10-K 1 a2036729z10-k.txt EXHIBIT 10-K 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, 2000 ---------------- 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-K is not contained herein, and will not be contained, to the best of the issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or in any amendment to this Form 10-K. [ ] On January 19, 2001, 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 $13,500,000 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 8,727,449 shares of Common Stock of the Issuer outstanding. PART I Item. 1 - BUSINESS Bio-Reference Laboratories, Inc., "Bio-Reference" or the "Company," operates a clinical laboratory servicing the greater New York metropolitan area. Bio-Reference offers a comprehensive list of chemical diagnostic tests including blood and urine analysis, blood chemistry, hematology services, serology, radioimmuno analysis, toxicology (including drug screening), pap smears, tissue pathology (biopsies) and other tissue analyses. Bio-Reference holds the required Federal and state licenses necessary to permit its operation of its processing facilities in New Jersey and New York State and to permit its servicing of its clients in Connecticut, Florida, Louisiana, Maryland, New Jersey, New York, Pennsylvania, Texas and Virginia. Bio-Reference markets its services directly to physicians, hospitals, clinics, and other health facilities. Subsequent to the close of fiscal 1998, the Company commenced the expansion of its business from an almost exclusively transaction processing operation (i.e. clinical laboratory testing) into health information and connectivity areas by seeking to expand its business base through utilization of its physician network and marketing staff. During fiscal 1999, the Company entered into the e-health marketplace through the opening of its own drug screen website, "DRUGSCREENLAB.com" and subsequently acquired an Internet website "DoctorNY.com" serving the New York metropolitan area and hosting a number of existing physician websites. To date, virtually all of the Company's revenues have been derived from its clinical laboratory testing. The United States market for clinical laboratory testing is estimated to generate approximately $30 billion in annual revenues. - 50% of these revenues are generated by hospital laboratories - 50% of these revenues are generated by independent laboratories and physician office laboratories. Bio-Reference was incorporated under the laws of the State of New Jersey in December 1981 under the name "Med-Mobile, Inc." Its initial primary business was to provide mobile medical examinations. This business was discontinued in June 1989. Since February 1987, the Company's primary business has been the operation of a clinical laboratory located in northern New Jersey servicing the greater New York metropolitan area. The Company expanded its laboratory services through the March 1988 acquisition of Cytology and Pathology Associates, Inc. and relocated all of its laboratory operations to its facility in Elmwood Park, New Jersey. The Company changed its name to Bio-Reference Laboratories, Inc. in November 1989. Bio-Reference has expanded its laboratory testing capabilities and its customer base through internal growth as well as through the completion of a series of acquisitions of the businesses of other testing laboratories. The Company's executive offices are located at 481 Edward H. Ross Drive, Elmwood Park, New Jersey 07407. Its telephone number is (201) 791-2600. DEVELOPMENTS SINCE THE BEGINNING OF FISCAL 2000 In November 1999, the New York State Department of Corrections renewed its contract with Bio-Reference's wholly-owned Medilabs subsidiary retaining Medilabs to perform all laboratory testing for the Department's seventy correctional institutions in the state encompassing over 70,000 prisoners from maximum security prisons to rehabilitation centers. This agreement was renewed again in November 2000 for one year. On December 2, 1999, the Company acquired the WEB Business of Medical Marketing Group, Inc. ("MMGI") including its Internet website "DoctorNY.com" as well as certain website-based agreements and arrangements with MMGI's physician clients in the New York metropolitan area for an aggregate 140,000 shares of Bio-Reference's authorized but unissued Common Stock. MMGI also agreed during the period that its Advertising Consulting Agreement with the Company (hereinafter described) is in effect, to market Internet -oriented services to healthcare and healthcare related businesses for linking to and participation in the WEB Business conducted by the Company. The 3 Company has agreed to pay a commission to MMGI equal to 15% of the recurring Internet access and website fees received by the Company from additional customers produced by MMGI through its sales efforts but solely with respect to those customers produced after production of the 1,000th additional customer. The "DoctorNY.com" website, with its associated domain sites and existing physician websites, includes website development capabilities for subscribing physicians as well as a search engine allowing consumers to locate physicians by region, credentials, specialty or other parameters. The Company plans to further develop the physician services offered by the system to enhance physician-patient and physician-payor electronic communications on a secure basis (i.e., preserving confidentiality), including communicating laboratory results, e-mail prescriptions, refills, payor verification and eligibility, etc. The offering of physician CME credits through the system is also contemplated. The Company intends to market these services to its existing physician network as well as to other individual physicians and groups of physicians. Pursuant to non-competition agreements executed in connection with the acquisition, the Company issued an additional 20,000 shares of Bio-Reference's authorized but unissued Common Stock to MMGI, an additional 40,000 of such shares to MMGI's principal stockholder and chief executive officer, and paid $10,000 to a former MMGI executive officer. The Company also executed a one-year Advertising Consulting Agreement (renewable by the Company for a maximum of three additional one- year terms), pursuant to which MMGI agreed to render advertising consulting, advisory and public relations services for the WEB Business operated by Bio-Reference, on a project by project basis. For such services, MMGI was paid a consulting fee of $40,000 in the Initial Year. In November 2000, the Company extended the Advertising Consulting Agreement for an additional year for a flat fee of $50,000. As an additional inducement to MMGI to market Internet oriented services to healthcare and healthcare related businesses for linkage to and participation in the WEB Business conducted by the Company, the Company granted an option to MMGI exercisable to purchase a maximum 100,000 shares of Bio- Reference's authorized but unissued Common Stock at an exercise price of $3.00 per share (equal to the last reported per share sales price for Bio-Reference Common Stock on The Nasdaq Stock Market on December 1, 1999, the day immediately preceding the acquisition). The option was only exercisable with respect to those shares as to which it became "vested," from the date of vesting until one year after completion of the term of the Advertising Consulting Agreement. The option was to become vested as to each 25,000 shares upon delivery by MMGI of 500 additional customers for the WEB Business conducted by the Company. The Company waived the customer delivery requirement in November 2000 in connection with the extension of the Advertising Consulting Agreement so that the 100,000 share option became fully vested. On December 14, 1999, the Company acquired the Health Food Business of Right Body Foods, inc. ("RBF"), a manufacturer of starch free, low carbohydrate, low caloric food products distributed in Long Island, New York, through health professionals, dieticians, nutritionists and physicians. The acquisition was effected through a newly formed, wholly-owned Company subsidiary. The Health Food Business was acquired for an aggregate 180,000 shares of Bio-Reference's authorized but unissued Common Stock. The Company intended to attempt to expand the market for the Health Food Business products through its physician accounts utilizing its existing sales force and distribution network. The Company also executed an employment agreement with RBF's chief executive officer, employing her through October 31, 2004 to perform executive and marketing duties in connection with the establishment, supervision of manufacturing and marketing of products for the Health Food Business. Pursuant to the employment agreement, the executive was to be paid a minimum annual salary of $150,000 and commissions equal to varying percentages (from 5% to 1%) of net cash receipts of the Health Food Business in each fiscal year to the extent such net cash receipts exceeded $1,000,000 in such fiscal year. The commissions earned were to be credited against a guaranteed $50,000 commission bonus (effective only for the first year). The executive was also being paid a $100,000 signing bonus in 24 monthly installments. The executive was also issued an additional 20,000 shares of Bio-Reference's authorized but unissued Common Stock in consideration of her executing a non-competition agreement. 4 In December 2000, the Company discontinued all further payments to RBF's chief executive officer and commenced a lawsuit against her, her husband and RBF seeking, among other remedies, rescission of the acquisition and the return of all monies paid as well as all other consideration transferred (including the shares). See Item 3 herein. At November 1, 1998, the Company was being represented by counsel in connection with various reviews being conducted by the Company's Medicare carrier. One review involved overpayments that occur in the normal course of business. The Company believes the overpayments will be determined to approximate $150,000, of which approximately $75,000 has already been remitted by the Company to Medicare. Counsel representing the Company in this matter advised at such time that he could not offer any opinion or projection as to whether the anticipated liability will be resolved at $150,000 or whether it will be increased. Counsel further advised that based upon his review of documents, many of the claims that Medicare thought were duplicate payments were not in fact duplicates, but rather were properly billed. Counsel also advised that in view of the complexity of this issue, he believed the final overpayment would be an amount negotiated between the Company and Medicare. During fiscal 2000, there was no change in the status of this matter. The Company continued to reserve the sum of $150,000 on its October 31, 2000 financial statements as the estimated liability in connection therewith. In January 2000, the Company commenced negotiations with New Jersey Medicaid regarding a claim (the "Claim") made by the State in December 1999 that with respect to certain clinical laboratory tests for which reimbursements were made by the State to the Company, although such tests were authorized by the physician, the underlying laboratory test requisitions did not bear the actual signature of the physician ordering the test. The Company believes that it had been in compliance with all requirements regarding bills submitted for payment by New Jersey Medicaid and requires actual physician signatures before it bills New Jersey Medicaid. However, in order to dispose of the issue, the Company entered into an oral agreement with New Jersey Medicaid in January 2000 to settle the Claim for approximately $227,000. The Company accrued the estimated settlement of $227,000 on its October 31, 1999 financial statements. The settlement was approved by the Director of the New Jersey Division of Medical Assistance. The Company paid the settlement amount during fiscal 2000 and the Claim was extinguished. During fiscal 2000, the Company continued its development of certain proprietary healthcare information software systems (the "PSIMedica project") utilizing licensed software and various analytical tools and data provided from two ERISA funds and other sources. Information being processed for the project includes data related to member and/or patient eligibility, hospital claims, pharmacy claims, medical claims and laboratory testing. The Company intends to incorporate the products developed in the PSIMedica project into its core laboratory presentations to group and institutional markets such as managed care organizations and correctional institutions. Management anticipates that the initial marketing of its PSIMedica products will commence during fiscal 2001. No assurances can be given that such marketing will be successful. The Company funds its operations through a revolving loan agreement (the "Loan Agreement") with PNC Bank. At October 31, 2000, the Company was utilizing $12,000,000 of this credit facility. This loan was due on March 31, 2001 and has been extended to September 30, 2001. If the Company is unable to obtain a renewal or an extension of the loan beyond its September 30, 2001 due date, it will be forced to seek replacement funding for its operations which may not be available on acceptable terms.The Loan Agreement requires the Company to be in compliance with various affirmative and negative covenants concerning its operations and financial condition. Failure to comply could result in PNC Bank declaring the Company to be in default thereby rendering all outstanding indebtedness under the Loan Agreement immediately due and payable. One covenant requires the Company to have at least $2,800,000 of working capital at the end of each fiscal quarter. Another covenant requires the Company to have a minimum Tangible Net Worth at fiscal year end; $5,500,000 at October 31, 2000 and $6,000,000 at October 31, 2001. At the end of one quarter in fiscal 2000 (but not at October 31, 2000), the Company's working capital was less than $2,800,000. In addition, at October 31, 2000, the Company's Tangible Net Worth was approximately $1,720,000 less than the minimum required $5,500,000. PNC Bank has waived the Company's failure to be in compliance during or at the conclusion of fiscal 2000 with these two covenants as well as a third covenant limiting the Company's ability to lend funds. Assuming the loan is extended to October 31, 2001 or beyond said date, the Company will be required to be in compliance with the minimum Tangible Net Worth requirement of $6,000,000 at October 31, 2001. Therefore, the Company must increase its Tangible Net Worth during fiscal 2001 by at least $2,200,000, through earnings and/or sales of equity. No assurance can be given 5 that the Company will be able to effect such an increase. If it is unable to increase its Tangible Net Worth to $6,000,000 at October 31, 2001, (or is not in compliance with any other covenant) the Company will be required to obtain a waiver from PNC Bank, the availability of which cannot be assured. A failure to obtain a renewal or an extension of the loan, or to obtain a waiver, if required, would have a material adverse effect on the Company's business and financial condition. 6 CLINICAL LABORATORY OPERATIONS THE CLINICAL LABORATORY INDUSTRY The United States market for clinical laboratory testing is estimated to generate approximately $30 billion in annual revenues. - 50% of these revenues are generated by hospital laboratories - 50% of these revenues are generated by independent laboratories and physician office laboratories. HISTORY Bio-Reference was incorporated in December 1981 to provide mobile medical examination services but discontinued that business in June 1989. Bio-Reference commenced clinical laboratory operations in 1987 with the belief that a strong business opportunity existed for a medium-sized clinical laboratory that produced high quality test results in a timely manner to practicing physicians. The current competition may be primarily categorized in two groups: - businesses that are national in scope performing millions of tests per month but impersonal in nature - smaller laboratories that attempt to compete in terms of quality and service but are limited in resources and scope of capabilities. Consequently, management believed that there existed a definite place for a medium-sized commercial laboratory in the greater New York metropolitan area. The Company did not realize income from operations from the time it commenced clinical laboratory operations in 1987 until fiscal 1994. The Company realized net income in each of the succeeding years until fiscal 1999. During fiscal 1999, the Company had a loss of approximately $4,900,000 which included a write-down of approximately $2.9 million for an impaired asset of $900,000 and its associated additional reserve of $2,000,000 for accounts receivable attributable to the Company's end stage renal dialysis business acquired from Smith Kline Beecham. In 1988, the Company consolidated and relocated all of its laboratory operations into a 35,000 sq. ft. space in Elmwood Park, New Jersey, approximately 10 miles from mid-town Manhattan. The new location was carefully chosen to offer easy access to the greater New York metropolitan area. This move afforded the Company an excellent geographical location to expand into newer markets in southern New York State, including Westchester, Rockland and Nassau Counties, southern and western New Jersey and southern Connecticut. Bio-Reference proceeded to develop esoteric testing, while maintaining its routine tests. It was found that by emphasizing the more difficult esoteric tests, routine tests also increased, particularly profile testing in chemistry and hematology. The Company hopes to continue its growth by aggressive marketing, entry into additional markets, primarily in the greater New York metropolitan area through acquisitions and the development of specialty niche markets to complement its routine business. Over the years, the Company has expanded its specialty testing services to include: - anatomic pathology (biopsies and pap smears) - cellular immunology (principally geared to the AIDS testing market) - male infertility - tumor markers OPERATIONS The efficiency of a medical laboratory depends on three items: - Quantity of tests - Selection of tests performed - Ability to automate the process 7 It is axiomatic that the initial fixed costs of testing a small number of patients are high. Such costs include: - cost of maintaining highly sophisticated equipment - cost of a full support facility - marketing - logistical - billing - other administrative costs As the patient volume increases, automated tests become progressively less expensive as the fixed costs are already in place, making the laboratory more cost efficient. Most medical laboratory tests can be divided into three principal categories: - those that are highly automated and computer driven, - those that are semi-automated requiring the use of sophisticated equipment, - those that are subjective and basically manually determined. The Company considers itself a highly automated and computer driven laboratory. The Company's couriers pick up patient specimens from physician offices, nursing homes and hospitals in the metropolitan New York area and test results are generally delivered back to the physician within 24 hours. Larger volume clients receive test results by way of printers placed in their offices, thereby accelerating test reporting. Bio-Reference furnishes its physician clients with periodic newsletters detailing: - advances in laboratory medicine - new tests - clinical commentaries - laboratory interpretation of test results. In addition, the Company provides an annual Test Compendium to all physician clients listing: - all tests offered - normal ranges - correct collection of samples - patient preparation - up to date billing information The Company utilizes the services of eighteen full-time Client Service Coordinators, all of whom are fully trained in medical and laboratory terminology. This staff is used as an interface with physicians and nurses and augments the client support provided by the Company's sales staff. Highly abnormal and life threatening results are immediately telephoned to the physician in order to provide speedy medical resolution of any patient problem. SALES AND MARKETING The Company presently employs 47 full and part-time sales and marketing personnel. The sales and marketing department works closely with the Technical Director to: - plan new tests - pricing - general client support. All sales and marketing personnel operate in a dual capacity; both in selling and as client support representatives. This ensures that all salespersons are intimately involved with the client, not only in selling, but in servicing the account that they sell. Bio-Reference believes that this is unique in the industry and is extremely helpful in client retention, providing a strong link between the physician and the Company's staff. QUALITY ASSURANCE 8 Medical testing is essentially one of communication and data transfer. In order to provide accurate and precise information to the physician, it is essential to maintain a well structured and vigorous quality assurance program. Bio-Reference holds the required Federal and state licenses necessary to permit its operation of a clinical laboratory at both its New Jersey and New York facilities and to permit the servicing of its clients in Connecticut, Florida, Louisiana, Maryland, New Jersey, New York, Pennsylvania and Virginia. To fully maintain these licenses, the laboratory must submit to vigorous sets of proficiency tests, or surveys, in all test procedures which are performed. Such proficiency tests or surveys may be performed as many as four to five times a year, depending upon the procedure, and results in hundreds of proficiency tests throughout the year. In addition, the Company performs thousands of quality control and quality assurance tests per year. The Company is also subjected to unannounced inspections by inspectors from some of the jurisdictions noted above who review past records, operating manuals, quality assurance records and safety regulations. In October 1998, the Company was notified that it had been re-accredited by the College of American Pathologists "CAP" in its Elmwood Park, New Jersey and Park Avenue, New York facilities. In September 1998, the Company was notified that it had been re-accredited in its Valley Cottage, New York facility. This accreditation by CAP, a peer review organization, involves an intensive review by numerous experts in their specific fields, who review technical, quality assurance, health and safety and computer documentation in order to bestow accreditation, which is one of the most prestigious approvals available to clinical laboratories. The Company's Quality Assurance Committee, headed by a Quality Assurance Coordinator and composed of supervisors from all departments, meets daily to assess and evaluate the laboratory's quality. Based on the information received from the committee, recommendations are made to correct conditions which have led to errors. Management, department supervisors and members of the assurance committee continually monitor the laboratory's quality. Depending on the test, two or three sets of Quality Control materials are run in each analytical assay to assure precision and accuracy. Patient population statistics are evaluated each day. Highly abnormal samples are repeated to assure their accuracy. It is the Company's position that all of these procedures are necessary, not only in assuring a quality product, but also in maintaining Federal and state licensing. The Company believes these high standards of quality are an important factor in what management regards as an excellent rate of client retention. REVENUE RECOGNITION AND BUSINESS STRATEGY Although the laboratory's clients are primarily physicians, it is usually the individual patient, his or her commercial insurance carrier, or a governmental agency such as Medicare or Medicaid that pays the laboratory charges. These third parties pay health care providers according to allowable costs or a predetermined contractual rate rather than according to the provider's established rates; the difference between what is paid and what is billed is the contractual allowance. Therefore, the Company has adopted the practice of reducing its revenues by these allowances or contractual adjustments. Over the past years there has been an increase in the number of patients that are covered by managed care health plans. These plans will often negotiate with a limited number of clinical laboratories at discounted rates. Some of these managed care health plans will contract with only a single laboratory and pay for services on a capitation basis (meaning one price per enrollee, regardless of how much laboratory work is performed). The effect of managed care health plans to the laboratory industry equates to lower reimbursement rates for laboratory services. If the laboratory is not a provider of services to the managed care health plan, it will not be reimbursed for providing the service and overall patient volume may be reduced. Therefore, this change has reduced the potential market for a clinical laboratory's services if it is not a provider to a particular managed care health plan. In addition, Medicare as well as an increasing number of commercial programs are requiring physicians to document the medical necessity when ordering specific laboratory tests. Since the laboratory has a responsibility to test a specimen when it first arrives in the laboratory, it may not be able to wait until all applicable information is provided and there is a possibility that a test can be performed 9 and results provided before appropriate medical necessity is documented. In these cases, the laboratory may not receive reimbursement for the tests.(See "Developments Since the Beginning of Fiscal 2000" as to the status of a review concerning overpayments being conducted by the Company's Medicare carrier) and a recent settlement of a claim against the Company asserted by New Jersey Medicaid. 10 The following table reflects the Company's breakdown of revenue by payor for the 12 months ended October 31, 1998, 1999 and 2000.
YEARS ENDED OCTOBER 31, ----------------------- 1998 1999 2000 ---- ---- ---- Direct Patient Billing......................... 16% 14% 12% Commercial Insurance........................... 30% 27% 36% Professional Billing........................... 28% 34% 24% Medicare....................................... 22% 22% 24% Medicaid....................................... 4% 3% 4% --- ---- ----- 100% 100% 100%
COMPETITION Bio-Reference's competition derives primarily from other laboratories located in the New York metropolitan area. On a national basis, approximately 30% of this market is made up of the two largest national laboratories: - Quest Clinical Laboratory, formerly a Division of Corning, Inc. - Laboratory Corporation of America, Inc. Although the Company is significantly smaller than the national laboratories and has modest financial resources, management believes it can compete successfully because it has; - fewer layers of staff - a more responsive business atmosphere - customized service. The Company believes its response to medical consultation is faster and more personalized than in the national laboratories. Client service staff only deal with basic technical questions and those that have medical or scientific significance are referred directly to other senior scientists and staff. GOVERNMENT REGULATION Laboratories require licensure in each jurisdiction in which they operate. Bio-Reference holds the required Federal and state licenses necessary to permit its operation of a clinical laboratory at both its New Jersey and New York facilities and to permit its servicing of its clients in those states where it presently operates. Laboratory technicians and technologists must also qualify under state regulations in order to be employed by the laboratory. All of these licensing and certification programs set standards in areas such as quality control, record keeping and personnel qualifications, including, in varying measures from state to state, educational experience and licensure for various levels of personnel responsible for testing. Compliance with these standards is by periodic inspections by the appropriate Federal, state or local agency. In addition, licensing and certification entail proficiency testing which involves actual testing of specimens that have been specifically prepared by the regulatory authority or designated agencies for testing by the laboratory. There can be no assurance that 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 that the Company will obtain the licenses required in a proposed jurisdiction of operation. The Company is also subject to Federal and state regulations governing the transportation and disposal of medical waste including bodily fluids. Federal regulations require licensure of interstate transporters of medical waste. In New Jersey, the Company is subject to the Comprehensive Medical Waste Management Act, "CMWMA," which requires the Company to register as a generator of special medical waste. CMWMA mandates the sterilization of certain medical waste and provides a tracking system to insure disposal in an approved facility. All of the Company's medical waste is disposed of by a licensed interstate hauler. The hauler provides a manifest of the disposition of the waste products as well as a certificate of incineration which is retained by the Company. These records are audited by the State of New Jersey on a yearly basis. 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 11 "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. Depending upon the nature of congressional and/or regulatory action, if any, which is taken and the content of legislation, if any, which is adopted, the Company could experience a significant decrease in revenues from Medicare and Medicaid, which could have a material adverse effect on the Company. The Company is unable to predict, however, the extent to which any such actions will be taken. Federal and state health care and related regulations are subject to constant change. The Company cannot now predict what changes may be enacted which may affect its business or the manner in which its business would be affected by such changes. Two Omnibus Budget Reconciliation Acts have severely restricted physician referrals of Medicare covered services to clinical laboratories in which the referring physician or his immediate family has a financial relationship. The Clinical Laboratory Improvement Amendments of 1988, "CLIA-88," acted to strengthen Federal control of medical laboratories by regulating stricter quality assurance practices, licensing requirements and staff qualifications. CLIA-88 extended Federal licensing requirements to all clinical laboratories (regardless of the location, size or type of laboratory), including those operated by physicians in their offices, based on the complexity of the tests they perform. The legislation also substantially increased regulation of cytology screening, most notably by requiring the Secretary of Health and Human Services, ("HHS,") to implement regulations placing a limit on the number of slides that a cytotechnologist may review in a twenty-four hour period. CLIA-88 also established a more stringent proficiency testing program for laboratories and increased the range and severity of sanctions for violating Federal licensing requirements. A number of these provisions, including those that imposed stricter cytology standards and increased proficiency testing, have been implemented by regulations applicable only to laboratories subject to Medicare certification. On February 28, 1992, HHS published three sets of regulations implementing CLIA-88, including quality standard 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 standard regulations establish varying levels of regulatory scrutiny depending upon the complexity of testing performed. Under these regulations, a laboratory that performs only one or more of eight routine "waived" tests may apply for a waiver from most requirements of CLIA-88. The Company believes that most tests performed by physician office laboratories will fall into either the "waived" or the "moderately complex" category. The latter category applies to simple or automated tests and generally permits existing personnel in physicians' offices to continue to perform testing under the implementation of systems that insure the integrity and accurate reporting of results, establishment of quality control systems, proficiency testing by approved agencies, and biannual inspection. The quality standard and 12 enforcement procedure regulations became effective on September 1, 1992, although certain personnel, quality control and proficiency testing requirements will be phased-in over a number of years. The laboratory has completed its first CLIA inspection under CLIA-88 guidelines and received its certificate of compliance effective February 7, 1996. In October 1998, the Company was notified that it had been re-accredited by the College of American Pathologists "CAP" in its Elmwood Park, New Jersey and Park Avenue, New York facilities. In September 1998, the Company was notified that it had been re-accredited in its Valley Cottage, New York facility. This accreditation by CAP, a peer review organization, involves an intensive review by numerous experts in their specific field, who review technical, quality assurance, health and safety and computer documentation in order to bestow accreditation, which is one of the most prestigious approvals available to clinical laboratories. The Office of Inspector General has published a Model Compliance Program for the clinical laboratory industry. This is a voluntary program for laboratories to demonstrate to the Federal government that they are responsible providers. Bio-Reference Laboratories has written and implemented a compliance program adhering to the standards set forth in the Model Compliance Program. INSURANCE The Company maintains professional liability insurance of $1,000,000 per occurrence, $3,000,000 in the aggregate. In addition, the Company maintains excess commercial insurance of $2,000,000 per occurrence. A determination of Company liability for uninsured or underinsured acts or omissions would have a material adverse effect on the Company's operations. EMPLOYEES At October 31, 2000, the Company had 502 full-time employees and 299 part-time employees. This includes: - three executive officers - Vice President of Technical Operations - Marketing Vice-President, - 98 full-time and 49 part-time technicians, and/or technologists (including physicians, pathologists and Ph.D.'s) - 251 full and part-time semi-technical employees - 50 full and part-time marketing representatives - 214 full and part-time clerical employees - 126 full and part-time drivers. - 6 Right Body Foods - 2 CareEvolve.com None of the Company's employees are represented by a labor union. The Company regards relations with its employees as satisfactory. Item 2 - PROPERTIES The Company's executive offices and New Jersey processing facility occupy approximately 56,000 square feet of leased space in two one-story brick facilities at 481-487 Edward H. Ross Drive, Elmwood Park, New Jersey. The lease for these facilities, which expires in February 2004, provides for a monthly rental of $31,391. Bio-Reference's New York processing facility occupies approximately 11,000 square feet of leased space in a two-story brick facility at 140 Route 303, Valley Cottage, New York. The lease for this facility, which expires in April 2002, provides for a monthly rental of $12,177. The Company's testing equipment maintained at both of its processing facilities is in good condition and in working order. Management believes that these facilities, as presently equipped, have the capacity to generate up to approximately $100,000,000 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 its facilities in what it believes are adequate amounts. The Company also leases 52 additional relatively 13 small draw stations throughout the New York metropolitan area to collect specimens from physician-referred patients for testing at both of its processing facilities. Item 3 - LEGAL PROCEEDINGS On December 19, 2000, the Company and its wholly owned BRLI No.1 Acquisition Corp. subsidiary, as plaintiffs, instituted a lawsuit in the United States District Court for the District of New Jersey against Rebecca Klafter, her husband Mitchell Klafter and Right Body Foods, Inc. ("RBF") as defendants. In its complaint, the plaintiffs alleged that in connection with their December 1999 purchase of the health food business of RBF and the simultaneous employment of Rebecca Klafter as the Director of the business purchased, the defendants made material misrepresentations and misleading statements to the plaintiffs regarding the business being purchased. In its lawsuit the plaintiffs are seeking rescission of the acquisition and all of the agreements entered into in connection therewith, together with restitution, with interest, of all moneys paid and consideration given, including shares of Bio-Reference Common Stock, to any of the defendants in connection therewith, or in the alternative, damages in excess of $1 million plus interest and costs. See "Developments Since the Beginning of Fiscal 2000" herein. The defendants filed an answer and counterclaims on January 22, 2001 naming the plaintiffs as well as the Company's chief executive officer and its chief operating officer as counterclaim defendants. In addition to denying the substantive allegations of the complaint and stating various affirmative defenses, the defendants demanded that Rebecca Klafter be rehired, that all payments required to be made to her under her agreements with the plaintiffs be made and that the plaintiffs be required to remove all restrictions against her ability to sell the shares received by her in the acquisition. In addition, the defendants asserted a claim of sexual harassment on behalf of Rebecca Klafter against the Company and BRLI No.1 Acquisition Corp. and alleged that the two officers aided and abetted the two corporations in discriminating and in retaliating against Ms. Klafter. In addition to seeking the removal of restrictions against the shares, the defendants are seeking an indeterminate amount of compensatory damages including back pay, "front" pay, bonuses, incentive pay and overtime, punitive damages, interest and costs. The litigation is in its initial stages so that no prediction can be made as to probable outcome of this lawsuit. Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's Annual Meeting of Stockholders was held on December 15, 2000. At the meeting, the following two individuals were elected by the following vote to serve as Class III directors, each for a term of three years and until his successor is duly elected and qualified. In addition, the stockholders ratified the adoption of the 2000 Employee Incentive Stock Option Plan reserving an aggregate 800,000 shares of Bio-Reference's authorized but unissued Common Stock for issuance upon exercise of incentive stock options which may be granted under the Plan:
FOR WITHHELD ABSTAIN --- -------- ------- John Roglieri 6,840,913 57,912 - 0 - Gary Lederman 6,840,130 57,912 - 0 - 2000 Employee Stock Option Plan 6,777,129 115,779 5,917
The other directors of the Company whose term continued are as follows: Marc D. Grodman Class I director Howard Dubinett Class I director Sam Singer Class II director Frank Devito Class II director
14 PART II Item 5. - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's Common Stock was traded on the National Association of Securities Dealers Automated Quotation ("NASDAQ") Small Cap System through July 13, 1992 after which it was delisted from trading on NASDAQ due to the Company's failure to maintain shareholders' equity of at least $1,000,000. Commencing July 14, 1992, the Common Stock was quoted in the over-the-counter market on the NASD OTC Bulletin Board. As a result of the improvement in the Company's financial condition based upon its November 1993 public offering, the Common Stock was readmitted for trading on the NASDAQ Small Cap System under the symbol "BRLI" on November 24, 1993. The following table sets forth the range of high and low bid prices for the Common Stock for the periods indicated, as derived from reports furnished by NASDAQ. Such quotations represent prices between dealers, do not include mark-ups, mark-downs or commissions and may not necessarily represent actual transactions.
FISCAL YEAR BID PRICES ----------- ---------- HIGH LOW ---- --- 1999 First Quarter $1.875 $.96875 Second Quarter $1.5625 $.75 Third Quarter $1.03125 $.4375 Fourth Quarter $1.0625 $.78125 2000 First Quarter $3.50 $.78125 Second Quarter $3.125 $1.5625 Third Quarter $2.0 $1.28125 Fourth Quarter $2.34375 $1.1875
At January 19, 2001 the closing sales price for the Common Stock on NASDAQ was $1.8125 per share. At October 31, 2000 the number of record holders of the Common Stock was 571. Such number of record owners was determined from the Company's shareholder records and does not include beneficial owners whose shares are held in nominee accounts with brokers, dealers, banks and clearing agencies. DIVIDENDS The Company has not paid any dividends upon its Common Stock since its inception and, does not contemplate or anticipate paying any dividends in the foreseeable future. Furthermore, the Company's loan agreement with PNC Bank prohibits the Company from paying dividends or making any distributions with respect to any shares of its stock without the prior written consent of the Bank. 15 Item 6. SELECTED FINANCIAL DATA
[In thousands, except per share data] YEARS ENDED --------------------------------------------------------------- OCTOBER 31, --------------------------------------------------------------- 2000 1999 1998 1997 1996 ------- ------- ------- ------- ------- OPERATING DATA: Net Revenues $ 66,460 $ 53,856 $ 46,554 $ 38,660 $ 35,126 Cost of Services $ 37,174 $ 30,850 $ 25,058 $ 19,339 $ 18,136 Gross Profit $ 29,286 $ 23,006 $ 21,496 $ 19,321 $ 16,989 General and Administrative Expenses $ 27,654 $ 26,432 $ 20,231 $ 17,436 $ 15,793 Income [Loss] from Operations $ 1,632 $ (3,426) $ 1,065 $ 1,885 $ 1,196 Non-Recurring Gain on Sale of Intangible Assets $ -- $ -- $ 334 $ 2,026 $ -- Other Expenses - Net $ 1,568 $ 1,185 $ 841 $ 850 $ 552 Provision for Income Tax Expense [Benefit] $ (42) $ 367 $ (38) $ (139) $ 52 Net income [Loss] $ 105 $ (4,978) $ 597 $ 3,200 $ 592 Net [Loss] Income Per Common Share $ .01 $ (.68) $ .08 $ .48 $ .10 Cash Dividends Per Common Share $ -- $ -- $ -- $ -- $ -- BALANCE SHEET DATA: Total Assets $ 38,349 $ 32,318 $ 40,778 $ 29,095 $ 28,231 Total Long-Term Liabilities $ 2,378 $ 2,931 $ 3,708 $ 921 $ 1,533 Total Liabilities $ 25,287 $ 20,948 $ 24,555 $ 13,570 $ 16,128 Working Capital $ 2,820 $ 3,702 $ 8,364 $ 9,415 $ 4,072 Stockholders' Equity [Deficit] $ 13,061 $ 11,369 $ 16,223 $ 15,525 $ 12,103
A number of proposals for legislation continue to be under discussion which could substantially reduce Medicare and Medicaid reimbursements to clinical laboratories. Depending upon the nature of regulatory action and the content of legislation, the Company could experience a significant decrease in revenues from Medicare and Medicaid, which could have a material adverse effect on the Company. The Company is unable to predict, however, the extent to which such actions will be taken. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NOTE REGARDING FORWARD-LOOKING STATEMENTS THIS ANNUAL REPORT ON FORM 10-K CONTAINS HISTORICAL INFORMATION AS WELL AS FORWARD-LOOKING STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN THIS ANNUAL REPORT PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES THAT MAY CAUSE THE COMPANY'S ACTUAL RESULTS IN FUTURE PERIODS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE PERFORMANCE SUGGESTED HEREIN. OVERVIEW During fiscal 2000, Bio-Reference expanded its laboratory testing capabilities and its customer base through internal growth. Previously, the Company completed a series of acquisitions, as discussed below, to enhance its position in the health information marketplace. The Company licensed software from a third party to allow for the grouping for analysis of medical claims data and has proceeded to develop its own proprietary algorithms and enhancements to the licensed software so as to include laboratory and prescription data. This project, called PSIMedica (Population Strategies in Medicine), is currently working with two ERISA funds which total over 60,000 lives as beta sites for its analytical tools and programs. The Company expects to seek customers for its PSIMedica products during fiscal year 2001. 16 The Company acquired certain assets of DoctorNY.com (www.doctorny.com), a health portal which, with its associated domain sites and existing physician websites, includes website development capabilities for health care providers, together with a search engine which allows consumers to locate physicians by region, credentials, specialty or other parameters. The Company announced the consumer view represented by DoctorNY.com was part of its entry into the e-health marketplace. The Company developed a business-to-business Internet strategy which was assigned to its new CareEvolve.com business unit. This unit is currently developing physician services to enhance physician- patient and physician-payor electronic communications on a secure basis (i.e., preserving confidentiality), including communicating laboratory results, e-mail prescriptions, refills, payor verification and eligibility. The CareEvolve system will further offer physicians claims processing, CME credits, immunization records and promote e-commerce services, including physician supplies, office supplies and computer hardware. The Company acquired certain assets of Right Body Foods, Inc. ("RBF"), a manufacturer and distributor of freshly prepared, starch free, low-calorie, low carbohydrate, food products, located in Syosset, New York. Its products are sold through health professionals, dieticians, nutritionists and physicians. See Item 3 herein. Results of Operations NET INCOME Comparing only the laboratory operations of the Company and excluding the one time write down of an impaired asset and its associated increase in reserve of accounts receivable which occurred in fiscal year 1999, the Company's laboratory operations showed net income for the year of $747,483 compared to a loss of $2,054,077 in the prior year. This turn around is related by and large to an increase in net revenues which is reflective of an increase in the number of tests per patient and in the frequency of more expensive or specialty testing services. RBF had a loss of $449,810 for the year ended October 31, 2000. CareEvolve had a loss of $192,518 for the year ended October 31, 2000. Including CareEvolve and RBF, the Company realized net income of $105,155 for fiscal 2000 as compared to a loss, including the write down of the impaired asset, of $4,978,448 for the prior year. NET REVENUES: ------------ Net Revenues for the year ended October 31, 2000 were $66,460,073 as compared to $53,856,414 for the year ended October 31, 1999; this represents a 23% increase in net revenues. This increase is due to a 12% increase in patients serviced and a 9% increase in net revenues per patient and is reflective of an increase in number of tests per patient serviced and in the frequency of more expensive or specialty testing services. The Company's laboratory operations had net revenues of $66,345,879 in fiscal 2000, of which MLI had net revenues of $12,394,210. CareEvolve had net revenues of $25,717 and RBF had net revenues of $88,477. The number of patients serviced during the year ended October 31, 2000 was 1,393,967 which was 12% greater when compared to the prior fiscal year's twelve month period. Net revenue per patient for the year ended October 31, 2000 was $47.57 compared to net revenue per patient for the year ended October 31, 1999 of $43.59, an increase of $3.98 or 9%. MLI's net revenue per patient was $29.16 for the year ended October 31, 2000 as compared to $31.71 for the year ended October 31, 1999, a decrease of $2.55 or 9%. In August 2000, the Company announced that its GenPath business unit resumed full service oncology testing to physicians and institutions. While GenPath had been offering limited oncology testing services since it was formed after the sale of the GenCare Laboratory to Impath in 1997, GenPath currently offers full service hematology/oncology and some genomic testing to its customers. The Company's non- competition agreement with Impath expired in April, 2000. Bio-Reference is assembling a scientific staff and a marketing sales force in order to duplicate the success that GenCare had in this market. 17 COST OF SALES: ------------- Cost of Sales, excluding CareEvolve and RBF, increased from $30,850,337 for the year ended October 31, 1999 to $36,734,839 for the year ended October 31, 2000. This represents a 19% increase in direct operating costs. This increase is related to the increase in net revenues of 23%. CareEvolve and RBF had cost of sales of $439,512 during this period. GROSS PROFITS: ------------- Gross profits on net revenues, excluding CareEvolve and RBF, increased to $29,611,040 for the year ended October 31, 2000 from $23,006,077 for the year ended October 31, 1999; an increase of $6,604,963 (29%), primarily attributable to the increase in net revenues. Gross profit margins increased to 45% from 43%, primarily attributable to the increase in net revenues per patient and the operating efficiencies realized with regard to the increase in net revenues. Management believes that the Company's automated chemistry laboratory will have enough capacity to handle the projected increase in patient volume. The Company's total gross profit was $29,285,722. CareEvolve and RBF had a gross loss of $325,318 for the year ended October 31, 2000. GENERAL AND ADMINISTRATIVE EXPENSES: ----------------------------------- General and administrative expenses for the year ending October 31, 2000 were $27,653,858 as compared to $26,341,909 for the year ended October 31, 1999, an increase of $1,311,949 or 5%. During the year ended October 31, 1999, the Company wrote down an impaired asset of $924,371 attributable to its end stage renal dialysis business acquired from Smith Kline Beecham and the associated increase in reserves on its accounts receivable of $2,000,000. Without the write-down and increase in reserves, the increase in indirect expenses would have been $4,236,320 or 16% as compared with Fiscal 1998. This increase was caused primarily by three factors, 1) an increase in marketing related expense of $1,184,436 2) an increase in bad debt of $1,802,846 and 3) an increase in data processing expense of $435,842 all of which are attributable to the Company's growth. CareEvolve and RBF had general and administrative expenses of approximately $317,000 for the year ended October 31, 2000. INTEREST EXPENSE: ---------------- Interest expense increased from $1,465,765 during the year ended October 31, 1999 to $1,635,847 during the year ending October 31, 2000 an increase of $170,082. Management believes that this trend will continue in the future due to the expected increased use of the Company's revolving line of credit to fund the Company's expansion and growth. INCOME: ------- Comparing only the laboratory operations of the Company and excluding the one time write down of an impaired asset and its associated increase in reserve of accounts receivable which occurred in fiscal year 1999, the Company's laboratory showed net income for fiscal 2000 of $747,483 compared to a loss of $2,054,077 for fiscal 1999. This turn around is related by and large to an increase in net revenues which is reflective of an increase in the number of tests per patient and in the frequency of more expensive or specialty testing services. RBF had a loss of $449,810 for the year ended October 31, 2000. CareEvolve had a loss of $192,518 during the year ended October 31, 2000. Including CareEvolve and RBF, the Company realized net income of $105,155 in fiscal 2000 compared to a loss, including the write down of the impaired asset, of $4,978,448 in fiscal 1999. Fiscal Year 1999 Compared to Fiscal Year 1998 NET INCOME ---------- The Company's net income (loss) for the years ended October 31, 1999 and 1998 was $(4,978,448) and $596,583, respectively. The main reasons for the $5,575,031 decrease in net income is the write-down of approximately $2,900,000 for impaired assets including the additional allowance for accounts 18 receivable relating to the Company's end stage renal dialysis business acquired from SmithKline Beecham of approximately $2,000,000 and an increase in general and administrative expenses of approximately $2,000,000 in fiscal 1999. . In addition, net revenue per patient decreased 8% during the twelve month period ended October 31, 1999, as compared to the twelve month period ended October 31, 1998. Gross profit margins decreased from 46% for the twelve month period ended October 31, 1998 to 43% for the twelve month period ended October 31, 1999. Based upon anticipated increases in patient volume, anticipated increased testing to be performed, reimbursement rate improvements, and anticipated decreases in operating costs, the bulk of the effects of which were expected to be realized in the second half of fiscal 2000, the Company projected net income for fiscal 2000. NET REVENUES Net revenues for the year ended October 31, 1999 were $53,856,414 as compared to $46,553,730 for the year ended October 31, 1998; this represents a 16% increase in net revenues. MLI had net revenues of $13,706,743 or 25% of the Company's net revenues for fiscal 1999. The Company acquired MLI in April of 1998, for the seven month period ended October 31, 1998, MLI had net revenues of $7,773,570 or 17% of the Company's net revenue for the twelve month period ended October 31, 1998. The number of patients serviced during the fiscal year ended October 31, 1999 was 1,235,514 which was 25% greater when compared to the prior fiscal year. MLI accounted for 35% of the patient count for the year ended October 31, 1999. Net revenue per patient for the year ended October 31, 1998 was $47.29 compared to net revenue per patient for the year ended October 31, 1999 of $43.59; a reduction of $3.70 or 8%. This decrease is due to the inclusion of a full twelve months of MLI's revenues with its associated lower revenue per patient in fiscal year 1999. MLI's net revenue per patient was $31.71 for the twelve month period ended October 31, 1999 compared to net revenue per patient of $33.04 in fiscal year 1998. The Company expected an increase in net revenues in fiscal year 2000 due to a number of factors: internal growth, an estimated increase in the contract with the New York State Department of Corrections, Medicare reimbursement for tests previously not covered, an increase in Medicare reimbursement for other selected tests, as well as new marketing initiatives in newer testing areas, such as drugs of abuse testing, and complimentary and alternative medicine. In addition, the Company identified three new business initiatives (See Below), all of which it sought to leverage off existing capabilities the Company possesses. The Company anticipated increasing its revenues in fiscal 2000 through internal growth and development of new marketing initiatives in laboratory testing services outside the traditional physician market. In November 1999, the contract to provide laboratory testing by the New York State Department of Corrections for inmates in its facilities was renewed. This contract was valued at approximately $6,300,000 for fiscal year 2000, an estimated increase of approximately 10% from fiscal year 1999. The Company is seeking to market its services to other correctional institutions. In December 1999, the Company announced the acquisition of DoctorNY.com (www.doctorny.com), a health portal which, with its associated domain sites and existing physician websites, includes website development capabilities for health care providers, together with a search engine which allows consumers to locate physicians by region, credentials, specialty or other parameters. The Company announced the consumer view represented by DoctorNY.com was part of its entry into the e-health marketplace. The Company plans to further develop the physician services offered by the system to enhance physician- patient and physician-payor electronic communications on a secure basis (i.e., preserving confidentiality), including communicating laboratory results, e-mail prescriptions, refills, payor verification and eligibility, etc. The offering of physician CME credits through the system is also contemplated. The Company intends to market these services to its existing physician network as well as to other individual physicians and groups of physicians. In December 1999, the Company acquired Right Body Foods, Inc., a manufacturer and distributor of freshly prepared, starch free, low-calorie, low carbohydrate, food products, located in Syosset, New York. Its products are sold through health professionals, dieticians, nutritionists and physicians. The Company expected to use its marketing staff and physician network to increase the distribution of these products. See Item 3 herein. 19 COST OF SERVICES: ----------------- Cost of sales increased from $25,058,008 for the year ended October 31, 1998 to $30,850,337 for the year ended October 31, 1999, an increase of $5,792,329 or 23%. This increase was primarily the result of the MLI acquisition. MLI's direct operating costs were $9,347,850 for the twelve month period ended October 31, 1999, as compared to $5,639,627 for the seven month period ended October 31, 1998, an increase of $3,708,223. The optimum consolidation of laboratory operations had not been completed and was expected to only marginally impact the Company's cost structure until the automated laboratory upgrade and expansion was completed. While the automated laboratory was expected to have a marginal impact on cost structure, the reduction of the Company's dependence on reference laboratories was expected to have a more favorable impact during the second half of fiscal 2000. GROSS PROFITS: ------------- Gross profit on net revenues increased from $21,495,722 for the year ended October 31, 1998 to $23,006,077 for the year ended October 31, 1999; an increase of $1,510,355 primarily attributable to the increase in revenues. Gross profit margins decreased from 46% for the year ended October 31, 1998 to 43% for the year ended October 31, 1999. Management believed that the Company's gross profit margin would increase in fiscal 2000, due to increased revenues from internal growth, Medicare reimbursement for tests not previously covered, increases in reimbursement rates from Medicare on certain tests, the completion of the automated chemistry laboratory and decrease in direct operating expenses. The decrease in gross profit margins in fiscal 1999 was primarily attributable to the lower net revenues per patient, the increase in direct costs associated with MLI and the duplication of direct costs that had not been eliminated as of October 31, 1999 by an optimum consolidation of laboratory operations. The Company invested a large amount of time and money during fiscal 1999 to increase its processing capacity. Management believes that its capacity, once the automated chemistry laboratory is completed for approximately $250,000, will be more than adequate to handle the projected increase in patient volume. GENERAL AND ADMINISTRATIVE EXPENSES: ----------------------------------- General and administrative expenses for the year ended October 31, 1999 were $26,431,909 as compared to $20,430,757 for the year ended October 31, 1998, an increase of approximately $6,000,000 or 29%. Approximately 48% of this increase was the impairment charge of approximately $2,900,000 associated with the Company's end stage renal dialysis business acquired from SmithKline Beecham. In addition, occupancy expenses, telephone, data processing and marketing expenses increased approximately $1,900,000 over the prior twelve month period. The Company recorded a $227,000 expense associated with a New Jersey Medicaid overpayment claim. Management believed that general and administrative expenses in 2000 would increase but not at a higher percentage than the projected increase in revenues. INTEREST EXPENSE: ---------------- Interest expense increased from $1,280,737 for the year ended October 31, 1998 to $1,465,765 for the year ended October 31, 1999, resulting from the Company's continuing use of its revolving line of credit with PNC Bank. -------------------------------------------------------------------------------- NOTE REGARDING FORWARD-LOOKING STATEMENTS ----------------------------------------- THIS ANNUAL REPORT ON FORM 10-K CONTAINS HISTORICAL INFORMATION AS WELL AS FORWARD-LOOKING STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN THIS ANNUAL REPORT PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES THAT MAY CAUSE THE COMPANY'S ACTUAL RESULTS IN FUTURE PERIODS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE PERFORMANCE SUGGESTED HEREIN. 20 LIQUIDITY AND CAPITAL RESOURCES FOR THE FISCAL YEAR ENDED OCTOBER 31, 2000 The Company's working capital at October 31, 2000 was approximately $2,800,000 as compared to approximately $3,700,000 at October 31, 1999, a decrease of $900,000. The Company decreased its cash position by approximately $1,700,000 during the current period. The Company utilized approximately $3,600,000 in cash for operating activities. To offset this use of cash, the Company borrowed $3,300,000 in short term debt and repaid approximately $1,900,000 in existing debt. The Company had current liabilities of approximately $23,000,000 at October 31, 2000. The Company entered into an agreement during fiscal 2000 with one of its vendors to convert approximately $670,000 of accounts payable obligations into a three year term debt. Management believes operating costs will be lower during fiscal year 2001 due to cost savings generated by the automated laboratory. Credit risk with respect to accounts receivable is generally diversified due to the large number of patients comprising the client base. The Company does have significant receivable balances with government payors and various insurance carriers. Generally, the Company does not require collateral or other security to support customer receivables, however, the Company continually monitors and evaluates its client acceptance and collection procedures to minimize potential credit risks associated with its accounts receivable. The Company establishes and maintains an allowance for uncollectible accounts based upon collection history and anticipated collection, and as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is not material to the financial statements. In January 2000, the Company commenced negotiations with New Jersey Medicaid regarding a claim (the "Claim") made by the State in December 1999 that with respect to certain clinical laboratory tests for which reimbursements were made by the State to the Company, although such tests were authorized by the physician, the underlying laboratory test requisitions did not bear the actual signature of the physician ordering the test. The Company believes it had been compliant with all requirements regarding claims submitted for payment by New Jersey Medicaid and in fact requires actual physician signatures before it bills New Jersey Medicaid. However, in order to dispose of this issue, the Company and New Jersey Medicaid entered into an oral agreement in January 2000 to settle the claim for approximately $227,000 and the Company accrued this settlement amount in its October 31, 1999 financial statements. The settlement was approved by the Director of the New Jersey Division of Medical Assistance. The Company paid the settlement amount during fiscal 2000 and on June 8, 2000, a Warrant to Discharge the Certificate of Debt against the Company was filed in the Superior Court of New Jersey. In April 1998, the Company amended its revolving loan agreement with PNC Bank. The maximum amount of the credit line available to the Company is the lesser of (1) $14,000,000 or (ii) 50% of the Company's qualified accounts receivable [as defined in the agreement] plus 1% of any face amount of the certificates of deposit, if any, pledged as collateral for this loan minus the amount of any portion of the outstanding principal balance of the term loan which is deemed to be collateralized by the certificates of deposit. Interest on advances are currently at prime plus 1% and are scheduled to increase to prime plus 2% at April 1, 2001. The credit line is collateralized by substantially all of the Company's assets and the assignment of a $4,000,000 insurance policy on the life of the president of the Company. The line of credit is available through September 2001 and may be extended for annual periods by mutual consent thereafter. The terms of this agreement contain, among other provisions, requirements for maintaining defined levels of capital expenditures and net worth, various financial ratios and insurance coverage. As of October 31, 1998, the Company was in compliance with the covenant provisions of this agreement and was utilizing $12,000,000 of this credit facility. As of October 31, 2000, the Company was in default of its Tangible Net Worth and one other covenant. The Company received waivers for these defaults in January 2000. As of October 31, 2000, the Company was utilizing $12,000,000 of this credit facility. -------------------------------------------------------------------------------- NOTE REGARDING FORWARD-LOOKING STATEMENTS ----------------------------------------- THIS ANNUAL REPORT ON FORM 10-K CONTAINS HISTORICAL INFORMATION AS WELL AS FORWARD-LOOKING STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN THIS ANNUAL REPORT PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES THAT MAY CAUSE THE COMPANY'S ACTUAL RESULTS IN FUTURE PERIODS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE PERFORMANCE SUGGESTED HEREIN. 21 The Company intends to expand its laboratory operations through aggressive marketing while also diversifying into related medical fields through acquisitions. These acquisitions may involve cash, notes, Common Stock, and/or combinations thereof. The Company has various employment and consulting agreements of up to seven years with commitments totaling approximately $5,500,000 [See Note 12 of the Notes to the Consolidated Financial Statements herein] and operating leases with commitments totaling approximately $4,000,000 (of which approximately $1,700,000 and $2,300,000 are due during fiscal 2001) [See Notes 13 and 14]. The Company's cash balances at October 31, 2000 totaled approximately $440,000 as compared to $2,100,000 at October 31, 1999. The Company believes that its cash position, the anticipated cash generated from future operations, the availability of its credit line with PNC Bank, the utilization of certificates of deposits maturing during the first quarter of fiscal year 2001 and the interest due thereupon, will meet its future cash needs. IMPACT OF INFLATION To date, inflation has not had a material effect on the Company's operations. NEW AUTHORITATIVE PRONOUNCEMENTS The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of Effective Date of FASB Statements No. 133." The Statement defers for one year the effective date of FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." The rule now will apply to all fiscal quarters of all fiscal years beginning after June 15, 2000. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the value of the hedged assets, liabilities, or firm commitments are recognized through earnings or are recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The adoption of SFAS No. 137 is not expected to have a material impact on the Company's consolidated results of operation, financial position or cash flows. 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 -------------------------------------------------------------------------------- NOTE REGARDING FORWARD-LOOKING STATEMENTS ----------------------------------------- THIS ANNUAL REPORT ON FORM 10-K CONTAINS HISTORICAL INFORMATION AS WELL AS FORWARD-LOOKING STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN THIS ANNUAL REPORT PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES THAT MAY CAUSE THE COMPANY'S ACTUAL RESULTS IN FUTURE PERIODS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE PERFORMANCE SUGGESTED HEREIN. 22 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.............................49 Chairman of the Board, President, Chief Executive Officer and Director Howard Dubinett..................................49 Executive Vice President, Chief Operating Officer and Director Sam Singer.......................................58 Vice President, Chief Financial Officer, Chief Accounting Officer and Director Frank DeVito(b)..................................78 Director John Roglieri, M.D(b)............................61 Director Gary Lederman, Esq.(a)...........................66 Director --------------- (a) Chairman of the Audit Committee (b) Member of the Audit Committee
The Audit Committee confers with the Company's auditors and reviews, evaluates and advises the Board of Directors concerning the adequacy of the Company's account systems, its financial reporting practices, the maintenance of its books and records and its internal controls. In addition, the Audit Committee reviews the scope of the audit of the Company's financial statements and the results thereof. 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 his rendering of medical services on a part time basis 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 in 1981. He became a Director of the Company in April 1986. 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. Mr. Singer was the Controller for Sycomm Systems Corporation, a data processing and management consulting company, from 1981 to 1987, prior to joining the Company. He received a B.A. degree from Strayer University and an M.B.A. from Rutgers University. Mr. Singer devotes all of his working time to the business of the Company. 23 Frank DeVito became a Director of the Company in April 1986. Mr. DeVito, who is now retired, served as 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. Mr. DeVito is also the former president of Benefit Plan Services of New Jersey, a medical insurance consulting company. From 1981 through December 1985, Mr. DeVito was also President of United Food and Commercial Workers District Council of Metropolitan New York and Northern New Jersey, which was comprised of 35 local unions with approximately 150,000 members. John Roglieri, M.D. became a Director of the Company in September 1995. He is an Assistant Professor of Clinical Medicine at Columbia University's College of Physicians and Surgeons and an Assistant Attending Physician at Presbyterian Hospital, New York City. Dr. Roglieri received a B.S. degree in Chemical Engineering and a B.A. degree in Applied Sciences from Lehigh University in 1960, an M.D. degree from Harvard Medical School in 1966, and a Master's degree from Columbia University School of Business in 1978. From 1969 until 1971, he was a Senior Assistant Surgeon in the U.S. Public Health Service in Washington. From 1971 until 1973 he was a Clinical and Research Fellow at Massachusetts General Hospital. From 1973 until 1975, he was Director of the Robert Wood Johnson Clinical Scholars program at Columbia University. In 1975 he was appointed Vice-President Ambulatory Services at Presbyterian Hospital, a position which he held until 1980. Since 1980, he has maintained a private practice of internal medicine at Columbia-Presbyterian Medical Center. From 1988 until 1992, he was also Director of the Employee Health Service at Presbyterian Hospital. From 1992 through 1999, Dr. Roglieri was the Corporate Medical Director of NYLCare, a managed care subsidiary of New York Life. Dr. Roglieri is currently the chief medical officer of Physician Weblink, a New York metropolitan area physician practice management company. 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. See Item 4 herein. KEY PERSONNEL AND CONSULTANTS The following key personnel and consultants make significant contributions to the Company's operations. Robert Rush, Ph.D (Age 60) 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. Bader Maria Pedemonte-Coira, M.D. (Age 42) has been employed by the Company since August 2000 as Medical Director. She is certified by the American Board of Pathology in Anatomic and Clinical Pathology with special certification in Hematopathology and Immunopathology. In addition to being 24 Medical Director, Dr. Pedemonte is director of GenPath, the oncology testing section of Bio-Reference. She holds a New York State Department of Health Certificate of qualification for Laboratory Director. Dr. Pedemonte's professional appointments include Director of Hematopathology & Molecular Pathology at JFK Medical Center in Edison, NJ (1998-2000). Hematopathologist, IMPATH, Inc. New York, NY (1997-1998). Medical Director & Hematopathologist GenCare-Biomedical Research Laboratory of Bio-Reference (1996-1998). She was Associate Director & Pathologist, Molecular Tissue Pathology; Director, Cellular Immunology, Corning Clinical Laboratories (Corning/MetPath) Teterboro, NJ (1991- 1996). Dr. Pedemonte is also an Adjunct Assistant Professor of Pathology, Columbia Unviersity, College of Physicians & surgeons, NY. (1991-Present). Ayad Mudarris, Ph.D. (Age 49) 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 2000, 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, 2000 to its Chief Executive Officer and its other executive officers who were serving as executive officers of the Company on October 31, 2000. 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
Long-Term Annual Compensation Compensation ---------------------------------- ------------------------------------- Other All Year Annual Restricted LTIP Other Ended Compen- Stock Options Pay- Compen- Name and Principal Position October 31, Salary Bonus Sation Awards (SARS) outs sation --------------------------- ----------- --------- --------- --------- ------ ------ ---- -------- Marc D. Grodman M.D. 2000 $366,921 $125,000 $-0- -0- -0- $-0- $-0- President and Chief 1999 $306,557 $125,000 $-0- -0- -0- $-0- $-0- Executive Officer 1998 $305,653 $125,000 $-0- -0- -0- $-0- $-0- Howard Dubinett 2000 $160,004 $60,000 $-0- -0- -0- $-0- $-0- Executive Vice 1999 $160,004 $60,000 $-0- -0- -0- $-0- $-0- President and Chief 1998 $157,622 $57,750 $-0- -0- -0- $-0- $-0- Operating Officer Sam Singer 2000 $160,004 $60,000 $-0- -0- -0- $-0- $-0- Vice President and 1999 $158,002 $60,000 $-0- -0- -0- $-0- $-0- Chief Financial and 1998 $156,333 $57,750 $-0- -0- -0- $-0- $-0- Accounting Officer
25 EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS On May 13, 1997, Dr. Grodman agreed to the terms of a new employment agreement pursuant to which he agreed to 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) which amount was increased to $4,000,000 during fiscal year 1999; (iv) the leasing of an automobile for his use; (v) participation in fringe benefit, bonus, pension, profit sharing, and similar plans maintained for the Company's employees; (vi) disability benefits; (vii) certain termination benefits; and (viii) in the event of termination due to a change in control of the Company, a severance payment equal to 2.99 times Dr. Grodman's average annual compensation during the preceding five years. In consideration for Dr. Grodman's acceptance of the terms of the employment agreement, the board of directors authorized the issuance to Dr. Grodman of (a) 300,000 shares of the Company's Common Stock, partially subject to forfeiture, (b) five-year incentive stock options ("ISOs") exercisable to purchase 100,000 shares of Common Stock at $.790625 per share, and (c) ten-year non-qualified stock options ("NQOs") exercisable to purchase 200,000 shares of Common Stock at $.71875 per share. The ISOs are only exercisable while Dr. Grodman is employed by the Company. The NQOs expire if Dr. Grodman's employment agreement is terminated by the Company "For Cause" or at his option, "Without Good Reason." See "Employee Stock Option Plans." The 300,000 shares of Common Stock issued to Dr. Grodman were 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.
Dr. Grodman continues to be employed by the Company at the date hereof so that the forfeiture provisions are no longer applicable. Also on May 13, 1997, Mr. Dubinett agreed to the terms of a new employment agreement pursuant to which he agreed to serve as executive vice president and chief operating officer of the Company. The agreement provides (i) for a five and one-half year term commencing May 1, 1997; (ii) a minimum annual Base Compensation commencing November 1, 1997 consisting of salary and bonus in the aggregate amount of $220,000 subject to increases based on increases in the Consumer Price Index as well as increases at the discretion of the board of directors; (iii) typical health insurance coverage and $500,000 face amount of "split dollar" life insurance insuring Mr. Dubinett's life and payable to his estate (excluding benefits required to be paid to the Company pursuant to the split dollar plan)which amount was increased to $1,000,000 during fiscal year 1999; (iv) the leasing of an automobile for his use; (v) participation in fringe benefit, bonus, pension, profit sharing, and similar plans maintained for the Company's employees; (vi) disability benefits; (vii) certain termination benefits; and (viii) in the event of termination due to a change in control of the Company, a severance payment equal to 2.99 times Mr. Dubinett's average annual compensation during the preceding five years. In consideration for Mr. Dubinett's acceptance of the terms of the employment agreement, the board of directors authorized the issuance to Mr. Dubinett of (a) 240,000 shares of the Company's Common Stock, partially subject to forfeiture and (b) ten-year ISOs exercisable to purchase 60,000 26 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. were 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." 27
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.
Mr. Dubinett continues to be employed by the Company at the date hereof so that the forfeiture provisions are no longer applicable. Also on May 13, 1997, Mr. Singer agreed to the terms of a new employment agreement pursuant to which he agreed to serve as vice president and chief financial officer of the Company. The agreement provides (i) for a five and one-half year term commencing May 1, 1997; (ii) a minimum annual Base Compensation commencing November 1, 1997 consisting of salary and bonus in the aggregate amount of $220,000 subject to increases based on increases in the Consumer Price Index as well as increases at the discretion of the board of directors; (iii) typical health insurance coverage and $400,000 face amount of "split dollar" life insurance insuring Mr. Singer's life and payable to his estate (excluding benefits required to be paid to the Company pursuant to the split dollar plan) which amount was increased to $800,000 during fiscal year 1999; (iv) the leasing of an automobile for his use; (v) participation in fringe benefit, bonus, pension, profit sharing, and similar plans maintained for the Company's employees; (vi) disability benefits; (vii) certain termination benefits; and (viii) in the event of termination due to a change in control of the Company, a severance payment equal to 2.99 times Mr. Singer's average annual compensation during the preceding five years. In consideration for Mr. Singer's acceptance of the terms of the employment agreement, the board of directors authorized the issuance to Mr. Singer of (a) 200,000 shares of the Company's Common Stock, partially subject to forfeiture and (b) ten-year ISOs exercisable to purchase 50,000 shares of Common Stock at $.71875 per share. The ISOs are only exercisable while Mr. Singer is employed by the Company. The 200,000 shares of Common Stock issued to Mr. Singer were 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.
Mr. Singer continues to be employed by the Company at the date hereof so that the forfeiture provisions are no longer applicable. EMPLOYEE STOCK OPTION PLANS 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 provided 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 could 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"). 28 Under the 1989 Plan, the exercise price of an option designated as an ISO could not be less than the fair market value of the Common Stock on the date the option was granted. However, in the event an option designated as an ISO was granted to a 10% shareholder (as defined in the 1989 Plan) such exercise price was required to be at least 110% of such fair market value. Exercise prices of NQOs options could be less than such fair market value. The aggregate fair market value of shares subject to options granted to a participant which are designated as ISOs which first become exercisable in any calendar year could 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 October 31, 1999, there were outstanding ISOs under the 1989 Plan exercisable to purchase an aggregate 612,041 shares of Bio-Reference Common Stock at prices ranging from $.71875 to $.790625 per share. Included were the above described ISOs issued to Dr. Grodman and Messrs. Dubinett and Singer exercisable to purchase 100,000 shares, 60,000 shares and 50,000 shares respectively and additional ISOs held by Messrs. Dubinett and Singer exercisable to purchase an aggregate 153,334 shares and 116,667 shares respectively. During fiscal 2000, one employee exercised ISOs and purchased an aggregate 16,667 shares so that at October 31, 2000, there were outstanding ISOs under the 1989 Plan exercisable to purchase an aggregate 595,374 shares at prices ranging from $.71875 to $.790625 per share. All options under the 1989 Plan were required to be granted before the Plan's July 1999 Termination Date so that no further options can be granted under the 1989 Plan. On August 25, 2000, the Board of Directors adopted the 2000 Employee Incentive Stock Option Plan (the "2000 Plan") reserving an aggregate 800,000 shares of Bio-Reference Common Stock for issuance upon exercise of ISOs which may be granted under the 2000 Plan. On the same date, the Board of Directors granted ISOs pursuant to the 2000 Plan to five key employees exercisable to purchase an aggregate 235,000 shares of Bio-Reference Common Stock reserved for issuance under the 2000 Plan at an exercise price of $1.22 per share (the mean between the closing bid and ask prices for the Common Stock in the over-the-counter market on August 24, 2000). The ISOs were subject to stockholder ratification of the adoption of the 2000 Plan which ratification was obtained at the Company's December 15, 2000 Annual Meeting of Stockholders. See Item 4 herein. At October 31, 2000, all of the above ISOs issued under the 2000 Plan and exercisable at various times to purchase an aggregate 235,000 shares of Bio-Reference Common Stock were outstanding. DESCRIPTION OF THE 2000 PLAN The 2000 Plan authorizes the grant of options which qualify for ISO treatment under Section 422 of the Internal Revenue Code, as amended (the "Code") to purchase up to a maximum aggregate 800,000 shares of the Company's Common Stock. Options may only be granted under the 2000 Plan to employees of the Company and its subsidiaries (including officers and directors who are also employees). The 2000 Plan will be administered by the Board of Directors 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 price (not less than the fair market value on the date of grant) at which options will be granted; the periods during which each option is exercisable; and the number of shares subject to each option. The Board or the Stock Option Committee has the authority to interpret the 2000 Plan and to establish and amend rules and regulations relating thereto. 29 The 2000 Plan provides that, the exercise price of an option granted thereunder 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 is granted under the 2000 Plan to a holder of 10% or more of the Company's outstanding Common Stock, the exercise price must be at least 110% of such fair market value. Under the 2000 Plan, options must be granted before the August 24, 2010 Termination Date. No option may have a term longer than ten years (limited to five years in the case of an option granted to a 10% or greater stockholder of the Company). The aggregate fair market value of the Company's Common Stock with respect to which options are exercisable for the first time by a grantee under the 2000 Plan during any calendar year cannot exceed $100,000. Options granted under the 2000 Plan are non-transferable and must be exercised by an optionee, if at all, while employed by the Company or a subsidiary or within three months after termination of such optionee's employment due to retirement, or within one year of such termination if due to disability or death. The Board of the Stock Option Committee, as the case may be, may, in its sole discretion, cause the Company to lend money to or guaranty any obligation of an employee for the purpose of enabling such employee to exercise an option granted under the 2000 Plan provided that such loan or obligation cannot exceed fifty percent (50%) of the exercise price of such option. During fiscal year 2000, the Company granted NQOs to one employee exercisable to purchase an aggregate 45,000 shares of Common Stock at an exercise price of $1.19 per share. At October 31, 2000, employees held NQOs exercisable to purchase an aggregate 762,850 shares at exercise prices ranging from $.594 to $1.19 per share including NQOs held by Dr. Grodman exercisable to purchase an aggregate 200,000 shares at an exercise price of $.71875 per share. In addition, at October 31, 2000, two directors, John Roglieri and Frank DeVito owned warrants exercisable to purchase 30,000 and 10,000 shares of Common Stock respectively at an exercise price of $.71785 per share and additional warrants were owned at such date by various consultants exercisable to purchase an aggregate 145,000 shares of Common Stock at exercise prices ranging from $1.19 to $3.00 per share. See Note 9 of Notes to the Consolidated Financial Statements. The following table sets forth certain information concerning unexercised options for each of the executive officers named in the "Summary Compensation Table." No options were exercised by any of such individuals in fiscal 2000. 2000 FISCAL YEAR-END OPTION VALUES
Number of Unexercised Options at 2000 Fiscal Year-End Value of ----------------------- Unexercised In-The-Money Name Exercisable Unexercisable Options at 10/31/00 ---- ----------- ------------- ------------------- Marc D. Grodman 200,000 -0- $ 256,250 100,000 -0- $ 120,938 Howard Dubinett 213,334 -0- $ 273,334 Sam Singer 166,667 -0- $ 213,542
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 19, 2001 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 30 the Company, and (iv) all directors and executive officers as a group. The percentages have been calculated on the basis of treating as outstanding for a particular holder, all shares of Common Stock outstanding on said date owned by such holders and all shares of Common Stock issuable to such holder in the event of exercise or conversion of outstanding options, warrants and convertible securities owned by such holder at said date which are exercisable or convertible within 60 days of such date.
Shares of Name and Address of Common Stock Percentage Beneficial Owner Beneficially Owned(1) Ownership ------------------- --------------------- ---------- Directors and Executive Officers* Marc D. Grodman(2)................................................ 1,673,845 17% Howard Dubinett (3)............................................... 477,001 5% Sam Singer(4)..................................................... 377,667 4% Frank DeVito(5)................................................... 10,202 -- John Roglieri(6).................................................. 31,667 -- Gary Lederman (7)................................................. 25,200 -- Executive Officers and directors as a group (six persons)(2)(3)(4)(5)(6)(7)....................... 2,595,582 26%
----------- * 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 608,100 shares owned directly by Dr. Grodman, 549,678 shares issuable upon conversion of Series A Senior Preferred Stock and 300,000 shares issuable upon exercise of options. Also includes 121,667 shares owned directly and 54,400 shares issuable upon conversion of Series A Senior Preferred Stock held by Dr. Grodman's wife, Pam Grodman, and a Company controlled by her and 40,000 shares owned by their minor children. (See Item 13). Dr. Grodman disclaims beneficial ownership of these 216,067 shares. (3) Includes 263,667shares owned directly, and 213,334 shares issuable upon exercise of options. (4) Includes 211,000 shares owned directly, and 166,667 shares issuable upon exercise of options. (5) Includes 202 shares owned directly and 10,000 shares issuable upon exercise of warrants. (6) Includes 1,667 shares owned directly and 30,000 shares issuable upon exercise of warrants. (7) Includes 25,200 shares owned directly. Item 13. - 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, 2000, $73,718 in outstanding principal, interest and van rentals was due from Dr. Grodman. 31 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 Series A Senior Preferred Stock issued to the Grodman Group. The new Series A Senior Preferred Stock is convertible into an aggregate 604,078 shares of Common Stock on or before May 1, 2007 at a conversion price of $.75 per share and has the same voting rights (one vote per share), dividend rights and liquidation rights as each share of Common Stock. 32 Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 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, 2000 and 1999 F-2.....F-3 Statement of Operations- Years ended October 31, 2000, 1999 and 1998 F-4 Statement of Shareholders' Equity Years ended October 31, 2000, 1999 and 1998 F-5 Statement of Cash Flows - Years ended October 31, 2000, 1999 and 1998 F-6.....F-7 Notes to Financial Statements- F-8.....F-23 Schedule II - Years ended October 31, 2000, 1999 and 1998 F-24....F-25
2. REPORTS ON FORM 8-K No reports on Form 8-K were filed during the Quarter ended October 31, 2000. 3. EXHIBITS
Incorporated by Exhibit No. Item Reference to ----------- ---- ------------ 3.1* Amended and Restated Certificate of Incorporation dated (A) November 15, 1989 3.1.1* Amendment to Certificate of Incorporation dated (B) October 4, 1991 (authorizing one-for-10 reverse stock split) 3.1.2* Amendment to Certificate of Incorporation dated (C) August 23, 1993 (authorizing one-for-three reverse stock split) 3.1.3* Amendment to Certificate of Incorporation dated March 23, 1998 (G) (creating Series A Senior Preferred Stock) 3.1.4* Amendment to Certificate of Incorporation dated March 31, 1998 (G) (creating Series A Junior Participating Preferred Stock) 3.2* By-laws (D) 4.1* Form of Common Stock Certificate, $.01 par value (C) 10.1* Lease Agreement for Elmwood Park, New Jersey Premises, (G) as in effect at October 31, 1999 10.2* Employment Agreement between the Company and (G) Marc Grodman as in effect at December 31, 1999 33 10.3* Employment Agreement between the Company and (G) Howard Dubinett as in effect at December 31, 1999 10.4* Employment Agreement between the Company and (G) Sam Singer as in effect at December 31, 1999 10.5* The Company's 1989 Stock Option Plan (B) 10.5.1 The Company's 2000 Employee Incentive Stock Option Plan. 10.6* Acquisition Agreement made as of April 9, 1998 for the (E) acquisition by the Company of all of the outstanding capital stock of Medilabs, Inc. 10.7* Rights Agreement dated as of March 31, 1998 including (F) Exhibits thereto between the Company and American Stock Transfer & Trust Company as Rights Agent 10.8* Asset Sale/Purchase Agreement made as of December 2, 1999 (G) for the acquisition by the Company of the WEB Business of the Medical Marketing Group, Inc. 10.9* Asset/Sale Purchase Agreement made as of December 14, 1999 (G) for the acquisition by the Company's wholly-owned BRLI No. 1 Acquisition Corp. subsidiary of the Health Ford Business of Right Body Foods, Inc. 10.10* Employment Agreement between the Company and Rebecca (G) Klafter, chief executive officer of Right Body Foods, Inc., dated December 14, 1999 21 Subsidiaries of the Company
The exhibits designated above with an asterisk (*) have previously been filed with the Commission and, pursuant to 17 C.F.R. Secs. 201.24 and 240.12b-32, are incorporated by reference to the documents as indicated below. (A) Incorporated by reference to exhibit filed with the Company's Registration Statement on Form S-1 (File No. 33-31360). (B) Incorporated by reference to exhibit filed with the Company's annual report on Form 10KSB for the year ended October 31, 1992. (C) Incorporated by reference to exhibit filed with the Company's Registration Statement on Form SB-2 (File No. 33-68678). (D) Incorporated by reference to exhibit filed with the Company's Registration Statement on Form S-18 (File No. 33-5048-NY). (E) Incorporated by reference to exhibit filed with the Company's report on Form 8-K for April 22, 1998. (F) Incorporated by reference to exhibit filed with the Company's report on Form 8-A dated March 31, 1998. (G) Incorporated by reference to exhibit filed with the Company's annual report on Form 10-K for the year ended October 31, 1999.
34 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BIO-REFERENCE LABORATORIES, INC. By: /s/ Marc D. Grodman -------------------------------------------- Marc D. Grodman Chairman of the Board, President, Chief Executive Officer and Director Dated: January 30, 2001 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Marc D. Grodman ------------------------------------------------- Marc D. Grodman Chairman of the Board, President, Chief Executive Officer and Director January 30, 2001 /s/ Howard Dubinett ------------------------------------------------- Howard Dubinett Executive Vice President, Chief Operating Officer and Director January 30, 2001 /s/ Sam Singer ------------------------------------------------- Sam Singer Vice President, Chief Financial Officer, Chief Accounting Officer and Director January 30, 2001 /s/ Frank Devito ------------------------------------------------- Frank DeVito Director January 30, 2001 /s/ John Roglieri ------------------------------------------------- John Roglieri Director January 30, 2001 /s/ Gary Lederman ------------------------------------------------- Gary Lederman Director January 30, 2001 35 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 subsidiaries as of October 31, 2000 and 1999, 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, 2000. 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 subsidiaries as of October 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended October 31, 2000, in conformity with generally accepted accounting principles. MOORE STEPHENS, P. C. Certified Public Accountants. Cranford, New Jersey January 11, 2001 [Except for Note 24D as to which the date is January 30, 2001] F-1
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES ------------------------------------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS ------------------------------------------------------------------------------------------------------------------- OCTOBER 31, ----------- 2000 1999 ------- ------- ASSETS: CURRENT ASSETS: Cash and Cash Equivalents $ 440,131 $ 2,128,474 Accounts Receivable - Net 24,048,223 18,615,496 Inventory 734,688 572,279 Other Current Assets 506,366 404,124 --------------- --------------- TOTAL CURRENT ASSETS 25,729,408 21,720,373 --------------- --------------- PROPERTY AND EQUIPMENT - AT COST 5,186,269 5,211,467 LESS: Accumulated Depreciation 3,367,372 3,039,128 --------------- --------------- PROPERTY AND EQUIPMENT - NET 1,818,897 2,172,339 --------------- --------------- OTHER: Due from Related Party 73,718 138,518 Deposits 316,113 278,619 Goodwill 6,262,409 5,396,863 Intangible Assets 2,723,544 1,764,740 Other Assets 1,424,692 846,546 --------------- --------------- TOTAL OTHER 10,800,476 8,425,286 --------------- --------------- TOTAL ASSETS $ 38,348,781 $ 32,317,998 =============== ===============
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements. F-2
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES ------------------------------------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS ------------------------------------------------------------------------------------------------------------------- OCTOBER 31, ----------- 2000 1999 ------- ------- LIABILITIES AND SHAREHOLDERS' EQUITY: CURRENT LIABILITIES: Accounts Payable $ 6,751,841 $ 5,540,787 Accrued Salaries and Commissions 1,158,636 1,099,175 Accrued Taxes and Expenses 1,653,955 1,153,561 Current Maturities of Long-Term Debt [Net of Discount] 1,029,617 1,215,671 Notes Payable - Banks 12,000,000 8,700,905 Capitalized Lease Obligation - Short-Term Portion 315,221 308,251 --------------- --------------- TOTAL CURRENT LIABILITIES 22,909,270 18,018,350 --------------- --------------- LONG-TERM LIABILITIES: Long-Term Debt Less Current Maturities 1,459,879 2,000,000 Capitalized Lease Obligations - Long-Term Portion 697,497 680,538 Other Long-Term Liabilities 220,740 250,000 --------------- --------------- TOTAL LONG-TERM LIABILITIES 2,378,116 2,930,538 --------------- --------------- COMMITMENTS AND CONTINGENCIES -- -- --------------- --------------- SHAREHOLDERS' EQUITY: Preferred Stock, Par Value $.10 Per Share, Authorized 1,062,589 Shares; None Issued -- -- Series A - Senior Preferred Stock, Par Value $.10 Per Share, Authorized, Issued and Outstanding 604,078 Shares 60,408 60,408 Series A - Junior Participating Preferred Stock, Par Value $.10 Per Share, Authorized 3,000 Shares; None Issued -- -- Common Stock, Par Value $.01 Per Share, Authorized 18,333,333 Shares; Issued and Outstanding 8,505,444 and 7,700,777 Shares at October 31, 2000 and 1999, Respectively 85,054 77,008 Additional Paid-in Capital 24,873,414 23,294,673 Accumulated [Deficit] (11,508,278) (11,613,433) --------------- --------------- Totals 13,510,598 11,818,656 Deferred Compensation (449,203) (449,546) --------------- --------------- TOTAL SHAREHOLDERS' EQUITY 13,061,395 11,369,110 --------------- --------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 38,348,781 $ 32,317,998 =============== ===============
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements. F-3
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES ------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS ------------------------------------------------------------------------------------------------------------------- YEARS ENDED ------------------------------------------------------- OCTOBER 31, ------------------------------------------------------- 2000 1999 1998 ------- ------- ------- NET REVENUES $ 66,460,073 $ 53,856,414 $ 46,553,730 ---------------- --------------- --------------- COST OF SERVICES: Depreciation and Amortization 791,666 856,668 704,293 Employee Related Expenses 16,582,161 14,096,914 11,675,839 Reagents and Laboratory Supplies 9,932,540 6,974,857 5,567,394 Other Cost of Services 9,867,984 8,921,898 7,110,482 ---------------- --------------- --------------- TOTAL COST OF SERVICES 37,174,351 30,850,337 25,058,008 ---------------- --------------- --------------- GROSS PROFIT 29,285,722 23,006,077 21,495,722 ---------------- --------------- --------------- GENERAL AND ADMINISTRATIVE EXPENSES: Depreciation and Amortization 846,428 974,529 935,370 Other General and Administrative Expenses 18,149,363 15,677,788 13,410,446 Provision for Doubtful Accounts 8,658,067 6,855,221 6,084,941 Expenses of Impaired Assets -- 2,924,371 -- ---------------- --------------- --------------- TOTAL GENERAL AND ADMINISTRATIVE EXPENSES 27,653,858 26,431,909 20,430,757 ---------------- --------------- --------------- INCOME [LOSS] FROM OPERATIONS 1,631,864 (3,425,832) 1,064,965 ---------------- --------------- --------------- NON-RECURRING GAIN ON SALE OF INTANGIBLE ASSETS -- -- 333,900 ---------------- --------------- --------------- OTHER [INCOME] EXPENSE: Interest Expense 1,635,847 1,465,765 1,280,737 Interest Income (67,638) (265,069) (440,155) Other Income -- (15,380) -- ---------------- --------------- --------------- TOTAL OTHER EXPENSE - NET 1,568,209 1,185,316 840,582 ---------------- --------------- --------------- INCOME [LOSS] BEFORE INCOME TAXES 63,655 (4,611,148) 558,283 PROVISION FOR INCOME TAX [BENEFIT] EXPENSE (41,500) 367,300 (38,300) ---------------- --------------- --------------- NET INCOME [LOSS] $ 105,155 $ (4,978,448) $ 596,583 ================ =============== =============== NET INCOME [LOSS] PER SHARE - BASIC $ .01 $ (.68) $ .08 ================ =============== =============== NET INCOME [LOSS] PER SHARE - ASSUMING DILUTION $ .01 $ (.68) $ .07 ================ =============== ===============
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements. F-4
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES ------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ------------------------------------------------------------------------------- SERIES A SENIOR PREFERRED STOCK COMMON STOCK ADDITIONAL ---------------------- ------------ PAID-IN SHARES AMOUNT SHARES AMOUNT CAPITAL ------ ------ ------ ------ ------- BALANCE - OCTOBER 31, 1997 604,078 $ 60,408 7,169,376 $ 71,694 $ 22,967,160 Amortization of Deferred Compensation -- -- -- -- -- Shares Issued on Exercise of Warrants -- -- 43,534 435 30,855 Net Income for the Year -- -- -- -- -- ----------- ----------- ------------- ----------- --------------- BALANCE - OCTOBER 31, 1998 604,078 60,408 7,212,910 72,129 22,998,015 Shares Issued in Lieu of Compensation -- -- 25,000 250 25,688 Shares Issued for Deferred Compensation -- -- 490,000 4,900 270,970 Escrow Shares Cancelled -- -- (27,133) (271) -- Amortization of Deferred Compensation -- -- -- -- -- Net [Loss] for the Year -- -- -- -- -- ----------- ----------- ------------- ----------- --------------- BALANCE - OCTOBER 31, 1999 604,078 60,408 7,700,777 77,008 23,294,673 Shares Issued for Deferred Compensation -- -- 95,000 950 67,623 Stock Options Issued for Deferred Compensation -- -- -- -- 107,625 Amortization of Deferred Compensation -- -- -- -- -- Shares Issued for Employee Services -- -- 130,000 1,300 91,520 Shares Issued for Acquisitions -- -- 400,000 4,000 1,021,200 Shares Issued for Consulting Agreements -- -- 179,667 1,796 290,773 Net Income for the Year -- -- -- -- -- ----------- ----------- ------------- ----------- --------------- BALANCE - OCTOBER 31, 2000 604,078 $ 60,408 8,505,444 $ 85,054 $ 24,873,414 =========== =========== ============= =========== ===============
TOTAL ACCUMULATED DEFERRED SHAREHOLDERS' [DEFICIT] COMPENSATION EQUITY ------- ------------ ------ BALANCE - OCTOBER 31, 1997 $ (7,231,568) $ (343,051) $ 15,524,643 Amortization of Deferred Compensation -- 70,418 70,418 Shares Issued on Exercise of Warrants -- -- 31,290 Net Income for the Year 596,583 -- 596,583 ----------------- ------------- --------------- BALANCE - OCTOBER 31, 1998 (6,634,985) (272,633) 16,222,934 Shares Issued in Lieu of Compensation -- -- 25,938 Shares Issued for Deferred Compensation -- (275,870) -- Escrow Shares Cancelled -- -- (271) Amortization of Deferred Compensation -- 98,957 98,957 Net [Loss] for the Year (4,978,448) -- (4,978,448) ----------------- ------------- --------------- BALANCE - OCTOBER 31, 1999 (11,613,433) (449,546) 11,369,110 Shares Issued for Deferred Compensation -- (68,573) -- Stock Options Issued for Deferred Compensation -- (107,625) -- Amortization of Deferred Compensation -- 176,541 176,541 Shares Issued for Employee Services -- -- 92,820 Shares Issued for Acquisitions -- -- 1,025,200 Shares Issued for Consulting Agreements -- -- 292,569 Net Income for the Year 105,155 -- 105,155 ----------------- ------------- --------------- BALANCE - OCTOBER 31, 2000 $ (11,508,278) $ (449,203) $ 13,061,395 ================= ============= ===============
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements. F-5
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES ------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------------------------------------------------------------------------------------- YEARS ENDED ------------------------------------------------------- OCTOBER 31, ------------------------------------------------------- 2000 1999 1998 ------- ------- ------- OPERATING ACTIVITIES: Net Income [Loss] $ 105,155 $ (4,978,448) $ 596,583 ---------------- --------------- --------------- Adjustments to Reconcile Net Income [Loss] to Net Cash Provided by [Used for] Operating Activities: Depreciation and Amortization 1,638,094 1,831,197 1,639,663 Amortization of Deferred Compensation 176,541 98,957 70,418 Amortization of Deferred Interest 84,329 92,000 53,667 Amortization Reversal Due to Legal Settlement -- -- (56,859) Expenses of Impaired Assets -- 2,924,371 -- Provision for Doubtful Accounts 8,658,067 6,855,221 6,084,941 Other 27,807 25,667 -- Nonrecurring Gain on Sale of Intangible Assets -- -- (333,900) Deferred Income Taxes (66,000) 344,000 (86,000) Stock Issued for Compensation 135,390 -- -- Changes in Assets and Liabilities [Net of Effects from Acquisitions]: [Increase] Decrease in: Accounts Receivable (14,090,794) (6,721,021) (10,990,642) Other Assets (578,146) (278,777) (120,866) Inventory (162,409) 14,822 117,625 Other Current Assets (36,242) 696,743 636,478 Increase [Decrease] in: Accounts Payable, Accrued Taxes and Expenses 520,909 621,001 (838,709) ----------- ------------ --------------- Total Adjustments (3,692,454) 6,504,181 (3,824,184) ---------------- --------------- --------------- NET CASH - OPERATING ACTIVITIES - FORWARD (3,587,299) 1,525,733 (3,227,601) ---------------- --------------- --------------- INVESTING ACTIVITIES: Acquisition of Property and Equipment (196,347) (392,102) (194,558) Purchase of Certificate of Deposit - Restricted -- -- (3,680,000) Maturities of Certificate of Deposit - Restricted -- 3,680,000 3,680,000 Cash Paid for Medilabs, Inc. Acquisition -- -- (4,000,000) Cash Acquired During Acquisition -- 86,412 Reduction [Additions] of Deposits (37,494) 24,735 (3,985) Repayment of Related Party Receivable 64,800 48,600 27,000 Payment for Acquisition of Intangible Assets (40,519) -- (152,867) ---------------- --------------- --------------- NET CASH - INVESTING ACTIVITIES - FORWARD $ (209,560) $ 3,361,233 $ (4,237,998)
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements. F-6
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES ------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------------------------------------------------------------------------------------- YEARS ENDED ------------------------------------------------------- OCTOBER 31, ------------------------------------------------------- 2000 1999 1998 ------- ------- ------- NET CASH - OPERATING ACTIVITIES - FORWARDED $ (3,587,299) $ 1,525,733 $ (3,227,601) ---------------- --------------- --------------- NET CASH - INVESTING ACTIVITIES - FORWARDED $ (209,560) 3,361,233 (4,237,998) ---------------- --------------- --------------- FINANCING ACTIVITIES: Proceeds from Long-Term Debt 693,270 -- 4,000,000 Payments of Long-Term Debt (1,503,774) (2,254,004) (1,001,368) Payments of Capital Lease Obligations (350,815) (239,540) (178,954) [Decrease] Increase in Revolving Line of Credit 3,299,095 (3,299,095) 4,386,292 Decrease in Restricted Cash -- -- 852,000 Other (29,260) 250,000 29,951 ---------------- --------------- --------------- NET CASH - FINANCING ACTIVITIES 2,108,516 (5,542,639) 8,087,921 ---------------- --------------- --------------- NET [DECREASE] INCREASE IN CASH AND CASH EQUIVALENTS (1,688,343) (655,673) 622,322 CASH AND CASH EQUIVALENTS - BEGINNING OF YEARS 2,128,474 2,784,147 2,161,825 ---------------- --------------- --------------- CASH AND CASH EQUIVALENTS - END OF YEARS $ 440,131 $ 2,128,474 $ 2,784,147 ================ =============== =============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the years for: Interest $ 1,524,015 $ 1,437,602 $ 1,179,533 Income Taxes $ 1,308 $ 33,736 $ 120,407
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: During fiscal 2000, the Company incurred capital lease obligations totaling approximately $375,000 in connection with the acquisition of medical equipment. In May 2000, the Company recorded $1,250,000 in additional goodwill and accrued expenses related to the Medilabs, Inc. acquisition. During 1999, the Company incurred seven capital lease obligations totaling $598,122 in connection with the acquisition of medical equipment and leasehold improvements. In May 1999, the Company recorded $625,000 in intangible assets and accrued expenses related to an employment agreement. During 1998, the Company incurred two capital lease obligations totaling $93,143 in connection with the acquisition of medical equipment. [See Notes 9, 11 and 18 for additional non-cash transactions] The Accompanying Notes are an Integral Part of These Consolidated Financial Statements. F-7 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- [1] ORGANIZATION AND BUSINESS Bio-Reference Laboratories, Inc. was incorporated on December 21, 1981 to initially engage in the business of developing and marketing on-site medical screening examinations. Since February 1987, its emphasis has been in clinical laboratory operations, principally servicing the greater New York metropolitan area and providing specialty services throughout the United States. Bio-Reference Laboratories, Inc. and its wholly-owned subsidiaries [the "Company"] markets its clinical laboratory testing services directly to physicians, hospitals, clinics, and other health facilities. [2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The operations of subsidiaries are included in operations commencing from date of acquisition [See Note 18]. 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 $228,071 and $1,113,418 in cash equivalents at October 31, 2000 and 1999, 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. 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 $896,724, $1,038,421 and $820,226 for the years ended October 31, 2000, 1999 and 1998, 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. 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, 2000, 1999 and 1998 of $384,454, $349,738 and $254,022, respectively. The balance sheet reflects accumulated amortization of $1,982,221 and $1,597,767 as of October 31, 2000 and 1999, respectively. INTANGIBLE ASSETS - Intangible assets are amortized using the straight-line method. The statements of operations reflect amortization expense related to intangible assets of $356,916, $443,038 and $565,415 for the years ended October 31, 2000, 1999 and 1998, respectively. The balance sheet reflects accumulated amortization of $2,628,351 and $2,271,436 as of October 31, 2000 and 1999, respectively. INTERNAL USE SOFTWARE COSTS - The Company accounts for internal use software costs in accordance with Statement of Position 98-1 ["SOP 98-1"], "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Per SOP 98-1, the Company has capitalized certain internal use software and web site development costs totaling $614,350 during the year ended October 31, 2000. The estimated useful life of costs capitalized is evaluated for each specific project when completed, at which time such costs begin to be amortized. There were no capitalized costs expensed in fiscal 2000. F-8 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #2 -------------------------------------------------------------------------------- [2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED] REVENUE RECOGNITION - Revenues are recognized at the time the services are performed. Revenues on the statements of operations are as follows:
YEARS ENDED --------------------------------------------------- OCTOBER 31, --------------------------------------------------- 2000 1999 1998 ------- ------- ------- Gross Revenues $ 152,571,975 $ 125,958,897 $ 102,351,588 ---------------- ---------------- ----------------- Contractual Adjustments and Discounts: Medicare/Medicaid Portion 41,512,648 38,779,145 33,064,535 Other 44,599,254 33,323,338 22,733,323 ---------------- ---------------- ----------------- Total Contractual Adjustments and Discounts 86,111,902 72,102,483 55,797,858 ---------------- ---------------- ----------------- NET REVENUES $ 66,460,073 $ 53,856,414 $ 46,553,730 ------------ ================ ================ =================
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 $23,556,935, $15,312,935 and $13,494,475 as of October 31, 2000, 1999 and 1998, respectively. 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. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. NET INCOME PER SHARE - Basic EPS is based on average common shares outstanding and diluted EPS includes the effects of potential common stock, such as, options and warrants, if dilutive. Securities that could potentially dilute earnings in the future are listed in Notes 11 and 24. 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. IMPAIRMENT - Certain long-term assets of the Company including goodwill are reviewed at least annually as to whether their carrying value has become impaired, pursuant to guidance established in Statement of Financial Accounting Standards ["SFAS"] No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Management considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations [undiscounted and without interest charges]. If impairment is deemed to exist, the assets will be written down to fair value. Management also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. During the year ended October 31, 1999, an impairment of $2,924,371 was recorded in connection with assets acquired for the hemo-dialysis business. The breakdown of this expense was an increase in the allowance for related accounts receivable of approximately $2,000,000 and the write down of goodwill of approximately $900,000 as F-9 a result of management's intent to no longer pursue the hemo-dialysis business. Accordingly, the Company has made revisions to future endeavors in this area. F-10 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #3 -------------------------------------------------------------------------------- [2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED] STOCK OPTIONS ISSUED TO EMPLOYEES - The Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," for financial note disclosure purposes and continues to apply the intrinsic value method of Accounting Principles Board ["APB"] Opinion No. 25, "Accounting for Stock Issued to Employees," for financial reporting purposes. ADVERTISING COSTS -Advertising costs are expensed when incurred. Advertising costs amounted to approximately $610,000, $548,000 and $819,000 and for the years ended October 31, 2000, 1999 and 1998, respectively. RECLASSIFICATION - Certain prior year amounts have been reclassified to conform to the 2000 presentation. [3] PROPERTY AND EQUIPMENT - Property and equipment - at cost is summarized as follows:
OCTOBER 31, ----------- 2000 1999 ------- ------- Automobiles $ -- $ 41,740 Medical Equipment 3,272,165 3,466,574 Leasehold Improvements 1,267,111 1,152,599 Furniture and Fixtures 646,993 550,554 -------------- --------------- TOTALS - AT COST $ 5,186,269 $ 5,211,467 ---------------- ============== ===============
[4] INTANGIBLE ASSETS Intangible assets are summarized as follows: OCTOBER 31, 2000:
ACCUMULATED NET OF ACCUMULATED INTANGIBLE ASSET LIFE IN YEARS COST AMORTIZATION AMORTIZATION ---------------- ------------- ---- ------------ ------------ Customer Lists 20 $ 2,371,882 $ 694,370 $ 1,677,512 Covenants Not-to-Compete 3 - 7.5 1,132,520 1,053,972 78,548 Employment Agreement 5 - 7 1,225,000 543,929 681,071 Costs Related to Acquisitions 1 - 20 466,488 301,649 164,839 Patent 17 156,005 34,431 121,574 ---------------- ----------------- ---------------- TOTALS $ 5,351,895 $ 2,628,351 $ 2,723,544 ------ ================ ================= ================
OCTOBER 31, 1999:
ACCUMULATED NET OF ACCUMULATED INTANGIBLE ASSET LIFE IN YEARS COST AMORTIZATION AMORTIZATION ---------------- ------------- ---- ------------ ------------ Customer Lists 20 $ 1,449,202 $ 578,736 $ 870,466 Covenants Not-to-Compete 3 - 7.5 1,020,000 977,574 42,426 Employment Agreement 5 - 7 1,025,000 444,643 580,357 Costs Related to Acquisitions 1 - 20 385,969 245,426 140,543 Patent 17 156,005 25,057 130,948 ---------------- ----------------- ---------------- TOTALS $ 4,036,176 $ 2,271,436 $ 1,764,740 ------ ================ ================= ================
F-11 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #4 -------------------------------------------------------------------------------- [5] NOTE PAYABLES - BANKS In April 1998, the Company amended its revolving loan agreement with PNC Bank. The maximum amount of the credit line available to the Company is the lesser of (i) $14,000,000 or (ii) 50% of the Company's qualified accounts receivable [as defined in the agreement] plus the face amount of any certificates of deposit pledged as collateral for this loan minus the amount of the outstanding principal balance of any term loans with the same bank. Interest on advances which are collateralized by certificates of deposit will be at 2% above the certificate of deposit interest rate. Interest on other advances will be at prime plus 1.25%. The certificate of deposit interest rate was 5% through March 25, 1999. The credit line is collateralized by substantially all of the Company's assets and the assignment of a $4,000,000 life insurance policy on the president of the Company. The line of credit is available through March 2001 and may be extended for annual periods by mutual consent, thereafter. The terms of this agreement contain, among other provisions, requirements for maintaining defined levels of capital expenditures and net worth, various financial ratios and insurance coverage. As of October 31, 2000, the Company was in default of certain covenants, however, the Company subsequently received bank waivers for these defaults [See Note 24D]. As of October 31, 2000, the Company utilized $12,000,000 of this credit facility. As of October 31, 1999, the Company utilized $8,700,905 of this credit facility. Prime rate at October 31, 2000 and 1999 was 9.25% and 8.25%, respectively. The weighted average interest rate on short-term borrowings outstanding as of October 31, 2000 and 1999 was 10.55% and 9.22%, respectively. [6] LONG-TERM DEBT
OCTOBER 31, ----------- 2000 1999 ------- ------- [A] Notes Payable to PNC Bank. Due April 2002. Interest at prime plus 2% for the unsecured portion and prime plus 1.6% for the secured portion. $ 2,000,000 $ 2,800,000 [B] Note Payable to Roche Diagnostic Corporation. Due November 2002. Interest at 12% per annum. Unsecured. 489,496 -- [C] Note Payable to LTC Service and Holdings, Inc. ["Holdings"]. Due April 2000. Interest imputed at 11.6%. Unsecured. -- 415,671 -------------- --------------- Totals 2,489,496 3,215,671 Less: Current Maturities 1,029,617 1,215,671 -------------- --------------- $ 1,459,879 $ 2,000,000 ============== ===============
LONG-TERM DEBT [A] In April 1998, the Company entered into an agreement to borrow $4,000,000 from PNC Bank. The note is payable in forty-seven principal installments of $66,667 commencing May 1, 1998 and one final balloon payment. The unsecured portion is $2,000,000 and the secured portion is $2,000,000. This note is in accordance with the provisions of the Company's revolving loan agreement [See Note 5] with the same lender. As of October 31, 2000, only the secured portion is outstanding. [B] In November 1999, the Company converted trade payables due a vendor into a $693,270 note payable. Terms of the note payable provide for thirty-five monthly payments of $23,000 and one payment of $24,141, including interest. The note payable is subject to interest of twelve [12%] percent per annum. [C] On April 9, 1998, the Company acquired the assets and certain liabilities of Medilabs, Inc. from Holdings for $4,000,000 cash plus a $1,500,000 promissory note. The note is payable in three semi- annual installments without interest. Interest was imputed at 11.6%. F-12 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #5 -------------------------------------------------------------------------------- [6] LONG-TERM DEBT [CONTINUED] Maturities of debt at October 31, 2000 in each of the next five years are as follows: 2001 $ 1,029,617 2002 1,035,977 2003 423,902 2004 -- 2005 -- ---------------- TOTAL $ 2,489,496 ----- ================
[7] RELATED PARTY TRANSACTIONS On October 1, 1989, an unsecured promissory note was received from Dr. Marc Grodman ["Dr. Grodman"], president of the Company, in exchange for a receivable in the amount of $235,354. As of October 31, 2000 and 1999, $73,718 and $138,518 was remaining on the note. This note is non-interest bearing and has no fixed terms. [8] 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, ----------------------------------------- 2000 1999 1998 ------- ------- ------- U.S. Federal Statutory Rate 34.0 % (34.0)% 34.0 % State and Local Income Taxes, Net of U.S. Federal Income Tax Benefit 25.0 % -- % 9.0 % Other -- % -- % (11.1)% Utilization of Net Operating Loss Carryforwards (20.0)% -- % (38.8)% Change in Valuation Allowance (104.0)% 42.0 % -- % --------- -------- --------- ACTUAL RATE (65.0)% 8.0 % (6.9)% ----------- ========= ======== =========
The [benefit] provision for income taxes shown in the consolidated statements of operations consist of the following:
OCTOBER 31, --------------------------------------------------- 2000 1999 1998 ------- ------- ------- Current: Federal $ -- $ -- $ 16,200 State and Local 24,500 23,300 31,500 Deferred: Federal (52,000)[1] 272,000 [1] (68,000) State and Local (14,000)[1] 72,000 [1] (18,000) ------------- -------------- -------------- TOTAL [BENEFIT] PROVISION FOR INCOME TAXES $ (41,500) $ 367,300 $ (38,300) ------------------------------------------ ============= ============== ==============
[1] [Decease] increase in deferred tax valuation allowance. BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #6 -------------------------------------------------------------------------------- F-13 [8] INCOME TAXES [CONTINUED] At October 31, 2000, the Company had net operating loss carryforwards of approximately $7,870,000 for federal income tax purposes, which expire in years 2006 through 2019. 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 --------------- ------ ------ ------ 2006 $ 725,000 $ -- $ 283,000 2007 1,255,000 -- 1,253,000 2008 2,375,000 -- 2,373,000 2009 390,000 -- -- 2014 3,125,000 3,125,000 3,124,000 --------------- ---------------- --------------- TOTAL $ 7,870,000 $ 3,125,000 $ 7,033,000 ----- =============== ================ ===============
At October 31, 2000, the Company had a deferred tax asset of approximately $3,148,000 and a valuation allowance of approximately $3,082,000 related to the asset, a decrease of $918,000 since October 31, 1999. The deferred tax asset primarily relates to net operating loss carryforwards. The net deferred tax asset of $66,000 is included in other current assets on the balance sheet. The realization of the net deferred tax asset is dependent on the Company generating sufficient taxable income in future years. Although realization is not assured, management believes it is more likely than not that all of the net deferred tax asset will be realized. The amount of the net deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced. The Company utilized approximately $100,000 of net operating loss carryforwards which resulted in federal and state tax benefits of approximately $40,000 in fiscal 2000. At October 31, 1999, the Company had a deferred tax asset of approximately $4,000,000 and a valuation allowance of approximately $4,000,000 related to the asset, an increase of $2,344,000 since October 31, 1998. The deferred tax asset primarily relates to net operating loss carryforwards. For the year ended October 31, 1998, the Company utilized approximately $500,000 of net operating loss carryforwards which resulted in a tax benefit for federal and state purposes of approximately $200,000. [9] CAPITAL TRANSACTIONS [A] PREFERRED STOCK AND COMMON STOCK - The Company is authorized to issue an aggregate of 1,669,667 shares of preferred stock, $.10 par value. There are 604,078 shares of Series A Senior preferred stock issued and outstanding. The Series A Senior preferred stock is convertible into an aggregate 604,078 shares of common stock on or before May 1, 2007 at a conversion price of $.75 per share and has the same voting rights [one vote per share], dividend rights and liquidation rights as each share of common stock. F-14 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #7 -------------------------------------------------------------------------------- [9] CAPITAL TRANSACTIONS [CONTINUED] Holders of the Company's Common Stock are entitled to one vote per share on matters submitted for shareholder vote. Holders are also entitled to receive dividends ratably, if declared. In the event of dissolution or liquidation, holders are entitled to share ratably in all assets remaining after payment of liabilities. On March 31, 1998, the Company's Board of Directors adopted a Shareholder Rights Plan and declared a dividend distribution of one Right for each outstanding share of Common Stock and each outstanding share of Series A Senior Preferred Stock. Each Right entitles the registered holder to purchase one one- ten-thousandth of a share of Series A Junior Participating Preferred Stock [the "Junior Preferred Stock"] from the Company at a price of $4.00. Because of the nature of the dividend, liquidation and voting rights of the Junior Preferred Stock, the value of each one-ten-thousandth of a share of Junior Preferred Stock is intended to approximate the value of one share of Common Stock. Junior Preferred Stock purchasable upon exercise of the Rights will not be redeemable. Each outstanding share of Junior Preferred Stock will be entitled to a minimum preferential quarterly dividend of $.05 per share and will be entitled to an aggregate dividend of 10,000 times the dividend declared per share of Common Stock. In the event of liquidation, the holders of the Junior Preferred Stock will be entitled to a minimum preferential liquidation payment of $10,000 per share and will be entitled to an aggregate payment of 10,000 times the payment made per share of Common Stock. Each share of Junior Preferred Stock will have 10,000 votes, voting together with the Common Stock and the Series A Senior Preferred Stock. In the event of any merger, consolidation or other transaction in which the Common Stock is exchanged, each share of Junior Preferred Stock will be entitled to receive 10,000 times the amount received per share of Common Stock. The Rights are protected by customary anti-dilution provisions. The Rights are not exercisable unless any one of certain triggering events occur including the acquisition by an individual or entity and their associates of 25% or more of the outstanding shares of Common Stock. The Shareholder Rights Plan is designed to protect the Company and its shareholders from coercive, unfair and inadequate takeover bids and practices. The Plan is designed to strengthen the Board of Directors' ability to deter a person or group from attempting to gain control of the Company without offering a fair price and equal treatment to all shareholders. [B] EQUITY TRANSACTIONS FOR SERVICES - In fiscal 2000, the Company issued 780,000 shares of common stock and options to purchase 205,000 shares of the Company's common stock at prices ranging from $1.19 to $1.656 in connection with employment and consulting agreements. In fiscal 1999, the Company issued 515,000 shares of common stock and options to purchase 436,000 shares of the Company's common stock at prices ranging from $.594 to $.719 in connection with employment and consulting agreements. [10] INCOME PER SHARE
For the Year Ended October 31, ------------------------------------------------------ 2000 1999 1998 ------- ------- ------- Income [Loss] Available to Common Stockholders $ 105,155 $ (4,978,448) $ 596,583 ================ =============== ================ Weighted Average Common Shares Outstanding 8,145,999 7,357,235 7,196,299 EFFECT OF DILUTIVE SECURITIES: Convertible Preferred Stock 371,621 -- 278,137 Warrants/Options 838,457 -- 492,568 ---------------- --------------- ---------------- DILUTED SHARES OUTSTANDING 9,356,077 7,357,235 7,967,004 ================ =============== ================ NET INCOME [LOSS] PER SHARE - BASIC $ .01 $ (.68) $ .08 ================ ============ =================== NET INCOME [LOSS] PER SHARE - DILUTED $ .01 $ (.68) $ .07 =============== ============ ===================
F-15 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #8 -------------------------------------------------------------------------------- [10] INCOME PER SHARE [CONTINUED] Warrants to purchase 20,000 shares of common stock at $3.00 per share were outstanding at October 31, 2000 but were not included in the computation of diluted EPS because the exercise price of these warrants was greater than the average market price of the common shares. These securities could potentially dilute earning per share in the future. Warrants and options to purchase 168,250 shares of common stock expired in April 2000. Incentive stock options to purchase 612,041 shares of common stock and non-incentive stock options and warrants to purchase 954,100 shares of common stock were outstanding at October 31, 1999 but were not included in the computation of diluted EPS because they were antidilutive. These securities could potentially dilute earnings per share in the future. Warrants and options to purchase 5,448,339 shares of common stock at $3.00 to $6.75 per share were outstanding at October 31, 1998 but were not included in the computation of diluted EPS because the exercise price of these items was greater than the average market price of the common shares. These securities could potentially dilute earnings per share in the future. Warrants to purchase 5,253,339 shares of common stock expired in November 1998. [11] STOCK OPTIONS AND WARRANTS [A] EMPLOYMENT INCENTIVE STOCK OPTIONS - In August 2000, the Company adopted the 2000 Employee Incentive Stock Option Plan ["2000 Plan"]. The 2000 Plan provides for the granting of incentive stock options to purchase an aggregate of 800,000 shares of the Company's stock at a price not less than 100% of the fair market value per share of the common stock at the date of grant. Employees of the Company or its subsidiaries, as determined, are eligible for the 2000 Plan. The term of the options shall not exceed ten years from the date of grant. The 2000 Plan is subject to stockholder approval. In August 2000, options to purchase 35,000 shares of common stock were granted under the 2000 Plan. An additional 200,000 options were granted which vest in four equal annual installments commencing January 31, 2002 contingent on the Company realizing targeted net revenue levels. On December 15, 2000, the stockholders approved the Plan. 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 this stock option plan, 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. Following is a summary of transactions:
2000 Plan 1989 Plan ------------------------------------- --------------------------------- Weighted Average Weighted Average ---------------- ---------------- Shares Under Exercise Price Shares Under Exercise Price Options Per Share Options Per Share ------- --------- ------- --------- Outstanding at October 31, 1997 -- $ -- 657,710 $ .73 Granted During the Year -- -- -- -- Expired During the Year -- -- (3,334) .72 Exercised During the Year -- -- (8,334) .72 ------------ ---------- ------------- ------------ OUTSTANDING AND ELIGIBLE FOR EXERCISE AT OCTOBER 31, 1998 - FORWARD -- $ -- 646,042 $ .73 -------
F-16 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #9 -------------------------------------------------------------------------------- [11] STOCK OPTIONS AND WARRANTS [CONTINUED]
2000 PLAN 1989 PLAN ------------------------------------- --------------------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE ---------------- ---------------- SHARES UNDER EXERCISE PRICE SHARES UNDER EXERCISE PRICE OPTIONS PER SHARE OPTIONS PER SHARE ------- --------- ------- --------- OUTSTANDING AND ELIGIBLE FOR EXERCISE AT OCTOBER 31, 1998 - FORWARD -- $ -- 646,042 $ .73 ------- Granted During the Year -- -- -- -- Expired During the Year -- -- (34,001) .72 Exercised During the Year -- -- -- -- ------------ ---------- ------------- --------- OUTSTANDING AND ELIGIBLE FOR EXERCISE AT OCTOBER 31, 1999 -- -- 612,041 .73 ---------------------------- Granted During the Year 35,000 1.22 -- -- Expired During the Year -- -- -- -- Exercised During the Year -- -- (16,667) .72 ------------ ---------- ------------- ------------ OUTSTANDING AND ELIGIBLE FOR EXERCISE AT OCTOBER 31, 2000 35,000 $ 1.22 595,374 $ .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 595,374 7 Years $ .73 $1.22 Per Share 35,000 10 Years $ 1.22 -------------- 630,374 ==============
The weighted average grant date fair value of incentive stock options granted during the year ended October 31, 2000 was $.72 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, 2000, 1999 and 1998. F-17 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #10 -------------------------------------------------------------------------------- [11] 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. The following is a summary of transactions:
WEIGHTED SHARES UNDER AVERAGE OPTIONS EXERCISE PRICE AND WARRANTS PER SHARE ------------ --------- OUTSTANDING AND ELIGIBLE FOR EXERCISE AT OCTOBER 31, 1997 5,818,809 $ 4.71 --------------------------------------------------------- Granted During the Year -- -- Expired During the Year (206,668) 5.00 Exercised During the Year (35,200) .72 -------------- ------------ OUTSTANDING AND ELIGIBLE FOR EXERCISE AT OCTOBER 31, 1998 5,576,941 4.73 --------------------------------------------------------- Granted During the Year 436,000 .87 Expired During the Year (5,058,841) 5.03 Exercised During the Year -- -- -------------- --------- OUTSTANDING AND ELIGIBLE FOR EXERCISE AT OCTOBER 31, 1999 954,100 1.37 --------------------------------------------------------- Granted During the Year 170,000 1.37 Expired During the Year (168,250) 3.77 Exercised During the Year (8,000) .72 -------------- ------------ OUTSTANDING AND ELIGIBLE FOR EXERCISE AT OCTOBER 31, 2000 947,850 $ .95 --------------------------------------------------------- ============== ============
During the years ended October 31, 2000 and 1999, 45,000 and 436,000 shares, respectively, under options were granted to employees. The Company accounts for these options under the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees." Total compensation cost recognized against income for employee nonincentive stock options and warrants was $-0- for the years ended October 31, 2000, 1999 and 1998. During the year ended October 31, 2000, 125,000 shares under options were granted to four non- employees. The fair value of each option 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 2 years based on Company expectations and a weighted average expected volatility of 114.8%. Dividends are not expected to be available to shareholders during the expected life of the options. The fair value of these options issued in August 2000 of approximately $126,000 [approximately $1.00 per share] has been accounted for as deferred compensation for the year ended October 31, 2000 and is being expensed over the term of the agreements. Total compensation expense recognized against income for deferred compensation from the issuance of stock options and warrants was $17,567, $2,848 and $2,848, respectively, for the years ended October 31, 2000, 1999 and 1998. F-18 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #11 -------------------------------------------------------------------------------- [11] STOCK OPTIONS AND WARRANTS [CONTINUED] [B] NON INCENTIVE STOCK OPTIONS AND WARRANTS [CONTINUED]
OUTSTANDING AND EXERCISABLE OPTIONS AND WARRANTS ------------------------------------------------ WEIGHTED NUMBER OF AVERAGE SHARES UNDER REMAINING WEIGHTED AVERAGE OPTIONS AND CONTRACTUAL EXERCISE PRICE EXERCISE PRICE RANGE WARRANTS LIFE PER SHARE -------------------- -------- ---- --------- Options - $.594 to $.719 Per Share 482,100 4.14 Years $ .69 Options - $1.19 to $1.656 Per Share 170,000 4.22 Years $ 1.37 Options - $1.00 Per Share 275,750 3.25 Years $ 1.00 Options - $3.00 Per Share 20,000 .17 Year $ 3.00 -------------- 947,850 ==============
These options have weighted average remaining contractual lives of 3.8 years. The weighted average grant date fair value of non-incentive stock options granted during the year ended October 31, 2000 was $.98 per share. The weighted average grant date fair value of all options granted during fiscal 2000 was $.88 per share. The weighted average grant date fair value of options granted during the year ended October 31, 1999 was $.3485 per share. [A] AND [B] PRO FORMA - Had compensation cost been determined on the basis of fair value pursuant to SFAS No. 123, for the 35,000 shares under employee incentive stock options for the year ended October 31, 2000 and the 45,000 and 436,000 shares under employee nonincentive stock options and warrants for the years ended October 31, 2000 and 1999 [no employee stock options were granted in fiscal 1998], respectively, net income and earnings per share would have been as follows:
2000 1999 ------- ------- Net Income [Loss]: As Reported $ 105,155 $ (4,978,448) ================ =============== Pro Forma $ 47,323 $ (5,130,411) ================ =============== Basic Earnings [Loss] Per Share: As Reported $ .01 $ (.68) =================== =============== Pro Forma $ .01 $ (.70) =================== =============== Diluted Earnings [Loss] Per Share: As Reported $ .01 $ (.68) =================== =============== Pro Forma $ .01 $ (.70) =================== ===============
The fair value used in the pro forma data was estimated by using an option pricing model which took into account as of the grant date, the exercise price and the expected life of the option, the current price of the underlying stock and its expected volatility, expected dividends on the stock and the risk-free interest rate for the expected term of the option. The following is the average of the data used for the following items.
RISK-FREE EXPECTED EXPECTED YEAR ENDED INTEREST RATE EXPECTED LIFE VOLATILITY DIVIDENDS ---------- ------------- ------------- ---------- --------- October 31, 2000 6% 2 Years 114.80% None October 31, 1999 6% 1 Year 97.89% -104.28% None
F-19 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #12 -------------------------------------------------------------------------------- [12] 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, 2000, the aggregate minimum commitment under these contracts and agreements, excluding commissions or consumer price index increases, was approximately as follows:
October 31, ----------- 2001 $ 1,670,000 2002 1,461,500 2003 985,000 2004 958,333 2005 310,000 Thereafter 92,500 --------------- TOTAL $ 5,477,333 ----- ===============
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, the Company has entered into fifteen employment agreements which provide for annual aggregate minimum commitments of approximately $1,373,000 which have no termination dates. The Company pays premiums on life insurance policies for three key officers. In the event that any of these officers leave the Company, they are required to pay the Company back for premiums paid on their policies. In the event of death, the benefit paid to the beneficiary is reduced by the amount of premiums paid on behalf of the individual by the Company. At October 31, 2000 and 1999, $810,342 and $695,726 is included in other assets which represents the amount of premiums paid to date. At October 31, 2000 and 1999, cash surrender values on these policies were in excess of amounts receivable. [13] CAPITALIZED LEASE OBLIGATIONS The Company leases various assets under capital leases expiring in 2005 as follows:
October 31, ----------- 2000 1999 ------- ------- Medical Equipment $ 1,699,982 $ 1,325,238 Less: Accumulated Depreciation 719,355 385,032 -------------- --------------- NET $ 980,627 $ 940,206 --- ============== ===============
Depreciation expense on assets under capital leases was approximately $334,323, $202,589 and $198,280 for the years ended October 31, 2000, 1999 and 1998, respectively. F-20 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #13 -------------------------------------------------------------------------------- [13] CAPITALIZED LEASE OBLIGATIONS [CONTINUED] Aggregate future minimum rentals under capital leases are:
YEARS ENDED OCTOBER 31, ----------- 2001 $ 441,912 2002 333,166 2003 289,477 2004 162,905 2005 24,999 Thereafter -- --------------- Total 1,252,459 Less: Interest 239,741 --------------- PRESENT VALUE OF MINIMUM LEASE PAYMENTS $ 1,012,718 --------------------------------------- ===============
[14] COMMITMENTS AND CONTINGENCIES The Company leases various office and laboratory facilities and equipment under operating leases expiring from 1999 to 2006. Several of these leases contain renewal options for three to five year periods. Total expense for property and equipment rental for the years ended October 31, 2000, 1999 and 1998 was $2,931,648, $2,848,225 and $2,180,112, respectively. There were no contingent rental amounts due through October 31, 2000. Aggregate future minimum rental payments on noncancelable operating leases [exclusive of several month to month leases aggregating approximately $1,000,000 annually] are as follows:
PROPERTY EQUIPMENT -------- --------- October 31, 2001 $ 625,292 $ 556,647 2002 482,400 325,690 2003 442,789 230,479 2004 170,780 121,171 2005 -- -- Thereafter -- -- --------------- ---------------- TOTALS $ 1,721,261 $ 1,233,987 ------ =============== ================
[15] LITIGATION In the normal course of business, the Company is exposed to a number of asserted and unasserted potential claims. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations [See Note 24]. F-21 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #14 -------------------------------------------------------------------------------- [15] LITIGATION [CONTINUED] The Company is being represented by counsel in connection with various reviews being conducted by the Company's Medicare carrier. One review involved overpayments that occur in the normal course of business. The Company believes the overpayment will be approximately $150,000, of which approximately $75,000 has been remitted to Medicare. Counsel representing the Company in this matter has advised that he cannot offer any opinion or projection at this time as to whether the anticipated liability will be resolved at $150,000 or whether it will be increased. Counsel has advised that based upon his review of documents, many of the claims that Medicare thought were duplicate payments were not in fact duplicates, but rather were properly billed. Counsel also advised that in view of the complexity of the issue, he believes the final overpayment will be an amount negotiated between the Company and Medicare. The Company has a reserve of $150,000 as of October 31, 2000 as an estimated liability in connection therewith. On December 30, 1996, the Company commenced a lawsuit against SmithKline Beecham Clinical Laboratories ["SBCL"] alleging that SBCL materially and repeatedly breached its obligations and its representations and warranties made in the Asset Agreement and the Non-Competition Agreement pursuant to which the Company purchased certain assets from SBCL and claims unspecified amounts of compensatory and punitive damages and related costs. As a result of its allegations against SBCL, the Company did not make any payments with respect to the $600,000 note payable. In October 1998, the Company and SBCL exchanged general releases for this lawsuit and no executory obligations were imposed upon the Company by the settlement agreement. Therefore, the Company cancelled the $600,000 note payable as well as the related goodwill of approximately $550,000. The settlement was subject to the consent of the Company's principal lending bank which consent was received in January 1999. In addition, management decided to no longer pursue the hemo-dialysis business and accordingly made revisions to its future business endeavors. Accordingly, the Company recorded an impairment of approximately $2,900,000 on related hemo-dialysis assets in fiscal 1999 of which $2,000,000 was for related accounts receivable and $900,000 was for goodwill [See Note 2]. In January 2000, the Company commenced negotiations with New Jersey Medicaid regarding a claim [the "Claim"] made by the State in December 1999 that with respect to certain clinical laboratory tests for which reimbursements were made by the State to the Company, although such tests were authorized by the physician, the underlying laboratory test requisitions did not bear the actual signature of the physician ordering the test. The Company believes that it has been in compliance with all requirements regarding bills submitted for payment by New Jersey Medicaid and requires actual physician signatures before it bills New Jersey Medicaid. However, in order to dispose of the issue, the Company entered into an oral agreement with New Jersey Medicaid in January 2000 to settle the Claim for approximately $227,000. The Company accrued the estimated settlement of $227,000 on its October 31, 1999 financial statements. The settlement was approved by the Director of the New Jersey Division of Medical Assistance. The Company paid the settlement during fiscal 2000 and the Claim was extinguished. [16] 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. F-22 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #15 -------------------------------------------------------------------------------- [17] SIGNIFICANT RISKS AND UNCERTAINTIES [A] CONCENTRATIONS OF CREDIT RISK - CASH - At October 31, 2000, the Company had approximately $414,000 in cash and certificate of deposit balances at financial institutions which were in excess of the federally insured limits. At October 31, 1999, the Company had approximately $1,846,000 in cash and certificate of deposit balances at financial institutions which were in excess of the federally insured limits. [B] CONCENTRATION OF CREDIT RISK - ACCOUNTS RECEIVABLE - Credit risk with respect to accounts receivable is generally diversified due to the large number of patients comprising the client base. The Company does have significant receivable balances with government payors and various insurance carriers. Generally, the Company does not require collateral or other security to support customer receivables, however, the Company continually monitors and evaluates its client acceptance and collection procedures to minimize potential credit risks associated with its accounts receivable and establishes an allowance for uncollectible accounts and as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is not material to the financial statements. A number of proposals for legislation continue to be under discussion which could substantially reduce Medicare and Medicaid reimbursements to clinical laboratories. Depending upon the nature of regulatory action, and the content of legislation, the Company could experience a significant decrease in revenues from Medicare and Medicaid, which could have a material adverse effect on the Company. The Company is unable to predict, however, the extent to which such actions will be taken. [18] ACQUISITIONS On December 2, 1999, the Company acquired the business of Medical Marketing Group, Inc. ("MMGI"). MMGI is engaged in selling Internet website design and other Internet orientated services to medical professionals including individual and group physician practices. The Company issued 140,000 shares of common stock in exchange for the title and interest in the WEB business. In addition, the Company issued 60,000 shares of common stock in connection with a non-competition agreement with the former owner of MMGI. At the date of acquisition, the 200,000 shares of the Company's common stock issued had a value of approximately $597,600. On December 14, 1999, the Company acquired the business of Right Body Foods, Inc. ("RBF"). RBF is engaged in the manufacture of health food products at a single facility located in New York. In exchange for acquiring the majority of the assets of RBF, the Company issued 180,000 shares of its common stock. In addition, the Company issued 20,000 shares of common stock to the former owner of RBF in connection with a non-competition agreement. The 200,000 shares of the Company's common stock issued in connection with the acquisition had a value of approximately $437,600. Both the MMGI and RBF acquisitions were accounted for under the purchase method of accounting. Under this method, the purchase price was allocated to the acquired assets based on their estimated fair value at date of acquisition. In both acquisitions, the purchase price was primarily allocated to a customer list and non-competition agreements with the former owners. Each of the customer lists acquired will be amortized over a 20 year period utilizing the straight line method of amortization. Non-Competition covenants will be amortized over the life of the respective covenant under the straight-line method of amortization. The results of operations for MMGI and RBF have been included in the consolidated statement of operations from the respective dates of acquisition through October 31, 2000. F-23 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #16 -------------------------------------------------------------------------------- [18] ACQUISITIONS [CONTINUED] On April 9, 1998, the Company acquired the assets and certain liabilities of Medilabs, Inc. ["MLI"] from LTC Service and Holdings, Inc. ["Holdings"], a wholly-owned subsidiary of Long-Term Care Services, Inc. ["LTC"]. The acquisition was effective April 9, 1998 for accounting purposes and is being accounted for under the purchase method. The operations of Medilabs, Inc. are included in the Company's results of operations commencing April 9, 1998. In connection with the acquisition of MLI, certain key employees signed employment agreements with the Company for an unspecified period which included a six month non-competition clause. In addition, LTC, Holdings, two affiliated corporations and an employee of LTC signed non-competition agreements. The agreement also included a provision for a purchase price adjustment ["earn-up"], upon Medilabs, Inc. obtaining a NY State municipal contract for services and meeting certain revenue criteria. The earn-up is subject to a maximum additional purchase price payment of $1,250,000. During fiscal 2000, Medilabs, Inc. achieved the criteria needed to earn the maximum "earn-up" of $1,250,000. At such time additional goodwill of $1,250,000 was recorded. The "earn-up" is payable in three installments of $625,000, $312,500 and $312,500. On July 1, 2000, the Company paid the first installment of $625,000. The remaining second and third installments of $312,500 each are due November 2000 and May 2001, respectively. At October 31, 2000, the remaining $625,000 "earn-up" is included in accrued taxes and expenses on the balance sheet. [19] 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.
OCTOBER 31, ----------------------------------------------------------------- 2000 1999 ------------------------------- ------------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------ ----- ------ ----- Long-Term Debt $ 1,459,879 $ 1,459,879 $ 2,000,000 $ 2,000,000
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 7]. [20] HEALTH INSURANCE PLAN The Company has a limited self-funded health insurance plan for its employees under which the Company pays the initial $50,000 of covered medical expenses per person per year. The Company has a contract with an insurance carrier for any excess. Health insurance expense for the years ended October 31, 2000, 1999 and 1998, totaled approximately $217,000, $287,000 and $279,000, respectively. F-24 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #17 -------------------------------------------------------------------------------- [21] EMPLOYEE BENEFIT PLAN The Company sponsors the Bio-Reference Laboratories, Inc. 401(k) Profit-Sharing Plan. Employees become eligible for participation after attaining the age of eighteen and completing one year of service. Participants may elect to contribute up to ten percent of their compensation, as defined in the Plan Adoption Agreement, to a maximum allowed by the Internal Revenue Service. The Company may choose to make a matching contribution to the plan for each participant who has elected to make tax- deferred contributions for the plan year, at a percentage determined each year by the Company. For the year ended October 31, 2000, 1999 and 1998, 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. [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 and $333,900 during October 31, 1997 and 1998, respectively, related to this sale. The $700,000 in contingent receivables were included in the calculation of gain on this sale for the year ended October 31, 1998 when target revenues were reached. This receivable was collected in fiscal 1999. [23] NEW AUTHORITATIVE ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ["SFAS 133"],"Accounting for Derivative Instruments and Hedging Activities." SFAS 133 [as amended by SFAS 138 in June 2000] establishes new standards of accounting and reporting for derivative instruments and hedging activities. SFAS 133 requires that all derivatives be recognized at fair value in the statement of financial position, and that the corresponding gains or losses be reported either in the statement of operations or as a component of comprehensive income, depending on the type of hedging relationship that exists. In July 1999, the Financial Account Standards Board issued SFAS No. 137 ["SFAS 137"], "Accounting for Derivative Instruments and Hedging Activities- Deferral of Effective Date of SFAS 133." SFAS 137 deferred the effective date of SFAS 133 until the first quarter of fiscal years beginning after June 15, 2000. The Company does not currently hold derivative instruments or engage in hedging activities. The Company expects the adoption of SFAS 133, SFAS 137 and SFAS 138 will not have a material impact on its financial statements and related disclosures. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ["SAB 101"], "Revenue Recognition in Financial Statements." SAB 101 provides guidance on applying accounting principles generally accepted in the United States to revenue recognition in financial statements and is effective in the fourth quarter of all fiscal years beginning after December 15, 1999. The Company's accounting policies are consistent with the requirements of SAB 101, so the implementation of SAB 101 is not expected to have an impact on the Company's operating results. In April 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44 ["FIN 44"], "Accounting for Certain Transactions Involving Stock Compensation," an interpretation of APB Opinion No. 25. FIN 44 is effective for transactions occurring after July 1, 2000. The application of FIN 44 did not have a material impact on the Company's financial statements. F-25 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #18 -------------------------------------------------------------------------------- [24] SUBSEQUENT EVENTS [A] In November 2000, the Company paid $312,500 representing the second installment of the Medilabs, Inc. "earn-up." [B] In January 2001, the Company's board of directors ["Board"] authorized a five year consulting agreement for software design services. In connection with the agreement, the Company will issue five year non-transferrable warrants exercisable at an exercise price of $2.00 per share to purchase an aggregate of 200,000 shares of the Company's common stock. In addition, the Board authorized the issuance of 20,000 shares to a consultant and 2,000 shares to an employee. [C] On December 19, 2000, the Company and its wholly owned BRLI No. 1 Acquisition Corp. subsidiary [used to acquired the business of Right Body Foods, Inc.], as plaintiffs, instituted a lawsuit in the United States District Court for the District of New Jersey against Rebecca Klafter, her husband Mitchell Klafter and Right Body Foods, Inc. ["RBF"] as defendants. In its complaint, the plaintiffs alleged that in connection with the December 1999 purchase of the health food business of RBF and the simultaneous employment of Rebecca Klafter as the Director of the business purchased, the defendants made material misrepresentations and misleading statements to the plaintiffs regarding the business being purchased. In its lawsuit, the plaintiffs are seeking rescission of the acquisition and all of the agreements entered into in connection therewith, together with restitution, with interest, of all moneys paid or consideration given to any of the defendants in connection therewith, or in the alternative, damages in excess of $1 million plus interest and costs. The defendants filed an answer and counter claims on January 22, 2001. The litigation is in its initial stages so that no prediction can be made as to probable outcome of this lawsuit. [D] On January 30, 2001, the Company amended its revolving Loan Agreement with PNC Bank, extending it to September 30, 2001, as well as amending other terms and provisions as defined in the Amendment. Additionally, the Company received a waiver of default provisions from PNC Bank because of the Company's failure to be in compliance with certain debt covenants, as of October 31, 2000. [See Note 5] The Company may be in default of such covenants in future periods. there is no guarantee that such a waiver, if required in the future, could be obtained. If the Company is unable to obtain a renewal or an extension of the loan beyond its September 30, 2001 due date or if the loan is extended and the Company fails to comply with certain debt covenants and fails to obtain a waiver, it will be forced to seek replacement funding for its operations. This may have a material adverse effect on the Company's business and financial condition. F-26 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 subsidiaries 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 11, 2001 F-27 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES -------------------------------------------------------------------------------- SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998. --------------------------------------------------------------------------------
(a) (b) (c) (d) (e) BALANCE AT CHARGED TO DEDUCTIONS BALANCE BEGINNING COST AND TO VALUATION AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS OF PERIOD ----------- --------- -------- -------- --------- Year Ended October 31, 2000 Allowance for Doubtful Accounts and Contractual Credits $ 15,312,935 $ 86,115,103 $ (77,871,103) $ 23,556,935 ============== ================ ================ ============== Year Ended October 31, 1999 Allowance for Doubtful Accounts and Contractual Credits $ 13,494,475 $ 85,674,430 $ (83,855,970) $ 15,312,935 ============== ================ ================ ============== Year Ended October 31, 1998 Allowance for Doubtful Accounts and Contractual Credits $ 8,564,436 $ 72,137,649 $ (67,207,610) $ 13,494,475 ============== ================ ================ ==============
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