Item 2 - Properties
Our 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. Our 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 2005,
provides for a monthly rental of $9,772 and increases to $10,366 in the final
year. Our testing equipment maintained at both of our processing facilities is
in good condition and in working order.
We believe that these facilities, as presently equipped, have the
capacity to generate up to approximately $135,000,000 in net revenues based on
the type of testing now being performed by us. We maintain fire, theft and
liability insurance coverage for our facilities in what we believes are
adequate amounts. We also lease 54
additional relatively small draw stations throughout the New York metropolitan
area to collect specimens from physician-referred patients for testing at both
of our processing facilities.
Item 3
Item 3 - Legal Proceedings
As reported in Part II Item 1 of our
quarterly report on Form 10-Q for the quarter ended July 31, 2002, pursuant to
a September 3, 2002 Settlement Agreement, we settled the lawsuit which we
instituted as plaintiffs on December 19, 2000 in the United States District
Court for the District of New Jersey against Rebecca Klafter, her husband and
Right Body Foods, Inc. (“RBF”) as
defendants. In our lawsuit, we alleged
that the defendants made material misrepresentations to us regarding the health
food business assets acquired by us in December 1999 and we sought rescission
of the acquisition or in the alternative, damages. The defendants counterclaimed demanding that Ms. Klafter, who was employed by us at the time
of the acquisition pursuant to a five year employment contract, and whose
employment was terminated by us in December 2000, be rehired and that the
employment contract continue. The
defendants also demanded removal of the restriction preventing Ms. Klafter’s transfer of the 200,000 shares of
our Common Stock issued to her in the acquisition. In addition, the defendants asserted a claim of sexual harassment
on behalf of Ms. Klafter against us and
alleged that our Chief Executive Officer and Chief Operating Officer had aided
and abetted alleged “discrimination” and “retaliation” against Ms. Klafter.
Pursuant to the September 3, 2002 Settlement
Agreement, the lawsuit was settled. All
claims and counterclaims were dismissed and the parties exchanged general
releases. We retained those assets
acquired in the December 1999 acquisition and were relieved of any further
financial obligation to the defendants including any remaining obligation under
Ms. Klafter’s employment contract (an additional approximately $650,000 if the
contract remained in force for the full five year term). At the same time, we agreed to permit Ms.
Klafter to retain the shares of our Common Stock issued to her in the
acquisition and we removed the restrictions preventing her transfer of the
shares. During the fourth quarter of
fiscal 2002, we terminated the health food business operations and sold the
remaining assets for a nominal sum.
During such quarter, we recorded a write-off of approximately $212,000
representing the remaining net book value of the intangible and other deferred
assets attributable to the health food business.
Item 4
Item 4 - Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of our
security holders during the fourth quarter of fiscal 2002.
PART II
Item 5.
Item 5. - Market for
Registrant’s Common Equity and Related Shareholder Matters
Our Common Stock was readmitted for trading
on the National Association of Securities Dealers Automated Quotation
(“NASDAQ”) Small Cap System under the symbol “BRLI” on November 24, 1993. It continued to trade on a continuous basis
on the Small Cap System until March 26, 2002 when our application to list our
Common Stock on The NasdaqÒ
National Market was approved. Since
said date, our Common Stock has traded on the NASDAQ National Market System
under the symbol “BRLI.”
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 Pink Sheets LLC. Such quotations represent
prices between dealers, do not include mark-ups, mark-downs or commissions and
may not necessarily represent actual transactions.
On January 3, 2003 the last sales price for the Common Stock on NASDAQ was $6.919
per share.
At October 31, 2002 the number of record holders of the Common Stock was 425. Such
number of record owners was determined from our shareholder records and does
not include beneficial owners whose shares are held in nominee accounts with
brokers, dealers, banks and clearing agencies.
Dividends
We have not paid any dividends upon our
Common Stock since our inception and, do not contemplate or anticipate paying
any dividends in the foreseeable future.
Furthermore, our loan agreement with PNC Bank prohibits us from paying
dividends or making any distributions with respect to any shares of our stock
without the prior written consent of the Bank.
Recent Sales of Unregistered Securities
During fiscal 2002, we issued the following
shares of our Common Stock that were not registered under the Securities Act of
1933 at the time of issuance.
• On
November 11, 2001, we issued 20,000 shares of our Common Stock to an outside
consultant pursuant to his exercise of a previously granted stock option at an
exercise price of $1.656 per share. On
January 7, 2002, we issued 25,000 shares of our Common Stock to a second
outside consultant pursuant to its exercise of a previously granted stock
option at an exercise price of $1.25 per share.
• During
fiscal year 2002, we issued an aggregate 532,937 shares of our Common Stock to
28 employees upon exercise of previously granted stock options at exercise prices
ranging from $.71875 to $1.75 per share.
Included were 100,000 shares issued to our Chief Executive Officer on
May 3, 2002 at an exercise price of $.790625 per share and 166,667 shares
issued to our Chief Financial Officer at an exercise price of $.71875 per
share.
The transactions described above were
effected in reliance upon the exemption from the registration requirements of
the Securities Act of 1933 provided by Section 4(2) of the Act on the basis
that such transactions did not involve a public offering. Each of the
recipients of shares of our Common Stock in the above transactions represented
that he or she was acquiring the shares for investment and not with a view to
distribution. A restrictive legend was placed on each of the certificates representing
the shares and stop transfer instructions were issued against such shares.
Item 6.
Item 6. Selected Financial
Data
Item 7.
Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains
historical information as well as forward-looking statements. Statements
looking forward in time are included in this Annual Report pursuant to the
“safe harbor” provisions of the Private Securities Litigation Reform Act of
1995. Such statements involve known and unknown risks and uncertainties that
may cause our actual results in future periods to be materially different from
any future performance suggested herein.
OVERVIEW
We are a regional clinical laboratory with
focused market testing capabilities. As a regional laboratory, we service the
New York metropolitan area, and currently do business in most New York State
counties, as well as in most of New Jersey and some parts of Pennsylvania and
Connecticut. As a regional laboratory, we primarily offer laboratory services
to physician offices in these areas with an infrastructure that includes a
comprehensive logistical department, extensive phlebotomy services and
phlebotomy draw stations scattered around our geographic area. We have also
developed expertise in certain focused testing areas with specific emphasis in
cancer pathology and diagnostics as well as molecular diagnostics. These
services are marketed as a business unit, called GenPath, which services customers
outside of routine physician office testing.
We have developed certain specialized markets, such as in the areas of
correctional health, substance abuse testing, fertility testing and molecular
diagnostics. Testing in these areas also may be supported outside of physician
offices.
During the last few years, the fundamentals
of the industry have been improving. In the cost containment era of the 1990s,
the industry was negatively impacted by the rapid growth of managed care,
stringent government regulation and investigations into fraud and abuse. These
factors led to revenue and profit
declines and industry consolidations, especially among commercial clinical
laboratories. As a result, fewer but larger clinical laboratories have emerged
with greater economies of scale, more effective compliance with government
billing regulation and other laws and a better approach to pricing their
services. These changes resulted in improved profitability. In addition, new and emerging technologies
continue to provide greater testing opportunities for clinical laboratories.
Our PSIMedica business unit is a Clinical
Knowledge Management (“CKM”) System that uses data derived from various
disparate sources to provide both administrative and clinical analysis of a
population. The source data consists of enrollment (demographic) data, claims
data, pharmacy data, laboratory results data, and any other data that may be
available. The system uses sophisticated algorithms to cleanse and configure
the data so that analysis can be comprehensive and meaningful. The data is
maintained on multiple levels of analysis enabling review of data from the
global level to the granular transactional detail. The system includes a base set of queries that provide basic
functionality and allows on-line real-time ad hoc query capability enabling the
user to customize analysis to the best needs of the organization using the
system. In addition to the basic queries provided by the system, PSIMedica
Quality Indicators (“PQI”) provide comprehensive, disease state oriented
queries that disclose the quality and efficiency of the care and service. These
indicators have been designed to provide the customer with standards and
outcome predictors based on a medical standards basis. We are using PSIMedica to market value-added
clinical laboratory services to bulk purchasers of clinical laboratory
solutions, as well as marketing our PSIMedica programs to businesses such as
Health Plans, Integrated Delivery Networks, Disease Management Companies,
Insurers, Clinical Trial Companies and other healthcare providers that most
benefit from the ability of the system to combine both clinical and
administrative analysis.
CareEvolve, our wholly owned subsidiary, is a
physician-based connectivity portal.
This system provides a complex, sophisticated system for ordering
laboratory services and delivering laboratory results. The system is designed to be
physician-centric and to provide a highly flexible, scalable, comprehensive
desktop solution for physicians to manage their day-to-day practice and
personal needs, as well as to handle their clinical laboratory ordering and
reporting. This product has been
designed to work as a platform with plug and play capability that can easily be
used by other laboratories that also need a web-based solution for their
physician customers. We have entered
into a Strategic Marketing Agreement with Roche Diagnostics to operate a Joint
Venture for the sale and distribution of CareEvolve services to other
laboratories throughout the country.
Under the terms of the Strategic Marketing Agreement, Roche supports the
marketing of CareEvolve to clinical laboratories through its extensive
diagnostic marketing force and underwrites all expenses for the CareEvolve
joint venture operation. The joint
venture is managed by a Steering Committee that consists of executives from
both companies. Roche holds an option exercisable to purchase up to a 50%
equity interest in this wholly owned subsidiary.
To date, neither our PSIMedica business unit
nor CareEvolve has produced significant revenues.
During fiscal 2002, in addition to operating
our physician-based connectivity portal business through our wholly owned
CareEvolve subsidiary (“CareEvolve”), we also operated a health food products
manufacturing business through our wholly owned Right Body Foods subsidiary,
(“RBF”). See Item 3 herein as to our
termination of the health food business during the fourth quarter of fiscal
2002 and our write-off of the remaining health food business assets during such
quarter.
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires us to make estimates and assumptions that affect the reported amounts
of revenues and expenses during the reporting period. While many aspects of our
business are subject to complex federal, state and local regulations, the
accounting for our business is generally straightforward. Our revenues are primarily comprised of a
high volume of relatively low dollar transactions, and about 46% of all our
costs consist of employee compensation and benefits. Revenues are recognized at the time the services are performed
and are reported at the estimated net realizable amounts from patients,
third-party payors and others for services rendered including prospectively
determined adjustments under reimbursement agreements with third-party
payors. These adjustments are accrued
on an estimated basis in the period the services are rendered and adjusted in
future periods as final settlements are determined. These estimates are reviewed and adjusted, if warranted, by
senior management on a monthly basis.
We believe that our estimates and assumptions are correct; however,
several factors could cause actual results to differ materially from those
currently anticipated due to a number of factors in addition to those discussed
under “Cautionary Statements” as well as elsewhere herein including:
• our
failure to integrate newly acquired businesses (if any) and the cost related to
such integration.
• our
failure to obtain and retain new customers and alliance partners, or a
reduction in tests ordered or specimens submitted by existing customers.
• adverse
results from investigations of clinical laboratories by the government, which
may include significant monetary damages and/or exclusion from the Medicare and
Medicaid programs.
• loss
or suspension of a license or imposition of a fine or penalties under, or
future changes in, the law or regulations of CLIA-88, or those of Medicare,
Medicaid or other federal, state or local agencies.
• future
changes in federal, state, local and third party payor regulations or policies
(or in the interpretation of current regulations) affecting governmental and
third-party reimbursement for clinical laboratory testing.
• failure
to comply with the Federal Occupational Safety and Health Administration
requirements and the recently passed Needlestick Safety and Prevention Act.
• failure
to comply with HIPAA, which could result in significant fines as well as
substantial criminal penalties.
• changes
in payor mix.
• failure
to maintain our days sales outstanding levels.
• increased
competition, including price competition.
• our
ability to attract and retain experienced and qualified personnel.
• adverse
litigation results.
We utilize diluted earnings per share (“EPS”)
on pre-tax income as a performance
indicator rather than the traditional EPS calculation on an after tax
basis. This pre-tax EPS takes out the
nuance of tax differences caused by
large net operating loss carryforwards which create benefits (which we used in
the past) and tax expense (which we expect in the future). The table below shows our pre-tax EPS on a
diluted quarterly and annual basis for fiscal years 2001 and 2002.
Results of Operations
Fiscal Year 2002 Compared to 2001
NET REVENUES:
Net Revenues for the year ended October 31, 2002 were $96,630,704 as
compared to $80,621,852 for the year ended October 31, 2001; this represents a
20% increase in net revenues. This increase is due to a 15% increase in
patients serviced and a 5% increase in net revenue per patient. Our laboratory
operations had net revenues of $96,567,862 in fiscal 2002.
The number of patients serviced during the year ended October 31, 2002
was 1,944,031 which was 15% greater when compared to the prior fiscal year’s
twelve month period. This increase is
attributable to a net increase of four new sales representatives and our
ongoing marketing efforts during the current fiscal year. Net revenue per
patient for the year ended October 31,
2002 was $49.67 compared to net revenue per patient for the year ended October
31, 2001 of $47.43, an increase of $2.24 or 5%. as a result of increases in esoteric testing.
COST OF SALES:
Cost of Sales for the year ended October 31, 2002 was $51,705,626 as
compared to $44,263,599 for the year ended October 31, 2001, an increase of
17%. This increase is related to the
increase in net revenues of 20%.
CareEvolve and RBF had combined cost of sales of $116,462 in the current
fiscal year.
GROSS PROFITS:
Gross profits on net revenues, excluding CareEvolve and RBF, increased
to $44,978,698 for the year ended October 31, 2002 from $36,935,361 for the
year ended October 31, 2001; an increase of
$8,013,818 (22%), primarily attributable to the increase in net revenues
and the decrease in direct costs relative to the increase in net revenue. Gross
profit margins in the laboratory increased to 47% from 46%, primarily due to
the increase in net revenues and
efficiencies in direct operating expenses. Our total gross profit for fiscal
2002 was $44,925,078. CareEvolve and RBF had a combined gross loss of $53,620
for the year ended October 31, 2002.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses for the year ended October 31, 2002
were $38,853,085 as compared to $32,750,467 for the year ended October 31,
2001, an increase of $6,102,618 or 19%. This increase was caused primarily by
three factors, 1) an increase in marketing related expense of
$1,544,192; 2) an increase in bad debt of $1,609,761; and 3) an increase in
computer related expense of $603,637
all of which are attributable to the Company’s growth. In addition, business insurance increased
$398,342 and we expect a substantial increase in this expense category in
fiscal year 2003. During the fourth
quarter of fiscal 2002, we terminated the health food business operations and
sold the remaining assets for a nominal sum.
During such quarter, we recorded a write-off of approximately $212,000
representing the remaining net book value of the intangible and other deferred
assets attributable to the health food business.
INTEREST EXPENSE:
Interest expense decreased from $1,685,963
during the year ended October 31, 2001 to $889,925 during the year ended
October 31, 2002; a decrease of $796,038.
This decrease is due to a decline in the variable interest rates
associated with the PNC line of credit utilized by the Company. Management
believes that this trend will not continue in the future due to the continued
use of our revolving line of credit to fund our expansion and growth and the
expectation that interest rates will not substantially decrease.
NET INCOME:
We realized net income of $4,921,539 for the twelve month period ended
October 31, 2002 as compared to $2,361,749 for the twelve month period ended
October 31, 2001, an increase of 108%.
Our laboratory operations realized net income of $4,417,449 for the
twelve month period ended October 31, 2002 as compared to $1,154,956 for the
twelve month period ended October 31, 2001, an increase of $3,262,493 or 282%.
Fiscal Year 2001 Compared to Fiscal Year 2000
NET REVENUES
Net Revenues for the year ended October 31, 2001 were $80,621,852 as
compared to $66,460,073 for the year ended October 31, 2000; this represents a
21% increase in net revenues. This increase is due primarily to a 23% increase
in patients serviced. Our laboratory operations had net revenues of $80,527,685
in fiscal 2001. CareEvolve had net revenues of $23,034 and RBF had net revenues
of $71,133.
The number of patients serviced during the year ended October 31, 2001
was 1,696,240 which was 23% greater when compared to the prior fiscal year’s
twelve month period. Net revenue per patient for the year ended October 31,
2001 was $47.43 compared to net revenue per patient for the year ended October
31, 2000 of $47.94, a decrease of $.51 or 1%.
COST OF SALES:
Cost of Sales, excluding CareEvolve and RBF, increased from $36,734,839
for the year ended October 31, 2000 to $43,592,324 for the year ended October
31, 2001. 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 combined cost of sales of $671,275
during this period.
GROSS PROFITS:
Gross profits on net revenues, excluding CareEvolve and RBF, increased
to $36,935,361 for the year ended October 31, 2001 from $29,611,040 for the
year ended October 31, 2000; an increase of $7,324,321 (25%), primarily
attributable to the increase in net revenues. Gross profit margins increased to
46% from 45%, primarily due to the increase in
net revenues and efficiencies in direct operating expenses. Our total
gross profit for fiscal 2001 was $36,358,253. CareEvolve and RBF had a combined
gross loss of $577,108 for the year ended October 31, 2001.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses for the year ended October 31, 2001
were $32,750,467 as compared to $27,653,858 for the year ended October 31,
2000, an increase of $5,096,609 or 18%. This increase was caused primarily by
three factors, 1) an increase in marketing related expense of
$1,469,220; 2) an increase in bad debt of $2,072,924; and 3) an increase in
computer related expense of $497,879 all of which are attributable to the
Company’s growth. If we exclude Bad Debt Expense from general and
administrative expenses, the growth of this category over the prior twelve
month period was $3,023,686 or 16%. CareEvolve and RBF had combined general and
administrative expenses of $323,635 for the year ended October 31, 2001.
INTEREST EXPENSE:
Interest expense increased from $1,635,847
during the year ended October 31, 2000 to $1,685,963 during the year ended
October 31, 2001; an increase of $50,116. Management believed that this trend
would continue in the future due to the continued use of our revolving line of
credit to fund our expansion and growth.
NET INCOME:
Comparing only our laboratory operations, we had net income for fiscal
2001 of $3,262,493 compared to $747,483 for fiscal 2000. This is related to the
increase in net revenues and a decrease in expenses. RBF had a loss of $89,197 for the year ended October 31, 2001.
CareEvolve had a loss of $811,547 for the year ended October 31, 2001.
Including CareEvolve and RBF, the Company realized net income of $2,361,749 in
fiscal 2001 compared to $105,144 in fiscal 2000.
Liquidity and Capital Resources
For the Fiscal Year Ended October 31, 2002
Our working capital at October 31, 2002 was approximately $12,651,000
as compared to approximately $7,257,000 at October 31, 2001, an increase of
$5,394,000. Our cash position increased by approximately $1,048,000 during the
current period. We decreased our short term borrowing by approximately
$2,075,000 and repaid approximately $1,443,000 in existing debt and capital
lease obligations. We had current liabilities of approximately $21,715,000 at
October 31, 2002. We generated approximately $4,682,000 in cash from
operations, an increase of approximately $3,088,000, as compared to the year
ended October 31, 2001.
Accounts receivable, net of allowance for doubtful accounts, totaled
approximately $28,699,000 at October 31, 2002, an increase of approximately
$1,413,000 from October 31, 2001, or 5%. This increase was primarily
attributable to increased revenue. Cash
collected over the twelve month period ended October 31, 2002 increased 25%
over the prior twelve month period.
Credit risk with respect to accounts receivable is generally diversified
due to the large number of patients comprising the client base. We have
significant receivable balances with government payors and various insurance
carriers. Generally, we do not require collateral or other security to support
customer receivables, however, we continually monitor and evaluate our client
acceptance and collection procedures to minimize potential credit risks
associated with our accounts receivable. While we maintain
what we believe to be an adequate allowance for doubtful accounts,
there can be no assurance that our ongoing review of accounts receivable will
not result in the need for additional reserves. Such additional reserves could
have a material impact on our financial position and results of operations.
In January 2002, we amended our revolving loan agreement with PNC
Bank. The maximum amount of the credit
line available to the Company is now the lesser of (i) $25,000,000 or (ii) 50%
of our qualified accounts receivable (as defined in the agreement). Interest on advances are currently at prime
or the Eurodollar Rate on a portion (fixed) of the line (See Note [5]). The
credit line is collateralized by substantially all of our assets, a $615,000
CareEvolve promissory note payable out of our share of CareEvolve’s net
after-tax income (if any) assigned by us to the bank and a $4,000,000
insurance policy on the life of the president of our Company also assigned by
us to the bank. The line of credit is
currently available through September 2004. The terms of this agreement
contain, among other provisions, requirements for maintaining defined levels of
capital expenditures and fixed charge coverage, various financial ratios and
insurance coverage. As of October 31, 2002, we were utilizing approximately
$10,546,000 of this credit facility and had approximately $7,744,000 of
additional availability. See “Cautionary Statements- Dependence on Bank
Financing.”
We intend to expand our laboratory operations through aggressive
marketing while also attempting to diversify into related medical fields
through acquisitions. These
acquisitions may involve cash, notes, Common Stock, and/or combinations
thereof.
We have various employment and consulting agreements with commitments
totaling approximately $6,282,000 over the next five years of which $2,968,000
is due during fiscal 2003. (See Note 12 of the Notes to the Consolidated
Financial Statements herein). We have operating and capital leases with
commitments totaling approximately $11,740,000 of which approximately
$4,192,000 is due during fiscal 2003. (See Notes 13 and 14).
Our cash balance at October 31, 2002 totaled approximately $3,403,000
as compared to $2,355,000 at October 31, 2001.
We believe that our cash position, the anticipated cash generated from
future operations, and the availability of our credit line with PNC Bank, will
meet our anticipated cash needs in fiscal 2003.
Impact of Inflation
To date, inflation has not had a material effect on our operations.
New Authoritative Pronouncements
The Financial Accounting Standards Board
(“FASB”) has issued Statement No. 143 “Accounting for Asset Retirement
Obligations” in June 2001, which requires that the fair value of a liability
for an asset retirement legal obligation be recognized in the period in which
it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset. This statement is effective for fiscal years
beginning after June 15, 2002.
In August 2001, FASB issued SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement retains the requirements of
SFAS No. 121 but removes goodwill from its scope and describes a
probability-weighted cash flow estimation approach in evaluating possible
future cash flows to be used in impairment testing. Provisions of this statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years.
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. l4,
44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections” (“SFAS 145”). SFAS 145 among other things rescinds SFAS
No. 4, Reporting Gains and Losses from
Extinguishment of Debt” (“SFAS 4”), and SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements” (“SFAS 64”) and amends SFAS No.
13, “Accounting for Leases” (“SFAS 13”). This statement updates, clarifies and simplifies existing
accounting pronouncements. As a result
of rescinding SFAS 4 and SFAS 64, the criteria in APB No. 30, “Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Event and
Transactions,”
will be used to classify gains and losses from extinguishment of debt.
SFAS 13 was amended to eliminate an inconsistency between the required accounting
for sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions and makes technical corrections to existing pronouncements. The provisions of SFAS 145 are effective for
fiscal years beginning after May 15, 2002, with earlier application
encouraged. The Company expects to
adopt SFAS 145 effective November 1, 2002 and reflect any necessary
reclassifications in its consolidated statements of operations. Management
believes that the adoption of SFAS 145 will not have a material impact on the
Company’s financial position.
In July 2002, the FASB issued SFAS No.
146, “Accounting for Costs Associated with Exit or Disposal Activities”
(“SFAS 146”), which addresses the recognition, measurement, and reporting of
costs associated with exit or disposal activities, and supercedes Emerging
Issues Task force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain
Employee Termination Benefits and other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)” (“EITF 94-3”). The principal difference between SFAS 146
and EITF 94-3 relates to the requirements for recognition of a liability for a
cost associated with an exit or disposal activity. SFAS 146 requires that a liability for a cost associated with an
exit or disposal activity, including those related to employee termination
benefits and obligations under operating leases and other contracts, be
recognized when the liability is incurred, and not necessarily the date of an
entity’s commitment to an exit plan, as under EITG 94-3. SFAS 146 also establishes that the initial
measurement of a liability recognized under SFAS 146 be based on fair value.
The provisions of SFAS 146 are effective for exit or disposal activities that
are initiated after December 31, 2002, with early application encouraged.
Item 7A.
Item 7A. Quantitative
and Qualitative Disclosure About Market Risk
Not applicable.
Item 8.
Item 8. - Financial Statements and Supplementary Data
Financial Statements are annexed hereto
Item 9.
Item 9. - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None
PART III
Item 10.
Item 10.- Directors and Executive Officers of the Registrant
The following table sets forth certain
information with respect to each of the directors and executive officers of the
Company.
(a) Chairman of the Audit Committee
(b) Member of the Audit Committee
(c) Chairman of the Compensation Committee
(d) Member of the Compensation Committee
The Audit Committee confers with our auditors
and reviews, evaluates and advises the Board of Directors concerning the
adequacy of the Company’s accounting 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 our
financial statements and the results thereof.
Marc D. Grodman, M.D. founded Bio-Reference
Laboratories in December 1981 and has been our 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 our Executive
Vice-President and Chief Operating Officer since our formation in 1981. He became a Director 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 our Vice President and
Chief Financial Officer since October 1987 and a Director since November
1989. He is responsible for all of our
financial activities. Mr. Singer was the Controller for Sycomm Systems
Corporation, a data processing and management consulting company, from 1981 to
1987, prior to joining us. 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.
Morton L. Topfer became a Director in May
2001 and Vice Chairman of the Board in March 2002. Mr. Topfer, who holds a
bachelor’s degree in physics from Brooklyn College, was awarded an
honorary doctorate in engineering from Polytechnic Institute of New
York in June 2000. Mr. Topfer currently serves as a member of the board of
directors of Dell Corporation (“Dell”).
From 1999 to 2002, he also served as counselor to Dell’s Chief Executive
Officer, a position to which he was elected in December 1999. Prior thereto, Mr. Topfer served as Dell’s
vice chairman for five years. In that position, Mr. Topfer shared the office of
Chief Executive Officer with Michael S. Dell, Dell’s chairman and CEO and Kevin
B. Rollins, Dell’s vice chairman. Prior to joining Dell in May 1994,
Mr. Topfer served as corporate executive vice president of Motorola, Inc.
and president of Motorola’s Land Mobile Products Sector. Mr. Topfer was
employed in various managerial and executive capacities during his 23 year
career at Motorola. Before joining Motorola in 1971, Mr. Topfer spent eleven
years with RCA Laboratories in various research and development management
positions. In July 1996, Mr. Topfer was conferred the Darjah Johan Negeri
Penang State Award by the Governor of Penang for his contributions to the
development of the electronics industry in Malaysia. In addition to his serving
as a director of the Company and of Dell, Mr. Topfer also currently serves as
chairman of the board and as a director of one other publicly owned
corporation, Measurement Specialties, Inc., a Fairfield, New Jersey
manufacturer of pressure transducers and certain consumer products.
John Roglieri, M.D. became a Director 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 was Chief Medical Officer of Physician WebLink, a national physician
practice management company, from 1999 to 2000. Since 2001, he has been Medical
Director for New York Life Insurance Company in Manhattan. He is a member of
Advisory Boards to several pharmaceutical companies, and a member of the
Editorial Advisory Boards of the journals Managed Care and Seminars in Medical
Practice. Dr. Roglieri is 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. degree from Brooklyn College in 1954 and his J.D. degree 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 Bio-Reference Laboratories. Our
Certificate of Incorporation provides for a staggered Board of Directors (the
“Board”) pursuant to which the Board is divided into three classes of directors
and the members of only one class or one-third of the Board are elected each
year to serve a three-year term.
Officers are elected by and hold office at the discretion of the Board
of Directors.
Key Personnel and Consultants
The following key personnel and consultants
make significant contributions to the Company’s operations.
Bader Maria Pedemonte-Coira, M.D. (Age 43)
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 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); and Medical Director & Hematopathologist
GenCare-Biomedical Research Laboratory of Bio-Reference (1996-1998). She was
Associate Director & Pathologist, Molecular Tissue Pathology; and Director,
Cellular Immunology, Corning Clinical Laboratories (Corning/MetPath) Teterboro,
NJ (1991-1996). Dr. Pedemonte is also an Adjunct Assistant Professor of
Pathology, Columbia University, College of Physicians & surgeons, NY.
(1991-Present).
Ayad Mudarris, Ph.D. (Age 50) 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, an M.S. degree in Medical Technology from Long Island University in 1980
and a Ph.D. degree in Biochemistry from the University of Arkansas for Medical
Sciences in 1986.
Michael Lehrer, PhD (age 57) has been
employed by the Company since December 2001 as an Associate Laboratory Director
and Chief of Toxicology. From 1988 to
2001, Dr. Lehrer was the Head of
Biochemistry & Toxicology at the Long Island Jewish Medical Center in
NY. Dr. Lehrer has published extensively in the field of Clinical and
Forensic Toxicology and is an Associate Professor in Pathology at the Albert
Einstein College of Medicine, Bronx, NY.
He is an active SAMHSA (NIDA) inspector for the Federal Workplace
Toxicology Certification Program. From
1981 to 1987 Dr. Lehrer was the
Technical Director and Vice President at SmithKline Clinical Laboratories
(Quest) and Princeton Diagnostic Laboratories of America (PDLA). He was marketing Director of Scientific
Instrumentation at Finnegan Corp (California) in 1987-1988. Dr.
Lehrer is a registered Clinical Laboratory Director in the States of New
York and New Jersey. He is certified by
the American Board of Bioanalysis and is a Fellow of the National Academy of
Clinical Biochemists (NACB) where he also serves as Treasurer. Dr.
Lehrer received his BA degree from Queens College (CUNY) in 1968 and his
PhD from Brandeis University in 1973.
Charles T. Todd, Jr. (Age 52) is the Senior Vice President of
Sales and Marketing of Bio-Reference Laboratories. Mr. Todd was the founder
and CEO of GenCare Biomedical Research Corporation, a specialty oncology
laboratory that was purchased by the Company in 1995. He attended Seton Hall University and received a B.S. in Finance
in 1974.
John W. Littleton (Age 42) joined
Bio-Reference Laboratories in September 2002 as the Vice President of
Sales. Prior to joining Bio-Reference
Laboratories, Mr. Littleton was Vice
President of Sales for Specialty Laboratories and the Northeast Regional Vice
President of Sales for Quest Diagnostics.
He received a B.A.. degree from Seton Hall University.
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, we believe that with respect to fiscal 2002, our officers, directors
and beneficial owners of more than 10% of its equity timely complied with all
applicable Section 16(a) filing requirements.
Item 11.
Item 11. - Executive Compensation
The following table sets forth information
concerning the compensation paid or accrued by us during the year ended October
31, 2002 to our Chief Executive Officer and our other executive officers who
were serving as our executive officers on October 31, 2002. All of our 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 and are generally available to all salaried employees.
SUMMARY COMPENSATION TABLE
Employment Agreements with Executive Officers
Dr.
Grodman serves as our President and Chief Executive Officer pursuant to
a seven-year employment agreement which expires on October 31, 2004. Dr.
Grodman’s minimum annual compensation under the agreement ($395,000) is
subject to increases based on increases in the Consumer Price Index as well as
to increases (including bonuses) at the discretion of our Compensation
Committee. The agreement provides (i) typical health insurance coverage and
$4,000,000 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) (ii) the leasing of an automobile
for his use; (iii) participation in fringe benefit, bonus, pension, profit
sharing, and similar plans maintained for the Company’s employees; (iv)
disability benefits; (v) certain termination benefits; and (vi) 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. See Item 13
herein as to the suspension of premium payments with respect to Dr. Grodman’s “split dollar” life insurance.
Mr.
Dubinett serves as our Executive Vice President and Chief Operating
Officer pursuant to a five-year employment agreement which was extended in
fiscal 2002 for two additional years beyond its October 31, 2002 termination
date. Mr. Dubinett’s minimum annual compensation under the extended
agreement is equal to his annual compensation in fiscal 2002 and is subject to
increases based on increases in the Consumer Price Index as well as to
increases (including bonuses) at the discretion of our Compensation
Committee. The agreement provides (i)
typical health insurance coverage and $1,100,000 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); (ii) the leasing of an automobile for his use; (iii)
participation in fringe benefit, bonus, pension, profit sharing, and similar
plans maintained for the Company’s employees; (iv) disability benefits; (v)
certain termination benefits; and (vi) 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. We have the option to extend the extension
period of the employment agreement on the same terms and conditions for up to
an additional two years through October 31, 2006. See Item 13 herein as to the suspension of premium payments with
respect to Mr. Dubinett’s “split
dollar” life insurance.
Mr.
Singer serves as our Vice President and Chief Financial Officer pursuant
to a five-year employment agreement which was extended in fiscal 2002 for two
additional years beyond its October 31, 2002 termination date. Mr.
Singer’s minimum annual compensation under the extended agreement is
equal to his annual compensation in fiscal 2002 and is subject to increases
based on increases in the Consumer Price Index as well as to increases
(including bonuses) at the discretion of our Compensation Committee. The agreement provides (i) typical health
insurance coverage and $800,000 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); (ii) the
leasing of an automobile for his use; (iii) participation in fringe benefit,
bonus, pension, profit sharing, and similar plans maintained for the Company’s
employees; (iv) disability benefits; (v) certain termination benefits; and (vi)
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. We have the option to extend the extension
period of the employment agreement on the same terms and conditions for up to
an additional two years through October 31, 2006. See Item 13 herein as to the suspension of premium payments with
respect to Mr. Singer’s “split dollar” life insurance.
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”).
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. 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.
At October 31,
2001, there were outstanding ISOs under the 1989 Plan held by 15 employees
exercisable to purchase an aggregate 549,672 shares of Bio-Reference Common
Stock at exercise prices ranging from $.71875 to $.790625 per share. Included were ISOs held by Dr. Grodman exercisable to purchase 100,000
shares at $.790625 per share and ISOs held by Mr. Dubinett and Mr. Singer
exercisable to purchase 213,334 shares and 166,667 shares respectively at an
exercise price of $.71875 per share.
During fiscal 2002, a total of eight employees exercised their ISOs
issued under the 1989 Plan and purchased an aggregate 275,337 shares including
Dr. Grodman and Mr. Singer who exercised their ISOs and purchased 100,000
shares and 166,667 shares respectively on May 3, 2002. At October 31, 2002, there were outstanding
ISOs issued under the 1989 Plan exercisable to purchase an aggregate 274,335
shares at an exercise price of $.71875 per share.
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. Stockholders ratified the
adoption of the 2000 Plan at our December 14, 2000 Annual Meeting of
Stockholders. At October 31, 2001,
there were outstanding ISOs under the 2000 Plan held by six employees
exercisable to purchase an aggregate 265,000 shares of Bio-Reference Common
Stock at exercise prices ranging from $1.125 to $1.688 per share. During fiscal 2002, we granted additional
ISOs under the 2000 Plan to a total of 17 employees exercisable to purchase an
aggregate 241,000 shares of Bio-Reference Common Stock at exercise prices
ranging from $5.94 to $7.79 per share and one employee exercised his ISOs
issued under the 2000 Plan and purchased 10,000 shares. As a result, at October 31, 2002, there were
outstanding ISOs issued under the 2000 Plan exercisable to purchase an
aggregate 496,000 shares at prices ranging from $1.125 to $7.79 per share.
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.
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 or 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.
Non-Qualified
Options (NQOs) and Warrants
At October 31,
2001, there were outstanding NQOs and Warrants owned by our employees,
directors, various consultants and a software provider exercisable to purchase
an aggregate 890,350 shares of Bio-Reference Common Stock at exercise prices
ranging from $.71875 to $3.14 per share.
During fiscal 2002, we issued an aggregate 292,600 shares upon exercise
of NQOs. In addition, NQOs exercisable
to purchase an aggregate 105,000 shares expired by their terms. On January 16, 2002, we issued NQOs to each
of our six directors exercisable to purchase 4,000 shares of Bio-Reference
Common Stock at an exercise price of $6.80 per share (equal to the last sale
price for the Common Stock on NASDAQ on such date). During fiscal 2002, we also issued NQOs to five other employees
exercisable to purchase an aggregate 41,000 shares at exercise prices ranging
from $4.20 to $6.80 per share. As a
result, at October 31, 2002, there were outstanding NQOs and Warrants
exercisable to purchase an aggregate 557,750 shares at exercise prices ranging
from $.71875 to $6.80 per share.
See Note 11 of
Notes to the Consolidated Financial Statements.
OPTION GRANTS IN LAST FISCAL YEAR
The following
table provides information on options to purchase Bio-Reference Common Stock
granted to our three Named Executive Officers in fiscal 2002.
(1) All options were granted with an exercise
price equal to the closing sale price for Bio-Reference Common Stock on NASDAQ
on the date of the option grant.
(2) Potential realizable value is based on
the assumption that the stock price for Bio-Reference Common Stock appreciates
at the annual rate shown (compounded annually) from the date of grant until the
end of the option term. Potenial
realizable
value is shown net of the exercise
price. The numbers are calculated based
on regulations promulgated by the Securities and Exchange Commission and do not
reflect our estimate of future growth of our stock price on the NASDAQ market.
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following
table provides information regarding option exercises in fiscal 2002 by our
Named Executive Officers and the value of such officer’s unexercised options at
October 31, 2002
(1) The Value Realized was calculated by
determining the difference between the market price of Bio-Reference Common
Stock on the date of exercise and the option exercise price paid on such date.
(2) Represents the difference between the
exercise price of the options and $7.221, the closing sale price for
Bio-Reference Common Stock on October 31, 2002.
Directors’
Compensation
Directors who
are not our employees are also paid a $1,000 per quarter director’s fee. During
fiscal year 2002, we issued 4,000 NQOs to each director.
Item 12.
Item 12. - Security
Ownership of Certain Beneficial Owners and Management
The following
table sets forth information as of January 10, 2003 with respect to the
ownership of Common Stock by (i) each person known to us to be the beneficial
owner of more than 5% of our outstanding Common Stock, (ii) each of our
directors, (iii) each of our executive officers, 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 holder 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.
* 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
885,500 shares owned directly by Dr. Grodman, 549,678 shares issuable upon conversion
of Series A Senior Preferred Stock and 4,000 shares issuable upon exercise of
options. Also includes 141,667 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 40,000 shares
owned by their minor children. (See Item 13). Dr. Grodman disclaims beneficial
ownership of these 236,067 shares.
(3) Includes
an aggregate 1,615,200 shares owned individually or by CastleTop Capital
Management, LP of which Morton L. Topfer is the Managing Director; and 12,000
shares issuable upon exercise of options.
(4) Includes
263,667 shares owned directly, and 217,334 shares issuable upon exercise of
options.
(5) Includes
362,667 shares owned directly, 4,000 shares issuable upon exercise of options
and 6,000 shares owned by children who share Mr. Singer’s household.
Mr. Singer disclaims beneficial
ownership of these 6,000 shares.
(6) Includes
25,200 shares owned directly and 12,000 shares issuable upon exercise of
options.
(6) Includes
56,667 shares owned directly and 12,000 shares issuable upon exercise of
options.
Item 13.
Item 13. - Certain
Relationships and Related Transactions
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.
See Item 11
herein as to the exercise by Marc Grodman and Sam Singer during fiscal 2002 of
ISOs to purchase 100,000 shares and 166,667 shares respectively of
Bio-Reference Common Stock.
These ISOs were granted in 1997
and were exercised in the case of Dr.
Grodman at an exercise price of $.790625 per share and in the case of Mr. Singer at an exercise price of $.71875 per
share.
We had
established “split dollar” insurance programs for each of our three Named
Executive Officers and paid the policy premiums. Pursuant to the programs, if the executive died while employed by
us, we would be reimbursed for the premiums and the death benefit less such
reimbursement would be paid to the executive’s estate. If the executive left our employ, he would
be required to pay us back the aggregate premiums we paid on the policy but
would be entitled to ownership of the policy.
The premiums paid on these policies aggregate $931,638 at October 31,
2001 and $1,138,207 at October 31, 2002.
As of October 31, 2002, the cash surrender value of the policies was
less than the aggregate premiums paid.
As a result of the uncertainty caused by passage of the Sarbanes-Oxley
Act of 2002 (signed into law on July 30, 2002), we have suspended payment of
the premiums on these policies.
Premiums are currently being paid by reducing the policy cash
values. See Note 12 of Notes to the
Consolidated Financial Statements.
PART IV
Item 14.
Item 14. Controls and Procedures
(a) Explanation
of disclosure controls and procedures.
Our chief executive officer and our chief financial officer after
evaluating the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14(c) and 15-d 149c) as of a date within 90
days of the filing date of this Annual Report (the “Evaluation Date”) have
concluded that as of the Evaluation Date, our disclosure controls and
procedures were adequate and effective to ensure that material information
relating to the Company and its consolidated subsidiaries would be made known
to them by others within those entities, particularly during the period in
which this Annual Report was being prepared.
(b) Changes
in internal controls. There were no
significant changes in our internal controls or in other factors that could
significantly affect our disclosure controls and procedures subsequent to the
Evaluation Date, nor any significant deficiencies or material weaknesses in
such disclosure controls and procedures requiring corrective action. As a result, no corrective actions were
taken.
Item 15.
Item 15. 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
Report of Independent Certified Public Accountants
Consolidated Balance Sheets - October 31, 2002 and 2001
Consolidated Statements of Operations-
Years ended October 31, 2002, 2001 and 2000
Consolidated Statements of Shareholders’
Equity
Years ended October 31, 2002, 2001, and 2000
Consolidated Statements of Cash Flows -
Years ended October 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements-
Schedule II -
Years ended October 31, 2002, 2001 and 2000
2.
Reports on
Form 8-K
No reports
on Form 8-K were filed during the Quarter ended October 31, 2002.
3.
Exhibits
Exhibit No.
Item
Incorporated
by
Reference to
3.1*
Amended and
Restated Certificate of Incorporation dated November 15, 1989
(A)
3.1.1*
Amendment to
Certificate of Incorporation dated October 4, 1991 (authorizing one-for-10
reverse stock split)
(B)
3.1.2*
Amendment to
Certificate of Incorporation dated August 23, 1993 (authorizing one-for-three
reverse stock split)
(C)
3.1.3*
Amendment to
Certificate of Incorporation dated March 23, 1998 (creating Series A Senior
Preferred Stock)
(F)
3.1.4*
Amendment to
Certificate of Incorporation dated March 31, 1998 (creating Series A Junior
Participating Preferred Stock)
(F)
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, expiring in February, 2004
(F)
10.2*
Employment
Agreement between the Company and Marc Grodman expiring in October 2004
(F)
10.3*
Employment
Agreement between the Company and Howard Dubinett as in effect at October 31,
(F)
10.3.1
Extension to
Employment Agreement between the Company and Howard Dubinett effective
November 1, 2002
10.4*
Employment
Agreement between the Company and Sam Singer as in effect at October 31,
(F)
10.4.1
Extension to
Employment Agreement between the Company and Sam Singer effective November 1,
10.5*
The
Company’s 1989 Stock Option Plan
(B)
10.5.1*
The
Company’s 2000 Employee Incentive Stock Option Plan.
(G)
10.7*
Rights Agreement
dated as of March 31, 1998 including Exhibits thereto between the Company and
American Stock Transfer & Trust Company as Rights Agent
(E)
10.11*
Stock
Purchase Agreement dated May 14, 2001, between the Company on the one hand
and CastleTop Investments, L.P. (an affiliate of Morton L. Topfer) and Morton
L. Topfer on the other
(H)
10.12*
Strategic
Marketing Alliance Agreement dated as of December 31, 2001 between
Bio-Reference Laboratories, Inc. and CareEvolve.com, Inc. on the one hand and
Roche Diagnostics Corporation on the other.
(H)
Subsidiaries
of the Company
The
following are the Company’s three wholly-owned subsidiaries:
99.1
Certifications
of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.CareEvolve
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-A dated
March 31, 1998.
(F) Incorporated
by reference to exhibit filed with the Company’s annual report on Form 10-K for
the year ended October 31, 1999.
(G) Incorporated
by reference to exhibit filed with the Company’s annual report on Form 10-K for
the year ended October 31, 2000.
(H) Incorporated
by reference to exhibit filed with the Company’s annual report on Form 10-K for
the year ended October 31, 2001.
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.
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.
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Marc D. Grodman, Chief
Executive Officer of Bio-Reference Laboratories, Inc. (the “Company”) do hereby
certify that:
(1) I have reviewed this annual report on Form 10-K of the
Company for the fiscal year ended October 31, 2002;
(2) Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the
period covered by this quarterly report;
(3) Based on my knowledge, the financial statements and other
financial information included in this quarterly report, fairly present in all
material respects, the financial condition, results of operations and cash
flows of the Company as of, and for, the period presented in this quarterly
report;
(4) The Company’s other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we
have:
(a) designed such disclosure controls and
procedures to ensure that material information relating to the Company,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this quarterly report
was being prepared;
(b) evaluated the effectiveness of the Company’s
disclosure controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the “Evaluation Date”); and
(c) presented in this quarterly report our
conclusions about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
(5) The Company’s other certifying officer and I have
disclosed, based on our most recent evaluation, to the Company’s auditors and
the audit committee of the Company’s board of directors:
(a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the Company’s
ability to record, process, summarize and report financial data and have
identified for the Company’s auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that
involves management or other employees who have a significant role in the
Company’s internal controls; and
(6) The Company’s other certifying officer and I have
indicated in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: January
21, 2003
/s/ Marc D. Grodman
Marc D. Grodman
Chief Executive Officer
Bio-Reference Laboratories, Inc.
CHIEF FINANCIAL OFFICER CERTIFICATION
I, Sam Singer, Chief
Financial Officer of Bio-Reference Laboratories, Inc. (the “Company”) do hereby
certify that:
(1) I have reviewed this annual report on Form 10-K of the
Company for the fiscal year ended October 31, 2002;
(2) Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the
period covered by this quarterly report;
(3) Based on my knowledge, the financial statements and other
financial information included in this quarterly report, fairly present in all
material respects, the financial condition, results of operations and cash
flows of the Company as of, and for, the period presented in this quarterly
report;
(4) The Company’s other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we
have:
(a) designed such disclosure controls and
procedures to ensure that material information relating to the Company,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this quarterly report
was being prepared;
(b) evaluated the effectiveness of the Company’s
disclosure controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the “Evaluation Date”); and
(c) presented in this quarterly report our
conclusions about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
(5) The Company’s other certifying officer and I have
disclosed, based on our most recent evaluation, to the Company’s auditors and
the audit committee of the Company’s board of directors:
(a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the Company’s
ability to record, process, summarize and report financial data and have
identified for the Company’s auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that
involves management or other employees who have a significant role in the
Company’s internal controls; and
(6) The Company’s other certifying officer and I have
indicated in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: January
21, 2003
/s/ Sam Singer
Sam Singer
Chief Financial Officer
Bio-Reference Laboratories, Inc.
INDEPENDENT
AUDITOR’S REPORT
To the Board of Directors and
Shareholders 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, 2002 and 2001, 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, 2002. 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 auditing standards generally accepted in the United States of
America. 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, 2002 and 2001, and
the consolidated results of their operations and their cash flows for each of
the three fiscal years in the period ended October 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.
MOORE
STEPHENS, P. C.
Certified
Public Accountants.
Cranford, New Jersey
December 6, 2002
BIO-REFERENCE
LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
The Accompanying Notes are an
Integral Part of These Consolidated Financial Statements.
BIO-REFERENCE
LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
The Accompanying Notes are an
Integral Part of These Consolidated Financial Statements.
BIO-REFERENCE
LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
The Accompanying Notes are an
Integral Part of These Consolidated Financial Statements.
BIO-REFERENCE
LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
The Accompanying Notes are an Integral Part
of These Consolidated Financial Statements.
BIO-REFERENCE
LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
The Accompanying Notes are an Integral Part of These Consolidated
Financial Statements.
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
In fiscal 2001 and 2000, the Company issued
shares of common stock and stock options with values of $400,000 and $333,360,
respectively, in 2001 and $68,573 and $107,625, respectively, in 2000, as
deferred compensation.
During fiscal 2002 and 2001, the Company
wrote-off approximately $1,540,000 and $1,380,000 of furniture and equipment
which were fully depreciated.
Approximately $467,000 and $1,466,000 of
capitalized costs related to covenants not-to-compete and employment
agreements, which were fully amortized, were written off in fiscal 2002 and
2001, respectively.
During fiscal 2002, 2001 and 2000, the
Company incurred capital lease obligations totaling approximately $1,476,000,
$229,000 and $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.
[See Notes 9, 11 and 18 for additional non-cash transactions]
The Accompanying Notes are an Integral Part of These Consolidated
Financial Statements.
BIO-REFERENCE LABORATORIES, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[1] Organization and
Business
Bio-Reference Laboratories, Inc. [“Bio-Reference” or the “Company”] was
incorporated on December 24, 1981.
Bio-Reference is principally engaged in providing clinical laboratory
testing services, primarily to customers in the greater New York metropolitan
area as well as to customers in a number of other states. 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
analysis. It operates two clinical
laboratories, one in Elmwood Park, New Jersey and one in Valley Cottage, New
York, and an andrology laboratory in New York City. Bio-Reference markets its clinical laboratory testing services
directly to physicians, hospitals, clinics, correctional 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 $1,231,841
and $1,574,777 in cash equivalents at October 31, 2002 and 2001, respectively.
Inventory -
Inventory is stated at the lower of cost [on a first-in, first-out basis] or
market. Inventory consists primarily of
laboratory 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 $705,237, $721,207 and $896,724 for the years ended
October 31, 2002, 2001 and 2000, 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 -
Effective November 1, 2001, the Company evaluates the recoverability and
measures the possible impairment of its goodwill under SFAS 142, “Goodwill and
Other Intangible Assets.” The
impairment test is a two-step process that begins with the estimation of the
fair value of the reporting unit. The first step screens for potential
impairment and the second step measures the amount of the impairment, if
any. Management’s estimate of fair
value considers publicly available information regarding the market
capitalization of the Company as well as (i) publicly available information regarding
comparable publicly-traded companies in the clinical laboratory testing
industry, (ii) the financial projections and future prospects of the Company’s
business, including its growth opportunities and likely operational
improvements, and (iii) comparable sales prices, if available. As part of the
first step to assess potential impairment, management compares the estimate of
fair value for the Company to the book value of the Company’s consolidated net
assets. If the book value of the
consolidated net assets is greater than the estimate of fair value, the Company
would then proceed to the second step to measure the impairment, if any. The second step compares the implied fair
value of goodwill with its carrying value.
The implied fair value is determined by allocating the fair value of
the reporting unit to all of the assets and liabilities of that unit as if the
reporting unit had been acquired in a business combination and the fair value
of the reporting unit was the purchase price paid to acquire the reporting
unit. The excess of the fair value of
the reporting unit over the amounts assigned to its assets and liabilities is
the implied fair value of goodwill. If
the carrying amount of the goodwill is greater than its implied fair value, an
impairment loss will be recognized in that period. No impairment loss was recognized in the year ended October 31,
2002.
Goodwill represents the excess of the cost of companies acquired over
the fair value of their net assets at dates of acquisition. The statements of operations reflect
amortization expense related to goodwill for the years ended October 31,
2001 and 2000 of $419,172 and $384,454, respectively. The balance sheet reflects accumulated amortization of $2,401,397
and $2,401,397 as of October 31, 2002 and 2001, respectively [See Note 10].
Other Intangible
Assets - Intangible assets are amortized using the
straight-line method. The statements of
operations reflect amortization expense related to intangible assets of
$631,242, $544,531 and $356,916 for the years ended October 31, 2002, 2001
and 2000, respectively. The balance
sheet reflects accumulated amortization of $2,084,613 and $1,708,971 as of
October 31, 2002 and 2001, 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 approximately $210,000 and $711,000 during the years ended
October 31, 2002 and 2001, respectively.
The estimated useful life of costs capitalized is evaluated for each
specific project when completed, at which time such costs begin to be
amortized.
Net Service Revenue
- Service revenues are principally generated from
clinical laboratory testing services including chemical diagnostic tests such
as blood and urine analysis, among others.
Net service revenues are recognized at the time the testing services are
performed and are reported at the estimated net realizable amounts from
patients, third-party payors and others for services rendered including
prospectively determined adjustments under reimbursement agreements with
third-party payors. These adjustments
are accrued on an estimated basis in the period the related services are
rendered and adjusted in future periods as final settlements are determined. The Company has two subsidiaries that
provide non-clinical laboratory services.
Revenues generated from these services are not material for each of the
years presented. Net service revenues
on the statements of operations are as follows:
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 payors. 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 $30,045,528 and $31,378,220 as of
October 31, 2002 and 2001, respectively.
As of October 31, 2002 and 2001, accounts receivable is reported net of
an allowance for doubtful accounts which is comprised of the following items:
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.
Earnings [Loss] Per
Share - Basic earnings [loss] per share [“EPS”]
reflects the amount of income [loss] attributable to each share of common stock
based on average common shares outstanding during the period. Diluted EPS reflects Basic EPS while giving
effect to all potential dilutive common shares that were outstanding during the
period, such as common shares that could result from the exercise or conversion
of securities into common stock. The
computation of Diluted EPS is calculated by using the treasury stock method,
which assumes that any proceeds obtained from the exercise of such dilutive
securities would be used to purchase common stock at the average market price
of the common stock during the period.
This reduces the gross number of dilutive shares by the number of shares
purchasable from the proceeds of the securities assumed to be exercised. Securities whose conversion would have an
anti-dilutive effect on EPS are not assumed converted. Securities that could potentially dilute
earnings in the future are disclosed in Note 10.
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 are reviewed quarterly 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.
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 $105,000, $487,000 and
$610,000 for the years ended October 31, 2002, 2001 and 2000, respectively.
Reclassification -
Certain prior year amounts have been reclassified to conform to the 2002
presentation.
[3] Property and
Equipment - Property and equipment - at cost is
summarized as follows:
[4] Intangible
Assets
Intangible assets are summarized as follows:
October 31, 2002:
October 31,
2001:
The estimated amortization expense related to intangible assets for
each of the five succeeding fiscal years and thereafter as of October 31, 2002
is as follows:
For the years ended October 31, 2002, 2001 and 2000 amortization
expense of intangible assets were $631,242, $547,308 and $843,903,
respectively.
[5] Revolving Note
Payable - Bank
In January 2002, the Company amended its revolving notes payable loan
agreement with a Bank. The maximum
amount of the credit line available to the Company was increased to the lesser
of (i) $25,000,000 or (ii) 50% of the Company’s qualified accounts receivable
[as defined in the agreement]. Based on
a January 2002 amendment of the Loan and Security Agreement, interest on
advances will be subject to the prime rate or Eurodollar rate of interest plus
an additional interest percentage. The
additional interest percentage charges on borrowings range from 1% to 3% and
are determined based upon certain financial ratios achieved by the
Company. During fiscal 2002, the
Company had elected to have $8,000,000 of the total advances outstanding
converted into a Eurodollar rate loan with a variable interest rate of 3.20% at
October 31, 2002. The remaining
outstanding advances during that period were subject to the prime rate of
interest. At October 31, 2002, advances
of $2,546,041 were subject to interest at the prime rate. As of October 31, 2002 and 2001, the
prime rate of interest was 4.75% and 6.50%, respectively. The credit line is collateralized by
substantially all of the Company’s assets, the assignment of CareEvolve’s
$615,000 promissory note payable out of the Company’s share of CareEvolve’s net
after-tax income (if any) (See Note 14) and a $4,000,000 life insurance policy
on the president of the Company also assigned to the bank. The line of credit is available through
September 2004 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, insurance
coverage, and the prohibition of the payment by the Company of cash dividends
without the prior written consent of the Bank. Effective October 2002, the
Company amended its loan agreement to increase its annual capital expenditure
covenant from $1,500,000 to $2,000,000.
As of October 31, 2002, the Company utilized $10,546,010 and had
$7,444,731 of available unused credit under this revolving note payable
agreement.
The weighted average interest rate on short-term borrowings outstanding
as of October 31, 2002 and 2001 was approximately 3.70% and 6.50%,
respectively.
[6] Long-Term Debt
In April 1998, the Company entered into an agreement to borrow
$4,000,000 from a Bank. The note is
payable in fifty-eight principal installments of $66,667 payable through May
2003. The $4,000,000 borrowed was
comprised of an unsecured portion or $2,000,000 and a secured portion of
$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,
2002, only the secured portion is outstanding.
As of October 31, 2002 and 2001, borrowings under the note payable
were subject to interest of 5.75% and
9.85%, respectively. As of
October 31, 2002, $400,000 of principal was outstanding on the secured portion
of the note payable.
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.
As of October 31, 2002, all principal and accrued interest had been
repaid in full.
[7] Related Party
Transactions
On October 1, 1989, an unsecured promissory note was received from the
president of the Company, in exchange for a receivable in the amount of
$235,354. As of October 31, 2002
and 2001, $-0- and $8,918 was remaining on the note. This note is non-interest bearing and has no fixed repayment terms.
In March 2001, the Company entered into a joint marketing agreement
[the “agreement”] with General Prescription Programs, Inc. [“GPP”]. Provisions of the agreement provide that GPP
will assist the Company in marketing its PSIMedica programs to various
customers. In addition, GPP will
provide ongoing data and data support to the PSIMedica program
development. The term of the agreement
is for a five year period commencing on October 2001. In exchange for obtaining GPP marketing and technical services, the
Company issued GPP 220,000 shares of its common stock with a fair value of approximately
$247,500 which is being amortized over the five year term of the agreement. For
the years ended October 31, 2002 and 2001, the Company recorded an expense of
$49,500 and $4,125, respectively. The
Chairman of the Board of GPP is the brother of the Company’s Chief Executive
Officer.
[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:
The provision [benefit] for income taxes shown in the consolidated
statements of operations consist of the following:
[1] [Decrease] increase in deferred tax valuation allowance.
At October 31, 2002, the Company had net operating loss carryforwards
of approximately $4,378,000 for federal income tax purposes, which expire in
years 2008 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. Net operating loss carryforwards
applicable to New Jersey were fully utilized in fiscal 2002. The following summarizes the operating loss
carryforwards by year of expiration:
At October 31, 2002 and 2001, the Company had a deferred tax asset of
approximately $1,208,000 and $2,300,000, respectively. The deferred taxes primarily relate to net
operating loss carryforwards, as well as timing differences associated with the
deductibility of certain accrued expenses and deferred costs. 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 a portion 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. For fiscal 2002 and 2001, the
Company utilized approximately $2,394,000 and $2,900,000 of net operating loss
carryforwards to reduce the federal and state current year taxable income.
[9] Capital
Transactions
[A] Preferred Stock
and Common Stock - The Company is authorized to
issue an aggregate of 1,666,667 shares of preferred stock, $.10 par value. 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.
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.
In May 2001, the Company completed the sale of 1,500,000 shares of its
common stock for an aggregate of $1,500,000 [$1.00 per share] to a single
investment limited partnership. The
general partner of the investment limited partnership was elected to the
Company’s Board of Directors.
[B] Equity
Transactions for Services - For the year ended
October 31, 2001, the Company issued 490,000 shares of common stock for
employment and consulting services having a value of $744,217. In fiscal 2000, the Company issued 804,667
shares of common stock in connection with employment and consulting agreements
with a value of $1,479,162. In fiscal
2002, no shares of the Company’s common stock were issued for employment or
consulting services [See Note 11 for common stock options issued for employee
and consulting services].
[10] Income Per
Share
For the year ended October 31, 2002, outstanding warrants to purchase
25,000 shares and 50,000 shares of the Company’s common stock at $7.97 and
$7.79 per share were not included in the computation of diluted EPS. Warrants to purchase 24,000 shares and
20,000 shares of common stock at $3.14 and $3.00 per share were outstanding at
October 31, 2001 and 2000, respectively, but were not included in the
computation of diluted EPS. The exercise price of these warrants was greater
than the average market price of the common shares and are considered
anti-dilutive. These securities could
potentially dilute EPS in the future.
As of November 1, 2001, the Company adopted SFAS No. 142, “Goodwill and
Other Intangible Assets;” earlier than
required. In accordance with the
provisions of SFAS No. 142, the Company discontinued the periodic amortization
of goodwill, but is now required to annually review the goodwill for potential
impairment. Had SFAS No. 142 been
effective in the comparative prior periods, the following adjusted results of
operations would have been achieved.
[11] Stock Options
and Warrants
[A] Employee
Incentive Stock Options - In August 2000, the
Company adopted, and on December 15, 2000, the stockholders approved, 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 common
stock at a price not less than 100% of the fair market value per share of the common
stock at the date of grant. 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 fair market value at the date of grant. At October 31, 2002, the 2000 Plan had 274,000 options available
to 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. In August
2000, options to purchase 35,000 shares of common stock were granted under the
2000 Plan. In fiscal 2000, 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. In fiscal
2002 and 2001, 241,000 and 50,000 options were granted under the Plan. Approximately 59,166 of options granted
under the plan in fiscal 2002 will vest over the next two fiscal years. A total of 10,000 and 20,000 incentive stock
options issued under the 2000 Plan were exercised in fiscal 2002 and 2001,
respectively. Options issued under the 2000 Plan must be granted before the
August 2010 termination date.
In November 1989, the shareholders approved and the Company adopted the
1989 Employee Stock Option Plan [“1989 Plan”] which provides for the granting
of options to acquire 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. A total of 275,337, 45,702 and
16,667 incentive stock options issued under the 1989 Plan were exercised in
fiscal 2002, 2001 and 2000. 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.
These stock options are exercisable up to ten years from the date of
grant. The following is a summary of
Employee Incentive Stock Option Plan transactions:
The weighted average grant date fair value of incentive stock options
under the 2000 Plan granted during the year ended October 31, 2002, 2001 and
2000 was $7.07, $1.13 and $1.22 per share, respectively. These options have weighted average
remaining contractual lives of 7.50 years.
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.” No compensation cost was recognized for
stock-based employee compensation awards for the years ended October 31, 2002,
2001 and 2000.
[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:
During the year ended October 31, 2002, the Company issued options to
purchase 65,000 shares of the Company’s common stock at prices ranging from
$3.60 to $7.97 in connection with employment agreements and employee
incentives. Included in the options
issued in fiscal 2002 were options issued to directors of the Company to
purchase 24,000 shares of common stock at a price of $6.80 per share.
During the years ended October 31, 2001 and 2000, a total of 278,000
and 45,000 shares, respectively, classified as non-incentive stock 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 non-incentive stock options and warrants was $-0- for the
years ended October 31, 2002, 2001 and 2000.
During the years ended October 31, 2001 and 2000, 294,000 and 125,000
shares under options were granted to non-employees per various consulting
agreements, respectively. No such
options were granted in 2002. The fair
value of each option granted was estimated on the date of grant using the Black-Scholes
option-pricing model. The fair value of
244,000 and 125,000 options in fiscal 2001 and 2000, respectively, of
approximately $488,000 and $125,000 [approximately $2.00 and $1.00 per share]
has been accounted for as deferred compensation for the years ended October 31,
2001 and 2000, respectively, and is being expensed over the term of the
agreements. The fair value of 50,000
options in fiscal 2001 of $27,000 had been expensed for the year ended October
31, 2001. Total compensation expense
recognized against income for deferred compensation from the issuance of stock
options and warrants was $293,406, $210,193 and $17,567, respectively, for
those options issued in the years ended October 31, 2002, 2001 and 2000.
These options have weighted average remaining contractual lives of 3.4
years. The weighted average grant date
fair value of non-incentive stock options granted during the years ended
October 31, 2002, 2001 and 2000 were $6.19, $1.11 and $.98 per share,
respectively.
[A] and [B] Pro
Forma - Had compensation cost been determined on
the basis of fair value pursuant to SFAS No. 123, for the 241,000, 50,000 and
235,000 shares under employee incentive stock options for the years ended
October 31, 2002, 2001 and 2000, respectively, and the 65,000, 278,000 and
45,000 shares under employee non-incentive stock options and warrants for the
years ended October 31, 2002, 2001 and 2000, respectively, net income and
earnings per share would have been as follows:
The fair value used in the pro forma data was estimated by using the
Black-Scholes 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.
[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, 2002, the approximate
aggregate minimum commitment under these employment contracts and agreements,
excluding commissions or consumer price index increases, is as follows:
The Company entered into an employment agreement which included a
provision for a $250,000 bonus to be paid over a five-year period. At October 31, 2002, the Company had a
long-term liability of $95,740 and $50,000 current liability related to the
remaining bonus amount due the employee.
The balance due at October 31, 2002 will be paid as follows:
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 twenty
employment agreements which provide for annual aggregate minimum commitments of
approximately $1,673,500 which have no termination dates.
In accordance with Section 402 of the Sarbanes-Oxley Act of 2002 [the
“Act”], companies are prohibited from making future loans to officers and
directors and also prohibited are any extension of credit after the date of the
acts enactment. While the Company had
entered into and funded “split-dollar” life insurance agreements of several
officer/directors of the Company before passage of the Act, future premiums
could be deemed an extension of credit.
Until further clarification of the issue, the Company suspended paying
any additional future premiums. At
October 31, 2002, the life insurance policies are being paid by reducing the
cash values of such life insurance policies.
In the event that any of these officers leave the Company, they are
required to pay the Company back for premiums paid on their life insurance
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, 2002 and 2001, $1,138,207 and $931,638, respectively, is
included in other assets which represents the amount of premiums paid to
date. As of October 31, 2002, the cash
surrender value of the life insurance policies were less than the balance of
premiums paid.
[13] Capitalized
Lease Obligations
The Company leases various assets under capital leases expiring in
fiscal 2007 as follows:
Depreciation expense on assets under capital leases was approximately
$448,290, $343,055 and $334,323 for the years ended October 31, 2002, 2001 and
2000, respectively.
Aggregate future minimum rentals under capital leases are:
[14] Commitments and
Contingencies
The Company leases various office and laboratory facilities and
equipment under operating leases expiring from 2003 to 2007. Several of these leases contain renewal
options for one to five year periods.
Total expense for property and equipment rental for the years ended
October 31, 2002, 2001 and 2000 was $3,218,107, $2,976,147 and $2,931,648,
respectively. There were no contingent
rental amounts due through October 31, 2002.
Aggregate future minimum rental payments on noncancelable operating
leases [exclusive of several month to month leases] are as follows:
In December 2001, one of the Company’s wholly owned subsidiary
[CareEvolve] entered into a five year strategic marketing alliance agreement
with Roche Diagnostic Corporation [“RDC”].
RDC is engaged in the business of manufacturing, marketing and selling
medical diagnostic equipment and medical supplies to various hospitals and
health care providers. The terms of the
agreement provide that RDC will provide managerial and sales support to
CareEvolve in an effort to further expand the sale of CareEvolve services. The Company, including CareEvolve, shall
hire marketing and management personnel to provide increased selling and marketing
efforts. RDC will initially fund
CareEvolve the sum of $1,000,000 which will be used to fund operations and
expenses of CareEvolve. Only those
expenses approved by a Steering Committee will be authorized to be paid with
the proceeds of the $1,000,000. During
the term of the agreement, CareEvolve will pay to RDC and Bio-Reference 50% of
the net after-tax income generated each quarter. At October 31, 2002 approximately $653,000 of the initial
$1,000,000 funded by Roche was available for future expense reimbursements.
In addition, the Agreement grants RDC an option to purchase an equity
interest in CareEvolve from the Company equal to 50% of the ownership in
CareEvolve.
[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.
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. In
October 2002, the Company received a determination letter from Medicare related
to this review. The determination
letter concluded that the Company had received Medicare overpayments of
approximately $356,000. A total of
approximately $202,000 was previously withheld from suspended Company funds
plus an additional payment of $154,000 is due from the Company within 30
days. If the $154,000 payment is not
received within the 30 day period, interest will accrue at the annual rate of
12.625% on the unpaid balance. The
Company has a reserve of approximately $154,000 as of October 31, 2002,
related to this Medicare settlement.
However, the Company is contesting the amount due.
In December 2000, the Company instituted a lawsuit against the former
owners of one of the Company’s wholly owned subsidiaries. The complaint alleges that in connection
with the Right Body Foods, Inc. [“RBF”] acquisition and the simultaneous
employment of the former owner as Director of RBF, that material
misrepresentations and misleading statements were made regarding the business
being purchased. The defendants filed a
counterclaim in January 2001 denying the allegations filed in the complaint by
the Company. In addition, the defendants
asserted a claim of sexual harassment and discrimination against several officers
of the Company. In September 2002, the
Company signed a settlement agreement with the former owner of RBF. Terms of the settlement agreement provide
for the former owner to retain the 200,000 shares of the Company’s common stock
issued in connection with the acquisition.
In exchange, the Company will retain ownership of the RBF business [See
Note 18]. All other claims that were
asserted between the parties were mutually dismissed.
[16] Insurance
The Company maintains professional liability insurance of $3,000,000 in
the aggregate, with a per occurrence limit of $2,000,000 . In addition, the Company maintains excess
commercial insurance of $2,000,000 per occurrence and $3,000,000 in aggregate. 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.
[17] Significant
Risks and Uncertainties
[A] Concentrations
of Credit Risk - Cash - At October 31, 2002 and
2001, the Company had approximately $1,132,000 and $1,873,000, respectively, 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. In October 2001, the Company granted options to purchase 50,000
shares of the Company’s common stock at an exercise price of $3 per share to
the former owner of MMGI for consulting services. An expense of approximately $27,000 was recorded in fiscal 2001. Such options were also exercised in October
2001.
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.
In October 2002, the Company terminated the operations of RBF in
conjunction with its legal settlement with the former owner. As a result of management’s decision to
terminate RBF operations, the Company recorded a current period write-off of
approximately $212,000 representing the net book value of intangible and other
deferred assets incurred in connection with the initial acquisition of RBF. Subsequent to October 31, 2002, the Company
sold the remaining RBF assets for a nominal sum.
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 were to
be amortized over a 20 year period utilizing the straight line method of
amortization. Non-Competition covenants
were to 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.
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 was 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” was 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, due
November 2000 and May 2001, were paid in fiscal 2001.
[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.
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 $100,000 of covered medical
expenses per person each year. The
Company has a contract with an insurance carrier for any excess up to a maximum
of $1,900,000 per person and $2,000,000 in the aggregate. Health insurance premium expense for the
years ended October 31, 2002, 2001 and 2000 amounted to approximately $383,000,
$230,000 and $217,000, respectively.
Uninsured employee medical expenses incurred by the Company amounted to
approximately $2,348,000, $1,901,000 and $1,549,000 for the years ended October
31, 2002, 2001, 2000, respectively.
[21] Employee
Benefit Plan
The Company sponsors the Bio-Reference Laboratories, Inc. 401(k)
Profit-Sharing Plan [the “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 December 31 [the plan
year end], 2000, the Company elected not to make matching contributions to the
plan. For the plan years beginning
January 1, 2002 and 2001, the Company elected to make a matching contribution
of 3% of salary not to exceed $250 per participant which amounted to $64,586
and $50,762, respectively which were charged to operations. The employer contribution will be fully
vested after the fifth year of service.
[22] New
Authoritative Accounting Pronouncements
The Financial Accounting Standards Board (“FASB”) issued Statement No.
143, “Accounting for Asset Retirement Obligations” in June 2001, which requires
that the fair value of a liability for an asset retirement legal obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. This statement is
effective for fiscal years beginning after June 15, 2002 and is not expected to
have a material impact on the Company.
In August 2001, the FASB issued SFAS No. 144, “Accounting for
Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), which supercedes SFAS
No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of” (“SFAS 121”).
SFAS 144 further refines SFAS 121’s requirement that companies recognize
an impairment loss if the carrying amount of a long-lived asset is not
recoverable based on its undiscounted future cash flows and measure an
impairment loss as the difference between the carrying amount and fair value of
the asset. In addition, SFAS 144
provides guidance on accounting and disclosure issues surrounding long-lived
assets to be disposed of by sale. SFAS
144 also extends the presentation of discontinued operations to include more
disposal transactions. SFAS 144 is
effective for all fiscal quarters of all fiscal years beginning after December
15, 2001. The Company does not expect
the adoption of SFAS 144 to have a material impact on the Company.
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections” (“SFAS 145”). SFAS 145 among other things rescinds SFAS No. 4,
“Reporting Gains and Losses from Extinguishment of Debt” (“SFAS 4”) and SFAS
No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements”
(“SFAS 64”) and amends SFAS No. 13, “Accounting for Leases” (“SFAS 13”). This statement updates, clarifies and
simplifies existing accounting pronouncements.
As a result of rescinding SFAS 4 and SFAS 64, the criteria in APB No.
30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions”, will be used to classify gains and losses from
extinguishment of debt. SFAS 13 was amended to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the
required accounting for certain lease modifications that have economic effects
that are similar to sale-leaseback transactions and makes technical corrections
to existing pronouncements. The
provisions of SFAS 145 are effective for fiscal years beginning after May 15,
2002, with earlier application encouraged.
The Company expects to adopt SFAS 145 effective November 1, 2002 and
reflect any necessary reclassifications in its consolidated statements of
operations. Management believes that the adoption of SFAS 145 will not have a
material impact on the Company’s financial position.
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs
Associated with Exit or Disposal Activities” (“SFAS 146”), which addresses the
recognition, measurement, and reporting of costs associated with exit or
disposal activities, and supercedes Emerging Issues Task Force (“EITF”) Issue
No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)” (“EITF 94-3”). The
principal difference between SFAS 146 and EITF 94-3 relates to the requirements
for recognition of a liability for a cost associated with an exit or disposal
activity. SFAS 146 requires that a
liability for a cost associated with an exit or disposal activity, including
those related to employee termination benefits and obligations under operating
leases and other contracts, be recognized when the liability is incurred, and
not necessarily the date of an entity’s commitment to an exit plan, as under
EITF 94-3. SFAS 146 also establishes
that the initial measurement of a liability recognized under SFAS 146 be based
on fair value. The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged.
[23] Selected
Quarterly Financial Data [Unaudited]
INDEPENDENT AUDITOR’S REPORT
To the Board of Directors and Shareholders 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. 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
December 6, 2002
BIO-REFERENCE LABORATORIES, INC. AND
SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS
ENDED OCTOBER 31, 2002, 2001 AND 2000.