inc. ("SBCL"), from SBCL, for $1,800,000 including a $1,200,000 down payment pursuant to an Asset Sale/Purchase Agreement (the "Asset Agreement"). In the Asset Agreement, SBCL represented and warrantied that its Renal Dialysis Testing Business was servicing at least 60 active accounts, was conducting testing for not less than 4,600 active dialysis patients and was generating at least $3,600,00 in net revenues on an annual basis. The parties also executed a Non-Competition Agreement (the "Non-Competition Agreement") pursuant to which SBCL agreed to cease performing all renal dialysis clinical laboratory testing services for a three year period (after conclusion of a limited Transition Period). After completion of the acquisition, the Company's management determined that SBCL's representations and warranties concerning the Renal Dialysis Testing Business were materially false and that the Company may only realize approximately $1,000,000 in annual net revenues from the acquired business. Management also determined that SBCL had fraudulently concealed that its Renal Dialysis Testing Business had suffered certain material adverse changes and that SBCL had breached the Non-Competition Agreement by continuing to perform renal dialysis testing on the transferred accounts after the Transition Period despite its assurances that it had ceased all such testing. Based upon SBCL's alleged breaches of the Asset Agreement and the Non-Competition Agreement, the Company has not paid any portion of the $600,000 balance of the purchase price (which was due in 24 consecutive monthly installments of $25,000 commencing January 1, 1997). As a result of the foregoing, the Company filed a lawsuit against SBCL in December 1996. The lawsuit, filed in the United States District Court for the District of New Jersey, alleges that SBCL materially and repeatedly breached its obligations and its representations and warranties made in the Asset Agreement and the Non-Competition Agreement and claims unspecified amounts of compensatory and punitive damages and related costs. This lawsuit is in its initial stages and no assurances can be given at this time that it will be concluded in the Company's favor. Item 4 - Submission of Matters to a Vote of Security holders --------------------------------------------------- There were no matters submitted by the Company to a vote of its security holders during the quarter ended October 31, 1997. PART II PRICE RANGE OF SECURITIES ------------------------ Item 5. - Market for Common Stock and Related Shareholder Matters ------------------------------------------------------- The Company's Common Stock was traded on the National Association of Securities Dealers Automated Quotation ("NASDAQ") Small Cap System through July 13, 1992 after which it was delisted from trading on NASDAQ due to the Company's failure to maintain shareholder's equity of at least $1,000,000. Commencing July 14, 1992, the Common Stock was quoted in the over-the-counter market on the NASD OTC Bulletin Board. As a result of the improvement in the Company's financial condition based upon its November 1993 public offering, the Common Stock was readmitted for trading on the NASDAQ Small Cap System under the symbol "BRLI" on November 24, 1993. The following table sets forth the range of high and low bid prices for the Common Stock for the periods indicated, as derived from reports furnished by NASDAQ. Such quotations represent prices between dealers, do not include mark-ups, mark-downs or commissions and may not necessarily represent actual transactions.
Fiscal Year Bid Prices - ----------- ---------- 1996 High Low First Quarter $3.50 $ 2.75 Second Quarter 2.75 2.125 Third Quarter 2.8125 1.9375 Fourth Quarter 1.9375 1.4375 1997 First Quarter $1.4375 $ .90625 Second Quarter $1.09375 $ .8125 Third Quarter $1.625 $ .71875 Fourth Quarter $2.03125 $ 1.34375
At January 14, 1997, the closing sales price for the Common Stock on NASDAQ was $1.3125 per share. At January 14, 1997 the number of record holders of the Common Stock was approximately 650. Such number of record owners was determined from the Company's shareholder records and does not include beneficial owners whose shares are held in nominee accounts with brokers, dealers, banks and clearing agencies. Dividends - --------- The Company has not paid any dividends upon its Common Stock since its inception and, by reason of its contemplated future financial requirements and business plans, does not contemplate or anticipate paying any dividends upon its Common Stock in the foreseeable future. The Company presently plans to retain earnings, to the extent that there are any, to finance the development and expansion of its business. Furthermore, the Company's loan agreement with PNC Bank prohibits the Company from paying dividends or making any distributions with respect to any shares of its stock without the prior written consent of the Bank. Item 6. Selected Financial Data ----------------------- The selected consolidated financial data set forth below for the years ended October 31, 1997, 1996, 1995, 1994 and 1993 were derived from the audited consolidated financial statements of the Company. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related Notes appearing elsewhere.
(In thousands, except per share data) Years Ended ----------- October 31, ------------ 1997 1996 1995 ---- ---- ---- Operating Data: Net Revenues $ 38,660 $ 35,126 $ 31,521 Cost of Services $ 19,339 $ 13,136 $ 15,036 Gross Profit $ 19,321 $ 16,989 $ 16,485 General and Administrative Expenses $ 17,436 $ 15,793 $ 14,702 Income (Loss) from Operations $ 1,885 $ 1,196 $ 1,783 Non-Recurring Gain on Sale of Intangible Assets $ 2,026 $ -- $ -- Other Expenses - Net $ 850 $ 552 $ 332 Extraordinary Item - Gain on Extinguishment of Debt $ -- $ -- $ -- Provision for Income Tax Expense (Benefit) $ (139) $ 52 $ 49 Net Income (Loss) $ 3,200 $ 592 $ 1,402 Net (Loss) Income Per Common Share $ .36 $ .10 $ .23 Cash Dividends Per Common Share $ -- $ -- $ -- Balance Sheet Data: Total Assets $ 29,095 $ 28,231 $ 24,201 Total Long- Term Liabilities $ 921 $ 1,533 $ 843 Working Capital (Deficit) $ 13,570 $ 16,128 $ 12,945 Stockholders' Equity (Deficit) $ 15,525 $ 12,103 $ 11,256 Years Ended ----------- October 31, ------------ 1994 1993 ---- ---- Operating Data: Net Revenues $ 22,946 $ 18,783 Cost of Services 11,396 10,469 Gross Profit 11,550 8,314 General and Administrative Expenses 10,550 9,154 Income (Loss) from Operations 1,000 (840) Non-Recurring Gain on Sale of Intangible Assets $ -- $ -- Other Expenses - Net $ 307 $ 1,474 Extraordinary Item - Gain on Extinguishment of Debt $ 447 $ -- Provision for Income Tax Expense (Benefit) $ -- $ -- Net Income (Loss) $ 1,140 $ (2,314) Net (Loss) Income Per Common Share $ .23 $ (1.07) Cash Dividends Per Common Share $ -- $ -- Balance Sheet Data: Total Assets $ 17,381 $ 9,105 Total Long- Term Liabilities $ 708 $ 478 Working Capital (Deficit) $ 9,134 $ 11,290 Stockholders' Equity (Deficit) $ 8,246 $ (2,185)
A number of proposals for legislation are under discussion which could substantially reduce Medicare and Medicaid reimbursements to clinical laboratories. Depending upon the nature of regulatory action and the content of legislation, the Company could experience a significant decrease in revenues from Medicare and Medicaid, which could have material adverse effect on the Company. The Company is unable to predict, however, the extent to which such actions will be taken. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - --------------------- Fiscal Year 1997 Compared to Fiscal Year 1996 - --------------------------------------------- NET REVENUES: - ------------ Net revenues for the twelve month period ended October 31, 1997 were $38,660,184 as compared to $35,125,878 for the prior comparable period ended October 31, 1996; this represents a 10% increase in net revenues. On September 30, 1997, the Company completed the sale of certain assets of its GenCare Division ("GenCare") to an unrelated third party. During the eleven month period ending September 30, 1997, net revenues related to GenCare was $2,116,523 or 5.5% of the Company's net revenues. The number of patients serviced for the twelve month period ended October 31, 1997 was 728,321 which was an increase of 5% over the same period in 1996. The number of patients processed by GenCare during this same twelve month period was 21,268. Net revenue per patient including GenCare was $53.08 for the period ending October 31, 1997 as compared to $50.46 an increase of 5.2%. Net revenue per patient excluding GenCare was $51.68 or a 2.6% decrease in per patient revenues for the current twelve month period. Management can not project if these increases will continue, or if they do, at what rate. However, management believes but cannot assure, that the fastest growing portion of the GenCare assets were retained by the Company. COST OF SERVICES: - ---------------- Cost of services increased from $18,136,395 for the twelve month period ended October 31, 1996 to $19,339,274 for the twelve month period ended October 31, 1997. This represents a 7% increase in direct operating costs and is in line with the 10% increase in net revenues. GROSS PROFITS: - ------------- Gross revenues increased from $16,989,483 or 48% of net revenues for the twelve month period ended October 31, 1996 to $19,320,910 or 50% of net revenues for the twelve month period ended October 31, 1997; an increase of 2%. GENERAL AND ADMINISTRATIVE EXPENSES: - ----------------------------------- General and administrative expenses for the twelve month period ended October 31, 1997 were $17,435,879 as compared to $15,793,247 for the twelve month period ended October 31, 1996, an increase of $1,642,632 (10%). The reserve for bad debt was increased by $1,005,700 in the period ended October 31, 1997, compared to the period ended October 31, 1996. When the increase in reserve for bad debt is factored out, General and Administrative Expenses would have increased by 4%. This compares favorably to an increase in net revenues for the period of 10%. INTEREST EXPENSE: - ---------------- Interest expense increased from $840,811 during the twelve month period ending October 31, 1996 to $1,084,347 during the twelve month period ending October 31, 1997. This increase was caused by the Company's increase in asset based borrowings and equipment leases for the eleven months ending September 30, 1997. On October 1, 1997, the Company utilized $3,500,000 of the cash payment received upon closing the GenCare sale to reduce its credit line with PNC Bank. NET INCOME: - ---------- The Company had net income of $3,199,915 for the twelve months ended October 31, 1997 as compared to $591,958 for the twelve months ended October 31, 1996. Two thirds of the increase in net income is attributable to the non-recurring gain on the sale of certain assets of the Company's GenCare Division ($2,025,689). Fiscal Year 1996 Compared to Fiscal Year 1995 - --------------------------------------------- NET REVENUES: - ------------ Net revenues for the twelve month period ended October 31, 1996 were $35,125,878 as compared to $31,521,118 for the prior comparable period ended October 31, 1995; this represents an 11% increase in net revenues. However, due to record snowfalls in the New York metropolitan area and based on volume on non-weather affected days; management estimates net revenues would have been $800,000 greater if the Northeast had not experienced such severe weather. The laboratory's patient count for the twelve month period ending October 31, 1996 increased by 17% over the same period in 1995. Net revenues per patient decreased from $52.98 for the period ending October 31, 1995 to $50.47 for the period ending October 31, 1996. This represents a 5% reduction in reimbursement levels. The Company processed 695,983 patients during the period ended October 31, 1996 and estimates that revenues were reduced by approximately $1,700,000 due to the reduction of reimbursement levels from the prior period. Management cannot project if these decreases will continue, or if they do, at what rate. During July 1996, the Company acquired certain assets and rights including the Customer List related to SBCL's Renal Dialysis Testing Business. While no revenues were generated by this acquisition during fiscal 1996; and SBCL represented that its renal dialysis business was realizing approximately $3,600,000 in annual net revenues, management believes that the Company may realize only approximately $1,000,000 in annual net revenues directly as a result of this acquisition. COST OF SERVICES: - ---------------- Cost of services increased from $15,036,034 for the twelve month period ended October 31, 1995 to $18,136,395 for the period ended October 31, 1996. This represents a 21% increase in direct operating costs. Employee costs increased 19% and represents 44% of the overall increase in direct operating expenses. During this period, direct staffing, increased by 49 employees. Reagents and laboratory supplies increased by 19% over the prior comparable period and is in line with the overall increase in the number of patients processed. Other cost of services for the twelve month period ended October 31, 1996 increased by 26% over the comparable period ended October 31, 1995. This increase is attributable primarily to two factors, (1) a 26% increase in pick-up and delivery expenses and (2) a 35% increase in reference laboratory fees, which is reflective of the complexity of the tests and the geographical area in which these patients are serviced. GROSS PROFITS: - ------------- Gross profit increased from $16,485,084 for the twelve month period ended October 31, 1995 to $16,989,483 for the period ended October 31, 1996; an increase of $504,399. The Company's gross profit margin decreased to 48% for the twelve month period ended October 31, 1996 compared to 52% for the period ended October 31, 1995. This decrease resulted from an increase in net revenues of only 11%, which was impacted by a 5% decrease in reimbursement levels, while direct expenses increased by 21%. The Company believes this decrease was attributable to the adverse effect on revenues due to severe winter weather and a decrease in net revenues per patient. GENERAL AND ADMINISTRATIVE EXPENSES: - ----------------------------------- General and administrative expenses for the twelve month period ended October 31, 1996 were $15,793,247 as compared to $14,702,188 for the period ended October 31, 1995, an increase of $1,091,059 (7%). This increase is in line with the 11% increase in net revenues. INTEREST EXPENSE: - ---------------- Interest expense increased from $605,405 during the twelve month period ending October 31, 1995 as compared to $840,811 during the twelve month period ending October 31, 1996. This increase was caused by the Company's increase in asset based borrowings and equipment leases. NET INCOME: - ---------- The Company had net income of $1,402,169 for the twelve months ended October 31, 1995 as compared to $591,958 for the twelve months ended October 31, 1996. Management believes the decrease in net income was attributable to the extreme winter weather and record snowfalls that the northeast experienced in December, January and February and the 5% reduction in reimbursement rates experienced during the current twelve month period. Liquidity and Capital Resources - ------------------------------- For the Fiscal Year Ended October 31, 1997 Working capital as of October 31, 1997 was $9,415,440 as compared to $4,072,447 at October 31, 1996 an increase of $5,342,993 during the twelve month period. The Company had $6,693,825 in cash and certificates of deposits at October 31, 1997. However, $4,532,000 represented restricted deposits. The Company utilized $171,064 in cash for operating activities. To offset this use of cash the Company raised $4,600,000 from the divestiture of its GenCare product line, reduced its credit line borowing by $2,317,031 and repaid approximately $1,190,733 in existing debt. The capital spending requirements for the Company during 1998 is expected not to exceed $600,000. During fiscal 1997, approximately $143,600 has been spent on capital improvements and approximately $252,300 in capital leases. The Company had current liabilities of $12,649,814 at October 31, 1997. The three largest items in this category are notes payable of $7,613,710, accounts payable of $2,231,693 and accrued salaries and commissions of $1,065,339 Containment of health-care costs, including reimbursement for clinical laboratory services, has been a focus of ongoing governmental activity. Omnibus budget reconciliation legislation, designed to "reconcile" existing laws with reductions and reimbursement required by enactment of a Congressional budget can adversely affect clinical laboratories by reducing Medicare reimbursement for laboratory services. In each of the omnibus budget reconciliation laws enacted in 1987, 1989 and 1990, Medicare reimbursement of clinical laboratories was reduced from previously authorized levels. None of the reductions enacted to date has had a material adverse effect on the Company. For many of the tests performed for Medicare beneficiaries or Medicaid recipients, laboratories are required to bill Medicare or Medicaid directly, and to accept Medicare or Medicaid reimbursement as payment in full. A number of proposals for legislation or regulation are under discussion which could have the effect of substantially reducing Medicare reimbursements for clinical laboratories. Depending upon the nature of regulatory action, if any, which is taken and the content of legislation, if any, which is adopted, the Company could experience a significant decrease in revenues from Medicare and Medicaid, which could have a material adverse effect on the Company. The Company is unable to predict, however, the extent to which such actions will be taken. The Company intends to capitalize on the current trend of consolidation in the clinical laboratory industry through acquisitions of other laboratories in its geographical region with significant customer lists. Purchase prices to acquire other laboratories may involve cash, notes, Common Stock, and/or combinations thereof. The Company has a credit facility with PNC Bank, N.A. for $10,000,000. As of October 31, 1997, $6,761,710 of this facility was being utilized. In addition, the Company had verbally renegotiated the convertible debt due to certain former owners of GenCare that were due and payable on January 4, 1997 in the amount of approximately $235,729. These notes were fully paid in November, 1997. Cash on hand, equity financing and additional borrowing capabilities are expected to be sufficient to meet anticipated operating requirements, debt repayments and provide funds for capital expenditures, excluding acquisitions for the foreseeable future. For the Fiscal Year Ended October 31, 1996 Working capital as of October 31, 1996 was $4,072,447 as compared to $4,551,855 at October 31, 1995 a decrease of $479,408 during the twelve month period. The Company had $5,933,474 in cash and certificates of deposits at October 31, 1996. However, $4,532,000 represented restricted deposits. The Company utilized $1,895,465 in cash for operating activities. To offset this use of cash the Company raised $1,180,000 in long-term debt, $3,687,448 in credit line borrowings and repaid approximately $2,327,868 in existing debt. The capital spending requirements for the Company during 1997 is expected not to exceed $600,000. During fiscal 1996, approximately $660,000 has been spent on capital improvements. The Company had current liabilities of $14,594,347 at October 31, 1996. The three largest items in this category are notes payable of $9,930,741, accounts payable of $2,147,403 and current portion of long-term debt of $730,374. Project 2000 - ------------ The Company is in the process of identifying those systems that require changes to accommodate the year 2000. It has identified four areas of concern. They are the laboratory's operations and billing systems, the general accounting systems and the two systems outside of its control; one being the payor systems and the other being the vendor systems. At the present time, it appears that the laboratory systems will require changes that translate into approximately $50,000.00 in costs. The general accounting systems (which are supplied by an outside vendor) will cost the Company less than $2,000.00 to convert and are scheduled for conversion during the second quarter of the current fiscal year. The payor systems are being converted per instructions on the part of each payor (i.e. Medicare, Medicaid, insurance companies, etc.). For example, electronic claims filing for Medicare has been completed, while the Company has been told not to make any changes for New Jersey medicaid until it is notified to do so. The final system of concern to the Company is its suppliers. Once its general accounting is converted to accommodate the year 2000, the Company is confident that it will accept the input of all vendor invoices. Note Regarding Forward-Looking Statements - ----------------------------------------- This Annual Report on Form 10-K contains historical information as well as forward-looking statements. Statements looking forward in time are included in this Annual Report pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks and uncertainties that may cuase the Company's actual results in future periods to be materially different from any future performance suggested herein. Impact of Inflation - ------------------- To date, inflation has not had a material effect on the Company's operations. New Authoritative Pronouncements - -------------------------------- The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128, Earnings Per Share ("EPS"), and SFAS No. 129, "Disclosure of Information about Capital Structure" in February 1997. SFAS No. 128 simplifies the earnings per share ("EPS") calculations required by Accounting Principles Board ("APB") Opinion O. 15, and related interpretations, by replacing the presentation of primary EPS with a presentation of basic EPS. SFAS No. 128 requires dual presentation of basic and diluted EPS by entities with complex capital structures. Basic EPS includes no dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings of an entity, similar to the fully diluted EPS of APB Opinion No. 15. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. When adopted, SFAS No. 128 will require restatement of al prior-period EPS data presented. Basic EPS will be based on average common shares outstanding and diluted EPS will include the effects of potential common stock, such as, options and warrants. The Company's basic EPS as calculated under SFAS No. 128 would have been $.43 for the year ended October 31, 1997. The Company's diluted EPS as calculated under SFAS No. 128 would have been $.40 for the year ended October 31, 1997. SFAS No. 129 does not change any previous disclosure requirements, but rather consolidates existing disclosure requirements for each of retrieval. The Financial Accounting Standards Board ("FASB) issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Earlier application is permitted. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company is in the process of determining its preferred format. The adoption of SFAS No. 130 will have no impact on the Company's consolidated results of operations, financial position or cash flows. The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 changes how operating segments are reported in annual financial statements issued to shareholders. SFAS No. 131 is effective for periods beginning after December 15, 1997, and comparative information for earlier years is to be restated. SFAS No. 131 need not be applied to interim financial statements in the initial year of its application. The Company is in the process of evaluating the disclosure requirements. The adoption of SFAS No. 131 will have no impact on the Company's consolidated results of operations, financial position or cash flows. Item 7A. Quantitative and Qualitative Disclosure About Market Risk --------------------------------------------------------- Not applicable. Item 8. - Financial Statements and Supplementary Data ------------------------------------------- Financial Statements are annexed hereto Item 9. - Changes in and Disagreements with Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure - --------------------- None PART III Item 10.- Directors and Executive Officers of the Registrant -------------------------------------------------- The following table sets forth certain information with respect to each of the directors and executive officers of the Company. Name Age Position - ---- Marc D. Grodman, M.D. 46 Chairman of the Board, President, Chief Executive Officer and Director Howard Dubinett 46 Executive Vice President, Chief Operating Officer and Director Sam Singer 5 Vice President, Chief Financial Officer, Chief Accounting Officer and Director Frank DeVito 56 Director John Roglieri, M.D. 56 Director Gary Lederman, Esq. 63 Director Marc D. Grodman, M.D. founded the Company in December 1981 and has been its Chairman of the Board, President, Chief Executive Officer and a Director since its formation. Dr. Grodman is an Assistant Professor of Clinical Medicine at Columbia University College of Physicians and Surgeons and Assistant Attending Physician at Presbyterian Hospital, New York City. From 1980 to 1983, Dr. Grodman attended the Kennedy School of Government at Harvard University and was a Primary Care Clinical Fellow at Massachusetts General Hospital. From 1982 to 1984, he was a medical consultant to the Metal Trades Department of the AFL-CIO. Dr. Grodman received a B.A. degree from the University of Pennsylvania in 1973 and an M.D. degree from Columbia University College of Physicians and Surgeons in 1977. Except for approximately 20 hours per month spent as Assistant Professor of Clinical Medicine and Assistant Attending Physician at Columbia University and Presbyterian Hospital and rendering medical services to the Uniformed Firefighters Association of New York City, Dr. Grodman devotes all of his working time to the business of the Company. Howard Dubinett has been the Executive Vice-President and Chief Operating Officer of the Company since its formation. He became a Director of the Company in April 1986. Prior to joining the Company, Mr. Dubinett was general manager of Union Prescription Service, Inc., a company which administered prescription drug plans. Mr. Dubinett attended Rutgers University. Mr. Dubinett devotes all of his working time to the business of the Company. Sam Singer has been the Company's Vice President and Chief Financial Officer since October 1987 and a Director since November 1989. He is responsible for all financial activities of the Company. Prior to joining the Company, he was Controller for Sycomm Systems Corporation, a data processing and management consulting company, from 1981 to 1987. He received a B.A. degree from Strayer College and an M.B.A. from Rutgers University. Mr. Singer devotes all of his working time to the business of the Company. Frank DeVito became a Director of the Company in April 1986. Since 1970, Mr. DeVito has been Vice President of the New Jersey State AFL-CIO and from 1960 until December 1985 was President of AFL-CIO United Food and Commercial Workers, Local 1245. From 1981 through December 1985 Mr. DeVito was also President of United Food and Commercial Workers District Council of Metropolitan New York and Northern New Jersey, which was comprised of 35 local unions with approximately 150,000 members. John Roglieri, M.D. became a Director of the Company in September 1995. He is an Assistant Professor of Clinical Medicine at Columbia University's College of Physicians and Surgeons and an Assistant Attending Physician at Presbyterian Hospital, New York City. Dr. Roglieri received a B.S. degree in Chemical Engineering and a B.A. degree in Applied Sciences from Lehigh University in 1960, an M.D. degree from Harvard Medical School in 1966, and a Master's degree from Columbia University School of Business in 1978. From 1969 till 1971, he was a Senior Assistant Surgeon in the U.S. Public Health Service in Washington. From 1971 till 1973 he was a Clinical and Research Fellow at Massachusetts General Hospital. From 1973 to 1975, he was Director of the Robert Wood Johnson Clinical Scholars program at Columbia University. In 1975 he was appointed Vice-President Ambulatory Services at Presbyterian Hospital, a position which he held until 1980. Since 1980, he has maintained a private practice of internal medicine at Columbia-Presbyterian Medical Center. From 1988 till 1992, he was also Director of the Employee Health Service at Presbyterian Hospital. Since 1992, he has been Corporate Medical Director of NYLCare, a managed care subsidiary of New York Life. He is a member of advisory boards to several pharmaceutical companies, a member of the Editorial Advisory Board of the journal Managed Care and a biographee of Who's Who in America. Gary Lederman, Esq. became a director of the Company in May 1997. He received his B.A. from Brooklyn College in 1954 and his J.D. from NYU Law School in 1957. He was manager of Locals 370, 491 and 662 of the U.F.C.W. International Union from 1961 to 1985. He is retired from the unions and has been a lecturer at Queensboro Community College in the field of insurance. He currently serves on an institutional review board for RTL, a pharmaceutical drug testing laboratory. There are no family relationships between or among any directors or executive officers of the Company. The Company's Certificate of Incorporation provides for a staggered Board of Directors (the "Board") pursuant to which the Board is divided into three classes of directors and the members of only one class or one-third of the Board) are elected each year to serve a three-year term. Officers are elected by and hold office at the discretion of the Board of Directors. Key Personnel and Consultants - ----------------------------- The following key personnel and consultants make significant contributions to the Company's operations. Robert Rush, Ph.D (Age 57) has been employed by the Company since July 1993 as Vice President of Technical Operations. From 1989 to 1993, Dr. Rush was a Technical Director for National Health Laboratories, Inc., a national clinical laboratory. From 1988 to 1989 he was the Technical Director of Maryland Medical Laboratory and from 1975 to 1988 he was the Technical Director of Smith-Kline Beecham Clinical Laboratories, another national clinical testing laboratory, in Atlanta, Georgia. Dr. Rush also worked for the Technicon Instruments Corporation, a Tarrytown, New York manufacturer of laboratory equipment, from 1969 to 1972, as a Section Head in Clinical Chemistry. Dr. Rush is a registered Clinical Laboratory Director in the states of New Jersey, New York and Connecticut. He is board certified by the American Board of Clinical Chemistry. Dr. Rush received a B.A. degree in Chemistry from Hunter College in 1962 and M.S. and Ph.D. degrees in Biochemistry in 1964 and 1966 from Pennsylvania State University. William Knakal (Age 46) has been employed by the Company as Vice President of Sales and Marketing since March 1990. He has over 15 years of experience in the laboratory testing industry. Mr. Knakal has held various sales and sales management positions at Smith-Kline Beecham Clinical Laboratories, where he worked for 11 years. He started employment with Smith-Kline Beecham Clinical Laboratories in 1978 and his last position (in 1989) was Director, National Accounts. He received a B.S. degree in Biochemistry from Fordham University in 1974. Benita Ponda, M.D. (Age 52) has been employed by the Company since February, 1994 as Medical Director. She is certified by the American Board of Pathology in Clinical Pathology, Anatomical Pathology and special qualification in Cytopathology. She holds a New York State Department of Health Certificate of Qualification for Laboratory Director. Dr. Ponda's professional appointments include Chief of Cytopathology and Associate Pathologist at New York Methodist Hospital, Brooklyn, New York (January 1992 to February, 1994); Associate Pathologist at Flushing Hospital and Medical Center, Flushing, New York (1981 to 1991) and Director of Laboratory at St. Mary's Hospital for Children (1985 - to date). She received M.B.B.S. degree (equivalent to M.D. in U.S.A.) from Bombay University, Bombay, India in 1970. Bader Maria Pedemonte-Coira, M.D. (Age 39) has been employed by the Company since May, 1996 as Medical Director for GenPath a Bio-Reference laboratory. Formerly, she was with Corning Clinical Laboratories as Director, Cellular Immunology Department and Associate Director, Molecular Tissue Pathology Department, She is certified by the American Board of Pathology in Clinical Pathology and Hematopathology. She holds New York State and New Jersey Departments of Health Certificate of Qualification for Laboratory Director. Dr. Pedemonte-Coira's professional appointments include Adjunct Assistant Professor of Pathology, Columbia University, College of Physicians and Surgeons, New York; Associate Attending Pathologist, Harlem Hospital Center, New York; and Consultant in Immunopathology Bronx-Lebanon Hospital Center, New York. Dr. Pedemonte received her Doctorate of Medicine, Cum Laude, from Autonomous University of Santo Domingo, Santo Domingo, Dominican Republic in 1983. Ayad Mudarris, Ph.D. (Age 47) has been employed by the Company since February 1996 as an Assistant Director of Technical Operation and Director of Toxicology. Dr. Mudarris has been a consultant to the Company since October 1994. From 1992 to 1994, Dr. Mudarris was a Technical Director for National Health Laboratories, a national clinical laboratory located in Cranford, New Jersey. From 1988 to 1992 he was Vice President and Director of Columbia Biomedical Laboratory, A SAMHSA (NIDA) certified forensic drug testing laboratory in Columbia, South Carolina, and from 1987 to 1988 as Scientific and Managing Director of Keystone Laboratory, a toxicology laboratory in Asheville, North Carolina. Dr. Mudarris is a registered Clinical Laboratory Director in the State of New York. He is certified by the American Board of Bioanalysis as a Clinical Laboratory Director and by the National Registry of Clinical chemistry as a Clinical chemist. He received his B.S. degree in Pharmacy from Damascus University in 1975 and M.S. degree in Medical Technology from Long Island University in 1980 and Ph.D. degree in Biochemistry from the University of Arkansas for Medical Sciences in 1986. Compliance with Section 16(a) of the Exchange Act - ------------------------------------------------- Based solely on a review of Forms 3 and 4 and any amendments thereto furnished to the Company pursuant to Rule 16a-3(e) under the Securities Exchange Act of 1934, or representations that no Forms 5 were required, the Company believes that with respect to fiscal 1997, its officers, directors and beneficial owners of more than 10% of its equity timely complied with all applicable Section 16(a) filing requirements. Item 11. - Executive Compensation ---------------------- The following table sets forth information concerning the compensation paid or accrued by the Company during the year ended on October 31, 1997 to its Chief Executive Officer and its other executive officers who were serving as executive officers of the Company on October 31, 1997. During the period ended October 31, 1997, the Company granted 740,000 restricted stock awards and had no long-term incentive plan in effect. All of the Company's group life, health, hospitalization or medical reimbursement plans, if any, do not discriminate in scope, terms or operation, in favor of the executive officers or directors of the Company and are generally available to all salaried employees.
SUMMARY COMPENSATION TABLE Annual Compensation ------------------- Other Year Annual Name and Ended Compen- Principal Position October 31, Salary Bonus sation - ------------------ ---------- ------ ----- ------- Marc D. Grodman M.D. 1997 $265,697 $90,000 $-0- President and Chief 1996 $264,196 $95,000 $-0- Executive Officer 1995 $264,159 $75,000 Howard Dubinett 1997 $148,817 $43,000 Executive Vice 1996 $154,188 $45,000 President and Chief 1995 $144,024 $45,000 Operating Officer Sam Singer 1997 $147,455 $43,000 Vice President and 1996 $153,326 $45,000 Chief Financial and 1995 $144,024 $45,000 Accounting Officer Long-Term Compensation ---------------------- Year Restricted Name and Ended Stock Options Principal Position October 31, Awards(1) (SARs) - ------------------ ---------- --------- ------- Marc D. Grodman M.D. 1997 300,000 300,000(2) President and Chief 1996 -0- -0- Executive Officer 1995 -0- -0- Howard Dubinett 1997 240,000 213,334 Executive Vice 1996 -0- -0- President and Chief 1995 -0- -0- Operating Officer Sam Singer 1997 200,000 116,667 Vice President and 1996 -0- -0- Chief Financial and 1995 -0- -0- Accounting Officer All Year LTIP Other Name and Ended Pay- Compen- Principal Position October 31, outs sation - ------------------ ---------- ---- ------ Marc D. Grodman M.D. 1997 $-0- $-0- President and Chief 1996 $-0- $-0- Executive Officer 1995 $-0- $-0- Howard Dubinett 1997 $-0- $-0- Executive Vice 1996 $-0- $-0- President and Chief 1995 $-0- $-0- Operating Officer Sam Singer 1997 $-0- $-0- Vice President and 1996 $-0- $-0- Chief Financial and 1995 $-0- $-0- Accounting Officer
(1) In connection with their acceptance of the terms of new employment agreements, the Company's boardof directors on May 13, 1997 authorized the issuance to Dr. Grodman, Mr. Dubinett and Mr. Singer of300,000, 240,000 and 200,000 shares of common stock respectively. The shares are forfeitable in part invarious amounts if the employee's employment is terminated "for cause" or at his option "without good reason" prior to May 1, 2000. See "Employment Agreements with Executive Officers" herein. (2) Does not include 604,078 shares of common stock issuable upon conversion of 604,078 shares of Senior Preferred Stock owned by Dr. Grodman, his wife and a corporation controlled by her (collectively the "Grodman Group"). On May 13, 1997 pursuant to a recapitalization, the previously outstanding Senior Preferred Stock owned by the Grodman Group convertible into an aggregate 604,078 shares of common stock on or before April 20, 2003 at a conversion price of $1.50 per share was retired in exchange for a new class of Senior Preferred Stock convertible into an aggregate 604,078 shares of common stock on or before May 1, 2007 at a conversion price of $.75 per share. See Item 13 herein. Employment Agreements with Executive Officers - --------------------------------------------- On May 13, 1997, Dr. Grodman agreed to the terms of a new employment agreement pursuant to which he will serve as president and chief executive officer devoting at least 90% of his working time to the business of the Company. The agreement provides (i) for a seven-year term commencing November 1, 1997; (ii) a minimum annual Base Compensation consisting of salary and bonus in the aggregate amount of $395,000 subject to increases based on increases in the Consumer Price Index as well as increases at the discretion of the board of directors; (iii) typical health insurance coverage and an initial $2,000,000 face amount of "split dollar" life insurance insuring Dr. Grodman's life and payable to his estate (excluding benefits required to be paid to the Company pursuant to the split dollar plan) with $2,000,000 of additional coverage to be applied for in the future; (iv) the leasing of an automobile for his use; (v) participation in fringe benefit, bonus, pension, profit sharing, and similar plans maintained for the Company's employees; (vi) disability benefits; (vii) certain termination benefits; and (viii) in the event of termination due to a change in control of the Company, a severance payment equal to 2.99 times Dr. Grodman's average annual compensation during the preceding five years. In consideration for Dr. Grodman's acceptance of the terms of the employment agreement, the board of directors authorized the issuance to Dr. Grodman of (a) 300,000 shares of the Company's common stock, partially subject to forfeiture, (b) five-year incentive stock options ("ISOs") exercisable to purchase 100,000 shares of common stock at $.790625 per share, and (c) ten-year non-qualified stock options ("NQOs") exercisable to purchase 200,000 shares of common stock at $.71875 per share. The ISOs are only exercisable while Dr. Grodman is employed by the Company. The NQOs expire if Dr. Grodman's employment agreement is terminated by the Company "For Cause" or at his option, "Without Good Reason." See "Employee Incentive Stock Option Plan." The 300,000 shares of common stock issued to Dr. Grodman are forfeitable in part on the following basis if his employment agreement is terminated by the Company "For Cause" or at Dr. Grodman's option "Without Good Reason."
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); (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); (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 Incentive Stock Option Plan - ------------------------------------ In July 1989, the Company's Board of Directors adopted the 1989 Employees Stock Option Plan (the "1989 Plan") which was approved by shareholders in November 1989. The 1989 Plan provides for the grant of options to purchase up to 666,667 shares of Common Stock. Under the terms of the 1989 Plan, options granted thereunder may be designated as options which qualify for incentive stock option treatment ("ISOs") under Section 422 of the Code, or options which do not so qualify ("NQOs"). The 1989 Plan also grants the Board or a Stock Option Committee designated by the Board, the discretion to grant stock appreciation rights ("SARs") in connection with, or independent of, any grant of options under the 1989 Plan. SARs give the holder the right to receive from the Company upon exercise an amount equal to the excess of the aggregate fair market value on the date of exercise of the number of shares of Common Stock as to which SARs are being exercised over the aggregate exercise price for those shares payable either in cash or Common Stock in the discretion of the Board or the Stock Option Committee. The 1989 Plan is administered by the Board or by a Stock Option Committee designated by the Board of Directors. The Board or the Stock Option Committee, as the case may be, has the discretion to determine the eligible employees to whom, and the times and the price at which, option will be granted; whether such options shall be ISOs or NonISOs; the periods during which options will be exercisable; and the number of shares subject to each option. The Board or Committee shall have full authority to interpret the 1989 Plan and to establish and amend rules and regulations relating thereto. Under the 1989 Plan, the exercise price of an option designated as an ISO shall not be less than the fair market value of the Common Stock on the date the option is granted. However, in the event an option designated as an ISO is granted to a 10% shareholder (as defined in the 1989 Plan) such exercise price shall be at least 110% of such fair market value. Exercise prices of Non-ISO options may be less than such fair market value. The aggregate fair market value of shares subject to options granted to a participant which are designated as ISOs which become exercisable in any calendar year shall not exceed $100,000. As described above, on May 13, 1997, the board of directors granted five-year ISOs under the Plan to Dr. Grodman, exercisable to purchase 100,000 shares of the Company's common stock at an exercise price of $.790625 per share (equal to 110% of the last sale price for the common stock on NASDAQ on May 12, 1997). The board also granted ten-year ISOs under the Plan to Mr. Dubinett and Mr. Singer exercisable to purchase 60,000 shares and 50,000 shares of common stock respectively at an exercise price of $.71875 per share (equal to the last sale price for the common stock on NASDAQ on May 12, 1997). In addition, the board granted ten-year NQOs to Dr. Grodman, exercisable to purchase 200,000 shares of common stock at an exercise price of $.71875 per share. At the same May 3, 1997 directors' meeting, in order to improve employee morale, the board canceled all other outstanding ISOs exercisable to purchase an aggregate 448,710 shares of common stock at exercise prices ranging from $1.3434 to $3.00 per share, and granted new ten-year ISOs under the Plan to 23 employees exercisable to purchase an aggregate 448,710 shares of common stock at an exercise price of $.71875 per share. Included in this grant were ISOs issued to Mr. Dubinett and Mr. Singer exercisable to purchase 153,334 shares and 116,667 shares respectively. (These ISOs replaced ISOs previously granted to said two individuals to purchase 153,334 shares and 116,667 shares respectively at exercise prices ranging from $1.3125 to $1.50 per share.) Also on May 13, 1997, the board of Directors granted five-year NQOs to 31 employees, exercisable to purchase an aggregate 136,100 shares of common stock at $.71875 per share but only while the optionee was employed by the Company. On May 13, 1997, the board also issued five-year warrants to each of its three outside directors, exercisable to purchase 10,000 shares (30,000 in the aggregate) of common stock at an exercise price of $.71875 per share, but only while serving as a director. At the same time, the board reduced the exercise price on warrants held by one outside director, John Roglieri, exercisable to purchase 23,334 shares ranging from $3.00 per share to $3.75 per share to $.71875 per share and issued five-year warrants to another outside director, Gary Lederman, exercisable to purchase 5,200 shares at $.71875 per share. See Note 10 of Notes to the Consolidated Financial Statements. The following table illustrates information concerning stock option grants made during fiscal 1997 to each of the executive officers named in the "Summary Compensation Table."
Option Grants in Fiscal 1997 ---------------------------- Number of Percent of Shares Total Options of Common Granted to Stock Employees and Underlying Consultants" Name Options Granted in Fiscal Year - ---- --------------- -------------- Marc D. Grodman 200,000 19.4 100,000 9.7 Howard Dubinett 213,334 20.7 Sam Singer 166,667 16.2 Exercise Expir- Price ation Name Per Share Date - ---- --------- ---- Marc D. Grodman $.71875 5/12/07 $.790625 5/12/02 Howard Dubinett $.71875 5/12/07 Sam Singer $.71875 5/12/97 Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term (1) --------------- Name 5% 10% - ---- -- --- Marc D. Grodman $263,064 $369,600 $124,345 $177,613 Howard Dubinett $280,602 $394,241 Sam Singer $219,220 $308,000
- ------------------------------------ (1) Assumes appreciation at the stated rates in the market price for Bio-Reference common stock. The option will have no value unless, and only to the extent that the market price for Bio-Reference common stock appreciates from the grant date to the exercise date. The following table sets forth certain information concerning unexercised options for each of the executive officers named in the "Summary Compensation Table." No options were exercised by any of such individuals in fiscal 1997.
1997 Fiscal Year-End Option Values ---------------------------------- Number of Unexercised Options At 1997 Fiscal Year-End ----------------------- Value of Unexercised In-The-Money Name Exercisable Unexercisable Options at 10/30/97 - ---- ----------- ------------- ------------------- Marc D. Grodman 200,000 -0- $175,000 100,000 -0- $ 80,313 Howard Dubinett 213,334 -0- $186,667 Sam Singer 166,667 -0- $145,835
Directors' Compensation Directors who are not employees of the Company are also paid a $1,000 per quarter director's fee.Item 12. - Security Ownership of Certain Beneficial Owners and Management -------------------------------------------------------------- The following table sets forth information as of January 16, 1998 with respect to the ownership of Common Stock by (i) each person known by the Company to be the beneficial owner of more than 5% of its outstanding Common Stock, (ii) each director of the Company, (iii) each executive officer of the Company, and (iv) all directors and executive officers as a group. The percentages have been calculated on the basis of treating as outstanding for a particular holder, all shares of Common Stock outstanding on said date owned by such holders and all shares of Common Stock issuable to such holder in the event of exercise or conversion of outstanding options, warrants and convertible securities owned by such holder at said date which are exercisable or convertible within 60 days of such date.
Shares of Name and Address of Common Stock Percentage Beneficial Owner Beneficially Owned(1) Ownership - ---------------- --------------------- --------- Directors and Executive Officers* Marc D. Grodman(2) 1,521,845 18.9% Howard Dubinett (3) 475,001 6.4% Sam Singer(4) 377,667 5.2% Frank DeVito(5) 10,202 - John Roglieri(6) 35,001 - Gary Lederman (7) 15,200 - Executive Officers and directors 2,434,916 28.6% as a group (six persons) (2)(3) (4)(5)(6)(7)
* The address of all of the Company's directors and executive officers is c/o the Company, 481 Edward H. Ross Drive, Elmwood Park, New Jersey 07407. (1) Except otherwise noted, each holder named in the table has sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned. (2) Includes 476,100 shares owned directly by Dr. Grodman, 549,678 shares issuable upon conversion of Senior Preferred Stock and 300,000 shares issuable upon exercise of options. Also includes 141,667 shares owned directly and 54,400 shares issuable upon conversion of Senior Preferred Stock held by Dr. Grodman's wife, Pam Grodman, and a Company controlled by her. Dr. Grodman disclaims beneficial ownership of these 196,067 shares. (3) Includes 261,667 shares owned directly, and 213,334 shares issuable upon exercise of options. (4) Includes 211,000 shares owned directly, and 166,667 shares issuable upon exercise of options. (5) Includes 202 shares owned directly and 10,000 shares issuable upon exercise of warrants. (6) Includes 1,667 shares owned directly and 33,334 shares issuable upon exercise of warrants. (7) Includes 15,200 shares issuable upon exercise of warrants. Item 13. - Certain Relationships and Related Transactions --------------------------------------------- In July 1989, the Company discontinued the operation of its Med-Mobile Division. At such time, Dr. Grodman, as the Associated Physician, was indebted to the Company in the amount of $235,354 in connection with the operation of this division. Pursuant to an October 1, 1989 Settlement Agreement, Dr. Grodman issued a $235,354 promissory note to the Company bearing interest at 10% per annum and payable at the rate of $50,000 per annum in payment of this indebtedness. On April 30, 1992, the Board of Directors amended this agreement, in consideration for Dr. Grodman's personal guarantee of the Company's $2,500,000 financing arrangement with Towers Financial Corporation, suspending all rental and interest charges for periods subsequent to November 1, 1991. As of October 31, 1997, $214,118 in outstanding principal, interest and van rentals was due from Dr. Grodman. On April 20, 1993, in order to facilitate the Company's 1993 proposed public offering, Dr. Grodman canceled his pro-rata option contained in his employment contract and all other outstanding options and warrants to purchase shares of common stock held by Dr. Grodman, his wife and an affiliated entity (the "Grodman Group") exercisable to purchase an aggregate 604,078 shares of Common Stock at prices ranging from $1.4438 to $1.50 or an average price of $1.47 per share, in consideration for the issuance to the Grodman Group of 604,078 shares of a new class of senior preferred stock, $.10 par value per share ("Senior Preferred Stock"). Each share of Senior Preferred Stock had the same voting rights (one vote per share), dividend rights and liquidation rights as each share of common stock and for a period of 10 years after issuance, was convertible into one share of common stock upon payment of a conversion price of $1.50 per share. The 604,078 shares of Senior Preferred Stock were issued to the Grodman Group on August 23, 1993. On May 13, 1997 pursuant to a recapitalization, the Senior Preferred was retired in exchange for a new class of Senior Preferred Stock issued to the Grodman Group. The new Senior Preferred Stock is convertible into an aggregate 604,078 shares of common stock on or before May 1, 2007 at a conversion price of $.75 per share and has the same voting rights (one vote per share), dividend rights and liquidation rights as each share of common stock. Item 14. Exhibits, Financial Statement Schedules --------------------------------------- and Reports on Form 10-KSB -------------------------- 1. Financial Statements -------------------- The following financial statements of the Company are included in Part II, Item 7 Page to Page ------------ Report of Independent Certified Public Accountants F-1 Balance Sheet - October 31, 1997 and 1996 F-2 ... F-3 Statement of Operations- Years ended October 31, 1997, 1996 and 1995 F-4 ... F-4 Statement of Shareholders' Equity Years ended October 31, 1997, 1996 and 1995 F-5 ... F-6 Statement of Cash Flows - Years ended October 31, 1997, 1996 and 1995 F-7 ... F-9 Notes to Financial Statements- F-10... F-25 Schedule II - Years ended October 31, 1997, 1996 and 1995 F-26... F-27 2. Reports on Form 8-K ------------------- During the Quarter ended October 31, 1997, the Company filed one report on Form 8-K in Item 2., the disposition of certain assets of its GenCare Division to an unrelated third party, IMPATH, Inc. 3. Exhibits -------- None SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BIO-REFERENCE LABORATORIES, INC. By: /S/ Marc D. Grodman ------------------------------- Marc D. Grodman Chairman of the Board, President, Chief Executive Officer and Director Dated: February 11, 1998 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /S/ Marc D. Grodman - ---------------------------------------- Marc D. Grodman Chairman of the Board, President, Chief Executive Officer and Director February 11, 1998 /S/ Howard Dubinett - ---------------------------------------- Howard Dubinett Executive Vice President, Chief Operating Officer and Director February 11, 1998 /S/ Sam Singer - ---------------------------------------- Sam Singer Vice President, Chief Financial Officer, Chief Accounting Officer and Director February 11, 1998 /S/ Frank DeVito - --------------------------------------- Frank DeVito Director February 11, 1998 /S/ John Roglieri - --------------------------------------- John Roglieri Director February 11, 1998 /S/ Gary Lederman - ----------------- Gary Lederman Director February 11, 1998 EXHIBIT INDEX ------------- Incorporated by Exhibit No. Item Reference to - ----------- ---- ------------ 3.1* Amended and Restated Certificate of Incorporation (A) dated November 15, 1989 3.1.1* Amendment to Certificate of Incorporation dated (B) October 4, 1993 (authorizing one-for-10 reverse stock split) 3.1.2* Amendment to Certificate of Incorporation dated (C) August 23, 1993 (creating Senior Preferred Stock) 3.1.3* Amendment to Certificate of Incorporation dated (C) August 23, 1993 (authorizing one-for-three reverse stock split) 3.2* By-laws (D) 4.1* Form of Common Stock Certificate, $.01 par value (C) 4.2* Form of Warrant Agreement between the Company and (C) American Stock Transfer & Trust Company as Warrant Agent 4.3* Form of Redeemable Warrant (attached to Exhibit 4.2) (C) 4.4* Form of Underwriter's Warrant Agreement (C) 4.5* Form of Underwriter's Warrant (attached to (C) Exhibit 4.4) 10.1* Lease Agreement for Elmwood Park, New (E) Jersey Premises March 23, 1988 10.2* Employment Agreement between the Company and (F) Marc Grodman M.D. dated as of January 1, 1991 10.3* Employment Agreement between the Company and (B) Howard Dubinett dated as of November 1, 1989 10.4* Employment Agreement between the Company and (B) Sam Singer dated as of November 1, 1989 10.5* Healthcare Purchase Contract between the (B) Company and Towers Financial Corporation dated as of January 29, 1992 10.6* Asset/Sale Purchase Agreement dated December 31, (G) 1991 between the Company and Pathology Services of Long Island, Inc. 10.7* Asset/Sale Purchase Agreement dated December 31, (G) 1991 between the Company and North Shore Diagnostic Associates 10.8* Consultation Agreement dated December 31, 1991 (G) 1991 between the Company and Advanced Healthcare Resources, Inc. 10.9* Asset/Sale Purchase and Restrictive Covenant Agreement (B) dated June 19, 1992 between the Company and Andre Mencz d/b/a/ MMC Management Company 10.10* The Company's 1986 Stock Option Plan (D) 10.11* The Company's 1989 Stock Option Plan (B) 10.12* Form of Bridge Warrant (B) 10.13* Form of Bridge Note (B) 10.14* Acquisition Agreement made as of October 31, (H) 1994 for the acquisition by the Company of all of the outstanding capital stock of GenCare 10.15* Employment Agreement between the Company (H) and Charles T. Todd, Jr. dated January 4, 1995. 10.16* Agreement and Bill of Sale dated September (I) 30,1997 between the Company and IMPATH concerning the sale of the GenCare assets. 10.17* Non-Competition and Confidentiality (I) Agreement dated September 30, 1997 between the Company, three officers and a fourth key employee on the one hand and IMPATH on the other hand. The exhibits designated above with an asterisk (*) have previously been filed with the Commission and, pursuant to 17 C.F.R. Secs. 201.24 and 240.12b-32, are incorporated by reference to the documents as indicated below. (A) Incorporated by reference to exhibit filed with the Company's Registration Statement on Form S-1 (File No. 33-31360). (B) Incorporated by reference to exhibit filed with the Company's annual report on Form 10KSB for the year ended October 31, 1992. (C) Incorporated by reference to exhibit filed with the Company's Registration Statement on Form SB-2 (File No. 33-68678). (D) Incorporated by reference to exhibit filed with the Company's Registration Statement on Form S-18 (File No. 33-5048-NY). (E) Incorporated by reference to exhibit filed with the Company's Registration Statement on Form S-1 (File No. 33-22721). (F) Incorporated by reference to exhibit filed with the Company's annual report on Form 10-K for the year ended October 31, 1990. (G) Incorporated by reference to exhibit filed with the Company's report on Form 8-K for December 31, 1991. (H) Incorporated by reference to exhibit filed with the Company's report on Form 8-K for January 4, 1995. (I) Incorporated by reference to exhibit filed with the Company's current report on Form 8-K for October 14, 1997. Item 6. Selected Consolidated Financial Data The selected consolidated financial data set forth below for the years ended October 31, 1997, 1996, 1995 1994, and 1993 were derived from the audited consolidated financial statements of the Company. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related Notes appearing elsewhere in the Prospectus.
[In thousands, except per share data] ------------------------------------- Years ended ----------- October 31, ----------- 1 9 9 7 1 9 9 6 1 9 9 5 ------- ------- ------- Operating Data: Net Revenues $ 38,660 $ 35,126 $ 31,521 Cost of Services $ 19,339 $ 18,136 $ 15,036 Gross Profit $ 19,321 $ 16,989 $ 16,485 General and Administrative Expenses $ 17,436 $ 15,793 $ 14,702 Income [Loss] from Operations $ 1,885 $ 1,196 $ 1,783 Non-Recurring Gain on Sale of Intangible Assets $ 2,026 $ -- $ -- Other Expenses - Net $ 850 $ 552 $ 332 Extraordinary Item - Gain on Extinguishment of Debt $ -- $ -- $ -- Provision for Income Tax Expense [Benefit] $ (139) $ 52 $ 49 Net Income [Loss] $ 3,200 $ 592 $ 1,402 Net [Loss] Income Per Common Share $ .36 $ .10 $ .23 Cash Dividends Per Common Share $ -- $ -- $ -- Balance Sheet Data: Total Assets $ 29,095 $ 28,231 $ 24,201 Total Long-Term Liabilities $ 921 $ 1,533 $ 843 Total Liabilities $ 13,570 $ 16,128 $ 12,945 Working Capital [Deficit] $ 9,415 $ 4,072 $ 4,552 Stockholders' Equity [Deficit] $ 15,525 $ 12,103 $ 11,256 1 9 9 4 1 9 9 3 ------- ------- Operating Data: Net Revenues $ 22,946 $ 18,783 Cost of Services $ 11,396 $ 10,469 Gross Profit $ 11,550 $ 8,314 General and Administrative Expenses $ 10,550 $ 9,154 Income [Loss] from Operations $ 1,000 $ (840) Non-Recurring Gain on Sale of Intangible Assets $ -- $ -- Other Expenses - Net $ 307 $ 1,474 Extraordinary Item - Gain on Extinguishment of Debt $ 447 $ -- Provision for Income Tax Expense [Benefit] $ -- $ -- Net Income [Loss] $ 1,140 $ (2,314) Net [Loss] Income Per Common Share $ .23 $ (1.07) Cash Dividends Per Common Share $ -- $ -- Balance Sheet Data: Total Assets $ 17,381 $ 9,105 Total Long-Term Liabilities $ 708 $ 478 Total Liabilities $ 9,134 $ 11,290 Working Capital [Deficit] $ 3,604 $ (5,987) Stockholders' Equity [Deficit] $ 8,246 $ (2,185)
A number of proposals for legislation are under discussion which could substantially reduce Medicare and Medicaid reimbursements to clinical laboratories. Depending upon the nature of regulatory action, and the content of legislation, the Company could experience a significant decrease in revenues from Medicare and Medicaid, which could have a material adverse effect on the Company. The Company is unable to predict, however, the extent to which such actions will be taken. INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of Bio-Reference Laboratories, Inc. Elmwood Park, New Jersey We have audited the accompanying consolidated balance sheets of Bio-Reference Laboratories, Inc. and its subsidiary as of October 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three fiscal years in the period ended October 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bio-Reference Laboratories, Inc. and its subsidiary as of October 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended October 31, 1997, in conformity with generally accepted accounting principles. MOORE STEPHENS, P. C. Certified Public Accountants. Cranford, New Jersey January 9, 1998 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY - ----------------------------------------------- CONSOLIDATED BALANCE SHEETS - ---------------------------
October 31, 1 9 9 7 1 9 9 6 Assets: Current Assets: Cash and Cash Equivalents $ 2,161,825 $ 1,401,474 Cash - Restricted 852,000 852,000 Accounts Receivable - Net 13,737,881 12,019,761 Inventory 453,870 394,377 Certificates of Deposit - Restricted 3,601,250 3,556,250 Other Current Assets 1,000,428 442,932 Deferred Tax Asset 258,000 -- ----------- ----------- Total Current Assets 22,065,254 18,666,794 ----------- ----------- Property and Equipment: Automobiles 57,656 57,656 Medical Equipment and Vans 2,146,896 1,806,082 Leasehold Improvements 370,283 350,557 Furniture and Fixtures 398,187 362,835 ----------- ----------- Totals - At Cost 2,973,022 2,577,130 Less: Accumulated Depreciation 1,685,298 1,265,836 ----------- ----------- Property and Equipment - Net 1,287,724 1,311,294 ----------- ----------- Other: Certificate of Deposit - Restricted 78,750 123,750 Due from Related Party [6] 214,118 234,918 Deposits 213,347 220,254 Goodwill [Net of Accumulated Amortization of $994,015 and $1,052,038, Respectively] 1,406,570 3,168,403 Intangible Assets [Net of Accumulated Amortization of $1,891,970 and $1,444,265, Respectively] 3,382,393 4,164,286 Other Assets 446,903 341,037 ----------- ----------- Total Other 5,742,081 8,252,648 ----------- ----------- Total Assets $29,095,059 $28,230,736 =========== ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements. BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY - ----------------------------------------------- CONSOLIDATED BALANCE SHEETS - ---------------------------
October 31, 1 9 9 7 1 9 9 6 ------- ------- Liabilities and Shareholders' Equity: Current Liabilities: Accounts Payable $ 2,231,693 $ 2,147,403 Accrued Salaries and Commissions 1,065,339 878,996 Accrued Expenses 511,386 327,876 Current Maturities of Long-Term Debt [Net of Discount] [4] 864,266 730,374 Notes Payable - Banks [3] 7,613,710 9,930,741 Capitalized Lease Obligation - Short-Term Portion [12] 84,970 202,147 Current Maturities of Convertible Subordinated Debt [5] 1,339 235,729 Taxes Payable 277,111 141,081 ------------ ------------ Total Current Liabilities 12,649,814 14,594,347 ------------ ------------ Long-Term Liabilities: Long-Term Debt Less Current Maturities [4] 668,030 1,433,817 Capitalized Lease Obligations - Long-Term Portion [12] 252,572 99,564 ------------ ------------ Total Long-Term Liabilities 920,602 1,533,381 ------------ ------------ Commitments and Contingencies [13] -- -- ------------ ------------ Shareholders' Equity: [8 and 10] Preferred Stock, Par Value $.10 Per Share, Authorized 1,062,589 Shares; None Issued -- -- Series A - Senior Preferred Stock, Par Value $.10 Per Share, Authorized, Issued and Outstanding 604,078 Shares 60,408 60,408 Common Stock, Par Value $.01 Per Share, Authorized 18,333,333 Shares; Issued and Outstanding 7,169,376 and 6,300,280 Shares at October 31, 1997 and 1996, Respectively 71,694 63,003 Additional Paid-in Capital 22,967,160 22,433,297 Accumulated [Deficit] (7,231,568) (10,431,483) ------------ ------------ Totals 15,867,694 12,125,225 Deferred Compensation (343,051) (22,217) ------------ ------------ Total Shareholders' Equity 15,524,643 12,103,008 ------------ ------------ Total Liabilities and Shareholders' Equity $ 29,095,059 $28,230,736 ============ ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements. BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY - ----------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS - -------------------------------------
Y e a r s e n d e d --------------------- O c t o b e r 3 1, -------------------- 1 9 9 7 1 9 9 6 1 9 9 5 ------- ------- Net Revenues $ 38,660,184 $ 35,125,878 $ 31,521,118 ------------ ------------ ------------ Cost of Services: Depreciation and Amortization 390,953 378,694 337,802 Employee Related Expenses 8,595,078 8,503,156 7,140,830 Reagents and Laboratory Supplies 4,777,325 4,430,381 3,723,867 Other Cost of Services 5,575,918 4,824,164 3,833,535 ------------ ------------ ------------ Total Cost of Services 19,339,274 18,136,395 15,036,034 ------------ ------------ ------------ Gross Profit 19,320,910 16,989,483 16,485,084 ------------ ------------ ------------ General and Administrative Expenses: Depreciation and Amortization 798,365 655,192 621,929 Other General and Administrative Expenses 11,346,007 10,761,548 10,050,229 Provision for Doubtful Accounts 5,291,507 4,285,807 4,030,030 Expenses of Abandoned Acquisition -- 90,700 -- ------------ ------------ ------------ Total General and Administrative Expenses 17,435,879 15,793,247 14,702,188 ------------ ------------ ------------ Income from Operations 1,885,031 1,196,236 1,782,896 ------------ ------------ ------------ Non-Recurring Gain on Sale of Intangible Assets [22] 2,025,689 -- -- ------------ ------------ ------------ Other [Income] Expense: Interest and Other Expense 1,124,432 840,811 605,405 Interest Income (274,887) (288,395) (273,903) ------------ ------------ ------------ Total Other Expense - Net 849,545 552,416 331,502 ------------ ------------ ------------ Income Before Income Taxes 3,061,175 643,820 1,451,394 Provision for Income Tax Expense [Benefit] [7] (138,740) 51,862 49,225 ------------ ------------ ------------ Net Income $ 3,199,915 $ 591,958 $ 1,402,169 ============ ============ ============ Net Income Per Share [9] $ .36 $ .10 $ .23 ============ ============ ============
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements. BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY - ----------------------------------------------- CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - -----------------------------------------------
Series A Senior Preferred Stock Shares Amount Balance - October 31, 1994 $ 604,078 $ 60,408 Shares Issued from Exercise of Warrants -- -- Shares Issued in Connection with an Acquisition -- -- Shares Issued in Lieu of Payment for Service -- -- Expenses Associated with Public Offering Amortization of Deferred Compensation -- -- Unrealized Loss on Securities Available for Sale -- -- Net Income for the Year -- -- ---------- -------- Balance - October 31, 1995 604,078 60,408 Shares Issued in Connection with an Acquisition 10,000 100 Shares Issued in Connection with an Acquisition [Including Shares Remaining in Escrow] 72,688 727 Shares Issued in Lieu of Payment for Service 4,000 40 Shares issued in Lieu of an Invoice Payment 4,745 48 Shares Issued in Connection with an Acquisition Agreement [Including Shares Remaining in Escrow] 133,333 1,333 Options Issued for Deferred Compensation 27,200 -- Amortization of Deferred Compensation -- -- Unrealized Loss on Securities Available for Sale -- -- Net Income for the Year -- -- ---------- -------- Balance - October 31, 1996 - Forward $ 604,078 $ 60,408 Balance - October 31, 1996 - Forwarded 604,078 $ 60,408 Shares Issued for Deferred Compensation -- -- Warrants Issued for Deferred Compensation -- -- Shares Issued in Connection with an Acquisition Agreement -- -- Shares Released from Escrow -- -- Amortization of Deferred Compensation -- -- Net Income for the Year -- -- ----------- --------- Balance - October 31, 1997 604,078 $ 60,408 =========== ========= Common Stock Shares Amount Balance - October 31, 1994 $ 5,740,162 $ 57,402 Shares Issued from Exercise of Warrants 12,100 121 Shares Issued in Connection with an Acquisition 311,252 3,112 Shares Issued in Lieu of Payment for Service 12,000 120 Expenses Associated with Public Offering -- -- Amortization of Deferred Compensation -- -- Unrealized Loss on Securities Available for Sale -- -- Net Income for the Year -- -- ----------- -------- Balance - October 31, 1995 6,075,514 60,755 Shares Issued in Connection with an Acquisition 10,000 100 Shares Issued in Connection with an Acquisition [Including Shares Remaining in Escrow] 72,688 727 Shares Issued in Lieu of Payment for Service 4,000 40 Shares issued in Lieu of an Invoice Payment 4,745 48 Shares Issued in Connection with an Acquisition Agreement [Including Shares Remaining in Escrow] 133,333 1,333 Options Issued for Deferred Compensation -- -- Amortization of Deferred Compensation -- -- Unrealized Loss on Securities Available for Sale -- -- Net Income for the Year -- -- ----------- -------- Balance - October 31, 1996 - Forward 6,300,280 $ 63,003 Balance - October 31, 1996 - Forwarded 6,300,280 $ 63,003 Shares Issued for Deferred Compensation 815,000 8,150 Warrants Issued for Deferred Compensation -- -- Shares Issued in Connection with an Acquisition Agreement 54,096 541 Shares Released from Escrow -- -- Amortization of Deferred Compensation -- -- Net Income for the Year -- -- ----------- -------- Balance - October 31, 1997 7,169,376 $ 71,694 Additional ---------- Paid-in Accumulated Deferred ------- ----------- -------- Capital [Deficit] Compensation ------- --------- ------------ Balance - October 31, 1994 $ 20,619,399 $(12,425,610) $ (65,135) Shares Issued from Exercise of Warrants 18,029 -- Shares Issued in Connection with an Acquisition 1,630,962 -- -- Shares Issued in Lieu of Payment for Service 25,380 -- -- Expenses Associated with Public Offering (70,240) -- -- Amortization of Deferred Compensation -- -- 47,635 Unrealized Loss on Securities Available for Sale -- -- -- Net Income for the Year -- 1,402,169 -- ----------- ------------ ------------ Balance - October 31, 1995 22,223,530 (11,023,441) Shares Issued in Connection with an Acquisition 23,900 -- -- Shares Issued in Connection with an Acquisition [Including Shares Remaining in Escrow] 94,208 -- -- Shares Issued in Lieu of Payment for Service 9,560 -- -- Shares issued in Lieu of an Invoice Payment 17,151 -- -- Shares Issued in Connection with an Acquisition Agreement [Including Shares Remaining in Escrow] 37,748 -- -- Options Issued for Deferred Compensation 27,200 -- (27,200) Amortization of Deferred Compensation -- -- 22,483 Unrealized Loss on Securities Available for Sale -- -- -- Net Income for the Year -- 591,958 -- ----------- ------------ ------------ Balance - October 31, 1996 - Forward $22,433,297 $(10,431,483) $ (22,217) Balance - October 31, 1996 - Forwarded $22,433,297 $(10,431,483) Shares Issued for Deferred Compensation 337,919 -- Warrants Issued for Deferred Compensation 13,423 -- (13,423) Shares Issued in Connection with an Acquisition Agreement 127,320 -- -- Shares Released from Escrow 55,201 -- -- Amortization of Deferred Compensation -- -- 38,658 Net Income for the Year -- 3,199,915 -- ----------- ------------ ------------ Balance - October 31, 1997 $22,967,160 $ (7,231,568) Unrealized Loss on Securities Total Available Shareholders' for Sale Equity Balance - October 31, 1994 $ -- $ 8,246,464 Shares Issued from Exercise of Warrants -- 18,150 Shares Issued in Connection with an Acquisition -- 1,634,074 Shares Issued in Lieu of Payment for Service -- 25,500 Expenses Associated with Public Offering -- (70,240) Amortization of Deferred Compensation -- 47,635 Unrealized Loss on Securities Available for Sale (47,998) (47,998) Net Income for the Year -- 1,402,169 ----------- ------------ Balance - October 31, 1995 (47,998) 11,255,754 Shares Issued in Connection with an Acquisition -- 24,000 Shares Issued in Connection with an Acquisition [Including Shares Remaining in Escrow] -- 94,935 Shares Issued in Lieu of Payment for Service -- 9,600 Shares issued in Lieu of an Invoice Payment -- 17,199 Shares Issued in Connection with an Acquisition Agreement [Including Shares Remaining in Escrow] -- 39,081 Options Issued for Deferred Compensation -- -- Amortization of Deferred Compensation -- 22,483 Unrealized Loss on Securities Available for Sale 47,998 47,998 Net Income for the Year -- 591,958 ----------- ------------ Balance - October 31, 1996 - Forward $ -- $ 12,103,008 Balance - October 31, 1996 - Forwarded $ -- $ 12,103,008 Shares Issued for Deferred Compensation -- -- Warrants Issued for Deferred Compensation -- -- Shares Issued in Connection with an Acquisition Agreement -- 127,861 Shares Released from Escrow -- 55,201 Amortization of Deferred Compensation -- 38,658 Net Income for the Year -- 3,199,915 ----------- ------------ Balance - October 31, 1997 $ -- $ 15,524,643 =========== ============
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements. BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY - ---------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------
Y e a r s e n d e d --------------------- O c t o b e r 3 1, ------------------- 1 9 9 7 1 9 9 6 1 9 9 5 ------- ------- ------- Operating Activities: Net Income $ 3,199,915 $ 591,958 $ 1,402,169 ----------- ------------- ----------- Adjustments to Reconcile Net Income to Net Cash [Used for] Operating Activities: Depreciation and Amortization 1,189,318 1,033,886 959,731 Amortization of Deferred Compensation 38,658 22,483 47,635 Expenses of Abandoned Acquisition -- 90,700 -- Shares Issued for Services -- -- 25,500 Provision for Doubtful Accounts 5,291,507 4,285,807 4,030,030 Other -- 20,242 (9,285) Gain from Sale of Marketable Securities -- (9,336) -- Gain on Sale of Assets -- (1,546) -- Nonrecurring Gain on Sale of Intangible Assets (2,025,689) -- -- Deferred Income Taxes (258,000) -- -- Changes in Assets and Liabilities [Net of Effects from Acquisitions]: [Increase] Decrease in: Accounts Receivable (7,509,627) (7,672,430) (6,442,884) Other Assets (105,866) (81,868) (63,230) Inventory (59,493) 60,931 (141,940) Other Current Assets 142,504 12,046 (271,111) Increase [Decrease] in: Accounts Payable and Accrued Expenses (210,861) (126,411) (299,189) Taxes Payable 136,030 (121,927) (6,986) ----------- ------------- ------------ Total Adjustments (3,371,519) (2,487,423) (2,171,729) ----------- ------------ ------------ Net Cash - Operating Activities - Forward (171,604) (1,895,465) (769,560) ---------- ------------- ------------ Investing Activities: Acquisition of Property and Equipment (143,613) (451,576) (424,180) Proceeds from Sale of Property and Equipment -- 29,652 45,961 Purchase of Marketable Securities -- -- (492,619) Proceed from Sale of Marketable Securities -- 501,955 -- Purchase of Certificate of Deposit - Restricted (3,680,000) (180,000) (3,665,650) Maturities of Certificate of Deposit - Restricted 3,680,000 165,650 -- Cash Acquired During Acquisition -- -- 42,338 Cash Overdraft of Acquired Company -- (3,797) -- Reduction of Deposits 6,907 63,146 22,649 Repayment of Related Party Receivable 20,800 15,800 10,400 Payment for Acquisition of Intangible Assets (44,375) (1,564,363) (290,081) Proceeds from Sale of Intangible Assets 4,600,000 -- -- ---------- ------------ ----------- Net Cash - Investing Activities - Forward $4,439,719 $ (1,423,533) $(4,751,182)
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements. BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Y e a r s e n d e d O c t o b e r 3 1, 1 9 9 7 1 9 9 6 1 9 9 5 ------- ------- ------- Net Cash - Operating Activities - Forwarded $ (171,604) $ (1,895,465) $ (769,560) Net Cash - Investing Activities - Forwarded $4,439,719 (1,423,533) (4,751,182) ---------- ------------- ----------- Financing Activities: Proceeds from Long-Term Debt -- 1,180,000 394,756 Payments of Long-Term Debt (739,895) (2,083,476) (2,679,620) Payments of Capital Lease Obligations (216,448) (236,472) (297,642) Payments of Subordinated Notes Payable (234,390) (7,920) (51,039) [Decrease] Increase in Revolving Line of Credit (2,317,031) 3,687,448 5,391,296 Increase in Restricted Cash -- 1,544,646 2,055,354 Proceeds from Exercise of Warrants -- -- 18,150 Expenses of Public Offering of Stock -- -- (70,240) Net Cash - Financing Activities (3,507,764) 4,084,226 4,761,015 Net Increase [Decrease] in Cash and Cash Equivalents 760,351 765,228 (759,727) Cash and Cash Equivalents - Beginning of Years 1,401,474 636,246 1,395,973 Cash and Cash Equivalents - End of Years $ 2,161,825 $ 1,401,474 $ 636,246 Supplemental Disclosures of Cash Flow Information: Cash paid during the years for: Interest $ 1,118,540 $ 815,521 $ 531,381 Income Taxes $ 44,136 $ 86,331 $ 81,686
Supplemental Schedule of Non-Cash Investing and Financing Activities: In November 1994, the Company purchased a customer list from a non-affiliated party. As consideration for the customer list, the seller received $120,000 of which $30,000 was paid at the closing and the remainder is to be paid over 5- years based on the cash collected from customer list revenues. In December 1994, the Company incurred capital lease obligations of $13,713 in connection with the acquisition of office furniture and $12,130 in connection with the acquisition of leasehold improvements. In January 1995, the Company incurred a capital lease obligation of $58,994 in connection with the acquisition of a computer imaging system. In January 1995, $44,119 of trade accounts payable was converted into debt. In January 1995, the Company assumed capital lease obligations of $31,793 for four automobiles in connection with an acquisition. In October 1995, the Company incurred a capital lease obligation of $54,117 in connection with the acquisition of medical equipment. The Accompanying Notes are an Integral Part of These Consolidated Financial Statements. BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Supplemental Schedule of Non-Cash Investing and Financing Activities [Continued]: In April 1996, management wrote-off an intangible asset with a carrying value of $197,986 and related debt in the amount of $168,528 in connection with an impaired contract. In April 1996, management wrote-off an intangible asset with a carrying value of $90,700 in connection with an abandoned acquisition. In October 1996, the Company incurred a capital lease obligation of $69,812 in connection with the acquisition of medical equipment. In Fiscal 1996, the Company issued debt in the amount of $108,000 in connection with the acquisition of a customer list related to a 1994 agreement. From March to July 1997, the Company incurred four capital leases obligations totaling $252,279 in connection with the acquisition of various medical equipment. In fiscal 1997, the Company issued debt in the amount of $108,000 in connection with the acquisition of a customer list related to a 1994 agreement. [See Notes 8, 17 and 22 for additional non-cash transactions] The Accompanying Notes are an Integral Part of These Consolidated Financial Statements. BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [1] Organization and Business Bio-Reference Laboratories, Inc. [the "Company"] was incorporated on December 21, 1981 to initially engage in the business of developing and marketing on-site medical screening examinations. Since February 1987, its emphasis has been in the clinical laboratory segment of its operations, principally servicing the greater New York metropolitan area. [2] Summary of Significant Accounting Policies Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary [See Note 17B]. All significant intercompany accounts and transactions have been eliminated. Revenue Recognition - Revenues are recognized at the time the services are performed. Revenues on the statements of operations are as follows:
Y e a r s e n d e d O c t o b e r 3 1, 1 9 9 7 1 9 9 6 1 9 9 5 Gross Revenues $ 80,462,096 $ 66,768,717 $ 56,097,026 Contractual Adjustments and Discounts: Medicare/Medicaid Portion 23,090,659 18,620,485 15,560,866 Other 18,711,253 13,022,354 9,015,042 Total Contractual Adjustments and Discounts 41,801,912 31,642,839 24,575,908
Net Revenues $38,660,184 $ 35,125,878 $ 31,521,118 A number of proposals for legislation are under discussion which could substantially reduce Medicare and Medicaid reimbursements to clinical laboratories. Depending upon the nature of regulatory action, and the content of legislation, the Company could experience a significant decrease in revenues from Medicare and Medicaid, which could have a material adverse effect on the Company. The Company is unable to predict, however, the extent to which such actions will be taken. Contractual Credits and Provision for Doubtful Accounts - An allowance for contractual credits is determined based upon a review of the reimbursement policies and subsequent collections for the different types of receivables. An allowance for doubtful accounts is determined based upon a percentage of total receivables. The aggregate allowance, which is shown net against accounts receivable, was $8,564,436, $5,357,096 and $2,569,125 as of October 31, 1997, 1996 and 1995, respectively. Inventory - Inventory is stated at the lower of cost [on a first-in, first-out basis] or market. Inventory consists primarily of clinical supplies. Stock Options Issued to Employees - The Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," on November 1, 1996 for financial note disclosure purposes and continues to apply the intrinsic value method of Accounting Principles Board ["APB"] Opinion No. 25, "Accounting for Stock Issued to Employees," for financial reporting purposes. Deferred Income Taxes - Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Reclassification - Certain fiscal 1996 and 1995 items have been reclassified to conform to the current years presentation. BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2 [2] Summary of Significant Accounting Policies [Continued] Deferred Income Taxes [Continued] - Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Impairment - Certain long-term assets of the Company including goodwill are reviewed at least annually as to whether their carrying value has become impaired, pursuant to guidance established in Statement of Financial Accounting Standards ["SFAS"] No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Management considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations [undiscounted and without interest charges]. If impairment is deemed to exist, the assets will be written down to fair value or projected discounted cash flows from related operations. Management also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of October 31, 1997, management expects these assets to be fully recoverable. Property and Equipment - Property and equipment are carried at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the respective assets which range from 2 to 15 years. Leasehold improvements are amortized over the life of the lease, which is approximately five years. The statements of operations reflect depreciation expense related to property and equipment of $419,462, $404,248 and $368,478 for the years ended October 31, 1997, 1996 and 1995, respectively. On sale or retirement, the asset cost and related accumulated depreciation or amortization are removed from the accounts, and any related gain or loss is reflected in income. Repairs and maintenance are charged to expense when incurred. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Goodwill - Goodwill represents the excess of the cost of companies acquired over the fair value of their net assets at dates of acquisition and is being amortized on the straight-line method over 20 years. The statements of operations reflect amortization expense related to goodwill for the years ended October 31, 1997, 1996 and 1995 of $203,490, $209,211 and $187,936, respectively. Intangible Assets - Intangible assets are amortized using the straight-line method. The statements of operations reflect amortization expense related to intangible assets of $566,366, $420,427 and $403,317 for the years ended October 31, 1997, 1996 and 1995, respectively. A summary is as follows:
Accumulated Net of Amortization Amortization October 31, October 31, Intangible Asset Life in Years Cost 1 9 9 7 1 9 9 7 - ---------------- ------------- ---- ------- ------- Customer Lists 20 $ 3,065,042 $ 518,731 $ 2,546,311 Covenants Not-to-Compete 5-7.5 1,420,206 958,738 461,468 Employment Agreement 5 400,000 286,666 113,334 Costs Related to Acquisitions 2-17 236,178 120,579 115,599 Patent 17 144,375 5,882 138,493 Other 17-20 8,562 1,374 7,188 ----------- ---------- ----------- Totals $ 5,274,363 $1,891,970 $ 3,382,393 =========== ========== ===========
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3 [2] Summary of Significant Accounting Policies [Continued] Intangible Assets [Continued]
Accumulated Net of Amortization Amortization October 31, October 31, Intangible Asset Life in Years Cost 1 9 9 6 1 9 9 6 - ---------------- ------------- ---- ------- ------- Customer Lists 20 $3,377,042 $ 410,111 $2,966,931 Covenants Not-to-Compete 5-20 1,420,206 720,250 699,956 Employment Agreement 5 400,000 206,666 193,334 Costs Related to Acquisitions 2-17 302,741 106,356 196,385 Patent 17 100,000 -- 100,000 Other 17-20 8,562 882 7,680 ---------- ----------- ---------- Totals $5,608,551 $ 1,444,265 $4,164,286 ========== =========== ==========
Advertising Costs -Advertising costs are expensed when incurred. Advertising costs amounted to $467,000, $344,000 and $256,000 for the years ended October 31, 1997, 1996 and 1995, respectively. Cash and Cash Equivalents - Cash equivalents are comprised of certain highly liquid investments with a maturity of three months or less when purchased. The Company had $1,307,278 and $717,484 in cash equivalents at October 31, 1997 and 1996, respectively. Nonmonetary Stock Issuances - The Company issues shares of common stock in payment for services rendered to the Company. The estimated fair value of the shares issued approximates the value of the services provided. [3] Note Payables - Banks [A] In March 1997, the Company amended its revolving loan agreement with PNC Bank. The maximum amount of the credit line available to the Company is the lesser of (i) $10,000,000 or (ii) 50% of the Company's qualified accounts receivable [as defined in the agreement] plus 100% of the face amount of the certificates of deposit pledged as collateral for this loan minus the amount of any portion of the outstanding principal balance of the term loan which is deemed to be collateralized by the certificate of deposit. Interest on advances which are collateralized by certificates of deposit will be at 2% above the certificate of deposit interest rate. Interest on other advances will be at prime plus 1.25%. The credit line is collateralized by substantially all of the Company's assets [including $3,680,000 in certificates of deposit with PNC] and the assignment of a $4,000,000 life insurance policy on the president of the Company. The line of credit is available through March 1999 and may be extended for annual periods by mutual consents, thereafter. The terms of this agreement contain, among other provisions, requirements for maintaining defined levels of capital expenditures and net worth, various financial ratios and insurance coverage. As of October 31, 1997 and 1996, the Company was in compliance with the covenant provisions of this agreement. As of October 31, 1996, the Company had utilized all of this credit facility. As of October 31, 1997, the Company utilized $6,761,710 of this credit facility. [B] On January 26, 1994, $3,352,000 was received for a demand note payable to Gotham Bank of New York. Interest is due at three percent above the bank's corporate savings account rate. As of October 31, 1997 and 1996, $2,500,000 was paid against the principal on this note. The Company has $852,000 in a savings account with this bank restricted as collateral for the loan. Prime rate at October 31, 1997 and 1996 was $8.5% and 8.25%, respectively. The weighted average interest rate on short-term borrowings outstanding as of October 31, 1997 and 1996 was 8.64% and 8.7%, respectively. BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4 [4] Long-Term Debt
October 31, 1 9 9 7 1 9 9 6 [A] Note Payable to PNC Bank. Due October 1999. Interest at prime plus 1.25%. $ 194,761 $ 294,760 [B] Notes Payable to PNC Bank. Due July 2000. Interest at prime plus 1.75% and certificate of deposit rate plus 2%. 610,255 1,106,251 [C] Note Payable to SmithKline Beecham Clinical Laboratories, Inc. Due January 1, 1999. Interest imputed at 8.25%. 551,373 551,373 [D] Various note payables to prior CML owners. Due November 1998. Interest ranging from 6% to 10.75%. 95,175 175,238 [E] Sclavo, Inc. Payments dependent on collections received from customer list. Interest at 10%. 80,732 36,569 ----------- ------------ Totals 1,532,296 2,164,191 Less: Current Maturities 864,266 730,374 ----------- ------------ Long-Term Debt $ 668,030 $ 1,433,817 =========== ============
[A] In June 1995, the Company entered into an agreement to borrow up to $400,000 to purchase equipment. During October 1995, the Company borrowed $394,756 under this agreement. The loan, which bears interest at an annual rate of prime + 1.25%, is due in monthly installments of $8,333 plus interest through October 1999. This note is in accordance with the provisions of the Company's revolving loan agreement [See Note 3A] with the same lender. [B] In July 1996, the Company entered into an agreement to borrow $1,180,000. The original principal balance of $1,000,000 was not collateralized and has an interest rate of prime + 1.75%. The remaining original principal balance of $180,000 is collateralized by a certificate of deposit and bears interest at the certificate of deposit rate + 2%. This note is in accordance with the provisions of the Company's revolving loan agreement [See Note 3A] with the same lender. [C] In July 1996, the Company purchased certain assets and rights from SmithKline Beecham Clinical Laboratories, Inc. for a total purchase price of $1,800,000. At the closing, $1,200,000 was paid in cash and the $600,000 remaining balance is due in 24 consecutive monthly installments of $25,000 commencing January 1, 1997. Interest was imputed at the prime rate [See Note 14]. [D] In connection with the acquisition of Community Medical Laboratories ["CML"], the Company assumed the promissory notes of prior CML noteholders by issuing Company's debentures in the principal amount of $200,174. Maturities of long-term debt at October 31, 1997 in each of the next five years are as follows: 1998 $ 864,266 1999 446,773 2000 221,257 2001 -- 2002 -- --------- Total $1,532,296
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5 [5] Convertible Subordinated Debt In January 1995, the Company issued two 8% convertible subordinated debentures for $206,956 and $31,732 in connection with the Company's acquisition of GenCare. As of October 31, 1997 and 1996, $237,349 and $2,959, respectively, has been repaid. [6] Related Party Transactions On October 1, 1989, a promissory note was received from Dr. Marc Grodman ["Dr. Grodman"], president of the Company, in exchange for a receivable in the amount of $235,354. As of October 31, 1997 and 1996, $214,118 and $234,918 in outstanding principal and interest were due from the officer. The Company pays premiums on life insurance policies for three key officers. In the event that any of these officers leave the Company, they are required to pay the Company back for premiums paid on their policies. In the event of death, the benefit paid to the beneficiary is reduced by the amount of premiums paid on behalf of the individual by the Company. At October 31, 1997 and 1996, $446,903 and $336,037 is included in other assets which represents the amount of premiums paid to date. At October 31, 1997 and 1996, cash surrender values on these policies were in excess of amounts receivable. [7] Income Taxes The reconciliation of income tax from continuing operations computed at the U.S. federal statutory tax rate to the Company's effective income tax rate is as follows:
October 31, 1 9 9 7 1 9 9 6 1 9 9 5 ------- ------- ------- U.S. Federal Statutory Rate 34.0% 34.0% 34.0% State and Local Income Taxes, Net of U.S. Federal Income Tax Benefit 10.0% 8.0% 8.0% Other (7.5)% 3.1% --% Utilization of Net Operating Loss Carryforwards (41.0)% (37.0)% (38.6)% ------- ------- ------- Actual Rate (4.5)% 8.1% 3.4% ====== ==== ====
The provision for income taxes shown in the consolidated statements of operations consist of the following:
October 31, 1 9 9 7 1 9 9 6 1 9 9 5 ------- ------- ------- Current: Federal $ 79,947 $14,228 $28,029 State and Local 39,313 37,634 21,196 Deferred: Federal (204,000) -- -- State and Local (54,000) -- -- --------- -------- ------- Total Provision for Income Taxes $(138,740) $51,862 $49,225 ========= ======= =======
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6 [7] Income Taxes [Continued] At October 31, 1997, the Company had net operating loss carryforwards of approximately $5,150,000 for federal income tax purposes, which expire in years 2006 through 2009. In addition, the Company had net operating losses for state purposes. The Company operates in several states, however, most of its business is conducted in the New Jersey and New York area. The following summarizes the operating loss carryforwards by year of expiration:
Federal New Jersey New York Expiration Date Amount Amount Amount - --------------- ------ ------ ------ 1999 $ -- $ 400,000 $ -- 2000 -- 2,400,000 -- 2006 1,050,000 -- -- 2007 1,300,000 -- -- 2008 2,400,000 -- -- 2009 400,000 -- 1,400,000 2010 -- -- 1,100,000 2011 -- -- 1,800,000 ---------- ---------- --------- Total $5,150,000 $2,800,000 $4,300,000 ========== ========== ==========
Investment tax credit carryforwards of approximately $32,161 are available to reduce future income taxes. These credits expire from 1998 to 2002. At October 31, 1997, the Company has a deferred tax asset of approximately $2,200,000 and a valuation allowance of approximately $1,942,000 related to the asset, a decrease of $1,658,000 since October 31, 1996. The deferred tax asset primarily relates to net operating loss carryforwards. At October 31, 1996, the Company has a deferred tax asset of approximately $3,600,000 and a valuation allowance of approximately $3,600,000 related to the asset, a decrease of $100,000 since October 31, 1995. The deferred tax asset primarily relates to net operating loss carryforwards. [8] Capital Transactions The Company is authorized to issue an aggregate of 1,666,667 shares of preferred stock, $.10 par value. In April 1993, the Board of Directors of the Company authorized the change of 604,078 shares from the preferred stock to a new class of Preferred Stock, called "Senior Preferred Stock" which has the same voting rights [one vote per share], dividend rights and liquidation rights as each share of common stock and for a period of ten years after issuance is convertible into one share of common stock upon payment of a conversion price of $1.50 per share. In April 1993, in order to facilitate a public offering contemplated by the Company, Dr. Grodman agreed to cancel his pro-rata option contained in his employment contract and to cancel other outstanding options and warrants to purchase 604,078 shares of Common Stock at prices ranging from $1.45 to $1.50 per share, in consideration for the issuance of 604,078 shares of Senior Preferred Stock. These shares of Senior Preferred Stock were issued in August 1993. On May 13, 1997, pursuant to a recapitalization, the Senior Preferred Stock was retired in exchange for a new class of Series A Senior Preferred Stock. The new Series A Senior Preferred Stock is convertible into an aggregate 604,078 shares of common stock on or before May 1, 2007 at a conversion price of $.75 per share and has the same voting rights [one vote per share], dividend rights and liquidation as each share of common stock. Holders of the Company's common stock are entitled to one vote per share on matters submitted for shareholder vote. Holders are also entitled to receive dividends ratably, if declared. In the event of dissolution or liquidation, holders are entitled to share ratably in all assets remaining after payment of liabilities. BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7 [8] Capital Transactions [Continued] On January 1, 1995, the Company acquired GenCare Biomedical Research Corporation ["GenCare"] in a business combination accounted for under the purchase method of accounting. All of the issued and outstanding common and preferred stock of GenCare was acquired for an aggregate 444,585 shares of the Company's common stock [subject to possible increase in the event of a future decrease in the market price of the common stock]. An aggregate 133,333 shares are being held in escrow pending certain required collections from GenCare customers. The fair market value of the 311,252 shares to be issued immediately was $1,634,074 on the date of the closing. During 1996, 42,413 shares held in escrow were released when collection requirements were met. During 1997, the remaining 90,920 shares held in escrow were released and an additional 54,096 shares were issued due to a decrease in the market price of the common stock [See Note 22]. In April 1995, the Company issued 12,000 shares of common stock in payment of a $25,500 fee to a public relations firm pursuant to a one year renewable contract. On July 27, 1995, an aggregate of 10,000 shares of the Company's common stock was issued upon exercise of a private placement warrant. On November 7, 1995, the Company acquired Oncodec Labs, Inc. in a business combination accounted for under the purchase method of accounting. All of the issued and outstanding common stock of Oncodec Labs, Inc. was acquired for a maximum of 40,000 shares of the Company's common stock. At the closing, the stockholders of Oncodec Labs, Inc. received 10,000 shares and the additional 30,000 shares will be issued contingent upon receipts obtained through December 31, 1998. On November 10, 1995, the Company acquired Community Medical Laboratories ["CML"] in a business combination accounted for under the purchase method of accounting. All of the issued and outstanding common stock of CML was acquired for an aggregate 72,688 shares of the Company's common stock. In addition, CML delivered CML notes, totaling $399,958 including accrued interest through October 31, 1995 in exchange for an aggregate $200,174 in principal amount of the Company's debentures. The 72,688 shares of the Company's stock will be held in escrow pending certain required collections from CML customers. In addition, the Company entered into a five year employment agreement for an annual salary of $60,000 contingent on revenue received from specified draw stations. During 1997 and 1996, an aggregate 21,944 and 23,611 shares respectively were released from escrow when collection requirements were met. In November 1995, the Company issued 4,000 shares of common stock in payment of a finders fee. In December 1995, the Company issued 4,745 shares of common stock in lieu of payment of an invoice for $17,199. In May 1997, the Company issued 815,000 shares of common stock and warrants to purchase 58,534 shares of the Company's common stock at a price of $.71875 in connection with employment and consulting agreements and a two year extension on a loan agreement [See Note 10]. Included in the 815,000 shares issued were 740,000 shares to three officers of the Company. The shares are forfeitable in part in various amounts if the employee's employment is terminated "for cause" or at his option "without good reason" prior to May 1, 2000. [9] Income Per Share Income per share is based on the weighted average number of shares of common stock outstanding of 6,166,156 and 6,010,964 during fiscal 1996 and 1995, respectively. Equity equivalents are assumed exercised or converted if dilutive. For fiscal 1997, the modified treasury stock method was utilized. Net income and number of shares used under the modified treasury stock method were $4,592,860 and 12,757,946 shares, respectively, for fiscal 1997. BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8 [10] Stock Options and Warrants [A] Employment Incentive Stock Options - In April 1986, the shareholders approved and the Company adopted the 1986 Employee Stock Option Plan ["1986 Plan"] under which 3,667 shares of common stock have been reserved for issuance to persons rendering services to the Company. In November 1989, the shareholders approved and the Company adopted the 1989 Employee Stock Option Plan ["1989 Plan"] which provides for the granting of 666,667 shares of common stock. Under the terms of its stock option plans, incentive stock options to purchase shares of the Company's common stock are granted at a price not less than the fair market value of the common stock at the date of grant. These stock options are exercisable up to ten years from the date of grant. At October 31, 1997 and 1996, there were 12,624 and 188,290 shares reserved for future grants under the 1986 and 1989 plans. No stock appreciation rights have been granted. In May 1997, the Company's board of directors approved the cancellation of all of outstanding employee stock options for new options at an exercise price of $.71875 which reflects current fair market value. Following is a summary of transactions:
Weighted Average Shares Exercise Under Price Options Per Share ------- --------- Outstanding at October 31, 1994 514,709 Granted During the Year 1,000 Expired During the Year (33,665) Exercised During the Year -- -------- Outstanding and Eligible for Exercise at October 31, 1995 482,044 $ .72 Granted During the Year -- -- Expired During the Year -- -- Exercised During the Year -- -- -------- ------- Outstanding and Eligible for Exercise at October 31, 1996 482,044 $ .72 Granted During the Year 210,000 .76 Expired During the Year (34,334) .72 Exercised During the Year -- -- -------- ------- Outstanding and Eligible for Exercise at October 31, 1997 657,710 $ .73 ======== =======
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 657,710 10 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, 1997, 1996 and 1995. BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9 [10] Stock Options and Warrants [Continued] [B] Non Incentive Stock Options and Warrants - Non-incentive stock options and warrants may be granted to employees or non-employees at fair market value or at a price less than fair market value of the common stock at the date of grant. Included in the outstanding warrants are publicly-owned warrants to purchase 5,015,841 shares of common stock sold in the Company's 1993 public offering. The following is a summary of transactions as of October 31, 1997 and 1996:
Weighted Shares Under Average Options Exercise Price and Warrants Per Share ------------ --------- Outstanding - October 31, 1994 5,735,481 Granted During the Year 370,000 $ 4.7 Canceled During the Year (4,334) Exercised During the Year (12,100) ---------- -------- Outstanding and eligible for Exercise at October 31, 1995 6,089,047 $ 4.65 Granted During the Year 40,000 3.00 Expired During the Year (106,667) 1.79 Exercised During the Year -- -- --------- -------- Outstanding and Eligible for Exercise at October 31, 1996 6,022,380 $ 4.63 Granted During the Year 381,300 .72 Expired During the Year (584,871) 1.45 Exercised During the Year -- -- --------- -------- Outstanding and Eligible for Exercise at October 31, 1997 5,818,809 $ 4.71 ========= ========
During the year ended October 31, 1996, 40,000 shares under warrants were granted to two non-employees. The fair value of each warrant granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: a weighted average risk-free interest rate of 6.8%, a weighted average expected life of 1 year based on Company expectations and the required minimum two year holding period, and a weighted average expected volatility of 50.75%. Dividends are not expected to be available to shareholders during the expected life of the warrants. The fair value of these warrants of $27,200 [$.68 per share] has been accounted for as deferred compensation for the year ended October 31, 1996 and is being expensed over the term of the agreement, 5 years. Total compensation expense recognized against income for this deferred compensation was $5,440 and $4,983, respectively for the years ended October 31, 1997 and 1996. During the year ended October 31, 1997, 35,200 shares under warrants were granted to three non-employees and 23,334 shares under warrants were canceled for new warrants at a price of $.71875 which represents fair market value at the time of grant. The fair value of each warrant granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: a weighted average risk-free interest rate of 6%, a weighted average expected life of 1 year based on Company expectations and the required minimum two year holding period, and a weighted average expected volatility of 84.09%. Dividends are not expected to be available to shareholders during the expected life of the warrants. BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10 [10] Stock Options and Warrants [Continued] [B] Non Incentive Stock Options and Warrants [Continued] - The fair value of these options issued in May of 1997 of $13,423 [$.2486 per share] has been accounted for as deferred compensation for the year ended October 31, 1997 and is being expensed over the term of the agreements. Total compensation expense recognized against income for this deferred compensation was $2,254 for the year ended October 31, 1997. During the year ended October 31, 1997, 346,100 shares under options were granted to employees. The Company accounts for these options under the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees." Total compensation cost recognized against income for employee nonincentive stock option and warrants was $-0- for the years ended October 31, 1997, 1996 and 1995.
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 - -------------------- -------- ---- --------- Warrants -$4.50 Per Share 3,789,175 1 Year $ 4.50 Warrants - $6.75 Per Share 1,226,666 1 Year $ 6.75 Options - $.71875 Per Share 404,634 7 Years $ .72 Options - $1.50 to $3.00 Per Share 23,334 3 Years $ 2.79 Options - $4.125 to $5.125 Per Share 375,000 1 Year $ 4.70 --------- 5,818,809 =========
These warrants and options have weighted average remaining contractual lives of approximately two years. The weighted average grant date fair value of options granted during the years ended October 31, 1997 and 1996 was $.2486 and $.68 per share, respectively. [A] and [B] Pro Forma - Had compensation cost been determined on the basis of fair value pursuant to SFAS No. 123, for the 657,710 shares under employee incentive stock options and 346,100 shares under employee nonincentive stock options and warrants for the years ended October 31, 1997 and 1996, net income and earnings per share would have been as follows:
1 9 9 7 1 9 9 6 ------- ------- Net Income: As Reported $ 3,199,915 $ 591,958 =========== ========== Pro Forma $ 2,950,000 $ 591,958 =========== ========== Earnings Per Share: As Reported $ .36 $ .10 =========== ========== Pro Forma $ .34 $ .10 =========== ==========
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11 [10] Stock Options and Warrants [Continued] [A] and [B] Pro Forma [Continued] - The fair value used in the pro forma data was estimated by using an option pricing model which took into account as of the grant date, the exercise price and the expected life of the option, the current price of the underlying stock and its expected volatility, expected dividends on the stock and the risk-free interest rate for the expected term of the option. The following is the average of the data used for the following items.
Risk-Free Expected Expected Expected Interest Rate Expected Life Volatility Dividends - ------------- ------------- ---------- --------- 6% 1 Year 84.09% None
[11] Employment Contracts and Consulting Agreements The Company has entered into various employment contracts and consulting agreements for periods ranging from one to seven years. At October 31, 1997, the aggregate minimum commitment under these contracts and agreements, excluding commissions, was approximately as follows:
October 31, - ---------- 1998 $1,091,250 1999 1,013,333 2000 943,333 2001 880,000 2002 and Thereafter 1,649,000 ---------- Total $5,576,916 - ----- ==========
Some of these agreements provide bonuses and commissions based on a percentage of collected revenues ranging from 1% to 10% on accounts referred by or serviced by the employee or consultant. In addition to the above, two employment agreements which provide for annual aggregate minimum commitments of $186,700 have no termination dates. [12] Capitalized Lease Obligations The Company leases various assets under capital leases expiring in 2002 as follows:
October 31, 1 9 9 7 1 9 9 6 ------- ------- Medical Equipment $ 654,479 $ 650,690 Furniture and Fixtures 11,565 11,565 Leasehold Improvements -- 12,130 Totals 666,044 674,385 Less: Accumulated Depreciation 262,979 274,704 Net $ 403,065 $ 399,681
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12 [12] Capitalized Lease Obligations [Continued] Depreciation expense on assets under capital leases was $83,853, $106,191 and $170,601 for the years ended October 31, 1997, 1996 and 1995, respectively. Aggregate future minimum rentals under capital leases are:
Years ended October 31, - ----------- 1998 $ 120,442 1999 109,331 2000 104,888 2001 62,750 2002 22,681 Thereafter -- ---------- Total 420,092 Less: Interest 82,550 ---------- Present Value of Minimum Lease Payments $ 337,542 =========
[13] Commitments and Contingencies The Company leases various office and laboratory facilities and equipment under operating leases expiring from 1997 to 2002. Several of these leases contain renewal options for three to five year periods. Total expense for property and equipment rental for the years ended October 31, 1997, 1996 and 1995 was $1,796,839, $1,850,085 and $1,640,360, respectively. There were no contingent rental amounts due through October 31, 1997. Aggregate future minimum rental payments on noncancelable operating leases are as follows:
Property Equipment -------- --------- October 31, - ----------- 1998 $ 499,734 $ 515,236 1999 137,280 420,854 2000 -- 294,417 2001 -- 149,229 2002 -- 19,120 Thereafter -- -- ---------- ---------- Totals $ 637,014 $1,398,856 ------ ========== ==========
[14] Litigation In the normal course of business, the Company is exposed to a number of asserted and unasserted potential claims. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. On December 30, 1996, the Company commenced a lawsuit against SmithKline Beecham Clinical Laboratories ["SBCL"] alleging that SBCL materially and repeatedly breached its obligations and its representations and warranties made in the Asset Agreement and the Non-Competition Agreement pursuant to which the Company purchased certain assets from SBCL and claims unspecified amounts of compensatory and punitive damages and related costs. This lawsuit is in its initial stages and no assurances can be given at this time that it will be concluded in the Company's favor. As a result of its allegations against SBCL, the Company has not made any payments with respect to the $600,000 note payable [See Notes 4C and 17F]. BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13 [15] Insurance The Company maintains professional liability insurance of $3,000,000 in the aggregate, with a per occurrence limit of $1,000,000 . In addition, the Company maintains excess commercial insurance of $2,000,000 per occurrence. The Company believes, but cannot assure, that its insurance coverage is adequate for its current business needs. A determination of Company liability for uninsured or underinsured acts or omissions could have a material adverse affect on the Company's operations. [16] Concentrations of Credit Risk At October 31, 1997, the Company had approximately $6,320,000 in cash and certificates of deposit balances at financial institutions which were in excess of the federally insured limits. Approximately $4,532,000 of this amount represents collateral for demand loans with the same financial institutions [See restricted cash and certificates of deposit on consolidated balance sheet]. At October 31, 1996, the Company had approximately $5,300,000 in cash and certificate of deposit balances at financial institutions which were in excess of the federally insured limits. Substantially all of this amount represents collateral for demand loans with the same financial institutions. [See restricted cash and certificates of deposit on consolidated balance sheet]. Credit risk with respect to accounts receivable is generally diversified due to the large number of patients comprising the client base. The Company does have significant receivable balances with government payors and various insurance carriers. Generally, the Company does not require collateral or other security to support customer receivables, however, the Company continually monitors and evaluates its client acceptance and collection procedures to minimize potential credit risks associated with its accounts receivable and establishes an allowance for uncollectible accounts and as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is not material to the financial statements. [17] Acquisitions [A] On November 16, 1994, the Company purchased a customer list and two leased draw stations from a clinical laboratory. As consideration, the Company assumed the sellers obligations under the draw station leases and entered into an agreement to pay up to $600,000 over a five and one-half year period based on cash collected on customer list revenues. The minimum liability for these payments is $120,000, of which $30,000 was paid at the closing. In addition, the Company entered into a five year employment agreement with a senior marketing representative for an annual base salary of $40,000 plus commissions based on sales. [B] On January 4, 1995 [effective as of November 1, 1994], the Company acquired GenCare Biomedical Research Corporation ["GenCare"] in a business combination accounted for under the purchase method of accounting. GenCare provides clinical testing services for the detection, differentiation and staging of cancer, genetic and infectious diseases. Their customers include hospitals, medical centers, reference laboratories and large medical practices. All of the issued and outstanding common and preferred stock of GenCare was acquired for an aggregate 444,585 shares of the Company's common stock [subject to possible increase in the event of a future decrease in the market price of the common stock]. An aggregate 133,333 shares are to be held in escrow pending certain required collections from GenCare customers. The fair market value of the 311,252 shares to be issued immediately was $1,634,074 on the date of the closing. The total cost of the acquisition was $1,634,074 which exceeded the fair value of the net assets of GenCare by $2,119,213. The excess is being amortized using the straight-line method over 20 years. In addition, if the specific collection levels are achieved, the 133,333 shares in escrow will be recorded as an additional cost of the acquisition at the fair market value of the shares at the time they are issued [See Notes 8 and 22]. BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14 [17] Acquisitions [Continued] [C] On November 7, 1995, the Company acquired Oncodec Labs, Inc. in a business combination accounted for under the purchase method of accounting. All of the issued and outstanding common stock of Oncodec Labs, Inc. was acquired for a maximum of 40,000 shares of the Company's common stock. At the closing, the stockholders of Oncodec Labs, Inc. received 10,000 shares and the additional 30,000 shares will be issued contingent upon receipts obtained through December 31, 1998. During 1996, Oncodec Labs, Inc. was dissolved and is now part of the operations of the Company. [D] On November 10, 1995, the Company acquired Community Medical Laboratories ["CML"] in a business combination accounted for under the purchase method of accounting. All of the issued and outstanding common stock of CML was acquired for an aggregate 72,688 shares of the Company's common stock. In addition, CML delivered CML notes totaling an aggregate $399,958 including accrued interest through October 31, 1995 in exchange for an aggregate $200,174 in principal amount of the Company's debentures. The 72,688 shares of the Company's stock will be held in escrow pending certain required collections from CML customers. In addition, the Company entered into a five year employment agreement for an annual salary of $60,000 contingent on revenue received from specified draw stations. During 1996, CML was dissolved and is now part of the operations of the Company [See Note 8]. [E] In May 1996, the Company acquired certain assets and rights of Advanced Medical Laboratory, Inc. ["AML"] for a maximum amount of $612,000 of which $180,000 was paid at closing. The remaining maximum balance of $432,000 is payable over a three year period solely out of cash collected on customer list revenues. [F] On July 19, 1996, the Company completed the purchase from SmithKline Beecham Clinical Laboratories, Inc. ["SBCL"] of certain assets and rights, including the Customer List related to SBCL's operation of its Renal Dialysis Testing Business. The purchase price was $1,800,000 of which $1,200,000 was paid at the closing. The $600,000 balance is payable in 24 consecutive monthly installments of $25,000 commencing January 1, 1997. At the closing, SBCL agreed for a three year period commencing no more than 120 days after the closing, to cease performing renal dialysis clinical laboratory testing services for renal dialysis centers or other entities which provide diagnosis and/or treatment to dialysis patients. Funding for the $1,200,000 down payment made by the Company at the closing was provided pursuant to its term loan and credit line facilities with PNC Bank [formerly Midlantic Bank, N.A.] [See Note 14]. [18] Fair Value of Financial Instruments For certain financial instruments, including cash and cash equivalents, trade receivables, trade payables, and short-term debt, it was estimated that the carrying amount approximated fair value for the majority of these items because of their short maturities. The fair value of the Company's long-term debt is estimated based on the quoted market prices for similar issues or by discounting expected cash flows at the rates currently offered to the Company for debt of the same remaining maturities.
O c t o b e r 3 1, 1 9 9 7 1 9 9 6 Carrying Fair Carrying Fair Amount Value Amount Value Long-Term Debt $668,030 $666,755 $1,433,817 $1,430,140 Capitalized Lease Obligations $252,572 $248,942 $ 99,564 $ 96,016
Due to the non-interest bearing nature and unspecified payment terms, it was not practicable to estimate the fair value of amounts due from related parties [See also Note 6].BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #15 [19] Health Insurance Plan The Company has a limited self-funded health insurance plan for its employees under which the Company pays the initial $35,000 of covered medical expenses per person per year. The Company has a contract with an insurance carrier for any excess. [20] Employee Benefit Plan In June 1994, the Company began sponsoring the Bio-Reference Laboratories, Inc. 401(k) Profit-Sharing Plan. Employees become eligible for participation after attaining the age of eighteen and completing one year of service. Participants may elect to contribute up to ten percent of their compensation, as defined in the Plan Adoption Agreement, to a maximum of $9,500 in 1997 and 1996 as adjusted for inflation. The Company may choose to make a matching contribution to the plan for each participant who has elected to make tax-deferred contributions for the plan year, at a percentage determined each year by the Company. For the year ended October 31, 1997, 1996 and 1995, the Company elected not to make matching contributions to the plan. If the Company elects to match participant contributions in the future, the employer contribution will be fully vested after the fifth year of service. [21] Certificates of Deposit-Restricted At October 31, 1997 and 1996, the Company had $852,000 of restricted cash and $3,680,000 of restricted certificates of deposit, which represents collateral for two demand notes and a long-term debt agreement [See Notes 3 and 4]. [22] Non-recurring Gain on Sale of Intangible Assets On September 30, 1997, the Company entered into an agreement to sell certain customer lists, its "GenCare" tradename and rights under two GenCare contracts to another laboratory for $4,600,000 in cash and $1,400,000 payable in four equal installments every six months beginning April 1, 1998, provided however that certain target revenues are reached. If target revenues are not reached amounts payable under the contract will be decreased up to a maximum of $700,000. The Company and certain of its officers entered into a noncompetion agreement with the purchaser as part of this agreement. The Company recorded a non-recurring gain of $2,025,689 related to this sale. The $700,000 in contingent receivables were not included in the calculation of gain on this sale as of October 31, 1997. [23] New Authoritative Accounting Pronouncements The Financial Accounting Standards Board ["FASB"] issued Statement of Financial Accounting Standards No. 128, Earnings Per Share ["EPS"], and SFAS No. 129, "Disclosure of Information about Capital Structure" in February 1997. SFAS No. 128 simplifies the earnings per share ["EPS"] calculations required by Accounting Principles Board ["APB"] Opinion No. 15, and related interpretations, by replacing the presentation of primary EPS with a presentation of basic EPS. SFAS No. 128 requires dual presentation of basic and diluted EPS by entities with complex capital structures. Basic EPS includes no dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings of an entity, similar to the fully diluted EPS of APB Opinion No. 15. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. When adopted, SFAS No. 128 will require restatement of all prior-period EPS data presented. Basic EPS will be based on average common shares outstanding and diluted EPS will include the effects of potential common stock, such as, options and warrants. The Company's basic EPS as calculated under SFAS No. 128 would have been $.43 for the year ended October 31, 1997. The Company's diluted EPS as calculated under SFAS No. 128 would have been $.39 for the year ended October 31, 1997.BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #16 [23] New Authoritative Accounting Pronouncements [Continued] SFAS No. 129 does not change any previous disclosure requirements, but rather consolidates existing disclosure requirements for ease of retrieval. The Financial Accounting Standards Board ["FASB"] issued Statement of Financial Accounting Standards ["SFAS"] No. 130, "Reporting Comprehensive Income." SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Earlier application is permitted. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company is in the process of determining its preferred format. The adoption of SFAS No. 130 will have no impact on the Company's consolidated results of operations, financial position or cash flows. The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 changes how operating segments are reported in annual financial statements and requires the reporting of selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 is effective for periods beginning after December 15, 1997, and comparative information for earlier years is to be restated. SFAS No. 131 need not be applied to interim financial statements in the initial year of its application. The Company is in the process of evaluating the disclosure requirements. The adoption of SFAS No. 131 will have no impact on the Company's consolidated results of operations, financial position or cash flows. . . . . . . . . . . INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of Bio-Reference Laboratories, Inc. Elmwood Park, New Jersey Our report on our audit of the basic financial statements of Bio-Reference Laboratories, Inc. and its subsidiary appears on page F-1. That audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule II is presented for purposes of complying with the Securities and Exchange Commissions Rules and Regulations under the Securities Exchange Act of 1934 and is not otherwise a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements, and in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. MOORE STEPHENS, P. C. Certified Public Accountants. Cranford, New Jersey January 9, 1998BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995. Year Ended October 31, 1997 Allowance for Doubtful Accounts and Contractual Credits $ 5,357,096 $ 47,593,419 $(44,386,079) $ 8,564,436 ============ ============= ============= =========== Year Ended October 31, 1996 Allowance for Doubtful Accounts and Contractual Credits $ 2,569,125 $ 35,928,646 $(33,140,675) $ 5,357,096 ============ ============= ============= =========== Year Ended October 31, 1995 Allowance for Doubtful Accounts and Contractual Credits $ 1,224,806 $ 28,605,938 $(27,261,619) $2,569,125 ============ ============= ============= ===========
EX-27 2
5 This Schedule contains summary financial information extracted from (a) the Balance Sheet and Statement of Operations filed as part of the Annual Report on Form 10-K and is qualified in its entirety by reference to such (b) Report on Form 10-K. YEAR OCT-31-1997 OCT-31-1997 3,013,825 0 13,737,881 8,564,436 453,870 22,065,254 2,973,022 1,685,298 29,095,059 12,649,814 9,484,887 0 60,408 71,694 22,967,160 29,095,059 38,660,184 38,660,184 19,339,274 36,775,153 (1,176,144) 5,291,507 1,124,432 3,061,175 (138,740) 3,199,915 0 0 0 3,199,915 .36 .36
-----END PRIVACY-ENHANCED MESSAGE-----